<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1998
REGISTRATION NO. 333-41055
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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PRE-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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1-800 CONTACTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<C> <C> <C>
DELAWARE 5961 87-0571643
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
13751 SOUTH WADSWORTH PARK DRIVE, SUITE D-140
DRAPER, UTAH 84020
TELEPHONE: (801) 572-8225
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S EXECUTIVE OFFICES)
JONATHAN C. COON, PRESIDENT
1-800 CONTACTS, INC.
13751 SOUTH WADSWORTH PARK DRIVE, SUITE D-140
DRAPER, UTAH 84020
TELEPHONE: (801) 572-8225
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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<C> <C>
DENNIS M. MYERS, ESQ. DAVID A. ZAGORE, ESQ.
Kirkland & Ellis Squire, Sanders & Dempsey L.L.P.
200 East Randolph Drive 4900 Key Tower, 127 Public Square
Chicago, Illinois 60601 Cleveland, Ohio 44114
(312) 861-2000 (216) 479-8500
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration 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. [ ]
------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<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.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS, DATED FEBRUARY 3, 1998
2,200,000 SHARES
1-800 CONTACTS LOGO
COMMON STOCK
Of the 2,200,000 shares of Common Stock, par value $.01 per share ("Common
Stock"), offered hereby (the "Offering"), 1,925,000 shares are being offered by
1-800 CONTACTS, INC., a Delaware corporation (the "Company"), and 275,000 shares
are being offered by the Selling Stockholder (as defined). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of any shares of Common Stock by the Selling Stockholder. Prior to the
Offering, there has been no public market for the Common Stock of the Company.
It is currently anticipated that the initial public offering price will be
between $10.00 and $12.00 per share. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering price
of the Common Stock.
The Company's Common Stock has been approved for inclusion on the Nasdaq
National Market System under the symbol "CTAC."
SEE "RISK FACTORS" BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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======================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
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<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
- ------------------------------------------------------------------------------------------------------------------
Total(3).............. $ $ $ $
==================================================================================================================
</TABLE>
(1) The Company and the Selling Stockholder 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 $750,000, which will be paid by the
Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days hereof, to purchase up to an aggregate of 330,000 additional shares of
Common Stock at the price to the public, less underwriting discounts and
commissions, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discounts and
Commissions and Proceeds to Company will be $ , and
, respectively. See "Underwriting."
------------------
At the request of the Company, up to 110,000 shares offered in the Offering
have been reserved for sale to directors, officers and employees of the Company
and certain members of their families at the initial public offering price. The
shares of Common Stock are offered by the Underwriters, subject to prior sale,
when, as and if issued to and accepted by them. The Underwriters reserve the
right to withdraw, cancel or modify such offer and to reject any order in whole
or in part. It is expected that delivery of the shares of Common Stock will be
made against payment therefor at the offices of McDonald & Company Securities,
Inc. or through the facilities of The Depository Trust Company on or about
, 1998.
MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC.
SECURITIES, INC.
The date of this Prospectus is , 1998
<PAGE> 3
[PICTURES ILLUSTRATING (I) A CALL CENTER AGENT TAKING AN ORDER; (II) A PANORAMIC
VIEW OF THE COMPANY'S CALL CENTER; AND (III) COPIES OF THE MATERIALS THE COMPANY
USES TO ADVERTISE AND DELIVER ITS PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING TRANSACTIONS
AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto included elsewhere in this Prospectus, including the information
contained under the heading "Risk Factors" beginning on page 5. Unless otherwise
stated, the information contained in this Prospectus: (i) assumes no exercise of
the Underwriters' over-allotment option; (ii) reflects the reincorporation of
the Company from Utah to Delaware and the associated changes to the Company's
charter and by-laws in connection with such reincorporation; (iii) reflects a
414.175-for-one stock split to be accomplished in connection with the
reincorporation; and (iv) gives effect to the exercise by the Company of an
option to repurchase a portion of the Company's outstanding common stock upon
completion of the Offering. See "Certain Transactions" and "Description of
Capital Stock." Unless otherwise stated in this Prospectus, references to the
"Company" shall mean 1-800 CONTACTS, INC. and its predecessors.
THE COMPANY
1-800 CONTACTS, INC. (the "Company") is a rapidly growing direct marketer
of replacement contact lenses. Through its easy-to-remember, toll-free telephone
number, "1-800 CONTACTS" (1-800-266-8228), the Company sells substantially all
of the most popular brands of contact lenses, including those manufactured by
Johnson & Johnson, CIBA Vision, Wesley Jessen/Barnes-Hind, Bausch & Lomb and
CooperVision. The Company's high volume, cost-efficient operations, supported by
its proprietary management information system, enable it to offer its products
at competitive prices while delivering a high level of customer service. As a
result of its extensive inventory, the Company is generally able to ship
approximately 80% of its orders within 24 hours of receipt. The Company believes
that it offers consumers an attractive alternative for obtaining replacement
contact lenses in terms of price, convenience and speed of delivery. The
Company's net sales have grown rapidly, from approximately $3.6 million in 1996
to approximately $21.1 million in 1997 and its net income has grown from
approximately $348,000 in 1996 to approximately $1.0 million in 1997.
The Company markets its products through a national advertising campaign.
As compared to other direct marketers of replacement contact lenses, the Company
believes that its toll-free telephone number, 1-800 CONTACTS, affords it a
significant competitive advantage in generating consumer awareness and repeat
business. The Company believes, based primarily upon an article in Inc.
magazine, that "vanity" numbers, like 1-800 CONTACTS, generate higher response
rates than traditional 1-800 numbers. After the Company first began using the
1-800 CONTACTS number in July 1995, net sales per advertising dollar increased
by over 20%. The Company believes its marketing strategy, combined with the
higher response rates attributable to the 1-800 CONTACTS telephone number,
allows the Company to acquire new customers at a lower average cost per
customer. The Company spent approximately $4.8 million (including the
capitalized portion thereof) on advertising in 1997, and plans to use a
significant portion of the net proceeds from this Offering to increase its sales
and marketing activities. The Company's experience has been that increases in
advertising expenditures have had a direct and immediate impact on the growth of
net sales. The Company believes that the planned increase in advertising
activities will enable it to attract significant numbers of new customers.
The Company operates within the large and growing contact lens industry. In
1996, sales of contact lenses in the United States totaled approximately $2.5
billion and, according to industry analysts, the U.S. market for contact lenses
is expected to grow by approximately 10% per year through the year 2000. This
anticipated growth is due largely to the shift in the contact lens market away
from traditional soft lenses, which generally are replaced on an annual basis,
to disposable lenses, which are replaced on a daily, weekly or bi-weekly basis.
Over the last decade, the contact lens industry has experienced significant
changes in the ways in which contact lenses are sold to consumers in the United
States. Driven primarily by the growing popularity of commodity-like contact
lens products, such as disposable lenses, direct marketers of contact lenses
have emerged as an attractive alternative to more traditional providers, such as
eye care practitioners and retail optical chains. The Company estimates that
direct marketers accounted for approximately 5% of contact lenses sales in the
United States during 1996. The Company believes that consumers are increasingly
seeking the convenience, speed and home delivery that can be provided by direct
marketers of replacement contact lenses.
1
<PAGE> 5
The Company's sales and marketing efforts, combined with its focus on
delivering a high level of customer service, have built a loyal customer base.
Historically, each $1.00 of sales to new customers has generated approximately
$0.78 of reorder sales within 12 months. During December 1997, approximately
$1.0 million of the Company's net sales were to repeat customers, compared to
net sales to repeat customers of approximately $123,000 in December 1996. The
Company's proprietary management information system creates a customer profile
containing prescription information, address and payment history, which allows a
repeat sale to the customer to be made in approximately one-third the time of a
sale to a new customer. The shorter call duration of a repeat order is more
convenient for the customer and more profitable for the Company. The Company
believes that as more wearers switch to disposable contact lenses, its ability
to attract and retain its customers will play an integral role in the Company's
continued growth.
COMPETITIVE STRENGTHS
The Company attributes its success in the direct marketing segment of the
contact lens industry and its significant opportunities for growth to several
competitive strengths, including the following:
- 1-800 CONTACTS Telephone Number. The Company believes that its
easy-to-remember, toll-free telephone number, 1-800 CONTACTS, affords it
a significant competitive advantage over other direct marketers of
contact lenses in its ability to generate consumer awareness in a
cost-effective manner.
- Proprietary Management Information System. The Company believes that
the operating efficiency resulting from its proprietary management
information system is largely responsible for average sales per employee
being approximately three to five times higher than its largest direct
marketing competitor.
- Customer Service. Delivering high quality, consistent customer service
has been a cornerstone of the Company's strategy since its inception,
and the Company believes that consistently providing every customer with
prompt and courteous service throughout their relationship with the
Company increases the Company's ability to attract and retain customers.
- Extensive Inventory; Convenient, Rapid Delivery. The Company stocks a
large inventory of contact lenses from which it can ship approximately
80% of its orders within 24 hours of receipt and intends to use a
portion of the net proceeds from the Offering to invest in additional
inventory.
- Competitive Pricing. The Company believes that its prices are generally
25% lower than prices typically charged by eye care practitioners and
comparable to those charged by large retail optical chains and mass
merchandisers, who generally do not offer the convenience of telephone
ordering and home delivery.
GROWTH STRATEGY
The Company believes that it has significant opportunities to attract and
retain new customers and increase sales through several strategic initiatives,
including the following:
- Expand Sales and Marketing Activities. Following the Offering, the
Company plans to significantly expand its sales and marketing activities
to attract new customers and increase sales to existing customers. The
Company's experience has been that increases in advertising expenditures
have had a direct and immediate impact on the growth of net sales.
- Continue to Deliver High Level of Customer Service. Historically, each
$1.00 of sales to new customers has generated $0.78 of reorder sales
within 12 months. The Company expects its sales to repeat customers to
continue to grow as the contact lens market continues to shift towards
disposable contact lenses, and consumers increase the frequency with
which they replace their contact lenses.
- Leverage Existing Infrastructure. To support anticipated growth, the
Company has expended considerable resources in establishing proprietary
management information and telecommunication systems and operating and
distribution facilities that have the capacity to handle the Company's
contemplated sales growth for the foreseeable future with minimal
additional capital expenditures.
2
<PAGE> 6
- Capitalize on Favorable Industry Trends. According to industry
analysts, the number of soft contact lens wearers in the United States
has increased from 19 million in 1990 to over 25 million in 1996 and are
projected to increase by approximately 5% annually through the year 2000
as soft contact lenses continue to gain popularity and the number of
14-to-25 year olds (the prime age group for new lens wearers) increases.
The Company was incorporated under the laws of the State of Utah in
February 1995 and will be reincorporated under the laws of the State of Delaware
prior to the completion of the Offering. The Company is the successor to the
business founded by the Company's Vice President of Operations in March 1991.
The Company's principal executive office is located at 13751 South Wadsworth
Park Drive, Suite D-140, Draper, Utah 84020 and its telephone number is (801)
572-8225. The Company maintains a website on the Internet at
www.1800contacts.com. The Company's website and the information contained
therein shall not be deemed to be part of this Prospectus.
THE OFFERING
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<S> <C>
Common Stock offered by the Company............. 1,925,000 shares(1)
Common Stock offered by the Selling
Stockholder................................... 275,000 shares
Common Stock outstanding after the Offering..... 6,141,818 shares(2)
Use of Proceeds................................. The net proceeds to be received by the Company from
the Offering will be used: (i) to fund additional
sales and marketing activities; (ii) to increase
inventory; (iii) to repay certain existing
indebtedness; (iv) to fund the S Corporation
Distribution (as defined) of approximately $0.8
million; (v) to repurchase approximately 442,651
shares of Common Stock from an existing stockholder
of the Company for $1.9 million; and (vi) any
remaining net proceeds for general corporate
purposes, including working capital. The
anticipated uses of the net proceeds are subject to
change due to the actual circumstances of operating
the Company's business. Pending such uses, the
Company currently plans to invest the net proceeds
in investment grade, short-term, interest-bearing
securities. See "Use of Proceeds," "S Corporation
Matters" and "Certain Transactions."
Nasdaq National Market Symbol................... CTAC
</TABLE>
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(1) Does not include the Underwriters' over-allotment option granted by the
Company for an aggregate of 330,000 shares of Common Stock.
(2) Does not include 211,140 shares of Common Stock issuable upon the exercise
of outstanding options granted to certain members of management or an
additional 310,000 shares of Common Stock available for future issuance to
employees or non-employee Directors under the Stock Option Plan (as
defined). See "Management--Incentive Stock Option Plan."
RISK FACTORS
Prospective investors should carefully consider the factors set forth under
"Risk Factors," as well as the other information set forth in this Prospectus
before making an investment in the Common Stock offered hereby. Such risk
factors include, among others, that: (i) the Company has experienced rapid
growth and has a limited operating history; (ii) a substantial portion of the
Company's sales do not comply with applicable state laws and regulations; (iii)
the Company currently purchases a substantial portion of its products from
unauthorized distributors, such as large optical retail chains with excess
inventory, and purchased from a single distributor approximately 27%, 40% and
21% of its inventory in 1995, 1996 and 1997, respectively, and purchased
approximately 40% of its inventory from another distributor in 1997; (iv) the
Company is dependant upon its telephone and management information systems; (v)
the retail sale of contact lenses is highly competitive;
3
<PAGE> 7
(vi) the Company is dependent upon the continued contributions of key management
personnel; (vii) upon completion of the Offering, the existing stockholders of
the Company (the "Existing Stockholders") will control approximately 64% of the
aggregate voting power of the Company; (viii) the direct marketing industry is
experiencing technological changes in marketing methods; and (ix) the Company
does not have and cannot acquire any property rights to the 1-800 CONTACTS
telephone number under the applicable regulations of the Federal Communications
Commission (the "FCC").
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
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PREDECESSOR(1) COMPANY
--------------------------------------------- -------------------------------
FEBRUARY 1, 1995
YEAR ENDED YEAR ENDED ONE MONTH ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995 1996
------------ ------------ --------------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $151,026 $212,584 $21,552 $587,918 $ 3,628,296
Gross profit......................... 48,784 95,258 8,483 232,452 1,412,990
Selling, general and administrative
expenses........................... 46,899 78,584 9,369 317,898 1,041,312
Income (loss) from operations........ 1,885 16,674 (886) (85,446) 371,678
Net income (loss)(2)................. $ 1,885 $ 16,674 $ (886) $(94,551) $ 348,363
======== ======== ======= ======== ===========
PRO FORMA STATEMENT OF OPERATIONS DATA:
Pro forma net income (loss)(3)....... $(58,149) $ 214,243
======== ===========
<CAPTION>
COMPANY
------------
YEAR ENDED
DECEMBER 31,
1997
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<S> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................ $21,115,314
Gross profit......................... 7,090,791
Selling, general and administrative
expenses........................... 5,945,221
Income (loss) from operations........ 1,145,570
Net income (loss)(2)................. $ 1,032,408
===========
PRO FORMA STATEMENT OF OPERATIONS DATA:
Pro forma net income (loss)(3)....... $ 634,931
===========
Pro forma basic net income per common
share.............................. $ 0.14
===========
Pro forma diluted net income per
common share(4).................... $ 0.13
===========
Supplemental pro forma diluted net
income per common share(5)......... $ 0.15
===========
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DECEMBER 31, 1997
-----------------------------------------
PRO PRO FORMA AS
ACTUAL FORMA(6) ADJUSTED(7)
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<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......... $(1,621,522) $(2,335,597) $14,838,563
Total assets...................... 7,781,064 7,781,064 21,440,331
Total debt (including current
portion)........................ 2,759,837 2,759,837 90,409
Stockholders' equity (deficit).... 854,358 (456,583) 16,586,167
</TABLE>
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(1) The term "Predecessor" is used herein to refer to the historical financial
and operating data of the Discount Lens Club.
(2) For all periods indicated, the Company has operated as an S corporation and
has not been subject to federal and certain state income taxes.
(3) Pro forma net income reflects historical net income less pro forma income
taxes. Pro forma income taxes are provided at an assumed 38.5% effective
income tax rate, as if the Company had been a C corporation rather than an S
corporation for the above periods. Prior to the closing of this Offering,
the Company's S corporation status will terminate; at that date, the Company
will record a non-recurring, non-cash charge to earnings to recognize
deferred income taxes in accordance with Statement of Financial Accounting
Standards No. 109 ("SFAS 109"). See "S Corporation Matters."
(4) Pro forma diluted net income per share is based on the weighted average
shares of Common Stock and Common Stock equivalents outstanding, including
actual shares outstanding and shares deemed to be outstanding. The shares
deemed to be outstanding include the number of shares being offered by the
Company hereby sufficient to fund an assumed S corporation distribution of
approximately $714,075 at December 31, 1997 (based on the amount of retained
earnings at December 31, 1997 of $1,286,220, net of notes receivable due
from stockholders of the Company of $572,145). Common Stock equivalents were
determined using the treasury stock method.
(5) Supplemental pro forma diluted net income per common share gives effect to
the elimination of interest expense, net of tax and the additional shares of
Common Stock considered to be outstanding as a result of the repayment of
$2.7 million of indebtedness from the proceeds of the Common Stock offered
by the Company at the assumed initial public offering price of $11.00 per
share.
(6) Gives effect to: (i) an assumed distribution of retained earnings of
$1,286,220 to the Company's stockholders upon the termination of the
Company's S corporation status; (ii) the repayment of notes receivable due
from stockholders of $572,145; and (iii) the recording of a deferred income
tax liability of $596,866 that would be recorded upon termination of the
Company's S corporation status in accordance with SFAS 109. See "S
Corporation Matters" and "Certain Transactions."
(7) As adjusted to reflect the sale of 1,925,000 million shares of Common Stock
offered by the Company hereby at the assumed initial public offering price
of $11.00 per share and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
4
<PAGE> 8
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act").
Also, documents subsequently filed by the Company with the Securities and
Exchange Commission (the "Commission") will contain forward-looking statements.
Such forward-looking statements are based on the beliefs of the Company's
management as well as on assumptions made by and information currently available
to the Company at the time such statements were made. When used in this
Prospectus, the words "anticipate," "believe," "estimate," "expect," "intends"
and similar expressions, as they relate to the Company are intended to identify
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of the risk factors set
forth below, the matters set forth or incorporated in the Prospectus generally
and certain economic and business factors, some of which may be beyond the
control of the Company. The Company cautions the reader, however, that the risk
factors described below may not be exhaustive. The safe harbor for
forward-looking statements provided by Section 27A of the Securities Act is not
applicable to limit the Company's liability for sales made in this Offering. In
analyzing an investment in the Common Stock offered hereby, prospective
investors should carefully consider, along with the other matters referred to
herein, the risk factors described below.
RISKS RELATED TO RAPID GROWTH AND LIMITED OPERATING HISTORY
Since its formation in February 1995, the Company has experienced rapid
growth, with net sales increasing from approximately $588,000 for the eleven
month period ended December 1995 to approximately $21.1 million in 1997. The
Company's ability to compete effectively and to manage future growth, if any,
will require the Company to continue to improve its financial and management
controls, reporting systems and procedures on a timely basis and to expand,
train and manage its employee base. It is anticipated that additional
experienced management will need to be added to meet the demands of expanded
operations. There can be no assurance that such additional management will be
attracted and retained, or that the existing and new management will be able to
implement such systems effectively or on a timely basis or to manage future
expansion successfully. The failure or inability to do so could have a material
adverse affect on the Company's business, financial condition and results of
operations.
The Company has a limited operating history. The Company was formed in
February 1995 as the successor to the business founded by the Company's Vice
President of Operations in March 1991. As a result, there is only limited
financial information and operating information available for a potential
investor to evaluate an investment in the Common Stock. As the Company expands
its operations to meet the anticipated demand for its products, there can be no
assurance that the Company will be able to realize or sustain growth in the
future comparable to that it has experienced since its formation or that the
Company will remain profitable in the future.
RISKS RELATED TO THE LACK OF COMPLIANCE WITH CERTAIN STATE LAWS AND REGULATIONS
The sale and delivery of contact lenses is generally governed by state laws
and regulations. The Company sells to customers in nearly all 50 states and each
sale is likely to be subject to the laws of the state where the customer is
located. The laws and regulations relating to the delivery and sale of contact
lenses vary from state to state, but can generally be classified into five
categories: (i) laws that require contact lenses to be dispensed only pursuant
to a valid prescription; (ii) laws that require the dispenser to be licensed by
the state as an optometrist, ophthalmologist or other professional authorized to
dispense lenses; (iii) laws that require lenses be dispensed only in a
face-to-face transaction; (iv) laws with requirements that are unclear or do not
specifically address the sale and delivery of contact lenses; and (v) laws that
the Company believes place no restrictions on the dispensing of replacement
contact lenses. Many of the states requiring that contact lenses be dispensed in
face-to-face meetings or by a person licensed by such state to dispense lenses
also require that lenses only be dispensed pursuant to a valid prescription.
The Company's operating practice is to attempt to obtain a valid
prescription from each of its customers or his/her eye care practitioner. If the
Company is unable to obtain a copy of or verify the customer's prescription, it
is the Company's practice to ship the lenses to the customer, based on the
information that the customer has provided. In addition, neither the Company nor
any of its employees is a licensed or registered dispenser of contact lenses in
any states other than California and Texas.
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<PAGE> 9
The Company retained legal counsel to identify and summarize the applicable
laws of each of the states in which the Company generates material sales. The
Company compared its operations to the applicable requirements of the laws
contained in such summaries. Based on such comparison, the Company estimates
that approximately one-third of its net sales in 1997 appeared to conform to the
requirements of applicable state laws and regulations. Any action brought
against the Company based on its failure to comply with applicable state laws
and regulations could result in significant fines to the Company, the Company
being prohibited from making sales in a particular state and/or the Company
being required to comply with such laws. Such required compliance could result
in: (i) increased costs to the Company; (ii) the loss of a substantial portion
of the Company's customers for whom the Company is unable to obtain or verify
their prescription; and (iii) the inability to sell to customers at all in a
particular state if the Company cannot comply with such state's laws. The
occurrence of any of the above results could have a material adverse effect on
the Company's ability to sell contact lenses and to continue to operate
profitably. Furthermore, there can be no assurance that states will not enact or
impose laws or regulations that prohibit mail order dispensing of contact lenses
or otherwise impair the Company's ability to sell contact lenses and continue to
operate profitably. The Company has not obtained an opinion of counsel with
regard to its compliance with applicable state laws and regulations, and
information contained herein regarding the Company's compliance with applicable
state laws and regulations should not be construed as being based on an opinion
of counsel.
In June 1997, the Company received notice from the Georgia State Board of
Dispensing Opticians (the "Georgia Board") that the Georgia Board considers
sales by the Company in Georgia to be in violation of Georgia law, which
requires face-to-face delivery of contact lenses. However, the Georgia Board did
not recommend that action be taken at that time, but reserved the right to
pursue future violations by the Company. In November 1997, the Company received
notice from the State of New Mexico Board of Examiners in Optometry (the "New
Mexico Board") that the New Mexico Board considers sales by the Company in New
Mexico to be in violation of New Mexico law and ordering the Company to cease
and desist selling contact lenses in New Mexico. The Company has not taken any
actions in response to such notices. Sales to customers in these two states in
1997 were less than 3% of the Company's net sales for that period. See
"Business -- Government Regulation."
RISKS RELATED TO SUPPLY ARRANGEMENTS
Historically, substantially all of the major manufacturers of contact
lenses have refused to sell lenses directly to direct marketers, including the
Company, and have sought to prohibit their distributors from doing so. As a
result, the Company currently purchases a substantial portion of its products
from unauthorized distributors, such as large optical retail chains with excess
inventory. The Company is aware that at least one large manufacturer of contact
lenses has begun to put tracking codes on its products in an effort to identify
distributors who are selling to direct marketers. The Company is not an
authorized dealer for the majority of the products which it sells. In addition,
the price the Company pays for certain of its products is sometimes higher than
that paid by eye care practitioners, retail chains and mass merchandisers, who
are able to buy directly from the manufacturers. Furthermore, in order to help
ensure adequate supply, the Company generally carries a higher level of
inventory than if it were able to purchase directly from contact lens
manufacturers. There can be no assurance that the Company will be able to obtain
sufficient quantities of contact lenses at competitive prices in the future to
meet the existing or anticipated demand for its products. Any such inability
would have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company purchased from a single distributor approximately 27%, 40% and
21% of its inventory in 1995, 1996 and 1997, respectively, and purchased
approximately 40% of its inventory from another distributor in 1997. The Company
believes that neither of these suppliers is authorized by contact lens
manufacturers to distribute their products. In the event that this supplier
could no longer supply the Company with contact lenses, there can be no
assurance that the Company could secure other adequate sources of supply, or
that such supply could be obtained on terms as favorable to the Company as its
current supply, which could adversely affect the Company by increasing its costs
or, in the event adequate replacement supply can not be secured, reducing its
net sales.
6
<PAGE> 10
DEPENDENCE ON TELEPHONE AND MANAGEMENT INFORMATION SYSTEMS
The Company's success depends, in part, on its ability to provide prompt,
accurate and complete service to its customers on a competitive basis, and to
purchase and promote products, manage inventory, ship products, manage sales and
marketing and maintain efficient operations through its telephone and
proprietary management information systems. A significant disruption in its
telephone or management information systems could adversely affect the Company's
relations with its customers and its ability to manage its operations. From time
to time, the Company has experienced temporary interruptions in its telephone
service as a result of the technical problems experienced by its long-distance
carrier. In 1997, the Company experienced four interruptions, which lasted on
average approximately three hours each. There can be no assurance that similar
interruptions will not occur in the future or that such interruptions would not
have a material adverse effect on the Company's business, financial condition
and results of operations. Furthermore, there can be no assurance that extended
or repeated reliance on the Company's back-up computer system would not have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS RELATED TO COMPETITION AND ALTERNATIVE TECHNOLOGIES
The retail sale of contact lenses is a highly competitive and fragmented
industry. The Company's principal competitors include ophthalmologists and
optometrists in private practice and retail chain stores, which the Company
believes collectively accounted for approximately 70% of all contact lens sales
in 1996. The Company also competes with national optical chains, such as Cole
National Corporation, LensCrafters and National Vision Association and mass
merchandisers, such as Wal-Mart, Sam's and Costco, which the Company believes
accounted for approximately 25% of all contact lens sales in 1996. The Company
also competes with other direct marketers of contact lenses, one of which, Lens
Express, Inc., is larger than the Company. The Company may face increased
competition in the future from new entrants in the direct marketing business,
which may include national optical chains and mass merchandisers, some of which
may have significantly greater resources than the Company. In addition, many of
the Company's competitors, including most eye care practitioners, national
optical chains and mass merchandisers, have direct supply arrangements with
contact lens manufacturers, which in some cases affords such competitors with
better pricing terms and access to supply. In light of such intense competition,
there can be no assurance that the Company will be able to maintain its current
market position or realize its anticipated growth.
The Company also encounters competition from manufacturers of eyeglasses
and from alternative technologies, such as surgical refractive procedures
(including new refractive laser procedures such as PRK, or photo refractive
keratectomy, and LASIK, or laser in situ keratomileusis). If surgical refractive
procedures become increasingly accepted as an effective and safe technique for
permanent vision correction, they could substantially reduce the demand for
contact lenses by enabling patients to avoid the ongoing cost and inconvenience
of contact lenses. Accordingly, there can be no assurance that these procedures,
or other alternative technologies that may be developed in the future, will not
cause a substantial decline in the number of contact lens wearers and thus have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON KEY EXECUTIVES
The Company is dependent to a large degree on the services of its senior
management team, particularly Jonathan C. Coon and John F. Nichols, the
Company's President and Vice President, Operations, respectively. Prior to the
completion of the Offering, Messrs. Coon and Nichols will enter into employment
agreements with the Company. The loss of any of its key executives could have a
material adverse effect on the Company. The Company's ability to manage its
anticipated growth will depend on its ability to identify, hire and retain
highly skilled management and technical personnel. Competition for such
personnel is intense. As a result, there can be no assurance that the Company
will be successful in attracting and retaining such personnel, and the failure
to attract such personnel could have a material adverse affect on the Company's
business, financial condition and results of operations. See "Management."
7
<PAGE> 11
CONTROL BY PRINCIPAL STOCKHOLDERS
Upon completion of the Offering, the Existing Stockholders will own
3,941,818 shares of Common Stock and control approximately 64% of the aggregate
voting power of the Company, which will allow such stockholders, in the event
that they act together, to control substantially all actions taken by the
stockholders of the Company, including the election of directors. Such
concentration of ownership could also have the effect of delaying, deterring or
preventing a change in control of the Company that might otherwise be beneficial
to stockholders and may also discourage acquisition bids for the Company and
limit the amount certain investors may be willing to pay for shares of the
Common Stock. See "Management," and "Principal and Selling Stockholders."
RISKS RELATED TO TECHNOLOGICAL CHANGES IN DIRECT MARKETING INDUSTRY
The Company expects that the direct marketing industry will be affected by
technological changes in marketing methods, such as on-line catalogs and
Internet shopping. The Company believes its success will depend, in part, on its
ability to adapt to new technologies and to respond to competitors' actions in
these areas. Adapting to new technologies could require significant capital
expenditures by the Company. There can be no assurance that the Company will
remain competitive in response to such technological changes.
INTELLECTUAL PROPERTY MATTERS
The Company believes that a large portion of its success is attributable to
the competitive advantage it enjoys as a result of its toll-free telephone
number (1-800 CONTACTS). Under applicable rules and regulations of the FCC, the
Company does not have and cannot acquire any property rights to this telephone
number. There can be no assurance that the Company will be able to retain the
use of the 1-800 CONTACTS telephone number. The loss of the right to use the
1-800 CONTACTS number would have a material adverse effect on the Company's
business, financial condition and results of operations.
COST OF POSTAGE AND SHIPPING
The Company ships its products to customers by United States mail and other
overnight delivery and surface services. The Company generally invoices the
costs of delivery and parcel shipments directly to customers as separate
shipping and handling charges. Any increases in shipping rates or postal rates
(paid by the Company to deliver its advertising) could have an adverse effect on
the Company's operating results as the Company may not be able to effectively
pass such increases on to its customers. The United States Postal Service has
recently requested approval for an increase in postal rates which would average
4.5% for all domestic services, which, if approved, is expected to be effective
in June 1998. Similarly, strikes or other service interruptions by such shippers
could adversely affect the Company's ability to market or deliver its products
on a timely basis. See "Business--Customers and Marketing."
STATE SALES TAX COLLECTION
At present, the Company does not collect sales or other similar taxes in
respect of sales and shipments of its products. However, various states have
sought to impose state sales tax collection obligations on out-of-state direct
marketing companies such as the Company. A successful assertion by one or more
states that the Company should have collected or be collecting sales taxes on
the sale of its products could result in additional costs and administrative
expenses to the Company and corresponding price increases to its customers,
which could adversely affect the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY EXPOSURE
The Company faces an inherent risk of exposure to product liability claims
in the event that the use of the products it sells results in personal injury.
Although the Company has not experienced any losses due to product liability
claims, there can be no assurance that it will not experience such losses in the
future. The Company maintains insurance against product liability claims, but
there can be no assurance that such coverage will be adequate to cover any
liabilities that the Company may incur, or that such insurance will continue to
be available on terms acceptable to the Company. A successful claim brought
against the Company in excess of available
8
<PAGE> 12
insurance coverage, or any claim that results in significant adverse publicity
against the Company, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--Legal
Proceedings."
ABSENCE OF PRIOR PUBLIC MARKET; SUBSTANTIAL DILUTION
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations among the Company and the Representatives (as defined herein)
and may not be indicative of the market price for shares of the Common Stock
after the Offering. For a description of factors considered in determining the
initial public offering price, see "Underwriting." There can be no assurance
that an active trading market for the Common Stock will develop or if developed,
that such market will be sustained. The market price for shares of the Common
Stock is likely to be volatile and may be significantly affected by such factors
as quarter-to-quarter variations in the Company's results of operations, news
announcements, changes in general market conditions for contact lenses,
regulatory actions, adverse publicity regarding the Company or the industry in
general, changes in financial estimates by securities analysts and other
factors. In addition, broad market fluctuation and general economic and
political conditions may adversely affect the market price of the Common Stock,
regardless of the Company's actual performance. There can be no assurance that
the market price of the Common Stock will not decline below the initial public
offering price.
Because the initial public offering price is substantially higher than the
book value per share of Common Stock, purchasers of the Common Stock in the
Offering will be subject to immediate and substantial dilution of $8.59 per
share. In addition, pursuant to certain provisions of the Company's restated
certificate of incorporation (the "Restated Certificate"), the Company has the
authority to issue additional shares of Common Stock and shares of one or more
series of voting Preferred Stock. The issuance of such shares could result in
the dilution of voting power of the shares of Common Stock purchased in the
Offering. See "Dilution" and "Description of Capital Stock."
ABSENCE OF DIVIDENDS
Following the completion of this Offering, the Company intends to retain
all future earnings for use in its business and, therefore, does not anticipate
paying any cash dividends on the Common Stock in the foreseeable future. See
"Dividend Policy."
POTENTIAL ADVERSE IMPACT FROM SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company expects to have 6,141,818
shares of Common Stock outstanding. Of these shares, the 2,200,000 shares of
Common Stock (2,530,000 shares if the Underwriters' overallotment option is
exercised in full) sold in the Offering will be freely tradeable without
restriction under the Securities Act, except any such shares which may be
acquired by an "affiliate" of the Company. Subject to certain 180-day "lock up"
agreements described herein, approximately 3,941,818 shares of Common Stock will
be eligible for sale in the public market, subject to compliance with the resale
volume limitations and other restrictions of Rule 144 under the Securities Act,
beginning 90 days after the date of this Prospectus. Future sales of the shares
of Common Stock held by the Existing Stockholders could have a material adverse
effect on the price of the Common Stock. See "Shares Eligible for Future Sale."
ANTI-TAKEOVER PROVISIONS COULD DELAY OR PREVENT A CHANGE IN CONTROL
Certain provisions of the Restated Certificate and the Company's by-laws
(the "By-laws") may inhibit changes in control of the Company not approved by
the Company's Board of Directors. These provisions include: (i) a classified
Board of Directors; (ii) a prohibition on stockholder action through written
consents; (iii) a requirement that special meetings of stockholders be called
only by the Board of Directors; (iv) advance notice requirements for stockholder
proposals and nominations; (v) limitations on the ability of stockholders to
amend, alter or repeal the By-laws; and (vi) the authority of the Board of
Directors to issue without stockholder approval preferred stock with such terms
as the Board of Directors may determine. The Company will also be afforded the
protections of Section 203 of the Delaware General Corporation Law, which could
have similar effects. See "Description of Capital Stock."
9
<PAGE> 13
RISKS RELATING TO FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Such forward-looking
statements include statements regarding the Company's marketing plans,
expectations concerning growth in the market, certain financial projections and
the planned use of proceeds. Actual results could differ from those projected in
any forward-looking statements. The forward-looking statements are made as of
the date of this Prospectus and the Company assumes no obligation to update such
forward-looking statements, or to update the reasons why actual results may
differ from those projected in the forward-looking statements. Numerous factors,
including without limitation factors mentioned in this Risk Factors section,
many of which are beyond the control of management of the Company, could cause
future results to differ substantially from those contemplated in such
forward-looking statements. The safe harbor for forward-looking statements
provided by Section 27A of the Securities Act and Section 21E of the Exchange
Act is not applicable to limit the Company's liability for sales made in this
Offering.
THE COMPANY
The Company was incorporated under the laws of the State of Utah in
February 1995 and will be reincorporated under the laws of the State of Delaware
prior to completion of the Offering. The Company is the successor to the
business founded by the Company's Vice President of Operations in March 1991.
The Company's principal executive office is located at 13751 South Wadsworth
Park Drive, Suite D-140, Draper, Utah 84020 and its telephone number is (801)
572-8225.
S CORPORATION MATTERS
Since its inception, the Company has been a corporation subject to taxation
under Subchapter S of the Internal Revenue Code of 1986, as amended. As a
result, the taxable income of the Company has been taxed, for Federal (and some
state) income tax purposes, directly to the Company's stockholders rather than
to the Company.
On the closing date of this Offering, the Company will elect to terminate
its S corporation status. As a result, the Company's earnings through the date
of termination of the Company's S corporation status generally will be taxed for
federal and state income tax purposes directly to the Existing Stockholders who
were the only stockholders of the Company prior to the closing of this Offering.
Subsequent to the termination of its S corporation status, the Company will be
subject to federal and state income taxes on its earnings.
Effective the day preceding the closing date of this Offering, the Company
will declare a distribution to the Existing Stockholders in an amount equal to
the Company's retained earnings from its formation through the date immediately
preceding the date of termination of the Company's S corporation status (the "S
Corporation Distribution"). If the Company's S corporation status had terminated
as of December 31, 1997, the amount of the S Corporation Distribution would have
been approximately $714,075 (net of notes receivable due from stockholders of
the Company). The actual amount of the S Corporation Distribution is estimated
to be approximately $0.8 million, reflecting undistributed earnings through the
date preceding the anticipated closing date of this Offering (net of notes
receivable due from stockholders of the Company). It is currently anticipated
that the S Corporation Distribution will be funded out of the net proceeds of
this Offering. See "Use of Proceeds" and "Certain Transactions."
Purchasers of Common Stock in this Offering will not receive any of the S
Corporation Distribution.
Immediately prior to the consummation of the Offering, the Existing
Stockholders and the Company intend to enter into an S corporation termination,
tax allocation and indemnification agreement (the "Agreement for Distribution of
Retained Earnings and Tax Indemnification") relating to the S Corporation
Distribution to such stockholders and indemnification arrangements among such
stockholders and the Company for certain tax liabilities.
10
<PAGE> 14
Upon termination of its S corporation status, the Company will become
subject to income taxation and in connection therewith, the Company will record
deferred income taxes in accordance with SFAS 109. If the Company's S
corporation status had been terminated at December 31, 1997, the amount of the
charge to earnings would have been approximately $597,000.
USE OF PROCEEDS
The net proceeds to the Company from the Offering (after deducting
applicable underwriting discounts and estimated expenses payable by the Company)
are estimated to be approximately $18.9 million (assuming an initial public
offering price of $11.00 per share). The Company expects to use: (i)
approximately $10.0 million to fund additional sales and marketing activities;
(ii) approximately $3.0 million to increase inventory; (iii) approximately $2.7
million for the repayment of debt; (iv) approximately $0.8 million to fund the S
Corporation Distribution; (v) $1.9 million to exercise an option to purchase
442,651 shares of Common Stock from an existing stockholder of the Company; and
(vi) any remaining net proceeds for general corporate purposes, including
working capital. The anticipated uses of the net proceeds are subject to change
due to the actual circumstances of operating the Company's business. Pending
such uses, the Company currently plans to invest the net proceeds in investment
grade, short-term, interest-bearing securities. See "Certain Transactions."
Approximately $1.6 million of the indebtedness expected to be repaid by the
Company out of the net proceeds of the Offering was borrowed from a stockholder
of the Company pursuant to a line of credit and two promissory notes, all of
which bear interest at the prime interest rate plus 2%. The line of credit
provides for maximum borrowings of $250,000 and matures in February 1999.
Initial borrowings under the two promissory notes were $250,000 and $1.1 million
and such promissory notes mature in September 1998 and July 1998, respectively.
The remainder of the indebtedness being repaid was incurred under the Credit
Facility (as defined), which bears interest at the lender's prime interest rate
plus 1.5% and matures on July 31, 1998.
The Company will not receive any of the proceeds from the sale of the
shares by the Selling Stockholder.
DIVIDEND POLICY
The Company anticipates that all of its future earnings will be retained to
finance the expansion of its business and, subsequent to the payment of the S
Corporation Distribution, does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future. Any future determination to pay
dividends will be at the discretion of the Company's Board of Directors and will
depend upon, among other factors, the Company's results of operations, financial
condition, capital requirements and contractual restrictions. In addition, the
Credit Facility (as defined) prohibits the Company from paying any cash
dividends on the Common Stock after the termination of the Company's S
corporation status.
11
<PAGE> 15
CAPITALIZATION
The following table sets forth: (i) the actual capitalization of the
Company as of December 31, 1997; (ii) the pro forma capitalization of the
Company as of such date, giving effect to the payment of the S Corporation
Distribution and the recording of approximately $597,000 of deferred income tax
liabilities resulting from the termination of S corporation status; and (iii)
such pro forma capitalization, as adjusted to give effect to the sale by the
Company of 1,925,000 shares of Common Stock pursuant to the Offering, assuming
an initial public offering price of $11.00 per share and the application of the
net proceeds to the Company therefrom as described under "Use of Proceeds." This
table should be read in conjunction with the financial statements of the Company
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ---------- -----------
<S> <C> <C> <C>
Short-term obligations:
Line of credit...................................... $1,055,640 $1,055,640 $ --
Notes payable to stockholders....................... 1,370,000 1,370,000 --
Current portion of capital lease obligation......... 23,532 23,532 23,532
---------- ---------- -----------
Total short-term obligations..................... $2,449,172 $2,449,172 $ 23,532
========== ========== ===========
Long-term obligations:
Notes payable to stockholders....................... $ 243,788 $ 243,788 $ --
Capital lease obligation, less current portion...... 66,877 66,877 66,877
---------- ---------- -----------
Total long-term obligations......................... 310,665 310,665 66,877
========== ========== ===========
Stockholders' equity:
Preferred Stock, $0.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding...... -- -- --
Common Stock, $0.01 par value, 20,000,000 shares
authorized; 4,659,469 shares issued on an actual
and a pro forma basis; and 6,584,469 shares
issued on a pro forma as adjusted basis (1)(2)... 46,595 46,595 65,845
Additional paid-in capital.......................... 93,688 93,688 19,017,188
Retained earnings (deficit)......................... 1,286,220 (596,866) (596,866)
Notes receivable from stockholders.................. (572,145) -- --
Treasury stock, 442,651 shares at cost (3).......... -- -- (1,900,000)
---------- ---------- -----------
Total stockholders' equity (deficit)............. 854,358 (456,583) 16,586,167
---------- ---------- -----------
Total capitalization........................ $1,165,023 $ (145,918) $16,653,044
========== ========== ===========
</TABLE>
- ---------------
(1) Assuming an initial public offering price of $11.00 per share (the mid-point
of the range set forth on the cover page of this Prospectus), less the
Underwriters' discount and the estimated expenses of the Offering.
(2) Does not include 211,140 shares of Common Stock issuable upon the exercise
of outstanding options granted to certain members of management or an
additional 310,000 shares of Common Stock available for future issuance
under the Stock Option Plan (as defined). See "Management -- Incentive Stock
Option Plan."
(3) Reflects the repurchase of an aggregate of 442,651 shares of Common Stock by
the Company from an existing stockholder of the Company for $1.9 million.
See "Certain Transactions."
12
<PAGE> 16
DILUTION
As of December 31, 1997, the pro forma deficit in the Company's net
tangible book value was approximately $2.6 million, or $0.57 per share after
giving effect to (i) the payment of the S Corporation Distribution and (ii) the
recording of approximately $597,000 of deferred income tax liabilities resulting
from the termination of the S corporation election. After giving effect to the
Offering and the application of the net proceeds therefrom as set forth under
"Use of Proceeds," the pro forma net tangible book value of the Company as of
December 31, 1997, would be $14.8 million or $2.41 per share. This represents an
immediate increase in net tangible book value per share of $2.98 per share to
the Existing Stockholders and an immediate dilution of $8.59 per share to new
investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share before the
Offering(1)............................................... $(0.57)
Increase per share attributable to payments by new
investors................................................. 2.98
------
Adjusted pro forma net tangible book value per share after
the Offering.............................................. 2.41
------
Dilution per share to new investors(2)...................... $ 8.59
======
</TABLE>
- ---------------
(1) The Company's pro forma deficit in net tangible book value per share of
Common Stock is determined by dividing the Company's deficit in tangible net
worth at December 31, 1997 of approximately $2.6 million by the aggregate
number of shares of Common Stock outstanding.
(2) Dilution is determined by subtracting pro forma, as adjusted, net tangible
book value per share after the Offering from the initial public offering
price per share.
The following table summarizes, on a pro forma basis, as of December 31,
1997, the difference between the Existing Stockholders and the new investors
with respect to the number of shares of Common Stock purchased (or to be
purchased) from the Company, the total consideration paid (or to be paid) and
the average price per share paid (or to be paid) by the Existing Stockholders
and new investors, at an assumed initial public offering price of $11.00 per
share, before deducting the estimated offering expenses and underwriting
discounts and commissions:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing Stockholders(3)......... 4,216,818 68.7% $ 140,283 0.7% $ 0.03
New investors(4)................. 1,925,000 31.3 21,175,000 99.3 11.00
--------- ----- ------------ -----
Total............................ 6,141,818 100.0% $ 21,315,283 100.0%
========= ===== ============ =====
</TABLE>
- ---------------
(3) Does not include 211,140 shares of Common Stock issuable upon the exercise
of outstanding options granted to certain members of management or an
additional 310,000 shares of Common Stock available for future issuance
under the Stock Option Plan (as defined). See "Management -- Incentive Stock
Option Plan."
(4) Sales of Common Stock by the Selling Stockholder in the Offering will reduce
the number of shares held by the Existing Stockholders to 3,941,818, or
approximately 64% of the outstanding Common Stock after the Offering, and
will increase the number of shares held by new investors to 2,200,000 shares
of Common Stock, or approximately 36% of the outstanding Common Stock after
the Offering.
13
<PAGE> 17
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The financial data as of and for the years ended December 31, 1993 and 1994
and the one month period ended January 1, 1995 are derived from the financial
statements of the Predecessor. The financial data as of and for the eleven month
period ended December 31, 1995 and the years ended December 31, 1996 and 1997
have been derived from the audited financial statements of the Company, which
are included as part of this Prospectus. The selected financial data below
should be read in conjunction with the financial statements and the notes
thereto of the Predecessor and the Company included elsewhere in this Prospectus
and "Management's Discussion and Analysis of Results of Operations and Financial
Condition."
<TABLE>
<CAPTION>
PREDECESSOR(1) COMPANY
----------------------------------------- ------------------------------------------
YEAR YEAR ONE MONTH FEBRUARY 1, YEAR YEAR
ENDED ENDED ENDED 1995 TO ENDED ENDED
DECEMBER 31, DECEMBER 31, JANUARY 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1994 1995 1995 1996 1997
------------ ------------ ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales................... $151,026 $212,584 $21,552 $587,918 $3,628,296 $21,115,314
Costs of sales.............. 102,242 117,326 13,069 355,466 2,215,306 14,024,523
-------- -------- ------- -------- ---------- -----------
Gross profit................ 48,784 95,258 8,483 232,452 1,412,990 7,090,791
Selling, general and
administrative expenses... 46,899 78,584 9,369 317,898 1,041,312 5,945,221
-------- -------- ------- -------- ---------- -----------
Income (loss) from
operations................ 1,885 16,674 (886) (85,446) 371,678 1,145,570
Other expenses, net......... -- -- -- (9,105) (23,315) (113,162)
-------- -------- ------- -------- ---------- -----------
Net income (loss)(2)........ $ 1,885 $ 16,674 $ (886) $(94,551) $ 348,363 $ 1,032,408
======== ======== ======= ======== ========== ===========
PRO FORMA STATEMENT OF
OPERATIONS DATA:
Pro forma (provision)
benefit for income
taxes..................... $ 36,402 $ (134,120) $ (397,477)
Pro forma net income
(loss)(3)................. (58,149) 214,243 634,931
======== ========== ===========
Pro forma basic net income
per common share.......... $ 0.14
===========
Pro forma diluted net income
per common share(4)....... $ 0.13
===========
Supplemental pro forma
diluted net income per
common share(5)........... $ 0.15
===========
BALANCE SHEET DATA (AT THE
END OF PERIOD):
Working capital (deficit)... $ 7,476 $ 13,449 $11,762 $(12,093) $ (204,080) $(1,621,522)
Total assets................ 20,651 25,574 23,687 243,845 1,156,646 7,781,064
Total debt (including
current portion).......... -- -- -- 207,864 370,705 2,759,837
Stockholders' equity
(deficit)................. 18,046 22,818 21,032 (28,412) 146,359 854,358
</TABLE>
- ---------------
(1) The historical financial and operating data of the Predecessor was derived
from the historical financial and operating data of the Discount Lens Club.
(2) For all periods indicated, the Company has operated as an S corporation and
has not been subject to federal and certain state income taxes.
(3) Pro forma net income reflects historical net income less pro forma income
taxes. Pro forma income taxes are provided at an assumed 38.5% effective
income tax rate, as if the Company had been a C corporation rather than an S
corporation for the above periods. Prior to the closing of this Offering,
the Company's S corporation status will terminate; at that date, the Company
will record a non-recurring, non-cash charge to earnings to recognize
deferred income taxes in accordance with SFAS 109. See "S Corporation
Matters."
(4) Pro forma diluted net income per share is based on the weighted average
shares of Common Stock and Common Stock equivalents outstanding, including
actual shares outstanding and shares deemed to be outstanding. The shares
deemed to be outstanding represent the number of shares being offered by the
Company hereby sufficient to fund an assumed S corporation distribution of
approximately $714,075 at December 31, 1997 (based on the amount of retained
earnings at December 31, 1997 of $1,286,220, net of notes receivable due
from stockholders of the Company of $572,145). Common Stock equivalents were
determined using the treasury stock method.
(5) Supplemental pro forma diluted net income per common share gives effect to
the elimination of interest expense, net of tax and the additional shares of
Common Stock considered to be outstanding as a result of the repayment of
$2.7 million of indebtedness from the proceeds of the Common Stock offered
by the Company at the assumed initial public offering price of $11.00 per
share.
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical and Pro Forma Financial Data" and the Company's financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
The Company is a rapidly growing direct marketer of replacement contact
lenses. The Company was formed in February 1995 and is the successor to the mail
order business founded by the Company's Vice President of Operations in March
1991. Since its formation, the Company has experienced significant growth in
revenues and net income. The Company's net sales have grown rapidly, from
approximately $3.6 million in 1996 to approximately $21.1 million in 1997 and
its net income has grown from approximately $348,000 in 1996 to approximately
$1.0 million in 1997.
During 1995, 1996 and 1997, the Company hired additional management
personnel and invested significant resources in infrastructure improvements such
as expanded operating facilities, enhanced telecommunications equipment and
upgrading its proprietary management information system to support its customer
service and marketing programs. Key components of the infrastructure investment
consisted of expanded operating facilities, a new, higher capacity telephone
switch and the purchase of software and corresponding hardware upgrades to the
Company's proprietary management information system.
Quarter-to-quarter comparisons are impacted by the timing of the mailing of
the Company's advertisements. Approximately 40% of the revenue related to a
particular mailing is generated within 60 to 90 days after such mailing. The
Company engages in an ongoing mailing campaign. The volume of mailings may vary
in different quarters and from year-to-year depending on the Company's
assessment of prevailing market opportunities.
The Company has operated as an S corporation and, as a result has not been
subject to federal or certain state income taxes. Prior to the consummation of
this Offering, the Company will become subject to federal and state income taxes
and will recognize an estimated non-recurring, non-cash charge to earnings to
record deferred income taxes for the tax effect of cumulative temporary
differences between financial and tax reporting. If the Company's S corporation
status had been terminated at December 31, 1997, the amount of this charge to
earnings would have been approximately $597,000. See "S Corporation Matters."
The Company sells a variety of brands of contact lenses, all with varying
gross margins. Accordingly, the Company's overall gross margin is affected by
its product mix. Historically, the Company's overall gross margin has been
positively impacted by the sale of manufacturers' promotional products, which
the Company is generally able to sell at higher gross margins than the Company's
other products. The recent rapid growth in the Company's net sales has resulted
in these sales representing a smaller percentage of the Company's overall sales.
As a result, the Company's overall gross margin has decreased in recent periods.
Gross margins on specific products, however, have remained relatively constant
over such periods. The Company's overall gross margin over the last four
quarters has remained relatively constant.
15
<PAGE> 19
RESULTS OF OPERATIONS
The following table presents the Company's results of operations expressed
as a percentage of net sales:
<TABLE>
<CAPTION>
COMBINED THE COMPANY
-------- ----------------
YEAR ENDED DECEMBER 31,
----------------------------
1995(1) 1996 1997
-------- ------- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 60.5 61.1 66.4
----- ----- -----
Gross profit................................................ 39.5 38.9 33.6
Selling, general and administrative expenses................ 53.7 28.7 28.2
----- ----- -----
Income (loss) from operations............................... (14.2) 10.2 5.4
Other (expense) income, net................................. (1.5) (0.6) (0.5)
----- ----- -----
Net income (loss)........................................... (15.7)% 9.6% 4.9%
===== ===== =====
</TABLE>
- ---------------
(1) The combined results of operations for the year ended December 31, 1995 were
prepared based on the combined historical results of (i) the Company for the
eleven month period from February 1,1995 through December 31, 1995 and (ii)
the historical results of operations of the Discount Lens Club for the one
month period ending January 31, 1995. The financial results of the Company
may not be comparable to those of the Predecessor due to changes in the
Company's operations that were implemented by Mr. Coon at the time he joined
the Company.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales. Net sales for the year ended December 31, 1997 increased $17.5
million, or approximately 482%, to $21.1 million from $3.6 million for the year
ended December 31, 1996. This increase was primarily attributable to higher
sales volumes due to additional sales and marketing activities.
Gross profit. Gross profit for the year ended December 31, 1997 increased
$5.7 million, or approximately 402%, to $7.1 million from $1.4 million in the
comparable 1996 period. Gross profit margin decreased to 33.6% for the year
ended December 31, 1997 from 38.9% in the comparable period. The Company's gross
profit margin for the year ended December 31, 1996 was positively impacted by
the sale of manufacturers' promotional products, which generally have higher
margins.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1997 increased by $4.9
million, or approximately 471%, to $5.9 million from $1.0 million for the year
ended December 31, 1996 due to the increase in sales and marketing activity and
the related increase in expenditures necessary to support the increased sales.
As a percentage of net sales, selling, general and administrative expenses
decreased to 28.2% in the 1997 period from 28.7% in the 1996 period. This
decrease is largely due to the fixed nature of many such expenses, including
rent, salaries, depreciation and certain equipment costs.
Income from operations. Income from operations for the year ended December
31, 1997 increased by $773,892 to $1.1 million from $371,678 for the year ended
December 31, 1996. This increase was primarily attributable to increased product
sales.
Other (expense) income, net. Other (expense) income for the year ended
December 31, 1997 decreased by $89,847 to $(113,162) from $(23,315) for the year
ended December 31, 1996. This decrease was primarily attributable to an increase
in interest expense due to increased borrowings by the Company from one of its
stockholders and under the Credit Facility, offset partially by an increase in
other income primarily due to an increase in interest income from stockholders'
notes receivable.
16
<PAGE> 20
YEAR ENDED DECEMBER 31, 1996 COMPARED TO COMBINED YEAR ENDED DECEMBER 31, 1995
Net sales. Net sales for the year ended December 31, 1996 increased by $3.0
million, or approximately 495%, to $3.6 million from $609,470 for the combined
year ended December 31, 1995. This increase was primarily attributable to higher
sales volumes due to increased sales and marketing activities.
Gross profit. Gross profit in 1996 increased by $1.2 million, or
approximately 486%, to $1.4 million from $240,935 in 1995. Gross profit margin
decreased to 38.9% in 1996 from 39.5% in the prior year. This decrease was
attributable to a change in product mix.
Selling, general and administrative expenses. Selling, general and
administrative expenses for the year ended December 31, 1996 increased by
$714,045, or 218%, to $1.0 million from $327,267 for the comparable period in
1995. This increase was the result of the increase in sales and marketing
activity and the related increase in expenditures necessary to support the
increased sales. As a percentage of net sales, selling, general and
administrative expenses decreased to 28.7% in 1996 from 53.7% in 1995. This
reduction was primarily the result of certain fixed expenses, including rent,
salaries, depreciation and certain equipment costs, being allocated over an
increased sales base.
Income from operations. Income from operations for the year ended December
31, 1996 increased by $458,010 to $371,678 from $(86,332) for the year ended
December 31, 1995. This increase was due to increased product sales.
Other (expense) income, net. Other (expense) income for the year ended
December 31, 1996 decreased by $14,210 to $(23,315) from $(9,105) for the year
ended December 31, 1995. This decrease was primarily attributable to an increase
in interest expense due to increased borrowings by the Company from a
stockholder of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its growth through a combination of
funds generated from operations and borrowings. Working capital requirements
generally precede the realization of sales on a monthly basis. The Company uses
funds generated from operations and borrowings to increase inventory levels in
anticipation of future sales realization. The Company's supply arrangements
generally require the Company to pay cash upon delivery of inventory. As a
result, the Company is generally unable to rely on standard trade credit
arrangements in purchasing its inventory, which would ordinarily permit the net
amount due to be paid within 30 days of shipment of ordered merchandise. In
addition, in order to help ensure sufficient supply, the Company generally
carries a higher level of inventory than if it were able to purchase directly
from contact lens manufacturers. See "Risk Factors -- Risks Related to Supply
Arrangements."
Net cash provided by (used in) operating activities was $(91,051), $114,275
and $(1,022,313) in 1995, 1996 and 1997, respectively. In 1996, approximately
$386,000 and $394,000 was used to finance increases in inventories and deferred
advertising costs, respectively, while $476,000 was provided by increases in
accounts payable and accrued liabilities related primarily to inventory
purchases and advertising expenditures. In 1997, approximately $4.3 million and
$1.3 million was used to finance increases in inventories and deferred
advertising costs, respectively, while $3.5 million was provided by increases in
accounts payable and accrued liabilities related primarily to inventory
purchases and advertising expenditures.
Net cash used in investing activities, principally related to capital
expenditures for infrastructure improvements and increases in notes receivable
from stockholders, was approximately, $46,690, $408,584 and $903,078 in 1995,
1996 and 1997, respectively.
Capital expenditures for infrastructure improvements such as expanded
operating facilities, upgrades in telecommunications and management information
systems were $32,546 in 1995, $174,992 in 1996 and $488,244 in 1997. The Company
presently anticipates that capital expenditures in 1998 will be approximately
$300,000.
17
<PAGE> 21
Net cash provided by financing activities for fiscal 1995, 1996 and 1997
was $139,017, $291,384 and $1,925,391, respectively. These amounts primarily
represent borrowings from a stockholder of the Company and borrowings under the
Credit Facility.
Immediately prior to the consummation of the Offering, the Company will
make the S Corporation Distribution to the Existing Stockholders. Based on the
present estimate of the closing date, the Company estimates that the S
Corporation Distribution will be approximately $0.8 million (net of notes
receivable due from stockholders of the Company) and will be paid from a portion
of the net proceeds of the Offering. The Agreement for Distribution of Retained
Earnings and Tax Indemnification will provide for indemnification of the Company
and the Existing Stockholders which could result in payments to or from the
Company following the consummation of this Offering. See "S Corporation
Matters."
In August 1997, the Company established a revolving credit facility to
provide for working capital borrowings and other corporate purposes (the "Credit
Facility"). The Company amended the Credit Facility in January 1998. As a
result, the Credit Facility currently provides for borrowings equal to the
lesser of $3.0 million or 50% of eligible inventory. The maximum borrowings
under the Credit Facility decreases to the lesser of $2.75 million on January
31, 1998, $2.25 million on February 28, 1998, $1.75 million on March 31, 1998
and $1.0 million on April 30, 1998 or 50% of eligible inventory at each of the
respective dates. The Credit Facility permits borrowings of the lesser of $1.5
million or 50% of eligible inventory on April 30, 1998 and thereafter in the
event that the Company receives at least $10.0 million in net proceeds from the
Offering. The Credit Facility has a scheduled maturity on July 31, 1998 and
bears interest at a floating rate equal to the lender's prime interest rate plus
1.5% (10% at December 31, 1997). As of December 31, 1997, outstanding borrowings
under the Credit Facility totaled approximately $1.1 million. The Credit
Facility is secured by substantially all of the Company's assets and contains
financial covenants customary for this type of financing.
The Company believes that its available cash after this Offering, together
with cash flow from operations, will be sufficient to support current operations
and future growth at least through fiscal 1998. The Company may be required to
seek additional sources of funds for accelerated growth or continued growth
after that point, and there can be no assurance that such funds will be
available on satisfactory terms. Failure to obtain such financing could delay or
prevent the Company's planned growth, which could adversely affect the Company's
business, financial condition and results of operations.
As a result of state regulatory requirements, the Company's liquidity,
capital resources and results of operations may be negatively impacted in the
future if the Company incurs increased costs or fines, is prohibited from
selling its products in a particular State(s) or experiences losses of a
substantial portion of the Company's customers for whom the Company is unable to
obtain or verify a prescription due to the enforcement of requirements by state
regulatory agencies. See "Risk Factors -- Risks Related to the Lack of
Compliance with Certain Laws and Regulations."
SEASONALITY
The Company does not believe that seasonality has had a material effect on
the Company's operations for the three years ended December 31, 1997.
INFLATION
The Company does not believe that inflation has had a material effect on
the Company's operations for the three years ended December 31, 1997.
YEAR 2000 ISSUE
The Company has reviewed all of its current computer applications with
respect to the year 2000 issue. The Company believes all of its applications are
substantially year 2000 compliant and that any additional costs with respect to
year 2000 compliance will not be material to the Company. The Company is
currently unable to determine the effects of year 2000 compliance by its
vendors.
18
<PAGE> 22
BUSINESS
OVERVIEW
The Company is a rapidly growing direct marketer of replacement contact
lenses. Through its easy-to-remember, toll-free telephone number, "1-800
CONTACTS" (1-800-266-8228), the Company sells substantially all of the most
popular brands of contact lenses, including those manufactured by Johnson &
Johnson, CIBA Vision, Wesley Jessen/Barnes-Hind, Bausch & Lomb and CooperVision.
The Company's high volume, cost-efficient operations, supported by its
proprietary management information system, enable it to offer its products at
competitive prices while delivering a high level of customer service. As a
result of its extensive inventory, the Company is generally able to ship
approximately 80% of its orders within 24 hours of receipt. The Company believes
that it offers consumers an attractive alternative for obtaining replacement
contact lenses in terms of price, convenience and speed of delivery. The
Company's net sales have grown rapidly, from approximately $3.6 million in 1996
to approximately $21.1 million in 1997 and its net income has grown from
approximately $348,000 in 1996 to approximately $1.0 million in 1997.
The Company markets its products through a national advertising campaign.
As compared to other direct marketers of replacement contact lenses, the Company
believes that its toll-free telephone number, 1-800 CONTACTS, affords it a
significant competitive advantage in generating consumer awareness and repeat
business. The Company believes, based primarily upon an article in Inc.
Magazine, that "vanity" numbers, like 1-800 CONTACTS, generate higher response
rates than traditional 1-800 numbers. After the Company first began using the
1-800 CONTACTS number in July 1995, net sales per advertising dollar increased
by over 20%. The Company believes its marketing strategy, combined with the
higher response rates attributable to the 1-800 CONTACTS telephone number,
allows the Company to acquire new customers at a lower average cost per
customer. The Company spent approximately $4.8 million (including the
capitalized portion thereof) on advertising in 1997, and plans to use a
significant portion of the net proceeds from this Offering to increase its sales
and marketing activities. The Company's experience has been that increases in
advertising expenditures have had a direct and immediate impact on the growth of
net sales. The Company believes that the planned increase in advertising
activities will enable it to attract significant numbers of new customers.
The Company's sales and marketing efforts, combined with its focus on
delivering a high level of customer service, have built a loyal customer base.
Historically, each $1.00 of sales to new customers has generated approximately
$0.78 of reorder sales within 12 months. During December 1997, approximately
$1.0 million of the Company's net sales were to repeat customers, compared to
net sales to repeat customers of approximately $123,000 in December 1996. The
Company's proprietary management information system creates a customer profile
containing prescription information, address and payment history, which allows a
repeat sale to the customer to be made in approximately one-third the time of a
sale to a new customer. The ease of placing additional orders is convenient for
the customer and is more profitable to the Company due to the lower costs
associated with repeat sales as compared to initial sales. The Company believes
that as more wearers switch to disposable lenses, its ability to attract and
retain its customers will play an integral role in the Company's continued
growth.
INDUSTRY OVERVIEW
Industry analysts estimate that over 50% of the United States' population
needs some form of corrective eyewear and that there are nearly 154 million
people in the United States who currently use some form of corrective eyewear.
Contact lenses have become a convenient, cost effective alternative to
eyeglasses and the number of contact lens wearers is expected to increase as
technology further improves the convenience, comfort and fit of contact lenses.
As a result, the contact lens market is large and growing. In 1996, sales of
contact lenses in the United States totaled approximately $2.5 billion and,
according to industry analysts, the U.S. market for contact lenses is expected
to grow approximately 10% per year through the year 2000. This growth is due
largely to the shift in the contact lens market away from traditional soft
lenses, which generally are replaced on an annual basis, to disposable lenses,
which are replaced on a daily, weekly, or bi-weekly basis. Since 1991, the
number of contact lens wearers in the United States has increased by 4.2% per
year while expenditures per wearer have increased by 6.5% per year as
conventional users have shifted to more costly specialty and disposable lenses.
19
<PAGE> 23
While the market for hard contact lenses has been relatively flat since 1991
with approximately 6 million U.S. wearers, the number of people wearing soft
contact lenses has grown at a compound annual growth rate of 5.9% since that
time.
Traditionally, contact lenses were almost exclusively sold to consumers by
either ophthalmologists or optometrists (referred to herein collectively as "eye
care practitioners"). Eye care practitioners would typically supply a patient
with his or her initial pair of contact lenses in connection with providing the
patient an eye examination and all replacement lenses, regardless of whether the
patient was given or required another eye examination. Because the initial
fitting of contact lenses requires a prescription written by an eye care
practitioner, the initial sale of contact lenses still takes place primarily in
this manner. Over the last decade, however, a number of alternative sellers of
replacement contact lenses have emerged, including direct marketers. The Company
estimates that direct marketers accounted for approximately 5% of contact lens
sales in the United States during 1996.
The Company believes that increased consumer awareness of the benefits of
the direct marketing of contact lenses will lead to further growth of direct
marketing. Purchasing replacement contact lenses from a direct marketer offers
the convenience of shopping at home, rapid home delivery, quick and easy
telephone ordering and competitive pricing. In addition, the growth in
popularity of disposable contact lenses, which require patients to purchase
replacement lenses more frequently, has contributed to the growth of the direct
marketing channel. The direct marketing industry continues to grow as many
retail customers have migrated towards the convenience and service offered by
home shopping and the Company expects the direct marketing segment of the
contact lens industry to grow in tandem with the growth in the direct marketing
industry as a whole.
Historically, sales of contact lenses by direct marketers have been impeded
by eye care practitioners and contact lens manufacturers. Many eye care
practitioners have been reluctant to provide patients with a copy of their
prescription or to release such information to direct marketers upon request,
thereby prohibiting such patients from purchasing lenses from a direct marketer.
In addition, substantially all of the major manufacturers of contact lenses have
historically refused to sell contact lenses directly to direct marketing
companies and have sought to prohibit their distributors from doing so. These
traditional barriers to the direct marketing of contact lenses may be reduced or
eliminated in the future. The Federal Trade Commission (the "FTC") has recently
solicitated comments regarding whether eye care practitioners should be required
to release contact lens prescriptions to their patients. In addition, the
Attorneys General for 28 states have joined in a lawsuit against the major
contact lens manufacturers and certain eye care practitioners and their trade
associations alleging that the manufacturers' policy not to sell to direct
marketers was adopted in conspiracy with eye care practitioners to eliminate
alternative channels of trade from the contact lens market. See "--Government
Regulation," and "--Purchasing and Principal Suppliers."
COMPETITIVE STRENGTHS
The Company attributes its success in the direct marketing segment of the
contact lens industry and its significant opportunities for growth to several
competitive strengths, including the following:
- 1-800 CONTACTS Telephone Number. The Company believes that its
easy-to-remember, toll-free telephone number, 1-800 CONTACTS, affords it
a significant competitive advantage over other direct marketers of
contact lenses in its ability to generate consumer awareness in a
cost-effective manner. The Company believes, based upon an independent
source, that "vanity" numbers, like 1-800 CONTACTS, generate higher
response rates than traditional 1-800 numbers. After the Company first
began using the 1-800 CONTACTS number in July 1995, net sales per
advertising dollar increased by over 20%. The Company believes that it
enjoys a higher customer retention rate and higher response rate due in
large part to the top-of-the-mind awareness generated by the 1-800
CONTACTS telephone number.
- Proprietary Management Information System. The Company believes that the
operating efficiency resulting from its proprietary management
information system gives it a significant competitive advantage over
other direct marketers. The Company believes this system is largely
responsible for average sales per employee being approximately three to
five times higher than its largest direct marketing competitor. The
20
<PAGE> 24
Company believes that this system is capable of supporting the Company's
anticipated sales growth in the foreseeable future.
- Customer Service. The Company believes that it provides better customer
service to replacement lens purchasers than traditional contact lens
distributors. Delivering high quality, consistent customer service has
been a cornerstone of the Company's strategy since its inception. The
Company's teleservice agents are trained to provide efficient and
accurate order entry and are able to provide each customer with real time
product availability information and the estimated delivery date for
their lenses. In addition, the Company's teleservice agents are trained
and authorized to handle all customer service issues, including accepting
product returns and issuing refunds, if appropriate. The Company believes
that consistently providing every customer with prompt and courteous
service throughout their relationship with the Company increases the
Company's ability to attract and retain customers.
- Extensive Inventory; Convenient, Rapid Delivery. The Company stocks a
large inventory of lenses from which it can ship approximately 80% of its
orders within 24 hours and intends to use a portion of the net proceeds
from the Offering to invest in additional inventory. Customers generally
receive their lenses from the Company in one to five business days after
shipping, depending on whether the customer chooses standard delivery or
pays an additional charge for delivery by an overnight courier. The
Company believes that its extensive inventory allows it to deliver lenses
to a customer quicker, on average, than eye care practitioners or optical
chains, which generally have smaller inventories and place orders for
lenses on a less frequent basis than the Company. In addition, lenses
ordered from the Company are delivered directly to the home or office of
the customer; a service which most eye care practitioners, optical chains
and discount stores do not offer.
- Competitive Pricing. The Company believes that its high volume,
cost-efficient operations allow it to maintain a pricing advantage over
many of the traditional contact lens providers. The Company believes that
its prices are generally 25% lower than prices typically charged by eye
care practitioners and comparable to those charged by large retail
optical chains and mass merchandisers, who generally do not offer the
convenience of telephone ordering and home delivery. Unlike many of its
competitors, the Company does not charge any membership fees for its
services and instead relies upon its customer service and rapid delivery
to retain customers.
GROWTH STRATEGY
The Company believes that it has significant opportunities to attract and
retain new customers and increase sales through several strategic initiatives,
including the following:
- Expand Sales and Marketing Activities. Following the Offering, the
Company plans to significantly expand its sales and marketing activities
to attract new customers and increase sales to existing customers. The
Company has spent approximately $4.8 million (including the capitalized
portion thereof) for advertising in 1997, an increase of approximately
460% from 1996. The Company has traditionally marketed its products
through direct mail, cooperative mailings and free standing inserts in
newspapers. Following the Offering, the Company intends to increase the
frequency of these activities and to begin advertising in media it has
not previously utilized, including magazines, traditional newspaper
advertisements, radio and television. The Company's experience has been
that increases in advertising expenditures have had a direct and
immediate impact on the growth of net sales. Based primarily on response
rates attributable to the 1-800 CONTACTS telephone number, the Company
believes that increasing its sales and marketing activities will allow it
to attract significant numbers of new customers.
- Continue to Deliver High Level of Customer Service. The Company has
built a loyal customer base due largely to its focus on delivering a high
level of customer service. Historically, each $1.00 of sales to new
customers has generated $0.78 of reorder sales within 12 months.
Approximately $1.0 million of the Company's sales in December 1997 were
to repeat customers, compared to sales to repeat customers of
approximately $123,000 in December 1996. The Company expects its sales to
repeat customers to continue to grow as the contact lens market continues
to shift towards disposable lenses, and consumers
21
<PAGE> 25
increase the frequency with which they replace their lenses. The Company
believes that the key to retaining its customers is to provide a competitive
price and convenient delivery while providing superior customer service. The
Company expends significant resources to train its teleservice agents not
only to provide accurate product information and efficient order entry,
but also to handle all customer service issues, including product returns
and refunds, if appropriate. The Company's proprietary management
information system creates a customer profile containing prescription
information, address and payment information which allows a sale to a
repeat customer to be made in approximately one-third the time of a sale
to a new customer. The shorter call duration of a repeat order is more
convenient for the customer and more profitable for the Company.
- Leverage Existing Infrastructure. To support anticipated growth, the
Company has expended considerable resources in establishing its
infrastructure. The Company believes that its current proprietary
management information and telecommunication systems and its operating
and distribution facilities have the capacity to handle the Company's
contemplated sales growth for the foreseeable future with minimal
additional capital expenditures. As a result, the Company believes that
it has the opportunity to improve its operating margins by leveraging its
existing infrastructure through increased sales.
- Capitalize on Favorable Industry Trends. According to industry analysts,
the number of soft contact lens wearers in the United States has
increased from 19 million in 1990 to over 25 million in 1996 and are
projected to increase by approximately 5% annually through the year 2000
as soft contact lenses continue to gain popularity and the number of
14-to-25 year olds (the prime age group for new lens wearers) increases.
Growth in the contact lens industry is also attributable to the ongoing
shift among wearers of conventional lenses to more frequently replaced
disposable lenses. Direct marketing is well suited to provide a cost
effective, convenient way to replace disposable lenses. The Company
believes that sales by direct marketers account for approximately 5% of
all contact lens sales in the United States, but account for
approximately 10% of all disposable contact lens sales in the United
States. The Company believes that it provides the most convenient way for
consumers to replace their lenses and that the Company's business will
continue to grow in tandem with the disposable lens market.
PRODUCT OFFERINGS
Contact lenses can be divided into two categories: soft lenses, which
represent approximately 80% of U.S. wearers, and hard lenses (primarily rigid
gas permeable ("RGP")), which represent approximately 20% of U.S. wearers. There
are three principal wearing regimes for soft contact lenses: conventional,
disposable and planned replacement. Conventional lenses are designed to be worn
indefinitely, but are typically replaced after 12 to 24 months. Disposable soft
contact lenses were introduced in the late 1980s based on the concept that
changing lenses on a more regular basis was important to comfort, convenience,
maintaining healthy eyes and patient compliance. Disposable lenses are changed
as often as daily and up to every two weeks, depending on the product. Planned
replacement lenses are designed to be changed as often as every two weeks and up
to every three months and currently represent a small portion of the overall
soft lens market.
The Company is a direct marketer of replacement contact lenses and does not
manufacture contact lenses nor provide eye examinations or related services to
its customers. The Company offers substantially all of the soft and hard contact
lenses produced by the leading contact lens manufacturers, including Johnson &
Johnson, CIBA Vision, Wesley Jessen/Barnes-Hind, Bausch & Lomb and CooperVision.
The Company stocks a large inventory of lenses from which it can ship
approximately 80% of its orders within 24 hours and intends to use a portion of
the net proceeds of the Offering to invest in additional inventory. The Company
believes that its ability to maintain a large inventory of contact lenses
provides it with a competitive advantage over eye care practitioners, optical
chains and discount stores and serves as an effective barrier of entry to
potential entrants in the direct marketing of contact lenses.
In July 1997, the Company was approved as an authorized distributor of CIBA
Vision. Approximately 23% of the Company's sales in 1997 were derived from the
sales of products manufactured by CIBA Vision. The Company's products are
delivered in the same sterile, safety sealed containers in which the lenses were
packaged by the manufacturer. From time to time, the Company purchases contact
lenses that were labeled as "samples"
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<PAGE> 26
by the manufacturer. Such lenses are sometimes offered by the Company to
customers as part of promotional programs at reduced prices.
CUSTOMERS AND MARKETING
The Company's customers are located principally throughout the United
States. The percentage of the Company's customers that are located in each state
is approximately equal to the percentage of the United States' population which
resides in such state, with the largest concentration of the Company's customers
residing in California. During 1997, the Company shipped approximately 248,000
orders, as compared to approximately 43,000 orders during 1996, an increase of
approximately 477%. The Company strives to deliver a high level of customer
service in an effort to establish a loyal customer base.
The Company utilizes a focused, closely managed and monitored marketing
strategy. The Company continually researches and analyzes new ways in which to
advertise the Company's products. After identifying an attractive potential new
advertisement or advertising medium, the Company commits to such advertising for
an initial test period. The response generated by such advertising is monitored
and analyzed by the Company, and a decision to commit significant resources to a
particular advertisement or advertising medium is made only if the Company is
satisfied with the response rates it has generated. After the initial testing
period, the Company continues to closely monitor its advertising in order to
identify and react to trends in consumer response patterns and adjust its
marketing strategy accordingly.
The majority of contact lens wearers are between the ages of 18 and 39. In
addition, 65% of all contact lens wearers are women and contact lens wearers
generally have higher incomes than eyeglass wearers. The Company is able to
target its advertising to lens wearers in these key demographic groups, as well
as certain other persons based on other important demographics, through its
national advertising campaign utilizing various types of print media, including
direct and cooperative mailings and free standing inserts.
Direct-Mailing. The Company uses direct-mail to advertise its products to
selected groups of consumers. The Company utilizes mailing lists obtained from
both private and public sources to target its advertisements specifically to
contact lens wearers.
Cooperative Mailings. The Company advertises its products in cooperative
mail programs sponsored by the leading cooperative mail companies in the United
States. This advertising medium permits the Company to target consumers in
specific zip codes according to age, income and other important demographics.
Free Standing Inserts. From time to time, the Company advertises its
products through free standing inserts, which are typically glossy
advertisements included inside the comic section of the Sunday paper. The
Company uses this advertising medium due to its ability to reach a large
audience in a cost-effective manner. The Company utilizes these inserts to
supplement its direct and cooperative mailing programs.
Following the Offering, the Company plans to significantly expand its sales
and marketing activities to attract new customers and increase sales to existing
customers. The Company plans to increase its use of direct mailings, cooperative
mailings and free standing inserts, as well as begin advertising in mediums not
previously utilized, including magazines, traditional newspaper advertisements,
radio and television.
During the first month after the Company acquired and activated the 1-800
CONTACTS telephone number, the Company generated approximately 2,000 calls and
$38,000 in additional sales without advertising the number. As a result of the
proliferation of 1-800 numbers in recent years, the Company believes that it
continues to receive new business from customers who simply call 1-800 CONTACTS
as a result of their expectation that a contact lens seller will use such a
number. In addition, the Company believes that it benefits from the advertising
of other direct marketers as a result of customers forgetting the competitors
telephone number and contacting the Company instead.
The Company also markets its products through its website on the Internet.
Although sales generated by its website have been immaterial to date, the
Company believes that the Internet offers an attractive opportunity to increase
sales in a cost-effective manner. The Company expects to contribute additional
resources to upgrading its
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<PAGE> 27
website in an effort to increase revenues generated from its website. The
Company's website is located at www.1800contacts.com. The Company's website and
the information contained therein shall not be deemed to be a part of this
Prospectus.
MANAGEMENT INFORMATION SYSTEM
The Company has developed a proprietary management information system that
integrates the Company's order entry and order fulfillment operations. The
Company believes that this system enables it to operate efficiently and provide
enhanced customer service. The key features of this management information
system are its ability to: (i) continually monitor and track the Company's
inventory levels; (ii) rapidly process credit card orders; (iii) increase the
speed of the shipping process with integrated and automated shipping functions;
and (iv) increase accuracy through the scanning of each order prior to shipment
to ensure it contains the correct lenses and the correct quantity of lenses.
The management information system provides the Company's teleservice agents
with real-time product availability information through a point-to-point
satellite connection with the Company's shipping facilities, which information
is immediately updated as lenses are shipped. The management information system
also has an integrated direct connection for processing credit card payments
which allows the agent to charge the customer's card and ensure that a valid
card number and authorization have been received in approximately six to fifteen
seconds while the agent is on the phone with the customer. Teleservice agents
also have access to records of all prior contact with a customer, including the
customer's address, prescription information, order history and payment history
and notes of any prior contact with the customer made by phone, fax or mail.
Based on product availability provided by the management information system, the
teleservice agent provides the customer with an estimated date of delivery of
their lenses. If a customer's order will not be shipped by the promised delivery
date, the management information system notifies the agent who entered the
order, and any information explaining the delay, and the agent then contacts the
customer to inform them of the delay.
After an order has been entered into the management information system by a
teleservice agent, it is sent to the Company's shipping facility via a
point-to-point satellite connection. After the shipping facility receives the
order, the invoice for the order is printed. The invoice for each order contains
the type and quantity of the lenses, as well as a shipping label for the order.
Tracking, manifesting, billing and other shipping functions are integrated into
the Company's management information system so that all necessary bar codes and
tracking information for shipment via independent couriers is printed directly
on the Company's shipping label, and separate labeling or a separate computer is
not needed to ship packages via independent couriers.
After the invoice for an order is printed at the Company's shipping
facility, the order is pulled from inventory and scanned to ensure that the
prescription and quantity of each item matches the order in the Company's
management information system. Audible notices inform the shipping agent of any
errors in the order. After the order has been scanned for accuracy, the
management information system updates the Company's inventory level, the order
is placed in a box produced by the Company's automated box folder and is sent to
an automatic sealer. After the package leaves the sealer, another scanner reads
the bar code on the shipping label to determine which method of shipment is
being used, adds the package to the appropriate carrier's manifest and directs
the appropriate hydraulic diverter to push the package into the appropriate
carrier's shipping bin. The Company's automated packaging system is capable of
folding, moving, scanning, sealing and shipping over 10,000 orders during a
twelve hour shift.
The Company has installed a battery powered back-up system capable of
supporting its entire call center, computer room, and phone switch. This system
is further supported by a generator capable of supporting the Company's entire
operation for a period of five days. All critical data is simultaneously written
to a series of back-up drives throughout the day and at the end of the day the
Company's data is transmitted by satellite to an offsite location. There can be
no assurance that the Company's back-up system will sufficient to prevent an
interruption in the Company's operations in the event of disruption in the
Company's management information system and an extended disruption in the
management information system could adversely affect the Company's business,
financial condition and results of operations.
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<PAGE> 28
OPERATIONS
The primary components of the Company's operations include its
teleservices, order entry and customer service and distribution and fulfillment.
Teleservices, Order Entry and Customer Service. The Company provides its
customers with toll-free telephone access to its teleservice agents. The
Company's call center generally operates from 6:00 a.m. to 8:00 p.m. (MST)
Monday through Friday and 8:00 a.m. to 3:30 p.m. (MST) on Saturday. During
non-business hours, a recorded message informs customers of the Company's hours
of operations. The Company's orders are received by phone, mail, facsimile and
electronic mail. Teleservice agents process orders directly into the Company's
proprietary management information system, which provides customer order history
and information, product specifications, product availability, expected shipping
date and order number. Teleservice agents are provided with a sales script and
are trained to provide information about promotional items. Additionally,
teleservice agents are trained to provide customer service and are authorized to
resolve all customer service issues, including accepting returns and issuing
refunds, as appropriate. In 1997, the total of customer returns, exchanges and
customer service credits was approximately 1.8% of gross sales.
The Company believes its customers are particularly sensitive to the way
merchants and salespeople communicate with them. The Company strives to hire
energetic, service-oriented teleservice agents who can understand and relate to
customers. Teleservice agents participate in a training program, which includes
a mentor system for working with more experienced personnel. After training,
teleservice agents are monitored to review performance and are re-trained
periodically.
The Company recently installed a new telephone system. In its current
facility, the Company has the capacity to handle up to 19,000 calls per day. The
Company believes that it processes telephone orders on average in less time than
its competitors, which allows each teleservice agent to handle a greater number
of orders per day.
The laws in most states require that contact lenses be sold pursuant to a
valid prescription. The Company's operating practice is to attempt to obtain a
valid prescription from each of its customers or his/her eyecare practitioner.
Customers may mail a copy of their prescription with their order or send it to
the Company via facsimile. Upon receipt of a prescription from a patient, the
prescription is filed by the Company and the prescription information, including
the expiration date, is entered into the Company's proprietary management
information system. If the Company is unable to obtain a copy of or verify the
customer's prescription, it is the Company's practice to ship the lenses to the
customer, based on the information that the customer has provided. See "Risk
Factors -- Risks Related to the Lack of Compliance with Certain State Laws and
Regulations."
Distribution and Fulfillment. Approximately 80% of the Company's orders
are shipped within 24 hours. Customers generally receive orders within one to
five business days after shipping, depending upon the method of delivery chosen
by the customer. A shipping and handling fee is charged on each customer order,
except those orders received by mail with an enclosed check. Customers have the
option of having their order delivered by overnight courier for an additional
$4.00 charge. The Company's management information system automatically
determines the anticipated delivery date for each order.
The Company uses an integrated packing and shipping system via an on-line
connection to the Company's management information system. This system monitors
the in-stock status of each item ordered, processes the order and generates
warehouse selection tickets and packing slips for order fulfillment operations.
The Company's management information system is specifically designed with a
number of quality control features to help ensure the accuracy of each order.
PURCHASING AND PRINCIPAL SUPPLIERS
Historically, substantially all of the major manufacturers of contact
lenses have refused to sell lenses directly to direct marketers, including the
Company, and have sought to prohibit their distributors from doing so. As a
result, the Company currently purchases a substantial portion of its products
from unauthorized distributors, such as large optical retail chains with excess
inventory. The Company is aware that at least one large manufacturer of
25
<PAGE> 29
contact lenses has begun to put tracking codes on its products in an effort to
identify distributors who are selling to direct marketers. In June 1994, the
Attorney General for the State of Florida, acting on behalf of disposable
contact lens consumers in that State, filed an anti-trust action against Johnson
& Johnson, CIBA Vision, Bausch & Lomb and certain eye care practitioners and
their trade associations alleging, among other things, that the contact lens
manufacturers' policy not to sell to mail order distributors and others was
adopted in conspiracy with eye care practitioners as the result of pressure by
eye care practitioners in order to eliminate alternative channels of trade from
the disposable lens market (the "Florida Action").
In December 1996, the Attorney General for the State of New York, on behalf
of itself and the Attorney Generals for approximately 21 other States, filed a
substantially similar action naming three major manufacturers of soft contact
lenses as well as several optometrists and their trade associations as
defendants (the "New York Action"). Six additional States have joined the New
York Action since it was filed and the Florida Action and the New York Action
have been consolidated and are currently pending in the United States District
Court for the Eastern District of New York (the "Attorney General Action").
Based upon public filings made in the Attorney General Action, the Company
believes that one defendant, CIBA Vision Corporation, has entered into a
proposed settlement agreement pursuant to which it has agreed to pay $5 million
into a settlement fund, agreed to provide rebates and coupons to consumers and
agreed to begin to sell soft contact lenses to direct marketers. Since this
settlement agreement was announced, the Company has become an authorized
distributor of CIBA Vision's contact lenses and can purchase such lenses at
wholesale level prices.
As a result of the manufacturers' refusal to sell to direct marketers,
other than with respect to CIBA Vision products, the Company is not an
authorized dealer for any of the products which it sells. In addition, the price
which the Company pays for certain of its products is sometimes higher than
those paid by eye care practitioners, retail chains and mass merchandisers, who
are able to buy directly from the manufacturers of such lenses. Although the
Company has been able to obtain most contact lens brands at competitive prices
in sufficient quantities on a regular basis, there can be no assurance that the
Company will not encounter difficulties in the future, particularly in light of
the Company's anticipated growth. The inability of the Company to obtain
sufficient quantities of contact lenses at competitive prices would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Risks Related to Supply
Arrangements."
Although the Company seeks to reduce its reliance on any one supplier by
establishing relationships with a number of distributors and other sources, the
Company purchased from a single distributor approximately 27%, 40% and 21% of
its inventory in 1995, 1996 and 1997, respectively, and purchased approximately
40% of its inventory from another distributor in 1997. The Company believes that
neither of these suppliers is authorized by contact lens manufacturers to
distribute their products. The Company does not have written agreements with any
of its suppliers. The Company continually seeks to establish new relationships
with potential suppliers in order to be able to obtain adequate inventory at
competitive prices.
COMPETITION
The retail sale of contact lenses is a highly competitive and fragmented
industry. Traditionally, contact lenses were almost exclusively sold to
customers by eye care practitioners in connection with providing them an eye
examination. Competition for patients and the revenue related to providing them
contact lenses significantly increased as optical chains and large discount
retailers began providing optical services and has further intensified with the
entry of direct marketers such as the Company. The Company believes that the eye
care profession suffers from a surplus of eye care practitioners, and that the
resulting competitive pressure has been exacerbated by the increased prevalence
of retail optical chains, mass merchandisers and direct marketers. Consequently,
the competition amongst eye care practitioners to acquire customers and the
competition to provide replacement lenses to such customers has intensified.
The Company's principal competitors include ophthalmologists and
optometrists in private practice, which collectively accounted for approximately
70% of all contact lens sales in 1996. The Company also competes with national
optical chains, such as Cole National Corporation, LensCrafters and National
Vision Association and mass merchandisers, such as Wal-Mart, Sam's and Costco,
which accounted for approximately 25% of all contact
26
<PAGE> 30
lens sales in 1996. The Company also competes with other mail-order contact lens
distributors, one of which, Lens Express, Inc., is larger than the Company. The
Company may face increased competition in the future from new entrants in the
direct marketing business, which may include national optical chains and mass
merchandisers, some of which may have significantly greater resources than the
Company.
The Company believes that many of its competitors, including most eye care
practitioners, national optical chains and mass merchandisers, have direct
supply arrangements with contact lens manufacturers, which in some cases affords
such competitors with better pricing terms and access to supply. In addition,
some of the competitors are significantly larger and have significantly greater
resources than the Company. The Company believes that the principal basis of
competition in the industry include price, product availability, customer
service and consumer awareness.
GOVERNMENT REGULATION
Federal Regulation. Contact lenses are regulated by the FDA as "medical
devices." The FDA classifies medical devices as Class I, Class II or Class III
and regulates them to varying degrees, with Class I medical devices subject to
the least amount of regulation and Class III medical devices subject to the most
stringent regulations. RGP and soft contact lenses are classified as Class II
medical devices if intended only for daily wear, and as Class III medical
devices if intended for extended wear. These regulations generally apply only to
manufacturers of contact lenses, and therefore do not directly impact the
Company. Federal regulations also require the labels on "medical devices" to
contain adequate instructions for their safe and proper use. However, there is
an exemption from this requirement for medical devices the use of which is not
safe except under the supervision of a practitioner licensed by law to direct
the use of such device. Devices which fall in this exception must contain as
part of their labeling the statement "Caution: Federal law restricts this device
to sale by or on the order of ," the blank to be filled in with the
word physician or other practitioner authorized by the law of the state in which
the practitioner practices to use or order the use of the device. The Company
believes that this exception is often misconstrued as being a federal
requirement that the device be sold only pursuant to a prescription. The FDA
considers contact lenses to qualify for this labeling exemption, however, there
is no federal law that requires that contact lenses be sold only pursuant to a
prescription.
State Regulation. Because there is no applicable federal law that
regulates the distribution of contact lenses, the sale and delivery of contact
lenses to the consumer is subject to state laws and regulations. The Company
sells to customers in almost all of the 50 states and each sale is likely to be
subject to the laws of the state where the customer is located. The laws and
regulations governing the sale and delivery of contact lenses vary from state to
state, but generally can be classified in five categories: (i) laws that require
contact lenses only be dispensed pursuant to a prescription; (ii) laws that
require the dispenser to be licensed by the state as an optometrist,
ophthalmologist or other professional authorized to dispense lenses; (iii) laws
that require lenses be dispensed only in a face-to-face transaction; (iv) laws
with requirements that are unclear or do not specifically address the sale and
delivery of contact lenses; and (v) laws that the Company believes place no
restrictions on the dispensing of replacement contact lenses. Many of the states
requiring that contacts be dispensed in face-to-face meetings or by a person
licensed by such state to dispense lenses also require that lenses only be
dispensed pursuant to a valid prescription.
The laws and regulations in a significant number of states, including most
of the states wherein a large portion of the Company's sales are concentrated,
require that contact lenses only be sold to a consumer pursuant to a valid
prescription. In some states, satisfying this prescription requirement obligates
the dispenser only to verify the customer's prescription with the customer's
prescriber, while other states specifically require that a written prescription
be obtained before providing the lenses to the customer. The Company's operating
practice is to attempt to obtain a valid prescription from each of its customers
or his/her eyecare practitioner. If the customer does not have a copy of his/her
prescription, the Company attempts to contact the customer's doctor to obtain a
copy of, or verify the customer's prescription. If the Company is unable to
obtain a copy of or verify the customer's prescription, it is the Company's
practice to complete the sale and ship the lenses to the customer based on the
prescription information provided by the customer. The Company retains copies of
the written prescriptions that it receives and maintains records of its
communications with the customer's prescriber.
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<PAGE> 31
The Company's ability to comply with state laws and regulations requiring a
valid prescription is hampered because the Company's customers are often unable
to get a copy of their prescription. The Company believes that optometrists,
ophthalmologists and other contact lens prescribers have historically refused to
release copies of a patient's contact lens prescription to the patient. In
addition, such providers have refused to release or verify prescriptions at the
request of mail order companies. Federal law requires prescribers to release
prescriptions for eyeglasses to a patient, but the issue of whether or not a
prescriber must release a contact lens prescription to the patient, or at the
patients request, is currently governed by state law. There are approximately 22
states that require contact lens prescribers to release the prescriptions for
contact lenses to the patient. However, even in states with a mandatory release
law, the Company believes that many prescribers continue to refuse to release
prescriptions to their patients or to mail order contact lens distributors,
including the Company.
In addition to requiring a valid prescription, a substantial number of
states also require that contact lenses only be dispensed by a person licensed
to do so under that state's laws. A dispenser may be required to be licensed as
an optometrist, ophthalmologist, optician, ophthalmic dispenser or contact lens
dispenser, depending on which state the customer is located in. Neither the
Company nor any of its employees is a licensed or registered dispenser of
contact lenses in any states other than California and Texas. The laws in a
small number of states effectively prohibit the sale of contacts through the
mail by requiring that a person licensed under that state's law to dispense
contacts be in personal attendance at the place of sale. In addition, there are
several states in which the laws and regulations do not specifically address the
issue of who may dispense contact lenses or are unclear with respect to the
requirements for dispensing lenses. Generally, these laws are older and were
written before mail order and other distributors began selling contact lenses.
Lastly, the Company believes that the laws in a small number of states do not
require that replacement contact lenses be dispensed pursuant to a prescription
or only by a professional licensed in such state.
The Company retained legal counsel to identify and summarize the applicable
laws of each of the states in which the Company generates material sales. The
Company compared its operations to the applicable requirements of the laws
contained in such summaries. Based upon such comparison, the Company estimates
that approximately one-third of its net sales in 1997 appeared to conform to the
requirements of applicable state laws and regulations. Any action brought
against the Company based on its failure to comply with applicable state laws
and regulations could result in significant fines to the Company, the Company
being prohibited from making sales in a particular state and/or the Company
being required to comply with such laws. Such required compliance could result
in: (i) increased costs to the Company; (ii) the loss of a substantial portion
of the Company's customers for whom the Company is unable to obtain or verify
their prescription; and (iii) the inability to sell to customers at all in a
particular state if the Company cannot comply with such state's laws. The
occurrence of any of the above results could have a material adverse effect on
the Company's ability to sell contact lenses and to continue to operate
profitably. Furthermore, there can be no assurance that states will not enact or
impose laws or regulations that prohibit mail order dispensing of contact lenses
or otherwise impair the Company's ability to sell contact lenses and continue to
operate profitably. The Company has not obtained an opinion of counsel with
regard to its compliance with applicable state laws and regulations, and
information contained herein regarding the Company's compliance with applicable
state laws and regulations should not be construed as being based on an opinion
of counsel.
An FTC rule adopted in 1978 requires eye care practitioners to provide
their patients with a copy of their eyeglass prescription (the "Prescription
Release Rule"). The Prescription Release Rule was adopted based on a finding by
the FTC that consumers were being deterred from comparison shopping for
eyeglasses because eye care practitioners refused to release prescriptions. In
April 1997, the FTC published a request for comments regarding the Prescription
Release Rule with respect to whether the rule should be expanded to require the
release of contact lens prescriptions, whether consumers have historically been
able to get their contact lens prescriptions upon request and whether the
refusal to release contact lens prescriptions has benefits justifying such
refusal. The FTC undertook a similar review in 1985 and again in 1995, both
times concluding that the rule should not be expanded to require the release of
contact lens prescriptions. The deadline for submitting comments to the FTC was
September 2, 1997.
In June 1997, the Company received notice from the Georgia Board that the
Georgia Board considers sales by the Company in Georgia to be in violation of
Georgia law, which requires face-to-face delivery of contact
28
<PAGE> 32
lenses. However, the Georgia Board did not recommend any action be taken at that
time, but reserved the right to pursue future violations by the Company. In
November 1997, the Company received notice from the New Mexico Board that the
New Mexico Board considers sales by the Company in New Mexico to be in violation
of New Mexico law and ordering the Company to cease and desist selling contact
lenses in New Mexico. The Company has not taken any actions in response to such
notices. Sales to customers in these two states in 1997 were less than 3% of the
Company's net sales for that period. The Company has never been subject to any
proceedings brought by any state to force the Company to comply with such
state's laws or to fine the Company for failure to comply with such laws.
INTELLECTUAL PROPERTY
The Company conducts its business under the trade name and service marks
"1-800 CONTACTS." The Company has taken steps to register and protect these
marks and believes that such marks have significant value and are an important
factor in the marketing of its products. The Company leases certain assets,
including the right to use the 1-800 CONTACTS telephone number, from an
individual pursuant to a non-cancelable lease. The lease expires in June 2000,
at which time the Company has the option to purchase such assets for $17,500.
However, under applicable FCC rules and regulations, the Company does not have
and cannot acquire any property rights to the telephone number. The Company does
not expect to lose the right to use the 1-800 CONTACTS number, however, there
can be no assurance in this regard. The loss of the right to use the 1-800
CONTACTS number would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company has
obtained the rights to 1-888 CONTACTS and the cellular and international
equivalents for the 1-800 CONTACTS phone number, however, like the 1-800
CONTACTS number, the Company does not have and cannot acquire any property
rights in these telephone numbers. See "Risk Factors -- Intellectual Property
Matters."
PROPERTIES
All of the Company's management and telephone operations are conducted
through 5,600 square feet of leased space located in Draper, Utah, a suburb of
Salt Lake City. The lease relating to this facility expires in 2002. The Company
intends to relocate to a new and expanded facility located adjacent to its
existing facility in May 1998 and the Company's current landlord has agreed to
release the Company from its current lease without significant penalty. The new
facility is expected to consist of 23,000 square feet. The lease on the new
facility is expected to be for a term of approximately seven years.
As of November 1, 1997, the Company began utilizing approximately 4,500
square feet of leased warehouse space. This warehouse facility is located
approximately two miles from the Company's operations facilities. In January
1998, the Company entered into a new lease with respect to its warehouse space
which provides for an increase of the Company's leased space to 9,988 square
feet. This lease expires in January 2000 and may be renewed at the Company's
option for four additional six month periods.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to claims and litigation that
arise in the normal course of business. Management believes that the ultimate
outcome of these claims and litigation will not have a material adverse effect
on the financial position or results of operations of the Company.
EMPLOYEES
As of December 31, 1997, the Company employed 57 persons, of which 37 were
engaged in sales related activities, 12 were engaged in distribution related
activities and 8 were engaged in administrative and accounting functions. None
of the Company's employees is covered by a collective bargaining agreement. The
Company believes its relationship with its employees to be good.
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<PAGE> 33
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information with respect to the
Directors, executive officers and certain key employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jonathan C. Coon....................... 27 President and Director
John F. Nichols........................ 37 Vice President, Operations and Director
Scott S. Tanner........................ 37 Chief Financial Officer and Director
Robert G. Hunter....................... 30 Controller
Craig A. Heesch........................ 39 Manager, Network Administration
S. Todd Witzel......................... 26 Manager, Management Information Systems
Donald A. Yacktman..................... 52 Director
Stephen A. Yacktman.................... 27 Director
E. Dean Butler......................... 53 Director
</TABLE>
JONATHAN C. COON is a co-founder of the Company and currently serves as
President of the Company and Director. Mr. Coon received his Bachelor's Degree
from Brigham Young University in 1994 and has substantially completed studies
for an MBA at Brigham Young University. Mr. Coon has five years of experience in
the contact lens industry.
JOHN F. NICHOLS is a co-founder of the Company and currently serves as Vice
President, Operations and Director. Mr. Nichols is a certified optician in the
State of California and was the owner of the Discount Lens Club from 1991 until
February 1995. Mr. Nichols worked with Bausch & Lomb as a Senior Sales
Representative from 1989 to 1991.
SCOTT S. TANNER has served as the Chief Financial Officer and a Director of
the Company since November 1997. Prior to joining the Company, Mr. Tanner served
as the Chief Financial Officer of Country Club Foods, Inc., a Utah-based snack
food manufacturer and distributor, from 1995 to 1997. Prior thereto, Mr. Tanner
served in various management positions at Apple Computer, Inc. from 1988 to 1995
and worked at Peat, Marwick & Mitchell & Co. in San Francisco from 1984 to 1986.
Mr. Tanner received a Bachelor's Degree from Stanford University and a MBA from
Harvard University. Mr. Tanner served as an executive officer of Country Club
Foods, Inc. at the time it filed a voluntary petition under chapter 11 of the
United States Bankruptcy Code in November 1995.
ROBERT G. HUNTER has served as the Controller of the Company since November
1997. Prior to joining the Company, Mr. Hunter served as an auditor with
Hawkins, Cloward & Simister LC from November 1993 to 1997 and with Arthur
Andersen LLP from April 1992 to November 1993. Mr. Hunter is a Certified Public
Accountant. Mr. Hunter graduated summa cum laude with a Bachelor's Degree from
Brigham Young University, where he also earned a Masters of Accountancy Degree.
CRAIG A. HEESCH has served as the Company's Network Administrator since
November 1997. From February 1997 through November 1997, Mr. Heesch was retained
as a consultant to the Company. From 1993 through 1997, Mr. Heesch owned and
operated a computer consulting business, was an authorized Novell reseller and
is a certified Novell technician. Mr. Heesch received a Bachelor's Degree in
Computer Science from the University of Utah.
S. TODD WITZEL has served as the Company's Manager, Management Information
Systems since October 1996. Prior to joining the Company, Mr. Witzel worked for
Access Software as a programmer, where he helped develop Access' management
information systems, from 1994 to 1996.
DONALD A. YACKTMAN has served as a Director of the Company since February
1996. Mr. Yacktman is the President and Chief Investment Officer of Yacktman
Asset Management Co., which manages approximately $1.6
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<PAGE> 34
billion, including more than $1 billion in two equity mutual funds. Prior to
founding his own firm, Mr. Yacktman served as the senior portfolio manager with
Selected Financial Services, Inc. from April 1982 until March 1992 and was a
portfolio manager and a partner with Stein Roe & Farnham from 1974 to 1982. Mr.
Yacktman was named "Portfolio Manager of the Year" by Morningstar in 1991 and
has been featured in articles in several newspapers and magazines and is a
frequent guest on radio and television investment programs. Mr. Yacktman holds a
Bachelor's Degree, magna cum laude in economics from the University of Utah and
an MBA with distinction from Harvard University.
STEPHEN A. YACKTMAN has served as a Director of the Company since February
1996. Mr. Yacktman is currently a Vice President at Yacktman Asset Management
Co. where he has been employed since 1993. Mr. Yacktman's responsibilities
include portfolio management, stock analysis and trading. Mr. Yacktman holds a
Bachelor's Degree in economics and an MBA from Brigham Young University.
E. DEAN BUTLER has served as a Director of the Company since January 1998.
Mr. Butler currently serves as Vice Chairman of Grand Vision, the largest retail
optical group in Europe. In 1988, Mr. Butler founded Vision Express in Europe,
which merged with the French retail group, GPS, to form Grand Vision in late
1997. In 1983, Mr. Butler founded LensCrafters and served as its Chief Executive
Officer until 1988. Prior to 1983, Mr. Butler was employed by Procter & Gamble
in various marketing positions since 1969.
Directors of the Company are currently elected annually by its stockholders
to serve during the ensuing year or until their respective successors are duly
elected and qualified. Executive officers of the Company are duly elected by the
Board of Directors to serve until their respective successors are elected and
qualified. Donald A. Yacktman is Stephen A. Yacktman's father. There are no
other family relationships between any of the Directors or executive officers of
the Company.
The Company anticipates that one additional Director not otherwise
affiliated with the Company or any of its stockholders will be elected by the
Board of Directors following the completion of the Offering. Prior to the
completion of the Offering, the Board of Directors will be divided into three
classes, as nearly equal in number as possible, with each Director serving a
three year term and one class being elected at each year's annual meeting of
stockholders. Mr. Tanner and the additional director anticipated to be appointed
by the Board of Directors will be in the class of directors whose term expires
at the 1999 annual meeting of the Company's stockholders. Mr. Stephen Yacktman
and Mr. Butler will be in the class of directors whose term expires at the 2000
annual meeting of the Company's stockholders. Messrs. Coon, Nichols and Donald
Yacktman will be in the class of directors whose term expires at the 2001 annual
meeting of the Company's stockholders. At each annual meeting of the Company's
stockholders, successors to the class of directors whose term expires at such
meeting will be elected to serve for three year terms and until their respective
successors are elected and qualified.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
or accrued for the years ended December 31, 1996 and 1997, to the Company's
President and Vice President, Operations (the "Named Executives"). None of the
Company's other executive officers earned more than $100,000 in compensation
during the years ended December 31, 1996 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) COMPENSATION($)(B)
--------------------------- ---- --------- ------------------
<S> <C> <C> <C>
Jonathan C. Coon................................. 1997 $105,042 $13,440
President(a) 1996 37,417 --
John F. Nichols
Vice President, Operations..................... 1997 110,625 10,580
</TABLE>
- ---------------
(a) Mr. Coon's salary was increased to $80,000 per annum effective February 1,
1997 and to $120,000 per annum effective June 1, 1997.
(b) Reflects payments made by the Company to such Named Executives for medical
costs and health insurance.
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<PAGE> 35
EMPLOYMENT AGREEMENTS
Immediately prior to the completion of the Offering, Mr. Coon and Mr.
Nichols will enter into employment agreements with the Company (each, an
"Employment Agreement"), pursuant to which Mr. Coon will agree to serve as the
President of the Company for a period of three years and Mr. Nichols will serve
as Vice President, Operations of the Company for a period of three years.
Pursuant to their respective Employment Agreement, Mr. Coon and Mr. Nichols will
receive: (i) an annual base salary equal to at least $120,000 and $120,000,
respectively, (ii) an annual bonus up to 50% of their annual base salary (upon
the Company achieving certain operating targets) and (iii) certain fringe
benefits. If Mr. Coon's or Mr. Nichols' employment is terminated for any reason
prior to the termination of such agreement other than for Cause (as defined
therein) or their resignation, they will be entitled to receive their base
salary and fringe benefits for 12 months following such termination in addition
to 50% of their bonus for the year in which their employment was terminated if
the termination is during the first six months of the year or 100% if such
termination was during the last six months of the year. Mr. Coon and Mr. Nichols
will agree not to compete with the Company for a period of two years following
their termination of employment with the Company and not to disclose any
confidential information at any time without the prior written consent of the
Company.
The Company will also enter into three-year employment agreements with each
of Messrs. Tanner, Hunter, Heesch and Witzel immediately prior to the completion
of the Offering. Such employment agreements will have terms similar to those of
Messrs. Coon and Nichols described above (other than annual base salary, bonus
levels and severance periods).
DIRECTOR COMPENSATION
Directors of the Company currently do not receive a salary or an annual
retainer for their services. The Company expects, however, that non-employee
directors appointed to the Board after the completion of the Offering and not
otherwise affiliated with the Company or its stockholders will be paid an annual
cash retainer of $10,000 and will be reimbursed for all reasonable expenses
incurred in attending Board meetings.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company currently has no committees of its Board of Directors. Upon the
selection and election of qualified independent directors, the Board of
Directors expects to establish both an audit committee and a compensation
committee, all of which is expected to occur within 90 days from the date of
this Prospectus.
Once created, the audit committee will be responsible for making
recommendations to the Board of Directors regarding the selection of independent
auditors, reviewing the results and scope of the audit and other services
provided by the Company's independent accountants and reviewing and evaluating
the Company's audit and control functions.
The compensation committee will make recommendations regarding the
Company's employee stock option plan and decisions concerning salaries and
incentive compensation for executive officers, key employees and consultants of
the Company.
The Board of Directors may also create other committees, including an
executive committee and a nominating committee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION
The Company currently does not have a compensation committee. The
compensation arrangements for Mr. Coon and Mr. Nichols were established by Mr.
Donald Yacktman pursuant to arrangements established at the time of Mr.
Yacktman's investment in the Company.
STOCK OPTIONS
As of the date of this Prospectus, the Company has granted options to
purchase an aggregate of 211,140 shares of Common Stock to certain members of
management (including Mr. Butler). Such options vest in three
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<PAGE> 36
equal installments beginning on the first anniversary of the grant date and have
an average exercise price of $8.59 per share. The options have a term of ten
years. In the event that the optionee ceases to be employed by the Company for
any reason (i) any portion of the option that was not vested at that time will
expire and (ii) any portion of the option that was vested will expire 90 days
after such termination date. Under such option agreements, the Company has the
right to repurchase at fair market value the shares of Common Stock issuable
upon the exercise of such options (the "Option Shares") in the event the
optionee ceases to be employed by the Company. In addition, the option
agreements: (i) restrict the transfer of the Option Shares, subject to certain
exceptions and (ii) require each optionee to consent to a sale of the Company
approved by the holders of a majority of the shares of Common Stock held by the
Existing Stockholders. The repurchase right and foregoing restrictions terminate
upon an initial public offering in which the Company receives net proceeds of at
least $10.0 million.
INCENTIVE STOCK OPTION PLAN
Prior to the completion of this Offering, the Company will establish the
1-800 CONTACTS, INC. Incentive Stock Option Plan (the "Stock Option Plan"). A
maximum of 310,000 shares of Common Stock, subject to adjustment, have been
initially authorized for the granting of stock options under the Stock Option
Plan. To date, no options have been granted pursuant to the Stock Option Plan.
Options granted under the Stock Option Plan may be either "incentive stock
options," which qualify for special tax treatment under the Internal Revenue
Code, or nonqualified stock options. The purposes of the Stock Option Plan are
to advance the interests of the Company and stockholders by providing employees
of the Company with an additional incentive to continue their efforts on behalf
of the Company, as well as to attract to the Company people of experience and
ability. The Stock Option Plan is intended to comply with Rule 16b-3 of the
Exchange Act.
It is expected that all officers, directors and other employees of the
Company or its subsidiaries will be eligible to participate under the Stock
Option Plan, as deemed appropriate by the Compensation Committee of the Board of
Directors. Eligible employees will not pay any cash consideration to the Company
to receive the options. The Stock Option Plan will be administered by the
Compensation Committee of the Board of Directors. The exercise price for
incentive stock options must be no less than the fair market value of the Common
Stock on the date of grant. The exercise price of nonqualified stock options is
not subject to any limitation based upon the then current market value of the
Common Stock. Options will expire no later than the tenth anniversary of the
date of grant. An option holder will be able to exercise options from time to
time, subject to vesting. Options will vest immediately upon death or disability
of a participant and upon certain change of control events. Upon termination for
cause or at will by the Company, the unvested portion of the options will be
forfeited. Subject to the above conditions, the exercise price, duration of the
options and vesting provisions will be set by the Compensation Committee of the
Board of Directors in its discretion.
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<PAGE> 37
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth certain information regarding the equity
ownership of the Company (a) as of December 31, 1997 and (b) immediately
following the Offering by: (i) each person or entity who beneficially owns five
percent or more of the Common Stock; (ii) each Director and the Named
Executives; (iii) all Directors and executive officers of the Company as a
group; and (iv) Jonathan C. Coon (the "Selling Stockholder"). Unless otherwise
stated, each of the persons named in the table has sole voting and investment
power with respect to the securities beneficially owned by it or him as set
forth opposite its or his name. Beneficial ownership of the Common Stock listed
in the table has been determined in accordance with the applicable rules and
regulations promulgated under the Exchange Act.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED
OFFERING AFTER THE OFFERING(1)
------------------- NUMBER ---------------------
NUMBER OF SHARES NUMBER
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES PERCENT OFFERED OF SHARES PERCENT
------------------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Jonathan C. Coon(2)(3)....................... 2,789,469 66.2% 275,000 2,514,469 40.9%
John F. Nichols(2)........................... 931,894 22.1 -- 931,894 15.2
Donald A. Yacktman(4)(5)..................... 256,477 6.1 -- 256,477 4.2
Stephen A. Yacktman(6)....................... 232,766 5.5 -- 232,766 3.8
Scott S. Tanner(7)........................... -- -- -- -- --
E. Dean Butler(8)............................ -- -- -- -- --
All Directors and executive officers as a
group (7 persons).......................... 4,210,606 99.9 275,000 3,935,606 64.1
</TABLE>
- ---------------
* Represents less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option and does not
give effect to any purchases, if any, by such persons named in the table in
the Offering.
(2) The address of such person is the executive offices of the Company.
(3) Includes: (i) 931,894 shares of Common Stock that Mr. Coon will acquire from
Mr. Nichols for an aggregate of $1.5 million upon the exercise of a stock
option granted to Mr. Coon from Mr. Nichols in February 1996 and (ii) an
aggregate of 92,775 shares held by Mr. Coon's children.
(4) Reflects the exercise of an option by the Company to repurchase an aggregate
of 442,651 shares of Common Stock held by such stockholder for approximately
$1.9 million. The Company will exercise such option upon completion of the
Offering. See "Use of Proceeds" and "Certain Transactions."
(5) Such shares are held of record by The Yacktman Family Trust, of which Mr.
Yacktman's wife serves as trustee. The address of Mr. Yacktman and such
trust is c/o Yacktman Asset Management Co., 303 West Madison Street,
Chicago, Illinois 60606.
(6) The address of such person is c/o Yacktman Asset Management Co., 303 West
Madison Street, Chicago, Illinois 60606.
(7) Does not include 47,986 shares of Common Stock that can be acquired through
the exercise of stock options, none of which are currently exercisable.
(8) Does not include 71,979 shares of Common Stock that can be acquired through
the exercise of stock options, none of which are currently exercisable.
CERTAIN TRANSACTIONS
LOANS TO EXECUTIVE OFFICERS
As of December 31, 1997, the Company had outstanding loans to Messrs. Coon
and Nichols, each an executive officer of the Company, an aggregate of $340,615
and $231,530, respectively, evidenced by a promissory note due on demand. The
note provides for the payment of interest calculated at a rate equal to the
prime rate (8.5% at December 31, 1997). These loans will be repaid in connection
with the S Corporation Distribution. See "S Corporation Matters."
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<PAGE> 38
LOANS FROM CERTAIN STOCKHOLDERS
In February 1996, the Company entered into a credit agreement with Mr.
Donald Yacktman, a Director of the Company, that provides for maximum borrowings
of $250,000. This loan bears interest at the prime interest rate plus 2%,
matures in February 1999 and, if not repaid in full by February 1999, may be
converted into 15% of the Company's Common Stock at the option of Mr. Yacktman.
In May 1997, Mr. Yacktman subsequently loaned an additional $250,000 to the
Company, which was repaid prior to September 30, 1997. Also in May 1997, the
Company borrowed $600,000 from Mr. Yacktman under a short-term promissory note
due in November 1997. In July 1997, the Company repaid $100,000 under such note
and refinanced the remaining $500,000 and borrowed an additional $600,000 from
Mr. Yacktman under a new short-term promissory note. The new short-term
unsecured promissory note bears interest at the prime interest rate plus 2% and
matures on July 30, 1998. In consideration for entering into this note, the
Company agreed to modify the option that it holds to repurchase a portion of the
Common Stock held by Mr. Yacktman. Under the revised terms of the option, the
Company has the right to repurchase an aggregate of 442,651 of Mr. Yacktman's
shares for $1.9 million.
In September 1997, the Company borrowed $250,000 from Mr. Yacktman under a
short-term unsecured promissory note. This note accrues interest at the prime
interest rate plus 2% and is due in September 1998. In addition, for every month
that this note remains outstanding a fee of $5,000 is added to the outstanding
balance.
During the years ended December 31, 1997 and 1996, the Company's largest
outstanding indebtedness to Mr. Yacktman was approximately $1.6 million and
$305,000, respectively. All of the Company's outstanding indebtedness to Mr.
Yacktman will be repaid out of the net proceeds of the Offering. See "Use of
Proceeds."
REPURCHASE OF STOCK FROM FORMER DIRECTOR
In February 1996, the Company redeemed all shares of the Company's Common
Stock then held by Mr. Steve Gibson, a former Director of the Company, which
shares represented twenty percent of the Company's Common Stock then
outstanding. The purchase price of such redeemed shares was $240,000 in cash.
Mr. Gibson resigned as a Director of the Company in February 1996.
TAX INDEMNIFICATION AGREEMENT
Prior to completion of the Offering, the Company will enter into the
Agreement for Distribution of Retained Earnings and Tax Indemnification with the
Existing Stockholders. The Agreement for Distribution of Retained Earnings and
Tax Indemnification will provide for, among other things, the indemnification of
the Existing Stockholders for any losses or liabilities with respect to any
additional taxes (including interest, penalties and legal fees) and the
repayment to the Company of amounts received as refunds, resulting from the
Company's operations during the period in which it was an S corporation. No
amounts are currently payable, or anticipated to be payable, or receivable or
anticipated to be receivable under the Agreement for Distribution of Retained
Earnings and Tax Indemnification.
S CORPORATION DISTRIBUTION
Effective February 1, 1995, the Company elected to be treated as an S
corporation for federal income tax purposes. As a result, for the period the
Company was an S corporation, the Company paid no federal income tax. Taxable
income of the Company was taxable to its Existing Stockholders. The Company will
terminate its S corporation status prior to the closing of the sale of shares
offered hereby and will distribute to the Existing Stockholders the balance of
its previously undistributed earnings through that date. The purchasers of
shares in this Offering will not receive any of these distributions. See "S
Corporation Matters."
STOCK REPURCHASE OPTION
In connection with Mr. Donald Yacktman's investment in the Company in
February 1996, the Company was granted an option, exercisable at any time prior
to February 1, 2001, to repurchase an aggregate of 465,947 shares of Common
Stock held by Mr. Donald Yacktman (10% percent of the Company's outstanding
Common Stock prior to the Offering), at an aggregate purchase price of $2.0
million. In connection with entering in to a promissory note with Mr. Donald
Yacktman in July 1997, the Company canceled a portion of this option and the
35
<PAGE> 39
number of shares now subject to repurchase by the Company pursuant to the option
is 442,651 (9.5% of the Company's outstanding Common Stock prior to the
Offering), at an aggregate purchase price of $1.9 million. The Company expects
to exercise this option concurrently with the completion of the Offering. See
"Use of Proceeds."
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
At the time of the Offering, the total amount of authorized capital stock
of the Company will consist of 20,000,000 shares of Common Stock, par value
$0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01 per
share (the "Serial Preferred Stock"). Upon completion of the Offering, 6,141,818
shares of Common Stock will be issued and outstanding (6,471,818 shares if the
Underwriters' over-allotment is exercised in full) and no shares of Serial
Preferred Stock will be issued and outstanding. The discussion herein describes
the Company's capital stock, the Restated Certificate and By-laws as anticipated
to be in effect upon consummation of the Offering. The following summary of
certain provisions of the Company's capital stock describes all material
provisions of, but does not purport to be complete and is subject to, and
qualified in its entirety by, the Restated Certificate and the By-laws of the
Company that are included as exhibits to the Registration Statement of which
this Prospectus forms a part and by the provisions of applicable law.
The Restated Certificate and By-laws will contain certain provisions that
are intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of delaying,
deferring or preventing a future takeover or change in control of the Company
unless such takeover or change in control is approved by the Board of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered by the Company will be upon payment therefor, validly
issued, fully paid and nonassessable. Subject to the prior rights of the holders
of any Serial Preferred Stock, the holders of outstanding shares of Common Stock
are entitled to receive dividends out of assets legally available therefor at
such time and in such amounts as the Board of Directors may from time to time
determine. See "Dividend Policy." The shares of Common Stock are not convertible
and the holders thereof have no preemptive or subscription rights to purchase
any securities of the Company. Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive pro rata the
assets of the Company which are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
any holders of Serial Preferred Stock then outstanding. Each outstanding share
of Common Stock is entitled to one vote on all matters submitted to a vote of
stockholders. There is no cumulative voting.
The Company's Common Stock has been approved for inclusion on the Nasdaq
National Market under the symbol "CTAC."
SERIAL PREFERRED STOCK
The Company's Board of Directors may, without further action by the
Company's stockholders, from time to time, direct the issuance of shares of
Serial Preferred Stock in series and may, at the time of issuance, determine the
rights, preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Serial Preferred Stock would reduce the
amount of funds available for the payment of dividends on shares of Common
Stock. Holders of shares of Serial Preferred Stock may be entitled to receive a
preference payment in the event of any liquidation, dissolution or winding-up of
the Company before any payment is made to the holders of shares of Common Stock.
Under certain circumstances, the issuance of shares of Serial Preferred Stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management. Upon the affirmative vote of
a majority of the total number of directors then in office, the Board of
Directors of the Company, without stockholder approval, may issue shares of
Serial Preferred Stock with voting and conversion rights which could adversely
affect the holders of shares of Common Stock. Upon consummation of the Offering,
there will be no shares of Serial Preferred Stock outstanding, and the Company
has no present intention to issue any shares of Serial Preferred Stock.
36
<PAGE> 40
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate provides for the Board of Directors to be divided
into three classes, as nearly equal in number as possible, serving staggered
terms. Approximately one-third of the Board of Directors will be elected each
year. See "Management." Under the Delaware General Corporation Law, directors
serving on a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of the
outstanding voting stock from obtaining control of the Board of Directors until
the second annual stockholders meeting following the date the acquiror obtains
the controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of the Company and could increase the
likelihood that incumbent directors will retain their positions.
The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provides
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by the Chief Executive Officer of the Company. Stockholders will
not be permitted to call a special meeting or to require the Board of Directors
to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board of Directors.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board of Directors or by a stockholder who was a
stockholder of record on the record date for the meeting, who is entitled to
vote at the meeting and who has given to the Company's Secretary timely written
notice, in proper form, of the stockholder's intention to bring that business
before the meeting. Although the By-laws do not give the Board of Directors the
power to approve or disapprove stockholder nominations of candidates or
proposals regarding other business to be conducted at a special or annual
meeting, the By-laws may have the effect of precluding the conduct of certain
business at a meeting if the proper procedures are not followed or may
discourage or defer a potential acquiror from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to obtain
control of the Company.
The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certificate and By-laws could enable a minority of
the Company's stockholders to exercise veto power over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
Following the consummation of the Offering, the Company will be subject to
the "Business Combination" provisions of the Delaware General Corporation Law.
In general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction which
the person became an "interested stockholder," unless (i) the transaction is
approved by the Board of Directors prior to the date the "interested
stockholder" obtained such status; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder," owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date the "business combination" is
approved by the Board of Directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder." A
"business combination" is defined to include mergers, asset sales
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<PAGE> 41
and other transactions resulting in financial benefit to a stockholder. In
general, an "interested stockholder" is a Person who, together with affiliates
and associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or other
takeover or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate will provide that the Company shall indemnify Directors and
officers of the Company to the fullest extent permitted by such law. The Company
anticipates entering into indemnification agreements with its current Directors
and executive officers prior to the completion of the Offering and any new
Directors or executive officers following such time.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no market for the Common Stock of the
Company. The Company can make no predictions as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock in the public market, or the perception that such sales may
occur, could adversely affect prevailing market prices. See "Risk
Factors--Shares Eligible for Future Sale."
Upon completion of the Offering, the Company expects to have 6,141,818
shares of Common Stock outstanding. Of the shares outstanding after the
Offering, the 2,200,000 shares of Common Stock (2,530,000 shares if the
Underwriters' over-allotment is exercised in full) sold in the Offering will be
freely tradeable without restriction under the Securities Act, except for any
such shares which may be acquired by an "affiliate" of the Company (an
"Affiliate"), as that term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"), which shares will be subject to the volume
limitations and other restrictions of Rule 144 described below. An aggregate of
3,941,818 shares of Common Stock held by Existing Stockholders of the Company
upon completion of the Offering will be "restricted securities" (as that phrase
is defined in Rule 144) and may not be resold in the absence of registration
under the Securities Act or pursuant to an exemption from such registration,
including among others, the exemption provided by Rule 144 under the Securities
Act.
In general, under Rule 144 as currently in effect, beginning ninety days
after the date of this Prospectus, if a period of at least one year has elapsed
since the later of the date the "restricted securities" were acquired from the
Company or the date they were acquired from an Affiliate, then the holder of
such restricted securities (including an Affiliate) is entitled to sell in the
public market a number of shares within any three-month period that does not
exceed the greater of 1% of the then outstanding shares of the Common Stock
(approximately 61,418 shares immediately after the Offering) or the average
weekly reported volume of trading of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding such sale. Under Rule 144, the
holder may only sell such shares through "brokers' transactions" or in
transactions directly with a "market maker" (as such terms are defined in Rule
144). Sales under Rule 144 are also subject to certain requirements regarding
providing notice of such sales and the availability of current public
information concerning the Company. Affiliates may sell shares not constituting
restricted shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year holding period. Under Rule
144(k), if a period of at least two years has elapsed between the later of the
date restricted securities were acquired from the Company or the date they were
acquired from an Affiliate, as applicable, a holder of such restricted
securities who is not an Affiliate at the time of the sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to sell
the shares in the public market without regard to the volume limitations and
other restrictions described above. Beginning 90 days after the date of this
Prospectus, approximately 3,941,818 shares of Common Stock will be eligible for
sale in the public market pursuant to Rule 144, subject to the volume
limitations and other restrictions described above.
38
<PAGE> 42
Notwithstanding the foregoing, the Company's executive officers, Directors
and the Existing Stockholders, who own in aggregate approximately 3,941,818
shares of Common Stock have agreed that, without the prior consent of the
Representatives (as defined), they will not (i) directly or indirectly, sell,
offer to sell, grant any option for the sale of or otherwise dispose of any
shares of Common Stock or securities or rights convertible into or exercisable
or exchangeable for Common Stock (except through gifts to persons who agree in
writing to be bound by such restrictions) or (ii) make any demand for or
exercise any right with respect to the registration of any Common Stock or other
such securities, for a period of 180 days after the date of this Prospectus,
other than (i) the sale to the Underwriters of the shares of Common Stock under
the Underwriting Agreement (as defined) or (ii) the issuance by the Company of
shares of Common Stock upon the exercise of an options sold or granted pursuant
to an existing benefit plan of the Company and outstanding on the date of this
Prospectus.
39
<PAGE> 43
UNDERWRITING
Subject to the terms and conditions contained in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the Selling Stockholder and
each of the Underwriters named below, the Company and the Selling Stockholder
have agreed to sell to the Underwriters, and each of the Underwriters severally
and not jointly has agreed to purchase from the Company and the Selling
Stockholder, the number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
McDonald & Company Securities, Inc..........................
Morgan Keegan & Company, Inc................................
---------
Total............................................. 2,200,000
=========
</TABLE>
McDonald & Company Securities, Inc. and Morgan Keegan & Company, Inc. are
acting as representatives (the "Representatives") of the several Underwriters.
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to take and pay for all shares of the
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any such shares are taken.
The Underwriters propose initially to offer the shares of Common Stock
directly to the public at the initial public offering price set forth on the
cover page hereof and to certain dealers at a price that represents a concession
not in excess of $ per share of Common Stock under the public offering
price. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $ per share of Common Stock to the other Underwriters
or to certain other dealers. The public offering price and the other selling
terms may be changed by the Representatives of the initial public offering.
The Company has granted to the Underwriters an option, exercisable at any
time during the 30-day period from the date of this Prospectus, to purchase up
to an aggregate of 330,000 additional shares of Common Stock at the public
offering price set forth on the cover page hereof less underwriting discount.
The Underwriters may exercise such option to purchase additional shares solely
for the purpose of covering over-allotments, if any, incurred in connection with
the sale of the Common Stock offered hereby. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares proportionate to such
Underwriter's initial amount reflected in the preceding table.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock has been
determined by negotiation between the Company and the Representatives. Among the
factors considered in determining the public offering price were the history of,
and the prospects for, the Company's business and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, its past and present earnings and the trend of such earnings, the
prospects for earnings of the Company, the present state of the Company's
development, the general condition of the securities markets at the time of the
Offering and the price-earnings ratios and market price of securities of
comparable companies at the time of the Offering. There can be no assurance that
an active trading market will develop for the Common Stock or that the Common
Stock will trade in the public market subsequent to the Offering at or above the
initial public offering price.
The Company and the Selling Stockholder have agreed to indemnify the
several Underwriters against certain liabilities, including certain liabilities
under the Securities Act, or to contribute to payments the Underwriters may be
required to make in respect thereof.
The Underwriters have informed the Company that they do not expect to
confirm sales of any accounts over which they exercise discretionary authority.
40
<PAGE> 44
At the request of the Company, the Underwriters have reserved up to 110,000
shares of Common Stock for sale at the initial public offering price to
Directors, officers, certain employees and business associates of the Company.
The number of shares of Common Stock available to the general public will be
reduced to the extent these persons purchase the reserved shares. Any reserved
shares of Common Stock that are not so purchased by such employees at the
closing of the Offering will be offered by the Underwriters to the general
public on the same term as the other shares in the Offering.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Underwriters to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions.
Neither the Company nor the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company and its executive officers, Directors and the Existing
Stockholders have agreed that, without the prior consent of the Representatives,
they will not (i) directly or indirectly, sell, offer to sell, grant any option
for the sale of or otherwise dispose of any shares of Common Stock or securities
or rights convertible into or exercisable or exchangeable for Common Stock
(except through gifts to persons who agree in writing to be bound by such
restrictions) or (ii) make any demand for or exercise any right with respect to
the registration of any Common Stock or other such securities, for a period of
180 days after the date of this Prospectus, other than (a) the sale to the
Underwriters of the shares of Common Stock under the Underwriting Agreement or
(b) the issuance by the Company of shares of Common Stock upon the exercise of
an options sold or granted pursuant to an existing benefit plan of the Company
and outstanding on the date of this Prospectus.
EXPERTS
The financial statements of the Company and the Predecessor included in
this Prospectus and elsewhere in the Registration Statement to the extent and
for the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, and are included herein in reliance upon
the authority of said firm as experts in giving said reports.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Kirkland & Ellis, Chicago, Illinois (a partnership which includes
professional corporations). Certain legal matters will be passed upon for the
Underwriters by Squire, Sanders & Dempsey L.L.P., Cleveland, Ohio.
41
<PAGE> 45
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part and which term shall encompass any amendments
thereto) on Form S-1 pursuant to the Securities Act with respect to the Common
Stock being offered in the Offering. This Prospectus does not contain all the
information set forth in the Registration Statement and the exhibits and
schedules thereto, certain portions of which are omitted as permitted by the
rules and regulations of the Commission. Statements made in this Prospectus as
to the contents of any contract, agreement or other document referred to are not
necessarily complete; with respect to any such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference. For
further information about the Company and the securities offered hereby,
reference is made to the Registration Statement and to the financial statements,
schedules and exhibits filed as a part thereof.
Upon completion of the Offering, the Company will be subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
will file reports and other information with the Commission. The Registration
Statement, the exhibits and schedules forming a part thereof and the reports and
other information filed by the Company with the Commission in accordance with
the Exchange Act may be inspected and copied at the public reference facilities
maintained by 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: Seven World Trade Center, 13th Floor, New York, New York 10048 and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material or any part thereof may also be obtained by
mail from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549 at prescribed rates or accessed electronically by
means of the Commission's home page on the Internet at http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and to make available quarterly reports
containing unaudited summary financial information for the first three fiscal
quarters of each fiscal year.
42
<PAGE> 46
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE COMPANY
Report of Independent Public Accountants.............................................. F-2
Balance Sheets as of December 31, 1996 and 1997....................................... F-3
Statements of Operations for the eleven months ended December 31, 1995 and the years
ended December 31, 1996 and 1997.................................................... F-5
Statements of Stockholders' Equity (Deficit) for the eleven months ended December 31,
1995 and the years ended December 31, 1996 and 1997................................. F-6
Statements of Cash Flows for the eleven months ended December 31, 1995 and the years
ended December 31, 1996 and 1997.................................................... F-7
Notes to Financial Statements......................................................... F-9
PREDECESSOR
Report of Independent Public Accountants.............................................. F-18
Statements of Operations and Owner's Capital for the year ended
December 31, 1994 and the one month period ended January 31, 1995................... F-19
Statements of Cash Flows for the year ended December 31, 1994 and
the one month period ended January 31, 1995......................................... F-20
Notes to Financial Statements......................................................... F-21
</TABLE>
F-1
<PAGE> 47
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 1-800 CONTACTS, INC.:
We have audited the accompanying balance sheets of 1-800 CONTACTS, INC. (a
Utah S Corporation) as of December 31, 1996 and 1997 and the related statements
of operations, stockholders' equity (deficit) and cash flows for the period from
inception (February 1, 1995) to December 31, 1995 and for the years ended
December 31, 1996 and 1997. 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 1-800 CONTACTS, INC. as of
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the period from inception (February 1, 1995) to December 31, 1995, and for
the years ended December 31, 1996 and 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 14, 1998
F-2
<PAGE> 48
1-800 CONTACTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash................................................ $ -- $ -- $ --
Inventories......................................... 475,410 4,811,855 4,811,855
Prepaid expenses and other.......................... 9,023 182,664 182,664
---------- ---------- ----------
Total current assets............................. 484,433 4,994,519 4,994,519
---------- ---------- ----------
DEFERRED ADVERTISING COSTS............................ 394,297 1,705,695 1,705,695
---------- ---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Office and computer equipment....................... 217,212 630,186 630,186
Leasehold improvements.............................. -- 75,270 75,270
---------- ---------- ----------
217,212 705,456 705,456
Less -- accumulated depreciation and amortization... (25,617) (142,953) (142,953)
---------- ---------- ----------
Net property and equipment....................... 191,595 562,503 562,503
---------- ---------- ----------
OTHER ASSETS.......................................... 86,321 518,347 518,347
---------- ---------- ----------
Total assets..................................... $1,156,646 $7,781,064 $7,781,064
========== ========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE> 49
1-800 CONTACTS, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31, PRO FORMA
------------------------- DECEMBER 31,
1996 1997 1997
---------- ---------- ------------
<S> <C> <C> <C>
CURRENT LIABILITIES:
Line of credit...................................... $ -- $1,055,640 $1,055,640
Current portion of capital lease obligation......... 17,731 23,532 23,532
Current portion of long-term debt................... 31,200 -- --
Notes payable to stockholders....................... -- 1,370,000 1,370,000
Accounts payable.................................... 471,294 3,762,158 3,762,158
Accrued liabilities................................. 63,800 300,439 300,439
Unearned revenue.................................... 35,945 104,272 104,272
Bank overdraft...................................... 68,543 -- --
Distributions payable to stockholders............... -- -- 714,075
---------- ---------- ----------
Total current liabilities........................ 688,513 6,616,041 7,330,116
---------- ---------- ----------
LONG-TERM LIABILITIES:
Notes payable to stockholders....................... 205,000 243,788 243,788
Long-term debt, less current portion................ 24,671 -- --
Capital lease obligation, less current portion...... 92,103 66,877 66,877
Deferred income taxes............................... -- -- 596,866
---------- ---------- ----------
Total long-term liabilities...................... 321,774 310,665 907,531
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $0.01 par value, 20,000,000 shares
authorized, 4,659,469 shares issued and
outstanding...................................... 46,595 46,595 46,595
Additional paid-in capital.......................... 93,688 93,688 93,688
Retained earnings (deficit)......................... 253,812 1,286,220 (596,866)
Notes receivable from stockholders.................. (247,736) (572,145) --
---------- ---------- ----------
Total stockholders' equity (deficit)............. 146,359 854,358 (456,583)
---------- ---------- ----------
Total liabilities and stockholders' equity....... $1,156,646 $7,781,064 $7,781,064
========== ========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-4
<PAGE> 50
1-800 CONTACTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FEBRUARY 1,
1995 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1995 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
NET SALES............................................ $ 587,918 $3,628,296 $21,115,314
COST OF GOODS SOLD................................... 355,466 2,215,306 14,024,523
-------- ---------- ----------
Gross profit.................................... 232,452 1,412,990 7,090,791
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 317,898 1,041,312 5,945,221
-------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS........................ (85,446) 371,678 1,145,570
-------- ---------- ----------
OTHER (EXPENSE) INCOME:
Interest expense................................... (9,105) (26,175) (161,520)
Other, net......................................... -- 2,860 48,358
-------- ---------- ----------
Total other, net................................ (9,105) (23,315) (113,162)
-------- ---------- ----------
NET INCOME (LOSS).................................... $ (94,551) $ 348,363 $ 1,032,408
======== ========== ==========
PRO FORMA INFORMATION (unaudited)
Income before pro forma (provision) benefit for
income taxes.................................... $ (94,551) $ 348,363 $ 1,032,408
(Provision) benefit for income taxes............... 36,402 (134,120) (397,477)
-------- ---------- ----------
PRO FORMA NET INCOME (LOSS).......................... $ (58,149) $ 214,243 $ 634,931
======== ========== ==========
PRO FORMA PER SHARE INFORMATION:
Basic net income per common share.................. $ 0.14
==========
Diluted net income per common share................ $ 0.13
==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-5
<PAGE> 51
1-800 CONTACTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RETAINED RECEIVABLE
--------------------- PAID-IN EARNINGS FROM
SHARES AMOUNT CAPITAL (DEFICIT) STOCKHOLDERS TOTAL
---------- ------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Initial capitalization........... 4,141,750 $41,418 $ 11,365 $ -- $ -- $ 52,783
Sale of common stock............. 517,719 5,177 22,323 -- -- 27,500
Advances to stockholders......... -- -- -- -- (14,144) (14,144)
Net loss......................... -- -- -- (94,551) -- (94,551)
--------- -------- --------- ---------- --------- --------
BALANCE, December 31, 1995......... 4,659,469 46,595 33,688 (94,551) (14,144) (28,412)
Repurchase of common stock....... (931,894) (9,319) (230,681) -- -- (240,000)
Sale of common stock............. 931,894 9,319 290,681 -- -- 300,000
Advances to stockholders......... -- -- -- -- (233,592) (233,592)
Net income....................... -- -- -- 348,363 -- 348,363
--------- -------- --------- ---------- --------- --------
BALANCE, December 31, 1996......... 4,659,469 46,595 93,688 253,812 (247,736) 146,359
Advances to stockholders......... -- -- -- -- (324,409) (324,409)
Net income....................... -- -- -- 1,032,408 -- 1,032,408
--------- -------- --------- ---------- --------- --------
BALANCE, December 31, 1997......... 4,659,469 $46,595 $ 93,688 $1,286,220 $ (572,145) $ 854,358
========= ======== ========= ========== ========= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6
<PAGE> 52
1-800 CONTACTS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FEBRUARY 1,
1995 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1995 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ (94,551) $ 348,363 $ 1,032,408
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 16,811 46,044 150,933
Other.............................................. -- -- 20,000
Loss on retirement of fixed assets................. -- 1,834 --
Changes in operating assets and liabilities:
Inventories..................................... (78,455) (385,892) (4,336,445)
Prepaid expenses and other...................... 1,500 (8,423) (173,641)
Deferred advertising costs...................... -- (394,297) (1,311,398)
Accounts payable................................ 50,066 421,228 3,290,864
Accrued liabilities............................. 9,368 54,432 236,639
Unearned revenue................................ 4,959 30,986 68,327
--------- ---------- -----------
Net cash provided by (used in) operating
activities................................. (90,302) 114,275 (1,022,313)
--------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in notes receivable from
stockholders.................................... (14,144) (233,592) (324,409)
Purchase of property and equipment................. (32,546) (174,992) (488,244)
Deposits on equipment.............................. -- -- (40,425)
Purchase of intangible assets...................... -- -- (50,000)
--------- ---------- -----------
Net cash used in investing activities......... (46,690) (408,584) (903,078)
--------- ---------- -----------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-7
<PAGE> 53
1-800 CONTACTS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
FEBRUARY 1,
1995 TO YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------------
1995 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock............................... $ 52,500 $ 300,000 $ --
Stock repurchase................................... -- (240,000) --
Stock offering costs............................... -- -- (375,198)
Net borrowings on line of credit................... -- -- 1,055,640
Borrowings from stockholders....................... 25,000 365,000 1,800,000
Payments on notes payable to stockholders.......... (5,000) (180,000) (411,212)
Proceeds from issuance of long-term debt........... 86,000 -- --
Principal payments on long-term debt............... (8,412) (21,717) (55,871)
Principal payments on capital lease obligation..... (10,171) (442) (19,425)
Bank overdraft..................................... -- 68,543 (68,543)
--------- ---------- -----------
Net cash provided by financing activities....... 139,917 291,384 1,925,391
--------- ---------- -----------
NET INCREASE (DECREASE) IN CASH...................... 2,925 (2,925) --
CASH AT BEGINNING OF PERIOD.......................... -- 2,925 --
--------- ---------- -----------
CASH AT END OF PERIOD................................ $ 2,925 $ -- $ --
========= ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest............................. $ 4,276 $ 18,984 $ 42,699
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the period ended December 31, 1995, the Company entered into a capital
lease for a toll-free telephone number totaling $120,447.
Upon inception of the Company, the stockholders contributed furniture and
equipment, inventory and supplies totaling $14,620, $11,063 and $2,100,
respectively.
The accompanying notes to financial statements
are an integral part of these statements.
F-8
<PAGE> 54
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS AND ORGANIZATION OF BUSINESS
1-800 CONTACTS, INC., (the "Company") was incorporated in the state of Utah
in February 1995. The Company is a direct marketer of replacement contact lenses
in the United States. The Company sells contact lenses primarily through its
toll-free telephone number.
REGULATORY COMPLIANCE
The sale and delivery of contact lenses is generally governed by state laws
and regulations. The Company sells to customers in nearly all 50 states and each
sale is likely to be subject to the laws of the state where the customer is
located. The laws and regulations relating to the delivery and sale of contact
lenses vary from state to state, but can generally be classified into five
categories: (i) laws that require contact lenses only be dispensed pursuant to a
valid prescription, (ii) laws that require the dispenser to be licensed by the
state as an optometrist, ophthalmologist or other professional authorized to
dispense lenses, (iii) laws that require lenses be dispensed only in a
face-to-face transaction, (iv) laws with requirements that are unclear or do not
specifically address the sale and delivery of contact lenses; and (v) laws that
the Company believes place no restrictions on the dispensing of replacement
contact lenses. The Company's operating practice is to attempt to obtain a
prescription from its customers or his/her eye care practitioner. If the
customer does not have a copy of his/her prescription, the Company attempts to
contact the customer's doctor to obtain a copy of, or verify the customer's
prescription. If the Company is unable to obtain a copy of, or verify the
customer's prescription, it is the Company's practice to complete the sale and
ship the lenses to the customer, based on the prescription information provided
by the customer. As a result, certain sales made by the Company violate the
applicable statute or regulation in the state in which the customer is located.
Any action brought against the Company based on its violation of such state laws
and regulations could result in fines to the Company and/or the required
compliance with such laws. Such required compliance could result in (i)
increased costs to the Company, (ii) the loss of a substantial portion of the
Company's customers for whom the Company is unable to obtain or verify their
prescription and (iii) the inability to sell to customers at all in a particular
state if the Company cannot comply with such state's laws. The occurrence of any
of the above results could have a material adverse effect on the Company's
ability to sell contact lenses and continue to operate profitably. Furthermore,
there can be no assurance that states will not enact or impose laws or
regulations that prohibit mail order dispensing of contact lenses or otherwise
impair the Company's ability to sell contact lenses and continue to operate
profitably.
In June 1997, the Company received notice from the Georgia State Board of
Dispensing Opticians (the "Georgia Board") that the Georgia Board considers
sales by the Company in Georgia to be in violation of Georgia law, which
requires face-to-face delivery of contact lenses. However, the Georgia Board did
not recommend any action be taken at that time, but reserved the right to pursue
future violations by the Company. In November 1997, the Company received notice
from the State of New Mexico Board of Examiners in Optometry (the "New Mexico
Board") that the New Mexico Board considers sales by the Company in New Mexico
to be in violation of New Mexico law and ordering the Company to cease and
desist selling contact lenses in New Mexico. The Company has not taken any
actions in response to such notices. Sales to customers in these two states in
1997 were less than 3% of the Company's net sales for that period.
SOURCES OF SUPPLY
Historically, substantially all of the major manufacturers of contact
lenses have refused to sell lenses directly to direct marketers, including the
Company, and have sought to prohibit their distributors from doing so. As a
result, the Company currently purchases a substantial portion of its products
from unauthorized distributors, such as large optical retail chains with excess
inventory. The Company is aware that at least one large manufacturer of contact
lenses has begun to put tracking codes on its products in an effort to identify
distributors who are selling to direct marketers. The Company is not an
authorized dealer for the majority of the products which it sells. In addition,
the price the Company pays for certain of its products is sometimes higher than
that paid by eye care
F-9
<PAGE> 55
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
practitioners, retail chains and mass merchandisers, who are able to buy
directly from the manufacturers. There can be no assurance that the Company will
be able to obtain sufficient quantities of contact lenses at competitive prices
in the future to meet the existing or anticipated demand for its products. Any
such inability would have a material adverse effect on the Company's business,
financial position and results of operations.
Although the Company seeks to reduce its reliance on any one supplier by
establishing relationships with a number of distributors and other sources, the
Company purchased from a single distributor approximately 40 percent and 21
percent of its contact lens inventory in 1996 and 1997, respectively. The
Company also purchased from another distributor 40 percent of its contact lens
inventory in 1997. The Company continually seeks to establish new relationships
with potential suppliers in order to be able to obtain adequate inventory at
competitive prices. In the event that this supplier could no longer supply the
Company with contact lenses, there can be no assurance that the Company could
secure other adequate sources of supply, or that such supply could be obtained
on terms no less favorable to the Company than its current supply, which could
adversely affect the Company by increasing its costs or, in the event adequate
replacement supply cannot be secured, reducing its net sales.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
Sales are recognized at the time of shipment to the customer. Payment for
the product is generally received prior to shipment. As a result, unearned
revenue represents amounts received from customers for which shipment has not
occurred. Shipping and handling fees are included as part of net sales. The
related freight costs associated with shipping products to customers are
included as a component of cost of goods sold.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of 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 consist of contact lenses and are recorded at the lower of cost
(using the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives ranging from three to
seven years. Leasehold improvements are amortized over the term of the lease.
Major additions and improvements are capitalized, while costs for minor
replacements, maintenance and repairs that do not increase the useful life of an
asset are expensed as incurred. Upon retirement or other disposition of property
and equipment, the cost and related accumulated depreciation or amortization are
removed from the accounts. The resulting gain or loss is reflected in income.
ADVERTISING COSTS
The Company capitalizes certain direct-mail advertising costs and amortizes
those costs over the period for which the revenues are generated in accordance
with Statement of Position ("SOP") 93-7. Based upon the Company's past
direct-response information, the Company capitalizes direct-mail advertising
costs on a cost-pool-by-cost-pool approach and amortizes those costs over a 12
month period, which is the period during which the future benefits are expected
to be received. Approximately 73 percent of capitalized costs are amortized over
F-10
<PAGE> 56
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the first six months after the advertisement. Accordingly, deferred advertising
costs are amortized in proportion to the expected future benefits to be
received. The Company recorded direct-response advertising expense of
approximately $420,300 and $3,411,000 for the years ended December 31, 1996 and
1997, respectively.
At each balance sheet date, the Company evaluates the realizability of
amounts reported as assets by comparing the carrying amounts of such assets to
the estimated remaining future net revenues (revenues less direct costs)
expected to result from the advertisement. To the extent the carrying amounts
exceed the remaining future net revenues, the excess is recorded as advertising
expense in the current period.
Revenue patterns in the future may be significantly different than those
currently estimated based upon factors such as regulatory action, economic
changes in customers, demographics, an inability to obtain supply adequate to
fulfill orders and other factors which could result in the impairment of
capitalized costs. In that event, the Company may be required to write off some
or all of the capitalized costs and or revise its amortization practices.
The Company expenses all other advertising costs when the advertising takes
place. These advertising costs totalled approximately $106,339, $47,800 and
$75,093 for the periods ended December 31, 1995, 1996 and 1997, respectively.
OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- --------
<S> <C> <C>
Intangible assets........................................... $120,447 $170,447
Deferred offering costs..................................... -- 375,198
Deposits.................................................... -- 40,425
-------- --------
120,447 586,070
Accumulated amortization.................................... (34,126) (67,723)
-------- --------
$ 86,321 $518,347
======== ========
</TABLE>
Intangible assets consist of amounts paid to secure the rights to the
Company's telephone number and internet address. These costs are amortized over
an estimated life of 5 years. The Company has contractual rights customary to
the industry to use its telephone and internet address. However, under
applicable rules and regulations of the Federal Communications Commission, the
Company does not have and cannot acquire any property rights to the telephone
number. The Company does not expect to lose the right to use the number,
however, there can be no assurance in this regard and such loss would have a
material adverse effect on the Company's results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash, short-term
payables, borrowings under a credit line and notes payable. The Company believes
that the carrying amounts approximate fair value.
LONG-LIVED ASSETS
The Company accounts for the impairment of long-lived assets in accordance
with Statement of Financial Accounting Standard ("SFAS") No. 121. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If
F-11
<PAGE> 57
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
INCOME TAXES
The Company has elected, for federal and state income tax purposes, to
include their taxable income with that of its shareholders (an S Corporation
election). Accordingly, the Company makes no provision for income taxes.
The S Corporation status of the Company will terminate upon consummation of
the offering and the Company will become subject to corporate income taxes (see
Note 9). Upon termination of the Company's S Corporation status, the Company
will recognize deferred income tax assets and liabilities in accordance with
SFAS No. 109, "Accounting for Income Taxes." The resulting adjustment will be
recorded as a deferred income tax provision or benefit for the period in which
the change in status is effective. Had the Company become a C corporation as of
December 31, 1997, a provision for deferred income taxes of approximately
$596,866 would have been recorded, arising from the following temporary
differences:
<TABLE>
<S> <C>
Deferred advertising costs.................................. $636,224
Other....................................................... (39,358)
--------
$596,866
========
</TABLE>
STOCK-BASED COMPENSATION
The Company accounts for its stock option grants to employees under
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees" and provides the pro forma footnote disclosures required by SFAS
No. 123, "Accounting for Stock Based Compensation."
NOTE 3. LINE OF CREDIT AND LONG-TERM DEBT
LINE OF CREDIT
In August 1997 (subsequently amended on October 1, 1997 and January 5,
1998), the Company entered into a line of credit agreement with a bank providing
for borrowings equal to the lesser of $3,000,000 or 50 percent of eligible
inventory. The maximum borrowings under the amended agreement decrease to the
lesser of $2,750,000 on January 31, 1998, $2,225,000 on February 28, 1998,
$1,750,000 on March 31, 1998, and $1,000,000 on April 30, 1998 or 50 percent of
eligible inventory at each of the respective dates. The agreement allows for the
borrowings to remain at the lesser of $1,500,000 or 50 percent of eligible
inventory on April 30, 1998 and thereafter, in the event the Company raises at
least $10,000,000 from an initial public offering. Borrowings under the
agreement bear interest at the bank's prime rate plus 1.5 percent (10 percent at
December 31, 1997) and are secured by substantially all assets of the Company
and guaranteed by two stockholders of the Company. The agreement expires on July
31, 1998. As of December 31, 1997, outstanding borrowings under the agreement
totalled $1,055,640, which includes checks that had been disbursed to vendors
but not presented to the bank for clearance. Upon presentment to the bank, the
outstanding checks will be funded by the line of credit. At January 5, 1998, the
Company had approximately $1.4 million available under the line of credit.
The agreement contains various affirmative and negative covenants which
require, among other things, restrictions on capital expenditures, restrictions
on additional debt, quarterly pre-tax income, maintenance of working capital and
restrictions on distributions and changes in ownership. As of December 31, 1997,
the Company was not in compliance with the covenants restricting capital
expenditures and additional debt. The bank waived these covenants for the year
ended December 31, 1997 and agreed to allow the terms of the agreement to
continue through the original maturity.
F-12
<PAGE> 58
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LONG-TERM DEBT
As of December 31, 1996, the Company's long-term debt consisted of two
notes payable with outstanding principal balances totaling $55,871 which were
paid in full as of December 31, 1997.
NOTE 4. NOTES PAYABLE TO STOCKHOLDERS
LONG TERM
In February 1996, the Company entered into a credit agreement with a
stockholder that provides for maximum borrowings of $250,000. The borrowings
accrue interest at the prime rate plus 2 percent (10.5 percent at December 31,
1997). As of December 31, 1996 and 1997, outstanding borrowings totalled
$205,000 and $243,788, respectively. The agreement matures in February 1999 at
which time all unpaid principal and interest is due. In the event of default by
the Company, the stockholder has the right to convert the $250,000 into 698,920
shares of common stock or the applicable proportionate number of shares for
unpaid amounts outstanding less than $250,000.
SHORT TERM
In May 1997, the Company borrowed $250,000 from a stockholder that was
repaid prior to December 31, 1997.
In May 1997, the Company borrowed $600,000 from a stockholder under a
short-term promissory note. The note accrued interest at the prime rate plus 2
percent and was due in November 1997. In July 1997, the Company repaid $100,000
on the note and refinanced the remaining $500,000 plus borrowed an additional
$600,000 from the stockholder under a new short-term promissory note. The total
$1,100,000 unsecured note payable accrues interest at prime plus 2 percent (10.5
percent at December 31, 1997) and is due July 30, 1998. As consideration for
entering into this note, the Company agreed to modify the option it holds to
repurchase the stockholder's common stock. Under the revised terms of the
option, the Company has the right to repurchase 442,651 shares of the
stockholder's common stock for $1,900,000.
In September 1997, the Company borrowed $250,000 from a stockholder under a
short-term, unsecured promissory note. The note accrues interest at prime plus 2
percent (10.5 percent at December 31, 1997) and is due in September 1998. In
addition, for every month the note is outstanding a fee of $5,000 is added to
the outstanding balance and expensed as additional interest. As of December 31,
1997, $20,000 has been added to the balance of the note.
In October 1995, the Company borrowed $25,000 from a stockholder, which
bore interest at 10.75 percent and was repaid in full in February 1996.
As of December 31, 1997, accrued interest on stockholder notes payable
totalled $98,315 and is included in the caption "accrued liabilities" in the
accompanying balance sheet.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEGAL AND REGULATORY MATTERS
From time to time the Company is involved in legal matters generally
incidental to its business. It is the opinion of management, after discussions
with legal counsel, that the ultimate dispositions of these matters will not
have a material impact on the financial condition, liquidity or results of
operations of the Company.
See Note 1 for a discussion of regulatory matters.
F-13
<PAGE> 59
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CAPITAL LEASE OBLIGATION
The Company leases the rights to use its telephone number from an
individual under a capital lease arrangement. At the end of the lease, the
Company has the option to purchase the interest in the telephone number for
$17,500. The minimum future lease payments under the capital lease as of
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ --------
<S> <C>
1998................................ $ 32,000
1999................................ 42,000
2000................................ 31,500
--------
Total minimum lease payments.................... 105,500
Less amount representing interest............... (15,091)
--------
Present value of minimum lease payments......... 90,409
Less current portion............................ (23,532)
--------
Capital lease obligations, excluding current
portion....................................... $ 66,877
========
</TABLE>
OPERATING LEASES
The Company leases office and warehouse facilities and certain equipment
under noncancelable operating leases. Lease expense for the periods ended
December 31, 1995, 1996 and 1997 totalled approximately $14,500, $30,900 and
$88,000, respectively. In November 1997, the Company agreed to occupy office
space in a facility currently under construction. The owner of the new facility
is the same as the lessor on the existing facility and has agreed to allow the
Company to cancel its existing lease by paying a fee estimated to be no greater
than $39,000. The new lease commitment is estimated to commence in May, 1998.
Future minimum lease payments under noncancelable operating leases are as
follows (including expense under the new lease):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, AMOUNT
------------------------ ----------
<S> <C>
1998........................ $ 269,204
1999........................ 391,942
2000........................ 405,742
2001........................ 419,542
2002........................ 430,048
Thereafter.................. 1,091,925
----------
$3,008,403
==========
</TABLE>
SALES TAX
The Company's direct mail business is located, and all of its operations
are conducted, in the state of Utah. At present, the Company does not collect
sales or other similar taxes. However, various states have sought to impose
state sales tax collection obligations on out-of-state mail-order companies,
such as the Company. The U.S. Supreme Court has held that the various states,
absent Congressional legislation, may not impose tax collection obligations on
an out-of-state mail order company whose only contacts with the taxing state are
the distribution of advertising materials through the mail, and whose subsequent
delivery of purchased goods is by mail or interstate common carriers. The
Company has not received an assessment from any state. The Company anticipates
that any legislative changes, if adopted, would be applied on a prospective
basis.
F-14
<PAGE> 60
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING COMMITMENTS
The Company has entered into certain noncancelable commitments with
cooperative mail companies that will require the Company to pay approximately
$3,375,000 for direct mail services through December 31, 1998.
NOTE 6. COMMON STOCK TRANSACTIONS
The Company was organized in February 1995 and 4,141,750 shares of common
stock were issued for consideration of $25,000 in cash and contributed assets of
$27,783. During 1995, the Company issued 517,719 shares of common stock to an
existing stockholder for $27,500 in cash.
In February 1996, the Company repurchased 931,894 shares of its outstanding
common stock for $240,000 in cash. Concurrently with the purchase, the Company
sold these shares to new stockholders for $300,000 in cash. The Company has the
right to repurchase 442,651 of these shares for $1,900,000 prior to February 1,
2001 (see Note 4).
NOTE 7. STOCK OPTIONS AND STOCK OPTION PLAN
The Company will establish a nonqualified and incentive stock option plan
in connection with the filing of a Form S-1 Registration Statement. The plan
provides for the issuance of a maximum of 310,000 shares of common stock to
officers, directors and consultants and other key employees. Incentive stock
options and nonqualified options are granted at not less than 100 percent of the
fair market value of the underlying common stock on the date of grant.
Prior to the establishment of the stock option plan, the Company issued
nonqualified stock options to an employee in November 1996 to purchase 47,986
shares of common stock at an exercise price of $3.22. In addition, during the
year ended December 31, 1997, the Company issued nonqualified stock options to
an employee to purchase 4,799 shares of common stock at an exercise price of
$8.16 and nonqualified options to two employees to purchase an aggregate of
67,181 shares at $11 per share. The Company also issued stock options to a
consultant in February 1997 to purchase 19,195 shares of common stock at an
exercise price of $4.70. As of December 31, 1997, 15,995 options were vested and
exercisable with an exercise price of $3.22 per share. All options vest equally
over a three year period.
The Company applies APB No. 25 and related interpretations in accounting
for its stock option grants to employees. Accordingly, no compensation expense
has been recognized for these stock option grants. Had compensation expense for
the Company's employee stock option grants been determined in accordance with
SFAS No. 123, the Company's net income for the years ended December 31, 1996 and
1997, and diluted net income per common share for the year ended December 31,
1997 would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Net income:
As reported(1).......................................... $214,243 $634,931
Pro forma............................................... $211,860 $617,785
Diluted net income per common share:
As reported(1).......................................... $ 0.13
Pro forma............................................... $ 0.13
</TABLE>
- ---------------
(1) Includes the effect of the pro forma adjustments as described in Note 10.
The fair value of each option grant has been estimated on the grant date
using the Black-Scholes option-pricing model with the following assumptions used
for all grants; risk-free interest rate of 6.5 percent, expected stock price
volatility of 0 percent, and an expected life of five years. The weighted
average fair value of options granted in 1996 and 1997 was $0.89 per share and
$2.64 per share, respectively. The weighted average remaining contractual life
of options outstanding as of December 31, 1997 was 9.5 years.
F-15
<PAGE> 61
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. RELATED PARTY TRANSACTIONS
During 1995, 1996 and 1997, the Company made aggregate loans to two
stockholders totaling $14,144, $226,331 and $289,473, respectively. The loans
are unsecured, bear interest at the prime rate (8.5 percent at December 31,
1997) and are due on demand. Interest income on the loans totalled $7,261 and
$34,936 for the years ended December 31, 1996 and 1997, respectively and is
included in the outstanding balance of the notes receivable. As of December 31,
1996 and 1997, notes receivable from stockholders totalled $247,736 and
$572,145, respectively. The Company anticipates making equity distributions to
the stockholders sufficient to allow for their repayment on these notes. As a
result, these notes have been classified as a reduction in stockholders' equity
in the accompanying financial statements.
See note 4 for a discussion of other related party transactions.
NOTE 9. SUBSEQUENT EVENTS
STOCK SPLIT AND CHANGE IN AUTHORIZED COMMON STOCK
In connection with the filing of an effective Form S-1 Registration
Statement and a reincorporation in the state of Delaware, the Board of Directors
and stockholders will approve a 414.175 for 1 stock split and a change in the
authorized common stock to 20,000,000 shares at $0.01 par value per share. This
stock split and change in authorized common stock have been retroactively
reflected in the accompanying financial statements.
STOCK OPTIONS
In January 1998, the Company granted nonqualified stock options to purchase
71,979 shares of common stock at $11 per share to a director of the Company. The
options vest over a three year period and expire in ten years.
DISTRIBUTIONS TO STOCKHOLDERS
Prior to the consummation of the offering, the Company will enter into an
agreement for distribution of retained earnings and tax indemnification with the
existing stockholders. Pursuant to the agreement, an S Corporation distribution
estimated to be approximately $800,000 (net of notes receivable due from
stockholders of the Company) will be distributed in the form of a promissory
note issued by the Company. The note will be paid in full promptly after the
closing of the offering. The agreement will provide for, among other things, the
indemnification of the existing stockholders for any losses or liabilities with
respect to any additional taxes (including interest, penalties and legal fees)
and the repayment to the Company of amounts received as refunds, resulting from
the Company's operations during the period in which is was an S Corporation. No
amounts are currently payable, or anticipated to be payable, or receivable, or
anticipated to be receivable under the agreement. that the existing stockholders
will be indemnified by the Company with respect to federal and state income tax
liabilities as result of an adjustment to the Company's taxable income which
increases the tax liability to the existing stockholders for taxable periods
ending prior to the termination of the S corporation status. In addition, the
existing stockholders will indemnify the Company with respect to any federal and
state tax liabilities as a result of an adjustment which decreases the existing
stockholders' tax liability for taxable periods ending prior to the termination
of the Company's S corporation status and correspondingly increases the tax
liability of the Company for a taxable period commencing on or after the
termination of the Company's S corporation status.
NOTE 10. UNAUDITED PRO FORMA INFORMATION
BALANCE SHEET
The following unaudited pro forma balance sheet gives effect as of December
31, 1997, to a distribution of $1,286,220, which represents the retained
earnings at that date, the repayment of notes receivable due from
F-16
<PAGE> 62
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
stockholders of $572,145 as of December 31, 1997, and the recording of an
estimated deferred income tax liability of $596,866 that would be recorded if
the Company terminated its S corporation status at that date.
PRO FORMA PROVISION FOR INCOME TAXES
The unaudited pro forma net income presents the pro forma effects on
historical net income adjusted for a pro forma provision for income taxes. The
pro forma provision for income taxes has been determined assuming the Company
had been taxed as a C corporation for federal and state income tax purposes
using an effective income tax rate of 38.5 percent for all periods.
PRO FORMA PER SHARE INFORMATION
In accordance with SFAS No. 128 "Earnings per Share," which became
effective December 15, 1997, basic net income per common share was computed by
dividing net income by the weighted average number of common shares outstanding
during the year. Diluted net income per common share takes into consideration
the effects of stock options and the shares deemed to be outstanding which are
being offered by the Company, at an expected initial public offering price of
$11 per share, sufficient to fund an assumed S corporation distribution of
approximately $714,075 at December 31, 1997 (based on the amount of retained
earnings net of notes receivable due from stockholders). For the year ended
December 31, 1997, the components of the weighted average number of common
shares outstanding is as follows:
<TABLE>
<S> <C>
Weighted average number of shares for basic net income per
common shares............................................. 4,659,469
Stock options............................................. 28,626
Assumed shares outstanding from expected stockholder
distribution........................................... 64,916
---------
Weighted average number of shares for diluted net income per
common share.............................................. 4,753,011
=========
</TABLE>
F-17
<PAGE> 63
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Discount Lens Club:
We have audited the accompanying statements of operations and owner's
capital and cash flows of Discount Lens Club (a California sole proprietorship)
for the year ended December 31, 1994 and the one month ended January 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and the related cash flows
of Discount Lens Club for the year ended December 31, 1994 and the one month
ended January 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
August 13, 1997
F-18
<PAGE> 64
DISCOUNT LENS CLUB
STATEMENTS OF OPERATIONS AND OWNER'S CAPITAL
<TABLE>
<CAPTION>
ONE-MONTH
YEAR ENDED ENDED
DECEMBER 31, JANUARY 31,
1994 1995
------------ -----------
<S> <C> <C>
NET SALES............................................................ $212,584 $21,552
COST OF GOODS SOLD................................................... 117,326 13,069
-------- -------
Gross profit....................................................... 95,258 8,483
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 78,584 9,369
-------- -------
NET INCOME (LOSS).................................................... 16,674 (886)
OWNER'S CAPITAL, beginning of period................................. 18,046 22,818
DISTRIBUTIONS........................................................ (11,902) (900)
-------- -------
OWNER'S CAPITAL, end of period....................................... $ 22,818 $21,032
======== =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-19
<PAGE> 65
DISCOUNT LENS CLUB
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
<TABLE>
<CAPTION>
ONE MONTH
YEAR ENDED ENDED
DECEMBER 31, JANUARY 31,
1994 1995
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ 16,674 $ (886)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation.................................................... 1,200 100
Changes in operating assets and liabilities:
Inventories..................................................... (200) 137
Accrued liabilities............................................. 150 (100)
-------- -------
Net cash provided by (used in) operating activities............. 17,824 (749)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to sole proprietor................................... (11,902) (900)
-------- -------
NET INCREASE (DECREASE) IN CASH...................................... 5,922 (1,649)
CASH AT BEGINNING OF PERIOD.......................................... 81 6,003
-------- -------
CASH AT END OF PERIOD................................................ $ 6,003 $ 4,354
======== =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-20
<PAGE> 66
DISCOUNT LENS CLUB
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND ORGANIZATION OF BUSINESS
Discount Lens Club ("DLC"), was formed in the State of California on March
1, 1991. The Company was a direct marketer of replacement contact lenses in the
United States. DLC sold contact lenses primarily by telephone. In February 1995,
DLC ceased operations and contributed certain assets, including mailings lists,
to form 1-800 CONTACTS, Inc.
REVENUE RECOGNITION
Sales were recognized at the time of shipment to the customer.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INCOME TAXES
DLC was formed as a sole proprietorship and includes its income with that
of its sole proprietor. Accordingly, DLC made no provision for income taxes.
F-21
<PAGE> 67
[Graphic illustrating a representative sample of the contact lenses sold
by the Company and a hypothetical comparison of lenses distributed by the
Company and an eyecare practitioner.]
<PAGE> 68
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY, THE SELLING STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE
COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THE PROSPECTUS OR
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 1
Risk Factors............................... 5
The Company................................ 10
S Corporation Matters...................... 10
Use of Proceeds............................ 10
Dividend Policy............................ 11
Capitalization............................. 12
Dilution................................... 13
Selected Historical and Pro Forma Financial
Data..................................... 14
Management's Discussion and Analysis Of
Financial Condition and Results of
Operations............................... 15
Business................................... 19
Management................................. 30
Principal and Selling Stockholders......... 34
Certain Transactions....................... 34
Description of Capital Stock............... 36
Shares Eligible for Future Sale............ 38
Underwriting............................... 40
Experts.................................... 41
Legal Matters.............................. 41
Additional Information..................... 42
Index to Financial Statements.............. F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, 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.
======================================================
======================================================
2,200,000 SHARES
[1-800 CONTACTS LOGO]
COMMON STOCK
---------------------
PROSPECTUS
---------------------
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1998
======================================================
<PAGE> 69
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, to be paid solely by
the Company, of the issuance and distribution of the securities being registered
hereby:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... 9,200
NASD filing fee............................................. 3,536
Nasdaq National Market original listing fee................. 35,000
Blue Sky fees and expenses (including attorneys' fees and
expenses)................................................. 10,000
Printing expenses........................................... 240,000
Accounting fees and expenses................................ 200,000
Transfer agent's and Registrar's fees and expenses.......... 3,000
Legal fees and expenses..................................... 240,000
Miscellaneous expenses...................................... 9,264
--------
Total..................................................... 750,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware.
Section 145 of the General Corporation Law of the State of Delaware ("Section
145") provides that a Delaware corporation may indemnify any persons who are, or
are threatened to be made, parties to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person was an officer, director, employee or agent
of such corporation, or is or was serving at the request of such corporation as
a director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any persons who are, or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.
The Company's Certificate of Incorporation and By-laws provide for the
indemnification of Directors and officers of the Company to the fullest extent
permitted by Section 145.
In that regard, the By-laws provide that the Company shall indemnify any
person whom it has the power to indemnify by Section 145 from or against any and
all of the expenses, liabilities or other matters referred to or covered in
Section 145, and such indemnification is not exclusive of other rights to which
such person shall be
II-1
<PAGE> 70
entitled under any By-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity for
or in behalf of the Company and/or any subsidiary of the Company and as to
action in another capacity while holding such office and shall continue as to
such person who has ceased to be a director, officer, employee, or agent of the
Company and/or subsidiary of the Company and shall inure to the benefit of the
heirs, executors, and administrators of such person.
The Company expects to enter into indemnification agreements with each of
its executive officers and Directors prior to the completion of the Offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since its incorporation on February 1, 1995, the Company has issued the
following securities without registration under the Securities Act of 1933, as
amended:
In February 1995, 4,500 shares of Common Stock were issued to Jonathan Coon
for consideration of $5,050, 4,500 shares of Common Stock were issued to John
Nichols for consideration of $22,733 and 1,000 shares of Common Stock were
issued to Steve Gibson for consideration of $25,000. In August 1995, the Company
issued 1,250 shares of Common Stock to Steve Gibson for consideration of $27,500
in cash. In February 1996, the Company repurchased 2,250 shares of its
outstanding Common Stock and subsequently resold 2,250 shares of Common Stock to
Donald and Stephen Yacktman for $300,000 in cash.
The above-described transactions were exempt from registration under the
Securities Act pursuant to Section 4(2) of the Securities Act as transactions
not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
**3.1(i) Form of Restated Certificate of Incorporation of the
Company.
**3.1(ii) Form of By-laws of the Company.
4.1 Form of certificate representing shares of Common Stock,
$0.01 par value per share.
**5.1 Opinion of Kirkland & Ellis.
**10.1 Form of Employment Agreement between the Company and
Jonathan C. Coon.
**10.2 Form of Employment Agreement between the Company and John F.
Nichols.
**10.3 Form of Employment Agreement between the Company and Scott
S. Tanner.
**10.4 Form of Employment Agreement between the Company and Robert
G. Hunter.
**10.5 Form of 1-800 CONTACTS, INC Incentive Stock Option Plan.
10.6 Lease between the Company and Draper Land Partnership II,
dated September 4, 1996, with respect to the Company's
current facilities.
10.7 Lease between the Company and Draper Land Partnership II,
dated November 3, 1997, with respect to the Company's new
facility.
10.8 Lease between the Company and Bird and Saunders, dated
January 23, 1998, with respect to the Company's warehouse.
10.9 Revolving Credit Agreement between the Company and Zions
First National Bank.
10.10 Form of Indemnification Agreement between the Company and
its officers and directors.
**10.11 Form of Agreement for Distribution of Retained Earnings and
Tax Indemnification between the Company and the Existing
Stockholders.
10.12 Lease between the Company and Larry T. Short, dated June 27,
1995, with respect to the 1-800 CONTACTS telephone number.
</TABLE>
II-2
<PAGE> 71
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
----------- -----------
<C> <S>
**10.13 Form of Stock Option Agreement.
23.1 Consent of Arthur Andersen LLP.
**23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).
**24.1 Power of Attorney (included in signature page).
**27.1 Financial Data Schedule for the year ended December 31,
1996.
**27.2 Financial Data Schedule for the nine months ended September
30, 1997.
**27.3 Financial Data Schedule for the year ended December 31,
1997.
</TABLE>
- ---------------
** Previously filed.
(b) Financial Statement Schedules.
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related
instructions, are inapplicable or not material, or the information called
for thereby is otherwise included in the financial statements and therefore
have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as requested by the underwriter to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE> 72
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS PRE-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT TO
BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF DRAPER, STATE OF UTAH, ON FEBRUARY 2, 1998.
1-800 CONTACTS, INC.
BY: /s/ JONATHAN C. COON
------------------------------------
JONATHAN C. COON
President
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
PRE-EFFECTIVE AMENDMENT NO. 2 TO REGISTRATION STATEMENT AND POWER OF ATTORNEY
HAVE BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President and Director
- ------------------------------------------------ (principal executive
JONATHAN C. COON officer) February 2, 1998
* Director
- ------------------------------------------------
JOHN F. NICHOLS February 2, 1998
* Chief Financial Officer and
- ------------------------------------------------ Director (principal
SCOTT S. TANNER financial officer) February 2, 1998
* Controller (principal
- ------------------------------------------------ accounting officer)
ROBERT G. HUNTER February 2, 1998
* Director
- ------------------------------------------------
DONALD A. YACKTMAN February 2, 1998
* Director
- ------------------------------------------------
STEPHEN A. YACKTMAN February 2, 1998
Director
- ------------------------------------------------
E. DEAN BUTLER
* The undersigned, by signing his name hereto, does hereby execute this Pre-Effective Amendment No. 2 to
Registration Statement on behalf of the officers and directors of the Registrant listed above pursuant
to the Powers of Attorneys previously filed with the Commission.
/s/ JONATHAN C. COON
- ------------------------------------------------
JONATHAN C. COON, ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE> 1
2,200,000 SHARES
1-800 CONTACTS, INC.
(A DELAWARE CORPORATION)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
UNDERWRITING AGREEMENT
------------------------------, 1998
McDONALD & COMPANY SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
as Representatives of the Several Underwriters
c/o McDonald & Company Securities, Inc.
2100 McDonald Investment Center
Cleveland, Ohio 44114
Ladies and Gentlemen:
Each of 1-800-CONTACTS, INC., a Delaware corporation (the "Company"), and
Mr. Jonathan C. Coon (the "Selling Stockholder") confirms its agreement with
McDonald & Company Securities, Inc. ("McDonald"), Morgan Keegan & Company, Inc.
("Morgan") and each of the other underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom McDonald and
Morgan are acting as representatives (in such capacity, McDonald and Morgan
shall hereinafter be referred to as the "Representatives"), with respect to the
sale by the Company and the Selling Stockholder of an aggregate 2,200,000 shares
of common stock, par value $.01 per share (the "Common Stock"), of the Company,
and the purchase by the Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock set forth in said Schedule A,
aggregating 2,200,000 shares of Common Stock, and with respect to the grant by
the Company of the option described in Section 2(b) hereof to purchase all or
any part of 330,000 shares of Common Stock, par value $.01 per share, solely to
cover over-allotments, in each case except as may otherwise be provided in the
Pricing Agreement, as hereinafter defined. As used herein, where appropriate,
the term "Company" shall also refer to predecessors of the Company as described
in the Registration Statement. Of the 2,200,000 shares of Common Stock,
1,925,000 are being sold by the Company and 275,000 are being sold by the
Selling Stockholder. The aforesaid 2,200,000 shares of Common Stock (the
"Initial Securities") to be purchased by the Underwriters and all or any part of
the 330,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "Option Securities") are collectively hereinafter called the
"Securities."
Prior to the purchase and public offering of the Securities by the
Underwriters, the Representatives, acting on behalf of the several Underwriters,
shall enter into an agreement substantially in the form of Exhibit A hereto (the
"Pricing Agreement"). The Pricing Agreement may take the form of an exchange of
any standard form of written telecommunication between the Company, the Selling
Stockholder and the Representatives and shall specify such applicable
information as is indicated in Exhibit A hereto. The offering of the Securities
will be governed by this Underwriting Agreement (this "Agreement"), as
supplemented by the Pricing Agreement. From and after the date of the execution
and delivery of the Pricing Agreement, this Agreement shall be deemed to
incorporate the Pricing Agreement.
The Company has filed with the Securities and Exchange Commission (the
"Commission") registration statement on Form S-1 (No. 333-41055) and a related
preliminary prospectus for the registration of the Securities under the
Securities Act of 1933, as amended (the "1933 Act"), and has filed such
amendments thereto, if any, and such amended preliminary prospectuses as may
have been required to the date hereof. Such registration statement (as amended,
if applicable) and the prospectus constituting a part thereof (including the
information, if any, deemed to be part thereof pursuant to Rule 430A(b) of the
rules and regulations of the Commission under
<PAGE> 2
the 1933 Act (the "1933 Act Regulations")), as from time to time amended or
supplemented pursuant to the 1933 Act or otherwise, are hereinafter referred to
as the "Registration Statement" and the "Prospectus," respectively, except that
if any revised prospectus shall be provided to the Underwriters by the Company
in connection with the offering of the Securities which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective (whether or not such revised prospectus is required to be
filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations), the
term "Prospectus" shall refer to such revised Prospectus from and after the time
it is first provided to the Underwriters for such use. Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is
hereinafter referred to as the "462(b) Registration Statement," and after such
filing the term Registration Statement shall include the 462(b) Registration
Statement.
Each of the Company and the Selling Stockholder understands that the
Underwriters propose to make a public offering of the Securities as soon as the
Representatives deem advisable after the Registration Statement and any 462(b)
Registration Statement become effective and the Pricing Agreement has been
executed and delivered.
SECTION 1. Representations and Warranties of the Company and Selling
Stockholder. (a) The Company and the Selling Stockholder represent and warrant
to each Underwriter as of the date hereof and as of the date of the Pricing
Agreement (such latter date being hereinafter referred to as the "Representation
Date") as follows:
(i) At the time the Registration Statement and any 462(b) Registration
Statement become effective and at the Representation Date, the Registration
Statement and the 462(b) Registration Statement will comply in all material
respects with the requirements of the 1933 Act and the 1933 Act
Regulations, and the Registration Statement and the 462(b) Registration
Statement 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. The Prospectus, at the
Representation Date (unless the term "Prospectus" refers to a prospectus
which has been provided to the Underwriters by the Company for use in
connection with the offering of the Securities which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it is first provided to the
Underwriters for such use) and at the Closing Time referred to in Section
2, 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 the
light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement, the 462(b) Registration Statement or Prospectus
made in reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through the Representatives expressly
for use in the Registration Statement or Prospectus.
(ii) The accountants who certified the financial statements and
supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(iii) The financial statements included in the Registration Statement
and the Prospectus present fairly the financial position of the Company as
of the dates indicated and the results of their operations for the periods
specified; except as otherwise stated in the Registration Statement, said
financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis; and the
supporting schedules in the Registration Statement present fairly the
information required to be stated therein.
(iv) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company, whether or not arising in the ordinary course of
business, (B) there have been no transactions entered into by the Company,
other than those in the ordinary course of business, which are material
with respect to the Company, and (C) there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock.
2
<PAGE> 3
(v) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of Delaware with corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus; and, except as otherwise set
forth in the Registration Statement and the Prospectus, the Company is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company. The Company has no
subsidiaries and neither owns nor has any obligation to acquire any debt or
equity securities of any corporation, partnership, limited liability
company, joint venture or other business enterprise.
(vi) The Company has the authorized, issued and outstanding
capitalization set forth in the Prospectus; the shares of issued and
outstanding capital stock of the Company have been duly authorized and
validly issued and are fully paid and non-assessable; the shares of Common
Stock to be issued and sold by the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company in the manner contemplated by this
Agreement, will be validly issued and fully paid and non-assessable; the
issuance of shares of Common Stock contemplated by this Agreement is not
subject to preemptive or other similar rights; the Common Stock conforms in
all material respects to all statements relating thereto contained in the
Prospectus; the certificates for the Securities are in due and proper form;
and the holders of the Securities will not be subject to personal liability
by reason of being such holders.
(vii) This Agreement has been duly authorized, executed and delivered
by the Company.
(xii) The Company is not in violation of its respective charter or in
default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, loan
agreement or note or in any material contract, lease or other instrument to
which the Company is a party or by which it or any of them may be bound, or
to which any of the property or assets of the Company; the consummation of
the transactions contemplated herein and by the Pricing Agreement has been
duly authorized by the Company by all necessary corporate action and the
issuance, sale and delivery of the shares of Common Stock to be issued and
sold by the Company and the execution, delivery and performance of this
Agreement by the Company will not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company pursuant
to any contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company is a party or by which it or any of them
may be bound, or to which any of the property or assets of the Company is
subject, nor will such action result in any violation of the provisions of
the charter or by-laws of the Company or any applicable law, administrative
regulation or administrative or court decree.
(ix) No labor dispute with the employees of the Company or, to the
knowledge of the Company, is imminent; and the Company is not aware of any
existing or imminent labor disturbance by the employees of any of its
principal suppliers or distributors which might be expected to result in
any material adverse change in the condition, financial or otherwise, or in
the earnings, business affairs or business prospects of the Company.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending or, to the
knowledge of the Company, threatened, against or affecting the Company,
which is required to be disclosed in the Registration Statement (other than
as disclosed therein), or which, considered singly or in the aggregate, may
result in any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of
the Company considered as one enterprise, or which may materially and
adversely affect the properties or assets thereof or which may materially
or adversely affect the consummation of this Agreement or the Pricing
Agreement; all pending legal or governmental proceedings to which the
Company is a party or of which any of their respective property or assets
is the subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material; and there are no
3
<PAGE> 4
contracts or documents of the Company which are required to be filed as
exhibits to the Registration Statement by the 1933 Act or by the 1933 Act
Regulations which have not been so filed.
(xi) The Company owns or possesses, or can acquire on reasonable
terms, the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names (collectively, "intellectual
property") presently employed by them in connection with the business now
operated by them, except where the failure to own or possess or have the
ability to acquire any such intellectual property would not have a material
adverse effect on the condition, financial or otherwise, or on the
earnings, business affairs or business prospects of the Company considered
as one enterprise, 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, singly or in the aggregate, if the subject of
an unfavorable decision, ruling or finding, would result in any material
adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company.
(xii) No authorization, approval or consent of any court or
governmental authority or agency is necessary in connection with the sale
of the Securities hereunder, except such as may be required under the 1933
Act or the 1933 Act Regulations, which qualification has been obtained, or
state and foreign securities laws.
(xiii) Except as otherwise set forth in the Registration Statement and
the Prospectus, the Company possesses such material certificates,
authorizations or permits issued by the appropriate state, federal or
foreign regulatory agencies or bodies necessary to conduct the business now
operated by them, and, except as set forth in the Registration Statement
and the Prospectus, the Company has not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would materially and
adversely affect the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company.
(xiv) The Company and its corporate predecessor have each qualified as
an "S corporation" since its incorporation and continue to qualify through
the date hereof. All United States federal income tax returns of the
Company required by law to be filed have been filed and all taxes shown by
the said returns or otherwise assessed which are due and payable have been
paid, except assessments against which appeals have been or will be
promptly taken. The United States federal income tax returns of the Company
through the fiscal year ended December 31, 1996 have been filed and no
assessment in connection therewith has been made against the Company, and
the United States federal income tax return for the fiscal year ended
December 31, 1997 will be filed on or before March 16, 1998 (the date on
which such return is required by law to be filed) or pursuant to any
extension or extensions that may be granted thereon. The Company has filed
all other tax returns which are required to have been filed by it pursuant
to applicable state, local or other law except (i) with respect to such
taxes as are being contested in good faith and (ii) insofar as the failure
to file such returns individually and in the aggregate would not have a
material adverse effect on the condition, financial or otherwise, or on the
earnings, business affairs or business prospects of the Company, and have
paid all taxes due pursuant to said returns or pursuant to any assessment
received by the Company, if any, as are being contested in good faith and
as to which adequate reserves have been provided. The charges, accruals and
reserves on the books of the Company in respect of any income and
corporation tax liability for any years not finally determined are adequate
to meet any assessments or re-assessments for additional income tax for any
years not finally determined, except to the extent of any inadequacy which
would not have a material adverse effect on the condition, financial or
otherwise, or on the earnings, business affairs or business prospects of
the Company considered as one enterprise.
(xv) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific authorization,
(B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets, (C) access to assets
is permitted only in accordance with management's general or specific
authorization,
4
<PAGE> 5
and (D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xvi) There are no holders of securities (debt or equity) of the
Company, or holders of rights, options or warrants to obtain securities of
the Company, who, by reason of the filing of the Registration Statement
under the 1933 Act, have the right to request the Company to register under
the 1933 Act securities held by them; and (b) the Company complied in all
material respects with all of the terms of any of their outstanding
agreements relating to the rights of any holder of securities to have
securities registered under the Registration Statement. Except as described
in the Prospectus, there are no outstanding options, warrants or other
rights calling for the issuance of, and there are no commitments, plans or
arrangements to issue, any shares of Common Stock or any security
convertible into or exchangeable or exercisable for any shares of Common
Stock.
(xvii) The Company has good title to all properties owned by them, in
each case free and clear of all liens, encumbrances and defects except (A)
as do not materially interfere with the use made and proposed to be made of
such properties, (B) as referred to in the Registration Statement
(including the notes to the financial statements included therein) or (C)
as could not reasonably be expected to materially and adversely affect the
condition, financial or otherwise, or the earnings or business affairs of
the Company.
(xviii) Except as disclosed in the Registration Statement, the Company
is in material compliance with all applicable existing federal, state and
local laws and regulations (including any laws or regulations relating to
Hazardous Material ("Environmental Laws")), except where such
noncompliance, singly or in the aggregate, would not have a material and
adverse effect on the condition, financial or otherwise, or the earnings or
business affairs of the Company. The term "Hazardous Material" means (A)
any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, (B) any
"hazardous waste" as defined by the Resource Conservation and Recovery Act,
as amended, (C) any petroleum or petroleum product, (D) any polychlorinated
biphenyl and (E) any pollutant or contaminant or hazardous, dangerous or
toxic chemical, material, waste or substance regulated under or within the
meaning of any other Environmental Law.
(xix) There is no alleged liability, or to the best knowledge and
information of the Company, potential liability (including, without
limitation, alleged or potential liability for investigatory costs, cleanup
costs, governmental response costs, natural resources damages, property
damages, personal injuries, or penalties) of the Company arising out of,
based on or resulting from (A) the presence or release into the environment
of any Hazardous Material at any location at which the Company has
previously conducted or is currently conducting any business (whether or
not owned by the Company) or has previously owned or currently owns any
property, or (B) any violation or alleged violation of any Environmental
Law, (X) which alleged or potential liability is required to be disclosed
in the Registration Statement, other than as disclosed therein, or (Y)
which alleged or potential liability, singly or in the aggregate, would
have a material and adverse effect on the condition, financial or
otherwise, or the earnings or business affairs of the Company.
(xx) The Company is not an "investment company" within the meaning of
the Investment Company Act of 1940, as amended.
(xxi) The Company maintains reasonably adequate insurance with respect
to its properties and business against loss or damage of the kinds
customarily insured against by corporations of established reputation
engaged in the same or similar businesses and similarly situated, of such
types and in such amounts as are customarily carried under similar
circumstances by such other corporations.
(xxii) The shares of Common Stock to be issued and sold by the Company
pursuant to the Agreement will at the Closing Time be duly authorized for
listing on the Nasdaq National Market System ("Nasdaq"), subject only to
official notice of issuance.
(xxiii) The Company has furnished the Representatives letters from
each of the executive officers and directors of the Company pursuant to
which such persons have agreed during a period of 120 days from the date
hereof that, without the prior written consent of McDonald, such persons
will not sell, offer to sell, contract to sell, or otherwise dispose of,
directly or indirectly, any shares of Common Stock, any other
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<PAGE> 6
equity security of the Company, or any security convertible into or
exchangeable or exercisable for shares of Common Stock, beneficially owned
by such person or with respect to which such person has the power of
disposition, other than as bona fide gifts.
(b) The Selling Stockholder represents, warrants and agrees that:
(i) The Selling Stockholder has, and immediately prior to the Closing
Time (as defined in Section 2 hereof) the Selling Stockholder will, have
good and valid title to the shares of Stock to be sold by the Selling
Stockholder hereunder on such date, free and clear of all liens,
encumbrances, equities or claims; and upon delivery of such shares and
payment therefor pursuant hereto, good and valid title to such shares, free
and clear of all liens, encumbrances, equities or claims, will pass to the
several Underwriters.
(ii) The Selling Stockholder has placed in custody under a custody
agreement (the "Custody Agreement") with , as custodian (the
"Custodian"), for delivery under this Agreement, certificates in negotiable
form (with signature guaranteed by a commercial bank or trust company
having an office or correspondent in the United States or a member firm of
the New York or American Stock Exchanges) representing the shares of Stock
to be sold by the Selling Stockholder hereunder.
(iii) The Selling Stockholder has duly and irrevocably executed and
delivered a power of attorney (the "Power of Attorney") appointing the
Custodian and one or more other persons, as attorneys-in-fact, with full
power of substitution, and with full authority (exercisable by any one or
more of them) to execute and deliver this Agreement and to take such other
action as may be necessary or desirable to carry out the provisions hereof
on behalf of the Selling Stockholder.
(iv) The Selling Stockholder has full right, power and authority to
enter into this Agreement, the Power of Attorney and the Custody Agreement;
the execution, delivery and performance of this Agreement, the Power of
Attorney and the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions contemplated
hereby and thereby will not conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument to which the Selling Stockholder is a party or by
which the Selling Stockholder is bound or to which any of the property or
assets of the Selling Stockholder is subject, nor will such actions result
in any violation of the provisions of the organizational documents or
documents creating a partnership or a trust of the Selling Stockholder or
any statute or any order, rule or regulation of any court or governmental
agency or body having jurisdiction over the Selling Stockholder or the
property or assets of the Selling Stockholder; and, except for the
registration of the Stock under the 1933 Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under
the Securities Exchange Act of 1934, as amended (the "1934 Act") and
applicable state securities laws in connection with the purchase and
distribution of the Common Stock by the Underwriters, no consent, approval,
authorization or order of, or filing or registration with, any such court
or governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and thereby.
(v) The Selling Stockholder has not taken and will not take, directly
or indirectly, any action which is designed to or which has constituted or
which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the shares of the Common Stock.
(vi) The Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section are
not true and correct, is familiar with the Registration Statement and the
Prospectus and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement, as of the
effective date, or the Prospectus, as of the applicable filing date, which
has adversely affected or may adversely affect the business of the Company
and is not prompted to sell shares of Common Stock by any information
concerning the Company which is not set forth in the Registration Statement
and the Prospectus.
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(c) Any certificate signed by an officer of the Company or by the Selling
Stockholder, as the case may be, and delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company or the Selling Stockholder, as the case may be, to each Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to Underwriters; Closing. (a) On the basis of
the representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company agrees to issue and sell 1,925,000
shares of Common Stock and the Selling Stockholder agrees to sell 275,000 shares
of Common Stock to each Underwriter, and each Underwriter, severally and not
jointly, agrees to purchase from the Company and the Selling Stockholder, at the
price agreed upon by the Representatives, the Company and the Selling
Stockholder as set forth in the Pricing Agreement, the number of shares of
Common Stock set forth in Schedule A opposite the name of such Underwriter
(except as otherwise provided in the Pricing Agreement). Each Underwriter shall
be obligated to purchase from the Company and from the Selling Stockholder that
number of shares of the Common Stock which represents the same proportion of the
number of shares of the Common Stock to be sold by the Company and by the
Selling Stockholder as the number of shares of the Common Stock set forth
opposite the name of such Underwriter in Schedule A represents of the total
number of shares of the Common Stock to be purchased by all of the Underwriters
pursuant to this Agreement. The respective purchase obligations of the
Underwriters with respect to the Common Stock shall be rounded among the
Underwriters to avoid fractional shares, as the Representatives may determine.
(i) If the Company has elected not to rely upon Rule 430A under the
1933 Act Regulations, the initial public offering price of the Securities
and the purchase price of the Securities to be paid by the several
Underwriters shall be agreed upon and set forth in the Pricing Agreement,
dated the date hereof, and an amendment to the Registration Statement and
the Prospectus will be filed before the Registration Statement becomes
effective.
(ii) If the Company has elected to rely upon Rule 430A under the 1933
Act Regulations, the initial public offering price of the Securities and
the purchase price of the Securities to be paid by the several Underwriters
shall be determined by agreement among the Representatives, the Company and
the Selling Stockholder and set forth in the Pricing Agreement. In the
event that such prices have not been agreed upon and the Pricing Agreement
has not been executed and delivered by all parties thereto by the close of
business on the fourth business day following the date of this Agreement,
this Agreement shall terminate forthwith, without liability of any party to
any other party, unless otherwise agreed to by the Company, the Selling
Stockholder and the Representatives.
(b) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase up to 330,000 shares of Common Stock at the price per share set forth
in the Pricing Agreement. The option hereby granted will expire 30 days after
(i) the date the Registration Statement becomes effective, if the Company has
elected not to rely on Rule 430A under the 1933 Act Regulations or (ii) the date
of the Pricing Agreement, if the Company has elected to rely on Rule 430A under
the 1933 Act Regulations, and may be exercised in whole or in part from time to
time (but not more than twice) only for the purpose of covering over-allotments
which may be made in connection with the offering and distribution of the
Initial Securities upon notice by the Representatives to the Company setting
forth the number of Option Securities as to which the several Underwriters are
then exercising the option and the time and date of payment and delivery for
such Option Securities. Any such time and date of payment (a "Date of Delivery")
shall be determined by the Representatives, but shall not be later than seven
full Business Days after the exercise of said option, nor in any event prior to
the Closing Time, as hereinafter defined, unless otherwise agreed by the
Representatives and the Company. If the option is exercised as to all or any
portion of the Option Securities, each of the Underwriters, acting severally and
not jointly, will purchase that proportion of the total number of Option
Securities then being purchased which the number of Initial Securities set forth
in Schedule A opposite the name of such Underwriters bears to the total number
of Initial Securities (except as otherwise provided in the Pricing Agreement),
subject in each case to such adjustments as the Representatives in their
discretion shall make to eliminate any sales or purchases of fractional shares.
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<PAGE> 8
(c) Payment of the purchase price for, and delivery of certificates for,
the Initial Securities shall be made at the offices of McDonald & Company
Securities, Inc., McDonald Investment Center, Cleveland, Ohio or at such other
place as shall be agreed upon by the Representatives, the Company and the
Selling Stockholder, at 10:00 A.M. on the third business day (unless postponed
in accordance with the provisions of Section 10) following the date the
Registration Statement becomes effective (or, if the Company has elected to rely
upon Rule 430A, the third business day after execution of the Pricing
Agreement), or such other time not later than ten business days after such date
as shall be agreed upon by the Representatives, the Company and the Selling
Stockholder (such time and date of payment and delivery being herein called the
"Closing Time"); provided, however, that if the Registration Statement becomes
effective later than 4:30 p.m., Eastern Time, on any date, then, subject to the
foregoing, the Closing Time shall be the fourth business day thereafter (or, if
the Company has elected to rely upon Rule 430A, and the Pricing Agreement is not
executed until after 4:30 p.m., Eastern Time, on any date, the fourth business
day after execution of the Pricing Agreement). In addition, in the event that
any or all of the Option Securities are to be purchased by the Underwriters,
payment of the purchase price for, and delivery of certificates for, such Option
Securities shall be made at the above-mentioned offices of McDonald & Company
Securities, Inc., or at such other place as shall be agreed upon by the
Representatives and the Company on each Date of Delivery as specified in the
notice from the Representatives to the Company. Payment shall be made to the
Company and the Selling Stockholder by wire transfer of immediately available
funds to accounts designated by the Company and the Selling Stockholder, against
delivery of the Securities to the Underwriters. The certificates representing
Securities shall be in such denominations and registered in such names as the
Representatives may request in writing at least two business days before the
Closing Time. It is understood that each Underwriter has authorized the
Representatives, for their account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Securities which it has agreed to
purchase. The Representatives may (but shall not be obligated to) make payment
of the purchase price for the Securities to be purchased by any Underwriter
whose check has not been received by the Closing Time, but such payment shall
not relieve such Underwriter from its obligations hereunder. The Securities will
be made available for examination and packaging by the Underwriters not later
than 10:00 A.M. on the last business day prior to the Closing Time at such place
as the Underwriters may designate in Cleveland, Ohio.
SECTION 3. Covenants of the Company and the Selling Stockholder. The
Company and the Selling Stockholder, as the case may be, covenant with each
Underwriter as follows:
(a) The Company will notify the Underwriters immediately, and confirm the
notice in writing, (i) of the effectiveness of the Registration Statement, the
462(b) Registration Statement and any amendments thereto (including any
post-effective amendments), (ii) of the receipt of any comments from the
Commission, (iii) of any request by the Commission for any amendment to the
Registration Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose or the suspension of the
qualification of the Securities for offering or sale, in any jurisdiction, or
the threatening or initiation of any proceeding for that purpose. The Company
will make every reasonable effort to prevent the issuance of any stop order or
any order preventing or suspending the use of any preliminary prospectus or
suspending such qualification and, if any stop order or any order preventing or
suspending the use of any preliminary prospectus or suspending such
qualification is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) The Company will give the Underwriters notice of its intention to file
or prepare any amendment to the Registration Statement (including any
post-effective amendment), the 462(b) Registration Statement or any amendment or
supplement to the Prospectus (including any revised prospectus which the Company
proposes for use by the Underwriters in connection with the offering of the
Securities which differs from the prospectus on file at the Commission at the
time the Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations), will furnish the Underwriters with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file any such amendment or supplement or use any
such prospectus to which counsel for the Underwriters and counsel for the
Company mutually agree shall not be filed or used.
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<PAGE> 9
(c) The Company will deliver to the Underwriters one signed copy of the
Registration Statement as originally filed and of each amendment thereto
(including exhibits filed therewith or incorporated by reference therein) and
will also deliver to the Underwriters conformed copies of the Registration
Statement as originally filed and of each amendment thereto (without exhibits).
(d) The Company will furnish to each Underwriter, from time to time during
the period when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, such number of copies of the Prospectus (as amended or
supplemented) as such Underwriter may reasonably request for the purposes
contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the 1934
Act Regulations.
(e) If any event shall occur as a result of which counsel for the Company
and counsel for the Underwriters mutually agree that it is necessary to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
light of the circumstances existing at the time it is delivered to a purchaser
or if for any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the 1933 Act, the 1933 Act Regulations, the
1934 Act or the rules and regulations of the Commission under the 1934 Act (the
"1934 Act Regulations"), the Company will forthwith amend or supplement the
Prospectus (in form and substance mutually satisfactory to counsel for the
Underwriters and counsel for the Company and in compliance with the 1933 Act and
the 1933 Act Regulations) so that, as so amended or supplemented, the Prospectus
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 existing at the time it is delivered to a purchaser, not
misleading and will comply with the 1933 Act, the 1933 Act Regulations, the 1934
Act and the 1934 Act Regulations, and the Company will furnish to the
Underwriters a reasonable number of copies of such amendment or supplement.
(f) The Company will endeavor, in cooperation with the Underwriters, to
qualify the Securities for offering and sale under the applicable securities
laws of such states and other jurisdictions of the United States as the
Representatives may designate; provided, however, that the Company shall not be
obligated to qualify as a foreign corporation in any jurisdiction in which it is
not so qualified. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be required
by the laws of such jurisdiction to continue such qualification in effect, for a
period of not less than one year from the effective date of the Registration
Statement.
(g) The Company will make generally available to its security holders as
soon as practicable, but not later than 90 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning
not later than the first day of the Company's fiscal quarter next following the
"effective date" (as defined in said Rule 158) of the Registration Statement.
(h) If, at the time that the Registration Statement becomes effective, any
information shall have been omitted therefrom in reliance upon Rule 430A of the
1933 Act Regulations, then immediately following the execution of the Pricing
Agreement, the Company will prepare, and file or transmit the filing with the
Commission in accordance with such Rule 430A and Rule 424(b) of the 1933 Act
Regulations, copies of an amended Prospectus, or, if required by such Rule 430A,
a post-effective amendment to the Registration Statement (including an amended
Prospectus), containing all information so omitted.)
(i) If the Company elects to rely upon Rule 462(b), the Company shall both
file a 462(b) Registration Statement with the Commission in compliance with Rule
462(b) of the 1933 Act Regulations and pay the applicable fees in accordance
with Rule 111 of the 1933 Act Regulations by the time confirmations are sent or
given, as specified by Rule 462(b)(2).
(j) The Company, during the period when the Prospectus is required to be
delivered under the 1933 Act, will file all documents required to be filed with
the Commission pursuant to Sections 13, 14 or 15 of the 1934 Act within the time
periods required by the 1934 Act and the 1934 Act Regulations.
(k) The Company will effect the listing of the Common Stock issued and sold
pursuant to this Agreement on the Nasdaq National Market System.
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<PAGE> 10
(l) During a period of 120 days from the date hereof, the Company and the
Selling Stockholder will not, without the prior written consent of McDonald,
sell, offer to sell, contract to sell, or otherwise dispose of, directly or
indirectly, any shares of Common Stock, any other equity security of the Company
or any security convertible into or exchangeable or exercisable for Common Stock
(except for shares of Common Stock issued pursuant to this Agreement and the
Pricing Agreement, the grant of options or the issuance of shares of Common
Stock upon the exercise of outstanding options under the Company's existing
stock option plans).
(m) The Company and the Selling Stockholder will each use all commercially
reasonable efforts to do and perform all things required or necessary to be done
and performed by it under this Agreement prior to the Closing Time and will
satisfy all conditions precedent to the delivery of the Securities.
(n) Prior to the Closing Time, the Company shall have reincorporated itself
from Utah to Delaware and made associated changes to the Company's charter and
by-laws in connection with such reincorporation.
(o) The Existing Stockholders (as defined in the Registration Statement)
and the Company shall enter into the Agreement for Distribution of Retained
Earnings and Tax Indemnification (also as defined therein).
SECTION 4. Payment of Expenses. The Company will pay all expenses
incident to the performance of its obligations under this Agreement, including
(i) the printing and filing and delivery to the Underwriters of copies of the
Registration Statement as originally filed and of each amendment thereto, during
the period specified in Section 3(d) hereof (excluding any fees, costs or
expenses of counsel to the Underwriters), (ii) the printing of this Agreement
and the Pricing Agreement, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, (iv) the fees and
disbursements of the Company's counsel and accountants, (v) the qualification of
the Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the fees and disbursements of
counsel for the Underwriters in connection therewith and in connection with the
preparation of the Blue Sky Survey, which counsel fees shall not exceed $10,000,
(vi) the printing and delivery to the Underwriters of copies of the Registration
Statement as originally filed and each amendment thereto, of the preliminary
prospectuses, and of the Prospectus and any amendments or supplements thereto,
(vii) the printing and delivery to the Underwriters of the Blue Sky Survey,
(viii) the fees and expenses of the Company's transfer agent, (ix) the fee of
the National Association of Securities Dealers, Inc. and (x) the fees and
expenses incurred in connection with the listing of the Securities on Nasdaq.
If this Agreement is terminated by the Representatives in accordance with
the provisions of Section 5 or Section 9(a)(i), the Company shall reimburse the
Underwriters for all of their out-of-pocket expenses relating to the
transactions contemplated hereby, including the reasonable fees and
disbursements of counsel for the Underwriters in an amount not to exceed
$100,000.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
the Underwriters hereunder are subject to the accuracy of the representations
and warranties of the Company and the Selling Stockholder herein contained, to
the performance by each of the Company and the Selling Stockholder of its
obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later than
5:30 P.M. on the date hereof, or with the consent of the Representatives, at a
later time and date, not later, however, than 5:30 P.M. on the first business
day following the date hereof, or at such later time and date as may be approved
by the Underwriters; and at the Closing Time no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
1933 Act or proceedings therefor initiated or threatened by the Commission. If
the Company has elected to rely upon Rule 430A of the 1933 Act Regulations, the
price of the Securities and any price related information previously omitted
from the effective Registration Statement pursuant to such Rule 430A shall have
been transmitted to the Commission for filing pursuant to Rule 424(b) of the
1933 Act Regulations within the prescribed time period, and prior to Closing
Time the Company shall have provided evidence satisfactory to McDonald of such
timely filing, or a post-effective amendment providing such information shall
have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the 1933 Act Regulations.
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(b) At the Closing Time the Underwriters shall have received:
(i) An opinion, dated the Closing Time, of Kirkland & Ellis, counsel
for the Company and the Selling Stockholder, substantially in the form set
forth on Annex I attached hereto.
(ii) An opinion, dated the Closing Time, of Squire, Sanders & Dempsey
L.L.P., counsel for the Underwriters, in form and substance reasonably
satisfactory to the Underwriters.
(iii) In giving their opinions required by subsections (b)(i) and
(ii), respectively, of this section, Kirkland & Ellis and Squire, Sanders &
Dempsey L.L.P. shall each additionally state that although such counsel has
not undertaken to determine independently the accuracy, completeness and
fairness of the statements contained in the Registration Statement or in
the Prospectus and takes no responsibility therefor, such counsel has
participated in discussions and meetings with officers and other
representatives of the Company and discussions with the auditors for the
Company in connection with the preparation of the Registration Statement
and the Prospectus. Such counsel has not, however, undertaken to determine
independently and, therefore, does not assume any responsibility,
explicitly or implicitly, for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus.
Nothing has come to such counsel's attention that has caused such counsel
to believe that (A) the Registration Statement, at the time it became
effective, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order
to make the statements therein not misleading, or (B) the Prospectus, at
the Closing Time, contained any untrue statement of a material fact or
omitted 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, except that in each case such counsel need not express any
opinion or belief with respect to the financial statements or other
financial data contained in the Registration Statement or the Prospectus.
(c) At the Closing Time, there shall not have been, since the date hereof
or since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, whether or not arising in the ordinary course
of business, and the Underwriters shall have received a certificate of the
President of the Company and the chief financial or chief accounting officer of
the Company, dated as of the Closing Time, to the effect that (A) there has been
no such material adverse change, (B) the representations and warranties in
Section 1 are true and correct with the same force and effect as though
expressly made at and as of the Closing Time, (C) each of the Company and the
Selling Stockholder has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to the Closing
Time, and (D) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or threatened by the Commission.
(d) At the time of the execution of this Agreement, the Underwriters shall
have received from Arthur Andersen LLP, independent certified public
accountants, a letter dated such date, in form and substance previously approved
by the Representatives, with respect to the financial statements and certain
financial information contained or incorporated by reference in the Registration
Statement and the Prospectus.
(e) At the Closing Time, the Underwriters shall have received from Arthur
Andersen LLP, independent certified public accountants, a letter, dated as of
Closing Time, to the effect that it reaffirms the statements made in the letter
furnished pursuant to subsection (d) of this Section, except that the specified
date referred to shall be a date not more than five days prior to the Closing
Time.
(f) At the Closing Time, the Representatives shall have been furnished with
such documents and opinions as it may reasonably require for the purpose of
enabling counsel for the Underwriters to pass upon the issuance and sale of the
Securities as herein contemplated and related proceedings, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be reasonably satisfactory in form and substance to
the Representatives and counsel for the Underwriters.
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<PAGE> 12
(g) At the time of the execution of this Agreement, the Representatives
shall have received from each of the executive officers and directors of the
Company a letter in which each such person agrees during a period of 120 days
from the date hereof, that such person will not, without the prior written
consent of McDonald, sell, offer to sell, contract to sell, or otherwise dispose
of, directly or indirectly, any shares of Common Stock, any other equity
security of the Company or any security convertible into or exchangeable or
exercisable for shares of Common Stock, beneficially owned by such person or
with respect to which such person has the power of disposition, other than as
bona fide gifts.
(h) In the event that the Underwriters exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Representatives shall have received:
(i) A certificate, dated such Date of Delivery, of the President of
the Company and of the chief financial or chief accounting officer of the
Company confirming that the certificate delivered at the Closing Time
pursuant to Section 5(c) hereof remains true and correct as of such Date of
Delivery.
(ii) An opinion, dated such Date of Delivery, of Kirkland & Ellis,
counsel for the Company and the Selling Stockholder, substantially in the
form set forth on Annex I attached hereto.
(iii) An opinion, dated such Date of Delivery, of Squire, Sanders &
Dempsey L.L.P., counsel for the Underwriters, in form and substance
reasonably satisfactory to the Underwriters.
(iv) A letter from Arthur Andersen LLP, in form and substance
satisfactory to the Representatives and dated such Date of Delivery,
substantially the same in form and substance as the letter furnished to the
Underwriters pursuant to Section 5(e) hereof, except that the "specified
date" in the letter furnished pursuant to this Section 5(h)(vi) shall be a
date not more than five days prior to such Date of Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Representatives by notice to the Company at any time at or prior to Closing
Time, and such termination shall be without liability of any party to any other
party except as provided in Section 4. Notwithstanding any such termination, the
provisions of Sections 6 and 7 shall remain in effect.
SECTION 6. Indemnification. (a) Each of the Company and the Selling
Stockholder agrees, jointly and severally, to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the 1933 Act, and each officer and director of each
Underwriter and any such controlling person to the extent and in the manner set
forth as follows:
(i) against any and all loss, liability, claim, damage, and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A(b) of the 1933 Act
regulations, if applicable, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation; or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon such untrue statement or omission, or any such
alleged untrue statement or omission, if such settlement is effected with
the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred (including,
subject to Section 6(c) hereof, the fees and disbursements of counsel
chosen by the Underwriters), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by a governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or
12
<PAGE> 13
omission, or any such alleged untrue statement or omission, to the extent
that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply (A) to any
loss, liability, claim, damage or expense to the extent arising out of any
untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with written information furnished to the
Company by any Underwriter through the Representatives expressly for use in the
Registration Statement or Prospectus and (B) with respect to the Prospectus or
any preliminary prospectus to the extent that any loss, liability, claim, damage
or expense results from the fact that such Underwriter sold Securities to a
person to whom there was not sent or given, at or prior to the written
confirmation of such sale, a copy of the Prospectus (and any amendment or
supplement thereto) in any case where such delivery is required by the 1933 Act
if the Company previously furnished copies thereof to such Underwriter and the
loss, liability, claim, damage or expense results from an untrue statement or
omission of a material fact contained in the Prospectus or any preliminary
prospectus which was corrected in the Prospectus (or any amendment or supplement
thereto).
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Selling Stockholder, the Company, its directors, each of its officers who signed
the Registration Statement, and each person, if any, who controls the Company
within the meaning of Section 15 of the 1933 Act against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto) or any preliminary prospectus
or the Prospectus (or any amendment or supplement thereto) in reliance upon and
in conformity with written information furnished to the Company by such
Underwriter through the Representatives expressly for use in the Registration
Statement (or any amendment thereto) or such preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the defense of any such
action. In no event shall the indemnifying parties be liable for fees and
expenses (which fees and expenses shall be reasonable) of more than one counsel
(in addition to any local counsel) separate from their own counsel for all
indemnified parties in connection with any one action or separate but similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances; provided, however, that if an indemnified party
shall have been advised in writing by counsel selected to represent the
indemnified parties that an actual or potential conflict of interest exists
between the position of that indemnified party and other indemnified parties,
the indemnified party in question shall have the right to select separate
counsel to participate in the defense of such action on behalf of such
indemnified party, and the indemnifying parties shall be responsible for the
reasonable fees and expenses of such separate counsel.
SECTION 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company, the Selling
Stockholder and the Underwriters shall contribute to the aggregate losses,
liabilities, claims, damages and expenses of the nature contemplated by such
indemnity agreement incurred by the Company and one or more Underwriters, as
incurred, in such proportions that the Underwriters are responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the initial public offering price
appearing thereon and the Company is responsible for the balance; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the 1933 Act, and each officer and director of any
Underwriter and of any such control person, shall have the same rights to
contribution as such Underwriter, 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 within the meaning of Section 15 of the 1933 Act shall
have the same rights to contribution as the Company.
13
<PAGE> 14
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement and the Pricing Agreement, or contained in certificates of officers of
the Company submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. Termination of the Agreement. (a) The Representatives may
terminate this Agreement, by notice to the Company, at any time at or prior to
Closing Time (i) if there has been, since the date of this Agreement or since
the respective dates as of which information is given in the Registration
Statement, any material adverse change in the condition, financial or otherwise,
or in the earnings, business affairs or business prospects of the Company,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States, or any new outbreak of hostilities or material escalation thereof or
other calamity or crisis, the effect of which is such as to make it, in the
judgment of the Representatives, impracticable to market the Securities or to
enforce contracts for the sale of the Securities, or (iii) if trading in the
Common Stock has been suspended by the Commission, or if trading generally on
the Nasdaq National Market System has been suspended, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, by either of said Exchanges or by order of the Commission or
any other governmental authority, or if a banking moratorium has been declared
by federal, Utah, New York or Ohio authorities.
(b) If this Agreement is terminated pursuant to this Section 9, such
termination shall be without liability of any party to any other party except as
provided in Section 4. Notwithstanding any such termination, the provisions of
Sections 6 and 7 shall remain in effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of
the Underwriters shall fail at Closing Time to purchase the Initial Securities
which it or they are obligated to purchase under this Agreement and the Pricing
Agreement (the "Defaulted Securities"), the Representatives shall have the
right, within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements with such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Initial Securities, the non-defaulting Underwriters shall be
obligated to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Initial Securities, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in the termination
of this Agreement, either the Representatives or the Company shall have the
right to postpone the Closing Time 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.
The Underwriters shall have the right to amend Schedule A hereto by making
such substitutions or corrections as indicated in the Pricing Agreement.
SECTION 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunications. Notices to the
Underwriters shall be directed to the Representatives, in care of McDonald &
Company Securities, Inc. at 2100 McDonald Investment Center, Cleveland, Ohio
44114, attention: John W. Dorsey, Senior Vice President, and notices to the
Company shall be directed to it at 13751 South Wadsworth Park Drive, Suite D-140
Draper, Utah 84020, attention: Jonathan C. Coon, President, telecopy number
(801) 572-8225.
14
<PAGE> 15
SECTION 12. Parties. This Agreement and the Pricing Agreement shall each
inure to the benefit of and be binding upon the Underwriters, the Company and
the Selling Stockholder and their respective successors. Nothing expressed or
mentioned in this Agreement or the Pricing Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Underwriters,
the Company and the Selling Stockholder and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or the Pricing Agreement or any
provision herein and therein contained. This Agreement and the Pricing Agreement
and all conditions and provisions hereof and thereof are intended to be for the
sole and exclusive benefit of the Underwriters, the Company and the Selling
Stockholder and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No Purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
SECTION 13. Governing Laws and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the internal
laws of the State of Ohio without giving effect to principles of conflict of
laws. Specified times of day refer to Cleveland Time. As used herein, the term
"business day" means any day on which the Nasdaq National Market System is open
for business.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters, the Company and the Selling Stockholder in accordance with its
terms.
Very truly yours,
1-800 CONTACTS, INC.
By:
--------------------------------------
Name:
Title:
CONFIRMED AND ACCEPTED --------------------------------------
as of the date first above written: Jonathan C. Coon
McDONALD & COMPANY SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
BY: McDONALD & COMPANY SECURITIES, INC.
By:
- ----------------------------------------------------
Name:
Title:
For themselves and as Representatives of the
other Underwriters in Schedule A hereto.
15
<PAGE> 16
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS TO BE PURCHASED
------------ ---------------
<S> <C>
McDonald & Company Securities, Inc. ........................
Morgan Keegan & Company, Inc. ..............................
---------
Total............................................. 2,200,000
=========
</TABLE>
<PAGE> 17
EXHIBIT A
2,200,000 SHARES
1-800 CONTACTS, INC.
(A DELAWARE CORPORATION)
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
PRICING AGREEMENT
------------------------------, 1998
McDONALD & COMPANY SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
as Representatives of the Several Underwriters
c/o McDonald & Company Securities, Inc.
2100 McDonald Investment Center
Cleveland, Ohio 44114
Ladies and Gentlemen:
Reference is made to the Underwriting Agreement, dated ,
1998 (the "Underwriting Agreement"), relating to the purchase by the several
Underwriters named in Schedule A thereto, for whom McDonald & Company
Securities, Inc. and Morgan Keegan & Company, Inc. are acting as
representatives, of the above shares of the Common Stock, par value $.01 per
share, of 1-800 CONTACTS, INC. (the "Company").
Pursuant to Section 2 of the Underwriting Agreement, the Company agrees
with the Underwriters as follows:
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $XX.XX.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $XX.XX, being an amount equal to the initial
public offering price set forth above less $X.XXX per share.
<PAGE> 18
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement among
the Underwriters, the Company and the Selling Stockholder (as defined in the
Underwriting Agreement) in accordance with its terms.
Very truly yours,
1-800 CONTACTS, INC.
By:
--------------------------------------
Its:
--------------------------------------
--------------------------------------
Jonathan C. Coon
CONFIRMED AND ACCEPTED
as of the date first above written:
McDONALD & COMPANY SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
BY McDONALD & COMPANY SECURITIES, INC.
By:
- ----------------------------------------------------
Name:
Title:
For themselves and as Representatives of the
other Underwriters in Schedule A to the
Underwriting Agreement.
<PAGE> 19
ANNEX I
FORM OF OPINION OF
KIRKLAND & ELLIS
(i) The Company is duly incorporated, validly existing, and in good
standing under the laws of the state of Delaware, and has the corporate power
and authority to own or lease its properties and to conduct its business as
described in the Prospectus, and to execute, deliver and perform its obligations
under the Underwriting Agreement. The Selling Stockholder has the requisite
power and authority to execute, deliver and perform its obligations under the
Underwriting Agreement.
(ii) The Company is duly qualified to do business and is in good standing
in all jurisdictions where it is required to be so qualified, except where the
failure to be so qualified would not individually or in the aggregate have a
material adverse effect on the business, condition (financial or other), results
of operations or properties of the Company taken as a whole.
(iii) The authorized capital stock of the Company consists of: (a)
220,000,000 shares of Common Stock, $.01 par value per share ("Common Stock"),
of which upon completion of this offering 6,584,469 shares are issued and
outstanding; and (b) 1,000,000 shares of Preferred Stock, par value $.01 per
share, none of which shares are issued and outstanding. Except as otherwise
stated in the Prospectus, all of the shares of issued and outstanding capital
stock of the Company have been duly authorized and validly issued and are fully
paid and nonassessable. The Securities to be sold by the Company pursuant to the
Underwriting Agreement have been duly authorized for issuance and sale to the
Underwriters pursuant to the Underwriting Agreement and, when issued and
delivered by the Company in the manner contemplated by the Underwriting
Agreement, will be validly issued and fully paid and nonassessable. The sale of
the Securities by the Company and the Selling Stockholder is not subject to
preemptive or other similar statutory rights or contractual preemptive or other
similar contractual rights pursuant to any contract or agreement filed as an
exhibit to either the Registration Statement and by which the Company is bound.
(iv) Except for the order of the Commission declaring the Registration
Statement effective, and permits and similar authorizations required under the
securities or Blue Sky laws of certain jurisdictions, and a listing application
for the Securities filed with Nasdaq, and except for such consents that are
required and have been received, no consent, approval, authorization or other
order from, and no filing with or notice to, any Ohio or Federal regulatory
body, administrative agency, or other governmental authority, and no filing with
or notice to, to the best of our knowledge, any other person or entity, is
required for the due authorization, execution, delivery and performance by the
Company and the Selling Stockholder of the Underwriting Agreement.
(v) The Underwriting Agreement, in the case of the Company, has been duly
authorized, executed and delivered by the Company, and, in the case of the
Selling Stockholder, executed and delivered by the Selling Stockholder, and is a
valid and binding obligation of each of the Company and the Selling Stockholder,
enforceable against the Company and the Selling Stockholder in accordance with
its terms except as rights to indemnity and contribution thereunder may be
limited under applicable securities laws.
(vi) The Company is not an "investment company" as such term is defined in
the Investment Company Act of 1940, as amended.
(vii) The execution and delivery by the Company and Selling Stockholder of
the Underwriting Agreement and the performance of its obligations thereunder
will not (A) result in the violation of any statute or regulation, or any order
or decree known to us of any court or governmental authority binding upon the
Company, its property or the Selling Stockholder, (B) conflict with or result in
a breach or violation of any of the terms or provisions of, or constitute a
default or in creation of a lien under any of the provisions of the Company's
Certificates of Incorporation or Bylaws or any indenture, mortgage, deed of
trust, loan agreement or other agreement filed as an exhibit to the Registration
Statement and by which the Company is bound, or (C) result in the creation of
any lien upon any of the properties or assets of the Company or the Selling
Stockholder.
I-1
<PAGE> 20
We have participated in the preparation of the Registration Statement, the
462(b) Registration Statement and Prospectus. From time to time we have had
discussions with officers, directors and employees of the Company, the Selling
Stockholder, Arthur Andersen LLP, the independent accountants who examined
certain of the consolidated financial statements of the Company included in the
Registration Statement, the 462(b) Registration Statement and Prospectus, and
your representatives concerning the information contained in the Registration
Statement and Prospectus and the proposed responses to various items in Form
S-1. Based thereupon we are of the opinion that the Registration Statement, the
462(b) Registration Statement, the Prospectus and each amendment or supplement
thereto and the documents incorporated by reference therein comply as to form in
all material respects with the requirements of the Securities Act of 1933 or the
Securities Exchange Act of 1934, as applicable, and the applicable rules and
regulations thereunder (except for the operating statistics, financial
statements and the notes thereto, financial schedules, other financial,
statistical and accounting data included therein as having been included in the
Registration Statement, the 462(b) Registration Statement and Prospectus on the
authority of Arthur Andersen LLP as experts).
We further are of the opinion that the statements contained in Item 15 in
part II of the Registration Statement, insofar as they purport to summarize the
provisions of the documents referred to therein, present fair summaries of such
provisions.
We do not know of any litigation or any governmental proceedings or
investigations, pending or threatened, required to be described in the
Prospectus that are not described as required, or of any contracts or other
documents of a character required to be described in the Registration Statement
or Prospectus or to be filed as exhibits to the Registration Statement that are
not described and filed as required.
The Registration Statement and the 462(b) Registration Statement have
become effective under the Securities Act of 1933; any required filing of the
Prospectus or any supplement thereto pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the Registration
Statement or the 462(b) Registration Statement has been issued and no
proceedings for that purpose are pending before or threatened by the Commission.
We have not independently verified and are not passing upon, and do not
assume any responsibility for, the accuracy, completeness or fairness (except as
set forth in the third preceding paragraph above) of the information contained
in the Registration Statement and Prospectus. Based upon the participation and
discussions described above, however, no facts have come to our attention that
cause us to believe that the Registration Statement (except for the operating
statistics, financial statements and the notes thereto, financial schedules,
other financial, statistical and accounting data included therein and except for
the information referred to under the caption "Experts" as having been included
in the Registration Statement and Prospectus on the authority of Arthur Andersen
LLP, as experts, as to all of which we express no view), at the time it became
effective contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading, or that the Prospectus (with the foregoing
exceptions), at such time or on the date hereof included or includes any untrue
statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
I-2
<PAGE> 1
EXHIBIT 4.1
================================================================================
1-800-CONTACTS
THE NATION'S CONTACT LENS STORE(TM)
[LOGO APPEARS HERE] [LOGO APPEARS HERE]
[INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 681977 10 4
This Certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $0.01 PAR VALUE, OF
============================ 1-800-CONTACTS, INC. ==============================
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
[SIG] [SEAL] [SIG]
SECRETARY PRESIDENT
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
================================================================================
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______________ Custodian _______________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act _____________________________________
in common (State)
UNIF TRF MIN ACT -- _______________ Custodian (until age __________)
(Cust)
_______________________ under Uniform Transfers
(Minor)
to Minors Act _________________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
| |
--------------------------------------
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------- Shares
of the captial stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
- ----------------------------------------------------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises.
Dated _________________________________________________
X
------------------------------------------------------------
X
------------------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S)
AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AN CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>
<PAGE> 1
Exhibit 10.6
COMMERCIAL LEASE
THIS LEASE (the "Lease") dated this 4th day of September, 1996, is entered
into by and between DRAPER LAND PARTNERSHIP II, a Utah limited partnership
("Landlord"), and 1-800-LENS NOW, INC., d.b.a. 1-800-CONTACTS (it is the
present intention of 1-800-LENS NOW, INC., to formally change its name to
1-800-CONTACTS, INC., and this Lease shall apply to full force and extent to
1-800 CONTACTS, INC., in such event), a Utah corporation, ("Tenant").
1. PREMISES.
(a) Description. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, for the term and subject to the terms and
conditions hereinafter set forth, to each and all of which Landlord and Tenant
hereby mutually agree, those certain premises (the "Premises"), highlighted on
Exhibit A attached hereto, which include approximately 6,500 Rentable square
feet of office space (approximately 5,652 Useable square feet) (the exact
Rentable square footage and location to be determined by final space plan).
The location of the Premises is commonly known as: Building "D" at 13751 South
Wadsworth Park Drive, Draper, UT, 84020 (the "Building").
(b) Additional Use. In addition, the Premises shall include the
appurtenant right to use, in common with others, the site, parking and
landscaped areas. Landlord shall provide Tenant, at no additional charge, the
use of 33 non-reserved parking stalls in the adjacent parking lot.
(c) Acceptance of Premises. Unless otherwise notified by Tenant
within thirty (30) days of taking possession, by entry hereunder Tenant accepts
the Premises as being in the condition in which Landlord is obligated to
deliver the Premises. Tenant shall at the end of the term and any extension
herein, surrender to Landlord the Premises and all alterations, additions and
improvements thereto in and same condition as when received; ordinary wear and
tear, damage by fire, earthquake, or act of God excepted. Landlord has no
liability and has made no representation to alter, improve, repair or paint the
Premises or any part thereof, except as specified in Article 2(c), 2(d) and 6
herein.
2. TERM, OPTION, TENANT IMPROVEMENTS.
(a) Lease Term. The initial Lease Term shall be six (6) years and
shall commence November 5, 1996 ("Commencement Date"), which Commencement Date
is subject to the substantial completion of Tenant Improvements. If Landlord
is solely responsible for not delivering possession of the Premises to Tenant
within forty-five (45) days of the Commencement Date, Tenant may upon ten (10)
days written notice terminate the Lease. In the event of Tenant's termination
due to late delivery, Landlord shall not be liable to tenant for any damage of
any kind resulting from such late delivery or failure to deliver possession of
the Premises.
(b) Option. Provided that Tenant is not in default under the
Lease, Tenant may by written notice to Landlord, not later than one hundred
fifty (150) days prior to the expiration of the Lease, extend the Lease by
exercising a (one-time) 5-year option on a timely basis. Tenant shall possess
the Premises during the Option period upon the same terms and conditions of the
Lease,
<PAGE> 2
except that Base Rent under Article 4(a) herein will be adjusted for the Option
period to the then fair market rate for similar space in similar condition in
the surrounding area.
(c) Base Building Improvements. At Landlord's sole cost and
expense, Landlord shall design, construct and install the Building's roof and
structural elements ("Shell"), shall provide basis utility access to and an
initial HVAC unit for the Premises, and shall design and construct the common
areas of the Premises and Building, as more specifically outlined in Exhibit B
- - Base Building Improvements (collectively "Base Building Improvements").
(d) Tenant Improvements. At execution of the Lease, Landlord shall
commence the building design, construction and installation of agreed-upon
Tenant Improvements requested by Tenant, as more specifically outlined in
Exhibit C - Tenant Improvements (collectively "Tenant Improvements"). Tenant
Improvements shall include all improvements to the Premises, but exclude the
Base Building Improvements.
(e) Substantial Completion of Tenant Improvements. The Premises
shall be deemed complete when Landlord has substantially completed the Tenant
Improvements. "Substantial Completion" shall mean when (i) installation of
Tenant Improvements has occurred, (ii) Basic utility services are available to
the Premises, (iii) Landlord's Architect/Contractor shall have issued a
Certificate of Substantial Completion with respect to Premises or that portion
of the Building within which they are contained, whether or not Substantial
Completion of the entire Building itself shall have occurred, and (iv) issuance
of a temporary Certificate of Occupancy. Substantial Completion shall be
deemed to have occurred notwithstanding a requirement to complete "punch-list"
work, which shall be completed within a reasonable time by Landlord. Landlord
shall use its best efforts to advise Tenant of Substantial Completion at least
thirty (30) days prior to such date, but the failure to give such notice shall
not constitute a default hereunder by Landlord.
3. NON-OCCUPANCY OF IMPROVED SPACE.
In the event Tenant does not occupy the Premises and fails to pay Rents
as required in Article 4 of the Lease, all costs for Tenant Improvements become
due and payable upon invoicing by Landlord, subject to reasonable mitigation by
Landlord for use with next tenant. Further, such invoicing by Landlord does
not waive any other rights or remedies Landlord may have against Tenant for
failure to occupy.
4. RENT.
(a) Base Rent. Total Base Rent shall be $9.75 per Rentable square
foot X 6,500+- square feet X 6 years ($380,250+-, subject to an annual increase
as provided below), payable as follows: $5,281+- per month payable in advance
on or before the 1st day of each month during the duration of the Lease, with
the first and last such monthly rental payments being due upon the execution of
the Lease. This Base Rent is estimated herein since the square footage is
approximated. The exact Base Rent will be determined according to the square
footage stated in the final space plan. Any partial months shall be prorated
accordingly. Base Rent under this Article shall be increased four (4%) percent
per year during the Lease Term and during any Option period (after adjustment
to fair market value at beginning of any Option period). Base Rent during the
Term of the Lease shall never decrease. All Base Rent and Additional Rent
(collectively "Rents") shall be paid as follows,
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unless otherwise directed in writing: Draper Land Partnership II, 71 East
Wadsworth Park Dr., Draper, UT 84020, Attn:: Kip Wadsworth.
(b) Additional Rent. All obligations payable by Tenant under the
Lease other than Base Rent are called "Additional Rent." Additional Rent shall
be paid monthly with Base Rent pursuant to the Lease, unless otherwise invoiced
by Landlord.
(c) Interest, Late Charges, Costs and Attorneys' Fees. If Tenant
fails to pay within ten (10) days of the date due any Rents which Tenant is
obligated to pay under the Lease, the unpaid amount shall bear interest at ten
(10%) percent per annum. Tenant acknowledges that any late payments of Rents
shall cause Landlord to lose the use of that money and incur costs and expenses
not contemplated under the Lease, including without limitation administrative,
collection and accounting costs, the exact amount of which is difficult to
ascertain. Therefore, in addition to interest, any late payments shall be
accompanied by a payment of a late charge equal to five (5%) percent of the
late Rents. Further, as Additional Rent, Tenant shall be liable to Landlord
for reasonable costs and attorneys' fees incurred as a result of late payments
or non-payments. Acceptance of any interest, late charge, costs or attorneys'
fees shall not constitute a waiver of any default by Tenant nor prevent
Landlord from exercising any other rights or remedies under the Lease or at
law.
5. USE.
(a) The Premises shall be used for general office use, storage and
any other lawful purpose incidental to Tenant's business, and no other, unless
consented to in writing by Landlord. Tenant shall not do or permit to be done
in or about the Premises or Building anything which is prohibited by or in any
way in conflict with any and all laws, statutes, ordinances, rules and
regulations now in force or which may hereafter be enacted or promulgated or
which is prohibited by the standard form of fire insurance policy, or which
will increase the existing rate of or affect any fire or other insurance upon
the Presides or Building or any of its contents, or cause a cancellation of any
insurance policy covering the Premises or Building or any part thereof or any
of its contents. Tenant shall not handle, use, store or otherwise put any
hazardous material on the Premises, without first notifying Landlord of its
intention to do so and identifying the hazardous material and safety plan which
shall ensure that nay such hazardous material is properly controlled,
safeguarded, and disposed of, and obtaining Landlord's prior written consent,
which consent may be reasonably withheld and may be conditioned upon absolute
indemnification by Tenant and accompanying bond. Tenant shall not do or permit
anything to be done in or about the Premises or Building which will in any way
violate rules or Regulations reasonably promulgated by Landlord throughout the
Lease, obstruct or interfere with the right of other tenants, or injure them,
or use or allow the Premises or building to be used for any improper, immoral,
or unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance,
in, on or about the Premises or Building or commit or suffer to be committed
any waste in, on or about the Premises or Building.
(b) Tenant shall not use the name of the Building in which the
Premises are located, in connection with any business carried on in said
Premises (except as Tenant's address) without written consent of Landlord.
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(c) Tenant shall not manufacture, assemble or store materials
inside the common areas outside of Building.
6. LANDLORD'S SERVICES.
Landlord, at its sole cost and expense, is responsible to maintain only
the roof and structural elements ("Shell") of the Premises and Building. All
Operating Expenses, including but not limited to repairs, maintenance, common
area utilities, common area janitorial, sewer and garbage, insurance, taxes,
and property management on the Premises, Building, and common areas shall be
coordinated by Landlord, but are the financial responsibility of the Tenant
through prorated billings as more fully outlined in Article 7 herein.
7. OPERATING EXPENSES - REPAIRS, MAINTENANCE, INSURANCE, TAXES AND PROPERTY
MANAGEMENT (EXCLUDES ELECTRIC, GAS AND OFFICE JANITORIAL).
Since the Premises is part of a Building or group of buildings, Tenant is
responsible for a prorated share of Operating Expenses, including but not
limited to repairs, maintenance, common area utilities, common area janitorial
(not specific tenant janitorial), water, sewer and garbage, insurance, taxes,
and property management incurred in the operation and management of the
Premises, Building, and common areas as shall be reasonably determined by the
Landlord. For purposes of the Lease, Operating Expenses specifically exclude
electric, gas, and janitorial expenses for the office space portion (excluding
common areas) of Tenant's Premises which are separately billed to Tenant and
which are the sole responsibility of Tenant. Proration shall be on a square
footage basis with all other tenants and Tenant's proration shall be calculated
by multiplying the Operating Expenses by an equation, the numerator being the
Rentable square feet of the Premises and the denominator being the total
Rentable square feet of the Building. The Operating Expenses shall be prorated
to Tenant and be payable by Tenant as Additional Rent on a monthly basis, and
subject to the following terms and conditions:
(a) Prorated Share. Tenant's prorated share of the Operating
Expenses shall be computed and paid in twelve (12) equal monthly estimated
payments as determined in the Landlord's reasonable discretion. Such
Additional Rent shall be paid by Tenant on or before the 1st day of each month
with the Base Rent. As soon as is reasonably possible, but in any event within
ninety (90) days following the end of each calendar year, Landlord shall
furnish to Tenant a statement showing the Premises' and Building's actual
Operating Expenses for the preceding calendar year. In the case of a
deficiency, Tenant shall promptly remit its prorated share of such deficiency
to Landlord. In the case of a surplus, Landlord shall apply said surplus to
the next Additional Rent due from Tenant.
(b) Right to Review. Tenant may review at his sole cost and
expense any Operating Expenses prorated to Tenant by Landlord, including
assessed Real Estate Taxes as may be statutorily allowed. Landlord shall make
available the applicable Operating Expenses' invoices and statements. However,
any such review must be requested and completed within sixty (60) days of
receipt of the annual statement.
8. ALTERATIONS.
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(a) Tenant will not make or suffer to be made any alterations,
additions or improvements in excess of $1,000, excluding the initial Tenant
Improvements, (collectively "Alterations") to or upon the Premises, Building,
or any part thereof, or attach any fixtures or equipment thereto, without first
obtaining Landlord's written approval, which shall not be unreasonably withheld
or delayed. Any Alterations to or upon the Premises shall be made by Tenant at
Tenant's sole cost and expense and any contractor selected by Tenant to make
the same shall be subject to Landlord's reasonable prior written approval. All
such Alterations permanent in character, made in or upon the Premises either by
Tenant or Landlord, may at the option of Landlord, become Landlord's property
and, at the end of the term or any extension hereof, shall remain on the
Premises without compensation to Tenant unless Landlord requests that Tenant
remove any such Alterations. Notwithstanding the above, Tenant's work stations
and other items of personal property shall remain Tenant's property.
(b) Any Alternations shall, when completed, be of such a character
as not to lessen the value of the Premises or such improvements as may be then
located thereon. Any Alterations shall be made promptly and in a good
workmanlike manner and in compliance with all applicable permits and
authorizations and building and zoning laws and with all other laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments, departments, commissions, boards and offices. The
costs of any such Alterations shall be paid by Tenant, so that the Premises be
free of liens, for services performed, labor and material supplied or claimed
to have been supplied. Before any Alternations shall be commenced, Tenant
shall pay any increase in premiums on insurance policies (provided for herein)
or ensure adequate coverage is in place for all risks related to the
construction of such Alterations and the increased value of the Premises.
9. PERSONAL PROPERTY & SIGNAGE.
Placement of signs on a monument, if any, including the type, size and
lighting of the signs, must be approved in writing by Landlord prior to their
installation. Such personal property must be removed at the end of the Lease
Term, any Option period herein if applicable, or upon Tenant's failing to have
possession of the Premises.
10. LIENS.
Tenant shall keep the Premises and the Building free from any mechanics'
and/or materialmen's liens or other liens arising out of any work performed,
materials furnished or obligations incurred by Tenant. Tenant shall notify
Landlord in writing at least seventy-two (72) hours before any work or activity
is to commence on the Premises which may give rise to such liens to allow
Landlord to post and keep posted on the Premises any notices which Landlord may
deem to be proper for the protection of Landlord and the Premises from such
liens.
11. DESTRUCTION OR DAMAGE.
(a) If the Premises is partially damaged by fire, earthquake, or other
Act of God, Landlord shall repair the same at Landlord's expense, subject to
the provisions of this Article and provided such repairs can, in Landlord's
reasonable opinion, be made within sixty (60) days. During such repairs, the
Lease shall remain in full force and effect, except that if there shall be
damage to the Premises and such damage is not the result of the negligence or
willful misconduct of Tenant,
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Tenant's employees, agents, or invitees, an abatement of Rents shall be allowed
Tenant for such portion of Premises and period of time as the Premises was
unusable by Tenant.
(b) If in Landlord's reasonable opinion the partially damaged Premises
can be repaired, but not within sixty (60) days, the Landlord may elect, upon
written notice to Tenant within thirty (30) days of such damages, to repair
such damages over a longer time period and continue the Lease in full force and
effect, but with Rents partially abated as provided in Article 11(a). In the
event such repairs cannot be made within sixty (60) days, Tenant shall have the
option to terminate the Lease provided that written notice is given to Landlord
within thirty (30) days of receipt of Landlord's notice stated in this
paragraph.
(c) If the partially damaged Premises is to be repaired under this
Article, Landlord shall repair such damages to the Premises itself, and to the
Tenant Improvements supplied by Landlord herein. Except in the event of
Landlord's gross negligence or willful misconduct, Tenant shall be responsible
for Tenant's equipment, furniture and fixtures, and other alterations,
additions and improvements made by Tenant to the Premises and Building.
(d) If in Landlord's reasonable opinion, the Premises is totally or
substantially destroyed by fire or other casualty, the Lease shall terminate
upon notice by Landlord.
12. SUBROGATION.
Landlord and Tenant shall each, prior to Tenant's taking possession or
immediately after the execution of the Lease, procure from each of the insurers
under all policies of fire, theft, public liability, workmen's compensation and
other insurance now or hereafter existing during the term and any extension
hereof and purchased by either of them insuring or covering the Premises and/or
Building or any portion thereof or operations therein, a waiver of all rights
of subrogation which the insurer might otherwise, if at all, have against the
other.
13. INDEMNIFICATION.
Tenant and Landlord hereby agree to indemnify and hold the other party
harmless from any damage to any property, including the release of any
hazardous materials, or injury to or death of any person arising from the use
of the Premises, Building, or common areas by Tenant or the ownership,
management or maintenance of the Premises, Building, or common areas by
Landlord, except such as is caused by reason of the negligent or willful act of
the other party, its agents, employees or contractors. The foregoing indemnity
obligation of Tenant and Landlord shall include reasonable fees, investigation
costs and all other reasonable costs and expenses incurred by Landlord or
Tenant from the first notice that any claim or demand is made, except in the
event of the other party's negligence or willful misconduct. The provisions of
this Article shall survive the Lease's termination with respect to any damage,
injury or death occurring prior to such termination.
14. COMPLIANCE WITH LEGAL REQUIREMENT.
Tenant shall, at its sole cost and expense, promptly comply with all laws,
statutes, ordinances and governmental rules, regulations or requirements now in
force or which may hereafter be in force, the requirements of any board of fire
underwriters or other similar body now or hereafter
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constituted, any direction or occupancy certificate issued pursuant to any law
by any public officer or officers, as well as the provisions of all recorded
documents affecting the Premises, (collectively the "Applicable Laws"), insofar
as any thereof relate to or affect the use or occupancy of the Premises,
Building, or common areas, excluding requirements of structural changes now
related to or affected by improvements made by or for Tenant.
Landlord shall, at its sole cost and expense, promptly comply with all
Applicable Laws, including the American with Disabilities Act ("ADA"), insofar
as any thereof relate to or affect Landlord's obligations under the Lease, or
its ownership of the Premises, Building, or common areas, except for Tenant's
requirements in the immediately preceding paragraph herein.
15. INSURANCE.
(a) Commercial General Liability. Tenant shall, maintain a Commercial
General Liability policy including all coverages normally provided therein.
Such policies shall specifically name Landlord as an additional insured, with a
cancellation period of thirty (30) days prior written notice of any
cancellation. A Certificate of Insurance shall be provided to Landlord. All
policies of insurance shall be issued by responsible insurance companies
licensed to do business in the State of Utah.
The minimum limits of coverage acceptable area:
(i) $1,000,000 Each Occurrence Combined Single
Limit for Bodily Injury and Property Damage
and
(ii) $2,000,000 Annual Aggregate
(b) Premises and Building Insurance. Landlord shall insure the
Premises and Building, including Landlord supplied Core and Shell and Tenant
Improvements as deemed necessary in Landlord's reasonable discretion. Tenant
shall pay its prorate share for such insurance as outlined in Article 7 herein,
involving Tenant's prorated share of Operating Expenses. All policies of
insurance shall be issued by responsible insurance companies licensed to be
business in the State of Utah.
(c) Tenant's Additional Insurance. Tenant may, at its sole cost and
expense, cause all equipment, machinery, furniture and fixtures, personal
property, and Tenant Improvements supplied by Tenant from time to time used or
intended to be used in connection with the operation and maintenance of the
Premises, to be insured by Tenant against loss or damage. Except for losses
caused by Landlord's gross negligence or willful misconduct, Landlord is in no
way liable for any uninsured Tenant's property.
16. ASSIGNMENT AND SUBLETTING.
In the event Tenant should desire to assign the Lease or sublet the
Premises, Tenant shall give Landlord written notice of such desire at least
ninety (90) days in advance of the date on which Tenant desires to make such
assignment or sublease. Landlord shall then have a period of thirty (30) days
following receipt of such notice within which to notify Tenant in writing that
Landlord elects
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either (i) to terminate the Lease as of the date so specified by Tenant, in
which event Tenant will be relieved of all further obligations hereunder, or
(ii) to permit Tenant to assign or sublet such space, subject to prior written
approval of the proposed assignee by Landlord, such consent not to be
unreasonably withheld or delayed, so long as the use of the Premises by the
proposed assignee would be a permitted use and the proposed assignee is of
sound financial condition as determined in Landlord's reasonable discretion. If
Landlord should fail to notify Tenant in writing of such election within said
thirty (30) day period, Landlord shall have deemed to have waived option (i)
above, but written approval by Landlord of the proposed assignee shall still be
required. Failure by Landlord to approve a proposed assignee shall not cause a
termination of the Lease. Any rents or other consideration realized by Tenant
under any such sublease and assignment in excess of the Rents hereunder, after
amortization of the reasonable costs of extra tenant improvements for which
Tenant has paid and reasonable subletting and assignment costs, shall be
divided and paid ten percent (10%) to Landlord and ninety percent (90%) to
Tenant.
Notwithstanding the above, Tenant shall have the right to sublease or
assign all or any portion of the Premises during the Term or any Option period
to any related entity, subsidiary, or affiliate of Tenant, having at least
fifty-one (51%) percent direct common ownership, without having to receive
Landlord's consent, but still requiring written notice to Landlord on or before
such sublease or assignment. No assignment or subletting by Tenant without the
express written consent of Landlord shall relieve Tenant of any obligation
under the Lease. Any assignment or subletting which conflicts with the
provisions hereof shall be void.
17. RULES.
Tenant shall faithfully observe and comply with all Rules and Regulations
reasonably promulgated by Landlord, in writing and after reasonable notice,
during the Term or any Option period herein. Landlord must apply rules
equitably against all Tenants, but shall not be responsible to Tenant for the
non-performance by other Building tenants, or adjacent buildings' tenants, of
any of said Rules and Regulations.
18. ENTRY BY LANDLORD.
The Landlord may enter the Premises or Building at reasonable hours and
upon 24 hours reasonable written notice to Tenant to (a) inspect the same, (b)
show the same to prospective purchasers, lenders or tenants, (c) determine
whether Tenant is complying with all of Tenant's obligations hereunder, (d)
post notices of non-responsibility or (e) make repairs required of Landlord
under the Lease, repairs to adjoining space or utility service, or make
repairs, alterations or improvements to the Building, provided that all such
work shall be done as promptly as possible and with as little interference to
Tenant as reasonably possible. Tenant hereby waives any claim for damages for
any inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Premises occasioned by such entry.
Landlord shall at all times have and retain a key to unlock all doors in, on or
about the Premises (excluding Tenant's vaults, safes and similar areas
designated in writing by Tenant). In the event of an emergency, Landlord shall
have the right to use any and all means which Landlord may deem proper to enter
the Premises, without notice, for the limited purpose of abating as possible
said emergency. Such emergency entrance shall not be construed or deemed to be
a forcible or unlawful entry into or a detainer of the Premises or an eviction,
actual or constructive, of Tenant from the Premises, or any portion thereof.
Entry
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by Landlord for non-emergencies shall be limited to regular business hours and
only with an officer of Tenant present.
19. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of the Lease by Tenant: (a) if Tenant
fails to pay Rents when and as the same becomes due and payable and such
failure continues for more than ten (10) days after written notice thereof, or
(b) if Tenant fails to pay any other sum when and as the same becomes due and
payable and such failure continues for more than ten (10) days after receipt of
written notice thereof; or (c) if Tenant fails to perform or observe any
material term or condition of the Lease, such failure continues for more than
thirty (30) days after written notice from Landlord, and Tenant does not within
such period begin with due diligence and dispatch the curing of such default,
or, having so began, thereafter fails or neglects to complete with due
diligence and dispatch the curing of such default; or (d) if Tenant shall make
a general assignment for the benefit of creditors, or shall admit in writing
its inability to pay its debts as they become due or shall file a petition in
bankruptcy, or shall be adjudicated as bankrupt or insolvent, or shall file a
petition seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, or shall file any answer admitting or shall fail timely to
contest the material allegations of a petition filed against it in any such
proceeding, or shall seek or consent to or acquiescence in the appointment of
any trustee, receiver or liquidator of Tenant or any material part of its
properties; or (e) if within sixty (60) days after the commencement of any
proceeding against Tenant seeking any reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief under any present or
future statute, law or regulation, such proceeding shall not have been
dismissed, or if, within sixty (60) days after the appointment without the
consent or acquiescence of Tenant, of any trustee, receiver or liquidator of
Tenant or of any material part of its properties, such appointment shall not
have been vacated; or (f) vacation or abandonment of the Premises for a
continuous period in excess of fifteen (15) days after initial occupancy, or
(g) if the Lease or any estate of Tenant hereunder shall be levied upon under
any attachment or execution and such attachment or execution is not vacated
within thirty (30) days of receipt thereof by Tenant.
20. TERMINATION UPON TENANT'S DEFAULT.
If an Event of Default shall occur, Landlord at any time thereafter may
give a written termination notice to Tenant, and on the date specified in such
notice (which shall not be less than three 93) days after service) Tenant's
right to possession shall terminate and the Lease shall terminate, unless on or
before such date all Rents, arrearages and other sums due by Tenant under the
Lease, including reasonable costs and attorneys' fees incurred by or on behalf
of Landlord, shall have been paid by Tenant and all other Events of Default by
Tenant shall have been fully cured to the satisfaction of Landlord. Upon such
termination, Landlord may recover from Tenant:
(a) the worth at the time of award of the unpaid Rents 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
Rents which would have been earned after termination until the time of award
exceeds the amount of such Rents loss that Tenant proves could have been
reasonably avoided; plus
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(c) the worth at the time of award of the amount by which the
unpaid Rents for the balance of the term of the Lease after the time of award
exceeds the amount of such Rents loss that Tenant proves could be reasonably
avoided; and plus
(d) any other amount reasonably necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom; and/or
(e) At Landlord's elections, such other amounts in addition or in
lieu of the foregoing as may be permitted from time to time herein or by
applicable law.
The "worth at the time of award" of the amounts referred to in clauses
(a) and (b) above is computed by allowing interest at the rate of 10% per
annum. The "worth at the time of award: of the amount referred to in clause (c)
above means the monthly sum of the Rents under the Lease. Failure of Landlord
to declare any default immediately upon occurrence thereof, or delay in taking
any action in connection therewith, shall not waive such default, but Landlord
shall have the right to declare any such default at any time thereafter.
21. CONTINUATION AFTER DEFAULT.
Even though Tenant has defaulted the Lease and abandoned the Premises,
the Lease shall continue in effect as long as Landlord does not terminate
Tenant's right to possession, and Landlord may enforce all of its rights and
remedies under the Lease, including the right to recover the Rents as they
become due under the Lease. Act of maintenance or preservation or efforts to
relet the Premises or the appointment of a receiver upon initiative of Landlord
to protect Landlord's interest under the Lease shall not constitute a
termination of Tenant's right to possession. If any fixture, equipment,
improvement, installation or appurtenance shall be required to be removed from
the Premises and/or Building by Tenant, then Landlord (in addition to all other
rights and remedies) may, at its election by written notice to Tenant, deem
that the same has been abandoned by Tenant to Landlord, or Landlord may remove
and store the same and restore the Premises to its original condition at the
reasonable expense of Tenant, as Additional Rent to be paid within ten (10)
days after written notice to Tenant of such expense.
22. LANDLORD'S DEFAULT.
If Landlord fails to perform or observe any of its material Lease
obligations herein and such failure continues for thirty (30) days after
written notice from Tenant, or such additional time, if any, that is reasonable
necessary to promptly and diligently cure such failure after receiving written
notice, Landlord shall be in breach of the Lease (a "Default"). If Landlord
commits a Default, Tenant may pursue any remedies given in the Lease or under
law, including without limitation a termination of the Lease and return of all
deposits.
23. LANDLORD'S RIGHT TO CURE DEFAULTS.
All terms and provisions to be performed by Tenant under the Lease
shall be at Tenant's sole cost and expense and without any abatement of Rents.
If Tenant fails to pay any sum of money, other than Rents, required hereunder
or fails to perform any other act required hereunder and such
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failure continues for thirty (30) days after notice by Landlord, Landlord may,
but shall not be obligated, and without waiving or releasing Tenant from any
obligations of Tenant, make any such payment or perform any such act on
Tenant's part to be made or performed as provided in the Lease. All sums paid
by Landlord and all incidental costs shall be deemed Additional Rent hereunder
and shall be payable within ten (10) days after written notice of such sums
paid.
24. OTHER RELIEF.
The remedies provided for in the Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
25. ATTORNEYS' FEES.
In the event either party places the enforcement of Lease, or any part
thereof, or the collection of any Rents, or recovery of the possession of the
Premises, or files suit upon the same, then the prevailing party shall recover
its reasonable attorneys' fees and costs.
26. EMINENT DOMAIN.
If all or any part of the Premises shall be taken or conveyed as a
result of the exercise of the power of eminent domain, the Lease shall
terminate as to the part so taken as of the date of taking, and, in the case of
a partial taking, either Landlord or Tenant shall have the right to terminate
the Lease as to the balance of the Premises by written notice to the other
within thirty (30) days after such date; provided, however, that a condition to
the exercise by Tenant of such right to terminate shall be that the portion of
the Premises taken or conveyed shall be of such extent and nature as
substantially to handicap, impede or impair Tenant's use of the balance of the
Premises. In the event of any taking, Landlord shall be entitled to any and
all compensation, damages, income, rent awards or any interest therein
whatsoever which may be paid or made in connection therewith, and Tenant shall
have no claim against Landlord for the value of any unexpired term of the Lease
or otherwise, provided that Tenant shall be entitled to any and all
compensation, damages, income, rent or awards paid for or on account of
Tenant's moving expenses, trade fixtures, equipment and any leasehold
improvements in the Premises, the cost of which was borne by Tenant, to the
extent of the then unamortized value of such improvements for the remaining
term of the Lease. In the event of a taking of the Premises which does not
result in a termination of Lease, the monthly rental herein shall be
apportioned as of the date of such taking so that thereafter the rent to be
paid by Tenant shall be in the ratio that the area of the Premises not so taken
bears to the total areas of the Premises prior to such taking.
27. SUBORDINATION, ATTORNMENT & NONDISTURBANCE; AND ESTOPPEL CERTIFICATE.
At Landlord's request, Tenant agrees to execute, acknowledge, and
deliver within ten (10) days to Landlord a Subordination, Attornment &
Nondisturbance Agreement ("Subordination Agreement"), subject to Landlord's
reasonably proposed form(s). Such Subordination agreement shall subordinate
the Lease to any ground lease, mortgage, deed of trust, or any other
hypothecation for security now or hereafter placed upon the Premises, Building
or common areas, or any part thereof, to any and all advances made on the
security, and to all renewals, modification,
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consolidations, replacements and extensions thereof, whether the Lease is dated
prior or subsequent to the date of said ground lease, mortgage, deed of trust
or other hypothecation or the date of recording thereof. Further, at
Landlord's request, Tenant agrees to execute, acknowledge, and deliver within
ten (10) days to Landlord an Estoppel Certificate, subject to Landlord's
reasonably proposed form(s). Such Subordination Agreement and Estoppel
Certificate may be relied upon by any prospective purchaser, mortgagee, or
beneficiary under any ground lease, mortgage, deed of trust, or any other
hypothecation of the Premises, Building, or common areas, or any part thereof.
Notwithstanding such Subordination Agreement, Tenant's right to quiet
possession of the Premises shall not be disturbed so long as Tenant is not in
default under the Lease, unless the Lease is otherwise terminated pursuant to
its terms.
In the event that Tenant fails to execute, acknowledge, and deliver to
Landlord such Subordination Agreement and Estoppel Certificate within ten (10)
days of Landlord's request, the parties herein expressly agree that Tenant
shall be deemed in default of the Lease without further notice. In such event,
the parties herein further expressly agree that the Subordination Agreement and
Estoppel Certificate are deemed to have been executed by Tenant.
28. NO MERGER.
The voluntary or other surrender of the Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
29. SALE.
In the event the original Landlord hereunder, or any successor owner of
the Premises, Building, and common areas shall sell or convey the Premises,
Building, and common areas, and the purchaser assumes the obligations of
Landlord under the Lease, all liabilities and obligation on the part of the
original Landlord, or such successor owner, under the Lease accruing after such
Sale shall terminate, and thereupon all such liabilities and obligations shall
be binding upon the new owner. Tenant agrees to attorn to such new owner.
30. NO LIGHT OR VIEW EASEMENT.
Any diminution or shutting off of light or view by any, structure
erected on lands adjacent to the Building shall in no way affect the Lease or
impose any liability on Landlord.
31. HOLDING OVER.
If, without objection by Landlord, Tenant holds possession of the
Premises after expiration of the Term or any Option period of the Lease, Tenant
shall become a tenant from month to month upon the terms herein specified, but
at a monthly Base Rent equivalent to 125% of the Base Rent at the end of the
term or extension period pursuant to Article 4, payable in advance on or before
the 1st day of each month. All Additional Rent shall also apply. Each party
shall give the other notice at least one month prior to the date of termination
of such monthly tenancy of its intention to terminate such tenancy.
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<PAGE> 13
32. ABANDONMENT.
If Tenant shall abandon (as set forth in paragraph 19(f) of this
agreement) or surrender the Premises, or be dispossessed by process of law or
otherwise, any personal property belonging to Tenant and left on the Premises
shall be deemed to be abandoned, at the option of Landlord, except such
property as may be mortgaged to Landlord.
33. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon execution of the Lease a
security deposit in the amount of the last month's rent ($6,425+-) ("Security
Deposit"). The Security Deposit shall be held by Landlord as security for the
faithful performance by Tenant of all of the provisions of the Lease to be
performed or observed by Tenant. In the event Tenant fails to perform or
observe any of the provisions of the Lease to be performed or observed by it,
then, at the option of the Landlord, Landlord may (but shall not be obligated
to do so) apply the Security Deposit, or so much thereof as may be necessary to
remedy such default or to repair damages to the Premises caused by Tenant. In
the event Landlord applies any portion of the Security Deport to remedy any
such default or to repair damages to the Premises caused by Tenant, Tenant
shall pay to Landlord, within thirty (30) days after written demand for such
payment by Landlord, all monies necessary to restore the Security Deposit up to
the original amount. Any portions of the Security Deposit remaining upon
termination of the Lease shall be returned.
34. WAIVER.
All waivers by either party herein must be in writing and signed by
such party. The waiver of any term or conditions herein shall not be deemed to
be a waiver of any subsequent breach of the same or any other agreement,
condition or provision herein contained, not shall any custom or practice which
may grow upon between the parties in the administration of the terms hereof be
construed to waive or to lessen the right of either party to insist upon the
performance by the other party in strict accordance with said terms. The
subsequent acceptance of Rents hereunder by Landlord shall not be deemed to be
a waiver of any breach by Tenant of any term or condition of the Lease,
regardless of Landlord's knowledge of such breach at the time of acceptance of
such Rents.
35. NOTICES.
All notices and demands which may or are required to be given by either
party to the other under the Lease shall be in writing and shall be deemed to
have been fully given when deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: to Tenant at 13751
South Wadsworth Park Drive, Draper, UT 84020, Attn: Jonathan Coon, or to such
other place as Tenant may from time to time designate in a notice to Landlord
at Draper Land Partnership II, 71 East Wadsworth Park Drive, Draper, UT
84020, Attn: Kip Wadsworth, or to such other place as Landlord may from time
to time designate in a notice to Tenant, or in the case of Tenant, delivered to
Tenant at the Premises. Tenant hereby appoints as its agent to receive the
service of all dispossessory or distraint proceedings and notices hereunder the
person in charge of or occupying
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<PAGE> 14
the Premises at the time, and if no person shall be in charge of or occupying
the same, then service may be made by attaching same on the main entrance of
the Premises.
36. COMPLETE AGREEMENT.
There are no oral agreements between Landlord and Tenant affecting the
Lease, and the Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between
Landlord and Tenant with respect to the subject matter of the Lease. The Lease
may not be altered, changed or amended, except by an instrument in writing
signed by both parties hereto.
37. CORPORATE AUTHORITY.
The person(s) executing the Lease on behalf of the parties herein
hereby covenants and warrants that (a) such party is a duly authorized and
validly existing entity under the laws in which it was formed, (b) such party
has and is qualified to do business in Utah, (c) such entity has full right and
authority to enter into the Lease, and (d) each person executing the Lease on
behalf of such entity is authorized to do so.
38. GUARANTEE OF LEASE.
Tenant guarantees, upon execution of the Lease, to occupy the Premises.
Any failure to occupy the Premises does not release the Tenant from the
obligation of paying Rents or any other terms set forth herein.
39. MISCELLANEOUS.
(a) The words "Landlord" and "Tenant" as used herein shall include
the plural as well as the singular. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several.
(b) Time is of the essence on the Lease and each and all of its
terms and conditions.
(c) The terms and conditions herein shall apply to and bind the
heirs, executors, administrators, successors and assigns of the parties hereto.
(d) The captions of the Lease are solely to assist the parties and
are not a part of the terms or conditions of the Lease.
(e) The Lease shall be governed by and construed in accordance with
the laws of the State of Utah, and is deemed to be executed within the State of
Utah.
40. SEVERABILITY.
If any term provision of the Lease, or the application thereof to any
person or circumstance, shall to any extent be invalid or unenforceable, the
remainder of the Lease, or the application of such provision to persons or
circumstances other than those as to which it is invalid or unenforceable,
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<PAGE> 15
shall not be affected thereby, and each provision of the Lease shall be valid
and shall be enforceable to the extent permitted by law.
41. BROKERS.
Landlord is represented by Prime Commercial, Inc. Agreed-upon
commissions shall be due and payable by Landlord upon execution.
42. PERFORMANCE DELIVERY.
In the event the Landlord does not deliver the premises substantially
complete on or before November 5, 1996, the Landlord will provide the Tenant
two (2) days free base rent for each day of delayed delivery. The Tenant
agrees to cooperate completely with the Landlord and agrees to make all
necessary decisions relating to the space completion promptly.
IN WITNESS WHEREOF, the parties have executed the Lease dated the day
and year first above written.
TENANT, LANDLORD,
1-800-LENS NOW, INC., DRAPER LAND PARTNERSHIP II
dba 1-800-CONTACTS
By: /s/ Jonathan Coon By: /s/ Kip Wadsworth
---------------------------- --------------------------
Its: President Its: Partner
---------------------------- --------------------------
By: /s/ John F. Nichols
----------------------------
Its: Vice President
----------------------------
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<PAGE> 16
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment") dated this 24th day of
October, 1996, is entered into by and between DRAPER LAND PARTNERSHIP II,
L.C., a Utah Limited Liability Company ("Landlord"), and 1-800-LENS NOW, INC.,
dba 1-800 CONTACTS, a Utah corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, the Landlord and Tenant entered into a Lease dated September 4,
1996, ("Lease") which is incorporated herein by reference:
WHEREAS, the parties hereto desire to amend certain terms and conditions
of the Lease as specifically indicated in this Amendment. However, unless
specifically amended herein, all terms and conditions of the Lease and 1st
Amendment remain in full force and effect:
NOW THEREFORE, in consideration of the mutual promises, representation
and covenants contained herein, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. The recitals contained herein are hereby incorporated by reference.
2. Article 1(a) shall be replaced in its entirety by the following:
1(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, for the term and subject to the terms and conditions hereinafter set
forth, to each and all of which Landlord and Tenant hereby mutually agree,
those certain premises ("Premises"), highlighted on Exhibit A attached hereto,
which include approximately 6,319 Rentable square feet (approximately 5,582
Useable), as determined by final space plan. The location of the Premises and
related Building is commonly known as: 13751 South Wadsworth Park Drive,
Building #D, Suite #140, Draper, UT 84020 (the "Building").
3. Article 4(a) shall be replaced in its entirety by the following:
4(a) Base Rent. Total Annual Base Rent (triple net - NNN) shall begin at
$61,061.28, (9.75 per Rentable sq. ft. X 6,319 sq. ft.), payable as follows:
$5,134.19 per month, payable in advance each month on or before the 1st day of
each month during the duration of the Lease, with the first and last such
monthly rental payments being due upon the execution of the Lease. Any partial
months shall be prorated accordingly. Base Rent under this Article will be
increased four (4%) percent annually during the Lease Term, and during any
Option Period (after adjustment to fair market value at beginning of any Option
period). Base Rent during the Term of the Lease or any option period shall
never decrease. All Base Rent and Additional Rent (collectively "Rents") shall
be paid as follows, unless otherwise directed in writing: Draper Land
Partnership II, L.C.; Attn: Kip Wadsworth; 71 East Wadsworth Dr., Draper, UT
84020.
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<PAGE> 17
IN WITNESS WHEREOF, the parties have executed this Lease dated the day and
year first above written.
TENANT, LANDLORD,
1-800-LENS NOW, INC., DRAPER LAND PARTNERSHIP II
dba 1-800-CONTACTS
By: /s/ Jonathan Coon By: /s/ Kip Wadsworth
-------------------------- --------------------------
Kip Wadsworth
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<PAGE> 1
Exhibit 10.7
COMMERCIAL LEASE
THIS LEASE (the "Lease") dated this 3rd day of November, 1997, is
entered into by and between DRAPER LAND LIMITED PARTNERSHIP NO. 2, a Utah
limited partnership ("Landlord"), and 1-800-LENS-NOW, INC. DBA 1-800-CONTACTS,
a Utah Corporation ("Tenant").
1. PREMISES.
(a) Description. Landlord hereby leases to Tenant, and Tenant
hereby leases from Landlord, for the term and subject to the terms and
conditions hereinafter set forth, to each and all of which Landlord and Tenant
hereby mutually agree, those certain premises (the "Premises"), highlighted on
Exhibit A attached hereto, which include approximately 23,000 Rentable square
feet of office space (the exact Rentable square footage and location to be
determined by final space plan). The location of the Premises is commonly
known as: Building B, approximately 13750 South Wadsworth Park Drive, Draper,
Utah.
(b) Additional Use. In addition, the Premises shall include the
appurtenant right to use, in common with others, the site, parking and
landscaped areas. Landlord shall provide Tenant, at no additional charge, the
use of 112 non-reserved parking stalls in the adjacent parking lot. Tenant
shall further have the use, at no additional charge, of 15 non-reserved stalls
located anywhere in the business park, subject to availability. Landlord shall
also provide Tenant with the use of an additional 65 stalls at a charge of $35
per month per stall which monthly charge shall be payable as Additional Rent.
Tenant shall be responsible for the costs of repair and maintenance on these 65
stalls which costs shall also be payable as Additional Rent.
(c) Acceptance of Premises. Unless otherwise notified by Tenant
within thirty (30) days of taking possession, by entry hereunder Tenant accepts
the Premises as being in the condition in which Landlord is obligated to
deliver the Premises. Tenant shall at the end of the term and any extension
herein surrender to Landlord the Premises and all alterations, additions and
improvements thereto in the same condition as when received; ordinary wear and
tear, damage by fire, earthquake, or act of God excepted. Landlord has no
liability and has made no representation to alter, improve, repair, or paint
the Premises or any part thereof, except as specified in Article 2(c), 2(d) & 6
herein.
2. TERM, OPTION, TENANT IMPROVEMENTS.
(a) Lease Term. The initial Lease Term shall be eighty-four (84)
months and shall commence on the earlier of substantial completion of tenant
improvements or May 25, 1998 ("Commencement Date"), which Commencement Date is
subject to the substantial completion of Tenant Improvements. If Landlord is
solely responsible for not delivering possession of the Premises to Tenant
within forty-five (45) days of the Commencement Date, Tenant may upon ten (10)
days written notice terminate the Lease. In the event of Tenant's termination
due to late delivery, Landlord shall not be liable to tenant for any damage of
any kind resulting from such late
<PAGE> 2
delivery or failure to deliver possession of the Premises. Tenant shall not be
responsible to pay any Rents for the first month of the Lease Term.
(b) Option. Provided that Tenant is not in default under the
Lease, Tenant may by written notice to Landlord, not later than one hundred
fifty (150) days prior to the expiration of the Lease, extend the Lease by
exercising a (one-time) 5-year option. Tenant shall possess the Premises
during the option period upon the same terms and conditions of the Lease,
except that Base Rent under Article 4(a) herein will be adjusted for the option
period to the then fair market rate for similar space in similar condition in
the surrounding area.
(c) Base Building Improvements. At Landlords sole cost and
expense, Landlord shall design, construct and install the Building's roof and
structural elements ("Shell"), shall provide basic utility access to and an
initial HVAC unit for the Premises, and shall design and construct the common
areas of the Premises and Building, as more specifically outlined in Exhibit B
- - Base Building Improvements (collectively "Base Building Improvements"). Any
improvements made to Building at the request of Tenant beyond those specified
in Exhibit B shall be considered Tenant Improvements.
(d) Tenant Improvements. At execution of the Lease, Landlord shall
continence the building design, construction and installation of agreed-upon
Tenant Improvements as provided for in Exhibit C - Tenant Improvements
Construction With Tenant Improvement Allowance (collectively "Tenant
Improvements").
(e) Substantial Completion of Tenant Improvements. The Premises
shall be deemed complete when Landlord has substantially completed the Tenant
Improvements. "Substantial Completion" shall mean when (i) installation of
Tenant Improvements has occurred, (ii) Basic utility services are available to
the Premises, (iii) Landlord's Architect/Contractor shall have issued a
Certificate of Substantial Completion with respect to Premises or that portion
of the Building within are contained, whether or not Substantial Completion of
the entire Building itself shall have occurred, and (iv) issuance of a
temporary Certificate of Occupancy. Substantial Completion shall be deemed to
have occurred notwithstanding a requirement to complete "punch-list" work,
which shall be completed within a reasonable time by Landlord. Landlord shall
use its best efforts to advise Tenant of Substantial Completion at least thirty
(30) days prior to such date, but the failure to give such notice shall not
constitute a default hereunder by Landlord.
3. NON-OCCUPANCY OF IMPROVED SPACE.
In the event Tenant does not occupy the Premises and fails to pay Rents
as required in Article 4 of the Lease, all costs for Tenant Improvements become
due and payable upon invoicing by Landlord, subject to reasonable mitigation by
Landlord for use with next tenant. Further, such invoicing by Landlord does
not waive any other rights or remedies Landlord may have against Tenant for
failure to occupy.
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<PAGE> 3
4. RENT.
(a) Base Rent. Total Base Rent shall be $16.50 per Rentable square
foot or (a)$379,500+-, subject to an annual increase as provided below,
payable as follows: $31,625+- per month payable in advance on or before the 1st
day of each month during the duration of the Lease, with the first such monthly
rental payments being due upon the execution of the Lease. This Base Rent is
estimated herein since the square footage is approximated. The exact Base Rent
will be determined according to the square footage stated in the final space
plan. Any partial months shall be prorated accordingly. Base Rent under this
Article shall be increased by $.60 per year after the thirteenth month of the
Lease Term and each year thereafter including during any option period (after
adjustment to fair market value at the beginning of the option period). All
Base Rent and Additional Rent (collectively "Rents") shall be paid as follows,
unless otherwise directed in writing: Draper Land Partnership II, 71 East
Wadsworth Park Dr., Draper, UT 84020, Attn: Kip Wadsworth.
(b) Additional Rent. All obligations payable by Tenant under the
Lease other than Base Rent are called "Additional Rent" and shall include but
not be limited to the costs of any Tenant Improvements to be paid by Tenant,
excess Operating Expenses and actual costs associated with the usage of the
HVAC system and lights other than during ordinary business hours. Additional
Rent shall be paid monthly with Base Rent pursuant to the Lease, unless
otherwise invoiced by Landlord.
(c) Interest, Late Charges, Costs and Attorneys' Fees. If Tenant
fails to pay within ten (10) days of the date due any Rents which Tenant is
obligated to pay under the Lease, the unpaid amount shall bear interest at ten
(10%) percent per annum. Tenant acknowledges that any late payments of Rents
shall cause Landlord to lose the use of that money and incur costs and expenses
not contemplated under the Lease, including without limitation administrative,
collection and accounting costs, the exact amount of which is difficult to
ascertain. Therefore, in addition to interest, any late payments shall be
accompanied by a payment of a late charge equal to five (5%) percent of the
late Rents. Further, as Additional Rent, Tenant shall be liable to Landlord
for costs and attorneys' fees incurred as a result of late payments or
non-payments. Acceptance of any interest, late charge, costs or attorneys'
fees shall not constitute a waiver of any default by Tenant nor prevent
Landlord from exercising any other rights or remedies under the Lease or at
law.
5. USE.
(a) The Premises shall be used for general office space and any
other lawful purpose incidental to Tenant's business, and no other, unless
consented to in writing by Landlord. Tenant shall not do or permit to be done
in or about the Premises or Building anything which is prohibited by or in any
way in conflict with any and all laws, statutes, ordinances, rules and
regulations now in force or which may hereafter be enacted or promulgated or
which is prohibited by the standard form of fire insurance policy, or which
will increase the existing rate of or affect any fire or other insurance upon
the Premises or Building or any of its contents, or cause a cancellation of any
insurance policy covering the Premises or Building or any part thereof or any
of its contents. Tenant shall not handle, use, store or otherwise put any
hazardous material on the Premises, without first notifying Landlord of its
intention to do so and identifying the hazardous material and safety plan which
shall ensure that any such hazardous material is properly controlled,
safeguarded, and
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<PAGE> 4
disposed of, and obtaining Landlord's prior written consent, which consent may
be reasonably withheld and may be conditioned upon absolute indemnification by
Tenant and accompanying bond. Tenant shall not do or permit anything to be
done in or about the Premises or Building which will in any way violate Rules
or Regulations reasonably promulgated by Landlord throughout the Lease,
obstruct or interfere with the rights of other tenants, or injure them, or use
or allow the Premises or Building to be used for any improper, immoral, or
unlawful purpose, nor shall Tenant cause, maintain or permit any nuisance, in,
on or about the Premises or Building or commit or suffer to be committed any
waste in, on or about the Premises or Building.
(b) Tenant shall not use the name of the Building in which the
Premises are located, in connection with any business carried on in said
Premises (except as Tenant's address) without written consent of Landlord.
(c) Tenant shall not manufacture, assemble or store materials
inside the common areas outside of Building.
6. LANDLORD'S SERVICES.
(a) Landlord is responsible to maintain the Premises and Building
(including the roof and structure). All Operating Expenses, including but not
limited to repairs, maintenance, common area utilities, janitorial, sewer and
garbage, insurance, taxes, property management and other operating expenses
("Operating Expenses") on the Premises, Building, and common areas shall be
coordinated by Landlord and are the financial responsibility of Landlord to the
extent that Tenant's pro rata share of such expenses does not exceed on an
annual basis $4.25 per Rentable square foot of space leased by Tenant.
Proration shall be on a square footage basis with all other tenants and
Tenant's proration shall be calculated by multiplying the Operating Expenses by
an equation, the numerator being the Rentable square feet of the Premises and
the denominator being the total Rentable square feet of the Building. In the
event Operating Expenses exceed $4.25 per Rentable square foot of space,
Operating Expenses shall be prorated to Tenant and be payable by Tenant as
Additional Rent. As soon as is reasonably possible, but in any event within
ninety (90) days following the end of each calendar year, Landlord shall
furnish to Tenant a statement showing the Premises' and Building's actual
Operating Expenses for the preceding calendar year. In the case of excess
Operating Expenses, Tenant shall promptly remit its pro rata share of such
excess to Landlord. Tenant may review at his sole cost and expense any
Operating Expenses prorated to Tenant by Landlord, including assessed Real
Estate Taxes as may be statutorily allowed. All costs that are within the
reasonable control of the Landlord, excluding property taxes, shall not
increase by more than 4% per year. Landlord shall make available the
applicable Operating Expenses' invoices and statements. However, any such
review must be requested and completed within sixty (60) days of receipt of the
annual statement.
(b) Tenant shall be responsible for the costs associated with usage
of the HVAC and lighting systems during times other than Ordinary Business
Hours as set forth in the Rules and Regulations. Additional utility cost shall
be paid only when the tenant exceeds his square foot Operating Expense.
Landlord may separately meter all utility usage of Tenants premises.
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<PAGE> 5
7. ALTERATIONS.
(a) Tenant will not make or suffer to be made any alterations,
additions or improvements in excess of $2,500, excluding the initial Tenant
Improvements, (collectively "Alterations") to or upon the Premises, Building,
or any part thereof, or attach any fixtures or equipment thereto, without first
obtaining Landlord's written approval, which shall not be unreasonably withheld
or delayed. Any Alterations to or upon the Premises shall be made by Tenant at
Tenant's sole cost and expense and any contractor selected by Tenant to make
the same shall be subject to Landlord's reasonable prior written approval. All
such Alterations permanent in character, made in or upon the Premises either by
Tenant or Landlord, may at the option of Landlord, become Landlord's property
and, at the end of the term or any extension hereof, shall remain on the
Premises without compensation to Tenant unless Landlord requests that Tenant
remove any such Alterations. Notwithstanding the above, Tenant's work stations
and other items of personal property shall remain Tenant's property.
(b) Any Alterations shall, when completed, be of such a character
as not to lessen the value of the Premises or such improvements as may be then
located thereon. Any Alterations shall be made promptly and in a good
workmanlike manner and in compliance with all applicable permits and
authorizations and building and zoning laws and with all other laws,
ordinances, orders, rules, regulations and requirements of all federal, state
and municipal governments, departments, commissions, boards and offices. The
costs of any such Alterations shall be paid by Tenant, so that the Premises be
free of liens, for services performed, labor and material supplied or claimed
to have been supplied. Before any Alterations shall be commenced, Tenant shall
pay any increase in premiums on insurance policies (provided for herein) or
ensure adequate coverage is in place for all risks related to the construction
of such Alterations and the increased value of the Premises.
8. LIENS.
Tenant shall keep the Premises and the Building free from any
mechanics' and/or materialmen's liens or other liens arising out of any work
performed, materials furnished or obligations incurred by Tenant. Tenant shall
notify Landlord in writing at least seventy-two (72) hours before any work or
activity is to commence on the Premises which may give rise to such liens to
allow Landlord to post and keep posted on the Premises any notices which
Landlord may deem to be proper for the protection of Landlord and the Premises
from such liens.
9. DESTRUCTION OR DAMAGE.
(a) If the Premises is partially damaged by fire, earthquake, or
other Act of God, Landlord shall repair the same at Landlord's expense, subject
to the provisions of this Article and provided such repairs can, in Landlord's
reasonable opinion, be made within sixty (60) days. During such repairs, the
Lease shall remain in full force and effect, except that if there shall be
damage to the Premises and such damage is not the result of the negligence or
willful misconduct of Tenant, Tenant's employees, agents, or invitees, an
abatement of Rents shall be allowed Tenant for such portion of Premises and
period of time as the Premises was unusable by Tenant.
5
<PAGE> 6
(b) If in Landlord's reasonable opinion the partially damaged
Premises can be repaired, but not within sixty (60) days, the Landlord may
elect, upon written notice to Tenant within thirty (30) days of such damages,
to repair such damages over a longer time period and continue the Lease in full
force and effect, but with Rents partially abated as provided in Article 9(a).
In the event such repairs cannot be made within sixty (60) days, Tenant shall
have the option to terminate the Lease provided that written notice is given to
Landlord within thirty (30) days of receipt of Landlord's notice stated in this
paragraph.
(c) If the partially damaged Premises is to be repaired under this
Article, Landlord shall repair such damages to the Premises itself, and to the
Tenant Improvements supplied by Landlord herein. Except in the event of
Landlord's gross negligence or willful misconduct, Tenant shall be responsible
for Tenant's equipment, furniture and fixtures, and other alterations,
additions and improvements made by Tenant to the Premises and Building.
(d) If in Landlord's reasonable opinion, the Premises is totally or
substantially destroyed by fire or other casualty, the Lease shall terminate
upon notice by Landlord.
10. SUBROGATION.
Landlord and Tenant shall each, prior to Tenant's taking possession or
immediately after the execution of the Lease, procure from each of the insurers
under all policies of fire, theft, public liability, workmen's compensation and
other insurance now or hereafter existing during the term and any extension
hereof and purchased by either of them insuring or covering the Premises and/or
Building or any portion thereof or operations therein, a waiver of all rights
of subrogation which the insurer might otherwise, if at all, have against the
other.
11. INDEMNIFICATION.
Tenant and Landlord hereby agree to indemnify and hold the other party
harmless from any damage to any property, including the release of any
hazardous materials, or injury to or death of any person arising from the use
of the Premises, Building, or common areas by Tenant or the ownership,
management or maintenance of the Premises, Building, or common areas by
Landlord, except such as is caused by reason of the negligent or willful act of
the other party, its agents, employees or contractors. The foregoing indemnity
obligation of Tenant and Landlord shall include reasonable fees, investigation
costs and all other reasonable costs and expenses incurred by Landlord or
Tenant from the first notice that any claim or demand is made, except in the
event of the other party's negligence or willful misconduct. The provisions of
this Article shall survive the Lease's termination with respect to any damage,
injury or death occurring prior to such termination.
12. COMPLIANCE WITH LEGAL REQUIREMENTS.
Tenant shall, at its sole cost and expense, promptly comply with all
laws, statutes, ordinances and governmental rules, regulations or requirements
now in force or which may hereafter be in force, the requirements of any board
of fire underwriters or other similar body now or hereafter constituted, any
direction or occupancy certificate issued pursuant to any law by any public
officer
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<PAGE> 7
or officers, as well as the provisions of all recorded documents affecting the
Premises, (collectively the "Applicable Laws"), insofar as any thereof relate
to or affect the use or occupancy of the Premises, Building, or common areas,
excluding requirements of structural changes now related to or affected by
improvements made by or for Tenant.
Landlord shall, at its sole cost and expense, promptly comply with all
Applicable Laws, including the American with Disabilities Act ("ADA"), insofar
as any thereof relate to or affect Landlord's obligations under the Lease, or
its ownership of the Premises, Building, or common areas, except for Tenant's
requirements in the immediately preceding paragraph herein.
13. INSURANCE.
(a) Commercial General Liability. Tenant shall, maintain a
Commercial General Liability policy including all coverages normally provided
therein. Such policies shall specifically name Landlord as an additional
insured, with a cancellation period of thirty (30) days prior written notice of
a cancellation. A Certificate of Insurance shall be provided to Landlord. All
polices of insurance shall be issued by responsible insurance companies
licensed to do business in the State of Utah.
The minimum limits of coverage acceptable are:
(i) $1,000,000 Each Occurrence Combined Single Limit
for Bodily Injury and Property Damage and
(ii) $2,000,000 Annual Aggregate
(b) Premises and Building Insurance. Landlord shall insure the
Premises and Building, including Landlord supplied Core and Shell and Tenant
Improvements as deemed necessary in Landlord's reasonable discretion. Tenant
shall pay its pro rata share for such insurance as outlined in Article 6
herein, involving Tenant's prorated share of Operating Expenses. All policies
of insurance shall be issued by responsible insurance companies licensed to do
business in the State of Utah.
(c) Tenant's Additional Insurance. Tenant may, at its sole cost
and expense, cause all equipment, machinery, furniture and fixtures, personal
property, and Tenant Improvements supplied by Tenant from time to time used or
intended to be used in connection with the operation and maintenance of the
Premises, to be insured by Tenant against loss or damage. Tenant shall also
obtain appropriate business interruption coverage. Except for losses caused by
Landlord's gross negligence or wilful misconduct, Landlord is in no way liable
for any uninsured Tenant's property.
14. ASSIGNMENT AND SUBLETTING.
In the event Tenant should desire to assign the Lease or sublet the
Premises, Tenant shall give Landlord written notice of such desire at least
sixty (60) days in advance of the date on which Tenant desires to make such
assignment or sublease. Landlord shall then have a period of twenty-
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one (21) days following receipt of such notice within which to notify Tenant in
writing that Landlord elects either (1) to terminate the Lease as of the date
so specified by Tenant, in which event Tenant will be relieved of all further
obligations hereunder, or (ii) to permit Tenant to assign or sublet such space,
subject to prior written approval of the proposed assignee by Landlord, such
consent not to be unreasonably withheld or delayed, so long as the use of the
Premises by the proposed assignee would be a permitted use and the proposed
assignee is of sound financial condition as determined in Landlord's reasonable
discretion. Landlord may refuse to consent to any assignment or subletting if
Landlord believes that the new Tenant would have a negative impact on the
Premises or the Building's other tenants. If Landlord should fail to notify
Tenant in writing of such election within said twenty-one (21) day period,
Landlord shall have deemed to have waived option (i) above, but written
approval by Landlord of the proposed assignee shall still be required. Failure
by Landlord to approve a proposed assignee shall not cause a termination of the
Lease. Any rents or other consideration realized by Tenant under any such
sublease and assignment in excess of the Rents hereunder, after amortization of
the reasonable costs of extra tenant improvements for which Tenant has paid and
reasonable subletting and assignment costs, shall, at Landlord's option, (i) be
paid ninety percent (90%) to Landlord and ten percent (10%) to Tenant, in which
event Tenant shall be relieved from any future performance or obligation under
the Lease, or (ii) be paid to Tenant.
Notwithstanding the above, Tenant shall have the right to sublease or
assign all or any portion of the Premises during the Term to any related
entity, subsidiary, or affiliate of Tenant, having at least fifty-one (51%)
percent direct common ownership, without having to receive Landlord's consent,
but still requiring written notice to Landlord on or before such sublease or
assignment. No assignment or subletting by Tenant shall relieve Tenant of any
obligation under the Lease. Any assignment or subletting which conflicts with
the provisions hereof shall be void.
15. RULES.
Tenant shall faithfully observe and comply with all Rules and
Regulations reasonably promulgated by Landlord, in writing and after reasonable
notice, during the Term or any Option period herein. Landlord must apply rules
equitably against all Tenants, but shall not be responsible to Tenant for the
nonperformance by other Building tenants, or adjacent buildings' tenants, of
any of said Rules and Regulations. A copy of the Rules and Regulations are
attached as Exhibit D.
16. ENTRY BY LANDLORD.
The Landlord may enter the Premises or Building at reasonable hours,
upon 24 hours notice to Tenant and in the company of a designee of Tenant to
(a) inspect the same, (b) show the same to prospective purchasers, lenders or
tenants, (c) determine whether Tenant is complying with all of Tenant's
obligations hereunder, (d) post notices of non-responsibility or (e) make
repairs required of Landlord under the Lease, repairs to adjoining space or
utility service, or make repairs, alterations or improvements to the Building,
provided that all such work shall be done as promptly as possible and with as
little interference to Tenant as reasonably possible. Tenant hereby waives any
claim for damages for any inconvenience to or interference with Tenant's
business, any loss of occupancy or quiet enjoyment of the Premises occasioned
by such entry. Landlord shall at all times have and retain a key to unlock all
doors in, on or about the Premises (excluding Tenant's vaults, safes and
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similar areas designated in writing by Tenant). In the event of an emergency,
Landlord shall have the right to use any and all means which Landlord may
deem proper to enter the Premises, without notice, for the limited purpose of
abating as possible said emergency. Such emergency entrance shall not be
construed or deemed to be a forcible or unlawful entry into or a detainer of
the Premises or an eviction, actual or constructive, of Tenant from the
Premises, or any portion thereof.
17. EVENTS OF DEFAULT.
The occurrence of any one or more of the following events ("Events of
Default") shall constitute a breach of the Lease by Tenant: (a) if Tenant
fails to pay Rents when and as the same becomes due and payable and such
failure continues for more than ten (10) days after written notice thereof, or
(b) if Tenant fails to pay any other sum when and as the same becomes due and
payable and such failure continues for more than ten (IO) days after written
notice thereof, or (c) if Tenant fails to perform or observe any material term
or condition of the Lease, such failure continues for more than thirty (30)
days after written notice from Landlord, and Tenant does not within such period
begin with due diligence and dispatch the curing of such default, or, having so
began, thereafter fails or neglects to complete with due diligence and dispatch
the curing of such default; or (d) if Tenant shall make a general assignment
for the benefit of creditors, or shall admit in writing its inability to pay
its debts as they become due or shall file a petition in bankruptcy, or shall
be adjudicated as bankrupt or insolvent, or shall file a petition seeking any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any present or future statute, law or
regulation, or shall file any answer admitting or shall fail timely to contest
the material allegations of a petition filed against it in any such proceeding,
or shall seek or consent to or acquiesce in the appointment of any trustee,
receiver or liquidator of Tenant or any material part of its properties; or (e)
if within sixty (60) days after the commencement of any proceeding against
Tenant seeking any reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any present or future statute,
law or regulation, such proceeding shall not have been dismissed, or if, within
sixty (60) days after the appointment without the consent or acquiescence of
Tenant, of any trustee, receiver or liquidator of Tenant or of any material
part of its properties, such appointment shall not have been vacated; or (f)
vacation or abandonment of the Premises for a continuous period in excess of
fifteen (15) days after initial occupancy, or (g) if the Lease or any estate of
Tenant hereunder shall be levied upon under any attachment or execution and
such attachment or execution is not vacated within thirty (30) days of receipt
thereof by Tenant.
18. TERMINATION UPON TENANT'S DEFAULT.
If an Event of Default shall occur, Landlord at any time thereafter may
give a written termination notice to Tenant, and on the date specified in such
notice (which shall not be less than three (3) days after service) Tenant's
right to possession shall terminate and the Lease shall terminate, unless on or
before such date all Rents, arrearages and other sums due by Tenant under the
Lease, including reasonable costs and attorneys' fees incurred by or on behalf
of Landlord, shall have been paid by Tenant and all other Events of Default by
Tenant shall have been fully cured to the satisfaction of Landlord. Upon such
termination, Landlord may recover from Tenant:
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(a) the worth at the time of award of the unpaid Rents 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 Rents which would have been earned after termination until the time of
award exceeds the amount of such Rents 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 Rents for the balance of the term of the Lease after the time of award
exceeds the amount of such Rents loss that Tenant proves could be reasonably
avoided; and plus
(d) any other amount reasonably necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom; and/or
(e) At Landlord's elections, such other amounts in addition or in
lieu of the foregoing as may be permitted from time to time herein or by
applicable law.
The "worth at the time of award" of the amounts referred to in clauses
(a) and (b) above is computed by allowing interest at the rate of 10% per
annum. The "worth at the time of award" of the amount referred to in clause (c)
above means the monthly sum of the Rents under the Lease. Failure of Landlord
to declare any default immediately upon occurrence thereof, or delay in taking
any action in connection therewith, shall not waive such default, but Landlord
shall have the night to declare any such default at any time thereafter.
19. CONTINUATION AFTER DEFAULT.
Even though Tenant has defaulted the Lease and abandoned the Premises,
the Lease shall continue in effect as long as Landlord does not terminate
Tenants right to possession, and Landlord may enforce all of its rights and
remedies under the Lease, including the right to recover the Rents as they
become due under the Lease. Acts of maintenance or preservation or efforts to
relet the Premises or the appointment of a receiver upon initiative of Landlord
to protect Landlord's interest under the Lease shall not constitute a
termination of Tenant's right to possession. If any fixture, equipment,
improvement, installation or appurtenance shall be required to be removed from
the Premises and/or Building by Tenant, then Landlord (in addition to all other
rights and remedies) may, at its election by written notice to Tenant, deem
that the same has been abandoned by Tenant to Landlord, or Landlord may remove
and store the same and restore the Premises to its original condition at the
reasonable expense of Tenant, as Additional Rent to be paid within ten (10)
days after written notice to Tenant of such expense.
20. LANDLORD'S DEFAULT.
If Landlord fails to perform or observe any of its material Lease
obligations herein and such failure continues for thirty (30) days after
written notice from Tenant, or such additional time, if any, that is reasonably
necessary to promptly and diligently cure such failure after receiving written
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notice, Landlord shall be in breach of the Lease (a "Default"). If Landlord
commits a Default, Tenant may pursue any remedies given in the Lease or under
law including terminating the lease and seeking the return of any unused
portion of the security deposit.
21. LANDLORD'S RIGHT TO CURE DEFAULTS.
All terms and provisions to be performed by Tenant under the Lease
shall be at Tenant's sole cost and expense and without any abatement of Rents.
If Tenant fails to pay any sum of money, other than Rents, required hereunder
or fails to perform any other act required hereunder and such failure continues
for thirty (30) days after notice by Landlord, Landlord may, but shall not be
obligated, and without waiving or releasing Tenant from any obligations of
Tenant, make any such payment or perform any such act on Tenant's part to be
made or performed as provided in the Lease. All sums paid by Landlord and all
incidental costs shall be deemed Additional Rent hereunder and shall be payable
within ten (10) days of written notice of such sums paid.
22. OTHER RELIEF.
The remedies provided for in the Lease are in addition to any other
remedies available to Landlord at law or in equity by statute or otherwise.
23. ATTORNEYS' FEES.
In the event either party places the enforcement of the Lease, or any
part thereof, or the collection of any Rents, or recovery of the possession of
the Premises, or files suit upon the same, then the prevailing party shall
recover its reasonable attorneys' fees and costs.
24. EMINENT DOMAIN.
If all or any part of the Premises shall be taken or conveyed as a
result of the exercise of the power of eminent domain, the Lease shall
terminate as to the part so taken as of the date of taking, and, in the case of
a partial taking, either Landlord or Tenant shall have the right to terminate
the Lease as to the balance of the Premises by written notice to the other
within thirty (30) days after such date; provided, however, that a condition to
the exercise by Tenant of such right to terminate shall be that the portion of
the Premises taken or conveyed shall be of such extent and nature as
substantially to handicap, impede or impair Tenant's use of the balance of the
Premises. In the event of any taking, Landlord shall be entitled to any and
all compensation, damages, income, rent awards or any interest therein
whatsoever which may be paid or made in connection therewith, and Tenant shall
have no claim against Landlord for the value of any unexpired term of the Lease
or otherwise, provided that Tenant shall be entitled to any and all
compensation, damages, income, rent or awards paid for or on account of
Tenant's moving expenses, trade fixtures, equipment and any leasehold
improvements in the Premises, the cost of which was borne by Tenant, to the
extent of the then unamortized value of such improvements for the remaining
term of the Lease. In the event of a taking of the Premises which does not
result in a termination of the Lease, the monthly rental herein shall be
apportioned as of the date of such taking so that thereafter the rent to be
paid by Tenant shall
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be in the ratio that the area of the Premises not so taken bears to the total
area of the Premises prior to such taking.
25. SUBORDINATION, ATTORNMENT & NONDISTURBANCE; AND ESTOPPEL
CERTIFICATE.
At Landlord's request, Tenant agrees to execute, acknowledge, and
deliver within ten (10) days to Landlord a Subordination, Attornment &
Nondisturbance Agreement ("Subordination Agreement"), subject to Landlord's
reasonably proposed form(s). Such Subordination Agreement shall subordinate the
Lease to any ground lease, mortgage, deed of trust, or any other hypothecation
for security now or hereafter placed upon the Premises, Building or common
areas, or any part thereof, to any and all advances made on the security, and
to all renewals, modification, consolidations, replacements and extensions
thereof, whether the Lease is dated prior or subsequent to the date of said
ground lease, mortgage, deed of trust or other hypothecation or the date of
recording thereof. Further, at Landlord's request, Tenant agrees to execute,
acknowledge, and deliver within ten (10) days to Landlord an Estoppel
Certificate, subject to Landlord's reasonably proposed form(s). Such
Subordination Agreement and Estoppel Certificate may be relied upon by any I
prospective purchaser, mortgagee, or beneficiary under any ground lease,
mortgage, deed of trust, or any other hypothecation of the Premises, Building,
or common areas, or any part thereof. Notwithstanding such Subordination
Agreement, Tenant's right to quiet possession of the Premises shall not be
disturbed so long as Tenant is not in default under the Lease, unless the Lease
is otherwise terminated pursuant to its terms.
In the event that Tenant fails to execute, acknowledge, and deliver to
Landlord such Subordination Agreement and Estoppel Certificate within ten (10)
days of Landlord's request, the parties herein expressly agree that Tenant
shall be deemed in default of the Lease without further notice. In such event,
the parties herein further expressly agree that the Subordination Agreement and
Estoppel Certificate are deemed to have been executed by Tenant.
26. NO MERGER.
The voluntary or other surrender of the Lease by Tenant, or a mutual
cancellation thereof, shall not work a merger, and shall, at the option of
Landlord terminate all or any existing subleases or subtenancies, or may, at
the option of Landlord, operate as an assignment to it of any or all such
subleases or subtenancies.
27. SALE.
In the event the original Landlord hereunder, or any successor owner of
the Premises, Building, and common areas shall sell or convey the Premises,
Building, and common areas, and the purchaser assumes the obligations of
Landlord under the Lease, all liabilities and obligation on the part of the
original Landlord, or such successor owner, under the Lease accruing after such
Sale shall terminate, and thereupon all such liabilities and obligations shall
be binding upon the new owner. Tenant agrees to attorn to such new owner.
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28. NO LIGHT OR VIEW EASEMENT.
Any diminution or shutting off of light or view by any structure
erected on lands adjacent to the Building shall in no way affect the Lease or
impose any liability on Landlord.
29. HOLDING OVER.
If, without objection by Landlord, Tenant holds possession of the
Premises after expiration of the Term or any Option period of the Lease, Tenant
shall become a tenant from month to month upon the terms herein specified, but
at a monthly Base Rent equivalent to 125% of the Base Rent at the end of the
term or extension period pursuant to Article 4, payable in advance on or before
the 1st day of each month. All Additional Rent shall also apply. Each party
shall give the other notice at least one month prior to the date of termination
of such monthly tenancy of its intention to terminate such tenancy.
30. ABANDONMENT.
If Tenant shall abandon or surrender the Premises, or be dispossessed
by process of law or otherwise, any personal property belonging to Tenant and
left on the Premises shall be deemed to be abandoned, at the option of
Landlord, except such property as may be mortgaged to Landlord.
31. SECURITY DEPOSIT.
Tenant shall deposit with Landlord upon execution of the Lease a
security deposit in an amount equal to one month's Base Rent during the last
year of the Lease Term ("Security Deposit"). The Security Deposit shall be
held by Landlord as security for the faithful performance by Tenant of all of
the provisions of the Lease to be performed or observed by Tenant. In the
event Tenant fails to perform or observe any of the provisions of the Lease to
be performed or observed by it, then, at the option of the Landlord, Landlord
may (but shall not be obligated to do so) apply the Security Deposit, or so
much thereof as may be necessary to remedy such default or to repair damages to
the Premises caused by Tenant. In the event Landlord applies any portion of
the Security Deposit to remedy any such default or to repair damages to the
Premises caused by Tenant, Tenant shall pay to Landlord, within thirty (30)
days after written demand for such payment by Landlord, all monies necessary to
restore the Security Deposit up to the original amount. Any portions of the
Security Deposit remaining upon termination of the Lease shall be returned.
32. WAIVER.
All waivers by either party herein must be in writing and signed by
such party. The waiver of any term or conditions herein shall not be deemed to
be a waiver of any subsequent breach of the same or any other agreement,
condition or provision herein contained, nor shall any custom or practice which
may grow upon between the parties in the administration of the terms hereof be
construed to waive or to lessen the right of either party to insist upon the
performance by the other party in strict accordance with said terms. The
subsequent acceptance of Rents hereunder by Landlord shall not be deemed to be
a waiver of any breach by Tenant of any term or condition of
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the Lease, regardless of Landlord's knowledge of such breach at the time of
acceptance of such Rents.
33. NOTICES.
All notices and demands which may or are required to be given by either
party to the other under the Lease shall be in writing and shall be deemed to
have been fully given when deposited in the United States mail, certified or
registered, postage prepaid, and addressed as follows: to Tenant at 13750
South Wadsworth Park Drive, Draper, UT 84020, or to such other place as Tenant
may from time to time designate in a notice to Landlord; to Landlord at Draper
Land Partnership II, 71 East Wadsworth Park Dr., Draper, UT 84020, Attn: Kip
Wadsworth, or to such other place as Landlord may from time to time designate
in a notice to Tenant, or in the case of Tenant, delivered to Tenant at the
Premises. Tenant hereby appoints as its agent to receive the service of all
dispossessory or distraint proceedings and notices hereunder the person in
charge of or occupying the Premises at the time, and if no person shall be in
charge of or occupying the same, then service may be made by attaching same on
the main entrance of the Premises.
34. COMPLETE AGREEMENT.
There are no oral agreements between Landlord and Tenant affecting the
Lease, and the Lease supersedes and cancels any and all previous negotiations,
arrangements, brochures, agreements and understandings, if any, between
Landlord and Tenant with respect to the subject matter of the Lease. The Lease
may not be altered, changed or amended, except by an instrument in writing
signed by both parties hereto.
35. AUTHORITY.
The person(s) executing the Lease on behalf of the parties herein
hereby covenants and warrants that (a) such party is a duly authorized and
validly existing entity under the laws in which it was formed, (b) such party
has and is qualified to do business in Utah, (c) such entity has full right and
authority to enter into the Lease, and (d) each person executing the Lease on
behalf of such entity is authorized to do so.
36. GUARANTEE OF LEASE.
Tenant guarantees, upon execution of the Lease, to occupy the Premises.
Any failure to occupy the Premises does not release the Tenant from the
obligation of paying Rents or any other terms set forth herein.
37. MISCELLANEOUS.
(a) The words "Landlord" and "Tenant" as used herein shall include
the plural as well as the singular. If there be more than one Tenant, the
obligations hereunder imposed upon Tenant shall be joint and several.
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(b) Time is of the essence on the Lease and each and all of its
terms and conditions.
(c) The terms and conditions herein shall apply to and bind the
heirs, executors, administrators, successors and assigns of the parties hereto.
(d) The captions of the Lease are solely to assist the parties and
are not a part of the terms or conditions of the Lease.
(e) The Lease shall be governed by and construed in accordance with
the laws of the State of Utah, and is deemed to be executed within the State of
Utah.
38. SEVERABILITY.
If any term provision of the Lease, or the application thereof to any
person or circumstance, shall to any extent be invalid or unenforceable, the
remainder of the Lease, or the application of such provision to persons or
circumstances other than those as to which it is invalid or unenforceable,
shall not be affected thereby, and each provision of the Lease shall be valid
and shall be enforceable to the extent permitted by law.
39. BROKERS.
Landlord is represented by CB Commercial Real Estate Group Inc. and
Tenant is represented by Commerce Properties. Agreed-upon commissions shall be
due and payable by Landlord upon execution.
40. PRIOR LEASE.
Upon Tenant's occupancy of the Premises, Tenant shall be released from
its obligations under its prior lease with Landlord except that Tenant shall be
responsible (1) for the payment of all Base Rent due under the prior lease for
a period of ninety (90) days or until a new tenant occupies Tenant's former
space, whichever is earlier; and (2) for fifty percent (50%) of the total cost
of any tenant improvement required by the new tenant. Tenant's obligation for
the costs of such improvements to its prior space shall not exceed $4.00 per
Useable square foot of Tenant's prior space.
41. FIRST RIGHT OF REFUSAL.
(a) Provided that Tenant is not in default under the Lease, Tenant
is granted a first right of refusal on the Building which will afford Tenant
the opportunity to purchase the Building on the same terms and conditions of an
offer from a third-party acceptable to Landlord. In the event such acceptable
offer includes real property in addition to the Building, Tenant shall be
obligated to purchase such additional property in order to exercise the first
right of refusal. Tenant must exercise its first right of refusal within seven
(7) business days of receiving notice of an acceptable offer.
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(b) After the first year of the Lease Term and provided that Tenant
is not in default under the Lease, Tenant is granted a first right of refusal
on other rentable space in the Building which will afford Tenant the
opportunity to lease such space on the same terms and conditions agreed to by a
third-party acceptable to Landlord. Tenant must exercise its first right of
refusal within five (5) business days of receiving notice.
42. PERFORMANCE DELIVERY.
Landlord shall deliver the Premises to Tenant on May 25, 1998
("Delivery Date"), so long as Tenant provides Landlord with an approved space
plan by November 14, 1997. In the event that Tenant fails to deliver the space
plan or Tenant otherwise requests changes or takes any action which delays
construction of the Building and/or Tenant Improvement, the Delivery Date shall
be adjusted one day for every day of delay resulting from Tenant's action.
In the event the Landlord does not deliver the premises substantially
complete by the Delivery Date, the Landlord will provide Tenant two (2) days
free base rent for each day of delayed delivery.
* * * * *
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IN WITNESS WHEREOF, the parties have executed the Lease dated the day
and year first above written.
TENANT, LANDLORD,
1-800-LENS-NOW, INC. dba DRAPER LAND PARTNERSHIP II
1-800-CONTACTS
By: /s/ Jonathan Coon By:
------------------------ --------------------------
Its: President Its: Partner
------------------------ -------------------------
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EXHIBIT A
SPACE PLAN
(ATTACHED)
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EXHIBIT B
BASE BUILDING IMPROVEMENTS
The Base Building Improvements and systems as described below shall be
furnished by Landlord at Landlord's sole cost and expense. These include:
1. The Building structure will be designed for a maximum floor load of 50
lb. live load plus a 20 lb. partition dead load.
2. The Building shell will include a core consisting of: 2 elevators with
equipment room, 2 stairwell enclosures, 1 men's and 1 women's rest-room on
each floor, electrical room, mechanical room, custodian closet, an area of
refuge, finished lobbies and exterior perimeter walls and windows and all
building columns.
3. A Concrete floor will be installed with a smoothed trowel finish for
installation of glued-down carpet. The Floor will be poured level and
finished in accordance with current ACI Standard Specifications 117.
4. A Life Safety system will be installed in accordance with national, state
and local codes and the Americans with Disabilities Act, throughout the
Building, including all corridors, stairwells and rest-rooms (strobes).
5. Electrical distribution will be provided to the main panel boxes in the
electrical closet on each floor. The electrical system shall be sized for
seven (7) watts per usable square foot (120-208-3 Phase) for Tenant's
consumption, over and above base building electrical requirements.
6. The Building will be equipped with a packaged-unit heating, ventilation
and air conditioning system sufficient for Tenant's anticipated occupancy
requirements. The system will be designed to maintain a space temperature
between 70'-78'degrees F on a year-round basis, based on a maximum average
occupancy of one (1) person for each 150 square feet of usable area (very
important to tenant who uses cubicles). The requirements for ventilation
shall comply with present ASHRAE (American Society of Heating,
Refrigeration and Air-Conditioning Engineers) standard 62-1989 as a minimum
requirement. Tenant shall be furnished with a price per ton for package
unit if additional air conditioning is required. All distribution and
controls of HVAC, within tenant space, shall be subject to Tenant
Improvement allowance.
7. Telephone service, as provided by the local utility, will be brought to
Tenant's or Building's main telephone room.
8. Common corridor walls and walls between tenant suites will be provided
with the side finished only to the common areas.
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9. All roadways necessary for Tenant's access to and egress from the Building
will be completed, along with parking, landscaping and sprinklers for
irrigation.
10. HVAC system will consist of 3 each 60 ton roof top units connected to VAV
(variable air volume) terminal units. Each VAV unit is controlled by its
own thermostat which is connected to a central computer terminal allowing
one area, to be heated while another area is being cooled.
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EXHIBIT C
TENANT IMPROVEMENTS CONSTRUCTION WITH
TENANT IMPROVEMENT ALLOWANCE
This Exhibit is part of the Lease relating to certain premises
("Premises") which are more particularly described in the Lease.
1. PLANS AND SPECIFICATIONS
A. Working Drawings. Within three (3) days after any request by
Landlord, Tenant shall furnish the additional information requested by Landlord
for the preparation by Landlord's architect, engineer or space planner of
working drawings and specifications. If Tenant fails to furnish the information
within the three (3) day period, Tenant's failure shall be deemed a Tenant
Delay pursuant to Section 7 of this Agreement. Within three (3) working days
after working drawings and specifications which have been prepared by
Landlord's architect, engineer or space planner are submitted to Tenant, Tenant
shall reasonably approve or disapprove the working drawings and specifications.
The working drawings and specifications shall be deemed approved if Tenant
fails to disapprove them within the three (3) business day periods.
If Tenant disapproves the working drawings and specifications, Tenant
shall have three (3) business days after the date of disapproval to provide
sufficient information to Landlord's architect, engineer or space planner so
that revised working drawing and specifications may be prepared. If Tenant
fails to submit the required information to revise the plans within the three
(3) business day period or if the working drawings and specifications, as
revised, are not approved by Tenant within three (3) business days after
submission to Tenant, Tenant's failure shall be deemed a Tenant Delay pursuant
to Section 7 of this Agreement.
The working drawings and specifications which have been approved by
Landlord and Tenant hereinafter are referred to as the "Approved Working
Drawings".
B. Tenant's Approval. Whenever Tenant's approval is required pursuant to
the terms of this Agreement, the approval shall not be unreasonably withheld or
delayed. Tenant's approvals or disapprovals shall be in writing.
C. Termination. If this Agreement and the Lease are terminated by
Landlord based upon Tenant's breach thereof or Tenant for any reason other than
Landlord's breach thereof, the parties' rights and obligations hereunder shall
be discharged; provided, however, that Tenant shall pay Landlord, within ten
(10) days after the date of Tenant's receipt of a statement for the same, the
costs incurred by Landlord through the date of termination in connection with
the preparation of any plans, drawings and specification and all costs incurred
by Landlord in applying for any governmental approvals, including a building
permit, required for construction of the Tenant Improvements or any
construction costs associated with Tenant Improvements and any and all
improvements become the property of the Landlord.
2. CONSTRUCTION OF TENANT IMPROVEMENTS.
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A. Construction to Landlord. Landlord shall cause construction of the
Tenant Improvements according to the Approved Working Drawings to be completed
in a good and workmanlike manner provided that Landlord shall not be required
to expend funds in excess of the Base Allowance of $20.00 per Useable square
foot.
B. Tenant Improvements Cost. The Tenant Improvement cost ("Tenant
Improvement Cost") to be paid by Landlord shall include, but not be limited to:
(i) All costs of preliminary and final architectural and
engineering plans, drawings and specifications for the Tenant
Improvements, and engineering costs;
(ii) All costs of obtaining building permits and other necessary
authorizations from the applicable governmental authority
(e.g., the City in which the Building is located);
(iii) All costs of interior design and finish schedule plans,
drawings and specifications including as-built plans, drawings;
(iv) All direct and indirect costs of procuring and installing
Tenant Improvements in the Premises, including the
contractor's fee for overhead and profit, the cost of all of
contractor's on-site supervisory and administrative staff,
office, equipment and temporary services provided in
connection with construction of the Tenant Improvements to the
extent set forth in the construction contract ("Contract")
that is entered into between Landlord and the Contractor
(hereinafter defined);
(v) All fees payable to Landlord's architect, engineer or space
planner if they are required to redesign any portion of the
Tenant Improvements following Tenant's approval of the
preliminary or working drawings;
(vi) Sewer connection fee, if any;
(vii) The fee charged by any construction cost consultant employed
in connection with the Tenant Improvement; a construction
management fee equal to 5% of the entire cost of the Tenant
Improvement will be assessed as part of the Allowance.
3. EXCESS TENANT IMPROVEMENT COST.
If the Tenant Improvement Cost exceed the Base Allowance and are between
$20.01 and $25.00 per Useable square foot, Tenant shall be charged only the
actual cost incurred by Landlord on the excess portion of the costs. Any costs
in excess of $25.00 per Useable square foot are subject
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to a charge for construction management and/or profit not to exceed 10%.
Excess Tenant Improvements Costs shall be paid by Tenant to Landlord, in cash,
within ten (10) days after receipt of a statement from Landlord. Landlord
reserves the right to invoice Tenant in advance for excess Tenant Improvement
Costs after Contract has been awarded to tenant improvement contractor and
prior to commencement of Tenant Improvements,
4. CHANGE REQUESTS.
A. No change to the Approved Working Drawings requested by Tenant
shall be made without Landlord's prior approval, which approval shall not be
unreasonably withheld; provided, however, that no change request shall affect
the Landlord and Tenant prior to the change being made. Tenant shall not
instruct or direct Contractor's workmen, subcontractor's, material suppliers or
others performing the Tenant Improvements construction. Tenant shall direct
all inquiries and requests relating to the construction work to Landlord of
Landlord's designated agent. Tenant shall be responsible for any added costs
or delay resulting from Tenant's actions which are contrary to this Section.
B. Tenant shall pay Landlord, in cash, within ten (10) days after
receipt of an itemized written bill from Landlord, any additional costs for
changes requested by Tenant, including, without limitation, architectural fees
and increases in construction costs caused by the delay. A change request
shall constitute an agreement by Tenant to any reasonable delay in substantial
completion caused by reviewing, processing and implementing the change; and the
Lease, at Landlord's option, shall commence on the date it would have otherwise
commenced but for any such delays.
C. As soon as reasonably possible after receipt of a written change
request from Tenant, Landlord shall notify Tenant of Landlord's approval or
disapproval of the request, and, if the request is approved, of an estimated
increase or decrease in costs and an estimate of the effect the change shall
have on the projected date for substantial completion of the Tenant
Improvements.
D. Landlord shall have the authority, without the consent of Tenant,to
order minor changes in the Tenant Improvements not involving an increase in
cost to Tenant or a delay in the Actual Commencement Date and not inconsistent
with the intent of the Approved Working Drawings.
5. COOPERATION.
Landlord and Tenant shall cooperate and diligently assist the architect,
engineer or space planner in completing the Approved Working Drawings and
specifications, and the Contractor in completing construction of the Tenant
Improvements.
6. CONDITION OF TENANT IMPROVEMENTS.
Within seven (7) days after the Actual Commencement Date, Tenant shall
"walk-through" the Premises with Landlord and they shall complete a punch-list
of items needing additional work by Landlord. Other than the items specified
in the punch list, by taking possession of the Premises,
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<PAGE> 24
Tenant shall be deemed to have accepted the Premises and the Building in good,
clean and completed condition and repair, subject to all applicable laws, codes
and ordinances. The punch list shall not include any damage to the Premises or
the Building caused by Tenant's move-in, which damage shall be promptly
repaired or corrected by Tenant at its sole expense. If Tenant fails to
complete a punch list with Landlord's cooperation within the seven (7) day
period specified above, it shall be deemed that there are not items needing
additional work or repair. Landlord shall complete all reasonable punch list
items within thirty (30) days after the walk-through inspection or as soon as
practicable thereafter and upon notification of completion of the punch list
items, Tenant shall approve or state its reasons for disapproval of the
completed items in writing to Landlord within seven (7) days of such items
shall be deemed approved by Tenant.
7. TENANT DELAYS.
If the Actual Commencement Date of the Lease has not occurred on or before
the Projected Commencement Date specified in the Basic Lease Information, and
if the cause of the delay in the occurrence of the Commencement Date is
attributable to Tenant, the Actual Commencement Date shall be the date the
Actual Commencement Date otherwise would have occurred but for the Tenant
Delays. Delays attributable to Tenant ("Tenant Delays") shall include those
caused by:
a. Tenant's request for special materials, finishes or installations
which are not readily available;
b. Tenant's failure to reasonably approve plans and working drawings
in accordance with this Agreement;
c. Tenant's failure to reasonably approve plans and working drawings
in accordance with this Agreement;
d. Tenant's change requests pursuant to this Agreement that result in
delays;
e. Tenant's failure to approve cost estimates if any approvals are
required pursuant to this Agreement.
f. Interference with Landlord's work caused by Tenant or Tenant's
agents; and
g. Tenant's failure to pay any amounts due hereunder.
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<PAGE> 25
EXHIBIT D
RULES AND REGULATIONS
The rules and regulations set forth in this Exhibit "D" shall be and
hereby are made a part of the Lease (the "Lease") to which they are attached.
Whenever the term "Tenant" is used in these rules and regulations, it shall be
deemed to include Tenant, its employees or agents and any other persons
permitted by Tenant to occupy or enter the Premises. The following rules and
regulations may from time to time be modified by Landlord.
1. Obstruction. The sidewalks, entries, passages, corridors, halls,
lobbies, stairways, elevators and other common facilities of the Building shall
be controlled by Landlord and shall not be obstructed by Tenant or used for any
purpose other than ingress or egress to and from the Premises, Tenant shall not
place any item in any of such locations, whether or not any such item
constitutes an obstruction. Landlord may remove any such item without notice
to Tenant and at the expense of Tenant.
2. Ordinary Business Hours. Whenever used in these regulations, the
ordinary business hours of the Building shall be from 7:00 a.m. to 6:00 p.m.,
Monday through Friday and Saturday from 8:00 a.m. to 12:00 noon only excluding
legal holidays (both state and national), irrespective of Landlord's
obligations to provide heat and airs conditioning pursuant to subsection 5.1(c)
of the Lease. All persons entering or leaving the Building between the hours
of 6:00 p.m. and 8:00 a.m., Monday through Friday, before 8:00 a.m. or after
12:00 noon on Saturday, or at any time on Sundays or Holidays, may be required
to do so under such regulations as Landlord may impose.
3. Deliveries. Tenant shall insure that all deliveries of supplies
to the Premises shall be made only through such access as may be designated by
Landlord for deliveries and only during the ordinary business hours of the
Building. If any person delivering supplies to Tenant damages any part of the
Building, Tenant shall pay to Landlord upon demand the amount required to
repair such damage.
4. Moving. Furniture and equipment shall be moved in or out of the
Building only through such access as may be designated by Landlord for
deliveries and then only during such hours and in such manner as may be
prescribed by Landlord. If Tenant's movers damage any part of the Building,
Tenant shall pay to Landlord upon demand the amount required to repair such
damage.
5. Heavy Articles. No safe or article, the weight of which may, in the
opinion of Landlord, constitute a hazard of damage to the Building or its
equipment, shall be moved in the Premises. Safes and other heavy equipment,
the weight of which will not constitute a hazard or damage the Building or its
equipment shall be moved into from or about the Building only during such hours
and in such manner as shall be prescribed by Landlord in its sole and absolute
discretion and Landlord shall have the right to designate the location of such
articles.
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<PAGE> 26
6. Nuisance. Tenant shall not do or permit anything to be done in the
Premises, or bring or keep anything therein which would in any way constitute a
nuisance or waste, or obstruct or interfere with the rights of other tenants of
the Building, or in any way inure or annoy them, or conflict with the laws
relating to fire, or with any regulation of the fire department, or with any
insurance policy upon the Building or any part thereof, or conflict with any of
the rules or ordinances of the Department of Health to the County and City in
which the Building is located.
7. Building Security. Landlord may require identification of persons
entering and leaving the Building during the period outside of the ordinary
business hours of the Building and, for the purpose, may issue building passes
to Tenants of the Building.
8. Pass Key. The janitor of the Building may at all times keep a pass
key to the Premises and he and other agents of Landlord shall at all times be
allowed admittance to the Premises.
9. Locks and Keys for Premises. No additional lock or locks shall be
placed by Tenant on any door in the Building and no existing lock shall be
changed unless written consent of Landlord shall first have been obtained. A
reasonable number of keys to the Premises and to the toilet rooms, if locked by
Landlord, will be furnished by Landlord, and Tenant shall not have any
duplicate key made. At the termination of this tenancy, Tenant shall promptly
return to Landlord all keys for any locks, safes, cabinets and vaults remaining
in the Premises.
10. Use of Water Fixtures. Water closets and other water fixtures shall
not be used for any purpose other than for which the same are intended, and any
damage resulting to the same from use on the part of Tenant shall be paid for
by Tenant. No persons shall waste water by tying back or wedging the faucets
or in any other manner. Upon leaving the Premises, Tenant shall shut off all
water faucets and major electrical apparatus located within the Premises.
11. No Animals; Excessive Noise. No animals shall be allowed in the
offices, halls or corridors in the Building. No persons shall be allowed in
the offices, halls or corridors in the Building. No persons shall disturb the
occupants of this building or adjoining building or space by making excessive
noises, causing disturbances or vibrations, any of which may be reasonable
offensive to the occupants of the Building or adjoining Buildings or space.
12. Bicycles. Bicycles or other vehicles shall not be permitted anywhere
inside or on the sidewalks outside of the Building, except in those areas
designated by Landlord for bicycle parking.
13. Trash. Tenant shall not allow anything to be placed on the outside of
the Building, nor shall anything be thrown by Tenant out of the windows or
doors, or down the corridors or ventilating ducts or shafts of the Building.
All trash shall be placed in receptacles provided by Landlord for the Building
or Tenant for the Premises.
14. Windows. No window shades, blinds, screens, or draperies will be
attached or detached by Tenant and no awnings shall be placed over the windows
without Landlord's prior written consent.
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<PAGE> 27
15. Hazardous Operations and Items. Tenant shall not install or operate
any steam or gas engine or boiler, or carry on any mechanical business in the
Premises without Landlord's prior written consent, which consent may be
withheld in Landlord's absolute discretion. The use of oil, gas or inflammable
liquids for heating, lighting, or any other purpose is expressly prohibited.
Explosives or other articles deemed extra hazardous shall not be brought into
the Building.
16. Hours for Repairs, Maintenance and Alteration. Any repairs,
maintenance and alterations required or permitted to be done by Tenant under
the Lease shall be done only during the weekday ordinary business hours of the
Building unless Landlord shall have first consented in writing to such work
being done outside of such times. If Tenant desires to have such work done by
Landlord's employees on Saturdays, Sundays, holidays or weekdays outside of
ordinary business hours, Tenant shall pay the extra cost for such labor.
17. No Defacing of Premises. Except as permitted by Landlord by prior
written consent, Tenant shall not mark upon, paint signs upon, cut drill into,
drive nails or screws into, or in any way deface the walls, ceilings,
partitions, or floors of the Premises or of the Building, and any defacement,
damage or injury directly or indirectly caused by Tenant shall be paid for by
Tenant. Pictures of diplomas shall be hung on tacks or small nails. Tenant
shall not use adhesive hooks for such purposes.
18. Solicitation: Food and Beverages. Landlord reserves the right to
restrict, control or prohibit canvassing, soliciting and peddling within the
Building. Tenant shall not grant any concessions, licenses or permission for
the sale or taking of orders for food or services or merchandise in the
Premises, nor install or permit the installation or use of any machine or
equipment for dispensing goods or foods or beverages in the building, nor
permit the preparation, serving, distribution or delivery of food or beverages
in the Premises without the prior written approval of Landlord and only in
compliance with procedures prescribed by Landlord. Only persons approved by
Landlord shall be permitted to serve, distribute or deliver food and beverages
within the Building, or to use the public areas of the Building for that
purpose.
19. Captions. The caption for each of these rules and regulations is
provided as a matter of convenience only and shall be considered of no effect
in the construction of any provision or interpretation of these rules and
regulations.
20. Parking. Parking shall be only during Tenant's standard hours of
operation.
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<PAGE> 1
Exhibit 10.8
COMMERCIAL AND INDUSTRIAL LEASE
THIS LEASE made and entered into this 23rd day of January 1998, by and
between Bird and Saunders hereinafter called "Landlord," and 1-800 CONTACTS,
INC., hereinafter called "Tenant".
WITNESSETH:
In consideration of the covenants and promises contained herein and other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, it is agreed by the parties hereto as follows:
I. DEMISED PREMISES: Landlord hereby leases to Tenant and Tenant hereby
leases from Landlord all those certain premises hereinafter more fully
described, together with the buildings and other improvements thereon, for the
term and upon the rental herein set forth. Said demised premises consist more
particularly of an area containing approximately 9,988 square feet of a certain
building containing approximately 9,988 square feet, situated on a parcel of
land approximately .54C commonly known as 33E 12675S located in Draper City,
State of Utah.
Tenants shall have the right to use the common and parking areas jointly with
any other tenants of the building.
II. TERM:
TO HAVE AND TO HOLD said premises unto Tenant for a term of 2 years
beginning on the 1st day of February 1998, and ending on the 31st day of
January 2000.
If Landlord fails to deliver possession of premises ready for occupancy at
the commencement of the lease term for any reason beyond Landlord's control,
Landlord shall not be liable for any damage caused thereby, nor shall this
Lease become void or voidable, nor shall the Lease term be extended, but in
such event no rental shall be payable by Tenant to Landlord for any portion of
the lease term until Landlord can deliver possession of premises to Tenant
ready for occupancy by Tenant. however, in the event the demised premises are
not completed and ready for occupancy by March 1, 1998 the Tenant herein, at
his option, may cancel this lease without damage.
III. TERM AND CONDITION OF LEASE: This Lease is made on the following terms
and conditions, which are expressly agreed to by Landlord and Tenant:
1. RENT: The Tenant agrees to pay as rental to Landlord, at the address
specified in this Lease or at such other place Landlord may from time to time
designate in writing, the sum of: ONE HUNDRED SIXTEEN THOUSAND FOUR HUNDRED
DOLLARS. Said sum to be lawful money of the United States payable as follows:
<PAGE> 2
Tenant to pay $4,850.000 for first month's rent together with $4,850.00
for Security Deposit equal to last month's rent upon signing of Lease
Agreement. Then $4,850.00 on the first day of each month thereafter for the
term of the Lease.
(a) Late Charges: In the event Tenant fails to pay said rental
(including any additional rental due hereunder) on the due date or within
ten (10) days thereafter, a late charge of ten percent (10%) for every ten days
of delinquency shall be added to said renal and paid to Landlord together
therewith.
Tenant to have Four (6-month options) to renew this Lease at a rental rate
equal to the last month of the initial term increased by 3% annually. e.g. The
first 6 month option will be at $4,850 plus 3%; the next 3% increase will be at
the beginning of 3rd Option.
(b) Security Deposit: Tenant contemporaneously with the execution
of this Lease, has deposited with Landlord the sum of $4,850 receipt of which
is hereby acknowledged by Landlord, said deposit being given to secure the
faithful performance by the Tenant of all of the terms, covenants and
conditions of this Lease by the Tenant to be kept and performed during the term
hereof. The Tenant agrees that if the Tenant shall fail to pay the rent herein
reserved, promptly when due, said deposit may, at the option of the Landlord
(but Landlord shall not be required to), be applied to any rent due and
unpaid, and if the Tenant violates any of the other terms, covenants and
conditions of this Lease, said deposit shall be applied to any damages suffered
by Landlord as a result of Tenant's default to the extent of the amount of the
damages suffered.
Nothing contained in this paragraph shall in any way diminish or be
construed as waiving any of the Landlord's other remedies as provided herein,
or by law. If the security deposit is applied by Landlord for the payment of
over due rent or other sums due and payable to Landlord by Tenant hereunder,
then the Tenant shall, on the written demand of Landlord, forthwith remit to
Landlord a sufficient amount in cash to restore said security deposit to its
original amount, and Tenant's failure to do so within fifteen days after
receipt of such demand, shall constitute a breach of this Lease. Should Tenant
comply with all of the terms, covenants and conditions of this Lease and
promptly pay all of the rental herein provided for as it falls due, and all
other sums payable by Tenant to Landlord hereunder, said security deposit shall
be returned in full to Tenant at the end of the term of this Lease, or upon the
earlier termination of this Lease pursuant to the provisions hereof, except in
the event that the demised premises are sold as a result of the exercise of any
power of sale under any mortgage or deed of trust, in which event this Lease
shall be automatically amended to delete any reference to this paragraph, and
Tenant shall be entitled to immediate reimbursement of its security deposit
from the party then holding said deposit.
2. AUTHORIZED USE: Tenant shall use the Leased Premises for the following
purpose, and for no other purpose whatsoever, without the written consent of
Landlord first had and obtained: Contact Lens distribution and sales.
Tenant shall not commit or knowingly permit any waste of the Leased
Premises or use the same for any unlawful purpose. The Tenant will comply with
all applicable federal, state and local laws, ordinances and regulations
relating to the Leased Premises and its use and operation by the Tenant.
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<PAGE> 3
Tenant also agrees not to keep, use or permit to be kept or used on the
Leased Premises any flammable fluids, explosives ro any "hazardous substance,"
"solid waste," or without the prior written permission of Landlord.
3. [INTENTIONALLY OMITTED]
4. FIRE AND CASUALTY INSURANCE: It shall be the responsibility of the
Tenant to insure its equipment, furniture, fixtures and other personal
property. Tenant shall insure and keep insured his leasehold improvements
against the perils of fire, lightning, the "Extended Coverages," vandalism and
malicious mischief in an amount sufficient to provide recovery of not less than
ninety percent (90%) of the replacement value of the Tenant's leasehold
improvements such insurance shall be made payable to Landlord and Mortgagee (if
any) as their interests may appear. Tenant shall be responsible for any damage
to premises as a result of forced entry into his space or burglary thereof.
Such insurance provided for hereunder shall be in a company or companies
reasonably acceptable to Landlord and shall be procured and paid for by Tenant.
Such insurance may, at Tenant's election, be carried under any General Blanket
Insurance Policy of Tenant; provided, however, that upon Landlord's request, a
satisfactory Certificate of Insurance, together with proof of payment of the
premium, shall be deposited with Landlord.
Upon Landlord's written request, Tenant agrees to reinvest all insurance
proceeds received from the loss or damage or destruction of said leasehold
improvements to rebuild said improvements in a manner satisfactory to Landlord,
regardless of whether or not Tenant elects to terminate this Lease as herein
provided. In the event Tenant elects to terminate this Lease as provided in
Section III, Paragraph 13, and providing said leasehold improvements are not
rebuilt, Tenant does hereby assign all of his right, title and interest in the
insurance proceeds covering leasehold improvements to Landlord.
Landlord shall insure the premises exclusive of Tenant's leasehold
improvements against the perils of fire, lightning, the "Extended Coverages,"
vandalism and malicious mischief in an amount sufficient to provide recovery of
not less than ninety percent (90%) of replacement value.
(a) INCREASING INSURANCE RISK ON LEASED PREMISES: Tenant will not
permit said Leased Premises to be used for any purpose which would render the
insurance thereon void or cause cancellation thereof or the insurance risk more
hazardous or increase the insurance premiums in effect at the time just prior
to the commencement of the term of this Lease. Tenant will not keep, use or
sell, or allow to be kept, used or sold in or about the Leased Premises, any
articles or material which are prohibited by law or by standard fire insurance
policies of the kind customarily in force with respect to premises of the same
general type as those covered by this Lease. Tenant further agrees to pay to
the Landlord on demand, any increase in insurance premiums on the premises,
resulting from any cause whatsoever, over those premiums in effect at the time
just prior to the commencement of the terms of this Lease.
5. REPAIR AND CARE OF BUILDING AND PAYMENT OF UTILITIES BY TENANT: Tenant
agrees to keep the interior of the building and the improvements on the
premises outside the building and grounds in good condition and repair and
agrees to pay for all labor, materials and other repairs to the electrical
wiring, plumbing, air conditioning and heating
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<PAGE> 4
systems (including spring and fall servicing, and replacement of filters as
recommended by the manufacturers); and to clean the interior of the demised
premises as the same may or might be necessary in order to maintain said
demises premises in a clean, attractive and sanitary condition. Tenant shall
keep the sidewalks, if any, reasonably free from ice and snow. Landlord shall
keep the driveway and parking lots, if any, reasonably free from ice and snow.
Tenant shall pay all charges, including but not limited to charges for
water, sewer, heat, gas, electricity and other public utilities used on the
Leased Premises, including all replacements of light bulbs, tubes, ballasts and
starters within a reasonable time after they burn out.
6. REPAIR OF BUILDING BY LANDLORD: Landlord agrees, for the term of this
Lease, to maintain the roof, in good condition and repair and to repair any
latent defects in the exterior walls, floor joists, and foundations, and to
repair any defects in the plumbing, electrical, heating and air-conditioning
systems for one (1) year after date of occupancy, as well as any damage that
might result from acts of Landlord or Landlord's representatives. Landlord
shall not, however, be obligated to repair any such damage until written notice
of the need of repair shall have been given to Landlord by Tenant, and, after
such notice is so given, Landlord shall have a reasonable time in which to make
such repairs.
7. CONDITION OF THE PREMISES: Tenant accepts the Leased Premises in the
condition they are in at the time of its taking possession of said premises.
Tenant agrees, if, during the term of this Lease, Tenant shall change the usual
method of conducting Tenant's business on the Leased Premises, or should Tenant
install therein any new facilities, or should new laws and regulations be
imposed, Tenant will, at the sole cost and expense of Tenant, make alterations
or improvements in or to the demised premises which may be required by reasons
of any Federal or state law, or by any municipal ordinance, or regulation
applicable thereto. Landlord warrants that the building, on date of occupancy,
meets all currently applicable Federal, state and municipal laws and
ordinances.
8. ALTERATIONS OF BUILDING AND INSTALLATION OF FIXTURES AND OTHER
APPURTENANCES: Tenant may, with written consent of Landlord, which consent
shall not be unreasonably withheld or delayed, but at Tenant's sole cost
and expense in a good and workmanlike manner, make such alterations and repairs
to the Leased Premises as Tenant may require for the conduct of its business
without, however, materially altering the basic character of the building or
improvements, or weakening any structure on the demised premises. Tenant shall
have the right, with the written permission of Landlord, to erect, at Tenant's
sole cost and expense, such temporary partitions, including office partitions,
as may be necessary to facilitate the handling of Tenant's business and to
install telephone and telephone equipment and wiring, and electrical fixtures,
additional lights and wiring and other trade appliances. Any alternations or
improvements to the Leased Premises, including partitions, all electrical
fixtures, lights and wiring shall, at the option of Landlord, become the
property of Landlord, at the expiration or sooner termination of this Lease.
Should Landlord request Tenant to remove all or any part of the above mentioned
items, Tenant shall do so prior to the expiration of this Lease and repair the
premises as described below. Temporary shelves, bins, and machinery installed
by Tenant shall remain the property of Tenant and may be removed by Tenant at
any time; provided, however, that all covenants, including rent due hereunder
to Landlord shall have been complied with and paid. At the expiration or
sooner termination of this Lease, or any extension thereof, Tenant shall remove
said shelves, bins and
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<PAGE> 5
machinery and repair, in a good workmanlike manner, all damage done to the
Leased Premises by such removal.
9. ERECTION AND REMOVAL OF SIGNS: Tenant may, if building policy permits,
place suitable signs on the Leased Premises for the purpose of indicating the
nature of the business carried on by Tenant in said premises; provided,
however, that such signs shall be in keeping with other signs in the district
where the Leased Premises are located; and provided, further, that the location
and size of such signs shall be approved by Landlord prior to their erection.
Signs shall be removed prior to the expiration of this Lease and any damage to
the Leased Premises caused by installation or removal of signs shall be
repaired at expenses of the Tenant. All work shall be completed in a good
workmanlike manner.
10. GLASS: Tenant agrees to immediately replace all glass in the demised
premises if broken or damaged during the term of this Lease with glass of the
same quality as that broken or damaged.
11. RIGHT OF ENTRY BY LANDLORD: Tenant, shall permit inspection of the
demised premises during reasonable business hours by Landlord or Landlord's
agents or representatives for the purpose of ascertaining the condition of the
demised premises and in order that Landlord may make such repairs as may be
required to be made by Landlord under the terms of this Lease. Sixty (60) days
prior to the expiration of the Lease, Landlord may post suitable notice on the
demised premises that the same are "For Rent" and may show the premises to
prospective tenants at reasonable times. Landlord may not, however, thereby
unnecessarily interfere with the use of demised premises by Tenant.
12. ASSIGNMENT AND SUBLETTING: Neither this Lease nor any interest herein
may be assigned by Tenant voluntarily or involuntarily, by operation of law,
and neither all nor any part of the Leased Premises shall be sublet by Tenant
without the written consent of Landlord first had or otherwise obtained;
however, Landlord agrees not to withhold its consent unreasonably for Tenant to
sublet the demised premises. In the event the premises should be sublet, as
herein provided, at an increased rental, fifty (50%) percent of said increase
shall be paid to Landlord by Tenant as additional rental.
13. DAMAGE OR DESTRUCTION: If the demised premises or any part thereof
shall be damaged or destroyed by fire or other casualty, Landlord shall
promptly repair all such damage and restore the demised premises without
expense to Tenant, subject to delays due to adjustment of insurance claims,
strikes and other causes beyond Landlord's control. If such damage or
destruction shall render the premises untenable in whole or in part, the rent
shall be abated wholly or proportionately as the case may be until the damage
shall be repaired and the premises restored. If the damage or destruction
shall be so extensive as to require the substantial rebuilding, i.e.,
expenditure of fifty (50%) percent or more of replacement cost of the building
or buildings on the demised premises, Landlord or Tenant may elect to terminate
this Lease by written notice to the other given within thirty (30) days after
the occurrence of such damage or destruction. Landlord and Tenant hereby
release each other from responsibility for loss or damage occurring on or to
the Leased Premises or the premises of which they are a part or to the
contents of either thereof, caused by fire or other hazards ordinarily covered
by fire and extended coverage insurance policies and each waives all rights of
recovery against the other for such loss or damage. Willful misconduct
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<PAGE> 6
lawfully attributable to either party, whether in whole or in part a
contributing cause of the casualty giving rise to the loss or damage, shall not
be excused under the foregoing release and waiver.
14. INJURIES AND PROPERTY DAMAGE: Tenant agrees to indemnify and hold
harmless Landlord of and from any and all claims of any kind or nature arising
from Tenant's use of the demised premises during the term hereof, and Tenant
hereby waives all claims against Landlord for damage to goods, ware,
merchandise or for injury to persons in and upon the premises from any cause
whatsoever, except such as might result from the negligence of Landlord or
Landlord's representatives or from failure to Landlord to perform its
obligation hereunder within a reasonable time after notice in writing by Tenant
requiring such performance by Landlord. Tenant shall at all times during the
term hereof keep in effect in responsible companies liability insurance in the
names of and for the benefit of Tenant and Landlord with limits as follows:
Bodily Injury, $500,000.00 each occurrence; Property Damage, $250,000.00;
or in lieu thereof, a combined limit of bodily injury and property damage
liability of not less than $500,000.00.
Such insurance may, at Tenant's election, be carried under any general
blanket coverage of Tenant. A renewal policy shall be procured not less than
ten (10) days prior to the expiration of any policy. Upon Landlord's request,
each original policy or a certified copy thereof, or a satisfactory certificate
of the insured evidencing insurance carried with proof of payment of the
premium shall be deposited with Landlord. Tenant shall have the right to
settle and adjust all liability claims and all other claims against the
companies, but without subjecting Landlord to any liability or obligation.
15. SURRENDER OF PREMISES: Tenant agrees to surrender the Leased Premises
at the expiration, or sooner termination, of the term of this Lease, or any
extension thereof, in the same condition as when said premises were delivered
to Tenant, or as altered, pursuant to the provisions of this Lease, ordinary
wear, tear and damage by the elements excepted, and Tenant shall remove all of
its personal property. Tenant agrees to pay a reasonable cleaning charge
should it be necessary for Landlord to restore or cause to be restored the
premises to the same condition as when said premises were delivered to Tenant.
16. HOLDOVER: Should the Landlord permit Tenant to holdover the Leased
Premises or any part thereof, after the expiration of the term of this Lease,
then and unless otherwise agreed in writing, such holding over shall constitute
a tenancy from month-to-month only, and shall in no event be construed as a
renewal of this Lease and all provisions of this Lease not inconsistent with a
tenancy from month-to-month shall remain in full force and effect. During the
month-to-month tenancy, Tenant agrees to vacate the premises upon thirty (30)
days prior written notice from Landlord. The rental for the month-to-month
tenancy shall be set by the Landlord within 10 days after Landlord receives
notice from Tenant of its intention to continue to occupy premises.
17. QUIET ENJOYMENT: If and so long as Tenant pays the rents reserved by
this Lease and performs and observes all the covenants and provisions hereof,
Tenant shall quietly enjoy the demised premises, subject, however, to the terms
of this Lease, and Landlord will warrant and defend Tenant in the enjoyment and
peaceful possession of the demised premises throughout the terms of this Lease.
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<PAGE> 7
18. WAIVER OF COVENANTS: The failure of any party to enforce the
provisions of this Lease shall not constitute a waiver unless specifically
stated in writing, signed by the party whose rights are deemed waived,
regardless of a party's knowledge of a breach hereunder.
19. DEFAULT: If Tenant shall make default in the fulfillment of any of
the covenants and conditions hereof except default in payment of rent, Landlord
may, at its option, after fifteen (15) days prior notice to Tenant, make
performance for Tenant and for the purpose advance such amounts as may be
necessary. Any amounts so advanced, or any expense incurred, or sum of money
paid by Landlord by reason of the failure to Tenant to comply with any
covenant, agreement, obligation or provision of this Lease, or in defending any
action to which Landlord may be subjected by reason of any such failure for any
reason of this Lease, shall be deemed to be additional rent for the Leased
Premises and shall be due and payable to Landlord on demand. The acceptance by
Landlord of any installment of fixed rent, or of any additional rent due under
this or any other paragraph of this Lease, shall not be a waiver of any other
rent then due nor of the right to demand the performance of any other
obligation of the Tenant under this Lease. Interest shall be paid to Landlord
on all sums advanced by Landlord at an annual interest rate of 2% over the
prime rate charges by Zions First National Bank.
If Tenant shall make default in fulfillment of any of the covenants or
conditions of this Lease (other than the covenants fro the payment of rent or
other amounts) and any such default shall continue for a period of fifteen
(15) days after notice, then Landlord may, at is option, terminate this Lease
by giving Tenant written notice of such termination and, thereupon, this Lease
shall expire as fully and completely as if that day were the date definitely
fixed for the expiration of the term of this Lease and Tenant shall quit and
surrender the Leased Premises.
20. DEFAULT IN RENT, INSOLVENCY OF TENANT: If Tenant shall make default
in the payment of the rent reserved hereunder, or any part thereof, or in
making any other payment herein provided for, and any such default shall
continue for a period of ten (10) days, after written notice to Tenant, or if
the leased Premises or any part thereof shall be abandoned or vacated or if
Tenant shall be legally dismissed therefrom by or under any authority other
than Landlord, or if Tenant shall be legally dismissed therefrom by or under
any authority other than Landlord, or if Tenant shall file a voluntary petition
in bankruptcy or if Tenant shall file any petition or institute any proceedings
under any insolvency or Bankruptcy Act or any amendment thereto hereafter made,
seeking to effect is reorganization or a composition with its creditors, or if
any proceedings based on the insolvency of Tenant or relating to bankruptcy
proceedings, a receiver or trustee shall be appointed for Tenant or the Leased
Premises or if any proceedings shall be commenced for the reorganization of
Tenant or if the leasehold estate created hereby shall be taken on execution or
by any process of law or if Tenant shall admit in writing its inability to pay
its obligations generally as they become due, then Landlord, in addition to any
other rights or remedies it may have, shall have the immediate right of
re-entry and may 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. Landlord may elect to re-enter, as
herein provided, or Landlord may take possession pursuant to this Lease and
relet said premises or any part thereof for such term or terms (which may be
for a term extending beyond the term of this Lease) and at such rental or
rentals and upon such other terms and conditions as Landlord in the exercise of
Landlord's sole discretion may deem advisable with the right to make
alternations and repairs to said premises. Upon each subletting, Tenant shall
be immediately liable for and shall pay to Landlord, in addition to any
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<PAGE> 8
indebtedness due hereunder, the costs and expenses of such re-letting including
advertising costs, brokerages fees, any reasonable attorney's fees incurred and
the cost of such alternations and repairs incurred by Landlord, and the amount,
if any, by which the rent reserved in this Lease for the period of such
re-letting (up to but not beyond the term of this Lease) exceeds the amount
agreed to be paid as rent for the premises for said period by such re-letting.
If Tenant has been credited with any rent to be received by such re-letting and
such rents shall not be promptly paid to Landlord by the new Tenant, such
deficiency shall be calculated and paid monthly by Tenant. No such re-entry or
taking possession of the premises by Landlord shall be construed as an election
by Landlord to terminate this Lease unless the termination thereof be decreed
by a court of competent jurisdiction or stated specifically by the Landlord in
writing addressed to Tenant. Notwithstanding any such re-letting without
termination, Landlord may at any time terminate this Lease for any breach, in
addition to any other remedy Landlord may have, Landlord may recover from
Tenant all damages Landlord may incur by reason of such breach, including the
cost of recovering the premises including attorney's fees, court costs, and
storage charges and including the worth at the time of such termination of the
excess, if any, of the amount of rent and charges equivalent to rent reserved
in this Lease for the remainder of the stated term over the then chargeable
rent on the premises for the remainder of the stated term, all of which amounts
shall be immediately due and payable from Tenant to Landlord. In no event,
shall this Lease or any rights or privileges hereunder be an asset of Tenant
under any bankruptcy, insolvency or reorganization proceedings.
21. ENFORCEMENT: In the event either party shall enforce the terms of
this Lease by suit or otherwise, the party at fault shall pay the costs and
expenses incident thereto, including a reasonable attorney's fee.
22. MEDIATION AND ARBITRATION: If any dispute or claim in law or equity
arises out of this Lease, Tenant and Landlord agree in good faith to attempt to
settle such dispute or claim by mediation under the Mediation rules of the
American Arbitration Association. If such mediation is not successful in
resolving such dispute or claim, then such dispute or claim shall be decided by
neutral binding arbitration before a ingle arbitrator in accordance with the
Commercial Arbitration rules of the American Arbitration Association. Judgment
upon the aware rendered by the arbitrator may be entered in any court having
jurisdiction thereof. However, this paragraph does not apply to disputes or
claims arising under Section 78, Chapter 36, of the Utah Code.
23. FAILURE TO PERFORM COVENANT: Any failure on the part of either party
to this Lease to perform any obligations hereunder, other than Tenant's
obligation to pay rent, and any delay in doing any act required hereby shall be
excused if such failure or delay is caused by any strike, lockout, governmental
restriction or any similar cause beyond the control of the party so failing to
perform, to the extent and for the period that such continues.
24. RIGHTS OF SUCCESSORS AND ASSIGNS: The covenants and agreements
contained in the Lease will apply to, inure to the benefit of, and be binding
upon the parties hereto, their heirs, distributees, executors, administrators,
legal representatives, assigns, and upon their respective successors in
interest except as expressly otherwise hereinabove provided.
25. TIME: Time is of the essence of this Lease and every term, covenant
and condition herein contained.
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<PAGE> 9
26. LIENS: Tenant agrees not to permit any lien for monies owing by
Tenant to remain against the Leased Premises for a period of more than thirty
(30) days following discovery of the same by Tenant; provided, however, that
nothing herein contained shall prevent Tenant, in good faith and for good
cause, from contesting the claim or claims of any person, firm or corporation
growing out of Tenant's operation of the demised premises or costs of
improvements by Tenant on the said premises, and the postponement of payment of
such claim or claims, until such contest shall finally be decided shall not be
a violation of this Lease or any covenant thereof. Should any such lien be
filed and not released or discharges or action not commenced to declare the
same invalid within thirty (30) days after discovery of the same by Tenant,
Landlord may at Landlord's option (but without any obligation so to do) pay and
discharge such lien and may likewise pay and discharge any taxes, assessments
or other charges against the Leased Premises which Tenant is obligated
hereunder to pay and which may or might become a lien on said premises. Tenant
agrees to repay any sum so paid by Landlord upon demand therefore, as provided
for in paragraph 19 herein.
27. CONSTRUCTION OF LEASE: Words of any gender used in this Lease shall
be held to include any other gender, and words in the singular number shall be
held to include the plural when the sense requires.
28. SUBORDINATION: Landlord shall have the right to subordinate this
Lease to any ground lease, deed of trust or mortgage encumbering the Property,
any advances made on the security thereof and any renewals, modifications,
consolidations, replacements or extensions thereof, whenever made or recorded.
However, Tenant's right to quiet possession of the Property during the Lease
Term shall not be disturbed if Tenant pays the rent and performs all of
Tenant's obligations under this Lease and is not otherwise in default. If any
ground Landlord, beneficiary or mortgagee elects to have this Lease prior to
the lien of its ground lease, deed or trust or mortgage and gives written
notice thereof to Tenant, this Lease shall be deemed prior to such ground
lease, deed of trust or mortgage whether this Lease is dated prior or
subsequent to the date of said ground lease, deed of trust or mortgage or the
date of recording thereof.
29. ATTORNMENT: If Landlord's interest in the Property is acquired by any
ground Landlord, beneficiary under a deed of trust, mortgagee, or purchaser at
a foreclosure sale, Tenant shall attorn to the transferee of or successor to
Landlord's interest in the Property and recognize such transferee or successor
as Landlord under this Lease. Tenant waives the protection of any statute or
rule of law which gives or purports to give Tenant any right to terminate this
Lease or surrender possession of the Property upon the transfer of Landlord's
interest.
30. SIGNING OF DOCUMENTS: Tenant shall sign and deliver any instrument or
documents necessary or appropriate to evidence any such attornment or
subordination or agreement to do so. Such subordination and attornment
documents may contain such provisions as are customarily required by any ground
Landlord, beneficiary under a deed of trust or mortgagee. If Tenant fails to
do so within ten (10) days after written request, Tenant hereby makes,
constitutes and irrevocably appoints Landlord, or any transferee or successor
of Landlord, the attorney-in-fact of Tenant to execute and deliver any such
instrument or documents.
31. ESTOPPEL CERTIFICATES:
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<PAGE> 10
(a) Upon Landlord's written request, Tenant shall execute,
acknowledge and deliver to Landlord a written statement certifying: (i) that
none of the terms or provisions of this Lease have been changes (or if they
have been changes, stating how they have been changed); (ii) that this Lease
has not been canceled or terminated; (iii) that the last date of payment of the
Base Rent and other charges and the time period covered by such payment; (iv)
that Landlord is not in default under this Lease (or, if Landlord is claimed to
be in default, stating why); and (v) such other matters as may be reasonably
required by Landlord or the holder of a mortgage, deed of trust or lien to
which the Property is or becomes subject. Tenant shall deliver such statement
to Landlord within ten (10) days after Landlord's request. Any such statement
by Tenant may be given by Landlord to any prospective purchaser or encumbrancer
of the Property. Such purchaser or encumbrancer may rely conclusively upon
such statement as true and correct.
32. TENANT'S FINANCIAL CONDITION: Within ten (10) days after written
request from Landlord, Tenant shall deliver to Landlord such financial
statements as are reasonably required by Landlord to verify the net worth of
Tenant, or any assignee, subtenant, or guarantor of Tenant. In addition,
Tenant shall deliver to any lender designated by Landlord any financial
statements required by such lender to facilitate the financing or refinancing
of the Property. Tenant represents and warrants to Landlord that each such
financial statement is a true and accurate statement as of the date of such
statement. All financial statements shall be confidential and shall be used
only for the purposes set forth herein.
33. PARAGRAPH HEADINGS: The paragraph headings as to the contents of
particular paragraphs herein, are inserted only for convenience and are in no
way to be construed as part of such paragraph or as a limitation on the scope
of the particular paragraph to which they refer.
34. NOTICES: It is agreed that all notices required or permitted to be
given hereunder, or for purposes of billing, process, correspondence, and any
other legal purposes whatsoever, shall be deemed sufficient if given by a
communication in writing by United States mail, postage prepaid and certified
and addresses as follows:
If to Landlord, at the following address: Bird and Saunders
1212685 So. 125 E.
Draper,
Utah 84020 Phone: 571-0540
If to Tenant, at the following address: 1-800 Contacts, Inc.
51 West Center
Orem,
Utah 84057 Phone: 572-5088
35. COMMISSIONS: Landlord acknowledges the services of _____________ as
Real Estate Broker in this transaction and in consideration of the effort of
said Broker in obtaining Tenant herein, does hereby agree to pay to said broker
for services rendered, commissions on the rental of the demised premises at the
rate specified and in accordance with Exhibit "D" annexed to Landlord's copy of
this Lease and made a part hereof. Said Broker shall be entitled to his
commission regardless of whether or not the premises are taken as a result of
the exercise of the power of eminent domain or by an agreement in lieu thereof.
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<PAGE> 11
36. GOVERNING LAW: The terms of this Agreement shall be governed by and
construed in accordance with Utah law.
37. DOCUMENTATION: The parties hereto agree to execute such additional
documentation as may be necessary or desirable to carry out the intent of this
Agreement.
38. CONTINGENCY REGARDING USE: This Lease is contingent upon there being
no restrictions, covenants, agreements, laws, ordinances, rules or regulations,
which would prohibit Tenant from using the above described premises for the
purposes described herein.
39. INDEMNIFICATION OF LANDLORD: Tenant, as a material part of the
consideration to be rendered to Landlord under this Lease, shall hold Landlord
exempt and harmless from any damage or injury to any person, or the goods,
wares and merchandise of any person, arising from the use of the premises by
Tenant, or from the failure of the Tenant to keep the premises in good
condition and repair, as herein provided.
40. EMINENT DOMAIN: If at any time during the term of this Lease the
entire premises or any part thereof shall be taken as a result of the exercise
of the power of eminent domain or by an agreement in lieu thereof, this Lease
shall terminate as to the part so taken as of the date possession is taken by
the condemning authority. If all or any substantial portion of the premises
shall be taken, Landlord may terminate this Lease at its option, by giving
Tenant written notice of such termination within thirty (30) days of such
taking. If all or a portion of the premises taken are so substantial that
Tenant's use of the premises is substantially impaired, Tenant may terminate
this Lease pursuant to this Article. Unless terminated as herein provided for,
this Lease shall remain in full force and effect, except that the rent payable
by Tenant hereunder shall be reduced in the proportion that the area of the
premises so taken bears to the total premises. Landlord shall be entitled to
and Tenant hereby assigns to Landlord the entire amount of any award in
connection with such taking. Nothing in this Article shall give Landlord any
interest in or preclude Tenant from seeking, on its own account, any award
attributable to the taking of personal property or trade fixtures belonging to
Tenant, or for the interruption of Tenant's business.
41. REPRESENTATION REGARDING AUTHORITY: The persons who have executed
this Lease represent and warrant that they are duly authorized to execute this
Lease in their individual or representative capacity as indicated.
42. ENTIRE AGREEMENT: This Lease constitutes the entire agreement and
understanding between the parties hereto and supersedes all prior discussions,
understandings and agreements. This Lease may not be altered or amended except
by a subsequent written agreement executed by all of the parties hereto.
43. REVIEW OF DOCUMENTS: The parties hereto represent that they have read
and understand the terms of this Lease, and that they have sought legal counsel
to the extent deemed necessary in order to protect their respective interests.
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<PAGE> 12
44. KEYS & LOCKS: Tenant, upon the termination of the Tenancy, shall
deliver to the Landlord all the keys to the offices, rooms and restrooms which
have been furnished to the Tenant.
45. AUCTION, FIRE OR BANKRUPTCY SALE: Tenant shall not conduct any
auction nor permit any fire or bankruptcy sale to be held on the premises.
46. CARPETING DAMAGE AND CHAIRMATS: Tenant agrees to be responsible for
the replacement of carpeting in the demised premises if same shall be damaged
by burning, or stains resulting from spilling anything on said carpet,
reasonable wear and tear excepted. Tenant further agrees to use "chairmat"
under all chairs used with desks.
47. AGENCY DISCLOSURE: At the signing of this Agreement the listing
agent, Ron Knight represents (X) Landlord (X) Tenant, and the selling agent,
Ron Knight represents (X) Landlord (X) Tenant. Landlord and Tenant confirm
that prior to signing this Agreement written disclosure of the agency
relationship(s) was provided to him/her.
( ) Landlord's initials
( ) Tenant's initials
48. ACCEPTANCE: This Lease must be accepted by all parties on or before
___________.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
executed as of the day and year first above written.
LANDLORD: TENANT:
BY: /s/ Michael Saunders BY: /s/ John F. Nichols
-------------------- -------------------
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<PAGE> 14
ADDENDUM
Addendum to that certain Lease Agreement dated January 23, 1998, between 1-800
Contacts. Inc. as Tenant and Bird and Saunders as Landlord covering the
premises at 33 E. 12675 So., Draper, Utah 84020:
TO WIT:
1. Landlord agrees to deliver premises to Tenant broom clean. Tenant to
have use of Landlord's pallet racking currently against North wall and the
compressor located in compressor room in NW corner of demised area in
south portion of building.
2. Tenant to have the right to remove all or part of demising wall as it
presently exists dividing building in half. Upon vacating demised area
Tenant to restore demising wall to its original condition at the request
of Landlord.
3. Tenant to give Landlord 72 hours notice of intent to demolish wall along
east side of tile floor room so that Landlords can remove motorized
roll-up door and man door. Any demolishing or removing of partitions to
be done in a work-manlike manner.
4. Tenant to pay all utilities including water, sewer, power, gas, telephone
expenses.
5. All HVAC in south portion of building to be in working order at time of
commencement of this Lease. Swamp air conditioners to be in working
condition at time to start up in customary season of warm weather.
6. Landlord agrees to remove overhead lighting bank and exhaust piping in
"Clean room" within 7 days from date of written request by Tenant.
7. Tenant to have access to demised area by January 26, 1998 to begin
installation of telephone lines, etc. Rent to begin February 1, 1998.
8. Tenant to have right to install metal bars on all windows for security.
Tenant to remove all window bars at the end of tenancy as requested by
Landlord or at Landlord's option, and to restore surface of building to
its original condition prior to the installation of metal bars less minor
wear and tear.
9. Tenant to be responsible for automatic sprinkler system for front lawn --
to see that it is operating properly and to pay for the water thus used
thereby. Any major repairs required to the system to be reported to
Landlords.
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<PAGE> 1
Exhibit 10.9
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 01-05-1998 07-31-1998 9003 Y 7420 7057008 11049
============================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document
to any particular loan or item.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT is entered into between 1-800 CONTACTS, INC.
(referred lo below as "Grantor"); and ZIONS FIRST NATIONAL BANK (referred to
below as "Lender"). For valuable consideration, Grantor grants to Lender a
security Interest In the Collateral to secure the Indebtedness and agrees that
Lender shall have the rights stated in this Agreement with respect to the
Collateral, in addition to all other rights which Lender may have by law.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have
the meanings attributed to such terms In the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
Collateral. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
All Inventory, chattel paper, accounts, equipment and general intangibles
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions for
any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general Intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described In this Collateral section.
(d) All proceeds (Including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property described
In this Collateral section.
(e) All records and data relating to any of the property described In
this Collateral section, whether in the form of a writing, photograph,
microffim. microfiche, or electron media, together with all of Grantor's
right, file, and interest in and to all computer software required to
utilize, create, maintain, and process any such records or data on
electronic media.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below In the section
titled "Events of Default."
Grantor. The word "Grantor" means 1-800 CONTACTS, INC., its successors and
assigns
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in connection
with the Indebtedness.
Indebtedness. The word "Indebtedness" means the Indebtedness evidenced by
the Note, including all principal and interest, together with all other
Indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as well
as all claims by Lender against Grantor, or any one or more of them, whether
existing now or later, whether they are voluntary or Involuntary, due or not
<PAGE> 2
01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 2
(Continued)
================================================================================
due, direct or Indirect, absolute or contingent, liquidated or unliquidated;
whether Grantor may be liable individually or jointly with others; whether
Grantor may be obligated as guarantor, surety, accommodation party or
otherwise; whether recovery upon such Indebtedness may be or hereafter may
become barred by any statute of limitations; and whether such indebtedness may
be or hereafter may become otherwise unenforceable,
Lender. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
Note. The word "Note" means the note or credit agreement dated January 6,
1998, In the principal amount of $3,000,000.00 from I-800 CONTACTS, INC.
to Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substilutions for the note or
credit agreement.
Related Documents. The words "Related Documents" mean and Include without
Initiation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other Instruments, agreements and documents,
whether now or hereafter existing, executed In connection with the
Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory
security interest in and hereby assigns, conveys, delivers, pledges, and
transfers all of Grantor's right, title and interest in and to Grantor's
accounts with Lender (whether checking, savings, or some other account),
including all accounts held jointly with someone else and all accounts Grantor
may open in the future, excluding, however, all IRA and Keogh accounts, and all
trust accounts for which the grant of a security interest would be prohibited
by law. Grantor authorizes Lender, to the extent permitted by applicable law,
to charge or setoff all Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
Perfection of Security Interest. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lendees Interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as Its
Irrevocable attorney-in-fact for the purpose of executing any documents
necessary to Perfect or to continue the security Interest granted in this
Agreement. Lender may at any time, and without further authorization from
Grantor, file a carbon, photographic or other reproduction of any
financing statement or of this Agreement for use as a financing statement.
Grantor will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. This is a continuing Security Agreement and will continue in
effect even though all or any part of the Indebtedness is paid in full and
even though for a period of time Grantor may not be indebted to Lender.
No Violation. The execution and delivery of this Agreement will not
violate any law or agreement governing Grantor or to which Grantor is a
party, and its certificate or articles of incorporation and bylaws do not
prohibit any term or condition of this Agreement.
Enforceability of Collateral. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral
have authority and capacity to contract and are in fact obligated as they
appear to be on the Collateral. At the time any account becomes subject
to a security interest in favor of Lender, the account shall be a good and
valid account representing an undisputed, bona fide indebtedness incurred
by the account debtor, for merchandise held subject to delivery
instructions or theretofore shipped or delivered pursuant to a contract of
sale, or for services theretofore performed by Grantor with or for the
account debtor; there shall be no setoffs or counterclaims against any
such account; and no agreement under which any deductions or discounts may
be claimed shall have been made with the account debtor except those
disclosed to Lender in writing.
Location of Collateral. Grantor, upon request of Lender, will deliver to
Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including, without
limitation the following: (a) all real property owned or being purchased
by Grantor; (b) all real property being rented or leased by Grantor; (c)
all storage facilities owned, rented, leased, or being used by Grantor;
and (d) all other properties where Collateral is or may be located.
Except in the ordinary course of its business, Grantor shall not remove
the Collateral from its existing locations without the prior written
consent of Lender.
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01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 3
(Continued)
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Transactions Involving Collateral. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale
in the ordinary course of Grantor's business does not include a transfer
in partial or total satisfaction of a debt or any bulk sale. Grantor
shall not pledge, mortgage, encumber or otherwise permit the Collateral to
be subject to any lien, security interest, encumbrance, or charge, other
than the security interest provided for in this Agreement, without the
prior written consent of Lender. This includes security interests even if
junior in right to the security interests granted under this Agreement.
Unless waived by Lender, all proceeds from any disposition of the
Collateral other than in the normal course of business (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
Title. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing
statement covering any of the Collateral is on file in any public office
other than those which reflect the security interest created by this
Agreement or to which Lender has specifically consented. Grantor shall
defend Lender's rights in the Collateral against the claims and demands of
all other persons.
Collateral Schedules and Locations. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and
equipment, Grantor shall deliver to Lender, as often as Lender shall
require, such lists, descriptions, and designations of such Collateral as
Lender may require to identify the nature, extent, and location of such
Collateral. Such information shall be submitted for Grantor and each of
its subsidiaries or related companies.
Maintenance and Inspection of Collateral. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall
have the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of
all cases involving the return, rejection, repossession, loss or damage of
or to any Collateral, of any request for credit or adjustment or of any
other dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral; except such happenings and events which occur in the
normal course of business.
Taxes, Assessments and Liens. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's Interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, reasonable attorneys' fees or other charges that
could accrue as a result of foreclosure or sale of the Collateral. In any
contest Grantor shall defend itself and Lender and shall satisfy any final
adverse judgment before enforcement against the Collateral. Grantor shall
name Lender as an additional obligee under any surety bond furnished in
the contest proceedings.
Compliance With Governmental Requirements. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
Hazardous Substances. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499
("SARA"), the Hazardous Materials Transportation Act, 49 U.S.C. Section
1801, et seq., the Resource Conservation and
<PAGE> 4
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Recovery Act, 42 U.S.C. Section 6901, et seq., or other applicable state
or Federal laws, rules, or regulations adopted pursuant to any of the
foregoing. The terms "hazardous waste" and "hazardous substance" shall
also include, without limitation, petroleum and petroleum by-products or
any fraction thereof and asbestos. The representations and warranties
contained herein are based on Grantor's due diligence in investigating the
Collateral for hazardous wastes and substances. Grantor hereby (a)
releases and waives any future claims against Lender for indemnity or
contribution in the event Grantor becomes liable for cleanup or other
costs under any such laws, and (b) agrees to indemnify and hold harmless
Lender against any and all claims and losses resulting from a breach of
this provision of this Agreement. This obligation to indemnify shall
survive the paymentof the indebtedness and the satisfaction of this
Agreement.
Maintenance of Casualty Insurance. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis
reasonably acceptable to Lender and issued by a company or companies
reasonably acceptable to Lender. Grantor, upon request of Lender, will
deliver to Lender from time to time the policies or certificates of
insurance in form satisfactory to Lender, including stipulations that
coverages will not be canceled or diminished without at least ten (10)
days'" prior written notice to Lender and not including any disclaimer of
the insurer's liability for failure to give such a notice. Each insurance
policy also shall include an endorsement providing that coverage in favor
of Lender will not be impaired in any way by any act, omission or default
of Grantor or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest, Grantor
will provide Lender with such loss payable or other endorsements as Lender
may require. If Grantor at any time fails to obtain or maintain any
insurance as required under this Agreement, Lender may (but shall not be
obligated to) obtain such insurance as Lender deems appropriate, irduding
if it so chooses "single interest insurance," which will cover only
Lendees interest in the Collateral.
Application of Insurance Proceeds. Grantor shall promptly notify Lender
of any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or
restoration. If Lender does not consent to repair or replacement of the
Collateral, Lender shall retain a sufficient amount of the proceeds to pay
all of the Indebtedness, and shall pay the balance to Grantor. Any
proceeds which have not been disbursed within six (6) months after their
receipt and which Grantor has not committed to the repair or restoration
of the Collateral shall be used to prepay the indebtedness.
Insurance Reserves. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be
created by monthly payments from Grantor of a sum estimated by Lender to
be sufficient to produce, at least fifteen (15) days before the premium
due date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the Insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds In trust for Grantor,
and Lender Is not the agent of Grantor for payment of the Insurance
premiums required to be paid by Grantor. The responsibility for the
payment of premiums shall remain Grantors sole responsibility.
Insurance Reports. Grantor, upon request of Lender, shall furnish to
Lender reports on each existing policy of insurance showing such
information as Lender may reasonably request Including the following: (a)
the name of the Insurer, (b) the risks insured; (c) the amount of the
policy; (d) the property insured; (e) the then current value on the basis
of which insurance has been obtained and the manner of determining that
value; and (f) the expiration date of the policy. In addition, Grantor
shall upon request by Lender (however not more often than annually) have
an independent appraiser satisfactory to Lender determine, as applicable,
the cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and
except as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner not inconsistent with this
Agreement or the Related Documents, provided that Grantor's right to possession
and beneficial use shall not apply to any Collateral where possession of the
Collateral by Lender is required by law to perfect Lender's security interest
in such Collateral. Until otherwise notified by Lender, Grantor may collect
any of the Collateral consisting of accounts. At any time and even though no
Event of Default exists, Lender may exercise Rs rights to called the accounts
and to notify account debtors to make payments directly to Lender for
application to the Indebtedness. If Lender at any time has possession of any
Collateral, whether before or after an Event of Default, Lender shall be deemed
to
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01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 5
(Continued)
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to have exercised reasonable care in the custody and preservation of the
Collateral if Lender takes such action for that purpose as Grantor shall
request or as Lender, in Lender's sole discretion, shall deem appropriate under
the circumstances, but failure to honor any request by Grantor shall not of
Itself be deemed to be a failure to exercise reasonable care. Lender shall not
be required to take any steps necessary to preserve any rights In the
Collateral against prior parties, nor to protect, preserve or maintain any
security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without
limitation all taxes, liens, security Interests, encumbrances, and other
claims, at any time levied or placed on the Collateral. Lender also may (but
shall not be obligated to) pay all costs for Insuring, maintaining and
preserving the Collateral. All such expenditures incurred or paid by Lender
for such purposes seat then bear Interest at the rate charged under the Note
from the date Incurred or paid by Lender to the date of repayment by Grantor.
All such expenses shall become a part of the Indebtedness and, at Lendees
option, will (a) be payable on demand, (b) be added to the balance of the Note
and be apportioned among and be payable with any Installment payments to become
due during either (i) the term of any applicable Insurance policy or (iii) the
remaining term of the Note, or (c) be treated as a balloon payment which will
be due and payable at the Note's maturity. This Agreement also will secure
payment of these amounts. Such right shall be in addition to all other rights
and remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Grantor to make any payment when due
on the Indebtedness.
Other Defaults. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
Default In Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, In favor of any other creditor or
person that may materially affect any of Borrower's property or Borrower's
or any Grantors ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents Is false or misleading in any material
respect, either now or at the time made or furnished.
Defective Collateralization. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral documents to create a valid and perfected security interest or
lien) at any time and for any reason.
Insolvency. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantors property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral
securing the Indebtedness. This includes a garnishment of any of
Grantor's deposit accounts with Lender. However, this Event of Default
shall not apply if there Is a good faith dispute by Grantor as to the
validity or reasonableness of the claim which is the basis of the creditor
or forfeiture proceeding and If Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in is sole discretion, as being an adequate reserve
or bond for thedispute.
Events Affecting Guarantor. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or such Guarantor dies
or becomes incompetent. Lender, at its option, may, but shall not be
required to, permit the Guarantor's estate to assume unconditionally the
obligations arising under the guaranty in a manner satisfactory to Lender,
and, in doing so, cure the Event of Default.
Adverse Change. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
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01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 7
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Cumulative Remedies. All of Lender's rights and remedies, whether
evidenced by this Agreement or the Related Documents or by any other
writing, shall be cumulative and may be exercised singularity or
concurrently. Election by Lender to pursue any remedy shall not exclude
pursuit of any other remedy, and an election to make expenditures or to
take action to perform an obligation of Grantor under this Agreement,
after Grantor's failure to perform, shall not affect Lender's right to
declare a default and to exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted
by Lender in the State of Utah. If there is a lawsuit, Grantor agrees
upon Lender's request to submit to the jurisdiction of the courts of the
State of Utah. Subject to the provisions on arbitration, this Agreement
shall be governed by and construed in accordance with the laws of the
State of Utah.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM
"PARTIES" MEANS THE LENDER, ANY OTHER SIGNERS HERETO AND
PERMITTED SUCCESSORS AND ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE
PARTIES AND SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED
AND DIFFERENT FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE
FACTUAL FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO
APPEAL OR TO SEEK MODIFICATION OF RULINGS BY ARBITRATORS IS
STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR
WHO IS OR WAS AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR
ATTORNEY OR THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including but not
limited to those arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising from
an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted In Salt Lake City, Utah. The arbitrators) shall have the
qualifications set forth In subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable in a judicial action brought
by a party shall apply to any arbitration or reference proceedings
hereunder.
(b) In any judicial action or proceeding arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered In
connection herewith, including but not limited to a claim based on or
arising from an alleged tort, if the controversy or claim is not submitted
to arbitration as provided and limited In subparagraph (a) hereto, all
decisions of fact and law shall be determined by a reference in accordance
with Rule 63 of the Federal Rules of Civil Procedure or Rule 63 of the Utah
Rules of Civil Procedure or other comparable, applicable reference
procedure. The parties shall designate to ft court the referee(s) selected
under the auspices of the American Arbitration Association in the same
manner as arbitrators are selected In Association-sponsored arbitration
proceedings. The referee(s) shall have the qualifications set forth In
subparagraph (c) hereto.
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01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 8
(Continued)
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(c) The arbitrators) or rateree(s) shall be selected In accordance with the
rules of the American Arbitration Association from panels maintained by the
Association. A single arbitrator or referee shall be knowledgeable in the
subject matter of the dispute. Where three arbitrators or referees conduct
an arbitration or reference proceeding, the claim shah be decided by a
majority vote of the three arbitrators or referees, at least one of whom
must be knowledgeable In the subject matter of the dispute and at least one
of whom must be a practicing attorney. The arbitrator(s) or referee(s)
shall award recovery of all costs and fees (including reasonable Attorneys'
fees, administrative fees, arbitrators" fees, and court costs). The
arbitrator(s) or referee(s) also may grant provisional or ancillary remedies
such as, for example, injunctive relief, attachment, or the appointment of a
receiver, either during the pendency of the arbitration or reference
proceeding or as part of the arbitration or reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following Initiation: the
arbitration or reference award Is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); If the award
exceeds that limit, either party may commence legal action for a court trial
de novo. Such legal action must be filed within thirty (30) days following
the date of the arbitration or reference award; if such legal action is not
filed within that time period, the amount of the arbitration or reference
award shall be binding. The computation of the total amount of an
arbitration or reference award shah include amounts awarded for arbitration
loan, attorneys' fees, interest, and all other related costs.
(e) At the Lender's option, foreclosure under a dead of trust or mortgage
may be accomplished either by exercise of a power of sale under the deed of
trust or by judicial foreclosure. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration If any other
party contests such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other provision of
this Agreement, the Federal Arbitration Act, 9 U.S.C. Section I et seq.,
shall apply to the construction and Interpretation of this arbitration
paragraph.
Attorneys' Fees; Expenses. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including reasonable attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor shall
pay the costs and expenses of such enforcement. Costs and expenses include
Lender's reasonable attorneys' fees and legal expertises whether or not a
salaried employee of Lender and whether or not there is a lawsuit, including
reasonable attorneys' fees and legal expenses for bankruptcy proceedings (and
Including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Grantor also
shall pay all court costs and such additional fees as may be directed by the
Court.
Caption Headings. Caption headings In this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Multiple Parties; Corporate Authority. All obligations of Grantor under this
Agreement shall be joint and several, and all references to Grantor shall mean
each and every Grantor. This means that each of the persons signing below is
responsible for all obligations in this Agreement.
Notices. All notices required to be given under this Agreement shall be given
in writing, may be sent by telefacsimile (unless otherwise required by law),
and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the notice Is to
be given at the address shown above. Any party may change its address for
notices under this Agreement by giving formal written notice to the other
parties, specifying that the purpose of the notice is to change the party"s
address. To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor wig keep Lender informed at all times of Grantors
current addresses).
Power of Attorney. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, cow, receive, receipt for, sue and r9oover all sums
of money or other property which may now or hereafter become due, owing or
payable from the Collateral; (b) to execute, sign and endorse any and al
claims, instruments, receipts, checks, drafts or warrants Issued in payment for
the Collateral; (c) to settle or compromise any and all claims arising under
the Collateral, and, in the place and stead of Grantor, to execute and deliver
its release and settlement for the claim; and (d) to file any claim or claims
or to take any action or institute or take part In any proceedings, either in
its own name or in the name of Grantor, or otherwise, which in the discretion
of Lender may seem to be necessary or advisable. This power is given as
security for the Indebtedness, and the authority hereby conferred Is and shall
be Irrevocable and shall remain In full force and effect unfit renounced by
Lender.
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01-05-1998 COMMERCIAL SECURITY AGREEMENT Page 9
(Continued)
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Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstances such
finding shall not render that provision invalid or unenforceable as to any
other persons or circumstances. If feasible, any such offending provision
shall be deemed to be modified to be within the limits of enforceability or
validity; however, if the offending provision cannot be so modified, it shall
be stricken and all other provisions of this Agreement In all other respects
shall remain valid and enforceable.
Successor Interests. Subject to the limitations set forth above on transfer of
the Collateral, this Agreement shall be binding upon and inure to the benefit
of the parties, their successors and assigns.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent of subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF
JANUARY 5, 1998.
BORROWER:
1-800 CONTACTS, INC.
By: /s/ Jonathan C. Coon By: /s/ John F. Nichols
-------------------------------- -----------------------------------
JONATHAN C. COON, PRESIDENT JOHN NICHOLS, VICE PRESIDENT
<PAGE> 9
FIRST AMENDMENT TO LOAN AGREEMENT
This First Amendment to Loan Agreement (the "Amendment") is executed this
5th day of January, 1998, by and between 1-800 CONTACTS, INC., formerly known
as 1-800-LENS NOW, INC., (the "Borrower") and ZIONS FIRST NATIONAL BANK (the
"Lender").
WHEREAS, Borrower and Lender entered into that certain Loan Agreement
dated October 1, 1997, which provided, among others things for Lender to
provide a Revolving Line of Credit in the principal amount of One Million
Dollars (1,000,000.00) (The "Loan Agreement"); and
WHEREAS, Borrower has requested Lender to renew and Increase the
outstanding Revolving Line of Credit to Three Million Dollars (3,000,00.00).
WHEREAS, Lender has agreed to such request provided, among other things,
Borrower executes and delivers this Amendment.
NOW THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Loan Agreement is hereby amended as follows:
(all capitalized terms not otherwise defined have the same meaning as provided
in the Loan Agreement).
1. The Section entitled BORROWING BASE, is hereby deleted in Rs entirety and
replaced as follows:
BORROWING BASE. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $3,000,000.00 until January 31, 1998,
$2,750,000.00 on February 28, 1998 to $2,225,000.00 on March 31, 1998 to
$1,750,000.00 and on April 30, 1998 to $1,000,000.00. If initial public
offering is completed for at least $10,000,000.00 the line of credit may
remain at $1,500,000.00 on April 30, 1998 and thereafter; or (b) 50.000%
of the aggregate amount of Eligible Inventory.
2. The Section entitled INVENTORY REPORT is hereby deleted in its entirety
and replaced as follows:
INVENTORY REPORT. Borrower shall furnish to Lender a weekly inventory
report as requested within (1) day from week end, but no later than the
Monday of each week for the prior week.
3. A New Section entitled MONTHLY FINANCIAL STATEMENTS is hereby added to
the Loan Agreement:
MONTHLY FINANCIAL STATEMENTS. Until such time as the Initial Public
Offering is completed, Borrower shall provide Borrowers balance sheet and
profit loss statement monthly within forty five (45) days of the end of
each month.
<PAGE> 10
4. The Section entitled COLLATERAL RECORDS is hereby deleted in its entirety
and replaced as follows:
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Inventory, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Inventory and records itemizing and describing the kind, type, quality, and
quantity of Inventory, Borrowers Inventory costs and selling prices, and the
daily withdrawals and additions to Inventory. The following is an accurate
and complete list of all locations at which Borrower keeps or maintains
business records concerning Borrower"s Inventory: 13751 South Wadsworth Park
Drive, Building D, Suite 140, Draper, UT. and 33 East 12675 South, Draper,
UT 84020.
5. The Section entitled INSECURITY is hereby deleted in its entirety.
Except as amended herein, all other terms and conditions of the Loan
Agreement remain in full force and effect and are applicable to this Amendment.
IN WITNESS WHEREOF, Borrower and Lender have executed this Amendment as of
the date and year first above written.
1-800 CONTACTS, INC. ZIONS FIRST NATIONAL BANK
By: /s/ Jonathan C. Coon By: /s/ Brett Eliason
-------------------------- ---------------------------
Jonathan C. Coon Brett Eliason
Its: President Its: Vice President
<PAGE> 11
SIDE LETTER TO LINE OF CREDIT AGREEMENTS
Whereas as 1-800 CONTACTS, Inc. ("Borrower") and Zions First National Bank
("Lender") have entered into various agreements related to a line of credit
extended by Lender to Borrower, including but not limited to a Loan Agreement,
as amended, Promissory Note, Commercial Security Agreement, and various
Commercial Guaranty agreements ("LOC Agreements"), all of even or approximate
date herewith;
Borrower and Lender desire to memorialize their understanding with regard to
certain matters pertaining to such LOT Agreements, as follows:
The parties acknowledge that Borrower is in the process of issuing its stock to
the public via an Initial Public Offering ("IPO"). Pursuant to such issuance,
Borrower filed on November 26, 1997 a Form S-1 Registration Statement with the
Securities and Exchange Commission ("SEC"), a complete copy of which has been
provided to Lender.
Notwithstanding any representations, warranties, covenants and other assertions
made by Borrower in the LOT Agreements, Lender acknowledges and is fully aware
that Borrower may not be in compliance with certain laws, regulations, and so
forth. Under is also aware of Borrower"s disclosures regarding the same in its
Form S-1 Registration Statement filed with the SEC.
Notwithstanding any representations, warranties, covenants and other assertions
made by Borrower in the LOT Agreements, Lender acknowledges and is fully aware
that just prior to the completion of Borrower's IPO and simultaneous with or
subsequent to Borrower's IPO, certain transactions related to ownership,
corporate status, distributions, and so forth are anticipated. Lender is also
aware of Borrower's disclosures regarding the same in its Form S-1 Registration
Statement filed with the SEC. Additionally, Lender acknowledges and is fully
aware that certain of the reporting requirements, covenants, and so forth
contained in the LOT Agreements will need to be adjusted upon successful
completion of Borrower's IP0.
Notwithstanding any representations, warranties, covenants and other assertions
made by Borrower in the LOT Agreements, Lender acknowledges and is fully aware
that Borrower intends to repay its debt outstanding to the subordinated
creditor, Donald A. Yacktman, with proceeds from its IPO. After repayment of
the Yacktman debt, Borrower's line of credit from Lender may continue to be
outstanding.
Lender acknowledges that information provided to Lender by Borrower pursuant to
the LOT Agreements is confidential; and, Lender agrees to keep such information
strictly confidential unless it has prior written consent from Borrower to do
otherwise.
Acknowledged, Agreed and Accepted:
Lender: Borrower:
Zions First National Bank 1-800 CONTACTS, Inc.
By: /s/ Brett Eliason By: /s/ Jonathan Coon
------------------------- -------------------------------
Authorized Officer Authorized Officer
Date: 1/7/98 Date. 1/6/98
------------- ---------------
<PAGE> 12
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 01-05-1998 07-31-1998 9003 Y 7420 7057008 11049
==============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
==============================================================================================================================
Principal Amount: $3,000,000.00 Initial Rate: 10.000% Date of Note: January 5, 1998
</TABLE>
PROMISE TO PAY. 1-800 CONTACTS, INC. (Borrower") promises to pay to ZIONS FIRST
NATIONAL BANK ("Lender"), or order, In lawful money of the United States of
America, the principal amount of Three Million & 00/100 Dollars ($3,OOO,000.00)
or so much as may be outstanding, together with Interest on the unpaid
outstanding principal balance of each advance. Interest shall be calculated
from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this low In one payment of all outstanding
principal plus all accrued unpaid Interest on July 31, 1998. In addition,
Borrower will pay regular monthly payments of accrued unpaid Interest beginning
February 1, 1998, and all subsequent Interest payments are due on the same day
of each month after that. The annual Interest rate for this Note Is computed
on a 365/360 basis; that Is, by applying the ratio of the annual Interest rate
over a year of 360 days, multiplied by the outstanding principal balance,
multiplied by the actual number of days the principal balance is outstanding.
Borrower will pay Lender at Lender"s address shown above or at such other place
as Lender may designate in writing. Unless otherwise agreed or required by
applicable law, payments will be applied first to any unpaid collection costs
and any late charges, then to any unpaid interest, and any remaining amount to
principal.
VARIABLE INTEREST RATE. The Interest rate on this Note is subject to change
from time to time based on -changes In an Index which is the ZIONS FIRST
NATIONAL BANK PRIME RATE (the "Index). "PRIME RATE" MEANS AN INDEX WHICH IS
DETERMINED DAILY BY THE PUBLISHED COMMERCIAL LOAN VARIABLE RATE INDEX HELD BY
ANY TWO OF THE FOLLOWING BANKS: CHASE MANHATTAN BANK, WELLS FARGO BANK N.A.,
AND BANK OF AMERICA N.T. & S.A. IN THE EVENT NO TWO OF THE ABOVE BANKS HAVE
THE SAME PUBLISHED RATE, THE BANK HAVING THE MEDIAN RATE WILL ESTABLISH
LENDERS" PRIME RATE. IF, FOR ANY REASON BEYOND THE CONTROL OF LENDER, ANY OF
THE AFOREMENTIONED BANKS BECOMES UNACCEPTABLE AS A REFERENCE FOR THE PURPOSE OF
DETERMINING THE PRIME RATE USED HEREIN, LENDER MAY, FIVE DAYS AFTER POSTING
NOTICE IN LENDERS OFFICES, SUBSTITUTE ANOTHER COMPARABLE BANK FOR THE ONE
DETERMINED UNACCEPTABLE. AS USED IN THIS PARAGRAPH, "COMPARABLE BANK" SHALL
MEAN ONE OF THE TEN LARGEST COMMERCIAL BANKS HEADQUARTERED IN THE UNITED STATES
OF AMERICA. THIS DEFINITION OF PRIME RATE IS TO BE STRICTLY INTERPRETED AND IS
NOT INTENDED TO SERVE ANY PURPOSE OTHER THAN PROVIDING AN INDEX TO DETERMINE
THE VARIABLE INTEREST RATE USED HEREIN. IT IS NOT THE LOWEST RATE AT WHICH
LENDER MAY MAKE LOANS TO ANY OF ITS CUSTOMERS, EITHER NOW OR IN THE FUTURE.
Lender will tell Borrower the current Index rate upon Borrower's request.
Borrower understands that Lender may make loans based on other rates as well.
The Interest rate change will not occur more often than each DAY. The Index
currently Is 8.500% per annum. The Interest rate to be applied to the unpaid
principal balance of this Note will be at a rate of 1.500 percentage points
over the Index, resulting in an Initial rate of 10.000% per annum. NOTICE:
Under no circumstances will the interest rate on this Note be more than the
maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance
charges are earned fully as of the date of the loan and will not be subject to
refund upon early payment (whether voluntary or as a result of default), except
as otherwise required by law. Except for the foregoing, Borrower may pay
without penalty all or a portion of the amount owed earlier than It Is due.
Early payments will not, unless agreed to by Lender In writing, relieve
Borrower of Borrower"s obligation to continue to make payments of accrued
unpaid Interest Rather, they will reduce the principal balance due.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower falls to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower falls to comply with or to perform
when due any other term, obligation, covenant, or condition contained In this
Note or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Borrower defaults under any loan, extension of
credit, security agreement, purchase or sales agreement, or any other
agreement, In favor of any other creditor or person that may materially affect
any of Borrower"s property or Borrower"s ability to repay this Note or perform
Borrower"s obligations under this Note or any of the Related Documents. (d)
Any representation or statement made or furnished to Lender by Borrower or on
Borrower"s behalf Is false or
<PAGE> 13
01-05-1998 PROMISSORY NOTE Page 2
(Continued)
================================================================================
misleading in any material respect either now or at the time made or furnished.
(e) Borrower becomes Insolvent, a receiver is appointed for any part of
Borrower's property, Borrower makes an assignment for the benefit of creditors,
or any proceeding Is
commenced either by Borrower or against Borrower under policy or Insolvency
laws. (f) Any creditor hiss to take any of Borrowees property on or In which
Lender has a Men or security Interest. This garnishment of any of Borrower"s
accounts with Lender. (g) Any guarantor dies or any of the other events
described In this default section h respect to any guarantor of this Note. (h)
A material adverse change occurs in Borrower"s financial condition.
If any default, other than a default In payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) If Borrower. after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (16) days;
or (b) If the cure requires more than fifteen (15) days, Immediately Initiates
steps which Lender deems In Lender's sole discretion to be sufficient to cure
the default and thereafter continues and completes an reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid Interest Immediately due, without
notice, and then Borrower will pay that amount. Upon default, Including
failure to pay upon final maturity, Lender, at Its option, may also, If
permitted under applicable law, Increase the variable interest rate on this
Note to 4.500 percentage points over the Index. The interest rate Will not
exceed the maximum rate permitted by applicable law. Lender may hire or pay
someone else to help collect this Note if Borrower does not pay. Borrower also
will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's reasonable attorneys" fees and Lendees legal expenses
whether or not there Is a lawsuit, Including reasonable attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services. If not prohibited by applicable law,
Borrower also will pay any court costs, In addition to all other sums provided
by law. This Note has been delivered to Lender and accepted by Lender In the
State of Utah. If there Is a lawsuit, Borrower agrees upon Lender"s request to
submit to the jurisdiction of the courts of SALT LAKE County, the State of
Utah. Subject to the provisions on arbitration, this Note shall be governed by
and construed In accordance with the laws of the State of Utah.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest In, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower"s right, title and Interest In and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), Including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open In the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security Interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
COLLATERAL. This Note is secured by A COMMERCIAL SECURITY AGREEMENT OF EVEN
DATE.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances
under this Note may be requested orally by Borrower or by an authorized person.
Lender may, but need not, require that all oral requests be confirmed in
writing. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following party or parties are authorized to request advances under the line of
credit until Lender receives from Borrower at Lender's address shown above
written notice of revocation of their authority: JONATHAN C. COON, PRESIDENT;
JOHN NICHOLS, VICE PRESIDENT; AND SCOTT TANNER, CHIEF FINANCIAL OFFICER.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Note at any time may be evidenced by endorsements on this Note or by Lender's
internal records, including daily computer print-outs. Lender will have no
obligation to advance funds under this Note if:; (a) Borrower or any guarantor
is in default under the terms of this Note or any agreement that Borrower or
any guarantor has with Lender, including any agreement made in connection with
the signing of this Note; (b) Borrower or any guarantor ceases doing business
or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to
limit, modify or revoke such guarantor's guarantee of this Note or any other
loan with Lender; (d) Borrower has applied funds provided pursuant to this Note
for purposes other than those authorized by Lender; or (e) Lender in good faith
deems itself insecure under this Note or any other agreement between Lender and
Borrower.
ARBITRATION DISCLOSURES
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS
THE LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND
ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
<PAGE> 14
01-05-1998 PROMISSORY NOTE Page 3
(Continued)
================================================================================
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND
DIFFERENT FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO
SEEK MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OR ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR
WAS AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY
OR THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including but
not limited to those arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising
from an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted in Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable in a judicial action
brought by a party shall apply to any arbitration or reference proceedings
hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, if the controversy or claim is
not submitted to arbitration as provided and limited in subparagraph (a)
hereto, all decisions of fact and law shall be determined by a reference
in accordance with Rule 53 of the Federal Rules of Civil Procedure or Rule
53 of the Utah Rules of Civil Procedure or other comparable, applicable
reference procedure. The parties shall designate to the court the
referee(s) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored arbitration proceedings. The referee(s) shall have
the qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with
the rules of the American Arbitration Association from panels maintained
by the Association. A single arbitrator or referee shall be knowledgeable
in the subject matter of the dispute. Where three arbitrators or referees
conduct an arbitration or reference proceeding, the claim shall be decided
by a majority vote of the three arbitrators or referees, at least one of
whom must be knowledgeable in the subject matter of the dispute and at
least one of whom must be a practicing attorney. The arbitrator(s) or
referee(s) shall award recovery of all costs and fees (including
reasonable attorneys' fees, administrative fees, arbitrators' fees, and
court costs). The arbitrator(s) or referee(s) also may grant provisional
or ancillary remedies such as, for example, injunctive relief, attachment,
or the appointment of a receiver, either during the pendency of the
arbitration or reference proceeding or as part of the arbitration or
reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); if the award
exceeds that limit, either party may commence legal action for a court
trial de novo. Such legal action must be filed within thirty (30) days
following the date of the arbitration or reference award; if such legal
action is not filed within that time period, the amount of the arbitration
or reference award shall be binding. The computation of the total amount
of an arbitration or reference award shall include amounts awarded for
arbitration fees, attorneys' fees, interest, and all other related costs.
(e) At the Lender's option, foreclosure under a deed of trustor mortgage
may be accomplished either by exercise of a power of sale under the deed
of trust or by judicial foreclosure. The institution and maintenance of
an action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party, including
the plaintiff, to submit the controversy or claim to arbitration if any
other party contests such action for judicial relief.
<PAGE> 15
01-05-1998 PROMISSORY NOTE Page 4
(Continued)
================================================================================
(f) Notwithstanding the applicability of other law to any other provision
of this Agreement, the Federal Arbitration Act, 9 U.S.C. Section 1 et
seq., shall apply to the construction and interpretation of this
arbitration paragraph.
LINE OF CREDIT REDUCTION. THE REVOLVING LINE OF CREDIT IN THE AMOUNT OF
$3,000,000.00 WILL BE REDUCED ON JANUARY 31, 1998 TO $2,750,000.00, ON FEBRUARY
28, 1998 TO $2,250,000.00, ON MARCH 31, 1998 TO $1,750,000.00, AND ON APRIL 30,
1998 TO $1,000,000.00. IF THE INITIAL PUBLIC OFFERING IS COMPLETED FOR AT
LEAST $10,000,000.00, THE LINE OF CREDIT MAY REMAIN AT $1,500,000.00 ON APRIL
30, 1998 AND THEREAFTER.
PRIOR NOTE. THE PROMISSORY NOTE FROM 1-800 LENS-NOW, INC. DBA 1-800 CONTACTS,
INC. TO LENDER DATED OCTOBER 1, 1997 IN THE ORIGINAL PRINCIPAL AMOUNT OF
$1,000,000.00.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or
remedies under this Note without losing them. Borrower and any other person
who signs, guarantees or endorses this Note, to the extent allowed by law,
waive presentment, demand for payment, protest and notice of dishonor. Upon
any change In the terms of this Note, and unless otherwise expressly stated in
writing, no party who signs this Note, whether as maker, guarantor,
accommodation maker or endorser, shall be released from lability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or Impair,
fail to realize upon or perfect Lender's security Interest In the collateral;
and take any other action deemed necessary by Lender without the consent of or
notice to anyone. All such parties also agree that Lender may modify this loan
without the consent of or notice to anyone other than the party with whom the
modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
I-800 CONTACTS, INC.
By: /s/ Jonathan C. Coon By: /s/ John F. Nichols
-------------------------------- ------------------------------
JONATHAN C. COON, PRESIDENT JOHN NICHOLS, VICE PRESIDENT
================================================================================
<PAGE> 16
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 01-05-1998 07-31-1998 9003 Y 7420 7057008 11049
=============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
LOAN TYPE. This is a Variable Rate (1.500% over ZIONS FIRST NATIONAL BANK
PRIME RATE, making an initial rate of 10-000%), Revolving Line of Credit Loan
to a Corporation for $3,000,000.00 due on July 31, 1998. This is a secured
renewal of the following described indebtedness: THE PROMISSORY NOTE FROM 1-800
LENS-NOW, INC. DBA I-800 CONTACTS, INC. TO LENDER DATED OCTOBER 1, 1997 IN
THE ORIGINAL PRINCIPAL AMOUNT OF $1,000,000.00.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan Is for:
[ ] Personal, Family, or Household Purposes or Personal Investment.
[X] Business (including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan Is: TO RENEW AND INCREASE
REVOLVING LINE OF CREDIT USED TO FINANCE THE PURCHASE OF INVENTORY.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds Will be
disbursed until all of Lender"s conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $3,000,000.00 as follows:
<TABLE>
<S> <C>
Undisbursed Funds: $1,979,850.00
Amount paid to others on Borrower"s behalf. $1,000,000.00
$1,000,000.00 RENEW LOAN #7057008-9003
Told Financed Prepaid Finance Charges: $ 20,150.00
$20,000-00 Loan Few
$150.00 Documentation Fee
-------------
Note Principal: $3,000,000.00
</TABLE>
FINAL AGREEMENT. Borrower understands that the loan documents signed in
connection with this loan are the final expression of the agreement between
Lender and Borrower and may not be contradicted by evidence of any alleged oral
agreement
DISBURSEMENT AUTHORIZATION. BORROWER HEREBY AUTHORizES LENDER TO DISBURSE ANY
FUNDS PURSUANT TO FACSIMILE WIRE INSTRUCTIONS WHICH BEAR THE SIGNATURE OF ANY
AUTHORIZED SIGNER.
ALLOCATION OF PROCEEDS. THE PROCEEDS OF THIS LOAN WILL BE USED TO RENEW AN
OUTSTANDING REVOLVING LINE OF CREDIT. THE CURRENT OUTSTANDING BALANCE AND THE
AMOUNT AVAILABLE ARE DESCRIBED ABOVE IN THE SECTION ENTITLED AMOUNT PAID TO
OTHERS ON BORROWER'S BEHALF.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER"S FINANCIAL
CONDITION AS DISCLOSED IN BORROWER"S MOST RECENT FINANCIAL STATEMENT TO LENDER.
THIS AUTHORIZATION IS DATED JANUARY 6, 1998.
<PAGE> 17
BORROWER:
1-800 CONTACTS, INC.
By: /s/ Jonathan C. Coon By: /s/ John F. Nichols
-------------------------------- ----------------------------
JONATHAN C. COON, PRESIDENT JOHN NICHOLS, VICE PRESENT
<PAGE> 18
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 01-05-1998 07-31-1998 9003 Y 7420 7057008 11049
===============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
I, the undersigned Secretary or Assistant Secretary of 1-800 CONTACTS, INC.
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of Utah as a corporation
for profit, with Its principal office at 13761 SOUTH WADSWORTH PK DRIVE, SUITE
D-140, DRAPER, UT 84020, and Is duly authorized to transact business in the
State of Utah.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held on December 29, 1997, at which a quorum was present and voting,
or by other duty authorized corporate action in Mu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that any one (1) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURE
----- --------- ----------------
<S> <C> <C>
JONATHAN C. COON PRESIDENT X /s/ Jonathan Coon
----------------------
JOHN NICHOLS VICE PRESIDENT X /s/ John F. Nichols
----------------------
SCOTT TANNER CHIEF FINANCIAL OFFICER X /s/ Scott Tanner
----------------------
</TABLE>
acting for and on behalf of the Corporation and as Its act and dead be, and
they hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from ZIONS FIRST NATIONAL BANK
("Lender"), on such terms as may be agreed upon between the Corporation and
Lender, such sum or sums of money as In their judgment should be borrowed,
without limitation.
Execute Notes. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporation, on
Lendees forms, at such rates of Interest and on such liens as may be agreed
upon, evidencing the sums of money so borrowed or any indebtedness of the
Corporation to Lender, and also to execute and deliver to Lender one or more
renewals. extensions, modifications, refinancings, consolidations, or
substitutions for one or more of the notes, any portion of the notes, or any
other evIdence of credit accommodations.
Grant Security. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of any
loans or credit accommodations so obtained, any promissory notes so executed
(including any amendments to or modifications, renewals, and extensions of
such promissory notes), or any other or further Indebtedness of the
Corporation to Lender at any time owing, however the same may be evidenced,
any property now or hereafter belonging to the Corporation or In which the
Corporation now or hereafter may have an Interest, including without
Imitation all real property and all personal property (tangible or
Intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness Is incurred, or at any other time or
times, and may be either In addition to or In lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
Execute Security Documents. To execute and delver to Lender the forms of
mortgage. deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written Instruments, any
chattel paper, or any other collateral, of any kind or nature, which they
may In their discretion deem reasonably necessary or proper In connection
with or pertaining to the giving of the Bons and encumbrances.
<PAGE> 19
01-05-1998 CORPORATE RESOLUTION TO BORROW Page 2
(Continued)
===============================================================================
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptance, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation In which the Corporation my have
an Interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or to
cause such other disposition of the proceeds dGdvGd therefrom as they may
deem advisable.
Further Acts. In the case of Ones of credit, to designate additional or
alternate Individuals as being authorized to request advances thereunder,
and In all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their designation deem reasonably necessary or
proper In order to carry Into effect the provisions of these Resolutions.
The following person or persons currently are authorized to request advances
and authorize payments under the line of credit unfit Lender receNes written
notice of revocation of their authority, JONATHAN C. COON, PRESIDENT; JOHN
NICHOLS, VICE PRESIDENT; and SCOTT TANNER, CHIEF FINANCIAL OFFICER.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in fun force and
effed and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such
notice shall not affect any of the Corporation"s agreements or commitments in
effect at the time notice Is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender' address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change In the name of the Corporation, (b)
change In the assumed business name(s) of the Corporation, (c) change In the
management of the Corporation,, (d) change In ft authorized signer(s), (e)
conversion of the Corporation to a now or different type of business entity, or
(0 change In any other aspect of the Corporation that directly or Indirectly
relates to any agreements between the Corporation and Lender. No change In the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duty
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the
foregoing Resolutions now stand of record on the books of the Corporation; and
that the Resolutions are In full force and effect and have not been modified or
revoked In any manner whatsoever. The Corporation has no corporate seal. and
therefore, no seal Is affixed to this certificate.
IN TESTIMONY WHEREOF, I have hereunto set my hand on January 5, 1998 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED AND ATTESTED TO:
X /s/ John F. Nichols
---------------------------------------------------------------
X /s/ Scott Tanner
---------------------------------------------------------------
Note: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, it is advisable to have
this certificate signed by a second Officer or Director of the Corporation.
<PAGE> 20
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Y 7420 7057008 11049
==============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
GUARANTOR: JOHN NICHOLS
13761 SOUTH WADSWORTH PARK DR. #140
DRAPER, UT 84020
================================================================================
AMOUNT OF GUARANTY. The amount of this Guaranty Is Three Million & 00/100
Dollars ($3,000,000.00).
CONTINUING GUARANTY. For good and valuable consideration, JONATHAN C. COON
("Guarantor") absolutely and unconditionally guarantees and promises to pay to
ZIONS FIRST NATIONAL BANK ("Lender") or Its order, in legal tender of the
United States of America, the Indebtedness (as that term is defined below) of
I-800 CONTACTS, INC. ("Borrower") to Lender on the terms and conditions set
forth In this Guaranty. The obligations of Guarantor under this Guaranty are
continuing.
DEFINITIONS. The following words shall have the following meanings when used
In this Guaranty:
Borrower. The word "Borrower" means 1-800 CONTACTS, INC..
Guarantor. The word "Guarantor" means JONATHAN C. COON.
Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated January 5, 1998.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrower's liabilities,
obligations, debts, and Indebtedness to Lender, now existing or hereinafter
Incurred or created, including, without Imitation, all loans, advances,
interest, costs, debts, overdraft indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any of
them, and any present or future judgments against Borrower, or any of them;
and whether any such Indebtedness is voluntarily or involuntarily Incurred,
due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined; whether Borrower may be liable individually or
jointly with others, or primarily or secondarily, or as guarantor or surety;
whether recovery on the Indebtedness may be or may become barred or
unenforceable against Borrower for any reason whatsoever and whether the
Indebtedness arises from transactions which may be voidable on account of
infancy, insanity, ultra vires, or otherwise.
Lender. The word "Lender" means ZIONS FIRST NAT10NAL BANK, its successors
and assigns.
Related Documents. The words "Related Documents" mean and Include without
incitation all promise notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust and all other Instruments, agreements and documents, whether now or
hereafter existing, executed In connection with the Indebtedness.
MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty
shall not exceed at any one time $3,000,000.00 plus all costs and expenses of
(a) enforcement of this Guaranty and (b) collection and sale of any collateral
securing this Guaranty.
The above limitation on liability Is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative This Guaranty shall not (unless specifically provided below
to the contrary) affect or invalidate any such other guaranties. The liability
of Guarantor will be the aggregate liability of Guarantor under the terms of
this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantor's liability under this Guaranty shall be open
and continuous for so long as this Guaranty remains In force. Guarantor
intends to guarantee at all times the performance and prompt payment when due,
whether at maturity or earlier by reason of acceleration or otherwise, of all
Indebtedness within the limits set forth in the preceding section of this
Guaranty. Accordingly, no payments made upon the Indebtedness will discharge
or diminish the continuing liability of Guarantor In connection with any
remaining portions of the Indebtedness or any of the Indebtedness which
subsequently arises or is thereafter Incurred or contracted.
<PAGE> 21
01-05-1998 COMMERCIAL GUARANTY Page 2
(Continued)
================================================================================
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor
or to Borrower, and will continue In full force until all Indebtedness incurred
or contracted before receipt by Lender of any notice of revocation shall have
been fully and finally paid and satisfied and all other obligations of
Guarantor under this Guaranty shall have been performed in full. If Guarantor
elects to revoke this Guaranty, Guarantor may only do so in writing.
Guarantees written notice of revocation must be mailed to Lender, by certified
mail, at the address of Lender listed above or such other place as Lender may
desIgnate In writing. Written revocation of this Guaranty will apply only to
advances or new Indebtedness created after actual receipt by Lender of
Guarantor's written revocation. For this purpose and without limitation, the
term "new Indebtedness" does not Include Indebtedness which at the time of
notice of revocation is contingent, unliquidated, undetermined or not due and
which later becomes absolute, liquidated, determined or due. This Guaranty
will continue to bind Guarantor for all Indebtedness incurred by Borrower or
committed by Lender prior to receipt of Guarantor's written notice of
revocation, including any extensions, renewals, substitutions or modifications
of the Indebtedness An renewals, extensions, substitutions, and modifications
of the Indebtedness granted after Guarantor's revocation, are contemplated
under this Guaranty and, specifically will not be considered to be new
Indebtedness. This Guaranty shall bind the estate of Guarantor as to
Indebtedness created both before and after the death or Incapacity of
Guarantor, regardless of Lender's actual notice of Guarantor's death. Subject
to the foregoing, Guarantor's executor or administrator or other legal
representative may terminate this Guaranty In the same manner In which
Guarantor might have terminated It and with the same effect. Release of any
other guarantor or termination of any other guaranty of the Indebtedness shall
not affect the liability of Guarantor under this Guaranty. A revocation
received by Lender from any one or more Guarantors shall not effect the
liability of any remaining Guarantors under this Guaranty. It Is anticipated
that fluctuations may occur In the aggregate amount of Indebtedness covered by
this Guaranty, and it is specifically acknowledged and agreed by Guarantor that
reductions in the amount of Indebtedness, even to zero dollars ($0.00), prior
to written revocation of this Guaranty by Guarantor shall not constitute a
termination of this Guaranty. This Guaranty Is binding upon Guarantor and
Guarantor's heirs, successors and assigns so long as any of the guaranteed
Indebtedness remains unpaid and even though the Indebtedness guaranteed may
from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either
before or after any revocation hereof, without notice or demand and without
lessening Guarantor's liability under this Guaranty, from time to time: (a)
prior to revocation as set forth above, to make one or more additional secured
or unsecured loans to Borrower, to lease equipment or other goods to Borrower,
or otherwise to extend additional credit to Borrower; (b) to after, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
including increases and decreases of the rate of Interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (d) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (e) to determine how, when and what
application of payments and credits shall be made on the Indebtedness; (f) to
apply such security and direct the order or manner of sale thereof, including
without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion
may determine; (g) to sell, transfer, assign, or grant participations in all or
any part of the Indebtedness; and (h) to assign or transfer this Guaranty in
whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this
Guarantor; (b) this Guaranty is executed at Borrower's request and not at the
request of Lender; (c) Guarantor has full power, right and authority to enter
into this Guaranty; (d) the provisions of this Guaranty do not conflict with or
result in a default under any agreement or other instrument binding upon
Guarantor and do not result in a violation of any law, regulation, court decree
or order applicable to Guarantor; (e) Guaranty has not and will not, without
the prior written consent of Lender, sell, lease, assign, encumber,
hypothecate, transfer, or otherwise dispose of all or substantially all of
Guarantor's assets, or any interest therein; (f) upon Lender's request,
Guarantor will provide to Lender financial and credit information in form
acceptable to Lender, and all such financial information which currently has
been, and all future financial information which will be provided to Lender is
and will be true and correct in all material respects and fairly present the
financial condition of Guarantor as of the dates the financial information is
provided; (g) no material adverse change has occurred in Guarantor's financial
condition since the date of the most recent financial statements provided to
Lender and no event has occurred which may materially adversely affect
Guarantor's financial condition; (h) no litigation, claim, investigation
administrative proceeding or similar action (including those for unpaid taxes)
against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (j)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Guarantor's risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any
<PAGE> 22
01-05-1998 COMMERCIAL GUARANTY Page 3
(Continued)
================================================================================
kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy with Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
Guarantor also waives and agrees not to assert or take advantage of (a) any
right (including the right, if any, under Utah's one-action rule as set forth
in Utah Code Annotated, 1953, Section 78-37-1) to require Lender to proceed
against or exhaust any security held by Lender at any time or to pursue any
other remedy in Lender's power before proceeding against Guarantor; (b) the
release or surrender of any security held for the payments of the Indebtedness;
or (c) any defense based upon an election of remedies (including, if available,
an election of remedies to proceed by non-judicial foreclosure) by Lender which
destroys or otherwise impairs the subrogation rights of Guarantor or the right
of Guarantor to proceed against Borrower for reimbursement, or both.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of
setoff, counterclaim, counter demand, recoupment or similar right, whether such
claim, demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with Guarantor's full
knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender
by law, Lender shall have, with respect to Guarantor's obligations to Lender
under this Guaranty and to the extent permitted by law, a contractual
possessory security interest in and a right of setoff against, and Guarantor
hereby assigns, conveys, delivers, pledges, and transfers to Lender all of
Guarantor's right, title and interest in and to, all deposits, moneys,
securities and other property of Guarantor now or hereafter in the possession
of or on deposit with Lender, whether held in a general or special account of
deposit, whether held jointly with someone else, or whether held for
safekeeping or otherwise, excluding however all IRA, Keogh, and trust accounts.
Every such security interest and right of set off may be exercised without
demand upon or notice to Guarantor. No security interest or right of setoff
shall be deemed to have been waived by any act or conduct on the part of Lender
or by any neglect to exercise such right of setoff or to enforce such security
interest or by any delay in doing so. Every right of setoff and security shall
continue in full force and effect until such right of setoff or security
interest is specifically waived or released by an instrument in writing
executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may nor or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of
creditors, by voluntary liquidation, or otherwise, the assets of Borrower
applicable to the payment of the claims of both Lender and Guarantor shall be
paid to Lender and shall be first applied by Lender to the Indebtedness of
Borrower to Lender. Guarantor does hereby assign to Lender all claims which it
may have or acquire against Borrower or against any assignee or trustee in
bankruptcy of Borrower; provided however, that such assignment shall be
effective only for the purpose of assuring to Lender full payment in legal
tender of the Indebtedness. If Lender so requests, any notes or credit
agreements now or hereafter evidencing any debts or obligations of Borrower to
Guarantor shall be marked with a legend that the same are subject to this
Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby
is authorized, in the name of Guarantor, from time to time to execute and file
financial statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment to
this Guaranty shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted
by Lender in the State of Utah. If there is a lawsuit, Guarantor agrees
upon Lender's request to submit to the jurisdiction of the courts of SALT
LAKE County,
<PAGE> 23
01-05-1998 COMMERCIAL GUARANTY Page 4
(Continued)
================================================================================
State of Utah. Subject to the provisions on arbitration, this Guaranty shall
be governed by and construed in accordance with the laws of the Stale of Utah.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS THE
LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND SUBJECT
TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT, INCLUDING
THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK
MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, Inducting but
not limited to those arising out of or relating to this Agreement or any
agreements or Instruments relating hereto or delivered In connection
herewith, and including but not limited to a claim based on or arising
from an alleged tort, shall at the request of any party be determined by
arbitration In accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted in Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable in a judicial action
brought by a party shall apply to any arbitration or reference proceedings
hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or Instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, If the controversy or claim Is
not submitted to arbitration as provided and limited in subparagraph (a)
hereto, al decisions of fact and law shall be determined by a reference in
accordance with Rule 53 of the Federal Rules of Civil Procedure or Rule 53
of the Utah Rules of Civil Procedure or other comparable, applicable
reference procedure. The parties shall designate to the court the
refers(s) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored arbitration proceedings. The referee(s) shall have
the qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with
the rules of the American Arbitration Association from panels maintained
by the Association. A single arbitrator or referee shall be knowledgeable
in the subject matter of the dispute. Where three arbitrators or referees
conduct an arbitration or reference proceeding, the claim shall be decided
by a majority vote of the three arbitrators or referees, at least one of
whom must be knowledgeable in the subject matter of the dispute and at
least one of whom must be a practicing attorney. The arbitrator(s) or
referee(s) shall award recovery of all costs and fees including reasonable
attorneys" fees, administrative fees, arbitrators" few, and court costs).
The arbitrator(s) or referee(s) also may grant provisional or ancillary
remedies such as, for example, injunctive relief, attachment, or the
appointment of a receivers either during the pendency of ft arbitration or
reference proceeding or as part of the arbitration or reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following arbitration: the
arbitration or reference award is binding upon the parties only If the
amount does not exceed Four Million Dollars ($4,000,000.00); if the award
exceeds that limit. either party may commence legal action for a court
trial de novo. Such legal action must be filed within thirty (30) days
following the date of the arbitration or reference award; If such legal
action Is not filed within that time period, the amount of the arbitration
or reference award shall be binding. The computation of the total amount
of an arbitration or reference award shall include amounts awarded for
arbitration fees, attorneys' fees, interest, and all other related costs.
<PAGE> 24
01-05-1998 COMMERCIAL GUARANTY Page 5
(Continued)
================================================================================
(e) At the Lender's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of a power of sale under the deed
of trust or by judicial foreclosure. The institution and maintenance of
an action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party, including
the plaintiff, to submit the controversy or claim to arbitration If any
other party contests such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other provision
of this Agreement, the Federal Arbitration Act, 9 U.S.C. Section 1 et
seq., shall apply to the construction and Interpretation of this
arbitration paragraph.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's
costs and expenses, including reasonable attorneys' fees and Lender's legal
expenses, incurred In connection with the enforcement of this Guaranty. Lender
may pay someone else to help enforce this Guaranty, and Guarantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
reasonable attorneys' fees and legal expenses whether or not a salaried
employee of Lender and whether or not there Is a lawsuit, including reasonable
attorneys' fees and legal expenses for bankruptcy proceedings (and inducing
efforts to modify or vacate any automatic stay or injunction), appeals, and any
anticipated postjudgment collection services. Guarantor also shall pay all
court costs and such additional fees as may be directed by the Court.
Notices. All notices required to be given by either party to the other under
this Guaranty shall be in writing, may be sent by telefacsimile (unless
otherwise required by law), and, except for revocation notices by Guarantor,
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier, or when deposited In the United States mail,
first class postage prepaid, addressed to the party to whom the notice Is to be
given at the address shown above or to such other addresses as either party may
designate to the other in writing. All revocation notices by Guarantor shall
be In writing and shall be effective only upon delivery to Lender as provided
above In the section tilled "DURATION OF GUARANTY." If there is more than one
Guarantor, notice to any Guarantor will constitute notice to all Guarantors.
For notice purposes, Guarantor agrees to keep Lender informed at all times of
Guarantor's current address.
Interpretation. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be deemed
to have been used in the plural where the context and construction so require;
and where there Is more khan one Borrower named in this Guaranty or when this
Guaranty is executed by more than one Guarantor, the words "Borrower, and
"Guarantor" respectively shall mean all and any one or more of them. The words
"Guarantor, "Borrower," and "Lender" include the heirs, successors, assigns,
and transferees of each of them. Caption headings in this Guaranty are for
convenience purposes only and are not to be used to interpret or define the
provisions of this Guaranty. If a court of competent Jurisdiction finds any
provision of this Guaranty to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances, and all provisions of
this Guaranty in all other respects shall remain valid and enforceable. If any
one or more of Borrower or Guarantor are corporations or partnerships, it is
not necessary for Lender to inquire into the powers of Borrower or Guarantor or
the officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Guaranty shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Guaranty. No prior waiver by
Lender, nor any course of dealing between Lender and Guarantor, shall
constitute a waiver of any of Lender's rights or of any of Guarantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Guaranty, the granting of such consent by lender in
any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withheld in the sole discretion of Lender.
TAX RETURNS. GUARANTOR SHALL PROVIDE TO LENDER COPIES OF GUARANTOR'S ANNUAL
FEDERAL INCOME TAX RETURNS, INCLUDING ALL SCHEDULES, WITHIN 15 DAYS OF WHEN
SUCH RETURNS ARE FILED.
FINANCIAL STATEMENTS. GUARANTOR SHALL PROVIDE TO LENDER GUARANTOR'S ANNUAL
PERSONAL FINANCIAL STATEMENT WITHIN 30 DAYS OF THE END OF EACH CALENDAR YEAR,
SUCH STATEMENTS SHALL BE IN FORM AND CONTENT ACCEPTABLE TO LENDER.
<PAGE> 25
01-05-1998 COMMERCIAL GUARANTY Page 6
(Continued)
================================================================================
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING REAL ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS
GUARANTY IS DATED JANUARY 5, 1998.
GUARANTOR:
X /s/ John Nichols
-------------------------
JOHN NICHOLS
<PAGE> 26
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Y 7420 7057008 11049
================================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
GUARANTOR: JONATHAN C. COON
14185 SOUTH ORGIL BAND ROAD
DRAPER, UT 84020
================================================================================
AMOUNT OF GUARANTY. The amount of this Guaranty Is Three Million & 00/100
Dollars ($3,000,000.00).
CONTINUING GUARANTY. For good and valuable consideration, JOHN NICHOLS
("Guarantor") absolutely and unconditionally guarantees and promises to pay to
ZIONS FIRST NATIONAL BANK (Lender") or Its order, In legal tender of the United
States of America, the Indebtedness (as that term Is defined below) of 1-800
CONTACTS, INC. ("Borrower") to Lender on the terms and conditions set forth In
this Guaranty. The obligations of Guarantor under this Guaranty are
continuing.
DEFINITIONS. The following words shall have the following meanings when used
In this Guaranty:
Borrower. The word "Borrower" means I-800 CONTACTS, INC..
Guarantor. The word "Guarantor" means JOHN NICHOLS.
Guaranty. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated January 5, 1998.
Indebtedness. The word "Indebtedness" is used in its most comprehensive
sense and means and includes any and all of Borrowees liabilities,
obligations, debts, and indebtedness to Lender, now existing or hereinafter
Incurred or created, including, without limitation, all loans, advances,
interest, costs, debts, overdraft Indebtedness, credit card indebtedness,
lease obligations, other obligations, and liabilities of Borrower, or any of
them, and any present or future judgments against Borrower, or any of them;
and whether any such Indebtedness is voluntarily or involuntarily incurred,
due or not due, absolute or contingent, liquidated or unliquidated,
determined or undetermined; whether Borrower may be liable individually or
jointly with others, or primarily or secondarily, or as guarantor or surely;
whether recovery on the Indebtedness may be or may become barred or
unenforceable against Borrower for any reason whatsoever, and whether the
Indebtedness arises from transactions which may be voidable on account of
Infancy, insanity, ultra vires, or otherwise.
Lender. The word "Lender" means MONS FIRST NATIONAL BANK, its successors
and assigns.
Related Documents. The words "Related Documents" mean and Include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements. guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
MAXIMUM LIABILITY. The maximum liability of Guarantor under this Guaranty
shall not exceed at any one lIne $3,000,000.00 plus all costs and expenses of
(a) enforcement of this Guaranty and (b) collection and sale of any collateral
securing this Guaranty.
The above limitation on liability Is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided
below to the contrary) affect or Invalidate any such other guaranties. The
liability of Guarantor will be the aggregate liability of Guarantor under the
term of this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantees liability under this Guaranty shall be open and
continuous for so long as this Guaranty remains In force. Guarantor Intends to
guarantee at all times the performance and prompt payment when due, whether at
maturity or earlier by reason of acceleration or otherwise, of all Indebtedness
within the limits set forth In the preceding section of this Guaranty.
Accordingly, no payments made upon the Indebtedness will discharge or diminish
the continuing liability of Guarantor in connection with any remaining portions
of the Indebtedness or any of the Indebtedness which subsequently arises or is
thereafter Incurred or contracted.
<PAGE> 27
1-05-1998 COMMERCIAL GUARANTY Page 2
(Continued)
================================================================================
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor
or to Borrower, and will continue In full force until all Indebtedness Incurred
or contracted before receipt by Lender of any notice of revocation shall have
been fully and finally paid and satisfied and all other obligations of
Guarantor under this Guaranty shall have been performed In full. If Guarantor
elects to revoke this Guaranty, Guarantor may only do so in writing.
Guarantees written notice of revocation must be mailed to Lender, by certified
mail, at the address of Lender listed above or such other place as Lender may
designate In writing. Written revocation of this Guaranty will apply only to
advances or new Indebtedness created after actual receipt by Lender of
Guarantor's written revocation. For this purpose and without limitation, the
term "new Indebtedness" does not include indebtedness which at the time of
notice of revocation is contingent, unliquidated, undetermined or not due and
which later becomes absolute, liquidated, determined or due. This Guaranty
will continue to bind Guarantor for all indebtedness incurred by Borrower or
committed by Lender prior to receipt of Guarantor's written notice of
revocation, Including any extensions, renewals, substitutions or modifications
of the Indebtedness. All renewals, extensions, substitutions, and modifications
of the Indebtedness granted after Guarantor's revocation, are contemplated
under this Guaranty and, specifically will not be considered to be new
Indebtedness. This Guaranty shall bind the estate of Guarantor as to
Indebtedness created both before and after the death or Incapacity of
Guarantor, regardless of Lender"s actual notice of Guarantor's death. Subject
to the foregoing, Guarantors executor or adagnistrator or other legal
representative may terminate this Guaranty In the same manner in which
Guarantor might have terminated It and with the same effect. Release of any
other guarantor or termination of any other guaranty of the Indebtedness shall
not affect the liability of Guarantor under this Guaranty. A revocation
received by Lender from any one or more Guarantors shall not affect the
liability of any remaining Guarantors under this Guaranty. It Is anticipated
that fluctuations may occur In the aggregate amount of Indebtedness covered by
this Guaranty, and it is specifically acknowledged and agreed by Guarantor that
reductions In the amount of Indebtedness, even to zero dollars ($0.00), prior
to written revocation of this Guaranty by Guarantor shall not constitute a
termination of this Guaranty. This Guaranty Is binding upon Guarantor and
Guarantor's heirs, successors and assigns so long as any of the guaranteed
Indebtedness remains unpaid and even though the indebtedness guaranteed may
from time to time be zero dollars ($0.00).
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, either
before or after any revocation hereof, Without notice or demand and without
lessening Guarantor's liability under this Guaranty, from time to time: (a)
prior to revocation as set forth above, to make one or more additional secured
or unsecured loans to Borrower, to lease equipment or other goods to Borrower,
or otherwise to extend additional credit to Borrower; (b) to after, compromise,
renew, extend, accelerate, or otherwise change one or more times the time for
payment or other terms of the Indebtedness or any part of the Indebtedness,
Including Increases and decreases of the rate of interest on the Indebtedness;
extensions may be repeated and may be for longer than the original loan term;
(c) to take and hold security for the payment of this Guaranty or the
Indebtedness, and exchange, enforce, waive, subordinate, fail or decide not to
perfect, and release any such security, with or without the substitution of new
collateral; (d) to release, substitute, agree not to sue, or deal with any one
or more of Borrower's sureties, endorsers, or other guarantors on any terms or
in any manner Lender may choose; (e) to determine how, when and what
application of payments and credits shall be made on the Indebtedness; (f) to
apply such security and direct the order or manner of sale thereof, including
without limitation, any nonjudicial sale permitted by the terms of the
controlling security agreement or deed of trust, as Lender in its discretion
may determine; (g) to sell, transfer, assign, or grant participations in all or
any part of the Indebtedness; and (h) to assign or transfer this Guaranty in
whole or in part.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants
to Lender that (a) no representations or agreements of any kind have been made
to Guarantor which would limit or qualify in any way the terms of this
Guarantor; (b) this Guaranty is executed at Borrower's request and not at the
request of Lender; (c) Guarantor has full power, right and authority to enter
into this Guaranty; (d) the provisions of this Guaranty do not conflict with or
result in a default under any agreement or other instrument binding upon
Guarantor and do not result in a violation of any law, regulation, court decree
or order applicable to Guarantor; (e) Guaranty has not and will not, without
the prior written consent of Lender, sell, lease, assign, encumber,
hypothecate, transfer, or otherwise dispose of all or substantially all of
Guarantor's assets, or any interest therein; (f) upon Lender's request,
Guarantor will provide to Lender financial and credit information in form
acceptable to Lender, and all such financial information which currently has
been, and all future financial information which will be provided to Lender is
and will be true and correct in all material respects and fairly present the
financial condition of Guarantor as of the dates the financial information is
provided; (g) no material adverse change has occurred in Guarantor's financial
condition since the date of the most recent financial statements provided to
Lender and no event has occurred which may materially adversely affect
Guarantor's financial condition; (h) no litigation, claim, investigation
administrative proceeding or similar action (including those for unpaid taxes)
against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (j)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition.
Guarantor agrees to keep adequately informed from such means of any facts,
events, or circumstances which might in any way affect Guarantor's risks under
this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with
<PAGE> 28
1-05-1998 COMMERCIAL GUARANTY Page 3
(Continued)
================================================================================
the creation of new or additional loans or obligations; (c) to resort for
payment or to proceed directly or at once against any person, including
Borrower or any other guarantor; (d) to proceed directly against or exhaust any
collateral held by Lender from Borrower, any other guarantor, or any other
person; (e) to give notice of the terms, time, and place of any public or
private sale of personal property security held by Lender from Borrower or to
comply with any other applicable provisions of the Uniform Commercial Code; (f)
to pursue any other remedy with Lender's power; or (g) to commit any act or
omission of any kind, or at any time, with respect to any matter whatsoever.
Guarantor also waives and agrees not to assert or take advantage of (a) any
right (including the right, if any, under Utah's one-action rule as set forth
in Utah Code Annotated, 1953, Section 78-37-1) to require Lender to proceed
against or exhaust any security held by Lender at any time or to pursue any
other remedy in Lender's power before proceeding against Guarantor; (b) the
release or surrender of any security held for the payments of the Indebtedness;
or (c) any defense based upon an election of remedies (including, if available,
an election of remedies to proceed by non-judicial foreclosure) by Lender which
destroys or otherwise impairs the subrogation rights of Guarantor or the right
of Guarantor to proceed against Borrower for reimbursement, or both.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of
setoff, counterclaim, counter demand, recoupment or similar right, whether such
claim, demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and
agrees that each of the waivers set forth above is made with Guarantor's full
knowledge of its significance and consequences and that, under the
circumstances, the waivers are reasonable and not contrary to public policy or
law. If any such waiver is determined to be contrary to any applicable law or
public policy, such waiver shall be effective only to the extent permitted by
law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender
by law, Lender shall have, with respect to Guarantor's obligations to Lender
under this Guaranty and to the extent permitted by law, a contractual
possessory security interest in and a right of setoff against, and Guarantor
hereby assigns, conveys, delivers, pledges, and transfers to Lender all of
Guarantor's right, title and interest in and to, all deposits, moneys,
securities and other property of Guarantor now or hereafter in the possession
of or on deposit with Lender, whether held in a general or special account of
deposit, whether held jointly with someone else, or whether held for
safekeeping or otherwise, excluding however all IRA, Keogh, and trust accounts.
Every such security interest and right of set off may be exercised without
demand upon or notice to Guarantor. No security interest or right of setoff
shall be deemed to have been waived by any act or conduct on the part of Lender
or by any neglect to exercise such right of setoff or to enforce such security
interest or by any delay in doing so. Every right of setoff and security shall
continue in full force and effect until such right of setoff or security
interest is specifically waived or released by an instrument in writing
executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may nor or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets
of Borrower, through bankruptcy, by an assignment for the benefit of
creditors, by voluntary liquidation, or otherwise, the assets of Borrower
applicable to the payment of the claims of both Lender and Guarantor shall be
paid to Lender and shall be first applied by Lender to the Indebtedness of
Borrower to Lender. Guarantor does hereby assign to Lender all claims which it
may have or acquire against Borrower or against any assignee or trustee in
bankruptcy of Borrower; provided however, that such assignment shall be
effective only for the purpose of assuring to Lender full payment in legal
tender of the Indebtedness. If Lender so requests, any notes or credit
agreements now or hereafter evidencing any debts or obligations of Borrower to
Guarantor shall be marked with a legend that the same are subject to this
Guaranty and shall be delivered to Lender. Guarantor agrees, and Lender hereby
is authorized, in the name of Guarantor, from time to time to execute and file
financial statements and continuation statements and to execute such other
documents and to take such other actions as Lender deems necessary or
appropriate to perfect, preserve and enforce its rights under this Guaranty.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Guaranty. No alteration of or amendment to
this Guaranty shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted
by Lender in the State of Utah. If there is a lawsuit, Guarantor agrees
upon Lender"s request to submit to the jurisdiction of the courts of SALT
LAKE County, State of Utah. Subject to the provisions on arbitration,
this Guaranty shall be governed by and construed in accordance with the
laws of the State of Utah.
ARBITRATION DISCLOSURES:
<PAGE> 29
1-05-1998 COMMERCIAL GUARANTY Page 4
(Continued)
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1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS
THE LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND
ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND
DIFFERENT FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO
SEEK MODIFICATION OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR
WAS AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY
OR THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, Including but
not It miled to those arising out of or retailing to this Agreement or any
agreements or instruments relating hereto or delivered In connection
herewith, and including but not limited to a claim based on or arising
from an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted In Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable In a judicial action
brought by a party shall apply to any arbitration or reference proceedings
hereunder.
(b) In any judicial action or proceeding arising out of or relating to
this Agreement or any agreements or Instruments relating hereto or
delivered in connection herewith, including but not limited to a claim
based on or arising from an alleged tort, If the controversy or claim is
not submitted to arbitration as provided and limited In subparagraph (a)
hereto, all decisions of fact and law shall be determined by a reference
in accordance with Rule 63 of the Federal Rules of Civil Procedure or Rule
53 of the Utah Rules of Civil Procedure or other comparable, applicable
reference procedure. The parties shall designate to the court the
referee(s) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored arbitration proceedings. The referee(s) shall have
the qualifications set forth in subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected In accordance with
the rules of the American Arbitration Association from panels maintained
by the Association. A single arbitrator or referee shall be knowledgeable
In the subject matter of the dispute. Where three arbitrators or referees
conduct an arbitration or reference proceeding, the claim shall be decided
by a majority vote of the three arbitrators or referees, at least one of
whom must be knowledgeable In the subject matter of the dispute and at
least one of whom must be a practicing attorney. The arbitrator(s) or
referee(s) shall award recovery of all costs and fees (Including
reasonable attorneys" fees, administrative fees, arbitrators" fees, and
court costs). The arbitrator(s) or referee(s) also may grant provisional
or ancillary remedies such as, for example, Injunctive relief,
attachment, or the appointment of a receiver, either during the pendency
of the arbitration or reference proceeding or as part of the arbitration
or reference award.
(d) Judgment upon an arbitration or reference award may be entered In any
court having jurisdiction, subject to the following limitation: the
arbitration or reference award is binding upon the parties only if the
amount does not exceed Four Million Dollars ($4,000,000.00); If the award
exceeds that limit, either party may commence legal action for a court
trial de novo. Such legal action must be filed within thirty (30) days
following the date of the arbitration or reference award; if such legal
action is not filed within that time period, the amount of the arbitration
or reference award shall be binding. The computation of the total amount
of an arbitration or reference award shall include amounts awarded for
arbitration fees, attorneys' fees, interest, and all other related costs.
(e) At the Lendees option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of a power of sale under the deed
of trust or by judicial foreclosure. The institution and maintenance of
an action for judicial relief or pursuit of a provisional or ancillary
remedy shall not constitute a waiver of the right of any party, including
the plaintiff, to submit the controversy or claim to arbitration if any
other party contests such action for judicial relief.
<PAGE> 30
1-05-1998 COMMERCIAL GUARANTY Page 5
(Continued)
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(f) Notwithstanding the applicability of other law to any other provision
of this Agreement, the Federal Arbitration Act, 9 U.S.C. Section 1 et
seq., shall apply to the construction and interpretation of this
arbitration paragraph.
Attorneys' Fees; Expenses. Guarantor agrees to pay upon demand all of Lender's
costs and expenses, Including reasonable attorneys' fees and Lender's legal
expenses, Incurred in connection with the enforcement of this Guaranty. Lender
may pay someone else to help enforce this Guaranty, and Guarantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
reasonable attorneys' fees and legal expenses whether or not a salaried
employee of Lender and whether or not there is a lawsuit, inducing reasonable
attorneys' fees and legal expenses for bankruptcy proceedings (and Including
efforts to modify or vacate any automatic stay or Injunction), appeals, and any
anticipated post-judgment collection services. Guarantor also shall pay all
court costs and such additional fees as may be directed by the court.
Notices. An notices required to be given by either party to the other under
this Guaranty shall be In writing, may be sent by telefacsimile (unless
otherwise required by law), and, except for revocation notices by Guarantor,
shall be effective when actually delivered or when deposited with a nationally
recognized overnight courier, or when deposited In the United States mail,
first class postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above or to such other addresses as either party may
designate to the other In writing. All revocation notices by Guarantor shall
be in writing and shall be effective only upon delivery to Lender as provided
above in the section titled "DURATION OF GUARANTY." If there is more than one
Guarantor, notice to any Guarantor will constitute notice to all Guarantors.
For notice purposes, Guarantor agrees to keep Lender Informed at all times of
Guarantor's current address.
Interpretation. In all cases where there Is more than one Borrower or
Guarantor, then all words used In this Guaranty in the singular shall be deemed
to have been used In the plural where the context and construction so require;
and where there Is more than one Borrower named In this Guaranty or when this
Guaranty Is executed by more than one Guarantor, the words "Borrower" and
"Guarantor" respectively shall mean all and any one or more of them. The words
"Guarantor," "Borrower," and "Lender" Include the heirs, successors, assigns,
and transferees of each of them. Caption headings In this Guaranty are for
convenience purposes only and are not to be used to Interpret or define the
provisions of this Guaranty. If a court of competent jurisdiction finds any
provision of this Guaranty to be Invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision Invalid or
unenforceable as to any other persons or circumstances, and all provisions of
this Guaranty In all other respects shall remain valid and enforceable. If any
one or more of Borrower or Guarantor are corporations or partnerships, it is
not necessary for Lender to inquire into the powers of Borrower or Guarantor or
the officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Guaranty shall not prejudice or constitute a waiver
of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Guaranty. No prior waiver by
Lender, nor any course of dealing between Lender and Guarantor, shall
constitute a waiver of any of Lender's rights or of any of Guarantor's
obligations as to any future transactions. Whenever the consent of Lender
is required under this Guaranty, the granting of such consent by lender in
any instance shall not constitute continuing consent to subsequent
instances where such consent is required and in all cases such consent may
be granted or withheld in the sole discretion of Lender.
TAX RETURNS. GUARANTOR SHALL PROVIDE TO LENDER COPIES OF GUARANTOR'S ANNUAL
FEDERAL INCOME TAX RETURNS, INCLUDING ALL SCHEDULES, WITHIN 15 DAYS OF WHEN
SUCH RETURNS ARE FILED.
FINANCIAL STATEMENTS. GUARANTOR SHALL PROVIDE TO LENDER GUARANTOR'S ANNUAL
PERSONAL FINANCIAL STATEMENT WITHIN 30 DAYS OF THE END OF EACH CALENDAR YEAR,
SUCH STATEMENTS SHALL BE IN FORM AND CONTENT ACCEPTABLE TO LENDER.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING REAL ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS
GUARANTY IS DATED JANUARY 5, 1998.
GUARANTOR:
X /s/ Jonathan C. Coon
----------------------------
JONATHAN C. COON
<PAGE> 31
SUBORDINATION AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$3,000,000.00 01-05-1998 07-31-1998 9003 Y 7420 7057008 11049
===============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
SALT LAKE CITY, UT 84125
CREDITOR: DONALD A. YACKTMAN
303 WEST MADISON STREET
CHICAGO, IL 60606
================================================================================
THIS SUBORDINATION AGREEMENT Is entered Into among 1-800 CONTACTS, INC.
("Borrower"), whose address is 13751 SOUTH WADSWORTH PK DRIVE, SUITE D-140,
DRAPER, UT 84020; ZIONS FIRST NATIONAL BANK ("Lender"), whose address is #1
SOUTH MAIN STREET, P.O. BOX 25822, SALT LAKE CITY, UT 84126; and DONALD A.
YACKTMAN ("Creditor"), whose address is 303 WEST MADISON STREET, CHICAGO, IL
60606. As of this date, January 6, 1998, Borrower is indebted to Creditor in
the aggregate amount of One Million Seven Hundred Thirteen Thousand Fifteen &
00/100 Dollars ($1,713,015.00). This amount is the total indebtedness of every
kind from Borrower to Creditor. Borrower and Creditor each want Lender to
provide financial accommodations to Borrower in the form of (a) new credit or
loan advances, (b) an extension of time to pay or other compromises regarding
all or part of Borrower"s present Indebtedness to Lender, or (c) other benefits
to Borrower. Borrower and Creditor each represent and acknowledge to Lender
that Creditor will benefit as a result of these financial accommodations from
Lender to Borrower, and Creditor acknowledges receipt of valuable consideration
for entering into this Agreement. Based on the representations and
acknowledgments contained In this Agreement, Creditor and Borrower agree with
Lender as follows:
DEFINITIONS. The following words shag have the following meanings when used In
this Agreement. Terms no( otherwise defined in this Agreement shall have the
meanings attributed to such terms In the Uniform Commercial Code. All
references to dollar amounts shag mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Subordination Agreement, as this
Subordination Agreement may be amended or modified from time to time,
together with all exhibits and schedules attached to this Subordination
Agreement from time to time.
Borrower. The word "Borrower" means I-800 CONTACTS, INC..
Creditor. The word "Creditor" means DONALD A. YACKTMAN.
Lender. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
Security Interest. The words "Security Interest" mean and Include without
Initiation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien Interest whatsoever,
whether created by law, contract, or otherwise.
Subordinated Indebtedness. The words "Subordinated Indebtedness" mean and
Include without limitation all present and future Indebtedness, obligations,
liabilities, claims, rights, and demands of any kind which may be now or
hereafter owing from Borrower to Creditor. The term "Subordinated
Indebtedness" is used in its broadest sense and includes without limitation
all principal, all interest, all costs and reasonable attorneys' fees, all
sums paid for the purpose of protecting the rights of a holder of security
(such as a secured party paying for insurance on collateral If the owner
falls to do so), all contingent obligations of Borrower (such as a
guaranty), and all other obligations, secured or unsecured, of any nature
whatsoever.
Superior Indebtedness. The words "Superior Indebtedness" mean and include
without limitation all present and future indebtedness, obligations,
liabilities, claims, rights, and demands of any kind which may be now or
hereafter owing from Borrower to Lender. The term "Superior Indebtedness"
is used in its broadest sense and includes without limitation all
principal, all interest, all costs and reasonable attorneys' fees, all sums
paid for the purpose of protecting Lender's rights in security (such as
paying for insurance on collateral if the owner falls to do so), all
contingent obligations of Borrower (such as a guaranty), all obligations
arising by reason of Borrower"s accounts with Lender (such as an overdraft
on a checking account), and all other obligations of Borrower to Lender,
secured or unsecured, of any native whatsoever.
SUBORDINATION. All Subordinated Indebtedness of Borrower to Creditor is and
shall be subordinated in all respects to all Superior Indebtedness of Borrower
to Lender. If Creditor holds one or more Security Interests, whether now
existing or hereafter acquired. In any of Borrower"s real property or personal
property, Creditor also subordinates all its Security Interests to all Security
Interests hold by Lender, whether the Lender's Security Interest or Interests
exist now or are acquired later.
<PAGE> 32
01-05-1998 SUBORDINATION AGREEMENT Page 2
(Continued)
================================================================================
PAYMENTS TO CREDITOR. Except as provided below, Borrower will not make and
Creditor will not accept, at any time while any Superior Indebtedness Is owing
to Lender, (a) any payment upon any Subordinated Indebtedness, (b) any advance,
transfer, or assignment of assets to Creditor in any form whatsoever that would
reduce at any time or in any way the amount of Subordinated Indebtedness, or
(c) any transfer of any assets as security for the Subordinated Indebtedness.
Notwithstanding the foregoing, Borrower may make regularly scheduled payments
of interest only to Creditor so long as Borrower is not in default under any
agreement between Lender and Borrower. Creditor may not accelerate any amounts
owed to Creditor without Lender's prior written consent.
In the event of any distribution, division, or application, whether partial or
complete, voluntary or Involuntary, by operation of law or otherwise, of all or
any part of Borrower's assets, or the proceeds of Borrower's assets, in
whatever form, to creditors of Borrower or upon any Indebtedness of Borrower,
whether by reason of the liquidation, dissolution or other winding-up of
Borrower, or by reason of any execution sale, receivership, Insolvency, or
bankruptcy proceeding, assignment for the benefit of creditors, proceedings for
reorganization, or readjustment of Borrower or Borrower's properties, then and
in such event, (a) the Superior Indebtedness shall be paid In full before any
payment Is made upon the Subordinated Indebtedness, and (b) all payments and
distributions, of any kind or character and whether In cash, property, or
securities, which shall be payable or deliverable upon or in respect of the
Subordinated Indebtedness shag be paid or delivered directly to Lender for
application In payment of the amounts then due on the Superior indebtedness
until the Superior Indebtedness shall have been paid in full.
In order that Lender may establish Its right to prove claims and recover for
its own account dividends based on the Subordinated Indebtedness, Creditor does
hereby assign all its right, title, and interest in such claims to Lender.
Creditor further agrees to supply such information and evidence, provide access
to and copies of such of Creditor"s records as may pertain to the Subordinated
Indebtedness, and execute such Instruments as may be required by Lender to
enable Lender to enforce all such claims and collect all dividends, payments,
or other disbursements which may be made on account of the Subordinated
Indebtedness. For such purposes, Creditor hereby irrevocably authorizes Lender
in its discretion to make and present for or on behalf of Creditor such proofs
of claims on account of the Subordinated Indebtedness as Lender may deem
expedient and proper and to vote such claims in any such proceeding and to
receive and collect any and all dividends, payments, or other disbursements
made thereon in whatever form the same may be paid or issued and to apply the
same on account of the Superior Indebtedness.
Should any payment, distribution, security, or proceeds thereof be received by
Creditor at any time on the Subordinated Indebtedness contrary to the terms of
this Agreement, Creditor immediately will deliver the same to Lender in
precisely the form received (except for the endorsement or assignment of
Creditor where necessary), for application on or to secure the Superior
Indebtedness, whether it is due or not due, and until so delivered the same
shall be held in trust by Creditor as property of Lender. In the event
Creditor fails to make any such endorsement or assignment, Lender, or any of
its officers on behalf of Lender, is hereby irrevocably authorized by Creditor
to make the same.
CREDITOR'S NOTES. Creditor agrees to deliver to Lender, at Lender's request,
all notes of Borrower to Creditor, or other evidence of the Subordinated
Indebtedness, now held or hereafter acquired by Creditor, while this Agreement
remains in effect. At Lender's request, Borrower also will execute and deliver
to Creditor a promissory note evidencing any book account or claim nor or
hereafter owed by Borrower to Creditor, which note also shall be delivered by
Creditor or Lender. Creditor agrees not to sell, assign, pledge or otherwise
transfer any of such notes except subject to all the terms and conditions of
this Agreement.
CREDITOR'S REPRESENTATIONS AND WARRANTIES. Creditor represents and warrants to
Lender that: (a) no representations or agreements of any kind have been made
to Creditor which would limit or qualify in any way the terms of this
Agreement; (b) this Agreement is executed at Borrower's request and not at the
request of Lender; (c) Lender has made no representation to Creditor as to the
creditworthiness of Borrower; and (d) Creditor has established adequate means
of obtaining from Borrower on a continuing basis information regarding
Borrower's financial condition. Creditor agrees to keep adequately informed
from such means of any facts, events, or circumstances which might in any way
affect Creditor's risks under this Agreement, and Creditor further agrees that
Lender shall have no obligation to disclose to Creditor Information or material
acquired by Lender in the course of its relationship with Borrower.
CREDITOR'S WAIVERS. Creditor waives any right to require Lender: (a) to make,
extend, renew, or modify any loan to Borrower or to grant any other financial
accommodations to Borrower whatsoever; (b) to make any presentment, protest,
demand, or notice of any kind, including notice of any nonpayment of the
Superior Indebtedness or of any nonpayment related to any Security Interests,
or notice of any action or nonaction on the part of Borrower, Lender, any
surety, endorser, or other guarantor in connection with the Superior
Indebtedness, or in connection with the creation of new or additional Superior
Indebtedness; (c) to resort for payment or to proceed directly or at once
against any person, including Borrower; (d) to proceed directly against or
exhaust any Security Interests held by Lender from Borrower, any other
guarantor, or any other person; (e) to give notice of the terms, time, and
place of any public or private sale of personal property security held by
Lender from Borrower or to comply with any other applicable provisions of the
Uniform Commercial Code; (f) to pursue any other remedy within Lender's power;
or (g) to commit any act or omission of any kind, at any time, with respect to
any matter whatsoever.
<PAGE> 33
01-05-1998 SUBORDINATION AGREEMENT Page 3
(Continued)
================================================================================
LENDER'S RIGHTS. Lender may take or omit any and all actions with respect to
the Superior Indebtedness or any Security Interests for the Superior
Indebtedness without affecting whatsoever any of Lender's rights under this
Agreement. In particular, without limitation, Lender may, without notice of
any kind to Creditor, (a) make one or more additional secured or unsecured
loans to Borrower; (b) repeatedly alter, compromise, renew, extend, accelerate,
or otherwise change the time for payment or other terms of the Superior
Indebtedness or any part thereof, including increases and decreases of the rate
of interest on the Superior Indebtedness; extensions may be repeated and may be
for longer than the original loan term; (c) take and hold Security Interests
for the payment of the Superior Indebtedness, and exchange, enforce, waive, and
release any such Security Interests, with or without the substitution of new
collateral; (d) release, substitute, agree not to sue, or deal with any one or
more of Borrower's sureties, endorsers, or guarantors on any terms or manner
Lender chooses; (e) determine how, when and what application of payments and
credits, shall be made on the Superior Indebtedness; (f) apply such security
and direct the order or manner of sale thereof, as Lender in its discretion may
determine and (g) assign this Agreement in whole or in part.
DEFAULT BY BORROWER. If Borrower becomes insolvent or bankrupt, this Agreement
shall remain in full force and effect. In the event of a corporate
reorganization or corporate arrangement of Borrower under the provisions of the
Bankruptcy Code, as amended, this Agreement shall remain in full force and
effect and the court having jurisdiction over the reorganization or arrangement
is hereby authorized to preserve such priority and subordination in approving
any such plan of reorganization or arrangement. Any default by Borrower under
the terms of the Subordinated Indebtedness also shall be a default under the
terms of the Superior Indebtedness to Lender.
DURATION AND TERMINATION. This Agreement will take effect when received by
Lender, without the necessity of any acceptance by Lender, in writing or
otherwise, and will remain in full force and effect until Creditor shall notify
Lender in writing at the address shown above to the contrary. Any such notice
shall not affect the Superior Indebtedness owed Lender by Borrower at the time
of such notice, nor shall such notice affect Superior Indebtedness thereafter
granted in compliance with a commitment made by Lender to Borrower prior to
receipt of such notice, nor shall such notice affect any renewals of or
substitutions for any of the foregoing. Such notice shall affect only
Indebtedness of Borrower to Lender arising after receipt of such notice and not
arising from financial assistance granted by Lender to Borrower in compliance
with Lender's obligations under a commitment. Any notes lodged with Lender
pursuant to the section titled "Creditor's Notes" above need not be returned
until this Agreement has no further force or effect.
PAYMENT OF INDEBTEDNESS TO CREDITOR. NOTWITHSTANDING THE RESTRICTIONS ON
PAYMENTS AS DESCRIBED IN THE SECTION ENTITLED PAYMENTS TO CREDITOR ABOVE,
BORROWER WILL BE ALLOWED TO PAY THE SUBORDINATED INDEBTEDNESS SOLELY FROM THE
PROCEEDS OF THE INITIAL PUBLIC OFFERING.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Utah. If there is a lawsuit, Creditor and Borrower
agree upon Lender's request to submit to the jurisdiction of the courts of
SALT LAKE County, State of Utah. Subject to the provisions on arbitration,
this Agreement shall be governed by and construed in accordance with the
laws of the State of Utah. No provision contained in this Agreement shall
be construed (a) as requiring Lender to grant to Borrower or to Creditor any
financial assistance or other accommodations, or (b) as limiting or
precluding Lender from the exercise of Lender's own judgment and discretion
about amounts and times of payment in making loans or extending
accommodations to Borrower.
AMENDMENTS. This Agreement constitutes the entire understanding and
agreement of the parties as to the matters set forth in this Agreement. No
alteration of or amendment to this Agreement shall be effective unless made
in writing and signed by Lender, Borrower, and Creditor.
ARBITRATION DISCLOSURES:
1. AS USED IN THIS ARBITRATION SECTION, THE TERM "PARTIES" MEANS
THE LENDER, ANY OTHER SIGNERS HERETO AND PERMITTED SUCCESSORS AND
ASSIGNS.
2. ARBITRATION IS USUALLY FINAL AND BINDING ON THE PARTIES AND
SUBJECT TO ONLY VERY LIMITED REVIEW BY A COURT.
3. THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
<PAGE> 34
01-05-1998 SUBORDINATION AGREEMENT Page 4
(Continued)
================================================================================
4. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED AND DIFFERENT
FROM COURT PROCEEDINGS.
5. ARBITRATORS' AWARDS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF RULINGS BY ARBITRATORS IS STRICTLY LIMITED.
6. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
7. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR
THE AMERICAN ARBITRATION ASSOCIATION.
ARBITRATION PROVISIONS:
(a) Any controversy or claim between or among the parties, including but not
limited to those arising out of or relating to this Agreement or any
agreements or instruments relating hereto or delivered in connection
herewith, and including but not limited to a claim based on or arising from
an alleged tort, shall at the request of any party be determined by
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. The arbitration proceedings shall be
conducted in Salt Lake City, Utah. The arbitrator(s) shall have the
qualifications set forth in subparagraph (c) hereto. All statutes of
limitations which would otherwise be applicable in a judicial action brought
by a party shall apply to any arbitration or reference proceedings
hereunder.
(b) In any judicial action or proceeding arising out of or relating to this
Agreement or any agreements or instruments relating hereto or delivered In
connection herewith, including but not limited to a claim based on or
arising from an alleged tort, if the controversy or claim is not submitted
to arbitration as provided and limited in subparagraph (a) hereto, all
decisions of fact and law shall be determined by a reference in accordance
with Rule 63 of the Federal Rules of Civil Procedure or Rule 63 of the Utah
Rules of Civil Procedure or other comparable, applicable reference
procedure. The parties shall designate to the court the referee(s) selected
under the auspices of the American Arbitration Association In the same
manner as arbitrators are selected in Association-sponsored arbitration
proceedings. The referee(s) shall have the qualifications set forth In
subparagraph (c) hereto.
(c) The arbitrator(s) or referee(s) shall be selected in accordance with the
rules of the American Arbitration Association from panels maintained by the
Association. A single arbitrator or referee shall be knowledgeable In the
subject matter of the dispute. Where three arbitrators or referees conduct
an arbitration or reference proceeding, the claim shall be decided by a
majority vote of the three arbitrators or referees, at least one of whom
must be knowledgeable In the subject matter of the dispute and at least one
of whom must be a practicing attorney. The arbitrator(s) or referee(s)
shall award recovery of all costs and fees (including reasonable attorneys'
fees, administrative fees, arbitrators' fees, and court costs). The
arbitrator(s) or referee(s) also may grant provisional or ancillary remedies
such as, for example, injunctive relief, attachment, or the appointment of a
receivers either during the pendency of the arbitration or reference
proceeding or as part of the arbitration or reference award.
(d) Judgment upon an arbitration or reference award may be entered in any
court having jurisdiction, subject to the following limitation: the
arbitration or reference award Is binding upon the parties only If the
amount does not exceed Four Million Dollars ($4,000,000.00); If the award
exceeds that limit, either party may commence legal action for a court trial
de novo. Such legal action must be filed within thirty (30) days following
the date of the arbitration or reference award; if such legal action is not
filed within that time period, the amount of the arbitration or reference
award shall be binding. The computation of the total amount of an
arbitration or reference award shall include amounts awarded for arbitration
few, attorneys' fees, interest, and all other related costs.
(e) At the Lender's option, foreclosure under a deed of trust or mortgage
may be accomplished either by exercise of a power of sale under the deed of
trust or by judicial foreclosure. The institution and maintenance of an
action for judicial relief or pursuit of a provisional or ancillary remedy
shall not constitute a waiver of the right of any party, including the
plaintiff, to submit the controversy or claim to arbitration if any other
party contests such action for judicial relief.
(f) Notwithstanding the applicability of other law to any other provision of
this Agreement, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq.,
shall apply to the construction and Interpretation of this arbitration
paragraph.
Attorneys' Fees; Expenses. Creditor and Borrower agree to pay upon demand all
of Lender's costs and expenses, including reasonable attorneys' fees and
Lendees legal expenses. incurred In connection with the enforcement of this
Agreement. Lender may pay someone else to help enforce this Agreement, and
Creditor and Borrower shall pay the costs and expenses of such enforcement.
Costs and expenses Include Lender's reasonable attorneys' fees and legal
expenses whether or not a salaried employee of Lender and whether or not there
is a lawsuit, including reasonable attorneys' fees and legal expenses for
bankruptcy proceedings (and including efforts to modify or vacate any automatic
stay or Injunction), appeals, and any anticipated post-judgment collection
services. Creditor and Borrower also shall pay all court costs and such
additional fees as may be directed by the court.
<PAGE> 35
01-05-1998 SUBORDINATION AGREEMENT Page 5
(Continued)
================================================================================
Successors. This Agreement shall extend to and bind the respective heirs,
personal representatives, successors and assigns of the parties to this
Agreement, and the covenants of Borrower and Creditor respecting subordination
of the Subordinated indebtedness in favor of Lender shall extend to, include,
and be enforceable by any transferee or endorsee to whom Lender may transfer
any or all of the Superior Indebtedness.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given In writing and signed by Lender. No
delay or emission on the part of Lender In exercising any right shall operate
as a waiver of such right or any other right. A waiver by Lender of a
provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or any
other provision of this Agreement. No prior waiver by Lender, nor any course
of dealing between Lender and Creditor, shall constitute a waiver of any of
Lender"s rights or of any of Creditor's obligations as to any future
transactions. Whenever the consent of Lender Is required under this Agreement,
the granting of such consent by Lender in any instance shall not constitute
continuing consent to subsequent Instances where such consent is required and
In all cases such consent may be granted or withheld in the sole discretion of
Lender.
BORROWER AND CREDITOR ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
SUBORDINATION AGREEMENT, AND BORROWER AND CREDITOR AGREE TO ITS TERMS. THIS
AGREEMENT IS DATED JANUARY 6, 1998.
BORROWER:
1-800 CONTACTS, INC.
By: /s/ Jonathan C. Coon By:
----------------------------------- --------------------------------
JONATHAN C. COON, PRESIDENT JOHN NICHOLS, VICE PRESIDENT
CREDITOR: LENDER:
DONALD A. YACKTMAN ZIONS FIRST NATIONAL BANK
/s/ Donald A. Yacktman By:
- -------------------------------------- --------------------------------
Creditor's Signature Authorized Officer
================================================================================
<PAGE> 36
LANDLORD'S CONSENT
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Y 7420 7057008 11049
==============================================================================================================================
References in the shaded area are for Lender"s use only and do not limit the applicability of this document to any particular
loan or item.
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
BORROWER: 1-800 CONTACTS, INC. LENDER: ZIONS FIRST NATIONAL BANK
13751 SOUTH WADSWORTH PK DRIVE, HEAD OFFICE/COMMERCIAL LOANS
SUITE D-140 #1 SOUTH MAIN STREET
DRAPER, UT 84020 P.O. BOX 25822
================================================================================
THIS LANDLORD'S CONSENT is entered into among 1-800 CONTACTS, INC. (Borrower"),
whose address is 13751 SOUTH WADSWORTH PK DRIVE, SUITE D-140, DRAPER, UT 84020;
ZIONS FIRST NATIONAL BANK ("Lender"), whose address Is #1 SOUTH MAIN STREET,
P.O. BOX 26822, SALT LAKE CITY, UT 84125; and STANLEY BIRD ("Landlord"), whose
address is 10762 SOUTH SAVANNAH DRIVE, SANDY, UT. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security Interest or other interest in the
Collateral. Some or all of the Collateral my be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest In the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used
In this Agreement. Terms not otherwise defined In this Agreement shall have
the meanings attributed to such terms In the Uniform Commercial Code. All
references to dollar amounts shall mean amounts in lawful money of the United
States of America.
Agreement. The word "Agreement" means this Landlord's Consent, as this
Landlord's Consent may be amended or modified from time to time, together
with all exhibits and schedules attached to this Landlord's Consent from
firm to time.
Borrower. The word "Borrower" means 1-800 CONTACTS, INC..
Collateral. The word "Collateral" means certain of Borrower's personal
property in which Lender has acquired or will acquire a security interest,
Including without limitation the following specific property.
All Inventory, Chattel Paper, Accounts, Equipment and General Intangibles
Landlord. The word "Landlord" means STANLEY BIRD. The term "Landlord" is
used for convergence purposes only. Landlord's interest in the Promises may
be that of a fee owner, lessor, sublessor or lienholder, or that of any
other holder of an interest in the Premises which may be, or may become,
prior to the interest of Lender.
Lease. The word "Lease" means that certain lease of the Premises, dated
____________ between Landlord and Borrower.
Lender. The word "Lender" means ZIONS FIRST NATIONAL BANK its successors
and assigns.
Loan. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or Is making to Borrower.
Premises. The word "Premises" means the real property located in UTAH
County, State of Utah, commonly known as 33 EAST 12676 SOUTH, DRAPER, UT
84020.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lendees security Interest
(or other interest) in the Collateral and disclaims all interests, hens and
claims which Landlord now has or may hereafter acquire In the Collateral.
Landlord agrees that any lien or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lendees security Interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender In this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral In such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall
extend to, Include, and be enforceable by any transferee or endorsee to whom
Lender may transfer any claim or calms to which this Agreement shall apply.
Lender need not accept this Agreement in writing or otherwise to make it
effective. This Agreement shall be governed by and construed in accordance
with the laws of the State of Utah. If Landlord Is other than an Individual,
any agent or other person executing this Agreement on behalf of Landlord
represents and warrants to Lender that he or she has full power and authority
to execute this Agreement on Landlord's behalf. Lender shall not be deemed to
have waived any rights under this Agreement unless such waiver is in writing
and signed by Lender. Without notice to
<PAGE> 37
01-05-1998 LANDLORD'S CONSENT Page 2
(Continued)
================================================================================
Landlord and without affecting the validity of this Consent, Lender may do or
not do anything it deems appropriate or necessary with respect to the Loan, any
obligors on the Loan, or any Collateral for the Loan; including without
limitation extending, renewing, rearranging, or accelerating any of the Loan
Indebtedness. No delay or omission on the part of Lender In exercising any
right shall operate as a waiver of such right or any other right. A waiver by
Lender of a provision of this Agreement shall not constitute a waiver of or
prejudice Lendees right otherwise to demand strict compliance with that
provision or any other provision. Whenever consent by Lender is required in
this Agreement, the granting of such consent by Lender in any one Instance
shall not constitute continuing consent to subsequent instances where such
consent is required.
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREES TO ITS TERMS. THIS
AGREEMENT IS DATED JANUARY 6, 1998.
BORROWER:
1-800 CONTACTS, INC.
By: By:
------------------------------ ----------------------------------
JONATHAN C. COON, PRESIDENT JOHN NIGHOLS, VICE PRESIDENT
LANDLORD: LENDER:
STANLEY BIRD ZIONS FIRST NATIONAL BANK
/s/ Stanley Bird By:
- --------------------------------- ----------------------------------
Landlord's Signature Authorized Officer
================================================================================
<PAGE> 1
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
This Agreement, dated as of February __, 1998, is made by and
between 1-800 CONTACTS, INC., a Delaware corporation (the "Company"), and who
is currently serving as an officer and/or director of the Company (the
"Indemnitee").
WHEREAS, the Indemnitee is currently serving in the capacity
or capacities described above;
WHEREAS, the Company is currently in the process of making an
initial public offering of its common stock (the "Offering"), the completion of
which will likely increase the risk of litigation and other claims being
asserted against the directors and officers of the Company;
WHEREAS, the Company wishes the Indemnitee to continue to
serve in such capacity or capacities and the Indemnitee is willing, under
certain circumstances, to continue in such capacity or capacities;
WHEREAS, damages sought and sometimes paid in many claims made
against corporate directors and officers and the expenses required to defend
such claims, whether or not the allegations are meritorious, may not bear a
reasonable relationship to the amount of compensation received by and may be
beyond the financial resources of the Indemnitee;
WHEREAS, the Indemnitee is currently entitled to
indemnification under Delaware General Corporation Law and the Certificate of
Incorporation of the Company, which the Indemnitee does not regard to be
adequate protection against the risks associated with his service to or at the
request of the Company;
WHEREAS, the Indemnitee and the Company have concluded that
the exposure to risk of personal liability and payment of damages out of the
Indemnitee's personal assets may result in overly conservative direction and
supervision of the Company's affairs, which is detrimental to the best
interests of the Company and its stockholders; and
WHEREAS, the Company has concluded that additional protection
is necessary for its directors and elected officers.
NOW, THEREFORE, the parties hereto, intending to be legally
bound, hereby agree as follows:
<PAGE> 2
1. Definitions.
(a) Agent. For the purposes of this Agreement, "agent"
of the Company means any person who is or was a director, officer, employee,
agent or fiduciary of the Company or a subsidiary of the Company, or is or was
serving at the request of, for the convenience of, or to represent the
interests of the Company or a subsidiary of the Company as a director, officer,
employee, agent or fiduciary of another corporation, partnership, joint
venture, trust or other enterprise or entity, including service with respect to
an employee benefit plan.
(b) Disinterested Director. For purposes of this
Agreement, "Disinterested Director" of the Company means a director of the
Company who is not and was not a party to the proceeding for which
indemnification is being sought by the claimant.
(c) Expenses. For purposes of this Agreement, "expenses"
includes all direct and indirect costs of any type or nature whatsoever
(including, without limitation, all attorneys' fees and related disbursements,
other out-of-pocket costs and reasonable compensation for time spent by the
Indemnitee for which he is not otherwise compensated by the Company or any
third party) actually and reasonably incurred by the Indemnitee in connection
with either the investigation, defense or appeal of a proceeding or
establishing or enforcing a right to indemnification under this Agreement,
Section 145 of the General Corporation Law of Delaware or otherwise; provided,
however, that expenses shall not include any judgments, fines, excise taxes or
penalties under the Employee Retirement Income Security Act of 1974 ("ERISA"),
or amounts paid in settlement of a proceeding.
(d) Independent Legal Counsel. For purposes of this
Agreement, "Independent Legal Counsel" means a law firm, a member of a law
firm, or an independent practitioner, that is experienced in matters of
corporation law and shall include any person who, under the applicable
standards of professional conduct then prevailing, would not have a conflict of
interest in representing either the Company or the Indemnitee in an action to
determine the Indemnitee's rights under this Agreement.
(e) Proceeding. For the purposes of this Agreement,
"proceeding" means any threatened, pending, or completed action, suit or other
proceeding, whether civil, criminal, administrative, investigative or any other
type whatsoever.
(f) Subsidiary. For purposes of this Agreement,
"subsidiary" means any corporation, partnership, joint venture or other
enterprise, a majority of whose equity interests are owned by the Company,
directly or through one or more other subsidiaries.
2. Agreement to Serve. The Indemnitee agrees to serve
as an agent of the Company, at its will (or under separate agreement, if such
agreement exists), in the capacity Indemnitee currently serves as an agent of
the Company, so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the By-Laws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing; provided,
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<PAGE> 3
however, that nothing contained in this Agreement is intended to create any
right to continued employment of the Indemnitee.
3. Mandatory Indemnification. Subject to the
limitations set forth in Section 7, if the Indemnitee is a person who was
or is a party or is threatened to be made a party to or is involved, including
involvement as a witness, in any proceeding, including any action by or in the
right of the Company, by reason of the fact that he is or was or has agreed to
become an agent, or by reason of any action alleged to have been taken or
omitted by him in any such capacity, the Company shall indemnify the Indemnitee
against all expense, liability and loss (including but not limited to
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement), actually and reasonably incurred by him in connection with
the investigation, defense, settlement or appeal of such proceeding; provided,
however, that except as provided in Section 7(c) of this Agreement with respect
to proceedings seeking to enforce rights to indemnification, the Company shall
indemnify the Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee) only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Company.
4. Mandatory Advancement of Expenses. The Company shall
advance all expenses incurred by the Indemnitee in connection with the
investigation, defense, settlement or appeal of any proceeding referred to in
Section 3 to which the Indemnitee is a party or is threatened to be made a
party or with respect to which the Indemnitee is otherwise involved (including
involvement as a witness) as an agent of the Company. The Indemnitee hereby
undertakes to repay such amounts advanced if, but only if and to the extent
that, it shall ultimately be determined pursuant to the provisions hereof that
the Indemnitee is not entitled to be indemnified by the Company as authorized
hereby. The advances to be made hereunder shall be paid by the Company to the
Indemnitee within twenty (20) days following delivery of a written request
therefor by the Indemnitee to the Company; provided, however, that, if and to
the extent that the Delaware General Corporation Law requires, an advancement
of expenses incurred by the Indemnitee in his capacity as a director or officer
shall be made only upon delivery of an undertaking by or on behalf of the
Indemnitee to repay all amounts so advanced if it shall ultimately be
determined by final judicial decision from which there is no further right to
appeal that the Indemnitee is not entitled to be indemnified for such expenses
under this Agreement or otherwise.
5. Maintenance of D&O Insurance.
(a) So long as the Indemnitee shall continue to serve in
any capacity described in Section 2 and thereafter so long as there is any
reasonable possibility that the Indemnitee shall be subject to any proceeding
by reason of the fact that the indemnitee served in any of such capacities, the
Company will use reasonable efforts to purchase and maintain in effect for the
benefit of the Indemnitee one or more valid, binding and enforceable policies
of directors' and officers' liability insurance ("D&O Insurance") providing, in
all respects, coverage and amounts as reasonably determined by the Board of
Directors.
-3-
<PAGE> 4
(b) Notwithstanding Section 5(a), the Company shall not
be required to maintain D&O Insurance if such is not reasonably available or
if, in the reasonable business judgment of the Board of Directors of the
Company as it may exist from time to time, either (i) the premium cost for such
insurance is substantially disproportionate to the amount of insurance or (ii)
the coverage is so limited by exclusions that there is insufficient benefit
provided by such insurance.
6. Notice and Other Indemnification Procedures.
(a) Promptly after receipt by the Indemnitee of notice of
the commencement of or the threat of commencement of any proceeding, the
Indemnitee shall, if the Indemnitee believes that the indemnification with
respect thereto properly may be sought from the Company under this Agreement,
notify the Company of the commencement or threat of commencement thereof. The
failure to notify or promptly notify the Company shall not relieve the Company
from any liability which it may have to the Indemnitee otherwise than under
this Agreement, and shall relieve the Company from liability hereunder only to
the extent the Company has been prejudiced.
(b) If, at the time of the receipt of a notice of the
commencement of a proceeding pursuant to Section 6(a), the Company has D&O
Insurance in effect, the Company shall give prompt notice of the commencement
of such proceeding to the insurers in accordance with the procedures set forth
in the D&O Insurance policy. The Company shall thereafter take all necessary
or desirable action to cause such insurers to pay, to or on behalf of the
Indemnitee, all amounts payable as a result of such proceeding in accordance
with the terms of such policy.
(c) In the event the Company shall be obligated to pay
the expenses of the Indemnitee in connection with any proceeding, the Company,
shall be entitled to assume the defense of such proceeding, with counsel
approved by the Indemnitee, upon the delivery to the Indemnitee of written
notice of its election so to do. After delivery of such notice, approval of
such counsel by the Indemnitee and the retention of such counsel by the
Company, the Company will not be liable to the Indemnitee under this Agreement
for any fees of counsel or other expenses subsequently incurred by the
Indemnitee with respect to the same proceeding, provided that (i) the
Indemnitee shall have the right to employ his own counsel in any such
proceeding at the Indemnitee's expense; and (ii) if (A) the employment of
counsel by the Indemnitee has been previously authorized by the Company, or (B)
the Indemnitee shall have reasonably concluded that there is a conflict of
interest between the Company and the Indemnitee in the conduct of any such
defense, or (C) the Company shall not, in fact, have employed counsel to assume
the defense of such proceeding, the fees and expenses of the Indemnitee's
counsel shall be paid by the Company; and provided further that the Company
shall not be required to pay the expenses of more than one such separate
counsel for persons it is indemnifying in any one proceeding.
7. Determination of Right to Indemnification.
(a) To the extent the Indemnitee has been successful on
the merits or otherwise in defense of any proceeding referred to in Section 3
or in the defense of any claim, issue or matter
-4-
<PAGE> 5
described therein, the Company shall indemnify the Indemnitee pursuant to
Section 3 against expenses actually and reasonably incurred by him in
connection with the investigation, defense, or appeal of such proceeding. If
the Indemnitee has not been successful on the merits or otherwise in any such
defense, the Company also shall indemnify the Indemnitee pursuant to Section 3
unless, and only to the extent that, the Indemnitee has not met the applicable
standard of conduct under the Company's Certificate of Incorporation required
to entitle the Indemnitee to such indemnification.
(b) Subject to the provisions of Section 8 relating to a
Change in Control (as defined therein), the determination as to whether the
Indemnitee is entitled to indemnification shall be made as follows: (1) if
requested by the Indemnitee by Independent Legal Counsel selected by the
Indemnitee with the consent of the Company (which consent shall not be
unreasonably withheld) or (2) if no request is made by the Indemnitee for a
determination by Independent Legal Counsel, (i) by a quorum of the Board of
Directors consisting of Disinterested Directors or (ii) if such quorum is not
obtainable or, even if obtainable, a quorum of Disinterested Directors so
directs, by Independent Legal Counsel in a written opinion. If Independent
Legal Counsel shall make such determination, the Company agrees to pay the
reasonable fees of such counsel and to indemnify such counsel fully against any
and all expenses (including attorneys' fees), claims, liabilities and damages
arising out of or relating to this Agreement or counsel's engagement pursuant
hereto.
(c) Notwithstanding a determination that the Indemnitee
is not entitled to indemnification with respect to a specific proceeding, the
Indemnitee shall have the right to apply to the court of Chancery of Delaware,
the court in which that proceeding is or was pending or any other court of
competent jurisdiction, for the purpose of enforcing the Indemnitee's right to
Indemnification or the advance payment of expenses pursuant to this Agreement.
The burden of proof shall be on the Company in any such suit to demonstrate by
the weight of the evidence that the Indemnitee is not entitled to
indemnification or advance payment of expenses. The Indemnitee's expenses
incurred in successfully establishing his right to Indemnification or
advancement of expenses, in whole or in part, in any such action (or settlement
thereof) shall be paid by the Company.
(d) Notwithstanding anything in Sections 3 or 4 to the
contrary, the Company shall not be liable under this Agreement to make any
indemnity payment or advancement of expenses in connection with any proceeding
(i) to the extent that payment is actually made, or for which payment is
available, to or on behalf of the Indemnitee under an insurance policy, except
in respect of any amount in excess of the limits of liability of such policy or
any applicable deductible under such policy; (ii) to the extent that payment
has been or will be made to the Indemnitee by the Company otherwise than
pursuant to this Agreement; or (iii) to the extent that there was a final
adjunction by a court of competent jurisdiction that the Indemnitee has not met
the applicable standard of conduct required to entitle the Indemnitee to
indemnification under the Delaware General Corporation Law as it now exists or
may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment).
-5-
<PAGE> 6
8. Change In Control.
(a) The Company agrees that if there is a Change in
Control, as defined below, of the Company (other than a Change in Control which
has been approved by a majority of the members of the Board of Directors who
were directors immediately prior to such Change in Control), then with respect
to all matters thereafter arising concerning the rights of the Indemnitee to
indemnity payments and advance payments of expenses under this Agreement the
Company shall seek legal advice only from Independent Legal Counsel selected by
the Indemnitee with the consent of the Company (which shall not be unreasonably
withheld). Such counsel, among other things, shall render a written opinion to
the Company and the Indemnitee as to whether and to what extent the Indemnitee
would be permitted to be indemnified under this Agreement and applicable law.
The Company agrees to pay the reasonable fees of the Independent Legal Counsel
and to indemnify such counsel fully against any and all expenses (including
attorneys' fees), claims, liabilities and damages arising out of or relating to
this Agreement or counsel's engagement pursuant hereto.
(b) Alternatively, the Indemnitee may choose to submit
all matters arising concerning his rights to Indemnity payments and advance
payments of expenses under this Agreement to a panel of three arbitrators, one
of whom is selected by the Company, another of whom is selected by the
Indemnitee and the third of whom is selected by the first two arbitrators so
selected. Any such submission shall be governed by the Commercial Arbitration
Rules of the American Arbitration Association and shall be deemed to be a
submission within the meaning of the Federal Arbitration Act or any statutory
modification or re-enactments thereof. Arbitration proceedings shall take
place in Salt Lake City, Utah, unless otherwise agreed to by the parties.
(c) "Change in Control" for purposes of this Agreement
shall be deemed to have occurred if (a) any "person" (as such term is used in
Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company or a
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 20% or more
of the total voting power represented by the Company's then outstanding voting
securities, except that a person who as of the date of this Agreement owns 20%
or more of the total voting power represented by the Company's outstanding
voting securities shall not be deemed to have caused a Change in Control, or
(b) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors and any new director
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least two-third (2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved, cease for any reason to constitute a majority thereof, or (c) the
stockholders of the Company approve a merger, plan of complete liquidation of
the Company, an agreement for the sale or disposition by the Company of all or
any substantial part of the Company's assets, or other business combination of
the Company with any other corporation, other than a business combination
-6-
<PAGE> 7
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least 80% of the total voting power represented by the voting
securities of the Company or such surviving entity outstanding immediately
after such bumpiness combination.
9. Limitation of Actions and Release of Claims. No
proceeding shall be brought and no cause of action shall be asserted by the
Company or any subsidiary or by any stockholder on behalf of the Company or any
subsidiary against the Indemnitee, his spouse, heirs, estate, executors or
administrators after the expiration of one year from the act or omission of the
Indemnitee upon which such proceeding is based; provided, however, that in the
event that the Indemnitee has fraudulently concealed the facts underlying such
cause of action, no proceeding shall be brought and no cause of action shall be
asserted after the expiration of one year from the earlier of (i) the date the
Company or any subsidiary of the Company discovers such facts, or (ii) the date
the Company or any subsidiary of the Company could have discovered such facts
by the exercise of reasonable diligence. Any claim or cause of action of the
Company or any subsidiary of the Company, including claims predicated upon the
negligent act or omission of the Indemnitee, shall be extinguished and deemed
released unless asserted by filing of a legal action within such period. This
Section 9 shall not apply to any cause of action which has accrued on the date
hereof and of which the Indemnitee is aware on the date hereof but as to which
the Company has no actual knowledge apart from the Indemnitee's knowledge.
10. Non-exclusivity. The provisions for indemnification
and advancement of expenses set forth in this Agreement shall not be deemed
exclusive of any other rights which the Indemnitee may have under any provision
of law, the Company's Certificate of Incorporation or By-Laws, the vote of the
Company's stockholders or Disinterested Directors, other agreements, or
otherwise, both as to administrators in his official capacity and to action in
another capacity while occupying his position as an agent of the Company, and
the Indemnitee's rights hereunder shall continue after the Indemnitee has
ceased acting as an agent of the Company and shall inure to the benefit of the
heirs, executors and administrators of the Indemnitee.
11. Settlement. The Company shall not be liable to
indemnify the Indemnitee under this Agreement for any amounts paid in
settlement of any proceeding without its written consent, which consent shall
not be unreasonably withheld. The Company shall not settle any proceeding
which would impose any penalty or limitation on the Indemnitee without the
Indemnitee's written consent, which consent shall not be unreasonably withheld.
In the event that consent is not given and the parties hereto are unable to
agree on a proposed settlement, Independent Legal Counsel shall be retained by
the Company, at its expense, with the consent of the Indemnitee, which consent
shall not be unreasonably withheld, for the purpose of determining whether or
not the proposed settlement is reasonable under all the circumstances and if
Independent Legal Counsel determines the proposed settlement is reasonable
under all the circumstances, the settlement may be consummated without the
consent of the other party.
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<PAGE> 8
12. Subrogation Rights. In the event of any payment
under this Agreement, the Company shall be subrogated to the extent of such
payment to all of the rights of recovery of the Indemnitee against any person
or organization and the Indemnitee shall execute all papers required and shall
do everything that may be reasonably necessary to secure such rights.
13. Interpretation of Agreement. It is understood that
the parties hereto intend this Agreement to be interpreted and enforced to as
to provide indemnification to the Indemnitee to the full extent now or
hereafter not prohibited by law. Indemnitee's rights hereunder shall apply to
claims made against Indemnitee arising out of acts or omissions which occurred
prior to the date hereof as well as those which occur after the date hereof.
14. Severability. If any provision or provisions of this
Agreement shall be held to be invalid, illegal or unenforceable for any reason
whatsoever, (i) the validity, legality and enforceability of the remaining
provisions of this Agreement (including, without limitation, all portions of
any paragraphs of this Agreement containing any such provision hold to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall not in any way be affected or impaired thereby, and (ii)
to the fullest extent possible, the provisions of this Agreement (including,
without limitation, all portions of any paragraph of this Agreement containing
any such provision held to be invalid, illegal or unenforceable) shall be
construed so as to give effect to the intent manifested by the provision held
invalid, illegal or unenforceable and to give effect to Section 13.
15. Modification and Waiver. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
both of the parties hereto. No waiver of any of the provisions of this
agreement shall be deemed or shall constitute a waiver of any other provision
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
16. Successors and Assigns. The terms of this Agreement
shall bind, and shall inure to the benefit of, the successors and assigns of
the parties hereto.
17. Notices. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be deemed
duly given (i) on the date of delivery if delivered by hand or (ii) on the
second business day after being deposited In the government mail (registered or
express), postage prepaid. Addresses for notice to either party are as shown
on the signature page of this Agreement, or as subsequently modified by written
notice. Each party agrees to receipt for any notice received promptly upon
request.
18. Governing Law. This Agreement shall be governed
exclusively by and construed according to the laws of the State of Delaware, as
applied to contracts between Delaware residents entered into and to be
performed entirely within Delaware.
19. Consent to Jurisdiction. The Company and the
Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of
the State of Delaware and the Company
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<PAGE> 9
irrevocably consents to the jurisdiction of any court in which an Indemnitee
brings action pursuant to Section 7(c), for all purposes in connection with any
proceeding which arises out of or relates to this Agreement. The Company
agrees not to initiate any such action or proceeding in any state other than
Delaware.
* * * * *
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<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have entered into this
Indemnification Agreement effective as of the date first above written.
1-800 CONTACTS, INC.
13751 South Wadsworth Park Drive
Suite D-140
Draper, Utah 84020
By:
-------------------------------------
Its:
-------------------------------------
INDEMNITEE:
----------------------------------------
Title:
----------------------------------
Address:
--------------------------------
----------------------------------------
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<PAGE> 1
EXHIBIT 10.12
NON-CANCELABLE LEASE AGREEMENT
This lease is made between Larry T. Short, herein called lessor, and 1-800
Lens-Now, Inc., herein called Lessee.
Lessee herein offers to lease from lessor, a business known as "Larry's
Lenses," a sole proprietorship which has as one of its assets, an interest in
the telephone number "800-266-8228" (Subject Property).
1. USE. Lessor agrees to allow Lessee to use the Subject Property of this
agreement via the Escrow Agent so long as all payments are made according to
the terms of this agreement and the Agreement to Transfer and Escrow
Instructions. Use shall include controlling the location at which the phone
number "800-266-8228" rings, the carrier of the long distance, and the manner
with which service for the number is provided.
2. OPTION TO PURCHASE. Lessor agrees to sell to the Lessee for the sum of
Seventeen Thousand Five Hundred and 00/100 dollars ($17,500) the business known
as "Larry's Lenses," a sole proprietorship which has as one of its asses the
telephone number "800-266-8228." This option to purchase may be exercised
after all lease payments totaling $136,000 have been made.
3. LEASE PAYMENTS. Payments shall be made by the first (1st) day of each
month according to the following schedule:
(a) Initial Payment of Ten Thousand Dollars and 00/100 at closing.
(b) Lease Payments of One Thousand and 00/100 Dollars ($1,000.00) per
month for eighteen (18) months with payments beginning on August 1, 1995.
(c) Lease Payments of Two Thousand Five Hundred and 00/100 Dollars
($2,500.00) per month for twenty-two (22) months with payments beginning on
February 1, 1997.
(d) Lease Payments of Three Thousand Five Hundred and 00/100 Dollars
($2,500.00) per month for eighteen (18) months with payments beginning on
December 1, 1998.
4. PURCHASE PAYMENTS. The price to purchase the Subject Property according
to the option provided by Lessor in section 2. of this agreement shall be
$17,500 - an amount which can be paid in five (5) monthly installments of Three
Thousand Five Hundred and 00/100 Dollars ($3,500) per month for five (5) months
beginning on June 1, 2000. If this purchase option is not exercised, Lens Now
authorizes the Escrow Agent to transfer the business "Larry's Lenses" (one of
its assets being an interest in the telephone number "800-266-8282") back to
Larry according to section B.4 of the Escrow Instructions.
5. LESSOR'S REMEDIES ON DEFAULT. If Lessee defaults on lease payments during
the term of this agreement, or defaults in the performance of any of the other
covenants or conditions hereof, or the Agreement to Transfer, Lessor may give
Lessee notice of such default by Federal Express (with
<PAGE> 2
signature of recipient) and if lessee fails to either prove that payment was
made according to the terms of the Escrow Instructions Section A.4, or make
payment to Lessor within 15 days of notification, Lessee authorizes the Escrow
Agent to return and transfer the Subject Property back to Lessor.
6. PENALTIES FOR LATE PAYMENTS. a 10% penalty shall apply to any late
payments. late payments shall be defined as any payment received by the Escrow
Agent after the first business day of each month.
7. SECURITY DEPOSITS. Lessee shall maintain a minimum balance with the
Escrow Agent of $3,000 during the term of this agreement.
8. ATTORNEY'S FEES. In case suit should be brought for any sum due
hereunder, the prevailing party shall be entitled to all costs incurred in
connection with such action, including a reasonable attorney's fee.
9. NOTICES. Any notice which either party may give, shall be given by
sending the same by Federal Express (with signature) according to the terms of
Section 17. of the Agreement to Transfer.
10. POSSESSION AND CONTROL. Lessee may terminate this lease if lessor is
unable to deliver possession and control of the Subject Property to the Escrow
Agent according to the terms of the Agreement to Transfer and Escrow
Instructions.
Signed this 27th day of June, 1995
- ------------------------------
1-800 Lens-Now, Inc. (Lessee)
6/27/95 /s/ Jonathan Coon
- --------------------------------------------------------------------------------
Jonathan Coon President Date Signature
6/27/95 /s/ Jonathan Coon
- --------------------------------------------------------------------------------
Larry T. Short (Lessor) Title Date Signature
/s/ Jonathan Coon
- --------------------------------------------------------------------------------
Jonathan Coon, Provo UT Guarantor Date Signature
6/27/95 /s/ John F. Nichols
- --------------------------------------------------------------------------------
John F. Nichols, Orem, UT Guarantor Date Signature
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Salt Lake City
February 2, 1998
