<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 19, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
RADIO SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
TENNESSEE 3699 62-1466437
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
5008 NATIONAL DRIVE
KNOXVILLE, TENNESSEE 37914
423-637-8205
(Address, Including Zip Code and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
-----------------
RANDAL D. BOYD
CHAIRMAN OF THE BOARD AND PRESIDENT
RADIO SYSTEMS CORPORATION
5008 NATIONAL DRIVE
KNOXVILLE, TENNESSEE 37914
423-637-8205
(Name, Address, Including Zip Code and Telephone Number, Including Area Code,
of Agent for Service)
COPIES TO:
J. CHASE COLE, ESQ. ELIZABETH E. MOORE, ESQ.
WALLER LANSDEN DORTCH & DAVIS, PLLC STOKES & BARTHOLOMEW, P.A.
2100 NASHVILLE CITY CENTER 424 CHURCH STREET
511 UNION STREET SUITE 2800
NASHVILLE, TENNESSEE 37219-1760 NASHVILLE, TENNESSEE 37219
615-244-6380 615-259-1450
FACSIMILE: 615-244-6804 FACSIMILE: 615-259-1470
-------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
==================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Common Stock, no
par value per share 2,098,750 shares $12.00 $25,185,000 $7,632
==================================================================================================================
</TABLE>
(1) Includes 273,750 shares of Common Stock which the Underwriters have the
option to purchase from the Company solely to cover over-allotments, if
any.
(2) Estimated in accordance with Rule 457(a) solely for the purpose of
calculating the registration fee.
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 19, 1997
1,825,000 SHARES
RADIO SYSTEMS CORPORATION
[LOGO]
COMMON STOCK
----------------
Of the 1,825,000 shares of common stock, no par value per share (the
"Common Stock"), of Radio Systems Corporation, a Tennessee corporation (the
"Company" or "Radio Systems"), offered hereby (the "Offering"), 1,490,000 shares
are being sold by the Company and 335,000 shares are being sold by certain
shareholders of the Company (the "Selling Shareholders"). The Company will not
receive any of the proceeds from the sale of the shares of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
Prior to this Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $10 and $12 per share. See "Underwriting" for a discussion of the
factors to be considered in determining the initial public offering price. [The
Company has submitted an application for the Common Stock to be quoted and
traded on the Nasdaq Stock Market's National Market (the "Nasdaq National
Market") under the symbol "[RDIO]."]
SEE "RISK FACTORS" BEGINNING ON PAGE 5 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2) SELLING SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share $ $ $ $
Total (3) $ $ $ $
===============================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $_________ payable by the Company.
(3) The Company has granted to the Underwriters a 30-day over-allotment option
to purchase up to 273,750 additional shares of Common Stock on the same
terms and conditions as set forth above. If all such shares are purchased
by the Underwriters, the total Price to Public will be $_________, the
total Underwriting Discount will be $_________and the total Proceeds to
Company will be $_________. See "Underwriting."
----------------
The shares of Common Stock are offered, subject to receipt and acceptance
by the several Underwriters, to prior sale and to the Underwriters' right to
reject orders in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that certificates for the shares of Common Stock
will be available for delivery on or about ___________, 1998.
----------------
J.C. BRADFORD & CO. THE ROBINSON-HUMPHREY COMPANY
________________________, 1998
<PAGE> 3
[PICTURES OF PRODUCTS]
----------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
STABILIZATION AND SHORT-COVERING TRANSACTIONS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. This summary is not intended to be complete and is qualified in
its entirety by reference to, and should be read in conjunction with, the more
detailed information, including "Risk Factors," and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise indicates, (i) all references herein to the "Company" or
"Radio Systems" shall mean Radio Systems Corporation, (ii) the information in
this Prospectus assumes that the Underwriters' over-allotment option is not
exercised and (iii) the information contained in this Prospectus gives effect to
a 3-for-1 stock split paid in the form of a stock dividend distributed to all
shareholders of the Company in November 1997.
THE COMPANY
Radio Systems is a leading provider of electronic pet containment and
training products. The Company currently offers over 20 products, including
radio fences, bark control collars, ultrasonic pet trainers, pet locators,
ultrasonic pest deterrents and an electronic flea comb. The Company introduced
its first Radio Fence pet containment system in 1991, which is a radio frequency
based system designed to keep pets safely in a designated area without a visible
fence. Radio Systems was the first company to introduce an affordable and
user-friendly "do-it-yourself" product to the electronic pet containment market
by designing and packaging its product for sale through mass retailers. The
retail prices of the products currently offered by the Company range from $9.95
to $299. The Company's "do-it-yourself" Radio Fence pet containment systems sell
at a significant discount to similar products sold and installed by specialty
fence companies.
The Company's primary product is the Radio Fence pet containment system,
which provides a safe, reliable method of pet containment utilizing a
proprietary computer microchip housed in the pet's collar to administer a mild,
electronic correction when the pet approaches a designated boundary. The pet
owner designates an outdoor containment area by running a wire approximately
three inches beneath the ground. Once the pet has been properly trained to
associate the mild, electronic correction with the boundaries of its containment
area, the pet learns not to approach those boundaries. The Company's newest pet
containment product is the Spray Control Radio Fence, which uses a burst of
non-toxic citronella spray from the pet's collar that is unpleasant to the pet,
rather than the electronic correction. For the nine months ended September 30,
1997, Radio Fence pet containment products represented approximately 75% of the
Company's net sales.
Management believes that the Company's success is primarily due to its
ability to apply technological expertise and its marketing efforts. The Company
has achieved a position as an innovator and a leader in the electronic pet
containment and training products industry, in part, through the use of
technological expertise in low frequency magnetics, radio frequency magnetics,
radio frequency design, receiver miniaturization, ultrasonics and mixed signal
computer chip design. The Company leverages its technological and engineering
capabilities to develop new products and enhance its existing products. For
example, during 1996 and 1997 combined, the Company introduced eight new
products and enhanced many of its existing products. In addition, the Company
currently has over 20 potential new products in various stages of development.
The Company currently distributes its products through most of the major
mass retail chains in the United States, consisting of over 7,000 retail
locations. Retailers of the Company's products include Home Depot, Lowe's,
Wal-Mart, Kmart, PETsMART, Target, Ace Hardware, Sharper Image, Cabela's and
many others. For the nine months ended September 30, 1997, approximately 28% of
the Company's net sales were through home improvement and hardware stores, 26%
through discount stores, 12% through farm supply stores, 17% through pet supply
stores, 13% through catalog retailers and 4% through other retail channels. Of
these total net sales, approximately 8% were made outside of the United States
and were equally divided between Canada and Western Europe.
1
<PAGE> 5
The Company perceives significant growth in the pet containment and
training products market as a result of several trends including: (i) the
absolute growth in the number of pet owning households and in the number of
pets, (ii) the absolute growth of sales of pet supplies, (iii) the evolving
needs of pet owners, and (iv) technological advances resulting in alternative
solutions. Based on industry surveys, in 1996, approximately 57% of all
households in the United States owned at least one dog or cat during the year
(up from 54% in 1990) and, in the aggregate, Americans owned approximately 128
million dogs and cats, an increase of 20% from 1990. In addition, based on
industry publications, Americans spent $4.1 billion on non-food pet supplies in
1996, an amount which is projected to grow to $6.1 billion by 2001. Moreover,
management believes that the needs of the Company's target market have evolved
as a result of the increasing percentage of dual income families, longer work
weeks and increasing travel habits, resulting in an increased reliance on pet
containment and training products as well as an increasing awareness of pet
behavioral issues. Company research suggests that only approximately 30% of
existing homeowners are aware that electronic pet containment products exist.
Management believes that an even smaller percentage of homeowners are aware that
economical and dependable "do-it-yourself" electronic pet containment systems
are available. While approximately 90% of pet owners rent or own homes, the
Company estimates that fewer than 600,000 electronic pet containment products
such as the Company's Radio Fence have been sold in the last three years.
Accordingly, management believes that it will be able to expand sales of
the Company's products significantly by increasing the public's awareness that
economical and dependable electronic pet containment and training products are
available. Moreover, although most of the Company's retailers that offer the
Company's products do so in all or substantially all of their stores, only a few
carry more than five of the Company's products. As a result of its efforts in
pioneering the "do-it-yourself" market, management believes that the Company's
Radio Fence pet containment systems are the only electronic pet containment
systems offered by most of the retailers that carry the Company's products.
Management believes that additional sales growth can result from increasing the
number of retailers and stores that currently carry its products as well as the
range of products offered by each retailer. Management also intends to grow the
Company through the selective acquisition of complementary businesses as well as
through the expansion of international sales.
The Company's operating strategy is to utilize its existing marketing and
engineering capabilities and take advantage of its strong distribution channels
and market position to maintain and strengthen its status as a leader in the
market for electronic pet containment and training products. In addition, the
Company intends to continue its strategy of developing customer-driven products,
providing exceptional customer service, maintaining cost-effective manufacturing
and product development techniques, and empowering its personnel through profit
teams to enhance the Company's products, processes and profitability.
Radio Systems Corporation was incorporated in Tennessee in 1991. Its
principal executive offices are located at 5008 National Drive, Knoxville,
Tennessee 37914, and its telephone number is 423-637-8205.
2
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.............. 1,490,000 shares
Common Stock offered by the Selling
Shareholders................................... 335,000 shares
Common Stock to be outstanding after the
Offering....................................... 6,156,223 shares (1)
Use of Proceeds by the Company................... To repay outstanding
indebtedness, to fund
research and development
activities and possible
future acquisitions and for
general corporate purposes,
including working capital.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol........... [RDIO]
- -----------------
(1) Does not include 528,000 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's existing stock option plans
and 12,000 shares of Common Stock issuable upon the exercise of an
outstanding warrant. See "Management - Compensation Pursuant to Plans" and
"Description of Capital Stock."
</TABLE>
3
<PAGE> 7
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended
September 30,
------------------------------------------------------------ -----------------------
(unaudited)
STATEMENT OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ................................ $ 4,626 $ 6,570 $ 13,490 $ 13,193 $ 18,869 $ 15,212 $ 20,318
Costs of goods sold ...................... 3,061 5,006 10,310 9,990 12,091 9,685 12,434
-------- -------- -------- -------- -------- -------- --------
Gross profit on sales .................... 1,565 1,564 3,180 3,203 6,778 5,527 7,884
Operating costs and expenses:
Selling, general and administrative
expenses ............................... 1,149 1,321 2,496 3,122 3,410 2,556 3,859
Research and development ............... 159 462 471 912 664 485 716
Interest expense ....................... 57 31 149 468 715 367 316
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income taxes and
cumulative effect of accounting
change ................................. 200 (250) 62 (1,299) 1,989 2,119 2,993
Income tax benefit (provision) ........... (23) 90 7 (196) (42) (105) (1,137)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative
effect of accounting change .............. 177 (160) 69 (1,495) 1,947 2,014 1,856
Cumulative effect of accounting change ... -- 60 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................ $ 177 $ (100) $ 69 $ (1,495) $ 1,947 $ 2,014 $ 1,856
======== ======== ======== ======== ======== ======== ========
Earnings per common and equivalent
share before cumulative
effect of accounting change .............. $ 0.06 $ (0.05) $ 0.02 $ (0.32) $ 0.37 $ 0.39 $ 0.35
======== ======== ======== ======== ======== ======== ========
Income (loss) per common and
equivalent share:
Primary ................................ $ 0.06 $ (0.03) $ 0.02 $ (0.32) $ 0.38 $ 0.38 $ 0.35
======== ======== ======== ======== ======== ======== ========
Fully diluted .......................... $ 0.06 $ (0.03) $ 0.02 $ (0.32) $ 0.36 $ 0.38 $ 0.34
======== ======== ======== ======== ======== ======== ========
Number of shares and common stock
equivalents used in computing earnings per
common and equivalent share(2):
Primary ............................... 2,944 3,106 4,123 4,733 5,330 5,306 5,362
Fully diluted ......................... 2,944 3,106 4,123 4,733 5,390 5,361 5,396
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
1997
-----------------------
BALANCE SHEET DATA: Actual As
Adjusted(1)
-------- ----------
<S> <C> <C>
Working capital........................................................................................... $ 5,706 $17,135
Total assets.............................................................................................. 11,045 22,106
------- -------
Long-term debt............................................................................................ 3,874 561
Shareholders' equity...................................................................................... 3,568 18,310
------- -------
</TABLE>
- -----------------
(1) Adjusted to reflect the sale by the Company of 1,490,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(2) Reflects a 100-for-1 stock split effected as a stock dividend on September
19, 1994, and a three-for-one stock split effected as a stock dividend on
November 14, 1997.
4
<PAGE> 8
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the shares of Common Stock offered hereby. This discussion also
identifies important cautionary factors that could cause the Company's actual
results of operations to differ materially from those suggested in
forward-looking statements regarding the Company made by, or on behalf of, the
Company. In particular, the Company's forward-looking statements, including
those regarding the adequacy of the Company's capital resources, its ability to
develop and market new products, the expansion of its business, potential
acquisitions and statements regarding trends relating to various net sales and
expense items, could be affected by a number of risks and uncertainties
including those described below.
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SUPPLIERS
The Company uses multiple foreign and domestic manufacturers to manufacture
and assemble substantially all of its products and component parts on a purchase
order basis and does not maintain purchase or supply agreements with these
suppliers. Certain of the Company's components, however, primarily the microchip
used in the Company's Radio Fence products, are currently obtained from a single
source. Management expects that the Company will continue to be substantially
dependent upon contract manufacturers in the future. There can be no assurance
that the Company will be able to continue to obtain sufficient quantities of
products or key components as required or that such products or key components
will be available to the Company on commercially reasonable terms. Moreover, the
Company has no commitment from any of its manufacturers or suppliers to continue
to manufacture, assemble or supply goods for the Company. Although management
believes its relationships with its suppliers and manufacturers are good and
that additional sources are available for all of the needed products and
components, a future deterioration of such relationships or events outside of
the Company's control (for example, changes in the costs of manufacturing,
foreign government or economic instability, damage to suppliers' manufacturing
plants, financial difficulties of suppliers, delays or interruptions in the
shipment of products or, in the case of foreign suppliers, changes in the
foreign policy of the United States, changes in regulation, tariffs or
import/export policies or currency fluctuation) could have a material adverse
effect on the Company's ability to obtain the necessary products or components
and ship its products to its customers and on its results of operations. See
"Business - Manufacturing and Assembly."
RISKS ASSOCIATED WITH FUTURE ACQUISITIONS
An element of the Company's growth strategy is expansion through the
acquisition of businesses or assets that complement or expand its existing
business. As a result, the Company evaluates potential acquisition
opportunities, some of which may be material in size or scope. Acquisitions
involve a number of special risks, including the time associated with
identifying and evaluating potential acquisitions, the Company's ability to
obtain acquisition financing, the diversion of management's attention to the
integration of the assets, operations and personnel of the acquired businesses,
the introduction of new products and services into the Company's business,
possible adverse short-term effects on the Company's results of operations, the
realization of acquired intangible assets and the loss of key employees of the
acquired businesses. The Company may issue equity securities and other forms of
consideration in connection with future acquisitions, which could cause dilution
to investors purchasing Common Stock in the Offering. The Company has no present
agreements, arrangements or commitments with respect to any acquisition. There
can be no assurance that suitable acquisition candidates will be found on terms
acceptable to the Company, that the Company will have adequate resources to
consummate any acquisition, that acquisitions can be consummated successfully or
that acquired businesses can be operated profitably or integrated successfully
into the Company's operations. See "Business - Growth Strategy."
5
<PAGE> 9
NEW PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE
Management believes that the market for the Company's products can be
characterized by, and is subject to, rapidly changing technology, competition
through technological advances and evolving industry standards. In addition, the
Company's operating and growth strategies are significantly dependent upon the
development, marketing and acceptance of the Company's products, including
products dependent upon technology or computer software. The development of new
electronic technology and software is a complex process, requiring high levels
of innovation and capital. The introduction of new or enhanced products also
requires that the Company manage transitions from older products in order to
minimize disruptions in customer orders, avoid excess inventory of products and
ensure that adequate supplies of new products can be delivered to meet new
customer orders. There can be no assurance that the Company will be successful
in the development and introduction of new or enhanced products, that the
Company can successfully manage the transition by customers to new or enhanced
products, that any such products will be sufficiently responsive to
technological changes or gain market acceptance, or that consumers will accept
any new or enhanced products. The Company's business, financial condition and
results of operations could be materially adversely affected if the Company
experiences significant delays in the development and introduction of new
products or enhancements, or if such new products or enhancements do not gain
market acceptance. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's products or
technologies non-competitive or obsolete. See "Business - Growth Strategy" and
"- Competition."
DISTRIBUTION CHANNELS
The success of the Company depends heavily on the business it conducts with
a limited number of retail segments and retailers. For the nine months ended
September 30, 1997, approximately 28%, 26%, 12%, 17% and 13% of the Company's
net sales were made to home improvement and hardware stores, discount stores,
farm supply stores, pet supply stores and catalog retailers, respectively. For
the same period, approximately 11.9%, 11.6% and 11.0% of the Company's net sales
were made through Lowe's, Wal-Mart and PETsMART, respectively. The Company has
long-standing relationships with most of the retailers that sell the Company's
products; however, it does not have contracts with them and, therefore, these
retailers may unilaterally reduce or discontinue their purchases without
penalty. The Company's loss of (or failure to retain a significant amount of
business with) any of these retailers, whether as a result of purchasing
decisions made by these retailers, interruptions in the businesses of any of
these retailers, the consolidation of segments of the retail industry, failures
of the businesses of these retailers, or otherwise, could have a material
adverse effect on the Company's business, prospects and results of operations.
See "Business - Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends upon the continued services of the
Company's senior management, particularly upon its founder, Chairman of the
Board and President, Randal D. Boyd. In addition to Mr. Boyd's service to the
Company in these positions, Mr. Boyd has also had a significant role in the
Company's sales and marketing activities and has developed relationships with
certain of the Company's largest retailers. Mr. Boyd has also developed and
implemented the Company's business and marketing strategies. The loss of the
services of any of the Company's senior management including, in particular, Mr.
Boyd, could have a material adverse effect upon the Company's business,
prospects and results of operations. Moreover, the Company's growth plans will
place significant demands on the Company's management and operating personnel.
The Company's ability to achieve and manage its future growth effectively will
require it to improve its operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
officers and associates. If the Company is unable to manage its growth
effectively, its business, prospects and results of operations may be adversely
affected. See "Management" and "Business - Growth Strategy."
6
<PAGE> 10
COMPETITION
The industry in which the Company operates is highly competitive. The
Company's products compete with other similar products primarily on the basis of
quality, reliability, the availability and quality of customer service and
price. Because of the competitive nature of the industry and because the market
for electronic pet containment and training products has not yet been widely
recognized, additional competitors may emerge that have greater access to
capital, more personnel and greater technological resources than the Company.
Additionally, current or future competitors may institute aggressive pricing
strategies in an effort to gain market share. There can be no assurance that the
Company will be able to compete successfully with any such competitors. See
"Business - Competition."
DEPENDENCE UPON INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on its
ability to protect its existing intellectual property, including its patents and
trademarks, and on its ability to develop and protect intellectual property. In
addition to patent and trademark protection, the Company also relies on trade
secrets, technological know-how and other unpatented, proprietary information
relating to its product development and manufacturing activities which it seeks
to protect, in part, by confidentiality agreements with its employees and third
parties. The Company's ability to compete effectively also depends on its
ability to avoid infringing on the proprietary rights of others. There can be no
assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation or that others will not
independently develop technology or products that compete with or are superior
to the Company's products. Likewise, there can be no assurance that the Company
will not inadvertently infringe on the intellectual property rights of others.
See "Business - Intellectual Property."
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly net sales and results of operations fluctuate
significantly, in part, with seasonal shifts in the retail industry, changes in
climate and the introduction of new products and technology. Historically,
approximately 55-60% of the Company's net sales have taken place in the second
and third fiscal quarters, when the weather is warm or mild. Future variability
of quarterly net sales and results of operations may be caused by a variety of
factors, including, but not limited to, the timing and shipment of significant
orders, the introduction of new products, processes and technologies by the
Company and its competitors, market acceptance of new and enhanced versions of
the Company's products, changes in pricing policies by the Company and its
competitors, the mix of distribution channels through which the Company's
products are sold, the inability to obtain sufficient supplies of sole or
limited source components for the Company's products, gains or losses of
significant customers, the timing of customer upgrade and expansion programs,
changes in the levels of operating expenses, the timing of acquisitions,
seasonality and general economic conditions. Moreover, the Company has certain
obligations to its retail customers to accept products that are returned by the
ultimate user or cannot be sold, in some cases at retail prices. Accordingly,
the Company may experience periods of high returns that adversely affect the net
sales of the Company in any quarterly period. In response to competitive
pressures of new product introductions, the Company may also take certain
pricing or marketing actions that could materially and adversely affect the
Company's operating results. The Company's expense levels are based, in part, on
the Company's expectations as to future sales. If future sales levels are below
expectations, the Company may be unable to adjust spending sufficiently in a
timely manner to compensate for such unexpected sales shortfalls. Therefore, in
future quarters, the Company's operating results may be below the expectations
of public market analysts and investors. In this event, the price of the Common
Stock may be materially adversely affected. See "Management's Discussions and
Analysis of Financial Conditions and Results of Operations."
7
<PAGE> 11
RECENT LOSSES
The Company incurred net losses of approximately $100,000 and $1.5 million
in fiscal 1993 and fiscal 1995, respectively. As a result of, among other
things, the competitive nature of the industry in which the Company operates and
the Company's need to develop new products and to enhance existing products,
there can be no assurance that the Company will maintain profitability or
achieve continued growth in operating performance in any future fiscal year or
quarter. See "Business - Competition."
EXPOSURE TO PRODUCT LIABILITY CLAIMS
The Company is potentially subject to various legal claims, including
products liability and other personal injury lawsuits relating to its products
and arising out of the ordinary course of its business. In addition, because the
Company sells products that are designed to contain pets, the Company may be
subject to claims if a pet is not effectively contained in its boundary, or
causes harm to property or individuals once it is outside of its boundary. The
Company does not maintain reserves to limit the economic impact to the Company
in the event of any successful legal claim of this nature against the Company.
The Company does, however, maintain general liability insurance coverage at
levels determined in light of management's estimation of the Company's exposure
to such claims, among other factors. There can be no assurance, however, that
such insurance will be adequate either in amount or type of coverage, or that
the Company will be able to maintain such coverage in the future. Consequently,
there can be no assurance that the costs and expenses or other liabilities
arising out of product liability or personal injury actions or legal proceedings
involving the Company will not have a material adverse effect on the Company's
business, prospects and results of operations. See "Business - Insurance."
GOVERNMENT REGULATION
Standards governing the treatment of animals are constantly evolving and
developing. Various countries, including Norway, Sweden and Switzerland,
prohibit products that are deemed to be inhumane or harmful to pets. If any
governing or regulatory body of any country or other political jurisdiction with
similar or analogous laws determines that any or all of the Company's products
are prohibited, then the Company could be prohibited from selling such products
in such countries or jurisdictions. In addition, regulations have been adopted
in at least one town in the United States that require pet owners to post a sign
to notify the public that an owners' pet is being restrained by an electronic
fence. There can be no assurance that additional, similar laws or regulations
will not be proposed or adopted in the future. In addition, many of the
Company's products require compliance with standards set by the Federal
Communications Commission (the "FCC"). The ability of the Company to adhere to
the standards of the FCC cannot be assured and changes in current rules and
regulations cannot be predicted. The failure to comply with the FCC or other
domestic or international regulations could have a material adverse effect on
the Company and its results of operations. See "Business - Regulation."
ABSENCE OF PRIOR PUBLIC MARKET; RELATIONSHIP OF OFFERING PRICE TO MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market will develop or
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock has been determined by negotiation among the Company,
the Selling Shareholders, and J.C. Bradford & Co. and The Robinson-Humphrey
Company, LLC, as the representatives of the Underwriters (the
"Representatives"), and may not be indicative of the market price for shares of
Common Stock after the Offering. See "Underwriting." Prices for the shares of
Common Stock after the Offering will be determined in the market and may be
influenced by many factors, including the depth and liquidity of the market for
the Common Stock, investor perception of the Company, the Company's industry as
a whole and general economic and market conditions.
8
<PAGE> 12
POSSIBLE VOLATILITY OF MARKET PRICE
From time to time after the Offering, there may be significant volatility
in the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimated by analysts, changes in general
conditions in the economy or the financial markets or other developments
affecting the Company could cause the market price of the Common Stock to
fluctuate substantially. In addition, the stock market from time to time
experiences extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities, often for reasons
unrelated to the operating performance of the issuers.
CONTROL BY MANAGEMENT AND CERTAIN SHAREHOLDERS
Following completion of the Offering, directors and officers of the Company
will beneficially own approximately 64.7% of the outstanding shares of Common
Stock (approximately 61.9% if the underwriters' over-allotment option is
exercised in full). Accordingly, these persons will have substantial influence
over the affairs of the Company, including the ability to control the election
of directors, the decision whether to effect or prevent a merger or sale of
assets and other matters requiring shareholder approval. See "Management" and
"Principal and Selling Shareholders."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. The number of shares of Common Stock available for sale in the
public market is limited by restrictions under the Securities Act of 1933, as
amended (the "Securities Act"), and lock-up agreements under which certain
holders of such shares have agreed not to sell or otherwise dispose of any of
their shares for a period of 180 days after the date of this Prospectus without
the prior written consent of J.C. Bradford & Co., acting on behalf of the
Underwriters. On the date of this Prospectus, no shares other than the
[_________] shares offered hereby will be eligible for sale. A total of
[_____________] additional shares are subject to lock-up agreements and will be
eligible for sale subject to the volume and holding period limitations of Rule
144 following the expiration of such lock-up agreements. See "Shares Eligible
for Future Sale."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
Pursuant to the Company's Amended and Restated Charter (the "Charter"), the
Company's Board of Directors has the authority, without action by the
shareholders, to issue up to 10,000,000 shares of preferred stock and to fix the
rights and preferences of such shares. This authority, together with provisions
of the Company's Charter that implement staggered terms for directors, may
delay, deter, or prevent a change in control of the Company. In addition, as a
Tennessee corporation, the Company is subject to the provisions of the Tennessee
Business Combination Act, the Tennessee Control Share Acquisition Act and the
Tennessee Greenmail Act, each of which may be deemed to have anti-takeover
effects and may delay, deter, or prevent a takeover attempt that might be
considered by the shareholders to be in their best interests. See "Description
of Capital Stock - Preferred Stock" and "Certain Provisions of the Charter,
Bylaws and Tennessee Law."
DILUTION
The purchasers of the Common Stock offered hereby will experience immediate
and significant dilution of $8.15 per share, the amount by which the purchase
price of the Common Stock offered hereby will exceed the net tangible book value
of the Common Stock immediately following the Offering. In the event the Company
issues additional shares of Common Stock in the future, including shares which
may be issued in connection with any future acquisitions, purchasers of Common
Stock in this Offering may experience further dilution in net tangible book
value per share of the Common Stock. See "Dilution."
9
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,490,000 shares of
Common Stock offered by the Company hereby (assuming an initial public offering
price of $11.00 per share) are estimated to be approximately $14.7 million
(approximately $17.5 million if the underwriters' over-allotment option is
exercised in full), after deducting the underwriting discount and estimated
expenses payable by the Company in connection with the Offering. The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Shareholders. See "Principal and Selling Shareholders."
The Company plans to use approximately $3.7 million of the net proceeds of
the Offering to repay outstanding indebtedness of the Company. The indebtedness
to be repaid from the net proceeds of the Offering bears interest at annual
rates ranging from 8.1% to 11.5%, and was incurred to purchase certain fixed
assets, acquire a product line from Austin Innovations, Inc. (the "Austin
Acquisition"), repurchase certain stock purchase warrants and meet the Company's
working capital needs. At September 30, 1997, such indebtedness had a weighted
average interest rate of 9.64%. Such indebtedness, if not repaid, would
otherwise mature at various dates through 2002. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
The remaining $11.1 million of the net proceeds is expected to be used to
fund research and development activities, possible future acquisitions and for
general corporate purposes, including working capital. Although the Company
periodically evaluates acquisition opportunities and conducts preliminary
discussions, the Company has no present agreements, arrangements or commitments
with respect to any acquisition. In identifying potential acquisitions, the
Company intends to target entities or product lines that are engaged in the
Company's existing business or that can increase the Company's ability to
compete in its markets. There can be no assurance that any such research and
development activities or acquisitions will be successful or that the terms of
any such transactions will be favorable to the Company.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds in short-term, investment-grade or
government, interest-bearing securities.
10
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of September 30, 1997 and (ii) the capitalization on an as adjusted basis to
reflect the issuance and sale of the 1,490,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $11.00 (the
midpoint of the estimated initial public offering price) per share and the
application of the estimated net proceeds therefrom, which are estimated to be
approximately $14.7 million (after deducting the underwriting discount and
estimated initial public offering expenses). This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
ACTUAL AS ADJUSTED (1)
------ ---------------
<S> <C> <C>
Short-term debt, including current portion of
long-term debt, capital lease obligations and
other obligations .................................... $ 406,397 $ [37,992]
Long-term debt, line of credit, capital lease
obligations and other obligations, less current
portion .............................................. 3,773,895 [560,598]
Notes payable to related parties ..................... 100,000 --
Shareholders' equity:
Preferred Stock, no par value per share;
10,000,000 shares authorized, no shares outstanding -- --
Common Stock, no par value per share;
50,000,000 shares authorized; 4,666,223 shares
outstanding; 6,156,223 shares outstanding, as
adjusted (2) ...................................... 2,022,375 [16,765,075]
Stock Purchase Warrants ........................... 7,259 7,259
Retained Earnings ................................. 1,538,043 1,538,043
Total shareholders' equity ...................... 3,567,677 [18,310,377]
Total capitalization ............................ $7,847,969 $[18,908,967]
========== ============
</TABLE>
- --------------
(1) Does not include 528,000 shares of Common Stock issuable upon the
exercise of stock options granted under the Company's stock option plans
and 12,000 shares of Common Stock issuable upon the exercise of an
outstanding warrant. See "Management - Compensation Pursuant to Plans"
and "Description of Capital Stock."
(2) Share amounts have been adjusted for a three-for-one stock split approved
by the Board of Directors on November 14, 1997.
11
<PAGE> 15
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock.
The Company expects that future earnings, if any, will be retained to finance
the growth and development of the Company's business and, accordingly, does not
intend to declare or pay any cash dividends on the Common Stock for the
foreseeable future. The declaration, payment and amount of future dividends, if
any, will be subject to the sole discretion of the Company's Board of Directors
and will depend upon the future earnings, results of operations, financial
condition and capital requirements of the Company and any applicable contractual
restrictions and such other factors as the Board of Directors, in its sole
discretion, deems relevant. Moreover, the Company's current $5,000,000 Revolving
Line of Credit, dated April 3, 1995, with First American National Bank, as
amended, restricts the Company's ability to pay cash dividends.
12
<PAGE> 16
DILUTION
At September 30, 1997, the net tangible book value of the Company was
approximately $2.8 million, or $0.61 per share of Common Stock. Net tangible
book value per share represents the amount of the Company's total tangible
assets less total liabilities, divided by the number of shares of Common Stock
outstanding.
After giving effect to the issuance and sale by the Company of the
1,490,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $11.00 (the midpoint of the estimated initial public offering
price) per share, and after deducting the estimated underwriting discount and
offering expenses payable by the Company and the receipt by the Company of
approximately $14.7 million in net proceeds, the pro forma net tangible book
value of the Company at September 30, 1997 would have been approximately $17.6
million, or $2.85 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $2.24 per share to existing
shareholders and an immediate dilution in net tangible book value of $8.15 per
share to purchasers of Common Stock in the Offering. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $11.00
Net tangible book value prior to the Offering.................... $0.61
Increase in net tangible book value attributable to
new investors.................................................. 2.24
-----
Pro forma net tangible book value after the Offering............. 2.85
Dilution in net tangible book value to new investors............. $ 8.15
======
</TABLE>
The following table summarizes, at September 30, 1997, the number of shares
of Common Stock issued by the Company, the total consideration paid to the
Company and the average price per share paid to the Company by existing
shareholders and by the new investors purchasing shares of Common Stock in the
Offering at an assumed initial public offering price of $11.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED (1) TOTAL CONSIDERATION AVERAGE PRICE
-------------------- --------------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders 4,331,223 70% $ 1,631,934 8% $ 0.38
New investors........ 1,825,000 30% 20,075,000 92% 11.00
--------- ---- ----------- ---
Total(2)........... 6,156,223 100% 21,706,934 100%
========= ===========
</TABLE>
- ------------------------
(1) Sales by Selling Shareholders in this Offering will cause the number of
shares owned by existing shareholders to be reduced to 4,331,223 shares, or
approximately 70%, and the number of shares owned by new investors to be
increased to 1,825,000 shares, or approximately 30%, of the total number of
shares of Common Stock to be outstanding after this Offering. See
"Principal and Selling Shareholders."
(2) Does not include 528,000 shares of Common Stock issuable upon the exercise
of stock options granted under the Company's stock option plans and 12,000
shares of Common Stock issuable upon the exercise of an outstanding
warrant. See "Management - Compensation Pursuant to Plans" and "Description
of Capital Stock."
13
<PAGE> 17
SELECTED FINANCIAL DATA
The selected financial data set forth on the following page for the Company
as of December 31, 1995 and 1996 and for each of the three years in the period
ended December 31, 1996 are derived from the audited financial statements
included elsewhere herein. The selected financial data set forth on the
following page for the Company as of December 31, 1992, 1993 and 1994, and for
each of the two years in the period ended December 31, 1993 are derived from
financial statements not included elsewhere herein. The financial data for the
nine-month periods ended September 30, 1996 and 1997 are derived from unaudited
financial statements. The unaudited financial statements include all
adjustments, consisting of normal recurring accruals, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the entire year ending December 31, 1997 or any other period.
All information contained in the following tables should be read in
conjunction with "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's Financial
Statements and related Notes included elsewhere in this Prospectus.
14
<PAGE> 18
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
----------------------------------------------------------- ----------------------
(unaudited)
STATEMENT OF OPERATIONS DATA: 1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales ........................ $ 4,626 $ 6,570 $ 13,490 $ 13,193 $ 18,869 $ 15,212 $ 20,318
Costs of goods sold .............. 3,061 5,006 10,310 9,990 12,091 9,685 12,434
-------- -------- -------- -------- -------- -------- --------
Gross profit on sales ............ 1,565 1,564 3,180 3,203 6,778 5,527 7,884
Operating costs and expenses:
Selling, general and
administrative expenses ........ 1,149 1,321 2,496 3,122 3,410 2,556 3,859
Research and Development ....... 159 462 471 912 664 485 716
Interest Expense ............... 57 31 149 468 715 367 316
-------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes and cumulative
effect of accounting change .... 200 (250) 62 (1,299) 1,989 2,119 2,993
Income tax benefit (provision) ... (23) 90 7 (196) (42) (105) (1,137)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative
effect of accounting
change ........................... 177 (160) 69 (1,495) 1,947 2,014 1,856
Cumulative effect of
accounting change ................ -- 60 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................ $ 177 ($ 100) $ 69 ($ 1,495) $ 1,947 $ 2,014 $ 1,856
======== ======== ======== ======== ======== ======== ========
Earnings per common and equivalent
share before cumulative
effect of accounting change ...... $ 0.06 $ (0.05) $ 0.02 $ (0.32) $ 0.38 $ 0.39 $ 0.35
======== ======== ======== ======== ======== ======== ========
Income (loss) per common and
equivalent
share:
Primary ........................ $ 0.06 $ (0.03) $ 0.02 $ (0.32) $ 0.37 $ 0.38 $ 0.35
======== ======== ======== ======== ======== ======== ========
Diluted ........................ $ 0.06 $ (0.03) $ 0.02 $ (0.32) $ 0.36 $ 0.38 $ 0.34
======== ======== ======== ======== ======== ======== ========
Number of shares and common
stock equivalents used in
computing earnings per
common and equivalent share(2):
Primary ......................... 2,944 3,106 4,123 4,733 5,330 5,306 5,362
Fully diluted ................... 2,944 3,106 4,123 4,733 5,390 5,361 5,396
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1997
----------------------------------------------------------- -------------------------
BALANCE SHEET DATA: 1992 1993 1994 1995 1996 Actual As Adjusted(1)
-------- -------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets ................... $ 1,538 $ 2,067 $ 4,514 $ 3,613 $ 6,255 $ 9,310 $ 20,371
-------- -------- -------- -------- -------- -------- --------
Total assets ..................... 1,606 2,359 5,119 4,449 7,119 11,045 22,106
-------- -------- -------- -------- -------- -------- --------
Long-term debt ................... 26 -- 172 1,072 162 3,874 561
-------- -------- -------- -------- -------- -------- --------
Shareholders' equity ............. 515 257 1,921 791 2,987 3,568 18,310
</TABLE>
- --------------------
(1) Adjusted to reflect the sale by the Company of 1,490,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $11.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "Capitalization."
(2) Reflects a 100-for-1 stock split effected as a stock dividend on September
19, 1994, and a three-for-one stock split effected as a stock dividend on
November 14, 1997.
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the Financial Statements and
Notes thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains certain
forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this Prospectus should be read as being applicable
to all related forward-looking statements wherever they appear in this
Prospectus. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include those discussed in "Risk Factors," as well as those discussed elsewhere
in this Prospectus.
OVERVIEW
The Company has achieved significant growth in the last five years, with
net sales increasing from $4.6 million in 1992 to $18.9 million in 1996. Net
sales increases have been primarily attributable to the addition of retailers to
the Company's distribution system as well as expanded penetration within each
retailer's chain. While the Company currently offers over 20 electronic pet
containment and training products, a substantial portion of the increase in net
sales has been attributable to the Company's Radio Fence pet containment
products. The Company's five largest customers accounted for 50.9% of total net
sales for the nine months ended September 30, 1997. The Company believes that
sustained growth can be achieved through continued expansion of its product line
and distribution channels, as well as increasing market awareness at the
consumer level, selective acquisitions, expansion of international sales and
other measures.
Product sales are recognized upon shipment, net of estimated trade
discounts and returns. Estimated warranty costs attributable to the Company's
standard warranty program are accrued for at the time of sale. Substantially all
sales transactions are denominated in U.S. dollars.
Cost of goods sold includes production costs plus freight, customs and
other costs associated with delivery from foreign contract manufacturers or from
domestic suppliers, as well as royalties paid under certain licensing or other
agreements. Selling, general and administrative expenses ("SG&A") include costs
related to the Company's sales force, which is comprised principally of
independent representatives working on a commission basis, and to a lesser
extent, of in-house associates. SG&A also include costs associated with
marketing and advertising activities, as well as corporate and administrative
support functions. Research and development costs consist primarily of salaries,
overhead and materials costs related to design and development efforts of the
Company's in-house engineering staff, as well as similar services provided on a
contract basis by third party consultants. Such costs are expensed when
incurred.
16
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of total net sales represented by certain items reflected in the
Company's statements of operations and the percentage change from period to
period in such items.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
-------------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 76.4 75.7 64.1 63.7 61.2
----- ----- ----- ----- -----
Gross profit on sales 23.6 24.3 35.9 36.3 38.8
Selling, general and
administrative expenses 18.5 23.7 18.1 16.8 19.0
Research and development 3.5 6.9 3.5 3.2 3.5
Interest expense 1.1 3.5 3.8 2.4 1.6
----- ----- ----- ----- -----
Income (loss) before income
taxes 0.5 (9.8) 10.5 13.9 14.7
Income tax benefit (provision) 0.1 (1.5) (0.2) (0.7) (5.6)
----- ----- ----- ----- -----
Net income (loss) 0.5% (11.3)% 10.3% 13.2% 9.1%
===== ===== ===== ===== =====
</TABLE>
Nine Months Ended September 30, 1997 Compared With Nine Months Ended September
30, 1996
Net sales. Net sales increased $5.1 million, or 33.6%, to $20.3 million for
the nine months ended September 30, 1997, from $15.2 million for the same period
in 1996. Of the increase, approximately $3.8 million was attributable to
increased net sales to existing retailers with the remaining $1.3 million
attributable to net sales to new retailers. The growth in net sales was
attributable to increased sales of existing products, as well as the
introduction of new training products developed by the Company or acquired by
the Company in the Austin Acquisition, such as bark control collars and
ultrasonic trainers.
Cost of goods sold. Cost of goods sold increased $2.7 million, or 28.4%, to
$12.4 million for the nine months ended September 30, 1997, from $9.7 million
for the same period in 1996. Cost of goods sold decreased as a percentage of net
sales from 63.7% for the nine months ended September 30, 1996, to 61.2% for the
same period in 1997, due to cost reductions resulting from efficiencies realized
in packaging and improved pricing with suppliers. Production overhead as a
percentage of net sales continued to decrease in 1997, as fixed costs were
spread over greater net sales volume. Freight costs as a percentage of net sales
decreased primarily as a result of improved freight rates and larger shipment
sizes.
Selling, general and administrative expenses. SG&A expenses increased $1.3
million, or 51.0%, to $3.9 million for the nine months ended September 30, 1997,
from $2.6 million for the same period in 1996. Increased marketing activities,
primarily advertising, accounted for approximately 31% of the increase and
increases in variable costs such as sales commissions and cooperative
advertising accounted for an additional 35% of the increase. Administrative and
other support costs remained relatively stable due to a combination of an
increase in bonuses payable as a result of improved operating results and a
reduction of costs achieved by the Company through its profit teams. SG&A as a
percentage of net sales increased from 16.8% in 1996 to 19.0% in 1997.
Research and development expenses. Research and development expenses
increased $230,000, or 47.6%, to $716,000 for the nine months ended September
30, 1997, from $486,000 for
17
<PAGE> 21
the same period in 1996, reflecting an increase in the number of personnel. The
additional personnel were added to increase activity in both the development of
new products and the enhancement of existing products.
Interest expense. Interest expense decreased $51,000, or 13.9%, to $316,000
for the nine months ended September 30, 1997, from $367,000 for the same period
in 1996. This decrease was substantially attributable to the decrease in
amortization of the debt discount associated with the stock purchase warrants
held by the subordinated debt holder. The subordinated note was retired on
December 18, 1996. This decrease was partially offset by the increase in
borrowing cost associated with debt incurred for the Austin Acquisition and for
the repurchase of the aforementioned stock purchase warrants.
Income taxes. Income tax provision increased $1.0 million, or 982.9%, to
$1.1 million for the nine months ended September 30, 1997, from $105,000 for the
same period in 1996. The 4.9% effective rate for 1996 reflected both the
utilization of net operating loss carryforwards from prior periods, as well as
reversal of the deferral tax valuation allowance established in 1995. The 1997
effective rate of 38.0% reflects the Company's combined federal and state tax
rate, as the utilization of net operating loss carryforwards and the change in
deferred tax asset valuation allowance were recorded entirely in 1996.
Year Ended December 31, 1996 Compared With Year Ended December 31, 1995
Net sales. Net sales increased $5.7 million, or 43.2%, to $18.9 million for
fiscal year 1996, from $13.2 million for fiscal year 1995. Of the increase,
approximately $3.4 million was attributable to increased sales through existing
distribution channels, with the remaining $2.3 million attributable to the
addition of new retailers. The increase in sales of the Radio Fence pet
containment products reflected an increase in volume of 34.0%, as the Company
implemented a dual brand strategy, with the Radio Fence brand featuring the
newer, ultralight receiver at a premium price, and the Pet Guardian brand using
the older receiver, offered at a more economical price.
Cost of goods sold. Cost of goods sold increased $2.1 million, or 21.0%, to
$12.1 million for fiscal year 1996, from $10.0 million for fiscal year 1995.
Cost of goods sold decreased as a percentage of net sales from 75.7% in 1995 to
64.1% in 1996, due to several cost reduction initiatives implemented in the last
quarter of 1995 and the first quarter of 1996. Such initiatives included the
outsourcing of substantially all manufacturing and assembly operations to third
parties, entering into more favorable copper supply arrangements and integrating
new, more cost-effective designs into the Company's pet containment products.
Selling, general and administrative expenses. SG&A expenses increased
approximately $300,000, or 9.2%, to $3.4 million for fiscal year 1996, from $3.1
million for fiscal year 1995. Increased selling and marketing costs associated
with the increase in net sales and increased compensation expense associated
with higher profitability were partially offset by reductions in corporate and
administrative expenses achieved by personnel reductions and other cost control
measures. As a result of higher net sales in 1996, SG&A as a percentage of net
sales decreased from 23.7% in 1995 to 18.1% in 1996.
Research and development expenses. Research and development expenses
decreased approximately $250,000 or 29.4%, to $664,000 for fiscal year 1996,
from $912,000 for fiscal year 1995. This decrease reflected a more focused
approach to new product development, which resulted in a reduction in both
research personnel and the use of outside engineering services.
Interest expense. Interest expense increased $247,000, or 52.8%, to
$715,000 for fiscal year 1996, from $468,000 for fiscal year 1995. Substantially
all of the increase is attributable to increased amortization of debt discount
associated with the stock purchase warrant held by the subordinated debt holder.
The subordinated note was retired on December 18, 1996.
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<PAGE> 22
Income taxes. Income tax provision decreased $153,000, or 78.6%, to $42,000
for fiscal year 1996, from $196,000 for fiscal year 1995. The net decrease
primarily reflected the approximately $1.3 million increase in tax provision
based on statutory rates applied to higher taxable income, net of the $1.4
million decrease resulting from the reversal of the $685,000 deferred tax asset
valuation allowance established in 1995. The elimination of the valuation
allowance reflected the utilization of net operating loss carryforwards and tax
credits for which a 100% valuation allowance had been established in 1995.
Year Ended December 31, 1995 Compared With Year Ended December 31, 1994
Net sales. Net sales decreased approximately $300,000, or 2.2%, to $13.2
million for fiscal year 1995, from $13.5 million for fiscal year 1994. A net
sales decrease of approximately $1.0 million to existing retailers was partially
offset by net sales of approximately $700,000 to new retailers. Substantially
all 1995 and 1994 net sales were in the pet containment product category.
Cost of goods sold. Cost of goods sold decreased approximately $321,000, or
3.1%, to $10.0 million for fiscal year 1995, from $10.3 million for fiscal year
1994, as a result of lower net sales volume. Cost of goods sold as a percentage
of net sales remained relatively unchanged at approximately 76.0%.
Selling, general and administrative expenses. SG&A expenses increased
approximately $626,000, or 25.1%, to $3.1 million for fiscal year 1995, from
$2.5 million for fiscal year 1994, primarily as a result of additional personnel
costs as the Company added customer service, and other support staff in
anticipation of net sales increases that did not materialize until 1996. SG&A as
a percent of net sales increased from 18.5% to 23.7%.
Research and development expenses. Research and development expenses
increased approximately $441,000, or 93.6%, to $912,000 for fiscal year 1995,
from $471,000 for fiscal year 1994, reflecting increased developmental
activities with respect to new training and other products.
Interest expense. Interest expense increased $319,000, or 214.1%, to
approximately $468,000 for fiscal year 1995, from $149,000 for fiscal year 1994,
primarily as a result of interest expense of $264,000 associated with
subordinated debt issued in December 1994. Such interest expense included
$134,000 related to amortization of the debt discount associated with the stock
purchase warrants held by the subordinated debt holder.
Income taxes. The Company's $7,000 tax benefit for 1994 reflected the
utilization of certain research and development credits, which more than offset
the provision related to 1994 earnings. The 1995 tax provision reflected
establishment of a deferred tax asset valuation reserve of $685,000, which more
than offset a tax benefit of $493,000 related to the 1995 loss from operations.
The reserve was established as realization of the net operating loss
carryforwards was deemed to be unlikely at that time.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed its operations through a
combination of cash flow from operations, bank and other borrowings and equity
capital. The Company's capital requirements have arisen primarily in connection
with purchases of fixed assets and the Austin Acquisition. On May 15, 1997, the
Company paid $1.8 million to a former subordinated debt holder of the Company to
repurchase warrants held by such former subordinated debt holder.
Net cash provided (used) by operating activities improved from ($2.3
million) for the fiscal year 1994 to ($74,000) for the fiscal year 1995
primarily due to significantly lower inventory levels in 1995. Net cash provided
(used) by operating activities increased to $68,000 in 1996 due to a significant
improvement in net income (loss) from ($1.5 million) for the fiscal year 1995 to
$1.9 million for the fiscal year 1996. Net cash provided (used) by operating
activities in the first nine
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<PAGE> 23
months of 1997 increased to $194,000 from ($29,000) in the first nine months of
1996 primarily reflecting an increase in accounts payable and accrued
liabilities due to improved cash management and a higher level of business
activity. Investing activities include additions to property, plant and
equipment and the consummation of the Austin Acquisition in March 1997.
On March 31, 1997, the Company consummated the Austin Acquisition. Under
the terms of the Austin Acquisition purchase agreement, the Company paid
$500,000 cash within 90 days of closing and agreed to pay the seller royalties
on product sales of a minimum of $750,000 over five years and an overall maximum
of $1.5 million. This transaction was accounted for by the purchase method of
accounting. Accordingly, the total purchase price, including the present value
of the minimum royalty payments, was approximately $1.1 million. A portion of
the purchase price was allocated to the separately identifiable assets
(principally inventory and product molds) at their respective fair values. The
remaining portion of the purchase price has been allocated to goodwill and other
intangible assets and is being amortized under the straight-line method over
seven years. The present value of the minimum royalty payments is included in
long-term debt and other obligations in the accompanying financial statements.
In May 1997, the Company redeemed the warrants held by a subordinated debt
holder. Consideration for the warrants was $1.8 million and has been recorded,
net of the excess tax deduction benefit of $510,000, as a charge to
shareholders' equity. This transaction was partially financed by a one-year term
loan from a bank of $1.0 million.
The Company maintains a bank line of credit that provides for borrowings on
(i) a revolving "primary" line, expiring May 30, 1999, of up to $5.0 million
with a limit of (a) 75% of eligible receivables, as defined herein, plus (b) the
lesser of 50% of eligible inventory, as defined, or $1.5 million; and (ii) a
non-revolving "acquisition" line, expiring May 30, 1998, of up to $1.5 million
for permitted acquisitions, as defined herein. The primary line bears interest
at the bank's index rate plus 1%, or plus 0.5% beginning December 31, 1997 if
certain conditions exist at that date. The acquisition line bears interest at
the bank's index rate plus 1%. The outstanding balance on the line of credit at
September 30, 1997 was approximately $2.6 million. The Company intends to use a
portion of the net proceeds of this Offering to repay the outstanding amounts on
its line of credit. See "Use of Proceeds."
The Company's principal commitments as of September 30, 1997 consisted
primarily of long-term debt of $1.6 million primarily related to the Austin
Acquisition and to the purchase of stock warrants from a former subordinated
debt holder, as well as the $2.6 million balance on the line of credit, all as
described above. After the application of the net proceeds of this offering as
set forth in "Use of Proceeds," the Company believes that its cash balances,
availability under its line of credit, and its cash flows from operations will
be sufficient to meet its working capital expenditure needs for at least the
next 12 months.
Although the Company has no present agreements, arrangements or commitments
with respect to any acquisition, the Company may in the future make strategic
acquisitions of other complementary businesses using stock, cash, debt or a
combination thereof. Depending on the terms of any potential acquisition, the
Company may need to incur additional indebtedness or issue equity securities to
make any such acquisition.
The Company routinely engages in transactions in foreign countries.
Substantially all of the Company's transactions are denominated in U.S. dollars,
thereby limiting the Company's exposure to fluctuations in foreign currency
exchange rates.
IMPACT OF INFLATION AND CHANGING PRICES
The Company believes that the relatively moderate rate of inflation
experienced over the past several years has not had a material impact on its
sales or profitability.
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<PAGE> 24
SEASONALITY
The Company's quarterly net sales and results of operations fluctuate
significantly, in part, with seasonal shifts in the retail industry, changes in
climate and the introduction of new products and technology. Historically,
approximately 55-60% of the Company's net sales have taken place in the second
and third fiscal quarters, when the weather is warm or mild.
EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the FASB issued Statement of Accounting Standards No.
128, Earnings Per Share ("SFAS 128"). SFAS 128 simplifies the standards for
computing earning per share ("EPS"). Additionally, SFAS 128 requires dual
presentation of the basic and diluted EPS on the face of the income statement
and requires a reconciliation of the numerator and denominator of the diluted
EPS calculation. The Company plans to adopt the provisions of SFAS 128 in fiscal
year 1997. Had the pronouncement been in effect at December 31, 1994, 1995 and
1996, basic and diluted EPS would have been $0.01 (both basic and diluted) in
1994, $(0.27) (both basic and diluted) in 1995 and $0.35 and $0.31 in 1996,
respectively.
IMPACT OF OTHER RECENTLY RELEASED ACCOUNTING STANDARDS
In addition to SFAS 128, the FASB has issued the following standards,
which: (i) are not yet effective, and (ii) are not expected to have a material
impact on the Company.
- - SFAS 129, Disclosure of Information About Capital Structure, issued in
February 1997, effective for fiscal years ending after December 15, 1997.
- - SFAS 130, Reporting Comprehensive Income, issued in June 1997,
effective for fiscal years beginning after December 15, 1997.
- - SFAS 131, Disclosures About Segment of an Enterprise and Related
Information, issued in June 1997, effective for fiscal years beginning
after December 15, 1997.
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<PAGE> 25
BUSINESS
GENERAL
Radio Systems is a leading provider of electronic pet containment and
training products. The Company currently offers over 20 products, including
radio fences, bark control collars, ultrasonic pet trainers, pet locators,
ultrasonic pest deterrents and an electronic flea comb. The Company introduced
its first Radio Fence pet containment system in 1991, which is a radio frequency
based system designed to keep pets safely in a designated area without a visible
fence. Radio Systems was the first company to introduce an affordable and
user-friendly "do-it-yourself" product to the electronic pet containment market
by designing and packaging its product for sale through mass retailers. The
retail prices of the products currently offered by the Company range from $9.95
to $299.
The Company's primary product is the Radio Fence pet containment system,
which provides a safe, reliable method of pet containment utilizing a
proprietary computer microchip housed in the pet's collar to administer a mild,
electronic correction when the pet approaches a designated boundary. The pet
owner designates an outdoor containment area by running a wire approximately
three inches beneath the ground. Once the pet has been properly trained to
associate the mild, electronic correction with the boundaries of its containment
area, the pet learns not to approach those boundaries. The Company's newest pet
containment product is the Spray Control Radio Fence, which uses a burst of
non-toxic citronella spray from the pet's collar that is unpleasant to the pet,
rather than the electronic correction. For the nine months ended September 30,
1997, Radio Fence pet containment products represented approximately 75% of the
Company's net sales.
Management believes that the Company's success is primarily due to its
ability to apply technological expertise and its marketing efforts. The Company
has achieved a position as an innovator and a leader in the electronic pet
containment and training products industry, in part, through the use of
technological expertise in low frequency magnetics, radio frequency magnetics,
radio frequency design, receiver miniaturization, ultrasonics and mixed signal
computer chip design. The Company leverages its technological and engineering
capabilities to develop new products and enhance its existing products. For
example, during 1996 and 1997 combined, the Company introduced eight new
products and enhanced many of its existing products. In addition, the Company
currently has over 20 potential new products in various stages of development.
The Company currently distributes its products through most of the major
mass retail chains in the United States, consisting of over 7,000 retail
locations. The following table lists certain of the major retailers, grouped by
retail category, that offer the Company's products, together with the percentage
of the Company's net sales attributable to each category for the nine months
ended September 30, 1997:
<TABLE>
<CAPTION>
Hardware/Home Improvement Mass Merchants/Discount
Stores (28%) Stores (26%) Farm Supply Stores (12%)
- -------------------------- -------------------------- -------------------------
<S> <C> <C>
Lowe's Wal-Mart Tractor Supply
Home Depot Kmart Central Tractor
Builder's Square Target Agway
Payless Cashways Ames Quality
Hechinger
Ace Hardware
Pet Supply Stores (17%) Catalog Retailers (13%) Other (4%)
- -------------------------- -------------------------- ------------------------
PETsMART Sporting Dog Northern Hydraulics
Petco Sears Canada PetSafe Ltd. (U.K.)
Pet Supplies Plus Damark
Sharper Image
Cabela's
</TABLE>
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<PAGE> 26
Management believes it will be able to expand sales of its products
significantly by increasing the public's awareness that economical and
dependable electronic pet containment and training products are available. Most
of the Company's retailers offer its products in all or substantially all of
their stores, but only a few carry more than five of the Company's products.
Management believes that additional sales growth can result from increasing the
number of retailers and stores that currently carry its products as well as the
range of products offered by each. Management also intends to grow the Company
through the selective acquisition of complementary businesses as well as through
the expansion of international sales.
The Company's operating strategy is to utilize its existing marketing and
engineering capabilities and take advantage of its strong distribution channels
and market positions to maintain and strengthen its status as a leader in the
market for electronic pet containment and training products market. In addition,
the Company intends to remain committed to its customers by continuing to
develop customer-driven products, providing exceptional customer service,
maintaining cost-effective manufacturing and product development techniques, and
empowering its personnel through profit teams to enhance the Company's products,
processes and profitability.
INDUSTRY OVERVIEW
The Company perceives significant growth in its target market as a result
of several trends including: (i) the absolute growth in the number of pet owning
households and in the number of pets, (ii) the absolute growth of sales of pet
supplies, (iii) the evolving needs of this target market, and (iv) technological
advances resulting in alternative solutions.
Pet ownership and the resulting pet supply market have grown considerably
in recent years and this growth is expected to continue. Based on industry
surveys, in 1996, approximately 57% of all households in the United States owned
at least one dog or cat during the year (up from 54% in 1990) and, in the
aggregate, Americans owned approximately 128 million dogs and cats, an increase
of 20% from 1990. In addition, based on industry publications, Americans spent
$4.1 billion on non-food pet supplies in 1996, an amount which is projected to
grow to $6.1 billion by 2001.
Further, management believes that the needs of the Company's target market
have evolved as a result of the increasing percentage of dual income families,
longer work weeks and increasing travel habits, resulting in an increased
reliance on pet containment and training products as well as an increased
awareness of pet behavioral issues. According to a 1996 survey by the American
Pet Products Manufacturers Association, 58% of pet owners indicated that
"finding care when away" was a drawback to owning a pet (making this the most
often cited drawback) and 26% indicated that "noise, barking and whining" was a
major concern. Therefore, as the number of dual income families grows and more
people pursue active lifestyles, management believes that the appeal of
electronic pet containment and training products is greatly enhanced as pet
owners have less time to directly supervise and train their pets.
Traditionally, pet owners have relied upon conventional methods, such as
fences and chains, to contain their pets. Products such as those sold by the
Company are designed to address the substantial expense and often unattractive
appearance associated with traditional pet containment devices. The
technological improvements made by the Company have led to less expensive,
smaller, easier to install and more energy efficient products to service the
needs of this growing and evolving market. Pet containment products similar to
the Company's Radio Fence are also sold through specialty fence installers.
Purchasers of those systems generally pay a significant premium to have the pet
containment system installed or maintained by the specialty fence installer. The
Company and a small number of private companies market and sell pet containment
systems such as the Radio Fence to the "do-it-yourself" market through mass
retailers. These pet containment systems are sold at a significant discount to
those offered by specialty fence installers.
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<PAGE> 27
Company research suggests that only approximately 30% of existing
homeowners are aware that electronic pet containment products exist. Management
believes that an even smaller percentage of homeowners are aware that economical
and dependable "do-it-yourself" electronic pet containment systems are
available. While approximately 90% of pet owners in the United States own or
rent homes, the Company estimates that fewer than 600,000 electronic pet
containment products such as the Company's Radio Fence have been sold in the
last three years.
GROWTH STRATEGY
The Company intends to continue its growth by (i) increasing market
awareness of and demand for its products, (ii) increasing sales through existing
and new distribution channels, (iii) applying technological capabilities to
develop and enhance products, (iv) selectively acquiring complementary
businesses and (v) expanding international sales.
Increase Market Awareness. Because of limited market awareness of
electronic pet containment and training products such as the Radio Fence,
management believes that it can increase sales of its Radio Fence pet
containment systems significantly in its core domestic market by increasing the
public's awareness that economical and dependable products such as those offered
by the Company are available. Management believes that the Company can increase
the market awareness of the Company's products by focusing on its advertising
and merchandising efforts.
Emphasize Advertising. Prior to 1997, the Company had not purchased
advertising for its products, although its products were selectively
advertised by certain retailers. During 1997, the Company initiated a
direct advertising effort, and while management believes that these
advertising efforts were successful, the results were limited by the small
amount of capital spent. To increase market awareness of and demand for
its products, the Company intends to substantially increase its spending
on advertising in 1998. The Company currently intends to target consumers
by advertising primarily through television, newspapers and magazines,
although the Company may also advertise through other channels including
direct marketing. In addition, the Company intends to cross-sell its
products by including marketing and advertising information regarding the
Company's various products in boxes containing the Company's Radio Fence
pet containment systems. The Company has recently retained a national
advertising agency to assist the Company with its advertising efforts.
Improve Point of Sale Merchandising. The Company's merchandising goal is
to enhance its product presentation so that customers can more easily
identify the Company's products at the point of sale. For example, the
Company is currently working with one retailer to develop a user-friendly
display board to demonstrate the Company's products and to more
efficiently utilize shelf space. In addition, the Company intends to
aggressively pursue opportunities to place Radio Systems signs at the
point of sale to enable consumers to easily locate the Company's products
within stores. The Company also intends to introduce new, distinctive
packaging for its core products to enhance brand and product recognition.
The Company will also pursue opportunities to display its products off of
the shelves with free-standing displays in the aisles of the retail
stores.
Increase Sales Through Existing and New Distribution Channels. The Company
currently distributes its products through most of the large mass retail chains
in the United States. Most of these retailers offer the Company's products in
all or substantially all of their stores, but only a few of these retailers
carry more than five of the Company's products in each of its stores. Although
the Company's products are currently distributed through over 7,000 retail
locations, management believes that additional sales growth can result from
increasing the Company's penetration of retailers that currently offer the
Company's products. The Company intends to continue its efforts to increase the
range of products offered by each retailer and store and to increase the number
of retailers and stores that carry its products.
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<PAGE> 28
Expand the Selection of Products Available at Retail. Management believes,
based on discussions with representatives of certain of the Company's
retail customers, the Company will be able to expand the selection of
products offered at many of these customers and increase its penetration
with certain of its customers. Management also believes that the Company's
increased advertising will increase the awareness of and demand for the
Company's products, thereby encouraging stores to expand their offerings
of the Company's products. In addition, the Company intends to continue to
apply technology to introduce new products and to enhance existing
products, thereby creating further demand for a broader selection of its
products.
Add Distribution Channels. The Company intends to broaden its distribution
to other retail segments such as grocery stores, drug stores, club stores,
veterinarians and independent dealers. Management believes that the price
points of certain of its products are within the range of products
customarily carried by such retailers.
Grow With Existing Distribution Channels. Based on the Company's current
relationships with the retail chains that now offer the Company's
products, management believes that it will be able to successfully place
its products in many of the new stores expected to be opened in the future
by such retail chains. No assurance can be given, however, that any such
expansion will occur or, if such expansion does occur, that the Company
will benefit.
Apply Technological Capabilities to Develop and Enhance Products. The
Company intends to maintain and enhance its industry position as an innovator
and a leader in the successful application of technology in electronic pet
containment and training products. Radio Systems has achieved this position
through the use of technological expertise in low frequency magnetics, radio
frequency magnetics, radio frequency design, receiver miniaturization,
ultrasonics and mixed signal computer chip design. The Company intends to
leverage its technological and engineering capabilities in these areas to
develop and identify new products and to enhance its existing products.
In 1993, the Company, together with Concorde Microsystems, Inc., an
engineering firm of which Ronald Nutt, Ph.D., a director of the Company, is the
founder and currently a director ("Concorde"), developed a proprietary mixed
signal microchip that combines analog and digital components on a single chip.
Use of this chip in connection with the Company's Radio Fence products allowed
the Company to reduce its manufacturing costs to produce the receiver worn on
the pet's collar by approximately 80%, reduce the size of the receiver by
approximately 50% and increase the energy efficiency of the receiver by
approximately 400%. Thus, the Company was able to dramatically reduce the
selling price of its Radio Fence products without adversely affecting its profit
margins. In 1996, the Company re-engineered the Radio Fence receiver and
introduced it as the UltraLight Receiver, 40% smaller and lighter and with twice
the battery life of its previous model. In 1997, in response to customer
comments, the Company redesigned its ultrasonic pest deterrents to, among other
things, double the decibel level emitted from the deterrents to enhance the
effectiveness of the products.
As a result of its commitment to applied technology and innovation, the
Company has, since its formation, successfully introduced economical and
dependable products to the domestic market and continued to enhance its existing
products such as the Radio Fence. During 1996 and 1997 combined, the Company
introduced eight new products to the domestic market and enhanced many of its
existing products. In addition, the Company currently has over 20 potential new
products in various stages of development. The Company may leverage its
technological abilities to introduce new applications in areas such as tracking
and home security.
Selectively Acquire Complementary Businesses. To enhance growth in its
core product line, the Company will continue to evaluate complementary
businesses for acquisition. In March 1997, the Company acquired the electronic
pet related assets of Austin Innovations, Inc. whose products included the
ultrasonic pet trainer and bark control collar. The Austin Acquisition
expanded the
25
<PAGE> 29
Company's product line and increased the Company's sales through a significant
mass retailer. In identifying potential acquisitions, the Company intends to
target entities that are engaged in the Company's existing business or product
lines that can increase the Company's ability to compete in its markets. The
Company may also seek to acquire brand names or technologies that can be
integrated with the Company's existing operations and that will be attractive to
the Company's targeted customers.
Expand International Sales. Currently, only approximately 8% of the
Company's total net sales are made outside of the United States. Of these sales,
approximately half are made in Canada and approximately half are made in Western
Europe. In Canada, the Company's products are offered primarily through large
retail chains. In Western Europe, the Company has a marketing agreement with
PetSafe Ltd., a corporation formed under the laws of the United Kingdom in which
the Company has a minority ownership interest ("PetSafe Ltd."), under which the
Company's products are sold through exclusive dealers and retail establishments.
The Company intends to use its relationship with PetSafe Ltd. to increase
awareness of and demand for the Company's products in the United Kingdom and
other countries of Western Europe. To increase its sales in Western Europe, the
Company recently reduced retail price points by shipping its products, in
certain instances, directly to retailers rather than consolidating shipments via
multiple warehouses in the United Kingdom and Western Europe.
OPERATING STRATEGY
The operating strategy of the Company is to utilize its existing marketing
and engineering capabilities and take advantage of its strong distribution
channels and current market positions to maintain and strengthen its status as a
leader in the market for electronic pet containment and training products.
Maintain and Strengthen Market Position. Management believes that the
Company revolutionized the pet containment industry by introducing the Radio
Fence, an affordable and user-friendly "do-it-yourself" product, to the mass
retail market at a time when comparable products were sold primarily through
specialty fence installation companies. Management believes that the Company has
maintained its leadership position at the mass retail level by being committed
to innovation and customer service, by being sensitive to customer needs, by
using engineering and technological expertise to develop new products and to
continually enhance its existing products, and by offering economical and
dependable solutions to pet owners. As a result of its efforts in pioneering the
"do-it-yourself" market, management believes that the Company's Radio Fence pet
containment systems are the only electronic pet containment system offered by
most of the retailers that carry the Company's products. In addition, management
believes that Radio Systems is recognized as the leading provider by the
purchasing agents at most retailers carrying electronic pet containment and
training products. The Company expects to rely upon these factors, among others,
to strengthen its market position in the future.
Continue to Develop Customer Driven Products. The market for the Company's
products is relatively new and, thus, the Company continually evaluates the
responses and suggestions of its ultimate customers to complement and enhance
its new product development efforts. By remaining sensitive to its market, as
well as to the needs and demands of its customers, the Company can remain
competitive and continue to improve its product offerings. Feedback from
retailers, consumer focus groups and interaction with customers through its
in-house customer service team, provide the Company with its primary means of
customer response. In the past, such interaction has led to technological
improvements in products that reduced cost, improved efficiency or enhanced the
appeal of its products to its customers. For example, in recent years, the
Company applied its technological capabilities to significantly reduce the size
of certain of its pet containment products. The Company also recently introduced
new Radio Fence and bark control products with citronella spray as an
alternative to the mild, electronic correction.
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<PAGE> 30
Provide Exceptional Customer Service. The Company has a dedicated customer
service team consisting of 11 employees which it refers to as "associates"
(approximately 21% of the Company's total number of associates) to assist
customers with questions regarding the Company's products and to respond to and
address customer complaints. All of the members of the Company's customer
service team have undergone pet training classes and possess technological or
electrical training. As a result, management believes that its customer service
team is able to respond effectively to virtually any question regarding the
Company's products and their intended uses. The Company's customer service team
can be reached by calling a toll-free number listed on all of the Company's
products or through the Company's home page on the internet. The efforts of the
Company's customer service team directly support the marketing of the Company's
products through mass retail outlets.
Maintain Cost-Effective Manufacturing and Product Development Techniques.
The Company currently outsources virtually all of its manufacturing and assembly
functions and certain specialized engineering and development projects.
Management believes that the Company maintains a close relationship with its
suppliers and takes steps designed to ensure that the Company's product
specifications and quality standards are met. Management believes that, by
outsourcing certain capital intensive functions, the Company is able to avoid
significant capital expenditures, benefit from the resources of its outside
manufacturers and engineers and concentrate the Company's resources on
developing, marketing and selling its products. As a result of these and other
decisions, management believes that it is better able to control its fixed
costs.
Empower Personnel Through Profit Teams. The Company has empowered its work
force to make many operational and strategic policy and planning decisions.
Radio Systems introduced cross-departmental profit teams in 1996 and believes
that these teams were significantly responsible for the Company's return to
profitability during 1996. These profit teams have direct control over certain
categories of expenses and are responsible for reducing costs, improving
procedures and processes, and establishing budgets, including the capital
investment budget. Coordinated by management, members of the Company's profit
teams regularly review and update corporate objectives and strategy. All
associates have full and equal access to financial information. Management
believes that it increases teamwork and motivation and reduces employee turnover
by empowering its associates with these responsibilities. All of the Company's
associates participate in the Company's profit sharing plan and cash bonus plan,
and more than half of the Company's associates own shares of the Company's
Common Stock or hold employee stock options.
PRODUCTS
The Company's products may generally be classified among three categories
of products: (i) the Radio Fence pet containment line of products, (ii) pet
training products and (iii) other complementary products. Many of the Company's
products are classified by Underwriters Laboratories.
Pet Containment Products. The Company currently offers three primary types
of Radio Fence pet containment systems, the Original Radio Fence, the Spray
Control Radio Fence and the Indoor Radio Fence. Each system includes one
receiver collar, but can be used to contain as many pets as desired within a
single area, as long as each pet is wearing a receiver collar, which may be
purchased separately at most retailers carrying the Company's products. The
Company includes an instructional video tape with each Radio Fence product that
demonstrates the installation of the Radio Fence and the proper training
techniques to be used by the pet owner. The Company's pet containment products
accounted for approximately 86%, 83% and 75% of the Company's net sales for the
fiscal years 1995 and 1996 and for the nine months ended September 30, 1997,
respectively. The Company sold approximately 145,000 pet containment systems in
the nine month period ended September 30, 1997.
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<PAGE> 31
Original Radio Fence. The Company introduced its Original Radio Fence pet
containment system in 1991, which is a radio frequency based system
designed to keep pets safely in a designated area without a visible fence.
Once a Radio Fence product is plugged into a standard electrical outlet, a
radio signal is emitted that travels along an underground wire boundary
installed by the consumer. A lightweight receiver worn on the collar of
the consumer's pet alerts the pet with a warning beep as it approaches the
boundary. If the pet crosses the boundary, it receives a mild, electronic
correction. If the pet is trained properly to associate the receipt of the
mild, electronic correction with the boundary, the pet learns quickly not
to approach or cross the boundary. The Company offers a selection of Radio
Fence systems that vary depending on the size of the property to be
covered and certain other features. The Original Radio Fence sells at
retail for approximately $150 and additional receiver collars may be
purchased at retail for approximately $59.
Spray Control Radio Fence. The newest version of the Radio Fence system,
the Spray Control Radio Fence, was introduced by the Company to the
domestic market in July 1997. Spray control technology has been used
successfully in France since 1993 and is licensed by the Company for
distribution in the United States and Mexico. The Company has adapted this
licensed spray control technology for use in the Radio Fence line of
products. The Spray Control Radio Fence operates on the same principle as
the Original Radio Fence, except that it releases a burst of citronella
spray rather than an electronic correction when a pet crosses the defined
boundary. To pet owners, the citronella spray smells much like lemon.
Pets, however, find the spray and the smell of citronella to be
bothersome. As a result, the citronella spray is an effective deterrent.
Management believes that the Spray Control Radio Fence will appeal to pet
owners that may be concerned about the use of an electronic correction to
train their pets. The Spray Control Radio Fence sells at retail for
approximately $299, additional receiver collars may be purchased at retail
for approximately $149 and additional citronella canisters can be
purchased at retail for approximately $15.
Indoor Radio Fence. The Indoor Radio Fence system, which was introduced by
the Company in 1995, relies upon the proven technology and methods used in
the Company's other pet containment systems to prevent pets from entering
prohibited areas or rooms within the home. With the Indoor Radio Fence, a
small, disk-shaped transmitter about the size of a dinner plate is placed
in the area from which the pet is prohibited, such as a room or portion of
the home. The pet wears the same receiver collar as used with the Original
Radio Fence system. If the pet nears the control area, a warning beep
sounds on its collar. If the pet continues to approach the prohibited
area, it receives a mild, electronic correction. If the pet is trained
properly to associate the receipt of the correction with the prohibited
area, the pet learns quickly not to approach or enter the prohibited area.
The Indoor Radio Fence sells at retail for approximately $89.
Pet Training Products. The Company offers a wide selection of economical
and dependable pet training products. Each of the Company's training products
works by conditioning pets to associate unacceptable behaviors with a negative
correction, or to associate desired behaviors with a positive reinforcement.
Once an association is made, the pet's behavior is modified. The Company's pet
training products accounted for approximately 10%, 9% and 18% of the Company's
net sales for the fiscal years 1995 and 1996, and for the nine months ended
September 30, 1997, respectively.
Bark Control Collars. Radio Systems currently offers three types of bark
control collars, the Original Bark Control Collar, the Silencer Bark
Control Collar and the Spray Control Anti-Bark Collar. The Original Bark
Control Collar was first sold by the Company in 1994 and, in 1996, the
Company sold approximately 68,000 bark control collars. Each of the
Company's bark control collars teaches a dog to associate barking with a
negative correction. By associating barking with the correction, the dog
quickly learns not to bark. All of the Company's bark control collars can
be removed once the dog learns that excessive barking is
not acceptable. The Original Bark Control Collar uses a mild, electronic
correction to train
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<PAGE> 32
the dog and sells at retail for approximately $60. The Silencer Bark
Control Collar was introduced by the Company in 1997 and is designed for
sensitive or easy to train dogs. The Silencer Bark Control Collar emits
unpleasant high frequency sound impulses to train the dog and sells at
retail for approximately $30. The Company has recently introduced the Spray
Control Anti-Bark Collar. The Spray Control Anti-Bark Collar releases a
brisk, non-toxic citronella spray when the dog barks as an alternative to
the mild, electronic correction. The Spray Control Anti-Bark Collar sells
at retail for approximately $180, and additional citronella canisters can
be purchased at retail for approximately $15. The Company licenses the
spray control technology and is authorized to sell spray control products
in the United States and Mexico.
Training Systems. The Company currently offers training systems designed
exclusively for indoor use and for outdoor use.
The Pet Mat Training Aid (the "Pet Mat") was introduced by the Company
in 1996. With the Pet Mat, a mat is placed on the location from which the
pet is prohibited, such as a sofa or a bed. When the pet touches the Pet
Mat, it receives a mild, electronic correction. As a result, it quickly
learns to avoid the prohibited area. Pet Mat adjusts to three levels of
correction, from very mild to standard. Once the pet is trained to avoid
one prohibited area, the Pet Mat can be moved to train the pet to avoid
other areas. The Pet Mat Training Aid system sells at retail for
approximately $60.
The GoodDog! Trainer allows a pet owner to correct a pet's behavior
from a distance of up to 30 feet by using a hand-held remote control
transmitter. The pet wears a special collar which receives the signal sent
by the owner. The GoodDog! Trainer uses infra-red technology to send one of
three signals to the pet: (i) a positive tone, (ii) a mild, electronic
correction accompanied by a negative tone, or (iii) a negative tone by
itself for negative communication without electronic correction. The three
signals provide the pet owner with the means of either deterring negative
behavior or encouraging positive behavior. This collar is designed
exclusively for short-range indoor use. The GoodDog! Trainer also
incorporates a shock disabling switch to avoid accidental corrections. The
GoodDog! Trainer sells at retail for approximately $79 and additional
infra-red collars sell at retail for approximately $39.
The Ultrasonic Pet Trainer was introduced by the Company in 1997 and
operates much like the GoodDog! Trainer, but can be used indoors and
outdoors and utilizes ultrasonic signals to reward or discourage a pet's
behavior. These ultrasonic signals are outside of the range of sounds heard
by humans. The Ultrasonic Pet Trainer can be used to discourage excessive
barking, destructive chewing or digging and other unacceptable behaviors
and can also be used to train a pet to heed commands. The Ultrasonic Pet
Trainer is accompanied by a one hour pet training video that demonstrates
how to correct or encourage virtually any behavior. The Ultrasonic Pet
Trainer sells at retail for approximately $30.
The Company also recently introduced the Champion Trainer. The
Champion Trainer, which relies upon the technology and methods used by the
Company in its Radio Fence products, permits a pet owner to train a pet up
to 75 feet away through the use of a hand-held transmitter. The Champion
Trainer permits the pet owner to choose among eight levels of electronic
correction, from very mild to standard. Designed for the average pet owner,
the Champion Trainer is accompanied by a comprehensive pet training video
that demonstrates how to correct virtually any behavior. The Champion
Trainer sells at retail for approximately $99.
Other Complementary Products. The Company also offers certain other
electronic products that it believes complement its line of electronic pet
training and containment products.
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Management believes that its Ultrasonic Pest Deterrent system has
significant market potential. Backyard pests, such as squirrels or rabbits, are
an annoyance to many consumers eager to cultivate backyard gardens or bird
feeding stations. Many of these consumers, however, are reluctant to use poisons
or traps. The Ultrasonic Pest Deterrent system broadcasts an ultrasonic sound
that is unpleasant to unwanted pests. The product may be used selectively to
deter (i) rodents, rabbits, squirrels and other small animals; (ii) dogs and
cats; or (iii) birds, or may be used to deter any combination of these
categories. The Ultrasonic Pest Deterrent can also be set to protect an area as
small as 170 square feet and as large as 6,000 square feet. The Ultrasonic Pest
Deterrent was introduced in 1995 and sells at retail for approximately $79. The
Company also sells an Ultrasonic Squirrel Deterrent which was introduced in
1996, and sells at retail for approximately $49.
The PetFinder is a small, durable unit worn on a pet's collar. The owner is
instructed to reset the PetFinder once every 24 hours, usually at a set time
each day such as mealtime. If a pet leaves home, or if the PetFinder is not
reset for 48 hours, the PetFinder's bright red warning light will start to flash
thereby alerting others that the pet is lost and needs assistance. The pet's
address and telephone number are printed on the back of the PetFinder making it
easy for anyone to return the lost pet to its home. Radio Systems recently
introduced the PetFinder which sells at retail for $9.95. The Company has
licensed this product for distribution in North America.
The Electronic Flea Comb is another product recently introduced by the
Company. This chemical-free device is easy to use and is an effective way to
protect pets from fleas. The owner simply combs her pet with the Electronic Flea
Comb. While passing across a pet's body, the Electronic Flea Comb emits an
electronic signal that is harmless to the pet but kills the pet's fleas. The
Electronic Flea Comb sells at retail for approximately $29. The Company has
licensed this product for distribution in North America.
PRODUCT DEVELOPMENT
The Company maintains an in-house staff of four engineers and four other
associates with technological training to oversee the design and development of
new products and to enhance the Company's existing products. These engineers
often work with outside engineers or technicians to develop new products or to
enhance the Company's existing products. Management believes that the Company's
technological expertise is a competitive advantage and the Company will seek to
maintain an active staff of engineers to oversee the development of new
products. The Company currently has several products in development, some of
which it plans to introduce within the next twelve months.
The Company has been working with Concorde Microsystems, Inc. since 1993 to
develop a wireless version of the Company's Radio Fence. This wireless system
would correct a pet's behavior if it strayed beyond a given distance from a
radio transmitter. Based on preliminary test data and models, management
believes that this wireless system will cover an area of up to one acre. This
product is expected to sell at retail for approximately $299. Although
prototypes of this system exist, management believes that further development of
this product will be required before it is available for distribution.
The Company is also currently working to expand its line of remote trainers
and anticipates that it will offer citronella spray control and other remote
trainers that will have expanded training ranges of up to one mile. Management
believes that long-range trainers will offer expanded capabilities to persons
seeking to train hunting dogs and other special-use animals. Although prototypes
of this line exist, management believes that further development of these
products will be required before it is available for distribution.
To enhance its Radio Fence line of products, the Company is currently
developing a low profile, flexible collar, where the electronic components
contained in the pet's collar are spread over a
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<PAGE> 34
larger area, thereby permitting the receiver to be very thin and almost hidden
from view. Management believes that this feature will be attractive to many pet
owners, especially those with small pets. Although prototypes of this system
exist, management believes that further development of this product will be
required before it is available for distribution.
During the fiscal 1995, 1996 and the nine months ended September 30, 1997,
the Company spent approximately $912,000, $664,000 and $716,000, respectively,
on research and development activities relating to the development of new
products and the enhancement of existing products.
MANUFACTURING AND ASSEMBLY
The Company currently outsources virtually all of its manufacturing and
assembly activities. For the nine month period ended September 30, 1997,
approximately 80% of the Company's products, including its standard Radio Fence
pet containment products, were manufactured or assembled in China by two
manufacturers. Other of the Company's products are manufactured in Israel and
France, and certain of the components of the Company's Radio Fence products are
manufactured in Taiwan. The microchips used in the Company's products are
manufactured by a supplier in California. The Company's products and component
parts are manufactured on a purchase order basis and the Company does not
maintain purchase or supply agreements with its suppliers. Final assembly,
packaging and shipping functions are handled by the Company at its Knoxville,
Tennessee facility.
SALES AND MARKETING
The Company currently sells it products to retailers throughout the United
States, including home improvement stores such as Home Depot and Lowe's, mass
merchants including Wal-Mart, Kmart and Target and major farm supply and pet
supply chains, including Central Tractor, Tractor Supply, Petco and PETsMART.
Lowe's, Wal-Mart and PetsMart accounted for approximately 11.9%, 11.6% and
11.0%, respectively, of the Company net sales for the nine months ended
September 30, 1997. For the nine months ended September 30, 1997, approximately
28% of the Company's net sales were made through home improvement and hardware
stores, 26% through discount stores, 12% through farm supply stores, 17% through
pet supply stores, 13% through catalog retailers and 4% through other channels.
Of these total net sales, approximately 8% were international and were divided
equally between Canada and Western Europe. In Western Europe, the Company
distributes its products through its marketing arrangement with PetSafe Ltd.
The Company's outside sales force consists primarily of 19 non-exclusive,
independent manufacturers' agencies which work on a commission basis and in many
cases have several sales representatives marketing the Company's products. Most
of these manufacturers' agencies have represented the Company for over five
years. For the nine months ended September 30, 1997, approximately 70% of the
Company's sales were made on a commission basis through these manufacturers'
agencies and 30% of the Company's sales were made directly by the Company.
The Company's recently hired national accounts manager is actively working
to formulate and implement an expanded marketing strategy for the Company, and
is also working to further develop the relationships with the Company's
significant accounts previously established by the Company. The Company has
budgeted for, and intends to locate and hire during 1998, regional account
managers for the eastern and western regions of the United States. These
regional account managers will report directly to the national accounts manager.
Management envisions that these regional account managers will work closely with
the Company's independent manufacturers' agencies to ensure that such agencies
are aggressively representing the Company's products. The national accounts
manager and the regional account managers will also work directly with the
retailers offering the Company's products to promptly address any merchandising
or other issues promptly. No assurance can be given, however, that the Company
will successfully locate and hire regional account managers that meet the
Company's requirements.
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The Company uses different brand names for its products to maximize market
penetration, minimize market channel conflicts and to differentiate products by
features, applications and price. The Company currently uses the Radio Fence,
Radio Systems, Premium Radio Fence, Champ and Pet Guardian brand names.
REGULATION
Standards governing the treatment of animals are evolving and developing in
different countries. Various countries, including Norway, Sweden and
Switzerland, prohibit products that are deemed to be inhumane or harmful to
pets. If any governing or regulatory body of any country or other political
jurisdiction with similar or analogous laws determines that the Company's
products are prohibited, then the Company could not sell its products in such
countries or jurisdictions. Legislation has been proposed in the United Kingdom
to ban such products, including products of the type manufactured and sold by
the Company. In addition, at least one town in the United States has adopted
regulations governing the installation and maintenance of products such as the
Radio Fence. In addition to other limitations and registration fees, these
regulations require that pet owners post a sign to notify the public that an
owners' pet is being restrained by an electronic fence. There can be no
assurance that additional laws or regulations will not be proposed or adopted in
the future. In addition, many of the Company's products require compliance with
standards set by the FCC.
INTELLECTUAL PROPERTY
The Company relies on a combination of patents, trademark registrations and
confidentiality agreements to protect its intellectual property. The Company
regards its intellectual property as having significant value in the development
and marketing of its operations and products. The Company's policy is to pursue
registration of its trademarks and patents whenever possible and to oppose
vigorously any infringement of these properties.
The Company currently owns the following federally registered trademarks:
Underground Fence(R), Private Broadcasting Systems(R), Radio Fence(R), and Only
the Best for Your Friend!(R), and has been assigned rights for the use of two
others. The Company has an application for federal registration pending for an
additional trademark, and claims exclusive ownership in other trade and service
marks, all related to the Company's existing products and services. The Company
owns one federal patent related to technology used in products currently offered
by the Company. In addition, it has obtained licenses for the use of three other
patented technologies, all as described below and for use in products currently
offered by the Company. The Company also owns one federal patent and has
obtained Notices of Allowance pending final registration for two others for
technologies in connection with products currently under development.
The Company has an exclusive license with Multi-Vet Limited, a Canadian
corporation ("Multi-Vet"), with respect to the citronella spray technology used
by the Company (the "Spray Technology License Agreement"). Under the Spray
Technology License Agreement, the Company may use the spray technology in the
United States and Mexico in the design, manufacture, sale, distribution and
marketing of electronic pet containment and training products. Under the Spray
Technology License Agreement, the Company must pay a royalty to Multi-Vet based
on the net sales of all spray technology products sold by the Company, together
with certain minimum royalties through 2001. The Spray Technology License
Agreement expires in October 2008, but may be extended upon the mutual consent
of the parties. The Company currently uses the technology licensed to it under
the Spray Technology License Agreement to manufacture and sell the Spray Control
Radio Fence and the Spray Control Anti-Bark Collar.
The Company also has a license with Duplex CSA Limited ("Duplex") to
manufacture, market and sell the PetFinder product in North America and to use
the tradename "PetFinder" (the "PetFinder License Agreement"). The Company
understands that application for a patent in the United States on the PetFinder
product has been submitted by Duplex and such patent is currently pending. Under
the PetFinder License Agreement, the Company must pay to Duplex a set royalty
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for each unit sold by the Company. The PetFinder License Agreement also requires
the Company to meet minimum sales levels to retain its distributor status. The
Pet Finder License Agreement expires in June 2001.
The Company is the exclusive distributor for the Electronic Flea Comb in
the United States, Canada and Mexico under a distribution agreement (the
"Distribution Agreement") between the Company and Mepro Epilady Ltd. ("Mepro").
Under the Distribution Agreement, the Company must meet minimum purchase
requirements of Electronic Flea Comb units to retain its distributor status.
Under the Distribution Agreement, the Company must pay Mepro a set royalty on
each unit sold. Once the Company has purchased from Mepro a specified minimum
number of units, the Company, with the approval of Mepro, may choose a third
party to manufacture the Electronic Flea Comb. The Distribution Agreement
expires in December 1998. Currently, Mepro is in receivership. Therefore, the
Distribution Agreement and its continued execution by Mepro are subject to court
approval.
COMPETITION
The market for the Company's products is very competitive. Management
believes, however, that it has developed and currently maintains a leading
competitive position in the electronic pet containment and training products
industry. Management believes that the principal competitive factors influencing
its business are product selection, price and quality, technological
advancements and improvements to products, the need to develop and market new
products in a cost-effective manner and customer service. Management believes
that its pet containment and training products currently compete at the mass
retail level with a relatively small number of private companies that generally
produce one or more electronic products similar to those offered by the Company.
The Company also competes with dealer-installed electronic pet containment
systems, the best known of which is Invisible Fence(R). Management believes that
the Company offers innovative, affordable solutions and methods for dealing with
the most common pet containment and behavioral problems. As a result, the
Company's products compete with conventional fences, training techniques and
chemical and mechanical pest and flea deterrents. The Company is periodically
forced to compete with products that claim to be similar to the products offered
by the Company but that are sold at substantially discounted prices. There can
be no assurance that any of the Company's competitors will not develop products
that offer price or performance features superior to those of the Company, or
that large, well-financed pet or electronics companies that do not currently
compete with the Company will not determine to enter the electronic pet
containment and training products market.
ASSOCIATES
At September 30, 1997, the Company employed 53 associates, 49 of whom were
full-time and four of whom were part time. None of the Company's associates is
represented by a collective bargaining agreement. Management believes that its
relationship with its associates is good.
PROPERTIES
[THE COMPANY'S CORPORATE HEADQUARTERS ARE LOCATED IN KNOXVILLE, TENNESSEE.
THE COMPANY CURRENTLY LEASES THE 30,000 SQUARE FOOT BUILDING IN WHICH IT IS
HEADQUARTERED PURSUANT TO A TRIPLE-NET LEASE AGREEMENT (THE "LEASE AGREEMENT")
FOR A TEN YEAR TERM, WHICH COMMENCES ON ____________, 1998. UNDER THE LEASE
AGREEMENT, THE COMPANY HAS THE OPTION TO LEASE ADDITIONAL SPACE AND AN OPTION TO
PURCHASE THE BUILDING AND THE SURROUNDING LAND DURING THE FIRST FIVE YEARS OF
THE LEASE. THE COMPANY ALSO LEASES WAREHOUSE SPACE IN LONDON, CANADA ON A
MONTH-TO-MONTH BASIS.]
INSURANCE
The Company maintains general liability and property insurance. The costs
of insurance coverage varies and the availability of certain coverage has
fluctuated in recent years. While management believes, based upon its claims
experience, that the Company's present insurance coverage is adequate for its
current operations, there can be no assurance that the coverage is
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sufficient for all future claims or will continue to be available in adequate
amounts or at reasonable rates. The Company maintains a $3.0 million key man
life insurance policy on Randal D. Boyd, Chairman of the Board and President of
the Company, the proceeds of which are payable to the Company.
LEGAL PROCEEDINGS
The Company does not have pending any litigation that, separately or in the
aggregate, if adversely determined, would have a material adverse effect on the
Company. The Company may, from time to time, be a party to litigation or
administrative proceedings which arise in the normal course of its business.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Randal D. Boyd.............. 38 Chairman of the Board of Directors and
President
James D. Hudson............. 51 Chief Financial Officer and Treasurer
Christopher E. Mainini...... 40 Vice President of Marketing and Product
Development
Todd G. Birdwell............ 38 Director
Tom Boyd.................... 59 Director
E. Douglas Grindstaff....... 57 Director
Donald F. Johnstone......... 67 Director
Ronald Nutt, Ph.D........... 59 Director
Richard B. Ray.............. 57 Director
B. Otto Wheeley............. 76 Director
</TABLE>
Randal D. Boyd founded the Company in January 1991 and has served as
Chairman of the Board of Directors and President of the Company since its
organization. In January 1983, Mr. Boyd founded SACO, Inc., a farm supply
distribution company ("SACO"), and has served as Chairman of the Board and
President of SACO since its organization. Prior to founding SACO, Mr. Boyd
served Fi-Shock, Inc., a manufacturer of electric fencing equipment
("Fi-Shock"), in several positions, including Director of International Sales
and Vice President of Sales. Mr. Boyd is the son of Tom Boyd, also a director of
the Company.
James D. Hudson has served as Chief Financial Officer of the Company since
May 1994 and as Treasurer of the Company since April 1995. From June 1993 to
April 1994, Mr. Hudson served as General Manager of Propper International Sales,
Inc., an apparel finishing company and, from May 1992 to April 1993, he served
as Vice-President of Operations of QSC Finishing, Inc., an apparel finishing
company. From May 1990 to May 1992, Mr. Hudson was Vice-President and Chief
Financial Officer of Marithe & Francois Girbaud, N.A., a division of VFCorp., an
apparel company. Prior to 1990, Mr. Hudson served CocaCola Bottling Company in
several positions, including Corporate Controller and Chief Financial Officer of
the Northeast CocaCola Bottling Company, Inc. and Vice-President of Finance and
Chief Financial Officer of CocaCola Bottling Corporation of Cincinnati. Mr.
Hudson is a certified public accountant.
Christopher E. Mainini has served as Vice President of Marketing and
Product Development of the Company since November 1996. From January 1988
through November 1996, Mr. Mainini was Vice President of Sales for Linear
Corporation, a manufacturer and distributor of professional, residential and
retail security systems, responsible for all retail product development and
sales. Prior to such time, Mr. Mainini held engineering management positions at
the sonic division of Loral Corporation and the electronics division of General
Dynamics Corporation.
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Todd G. Birdwell has served as a Director of the Company since January
1994. He has served on the Audit and Finance Committee of the Board of Directors
of the Company since July 1994. Since July 1992, Mr. Birdwell has been an
investment broker with Morgan Keegan & Company. Prior to such time, Mr. Birdwell
served as Vice President of Corporate Banking at First Tennessee Bank.
Tom Boyd has served as a Director of the Company since its organization in
1991 and has served as a member of the Compensation Committee of the Company's
Board of Directors since December 1994. He served as Secretary of the Company
from March 1991 through December 1994 and as Treasurer of the Company from March
1991 through April 1995. Mr. Boyd founded Fi-Shock in June 1968 and has served
as its Chief Executive Officer since its organization. In 1990, Mr. Boyd also
founded I-Shop, Inc., a CD-Rom publishing company specializing in product
informational CD-Roms and has served as its President since its organization.
Mr. Boyd is the father of Randal D. Boyd, the founder, Chairman of the Board of
Directors and President of the Company.
E. Douglas Grindstaff has been a Director of the Company since April 1996.
Mr. Grindstaff served as a marketing consultant to the Company from August 1995
until April 1996. Mr. Grindstaff served as President of the Canadian operations
of Procter & Gamble Inc. from March 1987 to September 1991 and as President of
The Procter & Gamble Cellulose Company from September 1991 to June 1992. From
June 1992 until October 1994, Mr. Grindstaff served as President and Chief
Executive Officer of Genesco, Inc., a major shoe manufacturer. Since September
1995, Mr. Grindstaff has served as Chairman of the Board, Chief Executive
Officer and President of EcoSmart Technologies, Inc., a pesticide company. He
also currently serves as Chairman of the Board of MedImages, Inc., a medical
services company, as a director and President of Heartland, Co. a general
contracting firm and as a director of Laurel Spring Water Co., a bottler of
water products.
Donald F. Johnstone has been a Director of the Company since January 1995.
He served as President and Chief Executive Officer of Phillips Consumer
Electronics from June 1983 until March 1994. Prior to his position at Philips
Consumer Electronics, Mr. Johnstone served as General Manager of the Television
and Microwave Divisions of General Electric Company. From March 1994 through
March 1997, Mr. Johnstone served as President and Chief Executive Officer of
Whittle Communications. Since March 1995, he has served on the board of
directors of Plasti-Line, Inc., a publicly-traded outdoor sign manufacturer.
Ronald Nutt, Ph.D. has served as a Director of the Company since June 1993.
Dr. Nutt co-founded CTI PET Systems, Inc., a medical products manufacturer, in
1984, where he has served as a director and the Senior Vice President since its
organization. From January 1992 through December 1996, Dr. Nutt served as an
executive officer for Concorde Microsystems, Inc., a research and development
company that provides technological expertise to the Company. He currently
serves as a director of Concorde. He also currently serves on the board of
directors of several other privately-held technology companies, including CPS,
Inc., Delta M Corporation and P.E.T. Net, LLC.
Richard B. Ray has been a Director of the Company since December 1994. He
has served on the Audit and Finance Committee of the Company's Board of
Directors since July 1995. Since October 1995, Mr. Ray has been the Co-Chairman
of the Board and Chief Financial Officer for 21st Century Mortgage Corporation,
a company he co-founded. From 1982 through 1994, he was a director, Executive
Vice President and Chief Financial Officer of Clayton Homes, Inc., one of the
nation's largest vertically integrated manufactured home manufacturers. Since
1992, Mr. Ray has been a director of BankFirst, a community bank headquartered
in Knoxville, Tennessee. From September 1994 through September 1995, he was a
director of Palm Harbor Homes, Inc., a manufactured homes manufacturer and,
since 1991, he has been a director and member of the Executive Committee for the
Knox Housing Partnership, a not-for-profit developer of low income housing. In
September 1997, Mr. Ray was elected to serve as a trustee for the Windsor Real
Estate Investment Trust 8, a publicly-traded real estate investment trust.
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B. Otto Wheeley has been a Director of the Company since December 1994 and
has served on the Compensation Committee of the Company's Board of Directors
since December 1994. From June 1943 through June 1982, Mr. Wheeley served in
various capacities, including as Deputy Chairman of the Board of Directors of
The Koppers Co., Inc. a conglomerate in industrial and commercial markets
("Koppers"). While with Koppers, Mr. Wheeley also served as President of
Kopvenco, Inc., a venture capital firm and a subsidiary of Koppers. In June
1984, Mr. Wheeley founded Venture First Associates, a venture capital firm
investing in technology firms in the East Tennessee area and served as its
general partner until 1995. He currently serves on the board of directors of
several privately held technology companies and Foster & Gallagher, a direct
mail company.
The Company's Board of Directors has established a policy of holding
meetings on a regular quarterly basis and other occasions when required by
special circumstances. Certain directors also devote their time and attention to
the board's principal standing committees. The committees and their primary
functions are as follows:
Audit and Finance Committee of the Board of Directors. The Audit and
Finance Committee makes recommendations to the board of directors with respect
to the Company's financial statements and the appointment of independent
accountants, reviews significant audit and accounting policies and practices,
meets with Company's independent accountants concerning, among other things, the
scope of audits and reports and reviews the performance of the overall
accounting and financial controls of the Company. The Audit and Finance
Committee currently consists of Messrs. Birdwell and Ray.
Compensation Committee of the Board of Directors. The Compensation
Committee has the responsibility for reviewing and approving salaries, bonuses
and other compensation and benefits of executive officers, advising management
regarding benefits and other terms and conditions of compensation and
administering the Company's cash incentive, stock incentive, 401(k) and other
executive compensation plans. The Compensation Committee currently consists of
Messrs. T. Boyd and Wheeley. See "--Compensation Committee Interlocks and
Insider Participation."
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company to each
of the Company's three executive officers, including the Chairman of the Board
and President (collectively, the "Named Executive Officers"), for the fiscal
year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ---------------
NAME AND PRINCIPAL OPTIONS ALL OTHER
POSITIONS YEAR SALARY BONUS (NO. OF SHARES) COMPENSATION
--------- ---- ------ ----- --------------- ------------
<S> <C> <C> <C> <C> <C>
Randal D. Boyd 1996 $110,000 $55,309 -- --
Chairman of the Board and
President
James D. Hudson 1996 97,000 47,029 45,000 --
Chief Financial Officer
and Treasurer
Christopher E. Mainini (1) 1996 13,339 -- 75,000 29,259(2)
Vice President of
Marketing and Product
Development
</TABLE>
- -------------------------
(1) Mr. Mainini became an officer of the Company on November 15, 1996.
(2) Consisting of $29,259 for moving expenses.
37
<PAGE> 41
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options to purchase
shares of Common Stock granted in 1996 to each of the Company's Named Executive
Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS GRANTED TO ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION PRICE APPRECIATION
GRANTED (1) IN 1996 $/SHARE (2) DATE FOR OPTION TERM (3)
----------- ------- ----------- ---- -------------------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C>
Randal D. Boyd -- -- -- -- -- --
James D. Hudson 45,000 20.27% $2.50 12/20/06 $17,550 $ 37,350
Christopher E. Mainini 75,000 33.78 2.50 11/15/06 $51,750 $114,750
</TABLE>
- -------------------
(1) Options shown in the above table for Mr. Hudson become exercisable in three
equal annual installments, beginning on December 20, 1997. Options shown in
the above table for Mr. Mainini become exercisable in five equal annual
installments, beginning on November 15, 1997. All options become fully
exercisable upon a change in control of the Company.
(2) The exercise price and any tax withholding obligations related to exercise
may be paid by delivery of shares of Common Stock.
(3) Potential realizable value is calculated from a base stock price of $2.50,
the exercise price of the options granted.
AGGREGATE FISCAL YEAR-END OPTION VALUES
The following table sets forth information with respect to the Company's
Named Executive Officers concerning options held at December 31, 1996. No
options were exercised by the Named Executive Officers during 1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT 12/31/96 (1)
-------------------------- -----------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Randal D. Boyd -- -- -- --
James D. Hudson 60,000 75,000 (2) $90,000 $45,000
Christopher E. Mainini -- 75,000 (3) -- --
</TABLE>
- --------------------------
(1) These amounts were calculated by subtracting the exercise price from the
market value of the underlying Common Stock as of year-end.
(2) 30,000 of which became exercisable on June 14, 1997 and 15,000 of which
become exercisable on December 20, 1997, 15,000 on December 20, 1998 and
15,000 on December 20, 1999. All options become fully exercisable upon a
change in control of the Company.
(3) 15,000 of which became exercisable on November 15, 1997 and 15,000 of which
become exercisable on November 15, 1998, 15,000 on November 15, 1999,
15,000 on November 15, 2000 and 15,000 on November 15, 2001. All options
become fully exercisable upon a change in control of the Company.
38
<PAGE> 42
COMPENSATION OF DIRECTORS
Directors who are employees of the Company do not receive additional
compensation for serving as directors of the Company. Non-employee directors of
the Company do not receive compensation for each board or committee meeting
attended. All but two of the non-employee directors have received, however,
options to purchase 30,000 shares of Common Stock and are eligible to
participate in the Radio Systems Corporation 1997 Stock Incentive Plan (the
"Incentive Plan").
COMPENSATION PURSUANT TO PLANS
1997 Incentive Stock Plan. The Company and its shareholders adopted the
Incentive Plan in November 1997. The Company has reserved 403,500 of the
authorized shares of Common Stock for issuance pursuant to options to be granted
under the Incentive Plan. Under the Incentive Plan and pursuant to action of the
Board, the Compensation Committee appointed by the Board of Directors may grant
to directors, officers and key employees of the Company non-transferable options
to purchase shares of Common Stock. The options are for terms not longer than
ten years (five years in the case of incentive stock options granted to an
individual who, at the time of the grant, owns more than 10% of the total
combined voting power of all classes of stock of the Company), at prices to be
determined by the Board of Directors or the Compensation Committee. Such prices
may not be less than 100% of the fair market value of the Common Stock on the
date of grant (110% in the case of an individual who, at the time of grant of
incentive stock options, owns more than 10% of the total combined voting power
of all classes of stock of the Company) in the case of incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Incentive stock options may be granted only to employees and may not be less
than 85% of the fair market value of the Common Stock on the date of grant in
the case of non-qualified stock options. Options granted under the Incentive
Plan may be exercisable in installments. The Company is authorized to loan, or
guarantee loans of, the purchase price of shares issuable upon exercise of
options granted under the Incentive Plan. Unless terminated earlier, the
Incentive Plan will terminate in 2007. The aggregate fair market value of Common
Stock with regard to which incentive stock options are exercisable by an
individual for the first time during any calendar year may not exceed $100,000.
The Incentive Plan is administered by the Compensation Committee. As of the date
of this Prospectus, the Company has granted options to purchase ____ shares of
Common Stock under the Incentive Plan. Such options are exercisable at the
initial public offering price and vest 25% per year commencing on the first
anniversary of the date of grant.
1994 Incentive Stock Plan. In 1994, the Company adopted the Radio Systems
Corporation 1994 Employee Incentive Stock Option Plan (the "1994 Plan"). The
Company has reserved 360,000 of the authorized shares of Common Stock for
issuance pursuant to options to be granted under the 1994 Plan. Under the 1994
Plan and pursuant to action of the Board, the Compensation Committee appointed
by the Board of Directors may grant to officers and executive personnel
non-transferable options to purchase shares of Common Stock. The options are for
terms not longer than ten years (five years in the case of incentive stock
options granted to an individual who, at the time of the grant, owns more than
10% of the total combined voting power of all classes of stock of the Company),
at prices to be determined by the Board of Directors or the Compensation
Committee. Such prices may not be less than 100% of the fair market value of the
Common Stock on the date of grant (110% in the case of an individual who, at the
time of grant of incentive stock options, owns more than 10% of the total
combined voting power of all classes of stock of the Company). Options granted
under the 1994 Plan are exercisable in installments. The Company is authorized
to loan, or guarantee loans of, the purchase price of shares issuable upon
exercise of options granted under the 1994 Plan. Only incentive options can be
issued under the 1994 Plan. The 1994 Plan was approved by the shareholders of
the Company on April 28, 1995 and, unless terminated earlier, the 1994 Plan will
terminate in 2004. The aggregate fair market value of Common Stock with regard
to which incentive stock options are exercisable by an individual for the first
time during any calendar year may not exceed $100,000. The 1994 Plan is
administered by the Compensation Committee. As of the
39
<PAGE> 43
date of this Prospectus, the Company has granted options to purchase 348,000
shares of Common Stock under the 1994 Plan.
Officer Incentive Program. The Company has an officer incentive program
(the "Officer Incentive Program") to compensate its Named Executive Officers
based on the Company's performance. The Officer Incentive Program applies to the
officers of the Company who are employed by the Company from January 15 of the
applicable year until the date of payment of the incentive. Under the Officer
Incentive Program, the pool from which the eligible officers receive their
incentive is determined as a percentage of operating income, up to 6%, depending
on the percentage increase in the operating income of the Company from one year
to the next. Each eligible officer's incentive is determined based on the
percentage of the individual officer's earned wages for the year compared to the
total earned wages of all eligible officers for the year with a maximum
incentive equal to 100% of the officer's earned wages for the year. The Officer
Incentive Program will be in effect for calendar years 1997 and 1998 and may be
extended thereafter.
Team Incentive Program. The Company has a team incentive program (the "Team
Incentive Program") to compensate all associates of the Company other than its
Named Executive Officers based on the Company's performance. The Team Incentive
Program applies to all associates of the Company who are employed by the Company
from January 15 of the applicable year until the date of payment of the
incentive. Under the Team Incentive Program, the pool from which the eligible
associates receive their incentive is determined as a percentage of operating
income, up to 7%, depending on the percentage increase in the operating income
of the Company from one year to the next. Each eligible associate's incentive is
determined based on the percentage of the individual associate's earned wages
for the year compared to the total earned wages of all eligible associates for
the year with a maximum incentive equal to 100% of the associate's earned wages
for the year. The Team Incentive Program will be in effect for the calendar
years 1997 and 1998 and may be extended thereafter.
401(k) Plan. The Company has adopted a Savings and Profit Sharing Plan (the
"Savings Plan") which is intended to be qualified under Sections 401(a) and
401(k) of the Code. To be eligible, an employee must have been employed by the
Company for at least one year. The Savings Plan permits employees who have
completed one year of service to defer from 2% to 15% of their compensation into
the Savings Plan up to specified limits per year (approximately $5,500 during
1997). Additional annual contributions may be made at the discretion of the
Company which will vest according to a schedule set forth in the Savings Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee is comprised of directors who are not employees
of the Company. No interlocking relationship exists among the members of the
Compensation Committee and any other director or officer of the Company. The
members of the Compensation Committee are Tom Boyd and B. Otto Wheeley. Mr.
Boyd is the father of Randal D. Boyd, the Chairman of the Board and President
of the Company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Pursuant to the Company's Charter and Bylaws, the Company is obligated to
indemnify each of its directors and officers to the fullest extent permitted by
law with respect to all liability and losses suffered and reasonable expenses
incurred by such person in any action, suit or proceeding in which such person
was or is made or threatened to be made a party or is otherwise involved by
reason of the fact that such person is or was a director or officer of the
Company. The Company is obligated to pay the reasonable expenses of the
directors or officers incurred in defending such proceedings if the indemnified
party agrees to repay all amounts advanced by the Company if it is ultimately
determined that such indemnified party is not entitled to indemnification. The
Company has also executed in favor of each of its directors indemnification
agreements that obligate the
40
<PAGE> 44
Company to indemnify and advance expenses to its directors. See "Description of
Capital Stock - Limitations on Liability of Officers and Directors."
41
<PAGE> 45
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth as of November 15, 1997, information with
respect to the beneficial ownership of the Company's outstanding Common Stock by
(i) each director of the Company, (ii) each of the Named Executive Officers of
the Company, (iii) all directors and all executive officers of the Company as a
group, (iv) each shareholder known by the Company to be the beneficial owner of
more than 5% of the Company's outstanding Common Stock, and (v) each Selling
Shareholder.
<TABLE>
<CAPTION>
Beneficial Ownership Shares Beneficially Owned
Prior to Offering (1) After Offering (1)
------------------------ ---------------------------
Number of Shares
Number of to be Sold Number of
Name and Address Shares Percent (2) in the Offering Shares Percent (2)
- ---------------- ------ ----------- --------------- ------ -----------
<S> <C> <C> <C> <C> <C>
Randal D. Boyd (3) 2,925,000 62.7% -- 2,925,000 47.5%
5008 National Drive
Knoxville, TN 37914
Tennessee Innovation Centers, Inc. 500,434 10.7 134,783 365,651 5.9
1055 Commerce Park Drive
Oak Ridge, TN 37830
Ronald Nutt, Ph.D. (4) 720,651 15.4 -- 720,651 11.7
2121 Lakepoint Drive
Knoxville, Tennessee 37922
Concorde Microsystems, Inc. 300,000 6.4 -- 300,000 4.9
2121 Lakepoint Drive
Knoxville, Tennessee 37922
Beta Development Corporation 200,217 4.3 200,217 -- *
James D. Hudson (5) 105,000 2.2 -- 105,000 1.7
Christopher E. Mainini (6) 15,000 * -- 15,000 *
Richard B. Ray (7) 32,405 * -- 32,405 *
Tom Boyd (8) 1,200 * -- 1,200 *
B. Otto Wheeley (9) 112,110 2.4 -- 112,110 1.8
Donald F. Johnstone (10) 12,000 * -- 12,000 *
E. Douglas Grindstaff (11) 55,750 1.2 -- 55,750 *
Todd G. Birdwell (12) 203,700 4.4 -- 203,700 3.3
All directors and executive officers
as a group (10 persons) (13) 3,980,316 85.3% -- 3,980,316 64.7%
</TABLE>
- ------------------
* Represents less than 1% of the Common Stock outstanding.
(1) Under the rules of the Securities and Exchange Commission (the
"Commission"), a person is deemed to be a "beneficial owner" of a security
if he has or shares the power to vote or direct the voting of such security
or the power to dispose of or direct the disposition of such security.
Accordingly, more than one person may be deemed to be a beneficial owner of
the same security. Shares of Common Stock subject to options held by the
directors and executive officers that are not exercisable within 60 days of
the date hereof are not, in accordance with beneficial ownership rules
promulgated by the Commission, deemed outstanding for the purpose of
computing such director's or executive officer's beneficial ownership.
(2) Based on 4,666,223 shares of Common Stock outstanding prior to the Offering
and 6,156,223 shares of Common Stock outstanding after the Offering.
(3) Includes 202,500 shares held by the Boyd Family Children Irrevocable
Trust of which Todd G. Birdwell, a director of the Company, is trustee
(the "Boyd Family Trust"). Mr. Boyd disclaims beneficial ownership of the
shares held in the Boyd Family Trust.
(4) Includes 300,000 shares held by Concorde Microsystems, Inc. Dr. Nutt is
a director of Concorde. Dr. Nutt disclaims beneficial ownership of the
shares owned by Concorde.
(5) Includes 105,000 shares issuable upon the exercise of vested options.
(6) Includes 15,000 shares issuable upon the exercise of vested options.
(7) Includes 12,000 shares issuable upon the exercise of vested options.
(8) Includes 1,200 shares issuable upon the exercise of vested options.
(9) Includes 12,000 shares issuable upon the exercise of vested options.
Also includes 100,110 shares held by NSBW Corporation.
(10) Includes 12,000 shares issuable upon the exercise of vested options.
42
<PAGE> 46
(11) Includes 40,000 shares held by Mr. Grindstaff's IRA. Also includes 12,000
shares issuable upon the exercise of a warrant held by Mr. Grindstaff's
IRA.
(12) Includes 1,200 shares issuable upon the exercise of vested options and
202,500 shares held by Mr. Birdwell as trustee of the Boyd Family Trust.
(13) Includes 143,400 shares issuable upon the exercise of vested options and
12,000 shares issuable upon the exercise of a warrant.
43
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
The Company is authorized to issue 50,000,000 shares of Common Stock, no
par value per share and 10,000,000 shares of preferred stock, no par value per
share ("Preferred Stock"). Upon consummation of the Offering, 6,156,223 shares
of Common Stock will be issued and outstanding, no shares of Preferred Stock
will be issued and outstanding and 773,500 shares of Common Stock will be
reserved for issuance pursuant to outstanding stock options under the Company's
stock option plans and an outstanding warrant. Prior to the Offering, shares of
the Common Stock were held of record by 14 shareholders.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by shareholders and are not entitled to cumulative voting
in the election of directors, which means that the holders of a majority of the
shares voting for the election of directors can elect all of the directors then
standing for election by the holders of Common Stock. The holders of Common
Stock are entitled to share ratably in such dividends, if any, as may be
declared from time to time by the Board of Directors in its discretion out of
funds legally available therefor. See "Dividend Policy." The holders of Common
Stock are entitled to share ratably in any assets remaining after satisfaction
of all prior claims upon liquidation of the Company. The Company's Charter gives
holders of Common Stock no preemptive or other subscription or conversion rights
and there are no redemption provisions with respect to such shares. All
outstanding shares of Common Stock are, and the shares offered hereby will be,
when issued and paid for, fully paid and nonassessable. The rights, preferences
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of holders of shares of any series of Preferred Stock
which the Company may designate and issue in the future.
PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors may issue shares of
Preferred Stock without approval of the shareholders, except as may be required
by applicable law or by the rules of the National Association of Securities
Dealers, Inc. The Board of Directors is also authorized to establish the voting,
dividend, redemption, conversion, liquidation and other relative provisions as
may be provided in a particular series or class. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and, under certain circumstances, make it
more difficult for a third party to acquire, or discourage a third party from
acquiring, a majority of the outstanding voting stock of the Company. The
Company has no present intention to issue any series or class of Preferred
Stock.
CERTAIN PROVISIONS OF THE CHARTER, BYLAWS AND TENNESSEE LAW
General. The provisions of the Charter, the Bylaws and Tennessee statutory
law described in this section may delay or make more difficult acquisitions or
changes of control of the Company that are not approved by the Board of
Directors. Such provisions have been implemented to enable the Company,
particularly (but not exclusively) in the initial years of its existence as an
independent, publicly-owned company, to develop its business in a manner that
will foster its long-term growth without the disruption of the threat of a
takeover not deemed by the Board of Directors to be in the best interests of the
Company and its shareholders.
Directors. The Charter provides that the Board of Directors of the Company
shall consist of not fewer than three nor more than 11 directors, the exact
number to be set from time to time by a resolution adopted by the Board of
Directors. The Company currently has eight directors. Any or all of the
directors may be removed either with or without cause by the affirmative vote of
the holders of
44
<PAGE> 48
a majority of the voting power of all the shares of the Company's Common Stock.
Vacancies on the Board of Directors (including vacancies created by an increase
in the number of directors) may be filled by the Board of Directors, acting by a
majority of the remaining directors then in office, or by a plurality of the
votes cast by the shareholders at a meeting at which a quorum is present.
Officers are elected annually by and serve at the pleasure of the Board of
Directors. The Charter provides that the Board if Directors is divided into
three classes of as nearly equal size as possible, and the term of office of
each class expires in consecutive years so that each year only one class is
elected.
Amendment of the Bylaws and Charter. The Bylaws provide that a majority of
the Board of Directors or the holders of a majority of the voting power of all
shares of the Company's capital stock represented at any regular or special
meeting have the power to amend, alter, change, or repeal the Bylaws.
Any proposal to amend, alter, change, or repeal provisions of the Charter
relating to staggered terms for directors requires approval by the affirmative
vote of both a majority of the members of the Board of Directors then in office
and the holders of three-fourths of the voting power of all of the shares of the
Company's capital stock entitled to vote on the amendments. Other amendments to
the Charter require the affirmative vote of both a majority of the members of
the Board of Directors then in office and the holders of a majority of the
voting power of all of the shares of the Company's capital stock entitled to
vote on the amendments, with shareholders entitled to dissenters' rights as a
result of the Charter amendment voting together as a single class. Shareholders
entitled to dissenters' rights as a result of a Charter amendment are those
whose rights would be materially and adversely affected because the amendment
(i) alters or abolishes a preferential right of the shares; (ii) creates,
alters, or abolishes a right in respect of redemption; (iii) alters or abolishes
a preemptive right; (iv) excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a limitation by dilution through
issuance of shares or other securities with similar voting rights; or (v)
reduces the number of shares held by such holder to a fraction if the fractional
share is to be acquired for cash. In general, however, under the Tennessee
Business Corporation Act (the "TBCA") no shareholder is entitled to dissenters'
rights if the security he or she holds is listed on a national securities
exchange.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The TBCA provides that a corporation may indemnify any of its directors and
officers against liability incurred in connection with a proceeding if (i) such
person acted in good faith, (ii) the director or officer reasonably believed, in
the case of conduct in an official capacity, that such conduct was in the
corporation's best interests, or, in all other cases, that such conduct was not
opposed to the best interests of the corporation and (iii) in connection with
any criminal proceeding, the director or officer had no reasonable cause to
believe his conduct was unlawful. In actions brought by or in the right of the
corporation, however, the TBCA provides that no indemnification may be made if
the director or officer was adjudged liable to the corporation. The TBCA also
provides that in connection with any proceeding charging improper personal
benefit to a director or officer, no indemnification may be made if such
director or officer is adjudged liable on the basis that such personal benefit
was improperly received. In cases where the director or officer is wholly
successful, on the merits or otherwise, in the defense of any proceeding to
which the director or officer was a party because the director or officer is or
was a director or officer of a corporation, the TBCA mandates that the
corporation indemnify the director or officer against reasonable expenses
incurred in connection with the proceeding. Notwithstanding the foregoing, the
TBCA provides that a court of competent jurisdiction, upon application, may
order that a director or officer be indemnified for reasonable expenses if, in
consideration of all relevant circumstances, the court determines that such
individual is fairly and reasonably entitled to indemnification, even if such
director or officer (i) was adjudged liable to the corporation in a proceeding
by or in right of the corporation, (ii) was adjudged liable on the basis that
personal benefit was improperly received, or (iii) breached his or her duty of
care to the corporation.
45
<PAGE> 49
The Company's Charter provides that to the fullest extent permitted by
Tennessee law, no director shall be personally liable to the Company or its
shareholders for monetary damages for breach of any fiduciary duty to the
Company. Under this charter provision and the TBCA, the Company's directors are
relieved of personal liability to the Company or its shareholders for monetary
damages for breach of fiduciary duty as a director, except for liability arising
from a judgment or other final adjudication establishing (i) any breach of the
director's duty of loyalty, (ii) acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, or (iii) any
unlawful distributions. In addition, the Company's Bylaws provide that each
director and officer of the Company shall be indemnified by the Company to the
fullest extent allowed by Tennessee law.
ANTI-TAKEOVER LEGISLATION
Business Combination Act. The Tennessee Business Combination Act (the
"Combination Act") provides, among other things, that any corporation to which
the Combination Act applies, including the Company, shall not engage in any
"business combination" with an "interested shareholder" for a period of five
years following the date that such shareholder became an interested shareholder
unless prior to such date the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
shareholder becoming an interested shareholder. The Combination Act defines
"business combination," generally, to mean any: (i) merger or consolidation;
(ii) share exchange; (iii) sale, lease, exchange, mortgage, pledge, or other
transfer (in one transaction or a series of transactions) of assets representing
10% or more of (A) the market value of consolidated assets, (B) the market value
of the corporation's outstanding shares or (C) the corporation's consolidated
net income; (iv) issuance or transfer of shares from the corporation to the
interested shareholder; (v) plan of liquidation; (vi) transaction in which the
interested shareholder's proportionate share of the outstanding shares of any
class of securities is increased; or (vii) financing arrangements pursuant to
which the interested shareholder, directly or indirectly, receives a benefit
except proportionately as a shareholder. The Combination Act defines "interested
shareholder," generally, to mean any person who is the beneficial owner, either
directly or indirectly, of 10% or more of any class or series of the outstanding
voting stock, or any affiliate or associate of the corporation who has been the
beneficial owner, either directly or indirectly, of 10% or more of the voting
power of any class or series of the corporation's stock at any time within the
five year period preceding the date in question. Consummation of a business
combination that is subject to the five-year moratorium is permitted after such
period if the transaction (i) complies with all applicable charter and bylaw
requirements and applicable Tennessee law and (ii) is approved by at least
two-thirds of the outstanding voting stock not beneficially owned by the
interested shareholder, or when the transaction meets certain fair price
criteria. The fair price criteria include, among others, the requirement that
the per share consideration received in any such business combination by each of
the shareholders is equal to the highest of (i) the highest per share price paid
by the interested shareholder during the preceding five-year period for shares
of the same class or series plus interest thereon from such date at a treasury
bill rate less the aggregate amount of any cash dividends paid and the market
value of any dividends paid other than in cash since such earliest date, up to
the amount of such interest, (ii) the highest preferential amount, if any, such
class or series is entitled to receive on liquidation, or (iii) the market value
of the shares on either the date the business combination is announced or the
date when the interested shareholder reaches the 10% threshold, whichever is
higher, plus interest thereon less dividends as noted above.
The Tennessee Control Share Acquisition Act (the "Acquisition Act")
prohibits certain shareholders from exercising in excess of 20% of the voting
power in a corporation acquired in a "control share acquisition," as defined in
the Acquisition Act, unless such voting rights have been previously approved by
the disinterested shareholders of the corporation. The Company has elected not
to make the Acquisition Act applicable to the Company. No assurance can be given
that such election, which must be expressed in a charter or bylaw amendment,
will not be made in the future.
46
<PAGE> 50
Greenmail Act. The Tennessee Greenmail Act (the "Greenmail Act") prohibits
the Company from purchasing or agreeing to purchase any of its securities, at a
price in excess of market value, as that term is defined in the Greenmail Act,
from a holder of 3% or more of any class of such securities who has beneficially
owned such securities for less than two years, unless such purchase has been
approved by the affirmative vote of a majority of the outstanding shares of each
class of voting stock issued by the Company or the Company makes an offer of at
least equal value per share to all holders of shares of such class.
The effect of the Combination Act, the Acquisition Act and the Greenmail
Act may be to render more difficult a change of control of the Company.
TRANSFER AGENT AND REGISTRAR
_________ is the transfer agent and registrar for the Common Stock.
47
<PAGE> 51
CERTAIN TRANSACTIONS
SACO, Inc., a farm distribution company, purchases products from the
Company for distribution in its normal course of business. During fiscal years
1995, 1996 and the nine months ended September 30, 1997, SACO purchased from the
Company products valued at approximately $196,000, $239,000 and $204,000,
respectively. Randal D. Boyd, Chairman of the Board and President of the Company
and the Company's majority shareholder, owns all of the outstanding common stock
of SACO and serves as its Chairman of the Board and President.
For several years, the Company has had an ongoing relationship with
Concorde Microsystems, Inc., a research and development company. During fiscal
years 1995, 1996 and the nine months ended September 30, 1997, the Company paid
Concorde approximately $92,000, $67,000 and $129,000, respectively, in fees and
royalties under a development agreement whereby Concorde developed a mixed
signal computer chip which is now owned by the Company and used in the Company's
products. Concorde is also currently performing product development work for the
Company and will be paid royalties on any product developed by Concorde that is
ultimately marketed by the Company. Concorde owns approximately 6% of the
outstanding Common Stock of the Company. Ronald Nutt, Ph.D., a director of
Concorde, is also a director and shareholder of the Company. While Dr. Nutt does
not directly own any shares of Common Stock of Concorde, Dr. Nutt's son owns 40%
of the outstanding common stock of Concorde.
On October 30, 1997, the Company paid the remaining outstanding principal
balance on a $100,000 10% Subordinated Debenture and Stock Purchase Warrant (the
"Debenture") held by E. Douglas Grindstaff, a director of the Company. The
Debenture was issued on December 12, 1995 and was due on December 20, 1997. In
connection with the Debenture, Mr. Grindstaff was granted a warrant for 12,000
shares of Common Stock of the Company. The warrant is currently held by Dean
Witter Reynolds in Mr. Grindstaff's individual retirement account. Also, Mr.
Grindstaff served as a marketing consultant to the Company from August 1995
until becoming a director of the Company in April 1996. In exchange for his
marketing consultant services, Mr. Grindstaff received 3,750 shares of Common
Stock of the Company.
Richard B. Ray, a director of the Company, is also a director of BankFirst
of Knoxville, Tennessee ("BankFirst"). As of September 30, 1997, the Company had
an outstanding principal balance of $155,000 under a Term Loan with BankFirst,
which bears interest at 11.5% per annum and expires on June 5, 2000.
48
<PAGE> 52
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has not been any public market for securities
of the Company. No prediction can be made as to the effect, if any, that market
sales of shares of Common Stock or the availability of shares of Common Stock
for sale will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions described below lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
Upon completion of the Offering, the Company will have outstanding
6,156,223 shares of Common Stock 6,429,973 shares if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 1,825,000
shares of Common Stock sold in the Offering will be freely tradable without
restriction or limitation under the Securities Act, except to the extent such
shares are subject to the agreement with the representatives of the Underwriters
described below and except for any shares purchased by "affiliates," as that
term is defined under the Securities Act, of the Company. The remaining
4,331,223 shares will be "restricted securities" within the meaning of Rule 144
adopted under the Securities Act (the "Restricted Shares"). The Restricted
Shares were issued by the Company in reliance upon an exemption from
registration under the Securities Act and none of such shares may be sold in the
public market, except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption from registration, such as the
exemption provided by Rule 144 under the Securities Act.
In general, under Rule 144, as currently in effect, any person (or person
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock 61,562
shares after giving effect to the Offering) and (ii) the average weekly trading
volume in the Common Stock during the four calendar weeks immediately preceding
the date on which the notice of sale is filed with the Commission. Sales under
Rule 144 are also subject to certain provisions relating to the manner and
notice of sale and the availability of current public information about the
Company. A shareholder who is not an affiliate of the Company at any time during
the 90 days immediately preceding a sale and who has beneficially owned his
shares for at least two years (as computed under Rule 144), is entitled to sell
such shares under Rule 144(k) without regard to the volume, manner and notice of
sale and availability of public information limitations described above. Shares
properly sold in reliance upon Rule 144 to persons who are not affiliates are
thereafter freely tradable without restrictions or registration under the
Securities Act.
The Company, the directors and executive officers of the Company (who in
the aggregate beneficially own 3,980,316 shares of Common Stock) and certain
holders of 5% or more of the shares of Common Stock outstanding after the
Offering have agreed with the Underwriters that, for a period of 180 days
following the Offering (the "Lock-up Period"), they will not offer to sell,
sell, contract to sell, grant an option to purchase or otherwise dispose (or
announce any offer, sale, grant of any option or other distribution) of any
shares of Common Stock of any securities convertible into or exchangeable for
shares of Common Stock without the prior written consent of J.C. Bradford & Co.
(except that the Company may grant options to purchase or award shares of Common
Stock under the Incentive Plan and the 1994 Plan and issue privately placed
shares in connection with acquisitions or upon the exercise of existing stock
options).
As soon as practicable following the consummation of the Offering, the
Company intends to file a registration statement under the Securities Act to
register shares of Common Stock issuable pursuant to the Incentive Plan and the
1994 Plan. See "Management - Compensation Pursuant to Plans." Shares of Common
Stock issued pursuant to the Incentive Plan and the 1994 Plan after the
effective date of such registration statement will be available for sale in the
open market, subject to the Lock-up Period, if applicable.
49
<PAGE> 53
UNDERWRITING
Pursuant to the Underwriting Agreement and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford &
Co. and The Robinson-Humphrey Company, LLC, as representatives of the several
underwriters (the "Representatives"), have agreed, severally, to purchase from
the Company and the Selling Shareholders the number of shares of Common Stock
set forth below opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITER SHARES
------------------- ------
<S> <C>
J.C. Bradford & Co. ................. [__________]
The Robinson-Humphrey Company, LLC .. [__________]
Total ............................ __________
==========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased.
The Company and the Selling Shareholders have been advised by the
Representatives that the Underwriters propose initially to offer the shares of
Common Stock to the public at the initial offering price set forth on the cover
page of this Prospectus, and to certain dealers at such price less a concession
not in excess of $_____ per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $_____ per share to certain brokers
or dealers. After the Offering, the public offering price and concessions may be
changed by the Representatives. The Representatives have informed the Company
that the Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
The Offering of the shares of Common Stock is made for delivery when, as
and if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of effectiveness of the Offering, to purchase up to
an aggregate of 273,750 additional shares of Common Stock to cover
over-allotments, if any. To the extent that the Underwriters exercise the
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the table above bears to the total number
of shares in such table, and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
the shares of Common Stock offered hereby. If purchased, the Underwriters will
sell these additional shares on the same terms as those on which the 1,825,000
shares are being offered.
The Company and its executive officers, directors, the Selling Shareholders
and certain other holders of the Common Stock, who, immediately following the
Offering, collectively will beneficially own an aggregate of 4,345,967 shares of
Common Stock, have agreed with the Representatives not to offer to sell or
otherwise dispose of any shares of Common Stock they currently own for a period
of 180 days from the date of this Prospectus, without the prior written consent
of J.C. Bradford & Co., except that the Company may grant options to purchase or
award shares of Common Stock under the Incentive Plan and the 1994 Plan and may
issue shares in connection with acquisitions or upon the exercise of existing
stock options. See "Shares Eligible for Future Sale."
The Underwriting Agreement provides that the Company and the Selling
Shareholders generally will severally indemnify the Underwriters and their
controlling persons, if any, against certain liabilities, including civil
liabilities under the Securities Act, or will contribute to payments that the
Underwriters or any such controlling persons may be required to make in respect
thereof.
50
<PAGE> 54
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock has been determined
by negotiation between the Company and the Representatives. Among the factors
considered in determining the initial public offering price, in addition to
prevailing market and general economic conditions, were the history of and
prospects for, the industry in which the Company operates, the ability of the
Company's management, the Company's past and present operations, the Company's
historical results of operations, the Company's earnings prospects, the prices
of similar securities of comparable companies and other relative factors. There
can be no assurance, however, that the price at which the Common Stock will sell
in the public market after the Offering will not be lower than the price at
which it is being sold by the Underwriters. The Representatives, on behalf of
the Underwriters, have agreed to undertake to sell the Common Stock in such a
manner as to ensure that the distribution standards of Nasdaq will be met. See
"Risk Factors - Absence of Prior Public Market; Relationship of Offering Price
to Market Price."
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for and purchase,
shares of Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the Offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of Common Stock above market levels that may otherwise prevail. The Underwriters
are not required to engage in these activities and may end any of these
activities at any time.
At the request of the Company, up to 50,000 shares of Common Stock have
been reserved for sale in the Offering to certain individuals, including
directors and employees of the Company, members of their families and other
persons having business relationships with the Company. The price of such shares
to such persons will be the initial public offering price set forth on the cover
of this prospectus. The number of shares available for sale to the general
public will be reduced to the extent these persons purchase such reserved
shares. Any reserved shares not purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock are being passed upon for the Company by Waller Lansden Dortch & Davis, a
Professional Limited Liability Company, Nashville, Tennessee, counsel to the
Company. Certain legal matters will be passed upon for the Underwriters by
Stokes & Bartholomew, P.A., Nashville, Tennessee.
EXPERTS
The financial statements and schedules as of December 31, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996 appearing
in this Prospectus and Registration Statement have been included herein in
reliance on the reports of Coopers & Lybrand L.L.P. independent accountants,
given on the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby
(the "Registration Statement"). This Prospectus, which is a part of the
Registration Statement, does not contain all of the
51
<PAGE> 55
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement and the
exhibits and schedules filed as a part thereof. Statements contained in this
Prospectus concerning the provisions or contents of any contract, agreement or
any other document referred to herein are not necessarily complete. With respect
to each such contract, agreement or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved and each statement shall be deemed qualified
in its entirety by such reference to the copy of the applicable document filed
with the Commission. A copy of the Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the Pubic
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New
York, New York 10048; and Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and
the exhibits and schedules thereto can be obtained from the Public Reference
Section of the Commission upon payment of prescribed fees. The Commission
maintains an Internet web site that contains reports, proxy and information
statements and other information regarding registrants, including the Company.
The address of that site is http://www.sec.gov.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
As a result of the Offering, the Company will become subject to the
informational and periodic reporting requirements of the Exchange Act and in
accordance therewith, will file periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and other regional offices referred to above. The Company
intends to register the securities offered by the Registration Statement under
the Exchange Act simultaneously with the effectiveness of the Registration
Statement and to furnish its shareholders with annual reports containing audited
financial statements and quarterly reports for the first three fiscal quarters
of each fiscal year containing unaudited interim financial information.
In addition, the Company has applied for the Common Stock to be included in
the NASDAQ National Market. Accordingly, upon such inclusion, such periodic
report, proxy statements and other financial information may be inspected at the
offices of the National Association of Securities Dealers, Inc. at 1735 K.
Street, N.W., Washington, D.C. 20006.
52
<PAGE> 56
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Report of Independent Accountants...............................................................F-2
Balance Sheets as of December 31, 1995 and 1996; and September 30, 1997........................F-3
Statements of Operations for the years ended December 31, 1994, 1995 and 1996;
and for the nine months ended September 30, 1996 and 1997...................................F-4
Statements of Shareholders' Equity for the years ended December 31, 1994, 1995
and 1996; and for the nine months ended
September 30, 1997..........................................................................F-5
Statements of Cash Flows for the years ended December 31, 1994, 1995
and 1996; and for the nine months ended September 30, 1996 and 1997.........................F-6
Notes to Financial Statements...........................................................F-7 to F-15
</TABLE>
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Radio Systems Corporation
We have audited the accompanying balance sheets of Radio Systems Corporation
(the "Company") as of December 31, 1995 and 1996, and the related statements of
operations, shareholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Radio Systems Corporation as of
December 31, 1995 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
January 24, 1997, except for the stock
split described in Note 13, as to
which the date is November 14, 1997
F-2
<PAGE> 58
RADIO SYSTEMS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 40,066 $ 5,161 $ 13,138
Accounts receivable:
Trade, less allowance for doubtful accounts
of $87,147 and $135,279 in 1995 and 1996 and
$320,182 (unaudited) in 1997, respectively 861,146 2,150,228 4,377,135
Related party trade receivables 192,978 556,465 371,420
Inventories 2,495,251 3,176,542 4,115,378
Deferred income taxes -- 365,022 338,356
Prepaid expenses 23,719 2,051 94,460
----------- ---------- -----------
Total current assets 3,613,160 6,255,469 9,309,887
Property and equipment, net 758,333 789,401 981,612
Other assets 77,744 74,324 753,890
----------- ---------- -----------
Total assets $ 4,449,237 $7,119,194 $11,045,389
=========== ========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Outstanding checks in excess of bank balance $ 189,106 $ 237,494 $ 763,068
Line of credit -- 2,008,170 --
Current portion of long-term debt and
other obligations 1,027,752 163,918 401,194
Current portion of capital lease obligations 21,841 24,684 5,203
Accounts payable 1,097,541 552,919 1,316,980
Income taxes payable -- 407,333 --
Accrued expenses 250,167 576,368 1,117,372
----------- ---------- -----------
Total current liabilities 2,586,407 3,970,886 3,603,817
Line of credit 785,598 -- 2,639,995
Long-term debt and other obligations, less current maturities 238,187 138,362 1,210,585
Noncurrent portion of capital lease obligations 48,171 23,315 23,315
----------- ---------- -----------
Total liabilities 3,658,363 4,132,563 7,477,712
----------- ---------- -----------
Commitments and contingencies (Notes 6, 11)
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized;
4,656,473 and 4,659,473 shares issued and outstanding
in 1995 and 1996, respectively, and 4,666,223 shares
issued and outstanding at September 30, 1997 (unaudited) 2,001,000 2,007,000 2,022,375
Stock purchase warrants 259,336 502,259 7,259
Retained earnings (deficit) (1,469,462) 477,372 1,538,043
----------- ---------- -----------
Total shareholders' equity 790,874 2,986,631 3,567,677
----------- ---------- -----------
Total liabilities and shareholders' equity $ 4,449,237 $7,119,194 $11,045,389
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 59
RADIO SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales $13,489,618 $13,192,843 $18,869,421 $15,212,148 $20,318,589
Cost of goods sold 10,310,627 9,989,793 12,091,736 9,684,820 12,434,430
----------- ----------- ----------- ----------- -----------
Gross profit on sales 3,178,991 3,203,050 6,777,685 5,527,328 7,884,159
----------- ----------- ----------- ----------- -----------
Selling, general and administrative expenses 2,496,040 3,122,235 3,410,001 2,555,947 3,859,033
Research and development 471,461 912,167 663,652 485,677 716,220
Interest expense 149,480 467,746 714,888 366,835 315,689
------------ ----------- ------------ ----------- -----------
Income (loss) before income taxes 62,010 (1,299,098) 1,989,144 2,118,869 2,993,217
Income tax benefit (provision) 6,751 (195,599) (42,310) (104,730) (1,137,422)
------------ ---------- ---------- ------------ -----------
Net income (loss) $ 68,761 $(1,494,697) $ 1,946,834 $ 2,014,139 $ 1,855,795
============ =========== =========== =========== ===========
Income (loss) per common and equivalent share:
Primary $0.02 $(0.32) $0.37 $0.38 $0.35
===== ====== ===== ===== =====
Fully Diluted $0.02 $(0.32) $0.36 $0.38 $0.34
===== ====== ===== ===== =====
Weighted average shares and equivalents
outstanding (000's):
Primary 4,123 4,733 5,330 5,306 5,362
===== ===== ===== ===== =====
Fully Diluted 4,123 4,733 5,390 5,361 5,396
===== ===== ===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 60
RADIO SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
STOCK RETAINED
COMMON STOCK PURCHASE EARNINGS
SHARES AMOUNT WARRANTS (DEFICIT) TOTAL
------ ------ -------- --------- -----
<S> <C> <C> <C> <C> <C>
Balances, at
January 1, 1994 3,225,000 $ 301,000 $ -- $ (43,526) $ 257,474
Issuance of common stock 1,126,473 1,125,000 -- -- 1,125,000
Conversion of note payable
to common stock 225,000 375,000 -- -- 375,000
Stock purchase warrant
issued with note payable -- -- 94,274 -- 94,274
Net income -- -- -- 68,761 68,761
--------- ---------- --------- ----------- -----------
Balances, at
December 31, 1994 4,576,473 1,801,000 94,274 25,235 1,920,509
Issuance of common stock 80,000 200,000 -- -- 200,000
Stock purchase warrant issued
with note payable -- -- 165,062 -- 165,062
Net loss -- -- -- (1,494,697) (1,494,697)
--------- ---------- --------- ----------- -----------
Balances, at
December 31, 1995 4,656,473 2,001,000 259,336 (1,469,462) 790,874
Issuance of common stock 3,000 6,000 -- -- 6,000
Stock purchase warrant issued
with note payable -- -- 242,923 -- 242,923
Net income -- -- -- 1,946,834 1,946,834
--------- ---------- --------- ----------- -----------
Balances, at
December 31, 1996 4,659,473 2,007,000 502,259 477,372 2,986,631
Issuance of common stock (unaudited) 6,750 15,375 -- -- 15,375
Retirement of stock purchase warrants
(unaudited) -- -- (495,000) (795,124) (1,290,124)
Net income (unaudited) -- -- -- 1,855,795 1,855,795
--------- ---------- --------- ----------- -----------
Balances, at
September 30, 1997 (unaudited) 4,666,223 $2,022,375 $ 7,259 $ 1,538,043 $ 3,567,677
========= ========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 61
RADIO SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- -----------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 68,761 $(1,494,697) $ 1,946,834 $ 2,014,139 $ 1,855,795
Adjustments to reconcile net income (loss)
to cash provided (used) by
operating activities:
Depreciation and amortization 147,452 332,997 609,557 268,937 287,723
Loss (gain) on disposal of equipment (10,023) 471 -- -- --
Provision for doubtful accounts 49,401 66,324 138,635 -- 383,303
Deferred taxes (50,726) 202,526 (365,022) -- 26,666
Consulting services provided in exchange
for common stock -- -- -- -- 9,375
Changes in operating assets and liabilities:
Accounts receivable (373,277) 195,787 (1,791,204) (2,146,144) (2,425,165)
Inventories (1,723,382) 292,936 (681,291) 93,473 (764,942)
Prepaid expenses (168,642) 161,779 21,668 (10,406) (92,409)
Accounts payable (227,891) 115,016 (544,622) (771,582) 779,752
Accrued expenses (54,024) 94,162 326,201 388,881 541,004
Income taxes payable 39,908 (41,708) 407,333 133,235 (407,333)
----------- ----------- ----------- ----------- -----------
Net cash provided (used) by
operating activities (2,302,443) (74,407) 68,089 (29,467) 193,769
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (290,762) (393,259) (272,251) (142,504) (232,333)
Net cash paid for acquisition of product line -- -- -- -- (500,000)
Other assets (35,332) (37,055) 3,420 (8,679) (37,909)
----------- ----------- ----------- ----------- -----------
Net cash used in investing
activities (326,094) (430,314) (268,831) (151,183) (770,242)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in checks in excess of
bank balance 305,414 (153,823) 48,388 206,434 525,574
Net proceeds from line of credit 545 257,296 1,222,572 42,634 631,825
Proceeds from notes payable 1,375,000 420,000 -- -- 819,766
Payments on notes payable (116,296) (28,608) (1,089,110) (74,215) (1,089,110)
Payments on capital lease obligations (50,878) (171,295) (22,013) (17,679) (19,481)
Proceeds from issuance of common stock 1,125,000 200,000 6,000 6,000 6,000
Net cash paid for retirement of stock
purchase warrants -- -- -- -- (290,124)
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities 2,638,785 523,570 165,837 163,174 584,450
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash 10,248 18,849 (34,905) (17,476) 7,977
Cash, at beginning of period 10,969 21,217 40,066 40,066 5,161
----------- ----------- ----------- ----------- -----------
Cash, at end of period $ 21,217 $ 40,066 $ 5,161 $ 22,590 $ 13,138
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 62
RADIO SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(REFERENCES TO THE NINE MONTHS ENDED SEPTEMBER 30, 1997 ARE UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY. Radio Systems Corporation (the "Company") is a provider of
electronic pet containment and training products. The Company sells
primarily to retailers such as home centers, discount stores, pet and farm
supply stores, and catalog retailers. Approximately 92% of the Company's
1996 net sales were made in the United States, with 4% in Canada and the
remaining 4% in Western Europe. Although no single customer accounted for
greater than 10% of the Company's sales, the Company's top four customers
accounted for 34%, 30% and 35% of the Company's sales in 1994, 1995 and
1996, respectively.
MANAGEMENT ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
INVENTORIES. Inventories are stated at lower of cost or market. Cost is
determined using standard costs which approximate the first-in, first-out
(FIFO) method.
PROPERTY, EQUIPMENT AND DEPRECIATION. Property and equipment are stated at
cost. Depreciation is computed using the straight-line method for financial
reporting purposes and accelerated methods for income tax purposes using an
estimated useful life of five years for all assets. The cost and related
accumulated depreciation are removed upon retirement, and any related gain
or loss is included in income from operations. Maintenance and repairs are
expensed as incurred. Major renewals and improvements are capitalized.
REVENUE RECOGNITION. Product sales are recognized upon shipment, net of
estimated trade discounts and returns. Estimated warranty costs
attributable to the Company's standard warranty program are provided for at
the time of sale.
RESEARCH AND DEVELOPMENT COSTS. Research and development expenditures are
charged to expense in the period incurred.
INCOME TAXES. Income taxes are calculated using the asset and liability
method. Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
INCOME (LOSS) PER SHARE. Income (loss) per common share have been computed
by dividing net income (loss) by the weighted average number of common and
common equivalent shares outstanding during each period. Common equivalent
shares relating to options and shares issued during the 12-month period
preceding November 15, 1997, have been calculated using the treasury stock
method assuming that the options and shares were outstanding during each
period presented and that the fair value of the Company's common stock
during each period was equal to the assumed initial public offering price
of $11.00 per share. Common equivalent shares relating to all other options
have been calculated using the treasury stock method for the portion of
each period for which the options were outstanding and using the estimated
fair value of the Company's common stock for each of the respective
periods. All shares, per share and conversion amounts relating to common
stock and stock options and warrants included in the accompanying financial
statements and notes reflect a 100-for-one stock split effected on December
21, 1994, and the three-for-one split described in Note 13.
F-7
<PAGE> 63
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INTERIM FINANCIAL STATEMENTS. Information in the accompanying financial
statements and notes to the financial statements for the interim periods is
unaudited. The accompanying unaudited condensed financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September
30, 1997, are not necessarily indicative of the results that may be
expected for the year ending December 31, 1997.
2. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Raw materials $ 680,817 $ 2,569,404 $ 2,973,054
Work in process 1,379,705 -- --
Finished goods 434,729 607,138 1,142,324
----------- ----------- -----------
$ 2,495,251 $ 3,176,542 $ 4,115,378
=========== =========== ===========
</TABLE>
The pet containment systems the Company sells are subject to technological
change. As of December 31, 1996, management is not aware of any changes
which would adversely affect the inventory on hand. Technological changes
could significantly increase the estimate of obsolete inventory. Such
changes could also significantly impact the estimates related to sales
returns reserves.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Machinery and equipment $ 973,585 $ 1,231,535 $ 1,573,385
Furniture and fixtures 66,438 73,506 85,370
Leasehold improvements 68,542 75,777 68,217
----------- ----------- -----------
Total property and equipment 1,108,565 1,380,818 1,726,972
Less accumulated depreciation and amortization (350,232) (591,417) (745,360)
----------- ----------- -----------
$ 758,333 $ 789,401 $ 981,612
=========== =========== ===========
</TABLE>
Machinery and equipment includes equipment under capital leases with a net
book value of $63,845 and $42,774 at December 31, 1995 and 1996, and
$26,972 at September 30, 1997 (unaudited), respectively.
F-8
<PAGE> 64
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. LINE OF CREDIT:
The Company has a line of credit with a bank (see Note 13). At December 31,
1995 and 1996, and September 30, 1997, advances on the line of credit
amounted to $785,598, $2,008,170, and $2,639,995 (unaudited), respectively.
The line of credit agreement contains certain covenants, the most
restrictive of which require the maintenance of certain financial ratios.
The Company was in default of certain covenants at December 31, 1995;
however, waivers were subsequently obtained from the lender and the
covenants modified to be less restrictive. The Company was in compliance
with these covenants, as modified, at December 31, 1996.
This line of credit agreement and a bank note payable discussed in Note 5
each require lender approval prior to the payment of dividends.
5. LONG-TERM DEBT AND OTHER OBLIGATIONS:
Long-term debt and other obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ ------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Subordinated note payable to a shareholder, bearing
interest at 10%, due December 20, 1997 (net of discount of
$7,760 in 1995, for warrants to purchase 12,000 shares of
common stock at $0.003 per share). $ 92,240 $100,000 $ 100,000
Notes payable to banks in monthly installments of $7,945,
including interest at annual rates ranging from 8.1% to
11.5% through 2001. These notes are collateralized by
equipment purchased with the loan proceeds. 291,391 202,280 191,706
Note payable to a bank, due in monthly installments of
$83,333 plus interest at 9% through 1998. This note is
collateralized by personal guarantees of certain of the
Company's officers. - - 750,001
Subordinated note payable, interest at 13% per annum,
retired on December 18, 1996 (net of discount for stock
purchase warrants of $117,692). 882,308 - -
Obligation to seller of a product line for minimum royalties,
due in quarterly installments of $37,500 through 2002.
Effective interest rate of 10%. - - 570,072
1,265,939 302,280 1,611,779
---------- -------- -----------
Less current portion (1,027,752) (163,918) (401,194)
---------- -------- -----------
$ 238,187 $138,362 $1,210,585
========== ======== ==========
</TABLE>
As of December 31, 1996, the scheduled maturities of the notes payable are
as follows:
1997 $163,918
1998 78,662
1999 59,700
F-9
<PAGE> 65
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. LONG-TERM DEBT AND OTHER OBLIGATIONS, CONTINUED:
SUBORDINATED NOTE WARRANTS. In connection with the subordinated note that
was retired on December 18, 1996, the Company issued a stock purchase
warrant to the lender that provided for the purchase of up to 525,420
shares of common stock at $0.003 per share. The fair value of the stock
purchase warrant was recorded as a discount on the subordinated note and
was amortized to interest expense during 1995, increasing the effective
rate of interest. The terms of the subordinated note agreement were such
that the number of shares under the warrants increased by 243,252 and
97,299 shares during 1995 and 1996, respectively, because the loan remained
outstanding. The Company amortized the discount related to each increase in
the warrant over the term between the warrant adjustment dates or over the
term of the subordinated notes, as appropriate.
Including the warrants issued in connection with the 10% subordinated note
to a shareholder, warrants to purchase a total of 498,501 shares of stock
at a strike price of $0.003 remained outstanding at December 31, 1996.
Total amortization expense amounted to $133,885 and $368,375 during the
years ended December 31, 1995 and 1996, respectively.
SUBSEQUENT EVENT - PURCHASE OF WARRANTS (UNAUDITED). In May 1997, the
Company purchased and retired the warrants held by the subordinated debt
holder. Consideration for the warrants was $1,800,000 and has been
recorded, net of the excess tax deduction benefit of $510,000, as a charge
to shareholders' equity.
6. LEASE OBLIGATIONS:
The Company leases certain equipment under capital lease obligations that
expire through May 1998. Approximate future minimum capital lease payments
as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997 $34,350
1998 28,625
-------
Total minimum lease payments 62,975
Less amounts representing interest (14,976)
-------
Present value of minimum lease payments 47,999
Less current portion (24,684)
-------
$23,315
=======
</TABLE>
The Company is obligated under various noncancelable operating leases (with
initial or remaining lease terms in excess of one year) for certain
facilities, vehicles and equipment. Approximate future minimum lease
payments under the operating leases as of December 31, 1996, are:
YEAR AMOUNT
1997 $46,000
1998 37,000
1999 33,000
2000 12,000
2001 6,000
Rental expense for operating leases during 1994, 1995 and 1996, was
approximately $110,000, $166,000 and $164,000, respectively.
F-10
<PAGE> 66
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES:
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1994 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal $ 33,336 $ -- $ 339,780 $ 966,125
State 10,639 -- 67,552 144,631
--------- --------- ----------- ----------
43,975 -- 407,332 1,110,756
--------- --------- ----------- ----------
Deferred:
Federal (46,995) 164,712 (308,720) 11,337
State (3,731) 30,887 (56,302) 15,329
--------- --------- ----------- ----------
(50,726) 195,599 (365,022) 26,666
--------- --------- ----------- ----------
Total income tax provision (benefit) $ (6,751) $ 195,599 $ 42,310 $1,137,422
========= ========= =========== ==========
</TABLE>
The income tax provision (benefit) recognized by the Company for the years
ended December 31, 1994, 1995, 1996 and the nine months ended September 30,
1997, differs from the amount determined by applying the applicable U.S.
statutory federal income tax rate to the Company's pretax income (loss) as
a result of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1994 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Computed tax provision (benefit)
at the statutory rate $ 21,083 $(441,693) $ 676,000 $1,047,626
State income tax provision (benefit),
net of Federal effect 7,022 (51,444) 97,400 89,504
Research and development tax credits
utilized (49,812) -- (79,523) --
Other, net 14,956 4,087 33,082 292
Change in valuation allowance -- 684,649 (684,649) --
--------- --------- ----------- ----------
$ (6,751) $ 195,599 $ 42,310 $1,137,422
========= ========= =========== ==========
</TABLE>
F-11
<PAGE> 67
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. INCOME TAXES, CONTINUED:
The net deferred tax asset is comprised of the following components at:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
Research and development tax credit $ 26,477 $ -- $ --
Accounts receivable allowance 33,000 52,785 121,329
Inventory valuation 6,600 -- --
Accrued expenses 66,000 184,757 272,027
Property and equipment (45,000) (31,220) (55,000)
Warrant amortization -- 158,700 --
Net operating loss carryforwards 597,572 -- --
--------- --------- ---------
Deferred tax asset 684,649 365,022 338,356
Valuation allowance (684,649) -- --
--------- --------- ---------
Net deferred tax asset $ -- $ 365,022 $ 338,356
========= ========= =========
</TABLE>
During 1996, the Company eliminated the valuation allowance of $684,649 to
reflect the utilization of net operating loss carryforwards and tax credits
for which a 100% valuation allowance had been provided in prior years. No
valuation allowance was deemed necessary at December 31, 1996, as a result
of management's evaluation that all remaining deferred tax assets will more
likely than not be realized.
8. RELATED PARTY TRANSACTIONS:
In the ordinary course of business, the Company executes transactions with
various related parties, including an entity wholly-owned by the Company's
majority shareholder; an entity in which the Company is a minority
shareholder; an entity owned by a director of the Company; and a minority
shareholder of the Company. Related party transactions are summarized as
follows for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Product sales to affiliated company $295,589 $353,340 $863,372
Equipment purchased from a minority shareholder 62,000 -- --
Payments to a minority shareholder for research
and development 163,000 92,000 66,913
</TABLE>
A director of the Company is also a director for a bank holding a note from
the Company in the amount of $291,391, $202,280 and $154,802 (unaudited) as
of December 31, 1995 and 1996 and September 30, 1997, respectively.
As discussed in Note 5, a minority shareholder holds a note from the
Company as well as warrants to purchase additional common stock.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution employee retirement savings plan
(covering all full time employees) which provides for a stipulated matching
contribution and for discretionary contributions by the Company.
Contributions to the Plan for the years ended December 31, 1994, 1995 and
1996, were approximately $31,000, $43,000 and $40,000, respectively, and
$55,000 for the nine months ended September 30, 1997 (unaudited).
F-12
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS:
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options equals
the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's 1994 Stock Option Plan authorized the grant of options to
employees for up to 360,000 shares of the Company's stock. Certain
directors of the Company have been granted options to purchase 150,000
shares of the Company's stock. All options vest ratably over five years and
expire ten years from the grant dates.
A summary of the Company's stock option activity and related information
under the 1994 stock option plan for the years ended December 31 follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
1995 1996 (UNAUDITED)
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 297,000 $1.18 258,000 $1.33 477,000 $1.78
Granted 42,000 2.50 222,000 2.29 54,000 2.96
Exercised - - (3,000) 2.00 (3,000) 2.00
Forfeited (81,000) 1.37 - - - -
------- ------- -------
Outstanding, end of year 258,000 $1.33 477,000 $1.78 528,000 $1.89
======= ======= =======
Exercisable at end of year 58,800 $1.16 119,400 $1.20 136,800 $1.31
Weighted-average fair value of
options granted during the year $0.84 $0.95 $0.97
</TABLE>
Exercise price for options outstanding as of December 31, 1996, ranged from
$1.00 to $2.50. The weighted-average remaining contractual life of those
options is eight years.
Pro forma information regarding net income and income per share is required
by Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, and has been determined as if the Company had
accounted 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 an option pricing model and the following assumptions:
risk-free interest rate of 6%; no dividend yield; and a weighted-average
expected life of the option of seven years.
F-13
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS, CONTINUED:
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Net income (loss):
As reported $(1,494,697) $1,946,834
Pro forma (1,497,068) 1,919,070
Income (loss) per share:
As reported $(0.32) $0.37
Pro forma (0.32) 0.37
</TABLE>
11. CERTAIN CONCENTRATIONS:
The Company produces and sells electronic pet containment and training
products to companies operating in the retail industry throughout the
United States. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Receivables are generally due within 30 to 90 days. Credit losses relating
to customers have been within management's expectations.
The Company currently outsources virtually all of its manufacturing and
assembly functions. A substantial portion of the Company's products,
including its standard Radio Fence products, are assembled by two suppliers
located in China. Other products offered by the Company are manufactured in
Israel and France, and certain of the components of the Company's Radio
Fence products are manufactured in Taiwan. The microchips used in the
Company's products are manufactured by a supplier in California. Management
believes that, if necessary, alternate sources of supply on comparable
terms could be obtained.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
In 1994, the Company converted $375,000 of shareholder notes payable to
common stock, and recorded capital lease obligations totaling $292,185.
Cash payments for interest and income taxes were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------
1994 1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C>
Interest $149,480 $325,352 $333,897 $ 288,952
Income taxes 4,067 34,781 -- 1,101,708
</TABLE>
13. SUBSEQUENT EVENTS:
1997 ACQUISITION (UNAUDITED). On March 31, 1997, the Company purchased
certain assets related to the pet products business (which consisted
principally of ultrasonic bark control collars and pet trainers) of a
company located in Austin, Texas. The purchase price was approximately
$1,065,000, with $500,000 paid at or within 90 days of closing, and the
remainder to be paid quarterly at the rate of $37,500. The seller also
receives a royalty of 5% or 10% on certain defined sales of the products.
The transaction has been accounted for using the purchase method of
accounting, and accordingly, the purchase price has been allocated to the
separately identifiable assets, principally inventory and product molds, at
their respective fair values. The remaining $712,000 of the purchase price
has been allocated to goodwill and other intangible assets, and is being
amortized using the straight-line method over seven years.
F-14
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. SUBSEQUENT EVENTS, CONTINUED:
Pro forma unaudited results of operations for the nine-months ended
September 30, 1997, and the year ended December 31, 1996, assuming that the
acquisition had occurred at the beginning of the earliest period presented,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1996 1997
<S> <C> <C>
Net sales $20,475,657 $20,765,206
=========== ===========
Net income $2,344,156 $1,903,371
========== ==========
Income per share $0.45 $0.41
===== =====
</TABLE>
RENEWAL OF CREDIT LINE (UNAUDITED). In May 1997, the Company amended its
bank line of credit. The amended agreement provides for a revolving credit
line of $5,000,000 that expires on May 30, 1999. The Company may also issue
letters of credit against the line up to $500,000. Borrowings under the
line are limited to a) 75% of eligible receivables, as defined, plus b) the
lesser of 50% of eligible inventory, as defined, or $1,500,000 ($1,800,000
at certain times). Borrowings under the line bear interest at the bank's
prime rate plus 1% (9.5% at September 30, 1997), reduced to the bank's
prime rate plus 0.5% if certain conditions exist at December 31, 1997. The
line is collateralized by accounts receivable, inventory, and certain
equipment. In addition, the Company's president and the president's spouse
are guarantors up to $1,000,000.
In addition to the revolving line of credit, the amended agreement also
provides for a non-revolving "Acquisition" line of credit of $1,500,000
which expires May 30, 1998. Under the amended agreement, the bank may make
advances on this line, at its discretion, for acquisitions of all or
substantial portions of the assets of other entities. The agreement calls
for a separate note for each acquisition which would require payments of
interest only at the bank's prime rate plus 1% until the consummation of
the acquisition. At that point the note would automatically convert to an
installment note payable in no more than 36 months, at the bank's
discretion.
STOCK SPLIT. On November 14, 1997, the shareholders approved a
three-for-one common stock split, to be effected in the form of a stock
dividend. All common stock information included in the financial statements
gives retroactive effect to this stock split.
F-15
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
In connection with our audits of the financial statements of Radio Systems
Corporation as of December 31, 1995 and 1996, and for each of the three
years in the period ended December 31, 1996, which financial statements are
included in the Prospectus, we have also audited the financial statement
schedule listed in Item 16(b) herein.
In our opinion, this financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information required to be included
therein.
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
January 24, 1997
S-1
<PAGE> 72
RADIO SYSTEMS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Balance at Additions Balance
Beginning Charged to at End of
Description of Year Expense Deductions Year
- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts 150,599 49,401 -- 200,000
Warranty Reserve -- 95,444 -- 95,444
YEAR ENDED DECEMBER 31, 1995
Allowance for doubtful accounts 200,000 66,324 179,177 87,147
Warranty Reserve 95,444 545,645 549,568 91,521
Allowance for Sales Returns -- 39,357 -- 39,357
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful accounts 87,147 138,635 90,503 135,279
Warranty Reserve 91,521 640,497 609,192 122,826
Allowance for Sales Returns 39,357 160,752 119,733 80,376
</TABLE>
S-2
<PAGE> 73
===============================================================================
No dealer, salesperson or any other person has
been authorized to give any information or to
make any representations other than those
contained in this Prospectus in connection with
the offering described herein and, if given or
made, such information or representations must
not be relied upon as having been authorized by
the Company, the Selling Shareholders or any
Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of
an offer to buy any securities other than those
specifically offered hereby or of any securities
offered hereby in any jurisdiction to any person
to whom it is unlawful to make an offer or
solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create
any implication that the information contained
herein is correct as of any time subsequent to
the date hereof.
-----------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary...............................
Risk Factors.....................................
Use of Proceeds..................................
Capitalization...................................
Dividend Policy..................................
Dilution.........................................
Selected Financial Data..........................
Management's Discussion and Analysis
of Financial Condition and Results of
Operations.....................................
Business.........................................
Management.......................................
Principal and Selling Shareholders...............
Description of Capital Stock.....................
Certain Transactions.............................
Shares Eligible for Future Sale..................
Underwriting.....................................
Legal Matters....................................
Experts..........................................
Available Information............................
Index to Financial Statements....................
</TABLE>
---------------------
Until _______________, 1998, (25 days after the
date of this Prospectus), all dealers effecting
transactions in the securities offered hereby,
whether or not participating in this
distribution, may be required to deliver a
Prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver
a Prospectus when acting as underwriters and
with respect to their unsold allotments or
subscriptions.
1,825,000 Shares
[LOGO]
Radio Systems Corporation
Common Stock
------------------
PROSPECTUS
------------------
J.C. BRADFORD & CO.
THE ROBINSON-HUMPHREY COMPANY
[________________], 1998
===============================================================================
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table shows the expenses, other than underwriting discounts,
that the Company expects to incur in connection with the issuance and
distribution of the securities being registered under this registration
statement. All expenses are estimated except for the Securities and Exchange
Commission registration fee, the Nasdaq National Market fee and the NASD filing
fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee $7,632
NASD Filing Fee 3,019
Nasdaq National Market Fee *
Blue Sky Fees and Expenses (including legal fees) *
Printing Expenses *
Legal Fees and Expenses *
Accounting Fees and Expenses *
Transfer Agent and Registrar Fees *
Miscellaneous Expenses *
Total $ *
======
</TABLE>
- ------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The TBCA provides that a corporation may indemnify any director or officer
against liability incurred in connection with a proceeding if (i) the director
or officer acted in good faith, (ii) the director or officer reasonably
believed, in the case of conduct in her official capacity with the corporation,
that such conduct was in the corporation's best interest, or, in all other
cases, that his conduct was not opposed to the best interests of the corporation
and (iii) in connection with any criminal proceeding, the director or officer
had no reasonable cause to believe that her conduct was unlawful. In actions
brought by or in the right of the corporation, however, the TBCA provides that
no indemnification may be made if the director or officer is adjudged to be
liable to the corporation. Similarly, the TBCA prohibits indemnification in
connection with any proceeding charging improper personal benefit to a director
or officer, if such director or officer is adjudged liable on the basis that a
personal benefit was improperly received. In cases where the director or officer
is wholly successful, on the merits or otherwise, in the defense of any
proceeding instigated because of his status as a director or officer of a
corporation, the TBCA mandates that the corporation indemnify the director or
officer against reasonable expenses incurred in the proceeding. Notwithstanding
the foregoing, the TBCA provides that a court of competent jurisdiction, upon
application, may order that a director or officer be indemnified for reasonable
expense if, in consideration of all relevant circumstances, the court determines
that such individual is fairly and reasonably entitled to indemnification,
whether or not the standard of conduct set forth above was met.
The Charter and Bylaws of the Company provide that the Company will
indemnify from liability, and advance expenses to, any present or former
director or officer of the Company to the fullest extent allowed by the TBCA, as
amended from time to time, or any subsequent law, rule, or regulation adopted in
lieu thereof. Additionally, the Charter provides that no director of the Company
will be personally liable to the Company or any of its shareholders for monetary
damages for breach of any fiduciary duty except for liability arising from (i)
any breach of a director's duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, (iii) any unlawful distributions, or (iv)
receiving any improper personal benefit. The Company has also executed in favor
of each of its directors
II-1
<PAGE> 75
Indemnification Agreements that obligate the Company to indemnify and advance
expenses to its directors.
The Company has purchased a directors and officers insurance policy
providing for $________ million in coverage for certain liabilities of the
Company's directors and officers. The policy expires in ____________].
The proposed form of the Underwriting Agreement to be filed as Exhibit 1.1
to this Registration Statement contains certain provisions relating to the
indemnification of the Company, its controlling persons and the Selling
Shareholders by the Underwriters and relating to the indemnification of the
Underwriters by the Company, its controlling persons and the Selling
Shareholders.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Except as described in this section, no securities of the Registrant have
been sold by the Registrant within the past three years without registration
under the Securities Act.
Since October 30, 1994, the Registrant has sold and issued the following
securities:
1. On December 14, 1994, the Registrant granted an option for 90,000
shares of Common Stock to James D. Hudson at an option price of $1.00
per share and an option for 60,000 shares of Common Stock to Barbara
Thompson at an option price of $1.00 per share (canceled January 15,
1996).
2. On December 15, 1994, the Registrant granted options for an aggregate
of 291,000 shares of Common Stock to the following:
a. an option for 3,000 shares of Common Stock was issued to Tom Boyd
at an option price of $1.00 per share;
b. an option for 3,000 shares of Common Stock was issued to Todd G.
Birdwell at an option price of $1.00 per share;
c. an option for 30,000 shares of Common Stock was issued to Richard
B. Ray at an option price of $1.00 per share;
d. an option for 30,000 shares of Common Stock was issued to B. Otto
Wheeley at an option price of $1.00 per share; and
e. an option for 30,000 shares of Common Stock was issued to Donald
F. Johnstone at an option price of $1.00 per share.
3. On December 20, 1994, the Registrant granted options for an aggregate
of 51,000 shares of Common Stock to the following:
a. an option for 3,000 shares of Common Stock was issued to Phillip
Greene at an option price of $2.00 per share;
b. an option for 15,000 shares of Common Stock was issued to Steve
J. Baker at an option price of $2.00 per share;
c. an option for 3,000 shares of Common Stock was issued to Charles
Ferrell at an option price of $2.00 per share (canceled);
d. an option for 15,000 shares of Common Stock was issued to Howard
A. Fehl at an option price of $2.00 per share; and
e. an option for 15,000 shares of Common Stock was issued to Rungwit
Sangsingkeow at an option price of $2.00 per share;
4. On December 29, 1994, the Registrant issued an aggregate of 405,000
shares of Common Stock to the following:
II-2
<PAGE> 76
a. 15,000 shares of Common Stock to Thomas C. Wylly II for $1.67 per
share;
b. 20,000.01 shares of Common Stock to James F. Smith, Jr. for $2.50
per share;
c. 20,000.01 shares of Common Stock to Meta K. Smith for $2.50 per
share;
d. 20,000.01 shares of Common Stock to Richard B. Ray for $2.50 per
share;
e. 20,000.01 shares of Common Stock to Tim W. Williams for $2.50 per
share;
f. 120,000 shares of Common Stock to Tennessee Innovation Centers,
Inc. for $1.67 per share;
g. 100,000 shares of Common Stock to Tennessee Innovation Centers,
Inc. for $2.50 per share;
h. 30,000 shares of Common Stock to NSBW Corporation for $1.67 per
share; and
i. 60,000 shares of Common Stock were issued to Beta Development
Corporation for $1.67 per share.
5. On August 23, 1995, the Registrant issued 39,999.99 shares of Common
Stock to E. Douglas Grindstaff IRA for $2.50 per share.
6. On October 30, 1995, the Registrant issued 39,999.99 shares of Common
Stock to Michael Mars for $2.50 per share.
7. On December 1, 1995, the Registrant granted options for an aggregate
of 42,000 shares of Common Stock to the following:
a. an option for 6,000 shares of Common Stock was issued to Wanda
Elmore at an option price of $2.50 per share;
b. an option for 6,000 shares of Common Stock was issued to William
S. Groh at an option price of $2.50 per share (canceled);
c. an option for 6,000 shares of Common Stock was issued to Marcia
Anderson at an option price of $2.50 per share;
d. an option for 3,000 shares of Common Stock was issued to Phillip
Greene at an option price of $2.50 per share;
e. an option for 6,000 shares of Common Stock was issued to Ned
Earnest Clapp III at an option price of $2.50 per share (canceled
December 10, 1996);
f. an option for 3,000 shares of Common Stock was issued to Mary
Lindsey at an option price of $2.50 per share;
g. an option for 3,000 shares of Common Stock was issued to Walter
Frankenwich at an option price of $2.50 per share;
h. an option for 6,000 shares of Common Stock was issued to Timothy
H. Fehl at an option price of $2.50 per share; and
i. an option for 3,000 shares of Common Stock was issued to Phillip
Strenstream at an option price of $2.50 per share.
8. On December 20, 1995, the Registrant issued a Stock Purchase Warrant
for 12,000 shares of Common Stock to E. Douglas Grindstaff as
additional consideration for a $100,000 10% Subordinated Debenture.
9. On January 6, 1996, the Registrant issued 3,000 shares of Common Stock
to Rungwit Sangsingkeow for $2.00 per share.
10. On January 26, 1996, the Registrant granted an option for 30,000
shares of Common Stock to Melvin E. Koons at an option price of $1.00
per share.
11. On May 3, 1996, the Registrant granted options for an aggregate of
66,000 shares of Common Stock to the following:
II-3
<PAGE> 77
a. an option for 15,000 shares of Common Stock was issued to Phillip
Greene at an option price of $2.50 per share;
b. an option for 30,000 shares of Common Stock was issued to Steve
J. Baker at an option price of $2.50 per share;
c. an option for 6,000 shares of Common Stock was issued to Mary
Lindsey at an option price of $2.50 per share;
d. an option for 3,000 shares of Common Stock was issued to Phillip
A. Winkle at an option price of $2.50 per share;
e. an option for 3,000 shares of Common Stock was issued to Patricia
Dianne Daniels at an option price of $2.50 per share;
f. an option for 3,000 shares of Common Stock was issued to Dick
Firestone at an option price of $2.50 per share;
g. an option for 6,000 shares of Common Stock was issued to Wanda
Elmore at an option price of $2.50 per share;
12. On November 15, 1996, the Registrant granted an option for 75,000
shares of Common Stock to Christopher E. Mainini at an option price of
$2.50 per share.
13. On December 20, 1996, the Registrant granted an option for 45,000
shares of Common Stock was issued to James D. Hudson at an option
price of $2.50 per share.
14. On February 3, 1997, the Registrant issued 750 shares of Common Stock
to E. Douglas Grindstaff for $2.50 per share.
15. On February 3, 1997, the Registrant issued 3,000 shares of Common
Stock to Rungwit Sangsingkeow for $2.00 per share.
16. On April 17, 1997, the Registrant issued 3,000 shares of Common Stock
to E. Douglas Grindstaff for $2.50 per share.
17. On July 15, 1997, the Registrant granted options for an aggregate of
54,000 shares of Common Stock to the following:
a. an option for 27,000 shares of Common Stock was issued to Tom
Boyd at an option price of $2.97 per share; and
b. an option for 27,000 shares of Common Stock was issued to Todd G.
Birdwell at an option price of $2.97 per share.
The sales and issuances of securities in the above transactions have been
adjusted to reflect the 3-for-1 stock split, which was effected in November,
1997. The sales and issuances of the securities referenced above were exempt
from registration under the Securities Act pursuant to Section 4(2) thereof as
transactions not involving any public offerings, with the recipients
representing their intentions to acquire the securities for their own accounts
and not with a view to the distribution thereof. In all of the above
transactions, appropriate legends were affixed to the respective stock
certificates, and all recipients had adequate access to information about the
Registrant.
II-4
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following exhibits are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Restated Charter of the Registrant
3.2 Form of Restated Bylaws of the Registrant
4.1* Specimen of Common Stock certificate
4.2 Form of Restated Charter of the Registrant (filed as Exhibit
3.1)
4.3 Form of Restated Bylaws of the Registrant (filed as Exhibit 3.2)
5.1* Opinion of Waller Lansden Dortch & Davis, PLLC
10.1 Radio Systems Corporation 1997 Stock Incentive Plan
10.2 Radio Systems Corporation 1994 Employee Incentive Stock Option
Plan
10.3 Officer Incentive Plan of Registrant
10.4 Form of Indemnification Agreement between the Registrant and
members of its Board of Directors
10.5 Industrial Lease, dated July 16, 1997, by and between the
Registrant and CRRSC Realty, LLC
10.6 10% Subordinated Debenture and Stock Purchase Warrant, dated
December 20, 1995, between the Registrant and E. Douglas
Grindstaff
10.7 Purchase Agreement, dated March 1, 1994, by and between the
Registrant and Concorde Microsystems, Inc.
10.8 Transmitter ASIC Development Agreement, dated January 1, 1995,
between the Registrant and Concorde Microsystems, Inc.
10.9 Agreement, dated January 10, 1997, between the Registrant and
Multi-Vet Limited and Multi-Vet International, Inc.
10.10 Agreement, dated July 1, 1996, between the Registrant and Duplex
CSA Limited
10.11 Form of Distribution Agreement, between the Registrant and Mepro
Epilady Ltd.
10.12 Loan Agreement, dated June 5, 1995, by and between the
Registrant and BankFirst of Knoxville, Tennessee
10.13 Loan and Security Agreement, dated April 3, 1995, by and between
the Registrant and First American National Bank
10.14 First Amendment to Loan and Security Agreement, dated October
25, 1995, by and between the Registrant and First American
National Bank
10.15 Second Amendment to Loan and Security Agreement, dated May 17,
1996, by and between the Registrant and First American National
Bank
10.16 Third Amendment to Loan and Security Agreement, dated December
13, 1996, by and between the Registrant and First American
National Bank
10.17 Fourth Amendment to Loan and Security Agreement, dated January
22, 1997, by and between the Registrant and First American
National Bank
10.18 Fifth Amendment to Loan and Security Agreement, dated April 30,
1997, by and between the Registrant and First American National
Bank
10.19 Sixth Amendment to Loan and Security Agreement, dated May 30,
1997, by and between the Registrant and First American Bank
10.20 Agreement, dated January 24, 1994, by and between the Registrant
and PetSafe Limited
10.21 Agreement Revision, dated May 13, 1996, by and between the
Registrant and PetSafe Limited
11.1* Statement regarding computation of per share earnings
23.1 Consent of Coopers & Lybrand L.L.P.
</TABLE>
II-5
<PAGE> 79
<TABLE>
<S> <C>
23.2* Consent of Waller Lansden Dortch & Davis, PLLC (included in
Exhibit 5)
24.1 Power of Attorney (included in the signature page)
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- --------------------
*To be filed by amendment.
(b) Financial Statement Schedules
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, 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,
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.
(3) To provide to the Underwriters at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-6
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Nashville, State of
Tennessee, on November 18, 1997.
RADIO SYSTEMS CORPORATION
By: /s/ Randal D. Boyd
-------------------------
Randal D. Boyd
Chairman of the Board and
President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Randal D. Boyd and James Hudson, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him in his name, place and stead, in any
and all capacities (until revoked in writing), to sign any and all amendments to
this Registration Statement (including post-effective amendments and amendments
thereto) and any registration statement relating to the same offering as this
Registration Statement that is to be effective upon filing 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 said 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, as fully and to all intents and
purposes as he might or could do in person hereby ratifying and confirming all
that said attorneys-in-fact and agents, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title(s) Date
---- -------- ----
<C> <C> <C>
/s/ Randal D. Boyd Chairman of the Board and November 18, 1997
- ---------------------------- President (principal
Randal D. Boyd executive officer)
/s/ James D. Hudson Chief Financial Officer and November 18, 1997
- ---------------------------- Treasurer (principal
James D. Hudson financial and accounting
officer)
/s/ Ronald Nutt, Ph.D. Director November 18, 1997
- ----------------------------
Ronald Nutt, Ph.D.
/s/ Richard B. Ray Director November 18, 1997
- ----------------------------
Richard B. Ray
/s/Tom Boyd Director November 18, 1997
- ----------------------------
Tom Boyd
/s/ B. Otto Wheeley Director November 18, 1997
- ----------------------------
B. Otto Wheeley
/s/ Donald F. Johnstone Director November 18, 1997
- ----------------------------
Donald F. Johnstone
/s/ E. Doug Grindstaff Director November 18, 1997
- ----------------------------
E. Doug Grindstaff
/s/ Todd G. Birdwell Director November 18, 1997
- ----------------------------
Todd G. Birdwell
</TABLE>
II-7
<PAGE> 81
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
------ -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Form of Restated Charter of the Registrant
3.2 Form of Restated Bylaws of the Registrant
4.1* Specimen of Common Stock certificate
4.2 Form of Restated Charter of the Registrant (filed as Exhibit
3.1)
4.3 Form of Restated Bylaws of the Registrant (filed as Exhibit 3.2)
5.1* Opinion of Waller Lansden Dortch & Davis, PLLC
10.1 Radio Systems Corporation 1997 Stock Incentive Plan
10.2 Radio Systems Corporation 1994 Employee Incentive Stock Option
Plan
10.3 Officer Incentive Plan of Registrant
10.4 Form of Indemnification Agreement between the Registrant and
members of its Board of Directors
10.5 Industrial Lease, dated July 16, 1997, by and between the
Registrant and CRRSC Realty, LLC
10.6 10% Subordinated Debenture and Stock Purchase Warrant, dated
December 20, 1995, between the Registrant and E. Douglas
Grindstaff
10.7 Purchase Agreement, dated March 1, 1994, by and between the
Registrant and Concorde Microsystems, Inc.
10.8 Transmitter ASIC Development Agreement, dated January 1, 1995,
between the Registrant and Concorde Microsystems, Inc.
10.9 Agreement, dated January 10, 1997, between the Registrant and
Multi-Vet Limited and Multi-Vet International, Inc.
10.10 Agreement, dated July 1, 1996, between the Registrant and Duplex
CSA Limited
10.11 Form of Distribution Agreement, between the Registrant and Mepro
Epilady Ltd.
10.12 Loan Agreement, dated June 5, 1995, by and between the
Registrant and BankFirst of Knoxville, Tennessee
10.13 Loan and Security Agreement, dated April 3, 1995, by and between
the Registrant and First American National Bank
10.14 First Amendment to Loan and Security Agreement, dated October
25, 1995, by and between the Registrant and First American
National Bank
10.15 Second Amendment to Loan and Security Agreement, dated May 17,
1996, by and between the Registrant and First American National
Bank
10.16 Third Amendment to Loan and Security Agreement, dated December
13, 1996, by and between the Registrant and First American
National Bank
10.17 Fourth Amendment to Loan and Security Agreement, dated January
22, 1997, by and between the Registrant and First American
National Bank
10.18 Fifth Amendment to Loan and Security Agreement, dated April 30,
1997, by and between the Registrant and First American National
Bank
10.19 Sixth Amendment to Loan and Security Agreement, dated May 30,
1997, by and between the Registrant and First American Bank
10.20 Agreement, dated January 24, 1994, by and between the Registrant
and PetSafe Limited
10.21 Agreement Revision, dated May 13, 1996, by and between the
Registrant and PetSafe Limited
11.1* Statement regarding computation of per share earnings
23.1 Consent of Coopers & Lybrand L.L.P.
23.2* Consent of Waller Lansden Dortch & Davis, PLLC (included in
Exhibit 5)
24.1 Power of Attorney (included in the signature page)
27.1 Financial Data Schedule (for SEC use only)
</TABLE>
- --------------------
*To be filed by amendment.
II-8
<PAGE> 1
EXHIBIT 1.1
RADIO SYSTEMS CORPORATION
____ SHARES OF COMMON STOCK
UNDERWRITING AGREEMENT
_________ ___, 199_
J.C. BRADFORD & CO., L.L.C.
THE ROBINSON-HUMPHREY COMPANY, L.L.C.
As Representatives of the Several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
Radio Systems Corporation, a Tennessee corporation (the
"Company"), and certain shareholders of the Company identified on Schedule II
hereto (the "Selling Shareholders") propose to sell to the several underwriters
named in Schedule I hereto (the "Underwriters"), for whom you are acting as the
representatives (the "Representatives"), _________ and ________shares,
respectively (collectively, the "Firm Shares"), of the common stock, $0.01 par
value per share (the "Common Stock"), of the Company. The Company proposes to
grant to the Underwriters an option to purchase up to ________ additional
shares of Common Stock as provided for in Section 3 of this Agreement for the
purpose of covering over-allotments (the "Option Shares"). The Underwriters,
severally not jointly, are willing to purchase the Firm Shares set forth
opposite their respective names on Schedule I hereto and their pro-rata share
of the Option Shares in the event the Representatives elect to exercise the
over-allotment taken in whole or in part. The Firm Shares and the Option Shares
purchased pursuant to this Underwriting Agreement (the "Agreement"), are
collectively referred to herein as the "Shares."
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), under the Securities Act of 1933, as amended
(the "Securities Act"), a registration statement on Form S-1 (Registration No.
_________), including the related preliminary prospectus relating to the
Shares. Copies of such registration statement and any amendments, including any
post-effective amendments, and all forms of the related prospectuses contained
therein and any supplements thereto, have been delivered to you. Such
registration statement, including the prospectus, Part II, all financial
schedules and exhibits thereto, all information deemed to be a part of such
registration statement pursuant to Rule 430A under the Rules and Regulations
(as hereinafter defined) and any related registration statement filed pursuant
to Rule 462(b) under the Rules and Regulations, at the time when they became
effective, are herein referred to as the "Registration Statement," and the
prospectus included as part of the Registration Statement on file with the
Commission that discloses all the information that was omitted from the
prospectus pursuant to Rule 430A under the Rules and Regulations on the date
that the Registration Statement became effective and in the form filed pursuant
to Rule 424(b) Rules and Regulations, is herein
<PAGE> 2
referred to as the "Final Prospectus." The prospectus included as part of the
Registration Statement on the date when the Registration Statement became
effective is referred to herein as the "Effective Prospectus." Any prospectus
included in the Registration Statement and in any amendment thereto prior to
the date on which the Registration Statement became effective is referred to
herein as a "Preliminary Prospectus." For purposes of this Agreement, "Rules
and Regulations" means the rules and regulations promulgated by the Commission
under either the Securities Act or the Securities Exchange of 1934, as amended
(the "Exchange Act"), as applicable.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus and no proceeding for that
purpose has been instituted or threatened by the Commission or the securities
authority of any state or other jurisdiction. Each Preliminary Prospectus, at
the time of filing thereof, complied with the requirements of the Securities
Act and the Rules and Regulations, and did not include any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; except that the
foregoing does not apply to statements or omissions made in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through J.C. Bradford & Co. ("Bradford") specifically for use
therein (it being understood that the only information so provided is the
information included in the last paragraph on the cover page and under the
caption "Underwriting" in the Preliminary, Effective and Final Prospectus).
When the Registration Statement becomes effective and at all times subsequent
thereto up to and including the First Closing Date (as hereinafter defined),
(i) the Registration Statement, the Effective Prospectus and the Final
Prospectus and any amendments or supplements thereto will contain all
statements which are required to be stated therein in accordance with the
Securities Act and the Rules and Regulations and will comply with the
requirements of the Securities Act and the Rules and Regulations, and (ii)
neither the Registration Statement, the Effective Prospectus nor the Final
Prospectus nor any amendment or supplement thereto will include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; except that the
foregoing does not apply to statements or omissions made in reliance upon and
in conformity with written information furnished to the Company by any
Underwriter through Bradford specifically for use therein (it being understood
that the only information so provided is the information included in the last
paragraph on the cover page and under the caption "Underwriting" in the Final
Prospectus).
(c) The Company is duly organized and validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization with full power and authority to own its properties and conduct
its business as now conducted and is duly qualified or authorized to do
business and is in good standing in all jurisdictions wherein the nature of its
business or the character of property owned or leased may require it to be
authorized or qualified to do business, except where failure to obtain such
authorization or qualification would not have a material adverse effect on the
Company's condition (financial or otherwise). The Company holds all licenses,
consents and approvals, and has satisfied all eligibility and other similar
requirements imposed by federal, state and local regulatory bodies,
administrative agencies or other governmental bodies, agencies or officials, in
each case as required for the conduct of the business in which it is engaged
and is contemplated to be engaged as set forth in the Effective Prospectus.
(d) The capitalization of the Company as of _________ ___, 199_
is as set forth under the caption "Capitalization" in the Effective Prospectus
and the Final Prospectus, and the Company's capital stock conforms to the
description thereof contained under the caption "Description of Capital Stock"
in the Effective Prospectus and the Final Prospectus. All the issued shares of
the Company's Common Stock, have been duly authorized and validly issued, and
are fully paid and nonassessable. None of the issued shares of the Company's
Common Stock have been issued in violation of any preemptive or similar rights.
The Shares to be sold by the Company hereunder have been duly and validly
authorized and, upon issuance and delivery and payment therefor in the manner
herein
2
<PAGE> 3
described, will be validly issued, fully paid and nonassessable. Except as set
forth in the Effective Prospectus and the Final Prospectus, (i) the Company
does not have outstanding any options to purchase, or any rights or warrants to
subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell, any shares of capital stock and (ii)
there are no preemptive rights or other rights to subscribe for or to purchase,
or any restriction upon the transfer of, any shares of capital stock pursuant
to the Company's Charter, bylaws or any agreement or other instrument to which
the Company is a party or by which it may be bound. Neither the filing of the
Registration Statement nor the issuance, offer or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any
shares of Common Stock or any other securities of the Company. The Underwriters
will receive good and marketable title to the Shares to be issued and delivered
hereunder, free and clear of all liens, encumbrances, claims, security
interests, restrictions, shareholders' agreements, voting trusts or any other
claims of third parties whatsoever.
(e) The form of stock certificate to be used to evidence the
Common Stock will be in due and proper form and will comply with all applicable
legal requirements.
(f) All offers and sales by the Company of the Company's
securities prior to the date hereof were at all relevant times duly registered
or the subject of an available exemption from the registration requirements of
the Securities Act, and were duly registered or the subject of an available
exemption from the registration requirements of the applicable state securities
or Blue Sky laws, and any private placement memoranda delivered in connection
with offers and sales of the Company's securities prior to the date hereof did
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein not misleading.
(g) The Company has full legal right, power and authority to enter
into this Agreement and to sell and deliver the Shares to be sold by it to the
Underwriters as provided herein, and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms. No consent, approval, authorization or order of any court or
governmental agency or body or third party is required for the performance of
this Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except such as have been obtained and such as
may be required by the National Association of Securities Dealers, Inc. (the
"NASD") or under the Securities Act or state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters. The issuance and sale of the Shares by the Company, the Company's
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in a breach or violation of, or conflict
with, any of the terms and provisions of, or constitute a default by the
Company under, any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which the Company is a party or to which the
Company or any of its properties is subject, the charter, bylaws or other
governing instruments of the Company or any statute or any judgment, decree,
order, rule or regulation of any court or governmental agency or body
applicable to the Company or any of its properties. The Company is not in
violation of its charter, bylaws or other governing instruments or any law,
administrative rule or regulation or arbitrators' or administrative court
decree, judgment or order or in violation or default (there being no existing
state of facts which with notice or lapse of time or both would constitute a
default) in the performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture, deed of
trust, mortgage, loan agreement, note, lease, agreement or other instrument or
permit to which it is a party or by which it or any of its properties is or may
be bound.
(h) The historical and pro forma financial statements, together
with the related schedules and notes, of the Company, included in the
Registration Statement, the Effective Prospectus and the Final Prospectus,
conform to the requirements of the Securities Act and the Rules and
Regulations. Such historical financial statements fairly present the financial
position of
3
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the Company at the respective dates indicated in accordance with generally
accepted accounting principles applied on a consistent basis for the periods
indicated. Such pro forma financial statements have been prepared on a basis
consistent with such historical statements, except for the pro forma
adjustments specified therein, and give effect to assumptions made on a
reasonable basis and present fairly the transactions reflected thereby as
indicated in the Prospectus. The financial and statistical data set forth in
the Effective Prospectus and the Final Prospectus fairly present the
information set forth therein on the basis stated in the Effective Prospectus
and the Final Prospectus. Coopers & Lybrand L.L.P., whose reports are included
in the Effective Prospectus and the Final Prospectus, are independent
accountants as required by the Securities Act and the Rules and Regulations.
(i) Subsequent to __________ __, 199_, the Company has not
sustained any material loss or interference with its business or properties
from fire, flood, hurricane, accident or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental action, order
or decree, which is not disclosed in the Effective Prospectus and the Final
Prospectus; and subsequent to the respective dates as of which information is
given in the Registration Statement, the Effective Prospectus and the Final
Prospectus, (i) the Company has not incurred any material liabilities or
obligations, direct or contingent, or entered into any transactions not in the
ordinary course of business, and (ii) there has not been any issuance of
options, warrants or rights to purchase interests or the capital stock of the
Company, or any material adverse change, or any development involving a
prospective material adverse change, in the general affairs, management,
business, prospects, financial position, net worth or results of operations of
the Company, except in each case as described in the Effective Prospectus and
the Final Prospectus.
(j) Except as described in the Effective Prospectus and the Final
Prospectus, there is not pending, or to the knowledge of the Company
threatened, any legal or governmental action, suit, proceeding, inquiry or
investigation, to which the Company or any of its officers or directors is a
party, or to which its property is subject, before or brought by any court or
governmental agency or body, wherein an unfavorable decision, ruling or finding
could prevent or materially hinder the consummation of this Agreement or result
in a material adverse change in the business condition (financial or other),
prospects, financial position, net worth or results of operations of the
Company.
(k) _______________ shares of Common Stock, including the Shares,
have been approved for listing on the Nasdaq National Market (the "Nasdaq
National Market"), subject to official notice of issuance. The Company has
filed a registration statement pursuant to Section 12 of the Exchange Act to
register the Common Stock.
(l) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly, any action
resulting in a violation of Regulation M under the Exchange Act, or designed to
cause or result under the Exchange Act or otherwise in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of any securities of the Company or
facilitation of the sale or resale of the Shares.
(m) There are no contracts or other documents required by the
Securities Act or by the Rules and Regulations to be described in the
Registration Statement, the Effective Prospectus or the Final Prospectus or to
be filed as exhibits to the Registration Statement which have not been
described or filed as required. All such contracts to which the Company is a
party have been duly authorized, executed and delivered by the Company,
constitute valid and binding agreements of the Company and are enforceable
against the Company in accordance with the terms thereof. The Company has
performed all obligations required to be performed by it, and is neither in
default nor has it received notice of any default or dispute under, any such
contract or other material instrument to which it is a party or by which its
property is bound or affected. To the best knowledge of the Company, no other
party under any such contract or other material instrument to which it is a
party is in default in any material respect thereunder.
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(n) Except as described in the Effective Prospectus and the Final
Prospectus, the Company has good and marketable title to all real and material
personal property owned by it, free and clear of all liens, charges,
encumbrances or defects, except those reflected in the financial statements
hereinabove described. The real and personal property and buildings referred to
in the Effective Prospectus and the Final Prospectus which are leased from
others by the Company are held under valid, subsisting enforceable leases. The
Company owns or leases all such properties as is necessary to its operations as
now conducted.
(o) The Company's system of internal accounting controls is
sufficient to meet the broad objectives of internal accounting controls insofar
as those objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material in relation to the Company's
financial statements.
(p) The Company has filed all foreign, federal, state and local
income and franchise tax returns required to be filed through the date hereof
and has paid all taxes shown as due therefrom to the extent such taxes have
become due and are not being contested in good faith; and there is no tax
deficiency that has been, nor does the Company have knowledge of any tax
deficiency which is likely to be, asserted against the Company which, if
determined adversely, could materially and adversely affect the earnings,
assets, affairs, business prospects or condition (financial or other) of the
Company.
(q) The Company operates its business in conformity with all
applicable statutes, common laws, ordinances, decrees, orders, rules and
regulations of governmental bodies, including, without limitation, those
relating to the manufacture, assembly and sale of radio frequency related
products using radio frequency technology. The Company has all licenses,
approvals or consents to operate its business in all locations in which such
business is currently being operated and is not aware of any existing or
imminent matter which may materially adversely impact its operations or
business prospects other than as specifically disclosed in the Effective
Prospectus and the Final Prospectus.
(r) The Company is not in violation of any federal, state, local
or foreign law or regulation relating to occupational safety and health or to
the storage, handling or transportation of hazardous or toxic materials, and
the Company has received all permits, licenses or other approvals required of
it under applicable federal, state and foreign occupational safety and health
and environmental laws and regulations to conduct its respective businesses,
and the Company is in compliance with all terms and conditions of any such
permit, license or approval, except any such violation of law or regulation,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
which would not result in a material adverse change in the condition, financial
or otherwise, or in the earnings, business affairs or prospects of the Company.
(s) The Company has not failed to file with the applicable
regulatory authorities any statements, reports, information or forms required
by all applicable laws, regulations or orders; all such filings or submissions
were in compliance with applicable laws when filed, and no material
deficiencies have been asserted by any regulatory commission, agency or
authority with respect to such filings or submissions. The Company has not
failed to maintain in full force and effect any licenses, registrations or
permits necessary or proper for the conduct of its business, or received any
notification that any revocation or limitation thereof is threatened or
pending, and there is not to the knowledge of the Company pending any change
under any law, regulation, license or permit which could materially adversely
affect the business, operations, property or business prospects of the Company.
The Company has not received any notice of violation of or been threatened with
a charge of violating or is under investigation with respect to a possible
violation of any provision of any law, regulation or order.
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<PAGE> 6
(t) No labor dispute exists or is imminent with any of the
employees of the Company or otherwise which could materially adversely affect
the Company. The Company is not aware of any existing or imminent labor
disturbance by employees of the Company which could be expected to materially
adversely affect the condition (financial or otherwise), results of operations,
properties, affairs, management, business affairs or business prospects of the
Company. The Company is in compliance with all federal, state and local
employment and labor laws, including but not limited to, laws relating to
non-discrimination in hiring, promotion and pay of employees.
(u) The Company owns or possesses all licenses, patents,
copyrights, trademarks, service marks and trade names presently employed by it
in connection with the businesses presently operated or proposed to be operated
by it, and the Company has not received any notice of infringement of or
conflict with asserted rights of others with respect to any of the foregoing
which, alone or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, could result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company.
(v) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged and in which it proposes
to engage; and the Company has no reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business.
(w) Neither the Company, nor any director, officer, agent,
employee or other person acting on behalf of the Company has (i) used, or
authorized the use of, any corporate or other funds for unlawful payments,
contributions, gifts or entertainment, (ii) made unlawful expenditures relating
to political activity to government officials or others, or (iii) established
or maintained any unlawful or unrecorded funds in violation of any federal,
state, local or foreign law or regulation, including Section 30A of the
Exchange Act. Neither the Company nor any director, officer, agent, employee or
other person acting on behalf of the Company has accepted or received any
unlawful contributions, payments, gifts or expenditures.
(x) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its business
in a manner that would cause it to become, an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act of 1940.
(y) Except as disclosed in the Registration Statement and the
Effective Prospectus, there are no business relationships or related party
transactions required to be disclosed therein by Item 404 of Regulation S-K
promulgated by the Commission.
2. Representations and Warranties of the Selling Shareholders.
Each of the Selling Shareholders, severally and not jointly, represents and
warrants to and agrees with, each of the Underwriters that:
(a) Such Selling Shareholder, at the First Closing Date, will
have good and marketable title to the Shares set forth in Schedule II to be
sold by such Selling Shareholder, free and clear of any liens, encumbrances,
equities and claims (other than as imposed by the Securities Act or this
Agreement), and full right, power and authority to effect the sale and delivery
of such Shares; and upon the delivery of and payment for the Shares to be sold
by such Selling Shareholder pursuant to this Agreement, good and marketable
title thereto, free and clear of any liens, encumbrances, equities and claims,
of any kind, will be transferred to the Underwriters.
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<PAGE> 7
(b) Such Selling Shareholder has duly executed and delivered the
Custody Agreement and Power of Attorney in the form previously delivered to the
Representatives, appointing the persons named therein, and each of them as such
Selling Shareholder's attorney-in-fact (the "Attorney-in-Fact") and as
custodian (the "Custodian"). The Attorney-in-Fact is authorized to execute,
deliver and perform this Agreement on behalf of such Selling Shareholder, to
deliver the Shares to be sold by such Selling Shareholder hereunder, to accept
payment therefor, and otherwise to act on behalf of such Selling Shareholder in
connection with this Agreement, including payment from the Offering proceeds of
expenses incurred on behalf of such Selling Shareholder. Certificates, in
suitable form for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank, representing the Shares to be
sold by such Selling Shareholder hereunder have been deposited with the
Custodian pursuant to the Custody Agreement and Power of Attorney for the
purpose of delivery pursuant to this Agreement. Such Selling Shareholder agrees
that the shares of Common Stock represented by the certificates on deposit with
the Custodian are subject to the interest of the Underwriters hereunder, that
the arrangements made for such custody and the appointment of the
Attorney-in-Fact are to that extent irrevocable, and that the obligations of
such Selling Shareholder hereunder shall not be terminated except as provided
in this Agreement and the Custody Agreement and Power of Attorney. If such
Selling Shareholder should die or become incapacitated, or if any other event
should occur, before the delivery of the Shares of such Selling Shareholder
hereunder, the certificates for such Shares deposited with the Custodian shall
be delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such death, incapacity or other event had not occurred,
regardless of whether the Custodian or the Attorney-in-Fact shall have received
notice thereof.
(c) Such Selling Shareholder, acting through his duly authorized
Attorney-in-Fact, has duly executed and delivered this Agreement and the
Custody Agreement and Power of Attorney; this Agreement constitutes a legal,
valid and binding obligation of such Selling Shareholder, all authorizations
and consents necessary for the execution and delivery of this Agreement and the
Custody Agreement and Power of Attorney on behalf of such Selling Shareholder
and for the sale and delivery of the Shares to be sold by such Selling
Shareholder hereunder have been given, except as may be required by the
Securities Act or state securities laws; and such Selling Shareholder has the
legal capacity and full right, power and authority to execute this Agreement
and the Custody Agreement and Power of Attorney.
(d) The performance of this Agreement and the Custody Agreement
and Power of Attorney and the consummation of the transactions contemplated
hereby and thereby by such Selling Shareholder will not result in a breach or
violation of, or conflict with, any of the terms or provisions of, or
constitute a default by such Selling Shareholder under, any indenture,
mortgage, deed of trust, trust (constructive or other), loan agreement, lease,
franchise, license or other agreement or instrument to which such Selling
Shareholder or any of his or its properties is bound, or any statute, judgment,
decree, order, rule or regulation of any court or governmental agency or body
applicable to such Selling Shareholder or any of his, her or its properties.
(e) Such Selling Shareholder has not distributed nor, other than
as permitted by the Securities Act and the Rules and Regulations, will
distribute any prospectus or other offering material in connection with the
offer and sale of the Shares other than any Preliminary Prospectus filed with
the Commission or the Final Prospectus or other material permitted by the
Securities Act.
(f) Such Selling Shareholder has reviewed and is familiar with
the Registration Statement and the Preliminary Prospectus. To the knowledge of
such Selling Shareholder, the Preliminary Prospectus does not include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
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<PAGE> 8
(h) At the time the Registration Statement becomes effective (i)
such parts of the Registration Statement and any amendments and supplements
thereto as specifically refer to such Selling Shareholder will not contain an
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and (ii) such parts of the Effective Prospectus and Final
Prospectus as specifically refer to such Selling Shareholder will not include
an untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(i) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory body, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement by such Selling Shareholder, and the consummation by him of the
transactions herein contemplated (other than as required by the Securities Act,
state securities laws and the NASD).
(j) Any certificates signed by or on behalf of such Selling
Shareholder as such and delivered to the Representatives or to counsel for the
Representatives shall be deemed a representation and warranty by such Selling
Shareholder to each Underwriter as to the matters covered thereby.
(k) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Shareholder agrees to deliver to you prior to or at
the First Closing Date (as hereinafter defined) a properly completed and
executed United States Treasury Department Form W-9 (or other applicable form
or statement specified by Treasury Department regulations in lieu thereof).
(l) Such Selling Shareholder has not taken nor will take,
directly or indirectly, any action resulting in a violation of Regulation M
under the Exchange Act or under the Exchange Act, or otherwise in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of any securities of the Company or
facilitation of the sale or resale of the Shares.
3. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties, agreements
and covenants herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Shareholders, severally not jointly, in
the amount set forth on Schedule II hereto, agree to sell to the several
Underwriters ___________ and, Firm Shares, respectively, and each of the
Underwriters, severally and not jointly, agrees to purchase at a purchase price
of $______ per share, the number of Firm Shares set forth opposite such
Underwriter's name in Schedule I hereto.
(b) The Company hereby grants to the Underwriters an option to
purchase, solely for the purpose of covering over-allotments in the sale of
Firm Shares, all or any portion of the Option Shares at the purchase price per
share set forth above. The option granted hereby may be exercised as to all or
any part of the Option Shares at any time within 30 days after the date of the
Final Prospectus. The Underwriters shall not be under any obligation to
purchase any Option Shares prior to the exercise of such option. The option
granted hereby may be exercised by the Underwriters by J.C. Bradford & Co.,
L.L.C. ("Bradford") giving written notice to the Company setting forth the
number of Option Shares to be purchased and the date and time for delivery of
and payment for such Option Shares and stating that the Option Shares referred
to therein are to be used for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares. If such notice is
given prior to the First Closing Date (as hereinafter defined), the date set
forth therein for such delivery and payment shall not be earlier than two full
business days thereafter or the First
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<PAGE> 9
Closing Date, whichever occurs later. If such notice is given on or after the
First Closing Date, the date set forth therein for such delivery and payment
shall not be earlier than three full business days thereafter. In either event,
the date so set forth shall not be more than four full business days after the
date of such notice. The date and time set forth in such notice is herein
called the "Option Closing Date." Upon exercise of the option, the Company
shall become obligated to sell to the Underwriters, and, subject to the terms
and conditions herein set forth, the Underwriters shall become obligated to
purchase, for the account of each Underwriter, from the Company, severally and
not jointly, the number of Option Shares specified in such notice. Option
Shares shall be purchased for the accounts of the Underwriters in proportion to
the number of Firm Shares set forth opposite such Underwriter's name in
Schedule I hereto, except that the respective purchase obligations of each
Underwriter shall be adjusted so that no Underwriter shall be obligated to
purchase fractional Option Shares.
(c) Certificates in definitive form for the Firm Shares which
each Underwriter has agreed to purchase hereunder shall be delivered by or on
behalf of the Company to the Underwriters for the account of such Underwriter
against payment by such Underwriter or on its behalf of the purchase price
therefor by wire transfer of immediately available funds to the order of the
Company, at the offices of Bradford, 330 Commerce Street, Nashville, Tennessee
37201, or at such other place as may be agreed upon by Bradford and the
Company, at 10:00 A.M., Nashville time, on the third full business day after
this Agreement becomes effective, or, at the election of the Underwriters, on
the fourth full business day after this Agreement becomes effective, if it
becomes effective after 4:30 P.M. Eastern time, or at such other time not later
than the seventh full business day thereafter as the Underwriters and the
Company may determine, such time of delivery against payment being herein
referred to as the "First Closing Date." The First Closing Date and the Option
Closing Date are herein individually referred to as the "Closing Date" and
collectively referred to as the "Closing Dates." Certificates in definitive
form for the Option Shares which each Underwriter shall have agreed to purchase
hereunder shall be similarly delivered by or on behalf of the Company on the
Option Closing Date. The certificates in definitive form for the Shares to be
delivered will be in good delivery form and in such denominations and
registered in such names as Bradford may request not less than 48 hours prior
to the First Closing Date or the Option Closing Date, as the case may be. Such
certificates will be made available for checking and packaging at a location in
New York, New York as may be designated by Bradford, at least 24 hours prior to
the First Closing Date or the Option Closing Date, as the case may be. It is
understood that Bradford may (but shall not be obligated to) make payment on
behalf of any Underwriter or Underwriters for the Shares to be purchased by
such Underwriter or Underwriters. No such payment shall relieve such
Underwriter or Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. After the Registration
Statement becomes effective, the several Underwriters propose to offer for sale
to the public the Firm Shares and any Option Shares which may be sold at the
price and upon the terms set forth in the Final Prospectus.
5. Covenants of the Company and the Selling Shareholders.
(a) The Company covenants and agrees with each of the
Underwriters that:
(i) The Company shall comply with the provisions of and make all
requisite filings with the Commission pursuant to Rules 424 and 430A of the
Rules and Regulations and shall notify the Representatives promptly (in
writing, if requested) of all such filings. The Company shall notify the
Representatives promptly of any request by the Commission for any amendment of
or supplement to the Registration Statement, the Effective Prospectus or the
Final Prospectus or for additional information; the Company shall prepare and
file with the Commission, promptly upon the Underwriters' request, any
amendments of or supplements to the Registration Statement, the Effective
Prospectus or the Final Prospectus which, in the Underwriters' opinion, may be
necessary or advisable in connection with the distribution of the Shares; and
the Company shall not file any
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<PAGE> 10
amendment of or supplement to the Registration Statement, the Effective
Prospectus or the Final Prospectus which is not approved by the Representatives
after reasonable notice thereof. The Company shall advise the Representatives
promptly of the issuance by the Commission or any jurisdiction or other
regulatory body of any stop order or other order suspending the effectiveness
of the Registration Statement, suspending or preventing the use of any
Preliminary Prospectus, the Effective Prospectus or the Final Prospectus or
suspending the qualification of the Shares for offering or sale in any
jurisdiction, or of the institution of any proceedings for any such purpose;
and the Company shall use its best efforts to prevent the issuance of any stop
order or other such order and, should a stop order or other such order be
issued, to obtain as soon as possible the lifting thereof.
(ii) The Company will take or cause to be taken all necessary
action and furnish to whomever the Representatives direct, such information as
may be reasonably required in qualifying the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
reasonably necessary to complete the distribution of the Shares.
(iii) Within the time during which a Final Prospectus relating to
the Shares is required to be delivered under the Securities Act, the Company
shall comply with all requirements imposed upon it by the Securities Act, as
now and hereafter amended, and by the Rules and Regulations, as from time to
time in force, so far as is necessary to permit the continuance of sales of or
dealings in the Shares as contemplated by the provisions hereof and the Final
Prospectus. If during such period any event occurs as a result of which the
Final Prospectus as then amended or supplemented would include an untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances then existing, not
misleading, or if during such period it is necessary to amend the Registration
Statement or supplement the Final Prospectus to comply with the Securities Act,
the Company shall promptly notify the Representatives and shall amend the
Registration Statement or supplement the Final Prospectus (at the expense of
the Company) so as to correct such statement or omission or effect such
compliance.
(iv) The Company will furnish without charge to the Representatives
and make available to the Underwriters copies of the Registration Statement
(four of which shall be signed and shall be accompanied by all exhibits), each
Preliminary Prospectus, the Effective Prospectus and the Final Prospectus, and
all amendments and supplements thereto, including any prospectus or supplement
prepared after the effective date of the Registration Statement, in each case
as soon as available and in such quantities as the Underwriters may reasonably
request.
(v) The Company will (A) deliver to the Representatives at such
office or offices as the Representatives may designate as many copies of the
Preliminary Prospectus and Final Prospectus as the Representatives may
reasonably request, (B) for a period of not more than nine months after the
Registration Statement becomes effective, send to the Representatives as many
additional copies of the Final Prospectus and any supplement thereto as the
Representatives may reasonably request, and (C) following nine months after the
Registration Statement becomes effective, send to the Representatives at their
expense as many additional copies of the Final Prospectus and any supplement
hereto as the Representative may reasonably request.
(vi) The Company shall make generally available to its security
holders, in the manner contemplated by Rule 158(b) under the Rules and
Regulations as promptly as practicable and in any event no later than 45 days
after the end of its fiscal quarter in which the first anniversary of the
effective date of the Registration Statement occurs, an earnings statement
satisfying the provisions of Section ll(a) of the Securities Act covering a
period of at least 12 consecutive months beginning after the effective date of
the Registration Statement.
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(vii) The Company will apply the net proceeds from the sale of the
Shares to be sold by it as set forth under the caption "Use of Proceeds" in the
Final Prospectus and will timely report such use of proceeds in its periodic
reports filed pursuant to sections 13(a) and 15(d) of the Exchange Act in
accordance with Rule 463 of the Securities Act or any successor provision.
(viii) During a period of five years from the effective date of the
Registration Statement or such longer period as the Representatives may
reasonably request, the Company will furnish to the Representatives copies of
all reports and other communications (financial or other) furnished by the
Company to its shareholders and, as soon as available, copies of any reports or
financial statements furnished or filed by the Company to or with the
Commission or any national securities exchange or over-the-counter market on
which any class of securities of the Company may be listed for trading.
(ix) The Company will, from time to time, after the effective date
of the Registration Statement file with the Commission such reports as are
required by the Securities Act, the Exchange Act and the Rules and Regulations,
and shall also file with foreign, state and other governmental securities
commissions in jurisdictions where the Shares have been sold by the
Underwriters (as the Representatives shall have advised the Company in writing)
such reports as are required to be filed by the securities acts and the
regulations of those states.
(x) Except pursuant to this Agreement or with the Representatives'
written consent, for a period of 180 days from the effective date of the
Registration Statement, the Company will not, and the Company has provided
agreements executed by each of its officers, directors and 5% or greater
Shareholders providing that for a period of 180 days from the effective date of
the Registration Statement, such person will not, offer for sale, sell (other
than the issuance by the Company of shares of Common Stock pursuant to
acquisitions or the exercise of options granted pursuant to existing employee
benefit plans and agreements), grant any options (other than pursuant to
existing employee benefit plans and agreements), rights or warrants with
respect to any shares of Common Stock, securities convertible into shares of
Common Stock or any other capital stock of the Company, or otherwise dispose
of, directly or indirectly, any shares of Common Stock or such other securities
or capital stock.
(xi) Neither the Company nor any of its directors, officers or
controlling persons, has taken or will take, directly or indirectly, any action
resulting in a violation of Regulation M under the Exchange Act, or designed to
cause or result under the Exchange Act or otherwise in, or which has
constituted or which reasonably might be expected to constitute, the
stabilization or manipulation of the price of any securities of the Company or
facilitation of the sale or resale of the Shares.
(xii) The Company will either conduct its business and operations
as described in the Final Prospectus or, if the Company makes any material
change to its business or operations as so conducted, promptly disclose such
change generally to the Company's security holders.
(xiii) If at any time during the 25 day period after the
Registration Statement is declared effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which, in the
Representatives' opinion, the market price for the Shares has been or is likely
to be materially affected (regardless of whether such rumor, publication or
event necessitates a supplement to or amendment of the Final Prospectus), the
Company will, after written notice from the Representatives advising it as to
the effect set forth above, prepare in consultation with the Representatives
concerning the substance of and, subject to the Rules and Regulations,
disseminate a press release or other public statement, reasonably satisfactory
to the Representatives, responding to or commenting on such rumor, publication
or event.
(xiv) The Company will use its best efforts to effect the listing
of the Common Stock, subject to notice of issuance, on the Nasdaq National
Market on or before the effective date of the Registration Statement.
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(b) Each of the Selling Shareholders, severally and not jointly,
covenants and agrees with each of the Underwriters that:
(i) Such Selling Shareholder will cooperate to the extent
necessary to cause the Registration Statement or any post-effective amendment
thereto to become effective at the earliest possible time.
(ii) Such Selling Shareholder will pay all federal and other
taxes, if any, on the transfer or sale of the Shares being sold by such Selling
Shareholder to the Underwriters.
(iii) Such Selling Shareholder will do or perform all things
required to be done or performed by such Selling Shareholder prior to the First
Closing Date to satisfy all conditions precedent to the delivery of the Shares
pursuant to this Agreement or the Power of Attorney and Custody Agreement.
(iv) Such Selling Shareholder has delivered to the Company an
agreement pursuant to which such Selling Shareholder has agreed that during the
period of 180 days from the date the Registration Statement is declared
effective under the Securities Act, such Selling Shareholder will not, without
your prior written consent, offer, pledge, issue, sell, contract to sell, grant
any option for the sale of, or otherwise dispose of (or announce any offer,
pledge, sale, grant of an option to purchase or other disposition), directly or
indirectly, any shares of Common Stock or securities convertible into,
exercisable or exchangeable for, shares of Common Stock.
(v) Such Selling Shareholder will not (i) take, directly or
indirectly, prior to the termination of the underwriting syndicate contemplated
by this Agreement, any action designed to cause or to result in, or that might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of any of
the Shares, (ii) sell, bid for, purchase or pay anyone any compensation for the
conflicting purchases of, the Shares or (iii) pay or agree to pay to any person
any compensation for soliciting another to purchase any other securities of the
Company.
(vi) Such Selling Shareholder will deliver to the Custodian on or
prior to the First Closing Date a properly completed and executed United States
Treasury Department Form W-9 (or other applicable form or statement specified
by Treasury Department Regulations in lieu thereof).
(vii) Such Selling Shareholder will furnish any documents,
instruments or other information which you may reasonably request in connection
with the sale and transfer of the Shares.
(viii) Such Selling Shareholder will use its or his best efforts to
comply or cause to be complied with the conditions to the obligations of the
Underwriters in Section 7 hereof insofar as such conditions relate to such
Selling Shareholder.
6. Expenses. The Company agrees with each of the Selling
Shareholders and the Underwriters that (a) whether or not the transactions
contemplated by this Agreement are consummated or this Agreement becomes
effective or is terminated, the Company will pay all fees and expenses incident
to the performance of the obligations of the Company hereunder, including, but
not limited to, (i) the Commission's registration fee, (ii) the expenses of
printing (or reproduction) and distributing the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus, the Effective Prospectus, the Final
Prospectus, any amendments or supplements thereto, any Marketing Materials (as
hereinafter defined) and this Agreement and other underwriting documents,
including Underwriter's Questionnaires, Underwriter's Powers of Attorney, Blue
Sky Memoranda, Agreements Among Underwriters and Selected Dealer Agreements,
(iii) fees and expenses of accountants and counsel for
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<PAGE> 13
the Company, (iv) expenses of registration or qualification of the Shares under
state Blue Sky and securities laws, including the fees and disbursements of
counsel to the Underwriters in connection therewith, (v) filing fees paid or
incurred by the Underwriters in connection with filings with the NASD, (vi)
expenses of listing the outstanding Common Stock on the Nasdaq National Market,
(vii) all travel, lodging and reasonable living expenses incurred by the
Company in connection with marketing, dealer and other meetings attended by the
Company and the Underwriters in marketing the Shares, (viii) the costs and
charges of the Company's transfer agent and registrar and the cost of preparing
the certificates for the Shares, and (ix) all other costs and expenses incident
to the performance of its obligations hereunder not otherwise provided for in
this Section; and (b) all out-of-pocket expenses, including counsel fees,
disbursements and expenses, incurred by the Underwriters in connection with
investigating, preparing to market and marketing the Shares and proposing to
purchase and purchasing the Shares under this Agreement, will be borne and paid
by the Company if the sale of the Shares provided for herein is not consummated
(i) by reason of the termination of this Agreement by the Company pursuant to
Section 14(a)(i) or (ii) by reason of the termination of this Agreement by the
Underwriters pursuant to Section 14(b)(ii), (iii), (iv) or (v) of this
Agreement or (iii) because of any failure or refusal on the part of the Company
or any Selling Shareholder to comply with the terms or fulfill any of the
conditions of this Agreement.
The provisions of this Section shall not affect any agreement that the
Company and the Selling Shareholders may have for the sharing of such costs and
expenses; provided, however, the Underwriters may deem the Company to be the
primary obligor with respect to all costs, fees, and expenses to be paid
hereunder by the Company and the Selling Shareholders.
7. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters to purchase and pay for the Firm Shares shall
be subject to the accuracy of the representations and warranties of the Company
herein as of the date hereof and as of the Closing Date as if made on and as of
the Closing Date, to the accuracy of the statements of the Company's officers
made pursuant to the provisions hereof, to the performance by the Company and
the Selling Shareholders of all of their respective covenants and agreements
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective not later than 5:30 P.M., Washington, D.C.
time, on the day following the date of this Agreement, or such later time and
date as shall have been consented to by the Representatives and all filings
required by Rule 424 and Rule 430A of the Securities Act Rules shall have been
made; no stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
instituted or threatened or, to the knowledge of the Company or the
Underwriters, shall be contemplated by the Commission; any request of the
Commission for additional information (to be included in the Registration
Statement or the Final Prospectus or otherwise) shall have been complied with
to the Representatives' satisfaction; and the NASD, upon review of the terms of
the public offering of the Shares, shall not have objected to such offering,
such terms or the Underwriters' participation in the same.
(b) No Representative shall have advised the Company that the
Registration Statement, Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or any supplement thereto, contains an
untrue statement of fact which, in the Representatives' reasonable judgment, is
material, or omits to state a fact which, in the Representatives' reasonable
judgment, is material and is required to be stated therein or necessary to make
the statements therein not misleading and the Company shall not have cured such
untrue statement of fact or stated a statement of fact required to be stated
therein.
(c) The Representatives shall have received an opinion, dated the
Closing Date, from Waller Lansden Dortch & Davis, counsel for the Company, to
the effect that:
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<PAGE> 14
(i) The Company has been duly incorporated and is validly
existing as a corporation under the laws of the State of Tennessee, with
corporate power and authority to own its properties and conduct its business as
now conducted as described in the Final Prospectus, and is duly qualified to do
business as a foreign corporation in good standing in all other jurisdictions
where the failure to so qualify would have a material adverse effect upon the
Company.
(ii) As of the dates specified therein, the Company had
historically authorized and issued capital stock as set forth under the caption
"Capitalization" in the Final Prospectus. All of the outstanding shares of
Common Stock have been duly authorized and are validly issued, fully paid and
nonassessable, and the Shares to be sold by the Company have been duly
authorized, and upon issuance thereof and payment therefor as provided herein,
will be validly issued, fully paid and nonassessable; none of the issued shares
have been issued in violation of or subject to any preemptive rights provided
for by law, any agreement known to such counsel or the Company's Charter. To
such counsel's knowledge, the Company does not have outstanding any options to
purchase, or any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue or sell
any shares of capital stock, and there are no preemptive rights or other rights
to subscribe for or purchase any shares of the capital stock of the Company, or
any restriction upon the transfer of, the Shares pursuant to the Company's
charter or bylaws or any agreement or other instrument known to such counsel to
which the Company is a party or by which it may be bound, except as described
in the Effective Prospectus and Final Prospectus. Neither the filing of the
Registration Statement nor the offer or sale of the Shares as contemplated by
this Agreement gives rise to any rights, other than those which have been
waived or satisfied, for or relating to the registration of any Common Stock or
any other securities of the Company. The Underwriters will receive good and
marketable title to the Shares to be issued and delivered by the Company
pursuant to this Agreement, free and clear of all liens, encumbrances, claims,
security interests, restrictions, shareholders agreements, voting trusts and
the rights of any third party whatsoever. The capital stock of the Company and
the Shares conform to the description thereof contained in the Final
Prospectus. All offers and sales of the Company's interests and securities
prior to the date hereof were made in reliance upon available exemptions from
the registration requirements of the Securities Act and the registration
requirements of applicable state securities or Blue Sky laws or, if not exempt,
properly registered in compliance with such laws.
(iii) The form of stock certificate to be used to evidence the
Common Stock will be in due and proper form and will comply with all applicable
legal requirements under the Tennessee Business Corporation Act.
(iv) No consent, approval, authorization or order of any court or
governmental agency or body or third party is required for the performance of
this Agreement by the Company or the consummation by the Company of the
transactions contemplated hereby, except such as have been obtained under the
Securities Act and such as may be required by the NASD and under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by several Underwriters, as to which such counsel need not express
an opinion. The performance of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby will not
conflict with or result in a breach or violation by the Company of any of the
terms or provisions of, or constitute a default by the Company under, any
material indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company is a party or to which the Company
or its properties is subject, the Charter or bylaws of the Company, any
statute, or any judgment, decree, order, rule or regulation of any court or
governmental agency or body applicable to the Company.
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<PAGE> 15
(v) The Company has full legal right and all corporate power and
authority to enter into this Agreement and to issue, sell and deliver the
Shares to be sold by it to the Underwriters as provided herein, and this
Agreement has been duly authorized, executed and delivered by the Company and
constitutes the valid and legally binding obligation of the Company enforceable
against the Company in accordance with its terms.
(vi) Except as described in the Final Prospectus, there is not
pending or threatened, any action, suit, proceeding, inquiry or investigation,
to which the Company is a party, or to which the property of the Company is
subject, before or brought by any court or governmental agency or body, which,
if determined adversely to the Company, could likely result in any material
adverse change in the business, financial position, net worth or results of
operations, or could materially adversely affect the properties or assets, of
the Company.
(vii) No default exists, and no event has occurred which with
notice or after the lapse of time to cure or both, would constitute a default,
in the due performance and observance of any term, covenant or condition of any
material indenture, mortgage, deed of trust, loan agreement, lease or other
agreement or instrument to which the Company is a party or to which its
respective properties are subject, or of the charter or bylaws of the Company.
(viii) There are no contracts or documents of the Company known to
such counsel which are required to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been so filed.
(ix) The Company is not an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(x) The Registration Statement and all post-effective amendments
thereto have become effective under the Securities Act, and, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceedings for that purpose have been instituted or are threatened, pending
or contemplated by the Commission. All filings required by Rule 424 and Rule
430A of the Rules and Regulations have been made; the Registration Statement,
the Effective Prospectus and Final Prospectus, and any amendments or
supplements thereto, as of their respective effective or issue dates, complied
as to form in all material respects with the requirements of the Securities Act
and the Rules and Regulations; the descriptions in the Registration Statement,
the Effective Prospectus and the Final Prospectus of statutes, regulations,
legal and governmental proceedings, and contracts and other documents are
accurate in all material respects and present fairly in all material respects
the information purported to be summarized; and counsel does not know of any
pending or threatened legal or governmental proceedings, statutes or
regulations required to be described in the Final Prospectus which are not
described as required nor of any contracts or documents of a character required
to be described in the Registration Statement or the Final Prospectus or to be
filed as exhibits to the Registration Statement which are not described and
filed as required.
In addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the attention of
such counsel which leads them to believe that the Registration Statement, the
Effective Prospectus and the Final Prospectus or any amendment or supplement
thereto contains an untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein not misleading in light
of the circumstances under which they were made (except that such counsel need
express no view as to financial statements, schedules and other financial or
statistical information included therein).
(d) The Representatives shall have received an opinion, dated the
Closing Date, of counsel for the Selling Shareholders, reasonably acceptable to
the Representatives, to the effect that:
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<PAGE> 16
(i) This Agreement and the Custody Agreement and Power of Attorney
have been duly authorized (in the case of corporate or partnership Selling
Shareholders), executed and delivered by or on behalf of each of the Selling
Shareholders and constitute valid and binding agreements of such Selling
Shareholders in accordance with their terms, subject to limits on remedies,
specific performance and bankruptcy and insolvency laws.
(ii) The sale of the Shares to be sold by each Selling Shareholder
hereunder and the compliance by such Selling Shareholder with all of the
provisions of this Agreement, the Custody Agreement and the Power of Attorney
and the consummation of the transactions herein and therein contemplated will
not conflict with or result in a breach or violation of any terms or provisions
of, or constitute a default under any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which such Selling Shareholder is
a party or by which such Selling Shareholder is bound or to which any of the
property or assets of such Selling Shareholder is subject, or any statute,
order, rule or regulation of any court or governmental agency or body
applicable to such Selling Shareholder or the property of such Selling
Shareholder.
(iii) No consent, approval, authorization or order of any
regulatory, administrative or other governmental body is required for the
consummation of the transactions contemplated by this Agreement in connection
with the Shares to be sold by each Selling Shareholder hereunder, except which
have been duly obtained and in full force and effect, such as have been
obtained under the Securities Act and such as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
such Shares by the Underwriters, as to which such counsel need express no
opinion.
(iv) Each of the Selling Shareholders has the full right, power
and authority to sell, transfer and deliver such Shares pursuant to this
Agreement. By delivery of a certificate or certificates therefor, the Selling
Shareholders will transfer to the Underwriters valid title to such shares, free
and clear of any pledge, lien, security interest, charge, claim, equity or
encumbrance of any kind.
The opinions to be rendered pursuant to paragraphs (c) and (d) may be
limited to federal law, and as to foreign and state law matters, to the laws of
the states or jurisdictions in which such counsel is admitted to practice. Such
counsel may rely upon opinions of other counsel in rendering such opinions
provided that such counsel shall state that they believe that both the
Representatives and they are justified in relying upon such opinions and that
such counsel is reasonably satisfactory to you.
(e) The Underwriters shall have received an opinion or opinions,
dated the Closing Date, of Stokes & Bartholomew, P.A., counsel for the
Underwriters, with respect to the Registration Statement and the Final
Prospectus, and such other related matters as the Underwriters may require, and
the Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such matters.
(f) The Representatives shall have received from Coopers &
Lybrand, L.L.P. a letter dated the date hereof and, at the Closing Date, a
second letter dated the Closing Date, in form and substance satisfactory to the
Representatives, stating that they are independent public accountants with
respect to the Company and its subsidiaries within the meaning of the
Securities Act and the applicable Rules and Regulations, and containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information of the Company contained in the Registration
Statement and the Prospectus.
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<PAGE> 17
In the event that the letters to be delivered referred to above set
forth any such changes, decreases or increases, it shall be a further condition
to the obligations of the Underwriters that the Underwriters shall have
determined, after discussions with officers of Company responsible for
financial and accounting matters and with Coopers & Lybrand, LLP that such
changes, decreases or increases as are set forth in such letters do not reflect
a material adverse change in the total assets, Shareholders' equity or
long-term debt of Company as compared with the amounts shown in the latest
balance sheets of Company included in the Final Prospectus, or a material
adverse change in revenues or net income of Company, in each case as compared
with the corresponding period of the prior year.
(g) There shall have been furnished to the Representatives a
certificate, dated the Closing Date and addressed to you, signed by the Chief
Executive Officer and Chief Financial Officer of the Company, to the effect
that:
(i) the representations and warranties of the Company in Section
1 of this Agreement are true and correct, as if made at and as of the Closing
Date, and the Company has complied with all the agreements and satisfied all
the conditions on its part to be performed or satisfied at or prior to the
Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
initiated or are pending, or to their knowledge, threatened under the
Securities Act;
(iii) all filings required by Rule 424 and Rule 430A of the Rules
and Regulations have been made;
(iv) they have carefully examined the Registration Statement, the
Effective Prospectus and the Final Prospectus, and any amendments or
supplements thereto, and such documents do not include any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made; and
(v) since the effective date of the Registration Statement, there
has occurred no event required to be set forth in an amendment or supplement to
the Registration Statement, the Effective Prospectus or the Final Prospectus
which has not been so set forth.
(h) The representations and warranties of each Selling
Shareholder in Section 2 of this Agreement shall be true and correct as of the
Closing Date and such Selling Shareholders shall deliver to the Representatives
a certificate to that effect, dated the Closing Date, signed by such Selling
Shareholder or his or its duly appointed Attorney-in-fact.
(i) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Final Prospectus, and except as
stated therein, the Company has not sustained any material loss or interference
with its business or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
court or governmental action, order or decree, or become a party to or the
subject of any litigation which is material to the Company, nor shall there
have been any material adverse change, or any development involving a
prospective material adverse change, in the business, properties, key
personnel, capitalization, prospects, net worth, results of operations or
condition (financial or other) of the Company, which loss, interference,
litigation or change, in the Representatives' reasonable judgment shall render
it unadvisable to commence or continue the offering of the Shares at the
offering price to the public set forth on the cover page of the Prospectus or
to proceed with the delivery of the Shares.
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<PAGE> 18
(j) The Shares shall be listed on the Nasdaq National Market.
(k) The Representatives shall have received the Lockup Agreements.
All such opinions, certificates, letters and documents delivered
pursuant to this Agreement will comply with the provisions hereof only if they
are reasonably satisfactory to the Representatives and their counsel. The
Company shall furnish to the Representatives such conformed copies of such
opinions, certificates, letters and documents in such quantities as the
Representatives shall reasonably request.
The respective obligations of the Underwriters to purchase and pay for
the Option Shares shall be subject, in their discretion, to the conditions of
this Section 7, except that all references to the "Closing Date" shall be
deemed to refer to the Option Closing Date, if it shall be a date other than
the Closing Date.
8. Condition of the Company's and the Selling Shareholder's
Obligations. The obligations hereunder of the Company and the Selling
Shareholders are subject to the condition set forth in Section 7(a) hereof.
9. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter, and each person, if any, who controls any Underwriter within the
meaning of the Securities Act, against any losses, claims, damages or
liabilities to which such Underwriter or controlling person may become subject
under the Securities Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based in
whole or in part upon: (i) any inaccuracy in the representations and warranties
of the Company or the Selling Shareholders contained herein; (ii) any failure
of the Company or the Selling Shareholders to perform their obligations
hereunder or under law; (iii) any untrue statement or alleged untrue statement
of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Effective Prospectus or Final Prospectus, or any
amendment or supplement thereto, (B) any audio or visual materials supplied by
the Company expressly for use in connection with the marketing of the Shares,
including without limitation, slides, videos, films and tape recordings (the
"Marketing Materials") or (C) in any Blue Sky application or other written
information furnished by the Company or the Selling Shareholders filed in any
state or other jurisdiction in order to qualify any or all of the Shares under
the securities laws thereof (a "Blue Sky Application"); (iv) or the omission or
alleged omission to state in the Registration Statement, any Preliminary
Prospectus, the Effective Prospectus or Final Prospectus or any amendment or
supplement thereto, any Marketing Materials or Blue Sky Application a material
fact required to be stated therein or necessary to make the statements therein
not misleading; or (v) any act or failure to act or any alleged act or failure
to act by any Underwriter in connection with, or relating to in any manner to,
the Shares or the offering contemplated hereby, and which is included as part
of or referred to in any loss, claim, damage, liability or action arising out
of or based upon matters covered by clause (i), (ii), (iii) or (iv) above
(provided that the Company shall not be liable under this clause (v) to the
extent that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be
taken by such Underwriter through its gross negligence or willful misconduct);
and will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action as such expenses are incurred; provided,
however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage, or liability arises out of or is based upon
any untrue statement or alleged untrue statement or omission or alleged
omission made in the Registration Statement, the Preliminary Prospectus, the
Effective Prospectus or Final Prospectus, or any amendment or supplement
thereto, or any Marketing Materials or Blue Sky Application in reliance
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<PAGE> 19
upon and in conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the only
information so provided is the information included in the last paragraph on
the cover page and under the caption "Underwriting" in any Preliminary
Prospectus and the Final Prospectus and the Effective Prospectus).
(b) The Selling Shareholders, severally and not jointly, agree to
indemnify and hold harmless each Underwriter, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, against any
losses, claims, damages or liabilities to which such Underwriter or controlling
person may become subject under the Securities Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based in whole or in part upon: (i) any inaccuracy in the
representations and warranties of the Company or such Selling Shareholder
contained herein; (ii) any failure of the Company or such Selling Shareholder
to perform their obligations hereunder or under law; (iii) any untrue statement
or alleged untrue statement of any material fact contained in (A) the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or supplement thereto, (B) any Marketing
Materials or (C) in any Blue Sky Application furnished by the Company or such
Selling Shareholder; or (iv) the omission or alleged omission to state the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus or
Final Prospectus or any amendment or supplement thereto, any Marketing
Materials or Blue Sky Application a material fact required to be stated therein
or necessary to make the statements therein not misleading; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter in
connection with, or relating to in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or referred to in any
loss, claim, damage, liability or action arising out of or based upon matters
covered by clause (i), (ii), (iii) or (iv) above (provided that the Company
shall not be liable under this clause (v) to the extent that it is determined
in a final judgment by a court of competent jurisdiction that such loss, claim,
damage, liability or action resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct);and will reimburse each Underwriter and each
such controlling person for any legal or other expenses reasonably incurred by
such Underwriter or such controlling person in connection with any
investigating or defending any such loss, claim, damage, liability or action as
such expenses are incurred; provided, however, that such Selling Shareholder
will not be liable in any such case to the extent that any such loss, claim,
damage, or liability arises out of or is based upon any untrue statement or
alleged statement or omission or alleged omission made in the Registration
Statement, the Preliminary Prospectus, the Effective Prospectus or Final
Prospectus, or any amendment or supplement thereto, or any Marketing Materials
or Blue Sky Application in reliance upon and in conformity with written
information furnished to the Company by any Underwriter specifically for use
therein (it being understood that the only information so provided is the
information included in the last paragraph on the cover page and in the first
and third paragraphs under the caption "Underwriting" in any Preliminary
Prospectus and the Final Prospectus and the Effective Prospectus).
(c) Notwithstanding the foregoing provisions of Section 9(a) and
(b), the parties agree that the indemnification obligations of each Selling
Shareholder under this Section 9, with respect to any matter that such Selling
Shareholder and the Company are both required to indemnify the Underwriters
hereunder, shall be subject to the determination by the Representatives, on
behalf of the Underwriters, that, in the Representatives' reasonable commercial
judgment, the Company is or may be unable to discharge fully its obligations to
the Underwriters hereunder; provided, however, that such Selling Shareholder's
obligations shall (i) be limited to such Selling Shareholder's proportion of
the Firm Shares as set forth on Schedule II, times the aggregate amount to
which the Underwriters are entitled to indemnification, and (ii) shall be
liable in any such case only to the extent of the total net proceeds (before
deducting expenses) received from the Underwriters by such Selling Shareholder
in connection with the sale of the Shares hereunder. To the extent the Company
is or may be able, in the Representatives' reasonable commercial judgment, to
discharge the Company's obligations to the Underwriters with respect to any
matter that the Company is required
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<PAGE> 20
to indemnify the Underwriters hereunder, the Underwriters shall to such extent,
first seek indemnification from the Company.
(d) Each Underwriter, will indemnify and hold harmless each of
the Selling Shareholders, the Company, each of its directors, each of the
Company's officers who signed the Registration Statement and each person, if
any, who controls the Company within the meaning of the Securities Act against
any losses, claims, damages or liabilities to which such Selling Shareholders,
the Company or any such director, officer or controlling person may become
subject, under the Securities Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in the Registration Statement, any Preliminary Prospectus, the
Effective Prospectus or Final Prospectus, or any amendment or supplement
thereto, any Marketing Materials or any Blue Sky Application, or arise out of
or are based upon the omission or the alleged omission to state in the
Registration Statement, any Preliminary Prospectus, the Effective Prospectus or
Final Prospectus, or any amendment or supplement thereto, any Marketing
Materials or any Blue Sky Application a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter specifically for use therein (it being understood that the only
information so provided is the information included in the last paragraph on
the cover page and under the caption "Underwriting" in any Preliminary
Prospectus and in the Effective Prospectus and the Final Prospectus).
(e) Promptly after receipt by an indemnified party under this
Section 9 of notice of the commencement of any action, including governmental
proceedings, such indemnified party will, if a claim in respect thereof is to
be made against the indemnifying party under this Section 9 notify the
indemnifying party of the commencement thereof; but the omission so to notify
the indemnifying party will not relieve it from any liability which it may have
to any indemnified party hereunder unless the indemnifying party has been
materially prejudiced thereby and in any event shall not relieve it from
liability otherwise than under this Section 9. In case any such action is
brought against any indemnified party, and it notifies the indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to such indemnified party; and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation except that the
indemnified party shall have the right to employ separate counsel if, in the
indemnified party's reasonable judgment, it is advisable for the indemnified
party to be represented by separate counsel, and in that event the fees and
expenses of separate counsel shall be paid by the indemnifying party.
(f) In order to provide for just and equitable contribution in
circumstances in which the indemnity agreement provided for in the preceding
part of this Section 9 is for any reason held to be unavailable to the
Underwriters, the Company or the Selling Shareholders or is insufficient to
hold harmless an indemnified party, then the Company and the Selling
Shareholders shall contribute to the damages paid by the Underwriters, and the
Underwriters shall contribute to the damages paid by the Company and the
Selling Shareholders; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f)) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The amount of such contribution shall (i) be in
such proportion as shall be appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders on the one hand and the
Underwriters on the other from the offering of the Shares or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, be
in such proportion as is appropriate to reflect not only
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<PAGE> 21
the relative benefits referred to in clause (i) above but also the relative
fault of the Company and the Selling Shareholders on the one hand and the
Underwriters on the other with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect
thereof, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholders on the one hand
and the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Shares purchased under this Agreement (before deducting expenses) received by
the Company and the Selling Shareholders, in the case of the Company and the
Selling Shareholders, and the total underwriting discounts and commissions
received by the Underwriters with respect to the Shares purchased under this
Agreement, in the case of the Underwriters, bear to the total gross proceeds
from the offering of the Shares under this Agreement, in each case as set forth
in the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission
or alleged omission to state a material fact relates to information supplied by
the Company the Selling Shareholders or the Underwriters, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company, the Selling
Shareholders and the Underwriters agree that it would not be equitable if the
amount of such contribution were determined by pro rata or per capita
allocation (even if the Underwriters were treated as one entity for such
purpose). Notwithstanding the foregoing, (i) no Underwriter or person
controlling such Underwriter shall be obligated to make contribution hereunder
which in the aggregate exceeds the underwriting discount applicable to the
Shares purchased by such Underwriter under this Agreement, less the aggregate
amount of any damages which such Underwriter and its controlling persons have
otherwise been required to pay in respect of the same or any similar claim (ii)
no Selling Shareholder shall be required to contribute any amount in excess of
the aggregate amount for which such Selling Shareholder is obligated to provide
indemnification pursuant to this Section 9. The Underwriters' obligations and
the Selling Shareholders' obligations to contribute hereunder are several in
proportion to their respective obligations and not joint. For purposes of this
Section, each person, if any, who controls an Underwriter within the meaning of
Section 15 of the Securities Act shall have the same rights to contribution as
such Underwriters, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company or a Selling Shareholder within the meaning of Section 15
of the Securities Act shall have the same rights to contribution as the Company
or the Selling Shareholder, as the case may be.
(g) No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is a party or is (or would be, if a claim were to be made against such
indemnified party) entitled to indemnity hereunder, unless such settlement
includes an unconditional release of such indemnified party from all liability
on claims that are the subject matter of such action, suit or proceeding.
10. Default of Underwriters. If any Underwriter defaults in its
obligation to purchase Shares hereunder and if the total number of Shares which
such defaulting Underwriter agreed but failed to purchase is ten percent or
less of the total number of Shares to be sold hereunder, the non-defaulting
Underwriters shall be obligated severally to purchase (in the respective
proportions which the number of Shares set forth opposite the name of each
non-defaulting Underwriter in Schedule I hereto bears to the total number of
Shares set forth opposite the names of all the non-defaulting Underwriters),
the Shares which such defaulting Underwriter or Underwriters agreed but failed
to purchase. If any Underwriter so defaults and the total number of Shares with
respect to which such default or defaults occur is more than ten percent of the
total number of Shares to be sold hereunder, and arrangements satisfactory to
the other Underwriters, the Company and the Selling Shareholders for the
purchase of such Shares by other persons (who may include the non-defaulting
Underwriters) are not made within 36 hours after such default, this Agreement,
insofar as it relates to the sale of the Shares, will terminate without
liability on the part of the non-defaulting Underwriters or the Company except
for (i) the provisions of Section 9 hereof, and (ii)
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<PAGE> 22
the expenses to be paid or reimbursed by the Company pursuant to Section 6. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 10. Nothing herein shall relieve a
defaulting Underwriter from liability for its default.
11. Default by the Selling Shareholders. If the Selling
Shareholders shall fail to sell and deliver the number of Firm Shares that the
Selling Shareholders are obligated to sell, the Representatives may, at their
option, by notice to the Company, either (a) require the Company to sell and
deliver such number of shares of Common Stock as to which the Selling
Shareholders have defaulted, or (b) elect to purchase the Firm Shares and the
Option Shares that the Company and the non-defaulting Selling Shareholders have
agreed to sell pursuant to this Agreement.
In the event of a default under this Section that does not result in
the termination of this Agreement, either the Representatives or the Company
shall have the right to postpone the First Closing Date or Option Closing Date
for a period not exceeding seven days in order to effect any required changes
in the Registration Statement or Prospectus or in any other documents or
arrangements. No action taken pursuant to this Section shall relieve the
Company or the Selling Shareholder so defaulting from liability, if any, in
respect of such default.
12. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Selling
Shareholders, the Company or their officers and the Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (a) any
investigation made by or on behalf of the Company, any of its officers or its
directors, any Underwriter or any controlling person, (b) any termination of
this Agreement and (c) delivery of and payment for the Shares.
13. Effective Date. This Agreement shall become effective at
whichever of the following times shall first occur: (i) at 11:30 am Washington
D.C. time, on the next full business day following the date in which the
Registration Statement becomes effective or (ii) at such time after the
Registration Statement has become effective as the Representatives shall
release the Firm Shares for sale to the public; provided, however, that the
provisions of Sections 6,9,12, and 13 hereof shall at all times be effective.
For purposes of this Section 13, the Firm Shares shall be deemed to have been
so released upon the release by the Representatives for publication, at any
time after the Registration Statement has become effective, of any newspaper
advertisement relating to the Firm Shares or upon the release by the
Representatives of telegrams offering the Firm Shares for sale to securities
dealers, whichever may occur first.
14. Termination.
(a) The Company's obligations under this Agreement may be
terminated by the Company by notice to the Representatives (i) at any time
before it becomes effective in accordance with Section 13 hereof, or (ii) in
the event that the condition set forth in Section 8 shall not have been
satisfied at or prior to the First Closing Date.
(b) This Agreement may be terminated by the Representatives by
notice to the Company (i) at any time before it becomes effective in accordance
with Section 13 hereof; (ii) in the event that at or prior to the First Closing
Date the Company or any Selling Shareholder shall have failed, refused or been
unable to perform any agreement on the part of the Company or such Selling
Shareholder to be performed hereunder or any other condition to the obligations
of the Underwriters hereunder is not fulfilled; (iii) if at or prior to the
Closing Date trading in securities on the NYSE, the Nasdaq, National Market,
the American Stock Exchange or the over-the-counter market shall have been
suspended or materially limited or minimum or maximum prices shall have been
established on either of such exchanges or such market, or a banking moratorium
shall have been declared by Federal or state authorities; (iv) if at or prior
to the Closing Date trading in securities of the Company shall have been
suspended; or (v) if there shall have been such a material adverse change
22
<PAGE> 23
in general economic, political or financial conditions or if the effect of
international conditions on the financial markets in the United States shall be
such as, in your reasonable judgment, makes it inadvisable to commence or
continue the offering of the Shares at the offering price to the public set
forth on the cover page of the Prospectus or to proceed with the delivery of
the Shares.
(c) Termination of this Agreement pursuant to this Section 14
shall be without liability of any party to any other party other than as
provided in Sections 6 and 9 hereof.
15. Notices. All communications hereunder shall be in writing
and, if sent to any of the Underwriters, shall be mailed or delivered or
telegraphed and confirmed in writing to the Underwriters in care of J. C.
Bradford & Co., J. C. Bradford Financial Center, 330 Commerce Street,
Nashville, Tennessee 37201, Attention: Thomas C. Wylly, II, or if sent to the
Company shall be mailed, delivered or telegraphed and confirmed in writing to
the Company at 5008 National Drive, Knoxville, Tennessee 37914, Attention Randy
Boyd, or if sent to Beta Development shall be mailed, delivered or telegraphed
and confirmed in writing to ___________, or if sent to Tennessee Innovations
shall be mailed, delivered or telegraphed and confirmed in writing to
___________.
16. Miscellaneous. This Agreement shall inure to the benefit of
and be binding upon the Underwriters, the Company and the Selling Shareholders
their respective successors and legal representatives. Nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of
this Agreement. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the Company, the Selling
Shareholders and the Underwriters and for the benefit of no other person except
that (a) the representations and warranties and indemnities of the Company and
the Selling Shareholder contained in this Agreement shall also be for the
benefit of any person or persons who control any Underwriter within the meaning
of Section 15 of the Securities Act, and (b) the indemnities by the
Underwriters shall also be for the benefit of the directors of the Company,
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Securities Act. No purchaser of Shares from any Underwriter will be deemed
a successor because of such purchase. The validity and interpretation of this
Agreement shall be governed by the laws of the State of Tennessee. 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. The Representatives hereby represent and warrant to the Company
that the Representative have authority to act hereunder on behalf of the
Underwriters, and any action hereunder taken by the Representatives shall be
binding upon all the Underwriters.
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<PAGE> 24
If the foregoing is in accordance with your understanding of our
agreement, please indicate your acceptance thereof in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among the Company, each of the Selling Shareholders and each of the
Underwriters.
Very truly yours,
RADIO SYSTEMS CORPORATION
By:
-------------------------------------
Title:
----------------------------------
SELLING SHAREHOLDERS
By:
------------------------------------
Attorney-in-Fact for each of the
Selling Shareholders listed in
Schedule II hereto
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<PAGE> 25
Confirmed and accepted as of
the date first above written.
J.C. BRADFORD & CO., L.L.C.
By:
------------------------
THE ROBINSON-HUMPHREY COMPANY, INC.
By:
------------------------
25
<PAGE> 26
SCHEDULE I
UNDERWRITERS
Underwriter Number of Firm Shares to be Purchased
J.C. Bradford & Co.
The Robinson-Humphrey Company
26
<PAGE> 27
SCHEDULE II
SELLING SHAREHOLDERS
Selling Shareholder Number of Shares to be Sold
Beta Development Corp.
Tennessee Innovations
27
<PAGE> 1
EXHIBIT 3.1
FORM OF
AMENDED AND RESTATED CHARTER
OF
RADIO SYSTEMS CORPORATION
The undersigned, pursuant to Section 48-20-107 of the Tennessee
Business Corporation Act (the "Act"), adopts the following amended and restated
charter for such corporation:
1. NAME. The name of the corporation is Radio Systems
Corporation (the "Corporation").
2. CAPITAL STOCK. The maximum number of shares which the
Corporation shall have the authority to issue is:
(a) Fifty million (50,000,000) shares of Common Stock, no par
value per share (the "Common Stock"), which shall be entitled to one vote per
share and, upon dissolution of the Corporation, shall be entitled to receive
the net assets of the Corporation; and
(b) Ten million (10,000,000) shares of Preferred Stock, no par
value per share (the "Preferred Stock").
(i) The Board of Directors is hereby authorized to issue
the Preferred Stock from time to time in one or more series, which
Preferred Stock shall be preferred to the Common Stock as to dividends
and distribution of assets of the Corporation on dissolution, as
hereinafter provided, and shall have such distinctive designations as
may be stated in the articles of amendment providing for the issuance
of such stock adopted by the Board of Directors. In such articles of
amendment providing for the issuance of shares of each particular
series, the Board of Directors is hereby expressly authorized and
empowered to fix the number of shares constituting such series and to
fix the relative rights and preferences of the shares of the series so
established to the full extent allowable by law except insofar as such
rights and preferences are fixed herein. Such authorization of the
Board of Directors shall expressly include the authority to fix and
determine the relative rights and preferences of such shares in the
following respects:
(A) The rate of dividend;
(B) Whether shares can be redeemed or called
and, if so, the redemption or call price and terms and
conditions of redemption or call;
(C) The amount payable upon shares in the event
of voluntary and involuntary liquidation;
(D) The purchase, retirement or sinking fund
provisions, if any, for the call, redemption or purchase of
shares;
(E) The terms and conditions, if any, on which
shares may be converted into Common Stock or any other
securities;
<PAGE> 2
(F) Whether or not shares have voting rights,
and the extent of such voting rights, if any, including the
number of votes per share; and
(G) Whether or not shares shall be cumulative,
non-cumulative or partially cumulative as to dividends and
the dates from which any cumulative dividends are to
accumulate.
All shares of the Preferred Stock shall be of equal rank and
shall be identical, except in respect to the particulars that may be
fixed by the Board of Directors as hereinabove provided in this
paragraph and which may vary among the series. Different series of the
Preferred Stock shall not be construed to constitute different classes
of stock for the purpose of voting by classes, except when such voting
by classes is expressly required by law.
(ii) The holders of Preferred Stock are entitled to
receive, when and as declared by the Board of Directors, but only from
funds legally available for the payment of dividends, cash dividends at
the annual rate for each particular series as theretofore fixed and
determined by the Board of Directors as hereinbefore authorized, and no
more; such dividends to be payable before any dividend on Common Stock
shall be paid or set apart for payment. Arrearages in the payment of
dividends shall not bear interest.
(iii) In the event of any dissolution, liquidation or
winding up of the affairs of the Corporation, after payment or
provision for payment of the debts and other liabilities of the
Corporation, the holders of each series of Preferred Stock shall be
entitled to receive, out of the net assets of the Corporation, an
amount in cash for each share equal to the amount fixed and determined
by the Board of Directors in any articles of amendment providing for
the issue of any particular series of Preferred Stock, plus an amount
equal to any dividends payable to such holder which are then unpaid,
either under the provisions of the articles of amendment providing for
the issue of such series of Preferred Stock or by declaration of the
Board of Directors, on each such share up to the date fixed for
distribution, and no more, before any distribution shall be made to the
holders of Common Stock.
3. REGISTERED OFFICE. The address of the registered office of
the Corporation in Roane County, Tennessee is 1108 W. Outer Drive, Oak Ridge,
Tennessee 37830. The Corporation's registered agent at the registered office is
Melvin E. Koons.
4. INITIAL INCORPORATOR. The sole initial incorporator of the
Corporation was Randal D. Boyd, 5008 National Drive, Knoxville, Tennessee 37914.
5. PRINCIPAL OFFICE. The address of the principal office of
the Corporation is 5008 National Drive, Knoxville, Tennessee 37914.
6. FOR PROFIT. The Corporation is for profit.
7. DURATION. The duration of the Corporation is perpetual.
8. PURPOSE. The Corporation is organized to do any and all
things and to exercise any and all powers, rights, and privileges that a
corporation may now or hereafter be organized to do or to exercise under the
Tennessee Business Corporation Act, as amended from time to time.
9. NO PREEMPTIVE RIGHTS. The shareholders of the Corporation
shall not have preemptive rights.
10. BOARD OF DIRECTORS. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of,
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<PAGE> 3
a Board of Directors consisting of not fewer than three (3) nor more than eleven
(11) directors, the exact number of directors to be determined by a resolution
adopted from time to time by the Board of Directors of the Corporation. The
directors shall be divided into three classes, designated Class I, Class II and
Class III. Each class shall consist, as nearly as may be possible, of one-third
of the total number of directors constituting the entire Board of Directors.
Each director elected at the special meeting of shareholders held on the date
hereof shall be classified in the following manner: (a) the directors of Class I
shall be elected to serve until the annual meeting of shareholders for the year
ended December 31, 2000, (b) the directors of Class II shall be elected to serve
until the annual meeting of shareholders for the year ended December 31, 1999
and (c) the directors of Class III shall be elected to serve until the annual
meeting of shareholders for the year ended December 31, 1998, or until their
respective successors are elected and qualified. At each annual meeting of
shareholders beginning in 2000, the directors of the class whose term expires at
the time of such annual meeting shall be elected to hold office until the third
succeeding annual meeting after their election or until their successors shall
be elected and qualified. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes so as to maintain the number of
directors in each class as nearly equal as possible, but in no case will a
decrease in the number of directors shorten the term of any incumbent director.
A director shall hold office until the annual meeting of shareholders for the
year in which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification, or removal from office. Any vacancy on the Board
of Directors, including a vacancy that results from an increase in the number of
directors or a vacancy that results from the removal of a director with cause,
may be filled by the Board of Directors.
Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation shall have the
right, voting separately by class or series, to elect directors at an annual or
special meeting of shareholders, the election, term of office, filling of
vacancies, and other features of such directorships shall be governed by the
terms of this Charter applicable thereto.
11. LIABILITY OF DIRECTORS. (a) A director of the Corporation
shall not be personally liable to the Corporation or its shareholders for
monetary damages for breach of fiduciary duty as a director, except for
liability for (i) any breach of the director's duty of loyalty to the
Corporation or its shareholders, (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, or (iii)
unlawful distributions under Section 48-18-304 of the Act, as amended from time
to time.
(b) If the Act is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of a director of the Corporation shall be eliminated or limited to the fullest
extent permitted by the Act, as so amended. Any repeal or modification of the
foregoing by the shareholders shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
(c) Any repeal or modification of this Article 11 by the
shareholders of the Corporation shall not affect adversely any right or
protection of a director of the Corporation existing at the time of such repeal
or modification or with respect to events occurring prior to such time.
12. INDEMNIFICATION. (a) The Corporation shall indemnify, and
upon request shall advance expenses to, in the manner and to the full extent
permitted by law, any officer or director (or the estate of any such person) who
was or is a party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, investigative or otherwise, by reason of the fact that such
person is or was a director or officer of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, partner, trustee or
employee of another corporation, partnership, joint venture, trust or other
enterprise (an "indemnitee"). The Corporation may, to the full extent permitted
by law, purchase and maintain
3
<PAGE> 4
insurance on behalf of any such person against any liability which may be
asserted against him or her. To the full extent permitted by law, the
indemnification and advances provided for herein shall include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement.
The indemnification provided herein shall not be deemed to limit the right of
the Corporation to indemnify any other person for any such expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement to the full
extent permitted by law, both as to action in his official capacity and as to
action in another capacity while holding such office. Notwithstanding the
foregoing, the Corporation shall not indemnify any such indemnitee (i) in any
proceeding by the Corporation against such indemnitee; or (ii) if a judgment or
other final adjudication adverse to the indemnitee establishes his liability for
(A) any breach of the duty of loyalty to the Corporation or its shareholders,
(B) acts or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law, or (C) unlawful distributions under
Section 48-18-304 of the Act.
(b) The rights to indemnification and advancement of expenses set
forth in paragraph 12(a) above are intended to be greater than those which are
otherwise provided for in the Act, are contractual between the Corporation and
the person being indemnified, his heirs, executors and administrators, and,
with respect to paragraph 12(a), are mandatory, notwithstanding a person's
failure to meet the standard of conduct required for permissive indemnification
under the Act, as amended from time to time.
(c) Any repeal or modification of the provisions of this
paragraph 12, either directly or by the adoption of an inconsistent provision of
this Amended and Restated Charter, shall not adversely affect any right or
protection set forth herein existing in favor of a particular individual at the
time of such repeal or modification. In addition, if an amendment to the Act
limits or restricts in any way the indemnification rights permitted by law as of
the date hereof, such amendment shall apply only to the extent mandated by law
and only to activities of persons subject to indemnification under this
paragraph 12 which occur subsequent to the effective date of such amendment.
(d) The indemnification and advancement of expenses provisions of
this Article 12 shall not be exclusive of any other right that any person (and
his or her heirs, executors, and administrators) may have or hereafter acquire
under any statute, this Charter, the Corporation's Bylaws, resolution adopted by
the shareholders, resolution adopted by the Board of Directors, agreement, or
insurance, purchased by the Corporation or otherwise, both as to action in his
or her official capacity and as to action in another capacity. The Corporation
is hereby authorized to provide for indemnification and advancement of expenses
through its Bylaws, resolution of shareholders, resolution of the Board of
Directors, or agreement, in addition to that provided by this Charter.
13. BYLAWS. The Bylaws of the Corporation may be amended,
altered, modified, or repealed by resolution adopted by the Board of Directors,
subject to any provisions of law then applicable.
14. SPECIAL MEETINGS OF THE SHAREHOLDERS. The Corporation shall
hold a special meeting of shareholders only in the event (a) of a call of the
Board of Directors of the Corporation or the officers authorized to do so by the
Bylaws of the Corporation, or (b) the holders of at least ten percent (10%) of
all the votes entitled to be cast on any issue proposed to be considered at the
proposed special meeting sign, date, and deliver to the Corporation's secretary
one or more written demands for the meeting describing the purpose or purposes
for which it is to be held.
15. AMENDMENT. The affirmative vote of the holders of at least
three-quarters (3/4) of the voting power of the shares entitled to vote at an
election of directors shall be required to amend, alter, modify, or to repeal
the provisions of Articles 10 and 14, and this Article 15, of this Charter.
4
<PAGE> 5
16. ADOPTION. This Amended and Restated Charter of the
Corporation was approved on November 14, 1997 by the Board of Directors and
shareholders of the Corporation.
Dated: November 14, 1997
Radio Systems Corporation
By:
-------------------------------------
Randal D. Boyd, President
5
<PAGE> 1
EXHIBIT 3.2
FORM OF
AMENDED AND RESTATED BYLAWS
OF
RADIO SYSTEMS CORPORATION
ARTICLE 1
Identification
Section 1.01. Name. The name of this Corporation is Radio Systems
Corporation The Corporation may conduct operations under such other names as the
Board of Directors may designate.
Section 1.02. Seal. The Corporation shall be authorized, but not
required, to use a corporate seal, which, if used, shall be circular in form
and contain the name of the Corporation and the words "Corporate Seal,
Tennessee." The corporate seal shall be affixed by the Secretary upon such
instruments or documents as may be deemed necessary. The presence or absence of
such seal on any instrument shall not, however, affect its character or
validity or legal effect in any respect.
Section 1.03. Offices. The address of the principal office of the
Corporation shall be 5008 National Drive, Knoxville, Tennessee 37914. The
Corporation may also have offices at such other places as the Board of
Directors may from time to time determine or the business of the Corporation
may require.
Section 1.04. Fiscal Year. The fiscal year of the Corporation shall
end on the last Sunday in December, unless otherwise established by the Board of
Directors.
ARTICLE 2
Capital Stock
Section 2.01. Consideration for Shares. Except as otherwise permitted
by law, Common Stock of the Corporation may be issued for such consideration as
shall be fixed from time to time by the Board of Directors. Shares purchased by
the Corporation may be reissued by the Corporation for such consideration as
may be fixed from time to time by the Board of Directors.
Section 2.02. Payment for Shares. The consideration for the issuance
of shares may be paid, in whole or in part, in money, in other property,
tangible or intangible, or in other benefit to the Corporation permitted by
law, including promissory notes, labor or services already performed, contracts
for services to be performed or other securities of the Corporation. Before the
Corporation issues shares, the Board of Directors shall determine that the
consideration is adequate. In absence of fraud in the transaction, the judgment
of the Board of Directors as to the value of the consideration received for
shares shall be conclusive. When payment of the consideration for which shares
are to be issued shall have been received by the Corporation, such shares shall
be deemed to be fully paid and nonassessable. The Corporation may place in
escrow shares issued for a contract for future services or benefits or a
promissory note, or make other arrangements to restrict transfer of the shares,
and may credit distributions in respect of the shares against their purchase
price until the services are performed, the note is paid or the benefits
received. Such escrow provisions may provide that if the services are not
performed, the note is not paid, or the benefits are not received, the shares
escrowed or restricted and the distributions credited may be cancelled in whole
or in part.
<PAGE> 2
Section 2.03. Certificates Representing Shares. The certificates of
stock of the Corporation shall bear the name of the Corporation, shall be
numbered consecutively and shall be entered in the books of the Corporation as
they are issued. The Board of Directors may authorize the issuance of some or
all of the shares without certificates. Such authorization shall not effect
shares already represented by certificates. Each holder of the capital stock of
the Corporation shall be entitled to a certificate setting forth the holder's
name and number of shares and signed by the President or a Vice-President and
the Secretary of the Corporation certifying the number of shares owned by him
in the Corporation. Where any such certificate is signed by a transfer agent,
the signature of either or both of such officers may be facsimile, engraved or
printed. Each certificate shall have noted thereon any restriction on voting or
transferability or any preference or call provision.
ARTICLE 3
Meetings of Shareholders
Section 3.01. Place of Meetings. Meetings of the shareholders of the
Corporation shall be held at the principal office of the Corporation or at such
other place as shall be determined by the Board of Directors.
Section 3.02. Annual Meeting. The annual meeting of the shareholders
shall be held at the principal office of the Corporation or at such other place
and at a time as the Board of Directors may designate, at which annual meeting
the shareholders shall elect a Board of Directors and transact such other
business as may properly come before the meeting. Failure to hold the annual
meeting shall not affect the validity of any corporate action.
Section 3.03. Special Meetings. Special meetings of the shareholders
shall be held on call of the President of the Corporation, by the Board of
Directors or the holders of at least ten percent (10%) of all the votes
entitled to be cast on any issue proposed to be considered at the special
meeting if such holders sign, date and deliver to the Secretary one or more
written demand(s) for the meeting. Any written demand for a meeting shall state
the purpose(s) of the proposed meeting and only business within such purpose(s)
described in the notice may be conducted at such meeting.
Section 3.04. Notice of Meetings - Waiver. Written notice stating the
place, day and hour of the meeting, and in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not
less than ten (10) days, nor more than sixty (60) days before the date of the
meeting, either personally or by mail to each shareholder entitled to vote at
such meeting. The waiver must be in writing, must be signed by the shareholder
entitled to notice, and must be delivered to the Corporation for inclusion in
the minutes or filing with the corporate records. A shareholder's attendance at
a meeting waives objection to lack of notice or defective notice unless at the
beginning of the meeting (or promptly upon his arrival) the shareholder objects
to holding the meeting or transacting business at the meeting. A shareholder's
attendance at a meeting also waives objection to consideration of a particular
matter which is not within the purpose(s) described in the notice unless the
shareholder objects when the matter is presented.
Section 3.05. Record Date. In determining the shareholders entitled to
notice of and to vote at any annual or special meeting of shareholders, the
Board of Directors shall fix any date no less than ten (10) nor more than
seventy (70) days before any such annual or special meeting as a record date
and only the shareholders whose names appear on the stock transfer books at the
close of business on that date shall be entitled to notice of and to vote at
such meeting, notwithstanding the transfer of shares thereafter.
Section 3.06. Quorum. A majority of the shares entitled to vote,
represented in person or by proxy, shall constitute a quorum at a meeting of
shareholders. The shareholders present at a duly organized meeting may continue
to do business until adjournment, notwithstanding the withdrawal
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of a number of shareholders so that less than a quorum remains. A meeting may be
adjourned despite the absence of a quorum.
Section 3.07. Proxies and Voting. Unless otherwise provided in the
Amended and Restated Charter of the Corporation, each shareholder entitled to
notice of and to vote at a meeting of shareholders shall be entitled to one
vote for each share of capital stock of the Corporation standing in his name on
the transfer books of the Corporation on the record date fixed for such
meeting. A shareholder may vote either in person or by proxy executed in
writing by the shareholder. A shareholder may appoint a proxy by signing an
appointment form and delivering it to the Secretary or other officer of the
Corporation who is authorized to tabulate votes. An appointment of a proxy is
revocable unless the appointment form conspicuously states that it is
irrevocable and the appointment is coupled with an interest. Such an
appointment becomes revocable when the interest is extinguished. No proxy shall
be valid after eleven months from the date of its execution, unless otherwise
provided in the proxy.
Section 3.08. Shareholder List. After fixing a record date for a
meeting, the Corporation shall prepare an alphabetical list of the names of all
its shareholders who are entitled to notice of a shareholders meeting. The
shareholders' list shall be available for inspection by any shareholder,
beginning two (2) business days after notice of the meeting is given for which
the list was prepared and continuing through the meeting, at the Corporation's
principal office or at a place identified in the meeting notice in the city
where the meeting will be held.
Section 3.09. Order of Business. Unless otherwise specified by the
Chairman of the Board or the chairman of the meeting, the order of business at
the annual meeting, and as far as practicable, at all other meetings of the
shareholders, shall be: (a) calling of roll, (b) proof of due notice of
meeting, (c) reading and disposal of any unapproved minutes, (d) annual reports
of officers and committees, (e) election of directors, (f) unfinished business,
(g) new business and (h) adjournment. The Chairman of the Board shall preside
at all meetings of the shareholders and in his absence the President or his
delegate.
ARTICLE 4
The Board of Directors
Section 4.01. Number and Qualifications. The business and affairs of
the Corporation shall be managed by a Board of Directors. The number of
directors shall be determined as stated in the Amended and Restated Charter.
Directors need not be residents of the State of Tennessee or shareholders of
the Corporation.
Section 4.02. Election. Directors shall be elected as set forth in the
Amended and Restated Charter.
Section 4.03. Place of Meeting. Meetings of the Board of Directors,
annual, regular or special, may be held either within or without the State of
Tennessee.
Section 4.04. Annual and Regular Meetings. The Board of Directors
shall meet each year for the purpose of organization, election of officers and
consideration of any other business that may properly be brought before the
meeting. Regular meetings shall be held at such time and place as the Board of
Directors may determine. No notice of any kind to either old or new members of
the Board of Directors for the annual meeting or any regular meeting shall be
required.
Section 4.05. Special Meetings. Special meetings of the Board of
Directors may be held upon written or oral notice at any time prior to the day
of the meeting, upon the call of a majority of the directors, the Chairman of
the Board, the President or the Secretary of the Corporation. Attendance
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in person at a special meeting without objection to the notice shall constitute
a waiver of notice of the meeting unless at the beginning of the meeting (or
promptly upon his arrival) the director objects to holding the meeting or to
transacting business at the meeting and does not thereafter vote for or assent
to action taken at the meeting. Notice of any meeting of the Board of Directors
may be waived before or after the date and time stated in the notice if in
writing, signed by the director entitled to the notice, and filed with the
minutes or corporate records. Neither the business to be transacted at, nor the
purpose of, any meeting of the Board of Directors need be specified in the
notice or waiver of notice of the meeting.
Section 4.06. Quorum and Voting. A quorum of the Board shall consist
of at least a majority of the directors in office.
Section 4.07. Conduct of Meetings. Members of the Board of Directors,
or any committee designated by the Board, may participate in a meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this subsection shall
constitute presence in person at such meeting.
Section 4.08. Chairman of the Board. At its annual meeting, the Board
of Directors may elect by vote of a majority of the entire Board a Chairman of
the Board who, if elected, shall preside at all meetings of the Board.
Section 4.09. Committees of the Board. The Board, by resolution
adopted by a majority of the entire Board, may designate an Executive
Committee, consisting of two or more directors, and other committees,
consisting of two or more persons, who must be directors if such committee has
the power to exercise powers of the Board, and may delegate to such committee
or committees all such authority of the Board that it deems desirable except
the authority to:
(a) Authorize distributions, except according to a formula or method
prescribed by the Board of Directors;
(b) Approve or propose to the shareholders action required to be
approved by shareholders;
(c) Fill vacancies on the Board of Directors or on any of its
committees;
(d) Amend the Amended and Restated Charter;
(e) Adopt, amend, or repeal these Bylaws;
(f) Approve a plan of merger, share exchange or consolidation not
requiring shareholder approval;
(g) Authorize or approve reacquisition of shares, except according to
a formula or method prescribed by the Board of Directors; or
(h) Authorize or approve the issuance or sale or contract for sale of
shares or determine the designation and relative rights, preferences, and
limitations of a class or series of shares, except that the Board of Directors
may authorize a committee to do so within limits specifically prescribed by the
Board of Directors and, according to applicable law. The Board may designate
one or more directors as alternate members of any such committee who may
replace any absent member or members at any meeting of any such committee. Each
committee of the Board shall keep regular minutes of its meetings and report
the same to the Board when required.
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ARTICLE 5
The Officers
Section 5.01. Officers. The officers of the Corporation shall consist
of a President and Secretary and, as deemed appropriate by the Board of
Directors, a Chairman of the Board, a Chief Executive Officer, Chief Operating
Officer, Chief Financial Officer, one or more Executive Vice-Presidents,
Vice-Presidents, Assistant Secretaries, Treasurers, Assistant Treasurers and
such other officers and assistant officers and agents as may be deemed
necessary by the Board of Directors. Any two or more offices may be held by the
same person, except the offices of President and Secretary. The Board of
Directors shall delegate to one (1) of the officers the responsibility of
preparing minutes of Board of Directors and shareholders meetings and of
authenticating records of the Corporation. Officers need not be Directors or
shareholders of the Corporation.
Section 5.02. Vacancies. Vacancies occurring in any office shall be
filled by the Board of Directors at any regular or special meeting.
Section 5.03. The President. Unless otherwise determined by the Board
of Directors, the President shall be the chief executive officer and shall be
responsible for the active, executive management and supervision of the
operations of the Corporation. He shall perform such duties as these Bylaws
provide or the Board of Directors may prescribe or his capacity as chief
executive officer by custom may provide.
Section 5.04. The Secretary. The Secretary shall attend all meetings
of the shareholders and of the Board of Directors, and shall keep a true and
complete record of the proceedings of these meetings. The Secretary shall be
custodian of the records of the Corporation and shall attend to the giving of
all notices, attest, when requested, to the authority of the President or other
officers, as revealed by the minutes or these Bylaws, to execute legal
documents binding the Corporation, and shall perform such other duties as these
Bylaws may provide or the Board of Directors may prescribe.
Section 5.05. The Treasurer. The Treasurer shall keep correct and
complete records of account, showing accurately at all times the financial
condition and results of operation of the Corporation. He shall be the legal
custodian of all moneys, notes, securities and other valuables that may from
time to time come into the possession of the Corporation. He shall immediately
deposit all funds of the Corporation coming into his hands in some reliable
bank or other depository to be designated by the Board of Directors, and shall
keep this bank account in the name of the Corporation. He shall furnish at
meetings of the Board of Directors, or whenever requested, a statement of the
financial condition and results of operation of the Corporation, and shall
perform such other duties as these Bylaws may provide or the Board of Directors
may prescribe. The Treasurer may be required to furnish bond in such amount as
shall be determined by the Board of Directors.
Section 5.06. Other Officers. The duties of other officers elected by
the Board of Directors shall be such as are customary to their respective
offices and as shall be given them by the President.
Section 5.07. Resignation and Removal. An officer may resign at any
time by delivering notice to the Corporation. A resignation is effective when
the notice is delivered unless the notice specifies a later effective date. If
a resignation is made effective at a later date and the Corporation accepts the
future effective date, the Board of Directors may fill the pending vacancy
before the effective date provided the successor does not take office until the
effective date. The Board of Directors may remove any officer at any time with
or without cause and any officer or assistant officer, if appointed by another
officer, may likewise be removed by such officer.
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ARTICLE 6
Special Corporate Acts;
Negotiable Instruments; Deeds and Contracts
All checks, drafts, notes, bonds, bills of exchange and orders for the
payment of money of the Corporation; all deeds, mortgages and other written
contracts and agreements to which the Corporation shall be a party; and all
assignments or endorsements of stock certificates, registered bonds or other
securities owned by the Corporation, shall, unless otherwise directed by the
Board of Directors, be signed by an officer of this Corporation. The Board of
Directors or the President may, however, designate other officers, directors or
employees of the Corporation to sign such instruments in the name of the
Corporation and may authorize the use of facsimile signatures of any such
persons. Any shares of stock issued by any other corporation and owned or
controlled by the Corporation may be voted in accordance with instructions
approved by the Board of Directors, at any shareholders meeting of the other
corporation by the President of the Corporation, if he be present or, in his
absence, by such person as he shall, by duly executed proxy, designate to
represent the Corporation at such shareholders meeting.
ARTICLE 7
Action Without Meeting
Action required or permitted to be taken at a shareholders meeting or
at a Board of Directors meeting may be taken without a meeting. If all
directors or shareholders entitled to vote on the action consent to taking such
action without a meeting, the affirmative vote of the number of shares or
directors that would be necessary to authorize or take such action at a meeting
is the act of the shareholders or the Board. The action must be evidenced by
one or more written consent(s) describing the action taken, signed by each
director or shareholder entitled to vote on the action in one or more
counterpart(s), indicating each signing director's or shareholder's vote or
abstention on the action, and delivered to the Corporation for inclusion in the
minutes or filing with the corporate records. A signed consent has the effect
of a meeting vote and may be described as such in any document.
ARTICLE 8
Indemnification
(a) The Corporation shall indemnify, and upon request shall advance
expenses to, in the manner and to the full extent permitted by law, any officer
or director (or the estate of any such person) who was or is a party to, or is
threatened to be made a party to, any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, investigative or
otherwise, by reason of the fact that such person is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, partner, trustee or employee of another
corporation, partnership, joint venture, trust or other enterprise (an
"indemnitee"). The Corporation may, to the full extent permitted by law,
purchase and maintain insurance on behalf of any such person against any
liability which may be asserted against him or her. To the full extent
permitted by law, the indemnification and advances provided for herein shall
include expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement. The indemnification provided herein shall not be deemed to limit
the right of the Corporation to indemnify any other person for any such
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement to the full extent permitted by law, both as to action in his
official capacity and as to action in another capacity while holding such
office. Notwithstanding the foregoing, the Corporation shall not indemnify any
such indemnitee (1) in any proceeding by the Corporation against such
indemnitee; or (2) if a judgment or other final adjudication adverse to the
indemnitee establishes his liability for (A) any breach of the duty of loyalty
to the Corporation or its shareholders, (B) acts or
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omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, or (C) unlawful distributions under Section 48-18-304 of the
Act.
(b) The rights to indemnification and advancement of expenses set
forth in Article 8(a) above are intended to be greater than those which are
otherwise provided for in the Act, are contractual between the Corporation and
the person being indemnified, his heirs, executors and administrators, and,
with respect to Article 8(a), are mandatory, notwithstanding a person's failure
to meet the standard of conduct required for permissive indemnification under
the Act, as amended from time to time. The rights to indemnification and
advancement of expenses set forth in Article 8(a) above are nonexclusive of
other similar rights which may be granted by law, the Amended and Restated
Charter, these Bylaws, a resolution of the board of directors or shareholders
of the Corporation, or an agreement with the Corporation, which means of
indemnification and advancement of expenses are hereby specifically authorized.
(c) Any repeal or modification of the provisions of this Article
8, either directly or by the adoption of an inconsistent provision of these
Bylaws, shall not adversely affect any right or protection set forth herein
existing in favor of a particular individual at the time of such repeal or
modification. In addition, if an amendment to the Act limits or restricts in any
way the indemnification rights permitted by law as of the date hereof, such
amendment shall apply only to the extent mandated by law and only to activities
of persons subject to indemnification under this Article 8 which occur
subsequent to the effective date of such amendment.
ARTICLE 9
Amendments
These Bylaws may be altered, amended or repealed and new Bylaws
adopted by the affirmative vote of the holders of a majority of the outstanding
voting power of the Corporation at any regular meeting of the shareholders or
special meeting called for the purpose, or by the affirmative vote of a
majority of the entire Board of Directors at any regular or special meeting of
the Board; provided, however, that the proposal may not be voted upon by
shareholders unless notice of the proposed amendment was given at least ten
(10) days prior to the meeting at which the vote is to be taken. Any amendment,
modification, repeal or addition to these Bylaws adopted by the Board of
Directors may be amended or repealed by the shareholders.
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EXHIBIT 10.1
RADIO SYSTEMS CORPORATION
STOCK INCENTIVE PLAN
EFFECTIVE NOVEMBER 14, 1997
<PAGE> 2
RADIO SYSTEMS CORPORATION STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I. DEFINITIONS......................................................................................... 1
1.1 Affiliate.................................................................................... 1
1.2 Agreement.................................................................................... 1
1.3 Board........................................................................................ 1
1.4 Code......................................................................................... 1
1.5 Committee.................................................................................... 1
1.6 Company...................................................................................... 1
1.7 Date of Exercise............................................................................. 1
1.8 Exchange Act................................................................................. 1
1.9 Fair Market Value............................................................................ 1
1.10 Incentive Option............................................................................. 2
1.11 Nonqualified Option.......................................................................... 2
1.12 Option....................................................................................... 2
1.13 Participant.................................................................................. 2
1.14 Plan......................................................................................... 2
1.15 Stock........................................................................................ 2
1.16 Ten Percent Shareholder...................................................................... 2
ARTICLE II. PURPOSE OF PLAN................................................................................... 2
ARTICLE III. ADMINISTRATION................................................................................... 3
3.1 Administration of Plan....................................................................... 3
3.2 Authority to Grant Options................................................................... 3
3.3 Persons Subject to Section 16(b)............................................................. 3
ARTICLE IV. ELIGIBILITY AND LIMITATIONS ON GRANTS............................................................. 3
4.1 Participation................................................................................ 3
4.2 Grant of Options............................................................................. 3
4.3 Limitations on Grants........................................................................ 3
4.4 Limitation on Incentive Options.............................................................. 4
ARTICLE V. STOCK SUBJECT TO PLAN.............................................................................. 4
5.1 Source of Shares............................................................................. 4
5.2 Maximum Number of Shares..................................................................... 4
5.3 Forfeitures.................................................................................. 4
ARTICLE VI. EXERCISE OF OPTIONS............................................................................... 4
6.1 Exercise Price............................................................................... 4
6.2 Right to Exercise............................................................................ 4
6.3 Maximum Exercise Period...................................................................... 4
6.4 Transferability.............................................................................. 4
6.5 Employee Status.............................................................................. 5
ARTICLE VII. METHOD OF EXERCISE............................................................................... 5
7.1 Exercise..................................................................................... 5
7.2 Payment...................................................................................... 5
</TABLE>
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<TABLE>
<S> <C> <C>
7.3 Federal Withholding Tax Requirements.......................................................... 5
7.4 Shareholder Rights............................................................................ 5
7.5 Issuance and Delivery of Shares............................................................... 5
ARTICLE VIII. ADJUSTMENT UPON CORPORATE CHANGES................................................................ 5
8.1 Adjustments to Options........................................................................ 5
8.2 Substitution of Options on Merger or Acquisition.............................................. 6
8.3 Effect of Certain Transactions................................................................ 6
8.4 No Adjustment Upon Certain Transactions....................................................... 6
8.5 Fractional Shares............................................................................. 6
ARTICLE IX. COMPLIANCE WITH LAW AND REGULATORY APPROVAL........................................................ 6
9.1 General....................................................................................... 6
9.2 Representations by Participants............................................................... 7
ARTICLE X. GENERAL PROVISIONS.................................................................................. 7
10.1 Effect on Employment or Continued Directorship................................................ 7
10.2 Unfunded Plan................................................................................. 7
10.3 Rules of Construction......................................................................... 7
10.4 Governing Law................................................................................. 7
10.5 Compliance With Section 16 of the Exchange Act................................................ 7
10.6 Amendment..................................................................................... 7
10.7 Duration of Plan.............................................................................. 8
10.8 Effective Date of Plan........................................................................ 8
</TABLE>
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RADIO SYSTEMS CORPORATION STOCK INCENTIVE PLAN
PREAMBLE
WHEREAS, Radio Systems Corporation, a Tennessee corporation (the
"Company"), desires to establish a plan through which the Company may award
options to purchase shares of the Common Stock of the Company to directors,
officers, employees and consultants of the Company and its Affiliates;
WHEREAS, the Company intends that the Plan provide for the granting of
options that qualify as "incentive stock options" within the meaning of section
422 of the Internal Revenue Code; and
WHEREAS, the Company intends that this Plan and Options granted
hereunder will (i) qualify as "performance-based compensation" described in
section 162(m)(4)(C) of the Internal Revenue Code, and (ii) conform to the
provisions of Securities Exchange Commission Rule 16b-3;
NOW, THEREFORE, the Company hereby establishes the Radio Systems
Corporation Stock Incentive Plan (the "Plan"), effective November 14, 1997:
ARTICLE I. DEFINITIONS
1.1 Affiliate. A "parent corporation," as defined in section
424(e) of the Code, or "subsidiary corporation," as defined in section 424(f) of
the Code, of the Company.
1.2 Agreement. A written agreement (including any amendment or
supplement thereto) between the Company or Affiliate and a Participant
specifying the terms and conditions of an Option granted to such Participant.
1.3 Board. The board of directors of the Company.
1.4 Code. The Internal Revenue Code of 1986, as amended.
1.5 Committee. A committee composed of at least two individuals
(or such number that satisfies section 162(m)(4)(C) of the Code and Rule 16b-3
of the Exchange Act) who are members of the Board and are not employees of the
Company or an Affiliate, and who are designated by the Board as the
"compensation committee" or are otherwise designated to administer the Plan.
1.6 Company. Radio Systems Corporation, a Tennessee corporation,
and its successors.
1.7 Date of Exercise. The date that the Company accepts tender of
the exercise price of an Option.
1.8 Exchange Act. The Securities Exchange Act of 1934, as amended.
1.9 Fair Market Value. On any given date, Fair Market Value shall
be the applicable description below (unless, where appropriate, the Committee
determines in good faith the fair market value of the Stock to be otherwise):
(a) If the Stock is traded on the New York Stock Exchange or the
American Stock Exchange, the average of the closing prices of the Stock on such
exchange on which such Stock is traded on the trading day immediately preceding
the date as of which Fair Market Value is being determined, or on the next
preceding day period on which such Stock is traded if no Stock was traded on
such trading day.
<PAGE> 5
(b) If the Stock is not traded on the New York Stock Exchange o
the American Stock Exchange, but is reported on the Nasdaq National Market or
another Nasdaq automated quotation system, and market information is published
on a regular basis, then Fair Market Value shall be the closing price of the
Stock, as so published, on the trading day immediately preceding the date as of
which Fair Market Value is being determined, or the closing price on the next
preceding trading day on which such prices were published if no Stock was traded
on such trading day.
(c) If market information is not so published on a regular basis,
then Fair Market Value shall be the average of the high bid and low asked prices
of the Stock in the over-the-counter market over a period of trading days that
is reasonably representative of the normal trading of the Stock immediately
preceding the date on which Fair Market Value is being determined, as reported
by a generally accepted reporting service.
(d) If the Stock is not publicly traded, Fair Market Value shall
be the value determined in good faith by the Committee or the Board. However,
such determination shall not take into account any restriction on the stock,
except for a restriction which by its terms will never lapse.
1.10 Incentive Option. An Option that is intended to qualify as an
"incentive stock option" within the meaning of section 422 of the Code. An
Incentive Option, or a portion thereof, shall not be invalid for failure to
qualify under section 422 of the Code, but shall be treated as a Nonqualified
Option.
1.11 Nonqualified Option. An Option that is not an Incentive
Option.
1.12 Option. The right that is granted hereunder to a Participant
to purchase from the Company a stated number of shares of Stock at the price set
forth in an Agreement. As used herein, an Option includes both Incentive Options
and Nonqualified Options.
1.13 Participant. A Board member, officer, employee, consultant or
advisor of the Company or of an Affiliate who either satisfies the requirements
of Article IV and is selected by the Committee to receive an Option, or
receives an Option pursuant to grant specified in this Plan.
1.14 Plan. The Radio Systems Corporation Stock Incentive Plan.
1.15 Stock. The Common Stock of the Company.
1.16 Ten Percent Shareholder. An individual who owns more than 10%
of the total combined voting power of all classes of stock of the Company or an
Affiliate at the time he is granted an Incentive Option. For the purpose of
determining if an individual is a Ten Percent Shareholder, he shall be deemed to
own any voting stock owned (directly or indirectly) by or for his brothers and
sisters (whether by whole or half blood), spouse, ancestors or lineal
descendants and shall be considered to own proportionately any voting stock
owned (directly or indirectly) by or for a corporation, partnership, estate or
trust of which such individual is a shareholder, partner or beneficiary.
ARTICLE II. PURPOSE OF PLAN
The purpose of the Plan is to provide a performance incentive and to
encourage stock ownership by directors, officers, employees, consultants and
advisors of the Company and its Affiliates, and to align the interests of such
individuals with those of the Company, its Affiliates and the Company's
shareholders. It is intended that Participants may acquire or increase their
proprietary interests in the Company and be encouraged to remain in the employ
or directorship of the Company or of its Affiliates. The proceeds received by
the Company from the sale of Stock pursuant to this Plan may be used for
general corporate purposes.
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ARTICLE III. ADMINISTRATION
3.1 Administration of Plan. The Plan shall be administered by the
Committee. The express grant in the Plan of any specific power to the Committee
shall not be construed as limiting any power or authority of the Committee. Any
decision made or action taken by the Committee to administer the Plan shall be
final and conclusive. No member of the Committee shall be liable for any act
done in good faith with respect to this Plan or any Agreement or Option. The
Company shall bear all expenses of Plan administration. In addition to all
other authority vested with the Committee under the Plan, the Committee shall
have complete authority to:
(a) Interpret all provisions of this Plan;
(b) Prescribe the form of any Agreement and notice and manner for
executing or giving the same;
(c) Make amendments to all Agreements;
(d) Adopt, amend, and rescind rules for Plan administration; and
(e) Make all determinations it deems advisable for the
administration of this Plan.
3.2 Authority to Grant Options. The Committee shall have
authority to grant Options upon such terms the Committee deems appropriate and
that are not inconsistent with the provisions of this Plan. Such terms may
include conditions on the exercise of all or any part of an Option.
3.3 Persons Subject to Section 16(b). Notwithstanding anything in
the Plan to the contrary, the Committee, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors subject to
section 16(b) of the Exchange Act, without so restricting, limiting or
conditioning the Plan with respect to other Participants.
ARTICLE IV. ELIGIBILITY AND LIMITATIONS ON GRANTS
4.1 Participation. The Committee may from time to time designate
directors, officers, employees, consultants and advisors to whom Options are to
be granted and who are eligible to become Participants. Such designation shall
specify the number of shares of Stock, if any, subject to each Option. All
Options granted under this Plan shall be evidenced by Agreements which shall be
subject to applicable provisions of this Plan or such other provisions as the
Committee may adopt that are not inconsistent with the Plan.
4.2 Grant of Options. An Option shall be deemed to be granted to
a Participant at the time that the Committee designates in a writing that is
adopted by the Committee as the grant of an Option, and that makes reference to
the Participant and the number of shares of Stock that are subject to the
Option. Accordingly, an Option may be deemed to be granted prior to the approval
of this Plan by the shareholders of the Company and prior to the time that an
Agreement is executed by the Participant and the Company.
4.3 Limitations on Grants. A person who is not an employee of the
Company or an Affiliate is not eligible to receive an Incentive Option. No
person may receive Options with respect to more than 100,000 shares of Stock
(subject to increases and adjustments as provided in Article VIII) in any
one-year period.
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4.4 Limitation on Incentive Options. To the extent that the
aggregate Fair Market Value of Stock with respect to which Incentive Options are
exercisable for the first time by a Participant during any calendar year (under
all stock incentive plans of the Company and its Affiliates) exceeds $100,000
(or the amount specified in section 422 of the Code), determined as of the date
an Incentive Option is granted, such Options shall be treated as Nonqualified
Options. This provision shall be applied by taking Incentive Options into
account in the order in which they were granted.
ARTICLE V. STOCK SUBJECT TO PLAN
5.1 Source of Shares. Upon the exercise of an Option, the Company
shall deliver to the Participant authorized but unissued Stock.
5.2 Maximum Number of Shares. The maximum aggregate number of
shares of Stock that may be issued pursuant to the exercise of Options is
403,500, subject to increases and adjustments as provided in Article VIII.
5.3 Forfeitures. If any Option granted hereunder expires or
terminates for any reason without having been exercised in full, the shares of
Stock subject thereto shall again be available for issuance pursuant to the
exercise of an Option that is subsequently granted under this Plan.
ARTICLE VI. EXERCISE OF OPTIONS
6.1 Exercise Price. The exercise price of an Incentive Option
shall not be less than 100% of the Fair Market Value of a share of Stock on the
date the Incentive Option is granted. In the case of a Ten Percent Shareholder,
however, the exercise price of an Incentive Option shall not be less than 110%
of the Fair Market Value of a share of Stock on the date the Incentive Option is
granted. The exercise price of a Nonqualified Option shall be the price
determined by the Committee at the time that such Option is granted. If the
exercise price of an Option is changed after the date it is granted, such change
shall be deemed to be a termination of the existing Option and the issuance of a
new Option.
6.2 Right to Exercise. An Option shall be exercisable on the date
of grant or on any other date established by the Committee or provided for in an
Agreement, provided, however, that Options granted to officers or directors
subject to section 16 of the Exchange Act shall not be exercisable until at
least six months after the Option is granted. A Participant must exercise an
Incentive Option while he is an employee of the Company or an Affiliate or
within the periods that may be specified in the Agreement after termination of
employment, death, disability or a "change of control" (as defined in any change
of control agreement to which the Company and any such Participant are parties).
6.3 Maximum Exercise Period. The maximum period in which an
Option may be exercised shall be determined by the Committee on the date of
grant; provided that no Incentive Option shall be exercisable after the
expiration of 10 years (five years in the case of Incentive Options granted to a
Ten Percent Shareholder) from the date it was granted. The terms of any Option
may provide that it is exercisable for a shorter period. All Incentive Options
shall terminate on the date the Participant's employment with the Company
terminates, except as otherwise provided in the Agreement with respect to
termination of employment, death, disability or a "change of control" (as
defined in any change of control agreement to which the Company and any such
Participant are parties).
6.4 Transferability. Generally, any Option granted under this
Plan shall not be transferable except by will or by the laws of descent and
distribution, and shall be exercisable during the lifetime of the Participant
only by the Participant. However, a Nonqualified Option granted under this Plan
may be transferable to the extent provided in an Agreement. Provided, further,
that no right or interest of a Participant in any Option shall be liable for, or
subject to, any lien, obligation or liability of such Participant.
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6.5 Employee Status. The Committee shall determine the extent to
which a leave of absence for military or government service, illness, temporary
disability, or other reasons shall be treated as a termination or interruption
of employment for purposes of determining questions of forfeiture and exercise
of an Option after termination of employment; provided, however, that if the
period treated as employment with respect to an Incentive Option exceeds three
months, such Option shall be deemed a Nonqualified Option.
ARTICLE VII. METHOD OF EXERCISE
7.1 Exercise. An Option granted hereunder shall be deemed to have
been exercised on the Date of Exercise. Subject to the provisions of Articles VI
and IX, an Option may be exercised in whole or in part at such times and in
compliance with such requirements as the Committee shall determine.
7.2 Payment. Unless otherwise provided by the Agreement, payment
of the Option price shall be made in cash or, to the extent approved by the
Committee, Stock that was acquired prior to the exercise of the Option, other
consideration acceptable to the Committee, or a combination thereof.
7.3 Federal Withholding Tax Requirements. Upon exercise of a
Nonqualified Option by a Participant who is an employee of the Company or an
Affiliate, the Participant shall, upon notification of the amount due and prior
to or concurrently with the delivery of the certificates representing the
shares, pay to the Company amounts necessary to satisfy applicable federal,
state and local withholding tax requirements or shall otherwise make
arrangements satisfactory to the Company for such requirements. Such
withholding requirements shall not apply to the exercise of an Incentive
Option, or to a disqualifying disposition of Stock that is acquired with an
Incentive Option, unless the Committee gives the Participant notice that
withholding described in this Section is required.
7.4 Shareholder Rights. No Participant shall have any rights as
a shareholder with respect to Stock subject to Options prior to the Date of
Exercise of such Options.
7.5 Issuance and Delivery of Shares. Shares of Stock issued
pursuant to the exercise of Options hereunder shall be delivered to Participants
by the Company (or its transfer agent) as soon as administratively feasible
after a Participant exercises an Option hereunder and executes any applicable
shareholder agreement or agreement described in Section 9.2 that the Company
requires at the time of exercise.
ARTICLE VIII. ADJUSTMENT UPON CORPORATE CHANGES
8.1 Adjustments to Options. The maximum number of shares of Stock
with respect to which Options hereunder may be granted and which are the subject
of outstanding Options, and the exercise price thereof, shall be adjusted as the
Committee determines (in its sole discretion) to be appropriate, in the event
that:
(a) the Company or an Affiliate effects one or more stock
dividends, stock splits, reverse stock splits, subdivisions, consolidations or
other similar events;
(b) the Company or an Affiliate engages in a transaction to which
section 424 of the Code applies; or
(c) there occurs any other event which in the judgment of the
Committee necessitates such action;
Provided, however, that if an event described in paragraph (a) or (b) occurs,
the Committee shall make adjustments to the limits on Options specified in
Sections 4.3 and 5.2 that are proportionate to the modifications of the Stock
that are on account of such corporate changes. Notwithstanding the
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foregoing, the Committee may not modify the Plan or the terms of any Options
then outstanding or to be granted hereunder to provide for the issuance under
the Plan of a different class of stock or kind of securities.
8.2 Substitution of Options on Merger or Acquisition. The
Committee may grant Options in substitution for stock awards, stock options,
stock appreciation rights or similar awards held by an individual who becomes an
employee of the Company or an Affiliate in connection with a transaction to
which section 424(a) of the Code applies. The terms of such substituted Options
shall be determined by the Committee in its sole discretion, subject only to the
limitations of Article V.
8.3 Effect of Certain Transactions. Upon a merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation of
the Company, as a result of which the shareholders of the Company receive cash,
stock or other property in exchange for their shares of Stock (but not a public
offering of Stock by the Company), and the Company is not the surviving entity
(or survives only as a subsidiary that is controlled by another entity), any
Option granted hereunder shall terminate, provided that the Participant shall
have the right immediately prior to any such merger, consolidation, acquisition
of property or stock, separation, reorganization or liquidation to exercise his
Options in whole or in part, whether or not the vesting requirements set forth
in any Agreement have been satisfied, unless the Committee elects to convert
all Options hereunder into stock incentive awards of an acquiring corporation.
Provided, however, that, notwithstanding the foregoing, a portion of the
acceleration of exercisability of Options shall not occur with respect to any
holder to the extent that such portion of acceleration would cause the
Participant or holder of such Option to be liable for the payment of taxes
pursuant to section 4999 of the Code. If the Committee so elects to convert the
Options, the amount and price of such converted options shall be determined by
adjusting the amount and price of the Options granted hereunder in the same
proportion as used for determining the number of shares of stock of the
acquiring corporation the holders of the Stock receive in such merger,
consolidation, acquisition of property or stock, separation or reorganization,
and the vesting schedule set forth in the Agreement shall continue to apply to
the converted options.
8.4 No Adjustment Upon Certain Transactions. The issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, for cash or property, or for labor or services rendered,
either upon direct sale or upon the exercise of rights or warrants to subscribe
therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, shall not affect, and no
adjustment by reason thereof shall be made with respect to, outstanding
Options.
8.5 Fractional Shares. Only whole shares of Stock may be acquired
through the exercise of an Option. Any amounts tendered in the exercise of an
Option remaining after the maximum number of whole shares have been purchased
will be returned to the Participant.
ARTICLE IX. COMPLIANCE WITH LAW AND REGULATORY APPROVAL
9.1 General. No Option shall be exercisable, no Stock shall be
issued, no certificates for shares of Stock shall be delivered, and no payment
shall be made under this Plan except in compliance with all federal or state
laws and regulations (including, without limitation, withholding tax
requirements), federal and state securities laws and regulations and the rules
of all securities exchanges or self-regulatory organizations on which the
Company's shares may be listed. The Company and the Committee shall have the
right to rely on an opinion of its counsel as to such compliance. Any
certificate issued to evidence shares of Stock for which an Option is exercised
may bear such legends and statements as the Committee upon advice of counsel may
deem advisable to assure compliance with federal or state laws and regulations.
No Option shall be exercisable, no Stock shall be issued, no certificate for
shares shall be delivered and no payment shall be made under this Plan until the
Company has obtained such consent or approval as the Committee may deem
advisable from any regulatory bodies having jurisdiction over such matters.
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9.2 Representations by Participants. As a condition to the
exercise of an Option, the Company or the Committee may require a Participant to
represent and warrant at the time of any such exercise that the shares of Stock
are being purchased only for investment and without any present intention to
sell or distribute such shares, if, in the opinion of counsel for the Company,
such representation is required by any relevant provision of the laws referred
to in Section 9.1. At the option of the Company, a stop transfer order against
any shares of stock may be placed on the official stock books and records of the
Company, and a legend indicating that the Stock may not be pledged, sold or
otherwise transferred unless an opinion of counsel was provided (concurred in by
counsel for the Company) and stating that such transfer is not in violation of
any applicable law or regulation may be stamped on the stock certificate in
order to assure exemption from registration. The Committee may also require such
other action or agreement by the Participants as may from time to time be
necessary, in the Committee's sole discretion, to comply with federal or state
securities laws. No provision contained herein shall obligate the Company or any
Affiliate to undertake registration of options or Stock hereunder or in
connection with the Plan.
ARTICLE X. GENERAL PROVISIONS
10.1 Effect on Employment or Continued Directorship. Neither the
adoption of this Plan, its operation, nor any documents describing or referring
to this Plan (or any part thereof) shall confer upon any director, officer or
employee any right to continue in the employ of, or as a director of, the
Company or an Affiliate or in any way affect any right and power of the Company
or an Affiliate to terminate the employment of any employee at any time with or
without assigning a reason therefor.
10.2 Unfunded Plan. The Plan, insofar as it provides for grants,
shall be unfunded, and the Company shall not be required to segregate any assets
that may at any time be represented by grants under this Plan. Any liability of
the Company to any person with respect to any grant under this Plan shall be
based solely upon contractual obligations that may be created hereunder. No such
obligation of the Company shall be deemed to be secured by any pledge of, or
other encumbrance on, any property of the Company.
10.3 Rules of Construction. Headings are given to the articles and
sections of this Plan solely as a convenience to facilitate reference. The
masculine gender when used herein refers to both masculine and feminine. The
reference to any statute, regulation or other provision of law shall be
construed to refer to any amendment to or successor of such provision of law.
10.4 Governing Law. The laws of the State of Tennessee shall apply
to all matters arising under this Plan, except to the extent that federal law is
otherwise applicable or preempts Tennessee law.
10.5 Compliance With Section 16 of the Exchange Act. With respect
to persons subject to liability under section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 (or successor provisions) under the Exchange Act. To
the extent any provision of this Plan or action by Committee fails to so comply,
it shall be deemed null and void to the extent permitted by law and deemed
advisable by the Committee.
10.6 Amendment. The Board may amend or terminate this Plan at any
time; provided, however, an amendment that would have a material adverse effect
on the rights of a Participant under an outstanding Option is not valid with
respect to such Option without the Participant's consent, except as necessary
for Incentive Options to maintain qualification under the Code; and provided,
further, that the shareholders of the Company must approve:
(a) 12 months before or after the date of adoption, any amendment
that increases the aggregate number of shares of Stock that may be issued under
Incentive Options or changes the employees (or class of employees) eligible to
receive Incentive Options;
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(b) before the effective date thereof, any amendment that changes
the number of shares of Stock in the aggregate which may be issued pursuant to
Options granted under the Plan or the maximum number of shares of Stock with
respect to which any individual may receive options in any calendar year, except
pursuant to Article VIII; and
(c) before the effective date thereof, any amendment that
increases the period during which Options may be granted or exercised.
Shareholder approval shall not be required for minor amendments to the Plan
that are intended to benefit the administration of the Plan, for amendments
necessitated by changes in legislation or administrative rules governing the
Plan, or for amendments that the Board deems necessary to obtain or maintain
favorable tax, securities exchange or regulatory treatment of the Plan for
future Participants.
10.7 Duration of Plan. This Plan shall continue until it is
terminated by the Board pursuant to Section 10.6. However, no Incentive Option
may be granted under this Plan more than ten years after the earlier of the date
that the Plan is adopted by the Board or the date that the Plan is approved by
shareholders as provided in Section 10.8. Incentive Options granted before such
date shall remain valid in accordance with their terms.
10.8 Effective Date of Plan. This Plan shall be effective on the
date of its adoption by the Board, November 14, 1997. Options may be granted
hereunder at any time after such adoption; provided, however, that the
effectiveness of this Plan will be retroactively revoked if it is not approved
by the shareholders of the Company in a manner that satisfies Treasury
Regulation section 1.422-5 within 12 months of the date that the Board took
action to adopt the Plan. All Options granted under the Plan will become void
immediately following the 12-month anniversary of the date the Board adopted the
Plan if such approval by shareholders has not yet been obtained.
IN WITNESS WHEREOF, the undersigned officer of the Company has
executed this Plan on this the 14th day of November, 1997, to be effective as
of the date specified in Section 10.8.
RADIO SYSTEMS CORPORATION
By:
----------------------
Its:
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EXHIBIT 10.2
RADIO SYSTEMS CORPORATION
1994 EMPLOYEE INCENTIVE STOCK OPTION PLAN
1. Purpose.
The purpose of this Employee Incentive Stock Option Plan (the "Plan")
is to give officers and executive personnel ("key employees") of Radio Systems
Corporation (the "Company") an opportunity to acquire shares of the common
stock of the Company ("Common Stock") to provide an incentive for key employees
to continue to promote the best interests of the Company and enhance its
long-term performance, and to provide an incentive for key employees to join or
remain with the Company.
2. Administration.
(a) Board of Directors. The Plan shall be administered by the
Board of Directors of the Company (the "Board"), which, to the extent it shall
determine, may delegate its powers with respect to the administration of the
Plan (except its powers under Section 12(c) to a committee (the "Committee")
appointed by the Board and composed of not less than three members of the Board.
If the Board chooses to appoint a Committee, references hereinafter to the Board
(except in Section 12(c)) shall be deemed to refer to the Committee.
(b) Powers. Within the limits of the express provisions of the
Plan, the Board shall determine: (i) the key employees to whom awards hereunder
shall be granted, (ii) the time or times at which such awards shall be granted,
(iii) the form and amount of the awards, and (iv) the limitations, restrictions
and conditions applicable to any such award. In making such determinations, the
Board may take into account the nature of the services rendered by such
employees and such other factors as the Board in its discretion shall deem
relevant.
(c) Interpretations. Subject to the express provisions of the
Plan, the Board may interpret the Plan, prescribe, amend and rescind rules and
regulations relating to it, determine the terms and provisions of the respective
awards and make all other determinations it deems necessary or advisable for the
administration of the Plan. The determinations of the Board on all matters
regarding the Plan shall be conclusive.
3. Awards Under the Plan.
(a) Maximum Limitations. The aggregate number of shares of Common
Stock available for grant under the Plan is 120,000, subject to adjustment
pursuant to Section 7. Shares of Common Stock issued pursuant to the Plan may
be either authorized but unissued shares or shares now or hereafter held in the
treasury of the Company. In the event that, prior to the end of the period
during which Incentive Stock Options may be granted under the Plan, any
Incentive Stock Option under the Plan expires unexercised or is terminated,
surrendered or canceled without being exercised, in whole or in part, for any
reason, the number of shares theretofore subject to such Incentive Stock
Option, or the unexercised, terminated, forfeited or unearned portion thereof,
shall be added to the remaining number of shares of Common Stock available for
grant as an Incentive Stock Option under the Plan, including a grant to a
former holder of such Incentive Stock Option, upon such terms and conditions as
the Board shall determine, which terms may be more or less favorable than those
applicable to such former Incentive Stock Option.
(b) Ten Percent Shareholder. Notwithstanding any other provision
herein contained, no key employee any receive an Incentive Stock Option under
the Plan if such employee, at the time the award is granted, owns (as defined
in Section 425(d) of the Internal Revenue Code of 1954, as amended (the
"Code")) stock possessing more than 10% of the total combined voting power of
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<PAGE> 2
classes of stock of the Company, its parent or any subsidiary, unless the
option price for such Incentive Stock Option is at least 110% of the fair
market value of the Common Stock subject to such Incentive Stock Option on the
date of grant.
4. Incentive Stock Option.
It is intended that Incentive Stock Options granted under the Plan
shall constitute Incentive Stock Options within the meaning of Section 422A of
the Code. Incentive Stock Options may be granted under the Plan for the
purchase of shares of Common Stock. Incentive Stock Options shall be in such
form and upon such conditions as the Board shall from time to time determine,
subject to the following:
(a) Option Prices. The option price of each Incentive Stock
Option shall be at least 100% of the fair market value of the Common Stock
subject to such Incentive Stock Option on the date of grant.
(b) Terms of Options. No Incentive Stock Option shall be
exercisable prior to the date one year, or after the date ten years, from the
date such Incentive Stock Option is granted.
(c) Limitation on Amounts. The aggregate fair market value
(determined with respect to each Incentive Stock Option as of the time such
Incentive Stock Option is granted) of the capital stock with respect to which
Incentive Stock Options are exercisable for the first time by a key employee
during any calendar year (under this Plan or any other plan of the Company)
shall not exceed $100,000.
5. Provisions Applicable to Incentive Stock Options.
(a) Exercise. Incentive Stock Options shall be subject to such
terms and conditions, shall be exercisable at such time or times, and shall be
evidenced by such form of written option agreement between the optionee and the
Company, as the Board shall determine; provided, that such determinations are
not inconsistent with the other provisions of the Plan, and with Section 422A of
the Code or regulations thereunder.
(b) Manner of Exercise of Options and Payment for Common Stock.
Incentive Stock Options may be exercised by an optionee by giving written
notice to the Secretary of the Company stating the number of shares of Common
Stock with respect to which the Incentive Stock Option is being exercised and
tendering payment therefor. At the time that an Incentive Stock Option granted
under the Plan, or any part thereof, is exercised, payment for the Common Stock
issuable thereupon shall be made in full in cash or by check or, if the Board
in its discretion agrees to accept, in shares of Common Stock of the Company
(the number of such shares paid for each share subject to the Incentive Stock
Option, or part thereof, being exercised shall be determined by dividing the
option price by the fair market value per share of the Common Stock on the date
of exercise). As soon as reasonably possible following such exercise, a
certificate representing shares of Common Stock purchased, registered in the
name of the optionee shall be delivered to the optionee.
6. Transferability.
No Incentive Stock Option may be transferred, assigned, pledged or
hypothecated (whether by operation of law or otherwise), except as provided by
will or the applicable laws of descent or distribution, and no Incentive Stock
Option shall be subject to execution, attachment or similar process. Any
attempted assignment, transfer, pledge, hypothecation or other disposition of
an Incentive Stock Option, or levy of attachment or similar process upon the
Incentive Stock Option not specifically permitted herein shall be null and void
and without effect. An Incentive Stock Option may be exercised only by a key
employee during his or her lifetime, or pursuant to Section 10(c), by
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his or her estate or the person who acquires the right to exercise such
Incentive Stock Option upon his or her death by bequest or inheritance.
7. Adjustment Provisions.
The aggregate number of shares of Common Stock with respect to which
Incentive Stock Options may be granted, the aggregate number of shares of
Common Stock subject to each outstanding Incentive Stock Option, and option
price per share of each such Incentive Stock Option, may all be appropriately
adjusted as the Board may determine for any increase or decrease in the number
of shares of issued Common Stock resulting from a subdivision or consolidation
of shares, whether through reorganization, recapitalization, stock split-up,
stock distribution or combination of shares, or the payment of a share dividend
or other increase or decrease in the number of such shares outstanding effected
without receipt of consideration by the Company. Adjustments under this Section
7 shall be made according to the sole discretion of the Board, and its
decisions shall be binding and conclusive.
8. Dissolution, Merger and Consolidation.
Upon the dissolution or liquidation of the Company, or upon a merger
or consolidation of the Company in which the Company is not the surviving
corporation, each Incentive Stock Option granted hereunder shall expire as of
the effective date of such transaction; provided, however, that the Board shall
give at least 30 days' prior written notice of such event to each optionee
during which time he or she shall have a right to exercise his or her wholly or
partially unexercised Incentive Stock Option (without regard to installment
exercise limitations, if any) and, subject to prior expiration pursuant to
Section 10(b) and (c), each Incentive Stock Option shall be exercisable after
receipt of such written notice and prior to the effective date of such
transaction.
9. Effective Date and Conditions Subsequent to Effective Date.
The Plan shall become effective on the date of the approval of the
Plan by the holders of a majority of the shares of Common Stock of the Company;
provided, however, that the adoption of the Plan is subject to such shareholder
approval within twelve (12) months before or after the date of adoption of the
Plan by the Board. The Plan shall be null and void and of no effect if the
foregoing condition is not fulfilled, and in such event each Incentive Stock
Option granted hereunder shall, notwithstanding any of the preceding provisions
of the Plan, be null and void and of no effect.
No grant or award shall be made under the Plan more than 10 years from
the earlier of the date of adoption of the Plan by the Board or shareholder
approval hereof; provided, however, that the Plan and all Incentive Stock
Options granted under the Plan prior to such date shall remain in effect and
subject to adjustment and amendment as herein provided until they have been
satisfied or terminated in accordance with the terms of the respective grants
and the related agreements.
10. Termination of Employment.
(a) Each Incentive Stock Option shall, unless sooner expired
pursuant to Section 10(b) or (c) below, expire on the first to occur of the
tenth anniversary of the date of grant thereof and the expiration date set forth
in the applicable option agreement.
(b) An Incentive Stock Option shall expire on the first to occur
of the applicable date set forth in paragraph (a) next above and the date that
the employment of the key employee with the Company terminates for any reason
other than death or disability. Notwithstanding the preceding provisions of this
paragraph, the Board, in its sole discretion, may, by written notice given to an
ex-employee, permit the ex-employee to exercise Incentive Stock Options during a
period following his or her termination of employment, which period shall not
exceed three months. In no event, however,
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may the Board permit an ex-employee exercise an Incentive Stock Option after the
expiration date contained in the agreement evidencing such option.
Notwithstanding the preceding provisions of this paragraph, if the Board permits
an ex-employee to exercise Incentive Stock Options during a period following his
or her termination of employment pursuant to such preceding provisions, such
Incentive Stock Options shall, to the extent unexercised, expire on the date
that such ex-employee violates (as determined by the Board) any covenant not to
compete in effect between the Company and the ex-employee.
(c) If the employment of a key employee with the Company
terminates by reason of disability (as defined in Section 422A(c)(9) of the Code
as determined by the Board) or by reason of death, his or her Incentive Stock
Options shall expire on the first to occur of the date set forth in paragraph
(a) of this Section 10 and the first anniversary of such termination of
employment.
11. Option to Repurchase Shares.
(a) Upon termination of the Optionee's employment, the Company
shall have the option (but not the obligation) to repurchase any of the Stock
purchased by the Optionee upon his exercise of the Option as follows: (i) within
one year of termination of employment of the Optionee either voluntarily, by
mutual agreement, death or permanent disability, the Company has the option to
repurchase the Stock at its fair market value, as determined in good faith by
the Board, as of the date on which the Optionee's employment was terminated,
(ii) the Company shall have the option, exercisable at any time to repurchase
the Stock at the grant price per share if the Optionee's employment is
terminated for cause as determined in good faith by the Company. Each
certificate for shares of stock shall bear the following legend:
"The transfer of the shares of stock represented by this
certificate is restricted under terms of an Employee
Incentive Stock Option Plan, a copy of which is on file at
the Company's principal office."
(b) The Company or its designee shall exercise its option to
repurchase Stock hereunder by: (i) delivering to the Optionee at his last known
address written notice of the exercise of the option to repurchase which shall
include (ii) the number of shares and purchase price of the Stock to be
repurchased and (iii) a demand that the certificates for the Stock to be
repurchased duly endorsed by the Optionee or his representative be delivered to
the Company's principal office no later than 30 days from the date of such
notice against payment of the purchase price for such Stock. Upon delivery of
such written notice, the Optionee or his representative shall no longer have
any rights as a stockholder. If the Optionee or his representative fails to
deliver a duly endorsed certificate for the Stock within such 30-day period,
the Company shall deliver the purchase price for the Stock to the Optionee's
last known address and make an appropriate notation in its stock records that
the Stock has been repurchased and the Stock certificate canceled pursuant to
this Plan.
12. Miscellaneous.
(a) Legal and Other Requirements. The obligation of the Company
to sell and deliver Common Stock under the Plan shall be subject to all
applicable laws, regulations, rules and approvals, including, but not by way of
limitation, the effectiveness of a registration statement under the Securities
Act of 1933 if deemed necessary or appropriate by the Company. Certificates for
shares of Common Stock issued hereunder may be legended as the Board shall deem
appropriate.
(b) No Obligation To Exercise Options. The granting of an
Incentive Stock Option shall impose no obligation upon an optionee to exercise
such Incentive Stock Option.
(c) Termination and Amendment of Plan. The Board, without further
action on the part of the shareholders of the Company, may from time to time
alter, amend or suspend the Plan or any
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Incentive Stock Option granted hereunder or may at any time terminate the Plan,
except that it may not, without the approval of the shareholders of the Company
(except to the extent provided in Section 7 hereof): (i) change the total number
of shares of Common Stock available for grant under the Plan; (ii) extend the
duration of the Plan; (iii) increase the maximum term of Incentive Stock
Options; (iv) decrease the minimum option price of Incentive Stock Options; (v)
change the class of employees eligible to be granted Incentive Stock Options
under the Plan; or (vi) effect a change relating to Incentive Stock Options
granted hereunder which is inconsistent with Section 422A of the Code or
regulations issued thereunder. No action taken by the Board under this Section,
either with or without the approval of the shareholders of the Company, may
materially and adversely affect any outstanding Incentive Stock Option without
the consent of the holder thereof. any, of any such leave of absence on awards
under the Plan theretofore made to any key employee who takes such leave of
absence.
(d) Fair Market Value. Notwithstanding any provision of the Plan
to the contrary, no determination of the Board made in good faith with respect
to the fair market value of Common Stock subject to an Incentive Stock Option
shall be inconsistent with Section 422A of the Code or regulations thereunder.
(e) Applicable Law. All questions pertaining to the validity,
construction and administration of the Plan and Stock Options granted hereunder
shall be determined in conformity with the laws of the state Tennessee, to the
extent not inconsistent with Section 422A of the Code and regulations
thereunder.
I, Melvin E. Koons, Secretary of Radio Systems Corporation hereby
certify that the stockholders approved this Incentive Stock Option Plan by
majority vote at a meeting held on April 28, 1995.
/s/ Melvin E. Koons
- -----------------------------------
Melvin E. Koons, Secretary
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EXHIBIT 10.3
OFFICER INCENTIVE PROGRAM
PURPOSE: To provide an incentive to officers based on goals consistent with the
goals of the shareholders. To compensate officers for exceptional performance as
measured by increases in operating income.
TERM: This plan will be in effect for calendar years 1997 and 1998. For years
after 1998, the plan may be extended, modified or discontinued.
ELIGIBILITY: CEO, CFO and VP of Product Development who are employed from
January 15 of the applicable year until the date of payment(s).
MODIFICATIONS: The Board of Directors reserve the right (at its sole discretion)
to modify or amend at any time.
BASIS OF DETERMINING POOL: Percentage of operating income after deducting the
expense of the incentive as per the following schedule:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Percentage Increase in Operating Income Percentage of Net Income Used For Computing Pool
- --------------------------------------------------------------------------------------------------------------------
<S> <C>
10%-29% 0%
30%-39% 1.5%
40%-49% 3%
50%-59% 3.6%
60%-69% 4.2%
70%-79% 4.8%
80%-99% 5.4%
100% & above 6%
</TABLE>
ALLOCATION OF POOL: The pool will allocated to eligible participants(EPP) under
the following formula. EPP = (EW/TW) times P. EW equals wages actually earned by
eligible participant. TW equals the total of wages actually earned by all
eligible participant. P equals the total pool.
MAXIMUM INCENTIVE: The maximum incentive paid to an individual for any year will
not exceed 100% of the individual base pay for that year
PAYMENT: An amount equal to 50% of the estimated pool will be paid on or before
November 15 of the plan year. The CFO and the Compensation Committee of the
Board of Directors will determine the basis for computing this estimate. Final
payment will be made within 30 days of the delivery of the audited financial
statements. Radio Systems Corporation has the right to modify the form and
timing on any payment for any eligible participant.
PAY INCREASES: Future pay (pay scale) increases will be based on "Cost of
Living" adjustments. Exceptions will be made for significant change in duties
and the normal progression through existing time and skill grades.
ACQUISITIONS: The inclusion or exclusion of operating income and personnel as a
result of an acquisition will determined by the Board of Directors on situation
by situation basis.
<PAGE> 2
SPECIAL RULES:
- - Any employee whose employment is terminated for any reason prior to
payment will lose any interest in the pool.
- - Neither short nor long term disability will disqualify an employee from
participating. As in all cases, the disabled, employee's share will be
computed only on wages earned.
- - Any employee on extended leave under the "Family & Medical Leave Act of
1993" will not be disqualified because of the leave.
- - Any special situation not covered under the foregoing will be decided by
the Compensation Committee of the Board of Directors.
DISCLAIMER:
THIS INCENTIVE PROGRAM SHALL NEITHER BE DEEMED TO CONSTITUTE A CONTRACT BETWEEN
RADIO SYSTEMS CORPORATION AND ANY EMPLOYEE' NOR TO BE CONSIDERATION NOR AN
INDUCEMENT FOR THE EMPLOYMENT OF ANY EMPLOYEE. NOTHING CONTAINED IN THIS
INCENTIVE PROGRAM SHALL BE DEEMED TO PROVIDE ANY EMPLOYEE THE RIGHT TO BE
RETAINED IN THE SERVICE OF RADIO SYSTEMS CORPORATION NOR TO INTERFERE WITH THE
RIGHT OF RADIO SYSTEMS CORPORATION TO DISCHARGE ANY PARTICIPANT OR OTHER
EMPLOYEE AT ANY TIME REGARDLESS OF THE EFFECT WHICH SUCH DISCHARGE SHALL HAVE
UPON SUCH PERSON AS A PARTICIPANT IN THE INCENTIVE PROGRAM. THIS INCENTIVE
PROGRAM SHALL NOT BE DEEMED TO GIVE RADIO SYSTEMS CORPORATION THE RIGHT TO
REQUIRE ANY EMPLOYEE TO REMAIN IN THE EMPLOY OF RADIO SYSTEMS CORPORATION OR TO
RESTRICT ANY SUCH PERSON 'S RIGHT TO TERMINATE HIS (HER) EMPLOYMENT AT ANY
TIME.
2
<PAGE> 1
EXHIBIT 10.4
FORM OF
INDEMNIFICATION AGREEMENT
This Indemnification Agreement is made and entered into this ___ day of
___________, 1997, by and between RADIO SYSTEMS CORPORATION, a Tennessee
corporation (the "Company") and ___________________________________________.
The shareholders of the Company have elected the Director as a director
of the Company. The Director has agreed to serve as a director, provided the
Company agrees to indemnify the Director to the maximum extent permitted by law.
The Company has authority to indemnify directors pursuant to T.C.A.
ss.48-18-501, et seq. and pursuant to the Company's charter and bylaws. The
Company has agreed to indemnify the Director to the maximum extent permitted by
law.
-----------------------
NOW, THEREFORE, for good and valuable consideration, the sufficiency of
which is hereby acknowledged, the parties agree as follows:
1. AGREEMENT TO INDEMNIFY. To the maximum extent permitted by law
including but not limited to the maximum extent permitted by T.C.A.
ss.48-18-502, and any amendments thereof, the Company agrees to indemnify the
Director from any and all claims, causes of actions, demands, damages or costs
arising out of or in any way relating to the Director's election to or service
on the Board of Directors of the Company. If the Director satisfies the
conditions set forth in T.C.A. ss.48-18-502(a)(1), (2) and (3), the Company
shall indemnify the Director against any liability incurred in a proceeding
against the Director.
2. ADVANCE FOR EXPENSES. If the Director meets the requirements of
T.C.A. ss.48-18-504(a)(1), (2) and (3), the Company shall pay for and reimburse
the reasonable expenses incurred by the Director in any proceeding in advance of
the final disposition of the proceeding, and no less frequently than monthly or
on other terms acceptable to the Director.
3. AUTHORIZATION OF INDEMNIFICATION. The Company agrees to make a
determination as to the permissibility of indemnification as required by the
terms of T.C.A. ss.48-18-506, and all amendments thereof, within a reasonable
time after request for indemnification has been made by the Director, both
Company and Director hereby agreeing that such reasonable time shall at no time
exceed thirty (30) days after such request by the Director.
4. ADOPTION OF THE ACT. Except as expressly stated in this
Indemnification Agreement, the Company and Director hereby adopt all other terms
of the Tennessee Business Corporation Act, and all amendments thereof, with
regard to indemnification by the Company of the Director for liability asserted
against or incurred by him.
5. COMPLETENESS OF AGREEMENT. This Agreement constitutes the entire
agreement between the parties hereto as to the transactions contemplated hereby
and supersedes all prior discussions, understandings or agreements between the
parties hereto, including but not limited to the bylaws or other prior actions
of the Company.
<PAGE> 2
IN WITNESS WHEREOF, the parties hereto have caused their names to be
signed as of the day and year first above written.
RADIO SYSTEMS CORPORATION
By:
---------------------------------
Randy Boyd, President
DIRECTOR
-------------------------------------
2
<PAGE> 1
EXHIBIT 10.5
INDUSTRIAL LEASE
BY AND BETWEEN
CRRSC REALTY, LLC
("LANDLORD")
AND
RADIO SYSTEMS CORPORATION
("TENANT")
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <S> <C>
1. TERMS.........................................................1
1.1 Premises.............................................1
1.2 Rent.................................................1
1.3 Notices and Payment Addresses........................1
1.4 Lease Summary and Special Provisions.................1
2. COMMENCEMENT AND EXPIRATION DATES.............................2
2.1 Lease Term...........................................2
2.2 Commencement Date....................................2
2.3 Delivery of Possession...............................2
3. PAYMENT OF RENT...............................................2
4. RENT INCREASES................................................2
5. SECURITY DEPOSIT..............................................2
6. USES..........................................................3
6.1 Permitted Uses.......................................3
6.2 Hazardous Materials..................................3
7. LATE CHARGES..................................................5
8. REPAIRS AND MAINTENANCE.......................................5
8.1 Landlord's Obligation................................5
8.2 Tenant's Obligations.................................5
9. UTILITIES AND SERVICES........................................6
9.1 Utility Bills........................................6
9.2 Disclaimer...........................................6
9.3 Heat Producing Equipment.............................6
9.4 Maintenance and Repair of HVAC System................7
10. ADJUSTMENTS...................................................7
10.1 Definition...........................................7
11. PERSONAL PROPERTY TAXES.......................................7
12. LIABILITY INSURANCE...........................................8
13. FIRE INSURANCE - FIXTURES AND EQUIPMENT.......................8
14. DESTRUCTION AND DAMAGE........................................9
14.1 Casualty Damage - Insured............................9
14.1.1 Total Destruction...........................9
14.1.2 Partial Destruction.........................9
14.2 Release..............................................9
14.3 Rent Abatement.......................................9
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
14.4 Delay ............................................9
14.5 Uninsured Damage....................................10
14.6 Repair Obligation...................................10
14.7 End of Term.........................................10
14.8 Waiver..............................................10
15. ALTERATIONS AND ADDITIONS; REMOVAL OF FIXTURES...............10
16. ACCEPTANCE OF PREMISES.......................................11
17. TENANT IMPROVEMENTS..........................................11
18. ACCESS.......................................................11
19. WAIVER OF SUBROGATION........................................12
20. INDEMNIFICATION..............................................12
21. ASSIGNMENT AND SUBLETTING....................................12
21.1 Landlord's Consent..................................12
21.2 Criteria 13
21.3 Approved Subleases and Assignments..................13
22. ADVERTISING..................................................14
23. LIENS........................................................14
24. DEFAULT......................................................14
24.1 Tenant's Default....................................14
24.2 Remedies............................................15
25. SUBORDINATION................................................16
26. SURRENDER OF POSSESSION......................................16
27. NON-WAIVER...................................................17
28. HOLDOVER.....................................................17
29. CONDEMNATION.................................................17
29.1 Substantial Taking..................................17
29.2 Partial Taking......................................17
29.3 Awards and Damages..................................17
30. NOTICES......................................................17
31. MORTGAGEE PROTECTION.........................................17
32. COSTS AND ATTORNEYS' FEES....................................18
33. BROKERS......................................................18
34. LANDLORD'S LIABILITY.........................................18
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
35. ESTOPPEL CERTIFICATES........................................18
36. FINANCIAL STATEMENTS.........................................19
37. TRANSFER OF LANDLORD'S ITEREST...............................19
38. RIGHT TO PERFORM.............................................19
39. SALES AND AUCTIONS...........................................19
40. NO ACCESS TO ROOF............................................19
41. AUTHORITY OF TENANT..........................................20
42. NO ACCORD OR SATISFACTION....................................20
43. MODIFICATIONS FOR LENDER.....................................20
44. PARKING......................................................20
45. EXTERIOR SIGNS...............................................20
46. RULES AND REGULATIONS........................................20
47. GENERAL PROVISIONS...........................................20
47.1 Acceptance..........................................20
47.2 Joint Obligation....................................20
47.3 Marginal Headings, Etc..............................21
47.4 Choice of Law.......................................21
47.5 Successors and Assigns..............................21
47.6 Recordation.........................................21
47.7 Quiet Possession....................................21
47.8 Inability to Perform................................21
47.9 Partial Invalidity..................................21
47.10 Cumulative Remedies.................................21
47.11 Entire Agreement....................................21
47.12 Exhibits........................................... 21
48. FIRST RIGHT OF REFUSAL FOR LEASE OF ADJACENT PROPERTY........21
48.1 Intentionally Omitted...............................21
48.2 Intentionally Omitted...............................21
49. EXPANSION OPTION.............................................21
50. PURCHASE OPTION..............................................22
</TABLE>
iii
<PAGE> 5
LEASE SUMMARY
DATE OF EXECUTION: July 16, 1997
LANDLORD: CRRSC Realty, LLC
MANAGING AGENT: Blue Ridge Development, LLC
LANDLORD'S & MANAGING AGENT'S ADDRESS: 6701 Balm Drive, Suite 242, Knoxville,
Tennessee 37919
LANDLORD'S REPRESENTATIVE: John-David W. Roddy
TENANT'S SPACE: The building located or to be located on the real property
described in Exhibit B. attached hereto.
BUILDING: The certain building to be built as described in Exhibit A.
TENANT: Radio Systems Corporation.
BUILDING ADDRESS: To be determined.
NAME AND ADDRESS FOR RENTAL REMITTANCE: CRRSC Realty, LLC, Blue Ridge
Development, LLC, 6701 Balm Drive, Suite 242, Knoxville, Tennessee
37919
TENANT'S ADDRESS (FOR NOTICE AND BILLING): Radio Systems Corporation, 5008
National Drive, Knoxville, TN 37914
TENANT'S REPRESENTATIVE: Mr. James D. Hudson
RENTABLE FLOOR AREA OF TENANT'S SPACE: 30,000 SQUARE FEET
TOTAL RENTABLE FLOOR AREA OF THE BUILDING: 30,000 SQUARE FEET
TENANT'S PERCENTAGE FLOOR AREA OF THE BUILDING: 100%
SCHEDULED TERM COMMENCEMENT DATE: February 15, 1998
OUTSIDE DELIVERY DATE: January 15, 1998
SCHEDULED TERM EXPIRATION DATE: February14, 2008
<TABLE>
<S> <C> <C> <C>
BASE RENT: Years 1-5 $181,600.00/yr. $15,133.33/mo.
Years 6-10 $195,200.00/yr. $16,266.67/mo.
</TABLE>
OPERATING COSTS: All operating costs shall be paid by Tenant in accordance with
the terms of Section X and 9.
ADDITIONAL RENT: Additional Rent is to be paid in accordance with the terms of
Section 10.
i
<PAGE> 6
PERSONAL PROPERTY TAXES: Personal Property taxes shall be paid in accordance
with the terms of Section 11.
PROPERTY TAXES: Property taxes shall be paid in accordance with the terms of
Section 10.
ESCALATIONS: Base Rent is to be escalated in accordance with the terms of
Section 4.
SECURITY DEPOSIT: $15,133.33
GUARANTOR (IF APPLICABLE): None
PERMITTED USES: Office, Assembly and storage for electronic materials and
products.
TENANT'S PUBLIC LIABILITY INSURANCE: Comprehensive General Liability insurance
policies with a Broad Form Comprehensive Liability Endorsement
including Contractual Insurance and with a combined single limit for
bodily injury and property damage of at least $2,000,000.00 per
occurrence on a per location basis.
TENANT'S FIRE LEGAL LIABILITY INSURANCE. Fire liability insurance for one
hundred percent (100%) of the replacement cost of the Premises shall be
maintained for the full term of the Lease.
SPECIAL PROVISIONS: Any special terms or provisions of this Lease are attached
immediately following this page as pages 2-A through ____. To the
extent that the Special Provisions conflict with any other terms of
this Lease, the Special Provisions shall control.
ii
<PAGE> 7
SPECIAL PROVISIONS
These Special Provisions are hereby incorporated into this Lease and in
the event that they conflict with any provision of this Lease, these Special
Provisions shall control.
iii
<PAGE> 8
LEASE
THIS LEASE, made this 16th day of July, 1997, by and between
CMSC Realty. LLC a Tennessee limited liability company ("Landlord"), and Radio
Systems Corporation., a Tennessee corporation ("Tenant").
WITNESSETH:
That Landlord, for and in consideration of the rents and all other
charges and payments hereinafter reserved and payable by Tenant, and of the
covenants, agreements, terms, provisions and conditions to be kept and performed
hereunder by Tenant, does hereby demise and lease to Tenant, and Tenant does
hereby hire and take from Landlord, the premises described below (hereinafter
referred to as the "Premises" or the "Leased Premises"), subject to all matters
hereinafter set forth and upon and subject to the covenants, agreements, terms,
provisions and conditions of this Lease for the term hereinafter stated.
1. Landlord and Tenant agree to the following, unless otherwise
specifically modified by provisions of this Lease:
1.1 Premises. The Premises demised by this Lease is a building (the
"Building") to be constructed by Landlord which will contain approximately
30,000 square feet, together with the exclusive right to use parking and other
common areas upon the parcel of land upon which the Building is constructed. The
location and dimensions of the Premises are shown on EXHIBIT A. The parcel of
land upon which the Building is located as more particularly described in
EXHIBIT B. No easement for light or air is incorporated in the Premises.
1.2 Rent. The Base Rent ("Rent") is 10.75% of the total project cost
annually or $15,133.33 per month based upon a total project cost of
$1,689,000.00. In addition to the Rent, Tenant shall pay the Additional Rent
described in Section 10 and Base Rent increases as described in Section 4, all
of which shall be deemed rent due under this Lease.
1.3 Notices and Payment Addresses.
If to Landlord: CRRSC Realty, LLC
c/o Blue Ridge Development, LLC
6701 Baum Drive
Suite 242
Knoxville, Tennessee 37919
Attn.: Mr. John-David W. Roddy
If to Tenant: Radio Systems Corporation
5008 National Drive
Knoxville, TN 37914
Attn.: Mr. James D. Hudson
Upon occupancy of the Premises, Tenant's address for notices shall be the
address for the Premises.
1.4 Lease Summary and Special Provisions. Each reference in this Lease
to any of the subjects or terms contained in the Lease Summary and Special
Provisions attached hereto shall be construed to incorporate the data stated for
that subject or term. All such terms and provisions of the Lease Summary and the
Special Provisions shall become a part of this Lease.
<PAGE> 9
2. COMMENCEMENT AMD EXPIRATION DATES.
2.1 Lease Term. The term of this Lease (the "Term") shall commence on
the Commencement Date, as defined and set forth in Section 2.2 below, and shall
continue until ten ( 10) years after the Commencement Date (the "Term Expiration
Date") unless sooner terminated in accordance with the terms contained herein.
2.2 Commencement Date
2.2.1 If Tenant improvements are to be constructed pursuant to
EXHIBIT C, the Commencement Date shall be the earliest occurring of the
following:
(i) Thirty (30) days of the date the county has approved the
Building and the Tenant Improvements constructed pursuant to EXHIBIT C in
accordance with its building code, evidenced by its issuance of a certificate of
occupancy; or
(ii) July 1, 1998.
Once the actual Commencement Date has been determined pursuant to the
foregoing, the parties shall execute a Commencement Date memorandum in the form
attached hereto as EXHIBIT E.
2.3 Delivery of Possession. If Landlord is unable to deliver possession
of the Premises to Tenant on the Commencement Date, this Lease shall not be void
or voidable, nor shall Landlord be liable to Tenant for any loss or damage
resulting therefrom, but in such event Tenant shall not be liable for any Rent,
Additional Rent, and other charges due under this Lease until such time as
Landlord tenders delivery of possession of the Premises to Tenant. Should
Landlord tender possession of the Premises to Tenant prior to the date specified
as the Commencement Date, and Tenant elects to accept such prior tender, such
prior occupancy shall be subject to all the terms, covenants and conditions of
this Lease, including the payment of Rent and Additional Rent.
3. PAYMENT OF RENT. Tenant shall pay Landlord the Rent and Additional
Rent (as defined in Section 10) and any other payments due under this Lease
without prior notice, deduction or offset, in lawful money of the United States
in advance on or before the first day of each month, except that the first
month's Rent shall be paid upon the execution hereof, at the address noted in
Section 1.3, or to such other party or at such other place as Landlord may
hereafter from time to time designate in writing. Rent and other amounts due
under this Lease for any partial month at the beginning or end of the Lease term
shall be prorated.
4. RENT INCREASES. The Base Rent shall increase by 7.5% to $16,266.67
per month based upon a total project cost of $1,689,000.00 at the 61st month and
continue until the 120th month of this Lease.
5. SECURITY DEPOSIT. As security for its full and faithful performance
of this Lease, Tenant shall pay Landlord a security deposit of Fourteen Thousand
Five Hundred Fifty Dollars ($15,133.33) upon execution of this Lease. If Tenant
defaults with respect to any covenant or condition of this Lease, including but
not limited to the payment of Rent, Additional Rent or any other payment due
under this Lease, Landlord may apply all or any part of the security deposit to
the payment of any sum in default or any other sum which Landlord may be
required or deem necessary to spend or incur by reason of Tenant's default. In
such event, Tenant shall, upon demand, deposit with Landlord the amount so
applied to replenish the security deposit. If Tenant shall have fully complied
with all of the covenants and conditions of this Lease, but not otherwise, the
amount of the security deposit then held by Landlord, less a nonrefundable Zero
Dollars ($0.00) cleaning fee, shall be repaid to Tenant within thirty (30) days
after the expiration or sooner termination of this
2
<PAGE> 10
Lease. Landlord may, in the event the security deposit is depleted, at
Landlord's election, apply any Rent or Additional Rent prepaid by Tenant to
replenish the deposit. Landlord shall not be required to keep this security
deposit separate from its other funds unless required by law, and Tenant shall
not be entitled to interest on such deposit.
Notwithstanding any other provision of this Section 5 to the contrary,
the security deposit does not constitute an advance payment of rent and does not
measure Landlord's damages in the event of default by Tenant with respect to any
covenant or condition of this Lease.
6. USES.
6.1 Permitted Uses. The Premises are to be used only for Office,
Assembly and storage for electronic materials and products ("Permitted Uses")
and for no other business or purpose without the prior written consent of
Landlord. Tenant shall comply with all present and future laws, ordinances,
orders, regulations (including those relating to the Americans With Disabilities
Act (the "ADA")) or zoning classifications of any lawful governmental authority,
agency or other public or private regulatory authority (including insurance
underwriters or rating bureaus) having jurisdiction over the Premises. No act
shall be done in or about the Premises that is unlawful or that will increase
the existing rate of insurance on the Building, unless Tenant pays any and all
increases in insurance premiums resulting from such acts. Tenant shall not
commit or allow to be committed any waste upon the Premises, or any public or
private nuisance or other act or thing which disturbs the quiet enjoyment of any
other tenant in the Building. If any of Tenant's machines or equipment shall
require higher power capacity or place additional point pressure on the building
structure or foundation, then Tenant shall be responsible for taking such action
as may be necessary to provide for any additional capacity or structural support
for those machines and equipment. Tenant shall agree to repair at its cost any
damages caused by such usage and shall hold Landlord harmless from any loss,
liability and expenses, both real and alleged, arising out of such damage or
repair caused by Tenant's negligence or failure to comply with this paragraph.
Tenant, at its expense, shall comply with all laws relating to its use or
occupancy of the Premises and shall observe such reasonable rules and
regulations as may be adopted and made available to Tenant by Landlord from time
to time for the safety, care and cleanliness of the Premises or the Building and
for the preservation of good order therein.
6.2 Hazardous Materials.
6.2.1 As used in this Lease, the term "Hazardous Materials"
shall mean and include any substance that is or contains (a) any "hazardous
substance" as now or hereafter defined in Section 101(14) of the Comprehensive
Environmental Response, Compensation, and Liability Act of 198O, as amended
("CERCLA") (42 U.S.C. Section 9601 et seq.) or any regulations promulgated under
CERCLA; (b) any "hazardous waste" as now or hereafter defined in the Resource
Conservation and Recovery Act, as amended ("RCRA") (42 U.S.C.Section 6901 et
seq.) or any regulations promulgated under RCRA; (c) any substance now or
hereafter regulated by the Toxic Substances Control Act, as amended ("TSCA") (15
U.S.C. Section 2601 et seq.) or any regulations promulgated under TSCA; (d)
petroleum, petroleum by-products, gasoline, diesel fuel, or other petroleum
hydrocarbons; (e) asbestos and asbestos-containing material, in any form,
whether friable or non-friable; (f) polychlorinated biphenyls; (g) lead and
lead-containing materials; or (h) any additional substance, material or waste
(A) the presence of which on or about the Leased Premises (I) requires
reporting, investigation or remediation under any Environmental Laws (as
hereinafter defined), (ii) causes or threatens to cause a nuisance on the Leased
Premises or any adjacent property or poses or threatens to pose a hazard to the
health or safety of persons on the Leased Premises or any adjacent property, or
(iii) which, if it emanated or migrated from the Leased Premises, could
constitute a trespass, or (B) which is now or is hereafter classified or
considered to be hazardous or toxic under any Environmental Laws.
3
<PAGE> 11
6.2.2 As used in this Lease, the term "Environmental Laws" shall
mean and include (a) CERCLA, RCRA and TSCA; and (b) any other federal, state or
local laws, ordinances, statutes, codes, rules, regulations, orders or decrees
now or hereinafter in effect relating to (i) pollution, (ii) the protection or
regulation of human health, natural resources or the environment, (iii) the
treatment, storage or disposal of Hazardous Materials, or (iv) the emission,
discharge, release or threatened release of Hazardous Materials into the
environment.
6.2.3 Tenant agrees that during its use and occupancy of the Leased
Premises it will (a) not (i) permit Hazardous Materials to be present on or
about the Leased Premises except in a manner and quantity necessary for the
ordinary performance of Tenant's business or (ii) release, discharge or dispose
of any Hazardous Materials on, in, at, under, or emanating from, the Leased
Premises or the property in which the Leased Premises are located; (b) comply
with all Environmental Laws relating to the Leased Premises and the use of
Hazardous Materials on or about the Leased Premises and not engage in or permit
others to engage in any activity at the Leased Premises in violation of any
Environmental Laws; and (c) immediately notify Landlord of (I) any inquiry,
test, investigation or enforcement proceeding by any governmental agency or
authority against Tenant, Landlord or the Leased Premises relating to any
Hazardous Materials or under any Environmental Laws or (ii) the occurrence of
any event or existence of any condition that would cause a breach of any of the
covenants set forth in this Section 6.2.
6.2.4 If Tenant's use of Hazardous Materials on or about the Leased
Premises results in a release, discharge or disposal of Hazardous Materials on,
in, at, under, or emanating from, the Leased Premises or the property in which
the Leased Premises are located, Tenant agrees to investigate, clean up, remove
or remediate such Hazardous Materials in full compliance with (a) the
requirements of (I) all Environmental Laws and (ii) any governmental agency or
authority responsible for the enforcement of any Environmental Laws; and (b) any
additional requirements of Landlord that are reasonably necessary to protect the
value of the Leased Premises or the property in which the Leased Premises are
located.
6.2.5 Upon reasonable notice to Tenant, Landlord may inspect the
Leased Premises during normal business hours for the purpose of determining
whether there exists on the Leased Premises any Hazardous Materials or other
condition or activity that is in violation of the requirements of this Lease or
of any Environmental Laws. Tenant will supply to Landlord such historical and
operational information regarding the Leased Premises as may be reasonably
requested to facilitate any such inspection and will make available for meetings
appropriate personnel having knowledge of such matters. Tenant agrees to give
Landlord at least sixty (60) days prior notice of its intention to vacate the
Leased Premises so that Landlord will have any opportunity to perform such an
inspection prior to such vacation. The right granted to Landlord herein to
perform inspections shall not create a duty on Landlord's part to inspect the
Leased Premises, or liability on the part of Landlord for Tenant's use, storage
or disposal of Hazardous Materials, it being understood that Tenant shall be
solely responsible for all liability in connection therewith.
6.2.6 Landlord shall have the right, but not the obligation, prior
or subsequent to an event of default, without in any way limiting Landlord's
other rights and remedies under this Lease, to enter upon the Leased Premises,
or to take such other actions as it deems necessary or advisable, to
investigate, clean up, remove or remediate any Hazardous Materials or
contamination by Hazardous Materials present on, in, at, under, or emanating
from, the Leased Premises or the property in which the Leased Premises are
located in violation of Tenant's obligations under this Lease or under any
Environmental Laws. Notwithstanding any other provision of this Lease, Landlord
shall also have the right, at its election, in its own name or as Tenant's
agent, to negotiate, defend, approve and appeal, at Tenant's expense, any action
taken or order issued by any governmental agency or authority with regard to any
such Hazardous Materials or contamination by Hazardous Materials. All costs and
expenses paid or incurred by Landlord in the exercise of the rights set forth in
this Section 6.2 shall be payable by Tenant upon demand.
4
<PAGE> 12
6.2.7 Tenant shall surrender the Leased Premises to Landlord upon
the expiration or earlier termination of this Lease free of debris, waste or
Hazardous Materials placed on or about the Leased Premises by Tenant or its
agents, employees, contractors or invitees, and in a condition which complies
with all Environmental Laws.
6.2.8 Tenant agrees to indemnify and hold harmless Landlord from
and against any and all claims, losses (including, without limitation, loss in
value of the Leased Premises or the property in which the Leased Premises are
located), liabilities and expenses (including reasonable attorney's fees)
sustained by Landlord attributable to (1) any Hazardous Materials placed on or
about the Leased Premises by Tenant or its agents, employees, contractors or
invitees or (ii) Tenant's breach of any provision of this Section 6.2.
6.2.9 The provisions of this Section 6.2 shall survive the
expiration or earlier termination of this Lease.
7. LATE CHARGES. Tenant hereby acknowledges that late payment to
Landlord of Rent, Additional Rent or other sums due hereunder will cause
Landlord to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. If any Rent, Additional Rent or
other sum due from Tenant is not received by Landlord or Landlord's designated
agent within ten (10) days after being due, then Tenant shall pay to Landlord a
late charge equal to five percent (5%) of such overdue amount, plus any
attorneys' fees incurred by Landlord by reason of Tenant's failure to pay Rent
and other charges when due hereunder. All unpaid Rent, Additional Rent or other
sum due from Tenant to Landlord under this Lease shall bear interest from the
tenth (10th) day after the due date thereof until paid, at the lesser of sixteen
percent (16%) per annum or the maximum interest rate per annum allowed by law.
The parties hereby agree that such late charges represent a fair and reasonable
estimate of the cost that Landlord will incur by reason of Tenant's late
payment. Landlord's acceptance of such late charges shall not constitute a
waiver of Tenant's default with respect to such overdue amount or estop Landlord
from exercising any of the other rights and remedies granted hereunder.
8. REPAIRS AND MAINTENANCE.
8.1 Landlord's Obligation. Landlord agrees to keep in good repair the
structural portions of the roof, the Building foundation, and exterior walls,
the underground utility and sewer pipes outside the exterior walls of the
Building, if any, except repairs rendered necessary by the negligence of Tenant,
or Tenant's employees, guests, agents, customers, independent contractors or
invitees, the repair of which shall be paid for by Tenant within ten (10) days
of Landlord's written demand. Subject to Landlord's rights of access granted by
this Lease, Tenant shall be exclusively responsible for all repairs and
maintenance of the Premises and all common areas, and Landlord shall be under no
obligation to inspect the Premises. Tenant shall promptly report in writing to
Landlord any defective condition known to it which Landlord is required to
repair, and failure to so report such defects shall make Tenant responsible to
Landlord for any liability incurred by Landlord by reason of such conditions.
8.2 Tenant's Obligations. Tenant accepts the Premises in their present
condition "as is" and as suited for the use intended by Tenant. Tenant shall,
throughout the initial term of this Lease and any renewals thereof, at its
expense, maintain in good order and repair and in compliance with all
governmental requirements now in force or which may be in force hereafter, the
Premises, including the Building and other improvements, components and systems
located therein or thereon (including without limitation the plumbing, wiring,
electrical systems, sprinkler systems, HVAC system, glass and plate glass,
equipment and machinery constituting fixtures), except those repairs expressly
required to be made by Landlord. Tenant agrees to return the Premises to
Landlord at the expiration or prior termination of this Lease in as good
condition and repair as when first received, normal wear and tear, damage by
storm, fire, lightning, earthquake or other casualty excepted.
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Tenant hereby waives any rights or remedy regarding Tenant's right to make
repairs and deduct the expenses of such repairs from the Rent due under the
Lease.
Tenant's obligations hereunder shall specifically include the duty to
enter into and maintain at Tenant's sole expense during the entire term of this
Lease a contract(s) for the routine and periodic inspection of the HVAC system
(which regular inspection shall be no less than once every six (6) months), the
replacement of filters as recommended and the performance of other recommended
periodic servicing in accordance with applicable manufacturer's standards and
recommendations. Such contract (a) shall be with a qualified contractor or
individual reasonably satisfactory to Landlord; (b) shall satisfy the
requirements for routine and periodic maintenance, if any, necessary to keep all
applicable manufacturer's warranties in full force and effect; and (c) shall
provide that in the event this Lease expires or is earlier terminated for any
reason whatsoever that said contract shall be immediately terminable by Landlord
or Tenant without any cost, expense or other liability on the part of Landlord.
Tenant's obligations hereunder shall specifically include the duty to
enter into and maintain at Tenant's sole expense during the entire term of this
Lease a contract(s) for the routine and periodic maintenance and regular
inspection of the sprinkler system, and the performance of any recommended
periodic servicing in accordance with applicable manufacturer's and insurer's
standards and recommendations. Tenant shall provide Landlord with copies of all
such maintenance and inspection reports, including but not limited to the
results of any testing performed on the sprinkler system. Such contract (a)
shall be with a qualified contractor or individual reasonably satisfactory to
Landlord; (b) shall satisfy the requirements for routine and periodic
maintenance, if any, necessary to keep all applicable manufacturer's warranties
and any insurance coverage in full force and effect; and (c) shall provide that
in the event this Lease expires or is earlier terminated for any reason
whatsoever that said contract shall be immediately terminable by Landlord or
Tenant without any cost, expense or other liability on the part of Landlord.
It is expressly agreed by Landlord and Tenant that Tenant shall have
the right to enforce the terms of all warranties applicable to HVAC Systems,
sprinkler systems and all other warranties from manufacturers or suppliers of
equipment, materials or services applicable to those items which Tenant is
required to maintain, repair or replace in the Premises. Landlord agrees to
cooperate with Tenant in enforcing any such warranties applicable to the
Premises.
9. UTILITIES AND SERVICES.
9.1 Utility Bills. Tenant shall promptly pay all water, sewer, gas,
electricity, fuel, phone, light, heat, electric power and other utility bills
for the Premises. If Tenant does not pay these bills, Landlord may pay them and
such payment shall be added to the Rent.
9.2 Disclaimer. Landlord shall not be liable for any loss injury or
damage to property caused by or resulting from any variation, interruption, or
failure of such services due to any cause whatsoever, or from failure to make
any repairs or perform any maintenance. No temporary interruption or failure of
such services incident to the making of repairs, alterations, or improvements,
or due to accident, strike, or conditions or events beyond Landlord's reasonable
control shall be an eviction of Tenant or relieve Tenant from any of Tenant's
obligations hereunder. In no event shall Landlord be liable to Tenant for any
damage to the Premises or for any loss, damage or injury to any property therein
or thereon occasioned by bursting, rupture, leakage or overflow of any plumbing
or other pipes (including, without limitation, water, steam, and/or refrigerant
lines), sprinklers, tanks, drains, drinking fountains or washstands, or other
similar cause in, above, upon or about the Premises or the Building.
9.3 Heat Producing Equipment. Before installing any equipment or lights
which generate an undue amount of heat in the Premises or if Tenant plans to use
any high-power usage
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equipment in the Premises, Tenant shall obtain the prior written permission of
Landlord. Landlord may refuse to grant such permission unless Tenant agrees to
pay the costs to Landlord for installation of supplementary air conditioning
capacity or electrical systems necessitated by such equipment. At Landlord's
option, Landlord may require Tenant to remove, at Tenant's expense, any such
electrical systems or supplementary air conditioning system upon termination of
the Lease, and Tenant shall repair any damage to the Premises or the Building
caused by such removal.
9.4 Maintenance and Repair of HVAC System. Without limiting any other
provision of this Lease relating to the HVAC system, Tenant, at its own expense,
shall be responsible for complying with all governmental requirements now in
force or which may be in force hereafter, relating to or in connection with the
maintenance, repair, operation, servicing, modification or replacement of the
HVAC system, as those governmental requirements may from time to time require.
10. ADJUSTMENTS.
10.1 Definition. In addition to the rent, and as additional rent
("Additional Rent"), Tenant shall pay the total cost of the following items:
10.1.1 All property taxes. "Property Taxes" shall be defined to
include any form of assessment, license, fee, rent, tax, levy, penalty (if a
result of Tenant's delinquency), or tax (other than net income, estate,
succession, inheritance, transfer or franchise taxes), imposed by an authority
having the direct or indirect power to tax, or by any city, county, state or
federal government or any improvement or other district or division thereof,
whether such tax is: (I) determined by the area of the Building or the parcel
upon which it is constructed or any part thereof or the Rent and other sums
payable hereunder by Tenant, including, but not limited to, any gross income or
excise tax levied by any of the foregoing authorities with respect to receipt of
such rent or other sums due under this Lease; (ii) upon any legal or equitable
interest of Landlord in the Building, the Premises upon which it is constructed
or the Premises or any part thereof; (iii) upon this transaction or any document
to which Tenant is a party creating or transferring any interest in the Building
or the parcel upon which it-is constructed; (iv) levied or assessed in lieu of,
in substitution for, or in addition to, existing or additional taxes against the
Building or the Premises upon which it is constructed whether or not now
customary or within the contemplation of the parties; or (v) surcharged against
the parking area.
10.1.2 All insurance premiums. Such insurance premiums shall
include all insurance premiums for fire ("All-Risk"), extended coverage, public
liability, and other insurance that Landlord reasonably deems necessary;
10.1.3 All costs to maintain, repair, replace, supervise, insure
(including provision of public liability insurance) and administer areas such as
parking areas, landscaping, sidewalks and Building areas, if any, Building
equipment and operating systems and other capital improvements to the Building,
parking lots, landscaping, sprinkler systems, sidewalk, driveways, and the roof
of the Building;
10.1.4 Any parking charges or other costs levied, assessed or
imposed by, or at the direction of, or resulting from statutes or regulations,
or interpretations thereof, promulgated by any governmental authority or insurer
in connection with the use or occupancy of the Premises or the common areas of
the Building.
11. PERSONAL PROPERTY TAXES. Tenant shall pay, or cause to be paid,
before delinquency any and all taxes levied or assessed and which become payable
during the term of this Lease upon all Tenant's leasehold improvements and all
equipment, furniture, fixtures, and any other trade fixtures and personal
property located on the Premises.
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12. LIABILITY INSURANCE. Tenant shall, at Tenant's expense, obtain and
keep in force during the term of this Lease a policy of comprehensive general
liability insurance including personal injury liability, contractual liability,
products and completed operations liability and liquor liability (if
applicable), insuring Landlord and Tenant against any liability arising out of
the ownership, use, occupancy or maintenance of the Premises. Such insurance
shall be in the amount of not less than Two Million and No/100ths Dollars
($2,000,000.00) for bodily injury and property damage for any one accident or
occurrence. Fire legal liability insurance in an amount of not less than One
Million and No/100ths Dollars ($1,000,000.00) shall also be obtained and kept in
force during the term of this Lease at Tenant's expense. Such insurance, with
extended coverage, shall cover the Premises in an amount equal to at least one
hundred percent (100%) of the replacement cost thereof. The limit of any of such
insurance shall not limit the liability of Tenant hereunder. Tenant may provide
this insurance under a blanket policy, provided that such insurance shall have a
Landlord's protective liability endorsement specifically describing the
Premises. If Tenant fails to procure and maintain such insurance, Landlord may,
but shall not be required to, procure and maintain the same, at Tenant's expense
to be reimbursed by Tenant within ten ( 10) days of written demand. All
insurance required to be obtained by Tenant hereunder shall be issued by
companies reasonably acceptable to Landlord. Thirty (30) days prior to the
Commencement Date, Tenant shall deliver to Landlord certified copies of policies
or, at Landlord's discretion, certificates of liability insurance required
herein with loss payable clauses satisfactory to Landlord. Any deductible under
such insurance policy in excess of Five Thousand and No/100ths Dollars
($5,000.00) must be approved by Landlord in writing prior to issuance of such
policy. No policy shall be cancelable or subject to reduction of coverage except
upon thirty (30) days' prior written notice to Landlord. All such policies shall
name Landlord and its agents as first named insureds, shall be written as
primary policies not contributing with and not in excess of coverage which
Landlord may carry, and shall be written with an insurance carrier satisfactory
to Landlord. From time to time, as Landlord deems necessary, the insurance
coverage and limits of such coverage required hereunder will be reviewed by
Landlord, and Tenant will be notified of any revisions or increases thereto
required by Landlord. Tenant shall obtain any revised or increased coverage
required by Landlord within thirty (30) days of any such notification from
Landlord.
In addition to the foregoing, Landlord and Tenant hereby waive any
claim, regardless of fault or negligence, arising in favor of one against the
other, or anyone claiming through or under either, by way of subrogation or
otherwise, for any loss of or damage to any property of either for which loss or
damage is recovered under said policies; provided, however that this release
shall be applicable and in force and effect only with respect to loss or damage
occurring during such times as the releaser's policies shall contain a clause or
endorsement to the effect that any such release shall not adversely affect or
impair said policies or prejudice the right of the releaser to recover
thereunder and then only to the extent of the insurance proceeds payable under
such policies. Each of the Landlord and Tenant agrees that it will request its
insurance carrier to include in its policies such a clause or endorsement.
13. FIRE INSURANCE - FIXTURES AND EQUIPMENT. Tenant shall maintain in
full force and effect on all trade fixtures and equipment and other personal
property on the Premises, a policy of all risk property insurance covering the
full replacement value of such property. During the term of this Lease, the
proceeds from any such policy of insurance shall be used for the repair or
replacement of the fixtures and equipment so insured. Landlord shall have no
interest in the insurance upon Tenant's equipment and fixtures and will sign all
documents reasonably necessary or proper in connection with the settlement of
any claim or loss by Tenant. Landlord will not carry insurance on Tenant's
possessions. Tenant shall furnish Landlord with certificate of insurance
evidencing that the requirements set forth herein are in full force and effect.
Any deductible in excess of Two Thousand Five Hundred and No/100ths Dollars
($2,500.00) under such insurance must be approved in writing by Landlord prior
to issuance of such policy. Upon demand, Tenant shall provide Landlord, at
Tenant's expense, with such increased amount of existing insurance, and such
other insurance as Landlord or Landlord's lender may reasonably require to
afford Landlord and
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Landlord's lender adequate protection. Tenant shall provide Landlord with notice
of loss or damage to property within forty-eight (48) hours after such loss or
damage occurs. Tenant shall provide and keep in force with companies
satisfactory to Landlord, business interruption and/or loss of rental insurance
in an amount equivalent to twelve (12) months Rent and Additional Rent which
shall not contain a deductible greater than One Thousand and No/100ths Dollars
($1,000.00). Tenant shall furnish Landlord with certificate of such insurance
naming Landlord as an additional insured. No policy shall be cancelable or
subject to reduction of coverage except upon thirty (30) days' prior written
notice to Landlord.
14. DESTRUCTION AND DAMAGE.
14.1 Casualty Damage - Insured. If the Building is damaged by fire or
other perils covered by extended coverage insurance the following provisions
shall apply:
14.1.1 Total Destruction. In the event of total destruction of
the Building, Landlord shall elect either to promptly commence repair and
restoration of the Building and prosecute the same diligently to completion, in
which event this Lease shall remain in full force and effect, or not to repair
or restore the Building, in which event this Lease shall terminate. In either
case, Landlord shall give Tenant written notice of its intention within sixty
(60) days after the occurrence of such destruction. If Landlord elects not to
restore the Building, this Lease shall be deemed to have terminated as of the
date of such total destruction.
14.1.2 Partial Destruction. In the event of a partial destruction
of the Building to an extent not exceeding twenty-five percent (25%) of the full
insurable value thereof and if the damage thereto is such that the Building may
be repaired or restored within ninety (90) days from the date of such
destruction and Landlord will receive insurance proceeds sufficient to cover the
cost of such repairs, Landlord shall commence and proceed diligently with the
work of repair and restoration, in which event the Lease shall continue in full
force and effect; or if such repair and restoration requires longer than ninety
(90) days or the cost thereof exceeds twenty-five percent (25%) of the full
insurable value thereof or if the insurance proceeds payable to Landlord will
not be sufficient to cover such cost, Landlord may elect either to so repair and
restore, in which event the Lease shall continue in full force and effect, or
not to repair, reconstruct or restore, in which event the Lease shall terminate.
In either case, Landlord shall give written notice to Tenant of its intention
within sixty (60) days after the destruction occurs. If Landlord elects not to
restore the Building, this Lease shall be deemed to have terminated as of the
date of such partial destruction.
14.2 Release. Upon any termination of this Lease under any of the
provisions of this article, the parties shall be released thereby without
further obligation to the other from the date of the damage or destruction,
except for items which have theretofore accrued and are then unpaid.
14.3 Rent Abatement. In the event of repair and restoration as herein
provided, the monthly installments of Rent shall be abated proportionately in
the ratio which the Tenant's use of the Premises is impaired during the period
of such repair, reconstruction or restoration, any such abatement of rent shall,
at the sole option of Landlord, create an extension of the term of this Lease in
an amount equal to the period of such repair, reconstruction or restoration;
provided, however, if the damage is due, directly or indirectly, to the fault or
neglect of Tenant, or its officers, contractors, licensees, agents, servants,
employees, guests, invitees or visitors, there shall be no abatement of Rent,
except to the extent Landlord receives proceeds from any applicable insurance
policy of Tenant to compensate Landlord for loss of Rent. Tenant shall not be
entitled to any compensation or damages for loss of use of the whole or any part
of said Premises and/or any inconvenience or annoyance occasioned by such
damage, repair, reconstruction or restoration.
14.4 Delay. Tenant shall not be released from any of its obligations
under this Lease except to the extent and upon the conditions expressly stated
in this article. Notwithstanding
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anything to the contrary contained in this article, if Landlord has elected to
repair and restore the Premises and is thereafter delayed or prevented from
repairing or restoring the Premises within one (1) year after the occurrence of
such damage or destruction by reason of acts of God, war, governmental
restrictions, inability to procure the necessary labor or materials, or other
cause beyond the control of Landlord, Landlord shall be relieved of its
obligation to make such repairs or restoration and, at Landlord's option, Tenant
shall be released from its obligations under this Lease as of the end of such
one (1) year period.
14.5 Uninsured Damage. If damage to the Building or the Premises is
due to any cause other than fire or other peril covered by extended coverage
insurance, Landlord may elect to terminate this Lease.
14.6 Repair Obligation. If Landlord is obligated to or elects to repair
or restore as herein provided, Landlord shall repair or restore only those
portions of the Building and Premises which were originally provided at
Landlord's expense and only to the extent of any insurance proceeds; and the
repair and restoration of areas or items not provided at Landlord's expense
shall be the obligation of Tenant.
14.7 End of Term. Notwithstanding anything to the contrary contained in
this article, Landlord may elect to terminate this Lease in the event of damage
to the Building or the Premises occurring during the last twelve (12) months of
the Lease or any extension thereof; and Landlord shall not have any obligation
to repair or restore the Premises or the Building during the last twelve ( 12)
months of this Lease or any extension thereof.
14.8 Waiver. Any provisions of state law which permit termination of a
lease upon destruction of the leased premises, are hereby waived by Tenant; and
the provisions of this article shall govern in case of such destruction.
15. ALTERATIONS AND ADDITIONS; REMOVAL OF FIXTURES. Tenant shall not
make or allow to be made any alterations, additions or improvements in excess of
$5,000.00 to or on the Premises nor shall Tenant make any alternations,
additions or improvements to the Building Structure, systems or roof without
first obtaining the written consent of Landlord. Any such alterations, additions
or improvements made, including, but not limited to, wall covering, paneling and
built-in cabinet work, but excepting movable furniture and trade fixtures, shall
be made at Tenant's sole expense, according to plans and specifications approved
in writing by Landlord, in compliance with all applicable laws and regulations
present and future (including any regulations relating to the ADA and including
prior governmental approval, if necessary), by a licensed contractor, and in a
good and workmanlike fashion conforming in quality and design with the Premises
existing as of the Commencement Date, shall not diminish the value of the
Building or the Premises and shall at once become a part of the realty and shall
be surrendered with the Premises. Landlord's approval hereunder shall not be
deemed as a warranty that Tenant's alterations meet ADA regulations, present or
future, such consent shall carry a requirement that such alterations will be
constructed by Tenant, at its own expense, in full compliance with all existing
ADA governmental regulations. Tenant shall be liable for all damages or injuries
that may result to any person or property by reason of or resulting from any
alterations, additions or improvements made by Tenant to the Premises and shall
hold the Landlord harmless with respect thereto.
Upon the expiration or sooner termination of the term hereof, Tenant
shall, upon written demand by Landlord, at Tenant's sole expense, with due
diligence, remove any alterations, additions, or improvements made by Tenant,
designated by Landlord to be removed, and repair any damage to the Premises
caused by such removal. Tenant shall remove all of its movable property and
trade fixtures which can be removed without damage to the Premises at the
termination of this Lease, either by expiration of the term or other cause,
thereby restoring the Premises to their original condition, and shall pay
Landlord any damages for injury to the Premises or Building resulting from
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such removal. If Tenant shall fail to remove any of its property of any nature
whatsoever from the Premises or the Building at the termination of this Lease or
when Landlord has the right of reentry, Landlord may, in accordance with the
provisions of applicable statutes governing commercial landlord and tenant
matters, either elect to keep Tenant's fixtures as of the date of termination of
this Lease, or remove and store such property without liability for loss thereof
or damage thereto, such storage to be for the account and at the expense of
Tenant. If Tenant shall not pay the cost of storing any such property after it
has been stored for a period of thirty (30) days or more, Landlord may, at its
option, sell, or permit to be sold, any or all such property at public or
private sale, in such manner and at such times and places as Landlord, in its
sole discretion, may deem proper, without notice to Tenant, unless notice is
required under applicable statutes, and shall apply the proceeds of such sale:
first, to the cost and expense of such sale, including reasonable attorneys'
fees actually incurred; second, to the payment of the costs or charges for
storing any such property; third, to the payment of any other sums of money
which may then be or thereafter become due Landlord from Tenant under any of the
terms hereof; and fourth, the balance, if any, to Tenant.
Without limiting the generality of the foregoing, the following
property shall in no event be deemed to be "trade fixtures" and Tenant shall not
remove any such property from the Premises under any circumstances, regardless
of whether installed by Landlord or Tenant: (a) any air conditioning, air
ventilating or heating fixtures or equipment; (b) any lighting fixtures or
equipment, unless Tenant returns any damage caused in the Premises by its
removal back to its origina1 condition; (c) any dock levelers; (d) any carpeting
or other permanent floor coverings; (e) any paneling or other wall coverings;
(f) plumbing fixtures arid equipment; (g) permanent shelving; or (h) any other
fixtures which have become affixed to the Premises.
16. ACCEPTANCE OF PREMISES. Unless Landlord has expressly agreed in
this Lease to perform certain tenant improvement work in the Premises, Tenant
shall be deemed to have accepted the Premises on the Lease Commencement Date in
their "as is" condition. If this Lease is entered into prior to the completion
of construction of the Building, or if tenant improvements are to be constructed
by Landlord in the Premises, the acceptance of the Premises by Tenant shall be
deferred until receipt by the Tenant of an architect's certificate of readiness
certifying that the Premises are ready for occupancy. Within five (5) days after
the architect gives such notice, Tenant shall make such inspection of the
Premises as Tenant deems appropriate, and, except as otherwise notified by
Tenant in writing to Landlord within such period, Tenant shall be deemed to have
accepted the Premises in their then existing condition. If, as a result of such
inspection, Tenant discovers minor deviations or variations from the plans and
specifications for Tenant's improvements of a nature commonly found on a "punch
list" (as that term is used in the construction industry), Tenant shall promptly
notify Landlord of such deviations. Landlord shall then have thirty (30) days
from its receipt of said punch list to complete those items contained therein.
The existence of such punch list items shall not postpone the Commencement Date
of this Lease nor the obligation of Tenant to pay Rent, Additional Rent or any
other charges due under this Lease.
17. TENANT IMPROVEMENTS. If Landlord has agreed to make any improvement
to the Premises, the provisions governing the planning, construction, scope of
work and terms of payment shall be set forth in EXHIBIT C, which, if attached
hereto, is incorporated herein by this reference.
18. ACCESS. Tenant shall permit Landlord and its agents to enter the
Premises at all reasonable times to inspect the same; to show the Premises to
prospective tenants, or interested parties such as prospective lenders and
purchasers; to clean, repair, alter or improve the Premises or the Building; to
discharge Tenant's obligations when Tenant has failed to do so within a
reasonable time after written notice from Landlord; to post notices of
nonresponsibility and similar notices and "For Sale" signs; and to place "For
Lease" signs upon or adjacent to the Building or the Premises at any time during
the term of this Lease. Tenant shall permit Landlord and its agents to enter the
Premises at any time in the event of an emergency. When reasonably necessary,
Landlord may
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temporarily close entrances, doors, corridors, elevators or other
facilities without liability to Tenant by reason of such closure and without
such action by Landlord being construed as an eviction of Tenant or a release of
Tenant from the duty of observing and performing any of the provisions of this
Lease.
Tenant shall give written notice to Landlord at least sixty (60) days
prior to vacating the Premises and shall arrange to meet with Landlord for a
joint inspection of the Premises prior to vacating. In the event of Tenant's
failure to give such notice or arrange such joint inspection, Landlord's
inspection at or after Tenant's vacating the premises shall be conclusively
deemed correct for purposes of determining Tenant's responsibility for repairs
and restoration.
19. WAIVER OF SUBROGATION. Whether the loss or damage is due to the
negligence of Tenant or Tenant's agents or employees, or any other cause, Tenant
hereby releases Landlord and Landlord's agents and employees from responsibility
for and waives its entire claim of recovery for (i) any loss or damage to the
real or personal property of Tenant located in the Building, including the
Building itself, arising out of any of the perils which are covered by Tenant's
property insurance policy, with extended coverage endorsements as such is
required to be carried by Tenant pursuant to this Lease, or (ii) loss resulting
from business interruption or loss of rental income, at the Premises, arising
out of any of the perils which may be covered by the business interruption or by
the loss of rental income insurance policy required by this Lease to be carried
by Tenant. Tenant shall cause its insurance carrier(s) to consent to such waiver
of all rights of subrogation against Landlord. Upon Landlord's request Tenant
shall provide Landlord a copy of any such insurance policies evidencing Tenant's
waiver of subrogation rights against Landlord.
20. INDEMNIFICATION. Tenant shall indemnify and hold harmless
Landlord, its agents, employees, officers, directors, partners and shareholders
from and against any and all liabilities, judgments, demands, causes of action,
claims, losses, damages, costs and expenses, including reasonable attorneys'
fees and costs, arising out of the use, occupancy, conduct, operation, or
management of the Premises by, or the willful misconduct or negligence of,
Tenant, its officers, contractors, licensees, agents, servants, employees,
guests, invitees, or visitors in or about the Building or arising from any
breach or default under this Lease by Tenant, or arising from any accident,
injury, or damage, howsoever and by whomsoever caused, to any person or
property, occurring in or about the Building or Premises. This indemnification
shall survive termination of this Lease. Landlord shall indemnify and hold
harmless Tenant, its agents, employees, officers, directors, partners, and
shareholders from and against all loss, damage, liability or expense resulting
from injuries to third parties caused by the negligence of Landlord, or their
officers, contractors, licensees, agents, employees, or invitees.
21. ASSIGNMENT AND SUBLETTING.
21.1 Landlord's Consent. Tenant shall not assign this Lease, or
sublease all or any part of the Premises, or permit the use of the Premises by
any party other than Tenant, without the prior written consent of Landlord. When
Tenant requests Landlord's consent to such assignment or sublease, it shall
notify Landlord in writing of its desire from and after a stated date (which
shall not be less than sixty (60) days after the date of Tenant's notice), which
shall include the name and address of the proposed assignee or subtenant and the
nature and character of the business of the proposed assignee or subtenant and
shall provide financial information including financial statements of the
proposed assignee or subtenant. Tenant shall also provide Landlord with a copy
of the proposed sublet or assignment agreement. In the event such proposed
sublet or assignment agreement provides for the payment of Rent, Additional Rent
(as those terms are defined in this Lease) and any other payments due under the
proposed sublet or assignment agreement which exceed all Rent, Additional Rent
and other payments due Landlord under this Lease attributable to the Premises or
portion thereof so assigned or sublet, then fifty percent (50%) of any such
excess-shall be paid to Landlord and fifty percent (50%) of any such excess
shall be paid to Tenant. If
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Tenant requests to assign or sublease greater than twenty-five percent (25%) of
the Premises, Landlord shall have the option (to be exercised within thirty (30)
days from the submission of Tenant's request) to cancel this Lease as of the
commencement date stated in the proposed sublease or assignment and enter into a
direct lease with such proposed assignee or subtenant. Should Landlord enter
into a direct lease with such proposed assignee or subtenant, Landlord will be
responsible for reasonable leasing fees. If Landlord shall not exercise its
option within the time set forth above, its consent to any proposed assignment
or sublease shall not be unreasonably withheld.
Landlord's withholding of consent shall be deemed reasonable if the use
or occupancy of the Premises by such assignee or subtenant (i) could make
Landlord responsible for any costs of compliance with the ADA or any other
legislation by any governmental body, or (ii) could cause an increase in
Landlord's insurance premiums.
21.2 Criteria. In determining whether or not to grant its consent to a
proposed sublet or assignment, Landlord shall be entitled to consider all
reasonable criteria including, but not limited to, the following: (i) whether or
not the proposed subtenant or assignee is engaged in a business which, and the
use of the Premises will be in a manner which, is in keeping with the then
character and nature of all other tenancies in the Building and other businesses
in the vicinity of the Building which are owned, leased or managed by Landlord
or any affiliate of Landlord (the "Park Complex"), (ii) the use to be made of
the Premises by the proposed subtenant or assignee does not conflict with any
so-called "exclusive" use then in favor of any other tenant of the Building or
of the entire Park Complex, and that such use would not be prohibited by any
other portion of this Lease, including, but not limited to, any rules and
regulations then in effect, or under applicable law, (iii) that the proposed
subtenant or assignee is a reputable party of reasonable financial worth and
stability in light of the responsibilities involved and does not impose a
greater load upon the Premises and the Building services (such as elevator,
janitorial and security services), than imposed by Tenant, (iv) that the
sublease or assignment agreement requires payment of the rent and other amounts
as required of Tenant hereunder with respect to the space being subleased or
assigned which are in no event less than that being offered by Landlord for
similar space in the Building or adjacent buildings in the entire Park Complex
under leases then being negotiated, and (v) that Tenant shall provide Landlord
with reasonable proof of (1), (ii), (iii), and (iv), and (vi) Tenant is not in
default hereunder at the time it makes its request for such consent or at the
time the assignment or sublet is to take effect.
21.3 Approved Subleases and Assignments. If Landlord approves an
assignment or sublease as herein provided, Tenant shall pay to Landlord, as
additional rent due under this Lease, fifty percent (50%) of the difference, if
any, between the Rent plus Additional Rent allocable to that part of the
Premises affected by such assignment of sublease pursuant to the provisions of
this Lease, and the rent and any additional rent payable by the assignee or
subtenant to Tenant net of all leasing costs. No consent to any assignment or
sublease shall constitute a further waiver of the provisions of this section,
and all subsequent assignments or subleases may be made only with the prior
written consent of Landlord. An assignee of Tenant, at the option of Landlord,
shall become directly liable to Landlord for all obligations of Tenant
hereunder, but no sublease or assignment by Tenant shall relieve Tenant of any
liability hereunder. Any assignment or sublease without Landlord's consent shall
be void, and shall, at the option of the Landlord, constitute a default under
this Lease. In the event that Landlord shall consent to a sublease or assignment
hereunder, Tenant shall pay Landlord's reasonable fees, not to exceed Five
Hundred and No/100ths Dollars ($500.00) per transaction, incurred in connection
with the processing of documents necessary to the giving of such consent.
As a condition to Landlord's prior written consent as provided for in
Section 21.1 above, any assignee or subtenant shall agree in writing to comply
with and be bound by all of the terms, covenants, conditions, provisions and
agreements of this Lease, and Tenant shall deliver to Landlord
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promptly after execution, an executed copy of each assignment or sublease
together with an agreement of said compliance by each assignee or subtenant.
22. ADVERTISING. Landlord will provide an allowance of $3,600.00 for a
standard building sign to Tenant. Should Tenant desire such sign, any additional
cost therefor shall be the responsibility of the Tenant. Tenant shall not
display any sign, graphics, notice, picture, or poster, or any advertising
matter whatsoever (other than the Landlord's standard building sign), anywhere
in or about the Premises or the Building at places visible from anywhere outside
the Building or at the entrance to the Premises without first obtaining
Landlord's written consent hereto, such consent to be at Landlord's sole
discretion. Any such consent by Landlord shall be upon the understanding and
condition that Tenant will maintain the sign in good condition and remove the
same at Tenant's expense upon the expiration or sooner termination of this
Lease. Tenant shall repair any damage to the Premises or the Building caused by
such removal.
23. LIENS. Tenant shall keep the Premises and the Building free from
any liens arising out of any work performed, materials ordered or obligations
incurred by or on behalf of Tenant, and Tenant hereby agrees to indemnify and
hold Landlord, its agents, employees, independent contractors, officers,
directors, partners, and shareholders harmless from any liability, cost or
expense for such liens. Tenant shall cause any such lien imposed to be released
or record by payment or posting of the proper bond acceptable to Landlord within
ten ( 10) days after the earlier of imposition of the lien or written request by
Landlord. Tenant shall give Landlord written notice of Tenant's intention to
perform work on the Premises which might result in any claim of lien, at least
ten (10) days prior to the commencement of such work to enable Landlord to post
and record a Notice of Nonresponsibility or other notice deemed proper before
commencement of any such work. If Tenant fails to remove any lien within the
prescribed ten (10) day period, then Landlord may do so at Tenant's expense and
Tenant's reimbursement to Landlord for such amount shall be deemed Additional
Rent. Such reimbursement shall include all sums disbursed, incurred or deposited
by Landlord, including Landlord's Costs, expenses and reasonable attorneys' fees
with interest thereon at the maximum rate of interest permitted by law.
24. DEFAULT.
24.1 Tenant's Default. A default under this Lease by Tenant shall exist
if any of the following occurs:
24.1.1 If Tenant fails to pay Rent, Additional Rent or any other
sum required to be paid hereunder when due; or
24.1.2 If Tenant falls to perform any term, covenant or condition
of this Lease except those requiring the payment of money, and Tenant fails to
cure such breach within thirty (30) days after written notice from Landlord
where such breach could reasonably be cured within such thirty (30) day period;
provided, however, that where such failure could not reasonably be cured within
the thirty (30) day period, that Tenant shall not be in default if it commences
such performance within the thirty (30) day period and diligently thereafter
prosecutes the same to completion; or
24.1.3 If Tenant assigns its assets for the benefit of its
creditors; or
24.1.4 If the sequestration or attachment of or execution on any
material part of Tenant's personal property essential to the conduct of Tenant's
business occurs, and Tenant fails to obtain a return or release of such personal
property within thirty (30) days thereafter, or prior to sale pursuant to such
sequestration, attachment or levy, whichever is earlier; or
24.1.5 If Tenant fails to continuously or uninterruptedly conduct
its business in the Premises, or shall have abandoned or vacated the Premises;
or
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24.1.6 If a court makes or enters any decree or order other than
under the bankruptcy laws of the United States adjudging Tenant to be insolvent,
or approving as properly filed a petition seeking reorganization of Tenant, or
directing the winding up or liquidation of Tenant, and such decree or order
shall have continued for a period of thirty (30) days; or
24.1.7 The chronic delinquency by Tenant in the payment of monthly
Rent, or any other periodic payments required to be paid by Tenant under this
Lease, shall constitute a default. "Chronic delinquency" shall mean failure by
Tenant to pay Rent, or any other periodic payments required to be paid by Tenant
under this Lease within three (3) days after written notice thereof for any two
(2) months (consecutive or nonconsecutive) during any twelve (12) month period.
In the event of a chronic delinquency, at Landlord's option, Landlord shall have
the additional right to require that monthly Rent be paid by Tenant
quarter-annually, in advance.
24.2 Remedies. Upon default, Landlord shall have the following
remedies, in addition to all other rights and remedies provided by law in equity
or otherwise provided in this Lease, to which Landlord may resort cumulatively
or in the alternative:
24.2.1 Landlord may continue this Lease in full force and effect,
and this Lease shall continue in full force and effect as long as Landlord does
not terminate this Lease, and Landlord shall have the right to collect Rent,
Additional Rent and other charges when due.
24.2.2 Landlord may terminate Tenant's right to possession of the
Premises at any time, without terminating the term of this Lease, by giving
written notice to that effect, and relet the Premises or any part thereof. On
the giving of the notice, all of Tenant's rights to occupancy of the Premises
shall terminate. Upon such termination of occupancy, Tenant shall surrender and
vacate the Premises in the condition required by Section 26, and Landlord may
re-enter and take possession of the Premises and all the remaining improvements
or property and eject Tenant or any of Tenant's subtenants, assignees or other
person or persons claiming any right under or through Tenant or eject some and
not others or eject none. This Lease may also be terminated by a judgment
specifically providing for termination. Any termination under this section shall
not release Tenant from the payment of any sum then due Landlord or from any
claim for damages or Rent, Additional Rent or other sum previously accrued or
then accruing against Tenant or for the remainder of the term. Upon such
termination Tenant shall be liable immediately to Landlord for all costs
Landlord. incurs in reletting the Premises or any part thereof, including,
without limitation, broker's commissions, expenses of cleaning and redecorating
the Premises required by the reletting and like costs. Reletting may be for a
period shorter or longer than the remaining term of this Lease. No act by
Landlord other than giving specific written notice to Tenant shall terminate
this Lease. Acts of maintenance, efforts to relet the Premises or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's right
to possession. On termination, Landlord has the right to remove all Tenant's
personal property and store same at Tenant's cost and to recover from Tenant as
damages:
(a) The worth at the time of award of unpaid Rent, Additional
Rent and other sums due and payable which had been earned at the time of
termination; plus
(b) The worth at the time of award of the amount by which the
unpaid Rent, Additional Rent and other sums due and payable which would have
been payable after termination until the time of award exceeds the amount of
such rent loss that Tenant proves could have been reasonably avoided; plus
(c) The worth at the time of award of the amount by which the
unpaid Rent, Additional Rent and other sums due and payable for the balance of
the term after the time of award exceeds the amount of such rent loss that
Tenant proves could be reasonably avoided; plus
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(d) Any other amount necessary which is to compensate Landlord
for all the detriment caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which, in the ordinary course of things, would be likely to
result therefrom including, without limitation, any costs or expenses incurred
by Landlord: (I) in retaking possession of the Premises; (ii) in maintaining,
repairing, preserving, restoring, replacing, cleaning, altering or
rehabilitating the Premises or any portion thereof, including such acts for
reletting to a new tenant or tenants; (iii) for leasing commissions; or (iv) for
any other costs necessary or appropriate to relet the Premises; plus
(e) At Landlord's election, such other amounts in addition to
or in lieu of the foregoing as may be permitted from time to time by the laws of
the state in which the Premises is located.
The "worth at the time of award" of the amounts referred to in Sections
24.2.2(a) and (b) is computed by allowing interest at the maximum interest rate
allowed by law on the unpaid rent and other sums due and payable from the
termination date through the date of award. The "worth at the time of award" of
the amount referred to in Section 24.2.2(c) is computed by discounting such
amount at the discount rate of the Federal Reserve Bank at the time of award
plus one percent (1%). Tenant waives redemption or relief from forfeiture under
any present or future law, in the event Tenant is evicted or Landlord takes
possession of the Premises by reason of any default of Tenant hereunder.
24.2.3 Landlord may, with or without terminating this Lease,
re-enter the Premises and remove all persons and property from the Premises;
such property may be removed and stored in a public warehouse or elsewhere at
the cost of and for the account of Tenant. No re-entry or taking possession of
the Premises by Landlord pursuant to this section shall be construed as an
election to terminate this Lease unless a written notice of such intention is
given to Tenant.
24.2.4 In the event that Landlord shall have taken possession of
the Premises pursuant to the authority herein granted, then Landlord shall have
the right to keep in place and use all of the furniture, fixtures and equipment
at the Premises, including that which is owned by or leased to Tenant at all
times using proper legal process prior to any foreclosure thereon by Landlord or
repossession thereof by any lessor thereof or third party having a lien thereon.
25. SUBORDINATION. Upon request of Landlord, Tenant will, in writing,
subordinate its rights hereunder to the lien of any mortgage, deed of trust,
ground lease or underlying lease now or hereafter in force against the Premises,
and to all advances made or hereafter to be made upon the security thereof.
Tenant shall execute and return to Landlord any such subordination documents
within ten (10) days of Landlord's written request. In the event any proceedings
are brought for foreclosure, or in the event of the exercise of the power of
sale under any mortgage or deed of trust made by the Landlord covering the
Premises, Tenant shall attorn to the purchaser at any such foreclosure, or to
the grantee of a deed in lieu of foreclosure, and recognize such purchaser or
grantee as the Landlord under this Lease. The provisions of this article to the
contrary notwithstanding and so long as Tenant is not in default hereunder, this
Lease shall remain in full force and effect for the full term hereof.
26. SURRENDER OF POSSESSION. Upon expiration of the term of this Lease,
Tenant shall promptly and peacefully surrender the Premises to Landlord in as
good condition as when received by Tenant from Landlord or as thereafter
improved, reasonable use and wear and tear excepted, all to the reasonable
satisfaction of Landlord. If the Premises are not surrendered in accordance with
the terms of this Lease, Tenant shall indemnify Landlord and its agents,
employees, independent contractors, officers, directors, partners, and
shareholders against any loss or liability including reasonable attorneys' fees
and costs, and including liability to succeeding tenants, resulting from delay
by Tenant in so surrendering the Premises. This indemnification shall survive
termination of this Lease.
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27. NON-WAIVER. Waiver by Landlord of any breach of any term, covenant
or condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition(s); or any subsequent breach of the same or any other
term, covenant or condition of this Lease, other than the failure of Tenant to
pay the particular rental so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such Rent.
28. HOLDOVER. If Tenant shall, without the written consent of
Landlord, hold over after the expiration of the term of this Lease, such tenancy
shall be deemed a month-to-month tenancy, which tenancy may be terminated at any
time by five (5) days prior written notice given by Landlord to Tenant. During
such tenancy, Tenant agrees to (a) pay to Landlord, each month, one hundred
fifty percent (150%) of the Rent and Additional Rent payable by Tenant for the
last month of the term of this Lease and (b) be bound by all of the terms,
covenants and conditions herein specified, so far as applicable.
29. CONDEMNATION.
29.1 Substantial Taking. If twenty percent (20%) or more of the
Premises or of such portions of the Building as may be required for the
reasonable use of the Premises, are taken by eminent domain or sale under threat
of condemnation by eminent domain, this Lease shall automatically terminate as
of the date title vests in the condemning authority, and all Rent, Additional
Rent, and other payments shall be paid to that date.
29.2 Partial Taking. In case of a taking of less than twenty percent
(20%) of the Premises, or a portion of the Building not required for the
reasonable use of the Premises, this Lease shall continue in full force and
effect, and the Rent shall be equitably reduced based on the proportion by which
the floor area of the Building is reduced, such reduction to be effective as of
the date title to such portion vests in the condemning authority.
29.3 Awards and Damages. Landlord reserves all rights to damages to the
Premises for any partial or entire taking by eminent domain, and Tenant hereby
assigns to Landlord any right Tenant may have to such damages or award, and
Tenant shall make no claim against Landlord or the condemning authority for
damages for termination of the leasehold interest or interference with Tenant's
business. Tenant shall have the right to claim and recover from the condemning
authority compensation for any loss which Tenant may incur for Tenant's moving
expenses, business interruption or taking of Tenant's personal property (not
including Tenant's leasehold interest), provided that such damages may be
claimed only if they are awarded separately in the eminent domain proceedings
and not out of or as part of the damages recoverable by Landlord.
30. NOTICES. All notices and demands which may be required or
permitted to be given to either party hereunder shall be in writing, and shall
be sent by United States mail, postage prepaid to the addresses set out in
Section 1.5, and to such other person or place as each party may from time to
time designate in a notice to the other. Notice shall be deemed given upon the
earlier of actual receipt or seventy-two (72) hours after deposit in the United
States mail, postage prepaid.
31. MORTGAGEE PROTECTION. Tenant agrees to give any of Landlord's
mortgagee(s) and/or trust deed holder(s) covering the Premises, a copy of any
notice of default served upon the Landlord by registered mail, provided that
prior to such notice Tenant has been notified in writing (by way of notice of
assignment of rents and leases, or otherwise) of the addresses of such
mortgagee(s) and/or trust deed holder(s). Tenant further agrees that if Landlord
shall have failed to cure such default within the time provided for in this
Lease, then the mortgagee(s) and/or trust deed holder(s) shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
if within such thirty (30) days any mortgagee and/or trust deed holder(s) has
commenced and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure
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proceedings, if necessary to effect such cure), in which event this Lease shall
not be terminated while such remedies are being so diligently pursued.
32. COSTS AND ATTORNEYS' FEES. If Tenant or Landlord shall bring any
action for any relief against the other, declaratory or otherwise, arising out
of this Lease, including any suit by Landlord for the recovery of Rent,
Additional Rent or other payments hereunder, or possession of the Premises, the
losing party shall pay the prevailing party a reasonable sum for attorneys' fees
in such suit, at trial and on appeal, and such attorneys' fees shall be deemed
to have accrued on the commencement of such action.
33. BROKERS. Tenant represents and warrants to Landlord that neither it
nor its officers or agents nor anyone acting on its behalf has dealt with any
real estate broker other than Blue Ridge Development, LLC, who represented
Landlord and Brownlee Realty Company who represented Tenant in the negotiating
or making of this Lease, and Tenant agrees to indemnify and hold Landlord, its
agents, employees, partners, directors, shareholders and independent contractors
harmless from all liabilities, costs, demands, judgments, settlements, claims,
and losses, including reasonable attorneys' fees and costs, incurred by Landlord
in conjunction with any such claim or claims of any other broker or brokers
claiming to have interested Tenant in the Building or Premises or claiming to
have caused Tenant to enter into this Lease.
34. LANDLORD'S LIABILITY. Anything in this Lease to the contrary
notwithstanding, covenants, undertakings and agreements herein made on the part
of Landlord are made and intended not for the purpose of binding Landlord
personally or the general assets of Landlord, but are made and intended to bind
only the Landlord's interest in the Premises and Building, as the same may, from
time to time, be encumbered, and no personal liability shall at any time be
asserted or enforceable against Landlord or its stockholders, officers,
employees or partners or their respective heirs, legal representatives,
successors and assigns on account of the Lease or on account of any covenant,
undertaking or agreement of Landlord contained in this Lease.
35. ESTOPPEL CERTIFICATES. Tenant shall, from time to time, within ten
(10) days of Landlord's written request, execute, acknowledge and deliver to
Landlord or its designee a written statement stating: the date this Lease was
executed and the date it expires; the date Tenant entered into occupancy of the
Premises; the amount of Rent, Additional Rent and other charges due hereunder
and the date to which such amounts have been paid; that this Lease is in full
force and effect and has not been assigned, modified, supplemented or amended in
any way (or specifying the date and terms of any agreement so affecting this
Lease); that this Lease represents the entire agreement between the parties as
to this leasing; that all conditions under this Lease to be performed by the
Landlord have been satisfied (or specifying any such conditions that have not
been satisfied); that all required contributions by Landlord to Tenant on
account of Tenant's improvements have been received (or specifying any such
contributions that have not been received); that on this date there are no
existing defenses or offsets which the Tenant has against the enforcement of
this Lease by the Landlord; that no Rent has been paid more than one (I ) month
in advance; that no security has bean deposited with Landlord (or, if so, the
amount thereof); or any other matters evidencing the status of the Lease, as may
be required either by a lender making a loan to Landlord to be secured by a deed
of trust or mortgage against the Building or the Premises, or a purchaser of the
Building or the Premises. It is intended that any such statement delivered
pursuant to this paragraph may be relied upon by a prospective purchaser of
Landlord's interest or a mortgagee of Landlord's interest or assignee of any
mortgage upon Landlord's interest in the Building and Premises. If Tenant fails
to respond within ten (10) days of receipt by Tenant of a written request by
Landlord as herein provided, Tenant shall be deemed to have given such
certificate as above provided without modification and shall be deemed to have
admitted the accuracy of any information supplied by Landlord to a prospective
purchaser or mortgagee.
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36. FINANCIAL STATEMENTS. Within five (5) days after Landlord's
request, Tenant shall deliver to Landlord the current year end financial
statements of Tenant, and financial statements of the two (2) years prior to the
current financial statements year, with an opinion of a certified public
accountant, including a balance sheet and profit and loss statement for the most
recent prior year, all prepared in accordance with generally accepted accounting
principles consistently applied.
37. TRANSFER OF LANDLORD'S INTEREST. In the event of any transfer(s) of
Landlord's interest in the Premises or the Building, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of Landlord accruing from and
after the date of such transfer, and Tenant agrees to attorn to the transferee.
38. RIGHT TO PERFORM. If Tenant shall fail to pay any sum of money,
other than Rent and Additional Rent, required to be paid by it hereunder or
shall fail to perform any other act on its part to be performed hereunder, and
such failure shall continue for ten ( 10) days, Landlord may, but shall not be
obligated so to do, and without waiving or releasing Tenant from any obligations
of Tenant, make any such payment or perform any such other act on Tenant's part
to be made or performed as provided in this Lease. Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and remedies
in the event of the nonpayment of sums due under this Section as in the case of
default by Tenant in the payment of Rent. All sums paid by Landlord and all
penalties, interest and costs in connection therewith, shall be due and payable
by Tenant on the next day after such payment by Landlord, together with interest
thereon at the higher of "prime rate" (as published in the Wall Street Journal)
plus five percent (5%) or at the maximum rate of interest permitted by law from
such date to the date of payment thereof, by Tenant to Landlord, plus collection
costs and attorneys' fees.
39. SALES AND AUCTIONS. Tenant may not display or sell merchandise
outside the exterior walls and doorways of the Premises and may not use such
areas for storage. Tenant further agrees not to install any exterior lighting,
amplifiers or similar devices or use in or about the Premises an advertising
medium that may be heard or seen outside the Premises, such as flashing lights,
searchlights, loudspeakers, phonographs or radio broadcasts. Tenant shall not
conduct or permit to be conducted any sale by auction in, upon or from the
Premises whether said auction be voluntary, involuntary, pursuant to any
assignment for the payment of creditors or pursuant to any bankruptcy or other
insolvency proceeding.
40. NO ACCESS TO ROOF. Tenant shall have no right of access to the roof
of the Premises or the Building and shall not install, repair or replace any
aerial, fan, air conditioner or other device on the roof of the Building (the
"Roof Device") without the prior written consent of Landlord. Any Roof Device
installed with such written consent shall be installed at Tenant's sole cost,
expense and risk; provided however, that Landlord shall be regularly consulted
and shall, at its option, supervise the installation of any Roof Device, all at
the sole cost and expense of Tenant. All plans and specifications for the
installation of the Roof Device shall be submitted to and approved in writing by
Landlord in advance. Any damage to the roof or other portion of the Building
resulting from the installation, maintenance or operation of the Roof Device,
including without limitation water damage or damage to the roof membrane, shall
be repaired promptly and at Tenant's sole expense. Tenant shall carry additional
insurance with respect to the Roof Device in amounts and of types satisfactory
to the Landlord in its sole discretion. Tenant shall maintain the Roof Device
and all related facilities and equipment (including, without limitation, wiring)
in good order and repair at Tenant's sole expense. Tenant shall maintain the
Roof Device and, promptly upon the expiration or earlier termination of this
Lease (and in any event no later than fifteen (15) days thereafter), Tenant
shall remove the Roof Device and make any necessary repairs to the roof by
reason of said removal at Tenant's sole cost and expense. Tenant shall insure
that the installation, existence, maintenance and operation of the Roof Device
shall be permitted under all applicable laws, ordinances, rules, orders
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and regulations of any federal, state, local or other authorities having
jurisdiction over the Roof Device. Tenant, in advance and at its sole expense
and in a timely manner, shall obtain all licenses and permits, perform all
monitoring, make all reports, and take all other necessary steps to insure the
lawful installation and continuing lawful operation of the Roof Device. Tenant
agrees to indemnify Landlord and hold Landlord harmless from all loss, cost,
damage and expense, including reasonable attorneys fees, incurred by Landlord as
a result of the installation, presence, use or removal of any Roof Device.
41. AUTHORITY OF TENANT. If Tenant is a corporation or partnership,
each individual executing this Lease on behalf of said corporation or
partnership represents and warrants that he is duly authorized to execute and
deliver this Lease on behalf of said corporation or partnership, and that this
Lease is binding upon said corporation or partnership.
42. NO ACCORD OR SATISFACTION. No payment by Tenant or receipt by
Landlord of a lesser amount than the monthly rent and other sums due hereunder
shall be deemed to be other than on account of the earliest rent or other sums
due, nor shall any endorsement or statement on any check or accompanying any
check or payment 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 other sum or pursue any other remedy provided in this
Lease.
43. MODIFICATIONS FOR LENDER. If in connection with obtaining
financing for the Building, the Premises or any portion thereof, Landlord's
lender shall request reasonable modifications to this Lease as a condition to
such financing, Tenant shall not unreasonably withhold, delay, or defer its
consent to such modification provided such modifications do not materially
adversely affect Tenant's rights hereunder.
44. PARKING. Intentionally Omitted
45. EXTERIOR SIGNS. Tenant shall place no signs in the common areas or
upon the outside walls or roof of the Building or elsewhere on the Premises
except with the prior written consent of the Landlord. Any and all signs placed
on or about the Premises by Tenant shall comply with Landlord's rules and
regulations governing such signs, and all governmental laws and Tenant shall be
responsible to Landlord for any damage caused by installation, use, or
maintenance of such signs. Tenant shall remove any of its signs upon the
termination of this Lease and repair any damage caused by the sign installation
or removal and, if Tenant fails to do so, Landlord shall have the right to
remove the signs and make such repairs at Tenant's expense.
46. RULES AND REGULATIONS. Tenant agrees to comply with such
reasonable rules and regulations as initially outlined in Exhibit D attached
hereto, and as Landlord may adopt from time to time for the orderly and proper
operation of the Building, the Premises and parking and other common areas. Such
rules may include but shall not be limited to the following: (1) the restricting
of employee parking to a limited, designated area or areas; and (2) regulation
of the removal, storage and disposal of Tenant's refuse and other rubbish at the
sole cost and expense of Tenant. The rules and regulations shall be binding upon
Tenant upon delivery of a copy of them to Tenant. Landlord shall not be
responsible to Tenant for the nonperformance of any of said rules and
regulations by any other tenants or occupants of the Building, the Premises or
the Park Complex.
47. GENERAL PROVISIONS.
47.1 Acceptance. This Lease shall only become effective and binding
upon full execution hereof by Landlord and delivery of a signed copy to Tenant.
47.2 Joint Obligation. If there be more than one Tenant, the
obligations hereunder imposed shall be joint and several.
20
<PAGE> 28
47.3 Marginal Headings, Etc. The marginal headings, Table of Contents,
lease summary sheet and titles to the articles of this Lease are not a part of
the Lease and shall have no effect upon the construction or interpretation of
any part hereof.
47.4 Choice of Law. This Lease shall be governed by and construed in
accordance with the laws of the state in which the Premises are located.
47.5 Successors and Assigns. The covenants and conditions herein
contained, subject to the provisions as to assignment, inure to and bind the
heirs, successors, executors, administrators and assigns of the parties hereto.
47.6 Recordation. Neither Landlord nor Tenant shall record this Lease,
but a short-form memorandum hereof may be recorded at the request of Tenant or
Landlord.
47.7 Quiet Possession. Upon Tenant's paying the rent reserved
hereunder and observing and performing all of the covenants, conditions and
provisions on Tenant's part to be observed and performed hereunder, Tenant shall
have quiet possession of the Premises from any adverse claim made by, through or
under Landlord for the entire term hereof, subject to all the provisions of this
Lease.
47.8 Inability to Perform. This Lease and the obligations of the
Tenant hereunder shall not be affected or impaired because the Landlord is
unable to fulfill any of its obligations hereunder or is delayed in doing so, if
such inability or delay is caused by reason of strike, labor troubles, acts of
God, or any other cause beyond the reasonable control of the Landlord.
47.9 Partial Invalidity. Any provision of this Lease which shall prove
to be invalid, void, or illegal shall in no way affect, impair or invalidate any
other provision hereof and such other provision(s) shall remain in full force
and effect.
47.10 Cumulative Remedies. No remedy or election hereunder shall be
exclusive but shall, whenever possible, be cumulative with all other remedies at
law or in equity.
47.11 Entire Agreement. This Lease contains the entire agreement of the
parties hereto and no representations, inducements, promises or agreements, oral
or otherwise, between the parties, not embodied herein, shall be of any force or
effect.
47.12 Exhibits. All exhibits and addenda attached hereto are
incorporated herein by this reference.
48. FIRST RIGHT OF REFUSAL FOR LEASE OF ADJACENT PROPERTY.
48.1 Intentionally Omitted
48.2 Intentionally Omitted
49. EXPANSION OPTION. Tenant shall have the right to exercise the
option to add an additional 30,000 square feet to the facility during the first
five (5) years of the initial term of the Lease by giving the Landlord thirty
(30) days written notice by certified mail at the Landlord's last known address.
The rental rate shall be determined by a formula in which Landlord shall receive
an 11% return of all hard and soft costs associated with the expansion. The
resulting rent shall be added to the rent already being paid on the original
Premises. Both Tenant and Landlord shall execute an amendment to the Lease
specifying the new rental amount and the extension of the term of the Lease to
ten (10) years from the time of occupancy of the expanded Premises.
21
<PAGE> 29
The parties agree that no broker participated in the negotiations for
the said expansion option and that, in the event of an expansion pursuant to
said option, no brokerage commission shall be payable.
50. PURCHASE OPTION. The Tenant shall have the right to exercise an
option to purchase the Premises, including the land, parking, and loading areas
during the first five (5) years of the initial term of the Lease by giving the
Landlord not less than thirty (30) days written notice by certified mail at the
Landlord's address set forth in the Lease. The sale shall be on an "As, Is,
Where Is" basis with no representations or warranties except that Landlord is
conveying fee simple marketable title to Tenant free and clear of liens and
encumbrances other than easements and restrictions of record in the Register's
office of Knox County, Tennessee. All closing costs, transfer taxes, title
insurance and closing fees shall be paid by Tenant and all rents shall be
prorated as of the closing date and all taxes shall be assumed and paid by
Tenant. The purchase price for the Premises shall be equal to an amount
determined based on a capitalization rate of 10% of Annual Gross Rent then in
effect at the time of exercising this option (the "Purchase Price"), which
Purchase Price shall be paid as follows:
(a) 25% of the Purchase Price will be paid by cashier's check
contemporaneously with the exercise of the option.
(b) The balance of the Purchase Price shall be paid by cashier's
check or wire transfer at closing. The closing of the purchase of the Premises
shall occur not later than thirty (30) days after Tenant's exercise of its
option.
The parties agree that no broker participated in the negotiations for
the said purchase option and that, in the event of a sale pursuant to said
option, no brokerage commission shall be payable.
22
<PAGE> 30
IN WITNESS WHEREOF, the parties herein have hereunto set their hands
and seals, in triplicate, the day and year first above written.
LANDLORD:
CRRSC Realty, LLC
a Tennessee limited liability company
By: /s/ John-David W. Roddy
-----------------------------------
Its: Chief Manager
----------------------------------
TENANT:
Radio Systems Corporation
a Tennessee corporation
By: /s/ James D. Hudson
-----------------------------------
Its:Chief Financial Officer
-----------------------------------
<PAGE> 1
EXHIBIT 10.6
THIS DEBENTURE HAS BEEN ISSUED UNDER AN EXEMPTION FROM REGISTRATION
UNDER THE FEDERAL SECURITIES ACT OF 1933 (the "1933 Act") AS WELL AS APPLICABLE
STATE SECURITIES LAWS. IT CANNOT BE SOLD, PLEDGED OR OTHERWISE DISPOSED OF,
EXCEPT IN A TRANSACTION WHICH, IN THE OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY, IS EXEMPTION UNDER THOSE ACTS, OR PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THOSE ACTS. THE COMPANY HAS NO OBLIGATION TO ANY HOLDER OF THIS
DEBENTURE TO FILE SUCH A REGISTRATION STATEMENT.
$100,000 Number 12-95
RADIO SYSTEMS CORPORATION
KNOXVILLE, TENNESSEE
DECEMBER 20, 1995
10% SUBORDINATED DEBENTURE DUE DECEMBER 20, 1997
AND
STOCK PURCHASE WARRANT
Radio Systems Corporation, a Tennessee corporation (the "Company"), for
value received hereby promises to pay to the Registered Holder hereof (the
"Holder") the principal sum of One Hundred Thousand No/100 dollars ($100,000)
together with interest from the date hereof on the unpaid principal amount.
Interest shall accrue daily from the date hereof at the rate of 10% per annum
compounded on the basis of a 365 day year on the principal amount outstanding
and said interest only shall be payable in arrears at the end of the 24th month
from the date hereof; thereafter, interest only shall be paid at the end of each
quarter until the principal amount thereof shall have been repaid as provided in
this Debenture.
Payments of principal and interest are to be made at the principal
office of the Company located at 5008 National Drive, Knoxville, Tennessee
37914, or, at the option of the Company, by check mailed to the address of each
holder appearing on the Company's books and records.
<PAGE> 2
ARTICLE I.
SUBORDINATION
A. Payment of this Debenture and the rights of the holder hereunder are
subject and subordinate in the manner and to the extent herein provided to the
rights of the holder of the "Senior Indebtedness," which is hereby defined as
(i) the Company's principal and all interest on all indebtedness of the company
to any commercial bank or other leading institutions, and their participants,
whether presently outstanding or from time to time hereafter incurred, under any
loan agreement, promissory notes, letters of credit or other instruments of
indebtedness, between the Company and any such bank, (ii) any increases or
additional advances under or with respect to said instruments of indebtedness of
the company payable to such bank, (iii) any mortgage indebtedness of the
Company, and (iv) all renewals, extensions and refinancing of the foregoing
whether or not with a bank or other lending institution.
B. Notwithstanding any other provision in this Debenture to the
contrary, until all Senior Indebtedness is paid in full, the Company agrees, and
the holder hereof by his acceptance of this Debenture agrees, that (i) the
Company shall not, directly or indirectly, grant a security interest in,
mortgage, assign, or transfer, any properties to secure or satisfy any part of
the indebtedness evidenced by this Debenture; (ii) the holder hereof shall not
demand or accept from the Company or any other person any such collateral; and
(iii) neither the Company nor the holder hereof shall otherwise take or permit
any action prejudicial to or inconsistent with the priority position or the
holders of the Senior Indebtedness over the holder created hereby; provided,
however, so long as there is no default on any instrument evidencing Senior
Indebtedness, payments of principal and interest due under this Debenture may be
received and retained by the holder.
ARTICLE II.
DEFAULT
Section 2.1. Default. The following events shall constitute an event of
default under this Debenture:
A. The failure of the company to pay any part of the principal of or
interest on any of the Debentures within thirty (30) days after the same shall
have become due and payable; or
B. The occurrence of an event of default by the Company under any of
the terms of any loan agreement relating to payment of the Senior Indebtedness,
which default is not cured or waived as provided for by such loan agreement; or
C. The Company shall commence any voluntary proceeding under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
receivership, dissolution, or liquidation law or statute of any jurisdiction,
whether now or hereafter in effect, or the Company shall be adjudicated
insolvent or bankrupt by a decree of a court of competent jurisdiction; or the
company shall petition or apply for, acquiescence in, or asset to, the
appointment of any receiver or trustee of the Company or for all or a
substantial part of the property of the company; or the company shall make an
assignment for the benefit of creditors, or the Company shall admit in writing
its inability to pay its debts as they mature; or
D. There shall be commenced against the Company any proceeding relating
to the Company under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, receivership, dissolution, or liquidation law or statue of
any jurisdiction, whether now or hereafter in
<PAGE> 3
effect, and any such proceeding shall remain undismissed for a period of sixty
(60) days or the company by any act indicates its consent to, approval of, or
acquiescence in, any such proceedings; or a receiver or trustee shall be
appointed for the company or for all or a substantial part of the property of
the company and any such receivership or trusteeship shall remain undischarged
for a period of sixty (60) days; or a warrant of attachment, execution, or
similar process shall be issued against any substantial part of the property of
the Company and the same shall not be dismissed or bonded within sixty (60) days
after levy; or
E. A judgment shall be rendered against the Company and the same shall
not be discharged or execution thereof stayed pending appeal within sixty (60)
days from the date of the judgment or the Company shall not have discharged such
judgment within sixty(60) days after the expiration of any such stay.
Section 2.2 Occurrence of Default. On the happening of any one or more
of such events of default, the Debenture shall forthwith mature and become due
and payable together with interest accrued thereon, without presentment, demand
protest or notice, all of which are hereby waived.
ARTICLE III.
WARRANTS
As additional consideration to the holder of this Debenture, the
Company hereby grants to such holder the right to purchase 4,000 fully paid and
nonassessable shares of common stock of the company, no par value, at the
maturity of this Debenture or when prepaid for a purchase price of one cent
($.01) per share of common stock. This warrant does not confer upon the holder
any right whatsoever as a shareholder of the company until such holder exercises
his rights to acquire the stock of the company. Such common stock shall be
issued subject to all reasonable conditions and requirements required by the
Company.
If this Debenture has not been redeemed and repaid in full within 24
months from the date hereof, the Company agrees to issue quarterly thereafter to
the holder of this Debenture additional warrants for the purchase of 500 shares
of stock at one cent ($.01) per share or pro rata to the balance of principal
unpaid at the end of the 24th month and each subsequent quarter.
The shares of common stock of the company issued upon the exercise of
the warrants herein have not been registered under the 1933 Act or under the
securities laws of any state. Any common stock of the company issued in
connection with warrants granted herein by the Company may not be sold,
transferred, pledged or hypothecated in absence of (i) an effective registration
statement under the 1933 Act or if such registration or qualification as may be
necessary under the securities laws of any state or (ii) an opinion of legal
counsel in form and substance reasonably satisfactory to the company that such
registration or qualification is not required. The Company may cause the
certificates evidencing all or any of the shares issued upon the exercise of the
warrants contained herein to bear the following legend:
THE SHARES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE. THE SHARES MAY NOT BE SOLD, TRANSFERRED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND SUCH REGISTRATION OR QUALIFICATION AS MAY BE NECESSARY UNDER THE
SECURITIES LAWS OF ANY STATE OR AN OPINION OF LEGAL COUNSEL SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION OR QUALIFICATION IS NOT REQUIRED.
2
<PAGE> 4
The warrants granted herein may be exercised by the holder hereof under
the conditions set forth herein upon the delivery of written notice of intent to
exercise to the Company together with the evidence of ownership of this
Debenture and a certified check payable to the Company for the aggregate
purchase price of the shares so purchased. Upon the exercise of the warrants
herein, the Company shall as promptly as practical execute and deliver to the
holder of the warrants a certificate for the total number of shares for which
the warrants are being exercised in such name in denominations as requested by
such holder.
ARTICLE IV.
MISCELLANEOUS
Section 4.1. Lost Debenture. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of the
Debenture, and upon delivery of an indemnity bond in such reasonable amount as
the Company may determine, or, in the case of any such mutilation, upon
surrender and cancellation of such Debenture, the Company at its expense will
execute and deliver, in lieu thereof, a new Debenture of like tenor, dated the
date to which interest has been paid on such lost, stolen, destroyed or
mutilated Debenture.
Section 4.2. Transfer of Debenture. No transfer of this Debenture shall
be valid unless made at the principal office of the company by the registered
owner in person or by his duly authorized attorney, the name of the transferee
being noted on the reverse side of this Debenture by the Company; or by
surrender and cancellation of this Debenture and upon such cancellation, a new
Debenture of the same principal amount will be issued to the transferee in
exchange therefor. This restriction on transfer is in addition to restrictions
noted in the legend on the face hereof.
Section 4.3. Registered Owner. The company may deem and treat the
person in whose name this Debenture may be registered as the absolute owner of
this Debenture for the purpose of the receiving payment of principal and
interest on this Debenture and for all other purposes, and the Company shall not
be affected by any notice to the contrary.
Section 4.4 Exemption from Individual Liability. No recourse shall be
had for the payment of the principal or the interest of the Debenture, or for
any claim based thereon, or otherwise, against any incorporator, shareholder,
officer, director or attorney of the Company or of any successor or subsidiary
corporation, under any rule of law, statute or constitutional provision or by
the enforcement of any assessment or by any legal or equitable proceeding or
otherwise, all such liability being expressly released by the acceptance of the
Debenture by the holder as a part of the consideration for the issuance thereof.
Section 4.5. Prepayment. This Debenture may be prepaid at anytime in
whole or in part at the option of the company.
3
<PAGE> 5
IN WITNESS WHEREOF, this Debenture is executed and delivered as of the
date first above written.
RADIO SYSTEMS CORPORATION
By: /s/ James D. Hudson
----------------------------
James D. Hudson
Title: Chief Financial Officer
REGISTERED HOLDER
Dean Witter Reynolds, Custodian
FBO E. Douglas Grindstaff IRA
Attn: Donna Sullivan
5 World Trade Center, 6th Floor
New York, NY 10048
4
<PAGE> 6
Principle amount of Debenture: $100,000.00
SUBSCRIBER: Douglas Grindstaff
/s/ Douglas Grindstaff
- ----------------------------------
Douglas Grindstaff
###-##-####
- ----------------------------------
Social Security Number
Residence Address: Mailing Address, if different
from residence address:
823 Tyne Blvd.
- ---------------------------------- --------------------------------------
Nashville, TN 37220
- ---------------------------------- --------------------------------------
Accepted this 20th day of December, 1995.
RADIO SYSTEMS CORPORATION
By: /s/ James D. Hudson
-------------------------------
James D. Hudson
Title: C.F.O.
----------------------
5
<PAGE> 1
EXHIBIT 10.7
PURCHASE AGREEMENT
THIS AGREEMENT is entered into on the 1st day of March, 1994 by and between
Radio Systems Corporation ("RSC") and Concorde Microsytems, Inc. ("CMI"), the
successor in interest of RKN, INC.
WHEREAS, RSC AND RKN had entered into a Purchase Agreement in 1993 for the
development and purchase of VLSI chips (the "chip" or "chips"); and
WHEREAS, RSC and CMI desire to restate said Purchase Agreement;
WHEREAS, RSC paid CMI $225,000 in 1993 to develop the chip, which included the
right to purchase, without additional consideration to CMI, up to 200,000 chips.
NOW THEREFORE, the parties hereto agree as follows:
1. All previous agreements, oral or written, entered into by and between RSC,
RKN, CMI and/or Ronald Nutt regarding the design, development, manufacture and
purchase of the chips used in the RSC RF250 receiver are hereby rescinded.
2. The $225,000 paid by RSC to CMI in 1993 for development of the chip and
rights to 200,000 chips without additional consideration has not been altered.
3. RSC shall pay CMI a royalty of one dollar ($1.00) per chip for every unit
sold containing the chip after the initial 200,000 chips, not to exceed an
additional 125,000 chips.
4. RSC shall reimburse CMI $62,000 for the masking and die development costs.
5. The sum of paragraphs 3 and 4 is $187,000. CMI hereby acknowledges payment in
full of said sum by RSC.
6. CMI for itself and on behalf of RKN, INC., and by the signature of its
President to this Agreement, hereby transfers, assigns and otherwise grants to
RSC all Rights, title and interest in and to the chip, its design and the dies
used to manufacture the chip.
THIS AGREEMENT has been signed by the parties hereto on the date first stated
above.
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
-----------------------
Randy Boyd, President
CONCORDE MICROSYSTEMS, INC.
By: /s/ Ronald Nutt
-----------------------
Ronald Nutt, President
<PAGE> 1
EXHIBIT 10.8
TRANSMITTER ASIC DEVELOPMENT AGREEMENT
This is an Agreement between Concorde Microsystems, Inc. (Concorde) and Radio
Systems Corporation (Radio Systems), both Tennessee corporations with primary
offices located in Knoxville. Concorde is in the process of developing an
Application Specific Integrated Circuit (ASIC) to be used in Radio Systems'
transmitters for pet containment systems.
Concorde agrees to develop the ASIC transmitter chip and Radio Systems agrees to
use the ASIC chip in all its existing transmitter products as long as those
products are offered to the consumer market.
Concorde's responsibility is to provide Radio Systems a design which meets the
agreed upon specifications. Radio Systems will purchase the ASIC chips from a
foundry specified by Concorde. Concorde will be responsible for the design
engineering cost, the prototyping cost, the final mask cost and the testing
software cost.
Radio Systems will pay Concorde $1.00 per ASIC chip, based on sales, that is
used in Radio Systems' transmitter products. Payment will be due to Concorde
within thirty days after the ASIC chips are shipped form foundry.
The anticipated use of the transmitter ASIC chip in 1995, is over 100,000 ASIC
chip will be prototyped in December 1994, and will be released to production
when prototype testing is successfully completed.
Terms of Agreement:
With an effective beginning date of January 1, 1995, the duration of this
Agreement is for ten years or until Radio Systems discontinues to use the ASIC
chip in its transmitter products, whichever is longer.
CONCORDE MICROSYSTEMS, INC. RADIO SYSTEMS CORPORATION
By: /s/ Ronald Nutt By: /s/ Randy Boyd
----------------------- ----------------------
<PAGE> 1
EXHIBIT 10.9
AGREEMENT ENTERED INTO AT Montreal, on the 10th day of January, 1997.
BETWEEN: RADIO SYSTEMS CORPORATION, a Tennessee corporation having its offices
at 5008 National Drive, Knoxville, Tennessee, 37914, USA,
(hereinafter referred to as "RSC");
AND: MULTI-VET LIMITED, a Canadian corporation having its offices at 120,
Ferland Street, Suite 11B, Nun's Island, Verdun, Quebec, H3E IL1,
(hereinafter referred to as "Multi-Vet");
AND: MULTI-VET INTERNATIONAL INC., a Canadian corporation having its offices
at 2340 des Bazars Street, St. Hyacinthe, Quebec, J2T 4P2,
(hereinafter referred to as "Multi-Vet International");
WHEREAS Multi-Vet is the owner of patents and know-how related to the
production of anti-barking collars and of the spray technology used therein;
WHEREAS RSC is in the business of selling animal behavior products to
consumers directly and through retail outlets;
WHEREAS Multi-Vet has granted certain distribution rights to Multi-Vet
International with respect to anti-barking collars;
WHEREAS RSC desires to acquire from Multi-Vet an exclusive license
allowing it to use the Spray Technology (as defined hereunder) in association
with the development, production, marketing, production, sale and distribution
of Products (as defined hereunder) in the RSC Market (as defined hereunder) in
the USA and Mexico (hereinafter - the "Territory");
WHEREAS RSC will grant to Multi-Vet the exclusive right to distribute
Products developed by RSC outside the RSC Market in the Territory as well as in
all markets outside the Territory except for certain restrictions in Europe;
WHEREAS Multi-Vet has the intention of assigning or licensing to Multi-Vet
International with respect to such distribution rights;
<PAGE> 2
THE PARTIES HAVE AGREED AS FOLLOWS:
SECTION I - DEFINITIONS
In this Agreement,
1.1 "AFFILIATES": A body corporate is deemed to be affiliated with an
individual if such individual, directly or indirectly, controls such
body corporate. A body corporate is deemed to be affiliated with
another body corporate, if one of them is the subsidiary of the other
or both are the subsidiaries of the same body corporate or each of them
is ultimately controlled by the same person(s). If two (2) bodies
corporate are affiliated with the same person at the same time, they
shall be deemed to be affiliated with each other.
1.2 "CONFIDENTIAL INFORMATION": the meaning set forth in section 15.1.
1.3 "CONTRACT YEAR": that period of time commencing on the Effective Date
and ending on December 31, 1997 and any subsequent twelve month period
ending on December 31st.
1.4 "EFFECTIVE DATE": February 15, 1997.
1.5 "NET SALES PRICE": the gross amount charged by RSC to its customers,
less the following deductions namely (i) quantity, quality, trade or
cash discounts actually allowed, (ii) all sales, use and other similar
taxes paid or payable by RSC or its customers in connection with such
sales, (iii) reasonable freight charges and (iv) reasonable returns or
allowances allowed to such customers not exceeding the invoice price of
the Products in question. Neither commissions, royalties or other fees
payable by RSC nor bad debts or allowances for bad debts shall be
deducted from the Net Sales Price. In the event the sales of Products
by RSC are made to an entity which is directly or indirectly controlled
by RSC or is an Affiliate or otherwise related to RSC in any way, the
"net sales price" for such sales shall be deemed to be the Net Sales
Price charged 6y RSC for Products sold in the same period to similar
customers not so related, Affiliated or controlled to or by RSC. If
there are no such other sales, then the "net sales price" shall be the
Net Sales Price of such related, Affiliated and/or controlled customers
of RSC to their non related, Affiliated and/or controlled customers.
1.6 "PATENTS": each and every unexpired patent embodying any part of the
Spray Technology, including, without limiting the generality of the
foregoing, the following patents:
<TABLE>
- ------------------------------------------------------------------------------
COUNTRY APPLICATION NO. PATENT NO. ISSUE DATE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
USA 709433 4627385 9 December 1986
- ------------------------------------------------------------------------------
USA 378901 5046453 9 October 1991
- ------------------------------------------------------------------------------
PCT PCT/CA96/00586
- ------------------------------------------------------------------------------
</TABLE>
as well as all patents which may issue therefrom and from applications which may
be filed in relation to the Spray Technology and any patent of importation,
improvement or addition, utility models and inventors certificates,
continuation, extension, division, re-validation, reissue or other combination
or renewal of same.
2
<PAGE> 3
1.7 "PRODUCT": any device to train, contain or otherwise control pets using
a spray but excluding anti-barking devices.
1.8 "RSC MARKET": all distribution channels but excluding the veterinarian
trade, behaviorists and professional trainers.
1.9 "SPRAY TECHNOLOGY": all the present and future commercial, scientific
and technical knowledge and accumulated experience acquired by
Multi-Vet and its predecessors in title as a result of research,
practical experience or otherwise, in the design, manufacture,
production, use, sale, distribution, marketing, advertising and/or
merchandising of anti-barking collars and/or of other devices to train,
contain or otherwise control pets using a spray, including, without
limiting the generality of the foregoing ideas, un-patented inventions,
processes, manufacturing procedures, methods, designs and data
pertaining to the Products and/or anti-barking devices.
1.10 "TERRITORY": the meaning set forth in the preamble.
SECTION 2 - EXCLUSIVE LICENSE
2.1 EXCLUSIVE LICENSE. Multi-Vet hereby licenses exclusively to RSC the
right to use the Spray Technology and the Patents, to develop,
manufacture, market and distribute Products in the RSC Market in the
Territory.
2.2 QUALITY STANDARDS. The License to use the Spray Technology and the
Patents granted to RSC shall be restricted to such Products that have a
high and merchantable quality which meet or exceeds Multi-Vet's quality
standards. In this respect, Multi-Vet acknowledges that RSC's current
quality standards are acceptable.
2.3 INSPECTION. Multi-Vet shall have the right, at no cost to RSC, at all
reasonable times, to enter and inspect any premises used by RSC in its
operation under this License for the purpose of determining compliance
with the standards, specifications and requirements referred to in
subsections 2.2 and 6.4 hereof.
2.4 MULTI-VET NON-COMPETE. Multi-Vet will not license the Patents or the
Spray Technology or distribute products incorporating same, nor will
any of its owners or associated companies, to competitors of RSC in the
Territory with the exception of anti-barking products which may be sold
to Invisible Fence. RSC competitors are defined as companies such as
Invisible Fence, Tri-tronics, Elexis, Austin Innovations, Innotek,
DogWatch, American Pet Tronics or DT Systems. New competitors that may
enter the RSC Market will he defined as competitors by being in same
genre as the above. Loosely, those are companies that are primary in
marketing and selling under their own brands a line of pet training
products. Other licensees of Multi-Vet in other territories will be
prohibited from selling Products within the RSC Market in the
Territory.
2.5 RSC NON-COMPETE. RSC acknowledges that the Products are complementary
to the products which it currently sells in the Territory. If
applicable laws permit, RSC agrees that neither itself nor its
Affiliates will, directly or indirectly, stock, distribute, promote or
sell competitive products (being defined as any product used to train,
contain or otherwise control pets using a spray) while this Agreement
is in effect and for a period of one (1) year after its termination for
any reason whatsoever without having previously obtained the written
permission of Multi-Vet.
2.6 NO SALES OUTSIDE TERRITORY. RSC shall not, whether directly or
indirectly, sell, distribute or deliver any Product outside the
Territory or outside the RSC Market or knowingly transfer
3
<PAGE> 4
possession of any Product to any person who may sell, distribute or
deliver same outside the Territory or outside the RSC Market. All
requests or inquiries received by RSC with respect to any Product for
delivery, use or purchase outside the Territory or outside the RSC
Market shall be referred immediately by RSC to Multi-Vet.
2.7 NO SALES IN THE TERRITORY. Multi-Vet shall not, whether directly or
indirectly, sell, distribute or deliver any Product in the RSC Market
in the Territory or knowingly transfer possession of any Product to any
person who may sell, distribute or deliver same in the RSC Market in
the Territory. All requests or inquiries received by Multi-Vet with
respect to any Product for delivery, use or purchase in the RSC Market
in the Territory shall be referred immediately by Multi-Vet to RSC.
2.8 RIGHT OF FIRST REFUSAL. In the event Multi-Vet terminates its licensing
arrangement with Multi-Vet International with respect to sales in the
Territory outside the RSC Market or with respect to sales in any market
outside the Territory, Multi-Vet hereby grants to RSC a right of first
refusal with respect to the granting of a license in such markets and
territories. RSC shall have thirty (30) days from the reception of a
notice from Multi-Vet specifying the terms of the proposed license to
accept same. Failure to respond within this time frame shall 6e deemed
a refusal.
SECTION 3 - ROYALTIES
3.1 ROYALTY. RSC will pay to Multi-Vet a royalty of 5% on the Net Sales
Price of all Products and of all spray cans sold but EXCLUDING all
Products sold by RSC to Multi-Vet International.
3.2 TERMS OF PAYMENT. RSC will make royalty payments to Multi-Vet within 30
days of the end of each calendar quarter.
3.3 PRE-PAYMENT OF ROYALTY. RSC will pay the following non-refundable
amounts to Multi-Vet as prepaid royalties:
3.3.1 Upon the signature of this Agreement: $50,000; and,
3.3.2 90 days after the signature of this Agreement: $50,000.
3.4 FEASIBILITY STUDY. During the first 180 days after the signature of
this Agreement, RSC will conduct a feasibility study. During this
period, RSC will have the right to terminate the agreement at anytime
provided the amounts due pursuant to section 3.3 have been paid in
full. If RSC concludes to continue, RSC will pay the following
additional non-refundable amounts to Multi-Vet as prepaid royalties:
3.4.1 270 days after the signature of this Agreement: $50,000; and,
3.4.2 360 days after the signature of this Agreement $50,000.
Thus, after the four payments, RSC will have paid $200,000 in the first twelve
months in non-refundable prepaid royalties.
3.5 MINIMUMS. RSC will be required to pay to the following minimum
royalties to Multi-Vet (the prepaid royalties mentioned above will be
applied to the payment of these minimum royalties):
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<PAGE> 5
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR MINIMUM UNITS (ANY SINGLE PRODUCT THAT CAN BE SOLD AS UNIT THAT MINIMUM TOTAL MINIMUM ROYALTY
INCORPORATES ANY SPRAY TECHNOLOGY) HAVING AN AVERAGE SELLING PRICE VALUE
OF AT LEAST $150
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1997 None (RSC will be allowed one year from the date of the signing $ 0 $ 0
of this agreement without any minimums in order to develop
Products)
- ---------------------------------------------------------------------------------------------------------------------
1998 5000 750,000 $ 37,500
- ---------------------------------------------------------------------------------------------------------------------
1999 10000 1,500,000 $ 75,000
- ---------------------------------------------------------------------------------------------------------------------
2000 15000 2,250,000 $112,500
- ---------------------------------------------------------------------------------------------------------------------
2001 20000 3,000,000 $150,000
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
RSC will thereafter be required to maintain a 10% yearly increase in sales over
the actual average sales of the two (2) previous years to maintain the
agreement. However, it is agreed that the minimum royalty payable for any given
year will never be less than the minimum royalty actually paid during the
previous year.
3.6 The above minimum royalties will be payable by RSC by adding to the
last quarterly royalty payment any balance between the minimum royalty
due and the actual royalties paid during a given year, if the total
actual royalties are less shall the minimum royalty due for such year.
Such termination or transformation shall be effective ninety (90) days
from the date of written notice from Multi-Vet to RSC.
3.7 If RSC does not pay the minimum royalty due in a given year, Multi-Vet
shall have the right (in addition to any other rights it may have
pursuant to this Agreement) either to terminate this License Agreement
or to transform it into a non-exclusive license, at Multi-Vet's option.
Such termination or transformation shall be effective ninety (90) days
from the date of written notice from Multi-Vet to RSC.
3.8 For the purposes of this Agreement, Products shall be considered sold
at the Net Sales Price when invoiced out, or if not invoiced, when
delivered or shipped to the customers.
SECTION 4 - REPORTS & PAYMENTS
4.1 RSC covenants and agrees to furnish royalty statements within thirty
(30) days after each calendar quarter ending the last day of March,
June, September and December in each year during the life of this
Agreement.
4.2 All statements shall:
4.2.1 include a calculation of the amount due to Multi-Vet for the royalties
in respect of the Net Sales so reported, and minimum royalties, when
applicable;
4.2.2 be certified as correct by the Controller or some other senior officer
of RSC; and,
4.2.3 be accompanied, by a remittance to Multi-Vet of the amount of the
royalties so shown to be payable.
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4.3 RSC agrees that all overdue accounts shall bear interest at the prime
rate prevailing at the time when payment is due plus 3%. Unpaid
interest will also bear interest at the same rate.
4.4 If no Net Sales have been made or no royalties are due in any quarter,
RSC shall so advise Multi-Vet within thirty (30) days after the end of
the quarter.
4.5 All dollar values expressed in this Agreement and the Schedules hereto
and all payments required to be made by RSC, shall be in US dollars.
When Net Sales have been made in other than US funds, the royalties
from such Net Sales will be converted to US funds at the bank exchange
rate prevalent at the time of payment.
4.6 Any amount owed to Multi-Vet pursuant to this agreement which is not
paid on its due date shall bear interest at the rate of one and one
half percent (l 1/2%) per month (eighteen percent (18%) per annum)
calculated from the date upon which such amount was due.
SECTION 5 - ACCOUNTS
5.1 RSC shall:
5.2 Keep proper and detailed accounts and records, including invoices,
receipts and vouchers relating thereto, (hereinafter referred to as the
"Records") in respect of its operations under this agreement, including
the Net Sales of Products and the Net Sales Price therefore.
5.3 Make the Records available during business hours on reasonable notice
and permit representatives of Multi-Vet to audit and/or inspect the
Records on an annual basis, to make notes or copies of documents
relating to its operations under this Agreement, including royalty
calculations and payments and to report to Multi-Vet only information
relative to the accuracy of the royalties payable under the Agreement.
In the event an error in favor of Multi-Vet is discovered during such
audit or inspection, RSC shall pay the difference within thirty (30)
days of such discovery. Furthermore, if such error exceeds five (5%)
percent of the royalties actually paid, RSC shall reimburse Multi-Vet
for all costs incurred in relation to such audit or inspection.
5.4 RSC shall preserve the Records for a period of five (5) years; provided
that RSC may, after giving Multi-Vet ninety (90) days prior written
notice, dispose of any or all of the Records.
SECTION 6 - SUPPLY OP COMPONENTS
6.1 MICRO ELECTRO-VALVES. RSC will be required to buy the micro
electro-valve device as described in Exhibit A (hereinafter the "Micro
Electro-valve") from Multi-Vet or its designated sub-contractors at
$10. each. Regarding all other components, RSC will have the right to
but not be required to buy components from Multi-Vet or any designated
Multi-Vet sub-contractor at a reasonable fair market price. The Micro
Electro-valve and other components are hereinafter referred to as the
"Components" . Such prices as of the signing of this agreement are
found in Exhibit B. These prices may be increased by Multi-Vet in the
events its own costs are increased. The price increase will be such
that Multi-Vet's current margins will be maintained.
6.2 Multi-Vet or its designated sub-contractors will supply RSC with
Components, FOB Port Vendres, France, at a price equal to or less than
the most favorable price (for similar quantities) granted by Multi-Vet
to any other non Affiliated party. The said prices shall be the net
selling price by Multi-Vet, exclusive of all sales and other similar
taxes, custom and excise duties, insurance premiums, freight and
storage charges and all other charges of a similar nature, whether
currently imposed or applicable in the future.
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<PAGE> 7
6.3 In the event Multi-Vet and its designated sub-contractors are unwilling
or are not able to supply RSC with Components, RSC will have a license
to produce them but only for resale within the Territory and the RSC
Market.
6.4 Multi-Vet will inform RSC at least three (3) months prior to any change
in its list prices. With respect to any written purchase orders for
Components which may be placed by RSC between the date of such written
notice by the company and the effective date of the price change, the
price for the Components so ordered shall be the price prevailing at
the time the purchase order is received and accepted by Multi-Vet or
its sub-contractors, provided that such written purchase order
specifies delivery dates not exceeding six (6) months from the order
date, failing which the increased purchase price shall be applicable.
6.5 RSC agrees not to add to, remove from or in any way change the
Components without the prior written approval of Multi-Vet. RSC also
agrees not to alter, remove or otherwise tamper with any trade mark or
other marking appearing on any Component, its container or any document
or object associated with same or its marketing without the prior
written approval of Multi-Vet.
6.6 RSC will have the obligation to advise Multi-Vet of the existence of
any defect as soon as possible after same is brought to its attention
and to provide Multi-Vet with all useful information and explanations
relating to same.
SECTION 7 - COMPONENT WARRANTY
7.1 Multi-Vet warrants that all Components manufactured and sold to RSC by
Multi-Vet as per section 6, shall be free from any material or
workmanship defects and in full compliance with its QC standards. This
warranty shall be valid for a period of eighteen (18) months as of the
production date stamped on the Component. the warranty obligations of
Multi-Vet are strictly limited to the replacement/repair of any
defective Components.
7.2 RSC shall assume all warranty obligations to its customers in respect
of Products incorporating such Components, and Multi-Vet shall have no
liability either to RSC or to its customers in respect of such warranty
obligations.
7.3 Except for the warranty contained in section 7.1, Multi-Vet does not
grant any warranty, either expressed or implied, legal or conventional,
with regard to any Component and disclaims all implied warranties of
merchantability and fitness for a particular purpose. The warranty
expressly contained in section 7.1 hereof is in lieu of any liability
or obligation of Multi-Vet for any damages whatsoever (including any
incidental, consequential, indirect or special damages or liabilities,
costs, loss of revenue or of business or other financial loss)
sustained by any person (including any employee, agent, invitee, RSC or
client of RSC) and/or in any way arising from or relating to the sale,
maintenance, use, performance, failure of any Components.
7.4 Multi-Vet's warranty obligations do not cover any faulty or negligent
manipulation, storage or use of any Components or any such manipulation
or storage or use which is not in conformity with instructions provided
by Multi-Vet.
7.5 RSC will have the obligation to advise Multi-Vet of the existence of
any warranty claim or any defect as soon as possible after same is
brought to its attention and to provide Multi-Vet with all useful
information and explanations relating to same. RSC shall allow
Multi-Vet to have free access to any Component at all reasonable times.
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<PAGE> 8
7.6 Multi-Vet shall replace or repair, free of charge, all defective
Components (as defined in section 7.1 above) returned by RSC to
Multi-Vet subject to the following terms:
7.6.1 The defective Components (minimum 500 units per shipment) will be
shipped (subject to prior coordination with Multi-Vet), F.O.B.
Knoxville, to Multi-Vet. Notwithstanding, Multi-Vet shall, at its own
discretion, be entitled to replace the reported defective Components
without requesting shipment of same to Multi-Vet.
7.6.2 Upon receipt of the defective Components shipment, Multi-Vet's
competent personnel will inspect and sort same. All Products covered by
the warranty as per section 7.1 above will be replaced free of charge.
However, components that will be found to have been returned for other
reasons (dirt, misuse, physical damage, repair by unauthorized
personnel, etc.) will be repaired against payment by RSC for parts and
labor.
7.6.3 The 500 replaced/repaired units return shipment to RSC will be sent
F.O.B. Port Vendres, France and include an itemized report and invoice
with regard to the number or replaced units and costs accrued as per
subsection 7.6.2.
SECTION 8 - PRODUCT DEVELOPMENT
8.1 PRODUCT DEVELOPMENT. RSC will be required to develop at its sole
expense pet training products using the Spray Technology including but
not limited to remote trainers, containment fences and indoor animal
control and to pay all costs associated with such development. RSC will
provide a reasonably full disclosure of any R&I) development to
Multi-Vet and Multi-Vet International. RSC will endeavor to get
Multi-Vet International's consultation as much as possible in the
product development process, provided Multi-Vet International will not
charge any fees or expenses to RSC for such consultation unless
otherwise agreed.
8.2 DISCLOSURE. Each party shall promptly disclose to the other party any
discovery or invention which is a new or improved Product which it
makes or acquires during the term of this Agreement and shall make
available to the other party all information relating thereto,
including blueprints, sketches, drawings, designs and other data. All
such disclosures and information shall be treated as confidential
information (within the meaning of section 15.1) by the recipient.
8.3 OWNERSHIP. Multi-Vet shall own all rights to the spray technology
aspects of any such discovery or invention while RSC will own all
rights to the containment aspects of any such discovery or invention.
The other aspects of any such discovery or invention shall be owned by
the party making it.
SECTION 9 - NEW PRODUCTS IN OTHER MARKETS AND OTHER TERRITORIES
9.1 RSC undertakes to grant to Multi-Vet the exclusive right to distribute
Products outside the Territory and outside the RSC Market in the
Territory but excluding certain products for resale in Europe to be
identified by RSC, the whole at RSC lowest trade price to any non
Affiliated customer less standard allowances for advertising and
commissions and royalties to Multi-Vet pursuant to section 3 hereof and
possibly any other negotiated cost savings under terms and conditions
to be negotiated separately. In the event RSC is unwilling or is not
able to supply Multi-Vet with such Products, Multi-Vet will have a
license to produce them but only for resale outside the Territory or
outside the RSC Market in the Territory but excluding certain products
for resale in Europe to be identified by RSC.
8
<PAGE> 9
9.2 The precise terms of such distribution/supply agreement will be
incorporated in a separate document. Such distribution/supply agreement
will provide that Multi-Vet shall indemnify and hold harmless RSC from
any liabilities, claims, causes of action, suits, damages and expenses
(including reasonable attorneys' fees and expenses) which RSC or any
other company in RSC group of companies is or becomes liable for, or
may incur, or be compelled by reason of any acts, whether of omission
or commission that may be committed or suffered by Multi-Vet or any of
its distributors, servants, agents or employees in connection with
Multi-Vet's performance under the terms of this Agreement or arising
out of the use of the Products sold by Multi-Vet.
SECTION 10 - PATENTS
10.1 RSC shall not, at any time during the term of this Agreement or
thereafter, question or, contest, directly or indirectly, the validity
of the Spray Technology or Patents or assist any other person to do so.
10.2 Any labeling used in connection with the manufacture and sale of the
Product shall clearly indicate the existence of the Patents as well as
their use under license and such label shall be in a form agreed upon
by the parties in writing, and the consent of either party shall not be
unreasonably withheld. As an example, the following patent notice is
agreeable:
*Covered by one or more of the following US Patents 4,627,385 and
5,046,453.*
*Made under license from Multi-Vet Ltd.*
SECTION 11 - PROMOTION AND SALE
11.1 RSC shall exercise its best and good faith efforts at its expense to
introduce, promote the sale and use of, obtain orders for, distribute
and sell Products throughout the Territory and give adequate, efficient
and prompt attention and service to local distributors and consumers.
11.2 RSC shall, at its own expense, organize and keep active an after sales
service center for the Products in the Territory.
11.3 RSC shall ascertain that the Products and all packaging, instructions,
advertising material, etc. is in conformity with the laws and
regulations of the Territory.
SECTION 12 - TERM
12.1 This Agreement is deemed to have commenced on the date mentioned above
and shall terminate on October 9, 2008 unless previously extended by
mutual consent or terminated in accordance with the terms of this
Agreement.
SECTION 13 - TERMINATION
13.1 In the event of the material breach of any provision of this Agreement
by one of the parties, the other party shall have the right to
terminate this Agreement. Such right shall be exercised by giving a
written notice to defaulting party specifying the circumstances in
which it breached the Agreement and stating that it elects to terminate
this Agreement as of a date not less than six (6) months subsequent to
the date of such notice unless the defaulting party has cured such
breach within thirty (30) days from the date of such notice. In the
case the defaulting party fails to cure such breach within the
aforesaid delay, this Agreement shall come to an end on the date
specified in such notice.
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13.2 Without limiting the generality of the foregoing, the occurrence of any
one or more of the following events shall constitute a material breach
under this Agreement:
13.2.1 a party fails to pay any amount due by it to the other party on its
due day;
13.2.2 a party institutes proceedings seeking relief under a bankruptcy law or
any similar law, or consents to entry of an order for relief against it
in any bankruptcy or insolvency proceeding or similar proceeding, or
files a petition for or consent or answer consenting to reorganization
or other relief under any bankruptcy act or other similar law, or
consents to the filing against it of any request for the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of it or of any substantial part of its property, or
makes an assignment for the benefit of creditors, or admits in writing
its inability to pay its debts as they become due, or takes any action
in furtherance of the foregoing;
13.2.3 a party enters or offers to enter into any composition, extension to or
other arrangement with its creditors;
13.2.4 a Receiver is appointed over the whole or any part of the undertaking
or assets of one of the parties;
13.2.5 a party ceases or threatens to cease to carry on the whole or any
substantial part of its business other than in the course of
reconstruction or amalgamation;
13.2.6 a party is convicted of a felony or other similar crime.
13.3 No assignee for the benefit of creditors, receiver, liquidator,
sequestrator, trustee in bankruptcy, sheriff or any other officer of
the court or of fiscal charged with taking over custody of a party's
assets or business shall have any right to continue the performance of
this Agreement.
13.4 Termination of this Agreement shall not release a party from any
payments or obligations due and payable or accrued to the other or
rescind any payment made or paid by one party to the other hereunder
prior to the time such termination becomes effective nor release any
party from those obligations hereunder which survive termination.
Furthermore, termination of this Agreement prior to the expiration of
its term shall be without prejudice to any other rights which one party
may have against the other, including, without limitation, damages for
breach to the extent that same may be recoverable.
13.5 RSC hereby grants to Multi-Vet an option and a right of first refusal
to purchase the inventory of Products owned or controlled by RSC upon
termination or expiration of this Agreement. This option and right of
first refusal shall apply only if and when the Agreement is terminated
or expired. For example, the transformation of the license into a non
exclusive license pursuant to section 3.7 shall not trigger such option
and right of first refusal. Accordingly, in the event that RSC receives
and desires to accept a bona fide offer from any third party with
respect to the purchase of any such Products, RSC shall notify
Multi-Vet in writing of the terms and conditions of such offer and
shall accompany such advice with an exact copy of the offer so
received. Multi-Vet shall thereafter have the right and option,
exercisable within thirty (30) days after receipt of such written
notification to advise RSC in writing that it intends to exercise its
right of first refusal on the same terms and conditions as are
contained in the bona fide offer. Thereafter, RSC and Multi-Vet shall
enter into an agreement under the same terms and conditions as were
contained in the bona fide offer within thirty (30) days of Multi-Vet
advising RSC of its intention to exercise its right of first refusal
hereunder. In the absence of such an offer, Multi-Vet shall have the
right and option
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to purchase such Products, in whole or in part, at the average sales
price of each such Products as of the date such option is exercised.
13.6 In the event of the termination of this Agreement pursuant to section
13.1, and unless otherwise provided in this Agreement, no party will be
liable for the payment of additional amounts to the other party.
SECTION 14 - INDEMNIFICATION
14.1 RSC shall indemnify and save and hold harmless Multi-Vet from any
liabilities, claims, causes of action, suits, damages and expenses
(including reasonable attorneys' fees and expenses) which Multi-Vet or
any other company in Multi-Vet group of companies is or becomes liable
for, or may incur, or be compelled by reason of any acts, whether of
omission or commission that may be committed or suffered by RSC or any
of its distributors, servants, agents or employees in connection with
RSC's performance under the terms of this Agreement or arising out of
the use of the Products sold by RSC.
14.2 RSC shall, at the request of Multi-Vet, assume the defense of any
demand, claim, action, suit or proceeding brought against Multi-Vet or
any of the foregoing parties by reason of the foregoing and pay any and
all damages assessed against or that are payable by Multi-Vet or any of
the foregoing parties as a result of the disposition of any such
demand, claim, action, suit or proceeding. Notwithstanding the
foregoing, Multi-Vet or the foregoing parties as well as their
respective successors, assigns, and their officers, directors,
employees and agents may be represented in any such action, suit or
proceeding at its or their own expense and by its or their own counsel.
14.3 Multi-Vet shall indemnify and save and hold harmless RSC, its clients
and their respective directors, officers, employees and agents from any
liabilities, claims, causes of action, suits, damages and expenses
(including reasonable attorney's fees and expenses) which any of the
above is or becomes liable for, or may incur, or be compelled to pay by
reason of infringement or alleged infringement of any patent of a third
party based upon the production, use and/or sale of any Product
containing or using the Spray Technology.
14.4 Multi-Vet shall, at the request of RSC, assume the defense of any
demand, claim, action, suit or proceeding brought against RSC or any of
the foregoing parties by reason of the foregoing and pay any and all
damages assessed against or that are payable by RSC or any of the
foregoing parties as a result of the disposition of any such demand,
claim, action, suit or proceeding. Notwithstanding the foregoing, RSC
or the foregoing parties as well as their respective successors,
assigns, and their officers, directors, employees and agents may be
represented in any such action, suit or proceeding at its or their own
expense and by its or their own counsel.
14.5 Multi-Vet's obligation hereunder is conditioned upon RSC promptly
notifying Multi-Vet of all such liabilities, claims, causes of action
or suits. In the defense of any such claim, RSC will cooperate fully
with Multi-Vet, and will, from time to time, make available to
Multi-Vet all relevant records, papers, information, samples, specimens
and other similar material. Should such suit, action or other
proceeding contain allegations that the Spray Technology portion of any
Product sold or distributed by RSC constitutes an infringement of one
or more of the claims mentioned in such suit and that such action or
other proceeding has not been settled six (6) months after the date of
service thereof, either party shall have the right to terminate this
Agreement upon written notice to the other
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SECTION 15 - CONFIDENTIAL INFORMATION
15.1 Each Party acknowledges and understands that the other Party is
involved in research, development, production and/or sale of different
devices to train, contain or otherwise control pets and has acquired or
shall acquire in the future great quantities of secret or proprietary
technical, scientific, marketing and commercial information relating to
its business and that of its Affiliates, including, but not limited to,
products, customer lists, pricing policies, marketing plans and
strategies, product development techniques or plans, business
acquisition plans, methods of manufacture, technical processes, designs
and design projects, inventions (patented or not) and research
programs, trade know-how, trade secrets, specific software (source,
object and documentation), algorithms, computer processing systems,
ideas, methods, experiments and data, no matter their form or support
medium including any sketch, report, model, prototype, chip, diskette,
tape and other similar documents or objects (the "Confidential
Information") and that it is imperative for it that the Confidential
Information remains secret.
15.2 Each Party agrees to maintain the confidentiality of the Confidential
Information of the other Party and not to disclose, directly or
indirectly, any part to anyone without prior written authorization from
the other Party.
15.3 Each Party agrees not to use, directly or indirectly, any Confidential
Information of the other Party for purposes other than as provided
herein and not to assist or collaborate with third parties using,
directly or indirectly, any similar Confidential Information for
purposes other than those provided for in the present Agreement,
without prior written authorization from the other Party.
15.4 The confidentiality and non-use undertakings specified in the present
Agreement do not apply to any part of the Confidential Information
which, through no breach of the provisions of the present Agreement:
15.4.1 the recipient can demonstrate was in the public domain at the time of
disclosure of such information by the other company or which later
becomes part of the public domain through no breach of this Agreement;
15.4.2 the recipient can demonstrate was in its possession, prior to
disclosure of such information by the other party and had not been
previously obtained directly or in-directly from the other party;
15.4.3 the recipient can demonstrate it had received from a third party after
disclosure of such information by the other party hereunder, as a
matter of right and having no direct or indirect obligation to the
other party with respect to same, provided that such third party did
not acquire such information directly or indirectly from the other
party; or
15.4.4 must be disclosed by virtue of the law but only to the extent
specifically required.
15.5 Notwithstanding the above, Confidential Information will not be deemed
to be in the public domain or to have been known by a party mainly
because it is embraced by more general information previously known to
it or merely because it is expressed in publications, books, patents or
other literature in general terms not specifically including such
Confidential Information disclose or made available to the other party.
15.6 Each party undertakes to cause those of its employees who are likely,
by reason of their employment, to have access to any part of tile
Confidential Information from the other party, including confidential
information relating to the Product, to sign an agreement in which
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said employee agrees to treat Confidential Information learned during
the course of his employment in the same manner as his employer treats
such information.
15.7 The confidentiality and non-use undertakings herein mentioned will
remain in full force and effect during the whole term of the present
Agreement and for an additional period of three (3) years thereafter.
SECTION 16 - INFRINGEMENT
16.1 In the event that RSC learns of any infringement or threatened
infringement or piracy of any of the Patents, RSC shall forthwith give
notice thereof to Multi-Vet together with all such information with
respect thereof as it may from time to time obtain. The parties
undertake and agree to consult with each other with respect to how to
respond to each infringement or piracy.
16.2 In the event Multi-Vet undertakes the prosecution of any such legal
proceedings, RSC agrees on behalf of, and at Multi-Vet's expense, to
execute any and all documents and do such acts and things, including
without limitation, being made a party to such proceedings, as may, in
the opinion of counsel for Multi-Vet, be necessary or useful to carry
out such prosecution.
16.3 Notwithstanding the foregoing, if Multi-Vet declines to institute legal
proceedings and advises RSC in writing that it does not object to RSC
instituting legal proceedings, RSC may institute legal proceedings at
its sole expense and Multi-Vet shall fully cooperate with RSC in
connection with such proceedings provided, however, Multi-Vet shall
always be free, at its own cost and expense, to subsequently join in
any pending proceedings.
16.4 "LEGAL PROCEEDINGS" as used herein shall include demand letters,
negotiation and settlement of disputes, as well as the filing of formal
legal actions with a court of proper jurisdiction. Under no
circumstances shall RSC have the authority to settle or compromise a
matter which in any way mitigates, lessens or restricts Multi-Vet's
ownership in the Patents.
SECTION 17 - ARBITRATION
17.1 Any dispute, controversy, claim or other matters of differences arising
out of or relating to the contract, or the breach thereof, including
any dispute relating to patent validity or infringement arising under
this contract, shall be settled by arbitration in accordance with the
Patent and International Arbitration Rules of the American Arbitration
Association, and judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof.
17.2 The place of arbitration shall be Chicago, Illinois and the English
language shall be used throughout the arbitration proceedings.
17.3 The parties expressly agree to confer upon the arbitrator the powers to
fill gaps, cure contractual omissions and to perform all other
activities which he may deem necessary and/or opportune.
17.4 The award of the arbitrator shall be the sole and exclusive remedy
between the parties regarding any claims and counter-claims presented
to the arbitrator. The parties undertake to fully and punctually abide
by the award rendered by the arbitrator. Failing such voluntary
compliance, judgment upon the award or any other appropriate procedures
may be entered or sought in any court having jurisdiction thereof to
secure enforcement of said award.
13
<PAGE> 14
17.5 The final award will be payable in United States currency without
deduction or offset and costs, fees or taxes incidental to the
enforcement of the arbitration award shall be charged in accordance
with the decision of the arbitrator against a party resisting
enforcement. Payment of the award including interest from the date of
breach and violation shall be made in accordance with the relevant
provisions of this Agreement.
17.6 Nothing herein contained shall prevent any party hereto from
instituting an action at law against the other party requesting
temporary restraining orders, preliminary injunctions or other
procedures in a court of competent jurisdiction to obtain interim
relief when deemed necessary by such court to preserve the status quo
or prevent irreparable injury pending final settlement of such dispute
by arbitration.
SECTION 18 - NOTICES
18.1 Any notice, demand, consent or other communication to be given in
connection with this Agreement (collectively and individually the
"Notice") shall be in writing and addressed to its addressee at the
address stated above or such addresses as the parties may specify from
time to time by Notice.
18.2 Notices may be delivered by hand, registered mail or fax and shall be
deemed to have been received as follows:
18.2.1 If delivered by hand: at the time of delivery to a person who
appears reasonably to be in charge.
18.2.2 If sent by fax: at the time of confirmed transmission
provided a confirmation copy is sent by
airmail or registered mail within
twenty-four (24) hours after the
transmission.
18.2.3 If sent by registered mail at the time of delivery or of attempted
delivery in the case delivery cannot be completed due to no fault of
the sender.
18.3 If the time of such deemed receipt as provided in paragraph 18.2 hereof
is not during the customary hours of business, the Notice shall be
deemed to have been received at 10:00 a.m. at the place of delivery on
the first customary day of business thereafter.
SECTION 19 - GENERAL PROVISIONS
19.1 PREAMBLE. The preamble to this Agreement forms part hereof as if
recited in full.
19.2 HEADINGS. Headings are for reference purposes and do not in any way
affect interpretation.
19.3 ENTIRE AGREEMENT. This Agreement sets forth the entire Agreement and
understanding between the patties with respect to the subject matter of
this Agreement and merges, supersedes and cancels all prior
discussions, representations, inducements, promises, undertakings,
understandings, agreements or otherwise, whether oral, in writing or
otherwise, between the parties with respect to such subject matter.
Without limiting the generality of the foregoing, no oral explanation
or oral information by the parties hereto, or any of them, shall alter
the meaning or interpretation of this Agreement. There are no
statements, terms, conditions, undertakings, representations,
warranties or collateral agreements still in force or effect which have
not been embodied in this Agreement. This Agreement may be altered,
modified or amended only by a written document signed by the parties.
14
<PAGE> 15
19.4 FURTHER AGREEMENTS AND ACTIONS. The parties agree to cooperate with
each other and execute and deliver such further or other documents and
assurances and do such other acts as may, from time to time, be
required or deemed useful by the other party to protect the Spray
Technology or the Patents or to effectively carry out or better
evidence or perfect the full intent and meaning of this Agreement or to
otherwise give effect to the provisions of this Agreement.
19.5 INDEPENDENT CONTRACTORS. Each party is an independent contractor and
does not have any power (nor will it represent itself as having any
power) to in any way enter into commitments or contracts, assume
obligations, give any warranties, make any representation or incur
liability of any kind in the name of the other party or on behalf of
the other party or to otherwise bind or obligate the other or to assume
or create any expressed or implied obligation or responsibility on
behalf of the other or in the other's name. Nothing in this Agreement
shall construed to create a relationship of partners, joint venturers,
fiduciaries, master-servant, agency or other similar relationship
between the parties.
19.6 SEVERABILITY. The parties agree that notwithstanding anything otherwise
contained in this Agreement, in the event that any clause, term or
provision of this Agreement or any portion thereof is determined by any
Court, arbitrator or agency of competent jurisdiction to be invalid,
unenforceable, in conflict with any applicable law or regulations or
otherwise illegal, this Agreement shall continue in full force and
effect as if the offending clause, terms and provisions hereof or
portion thereof are no longer incorporated herein.
19.7 MODIFICATIONS TO RENDER VALID. If any applicable and binding law or
rule of any jurisdiction (i) requires a greater prior notice of the
termination of this Agreement than is required hereunder, or ii)
requires the taking of some other action not required hereunder, or
iii) makes any provision of this Agreement or any specification or
standard prescribed by Multi-Vet invalid or unenforceable, the prior
notice and/or other action required by such law or rule shall be
substituted for the comparable provisions hereof, and the parties agree
to negotiate in good faith the modification of such, invalid or
unenforceable provision, specification or standard to the extent
required to achieve validity and enforceability. If the parties cannot
agree as to the modifications which are required, the matter will be
submitted to arbitration pursuant to section 17. RSC agrees to be bound
by any promise or covenant imposing the maximum duty permitted by law
which is subsumed within the terms of any provision hereof, as thought
it were separately articulated in and made a part of this Agreement,
that may result from striking from any of the provisions hereof, or any
specification or standard prescribed by Multi-Vet, any portion or
portions which a court may hold to be unenforceable in a final decision
to which Multi-Vet is a party, or from reducing the scope of any
promise or covenant to the extent required to comply with such a court
order.
19.8 WAIVER OF DEFAULT. The failure of any party at any time to take action
against the other party, or the failure of either party to terminate
the present Agreement as provided herein, shall not affect either
party's right to require fill performance of this Agreement at any time
thereafter, and the waiver by either party of a breach of any provision
of this Agreement shall not constitute a waiver of any subsequent
breach thereof nor nullify the effectiveness of such provisions or the
right of such party to demand redress for their respective losses,
damages and prejudices.
19.9 WAIVER IN WRITING. No waiver of any breach of any term or provision
hereof shall be effective or binding unless made in writing and signed
by the party purporting to give the same and, unless otherwise
provided, shall be limited to the specific breach waived.
19.10 TIME OF ESSENCE. Time shall be of the essence of this Agreement.
15
<PAGE> 16
19.11 ASSIGNMENT BY RSC. RSC shall not assign the rights and/or obligations
created pursuant to the terms of this Agreement without the consent of
Multi-Vet which shall not be unreasonably withheld except:
19.11.1 to a related company in the context of a corporate reorganization; or
19.1.2 to a successor to its entire business provided such successor is not a
direct competitor of Multi-Vet; provided that the assignor will at all
times guarantee performance by such assignee of each and every
obligation assumed by the assignor under the terms of this agreement.
19.12 ASSIGNMENT BY MULTI-VET. Multi-Vet shall not assign the rights and/or
obligations created pursuant to the terms of this Agreement to any
competitor of RSC identified in section 2.4 without the consent of RSC.
19.13 SUCCESSORS & ASSIGNS. Subject to the provisions of paragraphs 19.11 and
19.12, this Agreement shall inure to the benefit of and be binding upon
the heirs, executors, administrators, successors and permitted assigns
of the parties.
19.14 APPLICABLE LAW. This Agreement shall be governed, construed and
enforced in accordance with the laws in force in the province of Quebec
except for patent matters which shall be governed by the laws of the
Territory. The enforcement of any awards rendered by arbitration
pursuant to Section 17 and any disputes arising under this Agreement,
which for any reason cannot be resolved by arbitration as provided in
Section 17, shall be subject to the exclusive jurisdiction of the
Courts of the jurisdiction of the defendant in such proceedings and
both parties hereby irrevocably attorn to the jurisdiction Of such
Courts.
16
<PAGE> 17
IN WITNESS WHEREOF, the parties hereto have signed as of the place and
date indicated above.
RADIO SYSTEMS CORPORATION
Per: /s/ Randy Boyd
-------------------------------
Name: Randy Boyd
Title: President
MULTI-VET LIMITED
Per: /s/ Roger Garon
-------------------------------
Name: Roger Garon
Title: President
MULTI-VET INTERNATIONAL INC.
Per: /s/ Richard Garon
-------------------------------
Name: Richard Garon
Title: President
17
<PAGE> 1
EXHIBIT 10.10
THIS AGREEMENT is made the 1st day of July, 1996
BETWEEN:
(1) Duplex CSA Limited of Registered Office 30 Cambridge Street, St. Neots,
Cambridgeshire, PE19 1JL ("Duplex");and
(2) Radio Systems Corporation of 5008, National Drive, Knoxville, TN 37914
("Radio")
IT IS NOW AGREED AS FOLLOWS:
1. Definitions
In this agreement the following terms shall have the following meanings:
"the Intellectual Property" All copyright, design rights whether
registered or not, patents, whether
registered or not, trademarks and trade
names whether registered or not, know how,
confidential information and all such like
rights in the Product and the Trade Name and
the New Trade Name used in relation to the
Product and shall include the applications
for the Patents specified in Schedule 1 of
this Agreement.
"the Product" The product described in the Patent
specification attached at Schedule 2 of this
Agreement and known as "petfinder" and
including the Intellectual Property.
"the Territory" North America.
"Royalty" The payments to be made to Duplex by Radio
under this Agreement.
"the Trade Name" Pet Finder.
"the New Trade Name" Any trade name developed under clause 8.1 of
the Agreement.
"the Agreement Year" 1 July to 30 June in each year that the
Agreement is in force.
2. Background
2.1. Duplex is the sole owner of the Product.
2.2. Radio has requested a license to use the Product in order to
manufacture, market and sell the Product in the Territory.
2.3 Duplex has agreed to grant such a license to Radio on the terms set out
in this Agreement.
3. Grant
3.1 In consideration of the obligations undertaken by Radio under this
agreement Duplex grants to Radio an exclusive license do the following
acts:
<PAGE> 2
3.1.1. To manufacture, market and sell the Product in the Territory.
3.1.2. To use the Trade Name in connection with the manufacture,
marketing and sale of the Product.
4. Term and Quantity
4.1. This agreement shall commence on 1 July 1996 and shall extend for an
initial period of 5 years.
4.2. If by 30 June of each Agreement year Radio has failed to sell the
number of units of the Product specified in Schedule 3 of this
Agreement Duplex shall be entitled to terminate this Agreement by
giving 28 days written notice to Radio.
4.3. The numbers specified in Schedule 3 of this Agreement shall be agreed
between Duplex and Radio by July 31 in each Agreement Year, the agreed
figure to be inserted in the Schedule and signed by both parties.
5. Royalties
5.1. In consideration for the rights granted by Duplex to Radio, Radio shall
pay to Duplex a royalty of $0.60 on the selling price of each unit of
the Product sold by Radio.
5.2. Within 30 days of the expiration of each quarter Radio shall deliver a
statement to Duplex detailing all sales of the Products during the
quarter and showing the total Royalty payable to Duplex and at the same
time Radio shall deliver to Duplex a remittance for the full amount of
that Royalty.
5.3. Radio shall permit Duplex or its representatives from time to time to
examine Radio's books in so far as they relate to the sales of the
Products.
6. Quality
6.1. Radio shall manufacture the Products in line with specifications that
are provided by Duplex and at all times Radio shall ensure that the
Products are of the highest quality attainable within these
specifications.
6.2. Radio shall, before distribution of the Products send at its own
expense samples of the Products and their packaging to Duplex for its
approval and Radio shall not distribute the Products until it has
received written approval from Duplex of the samples.
6.3. Radio shall ensure that all other units of the Products including their
packaging correspond to the samples approved by Duplex under Clause
6.2.
6.4 Radio shall acquire Product Liability Insurance of not less than
$1,000,000 per claim in each case.
7. Intellectual Property
7.1. The Intellectual Property shall be protected as follows:
7.2. The packaging of every unit of the product shall bear the words "Patent
Pending Us No. 08/586,344".
2
<PAGE> 3
7.3. Every use of the Trade Name on the packaging of the Product or any
other use of the Trade Name shall include the trademark symbol - thus
"Pet Finder".
7.4. Radio shall not use the Trade Name or the New Trade Name as part of its
own name or the name of an entity associated with it without Duplex's
prior written consent.
7.5. Radio shall not at any time during the subsistence of this Agreement or
at any other time register or use any of the Intellectual Property in
its own name as proprietor.
7.6. Radio recognizes Duplex's right to the Intellectual Property and shall
not claim any right, title or interest in the Intellectual Property or
any part of it save as granted by this Agreement.
7.7. Radio shall call to Duplex's attention any use of the Intellectual
Property or any part thereof by any third party.
8. Trade name
8.1 It is agreed that Radio may develop a New Trade Name for the product.
If it is agreed between Radio and Duplex (such agreement to be recorded
in writing) that the New Trade Name shall be used in relation to the
Product, all provisions in this Agreement which refer to the Trade Name
shall apply to the New Trade Name.
8.2 Duplex shall have the right to use the New Trade Name in the UK and all
goodwill in the New Trade Name shall be held by Radio as bare trustee
for Duplex.
9. Sales at a Discount and Gifts
9.1 Radio shall not sell or otherwise dispose of any of the Products to any
person or persons at less than $0.60 per unit unless it has obtained
Duplex's written consent.
9.2 Notwithstanding Clause 9.1 Radio shall be entitled to provide a limited
number of samples to prospective customers free of charge.
10. Assignment and Sub licensing
10.1 Radio shall not assign the benefit of this Agreement or grant any Sub`s
without Duplex's prior written consent.
10.2 Duplex shall have the right to assign the benefit of this Agreement,
any goodwill in the Product and the Intellectual Property to any third
party.
11. Actions Against Third Parties
11.1 Radio and Duplex both have the right to take independent action against
third parties in respect of the Intellectual Property but before taking
any such action shall discuss with each other in good faith (such
discussions to be reduced to writing to avoid any later confusion):
11.1.1 whether to proceed with any action against the third party; and
11.1.2 how the cost and financial benefit of such proceedings should be
apportioned between Duplex and Radio; and
3
<PAGE> 4
11.1.3 how such actions should commercially be undertaken.
11.2 In the event that Radio and Duplex fail to agree the matters under
Clause 11.1 above then either party may, at its own cost, take action
as it considers fit and any financial benefit arising therefrom shall
belong to such party and in which event each party undertakes with the
other to cooperate in the production of materials and information.
12. Trademark
In the event that Duplex or Radio wish to obtain registration of the
Trade Name or the New Trade Name referred to at clause 8 above the
parties will discuss in good faith who shall bear the costs of such
registration.
13. Termination
13.1 The following breaches are fundamental breaches and will entitle Duplex
forthwith to give notice terminating this Agreement and thereupon this
Agreement shall absolutely terminate and cease to have effect but
without prejudice to the rights and remedies of Duplex in respect of
the breach or any antecedent breach by Radio of any of its obligations
under this agreement:
13.1.1 failure on Radio's part to pay Duplex under this Agreement for
21 days after payment is due
13.1.2 failure on Radio's part to perform any of its obligations
under this Agreement
13.1.3 the voluntary or compulsory liquidation of Radio or the
appointment of a receiver over its assets
13.2 On termination of this Agreement by expiration of time or otherwise
Radio will pay to Duplex the balance of any royalties due up to the
date of termination.
13.3 On termination of this agreement Radio shall discontinue all use of the
Intellectual Property and all remaining stocks of the Products may be
disposed of by Radio in compliance with the terms of this agreement but
not otherwise. Any Products in the course of manufacture at the date of
termination may be completed within 120 days and disposed of in
compliance with the terms of this Agreement but not otherwise.
14. General
14.1 This agreement constitutes the whole and only agreement between the
parties and supersedes and extinguishes any other agreement whether
written or oral
14.2 No waiver by Duplex of any of Radio's obligations under this agreement
shall be deemed to constitute a waiver of any subsequent obligation by
Radio nor shall any consent to any breach of Radio's obligations under
this Agreement constitute consent to any subsequent breach by Radio of
its obligations.
14.3 If at any time any provision of this agreement is or becomes illegal,
invalid or unenforceable in any respect, that shall not affect the
legality or validity or enforceability of any other provision of this
Agreement.
4
<PAGE> 5
14.4 Nothing in this agreement shall be deemed to constitute a partnership
between the parties and neither of the parties shall do or suffer to be
done anything whereby it may be represented as a partner of the other
party
14.0 Notices given under this Agreement must be given in writing to the
address of the parties at the following addresses or (in the case of
notices transmitted by facsimile) to the numbers set out below:
Duplex Address: P.O. Box 60
St. Neots
Cambridgeshire
PE19 ILL
UK
Fax: 44 01480 406206
Radio Address: 5008, National Drive
Knoxville
TN 37914
USA
Fax: 00 423 637 3097
14.6 This Agreement shall be binding upon and inure to the benefit of Duplex
and its successors and assigns
14.7 This Agreement shall be governed by and construed in accordance with
the Laws of England and Wales and the parties submit to the non -
exclusive jurisdiction of the English Courts.
14.8 RSC will have the right to remedy any infractions within 90 days of
written notice by DCSA.
IN WITNESS WHEREOF this agreement has been executed the day and year first
before written
SIGNED BY RUSSELL PAYNE )
for and on behalf of) )
Duplex CSA Limited )
SIGNED BY RANDY BOYD )
for and on behalf of) ) /s/ Randy Boyd
Radio Systems Corporation )
5
<PAGE> 1
EXHIBIT 10.11
WITHOUT PREJUDICE - SUBJECT TO THE RECEIVER'S APPROVAL
FORM OF
DISTRIBUTION AGREEMENT
MADE AND ENTERED INTO IN
ON THIS _______ DAY OF _________, 1995
BETWEEN
MEPRO EPILADY LTD. (IN RECEIVERSHIP)
A COMPANY INCORPORATED IN AND UNDER
THE LAWS OF THE STATE OF ISRAEL
OF KIBBUTZ HAGOSHRIM, D.N. UPPER GALILEE 12225
ISRAEL
(HEREINAFTER - MEPRO)
OF THE FIRST PART
AND
RADIO SYSTEMS CORPORATION
A COMPANY INCORPORATED IN AND UNDER
THE LAWS OF THE UNITED STATES OF AMERICA
OF 5008 NATIONAL DRIVE
KNOXVILLE, TENNESSEE 37914
(HEREINAFTER - THE DISTRIBUTOR)
OF THE SECOND PART
WHEREAS MEPRO IS ENGAGED, INTER ALIA, IN THE PRODUCTION AND SALE OF AN
ELECTRONIC FLEA COMB SUCH AS FURTHER DESCRIBED IN SCHEDULE "A" TO THIS
AGREEMENT (HEREINAFTER - THE "PRODUCTS"); AND
WHEREAS THE DISTRIBUTOR WISHES TO ACT AS MEPRO'S SOLE AND EXCLUSIVE DISTRIBUTOR
FOR THE SALE AND MARKETING OF THE PRODUCT IN THE USA, CANADA AND MEXICO
(HEREINAFTER - THE "TERRITORY"); AND
WHEREAS THE DISTRIBUTOR DECLARES THAT THERE IS NO LEGAL OR ANY OTHER
IMPEDIMENT, PREVENTING IT FROM ENTERING THIS AGREEMENT; AND
WHEREAS MEPRO AGREES TO APPOINT THE DISTRIBUTOR AS ITS SOLE AND EXCLUSIVE
DISTRIBUTOR FOR THE SALE AND MARKETING OF THE PRODUCT IN THE TERRITORY
ACCORDING TO THE TERMS AND CONDITIONS OF THIS AGREEMENT;
NOW THEREFORE, IT WAS AGREED BETWEEN THE PARTIES AS FOLLOWS:
<PAGE> 2
1. PREAMBLE AND ANNEXES
THE PREAMBLE TO THIS AGREEMENT AND THE SCHEDULES HERETO, AS UPDATED
FROM TIME TO TIME BY MUTUAL WRITTEN CONSENT, FORM AN INTEGRAL PART
THEREOF.
2. APPOINTMENT OF DISTRIBUTOR
A) MEPRO HEREBY APPOINTS THE DISTRIBUTOR AND THE DISTRIBUTOR HEREBY AGREES
TO ACT AS MEPRO'S SOLE AND EXCLUSIVE DISTRIBUTOR FOR THE SALE OF THE
PRODUCT IN THE TERRITORY SOLELY UNDER THE TERMS HEREOF. PROVIDED THE
AGREEMENT IS IN FORCE AND EFFECT MEPRO UNDERTAKES NOT TO SELL THE
PRODUCT IN THE TERRITORY OTHER THAN THROUGH THE DISTRIBUTOR, AND SHALL
USE ITS BEST EFFORTS AND COOPERATE WITH THE DISTRIBUTOR IN PREVENTING
ANY LEAKAGE OF THE PRODUCT INTO THE TERRITORY.
B) THE DISTRIBUTOR UNDERTAKES TO TAKE ALL NECESSARY MEASURES TO PREVENT
ANY LEAKAGE OF THE PRODUCT FROM THE TERRITORY AND SHALL NOT, DIRECTLY
OR INDIRECTLY, KNOWINGLY SELL ANY OF THE PRODUCT TO CUSTOMERS WHO MIGHT
GENERATE SAME. THIS PROVISION SHALL SURVIVE THE TERMINATION AND/OR
EXPIRATION OF THIS AGREEMENT.
C) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE AGREEMENT
AND THE DISTRIBUTORSHIP RIGHTS GRANTED TO THE DISTRIBUTOR HEREUNDER
SHALL BE VALID ONLY UNDER THE FOLLOWING SEPARATE AND CUMULATIVE STRICT
CONDITIONS:
i) THE DISTRIBUTOR PLACES, UPON EXECUTION OF THIS
AGREEMENT AN INITIAL ORDER (HEREINAFTER - THE INITIAL
ORDER) FOR 40,000 PRODUCT UNITS TO BE DELIVERED AS
FOLLOWS:
20,000 UNITS NOT LATER THAN BY 30/9/96
20,000 UNITS NOT LATER THAN BY 31/4/97
ii) THE DISTRIBUTOR ISSUES, NOT LATER THAN BY AUG. 25, 96
AN APPROPRIATE LETTER OF CREDIT FOR THE VALUE OF THE
FIRST 20,000 UNITS SHIPMENT AS PER 2C(i) ABOVE.
iii) THE DISTRIBUTOR ISSUES, NOT LATER THAN BY FEB. 28TH,
97 AN APPROPRIATE LETTER OF CREDIT FOR THE VALUE OF
THE SECOND 20,000 UNITS SHIPMENT AS PER 2C(i) ABOVE.
D) IN THE EVENT THE DISTRIBUTOR HAS FAILED TO MEET ITS ANNUAL MINIMUM
QUANTITIES UNDERTAKINGS MEPRO WILL BE ENTITLED, IN GOOD FAITH AND
TAKING INTO CONSIDERATION THE CURRENT RELEVANT FACTORS AND MARKET
CONDITIONS, TO RECONSIDER THE EXCLUSIVE RIGHTS GRANTED TO THE
DISTRIBUTOR HERETO. SUCH MEASURES WILL CONSIST MEPRO'S SOLE REMEDY IN
THIS RESPECT.
NOTWITHSTANDING, AFTER DISCONTINUATION OF HIS EXCLUSIVE RIGHTS AS PER
ABOVE AND IN ABSENCE OF ANY THIRD PARTY NEW EXCLUSIVE DISTRIBUTOR, THE
DISTRIBUTOR WILL BE ENTITLED AT ITS OWN DISCRETION,
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<PAGE> 3
TO PURSUE ITS PURCHASING OF THE PRODUCT DIRECTLY FROM MEPRO FOR
NON-EXCLUSIVE SALES, IN THE TERRITORY, IN FULL COMPLIANCE WITH THE
MUTUALLY AGREED UPON SURVIVING TERMS OF THE AGREEMENT.
FIRST CONTRACTUAL PERIOD ENDING DEC. 31ST, 1996:
A MINIMUM QUANTITY OF NOT LESS THAN 20,000 PRODUCT UNITS (FIRST
SHIPMENT OF INITIAL ORDER).
SECOND SUCCESSIVE TWELVE MONTH CONTRACTUAL PERIOD ENDING DECEMBER 31ST,
97:
AN ANNUAL CUMULATIVE MINIMUM QUANTITY OF 125,000 UNITS (INCLUDING THE
INITIAL ORDER'S SECOND SHIPMENT)
THIRD SUCCESSIVE TWELVE MONTH CONTRACTUAL PERIOD ENDING DECEMBER 31ST,
98:
AN ANNUAL CUMULATIVE MINIMUM QUANTITY OF 250,000 UNITS.
FAILURE TO PURCHASE THE HEREINABOVE SPECIFIED QUANTITIES BY THE
DISTRIBUTOR, SHALL ENTITLE MEPRO, AT ITS SOLE DISCRETION, TO
DISCONTINUE THE DISTRIBUTOR'S EXCLUSIVE RIGHTS GRANTED HERETO AND THE
DISTRIBUTOR SHALL HAVE NO CLAIMS WHATSOEVER AGAINST MEPRO REGARDING THE
TERMINATION OF THIS AGREEMENT, AS PER ABOVE, AND/OR NON-RENEWAL
THEREOF, INCLUDING ANY CLAIM FOR DAMAGES, LOSS OF PROFIT OR IN RESPECT
OF GOODWILL.
3. SALE OF THE PRODUCT
A) THE DISTRIBUTOR SHALL, ON A SEMIANNUAL BASIS, PROVIDE MEPRO
WITH A FORECAST IN RESPECT OF THE QUANTITIES OF PRODUCTS IT
INTENDS TO PURCHASE FROM MEPRO DURING SAID PERIOD.
B) MEPRO WILL DELIVER THE PRODUCT FOB ISRAELI AIR OR SEA PORT
ACCORDING TO THE DISTRIBUTOR'S WRITTEN INSTRUCTIONS.
4. SALES PROMOTION
A) THE DISTRIBUTOR SHALL, AT ITS OWN RESPONSIBILITY AND EXPENSES
PROMOTE THE SALE OF THE PRODUCT IN THE TERRITORY AND INVEST
DURING THE FIRST 12 MONTH CONTRACTUAL PERIOD NOT LESS THAN US$
300,000 INTO THE DEVELOPMENT AND IMPLEMENTATION OF ITS SALES
AND PROMOTION CAMPAIGN.
B) MEPRO WILL SUPPLY THE DISTRIBUTOR WITH SEVERAL SAMPLES OF
ADVERTISING MATERIAL WHICH MEPRO HAS ALREADY PREPARED AND IS
AVAILABLE. THE DISTRIBUTOR SHALL, AT ITS SOLE DISCRETION, BE
ALLOWED TO MAKE USE OF SAID MATERIAL.
5. FOR AVOIDANCE OF ANY INADVERTENT PRINTING OF INACCURATE INFORMATION FOR
WHICH MEPRO MIGHT BE LIABLE, THE LEGAL CONTENT OF ALL ADVERTISING
MATERIAL AND/OR ANY PACKAGES, PREPARED BY THE DISTRIBUTOR, WILL BE
APPROVED BY MEPRO BEFORE ANY USAGE THEREOF IS
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<PAGE> 4
MADE. MEPRO UNDERTAKES TO APPROVE SAID MATERIAL WITHIN TWO WORKING DAYS
AS OF RECEIPT BY MEPRO OR, IN ABSENCE OF SUCH APPROVAL CONSIDER SAME AS
HAVING BEEN APPROVED.
MEPRO SHALL, IN COORDINATION WITH THE DISTRIBUTOR, BE ALLOWED TO MAKE
USE OF SAID MATERIAL.
6. INTELLECTUAL PROPERTY
A) MEPRO SHALL REMAIN THE SOLE AND EXCLUSIVE PROPRIETOR OF ALL
THE INTELLECTUAL PROPERTY OWNED BY IT PRIOR TO THIS AGREEMENT
(PATENTS, TRADEMARKS AND TRADE NAMES) AND USED DURING THE
MANUFACTURING, ADVERTISING, MARKETING AND/OR ANY OTHER
ACTIVITY IN RESPECT OF THE PRODUCT.
HOWEVER, ALL ARTWORK, TRADE NAMES AND TRADEMARKS PRODUCED AND
REGISTERED BY THE DISTRIBUTOR WILL REMAIN ITS SOLE PROPERTY
AFTER THE EXPIRATION AND/OR TERMINATION OF THIS AGREEMENT.
B) THE DISTRIBUTOR UNDERTAKES TO NOTIFY MEPRO WITHOUT ANY DELAY
OF ANY INFRINGEMENT OF THE INTELLECTUAL PROPERTY OR ANY PART
THEREOF IN THE TERRITORY WHICH HAS BEEN DISCOVERED BY IT OR
BROUGHT TO ITS ATTENTION.
MEPRO AT ITS SOLE DISCRETION, SHALL DECIDE IF, WHEN AND IN
WHAT MANNER TO DEFEND AND PROTECT AGAINST SAID INFRINGEMENT.
HOWEVER, EACH PARTY WILL HAVE THE RIGHT, AT ITS OWN EXPENSE
AND BENEFIT, TO COMMENCE ITS OWN LEGAL ACTIVITIES AGAINST THE
INFRINGER. SUCH ACTIVITIES WILL BE COORDINATED WITH THE OTHER
PARTY WHICH, IN SUCH EVENT, WILL USE ITS BEST EFFORTS TO
AFFORD THE CLAIMANT PARTY ANY NECESSARY ASSISTANCE AND/OR
INFORMATION.
7. PRICES
A) THE FOB PORT OF ORIGIN PRICE OF THE PRODUCT UNIT TO BE SOLD TO
THE DISTRIBUTOR, IN BULK (EXCLUDING BATTERIES, PACKAGING, USER
MANUAL AND WARRANTY CERTIFICATE) TO THE DISTRIBUTOR SHALL BE
US$ 7.50.
B) ALL PRODUCTS SUPPLIED HEREUNDER SHALL REMAIN MEPRO'S EXCLUSIVE
PROPERTY UNTIL MEPRO RECEIVES FULL PAYMENT IN RESPECT THEREOF.
C) ALL TAXES, IN THE TERRITORY, WHEN IMPOSED, SHALL BE PAID BY
THE DISTRIBUTOR IN ADDITION TO THE ABOVE SPECIFIED PRICES.
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<PAGE> 5
8. FIRM ORDERS AND DELIVERIES
FIRM ORDERS WILL BE PLACED BY THE DISTRIBUTOR WITH MEPRO NOT LATER THAN
60 (SIXTY) DAYS PRIOR TO EX-FACTORY DELIVERY DATE, AND DELIVERED TO THE
DISTRIBUTOR BY MEPRO NOT LATER THAN 30 (THIRTY) DAYS AS OF ISSUANCE OF
THE CORRESPONDING L/C.
9. TERMS OF PAYMENT
THE DISTRIBUTOR SHALL PAY FOR EACH ORDER OF PRODUCTS BY WAY OF WIRE
TRANSFER COVERING THE TOTAL AMOUNT OF THE RESPECTIVE ORDER AND PAYABLE
30 DAYS AS OF SHIPMENT DOCUMENTS DATE.
IN ORDER TO GUARANTEE TIMELY PAYMENTS THE DISTRIBUTOR SHALL ISSUE AN
APPROPRIATE STAND BY LETTER OF CREDIT (LC) IN A FORMAT HEREINATTACHED
AS SCHEDULE "D" TO THIS AGREEMENT, FOR THE AMOUNT OF US$ 300,000 TO BE
ISSUED, BY A FIRST CLASS BANK ACCEPTABLE TO MEPRO AND IN FAVOR OF MEPRO
AND/OR ANY OTHER ENTITY AS INSTRUCTED BY MEPRO ALLOWING IMMEDIATE AND
FULL PAYMENT OF ANY DELAYED WIRE TRANSFER AS PER ABOVE.
ISSUANCE DATE OF THE CORRESPONDING L/C WILL BE AS FOLLOWS:
a) ORDERS UP TO 30,000 UNITS:
IRREVOCABLE L/C TO BE ISSUED, IN FAVOR OF MEPRO, 30 DAYS PRIOR
TO FOB DELIVERY DATE, AND PAYABLE IN FULL 90 DAYS AFTER FOB
DELIVERY DATE, AGAINST PRESENTATION OF APPROPRIATE DOCUMENTS.
b) ORDERS BETWEEN 30,000 - 50,000 UNITS:
IRREVOCABLE L/C/ TO BE ISSUED, IN FAVOR OF MEPRO, 60 DAYS
PRIOR TO FOB DELIVERY DATE, AND PAYABLE IN FULL 90 DAYS AFTER
FOB DELIVERY DATE, AGAINST PRESENTATION OF APPROPRIATE
DOCUMENTS.
c) ORDERS EXCEEDING 50,000 UNITS:
IRREVOCABLE L/C TO BE ISSUED, IN FAVOR OF MEPRO, 90 DAYS PRIOR
TO FOB DELIVERY DATE, AND PAYABLE IN FULL 90 DAYS AFTER FOB
DELIVERY DATE, AGAINST PRESENTATION OF APPROPRIATE DOCUMENTS.
10. OPTIONAL MANUFACTURING OF THE PRODUCT BY A THIRD PARTY
PROVIDED IT HAD PURCHASED AT LEAST 75,000 PRODUCT UNITS FROM MEPRO, THE
DISTRIBUTOR WILL BE ENTITLED, SUBJECT TO THE SOLE AND STRICT PROVISIONS
SPECIFIED IN AMENDMENT NO. 1 TO BE ATTACHED TO THIS AGREEMENT, TO HAVE
THE PRODUCT MANUFACTURED BY AN AGREED UPON INDEPENDENT THIRD PARTY.
11. WARRANTY (ONLY FOR PRODUCTS SUPPLIED BY MEPRO)
11.1 MEPRO HEREBY WARRANTS THAT ALL PRODUCTS MANUFACTURED AND SOLD
TO THE DISTRIBUTOR BY MEPRO, AS PER THIS DOCUMENT, SHALL BE
FREE FROM ANY MATERIAL OR WORKMANSHIP DEFECTS AND IN FULL
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<PAGE> 6
COMPLIANCE WITH ITS QC STANDARDS. SAID WARRANTY SHALL BE VALID
FOR A PERIOD OF 18 MONTHS AS OF THE PRODUCTION DATE STAMPED ON
THE PRODUCT OR 12 MONTHS FROM THE DATE OF PURCHASE BY THE
CONSUMER AS DOCUMENTED BY WARRANTY CARD, WHICHEVER IS THE
LATER.
11.2 AFTER THE LAPSE OF EITHER WARRANTY PERIOD AS PER SECTION 11.1
ABOVE, THE DISTRIBUTOR SHALL, AT ITS OWN RESPONSIBILITY AND
EXPENSE ENSURE, AS SPECIFIED IN SECTION 12 HEREUNDER, ADEQUATE
AFTER SALES SERVICE.
11.3 MEPRO SHALL REPLACE, FREE OF CHARGE, ALL DEFECTIVE PRODUCTS
(AS DEFINED IN SECTION 11.1 ABOVE) RETURNED BY THE DISTRIBUTOR
TO MEPRO SUBJECT TO THE FOLLOWING TERMS:
a) THE DEFECTIVE PRODUCTS (MINIMUM 500 UNITS PER
SHIPMENT) WILL BE SHIPPED (SUBJECT TO PRIOR
COORDINATION WITH MEPRO'S S. & M. DEPT.) F.O.B.
KNOXVILLE, TO MEPRO. NOTWITHSTANDING, MEPRO SHALL, AT
ITS OWN DISCRETION, BE ENTITLED TO REPLACE THE
REPORTED DEFECTIVE PRODUCTS WITHOUT REQUESTING
SHIPMENT OF SAME TO MEPRO.
b) UPON RECEIPT OF THE DEFECTIVE PRODUCTS SHIPMENT,
MEPRO'S COMPETENT PERSONAL WILL INSPECT AND SORT
SAME. ALL PRODUCTS COVERED BY THE WARRANTY AS PER
SECTION 11.1 ABOVE WILL BE REPLACED FREE OF CHARGE.
HOWEVER PRODUCTS THAT WILL BE FOUND TO HAVE BEEN
RETURNED FOR OTHER REASONS (DIRT, MISUSE, PHYSICAL
DAMAGE, REPAIR BY UNAUTHORISED PERSONNEL, ETC.) WILL
BE REPAIRED AGAINST PAYMENT BY THE DISTRIBUTOR FOR
PARTS AND LABOUR.
c) THE 500 REPLACED/REPAIRED UNITS RETURN SHIPMENT TO
THE DISTRIBUTOR WILL BE SENT F.O.B. ISRAEL AND
INCLUDE AN ITEMIZED REPORT AND INVOICE WITH REGARD TO
THE NUMBER OF REPLACED UNITS AND COSTS ACCRUED AS PER
SECTION 11.3(B) ABOVE.
d) NOTWITHSTANDING, THE DISTRIBUTOR MAY IN ITS SOLE
DISCRETION ELECT TO RECEIVE CREDIT FOR DEFECTIVE
PRODUCTS RATHER THAN REPLACEMENT AS PROVIDED FOR IN
SECTION 11.3(b) ABOVE.
IN NO EVENT SHALL MEPRO BE LIABLE FOR CONSEQUENTIAL, INCIDENTAL, SPECIAL AND/OR
INDIRECT DAMAGES.
12. AFTER SALES SERVICE
THE DISTRIBUTOR SHALL, AT ITS OWN EXPENSE, ORGANIZE AND KEEP ACTIVE A
COMPETENT AFTER SALES SERVICE CENTRE FOR THE PRODUCTS IN THE TERRITORY.
SAID CENTRE SHALL PROVIDE SERVICES AS FOLLOWS:
i) DURING THE WARRANTY PERIOD, AS DEFINED IN SECTION 11 ABOVE,
THE DISTRIBUTOR SHALL REPAIR OR REPLACE AT ITS EXPENSE, FREE
OF
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<PAGE> 7
CHARGE TO THE FINAL CUSTOMER, ANY DEFECTIVE PRODUCT THE DEFECT
OF WHICH IS COVERED BY SAID WARRANTY.
ii) FOLLOWING THE WARRANTY PERIOD, THE DISTRIBUTOR SHALL PROVIDE
SERVICE FOR THE PRODUCTS AGAINST PAYMENT BY CUSTOMERS.
SPARE PARTS FOR SERVICES AS PER (i) AND (ii) ABOVE, SHALL BE PURCHASED
FROM MEPRO BY THE DISTRIBUTOR IN ACCORDANCE WITH MEPRO'S SPARE PARTS
PRICE LIST SPECIFIED IN SCHEDULE "C" TO THIS AGREEMENT.
13. PRODUCT LIABILITY
MEPRO SHALL PROCURE AND KEEP VALID, THROUGH THE TERM OF THIS AGREEMENT,
A PRODUCT LIABILITY INSURANCE POLICY COVERING MEPRO'S UNDERTAKINGS AND
LIABILITIES HEREUNDER AND PROVIDE THE DISTRIBUTOR WITH A "VENDOR'S
ENDORSEMENT", IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF SAID
POLICY. (HEREINATTACHED AS SCHEDULE "B" TO THIS AGREEMENT).
14. LICENSES
THE DISTRIBUTOR SHALL, AT ITS EXPENSE, PROCURE AND KEEP VALID ALL
LICENSES, PERMITS AND APPROVALS, REQUIRED BY ANY AUTHORITY IN THE
TERRITORY FOR THE PURPOSE OF THE IMPORTATION, MARKETING AND SALE OF THE
PRODUCTS IN THE TERRITORY.
15. NON-COMPETITION
DURING THE TERM OF THIS AGREEMENT AND FOR A PERIOD OF TWO YEARS
FOLLOWING ITS TERMINATION, FOR ANY REASON, THE DISTRIBUTOR SHALL NOT BE
ENGAGED, DIRECTLY OR INDIRECTLY, IN THE MANUFACTURE, SALE, PROMOTION IN
ANY OTHER COMMERCIAL ACTIVITY IN RESPECT OF ANY ELECTRONIC DEVICE WHICH
IS SIMILAR AND/OR CONFUSINGLY SIMILAR TO THE PRODUCT.
THE DISTRIBUTOR UNDERTAKES THAT THE ABOVE COMMITMENT SHALL APPLY TO ALL
OF ITS PARENT AND/OR SISTER AND/OR SUBSIDIARY AND/OR AFFILIATED
COMPANIES.
16. CONFIDENTIALITY
EACH OF THE PARTIES HERETO SHALL ACT LOYALLY TOWARDS THE OTHER PARTY
AND SHALL NOT DIVULGE TO ANY THIRD PARTY ANY INFORMATION WHICH BECOMES
AVAILABLE TO IT RESPECTING THE OTHER PARTY'S ACTIVITIES WITHOUT
OBTAINING THE LATTER'S PRIOR WRITTEN CONSENT.
17. NO LEGAL REPRESENTATION
THE DISTRIBUTOR, ITS AGENTS AND EMPLOYEES, ARE IN NO WAY THE LEGAL
REPRESENTATIVES OF MEPRO. THE DISTRIBUTOR HAS NOT RIGHT TO MAKE ANY
DECLARATIONS OR ACCEPT ANY COMMITMENTS OR LIABILITY ON BEHALF OF MEPRO.
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<PAGE> 8
18. ASSIGNABILITY
MEPRO AND THE DISTRIBUTOR SHALL NOT ASSIGN ANY OF ITS RIGHTS OR
OBLIGATIONS HEREUNDER TO ANY OTHER PERSON OR ENTITY, WITHOUT THE OTHER
PARTY'S PRIOR WRITTEN CONSENT.
19. DURATION
THIS AGREEMENT SHALL BE VALID, SUBJECT TO THE PARTIES FULL COMPLIANCE
WITH THEIR UNDERTAKINGS UNDER THIS AGREEMENT, FOR A PERIOD STARTING AS
OF DATE OF EXECUTION THEREOF AND ENDING DECEMBER 31ST, 98.
SUBJECT TO THE DISTRIBUTOR'S FULL COMPLIANCE WITH ITS SEPARATE AND
CUMULATIVE UNDERTAKINGS AS SPECIFIED IN THIS AGREEMENT, AND TO ITS
UNDERTAKING TO CONTINUE TO PURCHASE A MINIMUM ANNUAL QUANTITY OF
250,000 UNITS, THIS AGREEMENT WILL AUTOMATICALLY BE ANNUALLY EXTENDED
FOR FIVE CONSECUTIVE SEPARATE 13 MONTHS PERIODS.
20. TERMINATION
A) IN THE EVENT ONE OF THE PARTIES HAS NOT FULFILLED ANY OF ITS
SEPARATE OR CUMULATIVE UNDERTAKINGS AS SPECIFIED IN THIS
AGREEMENT AND HAS NOT CURED SAID BREACH (EXCLUDING THE
NONCURABLE CONDITIONS SPECIFIED IN SECTION 2(C) HEREINABOVE)
WITHIN THIRTY DAYS AS OF THE OTHER PARTY'S FIRST WRITTEN
DEMAND TO DO SO, THEN THE OTHER PARTY SHALL BE ENTITLED TO
TERMINATE THIS AGREEMENT BY A THIRTY DAYS IN ADVANCE WRITTEN
NOTICE.
B) MEPRO WILL B ENTITLED TO TERMINATE THIS AGREEMENT FOLLOWING
THE ISSUANCE OF A WARRANT BY THE DISTRICT COURT OF HAIFA
SUPERVISING THE RECEIVERSHIP ORDERING MEPRO TO CEASE ALL ITS
BUSINESS IN REGARD TO THE PRODUCT/S IN THE TERRITORY OR IN
GENERAL.
C) UPON EXPIRATION OF THE ORIGINAL TERM, OR ANY MUTUALLY AGREED
UPON EXTENSION PERIOD, OR A MUTUALLY AGREED UPON EARLIER
TERMINATION OF THIS AGREEMENT, THE PARTIES HERETO SHALL HAVE
NO RIGHT OF ANY CLAIM WHATSOEVER AGAINST THE OTHER PARTY
REGARDING TERMINATION OF THIS AGREEMENT, AS PER ABOVE, AND/OR
NON-RENEWAL THEREOF, INCLUDING ANY CLAIM FOR DAMAGES, LOSS OF
PROFIT OR IN RESPECT OF GOODWILL.
D) SIXTY DAYS AS OF TERMINATION OF THIS AGREEMENT, PROVIDED MEPRO
HAS NOT COMMITTED ITSELF TO PURCHASE FROM THE DISTRIBUTOR THE
LATTER'S STOCK OF PRODUCTS OR ANY PART THEREOF, THE
DISTRIBUTOR SHALL BE FREE TO SELL SAID STOCK IN THE ORDINARY
COURSE OF BUSINESS, SUBJECT TO CLAUSE 2(B), BUT SHALL NOT BE
PERMITTED TO SELL PART OF ALL SUCH INVENTORY TO ANY THIRD
PARTY AT PRICES BELOW THE ACTUAL CURRENT MARKET PRICE.
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<PAGE> 9
21. VARIATION OF AGREEMENT
THIS AGREEMENT CONTAINS THE ENTIRE AND ONLY AGREEMENT BETWEEN THE
PARTIES AND IT SHALL NOT BE CHANGED EXCEPT WITH THE WRITTEN CONSENT OF
BOTH PARTIES.
THIS AGREEMENT SUPERSEDES ANY OTHER AGREEMENT BETWEEN THE PARTIES,
WHETHER ORAL OR IN A WRITTEN FORM.
22. PROPER LAW AND JURISDICTION
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ALL RESPECTS IN
ACCORDANCE WITH THE LAWS OF ISRAEL AND THE PARTIES AGREE THAT THE
COURTS OF ISRAEL SHALL HAVE JURISDICTION IN RESPECT OF ANY DISPUTE,
SUIT ACTION, ARBITRATION OR PROCEEDINGS WHICH MAY ARISE OUT OF OR IN
CONNECTION WITH THIS AGREEMENT.
NOTWITHSTANDING THE ABOVE, MEPRO WILL HAVE THE RIGHT TO INITIATE
PROCEEDINGS IN THE TERRITORY. IN THAT EVENT, THE LAW OF THE TERRITORY
AND THE JURISDICTION OF ITS COURTS SHALL APPLY.
23. RECEIVERSHIP
A) THE DISTRIBUTOR IS AWARE THAT MEPRO IS UNDERGOING RECEIVERSHIP
PROCEEDINGS IN THE HAIFA DISTRICT COURT AND THAT THIS
AGREEMENT AND ITS CONTINUING EXECUTION IS SUBJECT TO COURT
APPROVAL.
B) WITHOUT DEROGATING FROM THE DISTRIBUTOR'S RIGHTS AS SPECIFIED
IN THIS AGREEMENT, THE RECEIVER OF MEPRO WILL APPROVE THE
SIGNING OF THIS AGREEMENT ON BEHALF OF MEPRO ONLY AFTER THE
COURT'S APPROVAL, IN HIS CAPACITY AS RECEIVER AND WITHOUT
UNDERTAKING ANY PERSONAL RESPONSIBILITY.
24. NOTICES
ANY NOTICE REQUIRED TO BE GIVEN HEREUNDER, SHALL BE SUFFICIENTLY GIVEN
IF FORWARDED BY REGISTERED POST, CABLE, TELEX OR TELEFAX TO THE
REGISTERED OFFICE OF THE PARTY TO WHOM THE SAME IS ADDRESSED. EVERY
NOTICE SHALL BE DEEMED TO HAVE BEEN RECEIVED AND GIVEN AT THE TIME
WHEN, IN THE ORDINARY COURSE OF BUSINESS, IT SHALL HAVE BEEN DELIVERED
AT THE ADDRESS TO WHICH IT WAS SENT.
IN WITNESS WHEREOF, THE PARTIES HAVE HEREUNTO SET THEIR HAND AND SEAL AT THE
PLACE AND ON THE DATE HEREINABOVE FIRST ABOVE MENTIONED.
- ------------------------- ---------------------------------
FOR: MEPRO FOR: RADIO SYSTEMS
BY: MOTY LAPID - C.E.O. BY: RANDY BOYD - PRESIDENT
SCHEDULES: "A" - PRODUCT SPECIFICATIONS.
"B" - VENDOR'S ENDORSEMENT.
"C" - SPARE PARTS PRICE LIST.
"D" - STAND BY L/C FORMAT.
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<PAGE> 10
DRAFT - WITHOUT PREJUDICE
AMENDMENT NO. 1 TO THE MEPRO-RADIO SYSTEMS DISTRIBUTION AGREEMENT
THE FOLLOWING AMENDMENT IS INTENDED TO SET FORTH THE TERMS AND PROVISIONS UNDER
WHICH THE DISTRIBUTOR SHALL BE ENTITLED TO ORDER PRODUCT UNITS FROM A
MANUFACTURER OTHER THAN MEPRO. THIS AMENDMENT CONSTITUTES AN INTEGRAL PART OF
THE INITIAL DISTRIBUTION AGREEMENT AND IS SUBJECT TO ALL THE PERTINENT
PROVISIONS CONTAINED THEREOF.
WHEREAS MEPRO IS THE SOLE AND EXCLUSIVE OWNER OF THE PATENT AND TRADE MARK
RIGHTS EXPLOITED AND EXERCISED IN THE PRODUCTION AND SALE OF THE
PRODUCT; AND
WHEREAS THE DISTRIBUTOR DESIRES TO HAVE THE PRODUCT MANUFACTURED OUTSIDE THE
TERRITORY (HEREINAFTER-THE IMPORTED PRODUCT) FOR THE SOLE AND ABSOLUTE
PURPOSE OF ITS IMPORTATION INTO, AND DISTRIBUTION WITHIN, THE TERRITORY
IN COMPLIANCE WITH THE TERMS AND CONDITIONS OF THIS AMENDMENT; AND
WHEREAS MEPRO AGREES TO GRANT TO THE DISTRIBUTOR DISTRIBUTION RIGHTS IN RESPECT
OF THE SALE AND MARKETING OF THE IMPORTED PRODUCTS IN COMPLIANCE WITH
THE TERMS AND CONDITIONS OF THE INITIAL DISTRIBUTION AGREEMENT;
NOW THEREFORE, IT WAS AGREED BETWEEN THE PARTIES AS FOLLOWS
1. PREAMBLE AND ANNEXES
THE PREAMBLE TO THIS AMENDMENT AND THE SCHEDULES HERETO, AS UPDATED
FROM TIME TO TIME BY MUTUAL WRITTEN CONSENT, FORM AN INTEGRAL PART
THEREOF.
2. MANUFACTURING AND DISTRIBUTION RIGHTS
A) PROVIDED THE DISTRIBUTOR HAS PURCHASED AT LEAST 75,000 PRODUCT
UNITS FROM MEPRO AND SUBJECT TO MEPRO'S PRIOR APPROVAL OF THE
SELECTED MANUFACTURER, MEPRO WILL, JOINTLY WITH THE
DISTRIBUTOR SIGN WITH SAID MANUFACTURER, A TRIPARTITE
MANUFACTURING AGREEMENT SETTING FORTH THE TERMS UNDER WHICH
THE MANUFACTURER WILL BE GRANTED THE PRODUCT'S MANUFACTURING
RIGHTS.
SAID TRIPARTITE AGREEMENT WILL BE ATTACHED HERETO AS ANNEX "A"
TO THIS AMENDMENT, FORM AN INTEGRAL PART THEREOF AND
CONSTITUTE A STRICT PRECONDITION TO THE VALIDITY AND ENTRANCE
INTO EFFECT OF THIS AMENDMENT.
B) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AMENDMENT THE
AMENDMENT AND THE RIGHTS GRANTED TO THE DISTRIBUTOR HEREUNDER
SHALL BE VALID ONLY UNDER AND SUBJECT TO THE FOLLOWING
CUMULATIVE CONDITIONS:
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<PAGE> 11
i) ORDERS FROM THE MANUFACTURER
MEPRO SHALL BE COADRESSED TO ALL THE CORRESPONDENCE
AND RECEIVE COPIES OF ALL THE DOCUMENTS PERTAINING TO
THE QUANTITY OF PRODUCTS ORDERED BY THE DISTRIBUTOR
FROM THE MANUFACTURER.
ii) ROYALTIES
IN RETURN FOR THE ABOVE MANUFACTURING RIGHTS, THE
DISTRIBUTOR SHALL PAY TO MEPRO ROYALTIES PER EACH
SUCH ORDERED MANUFACTURED PRODUCT UNIT AS HEREUNDER
SPECIFIED:
UP TO 100,000 UNITS: US$ 2.50 P/U
ANY QUANTITY EXCEEDING 100,000 UNITS: US$ 2.00 P/U
THE TERMS AND MEANS OF PAYMENT OF SAID ROYALTIES WILL
BE CONCLUDED BETWEEN THE PARTIES AND ATTACHED AS
SCHEDULE "A" TO THIS AMENDMENT.
IN ORDER TO GUARANTEE THE TIMELY PAYMENT OF THE
ROYALTIES AND THE FULFILLMENT OF ALL ITS OTHER
HEREINCONTAINED UNDERTAKINGS, THE DISTRIBUTOR WILL
ISSUE AND DEPOSIT WITH MEPRO, AN IRREVOCABLE
REVOLVING BANK GUARANTEE IN MEPRO'S FAVOR, FOR THE
AMOUNT OF US$ 125,000. SAID BANK GUARANTEE WILL
SURVIVE THE TERMINATION OR EXPIRATION OF THIS
AGREEMENT FOR ANY REASON, BY A PERIOD OF SIX MONTHS.
MEPRO UNDERTAKES TO PROVIDE THE DISTRIBUTOR WITH A
TEN DAYS IN ADVANCE WRITTEN NOTICE OF ANY DRAW TO BE
MADE AGAINST THE GUARANTEE.
3. PRODUCTION AND ORDERS
NOTWITHSTANDING AND IN ADDITION TO THE FOREGOING, THE DISTRIBUTOR'S
HEREIN GRANTED RIGHTS SHALL BE VALID AND IN EFFECT SUBJECT TO ITS
FULFILLMENT OF THE FOLLOWING UNDERTAKINGS:
A) THE DISTRIBUTOR SHALL BE ENTITLED TO EXERCISE ITS GRANTED
MANUFACTURING RIGHTS BY WAY OF ONE OR A COMBINATION OF BOTH
THE FOLLOWING OPTIONS:
(i) THE DISTRIBUTOR WILL ORDER, EXCLUSIVELY FROM MEPRO,
AT COST PRICE (FOB) ALL THE PRODUCTS, PLASTIC PARTS
AND COMBING UNITS, TO BE ASSEMBLED BY THE
MANUFACTURER AND DISTRIBUTED BY THE DISTRIBUTOR IN
COMPLIANCE WITH THE TERMS OF THE INITIAL AGREEMENT.
(ii) THE DISTRIBUTOR WILL ORDER THE PRODUCT, IN WHOLE,
FROM THE MANUFACTURER.
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B) SUBJECT TO PRIOR COORDINATION WITH THE MANUFACTURER'S
PRODUCTION CAPACITY, MEPRO WILL BE ENTITLED TO ORDER ANY
QUANTITY OF ROYALTY FREE PRODUCTS, AT THE SAME PAYMENT TERMS
AND NET PRICE PAID BY RSC TO THE MANUFACTURER.
C) THE DISTRIBUTOR SHALL, UNDER NO CIRCUMSTANCES WHATSOEVER,
ORDER, DIRECTLY AND/OR INDIRECTLY ANY PRODUCT UNITS AND/OR
PARTS OTHER THAN AS SPECIFIED IN SECTION 3(A) ABOVE.
4. SALES AND INVENTORY REPORTS
THE DISTRIBUTOR SHALL, WITHIN TEN DAYS FROM THE END OF EACH TWO MONTH
PERIOD, SUBMIT TO MEPRO A GENERAL ITEMIZED SALES AND INVENTORY REPORT
SPECIFYING THE TOTAL IMPORTED PRODUCTS SALES EXECUTED IN EACH OF THE
COUNTRIES IN THE TERRITORY DURING THE PERIOD IN QUESTION.
IN ORDER TO ASCERTAIN THE CORRELATION BETWEEN PRODUCTION AND SALES,
MEPRO SHALL BE ENTITLED, THROUGH T C.P.A. FIRM, ACCEPTABLE TO THE
DISTRIBUTOR, WHOSE ACCEPTANCE WILL NOT BE UNREASONABLY WITHHELD, TO
CONDUCT QUARTERLY INSPECTIONS OF ALL RELEVANT RECORDS.
SUCH INSPECTIONS WILL BE COORDINATED WITH THE DISTRIBUTOR SEVEN DAYS IN
ADVANCE, AND NONE OF THE INFORMATION OBTAINED DURING SUCH INSPECTION
AND CONSIDERED CONFIDENTIAL BY THE DISTRIBUTOR, EXCEPT FOR THE RESULTS
THEREOF, WILL BE DISCLOSED TO MEPRO BY THE C.P.A.
ANY OUTSTANDING PAYMENT IN FAVOR OF ONE OF THE PARTIES REVEALED BY THE
AUDIT WILL BE SETTLED WITHIN THIRTY DAYS FROM THE AUDIT'S INSPECTION
REPORT DATE.
THIS PROVISION SHALL SURVIVE TERMINATION OR EXPIRATION OF THIS
AGREEMENT TO THE FULL EXTENT NECESSARY FOR THE PROTECTION OF THE
PARTIES' RIGHTS HERETO.
5. INTELLECTUAL PROPERTY
MEPRO SHALL REMAIN THE SOLE AND EXCLUSIVE PROPRIETOR OF ALL THE
INTELLECTUAL PROPERTY RIGHTS (PATENTS, TRADEMARKS AND TRADE NAMES)
WHICH ARE TO BE USED DURING THE MANUFACTURING OF THE PRODUCT.
6. PRODUCT'S GUARANTEE
THE DISTRIBUTOR SHALL, AT ITS SOLE AND ABSOLUTE RESPONSIBILITY, ENSURE
THAT THE MANUFACTURER WILL FULFILL ITS CONTRACTUAL UNDERTAKINGS IN
RESPECT OF THE QUALITY CONTROL STANDARDS TO BE EXERCISED BY IT IN
CONNECTION WITH THE PRODUCT.
MEPRO WILL BE ENTITLED, IN ACCORDANCE WITH THE MANUFACTURING AGREEMENT,
TO RECEIVE FOR ITS Q.C. INSPECTION, SAMPLES OF THE MANUFACTURED
PRODUCTS AS PROVIDED FOR BY THE STANDARD Q.C. REGULATIONS.
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<PAGE> 13
HOWEVER, ALL THE DISTRIBUTOR'S CLAIMS IN THIS RESPECT WILL BE DIRECTLY
LODGED WITH THE MANUFACTURER AND MEPRO SHALL, UNDER NO CIRCUMSTANCES,
BE LIABLE FOR ANY SUCH CLAIMS.
- ----------------------------------- ---------------------------------
FOR: MEPRO FOR: RADIO SYSTEMS
BY: MOTY LAPID BY: RANDY BOYD
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<PAGE> 1
EXHIBIT 10.12
LOAN AGREEMENT
THIS LOAN AGREEMENT, made and entered into this 5th day of June, 1995,
by and between RADIO SYSTEMS CORPORATION, a Tennessee corporation, of Knox
County, Tennessee ("Borrower"), and BANKFIRST of Knoxville, Tennessee, a banking
corporation organized and existing under the laws of the State of Tennessee,
with offices and place of business in Knox County, Tennessee ("BANKFIRST").
WITNESSETH:
WHEREAS, Borrower desires to purchase new computers and software for
the business, and to refinance equipment leases (the "Project"); and
WHEREAS, in order to loan funds to Borrower to be used in the Project,
BANKFIRST enters into this Loan Agreement with Borrower for the purposes herein
contained; and
WHEREAS, the loan made hereunder will be secured by the Continuing
Guaranty of Randal D. Boyd (the "Guarantors") and a Security Interest on the
personal property, improvements, machinery and equipment comprising Project,
including all new equipment purchased from the loan proceeds.
NOW, THEREFORE, for and in consideration of the premises, the sum of
One ($1.00) Dollar and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
ARTICLE I
AMOUNT AND TERMS OF LOAN
1.1 LOAN AND NOTE. The term "Loan" herein shall refer to the
indebtedness of Borrower to BANKFIRST evidenced by a Promissory Note in the
original principal amount of Three Hundred Twenty Thousand Dollars ($320,000.00)
in form satisfactory to BANKFIRST (the "Note"). A copy of the Note is appended
hereto as Exhibit "A", and incorporated herein by reference, as though more
fully set out. Concurrent with the execution and delivery of the Note, BANKFIRST
will, upon the terms and conditions of this Agreement, lend to the Borrower the
sum of Three Hundred Twenty Thousand Dollars ($320,000.00).
1.2 INTEREST AND REPAYMENT. The Note shall bear interest at
eleven and one-half (11.5%) percent per annum, on the aggregate unpaid principal
amount of the Loan in accordance with the terms of the Note. Payment of the Note
shall be made at BANKFIRST'S office at Post Office Box 10, Knoxville, Tennessee,
unless otherwise directed in writing by BANKFIRST. Borrower will punctually pay
all amounts due and owing in accordance with the terms of the Note.
1.3 PREPAYMENTS. Borrower shall have the right to prepay all
or any part of the indebtedness evidenced by the Note at any time without
premium or fee. Any prepayment received by BANKFIRST from Borrower, regardless
of the source thereof, shall be applied by BANKFIRST to payments due on the Note
being prepaid in inverse order of their due dates, and no such prepayment shall
postpone the due date of any subsequent monthly installment or change the amount
of any such installment, unless BANKFIRST shall otherwise expressly agree in
writing.
<PAGE> 2
1.4 USE OF PROCEEDS. Loan proceeds will be used for the
Project and for no personal, household, family or any other use.
ARTICLE II
CONDITION OF LENDING
2.1 CONDITIONS PRECEDENT TO THE LOAN. As a condition
precedent to BANKFIRST making the Loan, the Borrower shall deliver to BANKFIRST
on or before the date of the Loan closing, the following, in form and substance
satisfactory to BANKFIRST:
(a) Certified copy of Resolution of Borrower's Board of
Directors authorizing Borrower to enter into the
transaction anticipated by this Agreement;
(b) The Note;
(c) The Guaranty of each Guarantor;
(d) Security Agreement;
(e) UCC-I Financing Statements;
(f) Evidence satisfactory to BANKFIRST of ownership of
the Collateral by Borrower free and clear of
encumbrances of any kind; and
(g) Such other documents as reasonably may be required by
BANKFIRST or BANKFIRST'S Counsel.
The Loan documents as provided above, when prepared, shall set
forth the matters contained in this Loan Agreement and contain such other
provisions as are deemed necessary or desirable by BANKFIRST. The form and
substance of all such documents must be satisfactory to BANKFIRST prior to
disbursement by BANKFIRST of any of the proceeds of the Loan.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BORROWER
The Borrower represents and warrants to, and agrees with
BANKFIRST as follows:
3.1 ORGANIZATION AND IN GOOD STANDING. Borrower is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Tennessee, and is duly qualified as a foreign corporation in all
jurisdictions wherein the business transacted makes such qualification
necessary.
3.2 POWER AND AUTHORIZATION.
(a) The Board of Directors of Borrower has authorized the
execution and delivery of the Note and all other documents contemplated
by this Loan Agreement, and such execution and delivery will not
violate any law, or the Borrower's charter or bylaws, or any other
agreement to which Borrower is a party.
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<PAGE> 3
(b) This Loan Agreement constitutes, and upon execution and
delivery thereof, the Note, the Security Agreement, and the other
ancillary documents will constitute, legal, valid and binding
obligations of the Borrower enforceable against the Borrower.
3.3 FINANCIAL CONDITION. The reports and financial statements
of Borrower and Guarantor, submitted to BANKFIRST in connection with the Loan
have been prepared from Borrower's books and records in accordance with
generally accepted accounting principles and practices, consistently applied,
and fairly reflect the financial condition of Borrower and Guarantor for the
periods therein defined. No material adverse changes have since occurred.
Except as disclosed in the aforesaid reports and financial statements, Borrower
and Guarantor:
(a) Have not incurred any debts, liabilities or other
obligations, nor committed to incur any debts, liabilities or
obligations;
(b) Have no liabilities, direct or contingent;
(c) Have made no investments in, advances to, or guarantees or
obligations of any other company, person, firm, corporation, or other
entity;
(d) Are not subject to any judgment, nor are there any, liens,
encumbrances or security interests outstanding against Borrower or any
of its properties.
3.4 LITIGATION. There is no litigation, proceeding, claim or
dispute pending or threatened against Borrower, the adverse determination of
which would materially affect Borrower's ability to repay the Loan or otherwise
perform hereunder.
ARTICLE IV
COVENANTS BY BORROWER
Until all the obligations of Borrower under this Agreement
have been performed and paid in full, Borrower covenants and agrees as follows:
4.1 INSURANCE. Borrower shall maintain or require Guarantor to
maintain insurance on the Collateral as described in Article VII hereof in such
amounts and against such hazards and liabilities as is customarily maintained by
other companies in the same geographical area operating similar businesses, or
as may be otherwise requested by BANKFIRST. All such policies of insurance shall
be in form and substance and with insurance companies satisfactory to BANKFIRST,
and Borrower shall exhibit the same or deliver evidence thereof to BANKFIRST
upon request. Further, upon request, BANKFIRST shall be designated as loss payee
or as an additional insured under any such policies, as its interests may
appear.
4.2 MAINTENANCE OF BUSINESS AND CORPORATE EXISTENCE. Borrower
will maintain its corporate existence, shall comply with all valid and
applicable statutes, ordinances, rules and regulations and shall keep in force
and effect all licenses, permits, bonds and franchises necessary for the proper
conduct of its business.
4.3 ADVERSE CHANGES AND LITIGATION. Borrower shall immediately
inform BANKFIRST of any material adverse change in its financial condition, or
the financial condition of Guarantor, and shall promptly inform BANKFIRST of any
litigation or threatened litigation or of the occurrence of any other event or
circumstance which might substantially affect the financial condition or
business of Borrower or Guarantor.
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4.4 MANAGEMENT AND OWNERSHIP. No material change shall be made
in the management or ownership of Borrower, or in the manner in which its
business is conducted. Borrower will not merge or consolidate with or into any
corporation.
4.5 FINANCIAL STATEMENTS. Within thirty (30) days after the
end of each calendar quarter, Borrower shall furnish or cause to be furnished to
BANKFIRST a copy of Borrower's current financial statement and those of each
Guarantor, (provided, however, that with respect to Guarantors, only annual
financial statements need to be provided.) Borrower's financial statements shall
contain a balance sheet, profit and loss statement and aging of accounts
receivable and account payable, all in reasonable detail, prepared in accordance
with generally accepted accounting principles, consistently applied. Each set of
financial statements shall be prepared by a certified public. accountant
acceptable to BANKFIRST and certified by Borrower to be correct and accurate.
Borrower shall also furnish a copy of its income tax returns, and such other or
additional financial information as BANKFIRST may from time to time request.
Notwithstanding any term or provision to the contrary herein
or in the Note, or otherwise, in the event of a failure to provide financial
statements or income tax returns as required herein, the effective interest rate
to the loan, for a period beginning three (3) days after written notice of such
failure and ending upon the curing of said noticed failure, shall increase one
quarter of one percent (.25%) for the first thirty (30) days of said failure,
and increase an additional one quarter of one percent (.25%) during each thirty
(30) day period thereafter during which the noticed failure continues. Upon the
remedy of the noticed failure, the interest rate on the Loan shall revert to the
initially agreed-upon interest rate, effective on the date on which the failure
is remedied. Borrower acknowledges that such increased interest rate is intended
to compensate BANKFIRST for the potentially higher credit risk and increased
administrative costs associated with such failure to furnish timely financial
information.
4.6 FINANCIAL COVENANTS.
(a) Current Ratio. Borrower shall at all times maintain a
ratio of current assets to current liabilities of not less than 1.25 to
1.0. For purposes of this covenant, "current assets" shall refer to
cash, inventory, accounts receivable, marketable securities, notes
receivable (other than notes receivable from employees and shareholders
of Borrower) and deferred taxes, and "current liabilities" shall refer
to any indebtedness due and payable within one fiscal year from the
date of Borrower's most recent balance sheet (excluding indebtedness of
Borrower to Sirrom Capital Corporation), all determined in accordance
with generally accepted accounting principles consistently applied.
(b) Net Worth Requirements. Borrower shall at all times
maintain a minimum tangible net worth of $2,200,000.00 from the date
hereof through May 31, 1995; $2,500,000.00 from June l, 1995 through
November 30, 1995; and $3,750,000.00 thereafter. For purposes of this
covenant, "tangible net worth" shall refer to Borrower's total assets
minus total liabilities minus prepaids, intangibles and amounts due
from affiliates ~ any debt subordination to indebtedness of Borrower to
BANKFIRST pursuant to subordination agreements satisfactory to
BANKFIRST, all determined in accordance with generally accepted
accounting principles consistently applied.
(c) Debt to Worth Ratio. Borrower shall at all times maintain
a ratio of total liabilities (exclusive of any debt subordinated to
indebtedness of Borrower to BANKFIRST pursuant to subordination
agreements satisfactory to BANKFIRST) to tangible net worth of not more
than 2.0 to 1.0 for the month ending February 28, 1995; 3.0 to 1.0 from
March 1, 1995, through June 30, 1995; 3.5 to 1.0 from July 1, 199S,
through November 30, 1995; and 1.75 to 1.0 thereafter. For purposes of
this covenant, "tangible net worth" shall have the meaning set forth in
Section 6.2 hereof.
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(d) Interest Coverage Ratio. Borrower shall maintain a ratio
of income before interest and taxes to interest expense, all determined
in accordance with generally accepted accounting principles
consistently applied, calculated annually as of Borrower's fiscal
year-end, of not less than 1.30 to 1.0.
4.7 OTHER DEBTS. Borrower shall not directly or indirectly
incur, create, assume or permit to exist any obligation for payment of borrowed
money in excess of $25,000.00, excepting only unsecured current liabilities
incurred in the ordinary course of business and obligations contemplated by this
Agreement, nor enter into any leases, nor initiate any new investments of its
funds or assets without the express written consent of BANKFIRST, which consent
shall not be unreasonably withheld. Further, Borrower shall not guarantee the
obligations of any person or entity, excepting only obligations contemplated by
this Agreement.
4.8 SALE OF COLLATERAL. Borrower shall not sell, lease,
transfer or otherwise dispose of any of the Collateral as described in ARTICLE
VII hereof, other than in the ordinary course of Borrower's business. If
Borrower should desire to sell any of the Collateral, a release price therefore
will be determined at the sole discretion of BANKFIRST, and upon the sale of
that Collateral, the release price will be paid over by Borrower to BANKFIRST
and applied by BANKFIRST to payments due on the Note, in inverse order of the
due dates, and BANKFIRST shall thereupon release its lien or security interest
upon the Collateral sold.
4.9 BULK SALE. The Borrower shall not, without the prior
written consent of BANKFIRST, sell, transfer or convey all or any part of its
interest in its assets to another entity.
4.l0 ENCUMBRANCES. Borrower shall not incur or permit to exist
nor allow Guarantor to incur or permit to exist any encumbrance, pledge
or lien upon or against any of the Collateral, except:
(a) Liens or security interests required or expressly
contemplated or permitted by this Agreement;
(b) Liens for taxes, assessments and other governmental
charges not yet due; and liens of carriers, warehousemen, mechanics and
materialmen incurred in the ordinary course of business for sums not
yet due; and
(c) Tax liens which are being contested in good faith.
4.11 TAXES. Borrower shall pay promptly, when due, all taxes,
assessments and governmental charges or levies imposed upon the Borrower or upon
the income or any property of the Borrower, as well as all claims of any kind
(including claims for labor, material, supplies or rent) which, if unpaid, might
become a lien upon any or all of the Collateral.
4.12 EXAMINATION OF RECORDS. Borrower shall permit any
representative of BANKFIRST to examine and to audit any or all of Borrower's
books and records and to copy portions thereof, and to visit and inspect any of
the Collateral upon receipt of reasonable notification and request.
4.13 ERISA. Borrower is in compliance with the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), has not incurred
any material funding deficiency within the meaning of ERISA, and has not
incurred any material liability to the Pension Benefit Guaranty Corporation in
connection with any employee benefit plan established or maintained by Borrower.
4.14 DIVIDENDS. DISTRIBUTIONS. REDEMPTIONS AND SALARIES.
Borrower will not declare or pay any dividend, purchase, redeem, or otherwise
acquire for value any
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of its stock now or hereafter outstanding, return any capital to its
stockholders, or make any distribution of its assets to its stockholders as
such. Borrower shall not increase the aggregate compensation paid to its
officers as of the date of this Agreement without the prior consent of
BANKFIRST.
ARTICLE V
EVENTS OF DEFAULT
The occurrence of any one or more of the following shall
constitute an "Event of Default":
(a) Nonpayment, when due, of any principal, accrued interest,
premium, fee or other charge due under the Note.
(b) Default by Borrower in the due observance or performance
of any term, covenant, condition or agreement on its part to be
performed under this Loan Agreement, the Note, or under any other
document contemplated by this Loan Agreement.
(c) If Borrower shall:
(1) Make a general assignment for the benefit of its
creditors;
(2) File a voluntary petition in bankruptcy;
(3) Be adjudicated as bankrupt or insolvent;
(4) File any petition or answer seeking, consenting to, or
acquiescing in, reorganization, arrangement, composition,
liquidation, dissolution or similar relief, under any
present or future statute, law or regulation;
(5) File an answer admitting or failing to deny the
material allegations of the petition against it for any
such relief;
(6) Admit in writing its inability to pay its debts as
they mature;
(7) Discontinue business; or
(8) Be unable to pay its debts as they become due.
(d) Borrower fails to have vacated or set aside within thirty
(30) days of its entry any court order appointing a receiver or trustee
for all or a substantial portion of the Borrower's property.
(e) Any warranty, representation or statement made or
furnished to BANKFIRST by Borrower in connection with the Loan or in
connection with this Agreement (including any warranty, representation
or statement in the application of Borrower for the Loan or in any
accompanying financial statements) or to induce BANKFIRST to make the
Loan, proves to be untrue, misleading or false in any material respect.
(f) Borrower suffers or permits any lien, encumbrance or
security interest to attach to any of its property, except as herein
otherwise expressly permitted, or if any judgment shall be entered
against Borrower or any attachment shall be made against any
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property of Borrower, which judgment or attachment shall remain
undischarged, unbonded or undismissed for a period of thirty (30) days.
(g) Borrower defaults in the payment of any principal or
interest on any obligation to BANKFIRST or to any other creditor.
(h) Borrower shall sell, lease or otherwise transfer or convey
any of the Collateral, or any interest therein without BANKFIRST'S
prior written approval, except as herein otherwise expressly permitted.
(i) BANKFIRST deems itself insecure or that its prospects for
payment of the Note are impaired.
ARTICLE VI
REMEDIES ON EVENT OF DEFAULT
6.1 DECLARE NOTE DUE. Upon the occurrence of any Event of
Default as defined in this Agreement, the Note, the Security Agreement, or any
other document contemplated by this Agreement; then in any such event, BANKFIRST
at its option, may declare the entire unpaid balance of the Note to be forthwith
due and payable, and thereupon such balance shall become so due and payable
without presentment, protest or further demand or notice of any kind, all of
which are hereby expressly waived, and Borrower will forthwith pay to BANKFIRST
the entire principal of and interest accrued on the Note.
6.2 OTHER REMEDIES. Upon the occurrence or discovery of an
Event of Default, BANKFIRST shall, in addition to its option to declare the
entire unpaid amount of the Note due and payable, at its option:
(a) Move to protect its rights and remedies as a secured party
under the Security Agreement, by extrajudicial authority as set forth
in that instrument, by action at law or equity, or by any other lawful
remedy to enforce payment.
(b) Apply the proceeds from any disposition of the Collateral
to the satisfaction of the following items in the order in which they
are listed:
(1) The expenses of taking, preserving, insuring,
repairing, holding and selling the Collateral, including
any legal costs and attorney's fees. If any of the Note
shall be referred to an attorney for collection, Borrower
and all others liable on the Note, jointly and severally
agree to pay reasonable attorney's fees and all costs of
collection.
(2) The expenses of liquidating or satisfying any liens,
security interest or encumbrances on or in the Collateral
which may be prior to the lien or security interest of
BANKFIRST therein.
(3) The unpaid amount of any interest due on the Note, and
all other expenses of BANKFIRST.
(4) The unpaid principal amounts of the Note.
(5) Any other indebtedness of Borrower to BANKFIRST.
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(6) The remainder, if any, to Borrower, it being
understood and agreed that if the proceeds realized from
the disposition of the Collateral shall fail to satisfy
items (1) through (5) above, Borrower shall forthwith pay
any such deficiency to BANKFIRST upon demand.
(d) Exercise any and all rights of setoff which BANKFIRST may
have against any account, fund or property of any kind, tangible or
intangible, belonging to Borrower and which shall be in BANKFIRST'S
possession or under BANKFIRST'S control.
ARTICLE VII
COLLATERAL
Borrower's obligation for payment of the Note shall be
collateralized by the following (the "Collateral"):
7.1 GUARANTY. The Unlimited and Continuing Guaranty of Randal
D. Boyd.
7.2 SECURITY INTEREST. A security interest in and upon the
personal property of Borrower, including a first priority security interest in
all new equipment purchased from the loan proceeds.
ARTICLE VIII
MISCELLANEOUS
8.1 CLOSING. The Loan shall be closed on or before the 10th
day of June, 1995. However, BANKFIRST shall not be obligated to make the Loan or
advance any funds until Borrower has fully met all requirements herein set forth
to be met by Borrower, and until Borrower has paid to BANKFIRST and any other
parties entitled thereto, all fees and other charges due in connection with the
Loan.
8.2 AMENDMENTS. No amendment of any provisions of this Loan
Agreement, nor consent to any departure of Borrower therefrom, shall in any
event be effective unless the same shall be in writing and signed by BANKFIRST
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
8.3 NOTICES. All notices and other communications provided for
hereunder shall be in writing and mailed or telegraphed or delivered.
If to Borrower:
Radio Systems Corporation
5008 National Drive
Knoxville, Tennessee 37914
Attention: Randal D. Boyd
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If to BANKFIRST:
BANKFIRST
Post Office Box 10
Knoxville, Tennessee 37901-0010
8.4 WAIVER OF JURY. Borrower hereby unconditionally and
irrevocably waives any and all right to trial by jury in any action, suit,
counterclaim or cross claim arising in connection with, out of or otherwise
relating to the Loan Agreement, any other documentation relating to the Loan, or
any transaction arising therefrom or related thereto.
8.5 GOVERNING LAW AND PARTIES BOUND. This Agreement and the
Note shall be governed by and construed in accordance with the laws of the State
of Tennessee and shall be binding upon and shall inure to the benefit of the
parties hereto, their successors and assigns.
8.6 ATTORNEY'S FEES AND EXPENSES. If BANKFIRST shall incur
any cost or expense, including, without limitation, reasonable attorney's fees,
in connection with this Agreement, the Note or the Loan, in any manner
whatsoever, direct or indirect, whether with regard to the collection of amounts
due, protection of Collateral, defense of BANKFIRST or otherwise, upon demand by
BANKFIRST, Borrower shall pay the same or shall reimburse BANKFIRST therefor in
full.
8.7 ASSIGNMENT BY BORROWER. No commitment issued by BANKFIRST
to Borrower for the Loan nor any of Borrower's rights hereunder shall be
assignable by Borrower without the prior written consent of BANKFIRST.
8.8 NO WAIVER: REMEDIES. No failure on the part of
BANE(FIRST, and no delay in exercising any right under this Loan Agreement,
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right under this Loan Agreement preclude any other or further exercise
thereof or the exercise of any other right.
8.9 SEVERABILITY. In the event that any clause or provisions
of this Loan Agreement or any document or instrument contemplated by this
Agreement shall be held to be invalid by any court of competent jurisdiction,
the invalidity of such clause or provision shall not affect any of the remaining
portions or provisions of this Loan Agreement.
8.10 TIME. TIME IS OF THE ESSENCE of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Loan
Agreement as of the date first above written.
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
---------------------------------------
Its: President
--------------------------------------
BANKFIRST
By: /s/ Michael L. Bryson
---------------------------------------
Its: Senior Vice-President
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EXHIBIT 10.13
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 3rd day
of April, 1995, is made and entered into on the terms and conditions hereinafter
set forth, by and between RADIO SYSTEMS CORPORATION, a Tennessee corporation
with principal offices in Knoxville, Tennessee ("Borrower"), and FIRST AMERICAN
NATIONAL BANK, a national banking association with principal offices in
Nashville, Tennessee ("Lender").
WHEREAS, Borrower has requested that Lender make available to Borrower
a line of credit in the original principal amount not exceeding $5,000,000 (the
"Line of Credit"; the Line of Credit is sometimes hereinafter referred to as the
"Loan") on the terms and conditions hereinafter set forth, and for the
purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower,
Borrower has made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements
of Borrower, has agreed to make the Loan upon the terms and conditions
hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower and Lender hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the indicated
meanings:
"Borrowing Base" shall mean an aggregate amount equal to the sum of (a)
seventy-five percent (75%) of Eligible Receivables, plus (b) the lesser of forty
percent (40%) of Eligible Inventory or the Inventory Borrowing Limit.
"Collection Days" shall mean two (2) banking days.
"Eligible Receivables" shall mean Receivables arising out of the sale
or other disposition of Borrower's Inventory or the rendering of services to
Borrower's customers, excluding (a) all Receivables that are due and payable
more than one hundred eighty (180) days after the dates of the corresponding
invoices, (b) all Receivables that have been outstanding for more than sixty
(60) days after the due dates of the corresponding invoices, (c) all Receivables
owing from any account debtor if more than 50% of the Receivables owed to
Borrower by such account debtor have been outstanding for more than sixty (60)
days after the due dates of the corresponding invoices, (d) all returns,
allowances, discounts, credits and contra items, (e) all amounts owed from
employees, officers, shareholders, directors or affiliates and all intra-company
items, (f) any Receivables evidenced by instruments or chattel paper that have
not been endorsed and delivered to Lender by Borrower, and (g) all other items
which Lender in its sole discretion determines to be ineligible.
"Eligible Inventory" shall mean Borrower's Inventory of raw materials
and finished goods (excluding Inventory at the locations listed on Exhibit A
attached hereto), valued at the lesser of cost or market, with such adjustments
thereto as Lender in its sole discretion determines to be
<PAGE> 2
appropriate, including but not limited to adjustments relating to obsolete
Inventory (including obsolescence resulting from the introduction by Borrower of
new product lines).
"Event of Default" shall have the meaning assigned to such term in
Section 7.1 of this Agreement.
"Guarantor" shall mean Randal Boyd.
"Guaranty" shall mean that certain Continuing Guaranty of even date
herewith, executed in favor of Lender by Guarantor, pursuant to which
Guarantor's liability is limited to $1,000,000, plus interest and costs of
collection.
"Inventory" shall have the meaning assigned to such term in the Uniform
Commercial Code.
"Inventory Borrowing Limit" shall mean $1,000,000.
"Line of Credit" shall have the meaning assigned to such term in the
preamble of this Agreement.
"Line of Credit Borrowing Limit" shall mean $5,000,000.
"Line of Credit Interest Rate" shall mean an annual rate equal to the
lesser of (a) the maximum contract rate of interest permitted to be charged
under applicable law or (b) the interest rate from time to time designated by
Lender as its "Index Rate" plus one and three-quarters percentage points
(1-3/4%), computed on the basis of a 360-day year, actual number of days
elapsed, adjusted daily as the Index Rate changes.
"Line of Credit Termination Date" shall mean July 3, 1996.
"Loan Documents" shall mean, collectively, the Security Instruments,
together with the Note and any other instruments and documents now or hereafter
evidencing, securing or in any way related to the indebtedness evidenced by the
Note.
"Note" shall mean that certain Master Secured Promissory Note of even
date herewith, in the principal amount not exceeding the Line of Credit
Borrowing Limit, made and executed by -Borrower, payable to the order of Lender,
evidencing the indebtedness of Borrower to Lender in connection with the Line of
Credit, together with any and all extensions, modifications, renewals and/or
replacements thereof.
"Permitted Encumbrances" shall mean (a) a lien on certain of Borrower's
assets in favor of Sirrom Capital Corporation which, pursuant to the
requirements of Section 6.5 of this Agreement, is subordinate to the lien of
Lender in such assets pursuant to a subordination agreement satisfactory to
Lender in all respects, and (b) purchase money security interests in certain of
Borrower's equipment, to the extent such liens secure the purchase price of such
equipment.
"Receivables" shall mean accounts, general intangibles, instruments and
chattel paper, as such terms are defined in the Uniform Commercial Code.
"Secured Obligations" shall have the meaning assigned such term in
Section 3.2 of this Agreement.
"Security Instruments" shall mean, collectively, this Agreement, the
Guaranty and any other instruments, documents or agreements now or hereafter
securing the Secured Obligations, whether by specific or general reference.
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"Service Fee" shall mean $6,000, payable upon the execution of this
Agreement and annually thereafter.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in the State of Tennessee from time to time.
ARTICLE II
THE LOAN
2.1 Advances. Prior to the Line of Credit Termination Date and so long
as no Event of Default (or event that with the giving of notice or the passage
of time or both would constitute an Event of Default) has occurred and is in
existence hereunder, Lender shall advance proceeds under the Line of Credit to
Borrower upon Borrower's request in an aggregate amount outstanding at any one
time not to exceed the lesser of (i) the Borrowing Base in effect from time to
time, or (ii) the Line of Credit Borrowing Limit (with said credit availability
subject to reduction in accordance with the provisions of Section 2.3 of this
Agreement), although Lender may in its sole and absolute discretion permit
advances to exceed such amount. Any such excess advances shall be secured by,
and subject to the terms and conditions of, this Agreement.
2.2 Interest Rate: Repayment. The indebtedness of Borrower to Lender in
connection with the Line of Credit shall be evidenced by, and payable in
accordance with the terms of, the Note. Amounts outstanding under the Line of
Credit shall bear interest at the Line of Credit Interest Rate. In addition,
Borrower covenants and agrees to maintain Eligible Receivables and Eligible
Inventory in an aggregate amount sufficient to keep the aggregate outstanding
principal balance of the advances made in respect of the Line of Credit within
the limits specified in Section 2.1 of this Agreement. If at any time such
limits are exceeded, Borrower shall immediately pay to Lender an amount
sufficient to reduce the aggregate outstanding principal balance of the Line of
Credit to an amount that is within such limits.
2.3 Letters of Credit. Prior to the Line of Credit Termination Date, so
long as no Event of Default (or event that with the giving of notice or the
passage of time or both would constitute an Event of Default) has occurred and
is continuing hereunder and to the extent of Borrower's credit availability
under the Line of Credit, Lender shall, at Borrower's request, issue letters of
credit for the account of Borrower pursuant to applications submitted to Lender
by Borrower, subject to the following terms and conditions:
(i) in no event shall the aggregate, outstanding face amount
of any such letters of credit exceed $500,000,
(ii) any such letters of credit shall be issued on terms
satisfactory to Lender in all respects, and shall be conditioned upon
payment of Lender's customary fees and expenses,
(iii) the credit availability under the Line of Credit shall
be reduced by the aggregate undrawn amount from time to time available
under outstanding letters of credit, and
(iv) any amounts paid by Lender under any such letters of
credit shall be deemed to be advances against the Note, and the
indebtedness of Borrower to Lender in connection therewith shall
constitute a part of the Secured Obligations and shall be secured as
hereinafter set forth in the same manner as all other advances made by
Lender against the Note.
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2.4 Purpose. The purpose of the Line of Credit shall be to provide
working capital to Borrower on a revolving basis.
ARTICLE III
SECURITY
3.1 Security. The Secured Obligations are and shall continue to be
secured by the following:
(a) Personal Property. Borrower hereby grants to Lender a
security interest in the following described property and interests in
property, together with all proceeds (including but not limited to
insurance proceeds) and products thereof and all accessions thereto, as
applicable:
(i) Equipment. All equipment of Borrower of every kind
and description, whether now owned or . hereafter acquired and
wherever located, together with all parts, accessories and
attachments and all replacements thereof and additions
thereto;
(ii) Inventory. Accounts, Chattel Paper, Instruments.
Documents and General Intangibles. All of Borrower's
inventory, whether held for lease, sale or for furnishing
under contracts of service, all agreements for lease of same
and rentals therefrom, and all of Borrower's accounts,
accounts receivable, chattel paper, instruments, documents and
general intangibles (including but not limited to trade marks,
copyrights and patents), whether now in existence or owned or
hereafter acquired, entered into, created or arising, and
wherever located; and
(iii) Books and Records. All of Borrower's right, title
and interest to all of the books, records, files and all other
data and documents of Borrower of all kinds in whatever form,
whether computerized or otherwise and including but not
limited to computer disks, tapes and printouts, relating to
the above-described collateral.
(b) Other Security Instruments. The Deed of Trust, the
Guaranty, the Assignment of Life Insurance and the other Security
Instruments.
3.2 Secured Obligations. Without limiting any of the provisions
thereof, the Security Instruments shall secure:
(a) The full and timely payment of the indebtedness evidenced
by the Note, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment
thereof,
(b) The full and prompt performance of all of the obligations
of Borrower to Lender under the Loan Documents,
(c) The full and prompt payment of all expenses and costs of
whatever kind incident to the collection of the indebtedness evidenced
by the Note, the perfection, enforcement or protection of the security
interests of the Security Instruments or the exercise by Lender of any
rights or remedies of Lender with respect to the indebtedness evidenced
by the Note, including but not limited to reasonable attorney's fees
and expenses incurred by Lender, all of which Borrower agrees to pay to
Lender upon demand, and
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(d) The full and prompt payment and performance of any and all
other indebtedness and other obligations of Borrower to Lender, direct
or contingent (including but not limited to obligations incurred as
indorser, guarantor or surety), however evidenced or denominated, and
however and whenever incurred, including but not limited to
indebtedness incurred pursuant to any present or future commitment of
Lender to Borrower, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment
thereof.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
3.3 Assignment Of Life Insurance. Borrower may, at its option,
collaterally assign to Lender a life insurance policy on the life of Guarantor
in an amount not less than $1,000,000, as collateral security for the Secured
Obligations. Any such collateral assignment and policy shall be in form and
substance satisfactory to Lender in all respects. Upon Guarantor's death, in the
event Lender receives the proceeds of such policy and said proceeds are not
subject to any avoidance claim or action or similar claim in connection with any
pending or threatened bankruptcy, insolvency or similar proceeding, Lender will
not pursue any rights it may have against the estate of Guarantor and will
release any claim it has filed against the estate of Guarantor. Pending receipt
of such proceeds, Lender may file a claim against the estate of Guarantor and
take whatever other actions it deems necessary to protect its interests.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
Borrower hereby represents and warrants to Lender as follows:
4.1 Corporate Status. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Tennessee; and has
the corporate power to own and operate its properties, to carry on its business
as now conducted and to enter into and to perform its obligations under this
Agreement and the other Loan Documents to which it is a party. Borrower is not
required under applicable law to be qualified to do business in any other state.
4.2 Authorization. Borrower has full legal right, power and authority
to conduct its business and affairs in the manner contemplated by the Loan
Documents, and to enter into and perform its obligations thereunder, without the
consent or approval of any other person, firm, governmental agency or other
legal entity. The execution and delivery of this Agreement, the borrowing
hereunder, the execution and delivery of each Loan Document to which Borrower is
a party, and the performance by Borrower of its obligations thereunder are
within the corporate powers of Borrower and have been duly and properly
authorized by all necessary corporate action, have received all necessary
governmental approvals, if any were required, and do not and will not contravene
or conflict with any provision of law, any applicable judgment, ordinance,
regulation or order of any court or governmental agency, the charter or by-laws
of Borrower, or any agreement binding upon Borrower or its properties. The
officer(s) executing this Agreement and all of the other Loan Documents to which
Borrower is a party are duly authorized to act on behalf of Borrower.
4.3 Validity and Binding Effect. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their respective terms.
4.4 Other Transactions. Except as specifically set forth in this
Agreement and the other Loan Documents and except for Permitted Encumbrances,
there are no prior loans, liens, security
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interests, agreements or other financings upon which Borrower is obligated or by
which Borrower is bound that will in any way permit any third person to have or
obtain priority over Lender as to any of the security interests or liens granted
to Lender pursuant to this Agreement and the other Security Instruments.
Consummation of the transactions hereby contemplated and the performance of the
obligations of Borrower under and by virtue of the Loan Documents will not
result in any breach of, or constitute a default under, any mortgage, security
deed or agreement, deed of trust, lease, bank loan or credit agreement,
corporate charter or by-laws, agreement or certificate of limited partnership,
partnership agreement, license, franchise or any other instrument or agreement
to which Borrower is a party or by which Borrower or its properties may be bound
or affected.
4.5 Places of Business. The records with respect to all intangible
personal property constituting a part of the collateral security for the Secured
Obligations are maintained at Borrower's chief place of business and chief
executive office, which has the address of 5008 National Drive, Knoxville,
Tennessee 37914. All tangible personal property constituting a part of the
collateral security for the Secured Obligations is or will be located at
Borrower's chief place of business and chief executive office and/or at any
specific locations set forth in attached Exhibit A.
4.6 Litigation. Except as set forth in that certain letter from
Robertson, Ingram & Overbey to Coopers & Lybrand, L.L.P. dated January 30, 1995,
a copy of which is attached hereto as Exhibit B, there are no actions, suits or
proceedings pending, or, to the knowledge of Borrower, threatened, against or
affecting Borrower or any Guarantor or involving the validity or enforceability
of any of the Loan Documents or the priority of the liens thereof, at law or in
equity, or before any governmental or administrative agency, except actions,
suits and proceedings that are fully covered by insurance and that, if adversely
determined, would not impair the ability of Borrower and Guarantor to perform
each and every one of their respective obligations under and by virtue of the
Loan Documents; and to Borrower's knowledge, Borrower is not in default with
respect to any order, writ, injunction, decree or demand of any court or any
governmental authority.
4.7 Financial Statements. The financial statement(s) of Borrower and
each Guarantor heretofore delivered to Lender are true and correct in all
respects, have been prepared in accordance with generally accepted accounting
principles consistently applied, and fairly present the financial condition of
the subjects thereof as of the date(s) thereof. No material adverse change has
occurred in the financial condition of Borrower or any Guarantor since the
date(s) thereof, and no additional borrowings have been made by Borrower since
the date(s) thereof.
4.8 No Defaults. No default or event of default by Borrower exists
under this Agreement or any of the other Loan Documents, or under any other
instrument or agreement to which Borrower is a party or by which Borrower or its
properties may be bound or affected, and no event has occurred and is existing
that with notice or the passage of time or both would constitute a default or
event of default thereunder.
4.9 Compliance With Law. Borrower has obtained all necessary licenses,
permits and governmental approvals and authorizations necessary or proper in
order to conduct its business and affairs as heretofore conducted and as
intended to be conducted hereafter. To Borrower's knowledge, Borrower is
in-compliance with all laws, regulations, decrees and orders applicable to it
(including but not limited to laws, regulations, decrees and orders relating to
occupational and health standards and controls, antitrust, monopoly, restraint
of trade or unfair competition). Borrower has not received, and does not expect
to receive, any order or notice of any violation or claim of violation of any
law, regulation, decree, rule, judgment or order of any governmental authority
or agency relating to the ownership and/or operation of its properties, as to
which the cost of compliance is or might be material and the consequences of
noncompliance would or might be materially adverse to its business, operations,
property or financial condition, or which would or might impair its ability to
perform its obligations under the Loan Documents to which it is a party.
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4.10 Environmental Matters. (a) As used in this Section 4.10 and
in Section 5.12 hereof, the following terms shall have the indicated meanings:
"Business" means all of Borrower's assets, both real and
personal, tangible and intangible, now existing or hereafter acquired
and wherever located, and all of Borrower's current and future business
operations at all locations and in all jurisdictions.
"Environmental Authorities" means all federal, state and local
governmental bodies, authorities or agencies and all public
corporations created and/or empowered to administer, regulate and/or
enforce Environmental Laws, including without limitation the U.S.
Environmental Protection Agency.
"Environmental Laws" means any and all federal, state,
regional, county or local laws, statutes, rules, regulations or
ordinances relating to the generation, recycling, use, reuse, sale,
storage, handling, transport, treatment or disposal of Hazardous
Materials, including without limitation the Comprehensive Environmental
Response Compensation Liability Act of 1980, as amended by the
Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.
ss.ss.9601 et seq. ("CERCLA"), the Resource Conservation and Recovery
Act of 1976, as amended by the Solid and Hazardous Waste Amendments of
1984, 42 U.S.C. ss.ss.6901 et seq. ("RCRA"), the Tennessee Hazardous
Waste Management Act, T.C.A. ss.ss.68-46-101 et seq., and any rules,
regulations and guidance documents promulgated or published thereunder,
and any state, regional, county or local statute, law, rule, regulation
or ordinance relating to public health, safety or the discharge,
emission or disposal of Hazardous Materials or Hazardous Wastes in or
to air, water, land or groundwater, to the withdrawal or use of
groundwater, to the use, handling or disposal of asbestos,
polychlorinated biphenyls, petroleum, petroleum derivatives or
by-products, other hydrocarbons or urea formaldehyde, to the treatment,
storage, disposal or management of Hazardous Materials, to exposure to
Hazardous Materials, to the transportation, storage, disposal,
management or release of gaseous or liquid substances, and any
regulation, order, injunction, judgment, declaration, notice or demand
issued thereunder.
"Hazardous Materials" means any hazardous, toxic or dangerous
materials, substances, chemicals, waste or pollutants that from time to
time are defined by or pursuant to or are regulated under any
Environmental Laws, including without limitation asbestos,
polychlorinated biphenyls, petroleum, petroleum derivatives or
by-products, other hydrocarbons, urea formaldehyde and any material,
substance, pollutant or waste that is defined as a hazardous waste
under RCRA or defined as a hazardous substance under CERCLA.
"Hazardous Wastes" means Hazardous Materials that are or
become "wastes" or "solid wastes" as such terms are used in RCRA.
"Property" means all real property now or hereafter
constituting a part of, or otherwise used or operated by Borrower in
connection with, the Business.
(b) Borrower represents and warrants to Lender as follows:
(i) The Property is being operated by Borrower in
full compliance with Environmental Laws, and Borrower has
obtained, maintained and is in good standing under all
approvals, consents, certificates, licenses and permits
required by Environmental Laws with respect to the Property.
(ii) To Borrower's knowledge, the Property is free of
all Hazardous Wastes and is free of all Hazardous Materials
other than those maintained therein or
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thereon in full compliance with Environmental Laws. Borrower
has not caused or permitted the Property to be used to
generate, manufacture, refine, transport, treat, store,
handle, dispose, transfer, produce or process Hazardous
Materials except in full compliance with Environmental Laws.
(iii) Except as set forth on Exhibit C attached
hereto, Borrower has not received notice, and has no
knowledge, of any noncompliance with or violation of any
Environmental Laws with respect to the Property or the
Business.
4.11 No Burdensome Restrictions. No instrument, document or agreement
to which Borrower is a party or by which it or its properties may be bound or
affected materially adversely affects, or may reasonably be expected so to
affect, the business, operations, property or financial condition of Borrower.
4.12 Taxes. Borrower has filed or caused to be filed all tax returns
that to its knowledge are required to be filed (except for returns that are not
yet due), and has paid all taxes shown to be due and payable on said returns and
all other taxes, impositions, assessments, fees or other charges imposed on it
by any governmental authority, agency or instrumentality, prior to any
delinquency with respect thereto (other than taxes, impositions, assessments,
fees and charges currently being contested in good faith by appropriate
proceedings, for which appropriate amounts have been reserved). No tax liens
have been filed against Borrower or any of its property.
4.13 Equipment. The equipment constituting a part of the collateral for
the Secured Obligations is owned solely by Borrower, and Borrower has full
right, power and authority to grant to Lender a valid and enforceable security
interest therein. Except for Permitted Encumbrances, Lender's security interest
in such equipment constitutes a first and prior lien upon and security interest
in such equipment, and no other person or entity has any right, title, interest,
security interest, claim or lien with respect thereto.
4.14 Inventory. The Inventory constituting a part of the collateral for
the Secured Obligations is owned solely by Borrower, and Borrower has all
necessary right, power and authority to grant to Lender a valid and enforceable
security interest therein. Lender's security interest in such Inventory
constitutes a first and prior lien upon and security interest in such Inventory,
and, except for Permitted Encumbrances, no other person or entity has any right,
title, interest, security interest, claim or lien with respect thereto.
4.15 Receivables, Etc. With respect to the Receivables, (a) each
Receivable is a valid and bona fide existing obligation created by or arising
out of the sale and delivery or other disposition of Borrower's Inventory or the
rendition by Borrower of services to Borrower's customers in the ordinary course
of business, (b) the Receivables are owned solely by Borrower and Borrower has
all necessary right, power and authority to grant to Lender a valid and
enforceable security interest therein, (c) Lender's security interest in such
Receivables constitutes a first and prior lien upon and security interest in
such Receivables, and, except for Permitted Encumbrances, no other person or
entity has any right, title, interest, security interest, claim or lien with
respect thereto; (d) each Receivable constituting an Eligible Receivable will at
all times be unconditionally owed to Borrower and enforceable against the
obligor(s) with respect thereto without dispute of any kind, and (e) each
Receivable constituting an Eligible Receivable is an "account" as defined in the
Uniform Commercial Code and is not evidenced by any instrument or document
(except as specifically disclosed to Lender and accepted by Lender as an
Eligible Receivable) that would in any way change or alter its character as an
account. -
4.16 Effect of Request for Advance. Each request by Borrower for an
advance of proceeds of the Line of Credit shall constitute an affirmation by
Borrower that the representations and warranties of this Article IV remain true
and correct on and as of the date of such request.
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ARTICLE V
COVENANTS AND AGREEMENTS
Borrower covenants and agrees that during the term of this Agreement:
5.1 Payment of Secured Obligations. Borrower shall pay the indebtedness
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other Secured Obligations.
5.2 Sales of and Encumbrances on Collateral. Borrower will not sell,
exchange, lease, negotiate, pledge, assign or grant any security interest in or
otherwise dispose of the collateral described in the Security Instruments to
anyone other than Lender, nor permit any other lien of any kind to attach
thereto (other than Permitted Encumbrances), nor permit same to be attached to
or commingled with other goods or property, without Lender's prior written
consent; provided, however, that prior to the occurrence of an Event of Default
hereunder, Borrower shall have the right to process and sell its Inventory in
the ordinary course of business as herein provided and sell Inventory to its
suppliers to be processed and sold back to Borrower.
5.3 Further Assurances. Borrower will take all actions requested by
Lender to create and maintain in Lender's favor valid liens upon, security
titles to and/or perfected security interests in any collateral described in the
Security Instruments and all other collateral for the Secured Obligations now or
hereafter held by or for Lender. Without limiting the foregoing, Borrower agrees
to execute such further instruments (including financing statements and
continuation statements) as may be required or permitted by any law relating to
notices of, or affidavits in connection with, the perfection of Lender's
security interests or liens, to cooperate with Lender in the filing or recording
and renewal thereof, and, upon Lender's request, to immediately place notations
upon its books of account to disclose Lender's security interest in all
Receivables granted in this Agreement.
5.4 Financial Statements and Reports. Borrower shall furnish to Lender
such financial data as Lender may reasonably request. Without limiting the
foregoing, Borrower shall furnish to Lender (or cause to be furnished to Lender)
the following:
(a) as soon as practicable and in any event within one hundred
twenty (120) days after the end of each fiscal year of Borrower, a
balance sheet of Borrower as of the close of such fiscal year, a
statement of earnings and retained earnings of Borrower as of the close
of such fiscal year, and a statement of cash flows for Borrower for
such fiscal year, all in reasonable detail, prepared in accordance with
generally accepted accounting principles consistently applied, audited
in accordance with generally accepted auditing standards by independent
certified public accountants satisfactory to Lender, and accompanied by
the unqualified favorable opinion of such accountants and a certificate
of the chief executive or chief financial officer of Borrower, stating
that, to the best of the knowledge of such officer, Borrower has kept,
observed, performed and fulfilled each covenant, term and condition of
this Agreement and the other Loan Documents during such fiscal year and
that no Event of Default hereunder has occurred and is continuing (or
if an Event of Default has occurred and is continuing, specifying the
nature of same, the period of existence of same and the action Borrower
proposes to take in connection therewith);
(b) within thirty (30) days of the end of each calendar month,
a balance sheet of Borrower as of the close of such month and a
statement of earnings and retained earnings of Borrower as of the close
of such month, all in reasonable detail, and prepared substantially in
accordance with generally accepted accounting principles consistently
applied;
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(c) on a daily basis, a daily report, an assignment of
invoices, a report of collections and adjustments and a certification
of inventory, duly completed, in form satisfactory to Lender, together
with, at Lender's request, copies of Borrower's customers' invoices or
the equivalent, together with original shipping or delivery receipts
for all merchandise sold, and/or the original of all contracts,
mortgages and other documents executed by the customers and/or all
notes, bills, acceptances or other evidences of their indebtedness,
duly endorsed in blank by Borrower, together with any other information
or documents Lender from time to time may request Borrower to submit,
but Lender's failure to request any or all of the foregoing and/or
Borrower's failure to deliver same shall not affect Lender's security
interest in or rights to the Receivables;
(d) promptly upon receipt thereof, copies of all accountants'
reports and accompanying financial reports submitted to Borrower by
independent accountants in connection with each annual examination of
Borrower; and
(e) from time to time, personal financial statements of each
Guarantor, in form satisfactory to Lender, such that at all times
Lender shall have personal financial statements of each Guarantor on
file that are not more than one (1) year old.
5.5 Maintenance of Books and Records: Inspection. Borrower shall
maintain its books, accounts and records in accordance with generally accepted
accounting principles consistently applied, and permit Lender, its officers and
employees and any professionals designated by Lender in writing, at any time to
visit and inspect any of its properties (including but not limited to the
collateral security described in the Security Instruments), corporate books and
financial records, and to discuss its accounts, affairs and finances with any
employee, officer, director or shareholder of Borrower and with any Guarantor
(including any officer, director or shareholder of any corporate Guarantor).~
5.6 Insurance. Without limiting any of the requirements of any of the
other Loan Documents, Borrower shall maintain, in amounts satisfactory to Lender
(a) public liability insurance, (b) worker's compensation insurance (or maintain
a legally sufficient amount of self insurance against worker's compensation
liabilities, with adequate reserves, under a plan approved by Lender), and (c)
fire and "all risk" casualty insurance on its properties (including but not
limited to the collateral security now or hereafter securing payment and
performance of the Secured Obligations), against such hazards and in at least
such amounts as are customary in the type of business in which Borrower is
engaged. At the request of Lender, Borrower will deliver forthwith a
certificate, executed by a duly authorized representative of the insurer(s),
specifying the details of such insurance in effect.
All policies of insurance shall provide that at least thirty (30) days'
prior written notice of cancellation or modification of the policy shall be
given to Lender by the insurer, and all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be payable to Borrower
and Lender as their respective interests may appear. Borrower agrees that there
shall be no recourse against Lender for the payment of premiums, commissions,
assessments or advances in respect of any such policy, and at Lender's request
shall provide Lender with the agreement of the insurer(s) to this effect.
At the request of Lender, all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be delivered to and held
by Lender. Borrower shall act expeditiously in the adjustment and settlement of
claims under such policies in order to preserve the greatest possible value
reasonably obtainable in respect of such claims. Lender may, at its option, act
as attorney in fact for Borrower in adjusting and settling claims under such
insurance and endorsing any drafts with respect thereto, and this power, being
coupled with an interest, shall be irrevocable
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prior to payment in full of the indebtedness evidenced by the Note and
performance of all of the obligations of Borrower to Lender in connection
therewith.
5.7 Taxes and Assessments: Tax Indemnity. Borrower shall (a) file all
tax returns and appropriate schedules thereto that are required to be filed
under applicable law, prior to the date of delinquency, (b) pay and discharge
all taxes, assessments and governmental charges or levies imposed upon Borrower,
upon its income and profits or upon any properties belonging to it, prior to the
date on which penalties attach thereto, and (c) pay all taxes, assessments and
governmental charges or levies that, if unpaid, might become a lien or charge
upon any of its properties; provided, however, that Borrower in good faith may
contest any such tax, assessment, governmental charge or levy described in the
foregoing clauses (b) and (c) so long as appropriate reserves are maintained
with respect thereto. If any tax is or may be imposed by any governmental entity
in respect of sales of Borrower's Inventory or the merchandise that is the
subject of such sales, or as a result of any other transaction of Borrower,
which tax Lender is or may be required to withhold or pay, Borrower agrees to
indemnify and hold harmless Lender in connection with such taxes (including
penalties and interest), and Borrower shall immediately reimburse Lender for any
such amounts paid by Lender, and such amounts shall be added to the Secured
Obligations pursuant to the terms hereof.
5.8 Corporate Existence. Borrower shall maintain its corporate
existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is necessary pursuant to applicable law.
5.9 Compliance with Law and Other Agreements. Borrower shall maintain
its business operations and property owned or used in connection therewith in
compliance with (a) all applicable federal, state and local laws, regulations
and ordinances governing such business operations and the use and ownership of
such property, and (b) all agreements, licenses, franchises, indentures and
mortgages to which Borrower is a party or by which Borrower or any of its
properties is bound. Without limiting the foregoing, Borrower shall pay all of
its indebtedness promptly in accordance with the terms thereof.
5.10 Notice of Default. Borrower shall give written notice to Lender of
the occurrence of any Event of Default under this Agreement or any other Loan
Document promptly upon the occurrence thereof.
5.11 Notice of Litigation. Borrower shall give notice, in writing, to
Lender of (a) any actions, suits or proceedings wherein the amount at issue is
in excess of 5100,000, instituted by any persons against Borrower or any
Guarantor, or affecting any of the assets of Borrower or any Guarantor, and (b)
any dispute, not resolved within sixty (60) days of the commencement thereof,
between Borrower on the one hand and any governmental or regulatory body on the
other hand, which might interfere with the normal operations of Borrower.
5.12 Environmental Matters.
(a) Except for matters disclosed on Exhibit C attached hereto,
Borrower will cause the Property to remain free of all Hazardous
Wastes, and to remain free of all Hazardous Materials other than those
maintained therein or thereon in full compliance with Environmental
Laws. Borrower will not cause or permit the Property to be used to
generate, manufacture, refine, transport, treat, store, handle,
dispose, transfer, produce or process Hazardous Materials except in
full compliance with Environmental Laws.
(b) Borrower will notify Lender immediately if it receives any
notice or obtains knowledge of any noncompliance with or violation of
any Environmental Laws with respect to the Property or the Business.
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(c) In the event that Hazardous Materials unrelated to the
Business, or Hazardous Wastes, are discovered on or are brought onto
the Property, Borrower will cause such Hazardous Materials or Hazardous
Wastes to be removed and disposed of promptly and in full compliance
with Environmental Laws. Borrower will provide Lender prior written
notice of such removal and disposal actions.
(d) Borrower will comply with all Environmental Laws in all
jurisdictions in which Borrower operates, now or in the future, and
will comply with all Environmental Laws that in the future become
applicable to the Property or the Business.
5.13 Mergers, Consolidations, Acquisitions and Sales. Without the prior
express written consent of Lender, Borrower shall not (a) be a party to any
merger, consolidation or corporate reorganization (other than the contemplated
merger of Borrower and Thomas-Randal Corporation, in which Borrower shall be the
surviving corporation), (b) purchase or otherwise acquire all or substantially
all of the assets or stock of, or any partnership or joint venture interest in,
any other person, firm or entity, (c) sell, transfer, convey, grant a security
interest in or lease all or any substantial part of its assets, nor (d) create
any subsidiaries nor convey any of its assets to any subsidiary.
5.14 Management. Ownership. Borrower shall not permit any significant
change in the ownership, executive staff or management of Borrower without the
prior written consent of Lender. For purposes of this agreement, a significant
change in the executive staff or management of Borrower shall mean a change
involving Randal Boyd or James D. Hudson. The ownership, executive staff and
management of Borrower are material factors in Lender's willingness to institute
and maintain a lending relationship with Borrower.
5.15 Dividends Etc. Borrower shall not declare or pay any dividend of
any kind, in cash or in property, on any class of the capital stock of Borrower,
nor purchase, redeem, retire or otherwise acquire for value any shares of such
stock, nor make any distribution of any kind in respect thereof, nor make any
return of capital to shareholders, nor make any payments in respect of any
pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of Lender, which consent shall not be
unreasonably withheld.
5.16 Guaranties: Loans. Borrower shall not guarantee nor be liable in
any manner, whether directly or indirectly, or become contingently liable after
the date of this Agreement in connection with the obligations or indebtedness of
any person or persons, except for the indorsement of negotiable instruments
payable to Borrower for deposit or collection in the ordinary course of
business. Borrower shall not make any loan, advance or extension of credit to
any person other than in the normal course of its business.
5.17 Debt. Other than (a) the indebtedness evidenced by the Note, (b)
indebtedness reflected on Borrower's most recent financial statement delivered
to Lender prior to the date of this Agreement (which financial statement
indebtedness includes capital lease obligations of approximately $300,000),
other than indebtedness to be repaid in connection with the closing of the Loan,
(c) trade accounts payable and accrued expenses incurred in the ordinary course
of business and (d) the indorsement of negotiable instruments payable to
Borrower for deposit or collection in the ordinary course of business, Borrower
shall not create, incur, assume or suffer to exist indebtedness of any
description whatsoever in an aggregate amount in excess of $500,000.
5.18 Conduct of Business. Borrower will continue to engage, in an
efficient and economical manner, in a business of the same general type as
conducted by it on the date of this Agreement.
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5.19 Maintenance of Collateral. Borrower will maintain all tangible
personal property constituting any part of the collateral described in the
Security Instruments in good condition and repair and will pay all costs and
expenses incurred in the maintenance of same, and will not permit any act or
occurrence that may impair the value thereof. Prior to the occurrence of an
Event of Default, Borrower shall be entitled to possession of such tangible
collateral and to use same in any lawful manner permitted hereunder, provided
that such use does not cause excessive wear and tear to such collateral, nor
cause it to decline in value at an excessive rate, nor violate the terms of any
policy of insurance thereon.
5.20 Sale of Inventory. Borrower will not sell, lease, exchange or
otherwise dispose of any of that portion of the collateral that consists of
Inventory, nor remove the same from its place(s) of business as described
herein, without the prior written consent of Lender, except in the ordinary
course of business for cash or on open account or on terms of payment ordinarily
extended to its customers and except for sales to its suppliers of Inventory to
be processed and sold back to Borrower. Upon the sale, exchange or other
disposition of said Inventory, the security interest and lien created and
provided for herein, without break in continuity and without further formality
or act, shall continue in and attach to any proceeds thereof, including but not
limited to accounts, chattel paper, contract rights, shipping documents,
documents of title and cash or non-cash proceeds, and in the event of any
unauthorized sale, shall also continue in said Inventory itself. All chattel
paper shall be delivered to Lender promptly upon receipt.
5.21 Special Agreements of Borrower With Respect to Receivables and
Inventory.
(a) By the execution of this Agreement, Lender shall not be
obligated to do or perform any of the acts or things to be done or
performed by Borrower pursuant to any contracts in which Lender has a
security interest, but Lender may, at its election, perform some or all
of the obligations provided in said contracts to be performed by
Borrower, and if Lender incurs any liability or expenses by reason
thereof, same shall be payable by Borrower upon demand and same shall
also be secured by this Agreement and the other Loan Documents. Lender
shall be subrogated to all guaranties and security now or hereafter in
Borrower's possession or favor.
(b) If requested by Lender, Borrower shall immediately notify
all account debtors to direct payments to Lender or to a lockbox in
accordance with a Lockbox Service Agreement to be entered into between
Borrower and Lender at Lender's request. Borrower will forthwith on
receipt of all checks, drafts, cash and other remittances in payment of
inventory sold, or in payment on account of Borrower's Receivables,
deposit the same in a special bank account maintained with Lender over
which Lender alone has power of withdrawal. Said proceeds shall be
deposited in precisely the form received, except for the indorsement of
Borrower where necessary to permit collection of items, which
indorsement Borrower agrees to make, and which Lender is also hereby
authorized to make on Borrower's behalf. Pending such deposit, Borrower
agrees that it will not commingle any such checks, drafts, cash or
other remittances with any of Borrower's other funds or property, but
will hold them separate and apart therefrom and in trust for Lender
until deposit thereof is made in the special account. The funds in said
account and any funds collected by Lender under a Lockbox Service
Agreement shall be held by Lender as additional security for the
Secured Obligations. Lender may on a daily basis apply the whole or any
part of the collected funds on deposit in the special account and from
the lockbox against the Secured Obligations, and the amount, order and
method of such application shall be in the discretion of Lender;
provided, however, that so long as no Event of Default (or event that
with the giving of notice or the passage of time or both would
constitute an Event of Default) has occurred and is existing, said
collected funds will be applied first to the outstanding principal
balance of, and accrued and unpaid interest on, the Line of Credit, in
such order of priority as Lender shall determine. Any
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portion of said funds on deposit in the special account and from the
lockbox that Lender elects not to so apply may be paid over by Lender
to Borrower.
(c) Without limiting the provisions of subsection 5.21(b)
hereof, Borrower acknowledges and agrees that, upon the occurrence of
an Event of Default hereunder, Lender shall have the right to notify
the account debtors obligated on any or all of Borrower's Receivables
to make payment thereof direct to Lender, and to take control of all
proceeds of any such Receivables, and charge the collection costs and
expenses to Borrower. Until Lender gives Borrower other instructions,
Borrower shall continue to make collections of all Receivables for
Lender. All payments on account of Receivables, or as proceeds of any
collateral, whether such payments are made by check, draft, cash, money
order, wire transfer, or otherwise, shall be the specific property of
Lender. Borrower shall receive such payments as trustee for Lender and
shall immediately deliver them to Lender in their original form as
received. After allowing the Collection Days, Lender will credit all
such payments to the Line of Credit (other than items which are
returned to Lender unpaid); however, increases in loan availability by
virtue of the deposit of such items will be effective immediately upon
deposit.
(d) Lender shall be privileged to enjoy all the rights and
remedies of Borrower as to the Receivables and shall be and become
subrogated to all guaranties and securities possessed by Borrower or
due to come into Borrower's hands, but Lender shall not be liable in
any manner for exercising or refusing to exercise any rights thereby
bestowed.
(e) Borrower shall notify Lender promptly of all returns and
recoveries of merchandise and of all disputes and claims wherein the
amount at issue exceeds $100,000, and Borrower shall settle or adjust
disputes and claims directly with customers for amounts and upon terms
it considers advisable and dispose of merchandise returns as it sees
fit, unless Lender directs Borrower to make such settlements,
adjustments and disposals subject to Lender's approval. In all cases
Lender will credit the Line of Credit with only the net amounts
received by Borrower in payment of Receivables.
(f) Borrower hereby appoints the officers of Lender and/or any
other person whom Lender may designate as Borrower's
attorney(s)-in-fact with full power to endorse Borrower's name on any
checks, notes, acceptances, money orders, drafts or other forms of
payment or security that may come in Lender's possession; to sign
Borrower's name on any invoice or bill of lading relating to any
Receivable, on drafts against customers, on schedules of assignments of
Receivables, on notices of assignment, on financing statements,
applications for noting of liens on certificates of title and other
public records or documents of any kind as necessary or desirable to
insure perfection or enforceability of Lender's security interests in
or liens on property of Borrower granted hereunder or otherwise, on
verification of accounts and on notices to customers; to notify the
post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender; to receive, open
and dispose of all mail addressed to Borrower; to send requests for
verifications of accounts-to customers; and to do all other things
Lender deems necessary to carry out this Agreement. Borrower hereby
ratifies and approves all acts of the attorney(s) and neither Lender
nor the attorney(s) for Lender will be liable for any acts of
commission or omission, nor for any error of judgment or mistake of
fact or law, unless caused by Lender's gross negligence or willful
misconduct. This power, being coupled with an interest, is irrevocable
so long as any money remains owing to Lender from Borrower.
(g) Borrower shall pay to Lender the Service Fee in order to
compensate Lender for services rendered and to be rendered and the
costs and expenses incurred and to be incurred by Lender's officers and
employees in its routine inspection and verification of the collateral
for the Loan and the collection of Receivables. If for any reason the
amount of the
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<PAGE> 15
Service Fee should exceed the fair and reasonable cost of such services
and expenses, an appropriate adjustment shall be made and the excess
portion of the Service Fee shall be refunded to Borrower.
(h) Lender will be entitled to hold all sums at any time
standing to Borrower's credit on Lender's books and all of Borrower's
property at any time in Lender's possession, or upon or in which Lender
at any time has a lien or security interest, as security for all of
Borrower's obligations at any time owing to Lender, its parent
corporation, subsidiary, co-subsidiary or affiliate, whether such
obligations are direct or indirect, absolute or contingent, under this
Agreement or otherwise. Such obligations shall include without
limitation, all loans, advances, debts, liabilities, obligations for
purchases made by Borrower from other clients factored or financed by
Lender or from any such parent, subsidiary, co-subsidiary or affiliate,
whether such obligations are absolute or contingent, or under this
Agreement or otherwise, no matter how or when arising and whether due
or to become due, and further including all interest, fees, charges,
expenses and attorney's fees chargeable to Borrower's loan account or
incurred in connection with Borrower's loan account whether provided
for herein or in any other agreement between Borrower and Lender, and
Lender shall have the right to charge to Borrower's loan account the
amounts of all such obligations and pay over such amounts to such
parent, subsidiary, co-subsidiary or affiliate.
(i) Lender shall periodically render to Borrower a -statement
of Borrower's loan account which shall be deemed correct and accepted
by and binding upon Borrower unless Lender receives a written statement
of Borrower's exceptions thereto within fifteen (15) days of the
mailing thereof. The monthly statements and books of account of Lender
shall constitute prima facie evidence of the balance in Borrower's loan
account.
5.22 Places of Business: Mobile Goods. Borrower will not change the
location of its chief place of business, chief executive office or any place of
business disclosed to Lender pursuant to Section 4.5 hereof, nor will Borrower
move any of the tangible personal property constituting a part of the collateral
for the Secured Obligations to any other location(s) (except during temporary
periods in the normal and customary use thereof), nor will Borrower change the
location at which it maintains its records concerning the intangible collateral
for the Secured Obligations, without thirty (30) days' prior written notice to
Lender in each instance. If any of the tangible collateral for the Secured
Obligations constitutes goods of a type normally used in more than one state
(whether or not actually so used), Borrower will contemporaneously with the
execution hereof furnish to Lender a list of all states in which '. J such goods
are or will be used, and hereafter will notify Lender in writing of any other
state(s) in which such goods are or will be so used.
5.23 ERISA Plan. If Borrower has in effect, or hereafter institutes
(with Lender's consent, as hereinafter provided), a pension plan that is subject
to the requirements of Title IV of the Employee Retirement Income Security Act
of 1974, Pub. L. No. 93 406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. ss.
1001 et seq. (1975), as amended from time to time ("ERISA"), then the following
warranty and covenants shall be applicable during such period as any such plan
(the "Plan") shall be in effect: (a) Borrower hereby warrants that no fact that
might constitute grounds for the involuntary termination of the Plan, or for the
appointment by the appropriate United States District Court of a trustee to
administer the Plan, exists at the time of execution of this Agreement, (b)
Borrower hereby covenants that throughout the existence of the Plan, Borrower's
contributions under the Plan will meet the minimum funding standards required by
ERISA and Borrower will not institute a distress termination of the Plan, (c)
Borrower hereby covenants that the Plan's annual financial and actuarial
statements and the Plan's annual Form 5500 information return will be filed with
Lender within thirty (30) days of the preparation thereof, and (d) Borrower
covenants that it will send to Lender a copy of any notice of a reportable event
(as defined in ERISA) required by ERISA to be filed with the Labor Department or
the Pension Benefit Guaranty Corporation, at the time that such notice is so
filed.
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<PAGE> 16
No Plan shall be instituted by Borrower unless Lender shall have given
its written consent thereto.
ARTICLE VI
FINANCIAL COVENANTS
6.1 Current Ratio. Borrower shall at all times maintain a ratio of
current assets to current liabilities of not less than 1.0 to 1.0. For purposes
of this covenant, "current assets" shall refer to cash, inventory, accounts
receivable, marketable securities, notes receivable (other than notes receivable
from employees and shareholders of Borrower) and deferred taxes, and "current
liabilities" shall refer to any indebtedness due and payable within one fiscal
year from the date of Borrower's most recent balance sheet (excluding
indebtedness of Borrower to Sirrom Capital Corporation), all determined in
accordance with generally accepted accounting principles consistently applied.
6.2 Net Worth Requirements. Borrower shall at all times maintain a
minimum tangible net worth of $2,250,000 from the date hereof through May 31,
1995; $2,500,000 from June 1, 1995 through November 30, 1995; and $3,750,000
thereafter. For purposes of this covenant, "tangible net worth" shall refer to
Borrower's total assets minus total liabilities minus prepaids, intangibles and
amounts due from affiliates plus any debt subordinated to indebtedness of
Borrower to Lender pursuant to subordination agreements satisfactory to Lender,
all determined in accordance with generally accepted accounting principles
consistently applied.
6.3 Debt to Worth Ratio. Borrower shall at all times maintain a ratio
of total liabilities (exclusive of any debt subordinated to indebtedness of
Borrower to Lender pursuant to subordination agreements satisfactory to Lender)
to tangible net worth of not more than 2.0 to 1.0 for the month ending February
28, 1995; 3.0 to 1.0 from March 1, 1995, through June 30, 1995; 3.5 to 1.0 from
July 1, 1995, through November 30, 1995; and 1.75 to 1.0 thereafter. For
purposes of this covenant, "tangible net worth" shall have the meaning set forth
in Section 6.2 hereof.
6.4 Interest Coverage Ratio. Borrower shall maintain a ratio of income
before interest and taxes to interest expense, all determined in accordance with
generally accepted accounting principles consistently applied, calculated
annually as of Borrower's fiscal year-end, of not less than 1.25 to 1.0.
6.5 Subordinated Debt. Any and all indebtedness of Borrower to Sirrom
Capital Corporation and all security therefor shall be subordinated to the
indebtedness of Borrower to lender pursuant to a subordination agreement
satisfactory to Lender in all respects.
ARTICLE VII
DEFAULT AND REMEDIES
7.1 Events of Default. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Failure to make payment of interest on the indebtedness
evidenced by the Note within ten (10) days of when due;
(b) Failure to make payment of the principal of the
indebtedness evidenced by the Note in accordance with the terms of the
Note;
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<PAGE> 17
(c) Any misrepresentation by Borrower as to any material
matter hereunder or under any of the other Loan Documents, or delivery
by Borrower of any schedule, statement, resolution, report,
certificate, notice or writing to Lender that is untrue in any material
respect on the date as of which the facts set forth therein are stated
or certified;
(d) Failure of Borrower to perform any of its obligations
under Sections 5.3, 5.6, 5.7, 5.8, 5.9, 5.11, 5.12, 5.16, 5.17, 5.18 or
5.19 of this Agreement within the earlier of (i) ten (10) days after
written notice from Lender to Borrower or (ii) ten (10) days after the
date Borrower becomes aware of such failure to perform;
(e) Failure of Borrower to perform any of its other
obligations under this Agreement, the Note, any of the Security
Instruments or any of the other Loan Documents;
(f) Borrower or any Guarantor (i) shall generally not pay or
shall be unable to pay its debts as such debts become due; or (ii)
shall make an assignment for the benefit of creditors or petition or
apply to any court or tribunal for the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets; or
(iii) shall commence any proceeding or case under any bankruptcy,
reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; or (iv) shall have had any such petition or
application filed or any such proceeding or case commenced against it
in which an order for relief is entered or an adjudication or
appointment is made; or (v) shall indicate, by any act or omission, its
consent to, approval of or acquiescence in any such petition,
application, case, proceeding or order for relief or the appointment of
a custodian, receiver or trustee for it or a substantial part of its
assets; or (vi) shall suffer any such custodianship, receivership or
trusteeship to continue undischarged for a period of sixty (60) days or
more;
(g) Borrower or any Guarantor shall die or be liquidated,
dissolved, partitioned or terminated, or the charter or certificate of
authority thereof shall expire or be revoked;
(h) A default or event of default shall occur under any of the
other Loan Documents; or
(i) Borrower or any Guarantor shall default in the timely
payment or performance of any obligation now or hereafter owed to
Lender in connection with any other indebtedness of Borrower or any
Guarantor now or hereafter owed to Lender.
7.2 Acceleration of Maturity: Remedies. Upon the occurrence of any
Event of Default described in subsection 7.1(f) hereof as it relates to
Borrower, the indebtedness evidenced by the Note as well as any and all other
indebtedness of Borrower to Lender shall be immediately due and payable in full;
and upon the occurrence of any other Event of Default described above (including
but not limited to subsection 7.1(f) hereof as it relates to any Guarantor),
Lender at any time thereafter may at its option accelerate the maturity of the
indebtedness evidenced by the Note as well as any and all other indebtedness of
Borrower to Lender; all without notice of any kind; provided, however, upon the
occurrence of an Event of Default described in subsection 7.1(g) hereof
resulting from the death of a Guarantor, Lender may not accelerate said
indebtedness until ninety (90) days has elapsed since the date of death of such
Guarantor. Upon the occurrence of any such Event of Default and the acceleration
of the maturity of the indebtedness evidenced by the Note:
(a) any obligation of Lender to advance any proceeds under the
Line of Credit shall immediately cease and be of no further force nor
effect, and Lender shall be immediately entitled to exercise any and
all rights and remedies possessed by Lender pursuant to the terms of
the Security Instruments and all of the other Loan Documents;
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<PAGE> 18
(b) Lender shall have all of the rights and remedies of a
secured party under the Uniform Commercial Code; and
(c) Lender shall have any and all other rights and remedies
that Lender may now or hereafter possess at law, in equity or by
statute.
7.3 Remedies Cumulative, No Waiver. No right, power or remedy
conferred upon or reserved to Lender by this Agreement or any of the other Loan
Documents is intended to be exclusive of any other right, power or remedy, but
each and every such right, power and remedy shall be cumulative and concurrent
and shall be in addition to any other right, power and remedy given hereunder,
under any of the other Loan Documents or now or hereafter existing at law, in
equity or by statute. No delay or omission by Lender to exercise any right,
power or remedy accruing upon the occurrence of any Event of Default shall
exhaust or impair any such right, power or remedy or shall be construed to be a
waiver of any such Event of Default or an acquiescence therein, and every right,
power and remedy given by this Agreement and the other Loan Documents to Lender
may be exercised from time to time and as often as may be deemed necessary by
Lender.
7.4 Proceeds of Remedies. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including attorney's fees
and expenses, incurred by Lender in connection with the exercise of its
remedies;
Second, to the expenses of curing the default that has
occurred, in the event that Lender elects, in its sole discretion, to
cure the default that has occurred;
Third, to the payment of the Secured Obligations, including
but not limited to the payment of the principal of and interest on the
indebtedness evidenced by the Notes, in such order of priority as
Lender shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other
person lawfully "hereunto entitled.
ARTICLE VIII
MISCELLANEOUS
8.1 Performance By Lender.
(a) Lender may file one or more financing statements
disclosing Lender's security interests under this Agreement and the
other Loan Documents without the signature of Borrower appearing
thereon, and Borrower shall pay the costs of, or incidental to, any
recording or filing of any financing statements concerning the
collateral security described in the Security Instruments. Borrower
agrees that a carbon, photographic, photostatic or other reproduction
of this Agreement or any other Security Instrument or of a financing
statement is sufficient as a financing statement.
(b) If Borrower shall default in the payment, performance or
observance of any covenant, term or condition of this Agreement, Lender
may, at its option, pay, perform or observe the same, and all payments
made or costs or expenses incurred by Lender in connection therewith
(including but not limited to attorney's fees and expenses), with
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<PAGE> 19
interest thereon at the highest default rate provided in the Note (if
none, then at the maximum rate from time to time allowed by applicable
law), shall be immediately repaid to Lender by Borrower and shall
constitute a part of the Secured Obligations and be secured hereby
until fully repaid. Lender shall determine at its sole discretion the
necessity for any such actions and of the amounts to be paid.
8.2 Successors and Assigns Included in Parties. Whenever in this
Agreement one of the parties hereto is named or referred to, the heirs, legal
representatives, successors, successors-in-title and assigns of such parties
shall be included, and all covenants and agreements contained in this Agreement
by or on behalf of Borrower or by or on behalf of Lender shall bind and inure to
the benefit of their respective heirs, legal representatives,
successors-in-title and assigns, whether so expressed or not.
8.3 Costs and Expenses. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the loans that are the
subject of this Agreement, including but not limited to filing fees, recording
taxes and reasonable attorney's fees and expenses, promptly upon demand of
Lender. Borrower further agrees to pay all premiums for insurance required to be
maintained pursuant to the terms of the Loan Documents and all of the
out-of-pocket costs and expenses incurred by Lender in connection with the
administration, servicing and/or collection of the loans that are the subject of
this Agreement, including but not limited to reasonable attorney's fees and
expenses, promptly upon demand of Lender. Lender acknowledges receipt of $1,500
for the field examination conducted by Lender prior to the closing of the Loan
and the initial $6,000 annual Service Fee and that, in the absence of an Event
of Default hereunder, no other fees will be charged during the term of the Loan
for the costs and expenses of Lender described in subsection 5.21(g) of this
Agreement (other than the $6,000 Service Fee, which is due and payable
annually). Lender is authorized to retain possession of collateral or proceeds
thereof for a reasonable period of time of not less than ninety (90) days after
payment of all the Secured Obligations and to apply the same to the payment of
such costs and expenses.
8.4 Assignment. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender, and
any such holder and/or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in all or any portion of its
interest in the indebtedness evidenced by the Note. Borrower shall not assign
any of its rights nor delegate any of its duties hereunder or under any of the
other Loan Documents without the prior express written consent of Lender.
8.5 Disposition of Records. Any documents, schedules, invoices or other
papers delivered to Lender by Borrower, may be destroyed or otherwise disposed
of by Lender six (6) months after they are delivered to or received by Lender,
unless Borrower requests, in writing, the return of said documents, schedules,
invoices or other papers and makes arrangements, at Borrower's expense, for
their delivery.
8.6 Time of the Essence. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrower hereunder and under all
of the other Loan Documents.
8.7 Severability. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
8.8 Interest and Loan Charges Not to Exceed Maximum Allowed by Law.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of
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<PAGE> 20
the Loan, acceleration of the maturity of the unpaid balance of said loans or
otherwise, shall the interest and loan charges agreed to be paid to Lender for
the use of the money advanced or to be advanced hereunder exceed the maximum
amounts collectible under applicable laws in effect from time to time. It is
understood and agreed by the parties that, if for any reason whatsoever the
interest or loan charges paid or contracted to be paid by Borrower in respect of
the indebtedness evidenced by the Note shall exceed the maximum amounts
collectible under applicable laws in effect from time to time, then ipso facto,
the obligation to pay such interest and/or loan charges shall be reduced to the
maximum amounts collectible under applicable laws in effect from time to time,
and any amounts collected by Lender that exceed such maximum amounts shall be
applied to the reduction of the principal balance(s) of the indebtedness
evidenced by the Note and/or refunded to Borrower so that at no time shall the
interest or loan charges paid or payable in respect of the indebtedness
evidenced by the Note exceed the maximum amounts permitted from time to time by
applicable law.
8.9 Article and Section Headings: Defined Terms. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
8.10 Notices. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing and shall be
delivered personally, telecopied or sent by certified mail or nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
by the party whose address is being changed and of which receipt has been
acknowledged in writing. The date of personal delivery or telecopy or the date
of mailing (or delivery to such courier service), as the case may be, shall be
the date of such notice, election or demand.
For the purposes of this Agreement:
The Address of Lender is:
First American National Bank
Asset Based Lending Division
First American Center
Nashville, Tennessee 37237
Attention: Kevin W. Poff
Telecopy Number: 615/736-6174
with a copy to:
Bass, Berry & Sims
2700 First American Center
Nashville, Tennessee 37238
Attention: Felix R. Dowsley, III
Telecopy Number: 615/742-6293
The Address of Borrower is:
Radio Systems Corporation
5008 National Drive
Knoxville, Tennessee 37914
Attention: Randal Boyd and James D. Hudson
Telecopy Number: 615/637-8219
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<PAGE> 21
with a copy to:
Bernstein, Stair & McAdams
Suite 600, 530 South Gay Street
Knoxville, Tennessee 37902
Attention: Thomas N. McAdams
Telecopy Number: 615/522-8879
8.11 Integration. This Agreement and the Loan Documents contain the
entire agreement between the parties relating to the subject matter hereof and
supersede all oral statements and prior writings with respect thereto.
8.12 Indemnity. Borrower hereby agrees to defend, indemnify, and hold
Lender harmless from and against any and all claims, damages, judgments,
penalties, costs and expenses (including reasonable attorneys fees and expenses
and court costs now or hereafter arising from the aforesaid enforcement of this
clause) arising directly or indirectly from the activities of Borrower, its
predecessors in interests, or third parties to whom it has a contractual
relationship, or arising directly or indirectly from the violation of any law,
whether such claims are asserted by any governmental agency or any other person.
This indemnity shall survive the termination of this Agreement.
8.13 Jury Trial Waiver. BORROWER AND LENDER HEREBY WAIVE TRIAL BY JURY
IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT IN TORT,
AT LAW OR IN EQUITY, ARISING OUT OF OR ANY WAY RELATED TO THIS AGREEMENT OR THE
LOAN DOCUMENTS.
8.14 Venue. All actions or proceedings in any way, manner or respect
arising out of or from or related to this Agreement shall be litigated in courts
having situs within the City of Nashville, State of Tennessee. Borrower hereby
consents and submits to the jurisdiction of any local, state or federal courts
located within said city and state.
8.15 Miscellaneous. This Agreement shall be construed and enforced
under the laws of the State of Tennessee. No amendment or modification hereof
shall be effective except in a writing executed by each of the parties hereto.
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<PAGE> 22
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ Kevin W. Poff
---------------------------------------
Title: Assistant Vice-President
--------------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
---------------------------------------
Title: President
--------------------------------
22
<PAGE> 1
EXHIBIT 10.14
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 25th day of October, 1995, by and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ("Lender");
W I T N E S S E T H:
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, l995 (the "Agreement"), pursuant to which
Lender has made available to Borrower a line of credit in the maximum principal
amount of $5,000,000, as described therein; and
WHEREAS, Borrower and Lender desire to amend the Agreement in certain
respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Approved Overadvances. Advances in excess of the Borrowing Base will
be permitted by Lender at this time and until November 19, 19__ (the "Approved
Overadvances"). The aggregate outstanding amount of the Approved Overadvances
shall be $200,000 from the date hereof through November 4, 1995, and $100,000
from November 4, 1995, through November 19, 1995. Any overadvances made in
excess of the Approved overadvances will be made in the sole discretion of
Lender, and is not the present intention of Lender to permit any such
overadvances.
2. Representations and Warranties. Borrower represents and warrants
that the representations and warranties set forth in Article IV of the Agreement
are true and correct on and as of the date of this Amendment, and that no
default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
3. Miscellaneous. Except as amended hereby, the Agreement shall remain
in full force and effect. This Amendment does not constitute a waiver of any
default or Event of Default under the Agreement, whether or not Lender is aware
of any such default or Event of Default.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ Kevin W. Poff
---------------------------------------
Title: Assistant Vice-President
--------------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ James D. Hudson
---------------------------------------
Title: Vice-President,
--------------------------------
Chief Financial Officer
--------------------------------
2
<PAGE> 1
EXHIBIT 10.15
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 17th day of May, 1996, by and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ""Lender");
W I T N E S S E T H:
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, 1995, as amended by that certain First
Amendment to Loan and Security Agreement dated October 25, 1995 (collectively,
the "Agreement"), pursuant to which Lender has made available to Borrower a line
of credit in the maximum principal amount of $5,000,000, as described therein;
and
WHEREAS, Borrower and Lender desire to further amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt. and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Article I of the Agreement is hereby amended by
substituting the following definitions for the existing definitions of the
following terms:
"Borrowing Base" shall mean an aggregate amount equal to the
sum of (a) seventy percent (70%) of Eligible Receivables, plus (b) the
lesser of forty percent (40%) of Eligible Inventory or the Inventory
Borrowing Limit.
"Eligible Receivables" shall mean Receivables arising out of
the sale or other disposition of Borrower's Inventory or the rendering
of services to Borrower's customers, excluding (a) all Receivables that
have been outstanding for more than sixty (60) days after the due dates
of the corresponding invoices or more than one hundred eighty (180)
days after the dates of the corresponding invoices, (b) all Receivables
owing from any account debtor if more than fifty percent (50%) of the
Receivables owed to Borrower by such account debtor are otherwise
ineligible, (c) all returns, allowances, discounts, credits and contra
items, (d) all amounts owed from employees, officers, shareholders,
directors or affiliates and all intra-company items, (e) any
Receivables evidenced by instruments or chattel paper that have not
been endorsed and delivered to Lender by Borrower, and (g) all other
items which Lender in its sole discretion determines to be ineligible.
"Inventory Borrowing Limit" shall mean $800,000.
"Line of Credit" shall mean the revolving line of credit
Lender has made available to Borrower pursuant to the terms and
conditions of the Agreement, in the maximum principal amount not
exceeding the Line of Credit Borrowing Limit.
"Line of Credit Borrowing Limit" shall mean $4,000,000.
"Line of Credit Interest Rate" shall mean an annual rate equal
to the lesser of (a) the maximum contract rate of interest permitted to
be charged under applicable law or (b) the
<PAGE> 2
interest rate from time to time designated by Lender as its "Index
Rate" plus two percentage points (2%), computed on the basis of a
360-day year, actual number of days elapsed, adjusted daily as the
Index Rate changes; provided, however, such rate shall be reduced to
(a) the Index Rate plus one and three-quarters percentage points (1
3/4%) so long as no Event of Default exists hereunder and Borrower's
tangible net worth (as defined in Section 6.2 of this Agreement) is not
less than $2,750,000 as of September 30, 1996, and (b) the Index Rate
plus one and one-half percentage points (1 1/2%) so long as no Event of
Default exists and Borrower's tangible net worth (as defined in Section
6.2 of this Agreement) is not less than $3,000,000 as of December 31,
1996. Adjustments in the Line of Credit Interest Rate shall be
effective as of September 30, 1996, or December 31, 1996, as
applicable, based upon Lender's satisfactory review of Borrower's
financial statements for the applicable period (with adjustments to be
made, if necessary, based upon Borrower's audited financial statements,
effective December 31, 1996).
"Line of Credit Termination Date" shall mean June 30, 1997.
"Note" shall mean that certain Amended and Restated Master
Secured Promissory Note dated May 17, 1996, in the principal amount not
exceeding the Line of Credit Borrowing Limit, made and executed by
Borrower, payable to the order of Lender, evidencing the indebtedness
of Borrower to Lender in connection with the Line of Credit, together
with any and all extensions, modifications, renewals and/or
replacements thereof.
2. Assignment of Life Insurance. The Secured Obligations shall be
additionally secured by a Collateral Assignment of Life Insurance Policy on the
life of Randal Boyd, in an amount not less than $500,000 (the "Assignment"). The
definition of "Security Instruments" is hereby amended to include the
Assignment.
3. Financial Covenants. Subsection 6.2 (Net Worth Requirements),
6.3 (Debt to Worth Ratio), 6.4 (Interest Coverage Ratio) and 6.5 (Subordinated
Debt) are hereby amended to provide as follows:
6.2 Net Worth Requirements. Borrower shall at all times
maintain a minimum tangible net worth of $2,200,000 from June 30, 1996
through September 29, 1996; $2,300,000 from September 30, 1996 through
December 30, 1996; and $2,400,000 thereafter. For purposes of this
covenant "tangible net worth" shall refer to Borrower's total assets
minus total liabilities minus prepaids, intangibles and amounts due
from affiliates plus any debt subordinated to indebtedness of Borrower
to Lender pursuant to subordination agreements satisfactory to Lender,
all determined in accordance with generally accepted accounting
principles consistently applied.
6.3 Debt to Worth Ratio. Borrower shall at all times maintain
a ratio of total liabilities (exclusive of any debt subordinated to
indebtedness of Borrower to Lender pursuant to subordination agreements
satisfactory to Lender) to tangible net worth of not more than 1.75 to
1.0. For purposes of this covenant, "tangible net worth" shall have the
meaning set forth in Section 6.2 hereof.
6.4 Interest Coverage Ratio. Borrower shall maintain a ratio
of income before interest and taxes to interest expense, all determined
in accordance with generally accepted accounting principles
consistently applied, calculated quarterly on a year-to-date basis, of
not less than 1.25 to 1.0.
6.5 Subordinated Debt. Any and all indebtedness of Borrower to
Sirrom Capital Corporation, together with any and all future
indebtedness of Borrower to its shareholders or
2
<PAGE> 3
any other investors in Borrower, shall be subordinated to the
indebtedness of Borrower to Lender pursuant to the subordination
agreements satisfactory to Lender in all respects.
4. Reporting Requirements. Until further notice from Lender to
Borrower, Borrower shall submit to Lender on a weekly (rather than monthly)
basis certifications of inventory, in form satisfactory to Lender in all
respects.
5. Upfront Commitment Fee. Upon execution of this Amendment, Borrower
shall pay to Lender a non-refundable commitment fee of $10,000 (the "Upfront
Fee").
6. Unused Portion Commitment Fee. In addition to the Upfront Fee,
Borrower shall pay to Lender a non-refundable commitment fee equal to
one-quarter percent (1/4%) per annum of the average, unfunded portion of the
Loan, payable monthly, in arrears, beginning June 1, 1996, and on the first day
of every month thereafter.
7. Waiver. Lender hereby waives compliance by Borrower with the
financial covenants set forth in Sections 6.2 (Net Worth Requirements), Section
6.3 (Debt to Worth Ratio) and Section 6.4 (Interest Coverage Ratio) for any
period ending prior to the effective date of this Amendment. This does not
constitute a waiver of these covenants for any other period.
8. Representations and Warranties. Borrower represents and warrants
that the representations and warranties set forth in Article IV of the Agreement
are true and correct on and as of the date of this Amendment, and that no
default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
9. Miscellaneous. Except as amended hereby, the Agreement shall remain
in full force and effect. Except as expressly set forth herein, this Amendment
does not constitute a waiver of any default or Event of Default under the
Agreement, whether or not Lender is aware of any such default or Event of
Default.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ John D. Goodman
----------------------------
Title:
---------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
----------------------------
Title: President
---------------------
3
<PAGE> 1
EXHIBIT 10.16
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 13th day of December, 1996, by and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ("Lender");
W I T N E S S E T H:
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, 1995, as amended by that certain First
Amendment to Loan and Security Agreement dated October 25, 1995, and that
certain Second Amendment to Loan and Security Agreement dated May 17, 1996 (as
so amended, the "Agreement"), pursuant to which Lender has made available to
Borrower a line of credit in the maximum principal amount of $4,000,000, as
described therein; and
WHEREAS, Borrower and Lender desire to further amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Article I of the Agreement is hereby amended by
substituting the following definitions for the existing definitions of the
following terms:
"Borrowing Base" shall mean an aggregate amount equal to the
sum of (a) seventy percent (70%) of Eligible Receivables, plus (b) from
December 16, 1996 through April 15, 1997, the lesser of fifty percent
(50%) of Eligible Inventory or the Inventory Borrowing Limit and,
thereafter, the lesser of forty percent (40%) of Eligible Inventory or
the Inventory Borrowing Limit, plus (c) from December 16, 1996 through
April 15, 1997, the lesser of fifty percent (50%) of the face amount of
trade letters of credit issued by Lender for the account of Borrower
securing the purchase of Inventory by Borrower or $150,000.
"Inventory Borrowing Limit" shall mean $1,500,000.
2. K-Mart Receivables. "Eligible Receivables" shall include all
Receivables arising out of the sale of Borrower's Inventory to K-Mart
Corporation (collectively the "K-Mart Receivables"), excluding (a) all K-Mart
Receivables that have been outstanding for more than thirty (30) days after the
due dates of the corresponding invoices or more than ninety (90) days after the
dates of the corresponding invoices, (b) all K-Mart Receivables if more than
fifteen percent (15%) of the K-Mart Receivables are otherwise ineligible (other
than pursuant to (c) or (d) of this paragraph), (c) the amount by which total
K-Mart Receivables exceed fifteen percent (15%) of Borrower's total Receivables,
(d) the amount by which total K-Mart Receivables exceed $700,000, and (e) any
K-Mart Receivables which are otherwise ineligible pursuant to the provisions of
the Agreement.
3. Financial Covenants. Section 6.2 (Net Worth Requirements) and
Section 6.3 (Debt to Worth Ratio) of the Agreement are hereby amended to provide
as follows:
6.2 (Net Worth Requirements). Borrower shall at all times
maintain a minimum tangible net worth of $2,400,000. For purposes of
this covenant, intangible net worth" shall refer to Borrower's total
assets minus total liabilities minus prepaids, intangibles and
<PAGE> 2
amounts due from affiliates plus any debt subordinated to indebtedness
of Borrower to Lender pursuant to subordination agreements satisfactory
to Lender, all determined in accordance with generally accepted
accounting principles consistently applied.
6.3 (Debt to Worth Ratio). Borrower shall at all times
maintain a ratio of total liabilities (exclusive of any debt
subordinated to indebtedness of Borrower to Lender pursuant to
subordination agreements satisfactory to Lender) to tangible net worth
of not more than 2.0 to 1.0. For purposes of this covenant, intangible
net worth" shall have the meaning set forth in Section 6.2 hereof.
4. Repayment of Subordinated Debt. So long as no Event of Default
exists under the Agreement, nor any event with which the giving of notice,
passage of time or both would constitute an Event of Default thereunder, Lender
hereby consents to the repayment in full of the existing indebtedness of
Borrower to Sirrom Capital Corporation (up to a maximum amount of $1,000,000
plus accrued interest), on or before December 25, 1996, and consents to the use
of proceeds of the Loan for the repayment of said subordinated indebtedness.
5. Loan Modification Fee. Upon execution of this Amendment, Borrower
shall pay to Lender a non-refundable loan modification fee of $5,000.
6. Representations and Warranties. Borrower represents and warrants
that the representations and warranties set forth in Article IV of the Agreement
are true and correct on and as of the date of this Amendment, and that no
default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
7. Miscellaneous. Except as amended hereby, the Agreement-shall remain
in full force and effect. This Amendment does not constitute a waiver of any
default or Event of Default under the Agreement, whether or not Lender is aware
of any such default or Event of Default.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ John D. Goodman
-------------------------------
Title: Assistant Vice-President
------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ James D. Hudson
-------------------------------
Title: Chief Financial Officer
------------------------
2
<PAGE> 1
EXHIBIT 10.17
FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FOURTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 22nd day of January, 1997, by and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ("Lender");
W I T N E S S E T H
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, 1995, as amended by that certain First
Amendment to Loan and Security Agreement dated October 25, 1995, that certain
Second Amendment to Loan and Security Agreement dated May 17, 1996 (the "Second
Amendment"), and that certain Third Amendment to Loan and Security Agreement
dated December 13, 1996 (as so amended, the "Agreement") pursuant to which
Lender has made available to Borrower a line of credit currently in the maximum
principal amount of $4,000,000, as described therein; and
WHEREAS, Borrower and Lender desire to further amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Unused Portion Commitment Fee. Effective January 1, 1997, the unused
portion commitment fee set forth in paragraph 6 of the Second Amendment is
hereby deleted.
2. Representations and Warranties. Borrower represents and warrants
that the representations and warranties set forth in Article IV of the Agreement
are true and correct on and as of the date of this Amendment, and that no
default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
3. Miscellaneous. Except as amended hereby, the Agreement shall remain
in full force and effect. This Amendment does not constitute a waiver of any
default or Event of Default under the Agreement, whether or not Lender is aware
of any such default or Event of Default.
<PAGE> 2
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ John D. Goodman
-------------------------------
Title: Assistant Vice-President
------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ James D. Hudson
-------------------------------
Title: Chief Financial Officer
------------------------
2
<PAGE> 1
EXHIBIT 10.18
FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS FIFTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 30th day of April, 1997, by-and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ("Lender");
W I T N E S S E T H:
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, 1995, as amended by that certain First
Amendment to Loan and Security Agreement dated October 25, 1995, that certain
Second Amendment to Loan and Security Agreement dated May 17, 1996, that certain
Third Amendment to Loan and Security Agreement dated December 13, 1996, and that
certain Fourth Amendment to Loan and Security Agreement dated January 22, 1997
(as amended, the "Agreement"), pursuant to which Lender has made available to
Borrower a line of credit currently in the maximum principal amount of
$4,000,000, as described therein; and
WHEREAS, Borrower and Lender desire to further amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Article I of the Agreement is hereby amended by
substituting the following definitions for the existing definitions of the
following terms and, as applicable, adding the following definitions:
"Acquisition" means the acquisition by Borrower of all or any
substantial part of the business or assets of any other person or
entity.
"Acquisition Line" shall have the meaning assigned such term
in Section 2.5 of this Agreement.
"Acquisition Line Interest Rate" shall mean an annual rate
equal to the lesser of (a) the maximum contact rate of interest
permitted to be charged under applicable law or (b) the interest rate
from time to time designated by Lender as its "Index Rate" plus one
percentage point (1%), computed on the basis of a 360-day year, actual
number of days elapsed, adjusted daily as the Index Rate changes.
"Acquisition Line Termination Date" shall mean May 30, 1998.
"Acquisition Notes" shall have the meaning assigned such term
in Section 2.5 of this Agreement.
"Borrowing Base" shall mean an aggregate amount equal to the
sum of (a) seventy-five percent (75%) of Eligible Receivables, plus (b)
the lesser of fifty percent (50%) of Eligible Inventory or the
Inventory Borrowing Limit, plus (c) the lesser of fifty percent (50%)
of the face amount of trade letters of credit issued by Lender for the
account of Borrower securing the purchase of Inventory by Borrower or
$150,000.
<PAGE> 2
"Inventory Borrowing Limit" shall mean (a) $1,800,000 from
April 30, 1997, through September 30, 1997, and from December 31, 1997
through June 30, 1998, and (b) $1,500,000 at all other times.
"Line of Credit Borrowing Limit" shall mean $5,000,000.
"Line of Credit Interest Rate" shall mean an annual rate equal
to the lesser of (a) the maximum contract rate of interest permitted to
be charged under applicable law or (b) the interest rate from time to
time designated by Lender as its "Index Rate" plus one percentage point
(1%), computed on the basis of a 360-day year, actual number of days
elapsed, adjusted daily as the Index Rate changes; provided, however,
such rate shall be reduced to the Index Rate plus one-half percentage
point (1/2%) so long as no Event of Default exists hereunder and
Borrower's debt-to-tangible net worth (as defined in Section 6.3 of
this Agreement) is not greater than 1.5 to 1.0 as of December 31, 1997.
Any adjustment in the Line of Credit Interest Rate shall be effective
as of December 31, 1997, based upon Lender's satisfactory review of
Borrower's audited financial statements for the year ending December
31, 1997. If, at any time thereafter, Borrower fails to maintain a
debt-to-worth ratio of not greater than 1.5 to 1.0, the Line of Credit
Interest Rate shall revert to the Index Rate plus one percentage point
(1%) for the remainder of the term of the Line of Credit, effective as
of the month-end for which Borrower fails to maintain such compliance.
"Line of Credit Termination Date" shall mean May 30, 1999.
"Line of Credit Note" shall mean that certain Amended and
Restated Master Secured Promissory Note dated April ___, 1997, in the
principal amount not exceeding the Line of Credit Borrowing Limit, made
and executed by Borrower, payable to-the order of Lender, evidencing
the indebtedness of Borrower to Lender in connection with the Line of
Credit, together with any and all extensions, modifications, renewals
and/or replacements thereof.
"Permitted Acquisitions" shall have the meaning assigned such
term in Section 2.5 of this Agreement.
"Service Fee" shall mean $1,500, payable quarterly beginning
March 31, 1997, and on the last day of every third month thereafter.
2. Acquisition Line. The following Section 2.5 is hereby added to
the Agreement immediately following Section 2.4:
2.5 Acquisition Line. In addition to the Line of Credit,
Lender shall make available to Borrower a non-revolving acquisition
line of credit in the maximum principal amount of $1,500,000 (the
"Acquisition Line"). Prior to the Acquisition Line Termination Date and
so long as no Event of Default (or event that with the giving of notice
or the passage of time or both would constitute an Event of Default)
has occurred and is in existence hereunder, Lender shall advance
proceeds under the Acquisition Line to Borrower upon Borrower's request
on a non-revolving basis, subject to the following terms and
conditions:
(a) The purpose of the Acquisition Line shall be to finance
Permitted Acquisitions by Borrower. The proceeds by the Acquisition
Line shall be used for no other purpose.
(b) All advances under the Acquisition Line for a particular
Permitted Acquisition shall be evidenced by a separate term promissory
note bearing interest at the Acquisition Line Interest Rate
(collectively the "Acquisition Notes"). Interest only under the
2
<PAGE> 3
Acquisition Notes shall be payable monthly, in arrears, until
consummation of the subject Permitted Acquisition. Thereafter,
principal and interest shall be due and payable in monthly installments
based upon an amortization period to be determined by Lender in its
sole discretion, but in no event greater than thirty-six (36) months.
(c) Prior to the initial advance under the Acquisition
Line, Borrower shall pay to Lender a non-refundable commitment fee of
$11,250.
(d) As used herein, "Permitted Acquisitions" shall mean
Acquisitions which have the prior written approval of Lender, which
approval may be granted or withheld in Lender's sole discretion.
Without limiting the foregoing, Permitted Acquisitions shall be subject
to the following terms and conditions:
(i) following a Permitted Acquisition financed with
the proceeds of the Acquisition Line, the debt-to-tangible net
worth ratio covenant set forth in Section 6.3 of this
Agreement shall be adjusted as determined by Lender to reflect
the resulting changes in Borrower's financial condition;
provided, however, in no event shall any such adjustment
permit Borrower's debt-to-tangible worth ratio to exceed 4.0
to 1.0,
(ii) following a Permitted Acquisition, Borrower's
cash flow coverage ratio (ratio of net income plus interest
expense, amortization and depreciation to current maturities
of long-term debt plus interest expense) shall be not less
than 2.0 to 1.0 (this calculation shall include any
indebtedness incurred in connection with the ; subject
Permitted Acquisition, but shall exclude any projected
increase in cash flow associated with such Permitted
Acquisition),
(iii) any seller or other third-party financing
arising in connection with a Permitted Acquisition must be on
terms satisfactory to Lender in all respects and must be fully
subordinated to any and all indebtedness of Borrower to Lender
pursuant to subordination agreements in form and substance
satisfactory to Lender in all respects,
(iv) all Permitted Acquisitions must be within a
similar industry and complementary product line as Borrower's
existing business,
(v) prior to the closing of a Permitted
Acquisition, Borrower shall provide to Lender such information
with respect thereto as Lender may request, including but not
limited to drafts of purchase agreements and other acquisition
documents and financial projections, all of which must be
satisfactory to Lender in all respects, and
(vi) at the time of a Permitted Acquisition, no
Event of Default shall exist hereunder, and the consummation
of the subject Permitted Acquisition shall not result in an
Event of Default (except with respect to financial covenants
which Lender has agreed, in its sole discretion, to modify as
a result of said Permitted Acquisition).
3. K-Mart Receivables. "Eligible Receivables" shall include all
Receivables arising out of the sale of Borrower's Inventory to K-Mart
Corporation (collectively the "K-Mart Receivables"), excluding (a) all K-Mart
Receivables that have been outstanding for more than thirty (30) days after the
due dates of the corresponding invoices or more than ninety (90) days after the
dates of the corresponding invoices, (b) all K-Mart Receivables if more than
twenty-five percent (25%) of the K-Mart Receivables are otherwise ineligible
(other than pursuant to (c) of this paragraph), (c) the
3
<PAGE> 4
amount by which total K-Mart Receivables exceed twenty-five percent (251) of
Borrower's total Receivables and (d) any K-Mart Receivables which are otherwise
ineligible pursuant to the provisions of the Agreement.
4. Financial Covenants. Section 6.2 (Net Worth Requirements) and
Section 6.3 (Debt to Worth Ratio) of the Agreement are hereby amended to provide
as follows:
6.2 (Net Worth Requirements). Borrower shall at all times
maintain a minimum tangible net worth of $2,400,000 through June 30,
1997; $3,000,000 from July 1, 1997, through December 31, 1997;
$3,500,000 from January 1, 1998 through September 30, 1998; and
$4,000,000 thereafter. For purposes of this covenant, "tangible net
worth" shall refer to Borrower's total assets minus total liabilities
minus prepaids, intangibles and amounts due from affiliates plus any
debt subordinated to indebtedness of Borrower to Lender pursuant to
subordination agreements satisfactory to Lender, all determined in
accordance with generally accepted accounting principles consistently
applied.
6.3 (Debt-to-Tangible Worth Ratio). Borrower shall at all
times maintain a ratio of total liabilities (exclusive of any debt
subordinated to indebtedness of Borrower to Lender pursuant to
subordination agreements satisfactory to Lender) to tangible net worth
of not more than 3.0 to 1.0 through September 30, 1997; 2.5 to 1.0 from
October 1, 1997 through December 31, 1998; and-2.0 to 1.0 thereafter.
For purposes of this covenant, "tangible net worth" shall have the
meaning set forth in Section 6.2 hereof.
5. Representations and Warranties. Borrower represents and warrants
that the representations and warranties set forth in Article IV of the Agreement
are true and correct on and as of the date of this Amendment, and that no
default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
6. Miscellaneous. Except as amended hereby, the Agreement shall remain
in full force and effect. This Amendment does not constitute a waiver of any
default or Event of Default under the Agreement, whether or not Lender is aware
of any such default or Event of Default.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ John D. Goodman
-------------------------------
Title: Assistant Vice-President
------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
-------------------------------
Title: President
------------------------
5
<PAGE> 1
EXHIBIT 10.19
SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT
THIS SIXTH AMENDMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is
executed as of this 30th day of May, 1997, by and between RADIO SYSTEMS
CORPORATION, a Tennessee corporation with principal offices in Knoxville,
Tennessee ("Borrower") and FIRST AMERICAN NATIONAL BANK, a national banking
association with principal offices in Nashville, Tennessee ("Lender");
W I T N E S S E T H
WHEREAS, Borrower and Lender entered into that certain Loan and
Security Agreement dated April 3, 1995, as amended by that certain First
Amendment to Loan and Security Agreement dated October 25, 1995, that certain
Second Amendment to Loan and Security Agreement dated May 17, 1996, that certain
Third Amendment to Loan and Security Agreement dated December 13, 1996, that
certain Fourth Amendment to Loan and Security Agreement dated January 22, 1997,
and that certain Fifth Amendment to Loan and Security Agreement dated April 30,
1997 (as amended, the "Agreement"), pursuant to which Lender has made available
to Borrower a line of credit currently in the maximum principal amount of
$5,000,000, and an Acquisition Line in the maximum principal amount of
$1,500,000, all as more fully described and defined therein; and
WHEREAS, Borrower has requested that Lender make a term loan to
Borrower in the original principal amount of $1,000,000 (the "Term Loan"; the
Line of Credit, the Acquisition Line and the Term Loan are sometimes hereinafter
referred to as the "Loans") on the terms and conditions hereinafter set forth,
and for the purpose(s) hereinafter set forth; and
WHEREAS, Borrower and Lender desire to further amend the Agreement in
certain respects;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Article I of the Agreement is hereby amended by
substituting the following definitions for the existing definitions of the
following terms and, as applicable, adding the following definitions:
"Borrowing Base" shall mean an aggregate amount equal to the
sum of (a) seventy-five percent (75%) of Eligible Receivables, plus (b)
the lesser of fifty percent (50%) of Eligible Inventory or the
Inventory Borrowing Limit, plus (c) the lesser of fifty percent (50%)
of the face amount of trade letters of credit issued by Lender for the
amount of Borrower securing the purchase of Inventory by Borrower or
$150,000, minus (d) the amount of $500,000, which amount shall be
reduced by the amount each principal reduction in the Term Loan at the
time of each such reduction.
"Guarantor" shall mean, collectively, jointly and severally,
Randal Boyd and, so long as and to the extent that the Hudson Guaranty
is in effect, James Hudson.
"Guaranty" shall mean, collectively, one or more Continuing
Guaranties executed in favor of Lender by Guarantor.
"Hudson Guaranty" shall mean the Guaranty executed by James
Hudson pursuant to this Sixth Amendment.
<PAGE> 2
"Notes" shall mean, collectively, the Line of Credit Note, the
Acquisition Notes and the Term Note.
"Term Loan" shall have the meaning assigned to such term in
the preamble of this Agreement.
"Term Note" shall mean that certain Secured Term Promissory
Note of even date with this Sixth Amendment, in the original principal
amount of $1,000,000, made and executed by Borrower, payable to the
order of Lender, evidencing the indebtedness of Borrower to Lender in
connection with the Term Loan, together with any and all extensions,
modifications, renewals, restatements and/or replacements thereof.
2. Term Loan. The following Section 2.6 is hereby added to the
Agreement immediately following Section 2.5:
2.6 Term Loan.
(a) The Term Loan shall be evidenced by, and payable in
accordance with the terms of, the Term Note.
(b) The purpose of the Term Loan shall provide funds for the
repurchase of stock warrants issued by Borrower and currently held by
Sirrom Capital. The proceeds of the Term Loan shall be used for no
other purpose.
(c) Upon execution this Sixth Amendment, Borrower shall pay to
Lender a Term Loan fee in the amount of $7,500.
3. Hudson Guaranty Limitations and Conditions. Execution of the
Hudson Guaranty and delivery thereof to Lender is a condition precedent to the
funding of the Term Loan. The Hudson Guaranty shall be limited to Borrower's
obligations to Lender in connection with the Term Loan and shall be released
when such obligations are paid in full and no payment in respect of such
obligations remains subject to recoupment for any reason, including but not
limited to recoupment as a preferential payment pursuant to bankruptcy or other
insolvency laws. Lender shall apply regularly scheduled payments designated by
Borrower as Term Loan payments to the Term Loan in the absence of default or an
Event of Default. Otherwise Lender may apply any and all payments and proceeds
of collateral to any obligations of Borrower to Lender as Lender shall determine
at its sole discretion. Any payments made by any Guarantor other than James
Hudson may be applied in Lender's sole discretion first to Borrower's
obligations secured by such other Guarantor other than the Term Loan until all
such other obligations of Borrower to Lender are paid in full before any such
payments are applied to the Term Loan.
4. Representations and Warranties. Borrower represents and
warrants that the representations and warranties set forth in Article IV of the
Agreement are true and correct on and as of the date of this Amendment, and that
no default or Event of Default exists under the Agreement or any other documents
executed in connection therewith.
5. Miscellaneous. Except as amended hereby, the Agreement shall
remain in full force and effect. This Amendment does not constitute a waiver of
any default or Event of Default under the Agreement, whether or not Lender is
aware of any such default or Event of Default.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
LENDER:
FIRST AMERICAN NATIONAL BANK
By: /s/ John D. Goodman
-------------------------------
Title: Assistant Vice-President
------------------------
BORROWER:
RADIO SYSTEMS CORPORATION
By: /s/ Randy Boyd
-------------------------------
Title: President
------------------------
3
<PAGE> 1
EXHIBIT 10.20
AGREEMENT
DATED Twenty-fourth day of January, 1994
BETWEEN RADIO SYSTEMS CORP
5008 National Drive
Knoxville
Tennessee
TN 37914
("RSC") (1)
-and-
PETSAFE LIMITED
(Company No. 2820961)
Priory Lane
Burford
Oxfordshire
OX18 4SG
("Petsafe") (2)
IT IS HEREBY AGREED AND DECLARED as follows:
1. DEFINITIONS
In this Agreement the expressions set out in Column 1 have the
respective meanings set opposite in Column 2:
1. 2.
"Associate" As defined in clause 7
"Commencement Date" 1st January 1994
"Products" The range of products listed in
Schedule 1 to this Agreement and
components as manufactured and/or
supplied by RSC or any associate
of RSC or any successor in
business from time to time
"Territory" The area specified in Schedule 2
to this Agreement
2. RIGHTS AND PRINCIPAL RESTRICTIONS
2.1 RSC grants to Petsafe the exclusive right for the duration of this
Agreement to purchase from RSC the Products for resale in the Territory
and RSC undertakes that it will not confer like rights in respect of
the Products on any other party for the duration of this Agreement save
as provided below.
2.2 RSC shall refer all inquiries for the Products in the Territory to
Petsafe.
<PAGE> 2
2.3.1 Petsafe and RSC shall agree upon an amount of transmitters as a minimum
number to be purchased in the year prior to the commencement of each
calendar year. If Petsafe and RSC shall fail to reach agreement, then
the provisions of clause 2.3.2 shall apply.
2.3.2 If Petsafe shall fail to purchase cumulative minimum of
480 transmitters by 31st December 1994
1740 transmitters by 31st December 1995
3420 transmitters by 31st December 1996.
RSC may review the matter on a country by country basis and require
that Petsafe's rights become non-exclusive as regards certain countries
in the Territory provided that:
(a) RSC shall first show proof to Petsafe that another customer
not connected with RSC has signed a purchase order to RSC for
more than the minimum figure set out above for the relevant
period
(b) any shortfall shall not be due to the act or omission of RSC
including failure to deliver good quality products on schedule
or a breach of this Agreement
(c) any shortfall shall not be due to matters beyond the
reasonable control of Petsafe as specified in clause 10 below.
2.4 RSC will supply Petsafe with up to date brochures specifications and
information concerning the Products and their marketing and sale as
reasonably required. RSC will give due warning of any specification
changes to the Products and will not accept orders from Petsafe for
products that RSC knows will shortly become obsolete without warning
Petsafe.
2.5 Petsafe undertakes that it will not, while this Agreement is in force
as regards any part of the Territory where it has exclusive rights
without the Territory where it has exclusive rights without the
agreement of RSC sell any pet containment system similar to the
Products unless RSC shall have failed to deliver good quality Products
on a reasonable schedule.
3. TERMS OF SUPPLY
3.1 RSC will use its best endeavors to supply and ship such of the Products
as Petsafe shall order from time to time according to a reasonable
delivery schedule at competitive prices.
3.2 The price will not be higher than the lowest price available to any
other customer for the Products in any part of the world.
3.3 At least 4 weeks prior notice shall be given of any increase in prices
and RSC will honor any outstanding quotations issued by Petsafe prior
to such notice being given.
3.4 Delivery will be F.O.B. any US port or airport nominated by Petsafe.
3.5 Title to and risk in the Products will pass on delivery.
3.6 The Products will be safe in good condition properly packaged of sound
manufacture and design reasonably fit for their purpose free of defects
and will comply with any claims made for them or warranties given by
RSC and with all legal requirements specified by Petsafe
2
<PAGE> 3
applicable in the Territory. Without prejudice to the above the
warranty of RSC set out in Schedule 3 and the other terms of that
Schedule shall apply as if set forth therein.
3.7 The price shall be due and payable on shipment but it is envisaged that
after the first year from the Commencement Date credit terms will be
agreed.
4. POSITIVE OBLIGATIONS OF PETSAFE
Petsafe will at all times while this Agreement is in force use all
reasonable endeavors to promote the sale and use of the Products in the
Territory and will:
(a) spend at least $100,000 in starting and developing such
business
(b) use all reasonable endeavors to sell an increasing volume year
by year of Products in accordance with forecasts made by
Petsafe or any quotas agreed with RSC
(c) prior to each anniversary of the Commencement Date supply RSC
with copies of its sales forecasts for the following year
together with its stigmata of market penetration such
forecasts will show projected maximum minimum and most
probable sales.
5. BRAND NAMES ETC.
The parties will provide proper management and personnel to
professionally manufacture supply represent and sell the Products and
each shall conduct itself at all times (including after the termination
of this Agreement) to reflect well on the other party and the brand
names used in respect of the Products end shall not act in a manner
detrimental to the other's good name and reputation. This clause shall
be without prejudice to the free exercise and enforcement of either
party's rights against the other.
Either party may use the other's brand names provided a current written
approval from the other is in force and subject to any reasonable
requirements as to trade mark licensing and the like.
6. PERIOD AND TERMINATION
6.2.1 Period
This Agreement shall remain in force for an initial period of five
years from the Commencement Date and thereafter shall be automatically
renewed for further terms of five years unless and until terminated on
the expiry of not less than 6 months' notice in writing given by either
party to the other so as to expire at the end of any five-year period.
6.2 Prior Termination
6.2.1 Either party may terminate this Agreement forthwith by written notice
if:
(a) the other ceases or threatens to cease business becomes
insolvent compounds with its creditors commences to be
wound-up or suffers any distress or execution to be levied
against it or has a Receiver or Administrative Receiver of all
or any of its assets appointed or takes or suffers any similar
action in consequence of debt;
(b) the other shall persistently breach (after being given warning
of termination) or shall fail to make good any substantial
breach of its obligations under this Agreement
3
<PAGE> 4
(including but not limited to clauses 2.1 and 2.5) within 30
days of receiving notice in writing from the first party
requiring it to do so
6.2.2 RSC may terminate this Agreement by written notice served on Petsafe if
Petsafe shall have persistently failed over a period of 3 consecutive
years (after reasonable written warning giving notice of the need for
improvement from RSC) to meet its minimum sales targets or agreed
quotas.
7. ASSOCIATES
Any act or omission which if it were an act or omission of RSC or
Petsafe would be a breach of Clause 2.1 or clause 2.5 of this Agreement
(as the case may be) on its part shall be deemed to be such an act or
omission for which RSC or Petsafe is responsible respectively if done
or omitted by any "associate" of RSC or Petsafe (as the case may be).
For this purpose "associate" of RSC or Petsafe means any person or
persons who for the time being:
(a) directly or indirectly controls or control the RSC or Petsafe
(as the case may be);
(b) any other person or persons controlled directly or indirectly
by the person or persons who controls or control RSC or
Petsafe; and
(c) any person or persons who are directly or indirectly
controlled by RSC or Petsafe itself (as the case may be).
8. APPLICABLE LAW
This Agreement shall be governed in all respects by the law of England
and the Courts of that country shall have non-exclusive jurisdiction.
Both parties hereby submit to the jurisdiction of the English Courts.
Any dispute or difference concerning or arising out of this Agreement
shall be determined by arbitration in accordance with the Arbitration
Acts.
9. SEVERANCE
If any provision of this Agreement shall be invalid or unenforceable
under the law of England or any other part of the Territory but
provision shall continue to apply elsewhere in the Territory and the
remaining provisions of this Agreement shall remain in force.
10. FORCE MAJEURE
Neither party will be responsible for any delay or damage or
non-fulfillment of its obligations arising from force majeure including
strikes lockouts labor disputes accident to machinery shortages of
supplies or labor policies or restrictions of government war acts of
state or acts of God or any other cause beyond its reasonable control.
11. NOTICES
Any notices which are to be served under this Agreement shall be in
writing and shall be deemed served if sent by telex or facsimile
transmission or cable or if mailed by registered or recorded mail for
the relevant party at the address given above or such other address as
it may have notified to the other party in writing from time to time
for the purpose.
4
<PAGE> 5
Notice shall be deemed to have been served:
(a) (in the case of notice sent by letter) 7 days from the date of
posting and
(b) (in the case of telex or facsimile sent during the business
hours of the party to be served) at the time of transmission
or (if not sent during such hours) at the commencement of its
next business day.
AS WITNESS the hands of the parties hereto the day and the year first above
written.
SIGNED by
for and on behalf of )
RADIO SYSTEMS CORP ) /s/ Randy Boyd
in the presence of: ) Randy Boyd, President
SIGNED by
for and on behalf of )
PETSAFE LIMITED ) /s/ Nichole Tolleche
in the presence of: ) Chairman
/s/ Jennifer Sweeney
Jennifer Sweeney
Receptionist
433 N. Camden Dr. #400
Beverly Hills, CA 90210
5
<PAGE> 6
SCHEDULE 2
Territory
Western Europe as defined by:
Austria
Belgium
Denmark
France (including Monaco) Germany
Greece Iceland Irish Republic Italy
(including San Marino) Luxembourg
Netherlands Norway Portugal Spain
(including Andorra) Sweden
Switzerland (including
Liechtenstein) United Kingdom
(including Gibraltar and the Channel
Islands)
or any countries which may in the future evolve from the territory presently
covered by the above territory.
7
<PAGE> 7
SCHEDULE 3
Warranty
Full warranty to replace all faulty parts for an unlimited period,
including after the termination of this agreement, should such occur, on RSC
products sold by Petsafe during the term of this Agreement. Petsafe shall
purchase and hold an appropriate stock of parts to do repairs sufficient for a
reasonably estimated stock required for a one year period, and may return faulty
parts to RSC for credit to Petsafe account at the then current parts cost, at
times and quantities convenient to Petsafe. RSC will supply Petsafe with other
parts required for repairs on the terms of this Agreement. If any parts shall
become unavailable or obsolete and RSC cease to hold stocks, RSC will supply
appropriate substitute Products or components at a price not exceeding the price
of the relevant part on the last occasion on which it was supplied to Petsafe.
Petsafe shall be responsible for any labor cost, except in the case where faults
occur in more than 5% of the products supplied in any order which shall be
considered a significant quality problem, which RSC shall credit Petsafe with
any reasonable labor costs incurred by Petsafe in repair and servicing which it
cannot recoup from its customers. Petsafe shall be responsible for any labor
costs otherwise incurred in the repair or servicing of RSC products and for any
warranty it may extend to its customers.
8
<PAGE> 1
EXHIBIT 10.21
PETSAFE, LTD., RADIO SYSTEMS CORPORATION AGREEMENT REVISION
Revision date May 13, 1996
RSC hereby agrees to expand the territory list found in Schedule 2 to include
the following countries under the same terms and conditions.
Croatia
Czech Republic
Cyprus
Slovenia
Turkey
/s/ Randy Boyd /s/ Nicholas Tollemache
- -------------------------- ------------------------------
Randy Boyd, President, RSC Nicholas Tollemache, Director,
PetSafe, Ltd.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. ___________) of our report dated January 24, 1997, on our audits
of the financial statements and financial statement schedules of Radio
Systems Corporation. We also consent to the references to our firm under
the captions "Experts" and "Selected Financial Data."
COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
November 19, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
FINANCIAL STATEMENTS FOR THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
AND THE ACCOMPANYING FOOTNOTES; THE UNAUDITED FINANCIAL INFORMATION FOR THE
NINE-MONTH PERIOD ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-1-1996 JAN-1-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<CASH> 5,161 13,138
<SECURITIES> 0 0
<RECEIVABLES> 2,841,972 5,068,737
<ALLOWANCES> 135,279 320,182
<INVENTORY> 3,176,542 4,115,378
<CURRENT-ASSETS> 6,255,469 9,309,887
<PP&E> 1,380,818 1,726,972
<DEPRECIATION> 591,417 745,360
<TOTAL-ASSETS> 7,119,194 11,045,389
<CURRENT-LIABILITIES> 3,970,886 3,603,817
<BONDS> 0 0
0 0
0 0
<COMMON> 2,007,000 2,022,375
<OTHER-SE> 979,361 1,545,302
<TOTAL-LIABILITY-AND-EQUITY> 7,119,194 11,045,389
<SALES> 18,869,421 20,318,589
<TOTAL-REVENUES> 18,869,421 20,318,589
<CGS> 12,091,736 12,434,430
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 138,635 198,400
<INTEREST-EXPENSE> 714,888 315,689
<INCOME-PRETAX> 1,989,144 2,993,217
<INCOME-TAX> 42,310 1,137,422
<INCOME-CONTINUING> 1,946,834 1,855,795
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,946,834 1,855,795
<EPS-PRIMARY> 0.37 0.35
<EPS-DILUTED> 0.36 0.34
</TABLE>
