<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 1999 or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number: 0-23633
-----------
1-800 CONTACTS, INC.
(Exact name of registrant as specified in its charter)
Delaware 87-0571643
--------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
66 E. Wadsworth Park Drive 3rd
Floor, Draper, UT 84020
------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 924-9800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: Not applicable
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.01 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[_]
The aggregate market value of voting common equity held by non-
affiliates of the registrant as of March 26, 1999 at a closing sale price of
$11.00 as reported by the Nasdaq Stock Market ("Nasdaq") was approximately
$30.2 million. Shares held by each officer and director and by each person who
owns or may be deemed to own 10% or more of the outstanding Common Stock have
been excluded since such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of March 26, 1999, the Registrant has 6,275,364 shares of Common
Stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be used in connection
with the solicitation of proxies for the Annual Meeting to be held on May 21,
1999 (the "Proxy Statement") are incorporated by reference in Part III of this
Annual Report of Form 10-K (the "Form 10-K").
================================================================================
1
<PAGE>
1-800 CONTACTS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I
Item 1. Business.................................................................... 3
Item 2. Properties.................................................................. 11
Item 3. Legal Proceedings........................................................... 11
Item 4. Submission of Matters to a Vote of Security-Holders......................... 12
Item 4A. Executive Officers of the Registrant........................................ 12
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters... 12
Item 6. Selected Financial Data..................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 15
Item 7A. Quantitative and Qualitative Disclosure About Market Risk................... 19
Item 8. Financial Statements and Supplementary Data................................. 19
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.......................... 20
Item 11. Executive Compensation...................................................... 20
Item 12. Security Ownership of Certain Beneficial Owners and Management.............. 20
Item 13. Certain Relationships and Related Transactions.............................. 20
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............. 20
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
OVERVIEW
1-800 CONTACTS, INC. (the "Company") was incorporated under the laws of the
State of Utah in February 1995 and was reincorporated under the laws of the
State of Delaware in February 1998 in conjunction with its initial public
offering of common stock. 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 66 E. Wadsworth Park Drive 3rd Floor,
Draper, Utah 84020 and its telephone number is (801) 924-9800. The Company
maintains a website on the Internet at www.1800contacts.com.
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) and its Internet website, "1800contacts.com," the
Company sells substantially all of the most popular brands of contact lenses,
including those manufactured by Johnson & Johnson, CIBAVision, 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.
INDUSTRY OVERVIEW
Industry analysts estimate that over 50% of the United States' population
need 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. 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.
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 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 or Internet 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
3
<PAGE>
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
solicited comments regarding whether eye care practitioners should be required
to release contact lens prescriptions to their patients. In addition, the
Attorneys General for more than 30 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."
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, CIBAVision, 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. 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. The Company also purchases product directly from certain other
manufacturers. 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" 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. 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, approximately two-thirds of contact lens wearers are women and contact
lens wearers generally have higher incomes than eyeglass
4
<PAGE>
wearers do. 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.
During 1998, the Company significantly expanded its sales and marketing
activities to attract new customers and increase sales to existing customers.
The Company increased its use of direct mailings, cooperative mailings and free
standing inserts, and began advertising in mediums not previously utilized,
including magazines, traditional newspaper advertisements, radio, television and
Internet advertising.
The Company markets its products through its website on the Internet. The
Company believes that the Internet offers a very convenient, cost effective and
efficient way for the Company's customers to place new and repeat orders.
Significant efforts were made in 1998 to improve the Company's website and
integrate the Internet with the Company's information systems. Sales generated
by its website increased from an immaterial amount in 1997 to over $2.0 million
during the second half of 1998. The Company's website is located at
www.l800contacts.com.
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 customer service
representatives ("CSR") with real-time product availability information through
a direct connection with the Company's distribution center, 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 CSR 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. CSR's 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, mail or Internet.
Based on product availability provided by the management information system, the
CSR 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 CSR who entered the order, and any
information explaining the delay, and the CSR then contacts the customer to
inform them of the delay.
After an order has been entered into the management information system by a
CSR, it is sent to the Company's distribution center via a direct connection.
After the distribution center 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 distribution
center, 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.
5
<PAGE>
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 to an offsite location. There can be no assurance
that the Company's back-up system will be 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.
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 CSR's. The Company's call
center generally operates from 6:00 a.m. to 9:00 p.m. (MST) Monday through
Friday, 7:00 a.m. to 5:00 p.m. (MST) on Saturday and 8:00 a.m. to 4:00 p.m.
(MST) on Sunday. During non-business hours orders may be placed via the
Internet. Also, potential customers seeking product, pricing or other
information may request such through an Interactive Voice Response ("IVR")
system. The Company's orders are received by phone, mail, facsimile, the
Internet and electronic mail. CSR's 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. CSR's are provided with a sales script and are trained to
provide information about promotional items. Additionally, CSR's are trained to
provide customer service and are authorized to resolve all customer service
issues, including accepting returns and issuing refunds, as appropriate.
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 CSR's who can understand and relate to customers.
CSR's participate in a training program, which includes a mentor system for
working with more experienced personnel. After training, CSR's are monitored to
review performance and are re-trained periodically.
The Company moved into its new call center during June and July of 1998. In
conjunction with the move, the Company acquired new telecommunications systems
and enhanced its management information systems. In its current facility, the
Company believes it has the capacity to handle up to 25,000 calls per day. The
Company believes that it processes telephone orders on average in less time than
its competitors, which allows each CSR 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 eye care 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. 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.
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 via the Internet and those received by mail with an
enclosed check. Customers have the option of having their order delivered by
overnight courier for an additional 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 a
direct connection to the Company's management information system. This system
monitors the in-stock status of each item ordered, processes the order
6
<PAGE>
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.
The Company began operations in its new distribution center in February of
1999. This new facility is several times the size of the prior distribution
center and is strategically located near the Salt Lake City, Utah airport. The
Company believes that this new distribution center has the capacity to support
sales of $300 million.
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. 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. 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"). 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 some manufacturers' refusal to sell to direct
marketers, the Company is not an authorized dealer for many 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.
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 47% and 40% of its contact lens
inventory in 1998 and 1997, respectively. The Company also purchased from
another distributor approximately 21% and 40% of its contact lens inventory in
1997 and 1996, respectively. 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 either of these
suppliers. The Company continually seeks to establish new relationships with
potential suppliers in order to be able to obtain adequate inventory at
competitive prices.
7
<PAGE>
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. 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.
In addition, the Company competes with other mail-order contact lens
distributors. 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 in overall revenues 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 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 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
8
<PAGE>
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 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. The Company
retains copies of the written prescriptions that it receives and maintains
records of its communications with the customer's prescriber.
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 many of the states in which the Company does business. 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. The Company believes that
the figure for 1998 is similar. 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
9
<PAGE>
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.
From time to time the Company receives notices, inquiries or other
correspondence from states or their regulatory bodies charged with overseeing
the sale of contact lenses. The Company's practice is to review such notices
with legal counsel to determine the appropriate response on a case-by-case
basis. It is the opinion of management, after discussion with legal counsel,
that the Company is taking the appropriate steps to address the various notices
received. To date, no formal complaints have been filed against the Company
concerning its business practices, other than the Steinberg Complaint. See
"Legal Proceedings."
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.
The Company also has obtained the rights to various Internet domain names,
including but not limited to www.1800contacts.com and www.contacts.com. As with
phone numbers, the Company does not have and cannot acquire any property rights
in Internet domain names. The Company does not expect to lose the right to use
the domain names, however, there can be no assurance in this regard and such
loss would have a material adverse effect on the Company's financial position
and results of operations.
SEASONALITY
The Company does not believe that seasonality has had a material effect on
the Company's operations for the three years ended January 2, 1999.
10
<PAGE>
EMPLOYEES
As of January 2, 1999 the Company employed 196 persons, of which 138 were
full-time employees and 58 were part-time employees. None of the Company's
employees is covered by a collective bargaining agreement. The Company believes
its relationship with its employees to be good.
ITEM 2. PROPERTIES.
All of the Company's management and call center operations are conducted
through approximately 32,000 square feet of leased space located in Draper,
Utah, a suburb of Salt Lake City. The lease relating to this facility expires in
2005.
In February 1998, the Company began utilizing approximately 10,000 square
feet of leased warehouse space. This distribution center is located in Draper,
Utah, approximately two miles from the Company's call center. The Company
intends to sub-lease the space to another party for the duration of the lease
term, which expires in January 2000. In October 1998, the Company entered into a
new lease agreement to occupy approximately 35,000 square feet of space for its
new distribution center located near the Salt Lake City, Utah airport. The lease
for the new distribution center expires in December 2001. The Company began
operations in this distribution center in February of 1999.
ITEM 3. LEGAL PROCEEDINGS.
On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation
d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of
all optometrists licensed to practice in California against the Company and its
directors in Los Angeles County Superior Court (the "Steinberg Complaint"). The
complaint alleges three separate causes of action for unfair competition: (i)
selling contact lenses to California residents without being registered, (ii)
selling contact lenses to California residents without verifying the
prescription, and (iii) failing to disclose in its advertising that it sells
"sample" lenses not intended for sale to the public. The complaint requests
various forms of relief, including damages of an unspecified amount, attorney's
fees and a permanent injunction to prevent the Company from selling contact
lenses to California residents without being registered and without verifying
the prescription as well as from selling sample contact lenses to California
residents. In addition, the plaintiff has filed a motion for preliminary
injunction seeking the injunctive relief requested in the complaint. On August
11, 1998, the Company removed the action to the United States District Court for
the Central District of California based on diversity jurisdiction.
In response to motions by the Company, plaintiff and another California
optometrist, Ellis Miles (collectively, "plaintiffs") filed a First Amended
Complaint ("FAC") against the Company and its directors on or about September 3,
1998 purporting to sue on behalf of the public under California's unfair
competition statute rather than as a class action on behalf of optometrists.
Although the substantive claims for unfair competition remain the same, the FAC
seeks restitutionary relief rather than damages. Plaintiffs also stipulated to
dismiss the Company's directors as defendants rather than oppose the Company's
motion to dismiss them, leaving the Company as the only remaining defendant.
On October 2, 1998, plaintiffs re-filed their motion for preliminary
injunction in federal court. The Company likewise filed a motion to strike
plaintiffs' claims for monetary relief. Plaintiffs withdrew their motion for
preliminary injunction on October 19, 1998, after the Company filed its
opposition to the motion indicating, inter alia, that the Company had been
registered as a Nonresident Contact Lens Seller in California. The Court denied
the Company's motion to strike plaintiffs' claims for monetary relief on
February 26, 1999. The Company filed its Answer to the First Amended Complaint
on March 11, 1999.
From time to time the Company is involved in other legal matters generally
incidental to its business. It is the opinion of management, after discussion
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.
11
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted to a vote of the Company's security-holders in
the fourth quarter of fiscal 1998.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The information under this Item is furnished pursuant to Instruction 3 to
Item 401(b) of Regulation S-K. Executive officers of the Company are elected by
and serve at the discretion of the Board of Directors.
NAME AGE POSITION
- --------------------------------------------------------------------------------
Jonathan C. Coon.................. 28 President, Chief Executive
Officer and Director
John F. Nichols................... 38 Vice President, Operations and
Director
Scott S. Tanner................... 38 Chief Financial Officer and
Director
JONATHAN C. COON is a co-founder of the Company and currently serves as
President and Chief Executive Officer 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 six 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.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
The Common Stock is traded on the Nasdaq Stock Market ("Nasdaq") under
the symbol "CTAC." The Common Stock commenced trading on February 10, 1998. The
following table sets forth on a per share basis, the high and low closing sale
prices per share for the Common Stock as reported by the Nasdaq for the period
from February 10, 1998 through the end of fiscal 1998.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------- -------
<S> <C> <C>
April 4, 1998.............................. $20.875 $13.56
July 4, 1998............................... 19.875 13.00
October 3, 1998............................ 16.375 5.62
January 2, 1999............................ 18.000 4.75
</TABLE>
12
<PAGE>
HOLDERS
As of the close of business on March 18, 1999, there were approximately 65
holders of record of Common Stock. The Company believes that it has a
significantly larger number of beneficial holders of Common Stock. A recently
reported last sale price of the Common Stock on the Nasdaq is set forth on the
cover page of this report.
DIVIDENDS
Immediately prior to the consummation of its initial public offering, the
Company entered into an agreement to distribute to its existing stockholders an
amount equal to the Company's retained earnings from its formation date through
the date of the termination of the Company's S corporation status. The
distribution (net of notes receivable from stockholders of $599,689) was in the
form of promissory notes, totaling $982,995, issued by the Company. These
promissory notes were paid in full during the first quarter of fiscal 1998.
Subsequent to this S corporation distribution, the Company has not declared or
paid any cash or other dividends on its Common Stock and does not expect to pay
dividends for the foreseeable future. The Company anticipates that all of its
future earnings will be retained to finance the expansion of its business. 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 hereinafter defined)
prohibits the Company from paying any cash dividends on the Common Stock after
the termination of the Company's S corporation status.
RECENT SALES OF UNREGISTERED SECURITIES
No securities of the Company that were not registered under the Securities
Act have been issued or sold by the Company within the period covered by this
report.
USE OF PROCEEDS FROM REGISTERED SECURITIES.
A Registration Statement on Form S-1 (File No. 333-41055) (the
"Registration Statement") registering shares of the Company's Common Stock, par
value $0.01 per share, filed in connection with the Company's IPO, was declared
effective by the Securities and Exchange Commission on February 9, 1998. The IPO
commenced on the effective date and terminated after all the securities
registered under such Registration Statement were sold.
Pursuant to the Registration Statement, the Company sold 2,213,750 shares
of Common Stock (including 288,750 shares sold pursuant to the underwriter's
over-allotment option) for its own account, for an aggregate offering price of
$27,671,875, and 316,250 shares of Common Stock (including 41,250 shares sold
pursuant to the underwriter's over-allotment option) for the account of the
selling stockholder for an aggregate offering price of $3,953,125. The managing
underwriters of the IPO were McDonald & Company Securities, Inc. and Morgan
Keegan & Company, Inc.
In connection with the IPO, the Company incurred expenses of $2,821,766,
including underwriting discounts and commissions of $1,937,031 and other
expenses of $884,735. After such expenses, the Company's net proceeds from the
IPO were approximately $24.9 million. Since completion of the IPO, through
January 2, 1999, the approximate amounts of net offering proceeds used by the
Company were as follows: (i) $1.0 million for the payment of the S Corporation
distribution, net of notes receivable from stockholders, (which was paid to the
shareholders who were shareholders of the Company prior to the IPO, some of whom
are directors and officers of the Company); (ii) $3.0 million for the repayment
of debt (a portion of which was repaid to a director of the Company); (iii) $1.9
million to exercise an option to purchase 442,651 shares of Common Stock from a
director of the Company (iv) $2.0 million for capital expenditures and (v) $13.2
million for general corporate purposes, including advertising, inventory and
other working capital. The $3.8 million remaining proceeds are held in a money
market fund.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The financial data as of and for the years ended January 2, 1999, December
31, 1997 and 1996 and for the eleven month period ended December 31, 1995 have
been derived from the audited financial statements of the Company. The financial
data as of and for the one month period ended January 1, 1995 and the year ended
December 31, 1994 are derived from the audited financial statements of the
Predecessor. The selected financial data below should be read in conjunction
with the financial statements and the notes thereto of the Predecessor and the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Such information for the three years ended January 2,
1999 is included as part of this Form 10-K.
<TABLE>
<CAPTION>
COMPANY PREDECESSOR(1)
---------------------------------------------------------- ---------------------------
YEAR YEAR YEAR FEBRUARY 1, ONE MONTH YEAR
ENDED ENDED ENDED 1995 TO ENDED ENDED
JANUARY 2, DECEMBER 31, DECEMBER 31, DECEMBER 31, JANUARY 31, DECEMBER 31,
1999 1997 1996 1995 1995 1994
------------- -------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $59,875,941 $21,115,314 $ 3,628,296 $ 587,918 $ 21,552 $ 212,584
Cost of goods sold 37,315,413 14,024,523 2,215,306 355,466 13,069 117,326
------------- -------------- -------------- -------------- ------------- -------------
Gross profit 22,560,528 7,090,791 1,412,990 232,452 8,483 95,258
Selling, general and
administrative expenses 31,541,525 5,945,221 1,041,312 317,898 9,369 78,584
------------- -------------- -------------- -------------- ------------- -------------
Income (loss) from
operations (8,980,997) 1,145,570 371,678 (85,446) (886) 16,674
Other income (expense), net 445,710 (113,162) (23,315) (9,105) - -
------------- -------------- -------------- -------------- ------------- -------------
Income (loss) before
benefit (provision) for
income taxes (8,535,287) 1,032,408 348,363 (94,551) (886) 16,674
Benefit for income taxes 642,679 - - - - -
============= ============== ============== ============== ============= =============
Net income (loss)(2) $(7,892,608) $ 1,032,408 $ 348,363 $ (94,551) $ (886) $ 16,674
============= ============== ============== ============== ============= =============
Basic and diluted net
income (loss) per common
share $ (1.27)
=============
PRO FORMA STATEMENT OF
OPERATIONS DATA:
Income (loss) before
benefit (provision) for
income taxes (8,535,287) 1,032,408 348,363 (94,551)
Pro forma benefit
(provision) for income
taxes 642,679 (397,477) (134,120) 36,402
------------- -------------- -------------- --------------
Pro forma net income
(loss)(3) $(7,892,608) $ 634,931 $ 214,243 $ (58,149)
============= ============== ============== ==============
Pro forma basic net income
(loss) per common share $ (1.27) $ 0.14
============= ==============
Pro forma diluted net
income (loss) per common
share (4) $ (1.27) $ 0.13
============= ==============
BALANCE SHEET DATA (AT THE
END OF PERIOD):
Working capital (deficit) $11,844,537 $(1,621,522) $ (204,080) $ (12,093) $ 11,762 $ 13,449
Total assets 18,016,136 7,781,064 1,156,646 243,845 23,687 25,574
Total debt (including
current portion) 66,877 2,759,837 370,705 207,864 - -
Stockholders' equity
(deficit) 14,832,825 854,358 146,359 (28,412) 21,032 22,818
</TABLE>
_____________________
(1) The financial and operating data of the Predecessor was derived from the
financial and operating data of the Discount Lens Club.
(2) Prior to February 9, 1998, the Company operated as an S corporation and was
not subject to federal and certain state income taxes.
(3) Pro forma net income reflects 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 its initial
public offering, the Company's S corporation status was terminated; at that
date, the Company recorded a non-recurring, non-cash charge to earnings to
recognize deferred income taxes.
(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 for 1997 represent the number of shares sufficient
to fund the S corporation distribution of approximately $983,000. Common
Stock equivalents were determined using the treasury stock method.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
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. Net sales for fiscal 1998 increased 184% to $59.9 million from $21.1
million in 1997.
Prior to consummation of its initial public offering ("IPO") in
February 1998, the Company operated as an S corporation and, as a result, had
not been subject to federal or certain state income taxes. In connection with
the consummation of the IPO, the Company revoked its S Corporation status and
became subject to federal and state income taxes. As a result, the Company
recorded a net deferred tax liability and the related deferred tax provision of
approximately $791,000 for the tax effect of the differences between financial
statement and income tax basis of assets and liabilities that existed at the
termination date of the S corporation election.
Effective January 1, 1998, the Company changed from a calendar year end
to a 52/53 week year ending on the Saturday nearest to December 31. Due to this
change, fiscal year 1998 represents 52 weeks and 3 days, covering the period
January 1, 1998 to January 2, 1999.
During 1998, the Company began utilizing a variety of new advertising
vehicles, including new print vehicles, Internet and radio spots, and an
extensive television marketing campaign. As direct-response information became
available during the fourth quarter of 1998, the Company determined that its
ability to track individual sales to specific advertising campaigns was
restricted as a result of the variety of new advertising vehicles utilized.
Therefore, beginning in the fourth quarter of 1998, the Company began expensing
all advertising costs, including all direct-mail advertising costs, when the
advertising first takes place. As a result, quarter-to-quarter comparisons are
impacted by the timing of television, radio and Internet advertisements and by
the mailing of the Company's printed advertisements within and between quarters.
The volume of mailings and other advertising may vary in different quarters and
from year-to-year depending on the Company's assessment of prevailing market
opportunities.
The sale and delivery of contact lenses are generally governed by state
laws and regulations. The Company sells to customers in all 50 states and each
sale is likely to be subject to the laws of the state where the customer is
located. 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, the
Company's practice is to ship the lenses to the customer, based on the
information that the customer has provided. 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
appeared to conform to the requirements of applicable state laws and
regulations.
15
<PAGE>
RESULTS OF OPERATIONS
The following table presents the Company's results of operations expressed
as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Costs of goods sold 62.3 66.4 61.1
-------------- ---------------- ----------------
Gross profit 37.7 33.6 38.9
Selling, general and administrative expenses 52.7 28.2 28.7
-------------- ---------------- ----------------
Income (loss) from operations (15.0) 5.4 10.2
Other income (expense), net 0.7 (0.5) (0.6)
-------------- ---------------- ----------------
Income (loss) before benefit (provision) for income taxes (14.3) 4.9 9.6
Pro forma benefit (provision) for income taxes 1.1 (1.9) (3.7)
-------------- ---------------- ----------------
Pro forma net income (loss) (13.2)% 3.0% 5.9%
============== ================ ================
</TABLE>
YEAR ENDED JANUARY 2, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales for the year ended January 2, 1999 increased 184%
from the year ended December 31, 1997. The Company believes that this increase
in net sales reflects some of the benefits of the Company's increased television
and Internet advertising. The Company is also realizing the benefits of repeat
sales from a growing customer base. Repeat sales in fiscal 1998 reached $22.6
million, exceeding total net sales for 1997 of $21.1 million. Although the
Company believes that sales will increase substantially in the coming year, the
Company does not expect that the rate of growth in 1999 will be as significant
as the growth rate in 1998.
GROSS PROFIT. Gross profit as a percentage of sales increased to 37.7%
for the year ended January 2, 1999 from 33.6% for the year ended December 31,
1997. With the increase in sales, the Company was able to obtain inventory at
lower costs because of purchase volumes and more competitive pricing resulting
from access to more vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the year ended January 2, 1999 increased 431% from
the year ended December 31, 1997. As a percentage of net sales, selling, general
and administrative expenses increased to 52.7% in fiscal 1998 from 28.2% in
1997. During fiscal 1998, the Company continued to increase its sales and
marketing activity. Advertising as a percentage of sales was 40.4% in fiscal
1998 as compared to 16.5% in 1997. The Company expects that advertising spending
as well as advertising as a percentage of sales in fiscal 1999 will be less than
in fiscal 1998. However, if opportunities present themselves, the Company may
increase advertising spending above currently planned levels.
During 1998, the Company began utilizing a variety of new advertising
vehicles, including new print vehicles, Internet and radio spots, and an
extensive television marketing campaign. As direct-response information became
available during the fourth quarter of 1998, the Company determined that its
ability to track individual sales to specific advertising campaigns was
restricted as a result of the variety of new advertising vehicles utilized.
Therefore, beginning in the fourth quarter of 1998, the Company began expensing
all advertising costs, including all direct-mail advertising costs, when the
advertising first takes place. The Company also determined that for previously
deferred advertising costs the period during which the future benefits were
expected to be received was shortened and accordingly is amortizing the balance
at the beginning of the fourth quarter of 1998 over 5 months.
16
<PAGE>
OTHER INCOME (EXPENSE), NET. The increase in other income (expense) is
due to interest income from funds received in the initial public offering of
common stock in excess of the interest expense incurred prior to the initial
public offering.
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 for the year. The Company's future effective tax
rate will depend upon future taxable income and changes in the valuation
allowance associated with the deferred tax assets. The Company anticipates that
its future effective income tax rate will be approximately 38%.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales for the year ended December 31, 1997 increased
482% from 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 as a percentage of sales decreased to 33.6%
for the year ended December 31, 1997 from 38.9% for the year ended December 31,
1996. 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 471% from
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 1997 from 28.7% in 1996. This
decrease was largely due to the fixed nature of many such expenses, including
rent, salaries, depreciation and certain equipment costs.
OTHER INCOME(EXPENSE), NET. The decrease in other (expense) income 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. This increase in interest expense was offset partially by an increase
in other income primarily due to an increase in interest income from
stockholders' notes receivable.
INCOME TAXES. The pro forma provision for income taxes was determined
assuming the Company had been taxed as a C Corporation for federal and state
income tax purposes for 1997 and 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its growth through a combination of
funds generated from operations and borrowings. During February 1998, the
Company completed its initial public offering of common stock. In connection
therewith, the Company issued 2,213,750 shares of common stock, which included
288,750 shares pursuant to the underwriters' over-allotment option. The proceeds
received from the offering, net of underwriting commissions and offering costs,
totaled approximately $24.9 million. The Company uses funds to enhance growth
through increased advertising expenditures and to increase inventory levels in
anticipation of future sales. 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 all contact lens manufacturers.
For 1998, 1997 and 1996, net cash (used in) provided by operating
activities was approximately $(13.8) million, $(1.0) million and $0.1 million,
respectively. For all years, cash was used primarily to fund the Company's
growth as the Company increased inventory levels and advertising spending.
The Company used approximately $2.0 million, $0.9 million and $0.4
million for investing activities in 1998, 1997 and 1996, respectively. The
majority of these amounts relate to capital expenditures for infrastructure
improvements and increases in notes receivable from shareholders. The Company
received payment in full on the
17
<PAGE>
notes receivable during the first quarter of 1998, as the notes were netted with
the S Corporation distribution paid during the period. The amounts related to
capital expenditures for 1998, 1997 and 1996 were approximately $2,013,000 and
$488,000 and $175,000, respectively. The Company moved into its new call center
during June and July of 1998. In conjunction with the move, the Company acquired
new telecommunications systems and enhanced its management information systems.
The Company began operations in its new distribution center in February of 1999.
This new facility is several times the size of the prior distribution center and
is strategically located near the Salt Lake City, Utah airport. The Company
anticipates additional capital expenditures for infrastructure as it continues
to expand and improve operating facilities, telecommunications systems and
management information systems in order to handle future growth.
For the 1998 period, net cash of approximately $19.6 million was
provided by financing activities, resulting from net proceeds received from its
initial public offering, offset by repayments of debt, distributions to
stockholders (S corporation distribution) and repurchase of stock. For the 1997
and 1996 periods, net cash of approximately $1.9 million and $0.3 million,
respectively, was provided by financing activities. These amounts primarily
represent borrowings from a stockholder of the Company and borrowings under the
Credit Facility.
On October 13, 1998, the Company's Board of Directors authorized a
repurchase of up to 500,000 shares of its common stock. A purchase of the full
amount would equal approximately 7.8 percent of the 6,430,568 shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares will
be retained as treasury stock to be used for corporate purposes. The repurchase
program will be effected in accordance with the safe harbor provisions of Rule
10b-18. During fiscal 1998, the Company repurchased 15,000 shares for a total
cost, including commissions, of $81,375. Subsequent to year end the Company
repurchased 155,000 shares for a total cost, including commissions, of
$1,860,005. The repurchases were funded using cash on hand.
In August 1997, the Company established a revolving credit facility to
provide for working capital requirements and other corporate purposes (the
"Credit Facility"). The Company amended the Credit Facility in January 1998 and
October 1998. As a result, the Credit Facility provides for borrowings equal to
the lesser of $5.0 million or 50 percent of eligible inventory. The Credit
Facility bears interest at a floating rate equal to the lender's prime interest
rate plus 1.5 percent (9.25 percent at January 2, 1999). As of January 2, 1999,
the Company had no outstanding borrowings under the Credit Facility. The Credit
Facility is secured by substantially all of the Company's assets and contains
financial covenants customary for this type of financing. The Credit Facility is
set to mature on July 31, 1999. As of January 2, 1999, the Company was not in
compliance with the covenants regarding quarterly pre-tax income, but the bank
waived the covenants. Depending upon its financial performance in future
quarters, the Company may be required to seek other covenant waivers under the
Credit Facility.
The Company believes that its cash on hand, together with cash
generated from operations and the cash available through the Credit Facility,
will be sufficient to support current operations and future growth through
fiscal 1999. 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.
18
<PAGE>
YEAR 2000 ISSUE
Based on a preliminary review of its current computer applications and
internal technology systems, the Company believes all of its applications and
internal technology systems are substantially Year 2000 compliant. To ensure the
Company is Year 2000 compliant, the Company is currently taking steps to perform
a more in-depth analysis and testing of Year 2000 compliance on its computer
applications, internal technology systems and embedded technology. The Company
does not expect Year 2000 compliance to be a major issue since the Company has
replaced or upgraded the majority of its critical technology systems within the
last two years. However, the Company believes that by completing this in-depth
analysis and testing that the Company will be able to take any necessary steps
to become Year 2000 compliant. If this analysis and any necessary corrective
actions are not completed timely, the Year 2000 issue could have a material
impact on the operations of the Company.
The Company is currently unable to determine the effects of Year 2000
compliance by third parties that are significant to its operations. The Company
has sent correspondence to significant third parties to assess the parties' Year
2000 compliance and to determine the extent to which the Company's operations
will be impacted by those third parties' failure to fix their own Year 2000
issues. If the systems of critical third parties are not in compliance, the
Company's operations will be adversely affected.
The Company has not yet incurred any significant costs related to Year
2000 compliance. Once the Company has completed the above steps, the Company
will be able to determine any significant future costs associated with Year 2000
compliance. Although the Company has not yet approved a formal Year 2000
contingency plan, the Company has manual processes, which can be used in the
event of system disruption. The Company expects to approve a formal contingency
plan during 1999.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements about the Company's
future business prospects. These statements are subject to risks and
uncertainties that could cause actual results to differ materially from those
set forth in or implied by such forward looking statements. Factors that may
cause future results to differ materially from the Company's current
expectations include, among others: general economic conditions, the health of
the contact lens industry, inventory acquisition and management, advertising
spending and effectiveness, and regulatory considerations.
SEASONALITY
The Company does not believe that seasonality has had a material effect
on the Company's operations for the three years ended January 2, 1999.
INFLATION
The Company does not believe that inflation has had a material effect
on the Company's operations for the three years ended January 2, 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Based on its current operations, the Company believes it is not subject
to significant market risk. As of January 2, 1999, the Company did not hold any
market risk sensitive instruments and had no outstanding debt other than a
capital lease obligation of $66,877. In addition, all of the Company's
transactions are in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 is set forth on pages F-1 through
F-20 of this Form 10-K. The Company is not required to provide the supplementary
financial information required by Item 302 of Regulation S-K.
19
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to Directors of the Company is set forth in the
Proxy Statement under the heading "Election of Directors," which information is
incorporated herein by reference. Information regarding the executive officers
of the Company is included as Item 4A of Part I of this Form 10-K as permitted
by Instruction 3 to Item 401(b) of Regulation S-K. Information required by Item
405 of Regulation S-K is set forth in the Proxy Statement under the heading
"Compliance with Section 16(a) of the Securities Exchange Act of 1934," which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to executive compensation is set forth in the
Proxy Statement under the heading "Compensation of Executive Officers," which
information is incorporated herein by reference (except for the Compensation
Committee Report on Executive Compensation and the Performance Graph).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Beneficial
Ownership of Common Stock," which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions
is set forth in the Proxy Statements under the headings "Election of Directors
- -- Compensation Committee Interlocks and Insider Participation" and "Election of
Directors -- Certain Relationships and Related Transactions," which information
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following financial statements of the
Company and the report of the independent public accountants
thereon, are included in this Form 10-K on pages F-1 through F-
20:
Report of Independent Public Accountants
Balance Sheets as of January 2, 1999 and December 31, 1997
Statements of Operations for the years ended January 2,
1999, and December 31, 1997 and 1996
Statements of Stockholders' Equity for the years ended
January 2, 1999, and December 31, 1997 and 1996
20
<PAGE>
Statements of Cash Flows for the years ended January 2,
1999, and December 31, 1997 and 1996
Notes to Financial Statements
2. Financial Statement Schedules. All financial statement schedules
have been omitted because they are inapplicable or the
required information is included or incorporated by
reference elsewhere herein.
3. Exhibits. The Company will furnish to any eligible stockholder,
upon written request of such stockholder, a copy of any exhibit
listed below upon the payment of a reasonable fee equal to the
Company's expenses in furnishing such exhibit.
EXHIBIT
NO. EXHIBIT
------- ---------------------------------------------
3.1(i) Restated Certificate of Incorporation of the
Company. (1)
3.1(ii) Restated By-Laws of the Company. (1)
4.1 Form of certificate representing shares of
Common Stock, $0.01 par value per share. (2)
10.1 Employment Agreement between the Company and
Jonathan C. Coon. (2) *
10.2 Employment Agreement between the Company and
John F. Nichols. (2) *
10.3 Employment Agreement between the Company and
Scott S. Tanner. (2) *
10.4 Employment Agreement between the Company and
Robert G. Hunter. (2) *
10.5 1-800 CONTACTS, INC. 1998 Incentive Stock
Option Plan. (2) *
10.6 Lease between the Company and Draper Land
Partnership II, dated September 4, 1996, with
respect to the Company's former call center.
(2)
10.7 Lease between the Company and Draper Land
Partnership II, dated November 3, 1997, with
respect to the Company's call center. (2)
10.8 Lease between the Company and Bird and
Saunders, dated January 23, 1998, with
respect to the Company's warehouse. (2)
10.9 Revolving Credit Agreement between the
Company and Zions First National Bank. (2)
10.10 Indemnification Agreement between the Company
and its officers and directors. (2)
10.11 Agreement for Distribution of Retained
Earnings and Tax Indemnification between the
Company and the Existing Stockholders. (2)
10.12 Lease between the Company and Larry T. Short,
dated June 27, 1995, with respect to the 1-
800 CONTACTS telephone number. (2)
10.13 Stock Option Agreement. (2) *
21
<PAGE>
10.14 First Amendment to Lease between the Company
and Draper Land Partnership II, dated May 25,
1998, with respect to the Company's call
center.
10.15 Second Amendment to Lease between the Company
and Draper Land Partnership II, dated August
6, 1998, with respect to the Company's call
center.
10.16 Lease between the Company and ProLogis
Development Services Incorporated, dated
October 13, 1998, with respect to the
Company's distribution center.
10.17 Revolving Credit Agreement between the
Company and Zions First National Bank, dated
October 29, 1998.
23.1 Consent of Independent Public Accountants.
27.1 Financial Data Schedule.
------------
(1) Incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the
quarterly period ended April 4, 1998
(Commission File No. 0-23633).
(2) Incorporated by reference to the same
numbered exhibit to the Company's
Registration Statement on Form S-1
(Registration No. 333-41055).
* Management contract, compensatory plan or
arrangement required to be filed as an
exhibit pursuant to Item 14(c) of this
report.
(b) Reports on Form 8-K.
None.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this _____ day of
April, 1999.
1-800 CONTACTS, INC.
By: /s/ Jonathan C. Coon
--------------------
Name: Jonathan C. Coon
Title: President and Chief Executive Officer
By: /s/ Scott S. Tanner
-------------------
Name: Scott S. Tanner
Title: Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on this _____ day of April, 1999.
SIGNATURE CAPACITY
/s/ Jonathan C. Coon President, Chief Executive Officer and
-----------------------
Jonathan C. Coon Director (principal executive officer)
/s/ Scott S. Tanner Chief Financial Officer and Director
-----------------------
Scott S. Tanner (principal financial officer)
/s/ Robert G. Hunter Corporate Controller (principal
-----------------------
Robert G. Hunter accounting officer)
/s/ John F. Nichols Director
-----------------------
John F. Nichols
/s/ Stephen A. Yacktman Director
-----------------------
Stephen A. Yacktman
/s/ E. Dean Butler Director
-----------------------
E. Dean Butler
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants........................................................ F-2
Balance Sheets as of January 2, 1999 and December 31, 1997...................................... F-3
Statements of Operations for the years ended January 2, 1999, and December 31, 1997 and 1996.... F-5
Statements of Stockholders' Equity for the years ended January 2, 1999, and
December 31, 1997 and 1996.................................................................... F-6
Statements of Cash Flows for the years ended January 2, 1999, and December 31, 1997 and 1996.... F-7
Notes to Financial Statements................................................................... F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO 1-800 CONTACTS, INC.:
We have audited the accompanying balance sheets of 1-800 CONTACTS, INC. (a
Delaware corporation) as of January 2, 1999 and December 31, 1997, and the
related statements of operations, stockholders' equity and cash flows for each
of the three fiscal years in the period ended January 2, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with 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
January 2, 1999, and December 31, 1997, and the results of its operations and
its cash flows for each of the three fiscal years in the period ended January 2,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
February 4, 1999 (except with respect to certain matters discussed in Notes 5
and 12, as to which the date is March 26, 1999)
F-2
<PAGE>
1-800 CONTACTS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,762,220 $ -
Inventories 10,752,324 4,811,855
Prepaid advertising 294,259 127,696
Other current assets 188,880 54,968
------------ -----------
Total current assets 14,997,683 4,994,519
------------ -----------
DEFERRED ADVERTISING COSTS 175,631 1,705,695
------------ -----------
PROPERTY AND EQUIPMENT, at cost:
Office, computer and other equipment 2,078,102 630,186
Leasehold improvements 458,341 75,270
------------ -----------
2,536,443 705,456
Less - accumulated depreciation and amortization (487,593) (142,953)
------------ -----------
Net property and equipment 2,048,850 562,503
------------ -----------
DEFERRED INCOME TAXES 642,679 -
------------ -----------
OTHER ASSETS 151,293 518,347
------------ -----------
Total assets $18,016,136 $7,781,064
============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
1-800 CONTACTS, INC.
BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ - $1,055,640
Notes payable to stockholders - 1,370,000
Current portion of capital lease obligation 36,712 23,532
Accounts payable 2,056,451 3,762,158
Accrued liabilities 890,443 300,439
Unearned revenue 169,540 104,272
------------ ------------
Total current liabilities 3,153,146 6,616,041
------------ ------------
LONG-TERM LIABILITIES:
Notes payable to stockholders - 243,788
Capital lease obligation, less current portion 30,165 66,877
------------ ------------
Total long-term liabilities 30,165 310,665
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1 and 5)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized,
6,430,568 and 4,659,469 shares issued, respectively 64,306 46,595
Additional paid-in capital 23,017,266 93,688
Retained earnings (deficit) (8,189,072) 1,286,220
Treasury stock at cost, 11,000 shares (59,675) -
Notes receivable from stockholders - (572,145)
------------ -----------
Total stockholders' equity 14,832,825 854,358
------------ -----------
Total liabilities and stockholders' equity $18,016,136 $7,781,064
============ ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these balance sheets.
F-4
<PAGE>
1-800 CONTACTS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
-------------- ---------------- ----------------
<S> <C> <C> <C>
NET SALES $ 59,875,941 $ 21,115,314 $ 3,628,296
COST OF GOODS SOLD 37,315,413 14,024,523 2,215,306
-------------- ---------------- ----------------
Gross profit 22,560,528 7,090,791 1,412,990
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 31,541,525 5,945,221 1,041,312
-------------- ---------------- ----------------
INCOME (LOSS) FROM OPERATIONS (8,980,997) 1,145,570 371,678
-------------- ---------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (104,370) (161,520) (26,175)
Interest income 553,843 34,963 7,261
Other, net (3,763) 13,395 (4,401)
-------------- ---------------- ----------------
Total other, net 445,710 (113,162) (23,315)
-------------- ---------------- ----------------
INCOME (LOSS) BEFORE BENEFIT FOR INCOME TAXES (8,535,287) 1,032,408 348,363
BENEFIT FOR INCOME TAXES 642,679 - -
-------------- ---------------- ----------------
NET INCOME (LOSS) $ (7,892,608) $ 1,032,408 $ 348,363
============== ================ ================
PER SHARE INFORMATION:
Basic and diluted net income (loss) per common share $ (1.27)
==============
PRO FORMA INFORMATION:
Income (loss) before benefit (provision) for income taxes (8,535,287) 1,032,408 348,363
Benefit (provision) for income taxes 642,679 (397,477) (134,120)
-------------- ---------------- ----------------
Net income (loss) $ (7,892,608) $ 634,931 $ 214,243
============== ================ ================
Basic net income (loss) per common share $ (1.27) $ 0.14
============== ================
Diluted net income (loss) per common share $ (1.27) $ 0.13
============== ================
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-5
<PAGE>
1-800 CONTACTS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTES
ADDITIONAL RETAINED RECEIVABLE
COMMON STOCK PAID-IN EARNINGS TREASURY STOCK FROM
------------------- --------------------
SHARES AMOUNT CAPITAL (DEFICIT) SHARES AMOUNT STOCKHOLDERS TOTAL
--------- -------- ----------- ----------- ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Advances to stockholders - - - - - - (27,544) (27,544)
Distributions to
stockholders, net - - - (1,582,684) - - 599,689 (982,995)
Sale of common stock,
net of offering costs 2,213,750 22,138 24,827,971 - - - - 24,850,109
Repurchase and retirement
of common stock (442,651) (4,427) (1,895,573) - - - - (1,900,000)
Purchase of treasury shares - - - - (15,000) (81,375) - (81,375)
Exercise of common stock
options - - (8,820) - 4,000 21,700 - 12,880
Net loss - - - (7,892,608) - - - (7,892,608)
--------- -------- ----------- ----------- ------- -------- ------------ -----------
BALANCE, January 2, 1999 6,430,568 $ 64,306 $23,017,266 $(8,189,072) (11,000) $(59,675) $ - $14,832,825
========= ======== =========== =========== ======= ======== ============ ============
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-6
<PAGE>
1-800 CONTACTS, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
-------------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,892,608) $ 1,032,408 $ 348,363
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 446,389 150,933 46,044
Other - 20,000 -
Loss on retirement of property and equipment 13,762 - 1,834
Deferred income taxes (642,679) - -
Changes in operating assets and liabilities:
Inventories (5,940,469) (4,336,445) (385,892)
Prepaid advertising (166,563) (127,696) -
Other current assets (133,912) (45,945) (8,423)
Deferred advertising costs 1,530,064 (1,311,398) (394,297)
Accounts payable (1,705,707) 3,290,864 421,228
Accrued liabilities 590,004 236,639 54,432
Unearned revenue 65,268 68,327 30,986
-------------- ------------- ------------
Net cash (used in) provided by operating activities (13,836,451) (1,022,313) 114,275
-------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in notes receivable from stockholders (27,544) (324,409) (233,592)
Purchase of property and equipment (2,013,361) (488,244) (174,992)
Proceeds from sale of property and equipment 101,768 - -
Purchase of intangible assets (5,000) (50,000) -
Deposits (38,049) (40,425) -
-------------- ------------- -------------
Net cash used in investing activities $ (1,982,186) $ (903,078) $ (408,584)
-------------- ------------- -------------
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
F-7
<PAGE>
1-800 CONTACTS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
JANUARY 2, DECEMBER 31, DECEMBER 31,
1999 1997 1996
----------- ------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of common stock, net of underwriting discounts and commissions $ 25,734,844 $ - $ 300,000
Common stock offering costs (509,537) (375,198) -
Common stock repurchases (1,981,375) - (240,000)
Proceeds from exercise of common stock options 12,880 - -
Net (repayments) borrowings on line of credit (1,055,640) 1,055,640 -
Borrowings from stockholders - 1,800,000 365,000
Principal payments on notes payable to stockholders (1,613,788) (411,212) (180,000)
Principal payments on notes payable for distributions to
stockholders, net (982,995) - -
Principal payments on long-term debt - (55,871) (21,717)
Principal payments on capital lease obligation (23,532) (19,425) (442)
Bank overdraft - (68,543) 68,543
------------- ------------ ------------
Net cash provided by financing activities 19,580,857 1,925,391 291,384
------------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,762,220 - (2,925)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD - - 2,925
------------- ----------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,762,220 $ - $ -
============= =========== =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 228,907 $ 42,699 $ 18,984
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended January 2, 1999, the Company distributed $1,582,684
to its S Corporation stockholders. This distribution (net of notes
receivable from stockholders of $599,689) was in the form of promissory
notes, totaling $982,995, issued by the Company. The promissory notes were
paid in full during fiscal year 1998.
The accompanying notes to financial statements
are an integral part of these statements.
F-8
<PAGE>
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 was reincorporated in Delaware in February 1998 in
conjunction with its initial public offering of common stock. The Company is a
direct marketer of replacement contact lenses. The Company sells contact lenses
primarily through its toll-free telephone number and the Internet.
REGULATORY COMPLIANCE
The sale and delivery of contact lenses is generally governed by state laws
and regulations. The Company sells to customers in 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 customer 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.
From time to time the Company receives notices, inquiries or other
correspondence from states or their regulatory bodies charged with overseeing
the sale of contact lenses. The Company's practice is to review such notices
with legal counsel to determine the appropriate response on a case-by-case
basis. It is the opinion of management, after discussion with legal counsel,
that the Company is taking the appropriate steps to address the various notices
received. To date, no formal complaints have been filed against the Company
concerning its business practices, other than the Steinberg Complaint (see Note
5).
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. 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. 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
F-9
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
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 47 percent and 40
percent of its contact lens inventory in 1998 and 1997, respectively. The
Company also purchased from another distributor 21 percent and 40 percent of its
contact lens inventory in 1997 and 1996, respectively. 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 these
suppliers 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
CHANGE IN ACCOUNTING PERIOD
Effective January 1, 1998, the Company changed from a calendar year end to
a 52/53 week year, ending on the Saturday nearest to December 31. Due to this
change, fiscal year 1998 represents 52 weeks and 3 days, covering the period
January 1, 1998 to January 2, 1999.
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.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
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.
F-10
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
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
Prior to the fourth quarter of fiscal 1998, the Company capitalized certain
direct-mail advertising costs and amortized those costs over the period for
which the revenues were generated in accordance with Statement of Position
("SOP") 93-7. Based upon the Company's past direct-response information, the
Company capitalized direct-mail advertising costs on a cost-pool-by-cost-pool
approach and amortized those costs over a 12 month period, which was the period
during which the future benefits were expected to be received. Approximately 73
percent of capitalized costs were amortized over the first six months after the
advertisement. Accordingly, deferred advertising costs were amortized in
proportion to the expected future benefits to be received. The Company expensed
all other advertising costs when the advertising first occurred.
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
exceeded the remaining future net revenues, the excess was recorded as
advertising expense in the current period.
During 1998, the Company began utilizing a variety of new advertising
vehicles, including new print vehicles, Internet and radio spots, and an
extensive television marketing campaign. As direct-response information became
available during the fourth quarter of 1998, the Company determined that its
ability to track individual sales to specific advertising campaigns was
restricted as a result of the variety of new advertising vehicles utilized.
Therefore, beginning in the fourth quarter of 1998, the Company began expensing
all advertising costs, including all direct-mail advertising costs, when the
advertising first takes place. The Company also determined that for previously
deferred advertising costs the period during which the future benefits were
expected to be received was shortened and accordingly is amortizing the balance
at the beginning of the fourth quarter of 1998 over 5 months.
The Company recorded total advertising expense of approximately
$24,207,000, $3,486,000 and $468,000 for the years ended January 2, 1999 and
December 31, 1997 and 1996, respectively.
OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 2, DECEMBER 31,
1999 1997
----------- ------------
<S> <C> <C>
Intangible assets................... $ 175,447 $170,447
Deferred offering costs............. - 375,198
Deposits............................ 78,474 40,425
--------- --------
253,921 586,070
Accumulated amortization............ (102,628) (67,723)
--------- --------
$ 151,293 $518,347
========= ========
</TABLE>
Intangible assets consist of amounts paid to secure the rights to the
Company's telephone numbers and Internet domain names. These costs are amortized
over an estimated life of 5 years. The Company has contractual rights customary
to the industry to use its telephone numbers and Internet domain names. 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 numbers. In addition, the Company does not have and cannot acquire any
property
F-11
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
rights to the Internet domain names. The Company does not expect to lose the
right to use the numbers or domain names, however, there can be no assurance in
this regard and such loss would have a material adverse effect on the Company's
financial position and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist mainly of cash and cash
equivalents, short-term payables and notes payable. The Company believes that
the carrying amounts approximate fair value.
LONG-LIVED ASSETS
The Company reviews long-lived assets 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 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 recognizes deferred tax assets or liabilities for expected
future tax consequences of events that have been recognized in the financial
statements or tax returns. Under this method, deferred tax assets or liabilities
are determined based upon the difference between the financial statement and
income tax bases of assets and liabilities using enacted tax rates expected to
apply when differences are expected to be settled or realized.
Prior to February 9, 1998, the Company had elected for federal and state
income tax purposes to include its taxable income with that of its shareholders
(an S Corporation election). For the years ended December 31, 1997 and 1996, 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.
NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share ("Basic EPS") excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding during the period. Diluted net income (loss) per
common share ("Diluted EPS") reflects the potential dilution that could occur if
stock options or other common stock equivalents were exercised or converted into
common stock.
The pro forma Basic and Diluted EPS for the year ended December 31, 1997
gives effect to the pro forma effects on historical net income adjusted for a
pro forma provision for income taxes assuming the Company had been taxed as a C
Corporation for federal and state income tax purposes. In addition, it takes
into consideration the shares deemed to be outstanding at the initial public
offering price of $12.50 per share, sufficient to fund the S Corporation
distribution of approximately $983,000 (see Note 9).
F-12
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the numerator and denominator used to
calculate Basic and Diluted EPS:
<TABLE>
<CAPTION>
Year Ended January 2, 1999 Year Ended December 31, 1997
--------------------------------------------------- --------------------------------------------------
Income Per-Share Income Per-Share
(Loss) Shares Amount (Loss) Shares Amount
----------------- ------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Historical:
Basic EPS $(7,892,608) 6,227,640 $ (1.27)
Effect of stock
options
---------------- ------------- ---------------
Diluted EPS $(7,892,608) 6,227,640 $ (1.27)
================ ============= ===============
Pro Forma:
Basic EPS $(7,892,608) 6,227,640 $ (1.27) $634,931 4,659,469 $ 0.14
Effect of stock 20,782
options
Assumed distribution 78,640
---------------- ------------- --------------- --------------- -------------- ---------------
Diluted EPS $(7,892,608) 6,227,640 $ (1.27) $634,931 4,758,891 $ 0.13
================ ============= =============== =============== ============== ===============
</TABLE>
At January 2, 1999, there were outstanding options to purchase 223,010
shares of common stock that were not included in the computation of Diluted EPS
because they would be antidilutive.
RECLASSIFICATIONS
Certain amounts in prior years' financial statements have been reclassified
to conform to the fiscal 1998 presentation.
NOTE 3. LINE OF CREDIT
LINE OF CREDIT
The Company has a revolving credit facility that provides for borrowings
equal to the lesser of $5.0 million or 50 percent of eligible inventory. The
credit facility bears interest at a floating rate equal to the lender's prime
interest rate plus 1.5 percent (9.25 percent at January 2, 1999). As of January
2, 1999, the Company had no outstanding borrowings. The credit facility is
secured by substantially all of the Company's assets and expires on July 31,
1999.
The credit facility contains various affirmative and negative covenants
which require, among other things, restrictions on additional debt, quarterly
pre-tax income, maintenance of working capital and restrictions on distributions
and changes in ownership. As of January 2, 1999, the Company was not in
compliance with the covenants regarding quarterly pre-tax income. The bank
waived these covenants for the year ended January 2, 1999.
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
accrued interest at the prime rate plus 2 percent (9.75 percent at January 2,
F-13
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
1999). As of December 31, 1997, outstanding borrowings totaled $243,788. During
1998, this amount was paid in full with proceeds from the Company's initial
public offering of common stock.
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 accrued interest at prime plus 2 percent and
was due July 30, 1998. As consideration for entering into this note, the Company
agreed to modify the option it held to repurchase the stockholder's common
stock. Under the revised terms of the option, the Company had the right to
repurchase 442,651 shares of the stockholder's common stock for $1,900,000 (see
Note 6).
In September 1997, the Company borrowed $250,000 from a stockholder under a
short-term, unsecured promissory note. The note accrued interest at prime plus 2
percent and was due in September 1998. In addition, for every month the note was
outstanding, a fee of $5,000 was added to the outstanding balance and expensed
as additional interest. As of December 31, 1997, $20,000 had been added to the
balance of the note.
As of December 31, 1997, accrued interest on stockholder notes payable
totaled $98,315 and is included in the caption "accrued liabilities" in the
accompanying December 31, 1997 balance sheet.
During 1998, all amounts owed to stockholders were paid in full with
proceeds from the Company's initial public offering of common stock.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LEGAL AND REGULATORY MATTERS
On July 14, 1998, Craig S. Steinberg, O.D., a professional corporation
d.b.a. City Eyes Optometry Center, filed a purported class action on behalf of
all optometrists licensed to practice in California against the Company and its
directors in Los Angeles County Superior Court (the "Steinberg Complaint"). The
complain alleges three separate causes of action for unfair competition: (i)
selling contact lenses to California residents without being registered, (ii)
selling contact lenses to California residents without verifying the
prescription, and (iii) failing to disclose in its advertising that it sells
"sample" lenses not intended for sale to the public. The complaint requests
various forms of relief, including damages of an unspecified amount, attorney's
fees and a permanent injunction to prevent the Company from selling contact
lenses to California residents without being registered and without verifying
the prescription as well as from selling sample contact lenses to California
residents. In addition, the plaintiff has filed a motion for preliminary
injunction seeking the injunctive relief requested in the complaint. On August
11, 1998, the Company removed the action to the United States District Court for
the Central District of California based on diversity jurisdiction.
In response to motions by the Company, plaintiff and another California
optometrist, Ellis Miles (collectively "plaintiffs") filed a First Amended
Complaint ("FAC") against the Company and its directors on or about September 3,
1998 purporting to sue on behalf of the public under California's unfair
competition statute rather than as a class action on behalf of optometrists.
Although the substantive claims for unfair competition remain the same, the FAC
seeks restitutionary relief rather than damages. Plaintiffs also stipulated to
dismiss the Company's directors as
F-14
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
defendants rather than oppose the Company's motion to dismiss them, leaving the
Company as the only remaining defendant.
On October 2, 1998, plaintiffs re-filed their motion for preliminary
injunction in federal court. The Company likewise filed a motion to strike
plaintiff's claims for monetary relief. Plaintiffs withdrew their motion for
preliminary injunction on October 19, 1998, after the Company filed its
opposition to the motion indicating, inter alia, that the Company had been
registered as a Nonresident Contact Lens Seller in California. The Court denied
the Company's motion to strike plaintiffs' claims for monetary relief on
February 26, 1999. The Company filed its Answer to the First Amended Complaint
on March 11, 1999.
From time to time the Company is involved in other legal matters generally
incidental to its business.
It is the opinion of management, after discussion 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.
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 January
2, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AMOUNT
------------------ --------
<S> <C> <C>
1999 $ 42,000
2000 31,500
--------
Total minimum lease payments.......................... 73,500
Less amount representing interest..................... (6,623)
--------
Present value of minimum lease payments............... 66,877
Less current portion.................................. (36,712)
--------
Capital lease obligations, excluding current portion.. $ 30,165
========
</TABLE>
OPERATING LEASES
The Company leases office and warehouse facilities and certain equipment
under noncancelable operating leases. Lease expense for the years ended January
2, 1999 and December 31, 1997 and 1996 totaled approximately $376,700, $88,000
and $30,900, respectively. In October 1998, the Company agreed to occupy
warehouse space in a facility then under construction. The new lease commitment
commenced in January, 1999.
Future minimum lease payments under noncancelable operating leases are as
follows (including expense under the new lease):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING AMOUNT
------------------ ----------
<S> <C> <C>
1999 $ 759,246
2000 746,298
2001 760,503
2002 598,293
2003 602,389
Thereafter 658,703
----------
$4,125,432
==========
</TABLE>
F-15
<PAGE>
1-800 CONTACTS,INC.
NOTES TO FINANCIAL STATEMENTS
SALES TAX
The Company's direct mail business is located, and all of its operations
are conducted, in the state of Utah. At January 2, 1999, the Company did 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.
ADVERTISING COMMITMENTS
The Company has entered into certain noncancelable commitments with
cooperative mail companies that will require the Company to pay approximately
$3.5 million for direct mail services through December 31, 1999.
NOTE 6. COMMON STOCK TRANSACTIONS
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 received the right to repurchase 442,651 of these shares for $1,900,000
prior to February 1, 2001 (see Note 4). In connection with its initial public
offering, the Company exercised its rights to repurchase these shares.
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 approved 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.
During February 1998, the Company completed its initial public offering of
common stock. In connection therewith, the Company issued 2,213,750 shares of
common stock, which included 288,750 shares issued pursuant to the underwriters'
over-allotment option. The proceeds received from the offering, net of
underwriting commissions and offering costs, totaled approximately $24,850,000.
On October 13, 1998, the Company's Board of Directors authorized a
repurchase of up to 500,000 shares of its common stock. A purchase of the full
amount would equal approximately 7.8 percent of the total shares issued. The
repurchase of common stock is subject to market conditions and is accomplished
through periodic purchases at prevailing prices on the open market, by block
purchases or in privately negotiated transactions. The repurchased shares will
be retained as treasury stock to be used for corporate purposes. The repurchase
program will be effected in accordance with the safe harbor provisions of Rule
10b-18. During 1998, the Company repurchased 15,000 shares for a total cost,
including commissions, of $81,375. See Note 12 for repurchases subsequent to
year end.
During December 1998, an employee exercised stock options to purchase 4,000
shares of common stock at $3.22 per share for a total of $12,880.
NOTE 7. STOCK OPTIONS AND STOCK OPTION PLAN
During fiscal 1998, the Company established a nonqualified and incentive
stock option plan. 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
F-16
<PAGE>
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS
market value of the underlying common stock on the date of grant. As of January
2, 1999, 292,610 shares are available for future granting.
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. 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. All options granted through January 2, 1999 vest equally over a
three year period and expire in ten years.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise
Price Per
Shares Share
-------- ---------
<S> <C> <C>
Outstanding at January 1, 1996 - -
Granted 47,986 $ 3.22
------- -------
Outstanding at December 31, 1996 47,986 3.22
Granted 91,175 9.52
------- -------
Outstanding at December 31, 1997 139,161 7.35
Granted 89,369 11.22
Exercised (4,000) 3.22
Forfeited (1,520) 12.50
------- -------
Outstanding at January 2, 1999 223,010 $ 8.94
======= =======
Exercisable at January 2, 1999 82,378 $ 7.81
======= =======
</TABLE>
The following is additional information with respect to stock options:
<TABLE>
<CAPTION>
Outstanding Weighted-Average Exercisable
Range of as of Remaining Weighted-Average as of Weighted-Average
Exercise Prices January 2, 1999 Contractual Life Exercise Price January 2, 1999 Exercise Price
- ----------------- --------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$3.18 - $4.76 63,181 7.9 $ 3.67 34,390 $ 3.50
4.77 - 6.35 3,000 9.7 5.63 0 0.00
7.94 - 9.52 4,799 8.4 8.16 1,600 8.16
9.53 - 11.11 139,160 8.9 11.00 46,388 11.00
11.12 - 12.70 7,870 9.2 12.18 0 0.00
14.29 - 15.88 5,000 9.5 15.88 0 0.00
------- --- ------ ------ ------
223,010 8.7 $ 8.94 82,378 $ 7.81
======= ======
</TABLE>
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 (loss) for the years ended January 2,
1999 and December 31, 1997 and 1996,
F-17
<PAGE>
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS
and diluted net income (loss) per common share for the years ended January 2,
1999 and December 31, 1997 would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported (1)........................... $(7,892,608) $634,931 $214,243
Pro forma................................. $(8,070,562) $617,785 $211,860
Diluted net income (loss) per common share:
As reported (1)........................... $ (1.27) $ 0.13
Pro forma................................. $ (1.30) $ 0.13
</TABLE>
Due to the nature and timing of options grants, the resulting pro forma
compensation cost may not be indicative of future years.
____________________
(1) Includes the effect of the pro forma adjustments as described in Note 2.
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:
weighted average risk-free interest rate of 5.6 percent for 1998 grants and 6.5
percent for 1997 and 1997 grants, expected stock price volatility of
approximately 78 percent for 1998 grants and 0 percent for 1997 and 1996 grants,
an expected dividend yield of 0 for all grants and an expected life of five
years for all grants. The weighted average fair value of options granted during
fiscal years 1998, 1997 and 1996 was $7.53, $2.64 and $0.89 per share,
respectively.
NOTE 8. RELATED PARTY TRANSACTIONS
During fiscal 1998, 1997 and 1996, the Company made aggregate loans to two
stockholders totaling $22,300, $289,473 and $226,331, respectively. The loans
were unsecured, accrued interest at the prime rate and were due on demand.
Interest income on the loans totaled $5,244, $34,936 and $7,261 for the years
ended January 2, 1999, and December 31, 1997 and 1996, respectively, and is
included in the outstanding balance of the notes receivable. As of December 31,
1997 and 1996, notes receivable from stockholders totaled $572,145 and $247,736,
respectively. During 1998, the Company made equity distributions to the
stockholders sufficient to allow for their repayment on these notes. As a
result, these notes were classified as a reduction in stockholders' equity in
the accompanying 1997 financial statements. See Note 4 for a discussion of other
related party transactions.
NOTE 9. DISTRIBUTIONS TO STOCKHOLDERS
Prior to the consummation of its initial public offering, the Company
entered into an agreement for the distribution of retained earnings and tax
indemnification with the existing stockholders. Pursuant to the agreement, an S
Corporation distribution of $982,995 (net of notes receivable due from
stockholders of $599,689) was distributed in the form of promissory notes issued
by the Company. The notes were paid in full after the closing of the offering.
The agreement provided 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. The existing stockholders will
be indemnified by the Company with respect to federal and state income tax
liabilities as a 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
F-18
<PAGE>
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS
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. INCOME TAXES
Effective February 9, 1998 the Company's S corporation election was
terminated. As a result, the Company recorded a net deferred tax liability and
the related deferred tax provision of approximately $791,000 for the tax effect
of the differences between financial statement and income tax basis of assets
and liabilities that existed at the termination date of the S corporation
election.
The components of the provision for income taxes for the period in fiscal
1998 since the termination of the S corporation status are as follows:
Current provision........................... $ -
Deferred benefit (provision):
Federal........................... 2,864,270
State............................. 443,386
Change in valuation allowance..... (1,874,211)
Change from S corporation status.. (790,766)
-----------
Total benefit for income taxes.. $ 642,679
===========
The following is a reconciliation between the statutory federal income tax
rate and the Company's effective income tax rate which is derived by dividing
the benefit for income taxes by loss before benefit for income taxes for the
fiscal year ended January 2, 1999.
Statutory federal income tax rate......................... 34.0%
State income taxes, net of federal benefit................ 3.3
Change from S corporation status.......................... (8.0)
Valuation allowance....................................... (22.0)
Other..................................................... .2
-----
7.5%
=====
The components of the deferred tax assets and liabilities at January 2,
1999 are as follows:
Deferred income tax assets:
Operating loss carryforward................ $ 2,357,190
Accrued reserves........................... 176,429
Intangibles amortization................... 23,741
Other...................................... 33,645
-----------
2,591,005
Valuation allowance (1,874,211)
-----------
716,794
-----------
Deferred income tax liabilities:
Deferred advertising costs................ (65,510)
Depreciation.............................. (8,605)
-----------
(74,115)
-----------
Net deferred income tax asset.............. $ 642,679
===========
F-19
<PAGE>
1-800 CONTACTS, INC.
NOTES TO FINANCIAL STATEMENTS
A valuation allowance is provided when it is more likely than not that all
or some portion of the deferred tax assets will not be realized. Due to the
uncertainty with respect to the ultimate realization, the Company has
established a valuation allowance for a portion of the deferred tax assets. The
amount of the net deferred tax assets considered realizable, however, could
change in the near term based on changing conditions.
As of January 2, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $6,320,000 which expire in fiscal year 2018
for federal income tax purposes and 2013 for state income tax purposes.
NOTE 11. PREFERRED STOCK
The Company has 1,000,000 shares authorized of $.01 par value preferred
stock. For the years ended January 2, 1999, and December 31, 1997 and 1996 no
shares were issued or outstanding.
NOTE 12. SUBSEQUENT EVENTS
STOCK OPTIONS
In February 1999, the Company granted nonqualified stock options to
purchase 54,700 shares of common stock at $12.5625 per share to employees and
Directors of the Company. The options vest over a three year period and expire
in ten years.
STOCK REPURCHASES
In March 1999, the Company repurchased a total of 155,000 shares of its
common stock for a total cost, including commissions, of $1,860,005.
F-20
<PAGE>
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE ("Amendment") dated this 25th day of May,
1998, is entered into by and between DRAPER LAND PARTNERSHIP II, L.C., a Utah
Limited Liability Company ("Landlord"), and 1-800-CONTACTS, INC. a Utah
corporation ("Tenant").
W I T N E S S E T H:
WHEREAS, Landlord and Tenant entered into a Lease dated November 3,
1997, ("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 23,379 Rentable square feet. The location of the Premises
and related Building is commonly known as: 66 E. Wadsworth Park Dr., Bldg. B,
Suite #300, Draper, UT 84020 (the "Building").
3. Article 4(a) shall be replaced in its entirety by the following:
4(a) Base Rent. Total Base Rent shall be 16.50 per Rentable square foot
---------
or $385,753.50, subject to an annual increase as provided below, payable as
follows: $32,146.13 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 such
monthly rental
1
<PAGE>
payments being due upon the execution of the Lease. Any partial months shall
be prorated accordingly. Base Rent under this Article will be increased by
sixty cents ($0.60) after the thirteenth month of the lease and each year
thereafter including any option period, (after adjustment to fair market value
at 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, L.C.; Attn: Kip Wadsworth; 71 East
Wadsworth Dr., Draper, UT 84020.
IN WITNESS WHEREOF, the parties have executed this Lease dated the day
and year first above written.
TENANT, LANDLORD,
1-800 CONTACTS, INC. DRAPER LAND PARTNERSHIP II
By: [ILLEGIBLE SIGNATURE] By: /s/ Kip Wadsworth
---------------------------- ---------------------------
Kip Wadsworth
2
<PAGE>
SECOND AMENDMENT TO LEASE
THIS SECOND AMENDMENT TO LEASE ("2nd Amendment") dated this 6th day of
August, 1998, 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")
W I T N E S S F T H:
WHEREAS, Landlord and Tenant entered into a Lease dated November 3,
1997, and a First Amendment dated May 25, 1998 ("Lease") which are 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) (i) Original Premises. 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 ("Original Premises"), highlighted on Exhibit
A-l attached hereto, which include approximately 23,379
Rentable square feet. The location of the Original Premises
and related Building is commonly known as: 66 E. Wadsworth
Park Dr., Bldg. B, Suite #300, Draper, UT 84020 (the
"Building").
(ii) Expansion Space. (a) Landlord hereby leases to Tenant, and
---------------
Tenant hereby leases from Landlord, for the term and subject
to the terms and conditions hereafter set forth, to each and
all of which Landlord and Tenant hereby mutually agree, those
certain expansion premises ("Expansion Premises") highlighted
on Exhibit A-2 attached hereto, which includes approximately
8,380 Rentable square feet of office space (the exact Rentable
1
<PAGE>
square footage and location to be determined by final space
plan). The location of the Expansion Premises shall be on the
2nd floor of the same building as the Original Premises.
(b) Occupancy. Tenant will take occupancy of the
---------
Expansion Premises on December 15, 1998.
(c) Expansion Space Term. The lease term for the
--------------------
Expansion Premises shall be 60 months only,
commencing on December 15, 1998 and ending on
December 14, 2003. Options to extend the lease for
the Expansion space will be the same as the options
for the Original Premises. Nothing in this paragraph
will be deemed to affect the lease term or the
extension option for the Original Premises covered by
the lease and amendment #1.
(d) Rent for Expansion Premises. The monthly Base Rent
---------------------------
under the Lease will be increased, commencing on
December 15, 1998 by $11,522.50 per month,
representing rent for the Expansion Premises at the
rate of $16.50 per year per rentable square foot.
Therefore, commencing December 15, 1998 the total
monthly Base Rent under the Lease (for both the
Original Premises and the Expansion Premises) will be
$43,668.63 and will continue as designated in lease
amendment #1. On December 15, 2003, after the tenant
vacates the Expansion Premises, the monthly rent will
revert to the rate decimated for the Original
Premises in lease amendment #1.
(e) Additional Parking Stalls. In addition to the
-------------------------
parking stalls described in the Lease, Tenant will
have the use (from December 15, 1998 through December
14, 2003) of 5 non-reserved stall for each 1,000
rentable square feet included in the Expansion
Premises. These parking stalls will be located
anywhere in the decimated parking area for Building B
and the east section of lot 2 (see attachment B),
subject to availability. There will be no additional
charge for these parking stalls, but Tenant shall be
responsible for the costs of repair and maintenance
of these stalls, which cost will be payable as
Additional Rent.
(f) Tenant Improvement Allowances. Landlord will, at its
-----------------------------
sole cost and expense, provide Base Building
Improvements for the Expansion Premises, as described
in paragraph 2(c) of the Lease. Landlord will also
provide a Tenant Improvement Allowance for the
Expansion Premises in the amount of $22.50 per usable
square foot. Tenant shall pay for all other expenses
of improving the Expansion Premises and preparing
them for occupancy. In the event that Landlord
advances funds in excess of $22.50
2
<PAGE>
per usable square foot for any Expansion Premises
improvements other than the Base Building
Improvements, Tenant will reimburse Landlord within
ten (10) days after receipt of Landlord's invoice
therefor.
(g) Additional Security Deposit. Upon execution of this
---------------------------
Second Amendment, Tenant's security deposit under the
Lease will increase by $13,198.50, so that the total
security deposit will be $51,723.50.
(h) Miscellaneous. Except as expressly modified herein,
-------------
the Lease and Amendment #1 remain in full force and
effect between the parties in accordance with their
original terms.
(i) Tenant Improvements. The time schedule for tenant
-------------------
improvement documentation is as follows:
1. Tenant approved floor plan layout must be
delivered to the Landlord by September 1,
1998.
2. Tenant approved complete plan including
tenant finishes must be delivered to the
Landlord by September 12, 1998.
Any delay by Tenant beyond these dates will not cause
any change to the term, rent, and parking dates
referenced above in (c), (d), and (e), but may cause
a delay to the date of occupancy referenced above in
(b).
3. The Tenant has under gone a corporate name change hence the Tenant
name for the Lease shall be changed from 1-800-LENS NOW, INC., dba
1-800-CONTACTS, and amended to be 1-800 CONTACTS, INC. a Delaware Corporation.
IN WITNESS WHEREOF, the parties have executed this Lease dated the day
and year first above written.
TENANT, LANDLORD,
1-800-CONTACTS, INC. DRAPER LAND LIMITED
PARTNERSHIP NO. 2
By: [ILLEGIBLE SIGNATURE] By: /s/ Kip Wadsworth
---------------------- ----------------------------
Kip Wadsworth
3
<PAGE>
[Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 13th day of October, 1998, between
-- -------
ProLogis Development Services Incorporated ("Landlord"), and the Tenant named
below.
Tenant: 1-800-CONTACTS, INC.
Tenant's representative, Scott Tanner, Chief Financial Officer
address, and phone no.: 66 East Wadsworth Park Drive
Draper, Utah 84020
Phone: 801/924-9806
FAX: 801/924-9906
Premises: That portion of the Building, containing approx-
imately 34,850 rentable square feet, as
determined by Landlord, as shown on Exhibit A.
Project: Crossroads Corporate Center
Building: Crossroads Corporate Center #1, 1130 South 3800
West, Salt Lake City, Utah 84104
Tenant's Proportionate Share
of Project: 5.29%
Tenant's Proportionate Share
of Building: 18.13%
Lease Term: Beginning on the Commencement Date and ending on
the last day of the 37th full calendar month
thereafter.
Commencement Date: November 15, 1998, or upon Substantial Completion
of the Tenant Improvements, as set forth in
Addendum 2.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Initial Monthly Base Rent: $11,674.75
Initial Estimated Monthly 1. Utilities: $0.00
Operating Expense Payments:
(estimates only and subject 2. Common Area Charges: $369.41
to adjustment to actual costs
and expenses according to the 3. Taxes: $1,655.38
provisions of this Lease)
4. Insurance: $115.01
5. Others: $416.81
------
Initial Estimated Monthly
Operating Expense Payments: $2,556.61
--------
Initial Monthly Base Rent and
Operating Expense Payments: $14,231.36
Security Deposit: $14,231.36
</TABLE>
Broker: Bryce Kelly, Grubb & Ellis/Wallace Associates
Addenda: Addendum 1-Base Rent Adjustments; Addendum
2-Construction (Allowance); Addendum 3-One
Renewal Option at Market; Addendum 4-Right of
Second Offer; Addendum 5-Expansion Option;
Addendum 6-Sign Criteria; Addendum 7-Satellite
Dish; Addendum 8-Landlord's Waiver; Exhibit
A-Site and Space Plan.
1. Granting Clause. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. Acceptance of Premises. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to all applicable laws,
ordinances, regulations, covenants and restrictions. Landlord has made no
representation or warranty as to the suitability of the Premises for the conduct
of Tenant's business, and Tenant waives any implied warranty that the Premises
are suitable for Tenant's intended purposes. Except as provided in Paragraph 10,
in no event shall Landlord have any obligation for any defects in the Premises
or any limitation on its use. The taking of possession of the Premises shall be
conclusive evidence that Tenant accepts the Premises and that the Premises were
in good condition at the time possession was taken except for latent defects,
items that are Landlord's responsibility under Paragraph 10 and any punchlist
items agreed to in writing by Landlord and Tenant.
3. Use. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale and retail mail-order
sales) products, materials and merchandise made and/or distributed by Tenant and
for such other lawful purposes as may be incidental thereto, including limited
customer pick-up of mail-ordered products; provided, however, with Landlord's
prior written consent, Tenant may also use the Premises for light manufacturing.
Tenant shall not conduct or give notice of any auction, liquidation, or going
out of business sale on the Premises. Tenant will use the Premises in a careful,
safe and proper manner and will not commit waste, overload the floor or
structure of the Premises or subject the Premises to use that would damage the
Premises. Tenant shall not permit any objectionable or unpleasant odors, smoke,
dust, gas, noise, or vibrations to emanate from the
1-800-Contacts
<PAGE>
Premises, or take any other action that would constitute a nuisance or would
disturb, unreasonably interfere with, or endanger Landlord or any tenants of the
Project. Outside storage, including without limitation, storage of trucks and
other vehicles, is prohibited without Landlord's prior written consent.
Notwithstanding the foregoing, Tenant shall have the right to park trucks and
trailers (provided the same are in operable condition) overnight at the truck
loading docks and on the truck parking areas of the Project, and to place a
compressor outside the Premises at the location noted on Exhibit A. This
provision also shall supersede the terms of Paragraph 7 of the Rules and
Regulations attached to this Lease, to the extent of any conflict with such
rule.
Tenant, at its sole expense, shall use and occupy the Premises in
compliance with all laws, including, without limitation, the Americans With
Disabilities Act, orders, judgments, ordinances, regulations, codes, directives,
permits, licenses, covenants and restrictions now or hereafter applicable to the
Premises (collectively, "Legal Requirements"). The Premises shall not be used as
a place of public accommodation under the Americans With Disabilities Act or
similar state statutes or local ordinances or any regulations promulgated
thereunder, all as may be amended from time to time. Landlord represents that
the improvements constructed or installed by Landlord pursuant to the
Construction Addendum attached to this Lease shall comply in all material
respects with all applicable covenants or restrictions of record and all
applicable laws, building codes, regulations and ordinances in effect on the
Commencement Date of this Lease. Tenant shall, at its expense, make any
alterations or modifications, within or without the Premises, that are required
by Legal Requirements related to Tenant's use or occupation of the Premises.
Tenant will not use or permit the Premises to be used for any purpose or in any
manner that would void Tenant's or Landlord's insurance, increase the insurance
risk, or cause the disallowance of any sprinkler credits. If any increase in the
cost of any insurance on the Premises or the Project is caused by Tenant's use
or occupation of the Premises, or because Tenant vacates the Premises, then
Tenant shall pay the amount of such increase to Landlord. Any occupation of the
Premises by Tenant prior to the Commencement Date shall be subject to all
obligations of Tenant under this Lease, except Tenant shall not be obligated to
pay Base Rent and estimated Operating Expenses during the early access period
for set-up and fixturization of the Premises.
4. Base Rent. Tenant shall pay Base Rent in the amount set forth above. The
first month's Base Rent the Security Deposit, and the first monthly installment
of estimated Operating Expenses (as hereafter defined) shall be due and payable
on the date hereof, and Tenant promises to pay to Landlord in advance, without
demand, deduction or set-off, monthly installments of Base Rent on or before the
first day of each calendar month succeeding the Commencement Date. Payments of
Base Rent for any fractional calendar month shall be prorated. All payments
required to be made by Tenant to Landlord hereunder shall be payable at such
address as Landlord may specify from time to time by written notice delivered in
accordance herewith. The obligation of Tenant to pay Base Rent and other sums to
Landlord and the obligations of Landlord under this Lease are independent
obligations. Tenant shall have no right at any time to abate, reduce, or set-off
any rent due hereunder except as may be expressly provided in this Lease. If
Tenant is delinquent in any monthly installment of Base Rent or of estimated
Operating Expenses for more than 5 days, Tenant shall pay to Landlord on demand
a late charge equal to 5 percent of such delinquent sum. The provision for such
late charge shall be in addition to all of Landlord's other rights and remedies
hereunder or at law and shall not be construed as a penalty. The late charge
provided for in this Paragraph 4 shall not accrue with respect to the first 2
occurrences of delinquent payment in any consecutive 12-month period, so long as
payment is made by Tenant within 5 days of written notice from Landlord to
Tenant of Tenant's failure to pay an installment of Base Rent or estimated
Operating Expenses as therein described.
5. Security Deposit. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid to Tenant when
Tenant's obligations under this Lease have been completely fulfilled. Landlord
shall be released from any obligation with respect to the Security Deposit upon
transfer of this Lease and the Premises to a person or entity assuming
Landlord's obligations under this Paragraph 5.
6. Operating Expense Payments. During each month of the Lease Term, on the
same date that Base Rent is due, Tenant shall pay Landlord an amount equal to
1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's
Proportionate Share (hereinafter defined) of Operating Expenses for the Project.
Payments thereof for any fractional calendar month shall be prorated. The term
"Operating Expenses" means all costs and expenses incurred by Landlord with
respect to the ownership, maintenance, and operation of the Project including,
but not limited to costs of: Taxes (hereinafter defined) and fees payable to tax
consultants and attorneys for consultation and contesting taxes; insurance;
utilities; maintenance, repair and replacement of all portions of the Project,
including without limitation, paving and parking areas, roads, roofs, alleys,
and driveways, mowing, landscaping, exterior painting, utility lines, heating,
ventilation and air conditioning systems, lighting, electrical systems and other
mechanical and building systems; amounts paid to contractors and subcontractors
for work or services performed in connection with any of the foregoing; charges
or assessments of any association to which the Project is subject; property
management fees payable to a property manager, including any affiliate of
Landlord, or if there is no property manager, an administration fee of 15
percent of Operating Expenses payable to Landlord; security services, if any;
trash collection, sweeping and removal; and additions or alterations made by
Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse facility in the market area, provided that the cost
of additions or alterations that are required to be capitalized for federal
income tax purposes shall be amortized on a straight line basis over a period
equal to the lesser
-2-
1-800-Contacts
<PAGE>
of the useful life thereof for federal income tax purposes or 10 years, and
Tenant shall be responsible for paying its proportionate share of the cost on a
monthly basis over the remaining Lease Term and any extensions thereof, but not
for any balance remaining at the expiration of the Lease Term or any extension
thereof. Operating Expenses do not include costs, expenses, depreciation or
amortization for capital repairs and capital replacements required to be made by
Landlord under Paragraph 10 of this Lease, debt service under mortgages or
ground rent under ground leases, costs of restoration to the extent of net
insurance proceeds received by Landlord with respect thereto, leasing
commissions, or the costs of renovating space for tenants.
If Tenant's total payments of Operating Expenses for any year are less
than Tenant's Proportionate Share of actual Operating Expenses for such year,
then Tenant shall pay the difference to Landlord within 30 days after demand,
and if more, then Landlord shall retain such excess and credit it against
Tenant's next payments. For purposes of calculating Tenant's Proportionate Share
of Operating Expenses, a year shall mean a calendar year except the first year,
which shall begin on the Commencement Date, and the last year, which shall end
on the expiration of this Lease. With respect to Operating Expenses which
Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall
be the percentage set forth on the first page of this Lease as Tenant's
Proportionate Share of the Project as reasonably adjusted by Landlord in the
future for changes in the physical size of the Premises or the Project; and,
with respect to Operating Expenses which Landlord allocates only to the
Building, Tenant's "Proportionate Share" shall be the percentage set forth on
the first page of this Lease as Tenant's Proportionate Share of the Building as
reasonably adjusted by Landlord in the future for changes in the physical size
of the Premises or the Building. Landlord may equitably increase Tenant's
Proportionate Share for any item of expense or cost reimbursable by Tenant that
relates to a repair, replacement, or service that benefits only the Premises or
only a portion of the Project or Building that includes the Premises or that
varies with occupancy or use. The estimated Operating Expenses for the Premises
set forth on the first page of this Lease are only estimates, and Landlord makes
no guaranty or warranty that such estimates will be accurate.
7. Utilities. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord may cause at Tenant's expense any utilities to be separately
metered or charged directly to Tenant by the provider. Tenant shall pay its
share of all charges for jointly metered utilities based upon consumption, as
reasonably determined by Landlord. No interruption or failure of utilities shall
result in the termination of this Lease or the abatement of rent. Tenant agrees
to limit use of water and sewer for normal restroom use.
8. Taxes. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon demand, at the option of Landlord, as additional rent; provided, however,
in no event shall Tenant be liable for any net income taxes imposed on Landlord
unless such net income taxes are in substitution for any Taxes payable
hereunder. If any such tax or excise is levied or assessed directly against
Tenant, then Tenant shall be responsible for and shall pay the same at such
times and in such manner as the taxing authority shall require. Tenant shall be
liable for all taxes levied or assessed against any personal property or
fixtures placed in the Premises, whether levied or assessed against Landlord or
Tenant.
9. Insurance. Landlord shall maintain all risk property insurance covering
the full replacement cost of the Building. Landlord may, but is not obligated
to, maintain such other insurance and additional coverages as it may deem
necessary, including, but not limited to, commercial liability insurance and
rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term: all risk
property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths of persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance.
-3-
1-800-Contacts
<PAGE>
The all risk property insurance obtained by Landlord and Tenant shall
include a waiver of subrogation by the insurers and all rights based upon an
assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss or damage thereby insured against. Neither party nor its officers,
directors, employees, managers, agents, invitees or contractors shall be liable
to the other for loss or damage caused by any risk coverable by all risk
property insurance, and each party waives any claims against the other party,
and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims against
such parties for, business interruption and losses occasioned thereby sustained
by Tenant or any person claiming through Tenant resulting from any accident or
occurrence in or upon the Premises or the Project from any cause whatsoever,
including without limitation, damage caused in whole or in part, directly or
indirectly, by the negligence of Landlord or its agents, employees or
contractors.
10. Landlord's Repairs. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, and exterior walls of the Building
in good repair, reasonable wear and tear and uninsured losses and damages caused
by Tenant, its agents and contractors excluded. The term "walls" as used in this
Paragraph 10 shall not include windows, glass or plate glass, doors or overhead
doors, special store fronts, dock bumpers, dock plates or levelers, or office
entries. Tenant shall promptly give Landlord written notice of any repair
required by Landlord pursuant to this Paragraph 10, after which Landlord shall
have a reasonable opportunity to repair.
11. Tenant's Repairs. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking areas and
other common areas of the Building, including, but not limited to driveways,
alleys, landscape and grounds surrounding the Premises. Subject to Landlord's
obligation in Paragraph 10 and subject to Paragraphs 9 and 15, Tenant, at its
expense, shall repair, replace and maintain in good condition all portions of
the Premises and all areas, improvements and systems exclusively serving the
Premises including, without limitation, dock and loading areas, truck doors,
plumbing, water and sewer lines up to points of common connection, fire
sprinklers and fire protection systems, entries, doors, ceilings and roof
membrane, windows, interior walls, and the interior side of demising walls, and
heating, ventilation and air conditioning systems. Such repair and replacements
include capital expenditures and repairs whose benefit may extend beyond the
Term. Heating, ventilation and air conditioning systems and other mechanical and
building systems serving the Premises shall be maintained at Tenant's expense
pursuant to maintenance service contracts entered into by Tenant or, at
Landlord's election, by Landlord. The scope of services and contractors under
such maintenance contracts shall be reasonably approved by Landlord. At
Landlord's request, Tenant shall enter into a joint maintenance agreement with
any railroad that services the Premises. If Tenant fails to perform any repair
or replacement for which it is responsible within 10 days after notice from
Landlord that such repair or replacement is required, provided that the need for
such repair or replacement does not constitute a hazardous or unsafe condition,
in which case no notice shall be required, Landlord may perform such work and be
reimbursed by Tenant within 10 days after demand therefor. Subject to Paragraphs
9 and 15, Tenant shall bear the full cost of any repair or replacement to any
part of the Building or Project that results from damage caused by Tenant, its
agents, contractors, or invitees and any repair that benefits only the Premises.
Landlord agrees to assign or pass through to Tenant to the extent possible any
repair or replacement benefits available to Landlord under any warranties
covering any of the items for which Tenant is responsible under this Paragraph
11.
12. Tenant-Made Alterations and Trade Fixtures. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises
("Tenant-Made Alterations") shall be subject to Landlord's prior written
consent. Landlord shall not unreasonably withhold its approval of such plans and
specifications, and shall notify Tenant within 10 days of its receipt of such
plans and specifications of any changes needed to obtain Landlord's approval
thereof. Landlord's failure to respond within such 10-day period shall be deemed
to be approval by Landlord of the plans and specifications submitted. Tenant
shall cause, at its expense, all Tenant-Made Alterations to comply with
insurance requirements and with Legal Requirements and shall construct at its
expense any alteration or modification required by Legal Requirements as a
result of any Tenant-Made Alterations. All Tenant-Made Alterations shall be
constructed in a good and workmanlike manner by contractors reasonably
acceptable to Landlord and only good grades of materials shall be used. All
plans and specifications for any Tenant-Made Alterations shall be submitted to
Landlord for its approval. Landlord may monitor construction of the Tenant-Made
Alterations. Tenant shall reimburse Landlord for its costs in reviewing plans
and specifications and in monitoring construction, up to $500 per project.
Landlord's right to review plans and specifications and to monitor construction
shall be solely for its own benefit, and Landlord shall have no duty to see that
such plans and specifications or construction comply with applicable laws,
codes, rules and regulations. Tenant shall provide Landlord with the identities
and mailing addresses of all persons performing work or supplying materials,
prior to beginning such construction, and Landlord may post on and about the
Premises notices of non-responsibility pursuant to applicable law. Tenant shall
furnish security or make other arrangements satisfactory to Landlord to assure
payment for the completion of all work free and clear of liens and shall provide
certificates of insurance for worker's compensation and other coverage in
amounts and from an insurance company satisfactory to Landlord protecting
Landlord against liability for personal injury or property damage during
construction. Upon completion of any Tenant-Made Alterations, Tenant shall
deliver to Landlord sworn statements setting forth the names of all contractors
and subcontractors who did work on the Tenant-Made Alterations and final lien
waivers from all such contractors and subcontractors. Upon surrender of the
Premises, all Tenant-Made Alterations and any leasehold improvements constructed
by Landlord or Tenant shall remain on the Premises as Landlord's property,
except to the extent Landlord requires removal at Tenant's expense of any such
items at the time Landlord gives its approval for the installation of such
Tenant-Made Alterations or leasehold improvements, or to the extent Landlord and
Tenant have otherwise agreed in writing. Tenant shall repair any damage caused
by such removal.
-4-
1-800-Contacts
<PAGE>
Tenant, at its own cost and expense and without Landlord's prior
approval, may erect such shelves, bins, machinery and trade fixtures
(collectively "Trade Fixtures") in the ordinary course of its business provided
that such items do not alter the basic character of the Premises, do not
overload or damage the Premises, and may be removed without injury to the
Premises, and the construction, erection, and installation thereof complies with
all Legal Requirements and with Landlord's requirements set forth above. Tenant
shall remove its Trade Fixtures, including, at its option, its security systems
and cameras, telephone and computer systems and the wiring related thereto, and
shall repair any damage caused by such removal.
13. Signs. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
surrender or vacation of the Premises, Tenant shall have removed all signs and
repair, paint, and/or replace the building facia surface to which its signs are
attached. Tenant shall obtain all applicable governmental permits and approvals
for sign and exterior treatments. All signs, decorations, advertising media,
blinds, draperies and other window treatment or bars or other security
installations visible from outside the Premises shall be subject to Landlord's
approval and conform in all respects to Landlord's requirements.
14. Parking. Tenant shall be entitled to park in common with other tenants
of the Project in those areas designated for nonreserved parking. Landlord may
allocate parking spaces among Tenant and other tenants in the Project if
Landlord determines that such parking facilities are becoming crowded. Landlord
shall not be responsible for enforcing Tenant's parking rights against any third
parties.
15. Restoration. If at any time during the Lease Term the Premises are
damaged by a fire or other casualty, Landlord shall notify Tenant within 45 days
after such damage as to the amount of time Landlord reasonably estimates it will
take to restore the Premises. If the restoration time is estimated to exceed 4
months, either Landlord or Tenant may elect to terminate this Lease upon notice
to the other party given no later than 30 days after Landlord's notice. If
neither party elects to terminate this Lease or if Landlord estimates that
restoration will take 4 months or less, then, subject to receipt of sufficient
insurance proceeds, Landlord shall promptly restore the Premises excluding the
improvements installed by Tenant or by Landlord and paid by Tenant, subject to
delays arising from the collection of insurance proceeds or from Force Majeure
events. Tenant at Tenant's expense shall promptly perform, subject to delays
arising from the collection of insurance proceeds, or from Force Majeure events,
all repairs or restoration not required to be done by Landlord and shall
promptly re-enter the Premises and commence doing business in accordance with
this Lease. Notwithstanding the foregoing, either party may terminate this Lease
if the Premises are damaged during the last year of the Lease Term and Landlord
reasonably estimates that it will take more than one month to repair such
damage. Tenant shall pay to Landlord with respect to any damage to the Premises
the amount of the commercially reasonable deductible under Landlord's insurance
policy (up to a maximum of $10,000) within 10 days after presentment of
Landlord's invoice. If the damage involves the premises of other tenants, Tenant
shall pay the portion of the deductible that the cost of the restoration of the
Premises bears to the total cost of restoration, as determined by Landlord. Base
Rent and Operating Expenses shall be abated for the period of repair and
restoration in the proportion which the area of the Premises, if any, which is
not usable by Tenant bears to the total area of the Premises. Such abatement
shall be the sole remedy of Tenant, and except as provided herein, Tenant waives
any right to terminate the Lease by reason of damage or casualty loss.
16. Condemnation. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase in lieu
thereof (a "Taking" or "Taken"), and the Taking would prevent or materially
interfere with Tenant's use of the Premises or in Landlord's judgment would
materially interfere with or impair its ownership or operation of the Project,
then upon written notice by Landlord this Lease shall terminate and Base Rent
shall be apportioned as of said date. If part of the Premises shall be Taken,
and this Lease is not terminated as provided above, the Base Rent payable
hereunder during the unexpired Lease Term shall be reduced to such extent as may
be fair and reasonable under the circumstances. In the event of any such Taking,
Landlord shall be entitled to receive the entire price or award from any such
Taking without any payment to Tenant, and Tenant hereby assigns to Landlord
Tenant's interest, if any, in such award. Tenant shall have the right, to the
extent that same shall not diminish Landlord's award, to make a separate claim
against the condemning authority (but not Landlord) for such compensation as may
be separately awarded or recoverable by Tenant for moving expenses and damage to
Tenant's Trade Fixtures, if a separate award for such items is made to Tenant.
17. Assignment and Subletting. Without Landlord's prior written consent,
Tenant shall not assign this Lease or sublease the Premises or any part thereof
or mortgage, pledge, or hypothecate its leasehold interest or grant any
concession or license within the Premises and any attempt to do any of the
foregoing shall be void and of no effect. For purposes of this paragraph, a
transfer of the ownership interests controlling Tenant shall be deemed an
assignment of this Lease unless such ownership interests are publicly traded.
Notwithstanding the above, Tenant may assign or sublet the Premises, or any part
thereof, to any entity controlling Tenant, controlled by Tenant or under common
control with Tenant (a "Tenant Affiliate"), without the prior written consent of
Landlord. Provided no default has occurred and is continuing under this Lease,
upon 10 days prior written notice to Landlord, Tenant may, without Landlord's
prior written consent, assign this Lease to an entity into which Tenant is
merged or consolidated or to an entity to which substantially all of Tenant's
assets are transferred, provided (x) such merger, consolidation, or transfer of
assets is for a good business purpose and not principally for the purpose of
transferring Tenant's leasehold estate, and (y) the assignee or successor entity
has a net worth at least equal to the net worth of Tenant immediately prior to
such merger, consolidation, or transfer. Tenant shall reimburse Landlord for all
of Landlord's reasonable out-of-pocket expenses in connection with any
assignment or sublease. Upon Landlord's receipt of Tenant's written notice of a
desire to assign or sublet the Premises, or any part thereof (other than to a
Tenant Affiliate), Landlord may, by giving written notice to Tenant within 30
days after receipt of Tenant's notice, terminate this Lease with respect to the
space
-5-
1-800-Contacts
<PAGE>
described in Tenant's notice, as of the date specified in Tenant's notice for
the commencement of the proposed assignment or sublease.
Notwithstanding any assignment or subletting, Tenant and any guarantor
or surety of Tenant's obligations under this Lease shall at all times remain
fully responsible and liable for the payment of the rent and for compliance with
all of Tenant's other obligations under this Lease (regardless of whether
Landlord's approval has been obtained for any such assignments or sublettings).
In the event that the rent due and payable by a sublessee or assignee (or a
combination of the rental payable under such sublease or assignment plus any
bonus or other consideration therefor or incident thereto) exceeds the rental
payable under this Lease, then Tenant shall be bound and obligated to pay
Landlord as additional rent hereunder 50% of such excess rental and other excess
consideration within 10 days following receipt thereof by Tenant.
If this Lease be assigned or if the Premises be subleased (whether in
whole or in part) or in the event of the mortgage, pledge, or hypothecation of
Tenant's leasehold interest or grant of any concession or license within the
Premises or if the Premises be occupied in whole or in part by anyone other than
Tenant, then upon a default by Tenant hereunder Landlord may collect rent from
the assignee, sublessee, mortgagee, pledgee, party to whom the leasehold
interest was hypothecated, concessionee or licensee or other occupant and,
except to the extent set forth in the preceding paragraph, apply the amount
collected to the next rent payable hereunder; and 50% of such rentals collected
by Tenant shall be held in trust for Landlord and immediately forwarded to
Landlord. With respect to the obligation of Tenant to pay to Landlord any excess
rental and other excess consideration payable with respect to any assignment or
subleasing, Landlord agrees that Tenant shall be entitled, in determining the
amount of such excess rental or other excess consideration, to first recapture
the actual, reasonable out-of-pocket costs of improvements made by Tenant in
connection therewith, and the actual, reasonable out-of-pocket leasing
commissions, architectural expenses and attorney's fees paid by Tenant in
connection therewith. No such transaction or collection of rent or application
thereof by Landlord, however, shall be deemed a waiver of these provisions or a
release of Tenant from the further performance by Tenant of its covenants,
duties, or obligations hereunder.
18. Indemnification. Except for the negligence of Landlord, its agents,
employees or contractors, and to the extent permitted by law, Tenant agrees to
indemnify, defend and hold harmless Landlord, and Landlord's agents, employees
and contractors, from and against any and all losses, liabilities, damages,
costs and expenses (including attorneys' fees) resulting from claims by third
parties for injuries to any person and damage to or theft or misappropriation or
loss of property occurring in or about the Project and arising from the use and
occupancy of the Premises or from any activity, work, or thing done, permitted
or suffered by Tenant in or about the Premises or due to any other act or
omission of Tenant, its subtenants, assignees, invitees, employees, contractors
and agents. The furnishing of insurance required hereunder shall not be deemed
to limit Tenant's obligations under this Paragraph 18.
19. Inspection and Access. Landlord and its agents, representatives, and
contractors may enter the Premises at any reasonable time to inspect the
Premises and to make such repairs as may be required or permitted pursuant to
this Lease and for any other business purpose. Landlord and Landlord's
representatives may enter the Premises during business hours for the purpose of
showing the Premises to prospective purchasers and, during the last year of the
Lease Term, to prospective tenants. Landlord agrees that it shall not enter the
Premises unless accompanied by an employee or agent of Tenant, unless an
emergency situation requires such entry. Landlord may erect a suitable sign on
the Premises stating the Premises are available to let or that the Project is
available for sale. Landlord may grant easements, make public dedications,
designate common areas and create restrictions on or about the Premises,
provided that no such easement, dedication, designation or restriction
materially interferes with Tenant's use or occupancy of the Premises. At
Landlord's request, Tenant shall execute such instruments as may be necessary
for such easements, dedications or restrictions.
20. Quiet Enjoyment. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or under
Landlord.
21. Surrender. Upon termination of the Lease Term or earlier termination of
Tenant's right of possession, Tenant shall surrender the Premises to Landlord in
the same condition as received, broom clean, ordinary wear and tear and casualty
loss and condemnation covered by Paragraphs 15 and 16 excepted. Any Trade
Fixtures, Tenant-Made Alterations and property not so removed by Tenant as
permitted or required herein shall be deemed abandoned and may be stored,
removed, and disposed of by Landlord at Tenant's expense, and Tenant waives all
claims against Landlord for any damages resulting from Landlord's retention and
disposition of such property. All obligations of Tenant hereunder not fully
performed as of the termination of the Lease Term shall survive the termination
of the Lease Term, including without limitation, indemnity obligations, payment
obligations with respect to Operating Expenses and obligations concerning the
condition and repair of the Premises.
22. Holding Over. If Tenant retains possession of the Premises after the
termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any expansion
or renewal option or other similar right or option) shall be applicable during
such holdover period, except that Tenant shall pay Landlord from time to time,
upon demand, as Base Rent for the holdover period, an amount equal to 150% of
the Base Rent in effect on the termination date, computed on a monthly basis for
each month or part thereof during such holding over. All other payments shall
continue under the terms of this Lease. In addition, Tenant shall be liable for
all damages incurred by Landlord as a result of such holding over. No holding
over by Tenant, whether with or without consent of Landlord, shall operate to
extend this Lease except as otherwise expressly provided, and this Paragraph 22
shall not be construed as consent for Tenant to retain possession of the
Premises.
-6-
1-800-Contacts
<PAGE>
23. Events of Default. Each of the following events shall be an event of
default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or any
payment required herein when due, and such failure shall continue for a
period of 5 days from the date of Landlord's written notice to Tenant of
such failure to pay; provided, however, that Landlord shall not be
obligated to provide written notice of such failure more than 2 times in
any consecutive 12-month period, and the failure of Tenant to pay any third
or subsequent installment of Base Rent or any other payment required herein
when due in any consecutive 12-month period shall constitute an Event of
Default by Tenant under this Lease without the requirement of notice.
(ii) Tenant or any guarantor or surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of creditors;
(B) commence any case, proceeding or other action seeking to have an order
for relief entered on its behalf as a debtor or to adjudicate it as
bankrupt or insolvent, or seeking reorganization, arrangement, adjustment,
liquidation, dissolution or composition of it or its debts or seeking
appointment of a receiver, trustee, custodian or other similar official for
it or for all or of any substantial part of its property (collectively a
"proceeding for relief"); (C) become the subject of any proceeding for
relief which is not dismissed within 60 days of its filing or entry; or (D)
die or suffer a legal disability (if Tenant, guarantor, or surety is an
individual) or be dissolved or otherwise fail to maintain its legal
existence (if Tenant, guarantor or surety is a corporation, partnership or
other entity).
(iii) Any insurance required to be maintained by Tenant pursuant to
this Lease shall be cancelled or terminated or shall expire or shall be
reduced or materially changed, except, in each case, as permitted in this
Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or shall
fail to continuously operate its business at the Premises for the permitted
use set forth herein, whether or not Tenant is in monetary or other default
under this Lease.
(v) Tenant shall attempt or there shall occur any assignment,
subleasing or other transfer of Tenant's interest in or with respect to
this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the Premises
in violation of this Lease within 30 days after any such lien or
encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this Lease
other than those specifically referred to in this Paragraph 23, and except
as otherwise expressly provided herein, such default shall continue for
more than 30 days after Landlord shall have given Tenant written notice of
such default. Notwithstanding the provisions of this Subparagraph 23(vii),
Tenant shall not be in default under the circumstances described in such
Subparagraph 23(vii) if Tenant has made diligent efforts to cure such
default within the 30-day period described therein, and thereafter proceeds
diligently to cure such default within a commercially reasonable time, but
in no event more than 120 days.
24. Landlord's Remedies. Upon each occurrence of an Event of Default and so
long as such Event of Default shall be continuing, Landlord may at any time
thereafter at its election: terminate this Lease or Tenant's right of
possession, (but Tenant shall remain liable as hereinafter provided) and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenant and all persons and property therefrom.
If Landlord re-enters the Premises, Landlord shall have the right to remove and
store all of the furniture, fixtures and equipment at the Premises.
If Landlord terminates this Lease, Landlord may recover from Tenant the
sum of: all Base Rent and all other amounts accrued hereunder to the date of
such termination; the cost of reletting the whole or any part of the Premises,
including without limitation brokerage fees and/or leasing commissions incurred
by Landlord, and costs of removing and storing Tenant's or any other occupant's
property, repairing, altering, remodeling, or otherwise putting the Premises
into condition acceptable to a new tenant or tenants, and all reasonable
expenses incurred by Landlord in pursuing its remedies, including reasonable
attorneys' fees and court costs; and the excess of the then present value of the
Base Rent and other amounts payable by Tenant under this Lease as would
otherwise have been required to be paid by Tenant to Landlord during the period
following the termination of this Lease measured from the date of such
termination to the expiration date stated in this Lease, over the present value
of any net amounts which Tenant establishes Landlord can reasonably expect to
recover by reletting the Premises for such period, taking into consideration the
availability of acceptable tenants and other market conditions affecting
leasing. Such present values shall be calculated at a discount rate equal to the
90-day U.S. Treasury bill rate at the date of such termination.
If Landlord terminates Tenant's right of possession (but not this
Lease), Landlord may, but shall be under no obligation to, relet the Premises
for the account of Tenant for such rent and upon such terms as shall be
satisfactory to Landlord without thereby releasing Tenant from any liability
hereunder and without demand or notice of any kind to Tenant. For the purpose of
such reletting Landlord is authorized to make any repairs, changes, alterations,
or additions in or to the Premises as Landlord deems reasonably necessary or
desirable. If the Premises are not relet, then Tenant shall pay to Landlord as
damages a sum equal to the amount of the rental reserved in this Lease for such
period or periods, plus the cost of recovering possession of the Premises
(including attorneys' fees and costs of suit), the unpaid Base Rent and other
amounts accrued hereunder at the time of repossession, and the costs
-7-
1-800-Contacts
<PAGE>
incurred in any attempt by Landlord to relet the Premises. If the Premises are
relet and a sufficient sum shall not be realized from such reletting [after
first deducting therefrom, for retention by Landlord, the unpaid Base Rent and
other amounts accrued hereunder at the time of reletting, the cost of recovering
possession (including attorneys' fees and costs of suit), all of the costs and
expense of repairs, changes, alterations, and additions, the expense of such
reletting (including without limitation brokerage fees and leasing commissions)
and the cost of collection of the rent accruing therefrom] to satisfy the rent
provided for in this Lease to be paid, then Tenet shall immediately satisfy and
pay any such deficiency. Any such payments due Landlord shall be made upon
demand therefor from time to time and Tenant agrees that Landlord may file suit
to recover any sums falling due from time to time. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter elect in
writing to terminate this Lease for such previous breach.
Exercise by Landlord of any one or more remedies hereunder granted or
otherwise available shall not be deemed to be an acceptance of surrender of the
Premises and/or a termination of this Lease by Landlord, whether by agreement or
by operation of law, it being understood that such surrender and/or termination
can be effected only by the written agreement of Landlord and Tenant. Any law,
usage, or custom to the contrary notwithstanding, Landlord shall have the right
at all times to enforce the provisions of this Lease in strict accordance with
the terms hereof; and the failure of Landlord at any time to enforce its rights
under this Lease strictly in accordance with same shall not be construed as
having created a custom in any way or manner contrary to the specific terms,
provisions, and covenants of this Lease or as having modified the same. Tenant
and Landlord further agree that forbearance or waiver by Landlord to enforce its
rights pursuant to this Lease or at law or in equity, shall not be a waiver of
Landlord's right to enforce one or more of its rights in connection with any
subsequent default. A receipt by Landlord of rent or other payment with
knowledge of the breach of any covenant hereof shall not be deemed a waiver of
such breach, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless expressed in writing and signed by Landlord. To
the greatest extent permitted by law, Tenant waives the service of notice of
Landlord's intention to re-enter as provided for in any statute, or to institute
legal proceedings to that end, and also waives all right of redemption in case
Tenant shall be dispossessed by a judgment or by warrant of any court or judge.
The terms " enter," "re-enter," "entry" or "re-entry," as used in this Lease,
are not restricted to their technical legal meanings. Any reletting of the
Premises shall be on such terms and conditions as Landlord in its sole
discretion may determine (including without limitation a term different than the
remaining Lease Term, rental concessions, alterations and repair of the
Premises, lease of less than the entire Premises to any tenant and leasing any
or all other portions of the Project before reletting the Premises). Landlord
shall not be liable, nor shall Tenant's obligations hereunder be diminished
because of, Landlord's failure to relet the Premises or collect rent due in
respect of such reletting.
25. Tenant's Remedies/Limitation of Liability. Landlord shall not be in
default hereunder unless Landlord fails to perform any of its obligations
hereunder within 30 days after written notice from Tenant specifying such
failure (unless such performance will, due to the nature of the obligation,
require a period of time in excess of 30 days, then after such period of time as
is reasonably necessary). All obligations of Landlord hereunder shall be
construed as covenants, not conditions; and, except as may be otherwise
expressly provided in this Lease, Tenant may not terminate this Lease for breach
of Landlord's obligations hereunder. All obligations of Landlord under this
Lease will be binding upon Landlord only during the period of its ownership of
the Premises and not thereafter. The term "Landlord" in this Lease shall mean
only the owner, for the time being of the Premises, and in the event of the
transfer by such owner of its interest in the Premises, such owner shall
thereupon be released and discharged from all obligations of Landlord thereafter
accruing, but such obligations shall be binding during the Lease Term upon each
new owner for the duration of such owner's ownership. Any liability of Landlord
under this Lease shall be limited solely to its interest in the Project, and in
no event shall any personal liability be asserted against Landlord in connection
with this Lease nor shall any recourse be had to any other property or assets of
Landlord.
26. Waiver of Jury Trial. TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY
JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. Subordination. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Notwithstanding the preceding provisions
of this Paragraph 27, this Lease and Tenant's interest in the Premises shall not
be subordinate to any future mortgage or deed of trust on the Project, and
Tenant shall not be obligated to execute an instrument subordinating this Lease
or Tenant's interest in the Premises to any future mortgage or deed of trust on
the Project, unless concurrently with such subordination the holder of such
mortgage or deed of trust agrees in such instrument of subordination not to
disturb Tenant's possession of the Premises (so long as no default exists under
the Lease) in the event such holder acquires title to the Premises through
foreclosure, deed in lieu of foreclosure or otherwise. Notwithstanding the
foregoing, any such holder may at any time subordinate its mortgage to this
Lease, without Tenant's consent, by notice in writing to Tenant, and thereupon
this Lease shall be deemed prior to such mortgage without regard to their
respective dates of execution, delivery or recording and in that event such
holder shall have the same rights with respect to this Lease as though this
Lease had been executed prior to the execution, delivery and recording of such
mortgage and had been assigned to such holder. The term "mortgage" whenever used
in this Lease shall be deemed to include deeds of trust, security assignments
and
-8-
1-800-Contacts
<PAGE>
any other encumbrances, and any reference to the "holder" of a mortgage shall be
deemed to include the beneficiary under a deed of trust.
28. Mechanic's Liens. Tenant has no express or implied authority to create
or place any lien or encumbrance of any kind upon, or in any manner to bind the
interest of Landlord or Tenant in, the Premises or to charge the rentals payable
hereunder for any claim in favor of any person dealing with Tenant, including
those who may furnish materials or perform labor for any construction or
repairs. Tenant covenants and agrees that it will pay or cause to be paid all
sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises and
that it will save and hold Landlord harmless from all loss, cost or expense
based on or arising out of asserted claims or liens against the leasehold estate
or against the interest of Landlord in the Premises or under this Lease. Tenant
shall give Landlord immediate written notice of the placing of any lien or
encumbrance against the Premises and cause such lien or encumbrance to be
discharged within 30 days of the filing or recording thereof; provided, however,
Tenant may contest such liens or encumbrances as long as such contest prevents
foreclosure of the lien or encumbrance and Tenant causes such lien or
encumbrance to be bonded or insured over in a manner satisfactory to Landlord
within such 30 day period.
29. Estoppel Certificates. Tenant agrees, from time to time, within 15 days
after request of Landlord, to execute and deliver to Landlord, or Landlord's
designee, any estoppel certificate requested by Landlord, stating that this
Lease is in full force and effect, the date to which rent has been paid, that
Landlord is not in default hereunder (or specifying in detail the nature of
Landlord's default), the termination date of this Lease and such other matters
pertaining to this Lease as may be requested by Landlord. Tenant's obligation to
furnish each estoppel certificate in a timely fashion is a material inducement
for Landlord's execution of this Lease. No cure or grace period provided in this
Lease shall apply to Tenant's obligations to timely deliver an estoppel
certificate. Tenant hereby irrevocably appoints Landlord as its attorney in fact
to execute on its behalf and in its name any such estoppel certificate if Tenant
fails to execute and deliver the estoppel certificate within 15 days after
Landlord's written request thereof.
30. Environmental Requirements. Except for Hazardous Material contained in
products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or transport, store, use, generate,
manufacture or release any Hazardous Material in or about the Premises without
Landlord's prior written consent. Tenant, at its sole cost and expense, shall
operate its business in the Premises in strict compliance with all Environmental
Requirements and shall remediate in a manner satisfactory to Landlord any
Hazardous Materials released on or from the Project by Tenant, its agents,
employees, contractors, subtenants or invitees. Tenant shall complete and
certify to disclosure statements as requested by Landlord from time to time
relating to Tenant's transportation, storage, use, generation, manufacture or
release of Hazardous Materials on the Premises. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act; the Resource Conservation and Recovery
Act; and all state and local counterparts thereto, and any regulations or
policies promulgated or issued thereunder. The term "Hazardous Materials" means
and includes any substance, material, waste, pollutant, or contaminant listed or
defined as hazardous or toxic, under any Environmental Requirements, asbestos
and petroleum, including crude oil or any fraction thereof, natural gas liquids,
liquified natural gas, or synthetic gas usable for fuel (or mixtures of natural
gas and such synthetic gas). As defined in Environmental Requirements, Tenant is
and shall be deemed to be the "operator" of Tenant's "facility" and the "owner"
of all Hazardous Materials brought on the Premises by Tenant, its agents,
employees, contractors or invitees, and the wastes, by-products, or residues
generated, resulting, or produced therefrom.
Tenant shall indemnify, defend, and hold Landlord harmless from and
against any and all losses (including, without limitation, diminution in value
of the Premises or the Project and loss of rental income from the Project),
claims, demands, actions, suits, damages (including, without limitation,
punitive damages), expenses (including, without limitation, remediation,
removal, repair, corrective action, or cleanup expenses), and costs (including,
without limitation, actual attorneys' fees, consultant fees or expert fees and
including, without limitation, removal or management of any asbestos brought
into the property or disturbed in breach of the requirements of this Paragraph
30, regardless of whether such removal or management is required by law) which
are brought or recoverable against, or suffered or incurred by Landlord as a
result of any release of Hazardous Materials for which Tenant is obligated to
remediate as provided above or any other breach of the requirements under this
Paragraph 30 by Tenant, its agents, employees, contractors, subtenants,
assignees or invitees, regardless of whether Tenant had knowledge of such
noncompliance. The obligations of Tenant under this Paragraph 30 shall survive
any termination of this Lease.
Landlord shall have access to, and a right to perform inspections and
tests of, the Premises to determine Tenant's compliance with Environmental
Requirements, its obligations under this Paragraph 30, or the environmental
condition of the Premises. Access shall be granted to Landlord upon Landlord's
prior notice to Tenant and at such times so as to minimize, so far as may be
reasonable under the circumstances, any disturbance to Tenant's operations. Such
inspections and tests shall be conducted at Landlord's expense, unless such
inspections or tests reveal that Tenant has not complied with any Environmental
Requirement, in which case Tenant shall reimburse Landlord for the reasonable
cost of such inspection and tests. Landlord's receipt of or satisfaction with
any environmental assessment in no way waives any rights that Landlord holds
against Tenant.
Notwithstanding anything to the contrary in this Paragraph 30, Tenant
shall have no liability of any kind to Landlord as to Hazardous Materials on the
Premises caused or permitted by: (i) Landlord, its agents,
-9-
1-800-Contacts
<PAGE>
employees, contractors or invitees; or (ii) any other tenants in the Project or
their agents, employees, contractors, subtenants, assignees or invitees; or
(iii) any other person or entity located outside of the Premises or the Project.
31. Rules and Regulations. Tenant shall, at all times during the Lease Term
and any extension thereof, comply with all reasonable rules and regulations at
any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project.
32. Security Service. Tenant acknowledges and agrees that, while Landlord
may patrol the Project, Landlord is not providing any security services with
respect to the Premises and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in connection with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33. Force Majeure. Landlord shall not be held responsible for delays in the
performance of its obligations hereunder when caused by strikes, lockouts, labor
disputes, acts of God, inability to obtain labor or materials or reasonable
substitutes therefor, governmental restrictions, governmental regulations,
governmental controls, delay in issuance of permits, enemy or hostile
governmental action, civil commotion, fire or other casualty, and other causes
beyond the reasonable control of Landlord ("Force Majeure").
34. Entire Agreement. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.
35. Severability. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
36. Brokers. Tenant represents and warrants that it has dealt with no
broker, agent or other person in connection with this transaction and that no
broker, agent or other person brought about this transaction, other than the
broker, if any, set forth on the first page of this Lease, and Tenant agrees to
indemnify and hold Landlord harmless from and against any claims by any other
broker, agent or other person claiming a commission or other form of
compensation by virtue of having dealt with Tenant with regard to this leasing
transaction.
37. Miscellaneous. (a) Any payments or charges due from Tenant to Landlord
hereunder shall be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease shall be
in writing and shall be sent by registered or certified mail, return receipt
requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado
---------------------------------------
80011. Either party may by notice given aforesaid change its address for all
- -----
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
(d) Except as otherwise expressly provided in this Lease or as otherwise
required by law, Landlord retains the absolute right to withhold any consent or
approval.
(e) Tenant shall furnish Landlord with true and complete copies of its most
recent annual report upon its completion of same each year.
(f) Neither this Lease nor a memorandum of lease shall be filed by or on
behalf of Tenant in any public record. Landlord may prepare and file, and upon
request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenant of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions
-10-
<PAGE>
inserted in this Lease are for convenience only and in no way define, limit or
otherwise describe the scope or intent of this Lease, or any provision hereof,
or in any way affect the interpretation of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at all
times to comply with applicable law governing the maximum rate or amount of any
interest payable on or in connection with this Lease. If applicable law is ever
judicially interpreted so as to render usurious any interest called for under
this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, so as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by
the laws of the state in which the Project is located, excluding any principles
of conflicts of laws.
(1) Time is of the essence as to the performance of Tenant's obligations
under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated
into this Lease and made a part hereof. In the event of any conflict between
such exhibits or addenda and the terms of this Lease, such exhibits or addenda
shall control.
38. Intentionally Deleted.
39. Limitation of Liability of Trustees, Shareholders, and Officers
of ProLogis Trust. Any obligation or liability whatsoever of ProLogis Trust, a
Maryland real estate investment trust, which may arise at any time under this
Lease or any obligation or liability which may be incurred by it pursuant to any
other instrument, transaction, or undertaking contemplated hereby shall not be
personally binding upon, nor shall resort for the enforcement thereof be had to
the property of, its trustees, directors, shareholders, officers, employees or
agents, regardless of whether such obligation or liability is in the nature of
contract, tort, or otherwise.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the day and year first above written.
TENANT: LANDLORD:
1-800 CONTACTS, INC. PROLOGIS DEVELOPMENT SERVICES
INCORPORATED
By: [SIGNATURE APPEARS HERE] By: /s/ Robert J. Watson
--------------------------------- -------------------------------------
Title: Chief Financial Officer Title: Managing Director
-------------------------------
Address: Address:
66 E. Wadsworth Park Drive, 3rd Floor 47775 Fremont Blvd.
Draper, Utah 84020 Fremont, California 94538
cc: 14100 E. 35th Place,
Aurora, CO 80011
-11-
<PAGE>
Rules and Regulations
---------------------
1. The sidewalk, entries, and driveways of the Project shall not be obstructed
by Tenant, or its agents, or used by them for any purpose other than
ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor furniture,
etc., in the parking areas, landscaped areas or other areas outside of its
Premises, or on the roof of the Project, except Tenant shall be permitted
to place one communications antenna on the roof of the Building in a
location to be determined by Landlord, and an outside garbage container
near one of the overhead doors, as indicated on Exhibit A.
3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making of
loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections in
the Premises, Landlord or its agent will direct the electrician as to where
and how the wires may be introduced; and, without such direction, no boring
or cutting of wires will be permitted. Any such installation or connection
shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler, or
other mechanical apparatus in the Premises, except as specifically approved
in the Lease. 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 Project.
7. Parking any type of recreational vehicles is specifically prohibited on or
about the Project. Except for the overnight parking of operative vehicles,
as set forth in Paragraph 3 of the Lease, no vehicle of any type shall be
stored in the parking areas at any time. In the event that a vehicle is
disabled, it shall be removed within 48 hours. There shall be no "For Sale"
or other advertising signs on or about any parked vehicle. All vehicles
shall be parked in the designated parking areas in conformity with all
signs and other markings. All parking will be open parking, and no reserved
parking, numbering or lettering of individual spaces will be permitted
except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and other
pests.
9. Landlord reserves the right to exclude or expel from the Project any person
who, in the judgment of Landlord, is intoxicated or under the influence of
liquor or drugs or who shall in any manner do any act in violation of the
Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness or indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to the
effects of Tenant by the janitors or any other employee or person.
11. Tenant shall give Landlord prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment affecting the Premises.
12. Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, except as set
forth in Paragraph 3 of the Lease, or dumping of waste or refuse or permit
any harmful materials to be placed in any drainage system or sanitary
system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal firm for the
Premises must be kept in the trash enclosure areas, if any, provided for
that purpose.
14. No auction, public or private, will be permitted on the Premises or the
Project.
15. No awnings shall be placed over the windows in the Premises except with the
prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or cooking [except for
the use of a microwave oven and/or coffeemaker(s) in Tenant's breakroom(s)]
or for any immoral or illegal purposes or for any purpose other than that
specified in the Lease. No gaming devices shall be operated in the
Premises.
17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account the
capacity of the electrical wiring in the Project and the Premises and the
needs of other tenants, and shall not use more than such safe capacity.
Landlord's consent to the installation of electric equipment shall not
relieve Tenant from the obligation not to use more electricity than such
safe capacity.
18. Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage.
19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.
-12-
<PAGE>
ADDENDUM 1
BASE RENT ADJUSTMENTS
---------------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
Base Rent shall equal the following amounts for the respective periods set forth
below:
Period Monthly Base Rent
------ -----------------
11/15/98 to 12/14/98/1/ $0.00/2/
12/15/98 to 12/31/01/3/ $11,674.75
- ---------------------------------------
/1/ If Tenant Improvements are not Substantially Completed by November 15, 1998,
the one-month "free rent" period shall begin upon Substantial Completion of the
Tenant Improvements.
/2/ Tenant shall pay estimated Operating Expenses for this month.
/3/ Subject to adjustment if the Tenant Improvements are not Substantially
Completed by November 15, 1998.
<PAGE>
ADDENDUM 2
CONSTRUCTION
------------
(ALLOWANCE)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
(a) Landlord agrees to furnish or perform those items of
construction and those improvements (the "Tenant Improvements") specified below:
-------------------
The Shell, at Landlord's sole cost and expense, office and
warehouse improvements at Landlord's expense up to $174,250, as
set forth below.
Landlord shall pay for the Tenant Improvements up to a maximum amount of
$174,250.00, and Tenant shall pay for the cost of the Tenant Improvements in
excess of such amount. If the cost of the Tenant Improvements is estimated to
exceed such amount, such estimated overage shall be paid by Tenant before
Landlord begins construction and a final adjusting payment based upon the actual
costs of the Tenant Improvements shall be made when the Tenant Improvements are
complete.
(b) If Tenant shall desire any changes, Tenant shall so advise
Landlord in writing and Landlord shall determine whether such changes can be
made in a reasonable and feasible manner. Any and all costs of reviewing any
requested changes, and any and all costs of making any changes to the Tenant
Improvements which Tenant may request and which Landlord may agree to shall be
at Tenant's sole cost and expense and shall be paid to Landlord upon demand and
before execution of the change order.
(c) Landlord shall proceed with and complete the construction of
the Tenant Improvements. As soon as such improvements have been substantially
completed, Landlord shall notify Tenant in writing of the date that the Tenant
Improvements were Substantially Completed. Such date, unless an earlier date is
specified as the Commencement Date in this Lease or otherwise agreed to in
writing between Landlord and Tenant, shall be the "Commencement Date," unless
-----------------
the completion of such improvements was delayed due to any act or omission of,
or delay caused by, Tenant including, without limitation, Tenant's failure to
approve plans, complete submittals or obtain permits within the time periods
agreed to by the parties or as reasonably required by Landlord, in which case
the Commencement Date shall be the date such improvements would have been
completed but for the delays caused by Tenant. The Tenant Improvements shall be
deemed substantially completed ("Substantially Completed") when, in the opinion
-----------------------
of the construction manager (whether an employee or agent of Landlord or a third
party construction manager) ("Construction Manager"), the Premises are
--------------------
substantially completed except for punch list items which do not prevent in any
material way the use of the Premises for the purposes for which they were
intended. In the event Tenant, its employees, agents, or contractors cause
construction of such improvements to be delayed, the date of Substantial
Completion shall be deemed to be the date that, in the opinion of the
Construction Manager, Substantial Completion would have occurred if such delays
had not taken place. Without limiting the foregoing, Tenant shall be solely
responsible for delays caused by Tenant's request for any changes in the plans,
Tenant's request for long lead items or Tenant's interference with the
construction of the Tenant Improvements, and such delays shall not cause a
deferral of the Commencement Date beyond what it otherwise would have been.
After the Commencement Date Tenant shall, upon demand, execute and deliver to
Landlord a letter of acceptance of delivery of the Premises. In the event of any
dispute as to the Tenant Improvements, including the Commencement Date, the
certificate of the Construction Manager shall be conclusive absent manifest
error.
(d) The failure of Tenant to take possession of or to occupy the
Premises shall not serve to relieve Tenant of obligations arising on the
Commencement Date or delay the payment of rent by Tenant. Subject to applicable
ordinances and building codes governing Tenant's right to occupy or perform in
the Premises, Tenant shall be allowed access to the Premises for one month from
October 15, 1998 to November 14, 1998, without being obligated to pay Base Rent
or estimated Operating Expenses, and from November 15, 1998 to December 14, 1998
(or if the Tenant Improvements have not been Substantially Completed by November
15, 1998, Tenant shall be granted access for one month commencing with the date
the Tenant Improvements are Substantially Completed) without being obligated to
pay Base Rent but with the obligation of paying estimated Operating Expenses, to
install its tenant improvements, machinery, equipment, fixtures, or other
property on the Premises during the final stages of completion of construction
provided that Tenant does not thereby interfere with the completion of
construction or cause any labor dispute as a result of such installations, and
provided further that Tenant does hereby agree to indemnify, defend, and hold
Landlord harmless from any loss or damage to such property, and all liability,
loss, or damage arising from any injury to the Project or the property of
Landlord, its contractors, subcontractors, or materialmen, and any death or
personal injury to any person or persons arising out of such installations,
whether or not any such loss, damage, liability, death, or personal injury was
caused by Landlord's negligence. Any such occupancy or performance in the
Premises shall be in accordance with the provisions governing Tenant-Made
Alterations and Trade Fixtures in the Lease, and shall be subject to Tenant
providing to Landlord satisfactory evidence of insurance for personal injury and
property damage related to such installations and satisfactory evidence of
payment arrangements with respect to installations permitted hereunder. Delay in
putting Tenant in possession of the Premises shall not serve to extend the term
of this Lease or to make Landlord liable for any damages arising therefrom.
<PAGE>
(e) Except for incomplete punch list items, Tenant upon the
Commencement Date shall have and hold the Premises as the same shall then be
without any liability or obligation on the part of Landlord for making any
further alterations or improvements of any kind in or about the Premises.
<PAGE>
ADDENDUM 3
ONE RENEWAL OPTION AT MARKET
----------------------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998, BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
(a) Provided that as of the time of the giving of the Extension Notice
and the Commencement Date of the Extension Term, (x) Tenant is the Tenant
originally named herein or a Tenant Affiliate or successor by merger,
consolidation or transfer of assets as set forth in Paragraph 17 of the Lease,
(y) Tenant actually occupies all of the Premises initially demised under this
Lease and any space added to the Premises, and (z) no Event of Default exists or
would exist but for the passage of time or the giving of notice, or both; then
Tenant shall have the right to extend the Lease Term for an additional term of 2
years (such additional term is hereinafter called the "Extension Term")
--------------
commencing on the day following the expiration of the Lease Term (hereinafter
referred to as the "Commencement Date of the Extension Term"). Tenant shall give
---------------------------------------
Landlord notice (hereinafter called the "Extension Notice") of its election to
----------------
extend the term of the Lease Term at least 7 months, but not more than 12
months, prior to the scheduled expiration date of the Lease Term.
(b) The Base Rent payable by Tenant to Landlord during the Extension
Term shall be the greater of (i) the Base Rent applicable to the last year of
the initial Lease term and (ii) the then prevailing market rate for comparable
space in the Project and comparable buildings in the vicinity of the Project,
taking into account the size of the Lease, the length of the renewal term,
market escalations and the credit of Tenant. The Base Rent shall not be reduced
by reason of any costs or expenses saved by Landlord by reason of Landlord's not
having to find a new tenant for such premises (including, without limitation,
brokerage commissions, costs of improvements, rent concessions or lost rental
income during any vacancy period). In the event Landlord and Tenant fail to
reach an agreement on such rental rate and execute the Amendment (defined below)
at least 5 months prior to the expiration of the Lease, then Tenant's exercise
of the renewal option shall be deemed withdrawn and the Lease shall terminate on
its original expiration date.
(c) The determination of Base Rent does not reduce the Tenant's
obligation to pay or reimburse Landlord for Operating Expenses and other
reimbursable items as set forth in the Lease, and Tenant shall reimburse and pay
Landlord as set forth in the Lease with respect to such Operating Expenses and
other items with respect to the Premises during the Extension Term without
regard to any cap on such expenses set forth in the Lease.
(d) Except for the Base Rent as determined above, Tenant's occupancy of
the Premises during the Extension Term shall be on the same terms and conditions
as are in effect immediately prior to the expiration of the initial Lease Term;
provided, however, Tenant shall have no further right to any allowances, credits
or abatements or any options to expand, contract, renew or extend the Lease.
(e) If Tenant does not give the Extension Notice within the period set
forth in paragraph (a) above, Tenant's right to extend the Lease Term shall
automatically terminate. Time is of the essence as to the giving of the
Extension Notice.
(f) Landlord shall have no obligation to refurbish or otherwise improve
the Premises for the Extension Term. The Premises shall be tendered on the
Commencement Date of the Extension Term in "as-is" condition.
(g) If the Lease is extended for the Extension Term, then Landlord shall
prepare and Tenant shall execute an amendment to the Lease confirming the
extension of the Lease Term and the other provisions applicable thereto (the
"Amendment").
(h) If Tenant exercises its right to extend the term of the Lease for
the Extension Term pursuant to this Addendum, the term "Lease Term" as used in
the Lease, shall be construed to include, when practicable, the Extension Term
except as provided in (d) above.
<PAGE>
ADDENDUM 4
RIGHT OF SECOND OFFER
---------------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998 BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
(a) "Offered Space" shall mean the adjacent 17,850 sf which is located
-------------
to the north of the initial Premises in the Crossroads Corporate Center #1, Salt
Lake City, Utah.
(b) Provided that as of the date of the giving of Landlord's Notice, (x)
Tenant is the Tenant originally named herein or a Tenant Affiliate or successor
by merger, consolidation or transfer of assets, as set forth in Paragraph 17 of
the Lease, (y) Tenant actually occupies all of the Premises originally demised
under this Lease and any premises added to the Premises, and (z) no Event of
Default or event which but for the passage of time in the giving of notice, or
both, would constitute an Event of Default has occurred and is continuing, if at
any time during the Lease Term any lease for any portion of the Offered Space
shall expire, then Landlord, before offering such Offered Space to anyone, other
than the tenant (or its affiliates) then occupying such space or holding the
Right of First Offer for such Offered Space, shall offer to Tenant the right to
include the Offered Space within the Premises on the same terms and conditions
upon which Landlord intends to offer the Offered Space for lease.
(c) Such offer shall be made by Landlord to Tenant in a written notice
(hereinafter called the "Second Offer Notice") which offer shall designate the
-------------------
space being offered and shall specify the terms which Landlord intends to offer
with respect to any such Offered Space. Tenant may accept the offer set forth in
the Second Offer Notice by delivering to Landlord an unconditional acceptance
(hereinafter called "Tenant's Notice") of such offer within 5 business days
---------------
after delivery by Landlord of the Second Offer Notice to Tenant. Time shall be
of the essence with respect to the giving of Tenant's Notice. If Tenant does not
accept (or fails to timely accept) an offer made by Landlord pursuant to the
provisions of this Addendum with respect to the Offered Space designated in the
Second Offer Notice, Landlord shall be under no further obligation with respect
to such space by reason of this Addendum.
(d) Tenant must accept all Offered Space offered by Landlord at any one
time if it desires to accept any of such Offered Space and may not exercise its
right with respect to only part of such space. In addition, if Landlord desires
to lease more than just the Offered Space to one tenant, Landlord may offer to
Tenant pursuant to the terms hereof all of such space which Landlord desires to
lease, and Tenant must exercise its rights hereunder with respect to all such
space and may not insist on receiving an offer for just the Offered Space.
(e) If Tenant at any time declines any Offered Space offered by
Landlord, Tenant shall be deemed to have irrevocably waived all further rights
under this Addendum, and Landlord shall be free to lease the Offered Space to
third parties including on terms which may be less favorable to Landlord than
those offered to Tenant.
<PAGE>
ADDENDUM 5
EXPANSION OPTION
----------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998 BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
In the event tenant requires a larger facility in the Salt Lake City
area during the Lease term or any extensions thereof, and provided that (i)
Tenant has executed a lease by and between Landlord and Tenant within Landlord's
Salt Lake City area portfolio for other premises of at least 17,425 s.f. larger
than the Premises as described in this Lease ("Other Lease"), and (ii) (x)
Tenant is the Tenant originally named herein or a Tenant Affiliate or successor
by merger, consolidation or transfer of assets as set forth in Paragraph 17 of
the Lease, (y) Tenant actually occupies all of the Premises originally demised
under this Lease and any premises added to the Premises, and (z) no Event of
Default or event which but for the passage of time or the giving of notice, or
both, would constitute an Event of Default, has occurred and is continuing, then
Landlord agrees to terminate the remaining Lease Term of this Lease as of the
commencement date of the Other Lease without penalty; provided, however, Tenant
shall pay to Landlord at the time of such termination the costs of all
unamortized tenant improvements and commissions, if any, associated with this
Lease. The terms and conditions of the Other Lease shall be substantially
consistent with this Lease, except for all economic terms associated with the
Other Lease. In the event of any ownership change of the Building during the
Lease Term or any extensions thereof, all terms and conditions of this Expansion
Option shall be deemed null and void.
<PAGE>
ADDENDUM 6
-
SIGN CRITERIA
-------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998, BETWEEN
-----------------
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
------------------------------------------
and
1-800 CONTACTS
--------------
BASIC IDENTIFICATION SIGN:
Each Tenant is allowed a basic identification sign to display company name in
18" microgramma letters the color of which shall match the green accent color
(Devoe Paint, 1BL16A, Tall Tree Green) on the building. Logos or symbols of the
same construction as letters are allowed a maximum of 28" in any one dimension,
color may be determined by Tenant and approved by ownership. Letters and logos
are to be non-illuminated and individually mounted with the building facade
providing the background. Corporate or company names will be listed in capital
letters only, no lower case letters are allowed. Letter height will remain
consistent at 18" with the length of the sign varying according to the length of
the name displayed. Logos or symbols are to be centered from top to bottom in
the sign area. Names will be mounted above the reveal which is above the panel
that has the painted green diamonds, and justified to the left or right side
depending upon Tenant's front door location. Logo placement is dependent upon
sign location. This Tenant building sign will be restricted to company or
corporate name and logo or symbol only, no division names, descriptions of
services or slogans are allowed in this sign area.
WINDOW SIGNS:
Identity signs displaying trademarks or logos may be used on the glass panel to
the left or the right of the entrance door depending upon location of basic
identification sign (see above), i.e., if identification sign is mounted to the
right of the outside window frame, then window sign would be placed on glass
- -----
panel to the left of the entrance door. These signs may be either painted or
pressure sensitive vinyl or a combination of both. Company names shall be listed
in 3" white pressure sensitive capital letters in the microgramma style. Logos
and symbols may be in corporate colors as determined by Tenant. Tenant is
required to submit a layout to the ownership for final approval.
LOADING SIGNS:
Each tenant will be allowed to identify its loading door for shipping and
receiving purposes. The company name shall be placed on a 36" x 24" aluminum
panel adjacent to the loading doors. The aluminum panel shall be painted to
match the building.
Copy shall consist of 3" green vinyl capital letters only in Futura Bold style.
Company names and logos only are allowed.
Management reserves the right to deny any copy it considers unsuitable. Layout
is to be approved by building management. The cost of all lettering and logos
will be the responsibility of the Tenant. No other signs are allowed in the
windows or doors.
<PAGE>
ADDENDUM 7
SATELLITE DISH
--------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998 BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
Landlord hereby grants Tenant the right to install, maintain and replace
from time to time a satellite dish or similar antennae device (hereinafter
"Satellite Dish") on the roof of the Premises, subject to the following: (a)
--------------
applicable governmental laws; (b) the right of Landlord to supervise any roof
penetrations; (c) compliance with the conditions of any roof bond maintained by
Landlord on the Premises; and (d) the Satellite Dish not being visible at street
level. Tenant shall be responsible for the repair of any damage to any portion
of the Premises caused by Tenant's installation, use or removal of the Satellite
Dish. The Satellite Dish shall remain the exclusive property of Tenant, and
Tenant shall have the right to remove same at any time during the term of the
Lease so long as Tenant is not in default under the Lease. Tenant shall protect,
defend, indemnify and hold harmless Landlord from and against any and all
claims, damages, liabilities, costs or expenses of every kind and nature
(including without limitation reasonable attorney fees) imposed upon or incurred
by or asserted against Landlord arising out of Tenant's installation,
maintenance, use or removal of the Satellite Dish.
<PAGE>
ADDENDUM 8
LANDLORD'S WAIVER
-----------------
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED OCTOBER 13, 1998 BETWEEN
PROLOGIS DEVELOPMENT SERVICES INCORPORATED
and
1-800-CONTACTS, INC.
Tenant and its subtenants, assignees, invitees, employees, contractors
and agents shall not be liable for, and Landlord hereby waives all claims
against Tenant and its subtenants, assignees, invitees, employees, contractors
and agents for damage to property sustained by Landlord or any person claiming
through Landlord resulting from any accident or occurrence in or upon the
Premises or in or about the Project from any cause whatsoever, including,
without limitation, damage caused in whole or in part, directly or indirectly,
by the negligence of Tenant or its subtenants, assignees, invitees, employees,
contractors or agents; provided, however, such waiver shall only apply to claims
in excess of the commercially reasonable deductible under Landlord's insurance
policy.
<PAGE>
EXHIBIT A
[ARCHITECTURAL SITE PLAN APPEARS HERE]
[LOGO OF PROLOGIS DEVELOPMENT
SERVICES INC. APPEARS HERE]
ARCHITECTURAL SITE PLAN
--------------------------------------[GRAPHIC APPEARS HERE]
<PAGE>
EXHIBIT A
[ARCHITECTURAL SITE PLAN APPEARS HERE]
<PAGE>
EXHIBIT A
[ARCHITECTURAL SITE PLAN APPEARS HERE]
<PAGE>
LOAN AGREEMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 10-29-1998 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 an particular loan or item.
- -----------------------------------------------------------------------------------------------------------
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
===========================================================================================================
</TABLE>
THIS LOAN AGREEMENT between 1-800 CONTACTS (DELAWARE), INC. ("Borrower") and
ZIONS FIRST NATIONAL BANK ("Lender") is made and executed on the following
terms and conditions. Borrower has received prior commercial loans from
Lender or has applied to Lender for a commercial loan or loans and other
financial accommodations, including those which may be described on any
exhibit or schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations
from Lender to Borrower, are referred to in this Agreement individually as
the "Loan" and collectively as the "Loans." Borrower understands and agrees
that: (a) in granting, renewing, or extending any Loan, Lender is relying
upon Borrower's representations, warranties, and agreements, as set forth in
this Agreement; (b) the granting, renewing, or extending of any Loan by
Lender at all times shall be subject to Lender's sole judgment and
discretion; and (c) all such Loans shall be and shall remain subject to the
following terms and conditions of this Agreement.
TERM. This Agreement shall be effective as of October 29, 1998, and shall
continue thereafter until all Indebtedness of Borrower to Lender has been
performed in full and the parties terminate this Agreement in writing.
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 Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means 1-800 CONTACTS (DELAWARE), INC.. The
word "Borrower" also includes, as applicable, all subsidiaries and
affiliates of Borrower as provided below in the paragraph titled
"Subsidiaries and Affiliates."
Borrowing Base. The words "Borrowing Base" mean as determined by Lender
from time to time, the lesser of (a) $5,000,000.00; or (b) 50.000% of the
aggregate amount of Eligible Inventory. Eligible Inventory is defined as
Inventory which has not yet expired..
Business Day. The words "Business Day" mean a day on which commercial
banks are open for business in the State of Utah.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and
exclusive of extraordinary gains and income, plus depreciation and
amortization.
Collateral. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, 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. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible inventory. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
(c) Work in progress.
(d)Inventory which is not for direct resale including but not limited
to packaging, labeling and manufacturing supplies. Inventory which is
prohibited from being sold by any federal, state or local governmental
agency. Inventory which Lender in its sole discretion reasonably deems
ineligible.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
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."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may
be liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, 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.
Inventory. The word "Inventory" means all of Borrowers raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all
<PAGE>
10-29-1998 LOAN AGREEMENT Page 2
(Continued)
================================================================================
returns on Accounts.
Lender. The word "Lender" means ZIONS FIRST NATIONAL BANK, its successors
and assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrowers Loan obligations
in favor of Lender, as well as any substitute, replacement or refinancing
note or notes therefor.
Permitted Liens. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either not yet due or being
contested in good faith; (c) liens of materialmen, mechanics,
warehousemen, or carriers, or other like liens arising in the ordinary
course of business and securing obligations which are not yet delinquent;
(d) purchase money liens or purchase money security interests upon or in
any property acquired or held by Borrower in the ordinary course of
business to secure indebtedness outstanding on the date of this Agreement
or permitted to be incurred under the paragraph of this Agreement titled
"Indebtedness and Liens"; (e) liens and security interests which, as of
the date of this Agreement, have been disclosed to and approved by the
Lender in writing; and (f) those liens and security interests which in the
aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
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.
Security Agreement. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation 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.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance
acceptable to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible
items, but including leaseholds and leasehold improvements) less total
Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the
aggregate amount of such Advances outstanding at any time does not exceed the
Borrowing Base. Within the foregoing limits, Borrower may borrow, partially
or wholly prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Inventory, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
orally by authorized persons. Lender may, but need not, require that all
oral requests be confirmed in writing. Each Advance shall be conclusively
deemed to have been made at the request of and for the benefit of Borrower
(a) when credited to any deposit account of Borrower maintained with
Lender or (b) when advanced in accordance with the instructions of an
authorized person. Lender, at its option, may set a cutoff time, after
which all requests for Advances will be treated as having been requested
on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount
of the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay
to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the
Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid
principal amount of all Advances then outstanding and all accrued unpaid
interest, together with all other applicable fees, costs and charges, if
any, not yet paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
<PAGE>
10-29-1998 LOAN AGREEMENT Page 3
(Continued)
================================================================================
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Inventory. Lender's Security Interests in the
Collateral shall be continuing liens and shall include the proceeds and products
of the Collateral, including without limitation the proceeds of any insurance.
With respect to the Collateral, Borrower agrees and represents and warrants to
Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and any
similar statements as may be required by applicable law, and will file such
financing statements and all such similar statements in the appropriate
location or locations. Borrower hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue any Security Interest. Lender may at any time, and
without further authorization from Borrower, file a carbon, photograph,
facsimile, or other reproduction of any financing statement for use as a
financing statement. Borrower will reimburse Lender for all expenses for the
perfection, termination, and the continuation of the perfection of Lender's
security interest in the Collateral. Borrower promptly will notify Lender of
any change in Borrower's name including any change to the assumed business
names of Borrower. Borrower also promptly will notify Lender of any change in
Borrower's Social Security Number or Employer Identification Number. Borrower
further agrees to notify Lender in writing prior to any change in address or
location of Borrower's principal governance office or should Borrower merge
or consolidate with any other entity.
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,
Borrower's Inventory costs and selling prices, and the daily withdrawals and
additions to Inventory.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Inventory and Eligible Inventory, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Inventory specifying the value thereof,
and such other matters and information relating to Borrower's Inventory as
Lender may request. Supplemental schedules shall be delivered according to
the following schedule: EVERY 30 DAYS.
Representations and Warranties Concerning Inventory. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d) Except
as agreed to the contrary by Lender in writing, all Eligible Inventory is now
and at all times hereafter will be in Borrower's physical possession and
shall not be held by others on consignment, sale on approval, or sale or
return; (e) Except as reflected in the inventory schedules delivered to
Lender, all Eligible Inventory is now and at all times hereafter will be of
good and merchantable quality, free from defects; (f) Eligible Inventory Is
not now and will not at any time hereafter be stored with a bailee,
warehouseman, or similar party without Lender's prior written consent, and,
in such event, Borrower will concurrently at the time of bailment cause any
such bailee, warehouseman, or similar party to issue and deliver to Lender,
in form acceptable to Lender, warehouse receipts in Lender's name evidencing
the storage of Inventory; and (g) Lender, its assigns, or agents shall have
the right at any time and at Borrower's expense to inspect and examine the
Inventory and to check and test the same as to quality, quantity, value, and
condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware and is
validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged or
presently proposes to engage. Borrower also is duly qualified as a foreign
corporation and is in good standing in all states in which the failure to so
qualify would have a material adverse effect on its businesses or financial
condition.
Authorization. The execution, delivery, and performance of this Agreement and
all Related Documents by Borrower, to the extent to be executed, delivered or
performed by Borrower, have been duly authorized by all necessary action by
Borrower; do not require the consent or approval of any other person,
regulatory authority or governmental body; and do not conflict with, result
in a violation of, or constitute a default under (a) any provision of its
articles of incorporation or organization, or bylaws, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect, This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against Borrower
in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's legal
name, and Borrower has not used, or filed a financing statement under, any
other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and 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. Except as disclosed to and acknowledged by
Lender in writing, Borrower represents and warrants that: (a) During the
period of Borrower's ownership of the properties, there has been no use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any hazardous waste or substance by any person on, under, about or
from any of the properties. (b) Borrower has no knowledge of, or reason to
believe that there has been (i) any use, generation, manufacture, storage,
treatment, disposal, release, or threatened release of any hazardous waste or
substance on, under, about or from the properties by any prior owners or
occupants of any of the properties, or (ii) any actual or threatened
litigation or claims of any kind by any person relating to such matters. (c)
Neither Borrower nor any tenant, contractor, agent or other authorized user
of any of the properties shall use, generate, manufacture, store, treat,
dispose of, or release any hazardous waste or substance on, under, about or
from any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws, regulations,
and ordinances, including without limitation those laws, regulations and
ordinances described above. Borrower authorizes Lender and its agents to
enter upon the properties to make such inspections and tests as Lender may
deem appropriate to determine compliance of the properties with this section
of the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be construed
to create any responsibility or liability on the part
<PAGE>
10-29-1998 LOAN AGREEMENT Page 4
(Continued)
================================================================================
of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the properties for hazardous waste and hazardous substances.
Borrower hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower 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, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain or
suffer resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal, release
or threatened release of a hazardous waste or substance on the properties.
The provisions of this section of the Agreement, including the obligation to
indemnify, shall survive the payment of the Indebtedness and the termination
or expiration of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by foreclosure
or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith in
the ordinary course of business and for which adequate reserves have been
provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or affecting
any of the Collateral directly or indirectly securing repayment of Borrower's
Loan and Note, that would be prior or that may in any way be superior to
Lender's Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly or
indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to any
such plan, (ii) Borrower has not withdrawn from any such plan or initiated
steps to do so, (iii) no steps have been taken to terminate any such plan,
and (iv) there are no unfunded liabilities other than those previously
disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business, or
Borrower's Chief executive office, if Borrower has more than one place of
business, is located at 66 EAST WADSWORTH PARK DRIVE 3RD FLOOR, DRAPER, UT
84020. Unless Borrower has designated otherwise in writing this location is
also the office or offices where Borrower keeps its records concerning the
Collateral.
Information, All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all information
hereafter furnished by or on behalf of Borrower to Lender will be, true and
accurate in every material respect on the date as of which such information
is dated or certified; and none of such information is or will be incomplete
by omitting to state any material fact necessary to make such information not
misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect until
such time as Borrower's Indebtedness shall be paid in full, or until this
Agreement shall be terminated in the manner provided above, whichever is the
last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by
a certified public accountant satisfactory to Lender, and, as soon as
available, but in no event later than forty five (45) days after the end of
each month, Borrower's balance sheet and profit and loss statement for the
period ended, prepared and certified as correct to the best knowledge and
belief by Borrower's chief financial officer or other officer or person
acceptable to Lender. All financial reports required to be provided under
this Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may reasonably request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Working Capital. Maintain Working Capital in excess of $10,000,000.00.
Except as provided above, all computations made to determine compliance
with the requirements contained in this paragraph shall be made in
accordance with generally accepted accounting principles, applied on a
consistent basis, and certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, 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 cancelled or diminished without at
least ten (10) days' prior written notice to Lender. 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
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (a) the name of the
Insurer; (b) the risks Insured; (c) the amount of the policy; (d) the
properties insured; (e) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those
values; and (f) the expiration date of the policy. In addition, upon request
of Lender (however not more often than annually), Borrower will have an
independent appraiser satisfactory to Lender determine, as applicable, the
actual cash value or replacement cost of any Collateral. The cost of such
appraisal shall be paid by Borrower.
<PAGE>
10-29-1998 LOAN AGREEMENT Page 5
(Continued)
================================================================================
Other Agreements. Comply with all terms and conditions of all other
significant agreements, whether now or hereafter existing, between Borrower
and any other party and notify Lender immediately in writing of any material
default in connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations rations, unless specifically consented to the contrary by Lender
in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed
upon Borrower or its properties, income, or profits, prior to the date on
which penalties would attach, and all lawful claims that, if unpaid, might
become a lien or charge upon any of Borrower's properties, income, or
profits. Provided however, Borrower will not be required to pay and discharge
any such assessment, tax, charge, levy, lien or claim so long as (a) the
legality of the same shall be contested in good faith by appropriate
proceedings, and (b) Borrower shall have established on its books adequate
reserves with respect to such contested assessment, tax, charge, levy, lien,
or claim in accordance with generally accepted accounting practices.
Borrower, upon demand of Lender, will furnish to Lender evidence of payment
of the assessments, taxes, charges, levies, liens and claims and will
authorize the appropriate governmental official to deliver to Lender at any
time a written statement of any assessments, taxes, charges, levies, liens
and claims against Borrower's properties, income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely manner,
and promptly notify Lender if Borrower learns of the occurrence of any event
which constitutes an Event of Default under this Agreement or under any of
the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable federal,
state and municipal laws, ordinances, rules and regulations respecting its
properties, charters, businesses and operations, including without
limitation, compliance with the Americans With Disabilities Act and with all
minimum funding standards and other requirements of ERISA and other laws
applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and records.
If Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender
with copies of any records it may request, all at Borrower's expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
quarterly within Thirty days (45) days of quarter end and at the time of each
disbursement of Loan proceeds with a certificate executed by Borrower's chief
financial officer, or other officer or person acceptable to Lender,
certifying that the representations and warranties set forth in this
Agreement are true and correct as of the date of the certificate and further
certifying that, as of the date of the certificate, no Event of Default
exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part of
any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (b) except as allowed as a Permitted Lien, sell, transfer, mortgage,
assign, pledge, lease, grant a security interest in, or encumber any of
Borrower's assets, or (c) sell with recourse any of Borrower's accounts,
except to Lender.
Continuity of Operations. (a) Engage In any business activities substantially
different than those in which Borrower is presently engaged, (b) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change ownership, change its name, dissolve or transfer or sell
Collateral out of the ordinary course of business, in excess of $150,000, (c)
pay any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal and
state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower.
Loans, Acquisitions and Guaranties. (a) Loan, invest or advance money or
assets, (b) purchase, create or acquire any interest in any other enterprise
or entity, or (c) incur any obligation as surety or guarantor other than in
the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse
<PAGE>
10-29-1998 LOAN AGREEMENT Page 6
(Continued)
================================================================================
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender; or (e) Lender in
good faith deems itself insecure, even though no Event of Default shall have
occurred.
BORROWING BASE CERTIFICATE. BORROWER SHALL FURNISH TO LENDER A MONTHLY BORROWING
BASE CERTIFICATE CERTIFIED BY AN AUTHORIZED OFFICER/EMPLOYEE OF BORROWER, WITHIN
FIFTEEN (15) DAYS OF THE END OF EACH MONTH IN A FORM ACCEPTABLE TO LENDER,
UNLESS LENDER SPECIFICALLY REQUESTS OTHERWISE IN WRITING TO BORROWER.
WAIVER OF CLAIMS. Borrower (i) represents that Borrower has no defenses to or
setoffs against any indebtedness or other obligations owing to Lender or its
affiliates (the "Obligations"), nor claims against Lender or its affiliates for
any matter whatsoever, related or unrelated to the Obligations, and (ii)
releases Lender and its affiliates from all claims, causes of action, and costs,
in law or equity, existing as of the date of this Agreement, which Borrower has
or may have by reason of any mailer of any conceivable kind or character
whatsoever, related or unrelated to the Obligations, including the subject
matter of this Agreement. This provision shall not apply to claims for
performance of express contractual obligations owing to Borrower by Lender or
its affiliates.
TIME OUT OF DEBT. FOR A PERIOD OF AT LEAST FIFTEEN (15) DAYS EACH QUARTER,
FIFTEEN (15) DAYS OF WHICH MUST BE CONSECUTIVE, BORROWER SHALL NOT HAVE AN
OUTSTANDING BALANCE UNDER THE PROMISSORY NOTE IN THE AMOUNT OF $5,000,000.00.
INVENTORY REPORTS. BORROWER SHALL FURNISH TO LENDER A MONTHLY INVENTORY REPORT
WITHIN FIFTEEN (15) DAYS FROM THE END OF EACH MONTH IN A FORM ACCEPTABLE TO
LENDER.
ADDITIONAL FINANCIAL STATEMENTS. BORROWER SHALL FURNISH TO LENDER QUARTERLY 10-Q
STATEMENTS WITHIN FORTY FIVE (45) DAYS OF EACH QUARTER.
OPERATING TOTALS. BORROWER SHALL NOT EXCEED OPERATING LOSSES GREATER THAN
$4,500,000.00 FOR THE QUARTER ENDING SEPTEMBER 30, 1998, $500,000.00 FOR THE
QUARTER ENDING DECEMBER 31, 1998, $1,000,000.00 FOR THE QUARTER ENDING MARCH 31,
1999, AND BORROWER SHALL MAINTAIN AN OPERATING PROFIT OF NOT LESS THAN
$500,000.00 FOR THE QUARTER ENDING JUNE 30, 1999.
ADDITIONAL LONG TERM DEBT. BORROWER SHALL NOT INCUR ADDITIONAL LONG TERM DEBT IN
EXCESS OF $250,000.00 WITHOUT THE WRITTEN CONSENT OF LENDER.
INVENTORY COUNTS. BORROWER SHALL ALLOW LENDER TO PERFORM A MINIMUM OF THREE (3)
INVENTORY COUNTS IN NON QUARTER END INTERVALS PRIOR TO MAY 31, 1999.
YEAR 2000 COMPLIANCE COVENANT. An exhibit, titled "YEAR 2000 COMPLIANCE
COVENANT," is attached to this Agreement and by this reference is made a part of
this Agreement just as if all the provisions, terms and conditions of the
Exhibit had been fully set forth in this Agreement.
RIGHT OF SETOFF. Borrower grants to Lender a contractual 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 the Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due on
the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition contained
in this Agreement or in any of the Related Documents, or failure of Borrower
to comply with or to perform any other term, obligation, covenant or
condition contained in any other agreement between Lender and Borrower.
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
Grantor's 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 Borrower or any Grantor under this Agreement or
the Related Documents is false or misleading in any material respect at the
time made or furnished, or becomes false or misleading at any time
thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time and
for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrower's 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 Borrower.
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 Borrower, any creditor of any Grantor
against any collateral securing the Indebtedness, or by any governmental
agency. This includes a garnishment, attachment, or levy on or of any of
Borrower's deposit accounts with Lender. However, this Event of Default shall
not apply if there is a good faith dispute by Borrower or Grantor, as the
case may be, as to the validity or reasonableness of the claim which is the
basis of the creditor or forfeiture proceeding, and if Borrower or Grantor
gives Lender written notice of the creditor or forfeiture proceeding and
furnishes reserves or a surety bond for the creditor or forfeiture proceeding
satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. 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.
Change In Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar default within the preceding twelve (12) months, it may
be cured (and no Event of Default will have occurred) if Borrower or Grantor,
as the case may be, after receiving written notice from Lender demanding cure
of such default: (a) cures the default within fifteen (15)
<PAGE>
10-29-1998 LOAN AGREEMENT Page 7
(Continued)
================================================================================
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 all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly 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 Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and 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, 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
Agreement shall be governed by and construed in accordance with the laws of
the State of Utah.
ARBITRATION DISCLOSURES:
1. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY
VERY LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF ARBITRATORS' RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and
their assigns, including but not limited to Disputes arising out of or
relating to this agreement, this arbitration provision ("arbitration
clause"), or any related agreements or instruments relating hereto or
delivered in connection herewith ("Related Documents"), and including but not
limited to a Dispute based on or arising from an alleged tort, shall at the
request of any party be resolved by binding arbitration in accordance with
the applicable arbitration rules of the American Arbitration Association (the
"Administrator"). The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of this agreement or Related Documents.
The provisions of this arbitration clause shall supersede any prior
arbitration agreement between or among the parties. If any provision of this
arbitration clause should be determined to be unenforceable, all other
provisions of this arbitration clause shall remain in full force and effect.
(b) The arbitration proceedings shall be conducted in Salt Lake City, Utah,
at a place to be determined by the Administrator. The Administrator and the
arbitrator(s) shall have the authority to the extent practicable to take any
action to require the arbitration proceeding to be completed and the
arbitrator(s)' award issued within one hundred fifty (150) days of the filing
of the Dispute with the Administrator. The arbitrator(s) shall have the
authority to impose sanctions on any party that fails to comply with time
periods imposed by the Administrator or the arbitrator(s), including the
sanction of summarily dismissing any Dispute or defense with prejudice. The
arbitrator(s) shall have the authority to resolve any Dispute regarding the
terms of this agreement, this arbitration clause or Related Documents,
including any claim or controversy regarding the arbitrability of any
Dispute. All limitations periods applicable to any Dispute or defense,
whether by statute or agreement, shall apply to any arbitration proceeding
hereunder and the arbitrator(s) shall have the authority to decide whether
any Dispute or defense is barred by a limitations period and, if so, to
summarily enter an award dismissing any Dispute or defense on that basis. The
doctrines of compulsory counterclaim, res judicata, and collateral estoppel
shall apply to any arbitration proceeding hereunder so that a party must
state as a counterclaim in the arbitration proceeding any claim or
controversy which arises out of the transaction or occurrence that is the
subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)'
discretion and at the request of any party: (1) consolidate in a single
arbitration proceeding any other claim or controversy involving another party
that is substantially related to the Dispute where that other party is bound
by an arbitration clause with the Lender, such as borrowers, guarantors,
sureties, and owners of collateral; (2) consolidate in a single arbitration
proceeding any other claim or controversy that is substantially similar to
the Dispute; and (3) administer multiple arbitration claims or controversies
as class actions in accordance with the provisions of Rule 23 of the Federal
Rules of Civil Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of the
Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute. Where
three arbitrators conduct an arbitration proceeding, the Dispute shall be
decided by a majority vote of the three arbitrators, at least one of whom
must have expertise in the subject matter of the Dispute and at least one of
whom must be a practicing attorney. The arbitrator(s) shall award to the
prevailing party recovery of all costs and fees (including attorneys' fees
and costs, arbitration administration fees and costs, and arbitrator(s)'
fees). The arbitrator(s), either during the pendency of the arbitration
proceeding or as part of the arbitration award, also may grant provisional or
ancillary remedies, including but not limited to an award of injunctive
relief, foreclosure, sequestration, attachment, replevin, garnishment, or the
appointment of a receiver.
(d) Judgment upon an arbitration award may be entered in any court having
jurisdiction, subject to the following limitation: the arbitration 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
demand the right to a court trial. Such a demand must be filed with the
Administrator within thirty (30) days following the date of the arbitration
award; if such a demand is not made within that time period, the amount of
the arbitration award shall be binding. The computation of the total amount
of an arbitration award shall include amounts awarded for attorneys' fees and
costs, arbitration administration fees and costs, and arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any rights
hereunder, shall limit the right of any party to: (1) judicially or
non-judicially foreclose against any real or personal property collateral or
other security; (2) exercise self-help remedies, including but not limited to
repossession and setoff rights; or (3) obtain from a court having
jurisdiction thereover any provisional or ancillary remedies, including but
not limited to injunctive relief, foreclosure, sequestration, attachment,
replevin, garnishment, or the appointment of a receiver.
<PAGE>
10-29-1998 LOAN AGREEMENT Page 8
(Continued)
================================================================================
Such rights can be exercised at any time, before or during initiation of
an arbitration proceeding, except to the extent such action is contrary
to the arbitration award. The exercise of such rights shall not
constitute a waiver of the right to submit any Dispute to arbitration,
and any claim or controversy related to the exercise of such rights shall
be a Dispute to be resolved under the provisions of this arbitration
clause. Any party may initiate arbitration with the Administrator;
however, if any party initiates litigation and another party disputes any
allegation in that litigation, the disputing party--upon the request of
the initiating party--must file a demand for arbitration with the
Administrator and pay the Administrator's filing fee. The parties may
serve by mail a notice of an initial motion for an order of arbitration.
(f) Notwithstanding the applicability of any other law to this agreement,
the arbitration clause, or Related Documents between or among the
parties, the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall
-- ---
apply to the construction and interpretation of this arbitration clause.
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 Borrower under this
Agreement shall be joint and several, and all references to Borrower shall
mean each and every Borrower. This means that each of the persons signing
below is responsible for all obligations In this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loans to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy it may have with respect to such
matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
Interests in the Loans and will have all the rights granted under the
participation agreement or agreements governing the sale of such
participation interests. Borrower further waives all rights of offset or
counterclaim that it may have now or later against Lender or against any
purchaser of such a participation interest and unconditionally agrees that
either Lender or such purchaser may enforce Borrower's obligation under the
Loans irrespective of the failure or insolvency of any holder of any interest
in the Loans. Borrower further agrees that the purchaser of any such
participation interests may enforce its interests irrespective of any
personal claims or defenses that Borrower may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation reasonable attorneys' fees, incurred
in connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant to
this Agreement. Lender may pay someone else to help collect the Loans and to
enforce this Agreement, and Borrower will pay that amount. This includes,
subject to any limits under applicable law, Lender's reasonable attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including reasonable attorneys' fees for bankruptcy proceedings (including
efforts to modify or vacate any automatic stay or injunction), appeals, and
any anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
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
Borrower, notice to any Borrower will constitute notice to all Borrowers. For
notice purposes, Borrower will keep Lender informed at all times of
Borrower's current address(es).
Severability, if a court of competent jurisdiction finds any provision of
this Agreement 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. 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.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other financial
accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery to
Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
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 Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor 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 in subsequent instances where such consent is required, and in all
cases such consent may be granted or withheld in the sole discretion of
Lender.
FINAL AGREEMENT. Borrower understands that this Agreement and the related loan
documents are the final expression of the agreement between Lender and Borrower
and may not be contradicted by evidence of any alleged oral agreement.
<PAGE>
PROMISSORY NOTE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$5,000,000.00 10-29-1998 07-31-1998 9003 Y 7420 7057008 11049
- ----------------------------------------------------------------------------------------------------------
References the shaded area are for Lender's use only and do not limit the a
applicability of this document to an particular loan or item.
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
==========================================================================================================
Principal Amount: $5,000,000.00 Initial Rate: 9.500% Date of Note: October 29, 1998
</TABLE>
PROMISE TO PAY. 1--800 CONTACTS (DELAWARE), 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 Five Million & 00/100
Dollars ($5,000,000.00) 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 loan in one payment of all outstanding
principal plus all accrued unpaid interest on July 31, 1999. In addition,
Borrower will pay regular monthly payments of accrued unpaid interest
beginning November 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 NA.,
AND BANK OF AMERICA NT. & SA. 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 8.000% 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
9.500% 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 fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails 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 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 any bankruptcy or
insolvency laws. (f) Any creditor tries to take any of Borrower's property on
or in which Lender has a lien or security interest. This includes a
garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies
or any of the other events described in this default section occurs with
respect to any guarantor of this Note. (h) A material adverse change occurs
in Borrower's financial condition, or Lender believes the prospect of payment
or performance of the indebtedness is impaired. (i) Lender in good faith
deems itself insecure.
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
(15) 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 all
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 Lender's 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 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
<PAGE>
10-29-1998 PROMISSORY NOTE Page 2
(Continued)
================================================================================
permitted by applicable law, to charge or setoff all sums owing on this Note
against any and all such accounts.
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 AND CEO; 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. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY VERY
LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN COURT,
INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION OF
ARBITRATORS' RULINGS IS VERY LIMITED.
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and
their assigns, including but not limited to Disputes arising out of or
relating to this agreement, this arbitration provision ("arbitration
clause"), or any related agreements or Instruments relating hereto or
delivered in connection herewith ("Related Documents"), and including but not
limited to a Dispute based on or arising from an alleged tort, shall at the
request of any party be resolved by binding arbitration in accordance with
the applicable arbitration rules of the American Arbitration Association (the
"Administrator"). The provisions of this arbitration clause shall survive any
termination, amendment, or expiration of this agreement or Related Documents.
The provisions of this arbitration clause shall supersede any prior
arbitration agreement between or among the parties. If any provision of this
arbitration clause should be determined to be unenforceable, all other
provisions of this arbitration clause shall remain in full force and effect.
(b) The arbitration proceedings shall be conducted in Salt Lake City,
Utah, at a place to be determined by the Administrator. The Administrator and
the arbitrator(s) shall have the authority to the extent practicable to take
any action to require the arbitration proceeding to be completed and the
arbitrator(s)' award issued within one hundred fifty (150) days of the filing
of the Dispute with the Administrator. The arbitrator(s) shall have the
authority to impose sanctions on any party that fails to comply with time
periods imposed by the Administrator or the arbitrator(s), including the
sanction of summarily dismissing any Dispute or defense with prejudice. The
arbitrator(s) shall have the authority to resolve any Dispute regarding the
terms of this agreement, this arbitration clause or Related Documents,
including any claim or controversy regarding the arbitrability of any
Dispute. All limitations periods applicable to any Dispute or defense,
whether by statute or agreement, shall apply to any arbitration proceeding
hereunder and the arbitrator(s) shall have the authority to decide whether
any Dispute or defense is barred by a limitations period and, if so, to
summarily enter an award dismissing any Dispute or defense on that basis. The
doctrines of compulsory counterclaim, res judicata, and collateral estoppel
shall apply to any arbitration proceeding hereunder so that a party must
state as a counterclaim in the arbitration proceeding any claim or
controversy which arises out of the transaction or occurrence that is the
subject matter of the Dispute. The arbitrator(s) may in the arbitrator(s)'
discretion and at the request of any party: (1) consolidate in a single
arbitration proceeding any other claim or controversy involving another party
that is substantially related to the Dispute where that other party is bound
by an arbitration clause with the Lender, such as borrowers, guarantors,
sureties, and owners of collateral; (2) consolidate in a single arbitration
proceeding any other claim or controversy that is substantially similar to
the Dispute; and (3) administer multiple arbitration claims or controversies
as class actions in accordance with the provisions of Rule 23 of the Federal
Rules of Civil Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of
the Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute. Where
three arbitrators conduct an arbitration proceeding, the Dispute shall be
decided by a majority vote of the three arbitrators, at least one of whom
must have expertise in the subject matter of the Dispute and at least one of
whom must be a practicing attorney. The arbitrator(s) shall award to the
prevailing party recovery of all costs and fees (including attorneys' fees
and costs, arbitration administration fees and costs, and arbitrator(s)'
fees). The arbitrator(s), either during the pendency of the arbitration
proceeding or as part of the arbitration award, also may grant provisional or
ancillary remedies, including but not limited to an award of injunctive
relief, foreclosure, sequestration, attachment, replevin, garnishment, or the
appointment of a receiver.
(d) Judgment upon an arbitration award may be entered in any court having
jurisdiction, subject to the following limitation: the arbitration 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
demand the right to a court trial. Such a demand must be filed with the
Administrator within thirty (30) days following the date of the arbitration
award; if such a demand is not made within that time period, the amount of
the arbitration award shall be binding. The computation of the total amount
of an arbitration award shall include amounts awarded for attorneys' fees and
costs, arbitration administration fees and costs, and arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any
rights hereunder, shall limit the right of any party to: (1) judicially or
non-judicially foreclose against any real or personal property collateral or
other security; (2) exercise self-help remedies, including but not limited
to repossession and setoff rights; or (3) obtain from a court having
jurisdiction thereover any provisional or ancillary remedies, including but
not limited to injunctive relief, foreclosure, sequestration, attachment,
replevin, garnishment, or the appointment of a receiver. Such rights can be
exercised at any time, before or during initiation of an arbitration
proceeding, except to the extent such action is contrary to the arbitration
award. The exercise of such rights shall not constitute a waiver of the right
to submit any Dispute to arbitration, and any claim or controversy related to
the exercise of such rights shall be a Dispute to be resolved under the
provisions of this arbitration clause. Any party may initiate arbitration
with the Administrator; however, if any party initiates litigation and
another party disputes any allegation in that litigation, the disputing
party--upon the request of the initiating party--must file a demand for
arbitration with the Administrator and pay the Administrator's filing fee.
The parties may serve by mail a notice of an initial motion for an order of
arbitration.
(f) Notwithstanding the applicability of any other law to this agreement,
the arbitration clause, or Related Documents between or among the parties,
the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to the
-- ---
construction and interpretation of this arbitration clause.
<PAGE>
10-29-1998 PROMISSORY NOTE Page 3
(Continued)
================================================================================
PRIOR NOTE. THE PROMISSORY NOTE FROM 1-800 CONTACTS, INC. TO LENDER DATED
JANUARY 5, 1998.
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 liability. 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:
1-800 CONTACTS (DELAWARE), INC.
By: /s/ JOHATHAN COON
-------------------------------------------
JOHATHAN C. COON, PRESIDENT AND CEO
================================================================================
<PAGE>
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>
$5,000,000.00 10-29-1998 07-31-1999 9003 Y 7420 7057008 111049
- ----------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to an particular loan or item.
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
==========================================================================================================
</TABLE>
THIS COMMERCIAL SECURITY AGREEMENT is entered into between 1-800 CONTACTS
(DELAWARE), INC. (referred to 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,
microfilm, microfiche, or electronic media, together with all of Grantor's
right, title, 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 (DELAWARE), 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
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 October 29,
1998, in the principal amount of $5,000,000.00 from 1--800 CONTACTS
(DELAWARE), INC. to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of and substitutions for
the note or credit agreement.
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.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual 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
Lender's 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
<PAGE>
10-29-1998 COMMERCIAL SECURITY AGREEMENT Page 2
(Continued)
================================================================================
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 the 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.
Removal of Collateral. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the records
concerning the Collateral) at Grantor's address shown above, or at such other
locations as are acceptable to Lender. Except in the ordinary course of its
business, including the sales of inventory, Grantor shall not remove the
Collateral from its existing locations without the prior written consent of
Lender. To the extent that the Collateral consists of vehicles, or other
titled property, Grantor shall not take or permit any action which would
require application for certificates of title for the vehicles outside the
State of Utah without the prior written consent of Lender.
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 (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.
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 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 payment
<PAGE>
10-29-1998 COMMERCIAL SECURITY AGREEMENT Page 3
(Continued)
================================================================================
of 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
cancelled 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, including if it so chooses "single interest insurance,"
which will cover only Lender's 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
Grantor's 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 its rights to collect 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 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
will 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 Lender's 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 (ii) 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
Grantor's 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 Grantor's 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 its sole discretion, as
being an adequate reserve or bond for the
<PAGE>
10-29-1998 COMMERCIAL SECURITY AGREEMENT Page 4
(Continued)
================================================================================
dispute.
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.
Insecurity. Lender, in good faith, deems itself insecure.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) 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 all reasonable and necessary
steps sufficient to produce compliance as soon as reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Utah Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
Accelerate Indebtedness. Lender may declare the entire indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
Assemble Collateral. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and other
documents relating to the Collateral. Lender may require Grantor to assemble
the Collateral and make it available to Lender at a place to be designated by
Lender. Lender also shall have full power to enter upon the property of
Grantor to take possession of and remove the Collateral. If the Collateral
contains other goods not covered by this Agreement at the time of
repossession, Grantor agrees Lender may take such other goods, provided that
Lender makes reasonable efforts to return them to Grantor after repossession.
Sell the Collateral. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name or
that of Grantor. Lender may sell the Collateral at public auction or private
sale. Unless the Collateral threatens to decline speedily in value or is of a
type customarily sold on a recognized market, Lender will give Grantor
reasonable notice of the time after which any private sale or any other
intended disposition of the Collateral is to be made. The requirements of
reasonable notice shall be met if such notice is given at least ten (10) days
before the time of the sale or disposition. All expenses relating to the
disposition of the Collateral, including without limitation the expenses of
retaking, holding, insuring, preparing for sale and selling the Collateral,
shall become a part of the Indebtedness secured by this Agreement and shall
be payable on demand, with interest at the Note rate from date of expenditure
until repaid.
Appoint Receiver. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right, (b)
the receiver may be an employee of Lender and may serve without bond, and (c)
all fees of the receiver and his or her attorney shall become part of the
Indebtedness secured by this Agreement and shall be payable on demand, with
interest at the Note rate from date of expenditure until repaid.
Collect Revenues, Apply Accounts. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any Collateral
into its own name or that of its nominee and receive the payments, rents,
income, and revenues therefrom and hold the same as security for the
Indebtedness or apply it to payment of the Indebtedness in such order of
preference as Lender may determine. Insofar as the Collateral consists of
accounts, general intangibles, insurance policies, instruments, chattel
paper, choses in action, or similar property, Lender may demand, collect,
receipt for, settle, compromise, adjust, sue for, foreclose, or realize on
the Collateral as Lender may determine, whether or not Indebtedness or
Collateral is then due. For these purposes, Lender may, on behalf of and in
the name of Grantor, receive, open and dispose of mail addressed to Grantor;
change any address to which mail and payments are to be sent; and endorse
notes, checks, drafts, money orders, documents of title, instruments and
items pertaining to payment, shipment, or storage of any Collateral. To
facilitate collection, Lender may notify account debtors and obligors on any
Collateral to make payments directly to Lender.
Obtain Deficiency. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining on
the Indebtedness due to Lender after application of all amounts received from
the exercise of the rights provided in this Agreement. Grantor shall be
liable for a deficiency even if the transaction described in this subsection
is a sale of accounts or chattel paper.
Other Rights and Remedies. Lender shall have all the rights and remedies of a
secured creditor under the provisions of the Uniform Commercial Code, as may
be amended from time to time. In addition, Lender shall have and may exercise
any or all other rights and remedies it may have available at law, in equity,
or otherwise.
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 singularly 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 SALT LAKE
County, 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. ARBITRATION IS FINAL AND BINDING ON THE PARTIES AND SUBJECT TO ONLY
VERY LIMITED REVIEW BY A COURT.
2. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT TO LITIGATE IN
COURT, INCLUDING THEIR RIGHT TO A JURY TRIAL.
3. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN DISCOVERY IN COURT.
4. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL
REASONING IN THEIR AWARDS. THE RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF ARBITRATORS' RULINGS IS VERY LIMITED.
<PAGE>
10-29-1998 COMMERCIAL SECURITY AGREEMENT Page 5
(Continued)
================================================================================
5. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR WHO IS OR WAS
AFFILIATED WITH THE BANKING INDUSTRY.
6. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT YOUR ATTORNEY OR THE
AMERICAN ARBITRATION ASSOCIATION.
(a) Any claim or controversy ("Dispute") between or among the parties and
their assigns, including but not limited to Disputes arising out of or
relating to this agreement, this arbitration provision ("arbitration
clause"), or any related agreements or instruments relating hereto or
delivered in connection herewith ("Related Documents"), and including but
not limited to a Dispute based on or arising from an alleged tort, shall
at the request of any party be resolved by binding arbitration in
accordance with the applicable arbitration rules of the American
Arbitration Association (the "Administrator"). The provisions of this
arbitration clause shall survive any termination, amendment, or expiration
of this agreement or Related Documents. The provisions of this arbitration
clause shall supersede any prior arbitration agreement between or among
the parties. If any provision of this arbitration clause should be
determined to be unenforceable, all other provisions of this arbitration
clause shall remain in full force and effect.
(b) The arbitration proceedings shall be conducted in Salt Lake City,
Utah, at a place to be determined by the Administrator. The Administrator
and the arbitrator(s) shall have the authority to the extent practicable
to take any action to require the arbitration proceeding to be completed
and the arbitrator(s)' award issued within one hundred fifty (150) days of
the filing of the Dispute with the Administrator. The arbitrator(s) shall
have the authority to impose sanctions on any party that fails to comply
with time periods imposed by the Administrator or the arbitrator(s),
including the sanction of summarily dismissing any Dispute or defense with
prejudice. The arbitrator(s) shall have the authority to resolve any
Dispute regarding the terms of this agreement, this arbitration clause or
Related Documents, including any claim or controversy regarding the
arbitrability of any Dispute. All limitations periods applicable to any
Dispute or defense, whether by statute or agreement, shall apply to any
arbitration proceeding hereunder and the arbitrator(s) shall have the
authority to decide whether any Dispute or defense is barred by a
limitations period and, if so, to summarily enter an award dismissing any
Dispute or defense on that basis. The doctrines of compulsory
counterclaim, res judicata, and collateral estoppel shall apply to any
arbitration proceeding hereunder so that a party must state as a
counterclaim in the arbitration proceeding any claim or controversy which
arises out of the transaction or occurrence that is the subject matter of
the Dispute. The arbitrator(s) may in the arbitrator(s)' discretion and at
the request of any party: (1) consolidate in a single arbitration
proceeding any other claim or controversy involving another party that is
substantially related to the Dispute where that other party is bound by an
arbitration clause with the Lender, such as borrowers, guarantors,
sureties, and owners of collateral; (2) consolidate in a single
arbitration proceeding any other claim or controversy that is
substantially similar to the Dispute; and (3) administer multiple
arbitration claims or controversies as class actions in accordance with
the provisions of Rule 23 of the Federal Rules of Civil Procedure.
(c) The arbitrator(s) shall be selected in accordance with the rules of
the Administrator from panels maintained by the Administrator. A single
arbitrator shall have expertise in the subject matter of the Dispute.
Where three arbitrators conduct an arbitration proceeding, the Dispute
shall be decided by a majority vote of the three arbitrators, at least one
of whom must have expertise in the subject matter of the Dispute and at
least one of whom must be a practicing attorney. The arbitrator(s) shall
award to the prevailing party recovery of all costs and fees (including
attorneys' fees and costs, arbitration administration fees and costs, and
arbitrator(s)' fees). The arbitrator(s), either during the pendency of the
arbitration proceeding or as part of the arbitration award, also may grant
provisional or ancillary remedies, including but not limited to an award
of injunctive relief, foreclosure, sequestration, attachment, replevin,
garnishment, or the appointment of a receiver.
(d) Judgment upon an arbitration award may be entered in any court having
jurisdiction, subject to the following limitation: the arbitration 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 demand the right to a court trial. Such a demand must be filed
with the Administrator within thirty (30) days following the date of the
arbitration award; if such a demand is not made within that time period,
the amount of the arbitration award shall be binding. The computation of
the total amount of an arbitration award shall include amounts awarded for
attorneys' fees and costs, arbitration administration fees and costs, and
arbitrator(s)' fees.
(e) No provision of this arbitration clause, nor the exercise of any
rights hereunder, shall limit the right of any party to: (1) judicially or
non-judicially foreclose against any real or personal property collateral
or other security; (2) exercise self-help remedies, including but not
limited to repossession and setoff rights; or (3) obtain from a court
having jurisdiction thereover any provisional or ancillary remedies,
including but not limited to Injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment, or the appointment of a
receiver. Such rights can be exercised at any time, before or during
initiation of an arbitration proceeding, except to the extent such action
is contrary to the arbitration award. The exercise of such rights shall
not constitute a waiver of the right to submit any Dispute to arbitration,
and any claim or controversy related to the exercise of such rights shall
be a Dispute to be resolved under the provisions of this arbitration
clause. Any party may initiate arbitration with the Administrator;
however, if any party initiates litigation and another party disputes any
allegation in that litigation, the disputing party--upon the request of
the initiating party--must file a demand for arbitration with the
Administrator and pay the Administrator's filing fee. The parties may
serve by mail a notice of an initial motion for an order of arbitration.
(f) Notwithstanding the applicability of any other law to this agreement,
the arbitration clause, or Related Documents between or among the parties,
the Federal Arbitration Act, 9 U.S.C. Section 1 et seq., shall apply to
-- ---
the construction and interpretation of this arbitration clause.
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 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. 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 will keep Lender informed at all times of Grantor's
current address(es).
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, collect, receive, receipt for, sue and recover all
sums of money or other property which may now or hereafter become
<PAGE>
10-29-1998 COMMERCIAL SECURITY AGREEMENT Page 6
(Continued)
================================================================================
due, owing or payable from the Collateral; (b) to execute, sign and endorse
any and all 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 until renounced by Lender.
Severability. If a court of competent jurisdiction finds any provision of
this Agreement 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. 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 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.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER 29,
1998.
GRANTOR:
1-800 CONTACTS (DELAWARE), INC.
By: /s/ JONATHAN C. COON
--------------------------------------
JONATHAN C. COON, PRESIDENT AND CEO
================================================================================
<PAGE>
CORPORATE RESOLUTION TO BORROW
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$5,000,000.00 10-29-1998 07-31-1999 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.
- -------------------------------------------------------------------------------------------------------------
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
=============================================================================================================
</TABLE>
I, the undersigned Secretary or Assistant Secretary of 1-800 CONTACTS
(DELAWARE), INC. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
Delaware as a corporation for profit, with its principal office at 66 EAST
WADSWORTH PARK DRIVE 3RD FLOOR, 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 10-13-98, at which a quorum was present and voting, or
--------
by other duly authorized corporate action in lieu 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:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
JONATHAN C. COON PRESIDENT AND CEO x /s/ Jonathan C. Coon
JOHN NICHOLS VICE PRESIDENT x /s/ John Nichols
SCOTT TANNER CHIEF FINANCIAL OFFICER x /s/ Scott Tanner
acting for and on behalf of the Corporation and as its act and deed 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
Lender's forms, at such rates of interest and on such terms 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 limitation 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 deliver 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 liens and encumbrances.
Negotiate Items. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
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 derived therefrom as they
may deem advisable.
Further Acts. In the case of lines 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 discretion 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 until
Lender receives written notice of revocation of their authority: JONATHAN
C. COON, PRESIDENT AND CEO; 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 full
force and effect 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's 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 the authorized signer(s),
(e) conversion of the Corporation to a new or different type of business
entity, or (f) 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
duly 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.
<PAGE>
10-29-1998 CORPORATE RESOLUTION TO BORROW Page 2
(Continued)
================================================================================
IN TESTIMONY WHEREOF, I have hereunto set my hand on October 29, 1998 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X /s/ John Nichols
---------------------------------
X ---------------------------------
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.
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26(c) 1998 CFI ProServices, Inc.
All rights reserved. [UT-C10 CONTACTS.LN C3.OVL]
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$5,000,000.00 10-29-1998 07-31-1999 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.
- -------------------------------------------------------------------------------------------------------------
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
=============================================================================================================
</TABLE>
LOAN TYPE. This is a Variable Rate (1.500% over ZIONS FIRST NATIONAL BANK
PRIME RATE, making an initial rate of 9.500%), Revolving Line of Credit Loan
to a Corporation for $5,000,000.00 due on July 31, 1999. This is a secured
renewal of the following described indebtedness: THE PROMISSORY NOTE FROM
1-800 CONTACTS, INC. TO LENDER DATED JANUARY 5, 1998.
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
THE REVOLVING LINE OF CREDIT USED TO FUND TIMING DIFFERENCES IN BORROWERS
OPERATING CYCLE.
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 $5,000,000.00 as follows:
Undisbursed Funds: $4,987,250.00
Other Charges Financed: $225.00
$225.00 Documentation Fees
Total Financed Prepaid Finance Charges: $12,525.00
$12,500.00 Loan Fees
$10.00 UCC Recording
$15.00 Post Search
-------------
Note Principal: $5,000,000.00
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.
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 OCTOBER 29, 1998.
BORROWER:
1-800 CONTACTS (DELAWARE), INC.
By: /s/ Jonathan C. Coon
-------------------------------------
JONATHAN C. COON, PRESIDENT AND CEO
================================================================================
Variable Rate. Line of Credit LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.26
(c) 1998 CFI ProServices, Inc. All rights
reserved. (UT-I20 CONTACTS.LN C3. OVL)
<PAGE>
NOTICE OF INSURANCE REQUIREMENTS
- --------------------------------------------------------------------------------
Loan Date Loan No. Call Collateral Customer No. Officer Initials
10-29-1998 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>
<CAPTION>
<S> <C>
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
================================================================================
</TABLE>
----------------------------------
TO: DATE: October 29, 1998
----------------------------------
Dear Insurance Agent:
1-800 CONTACTS (DELAWARE), INC. ("Grantor") is obtaining a loan from ZIONS
FIRST NATIONAL BANK. Please send appropriate evidence of insurance to ZIONS
FIRST NATIONAL BANK, together with the requested endorsements, on the
following property, which Borrower is giving as security for the loan.
Collateral: All Inventory and Equipment.
Type. All risks, including fire, theft and liability.
Amount. Full insurable value.
Basis. Replacement value.
Endorsements. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum
of ten (10) days' prior written notice to Lender.
BORROWER:
1-800 CONTACTS (DELAWARE), INC.
By: /s/ Jonathan C. Coon
-----------------------------------
JONATHAN C. COON, PRESIDENT AND CEO
MAIL TO:
- ------------------------------------------------
ZIONS FIRST NATIONAL BANK
#1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125 LASER PRO, Reg. U.S. Pat. &
T.M. Off., Ver. 3.26 (c) 1998
CFI ProServices, Inc.
All Rights Reserved.
- ------------------------------------------------
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
$5,000,000.00 10-29-1998 07-31-1999 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.
- -------------------------------------------------------------------------------------------------------------
Borrower: 1-800 CONTACTS (DELAWARE), INC. Lender: ZIONS FIRST NATIONAL BANK
66 EAST WADSWORTH PARK DRIVE 3RD FLOOR HEAD OFFICE/COMMERCIAL BANKING
DRAPER, UT 84020 #1 SOUTH MAIN STREET
P.O. BOX 25822
SALT LAKE CITY, UT 84125
=============================================================================================================
</TABLE>
INSURANCE REQUIREMENTS. 1-800 CONTACTS (DELAWARE), INC. ("Grantor")
understands that insurance coverage is required in connection with the
extending of a loan or the providing of other financial accommodations to
Grantor by Lender. These requirements are set forth in the security
documents. The following minimum insurance coverages must be provided on
the following described collateral (the "Collateral"):
Collateral: All Inventory and Equipment.
Type. All risks, including fire, theft and liability.
Amount. Full insurable value.
Basis. Replacement value.
Endorsements. Lender's loss payable clause with stipulation
that coverage will not be cancelled or diminished without a
minimum of ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Lender.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, fifteen
(15) days from the date of this Agreement, evidence of the required
insurance as provided above, with an effective date of October 29, 1998, or
earlier.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Lender to provide to any person (including any insurance
agent or company) all information Lender deems appropriate, whether
regarding the Collateral, the loan or other financial accommodations, or
both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
OCTOBER 29,1998.
GRANTOR:
1-800 CONTACT (DELAWARE), INC.
By: /s/ Jonathan C. Coon
-----------------------------------
JONATHAN C. COON, PRESIDENT AND CEO
================================================================================
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE: _________________ PHONE: _________________
AGENTS NAME:_____________________________________________________________
INSURANCE COMPANY:________________________________________________________
POLICY NUMBER:____________________________________________________________
EFFECTIVE DATES:__________________________________________________________
COMMENTS:_____________________________________________________________
================================================================================
================================================================================
<PAGE>
Zions First National Bank
Exhibit "A"
September 24, 1998
Please amend the financing statement to reflect the following:
Change the Debtor's Name
from: 1-800 Contacts, Inc.
By: /s/ Jonathan C. Coon
----------------------------
Its: President and CEO
---------------------------
to: 1-800 Contacts (Delaware), Inc.
66 East Wadsworth Park Drive 3rd floor
Draper, UT 84020
By: /s/ Jonathan C. Coon
----------------------------
Its: President and CEO
---------------------------
<PAGE>
STANDARD FORM UNIFORM COMMERCIAL CODE
STATEMENTS OF CONTINUATION, PARTIAL RELEASE, ASSIGNMENT, ETC. - FORM UCC-3
07-01-07 (Rev. 6/84) Kelly Co. #13555
PLEASE TYPE this form. Fold only along perforation for mailing.
Remove Secured Party and Debtor copies and send other 3 copies with interleaved
carbon paper to the filing officer.
Enclose filing fee(s), and fill in original Financing Statement number and date
filed. There is no fee for terminations.
If the space provided for any item(s) on the form is inadequate the item(s)
should be continued on additional sheets, preferably 5" x 8" or 8" x 10". Only
one copy of such additional sheets need be presented to this filing officer with
a set of three copies of Form UCC-3. Long schedules of collateral, etc., may be
on any size paper that is convenient for the secured party. Indicate the number
of additional sheets attached.
If collateral is crops or goods which are or are to become fixtures, describe
generally the real estate and give name of record owner.
At the time of filing, filing officer will return third copy as an
acknowledgment.
Debtors Soc. Sec. No. and/or Emp. Fed Tax I.D. No.- Must List.
This STATEMENT is presented to a filing officer for filing pursuant to the
Uniform Commercial code:
Debtor(s) (Last Name First) 2. Secured Party(ies) and address(es)
and address(es) Zions First National Bank
1--800 Contacts, Inc. ** P.O. Box 25822
13751 South Wadsworth Pk Dr. Salt Lake City, UT 84125
ste. D--140
Draper, UT 84020
Social Security No.
--------------
Emp. Fed. I.D. No. 87-0571643 Attn: Carla/Brett 185
--------------
- -------------------------------------------------------------------------------
This statement refers to original Financing Statement bearing File No. 437990
------
Date Filed May 9 1995 Maturity Date 19
------------ ---- ----------------- --
For Filing Officer (Date, Time and Filing Office)
- -------------------------------------------------------------------------------
[_] Continuation. The original financing statement between the foregoing
Debtor and Secured Party, bearing file number shown
above, is still effective.
[_] Termination. Secured party no longer claims a security interest under
the financing statement bearing file number shown above.
[_] Assignment. The secured party's right under the financing statement
bearing file number shown above to the property described
in Item 10 have been assigned to the assignee whose name
and address appears in Item 10.
[X] Amendment. Financing statement bearing file number shown above is
amended as set forth in Item 10.
[_] Partial Release. Secured Party releases the collateral described in Item
10 from the financing statement bearing file number shown
above.
- ------------------------------------------------------------------------------
** See the attached Exhibit A for additional debtors, signatures and the
changes requested on this financing statement.
No. of additional Sheets presented:
- ------------------------------------------------------------------------------
see attached exhibit A for signatures Zions First National Bank
- -------------------------------------- ---------------------------------------
By: /s/ Jonathan C. Coon By: /s/ [ILLEGIBLE SIGNATURE]
----------------------------------- ---------------------------------------
Signature(s) of Debtor(s) (necessary Signature(s) of Secured Party(ies)
only if item 8 is applicable).
1) Filing Officer Copy - Alphabetical
STANDARD FORM - FORM UCC-3
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report in this Form 10-K, into the Company's previously filed Registration
Statement on Form S-8, File No. 333-61205.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-02-1999
<PERIOD-START> JAN-01-1998
<PERIOD-END> JAN-02-1999
<EXCHANGE-RATE> 1
<CASH> 3,762,220
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 10,752,324
<CURRENT-ASSETS> 14,997,683
<PP&E> 2,536,443
<DEPRECIATION> 487,593
<TOTAL-ASSETS> 18,016,136
<CURRENT-LIABILITIES> 3,153,146
<BONDS> 0
0
0
<COMMON> 64,306
<OTHER-SE> 14,768,519
<TOTAL-LIABILITY-AND-EQUITY> 18,016,136
<SALES> 59,875,941
<TOTAL-REVENUES> 59,875,941
<CGS> 37,315,413
<TOTAL-COSTS> 68,856,938
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 104,370
<INCOME-PRETAX> (8,535,287)
<INCOME-TAX> (642,679)
<INCOME-CONTINUING> (8,980,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,892,608)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
