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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBERS:
333-44473
333-77905
THE HOLMES GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MASSACHUSETTS 04-2768914
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
233 FORTUNE BOULEVARD, MILFORD, MASSACHUSETTS 01757
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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(508) 634-8050
(REGISTRANT'S TELEPHONE NUMBER)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
TITLE OF CLASS: NOT APPLICABLE
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. Yes [X] 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 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. [X]
DOCUMENTS INCORPORATED BY REFERENCE: NOT APPLICABLE
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THE HOLMES GROUP, INC.
FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I.
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 8
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 9
Item 6. Selected Financial Data..................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 16
Item 8. Financial Statements and Supplementary Data................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 50
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 53
Item 13. Certain Relationships and Related Transactions.............. 53
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 54
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this
report, are or may be forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," and similar expressions are
intended to identify forward-looking statements. Various economic and
competitive factors could cause actual results or events to differ materially
from those discussed in such forward-looking statements, including without
limitation, our degree of leverage, our dependence on major customers and key
personnel, the integration of the Rival acquisition, as described herein,
competition, risks associated with foreign manufacturing, risks of the retail
industry, potential product liability claims, the cost of labor and raw
materials and the other factors which are described in our most recent
Registration Statement on Form S-4 (File No. 333-77905), our Current Reports on
Form 8-K (filed February 10, 1999, October 12, 1999 and January 13, 2000), and
from time to time in our other periodic reports filed with the Securities and
Exchange Commission. Accordingly, such forward-looking statements do not purport
to be predictions of future events or circumstances and may not be realized.
PART I
ITEM 1. BUSINESS
GENERAL
The Holmes Group, Inc., formerly known as Holmes Products Corp., is a
leading developer, manufacturer and marketer of quality, branded home
appliances, including home environment, small kitchen and personal care
appliances. Our home environment products include fans, heaters, humidifiers and
air purifiers. We believe that we have the leading U.S. market share in each of
these product categories. Home environment products, in the aggregate, accounted
for approximately 56% of our net sales for the fiscal year ended December 31,
1999. Our kitchen appliances include Crock-Pot(R) slow cookers, can openers, ice
cream freezers and other similar small kitchen electric appliances where we hold
the number one or two market share. Kitchen appliances accounted for
approximately 36% of our net sales for fiscal 1999. Our personal care products
include massagers and showerheads. We believe that our strong market position
and success are attributable to our continuous product innovation, engineering
and manufacturing expertise, close customer partnerships, breadth of product
offerings, reputation for quality and presence and experience in the Far East.
Our products are sold under the Holmes(R), Rival(R), Pollenex(R),
Bionaire(R), Patton(R), Family Care(R) and Titan(R) brand names. These products
are sold to consumers through major retail chains, including mass merchants,
do-it-yourself home centers, warehouse clubs, hardware, department and specialty
stores and national drugstore chains. Major customers in these channels include
Wal-Mart, Kmart, Target, Home Depot, Costco, BJ's Wholesale Club, TruServ
(formerly True Value and ServiStar) and Walgreens. We believe that the strength,
scope and visibility of our retail account base provide a competitive advantage
with respect to brand recognition, access to shelf space and penetration of the
consumer market.
Holmes was founded in 1982 by our Chief Executive Officer, Jordan A. Kahn,
an innovator in the home environment market with over 30 years of industry
experience. Holmes opened its first manufacturing facility in China in 1989, and
currently operates two facilities in China where we manufacture many of our
products and electric motors for use in our products. We also currently operate
five manufacturing facilities in the United States. Our Warrensburg, Missouri
facility will be closing during 2000. Our vertically integrated manufacturing
facilities provide control over the production process and product quality.
These facilities also enhance operational flexibility and allow us to quickly
respond to changes in consumer demand and to specialized production needs. We
maintain distribution facilities in the United States, Canada and Europe, as
well as offices in Hong Kong and Taiwan that are responsible for sourcing raw
materials, processing orders and shipping the Company's products from the
Chinese factories. We coordinate product development, marketing, sales and
distribution from our Milford, Massachusetts headquarters.
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Our principal executive offices are located at 233 Fortune Boulevard,
Milford, Massachusetts 01757. Our telephone number is (508) 634-8050 and our
corporate web site is located at www.theholmesgroup.com.
THE RIVAL COMPANY ACQUISITION
On February 5, 1999, we completed our acquisition of The Rival Company
("Rival"), a leading developer, manufacturer and marketer of a variety of
products including small kitchen, home environment and personal care appliances.
In connection with this acquisition, we issued $31.3 million of senior
subordinated notes due in November 2007, bearing interest at 9 7/8% (the
"Notes"), and amended and restated our existing $100.0 million credit facility
to provide for a total availability of $325.0 million. We also sold $50.0
million of common stock in a private placement to investment funds affiliated
with Berkshire Partners LLC (Holmes' majority shareholder), and to members of
management and certain other co-investors. The initial borrowings under the
credit facility, together with the net proceeds of the equity investment and the
offering of the Notes, were used to consummate the Rival acquisition, refinance
Rival's then existing indebtedness, and pay the fees and expenses of the
transaction.
Prior to the Rival acquisition, in November 1997, Holmes and Berkshire
Partners completed a recapitalization transaction in which we issued $105.0
million of Notes and entered into the $100.0 million line of credit facility, of
which approximately $27.5 million was initially drawn. The proceeds of these
borrowings were used to repay our then existing indebtedness and redeem a
significant portion of the previous majority shareholder's common stock.
Accordingly, commencing in November 1997, we had a significantly higher
level of borrowing and a corresponding higher level of interest expense than in
the past. The Rival acquisition and the related financing transactions
consummated in February 1999 further increased our indebtedness and interest
expense substantially.
Our results of operations and balance sheet included herein reflect the
acquisition of Rival, in accordance with purchase accounting, from the
consummation of the acquisition. Accordingly, Rival's larger size relative to
Holmes significantly influences comparisons between periods before and after the
Rival acquisition.
Following the Rival acquisition, we made two strategic divestitures of
certain of Rival's non-core business units. On October 8, 1999, we sold the
assets of Rival's sump and utility pump division, which accounted for net sales
of approximately $19.0 million during the twelve months ended June 30, 1999. On
December 21, 1999, we sold the assets of Rival's industrial and building supply
products businesses, which accounted for net sales of approximately $25.0
million during the twelve months ended October 31, 1999. Net proceeds from these
divestitures were approximately $21.1 million and resulted in an increase in
goodwill of approximately $4.7 million. The Company may receive up to an
additional $2.7 million in connection with the industrial and building supply
divestiture during the year ended December 31, 2000 as additional consideration
for certain performance obligations of the Company.
Our ability to achieve revenue enhancements and recognize cost savings from
the Rival acquisition will depend to a significant extent on our ability to
continue to integrate Rival's operations, as well as other factors including
competition, labor and materials costs, and the general retail environment. In
furtherance of our strategic objectives, we may from time to time engage in
discussions regarding mergers, acquisitions, divestitures of other non-core
assets, or other business combination transactions within the consumer products
industry.
BUSINESS STRATEGY
Our strategy is to capitalize on our core strengths to achieve further
growth in net sales, profitability and cash flow by: (1) growing Rival's core
kitchen franchise, (2) further growth of the multibrand home environment product
lines (Holmes(R), Bionaire(R), Pollenex(R), Patton(R), Titan(R) and Family
Care(R)) (3) penetrating new and existing distribution channels, (4) improving
our overall cost structure and (5) expanding geographically. We believe an
important challenge in the year ahead will be the continued integration of
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Rival's operations in order to capitalize on the full potential of the
acquisition. We intend to pursue the following initiatives as part of our
strategy:
Strengthen the Kitchen Franchise. Rival's long-standing reputation as a
leader in the small kitchen appliance market has added a strong, complementary
business to our home environment product line. We are the leading manufacturer
and marketer of slow cookers through Rival's Crock-Pot(R) brand, and enjoy a
leading market share in can openers and ice cream freezers. We intend to
leverage our expertise in product innovation, manufacturing, marketing and
distribution to further strengthen our kitchen franchise.
Leverage and Grow Brands. The addition of Rival's home environment brands
has allowed us to increasingly differentiate our home comfort offerings among
customers and consumers. Through these additional brands, such as Bionaire(R),
the Company can offer a step-up brand strategy for increased presence in high
end distribution channels.
Further Penetrate Existing Distribution Channels. We believe that we can
further penetrate our existing distribution channels as a result of favorable
industry dynamics and our strong relationships and execution with mass merchant
retailers. Management believes that mass merchants will continue to consolidate
their vendor base and focus on a smaller number of sophisticated suppliers that
can (1) provide a broad array of differentiated, quality products, (2)
efficiently and consistently fulfill logistical requirements and volume demands
and (3) provide full product support from design to category management,
point-of-sale and after-market service with the consumer. We work closely with
key customers such as Wal-Mart, where we have been selected to design and
produce home environment and selected kitchen products for the GE branded
product program.
Develop New Distribution Channels. We continue to develop new channels of
distribution by providing customized product offerings that appeal to the
specific needs of each channel. For example, since 1996, we have marketed
selected products through an arrangement with the QVC electronic retailing
network. We have begun to partner with internet based electronic retailers to
distribute a broad array of our products. We also have developed unique brands
and product offerings to further penetrate the national chain drug stores.
Develop Our Brand Portfolio. We believe our wide portfolio of brands
allows us to increase market share by penetrating new segments of distribution
as well as expand shelf share in existing channels. Our brand development
focuses on both consumer brand awareness vehicles as well as the development of
new technologies and feature enhancements unique to these brands.
Improve the Overall Cost Structure. Through our manufacturing facilities
in China and related Far East sourcing capabilities, we have the ability to be a
low-cost, high quality, flexible producer of appliance products. By applying
these capabilities to certain of Rival's products, we believe we can further
reduce our overall manufacturing costs.
Expand into New Geographic Regions. We believe that the European, Latin
American and Asian home comfort markets are underdeveloped and represent
significant growth opportunities. We intend to leverage the greater
international recognition of Rival's brands in Europe and Latin America with our
low cost flexible supply in Asia to increase sales in these regions.
PRODUCTS
Holmes is a leading developer, manufacturer and marketer of quality,
branded home appliances, including home environment, small kitchen and personal
care appliances.
HOME ENVIRONMENT
Home environment products allow consumers to better control the air
quality, temperature and lighting of their home and office environments.
Fans. We currently manufacture and market approximately 90 different fan
models under the Holmes(R) and Patton(R) brand names, including table, stand,
window, window-to-floor, box, commercial grade, high
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velocity and oscillating fans, typically for purchase and use by household
consumers. Retail prices for our fans range from $5 to $300.
Heaters. Portable electric space heaters are used to heat areas of the
house not adequately reached by central heat and to heat an individual room
while that room is in use. We currently manufacture and market approximately 65
different heater models under the Holmes(R), Patton(R), Bionaire(R) and Titan(R)
brand names, including plastic, ceramic, metal, radiant and baseboard styles.
Retail prices for our heaters range from $20 to $80.
Humidifiers. Consumers use humidifiers to provide greater comfort by
increasing moisture in the home environment. We currently manufacture and market
approximately 50 different humidifiers under the Holmes(R), Bionaire(R) and
Pollenex(R) brand names, including cool mist, warm mist, ultrasonic and console
models that range in moisture output from one to 12 gallons per day. Retail
prices for our humidifiers range between $15 and $150. We also sell a variety of
humidifier accessories, replacement parts and chemical treatments.
Air Purifiers. Air purifiers circulate a room's air through filters that
remove contaminants from the air. In recent years, high efficiency particulate
arresting ("HEPA") filters have come to dominate the industry. We currently
manufacture and market approximately 30 different air purifier models under the
Holmes(R), Bionaire(R) and Pollenex(R) brand names. Retail prices for our air
purifiers range between $10 and $280. Air purifiers represent one of the most
underdeveloped categories of the home environment product line.
Accessories. Many of our products require accessories, including
replacement filters, chemical treatments and replacement parts. For example, air
purifiers periodically need new replacement filter cartridges and humidifiers
need new replacement wick filters. As the installed base of these products
continues to expand, we expect that the market for these accessories will grow
as well. In addition, we believe that sales of filters and accessories increase
brand awareness and customer loyalty. Accessories represent one of the fastest
growing categories in the home environment product line.
Lighting Products. We market over 150 different decorative and home office
lighting products, including table, floor and wall-mounted models. These
products complement our traditional home environment appliance line, provide an
additional non-seasonal category, and are distributed through the same
distribution channels as our other products. Holmes' lighting products are
manufactured by subcontractors in China and in the United States. Retail prices
for these products range between $4 and $90.
KITCHEN ELECTRICS
Small kitchen electric appliances, which constituted Rival's primary
product line for over sixty years, accounted for approximately 36% of our net
sales in 1999. The kitchen electrics business unit sells products including slow
cookers under the Crock-Pot(R) brand, ice cream freezers under the White
Mountain(R) brand and can openers, toasters, food slicers, mixers, indoor
grills, fryers and skillets under the Rival(R) brand to retailers and
distributors throughout the United States. We are the dominant manufacturer and
marketer of slow cookers, of which we market over 25 different models which
retail for between $10 and $70. In addition, Rival invented the electric can
opener category and continues to maintain the number one market share. We
believe that the combination of innovative product development and global
manufacturing strengths will position our kitchen business for growth and share
gain in the future.
PERSONAL CARE
We manufacture and market a wide variety of personal care products,
including showerheads, massagers and other wellness products under the
Pollenex(R) brand to retailers and distributors throughout the United States.
Personal care products represent an important growth opportunity for the
Company.
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INTERNATIONAL
Our products are sold in Canada and Europe from our sales and distribution
facilities in Toronto and the Netherlands. We also ship products from the United
States and our manufacturing facilities in China to customers in Latin America
and Asia.
ELECTRIC MOTORS
One of our Far East subsidiaries, Raider Motor Corporation, has proven
strengths in the design and manufacture of a variety of electric motors for use
in home and commercial appliances. In addition to supplying most of the motors
for our products, Raider has sufficient manufacturing capacity to supply other
manufacturers of appliances with electric motors. In October, 1998, we entered
into a joint venture with General Electric for motor manufacturing, sales and
distribution to third parties. The joint venture entity is owned 49% by Holmes
and 51% by GE. Capital expenditures necessary to support the growth of the GE
joint venture are shared 50/50 with GE.
PRODUCT DEVELOPMENT
We have internal product development teams dedicated to new product
development and product enhancements. We maintain our own engineering and
product development department to research new product concepts as well as
activities relating to improving existing products. The product design and
research development team consists of employees located in Milford,
Massachusetts, Kansas City, Missouri and in the Far East. We also retain the
services of outside consultants to assist our internal team.
We utilize state-of-the-art design technology including advanced CAD design
software and a laser-based stereolithography technique to design and engineer
new products. Management believes this technology allows us to design and
develop new products quickly, enabling us to accurately assess the feasibility,
cost and tooling requirements of new products before manufacturing the products.
Management believes this technology gives us a competitive advantage in the
design and development of new products and product line extensions.
Our expenditures for new product development and tooling totaled
approximately $9.5 million, $9.4 million and $17.6 million for the years ended
December 31, 1997, 1998 and 1999, respectively.
MANUFACTURING
We manufacture over 80% of our products ourselves, utilizing a combination
of our foreign and domestic manufacturing facilities. The management,
coordination and control of all manufacturing operations are centralized at our
principal offices in Milford, Massachusetts.
We manufacture most of our home environment products at our manufacturing
facilities in China. These facilities are highly integrated and produce most of
the electric motors, injection molded plastic components and other components
used in the manufacturing and assembly process. The balance of our home
environment products are produced through subcontracted manufacturers in China
and the United States, generally under the supervision of Holmes employees.
Our domestic manufacturing plants specialize in the production of selected
small kitchen appliances, particularly our Crock-Pot(R) slow cookers. These
plants are highly integrated and produce electric elements and motors, injection
molded plastic components, screw machine parts, stampings and stoneware. Four of
these manufacturing and assembly facilities are located in rural Missouri
(Clinton, Sedalia, Sweet Springs and Warrensburg), near Kansas City. The fifth
facility, in Flowood, Mississippi, produces the stoneware for our slow cookers
and other products. We will be closing the Warrensburg, Missouri facility during
2000.
We believe that we have a cost advantage as a result of our degree of
vertical integration, purchasing power, and low labor costs at our Chinese
manufacturing facilities. In addition, by operating our own manufacturing
facilities, we have control over the quality of our products from design through
final distribution.
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MARKETING AND DISTRIBUTION
Our products are sold in the United States, Canada and Europe to the retail
trade by an internal sales staff consisting of 35 sales managers, with
assistance from an internal sales support staff, field sales associates and
regional independent manufacturers representative organizations. We market our
products through all major channels of distribution including mass merchants,
do-it-yourself home centers, warehouse clubs, hardware stores, department
stores, home and kitchen specialty stores, national drugstore chains and mail
order and premium companies. The sales managers are actively involved in
servicing all aspects of each retail account.
In order to respond most efficiently to the demands of its retail customers
and ensure timely delivery, we balance direct shipments from our manufacturing
facilities with shipments from our domestic and international warehouses. We
employ an electronic data interchange system with selected retail customers to
expedite order and invoice processing.
Our marketing department consists of 40 individuals who are responsible for
market analysis, new product development, pricing strategy, promotions and
overall category development. We believe that our packaging is one of our most
powerful marketing tools because most consumers typically purchase small
appliances without the benefit of knowledgeable retail sales staff. Holmes'
innovative packaging and point-of-purchase support provide written information
and illustrations regarding product features, usage instructions, safety
features and product operation. We have an in-house art department that develops
much of our packaging and marketing materials on state-of-the-art desktop
graphics systems.
MAJOR CUSTOMERS
Our three largest retail customers, Wal-Mart (including Sam's Wholesale
Club), Kmart and Target accounted for approximately 46% of our net sales during
1999. Individually, Wal-Mart and Kmart each accounted for over 10% of our net
sales during 1999. We do not have long-term agreements with our major customers,
and purchases are generally made through the use of individual purchase orders.
A significant reduction in purchases by any of these customers could have a
material adverse effect on our business.
SEASONALITY
Sales of our products are highly seasonal, and counter-seasonal weather can
adversely affect our results of operations. Within the home environment product
line, sales of fans occur predominantly from January through June, and sales of
heaters and humidifiers occur predominantly from July through December. Although
kitchen appliances, personal care products and certain home environment products
such as air purifiers and lighting products are used year-round, the nature of
these products tend to draw increased sales during the winter months when people
are indoors and, as a result, sales of these products tend to be greatest in
advance of the winter months from July through December. Additionally, because
many of the kitchen and personal care products we sell are given as gifts, we
sell more of these products in anticipation of the holiday season. When holiday
shipments are combined with seasonal products such as heaters and humidifiers,
our sales during the months of August through November are generally at a higher
level than during the other months of the year. In addition to the seasonal
fluctuations in sales, we experience seasonality in gross profit, as margins
realized on fan products tend to be lower than those realized on heater,
humidifier, and air purifier products.
COMPETITION
The markets for most of our products are developed and highly competitive.
Management believes that competition is based on several factors, including
price, access to retail shelf space, product features, product enhancements,
brand names, new product introductions, and marketing support and distribution
systems.
We compete with many well-established companies, some of which have
substantially greater facilities, personnel, financial and other resources than
us. Our major competitors include AdobeAir, Catalina Lighting, Cheyenne,
Homedics, Honeywell Consumer Products (maker of Duracraft and Enviracare
brands), Hamilton
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Beach/Proctor Silex, Lasko, Masco, Salton/Maxim (Toastmaster), Sunbeam, Tensor,
Teledyne and Windmere. We also compete with importers and foreign manufacturers
of unbranded products.
We believe that our most important competitive strengths are the quality,
design and competitive pricing of our products, our attention to retailer and
consumer needs, our stable of recognized brands, our access to major channels of
distribution, the development of new products and innovation in existing
products, our ability to provide timely shipment through our manufacturing and
distribution facilities and the capabilities of our management team.
PATENTS AND TRADEMARKS
We hold a number of patents and trademarks registered in the United States,
Canada, and other countries for various products and technologies. Of particular
importance are the Holmes(R), Rival(R), Pollenex(R), Patton(R), Bionaire(R),
White Mountain(R), Family Care(R), Titan(R) and Crock-Pot(R) trademarks. We have
additional patent applications pending in the United States, Canada and Mexico.
We also register trademarks on product names and unique features in the United
States and other countries. We believe that, other than with respect to the
Crock-Pot(R) trademark, none of our product lines is dependent upon any single
trademark, patent, group of patents or other intellectual property rights.
REGULATION
We are subject to federal, state and local regulations concerning the
environment, occupational safety and health, trade-related issues and consumer
products safety. Most of our products are listed by Underwriters Laboratories,
Inc. ("UL"), the Canadian Underwriters Laboratories, Inc. ("CUL"), or similar
organizations in other markets. UL and CUL are independent, not-for-profit
corporations engaged in the testing of products for compliance with certain
public safety standards. We are also regulated by, and hold ongoing discussions
regarding specific products with, the United States Consumer Products Safety
Commission and the Canadian Standards Association. We believe that we are in
material compliance with all of the regulations applicable to us. There can be
no assurance, however, that such regulations will not negatively affect us in
the future. Our operations could also be adversely affected by other regulations
relating to our foreign operations, including changes in trade laws, increased
import duties, import/export regulations and changes in foreign laws.
EMPLOYEES
We had approximately 7,500 employees as of December 31, 1999, of which
approximately 2,215 were located in the United States, Europe and Canada,
approximately 5,200 were located at our manufacturing facilities in Dongguan,
China, and approximately 85 were located in Hong Kong and Taiwan.
ITEM 2. PROPERTIES
The following table sets forth our principal facilities, the primary
activity at each of the facilities listed and the expiration date of the
applicable lease, in the case of leased facilities.
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LOCATION SIZE PRIMARY USE LEASE EXPIRATION
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Milford, MA............... 83,000 square feet Headquarters and
Distribution 2001
City of Industry, CA...... Varies Distribution At will
Clinton, MA............... 207,000 square feet Distribution 2000
Worcester, MA............. 156,000 square feet Distribution 2003
Clinton, MO............... 164,000 square feet Manufacturing and Assembly Owned
279,000 square feet Warehousing and Distribution Owned
Kansas City, MO........... 32,000 square feet General Offices 2005
Sedalia, MO(1)............ 157,000 square feet Manufacturing and Assembly Owned
67,000 square feet Manufacturing and Assembly Owned
216,000 square feet Warehousing and Distribution Owned
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LOCATION SIZE PRIMARY USE LEASE EXPIRATION
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Sweet Springs, MO......... 125,000 square feet Manufacturing/Return
Processing Owned
Warrensburg, MO(1)........ 158,000 square feet Manufacturing and Assembly Owned
Flowood, MS............... 154,000 square feet Manufacturing Owned
Dongguan, China(2)........ 466,000 square feet Manufacturing and Assembly 2006
Dongguan, China(2)........ 269,000 square feet Motor Manufacturing 2006
Hong Kong................. 21,000 square feet Office 2001
Oosterhout, Netherlands... 50,000 square feet General Office, Warehousing
and Distribution 2005
Mississaugua, Ontario..... Varies Distribution At will
Mississaugua, Ontario..... 55,000 square feet General Office, Warehousing
and Distribution 2005
Taipei, Taiwan............ 1,700 square feet Office 2000
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(1) The Warrensburg plant and 67,000 square feet of the Sedalia plant are
occupied under long-term leases which give the Company the option to
purchase the relevant property at a nominal cost. We will be closing the
Warrensburg facility during 2000.
(2) These facilities are located in Guangdong Province, China, approximately 70
miles from Hong Kong. These facilities include 20 buildings on two separate
campuses that include manufacturing, assembly, warehousing, and employee
dormitory operations. The lease expiration date assumes the exercise of our
options to extend the lease on the primary manufacturing buildings. We have
agreed to purchase additional land in Guangdong Province for the
construction of a new manufacturing facility.
Rival's previously closed manufacturing and assembly facility in
Fayetteville, North Carolina is currently under agreement to be sold.
Subsequent to December 31, 1999, we signed a lease for our new corporate
headquarters and distribution facility currently under construction in Milford,
Massachusetts. See Note 11 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings incident to our normal
business operations, including product liability and patent and trademark
litigation. Management believes that the outcome of such litigation will not
have a material adverse effect on our business, financial condition or results
of operations. We have product liability and general liability insurance
policies in amounts management believes to be reasonable. There can be no
assurance, however, that such insurance will be adequate to cover all potential
product or other liability claims against us. We also face exposure to voluntary
or mandatory product recalls in the event that our products are alleged to have
manufacturing or safety defects. We do not maintain product recall insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Holmes is privately-owned and there is no public trading market for our
equity securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999 have been derived from our audited
Consolidated Financial Statements. The following information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our Consolidated Financial Statements, including
the notes thereto, included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- --------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales......................... $178,132 $194,331 $ 192,153 $ 214,479 $506,833
Cost of goods sold................ 141,226 145,915 136,740 146,509 363,654
-------- -------- --------- --------- --------
Gross profit.................... 36,906 48,416 55,413 67,970 143,179
Selling, general and
administrative expenses......... 22,500 27,308 36,530(1) 37,095 98,486
Product development expenses...... 3,154 5,520 5,463 6,295 10,448
Plant closing costs............... -- -- -- -- 2,439
-------- -------- --------- --------- --------
Operating profit................ 11,252 15,588 13,420 24,580 31,806
Interest expense, net............. 5,219 6,491 7,096 13,833 33,472
Other (income) expense, net....... (337) (319) 56 (436) (2,489)
-------- -------- --------- --------- --------
Income before income taxes,
equity in earnings from joint
venture and minority
interest..................... 6,370 9,416 6,268 11,183 823
Income tax expense (benefit)...... 2,614 2,787 2,196 2,222 (87)
Equity in earnings from joint
venture......................... -- -- -- -- (902)
-------- -------- --------- --------- --------
Income before minority
interest..................... 3,756 6,629 4,072 8,961 1,812
Minority interest in net income of
majority-owned
subsidiaries(2)................. 518 408 225 -- --
-------- -------- --------- --------- --------
Net income...................... $ 3,238 $ 6,221 $ 3,847 $ 8,961 $ 1,812
======== ======== ========= ========= ========
OTHER DATA:
EBITDA(3)......................... $ 16,098 $ 22,774 $ 20,837 $ 32,264 $ 50,330
Ratio of earnings to fixed
charges(4)...................... 2.1x 2.2x 1.8x 1.7x 1.0x
Depreciation and amortization..... 4,509 6,867 7,473 7,248 15,133
Capital expenditures.............. 9,706 8,594 5,815 4,749 17,614
BALANCE SHEET DATA (AT END OF
PERIOD):
Cash and cash equivalents......... $ 3,368 $ 4,462 $ 5,141 $ 5,379 $ 6,647
Working capital (deficit)......... (6,770) (2,883) 78,318 71,089 211,646
Total assets...................... 118,524 128,286 135,165 131,357 456,496
Total long-term debt including
capital leases.................. 217 737 134,294 115,139 338,710
Total stockholders' equity
(deficit)....................... 11,487 17,708 (24,991)(5) (15,389)(5) 37,800
</TABLE>
- ---------------
(1) Includes approximately $6.9 million of incremental compensation expense,
which was paid to certain executives in conjunction with Holmes' November,
1997 recapitalization.
(2) In May and June, 1997, Holmes repurchased the shares held by 30% minority
stockholders in one of Holmes' subsidiaries for a total of $900,000.
10
<PAGE> 12
(3) EBITDA represents income before interest expense, income tax expense
(benefit), depreciation and amortization and the minority interest in net
income of majority-owned subsidiaries. EBITDA is presented because it is a
widely accepted measure to provide information regarding a company's ability
to service and/or incur debt. EBITDA should not be considered in isolation
or as a substitute for net income, cash flows from operations or other
income or cash flow data prepared in accordance with generally accepted
accounting principles, or as a measure of a company's profitability or
liquidity. Additionally, Holmes' calculation of EBITDA may differ from that
performed by other companies, and thus the amounts disclosed may not be
directly comparable to those disclosed by other companies. EBITDA as
presented does not reflect addback of integration expenses, amortization of
acquired profit in inventory, plant closing costs and reduction for a legal
settlement. Adjusting for these items would result in EBITDA of $62.3
million for 1999.
(4) For purposes of determining the ratio of earnings to fixed charges, earnings
represent income before income taxes and minority interest, plus fixed
charges as presented, without adjustment for one-time items as discussed in
(3) above. Fixed charges consist of interest expense on all indebtedness
plus a portion of rental payments on operating leases that is considered
representative of the interest factor.
(5) Total stockholders' equity (deficit) as of December 31, 1997 and 1998
reflects a reduction attributable to Holmes' 1997 recapitalization. See Note
9 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Sales of most of our products follow seasonal patterns that affect results
of operations. In general, sales of fans occur predominantly from January
through June, and sales of heaters and humidifiers occur predominantly from July
through December. Although kitchen electrics, air purifiers, lighting products
and accessories generally are used year-round, these products tend to draw
increased sales during the winter months when people are indoors and, as a
result, sales of these products tend to be greatest in advance of the winter
months from July through December. Additionally, many of the kitchen and
personal care products we sell are given as gifts and, as such, sell at larger
volumes during the holiday season. When holiday shipments are combined with
seasonal products, our sales during the months of August through November are
generally at a higher level than during the other months of the year. In
addition to the seasonal fluctuations in sales, we experience seasonality in
gross profit, as margins realized on fan products tend to be lower than those
realized on kitchen electrics and other home environment products.
On February 5, 1999, we completed the acquisition of The Rival Company, a
leading developer, manufacturer and marketer of a variety of products including
small kitchen, home environment and personal care appliances. In connection with
this acquisition, we issued $31.3 million of senior subordinated notes due in
November 2007, bearing interest at 9 7/8% (the "Notes"), amended and restated
our existing $100.0 million credit facility to provide for a total availability
of $325.0 million, and sold $50.0 million of common stock in a private
placement. In November 1997, we completed a recapitalization transaction in
which we issued $105.0 million of Notes and entered into the $100.0 million line
of credit facility, of which approximately $27.5 million was initially drawn
(collectively, the "1997 Transactions"). As a result of these transactions, we
have a significantly higher level of borrowing and a corresponding higher level
of interest expense than in the past.
RESULTS OF OPERATIONS
Our historical results of operations for the year 1998 discussed below do
not include any of Rival's operations. The Rival acquisition was accounted for
as a purchase, and accordingly, Rival's results of operations are included in
the Company's financial information beginning on February 5, 1999. Rival's
larger size relative to Holmes greatly influences the comparison of 1999 and
1998 below. Therefore, we have provided supplemental information for Holmes and
its subsidiaries other than Rival on a stand-alone basis, and for Rival and its
subsidiaries on a stand-alone basis.
11
<PAGE> 13
Comparison of Years Ended December 31, 1999 and December 31, 1998
Net Sales. Net sales for fiscal 1999 were $506.8 million compared to $214.5
million for fiscal 1998, an increase of $292.3 million or 136.3%, primarily due
to the Rival acquisition. On a stand-alone basis, Holmes' net sales increased
approximately $17.5 million, or 8.2%, in 1999 versus 1998. Holmes' U.S. fan
shipments increased approximately $5 million in 1999 over 1998 as warm summer
weather improved customer response. Winter season U.S. shipments of heaters and
humidifiers increased by approximately $4 million and $3 million, respectively,
in 1999 versus 1998 as increased product offerings and improved placement
resulted in increased volume. Lighting product shipments increased as well in
1999 by approximately $2 million when compared to 1998, and U.S. sales of
accessory products increased by $5 million from 1998 to 1999. Dehumidifier
shipments decreased in 1999 by approximately $5 million versus 1998 following a
management decision to exit this low margin category. U.S. sales of air
purifiers also decreased from 1998 to 1999 by approximately $4 million as stock
levels at retailers slowed shipping demand in 1999. A reduction in returns and
allowances of approximately $4 million from 1998 to 1999 also favorably impacted
net sales. Increases in other categories accounted for the balance of the sales
gain.
On a stand-alone basis, Rival's net sales decreased by approximately $31
million for the full calendar year 1999 compared with 1998, excluding the
divested businesses. Rival's U.S. shipments of kitchen appliances decreased by
approximately $11 million in 1999 when compared to 1998. Decreased sales of can
openers made up approximately 40% of this decrease as an increase in shipments
from new product introductions in 1998 did not repeat in 1999. In addition,
approximately 30% of the overall kitchen decrease was attributable to reduced
shipments of toasters and irons as we de-emphasized the existing lower margin
opening price point products on several categories. Despite price erosion, U.S.
sales of Crock-Pot(R)slow cookers were flat in dollars but shipments in units
were up from 1998 to 1999. The remainder of the kitchen shortfall was spread
over a number of the smaller categories. Rival U.S. home environment shipments
decreased approximately $18 million in 1999 versus 1998 with the retail fan and
air purifier product categories making up over 95% of the decrease. Anticipated
retail placement losses and negative impacts from shelf transitions at several
key retailers were the primary factors for these category decreases. Shipments
from Rival's industrial and pump business units decreased by approximately $5
million and $4 million, respectively, in 1999 versus 1998. The sale of both of
these divisions, which accounted for net sales of approximately $43.0 million in
1999, took place in the fourth quarter of 1999. Rival's international shipments
increased by approximately $4 million in 1999 versus 1998 with shipments in
Mexico making up virtually all of this increase. Rival also experienced an
increase in credits for returns and discounts of approximately $6 million from
1998 to 1999 which further reduced its overall net sales.
Gross Profit. Gross profit for fiscal 1999 was $143.2 million compared to
$68.0 million for fiscal 1998, an increase of $75.2 million or 110.6%, with the
increase again in large part due to the Rival acquisition. As a percentage of
net sales, gross profit decreased to 28.2% in 1999 from 31.7% in 1998 as a
result of the decreased gross margins realized by Rival in 1999. On a
stand-alone basis, Holmes' gross profit margin increased over three percentage
points for the year 1999 versus 1998. Holmes' product mix in 1999 included a
decrease in low margin dehumidifier sales and an increase in higher margin sales
as discussed above which favorably impacted overall Holmes' margins. In
addition, positive contribution was realized from improved efficiencies in our
Far East factories. On a stand-alone basis for the full calendar year 1999,
Rival's gross profit decreased approximately $19 million from 1998, primarily
due to the sales volume shortfall discussed above and due to amortization of
acquired profit in inventory in connection with the Rival acquisition. Rival's
gross profit percentage was approximately 24.2% in 1999 versus 24.5% in 1998
(before the impact of the amortization of acquired profit in inventory in 1999).
Selling Expenses. Selling expenses for 1999 were $67.5 million compared to
$20.5 million in 1998, an increase of $47.0 million or 229.3%, primarily as a
result of the Rival acquisition. As a percentage of net sales, selling expenses
increased to 13.3% for 1999 compared to 9.5% in 1998. A significant portion of
this percentage increase was due to the traditionally higher levels of
co-operative advertising done by Rival and increased freight costs related to
both continuing Rival businesses and businesses sold during 1999. In addition to
the Rival impact, there were increases in some sales related expense items such
as shipping freight costs and supplies, particularly in regards to the overall
Holmes sales increases and to the increase in accessory sales. In
12
<PAGE> 14
addition, salaries and related benefits and travel costs increased as we
developed an infrastructure to support the integration of Rival and future
initiatives.
General and Administrative Expenses. General and administrative expenses
for 1999 were $28.3 million compared to $16.6 million in 1998, an increase of
$11.7 million or 70.5%. As a percentage of net sales, general and administrative
expenses decreased to 5.6% for 1999 from 7.8% for 1998. The increase in dollars
was primarily attributable to the Rival acquisition. In addition, the increase
in dollars was due to expenses incurred for consulting, travel and other costs
to support the Rival integration process. Total integration related expenses in
1999 were approximately $3.4 million.
Product Development Expenses. Product development expenses for 1999 were
$10.4 million compared to $6.3 million for 1998, an increase of $4.1 million or
65.1%. As a percentage of net sales, product development expenses decreased to
2.1% for 1999 from 2.9% for 1998. The increase in dollars and the decrease as a
percentage of net sales were primarily due to the Rival acquisition.
Plant Closing Costs. The Company recorded $2.4 million in plant closing
costs associated with Rival's previously announced closing of its New Haven,
Indiana and Fayetteville, North Carolina plants. Approximately $1.7 million
related to the expenses associated with the wind down of these two facilities
which were expensed as incurred and $0.7 million related to the write down of
fixed assets at these facilities.
Interest and Other Expense, Net. Interest and other expense, net for 1999
was $31.0 million compared to $13.4 million for 1998, an increase of $17.6
million or 131.3%. The increase in interest expense was primarily due to the
additional borrowings resulting from the new debt associated with the Rival
acquisition. This increase was offset by an increase in other income largely
related to a favorable legal settlement in 1999.
Income Tax Expense (Benefit). The income tax benefit for 1999 was $0.1
million compared to expense of $2.2 million for 1998. This was largely due to
the losses experienced in the U.S. creating benefits at higher rates than the
foreign income taxed at lower rates.
Equity in Earnings from Joint Venture. We recorded $0.9 million in equity
in earnings from our joint venture with General Electric for the shipment of
motors from our factory in the Far East. There were no such earnings recorded in
1998.
Net Income. As a result of the foregoing factors, net income for 1999 was
$1.8 million, compared to net income of $9.0 million for 1998.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Net Sales. Net sales for fiscal 1998 were $214.5 million compared to
$192.2 million for fiscal 1997, an increase of $22.3 million or 11.6%. This
increase was attributable to increases in each of what were then our four major
product categories: fans, heaters, humidifiers and air purifiers, which resulted
from a strong 1998 for retailers, as well as continued growth in filter and
accessory sales due to the growing installed base of products requiring filters
and accessories. Our Far East operations also had a significant increase in
external sales versus 1997.
Gross Profit. Gross profit for fiscal 1998 was $68.0 million compared to
$55.4 million for fiscal 1997, an increase of $12.6 million or 22.7%. As a
percentage of net sales, gross profit increased to 31.7% for fiscal 1998 from
28.8% for fiscal 1997. The increase was primarily due to the above mentioned
increases in net sales in humidifiers, heaters and filters and accessories which
are relatively higher margin contributors, as well as continued reductions in
raw material prices at our manufacturing operations in the Far East.
Selling Expenses. Selling expenses for fiscal 1998 were $20.5 million
compared to $15.6 million for fiscal 1997, an increase of $4.9 million or 31.4%.
As a percentage of net sales, selling expenses increased to 9.6% for fiscal 1998
from 8.1% for fiscal 1997. The increase in selling expenses was primarily due to
an increase in co-operative advertising of higher margin products and new sales
promotions with several major retailers. To a lesser extent, shipping costs
increased as a result of the higher sales level. Also, there were continued
expenses associated with the redesign of some of our product packaging.
13
<PAGE> 15
General and Administrative Expenses. General and administrative expenses
for fiscal 1998 were $16.6 million compared to $20.9 million for fiscal 1997, a
decrease of $4.3 million or 20.6%. As a percentage of net sales, general and
administrative expenses decreased to 7.7% for fiscal 1998 from 10.9% for fiscal
1997. The higher amount in 1997 resulted from incremental incentive compensation
expenses paid in connection with the 1997 Transactions. This overall decrease
was offset in part by increased expenditures on management and information
systems support, increases in personnel costs to improve operating efficiencies
at all of our locations and on-going expenses associated with the
recapitalization in November, 1997.
Product Development Expenses. Product development expenses for fiscal 1998
were $6.3 million compared to $5.5 million for fiscal 1997, an increase of $.8
million or 14.6%. As a percentage of net sales, product development expenses
remained constant at 2.9% for fiscal 1998 and 1997. The increase was primarily
due to increased expenditures for royalties and outside consultants as part of
our continuing effort in developing new technologies for both existing and new
product lines.
Interest and Other Expense, Net. Interest and other expense, net for
fiscal 1998 was $13.4 million compared to $7.2 million for fiscal 1997, an
increase of $6.2 million or 86.1%. The increase in interest expense was
primarily due to the additional borrowings resulting from the recapitalization
in November 1997. Our interest expense in future periods has been higher than
1998 as a result of the Rival acquisition.
Income Tax Expense. In 1997, we recorded a $3.6 million valuation
allowance related to deferred tax assets generated as a result of certain
limitations on the deductibility of interest paid to Pentland. This 1997
non-recurring charge comprises the majority of the 15% change in our effective
tax rate from 35% in 1997 to 20% in 1998.
Net Income. As a result of the foregoing factors, net income for fiscal
1998 was $9.0 million, compared to net income of $3.8 million in fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
Following the recapitalization transaction in November 1997 and the Rival
acquisition in February 1999, we have funded our liquidity requirements with
cash flows from operations and borrowings under the Credit Facility. Our primary
liquidity requirements are for working capital and to service our indebtedness.
We believe that existing cash resources, cash flows from operations and
borrowings under the Credit Facility will be sufficient to meet our liquidity
needs for the foreseeable future.
Cash provided by operations for the years ended December 31, 1999 and 1998
was $4.9 million and $24.3 million, respectively. Cash provided by operations
for 1999 reflected a $36.5 million increase in receivables as a significant
percentage of Rival's sales are shipped and billed in the fourth quarter which
results in an increase in open receivables at year end from the February 5, 1999
balance. Partially offsetting the increase in receivables was a decrease in
inventory levels of approximately $26.2 million at December 31, 1999, which
included the amortization of acquired profit in inventory. This decrease related
to an increase in shipping activity during the fourth quarter as well as our
increased focus on management of raw material and finished goods inventory
levels. Finally, cash provided by operations in 1999 included a decrease in
accounts payable which was in large part related to Rival's overall sales
activity decline in 1999.
Cash used for investing for the year ended December 31, 1999 included
$279.6 million paid in connection with the Rival acquisition. In addition, we
invested $17.6 million in capital expenditures for property and equipment during
1999. We also received net proceeds of $23.8 million in 1999 in connection with
the sale of two of Rival's closed manufacturing facilities and from the sale of
the Rival's commercial and industrial and Simer pump business units.
Cash provided by (used for) financing activities for the years ended
December 31, 1999 and 1998 was $265.2 million and $(18.8) million, respectively.
Cash used for financing for the year 1998 reflected repayments of the prior line
of credit used to fund cash flows for operations. The cash provided by financing
activities for the year 1999 reflected the borrowings on the Credit Facility,
and proceeds from the issuance of the Notes and common stock associated with the
Rival acquisition.
14
<PAGE> 16
We issued $105.0 million of 9 7/8% Senior Subordinated Notes due November
2007 (the "Notes") in November 1997, and an additional $31.3 million of Notes in
February, 1999. While we may repurchase Notes from time to time in open market
or privately negotiated transactions, the Notes are not redeemable at our option
prior to November 15, 2002. Thereafter, the Notes are subject to redemption at
any time at our option, in whole or in part, at stated redemption prices. Annual
interest payments on the Notes are approximately $13.5 million. The payment of
principal and interest on the Notes is subordinated to the prior payment in full
of all of our senior debt, including borrowings under the Credit Facility.
We entered into the Credit Facility in February, 1999. The Credit Facility
amended and restated our prior $100.0 million credit facility. The Credit
Facility consists of a six-year tranche A term loan of $40.0 million, an
eight-year tranche B term loan of $85.0 million and a $200.0 million, six-year
revolving credit facility which was reduced to $170.0 million on August 20, 1999
and further reduced to $140.0 million on February 8, 2000. The Credit Facility
bears interest at variable rates based on either the prime rate or LIBOR, at our
option, plus a margin which, in the case of the tranche A term loan and the
revolving credit facility, varies depending upon certain financial ratios. The
Credit Facility, and the guarantees thereof by our domestic subsidiaries, are
secured by substantially all of our domestic and certain foreign assets. The
Credit Facility and the Notes Indentures include certain financial and operating
covenants, which, among other things, restrict our ability to incur additional
indebtedness, grant liens, make investments and take certain other actions. Our
ability to meet our debt service obligations will be dependent upon our future
performance, which will be impacted by general economic conditions and other
factors. See "Disclosure Regarding Forward-Looking Statements."
YEAR 2000
Over the past year, we developed and implemented plans to address possible
Year 2000 exposures related to computer systems used by us and by third parties,
as described below. We have not experienced any material Year 2000 problems
subsequent to the date change on January 1, 2000.
We had identified our Year 2000 risk to be in two general categories:
Information Technology Systems, including Electronic Data Interchange Systems
(EDI), and General Business Systems.
Information Technology Systems Including EDI. We transitioned to Rival's
computer software system approximately six months following the Rival
acquisition, during the third quarter of 1999. Rival had implemented its
corporate computer system in 1995. This system is Year 2000 compliant, according
to the vendor, as confirmed by full systems testing performed by Rival. The
Company used both internal and external resources to test, reprogram or replace
the software and hardware for Year 2000 modifications, the cost of which was
approximately $320,000 as of December 31, 1999. The majority of project costs,
related to the purchase of hardware and software to meet both Year 2000 and
company specific requirements, have been capitalized. All other remaining
project costs were expensed in 1999 or will be expensed in 2000.
General Business Systems. Our general business systems encompass the
following: telecommunications systems, departmental specific application
systems, machinery and equipment, building and utility systems and, finally,
third party vendors and service providers. We created a Year 2000 committee
consisting of one member from each department. The committee reviewed all
aspects of our internal business systems and determined that they were Year 2000
compliant. Rival had created its own cross-departmental Year 2000 committee in
1997, and determined that its internal systems were Year 2000 compliant as well.
We have not experienced any material Year 2000 problems subsequent to the
date change with respect to our significant customers and suppliers. While we
have carefully monitored our supplier and customer risks, and will continue to
do so, we cannot fully control suppliers and customers, and there can be no
guarantee that a Year 2000 problem that may originate with a supplier will not
materially adversely affect us in a subsequent accounting period. Finally, we
determined that products that we manufacture and sell have no exposure related
to the Year 2000 issue.
15
<PAGE> 17
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). SFAS 133 establishes new standards of accounting and reporting for
derivative instruments and hedging activities. SFAS 133 requires that all
derivatives be recognized at fair value in the balance sheet, and the
corresponding gains and losses be reported either in the statement of income or
as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company does not expect the impact of SFAS 133,
which will be effective for fiscal 2001, to be significant given its limited use
of derivatives.
INVESTOR CONFERENCE CALL
We will hold a telephone conference call on Friday, April 14, 2000 at 2
p.m., Eastern time, in order for investors and other interested stakeholders to
hear management's views on our results of operations during the fourth quarter
and year ended December 31, 1999, as well as our current financial position. If
you are interested in participating in the call in listen-only mode, please fax
the following information to Sandy LaBree, Executive Assistant, at 508-634-7942:
- Name of Participant(s)
- Company Affiliation
- Nature of Business
- Address
- Phone, Fax and E-mail
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 1999, the carrying value of our debt totaled $345.3 million
(including capital leases), which approximated its fair value. This debt
includes amounts at both fixed and variable interest rates. For fixed rate debt,
interest rate changes affect the fair market value but do not impact earnings or
cash flows. Conversely, for variable rate debt, interest rate changes generally
do not affect the fair market value but do impact earnings and cash flows,
assuming other factors are held constant.
At December 31, 1999, the Company had fixed rate debt of $135.2 million
(including capital leases) and variable rate debt of $210.1 million. Holding
other variables constant (such as foreign exchange rates and debt levels), a one
percentage point decrease in interest rates would increase the unrealized fair
market value of fixed rate debt by approximately $7.3 million. Based on the
amounts of variable rate debt outstanding at December 31, 1999, the earnings and
cash flows impact, net of taxes, for the next year resulting from a one
percentage point increase in interest rates would be approximately $1.4 million,
holding other variables constant.
In order to help hedge our interest rate exposure, effective May 7, 1999,
we entered into an interest rate collar transaction agreement with our lending
bank. This arrangement is described in Note 8 of Notes to Consolidated Financial
Statements.
16
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... 18
Consolidated Balance Sheet at December 31, 1998 and 1999.... 19
Consolidated Statement of Income for the years ended
December 31, 1997, 1998 and 1999.......................... 20
Consolidated Statement of Stockholders' Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999.......... 21
Consolidated Statement of Comprehensive Income for the years
ended December 31, 1997, 1998 and 1999.................... 22
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................... 23
Notes to Consolidated Financial Statements.................. 24
Financial Statement Schedule:
For each of the three years in the period ended December
31, 1999:
II-Valuation and Qualifying Accounts...................... 49
All other schedules are omitted because they are not
applicable or the required information is shown in the
consolidated financial statements or the notes thereto.
</TABLE>
17
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The Holmes Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 of this Form 10-K present fairly, in all material
respects, the financial position of The Holmes Group, Inc. and its subsidiaries
(the "Company") at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States. In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 8 of this Form 10-K presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
March 23, 2000
18
<PAGE> 20
THE HOLMES GROUP, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
-------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,379 $ 6,647
Accounts receivable, net of allowances of $719 and
$10,057, respectively.................................. 36,967 142,264
Inventories............................................... 53,340 112,660
Prepaid expenses and other current assets................. 2,027 3,997
Deferred income taxes..................................... 4,983 11,877
Income taxes receivable................................... -- 7,852
-------- --------
Total current assets................................... 102,696 285,297
Assets held for sale...................................... -- 2,434
Property and equipment, net............................... 15,752 54,348
Goodwill, net............................................. -- 89,493
Deferred income taxes..................................... 563 --
Deposits and other assets................................. 3,174 5,610
Debt issuance costs, net.................................. 9,172 19,314
-------- --------
$131,357 $456,496
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations and other
liabilities............................................ $ 604 $ 589
Current portion of credit facility........................ -- 6,450
Accounts payable.......................................... 15,004 26,433
Accrued expenses.......................................... 12,292 36,256
Accrued income taxes...................................... 3,707 3,923
-------- --------
Total current liabilities.............................. 31,607 73,651
Capital lease obligations................................... 139 --
Credit facility............................................. 10,000 203,625
Long-term debt.............................................. 105,000 135,085
Other long-term liabilities................................. -- 4,054
Deferred income taxes....................................... -- 2,281
Commitments and contingencies
Stockholders' Equity (Deficit):
Common stock, $.001 par value. Authorized 12,500,000
shares as of December 31, 1998 and 25,000,000 as of
December 31, 1999; issued and outstanding 10,200,815
shares at December 31, 1998 and 20,307,995 shares at
December 31, 1999...................................... 10 20
Additional paid in capital.................................. 16,985 67,915
Accumulated other comprehensive income...................... (40) 397
Treasury stock, at cost (18,620,450 shares)................. (62,058) (62,058)
Retained earnings........................................... 29,714 31,526
-------- --------
Total stockholders' equity (deficit)................... (15,389) 37,800
-------- --------
$131,357 $456,496
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 21
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales............................................... $192,153 $214,479 $506,833
Cost of goods sold...................................... 136,740 146,509 363,654
-------- -------- --------
Gross profit....................................... 55,413 67,970 143,179
-------- -------- --------
Operating expenses:
Selling............................................... 15,647 20,456 67,452
General and administrative............................ 20,883 16,639 28,334
Product development................................... 5,463 6,295 10,448
Plant closing costs................................... -- -- 2,439
Amortization of goodwill and other intangible
assets............................................. -- -- 2,700
-------- -------- --------
Total operating expenses......................... 41,993 43,390 111,373
-------- -------- --------
Operating profit................................. 13,420 24,580 31,806
-------- -------- --------
Other income and expense:
Other (income) expense, net........................... 56 (436) (2,489)
Interest expense, net................................. 7,096 13,833 33,472
-------- -------- --------
7,152 13,397 30,983
-------- -------- --------
Income before income taxes, equity in earnings from
joint venture and minority interest................... 6,268 11,183 823
Income tax expense (benefit)............................ 2,196 2,222 (87)
Equity in earnings from joint venture................... -- -- (902)
Minority interest in net income of majority-owned
subsidiaries.......................................... 225 -- --
-------- -------- --------
Net income....................................... $ 3,847 $ 8,961 $ 1,812
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 22
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK,
$.001 PAR VALUE
COMMON STOCK, --------------------------- ACCUMULATED TOTAL
$1 PAR VALUE ADDITIONAL OTHER STOCKHOLDERS'
----------------- PAID IN COMPREHENSIVE TREASURY RETAINED EQUITY
SHARES AMOUNT SHARES PAR CAPITAL INCOME STOCK EARNINGS (DEFICIT)
-------- ------ ------- ---- ---------- ------------- -------- -------- -------------
(IN THOUSANDS, EXCEPT PAR VALUE)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1996.................... 100,000 $100 21,159 $ 21 $ 681 $ -- $ -- $16,906 $ 17,708
Issuance of additional
shares in conjunction
with contribution of
Holmes Products (Far
East) Limited (see Note
9)...................... (100,000) (100) 2,750 3 97 -- -- -- --
Issuance of common stock,
Net of related costs.... -- -- 4,718 5 15,507 -- -- -- 15,512
Redemption of common
stock................... -- -- (18,621) (19) 19 -- (62,058) -- (62,058)
Foreign currency
translation
adjustments............. -- -- -- -- -- -- -- -- --
Net income................ -- -- -- -- -- -- -- 3,847 3,847
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1997.................... -- -- 10,006 10 16,304 -- (62,058) 20,753 (24,991)
Issuance of common
stock................... -- -- 195 -- 681 -- -- -- 681
Foreign currency
translation
adjustments............. -- -- -- -- -- (40) -- -- (40)
Net income................ -- -- -- -- -- -- -- 8,961 8,961
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1998.................... -- -- 10,201 10 16,985 (40) (62,058) 29,714 (15,389)
Issuance of common
stock................... -- -- 10,107 10 50,930 -- -- -- 50,940
Foreign currency
translation
adjustments............. -- -- -- -- -- 437 -- -- 437
Net income................ -- -- -- -- -- -- -- 1,812 1,812
-------- ---- ------- ---- ------- ---- -------- ------- --------
BALANCE AT DECEMBER 31,
1999.................... -- -- 20,308 $ 20 $67,915 $397 $(62,058) $31,526 $ 37,800
======== ==== ======= ==== ======= ==== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE> 23
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................ $3,847 $8,961 $1,812
Other comprehensive income:
Foreign currency translation adjustments............ -- (40) 437
------ ------ ------
Comprehensive income.................................. $3,847 $8,921 $2,249
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE> 24
THE HOLMES GROUP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $ 3,847 $ 8,961 $ 1,812
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization......................... 7,473 7,248 15,133
Amortization of debt issuance costs................... 98 1,182 3,983
Change in allowance for doubtful accounts............. (654) 260 1,297
(Gain) Loss on disposition of property, plant and
equipment.......................................... -- 1,356 (31)
Deferred income taxes................................. (715) (741) (1,477)
Minority interest in net income of majority-owned
subsidiaries....................................... 225 -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (5,776) 875 (36,518)
Inventories........................................ 5,702 2,210 26,219
Prepaid expenses and other current assets.......... 94 (911) (158)
Income taxes receivable............................ (104) 104 (4,308)
Deposits and other assets.......................... 3,836 (2,493) 5,366
Accounts payable................................... (58,558) 1,254 (7,607)
Accrued expenses................................... (816) 2,467 2,211
Accrued income taxes............................... (1,025) 2,483 (1,044)
-------- -------- ---------
Net cash provided by (used for) operating
activities..................................... (46,373) 24,255 4,878
-------- -------- ---------
Cash flows from investing activities:
Acquisition of business, net of cash acquired........... -- -- (279,571)
Contribution in joint venture........................... -- -- (25)
Proceeds from sale of assets held for sale and business
divestitures.......................................... -- -- 23,787
Distribution of earnings from joint venture............. -- -- 138
Purchase of property and equipment...................... (5,815) (4,749) (17,614)
Purchase of minority interest........................... (451) (451) --
Cash received from joint venture partner................ -- -- 4,504
-------- -------- ---------
Net cash used for investing activities........... (6,266) (5,200) (268,781)
-------- -------- ---------
Cash flows from financing activities:
Net borrowing (repayment) of line of credit............. 27,136 (18,502) (10,000)
Issuance of common stock................................ 15,512 681 50,400
Borrowings of long-term debt, net of issuance costs..... 96,209 -- 27,329
Borrowings on credit facility, net of issuance costs.... -- -- 198,704
Net borrowings from (repayments to) affiliate........... (23,000) -- --
Purchase of treasury stock.............................. (62,058) -- --
Debt issuance costs..................................... -- (295) (658)
Principal payments on capital lease obligations......... (481) (701) (604)
-------- -------- ---------
Net cash provided by (used for) financing
activities..................................... 53,318 (18,817) 265,171
-------- -------- ---------
Net increase in cash and cash equivalents........ 679 238 1,268
Cash and cash equivalents, beginning of period... 4,462 5,141 5,379
-------- -------- ---------
Cash and cash equivalents, end of period.................. $ 5,141 $ 5,379 $ 6,647
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................. $ 7,079 $ 13,283 $ 28,812
Cash paid for income taxes.............................. $ 4,040 $ 268 $ 190
</TABLE>
The Company had a non-cash transaction in 1999 whereby the Company paid
vendor invoices totaling $500,000 with 99,222 shares of common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 25
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
The Holmes Group, Inc. ("THG") formerly known as Holmes Products Corp.,
along with its wholly-owned subsidiary, The Rival Company ("Rival") and its
subsidiaries, acquired on February 5, 1999, designs, develops, imports and sells
consumer durable goods, including fans, heaters, humidifiers, air purifiers,
small kitchen electric appliances, personal care appliances and lighting
products to retailers throughout the United States and Canada, and to a lesser
extent, Europe, Latin America and Asia.
Holmes Products (Far East) Limited ("HPFEL") and its subsidiaries
manufacture, source and sell consumer durable goods, including fans, heaters,
humidifiers and kitchen electrics, mainly to THG. HPFEL operates facilities in
Hong Kong, Taiwan and The People's Republic of China.
HPFEL is a wholly-owned subsidiary of THG. Prior to the recapitalization
transaction described in Note 9, THG and HPFEL were both directly or indirectly
80% owned subsidiaries of Asco Investments Ltd., a subsidiary of Pentland Group
plc ("Pentland").
2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
Basis of Consolidation
The accompanying financial statements include the accounts of THG and its
wholly-owned subsidiaries, Rival, HPFEL, Holmes Manufacturing Corp., Holmes Air
(Taiwan) Corp., Holmes Motor Corp. and Holmes Air (Canada) Corp. The
accompanying financial statements also include the accounts of Rival's direct
and indirect wholly-owned subsidiaries, Bionaire International B.V., Patton
Building Products, Inc., Patton Electric Company, Inc., Patton Electric (Hong
Kong) Limited, Rival Consumer Sales Corporation, The Rival Company of Canada,
Ltd., Rival de Mexico S.A. de C.V. and Waverly Products Company, Ltd. and
HPFEL's wholly-owned subsidiaries, Esteem Industries Ltd., Raider Motor Corp.,
Dongguan Huixin Electrical Products Company, Ltd., Holmes Products (Europe)
Ltd., Dongguan Holmes Products Ltd. and Dongguan Raider Motor Corp. Ltd. All
significant inter-company balances and transactions have been eliminated.
THG and its consolidated subsidiaries, including Rival, HPFEL and their
respective subsidiaries, are referred to herein as the "Company."
Minority Interest
Prior to May 1997, HPFEL owned 70% of Raider Motor Corp., which owns 100%
of Dongguan Raider Motor Corp. Ltd. The minority stockholders' interests in the
net income and net assets of Raider Motor Corp. and Dongguan Raider Motor Corp.
Ltd. were presented separately in the accompanying financial statements.
In May and June 1997, the Company acquired the capital stock held by the
minority stockholders. The book value of the minority interest exceeded the
repurchase price by approximately $650,000. The excess of the fair market value
of the assets and liabilities of Raider Motor Corp. on the date of acquisition
over the purchase price has been recorded as a reduction of property and
equipment during the year ended December 31, 1997.
Translation of Foreign Currencies
The functional currency for the Company's foreign operations is the local
currency. Assets and liabilities are translated into U.S. dollars at exchange
rates in effect at the balance sheet date. Income, expense and cash flow items
are translated at average exchange rates for the period. Adjustments resulting
from the translation of foreign functional currency financial statements into
U.S. dollars are recorded in the accumulated other comprehensive income
component of stockholders equity (deficit).Gains and losses resulting from
remeasure-
24
<PAGE> 26
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ment of balances denominated in other than the local currency are not material
and are included in other (income) expense, net.
Inventories
All inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method on approximately 80% of
the inventories and the last-in, first-out method (LIFO) for the remaining 20%
of the inventory.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method, except
for Rival tooling which is depreciated using the units of production method.
Repairs and maintenance are expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including goodwill, for impairment
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
these assets are no longer appropriate. Each impairment test is based on a
comparison of the undiscounted cash flows to the recorded value of the asset. If
an impairment is indicated, the asset is written down to its estimated fair
value on a discounted cash flow basis.
Revenue Recognition
Revenue is recognized upon shipment of goods from the Company's warehouses.
Revenue for goods sent directly from HPFEL to a retail customer is recognized
when the customer takes ownership of the goods. Estimates for returned goods and
warranty costs are accrued at the time of shipment.
Product Development
Research, engineering and product development costs are expensed as
incurred.
Statement of Cash Flows
All highly liquid debt instruments with original maturities of three months
or less are considered to be cash equivalents. Such investments consist of a
money market account.
Advertising
Advertising costs are expensed as incurred. In conjunction with transfers
of inventory in 1998, the Company received advertising credits totaling
$2,352,000 to be used for the purchase of advertising media, merchandise or
services, subject to certain limitations and cash co-payments. The credits
expire in February 2003. The remaining balance of these credits approximated
$2,352,000 at December 31, 1998 and $2,346,000 at December 31, 1999 which are
reported as prepaid expenses and other current assets and deposits and other
assets. Additionally, the Company offers co-operative advertising credits to
certain customers. These credits are expensed as earned. Total advertising
expenses in 1997, 1998, and 1999 were approximately $5,968,000, $6,564,000 and
$12,716,000, respectively which are included in selling expenses in the
accompanying statement of income.
25
<PAGE> 27
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes, as set forth in Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." SFAS 109 requires recognition
of deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.
Joint Venture
In October 1998, the Company signed an agreement with General Electric
creating a limited liability company for a motor manufacturing, sales and
distribution company. The limited liability company, GE Holmes Industries, is
owned 49% by a subsidiary of THG. The Company's portion of the joint venture
earnings in 1999 was approximately $1,475,000 of which $902,000 is recorded as
equity in earnings from joint venture and $573,000 is recorded as part of gross
profit. The joint venture had no transactions during the year ended December 31,
1998.
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
disclosures of contingencies at December 31, 1998 and 1999, and the reported
amounts of revenues and expenses during the periods presented. Actual results
could differ from those estimates.
Reclassifications
Certain amounts in the prior year's financial statements have been
reclassified to conform to the current period presentation.
3. ACQUISITION
On February 5, 1999, THG completed its acquisition of Rival for an
aggregate of $279.6 million, including $129.4 million cash paid in connection
with a tender offer for all of the outstanding shares of Common Stock of The
Rival Company (including payments to optionees), $142.9 million to refinance
Rival's outstanding debt and $7.3 million in acquisition costs. The acquisition
was made utilizing cash on hand, borrowings under an amended and restated Credit
Facility entered into in connection with the acquisition, the issuance of $31.3
million of senior subordinated notes and proceeds of $50.0 million from the sale
of THG's common stock to investment funds affiliated with THG's majority
shareholder, certain members of THG's management and to certain other
co-investors. This acquisition has been accounted for as a purchase, and the
results of operations of Rival have been included in the consolidated financial
statements since the date of acquisition. The excess of purchase price over the
fair value of net assets acquired was approximately $91.8 million and is being
amortized on a straight-line basis over 35 years.
In connection with the acquisition, THG recorded a restructuring reserve of
$6.4 million as an assumed liability in accordance with EITF 95-3, "Recognition
of Liabilities in Connection with a Purchase Business Combination." Management
determined that certain restructuring actions would be required to effectively
integrate the Rival operations into THG. These restructuring actions were
comprised primarily of the elimination of certain overlapping positions within
the management and support staff layers of the combined company, relocation of
key home environment personnel from Kansas City, MO to Milford, MA,
consolidation of the Rival Hong Kong and Canadian offices into other existing
local offices, and closure of the Warrensburg, MO manufacturing facility.
26
<PAGE> 28
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These actions are estimated to result in the elimination of 216 Rival
employees from a combination of the Rival Warrensburg facility and the Kansas
City, Canada and Hong Kong offices. As of December 31, 1999, 20 of these
employees had been terminated. Severance for the remaining employees will be
paid during fiscal 2000 when the facility closure and office consolidations are
completed.
Exit costs related to these restructuring plans are comprised primarily of
lease exit costs for Canada and Hong Kong and facility closure and exit costs
related to the Warrensburg facility. At December 31, 1999, the Hong Kong
consolidation has been completed resulting in exit costs of $0.1 million. The
Canada and Warrensburg closures will be completed during fiscal 2000.
The reserve activity for fiscal 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
EMPLOYEE FACILITY TOTAL
SEVERANCE AND EXIT AND ACCRUED
RELOCATION COSTS OTHER COSTS RESTRUCTURING
---------------- -------------- -------------
<S> <C> <C> <C>
Restructuring accrual at February 5,
1999..................................... $5,864 $ 563 $ 6,427
Cash payments made......................... (1,647) (136) (1,783)
------ ------ -------
Balance at December 31, 1999............... $4,217 $ 427 $ 4,644
</TABLE>
Prior to the acquisition by THG, Rival recorded an $8.4 million
restructuring charge relating to the closing of three facilities. Each of these
facilities has been closed during fiscal 1999. One of the properties was sold
during June 1999 resulting in no gain or loss. Proceeds from the sale were
$1,519,000 net of selling expenses. A second property was sold during September
1999 which also resulted in no gain or loss. The proceeds from this sale were
$1,165,000. The estimated fair value of the remaining property has been
reflected in the December 31, 1999 balance sheet as assets held for sale.
Additionally, wind down costs and fixed asset writedowns relating to these
facilities have been included as plant closing costs in the consolidated
statement of income for the year ended December 31, 1999. Approximately $0.2
million of this Rival restructuring reserve remains in accrued expenses at
December 31, 1999 relating to exit activities for the final facility.
Following the Rival acquisition, the Company divested two of Rival's
non-core business units. On October 8, 1999, the Company sold the assets of
Rival's sump and utility pumps division for $11.4 million. The proceeds received
for the assets exceeded the net asset values recorded by $0.7. On December 21,
1999, the Company sold the net assets of Rival's industrial and building supply
products businesses for proceeds of $9.7 million, net of contingent
consideration of $2.7 million. The contingent consideration may be earned during
fiscal 2000 based on certain performance metrics and actual final inventory
counts. Excluding the contingent consideration, the book value of the net assets
sold exceeded the proceeds received by $5.5 million. Due to the proximity of the
transactions to the original Rival acquisition date, the net loss on these
transactions of $4.7 million was recorded as an increase in goodwill. Any
contingent consideration earned during fiscal 2000 will result in corresponding
decreases in the goodwill balance as the contingencies are resolved. These
business units accounted for approximately $43.0 million of revenue for fiscal
1999.
The following unaudited pro forma data summarizes the Company's results of
operations for the periods indicated as if the acquisition had been completed as
of the beginning of the periods presented. These unaudited pro forma results
have been prepared for comparative purposes only and include certain
adjustments, such as increased interest expense on acquisition debt and
additional amortization expense as a result of the goodwill. They do not purport
to be indicative of the results of operations that actually would have resulted
had the acquisitions been in effect on January 1, 1998, or of future results of
operations.
27
<PAGE> 29
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------ ------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Net sales.......................................... $561,748 $529,178
Net income (loss).................................. 38 (6,465)
</TABLE>
4. RELATED PARTY TRANSACTIONS
Prior to the 1997 recapitalization described in Note 9, THG had numerous
business relationships with Pentland and Asco General Supplies (Far East) Ltd.
("Asco"), an affiliated entity. These arrangements were generally terminated in
conjunction with the recapitalization of THG, and all outstanding amounts were
repaid.
Asco provided THG with letter of credit financing for their purchases from
foreign manufacturers. THG paid a commission to Asco for administrative services
related to the processing of these trade acceptances. Total commissions
approximated $1,834,000 in 1997 which is included in cost of goods sold in the
accompanying statement of income. This arrangement has been terminated in
connection with the completion of the recapitalization transaction described in
Note 9.
THG had a revolving credit facility agreement with Pentland Management
Services Limited ("PMSL"), an affiliated company, whereby PMSL would provide
short-term loans to THG. The facility was increased several times between 1993
and 1997, reaching a peak of $38,000,000. Total borrowings under the agreement
were limited to a defined borrowing base of eligible accounts receivable and
inventory, and were secured by all assets of the Company. Individual loans under
the agreement had maturities which ranged from one to six months, at THG's
option. Interest rates on individual loans were at the prime rate as of the
inception date of the loan, and were fixed through the maturity of the loan.
Interest was payable at the expiration of each loan, and totaled approximately
$2,410,000 in 1997. This agreement included certain financial covenants, as well
as restrictions on the incurrence of additional debt. This facility was
terminated in conjunction with the completion of the recapitalization
transaction described in Note 9.
THG pays a sales commission to Jordan Kahn Co. Inc., owned principally by
an officer and stockholder of the Company. Such commissions approximated
$367,000, $368,000 and $287,000 in 1997, 1998 and 1999, respectively, which are
included in selling expenses in the accompanying statement of income.
Asco had advanced HPFEL monies for working capital purposes from time to
time. All advances were repaid during 1997 in conjunction with the
recapitalization of the Company. The interest rate on these advances was 8.5%.
Interest expense incurred on amounts due from HPFEL to Asco was $446,000 in
1997.
The salaries and related benefits of certain employees of Dongguan Raider
Motor Corp Ltd. were paid through Asco, which is reimbursed by Raider Motor
Corp. for such costs. These costs amounted to $128,000 in 1997.
In addition, beginning in March 1995, HPFEL occupied facilities owned by
the spouse of a director of HPFEL. Total rent expense paid on this property
amounted to $475,000 in 1997. HPFEL also paid $12,000 in 1997 to Asco for the
use of certain shared computer facilities.
Certain employees of Pentland and Asco have performed various management
and administrative services for HPFEL, for which no amounts have been charged to
HPFEL. Management has estimated such costs, which consist of allocations of
salary and related benefits costs and travel expenses, to be insignificant in
1997. Accordingly, no amounts have been recorded in the accompanying financial
statements for such costs.
As part of the recapitalization transactions described in Note 9, the
Company entered into a consulting agreement with the new majority stockholder,
to provide management, financial, advisory and strategic
28
<PAGE> 30
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
support and analysis. The agreement expires in November 2002, or earlier if the
stockholder's ownership percentage declines to less than 40% or less than the
percentage owned by management of the Company, taken as a group. Fees under this
agreement were $400,000 per year and increased to $500,000 per year as of
February 5, 1999, related to the Rival acquisition.
5. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Finished goods........................................... $34,620,000 $ 61,154,000
Raw materials............................................ 7,930,000 39,117,000
Work-in-process.......................................... 10,790,000 11,288,000
----------- ------------
53,340,000 111,559,000
LIFO allowance........................................... -- 1,101,000
----------- ------------
$53,340,000 $112,660,000
=========== ============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
DEPRECIABLE LIVES 1998 1999
--------------------- ----------- -----------
<S> <C> <C> <C>
Mold costs and tooling............... 1 1/2-5 years $15,241,000 $26,377,000
Plant and machinery.................. 7-10 years 11,283,000 30,564,000
Buildings and leasehold
improvements....................... life of lease-40 4,048,000 16,581,000
years
Equipment and computer equipment..... 5-7 years 3,282,000 6,059,000
Furniture and fixtures............... 5-10 years 2,347,000 4,385,000
Land................................. N/A -- 712,000
Motor vehicles....................... 4-5 years 412,000 506,000
----------- -----------
36,613,000 85,184,000
Less -- accumulated depreciation and
amortization....................... 20,861,000 30,836,000
----------- -----------
$15,752,000 $54,348,000
=========== ===========
</TABLE>
Property and equipment recorded under capital leases amounted to
approximately $2,055,000 and $1,321,000 at December 31, 1998 and 1999,
respectively. Total accumulated amortization related to these assets is
approximately $582,000 and $567,000 at December 31, 1998 and 1999, respectively.
Amortization expense for the period is included in depreciation and amortization
in the accompanying statement of cash flows.
29
<PAGE> 31
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. ACCRUED EXPENSES
Accrued expenses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Sales returns and allowances.............................. $ 3,540,000 $ 7,812,000
Payroll and bonuses....................................... 1,606,000 8,179,000
Interest payable.......................................... 1,576,000 2,144,000
Advertising............................................... 1,210,000 6,613,000
Other..................................................... 4,360,000 11,508,000
----------- -----------
$12,292,000 $36,256,000
=========== ===========
</TABLE>
8. LONG-TERM DEBT
Senior Subordinated Notes
In connection with the recapitalization transactions described in Note 9
and the Rival acquisition described in Note 3, THG issued $105.0 million and
$31.3 million, respectively, in senior subordinated notes, maturing on November
15, 2007 (the "Notes"). The Notes bear interest at 9 7/8%, payable semi-annually
on May 15 and November 15. No principal is due until the maturity date.
The Notes are subordinated to the Company's other debt, including the
Credit Facility (as described below) and capital leases. The Notes are
guaranteed by THG's current and future domestic subsidiaries (see Note 17) on a
full, unconditional and joint and several basis, but are otherwise unsecured.
THG can, at its option, redeem the Notes at any time after November 15,
2002, subject to a fixed schedule of redemption prices which declines from
104.9% to 100% of the face value. However, THG may redeem up to $43.3 million of
the Notes prior to such date at a price of 109.875% of face value upon issuance
of equity securities. Additionally, upon certain sales of stock or assets or a
change of control of THG, THG must offer to repurchase all or a portion of the
Notes at a redemption price of 101% of face value.
The Notes contain certain restrictions and covenants, including limitations
(based on certain financial ratios) on THG's ability to pay dividends,
repurchase stock or incur additional debt (other than borrowings under the
Credit Facility). The Notes and Credit Facility contain cross-default
provisions.
Credit Facility
The Company entered into an amended and restated Credit Facility agreement
in February, 1999 in connection with the Rival acquisition. The Credit Facility
consisted of a six-year tranche A term loan of $40.0 million, an eight-year
tranche B term loan of $85.0 million and a $200.0 million, six-year revolving
credit facility, which was reduced to $170.0 million on August 20, 1999 and
further reduced to $140.0 million on February 8, 2000. The Credit Facility bears
interest at variable rates based on either the prime rate or eurodollar rate at
the Company's option, plus a margin which, in the case of the tranche A term
loan and the revolving credit facility, varies depending upon certain financial
ratios of the Company. There is a 0.5% commitment fee charged on the unused
portion of the revolving facility. The Credit Facility, and the guarantees
thereof by the Company's domestic subsidiaries, are secured by substantially all
of the Company's domestic and certain foreign assets. The Credit Facility and
the Notes Indentures include certain financial and operating covenants, which,
among other things, restrict the ability of the Company to incur additional
indebtedness, grant liens, make investments and take certain other actions. The
ability of the Company to meet its debt service obligations will be dependent
upon the future performance of the Company, which will be impacted by general
economic conditions and other factors.
30
<PAGE> 32
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Credit Facility............................................ $ 10,000 $210,075
9 7/8% Senior Subordinated Notes, net of unamortized
discount of $1.2 million at December 31, 1999 ($0 in
1998).................................................... 105,000 135,085
-------- --------
Total debt................................................. 115,000 345,160
Less current maturities.................................... -- 6,450
-------- --------
Long-term debt............................................. $115,000 $338,710
</TABLE>
Aggregate maturities of long-term debt (excluding obligations under capital
leases) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
--------------
(IN THOUSANDS)
<S> <C>
2000........................................................ $6,450
2001........................................................ 7,250
2002........................................................ 8,850
2003........................................................ 9,450
2004........................................................ 9,450
</TABLE>
Effective May 7, 1999 the Company entered into an interest rate collar
transaction agreement with its lending bank. The interest rate collar consists
of a cap rate of 6.5% and a floor rate of 4.62%. The one-time premium payment
for the collar was $225,000 and the agreement terminates March 31, 2002.
Quarterly on the last business day of March, June, September and December
beginning September 30, 1999 if the LIBOR interest rate at the lending bank is
greater than the cap rate, the lending bank agrees to pay the Company a notional
amount as described in the agreement multiplied by the number of days in that
quarter over 365 days times the difference between the LIBOR rate and the cap
rate. If on the other hand the LIBOR rate is less than the floor rate, the
Company would have to pay the lending bank based on the same calculation. If the
LIBOR rate is between the cap and floor rate, no payments would be necessary by
either party. The LIBOR interest rate at December 31, 1999 was 6.18%.
9. STOCKHOLDERS' EQUITY
Recapitalization
On November 26, 1997, the Company and its stockholders consummated an
agreement to perform the following: (i) the stockholders of HPFEL contributed
their shares of common stock, $1 par value, to THG in exchange for 2,750,741
shares of THG's common stock, no par value, (ii) THG issued 4,718,579 shares of
its common stock to outside investors and certain executive officers of the
Company for approximately $15.5 million, net of related issuance costs, (iii)
the Company repaid all amounts outstanding to Pentland affiliates and repaid all
amounts outstanding on the Company's trade acceptances, including accrued
interest, and (iv) THG redeemed 18,620,450 shares of THG common stock held by
Pentland for approximately $62.1 million. In connection with these transactions,
THG issued $105.0 million of 9 7/8% Senior Subordinated Notes due in November
2007 and borrowed $27.5 million under a new Line of Credit facility, both
described in Note 8.
The transactions described above have been accounted for as a leveraged
recapitalization of the Company. The Company has retained its historical cost
basis of accounting, due to the significant minority shareholders which
remained. The shares redeemed from Pentland have been recorded as treasury
stock, at cost.
31
<PAGE> 33
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with certain previous employment agreements, incremental
compensation in the amount of $6.9 million was paid at the time of closing in
1997, and the related agreements were terminated. These costs have been recorded
in general and administrative expenses in the accompanying consolidated
statement of income.
Stock Option Plan
In connection with the recapitalization transaction described above, THG's
Board of Directors adopted and the stockholders approved the 1997 Stock Option
Plan (the "Plan"). The Plan provides for the grant of incentive stock options
and non-qualified stock options to employees, officers, directors, and
consultants of the Company's, except that incentive stock options may not be
issued to consultants or non-employee directors. A total of 1,563,020 shares of
THG's common stock were reserved for issuance under the Plan. In order to
provide for the Company's larger size and the addition of Rival's employees
following the acquisition, the Option Plan was amended to increase the number of
shares available for grant to 4,260,978. The exercise price and period over
which options become exercisable will be determined by the Board of Directors.
However, the exercise price of incentive stock options will be equal to at least
100% of the fair market value of THG's common stock on the date of grant (110%
for individuals holding more than 10% of THG's common stock). Options will
expire no later than 10 years after date of grant (5 years for individuals
holding more than 10% of THG's common stock). The Plan will expire in November
2006.
The following summarizes stock option activity under the plan:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
--------- ------------- ----------------
<S> <C> <C> <C>
Outstanding as of December 31, 1997............... -- -- --
Granted during 1998............................... 1,474,152 $3.50 $3.50
Exercised during 1998............................. -- -- --
Forfeited during 1998............................. (25,800) $3.50 $3.50
--------- ------------- -----
Outstanding as of December 31, 1998............... 1,448,352 $3.50 $3.50
Granted during 1999............................... 2,380,404 $5.04 $5.04
Exercised during 1999............................. -- -- --
Forfeited during 1999............................. (161,670) $3.50 - $5.04 $4.48
--------- ------------- -----
Outstanding as of December 31, 1999............... 3,667,086 $3.50 - $5.04 $4.46
--------- ------------- -----
Number of shares exercisable as of December 31,
1999............................................ 307,421 $3.50 $3.50
Total available for grant as of December 31,
1999............................................ 593,892 -- --
</TABLE>
The following table summarizes information about the 1997 Plan stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ ----------------------------------
WEIGHTED
AVERAGE
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED NUMBER WEIGHTED
EXERCISES OUTSTANDING AT LIFE AVERAGE EXERCISABLE AT AVERAGE
PRICES DECEMBER 31, 1999 (YEARS) EXERCISE PRICE DECEMBER 31, 1999 EXERCISE PRICE
- --------------- ----------------- ----------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$3.05 1,389,682 8.5 $3.05 307,421 $3.05
$5.04 2,277,404 9.2 $5.04 -- $5.04
--------- ----- ------- -----
3,667,086 $4.46 307,421 $3.05
========= ===== ======= =====
</TABLE>
32
<PAGE> 34
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-based compensation
The Company accounts for stock-based compensation using the method
prescribed in Accounting Principles Board Opinion No. 25 "Accounting for Stock
Issued to Employees". Accordingly, no compensation cost has been recognized for
the Company's stock option plan. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123 "Accounting
for Stock-Based Compensation" ("FAS 123"). Had compensation cost been determined
based on fair value at the grant dates for awards in 1998 and 1999, consistent
with the provisions of FAS 123, the Company's net income would have been reduced
to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1999
------ ------
(IN THOUSANDS)
<S> <C> <C>
Net income -- as reported................................... $8,961 $1,812
Net income -- pro forma..................................... 8,805 1,286
</TABLE>
The fair value of options granted at date of grant was estimated using the
Black-Sholes model with the following assumptions:
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Weighted average expected life (years)...................... 6.0 6.0
Weighted average interest rate.............................. 5.32% 5.12%
</TABLE>
The weighted average grant date fair value of options granted during 1998
and 1999 was $1.17 and $1.30 per share, respectively.
Stock Split
In April 1998, the Company's Board of Directors approved an increase in the
number of authorized shares of common stock from 15,000 with no par value to
12.5 million with a $.001 par value. The change in par value did not affect any
of the existing rights of shareholders and has been recorded as an adjustment to
additional paid-in capital and common stock. In addition, the Company's Board of
Directors approved a 21,159-for-1 stock split. Shares outstanding have been
adjusted for all periods presented to reflect post-split amounts.
Warrant
In conjunction with the recapitalization transaction described above, THG
issued a warrant to Pentland to purchase 24 shares of common stock at an
exercise price of $74,012 per share (pre stock split). This warrant is
exercisable only upon the occurrence of one of the following by November 26,
1999: (a) an initial public offering of equity securities by THG, provided that
this offering includes or is followed within specified time periods by sales of
shares offered by selling stockholders, (b) a sale of the Company, (c) a sale by
the new majority stockholder and its affiliates of all or substantially all of
their holdings of THG's common stock or (d) a further recapitalization of the
Company through the issuance of additional debt. The warrant expired on November
26, 1999 as none of the conditions of excerisability occurred. Management has
determined that the value of the warrant is not material to the Company's
consolidated financial statements.
Stockholders' Agreement
All of the holders of THG's outstanding stock are subject to stockholders'
agreements. These agreements provide the Company with a right of first refusal
on any proposed sales of stock to outside parties. Additionally, THG has certain
rights to purchase shares of Common Stock and options from employees upon their
termination of employment.
33
<PAGE> 35
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. Under SFAS 109, the
benefit associated with future deductible temporary differences and operating
loss or credit carryforwards is recognized if it is more likely than not that a
benefit will be realized. Deferred tax expense (benefit) represents the change
in the net deferred tax asset or liability balance.
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Current:
Federal................................... $1,514,000 $ 1,844,000 $ (7,309,000)
State..................................... 534,000 366,000 115,000
Foreign................................... 863,000 753,000 2,046,000
---------- ----------- ------------
Total current............................. 2,911,000 2,963,000 (5,148,000)
---------- ----------- ------------
Deferred:
Federal................................... $ (547,000) $ (609,000) $ 2,770,000
State..................................... (168,000) (132,000) 92,000
Foreign................................... -- -- 2,199,000
---------- ----------- ------------
Total deferred............................ (715,000) (741,000) 5,061,000
---------- ----------- ------------
$2,196,000 $ 2,222,000 $ (87,000)
========== =========== ============
</TABLE>
Pre-tax income (loss) is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Domestic.................................... $ (715,000) $ 988,000 $(16,464,000)
Foreign..................................... 6,983,000 10,195,000 18,189,000
---------- ----------- ------------
$6,268,000 $11,183,000 $ 1,725,000
========== =========== ============
</TABLE>
The two subsidiaries which are incorporated and based in the People's
Republic of China have a two-year tax holiday on the basis that they expect to
operate in China for ten or more years. The tax holiday provides for an
exemption from income tax in the first two profit-making years and for a 50%
reduction in the subsequent three years. The first profit-making year is defined
as the year in which the foreign enterprise recognizes profit on a cumulative
basis for the first time, after offsetting prior years' losses. Losses can be
carried forward for a maximum of five years.
Dongguan Raider Motor Corp. Ltd. has been profitable for over 5 years and
therefore has technically passed the tax holiday. However, since over 70% of
Dongguan Raider Motor Corp. Ltd's sales were exported, it is eligible to claim
the status of "export oriented enterprise" and thus is entitled to a 50%
reduction in the tax rate. Dongguan Huixin Electrical Products Company, Ltd. has
made profits in 1997 and 1998 and is now in the tax holiday period which
provides for a 50% reduction in the tax rate.
If not exempt, the statutory tax rate which applies to these companies in
China is 24% (prior to the 50% reduction described above for the first three
years after the exemption expires), as their operations are located in a region
of China where tax incentives are applicable.
34
<PAGE> 36
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Bahamas registered companies (HPFEL and Raider Motor Corp.) are subject
to tax in Hong Kong at 16.5% only to the extent that their income is deemed to
be onshore Hong Kong.
The Company's effective tax rate varies from the statutory U.S. federal tax
rate as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998 1999
----- ----- ------
<S> <C> <C> <C>
Statutory U.S. federal tax rate............................ 35.0% 35.0% 35.0%
State taxes, net of federal tax benefit.................... .5 1.4 (30.1)
Foreign earnings taxed at different rates.................. (17.6) (17.1) (102.7)
Valuation allowance on deferred tax assets................. 15.6 -- 16.4
Goodwill amortization...................................... -- -- 41.2
Non-deductible expenses.................................... .5 .3 3.8
Other...................................................... 1.0 .3 31.4
----- ----- ------
Effective tax rate......................................... 35.0% 19.9% (5.0)%
===== ===== ======
</TABLE>
Deferred tax assets and deferred tax liabilities are comprised of the
following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating losses to be carried back................... -- 3,729,000
Accrued expenses.......................................... 2,632,000 4,712,000
Inventory................................................. 2,144,000 1,910,000
Interest limitation carryforward.......................... 1,367,000 964,000
Intangibles............................................... -- 997,000
Property and equipment.................................... 483,000 --
Accounts receivable....................................... 287,000 5,348,000
---------- ----------
Gross deferred tax assets.............................. 6,913,000 17,660,000
Deferred tax liabilities:
Property and equipment.................................... -- (5,653,000)
Employee pension plan..................................... -- (867,000)
---------- ----------
Net deferred tax assets before valuation allowance..... 6,913,000 11,140,000
Valuation allowance....................................... (1,367,000) (1,650,000)
---------- ----------
Net deferred tax assets................................... 5,546,000 9,490,000
========== ==========
</TABLE>
The deductibility of interest paid to or guaranteed by Pentland and its
affiliates while THG was a majority-owned subsidiary of Pentland was subject to
certain limitations under the U.S. Internal Revenue Code. Primarily as a result
of the compensation recorded in conjunction with the recapitalization
transaction described in Note 9, approximately $2,500,000 of interest expense
incurred by THG during the year ended December 31, 1997 was not deductible for
income tax purposes. Such amounts can be carried forward indefinitely. However,
due to the impact of the Company's current debt structure on future operating
results and the Internal Revenue Code limitations, management has provided a
valuation allowance of $964,000 against the deferred tax asset arising from this
carryforward. The utilization of this carryforward may be further limited as a
result of the change in ownership that occurred as part of the recapitalization
of the
35
<PAGE> 37
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company, although this limitation will primarily impact only the timing of any
possible utilization. If the Company is able to utilize this deduction, it will
reduce income tax expense in future years. In addition, the Company generated
state net operating losses of $11,748,000 during fiscal 1999 resulting in a
deferred tax asset of $886,000. The Company has provided a valuation reserve of
$686,000 against this asset due to the inability to carry these losses back and
the brevity of the state carryforward period.
In general, no provision has been recorded for U.S. or additional foreign
taxes on undistributed earnings of foreign subsidiaries, as it is management's
intention that these earnings will continue to be reinvested. It is not
practicable to estimate the amount of additional tax that might be payable on
such earnings. Total undistributed earnings of foreign subsidiaries as of
December 31, 1999 are approximately $27,693,000.
11. LEASES
In addition to leasing property and equipment under various capital leases
(Note 6), the Company has various noncancellable operating leases for
facilities, vehicles and office equipment which expire at various dates through
2015. Certain of these leases contain options for renewal or purchase of the
underlying asset. Rent expense was approximately $3,099,000 in 1997, $3,916,000
in 1998 and $7,052,000 in 1999.
Subsequent to year end on January 7, 2000, the Company signed a 15 year
lease agreement for its new corporate headquarters facility and distribution
center currently under construction. The lease payments commence September 1,
2000 for a portion of the facility and December 1, 2000 for the full facility.
Yearly lease payments of $2,265,415 increase every three years by a factor of up
to 6.75%.
At December 31, 1999, future minimum rental payments under noncancellable
lease arrangements (including the new corporate headquarters facility and
distribution center) are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
----------- --------
<S> <C> <C>
2000........................................................ $ 5,943,000 $143,000
2001........................................................ 5,151,000 --
2002........................................................ 4,812,000 --
2003........................................................ 4,326,000 --
2004 and thereafter......................................... 36,079,000 --
----------- --------
$56,311,000 $143,000
===========
Less: amount representing interest.......................... 4,000
--------
Present value of obligations under capital leases........... $139,000
Comprised of:
Current portion........................................... $139,000
Non-current portion....................................... --
--------
$139,000
========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
THG provides its employees with a defined contribution retirement plan
under section 401(k) of the Internal Revenue Code. All employees are eligible to
participate in the plan and contribute up to 15% of their compensation, which is
then invested in one or more investment funds. THG matches up to 3% of an
employee's contribution. Employees of THG's subsidiary, The Rival Company, are
not eligible for this plan.
The Rival Company has a Savings Plan (401k) which allows employees to make
voluntary contributions of up to 15% of annual compensation, as defined. The
Company makes partial matching contributions.
36
<PAGE> 38
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
HPFEL provides its Hong Kong based employees with a defined contribution
retirement plan. All Hong Kong based employees of HPFEL and Esteem Industries
Ltd. may contribute 5% of their compensation, with the Company contributing an
additional 5% to 7 1/2% of an employee's compensation.
The Company's contributions to these plans approximated $277,000, $308,000
and $542,000 in 1997, 1998 and 1999, respectively.
As part of the acquisition as described in Note 3, THG acquired three Rival
Company defined benefit pension plans. The plans have not been amended from the
acquisition date through December 31, 1999.
The benefits for one of these plans, The Rival Company Retirement Plan for
Sales, Administrative and Clerical Employees, are based primarily on years of
service and employees' pay near retirement. The benefits for the other two
plans, The Rival Company Jackson Plant Employees' Retirement Plan and The Rival
Manufacturing Company Clinton Plant Employees' Retirement Plan, are based
primarily on years of service. All of the defined benefit plans are
noncontributory. The company's funding policy is consistent with the funding
requirements under ERISA and the Internal Revenue Code.
Statement of Financial Accounting Standards No. 132, "Employer's
Disclosures about Pension and Other Postretirement Benefits," first became
applicable in 1999.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $ --
Service cost................................................ 729,989
Interest cost............................................... 930,357
Actuarial (gain)/loss....................................... (1,080,411)
Acquisition................................................. 15,374,393
Benefits paid............................................... (533,031)
-----------
Benefit obligation at end of year........................... $15,421,297
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. --
Actual return on plan assets................................ $ (410,186)
Acquisition................................................. 17,550,509
Employer contribution....................................... 332,056
Benefits paid............................................... (533,031)
-----------
Fair value of plan assets at end of year.................... 16,939,348
Funded status............................................... 1,518,051
Unrecognized transition asset............................... --
Unrecognized prior service cost............................. --
Unrecognized net actuarial (gain)/loss...................... 748,142
-----------
(Accrued)/prepaid benefit cost.............................. $ 2,266,193
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1999
Discount rate............................................... 8.00%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
</TABLE>
37
<PAGE> 39
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
DECEMBER 31, 1999
-----------------
<S> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost................................................ $ 729,989
Interest cost............................................... 930,357
Expected return on plan assets.............................. (1,418,368)
Recognized net actuarial loss............................... --
Amortization of transition obligation....................... --
Amortization of prior service cost.......................... --
-----------
Net periodic pension cost................................... $ 241,978
WEIGHTED-AVERAGE ASSUMPTIONS AS OF ACQUISITION DATE
Discount rate............................................... 6.75%
Expected return on plan assets.............................. 9.00%
Rate of compensation increase............................... 4.50%
</TABLE>
13. BUSINESS AND CREDIT CONCENTRATIONS AND BUSINESS SEGMENTS
Business and Credit Concentrations
THG sells its products to retailers throughout the United States, Canada
and Europe. Three customers accounted for approximately 17%, 11% and 11%,
respectively, of total sales in 1997. These same three customers accounted for
approximately 22%, 14% and 12%, respectively, of total sales in 1998. Two of
these customers accounted for approximately 27% and 11%, respectively, of total
sales in 1999. Accounts receivable due from the single largest customers
amounted to 27% and 29% of total accounts receivable at December 31, 1998 and
1999, respectively.
Certain of THG's retail customers have filed for bankruptcy protection
during 1998 and 1999. Management monitors and evaluates the credit status of its
customers, and adjusts sales terms as appropriate. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations. THG has also entered into an agreement with
an insurance company to insure THG's receivables from certain pre-determined
customers, up to specified limits, if the customer defaults on payment. In
exchange, THG pays a monthly fee. Management does not believe that the Company
is subject to any other unusual risks beyond the normal credit risk attendant to
operating their business.
Business Segments
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS 131"), during 1998. SFAS 131
established standards for reporting information about business segments in
annual financial statements. It also established standards for related
disclosures about products and services, major customers and geographic areas.
Business segments are defined as components of a business about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision making group, in deciding how to allocate
resources and in assessing performance. The business segments are managed
separately because each segment represents a strategic business unit whose main
business is entirely different. The adoption of SFAS 131 did not affect the
Company's results of operations or financial position.
The Company manages its operations through four business segments: consumer
durables, industrial and building supply (industrial), international and Far
East. The consumer durables segment sells products including fans, heaters,
humidifiers, air purifiers, Crock-Pot(R) slow cookers, toasters, ice cream
freezers, can openers, showerheads, massagers and lighting products to retailers
throughout the U.S. The consumer
38
<PAGE> 40
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
durables segment is made up of home environment products and kitchen electric
products and is considered one business segment due to the similar customer base
and distribution channels. The industrial segment sells products including
industrial fans and drum blowers, household ventilation, ceiling fans, door
chimes and electric heaters to electrical and industrial wholesale distributors
throughout the U.S. The international segment sells the Company's products
outside the U.S. The Far East segment is the manufacturing and sourcing
operation located primarily at HPFEL.
<TABLE>
<CAPTION>
CONSUMER CONSOLIDATED
DURABLES FAR EAST INTERNATIONAL INDUSTRIAL ELIMINATIONS TOTALS
-------- -------- ------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales to customers........ 1999 $436,643 $ 6,566 $ 38,953 $24,671 -- $506,833
1998 203,940 5,070 5,469 -- -- 214,479
1997 184,626 2,428 5,099 -- -- 192,153
Intersegment net sales........ 1999 -- 154,501 -- -- (154,501) --
1998 -- 106,241 -- -- (106,241) --
1997 -- 83,626 -- -- (83,626)
Depreciation and
amortization................ 1999 8,432 4,764 170 1,767 -- 15,133
1998 2,770 4,571 7 -- (100) 7,248
1997 5,521 2,077 5 -- (130) 7,473
Net interest expense
(income).................... 1999 33,489 (25) -- 8 -- 33,472
1998 14,337 (890) 404 -- (18) 13,833
1997 6,432 579 85 -- -- 7,096
Other operating costs......... 1999 401,887 144,678 36,240 27,802 (154,191) 456,416
1998 187,470 97,261 4,872 -- (105,166) 184,437
1997 174,718 76,616 4,846 -- (82,443) 173,737
Segment income (loss)......... 1999 (7,165) 11,650 2,543 (4,906) (310) 1,812
1998 (637) 10,369 186 -- (957) 8,961
1997 (2,045) 6,782 163 -- (1,053) 3,847
Segment assets................ 1999 656,448 63,828 29,620 5,624 (299,024) 456,496
1998 103,418 41,734 4,821 -- (18,616) 131,357
1997 115,070 32,621 3,966 -- (16,492) 135,165
Segment capital
expenditures................ 1999 4,212 12,534 240 628 -- 17,614
1998 2,784 1,963 2 -- -- 4,749
1997 4,509 1,304 2 -- -- 5,815
</TABLE>
39
<PAGE> 41
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accounting policies of the reportable segments are the same as those
described in Note 2 of the Notes to Consolidated Financial Statements. The
results are disaggregated using a management approach, which is consistent with
the manner in which the Company's management internally disaggregates financial
information for the purposes of assisting in making internal operational
decisions.
Other operating costs include: cost of sales, operating expenses, other
(income) expense, net and income taxes.
The following information is summarized by geographic area:
<TABLE>
<CAPTION>
CANADA CONSOLIDATED
UNITED STATES FAR EAST AND EUROPE TOTAL
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net sales:
Year ended December 31, 1997.... $184,626,000 $ 2,428,000 $ 5,099,000 $192,153,000
Year ended December 31, 1998.... 203,940,000 5,070,000 5,469,000 214,479,000
Year ended December 31, 1999.... 461,314,000 6,566,000 38,953,000 506,833,000
Identifiable assets:
December 31, 1998............... 3,232,000 12,510,000 10,000 15,752,000
December 31, 1999............... 35,991,000 20,264,000 527,000 56,782,000
</TABLE>
Net sales are grouped based on the geographic origin of the transaction.
Net sales in the United States include direct export sales to Europe.
The Company's manufacturing entities in the Far East sell completed
products to THG in the United States at intercompany transfer prices which
reflect management's estimate of amounts which would be charged by an unrelated
third party. These sales are eliminated in consolidation. The remaining Far East
sales are to unrelated third parties.
14. COMMITMENTS AND CONTINGENCIES
THG is a party to several agreements to license certain technologies and
products. These license agreements generally provide for royalties based on
sales of the related products by THG. Such royalties have not been material to
date.
In January 1998, THG entered into an exclusive license and supply agreement
for certain chemical additives. The agreement provides for a minimum annual
royalty payment by THG of $240,000 that commenced in September 1998. THG has an
annual minimum purchase obligation under this agreement of $100,000 in 1998 and
$110,000 in 1999.
The Company is involved in litigation and is the subject of claims arising
in the normal course of its business. HPFEL has a contingent liability related
to potential withholding taxes (and the surcharges thereon) on rent paid to the
spouse of one of the directors (see Note 4). Although the individual has
accepted responsibility for the payment of these taxes, the Company would be
accountable for these tax payments in the event that the individual did not
fulfill this obligation. In the opinion of management, based upon discussions
with legal counsel, no existing litigation or claims will have a materially
adverse effect on the Company's financial position or results of operations and
cash flows.
The Company has entered into employment agreements with several executives,
which expire on December 31, 2000, renewable for annual periods by mutual
consent. These agreements provide that if employment is terminated without
cause, the employees will receive severance payments of their respective
salaries for the longer of 12 months or the remainder of the term, in the case
of the Company's president, or for 12 months, in the case of the other
executives.
40
<PAGE> 42
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning July 1, 1997, Hong Kong has been governed by the People's
Republic of China. Management does not believe that this event has materially
affected the Company's financial position or results of operations and cash
flows.
15. DISTRIBUTION OF PROFIT
Amounts that can be distributed by HPFEL's subsidiaries in China are based
on the financial regulations of China, which differ from accounting principles
generally accepted in the United States. In particular, HPFEL's two Chinese
operating subsidiaries, Dongguan Huixin Electrical Products Company, Ltd. and
Dongguan Raider Motor Corp. Ltd., are deemed to be wholly owned foreign
enterprises and, as such, Chinese laws and regulations require these companies
to transfer to separate reserves a certain portion of after-tax profit each year
for specific purposes. These purposes include enterprise expansion, repair and
maintenance of fixed assets and staff welfare. These reserves are deemed to be
non-deductible to the parent company.
The amount transferred to the reserve fund must be at least 10% of the
after-tax profit each year, determined in accordance with the financial
regulations of China, up to a cumulative maximum of 50% of the entity's
registered capital stock. Transfers to the staff welfare fund can be determined
by management. Management has decided that no transfers are to be made to the
employee staff welfare fund in 1998.
Consistent with standard practice in China, Dongguan Huixin Electrical
Products Company, Ltd. and Dongguan Raider Motor Corp. Ltd. account for their
staff welfare commitments on a monthly basis and the amounts involved are
charged directly to the profit and loss account. Such expenses were not material
in 1997, 1998 and 1999.
The retained earnings (accumulated losses) of these companies, including
earnings attributable to the former minority stockholders, on the basis of
accounting principles generally accepted in the United States, are as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Dongguan Raider Motor Corp. Ltd............................. $8,860,000 $9,633,000
Dongguan Huixin Electrical Products Company, Ltd. .......... 1,997,000 4,780,000
</TABLE>
The currency of China, the reminbi, is not freely convertible and the
ability of these subsidiaries to remit retained earnings to the parent company
is dependent on their ability to generate foreign currency denominated earnings
or to obtain government approval for the purchase of foreign currency.
16. FINANCIAL INSTRUMENTS
The company enters into various types of financial instruments in the
normal course of business. Fair values are estimated based on assumptions
concerning the amount and timing of estimated future cash flows and assumed
discount rates reflecting varying degrees of perceived risk. Accordingly, the
fair values may not represent actual values of the financial instruments that
could have been realized as of year end or that will be realized in the future.
Fair values for cash and cash equivalents, accounts receivable, other
receivables, income taxes receivable, accounts payable, accrued expenses,
accrued income taxes and capital lease obligations approximate their carrying
values at December 31, 1998 and 1999, due to their relatively short maturity.
The fair values of the Company's Notes and Credit Facility approximate their
carrying values at December 31, 1999 because the interest rates on these
borrowings approximate current market rates.
41
<PAGE> 43
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. CONDENSED CONSOLIDATING INFORMATION
The senior subordinated notes described in Note 8 were issued by THG and
are guaranteed by Rival and its three domestic subsidiaries and Holmes
Manufacturing Corp. ("Manufacturing"), Holmes Motor Corp. ("Motor") and Holmes
Air (Taiwan) Corp. ("Taiwan"), but are not guaranteed by THG's other
subsidiaries, HPFEL and Holmes Air (Canada) Corp. ("Canada"), or Rival's five
foreign subsidiaries. The guarantor subsidiaries are directly or indirectly
wholly-owned by THG, and the guarantees are full, unconditional and joint and
several. The following condensed consolidating financial information presents
the financial position, results of operations and cash flows of (i) THG, as
parent, as if it accounted for its subsidiaries on the equity method, (ii) Rival
(on a consolidated basis following its acquisition by THG), Manufacturing, Motor
and Taiwan, the guarantor subsidiaries, and (iii) HPFEL, Canada, Bionaire
International B.V., The Rival Company of Canada, Ltd., Waverly Products Company,
Ltd., and Rival de Mexico S.A. de C.V. the non-guarantor subsidiaries. There
were no transactions between Rival, Manufacturing, Motor and Taiwan, or between
HPFEL and Canada, during any of the periods presented. Taiwan had no revenues or
operations during the periods presented, and Manufacturing ceased operations in
March 1997. As further described in Note 15, certain of HPFEL's subsidiaries in
China have restrictions on distributions to their parent companies.
42
<PAGE> 44
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,545 $-- $ 3,834 -- $ 5,379
Accounts receivable, net........ 35,558 -- 1,409 -- 36,967
Inventories..................... 44,748 -- 13,142 $ (4,550) 53,340
Prepaid expenses and other
current assets............... 869 -- 1,158 -- 2,027
Deferred income taxes........... 4,983 -- -- -- 4,983
Income taxes receivable......... -- -- -- -- --
Due from affiliates............. (89) 89 14,066 (14,066) --
-------- --- ------- -------- --------
Total current assets......... 87,614 89 33,609 (18,616) 102,696
-------- --- ------- -------- --------
Property and equipment, net....... 3,132 -- 12,520 100 15,752
Deferred income taxes............. 563 -- -- -- 563
Deposits and other assets......... 12,020 1 425 (100) 12,346
Investments in consolidated
subsidiaries.................... 19,677 -- -- (19,677) --
-------- --- ------- -------- --------
$123,006 $90 $46,554 $(38,293) $131,357
======== === ======= ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt... $ -- $-- $ 604 -- $ 604
Accounts payable................ 2,400 -- 12,604 -- 15,004
Accrued expenses................ 8,960 -- 3,332 -- 12,292
Accrued income taxes............ 1,922 -- 1,785 -- 3,707
Due to affiliates............... 10,113 -- 3,953 $(14,066) --
-------- --- ------- -------- --------
Total current liabilities.... 23,395 -- 22,278 (14,066) 31,607
-------- --- ------- -------- --------
Capital lease obligations......... -- -- 139 -- 139
-------- --- ------- -------- --------
Line of credit.................... 10,000 -- -- -- 10,000
-------- --- ------- -------- --------
Long-term debt.................... 105,000 -- -- -- 105,000
-------- --- ------- -------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value... 10 1 -- (1) 10
Common stock, $1 par value...... -- -- 100 (100) --
Additional paid in capital...... 16,985 -- -- -- 16,985
Accumulated other comprehensive
income....................... (40) -- -- -- (40)
Treasury stock.................. (62,058) -- -- -- (62,058)
Retained earnings............... 29,714 89 24,037 (24,126) 29,714
-------- --- ------- -------- --------
Total stockholders' equity
(deficit).................. (15,389) 90 24,137 (24,227) (15,389)
-------- --- ------- -------- --------
$123,006 $90 $46,554 $(38,293) $131,357
======== === ======= ======== ========
</TABLE>
43
<PAGE> 45
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 192 $ 795 $ 5,660 -- $ 6,647
Accounts receivable, net.................. 47,610 77,636 17,018 -- 142,264
Inventories............................... 45,518 47,993 23,899 $ (4,750) 112,660
Prepaid expenses and other current
assets.................................. 2,154 45 1,798 -- 3,997
Deferred income taxes..................... 5,134 5,748 995 -- 11,877
Income taxes receivable................... -- 7,852 -- -- 7,852
Due from affiliates....................... 230,256 89 20,721 (251,066) --
-------- -------- ------- --------- --------
Total current assets.................... 330,864 140,158 70,091 (255,816) 285,297
-------- -------- ------- --------- --------
Assets held for sale........................ 701 1,733 -- -- 2,434
Property and equipment, net................. 3,440 30,127 20,791 (10) 54,348
Goodwill, net............................... -- 87,498 1,995 -- 89,493
Deferred income taxes....................... -- -- -- -- --
Deposits and other assets................... 24,386 2,267 571 (2,300) 24,924
Investments in consolidated subsidiaries.... 40,898 -- -- (40,898) --
-------- -------- ------- --------- --------
$400,289 $261,783 $93,448 $(299,024) $456,496
======== ======== ======= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current portion of capital lease
obligations and other debt.............. $ -- $ -- $ 589 -- $ 589
Current portion of credit facility........ 6,450 -- -- -- 6,450
Accounts payable.......................... 5,395 1,335 22,003 (2,300) 26,433
Accrued expenses.......................... 11,304 20,626 4,326 -- 36,256
Accrued income taxes...................... (2,518) 3,028 3,413 -- 3,923
Due to affiliates......................... 3,148 226,104 21,814 $(251,066) --
-------- -------- ------- --------- --------
Total current liabilities............... 23,779 251,093 52,145 (253,366) 73,651
-------- -------- ------- --------- --------
Credit facility............................. 203,625 -- -- -- 203,625
-------- -------- ------- --------- --------
Long-term debt.............................. 135,085 -- -- -- 135,085
-------- -------- ------- --------- --------
Other long-term liabilities................. -- -- 4,054 -- 4,054
-------- -------- ------- --------- --------
Deferred income taxes....................... -- 2,281 -- -- 2,281
-------- -------- ------- --------- --------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.001 par value............. 20 2 -- (2) 20
Common stock, $1 par value................ -- -- 100 (100) --
Additional paid in capital................ 67,915 -- -- -- 67,915
Accumulated other comprehensive income.... 397 -- 397 (397) 397
Treasury stock............................ (62,058) -- -- -- (62,058)
Retained earnings......................... 31,526 8,407 36,752 (45,159) 31,526
-------- -------- ------- --------- --------
Total stockholders' equity (deficit).... 37,800 8,409 37,249 (45,658) 37,800
-------- -------- ------- --------- --------
$400,289 $261,783 $93,448 $(299,024) $456,496
======== ======== ======= ========= ========
</TABLE>
44
<PAGE> 46
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales..................... $183,386 $1,240 $91,153 $(83,626) $192,153
Cost of goods sold............ 143,584 1,244 74,425 (82,513) 136,740
-------- ------ ------- -------- --------
Gross profit................ 39,802 (4) 16,728 (1,113) 55,413
-------- ------ ------- -------- --------
Operating expenses:
Selling..................... 15,317 -- 330 -- 15,647
General and
administrative........... 13,401 15 7,467 -- 20,883
Product development......... 5,348 -- 115 -- 5,463
-------- ------ ------- -------- --------
Total operating
expenses............... 34,066 15 7,912 -- 41,993
-------- ------ ------- -------- --------
Operating profit
(loss)................. 5,736 (19) 8,816 (1,113) 13,420
-------- ------ ------- -------- --------
Other income and expense:
Other (income) expense,
net...................... -- -- 42 14 56
Interest expense, net....... 6,432 -- 664 -- 7,096
-------- ------ ------- -------- --------
Total other income
(expense).............. 6,432 -- 706 14 7,152
-------- ------ ------- -------- --------
Income (loss) before income
taxes and equity in income
of consolidated
subsidiaries................ (696) (19) 8,110 (1,127) 6,268
Income tax expense
(benefit)................... 1,330 -- 940 (74) 2,196
-------- ------ ------- -------- --------
Income (loss) before equity in
income of consolidated
subsidiaries................ (2,026) (19) 7,170 (1,053) 4,072
Equity in income of
consolidated subsidiaries... 5,873 -- -- (5,873) --
-------- ------ ------- -------- --------
Income (loss) before minority
interest.................... 3,847 (19) 7,170 (6,926) 4,072
Minority interest in net
income of majority owned
subsidiaries................ -- -- 225 -- 225
-------- ------ ------- -------- --------
Net income (loss)............. $ 3,847 $ (19) $ 6,945 $ (6,926) $ 3,847
======== ====== ======= ======== ========
</TABLE>
45
<PAGE> 47
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales..................... $203,940 $-- $116,780 $(106,241) $214,479
Cost of goods sold............ 154,736 -- 97,039 (105,266) 146,509
-------- -- -------- --------- --------
Gross profit (loss)......... 49,204 -- 19,741 (975) 67,970
-------- -- -------- --------- --------
Operating expenses:
Selling..................... 19,740 -- 716 -- 20,456
General and
administrative........... 8,328 -- 8,311 -- 16,639
Product development......... 6,213 -- 82 -- 6,295
-------- -- -------- --------- --------
Total operating
expenses............... 34,281 -- 9,109 -- 43,390
-------- -- -------- --------- --------
Operating profit
(loss)................. 14,923 -- 10,632 (975) 24,580
-------- -- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... (216) -- (220) -- (436)
Interest and other expense,
net...................... 14,337 -- (486) (18) 13,833
-------- -- -------- --------- --------
Total other (income)
expense................ 14,121 -- (706) (18) 13,397
-------- -- -------- --------- --------
Income (loss) before income
taxes and equity in income
of consolidated subsidiaries
and minority interest....... 802 -- 11,338 (957) 11,183
Income tax expense............ 1,439 -- 783 -- 2,222
-------- -- -------- --------- --------
Income (loss) before equity in
income of consolidated
subsidiaries and minority
interest.................... (637) -- 10,555 (957) 8,961
Equity in income of
consolidated subsidiaries... 9,598 -- -- (9,598) --
-------- -- -------- --------- --------
Income (loss) before minority
interest.................... 8,961 -- 10,555 (10,555) 8,961
Minority interest in net
income of majority owned
subsidiaries................ -- -- -- -- --
-------- -- -------- --------- --------
Net income (loss)............. $ 8,961 $-- $ 10,555 $ (10,555) $ 8,961
======== == ======== ========= ========
</TABLE>
46
<PAGE> 48
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATING INCOME STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
-------- ------------ ------------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales..................... $215,803 $245,512 $200,019 $(154,501) $506,833
Cost of goods sold............ 159,618 191,448 166,778 (154,190) 363,654
-------- -------- -------- --------- --------
Gross profit (loss)......... 56,185 54,064 33,241 (311) 143,179
-------- -------- -------- --------- --------
Operating expenses:
Selling..................... 27,621 33,226 6,605 -- 67,452
General and
administrative........... 9,146 9,645 9,543 -- 28,334
Product development......... 7,448 3,000 -- -- 10,448
Plant closing costs......... -- 2,439 -- -- 2,439
Amortization of goodwill and
other intangible
assets................... -- 2,634 66 -- 2,700
-------- -------- -------- --------- --------
Total operating expenses.... 44,215 50,944 16,214 -- 111,373
-------- -------- -------- --------- --------
Operating profit (loss)..... 11,970 3,120 17,027 (311) 31,806
-------- -------- -------- --------- --------
Other income and expense:
Other (income) expense,
net...................... -- (1,041) (1,448) -- (2,489)
Interest and other expense,
net...................... 33,423 74 (25) -- 33,472
-------- -------- -------- --------- --------
Total other (income)
expense................ 33,423 (967) (1,473) -- 30,983
-------- -------- -------- --------- --------
Income (loss) before income
taxes and equity in income
of and equity in earnings
from joint venture.......... (21,453) 4,087 18,500 (311) 823
Income tax expense
(benefit)................... (3,357) (1,037) 4,307 -- (87)
-------- -------- -------- --------- --------
Equity in earnings from joint
venture..................... (902) -- -- -- (902)
Income (loss) before equity in
income of consolidated
subsidiaries................ (17,194) 5,124 14,193 (311) 1,812
Equity in income of
consolidated subsidiaries... 19,006 -- -- (19,006) --
Net income (loss)............. $ 1,812 $ 5,124 $ 14,193 $ (19,317) $ 1,812
======== ======== ======== ========= ========
</TABLE>
47
<PAGE> 49
THE HOLMES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
GUARANTOR NON-GUARANTOR
PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
-------- ------------ ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Net cash provided by (used for) operating activities........ $(45,543) $ 459 $ (1,289) $(46,373)
-------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (4,509) -- (1,306) (5,815)
Purchase of minority interest............................. -- -- (451) (451)
-------- ------- -------- --------
Net cash used for investing activities.................. (4,509) -- (1,757) (6,266)
-------- ------- -------- --------
Cash flows from financing activities:
Borrowings of long-term debt.............................. 96,209 -- -- 96,209
Net borrowing of line of credit........................... 26,134 -- 1,002 27,136
Net repayments to affiliate............................... (23,000) -- -- (23,000)
Principal payments on capital lease obligations........... -- -- (481) (481)
Issuance of common stock.................................. 15,512 -- -- 15,512
Purchase of treasury stock................................ (62,058) -- -- (62,058)
Other net activity with Parent............................ (288) (459) 747 --
-------- ------- -------- --------
Net cash provided by (used for) financing activities.... 52,509 (459) 1,268 53,318
-------- ------- -------- --------
Net increase in cash and cash equivalents................... 2,457 -- (1,778) 679
Cash and cash equivalents, beginning of period.............. 1,284 -- 3,178 4,462
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 3,741 $ -- $ 1,400 $ 5,141
======== ======= ======== ========
Year Ended December 31, 1998
Net cash provided by operating activities................... $ 18,454 $ -- $ 5,801 $ 24,255
-------- ------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....................... (2,784) -- (1,965) (4,749)
Purchase of minority interest............................. -- -- (451) (451)
-------- ------- -------- --------
Net cash used for investing activities.................. (2,784) -- (2,416) (5,200)
-------- ------- -------- --------
Cash flows from financing activities:
Debt issuance costs....................................... (295) -- -- (295)
Net borrowing of line of credit........................... (17,500) -- (1,002) (18,502)
Principal payments on capital lease obligations........... -- -- (701) (701)
Issuance of common stock.................................. 681 -- -- 681
Other net activity with Parent............................ (752) -- 752 --
-------- ------- -------- --------
Net cash used for financing activities.................. (17,866) -- (951) (18,817)
-------- ------- -------- --------
Net increase in cash and cash equivalents................... (2,196) -- 2,434 238
Cash and cash equivalents, beginning of period.............. 3,741 -- 1,400 5,141
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 1,545 $ -- $ 3,834 $ 5,379
======== ======= ======== ========
Year Ended December 31, 1999
Net cash provided by operating activities................... $(39,278) $33,563 $ 10,593 $ 4,878
-------- ------- -------- --------
Cash flows from investing activities:
Acquisition of business, net of cash acquired............. (279,571) -- -- (279,571)
Contribution in joint venture............................. (25) -- -- (25)
Proceeds from sale of assets held for sale and business
divestitures............................................ -- 23,787 -- 23,787
Distribution in earnings from joint venture............... 138 -- -- 138
Purchases of property and equipment....................... (1,700) (3,140) (12,774) (17,614)
Cash received from joint venture partners................. -- -- 4,504 4,504
-------- ------- -------- --------
Net cash used for investing activities.................. (281,158) 20,647 (8,270) (268,781)
-------- ------- -------- --------
Cash flows from financing activities:
Net repayment of line of credit........................... (10,000) -- -- (10,000)
Issuance of common stock.................................. 50,400 -- -- 50,400
Borrowings of long-term debt, net of issuance costs....... 27,329 -- -- 27,329
Borrowings on credit facility, net of issuance costs...... 198,704 -- -- 198,704
Principle payments on capital lease obligations........... -- -- (604) (604)
Debt issuance costs....................................... (658) -- -- (658)
Other net activity with Parent............................ 53,308 (52,942) (366) --
-------- ------- -------- --------
Net cash used for financing activities.................. 319,083 (52,942) (970) 265,171
-------- ------- -------- --------
Net increase in cash and cash equivalents................... (1,353) 1,268 1,353 1,268
Cash and cash equivalents, beginning of period.............. 1,545 (473) 4,307 5,379
-------- ------- -------- --------
Cash and cash equivalents, end of period.................... $ 192 $ 795 $ 5,660 $ 6,647
======== ======= ======== ========
</TABLE>
48
<PAGE> 50
SCHEDULE II
THE HOLMES GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
--------------------- DEDUCTIONS
BALANCE AT CHARGED TO CHARGED WRITE-OFF OF BALANCE
BEGINNING COSTS AND TO OTHER UNCOLLECTIBLE AT END OF
OF PERIOD EXPENSES ACCOUNTS ACQUISITION ACCOUNTS PERIOD
---------- ---------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997......... $1,113 $ 330 $ -- $ -- $984 $ 459
Year ended December 31, 1998......... 459 523 -- -- 263 719
Year ended December 31, 1999......... 719 1,297 -- 8,751 710 10,057
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS
-----------------------
NET DEDUCTIONS
OPERATING ---------------------------
CHARGED TO LOSSES NET
BALANCE AT INCOME WITHOUT OPERATING CHARGED BALANCE
BEGINNING TAX TAX LOSSES TO OTHER AT END OF
OF PERIOD EXPENSE BENEFIT(1) UTILIZED ACCOUNTS PERIOD
---------- ---------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax valuation allowance:
Year ended December 31, 1997........... $ 469 $1,447(1) $ -- $ 469 -- $1,447
Year ended December 31, 1998........... 1,447 -- -- -- 80 1,367
Year ended December 31, 1999........... 1,367 283 -- -- -- 1,650
</TABLE>
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
---------- ----------
BALANCE AT CHARGED TO WRITE-OFF BALANCE
BEGINNING COSTS AND OF AT END OF
OF PERIOD EXPENSES ACQUISITION INVENTORY PERIOD
---------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Inventory obsolescence reserve:
Year ended December 31, 1997................... $2,003 $2,268 $ -- $ 807 $ 3,464
Year ended December 31, 1998................... 3,464 1,522 -- 1,069 3,917
Year ended December 31, 1999................... 3,917 1,456 10,082 4,523 10,932
</TABLE>
- ---------------
(1) The Company was subject to certain limitations on interest paid to or
guaranteed by Pentland. See Note 10 of Notes to Consolidated Financial
Statements.
49
<PAGE> 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to our
directors and executive officers. The directors are elected annually by the
stockholders. Pursuant to the terms of a Stockholders' Agreement entered into in
connection with the 1997 Transactions, the stockholders have agreed to vote in
favor of the election of the persons named as directors below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jordan A. Kahn....................... 58 President, Chief Executive Officer and Director
Stanley Rosenzweig................... 35 Chief Operating Officer and Director
Gregory F. White..................... 35 Executive Vice President, Sales and Marketing and
Director
Ira B. Morgenstern................... 47 Chief Financial Officer and Treasurer
(Tommy) Woon Fai Liu................. 47 Managing Director of Holmes' Far East Operations and
Director
Louis F. Cimini...................... 45 Senior Vice President -- Human Resources and
Organization Performance
Richard K. Lubin..................... 53 Director
Randy Peeler......................... 35 Director
Thomas K. Manning.................... 58 Director
</TABLE>
Jordan A. Kahn, Holmes' founder, has served as President and Chief
Executive Officer and a director since Holmes' organization in 1982. Since 1968,
Mr. Kahn has also been President of Jordan Kahn Co., Inc. a manufacturer's
representative representing small electric personal appliance manufacturers,
including the Company, to retailers across the Northeast.
Stanley Rosenzweig has served with Holmes since 1991, initially as Vice
President -- Operations, and since 1993 as Chief Operating Officer and a
director. From 1987 to 1988, Mr. Rosenzweig served as a management consultant
with Bain & Company, and from 1988 to 1989 as a sales manager with Jolson
Corporation, a Canadian appliance company.
Gregory F. White has served as Executive Vice President, Sales and
Marketing since 1995, and from 1993 to 1995 as Vice President Marketing. He
became a director of Holmes in 1997. Mr. White served as Account Supervisor at
Ammirati & Puris, an advertising agency, from 1992 to 1993 and as Account
Manager at the advertising agency D'Arcy, Masius, Benton & Bowles from 1991 to
1992.
Ira B. Morgenstern, Chief Financial Officer and Treasurer, joined Holmes in
August, 1998 from Diageo, PLC, a combination of the food and beverage businesses
of Grand Metropolitan PLC and Guinness PLC, where he spent over six years in a
number of financial management positions in the U.S. and London, including Vice
President of Strategic Marketing Finance in the U.S. drinks division. Prior to
Diageo, Mr. Morgenstern served as Vice President of Ditri Associates, Inc., a
leveraged acquisition firm, consultant for Touche Ross, and internal auditor
with Atlantic Richfield.
(Tommy) Woon Fai Liu became Managing Director of Holmes' Far East
operations upon the closing of the 1997 Transactions. From 1993 to 1997, Mr. Liu
served as Chief Financial Officer and Executive Director of Asco General
Supplies Far East Limited, a subsidiary of Pentland, as well as Executive
Director of Holmes Far East since 1994. From 1989 to 1993, Mr. Liu was Finance
Director for Johnson & Johnson Hong Kong. He became a director of Holmes during
1999.
Louis F. Cimini joined the Company in December, 1999 from CGU, an insurance
company, where he was Vice President of Human Resources for two years. Prior to
joining CGU, Mr. Cimini spent nine years
50
<PAGE> 52
with PHH (now Cendant Mobility), a Fortune 500 corporate services organization,
as Senior Vice President of Human Resources and Quality, where he lead the human
resources elements of restructuring and re-engineering during several
acquisitions.
Richard K. Lubin is a Managing Director of Berkshire Partners, which he
co-founded in 1986. He became a director of Holmes in 1997, and has been a
director of many of Berkshire's manufacturing, retailing and transportation
investments, including, among others, InteSys Technologies, Inc. and English
Welsh & Scottish Railway, Ltd. In addition, Mr. Lubin is Treasurer of the
Dana-Farber Cancer Institute and a Trustee of Beth Israel Deaconess Medical
Center.
Randy Peeler is a Managing Director of Berkshire Partners, where he has
been employed since 1996. From 1994 to 1996, he was responsible for new business
ventures at Health Advances, a healthcare industry consulting firm. From 1993 to
1994, he served as Chief of Staff to the Assistant Secretary for Economic Policy
at the U.S. Department of the Treasury. Prior to that, he was a consultant with
Cannon Associates. Mr. Peeler became a director of Holmes in 1997, and also
serves as a director of Miami Cruisline Services, B.V. and Weigh-Tronix, Inc.
Thomas K. Manning became a director of Holmes in February, 1999 upon the
closing of the Rival acquisition. He was Chairman of the Board and Chief
Executive Officer of Rival, and served with Rival for over 20 years.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY
The following Summary Compensation Table sets forth information concerning
the compensation paid or accrued by Holmes to the Chief Executive Officer and
certain other persons who served as executive officers during the fiscal year
ended December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------- ----------------------------
NAME AND OTHER ANNUAL STOCK OPTION ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) SHARES COMPENSATION
- ------------------ -------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Jordan A. Kahn............ 1999 $488,804 $112,500 $ 15,600 490,538 $ --
President and Chief 1998 402,776 200,000 23,400 297,717 --
Executive Officer 1997 311,905 770,000 31,200 -- 3,964,000(2)
Stanley Rosenzweig........ 1999 353,441 112,500 15,600 367,903 4,800(3)
Chief Operating Officer 1998 253,960 125,000 15,600 297,717 4,800(3)
1997 228,859 296,000 15,600 -- 1,984,324(4)
Gregory F. White.......... 1999 277,638 112,500 10,200 367,903 4,800(3)
Executive Vice President 1998 205,054 100,000 10,200 297,717 4,800(3)
Sales and Marketing 1997 173,800 148,000 10,200 -- 509,237(5)
(Tommy) Woon Fai Liu...... 1999 250,000 112,500 43,701 50,000 --
Managing Director of 1998 200,000 100,000 43,701 60,000 --
Holmes Far East 1997 270,513(6) 66,667(7) 2,083 -- --
Ira B. Morgenstern(8)..... 1999 207,818 112,500 50,000(9) 135,000 4,800(3)
Chief Financial Officer
</TABLE>
- ---------------
(1) Primarily represents automobile allowance, annual living expense allowance
or annual lease payments on automobile provided by Holmes.
(2) Represents bonuses paid in connection with the 1997 Transactions pursuant to
a previous employment agreement with Holmes.
(3) Represents Holmes' matching contribution under its 401(k) plan.
(4) Includes $9,500 representing Holmes' matching contribution under its 401(k)
plan, $20,824 paid in 1997 on account of a previous employment agreement
with Holmes and $1,954,000 which was paid in connection with the 1997
Transactions.
(5) Includes $9,237 representing Holmes' matching contribution under its 401(k)
plan and $500,000 which was paid in connection with the 1997 Transactions.
51
<PAGE> 53
(6) Includes compensation paid to Mr. Liu by Holmes and by an affiliate of
Pentland.
(7) Does not include any amounts paid by affiliates of Pentland for services
rendered to such affiliates.
(8) Mr. Morgenstern joined Holmes in August, 1998.
(9) Represents the 1999 payment of a relocation bonus in connection with joining
the Company.
OPTION GRANTS IN LAST FISCAL YEAR
The following table describes stock options granted during 1999 to the
executive officers set forth in the Summary Compensation Table above.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATE OF
SECURITIES TOTAL STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM($)(2)
GRANTED EMPLOYEES PRICE EXPIRATION ----------------------
NAME (#)(1) IN 1999 ($/SH) DATE 5% 10%
- ---- ---------- ---------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Jordan A. Kahn............ 490,538 20.6% 5.04 02-05-09 1,554,823 3,940,228
Stanley Rosenzweig........ 367,903 15.5% 5.04 02-05-09 1,166,116 2,955,167
Gregory F. White.......... 367,903 15.5% 5.04 02-05-09 1,166,116 2,955,167
(Tommy) Woon Fai Liu...... 50,000 2.1% 5.04 02-05-09 158,481 401,623
Ira B. Morgenstern........ 135,000 5.7% 5.04 02-05-09 427,900 1,084,382
</TABLE>
- ---------------
(1) These options to purchase Holmes' common stock were granted under Holmes'
1997 Stock Option Plan. Approximately one-half of each option grant consists
of "incentive stock options" (except for Mr. Kahn, who received only
non-qualified options), vesting over a five-year period. The remaining
options are non-qualified options whose vesting is tied to specific Holmes
performance measures.
(2) Net gains from potential stock option exercises are estimated based on
assumed rates of stock price appreciation over the options' terms, as set
forth in rules promulgated by the Securities and Exchange Commission, and
are not intended to forecast future appreciation of Holmes' common stock.
The actual net gains, if any, are dependent on the actual future performance
of the common stock, for which there is currently no public market.
AGGREGATED OPTION EXERCISES AND FISCAL YEAR END VALUES
The following table sets forth certain information concerning the number
and value of unexercised options to purchase Holmes' common stock at December
31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT YEAR-END(#) OPTIONS($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jordan A. Kahn.............. -- -- 57,400 730,855 88,396 370,088
Stanley Rosenzweig.......... -- -- 57,400 608,220 88,396 370,088
Gregory F. White............ -- -- 57,400 608,220 88,396 370,088
(Tommy) Woon Fai Liu........ -- -- 11,568 98,432 17,815 74,585
Ira B. Morgenstern.......... -- -- 1,446 148,554 2,227 20,873
</TABLE>
- ---------------
(1) Represents the assumed value of shares of Holmes' common stock covered by
outstanding options, less the aggregate option exercise price. There is
currently no public market for Holmes' common stock, and no valuation of
such common stock existed as of December 31, 1999. The price of the common
stock, valued on February 5, 1999, the date of the Rival acquisition
closing, was $5.04 per share.
52
<PAGE> 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Holmes' common stock. Except as indicated in the footnotes to this
table, the Company believes that the persons named in this table have sole
voting and investment power with respect to all shares of common stock
indicated.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER(1) SHARES OUTSTANDING SHARES(2)
--------------------------------------- ----------- ---------------------
<S> <C> <C>
Berkshire Fund IV, Limited Partnership(3)................... 15,052,594 74.0%
Berkshire Fund V, Limited Partnership
c/o Berkshire Partners LLC
One Boston Place
Boston, MA 02108
Jordan A. Kahn(4)........................................... 2,621,330 12.7
Bain Securities, Inc.(5).................................... 1,028,214 5.1
c/o Bain Capital, Inc.
2 Copley Place
Boston, MA 02116
Stanley Rosenzweig(4)....................................... 314,596 1.5
Gregory F. White(4)......................................... 200,238 *
(Tommy) Woon Fai Liu(4)..................................... 139,987 *
Ira B. Morgenstern(4)....................................... 58,588 *
Richard Lubin(6)............................................ 15,052,594 74.0
Thomas K. Manning........................................... 100,000 *
Randy Peeler(6)............................................. 15,052,594 74.0
All directors and executive officers as a group (8
persons)(7)............................................... 18,487,333 90.1
</TABLE>
- ---------------
* Less than 1.0%
(1) Unless otherwise specified, the address of each person is c/o The Holmes
Group, Inc., 233 Fortune Boulevard, Milford, MA 01757.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission and reflects general voting power and/or investment power with
respect to securities. Shares of common stock subject to options or warrants
currently exercisable are deemed outstanding.
(3) Includes shares held by various investment entities affiliated with
Berkshire Partners LLC.
(4) Includes shares which may be held by family members or affiliates. Includes
the following shares subject to vested stock options: 57,400 option shares
held by each of Messrs. Kahn, Rosenzweig and White, 11,568 option shares
held by Mr. Liu, and 1,446 option shares held by Mr. Morgenstern. With
respect to Mr. Kahn, includes 194,472 shares held in trust for employees of
the Company as to which Mr. Kahn is voting trustee. Mr. Kahn disclaims
beneficial ownership of such shares.
(5) Includes shares held by affiliated investment entities.
(6) This person is affiliated with Berkshire Partners and may be deemed to have
a beneficial interest in certain of the shares held by its affiliates. This
person disclaims beneficial ownership of such shares.
(7) Includes stock options referred to in Note 4 and the shares referred to in
Note 6.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to a letter agreement dated December 10, 1998 with two investment
funds affiliated with Berkshire Partners (the "Letter Agreement"), Berkshire
Partners received a fee of $2.0 million from Holmes as of the closing of the
Rival acquisition. Pursuant to a Management Agreement (the "Management
Agreement"), entered into in November, 1997 in connection with the 1997
Transactions, Berkshire Partners received a $1.5 million fee from Holmes and an
annual fee of $400,000 per year for the provision of management and advisory
services. The Letter Agreement increased the annual management fee to $500,000
following the closing of the Rival acquisition. The Management Agreement will be
in effect until November,
53
<PAGE> 55
2002, provided that the Management Agreement will terminate on the later of the
first date that (i) Berkshire Partners owns less than 40.0% of Holmes' common
stock on a fully diluted basis, and (ii) Berkshire Partners owns fewer common
shares than the members of Holmes' management, taken as a group, or fewer shares
than any other single stockholder. Berkshire Partners is also entitled to
designate two of Holmes' directors and has the right, at its election, to
increase the size of the Board of Directors and the number of directors
designated by it by an additional two directors. From time to time, Holmes may
pay additional consulting or other fees to Berkshire Partners.
Since its inception in 1982, Holmes has retained Jordan Kahn Co., Inc.
("JKC"), a corporation owned by Jordan A. Kahn, to serve as a sales
representative for Holmes in the northeastern United States. Pursuant to a
representation agreement between Holmes and JKC, Holmes has agreed to pay to JKC
a commission on net sales to JKC's customers in its territory, which fee is the
same fee paid by Holmes to other unaffiliated sales representatives
organizations representing Holmes in other territories throughout the United
States. Pursuant to this arrangement, Holmes paid a total of $367,000, $368,000
and $287,000 to JKC for the years ended December 31, 1997, 1998 and 1999,
respectively.
In connection with the 1997 Transactions, Holmes purchased a portion of the
shares of common stock of Holmes beneficially owned by an affiliate of Pentland,
its former majority stockholder, and issued to the Pentland affiliate a warrant
to purchase shares of Holmes' common stock under certain circumstances. In
addition, Holmes entered into new employment agreements with Messrs. Kahn,
Rosenzweig, White and Liu, and made certain payments to Messrs. Kahn, Rosenzweig
and White in connection with the 1997 Transactions.
During 1993, Holmes entered into a revolving credit facility with an
affiliate of Pentland, pursuant to which such affiliate provided short-term
loans to Holmes. Another affiliate of Pentland provided Holmes with trade
acceptance and letter of credit financing for its purchases from foreign
manufacturers. Holmes paid a commission for administrative services related to
the processing of these trade acceptances. In conjunction with the 1997
Transactions, all of the financing facilities provided by Pentland and its
affiliates were terminated and paid in full. In addition, a net payable of $10.0
million due to affiliates of Pentland was repaid in connection with the 1997
Transactions. See Note 4 of Notes to Consolidated Financial Statements.
In connection with the Rival acquisition, Holmes retained an affiliate of
Bain Securities, Inc., a stockholder of Holmes, to perform acquisition
consulting services, for which Holmes paid approximately $300,000 during 1998
and approximately $1,925,000 during 1999. Approximately $500,000 of the 1999
fees were paid in the form of 99,222 shares of Holmes' common stock. The Company
also paid $350,000 for professional fees related to the divestiture of Rival's
commercial and industrial and pump division business assets during 1999. The
remaining fees were paid in connection with the acquisition and for other
general consulting services.
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 are listed in the Index to Consolidated
Financial Statements contained in Item 8 of this Report.
2. Financial Statement Schedules, to the extent required, are listed
in the Index to Consolidated Financial Statements contained in Item 8 of
this Report.
3. Exhibits are listed in subsection (c) below.
(b) Reports on Form 8-K:
1. Current Report on Form 8-K dated October 8, 1999 reporting under
Item 5, Other Events, the consummation of the sale of Rival's Simer Pump
business unit.
54
<PAGE> 56
2. Current Report on Form 8-K dated December 21, 1999 reporting under
Item 5, Other Events, the consummation of the sale of Rival's industrial
and building supply products businesses.
(c) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3.1 Articles of Organization (as amended) of The Holmes Group,
Inc. f/k/a Holmes Products Corp.(1)
3.2 Articles of Organization of Holmes Manufacturing Corp.(1)
3.3 Articles of Organization of Holmes Air (Taiwan) Corp.(1)
3.4 Certificate of Incorporation of Holmes Motor Corp.(4)
3.5 Restated Certificate of Incorporation (as amended) of The
Rival Company(4)
3.6 Certificate of Incorporation (as amended) of Patton Electric
Company, Inc.(4)
3.7 Certificate of Incorporation (as amended) of Patton Building
Products, Inc.(4)
3.8 Certificate of Incorporation (as amended) of Rival Consumer
Sales Corporation(4)
3.9 Bylaws (as amended) of The Holmes Group, Inc. f/k/a Holmes
Products Corp.(1)
3.10 By-laws of Holmes Manufacturing Corp.(1)
3.11 By-laws of Holmes Air (Taiwan) Corp.(1)
3.12 By-laws of Holmes Motor Corp.(4)
3.13 By-laws of The Rival Company(4)
3.14 By-laws of Patton Electric Company, Inc.(4)
3.15 By-laws of Patton Building Products, Inc.(4)
3.16 By-laws of Rival Consumer Sales Corporation(4)
4.1 Stockholders' Agreement dated November 26, 1997 among The
Holmes Group, Inc. f/k/a Holmes Products Corp. and certain
stockholders thereof(1)
4.2 Registration Rights Agreement dated November 26, 1997 among
The Holmes Group, Inc. f/k/a Holmes Products Corp. and
certain stockholders thereof(1)
4.3 Indenture dated November 26, 1997 among The Holmes Group,
Inc. f/k/a Holmes Products Corp., Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp. and State Street Bank and
Trust Company(1)
4.4 Form of Senior Subordinated Notes due 2007 -- (Included in
Exhibit 4.3)(1)
4.5 Form of Note Guaranty -- (Included in Exhibit 4.3)(1)
4.6 First Supplemental Indenture and Guarantee dated October 14,
1998 among The Holmes Group, Inc. f/k/a Holmes Products
Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
Corp., Holmes Motor Corp. and State Street Bank and Trust
Company(4)
4.7 Indenture dated February 5, 1999 among The Holmes Group,
Inc. f/k/a Holmes Products Corp., Holmes Manufacturing
Corp., Holmes Air (Taiwan) Corp., Holmes Motor Corp., The
Rival Company, Patton Electric Company, Inc., Patton
Building Products, Inc., Rival Consumer Sales Corporation
and State Street Bank and Trust Company(3)
4.8 First Amendment to Registration Rights Agreement dated
February 5, 1999 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and certain stockholders thereof(4)
4.9 First Amendment to Stockholders' Agreement dated February 5,
1999 among The Holmes Group, Inc. f/k/a Holmes Products
Corp. and certain stockholders thereof(4)
</TABLE>
55
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.10 Second Supplemental Indenture and Guarantee dated February
5, 1999 among The Holmes Group, Inc. f/k/a Holmes Products
Corp., Holmes Manufacturing Corp., Holmes Air (Taiwan)
Corp., Holmes Motor Corp., Moriarty Acquisition Corp., The
Rival Company, Patton Electric Company, Inc., Patton
Building Products, Inc., Rival Consumer Sales Corporation
and State Street Bank and Trust Company(4)
10.1 Stock Purchase and Redemption Agreement dated as of October
27, 1997, as amended as of November 25, 1997, among Asco
Investments Ltd., Jordan A. Kahn, The Holmes Group, Inc.
f/k/a Holmes Products Corp., Holmes Products (Far East)
Limited and Holmes Acquisition LLC(1)
10.2 Stock Purchase Agreement dated as of October 27, 1997 among
Jordan A. Kahn and Holmes Acquisition LLC(1)
10.3 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Jordan A. Kahn(1)
10.4 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Stanley Rosenzweig(1)
10.5 Executive Employment and Non-Competition Agreement dated
November 26, 1997 among The Holmes Group, Inc. f/k/a Holmes
Products Corp. and Gregory F. White(1)
10.6 Employment Agreement dated November 16, 1997 among Holmes
Products (Far East) Limited and (Tommy) Woon Fai Liu(1)
10.7 The Holmes Group, Inc. f/k/a Holmes Products Corp. Amended
and Restated 1997 Stock Option Plan(4)
10.8 Non-transferable Common Stock Purchase Warrant dated
November 26, 1997 issued to Pentland Group plc(1)
10.9 The Holmes Group, Inc. f/k/a Holmes Products Corp. Employee
Stock Purchase Plan(4)
10.10 Agreement and Plan of Merger dated December 17, 1998, by and
among The Holmes Group, Inc. f/k/a Holmes Products Corp.,
Moriarty Acquisition Corp. and The Rival Company(2)
10.11 Confidentiality Agreement dated October 1, 1998, by and
between The Holmes Group, Inc. f/k/a Holmes Products Corp.
and BancAmerica Securities, Inc., on behalf of The Rival
Company(2)
10.12 Purchase Agreement dated as of January 29, 1999 among The
Holmes Group, Inc. f/k/a Holmes Products Corp., BancBoston
Robertson Stephens Inc. and Lehman Brothers Inc(2)
10.13 Investors Subscription Agreement dated February 5, 1999 by
and among The Holmes Group, Inc. f/k/a Holmes Products Corp.
and certain investors(3)
10.14 Amended and Restated Revolving Credit and Term Loan
Agreement dated as of February 5, 1999 among The Holmes
Group, Inc. f/k/a Holmes Products Corp., Moriarty
Acquisition Corp., The Rival Company, Holmes Products (Far
East) Limited, Esteem Industries Limited, Raider Motor
Corporation, Holmes Products (Europe) Limited, Bionaire
International B.V., Patton Electric Hong Kong, Limited, and
The Rival Company of Canada, Ltd., BankBoston, and the other
lending institutions party thereto, BankBoston, N.A. as
Administrative Agent and Lehman Commercial Paper Inc. as
Documentation Agent, with BancBoston Robertson Stephens Inc.
as Syndication Agent and Arranger and Lehman Brothers Inc.
as Co-Arranger(3)
10.15 Asset Purchase Agreement dated October 1, 1999 by and among
The Holmes Group, Inc. f/k/a Holmes Products Corp., The
Rival Company and Sta-Rite Industries(5)
10.16 Agreement of Purchase and Sale of Assets dated December 21,
1999 by and among The Holmes Group, Inc., The Rival Company,
Patton Building Products, Inc., Patton Electric Company,
Inc. and The Marley Company(6)
10.17 Employee Stockholders' Agreement dated April 23, 1998(7)
</TABLE>
56
<PAGE> 58
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.18 Voting Trust Agreement(7)
10.19 Lease Agreement between The Holmes Group, Inc. and ACRE HPC
LLC dated as of January 7, 2000(8)
21.1 Subsidiaries of Registrant(8)
23.1 Consent of PricewaterhouseCoopers LLP(8)
27.1 Financial Data Schedule(8)
</TABLE>
- ---------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (Registration No. 333-44473).
(2) Incorporated by reference to the Registrant's Tender Offer Statement on
Schedule 14D-1 dated December 23, 1998, as amended.
(3) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated February 5, 1999.
(4) Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the Fiscal Year ended December 31, 1998.
(5) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated October 8, 1999.
(6) Incorporated by reference to the Registrant's Current Report on Form 8-K
dated December 21, 1999.
(7) Incorporated by reference to the Registrant's Registration Statement on Form
S-4, as amended (Registration No. 333-77905).
(8) Filed herewith.
57
<PAGE> 59
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.
THE HOLMES GROUP, INC.
By: /s/ JORDAN A. KAHN
------------------------------------
Jordan A. Kahn, President,
Chief Executive Officer
Dated: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
/s/ JORDAN A. KAHN President, Chief Executive March 30, 2000
- --------------------------------------------------- Officer and Director (Principal
Jordan A. Kahn Executive Officer)
/s/ IRA B. MORGENSTERN Chief Financial Officer and March 30, 2000
- --------------------------------------------------- Treasurer (Principal Financial
Ira B. Morgenstern and Accounting Officer)
/s/ STANLEY ROSENZWEIG Chief Operating Officer and March 30, 2000
- --------------------------------------------------- Director
Stanley Rosenzweig
/s/ GREGORY F. WHITE Executive Vice President Sales March 30, 2000
- --------------------------------------------------- and Marketing and Director
Gregory F. White
/s/ RICHARD LUBIN Director March 30, 2000
- ---------------------------------------------------
Richard Lubin
/s/ RANDY PEELER Director March 30, 2000
- ---------------------------------------------------
Randy Peeler
/s/ THOMAS K. MANNING Director March 30, 2000
- ---------------------------------------------------
Thomas K. Manning
/s/ (TOMMY) WOON FAI LIU Director March 30, 2000
- ---------------------------------------------------
(Tommy) Woon Fai Liu
</TABLE>
58
<PAGE> 1
EXHIBIT 10.19
BASIC LEASE INFORMATION
LEASE DATED AS OF JANUARY 7, 2000
LANDLORD: ACRE HPC, LLC
TENANT: The Holmes Group, Inc.
COMMENCEMENT DATE: As of December 1, 1999
RENT COMMENCEMENT
DATE: As to the warehouse component of the Improvements,
September 1, 2000. As to the office building
component of the Improvements, December 1, 2000.
LEASE EXPIRATION
DATE: December 31, 2015, unless extended pursuant to
paragraph 3(c) of this Lease.
PRIMARY TERM FIXED RENT: The annual Fixed Rent during the Primary Term of
this Lease shall be payable monthly in advance as
follows:
(a) From the date of delivery of this Lease to but not including the Rent
Commencement Date, no Fixed Rent shall be payable, but Tenant shall be
responsible for Additional Rent during such period, as provided in the
Lease.
(b) Subject to subparagraph (d) below, from September 1, 2000 through
November 30, 2000, Fixed Rent shall be paid at the annual rate of
$1,472,520, and shall be payable on the fifteenth day of each month
commencing September 15, 2000.
(c) Subject to subparagraph (d) below, from December 1, 2000 through August
31, 2002: at the annual rate of $2,265,415, 1/12 of which shall be
payable in advance on the fifteenth day of each month, commencing on
December 15, 2000. If Tenant requests Landlord to approve change orders
involving any cost in connection with the construction of the
Improvements on the Premises which exceed the guaranteed maximum price
under the Construction Contract or if the Mortgagee requires Landlord
to invest funds in excess of the guaranteed maximum price under the
Construction Contract in order to complete the Premises, and Landlord
actually advances funds for such purpose (which Landlord agrees to do
to the extent of the first $500,000 which is shown as the contingency
in the initial Project Budget), then Fixed Rent shall be increased by
an amount determined by using an annual rental constant of 11.7% on the
first $500,000 of such Landlord advances and 12.5% on any amounts in
excess of $500,000, which increased rentals shall be confirmed by a
supplement to this Lease. Notwithstanding the preceding sentence,
Tenant shall have the right for ten
<PAGE> 2
(10) days after submission of a requisition to advance funds to pay the
costs in excess of the guaranteed maximum price under the Construction
Contract, in which case there will be no increase in Fixed Rent in
respect of the amounts so paid by Tenant; such payment shall not be
deemed to be Additional Rent, but shall be accounted for as a leasehold
improvement. If the Improvements are not Substantially Complete by
December 1, 2001 for reasons of force majeure which excuse timely
performance under the Construction Contract, then Landlord may invest
such further funds as it in good faith deems necessary to bring the
Improvements to Substantial Completion, and annual Fixed Rent will be
increased by 12.5% of any sums expended for such purpose (in addition
to those funds described in the preceding sentence) which increased
rents shall be confirmed by a supplement to this Lease. If solely by
reason of force majeure as described in the Construction Contract, the
Improvements are not Substantially Complete by December 1, 2000, Fixed
Rent shall be reduced to the product of (x) the then applicable rate of
interest on the Mortgage, and (y) the excess of the total amount of the
Project Budget over the amount then secured by the Mortgage; such
reduction shall terminate as additional funds are drawn down under the
Mortgage. Upon Final Completion of the Improvements, if the amount
Landlord has invested in the Premises (including amounts represented by
the Mortgage) is less than the total amount of the Project Budget, then
annual Fixed Rent for the first thirty-six months of the Term shall be
reduced by 8% of the excess of the total amount of the Project Budget
over the amount so invested by Landlord. If Tenant has, pursuant to
this paragraph, paid for a portion of construction because Mortgagee
refused to fund a portion of a requisition due to the fact that certain
line items of the Project Budget were being exceeded, and if after
Final Completion of the Improvements, the Project Budget has not been
exceeded in the aggregate and Landlord may draw down funds from
Mortgagee, Landlord agrees to draw such funds to the extent of
construction costs paid by Tenant for the reasons set forth in this
sentence, and to pay such proceeds to Tenant (in which case the Fixed
Rent will be appropriately increased). If Landlord has invested
additional equity funds because Mortgagee refused to fund a portion of
a requisition due to the fact that certain line items of the Project
Budget were being exceeded, Landlord agrees to draw down funds from
Mortgagee to the extent available and as soon as possible under the
terms of the Loan Documents in order to result in the capitalization of
the Premises being 25% equity and 75% debt, provided that Landlord
shall receive an equity return of 15% per annum on such additional
equity funds (pro rated for any period shorter than one year).
(d) Beginning September 1, 2002, annual Fixed Rent shall be the annual
Fixed Rent payable during the preceding annual period and increased
(but not decreased) in such month and every thirty-six months
thereafter during the Primary Term by the lesser of (x) a dollar amount
equivalent to the product of (a) the annual Fixed Rent payable during
the immediately preceding period, and (b)(i) the percentage increase in
the All Urban Consumer Price Index - All Items, All Cities over the
immediately preceding three year period, multiplied by (ii) 1,000, or
(y) 6.75% of the annual Fixed Rent payable during the immediately
preceding period, one twelfth (1/12th) of which shall be payable in
advance on the fifteenth day of month, beginning on September 15, 2002.
There shall be no adjustment in the date or the amount of the triennial
re-set of Fixed Rent in the event one component of the Improvements is
Substantially Complete before the other.
<PAGE> 3
(e) Tenant shall receive a credit against Fixed Rent for the net amount of
any liquidated damages under the Construction Contract when such
damages are actually received by Landlord, it being understood that
Landlord has no duty to seek such damages under the Construction
Contract, although Tenant shall have the right to seek such damages
pursuant to the rights granted to Tenant in Section 8 and 30 of this
Lease for the account of Landlord. Receipt by Landlord shall include
receipt by Mortgagee when Mortgagee applies such amount against the
principal secured by a Mortgage, in which case the credit shall be in
an amount equal to reduction in monthly debt service on the Mortgage;
if there is no reduction in debt service on the Mortgage, then such net
amount shall be paid to Tenant upon the earlier to occur of (x) the
maturity of the debt secured by the Mortgage, (y) the refinancing of
such Mortgage, and (z) the sale of the Premises by the Landlord.
EXTENSION TERM RENT: The annual Fixed Rent during each Extension Term
- ------------------- shall be the amount of Fixed Rent payable during
the last year of the preceding Term of this Lease,
increased (but not decreased) on the first day of
the thirty-seventh month after the last increase
in Fixed Rent under this Lease, and every
thirty-six months thereafter by the lesser of (x)
a dollar amount equivalent to the product of (a)
the annual Fixed Rent payable during the
immediately preceding period and (b) the
percentage increase in the All Urban Consumer
Price Index - All Items All Cities over the
immediately preceding three year period,
multiplied by (ii) 1,000, and (y) 6.75%, payable
monthly in advance.
LANDLORD ADDRESS
FOR PAYMENT: ---------------------------
---------------------------
---------------------------
TENANT ADDRESS: The Holmes Group, Inc.
233 Fortune Boulevard
Milford, Massachusetts 01757
<PAGE> 4
LEASE AGREEMENT
Between
ACRE HPC, LLC
as Landlord
and
THE HOLMES GROUP, INC.
as Tenant
Dated as of January 7, 2000
<PAGE> 5
TABLE OF CONTENTS
PAGE
DEFINITIONS..................................................................2
1. DEMISE OF PREMISES; QUIET ENJOYMENT.................................6
2. USE.................................................................7
3. TERM................................................................8
4. RENTAL..............................................................8
5. TAXES...............................................................9
6. NET LEASE; NON-TERMINABILITY.......................................11
7. SERVICES...........................................................12
8. REPAIRS AND MAINTENANCE; REPLACEMENT...............................13
9. DESTRUCTION OF OR DAMAGE TO PREMISES...............................14
10. INSURANCE, HOLD HARMLESS AND INDEMNIFICATION.......................16
11. COMPLIANCE WITH LAWS, COVENANTS....................................19
12. PARTIAL TAKING.....................................................20
13. SUBSTANTIAL TAKING.................................................21
14. DEFAULT: EVENTS OF DEFAULT.......................................22
15. REMEDIES...........................................................23
16. SUBORDINATION......................................................26
17. LANDLORD'S RIGHT OF ENTRY..........................................27
18. NOTICES............................................................27
19. ESTOPPEL CERTIFICATES; FINANCIAL DATA..............................29
20. MECHANICS' LIENS..................................................30
i
<PAGE> 6
21. END OF TERM........................................................31
22. ALTERATIONS........................................................32
23. MEMORANDUM OF LEASE ...............................................35
24. SUBLETTING/ASSIGNMENT..............................................35
25. HAZARDOUS MATERIAL.................................................37
26. EARLY TERMINATION..................................................40
27. TENANT ALLOWANCE; FINANCING........................................40
28. REPRESENTATIONS AND WARRANTIES OF TENANT...........................41
29. REPRESENTATIONS AND WARRANTIES OF LANDLORD.........................43
30. LANDLORD'S WORK....................................................44
31. RESERVED...........................................................47
32. TENANT'S RIGHT OF FIRST REFUSAL....................................47
33. MISCELLANEOUS PROVISIONS...........................................48
ii
<PAGE> 7
EXHIBITS:
A. LEGAL DESCRIPTION - LAND
B. DESCRIPTION OF EQUIPMENT, PERSONAL PROPERTY AND FIXTURES
C. PERMITTED ENCUMBRANCES
D. PROJECT BUDGET
iii
<PAGE> 8
THIS LEASE, made and entered into as of January 7, 2000 (together with
all amendments and supplements hereto, this "Lease"), by and between ACRE HPC,
LLC, a Delaware limited liability company with offices c/o American Corporate
Real Estate LLC, 800 Third Avenue, 40th Floor, New York, New York 10022
(together with any successor or assigns, hereinafter called the "Landlord") and
THE HOLMES GROUP, INC., a Massachusetts corporation having an address at 233
Fortune Boulevard, Milford, Massachusetts 01757 (together with any permitted
successor or assigns, hereinafter collectively called the "Tenant").
RECITALS
A. Capitalized terms used in these recitals and elsewhere in this Lease and not
otherwise defined herein have the meanings set forth in the definitions section
immediately following these recitals.
B. Landlord has acquired the land described on EXHIBIT A hereto (the "Land") and
has engaged Consigli Construction Co., Inc., a Massachusetts corporation having
an address at 72 Sumner Street, Milford, Massachusetts 01757 (together with any
permitted successor or assign under the Construction Contract, "General
Contractor") to cause the design and construction and installation of the
Improvements on the Land pursuant to the Approved Plans.
C. Landlord and Tenant agree that Tenant should have certain rights and
obligations with respect to Landlord's Work and the parties desire to set forth
such rights and obligations upon the terms and conditions set forth in this
Lease.
D. In connection with its acquisition of the Land and its engagement of General
Contractor to cause the construction of certain of the Improvements thereon,
Landlord has obtained financing in the principal amount of up to Seventeen
Million Four Hundred Thousand Dollars ($17,400,000) (the "Construction Loan")
from Fleet National Bank ("Lender") pursuant to the terms and conditions of the
Construction Loan Documents.
E. Landlord desires to lease the Land and the Improvements to Tenant, and Tenant
desires to lease the Land and Improvements from Landlord.
F. Tenant has received and reviewed copies of the Construction Contract and the
Construction Loan Documents and is fully aware of the terms and conditions
thereof.
G. Tenant has been fully involved in the testing and preparation of the Land for
the construction of the Improvements and the drafting and review of the Approved
Plans to date. Tenant is satisfied that the Premises are acceptable (or will be
acceptable upon completion of the Improvements) to Tenant for its business
purposes, subject to its review and approval of the plans not yet prepared which
shall be included in the term "Approved Plans".
NOW, THEREFORE, in consideration of the following agreements and covenants, the
mutual sufficiency of which is hereby acknowledged, the parties agree as
follows:
-1-
<PAGE> 9
DEFINITIONS
Capitalized terms used herein shall have the following meanings for all purposes
of this Lease and shall be equally applicable to both the singular and plural
forms of the terms herein defined.
"ADDITIONAL RENT" means all amounts, liabilities and obligations other
than Fixed Rent which Tenant assumes or agrees to pay under this Lease to
Landlord or others, but shall exclude capital investments of the character
described in paragraph (c) of the Basic Lease Information or alterations of the
character described in paragraph 22. In the event of casualty which damages the
Improvements while the Construction Loan is outstanding, and Landlord, if such
casualty occurs prior to Substantial Completion of the component in question,
determines in the exercise of commercially reasonable judgment that the affected
Improvements can be restored, but that such restoration is not reasonably
anticipated to be completed prior to the initial maturity of the Construction
Loan, then Landlord shall exercise its right to extend the term of the
Construction Loan for a period not to exceed one (1) year. If Landlord is
required to so extend the term of the Construction Loan for the sole purpose of
permitting restoration of the Improvements while the Construction Loan is
outstanding, Additional Rent shall include an amount equal to the extension fee,
if any, charged by the construction lender for so extending the Construction
Loan and an amount equal to any increased interest or other charges imposed by
the construction lender during the period of such extension. Moreover, if solely
as a result of (i) an Event of Default under this Lease which has occurred and
is continuing or (ii) a default by Tenant under any loan or credit agreement to
which it is now or hereafter a party in connection with which a creditor gives
Tenant a notice of default which default has not been waived by such creditor or
cured, the lender declares a default under the Construction Loan, Tenant shall
pay as Additional Rent any fees, costs, and increased interest imposed by the
construction lender in order for such construction lender to waive such default.
"AFFILIATES" means entities controlled by, controlling or under common
control with Tenant.
"APPRAISER" means the firm or person that has prepared and delivered
the Closing Appraisal and any "bringdowns" thereof in accordance with the terms
of this Lease.
"APPROVED PLANS" means the plans and specifications prepared and to be
prepared by the Architect and other design professionals and approved by
Landlord and Tenant pursuant to this Lease and approved by Lender pursuant to
the Construction Loan Documents, as the same may be modified from time to time
by Change Orders or otherwise in accordance with the terms of this Lease, the
Construction Contract and the Construction Loan Documents.
"ARCHITECT" means Adam Kornafel of AM Design Architects, Inc., a
Connecticut corporation with an address at 700 Plaza Middlesex, Middletown, CT
06457, Massachusetts Registration No. 10437.
-2-
<PAGE> 10
"BASIC LEASE INFORMATION" means the pages preceding this Lease which
are hereby incorporated by reference.
"CHANGE ORDER" has the meaning set forth in the Construction Contract.
"CLOSING APPRAISAL" means an MAI appraisal in form and substance
acceptable to Landlord and provided to Landlord on or prior to the Closing Date
which indicates an estimated fair market value and useful life of the Premises
on the Closing Date, assuming construction of the Improvements in accordance
with the Approved Plans.
"CLOSING DATE" means January 14, 2000.
"CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
"COMMENCEMENT DATE" has the meaning specified in the Basic Lease
Information.
"COMPLETION DATE" means the date on which either component of the
Improvements is Substantially Complete, and all certificates, waivers and other
instruments, agreement and other documents required to satisfy the definition of
"Substantially Complete" pursuant to the terms of the Construction Contract have
been executed and delivered as required thereunder.
"CONSTRUCTION CONTRACT" means that certain Standard Form of Agreement
Between Owner and Design Builder dated as of January 7, 2000 entered into by and
between Landlord and the General Contractor, together with that certain Rider
attached thereto dated as of January 7, 2000, and together with all other
amendments thereto from time to time.
"CONSTRUCTION LOAN" has the meaning specified in the recitals hereof.
"CONSTRUCTION LOAN DOCUMENTS" means (i) that certain $17,400,000
Construction Loan Agreement dated as of January 7, 2000, by and between Landlord
and Lender, (ii) that certain Promissory Note in the principal amount of
$17,400,000 dated as of January 7, 2000, by Landlord, as maker, to Lender, as
Payee, (iii) that certain Mortgage and Security Agreement dated as of January 7,
2000, by Landlord, as mortgagor, to Lender, as mortgagee, (iv) that certain
Assignment of Leases and Rents dated as of January 7, 2000, by Landlord, as
assignor, to Lender, as Assignee, (v) that certain Collateral Assignment and
Security Agreement in respect of Contracts, Licenses and Permits dated as of
January 7, 2000, by Landlord, as assignor, and Lender, as assignee, and (vi) any
other agreements and instruments evidencing or entered into in connection with
the Construction Loan as of the date hereof.
"COST OF THE PROJECT" means at any time the sum of (i) the cost of
acquisition of the Land, (ii) the cost of design, acquisition, construction,
financing and installation of the Improvements pursuant to the Construction
Contract, (iii) certain transaction costs relating to the acquisition of the
Land and to transactions contemplated by this Lease, the Construction Contract
and the Construction Loan Documents, including construction period interest,
acquisition fees, legal fees and expenses, appraisal fees, asset management
fees, environmental site assessment fees and title and survey
-3-
<PAGE> 11
expenses, and (iv) the costs of ownership of the Land and Improvements arising
during or attributable to the period from the Commencement Date through the
Completion Date, all as determined in good faith by Landlord and Tenant and
accompanied by supporting documentation and materials satisfactory to Landlord.
"DEFAULT" means any event or circumstance that with the passage of time
or the giving of notice or both would constitute an Event of Default hereunder.
"ENVIRONMENTAL LAWS" is defined in paragraph 25(b) of this Lease.
"EVENT OF DEFAULT" is defined in paragraph 14 of this Lease.
"EXTENSION TERM" is defined in paragraph 3(b) of this Lease.
"FINAL COMPLETION" has the meaning specified in the Construction
Contract.
"FIRST MORTGAGE" or "MORTGAGE" shall mean a first mortgage on the
Premises given by Landlord to the Lender to secure a loan financing or
refinancing the Landlord's interest in the Premises.
"FIXED RENT" is defined in paragraph 4 of this Lease.
"GENERAL CONTRACTOR" has the meaning set forth in the recitals to this
Lease.
"IMPOSITION" means the various taxes and other charges referred to in
paragraph 5, the present and future governmental laws and regulations more
specifically described in paragraph 11.
"IMPROVEMENTS" means the interest of Landlord in all of the buildings,
structures, improvements, and all building fixtures therein (including, without
limitation, parking areas and driveways) now or hereafter located on the Land,
including the improvements described in the recitals to this Lease which are to
be constructed pursuant to the Construction Contract, and including without
limitation the equipment, personal property and fixtures described on EXHIBIT B
hereto.
"INDEMNIFIED PARTIES" means Landlord and its shareholders, officers,
directors, partners, employees, attorneys and agents, licensees, and any holder
of any beneficial interest in any of them, or their successors and assigns,
provided that until Final Completion of a component of the Improvements, the
term "Indemnified Parties" with respect to such component shall mean Landlord
only.
"LAND" means the land, but none of the Improvements thereon, described
in EXHIBIT A hereto.
"LANDLORD" is defined in the first paragraph of this Lease.
-4-
<PAGE> 12
"LANDLORD'S AUTHORIZED REPRESENTATIVES" means any of R. Michael Dorsch
III, H. Cabot Lodge III or Barclay G. Jones III.
"LANDLORD'S WORK" means the construction of the Improvements shown or
described on the Approved Plans pursuant to the Construction Contract.
"LAWS" means all federal, state and local laws, ordinances, rules,
regulations and requirements which have been enacted as of the date of this
Lease and which are or will become applicable to the Premises including, without
limitation, all building laws, health codes, safety rules, handicapped access
laws (including the Americans with Disabilities Act) and zoning subdivision laws
and regulations.
"LEASE" is defined in the first sentence of this Lease.
"LEASE EXPIRATION DATE" has the meaning specified in the Basic Lease
Information.
"MEMORANDUM OF LEASE" means any short form or memorandum of this Lease
executed and delivered by Landlord and Tenant for recording purposes.
"MORTGAGEE" shall mean Lender and any other holder of a First Mortgage
with respect to the Premises or any part thereof.
"OFFER AMOUNT" means the Landlord's total investment in the Premises,
including Costs of the Project and any other money invested in the Premises. At
the date hereof, the parties estimate the Offer Amount will be $21,457,000, but
will be increased if costs in excess of those specified in the Construction
Contract are incurred by Landlord.
"OFFER NOTICE" is defined in paragraph in paragraph 32(a) of this
Lease.
"OPERATIVE DOCUMENTS" means this Lease, the Memorandum of Lease, the
Construction Contract, and the Construction Loan Documents.
"OVERDUE RATE" means the greater of (x)thirteen percent (13%) per annum
or (y) four percent (4%) plus the prime or base interest rate of money center
banks as reported from time to time in the Wall Street Journal, but in any
event, if lower, the maximum annual interest rate allowed by law for business
loans (not primarily for personal, family or household purposes).
"PERSON" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint stock company, trust,
trustee(s) of a trust, unincorporated organization, or government or
governmental authority, agency or political subdivision thereof.
"PERMITTED ENCUMBRANCES" means:
-5-
<PAGE> 13
(a) Any liens for taxes, assessments and other governmental
charges and any liens of mechanics, materialmen and laborers
for work or services performed or materials furnished in
connection with the Premises, which are not due and payable;
(b) The easements, rights-of-way, encroachments, encumbrances,
restrictive covenants or other matters affecting the title to
the Premises or any part thereof set forth in Schedule B to
the policy of owner's title insurance (or commitments
therefor) delivered to and accepted by Landlord with respect
to the Premises in connection with the delivery of this Lease
as shown on EXHIBIT C attached hereto;
(c) This Lease and the rights of Tenant hereunder; and
(d) Utility easements benefiting the Premises in such location and
in form and substance acceptable to Landlord and Tenant.
"PRIMARY TERM" is defined in paragraph 3(a) of this Lease.
"PREMISES" is defined in paragraph 1 of this Lease.
"PROJECT BUDGET" means the budget for the acquisition of the Land and
construction of the Improvements attached hereto as EXHIBIT D. The Project
Budget may be increased by up to $500,000, which Landlord has agreed to fund as
provided in the Basic Lease Information.
"RENT" means Fixed Rent and Additional Rent.
"RENT COMMENCEMENT DATE" has the meaning specified in the Basic Lease
Information.
"SITE ASSESSMENTS" is defined in paragraph 25(d) of this Lease.
"SITE REVIEWERS" is defined in paragraph 25(d) of this Lease.
"SUBSTANTIALLY COMPLETE and "SUBSTANTIAL COMPLETION" have the meanings,
with respect to either the warehouse component or the office building component
of the Improvements, as specified in the Construction Contract.
"TENANT'S TRADE FIXTURES" means all personal property of Tenant in or
on the Premises which is not necessary for the operation of the Improvements.
"TERM" means the Primary Term, together with the Extension Terms.
"TERMINATION DATE" is defined in paragraph 13 of this Lease.
1. DEMISE OF PREMISES; QUIET ENJOYMENT
-6-
<PAGE> 14
(a) Landlord hereby demises and leases to Tenant and Tenant hereby
leases and rents from Landlord the Premises (it being understood that the
Improvements will be built after the Commencement Date), IN ITS "AS IS"
CONDITION, SUBJECT TO THE EXISTING STATE OF TITLE (WITHOUT EXPRESS OR IMPLIED
WARRANTY OF LANDLORD WITH RESPECT TO THE CONDITION, QUALITY, REPAIR OR FITNESS
OF THE PREMISES FOR A PARTICULAR USE OR TITLE THERETO, ALL SUCH WARRANTIES BEING
HEREBY WAIVED AND RENOUNCED BY TENANT), consisting of the Landlord's interest in
the Land, the Improvements, together with any easements, rights, and
appurtenances in connection therewith or belonging to said Land and
Improvements, all being collectively hereinafter referred to as "the Premises".
No easement for light, air or view is included with or appurtenant to the
Premises. The foregoing disclaimer has been negotiated by Landlord and Tenant,
each being represented by independent counsel, and is intended as a complete
negation of any representation or warranty by Landlord, express or implied.
(b) Landlord covenants with Tenant, that upon the payment of the Fixed
Rent and Additional Rent and the performance of all the terms of this Lease,
Tenant shall at all times during the Term, peaceably and quietly enjoy the
Premises without any disturbance from Landlord or from any person claiming by,
through, or under Landlord. Exercise by Landlord of its rights to come upon the
Premises as set forth in this Lease shall not constitute a violation of this
paragraph.
(c) Landlord hereby assigns to Tenant, without representation or
warranty, for the duration of this Lease, all warranties relating to the design,
construction, materials, equipment and services relating to the Premises to
facilitate Tenant's performance of its obligations hereunder. The foregoing
assignment shall automatically terminate and all rights in the representations
and warranties thereby assigned shall revert to Landlord effective upon the
expiration or termination of this Lease. If any such warranty is, by its terms,
not assignable by Landlord, then Tenant shall have the right to enforce such
warranty in the name and on behalf of Landlord, all at Tenant's expense, and
Landlord shall hold any such unassignable warranty interest in trust for the
benefit of Tenant for the duration of this Lease.
2. USE
Tenant may, subject to applicable zoning restrictions and any recorded
covenants or restrictions, use and occupy the Premises for office, warehouse,
research & development, light manufacturing and assembly, and
repair/refurbishing purposes only. Tenant shall not use, suffer or permit the
Premises, or any portion thereof, to be used by Tenant, any third party or the
public, as such, without restriction or in such manner as might impair
Landlord's title to the Premises, or in such manner as might reasonably make
possible a claim or claims of adverse usage or adverse possession by the public,
as such, or third Persons, or of implied dedication of the Premises, or any
portion thereof. With the consent of Landlord, which shall not be unreasonably
withheld, Tenant may use the Premises for other lawful purposes that do not
decrease the value or utility of the Premises, increase the cost of insurance on
the Premises or increase the risk of environmental contamination of the
Premises.
-7-
<PAGE> 15
3. TERM
a. The term of this Lease shall be for a period of approximately
sixteen (16) years (the "Primary Term") and shall commence on the Commencement
Date and end on the Lease Expiration Date.
b. Tenant shall have the right, at its option, to extend the Primary
Term of this Lease, for three (3) extension terms (the "Extension Terms"), which
shall extend the Primary Term for an additional five (5) years each. Each
Extension Term shall commence on the day after the expiration of the preceding
term and shall expire on the fifth (5th) anniversary of the Lease Expiration
Date in the case of the first Extension Term, on the tenth (10th), anniversary
of the Lease Expiration Date in the case of the second Extension Term, and on
the fifteenth (15th) anniversary of the Lease Expiration Date in the case of the
third Extension Term. Subject to the next sentence, the option to extend the
Term of this Lease as described above shall be deemed exercised by Tenant,
unless at least eighteen (18) months prior to the Lease Expiration Date or
expiration of the Extension Term, as the case may be, Tenant shall have
delivered notice to Landlord of Tenant's irrevocable decision to terminate this
Lease on the Lease Expiration Date or expiration of the applicable Extension
Term, as the case may be. Landlord shall give Tenant notice of its right to
terminate this Lease, such notice to be given at any time after the
twenty-fourth (24th) month prior to the Lease Expiration Date; failure of
Landlord to deliver such notice shall not be a default and shall have the effect
of extending the date for Tenant to give its notice to terminate this Lease
pursuant to this Section 3 to a date that is ten (10) business days after
Landlord gives such notice to Tenant with such termination effective eighteen
(18) months after the date Landlord gave such reminder notice to Tenant. Subject
to the provisions of paragraph 4, the terms and conditions of this Lease shall
apply to each Extension Term with the same force and effect as if such Extension
Term had originally been included in the Primary Term of the Lease. The right of
Tenant to the Extension Terms shall be conditioned upon this Lease being in full
force and effect as of the Lease Expiration Date or expiration of the first,
second and third Extension Term, as the case may be. The Primary Term, together
with any Extension Term, shall constitute the "Term" of this Lease.
4. RENTAL
a. Tenant shall pay to Landlord the following amounts as rent for the
Premises:
i. During the Term of this Lease from and after the Rent
Commencement Date, Tenant shall pay to Landlord, as fixed monthly rent, the
amount of monthly rent specified in the Basic Lease Information (the "Fixed
Rent").
ii. Throughout the Term of this Lease, Tenant shall pay, as
additional rent, all other amounts of money and charges required to be paid by
Tenant under this Lease, whether or not such amounts of money or charges are
designated Additional Rent. Such additional Rent shall not include capital
investments of the character described in paragraph (c) of the Basic Lease
Information or paragraph 22 hereof. As used in this Lease, "Rent" shall mean and
include all Fixed Rent and Additional Rent payable by Tenant in accordance with
this Lease.
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b. It is the intention of Landlord and Tenant that the Fixed Rent
payable by Tenant to Landlord during the entire term of this Lease shall be as
specified in the Basic Lease Information and shall be absolutely net of all
costs and expenses incurred in connection with the management, operation,
maintenance and repair of the Premises in accordance with this Lease. After
Substantial Completion of each component of the Improvements, Landlord shall
have no obligations or liabilities whatsoever with respect to the management,
operation, maintenance or repair of such components of the Premises during the
term of this Lease, and after Substantial Completion of each component of the
Improvements, Tenant shall manage, operate, maintain and repair such component
of the Premises in accordance with this Lease and shall pay all costs and
expenses incurred in connection therewith before such costs or expenses become
delinquent. Without limiting the generality of the foregoing, throughout the
entire Term of this Lease, Tenant shall pay, as Additional Rent, after
Substantial Completion of each component of the Improvements, all premiums for
all property and liability insurance covering the such component(s) required
hereunder. Throughout the term of this Lease, Tenant shall pay all Property
Taxes (as defined in paragraph 5(a)) and all Other Taxes (as defined in
paragraph 5(b)) that accrue during or are allocable to the terms of this Lease.
c. Subject to Landlord's exercise of its one-time right to change
payment dates as specified in paragraph (d) of the Basic Lease Information,
Tenant shall pay all Fixed Rent to Landlord, in advance, on or before the
fifteenth day of each and every calendar month during the Term of this Lease
without notice, by wire transfer or other electronic means (or otherwise so
there are collected funds available to Landlord on the due date). Interest at
the Overdue Rate shall accrue on Fixed Rent from the due date thereof to the
date of actual payment. If the Fixed Rent is paid more than five (5) days after
its due date, a late charge of five percent (5%) of the delinquent amount shall
be due and payable. Tenant shall pay all Additional Rent when due. Tenant shall
pay all Fixed Rent to Landlord without notice, demand, deduction or offset
(except as otherwise expressly set forth in this Lease), in lawful money of the
United States of America, at the address of Landlord specified in the Basic
Lease Information, or to such other person or persons or at such other place or
places as Landlord may from time to time designate in writing, provided that no
more than three such persons shall be designated at any one time.
5. TAXES
a. Tenant shall pay, as Additional Rent, all Property Taxes prior to
the assessment of any interest or penalty for late payment. Property Taxes shall
mean all taxes, assessments, excises, levies, fees and charges (and any tax,
assessment, excise, levy, municipal service fee, fee or charge levied wholly or
partly in lieu thereof or as a substitute therefor or as an addition thereto) of
every kind and description, general or special, ordinary or extraordinary,
foreseen or unforeseen, secured or unsecured, whether or not now customary or
within the contemplation of Landlord and Tenant, that are levied, assessed,
charged, confirmed or imposed by any public or government authority on or
against, or otherwise with respect to, the Premises or any part thereof or any
personal property used in connection with the Premises. Property Taxes shall not
include net income, estate, inheritance, succession or transfer taxes of
Landlord, unless levied or assessed against Landlord in whole or in part in lieu
of, as a substitute for, or as an addition to any Property Taxes.
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b. Tenant shall pay, as Additional Rent, all Other Taxes prior to the
assessment of any interest or penalty for late payment. Other Taxes shall mean
all taxes, assessments, excises, levies, fees and charges, including all
payments related to the cost of providing facilities or services, whether or not
now customary or within the contemplation of Landlord and Tenant, that are
levied, assessed, charged, confirmed or imposed by any public or government
authority upon, or measured by, or reasonably attributable to (i) the Premises,
(ii) the cost or value of Tenant's equipment, furniture, fixtures and other
personal property located in the Premises or the cost or value of any leasehold
improvements made in or to the Premises by or for Tenant, regardless of whether
title to such improvements is vested in Tenant or Landlord, (iii) any Rent
payable under this Lease, including any gross income tax or excise tax levied by
any public or government authority with respect to the receipt of any such Rent,
(iv) the possession, leasing, operation, management, maintenance, alteration,
repair, use or occupancy by Tenant of the Premises, or (v) this transaction or
any document to which Tenant is a party creating or transferring an interest or
an estate in the Premises. Other Taxes shall not include net income, estate,
inheritance, succession or transfer taxes of Landlord, unless levied or assessed
against Landlord in while or in part in lieu of, as a substitute for, or as an
addition to any Other Taxes.
c. Except for any tax on the net income derived from the Fixed Rent, if
at any time during the Term, any method of taxation shall be such that there
shall be levied, assessed or imposed on the Landlord, or on the Fixed Rent or
Additional Rent, or on the Premises, or any portion thereof, a capital levy,
gross receipts tax, occupational license tax or other tax on the Rents received
therefrom, or a franchise tax, or an assessment, gross receipts levy or charge
measured by or based in whole or in part upon such gross Rents, Tenant, to the
extent permitted by law, covenants to pay and discharge the same, it being the
intention of the parties hereto that the Fixed Rent to be paid hereunder shall
be paid to Landlord absolutely net without deduction or charge of any nature
whatsoever, foreseeable or unforeseeable, ordinary or extraordinary, or of any
nature, kind, or description, except as otherwise expressly provided in this
Lease.
d. Tenant covenants to furnish Landlord, within fifteen (15) days after
request by Landlord, official receipts of the appropriate taxing authority, if
any, or other appropriate proof reasonably satisfactory to Landlord, evidencing
the payment of the same. The certificate, advice or bill of the appropriate
official designated by law to make or issue the same or to receive payment of
any Imposition may be relied upon by Landlord as sufficient evidence that such
Imposition is due and unpaid at the time of making or issuance of such
certificate, advice or bill.
e. Tenant shall have the right to contest the amount or validity, in
whole or in part, of any Property Tax or Other Tax or to seek a reduction in the
valuation of the Premises as assessed for real estate property tax purposes by
appropriate proceedings diligently conducted in good faith (but only after
payment of such Tax). Landlord shall not be required to join in any proceeding
referred to in this subparagraph (e) unless required by law, in which event
Landlord shall, upon written request by Tenant, join in such proceedings or
permit the same to be brought in its name. Tenant covenants that Landlord shall
not suffer or sustain any costs or expenses (including, but not limited to,
counsel fees) or any liability in connection with any such proceeding. No such
consent shall subject Landlord to any material civil liability or the risk of
any criminal liability.
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f. During the continuance of an Event of Default, upon notice from
Landlord, Tenant shall pay to Landlord on the first day of each calendar month
an amount equal to one twelfth (1/12th) of the Property Taxes and Other Taxes,
as reasonably estimated by Landlord on the basis of assessments and bills and
estimates thereof. Such amounts shall be held by Landlord or Mortgagee, and so
long as they are held by Mortgagee, they shall be held without interest, and
shall not be deemed to be trust funds and may be commingled with the general
funds of Mortgagee. If such funds are held by Landlord, they shall be held in a
separate interest bearing account with interest payable to Tenant. Landlord
shall apply such amounts to the payment of the taxes with respect to which such
amounts were paid, subject to any rights of the Mortgagee thereto. Landlord
shall make no charge for holding and applying such amounts. If at any time the
amount on deposit pursuant to this paragraph shall be less than the amount
reasonably deemed necessary by Landlord to pay such taxes as they become due,
Tenant shall pay to Landlord the amount necessary to make up the deficiency
within five (5) days after notice from Landlord requesting payment thereof.
Annually Landlord shall refund to Tenant any amount held by Landlord pursuant to
this paragraph which is not reasonably deemed necessary for the payment of
future taxes.
6. NET LEASE; NON-TERMINABILITY
a. This is an absolutely net lease and the Fixed Rent, Additional Rent
and all other sums payable hereunder by Tenant shall be paid without notice,
demand, set-off, counterclaim, abatement (except as otherwise expressly provided
in this Lease), suspension, deduction or defense. It is the intention of the
parties hereto that the Fixed Rent shall be an absolutely net return to Landlord
throughout the Term of this Lease. In order that such Rent shall be absolutely
net to Landlord, Tenant shall pay when due, and save Landlord harmless from and
against, any and all costs, charges and expenses attributable to the Premises,
including but not limited to, each fine, fee, penalty, charge (including
governmental charges), assessments, sewer rent, Impositions, insurance premiums
as may be required from time to time by Landlord or Mortgagee, utility expenses,
carrying charges, costs, expenses and obligations of every kind and nature
whatsoever, general and special, ordinary and extraordinary, foreseen and
unforeseen, the payment for which Landlord or Tenant is, or shall become liable
by reason of any rights or interest of Landlord or Tenant in, to or under the
Premises or this Lease or in any manner relating to the ownership, leasing,
operation, management, maintenance, repair, rebuilding use or occupation of the
Premises, or of any portion thereof; provided, however, that nothing herein
contained shall be construed as imposing upon Tenant any obligation to pay any
net income, estate, inheritance, succession or transfer tax of Landlord growing
out of, or levied in connection with, this Lease or Landlord's right or interest
in the Premises. The foregoing shall not affect Landlord's obligation to fund
the Project Budget for the costs of initial construction of the Improvements.
b. This Lease shall not terminate, nor shall Tenant have any right to
terminate this Lease, except as expressly provided in paragraphs 9(b), 13 and
26, nor shall Tenant be entitled to any abatement or reduction of Rent
hereunder, nor shall the obligations of Tenant under this Lease be affected, by
reason of (i) any damage to or destruction of all or any part of the Premises
from whatever cause, subject to paragraph 9(b), (ii) subject to paragraph 13,
the taking of the Premises
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or any portion thereof by condemnation, requisition or otherwise, (iii) the
prohibition, limitation or restriction of Tenant's use of all or any part of the
Premises, or any interference with such use, (iv) any eviction by paramount
title or otherwise, (v) Tenant's acquisition or ownership of all or any part of
the Premises otherwise than as expressly provided herein, (vi) any default on
the part of Landlord under this Lease, or under any other agreement to which
Landlord and Tenant may be parties, (vii) the failure of Landlord to deliver
possession of the Premises or (viii) any other cause whether similar or
dissimilar to the foregoing, any present or future law to the contrary
notwithstanding. It is the intention of the parties hereto that the obligations
of Tenant hereunder shall be separate and independent covenants and agreements,
that the Fixed Rent, the Additional Rent and all other sums payable by Tenant
hereunder shall continue to be payable in all events and that the obligations of
Tenant hereunder shall continue unaffected unless the requirement to pay or
perform the same shall have been terminated pursuant to any express provision of
this Lease. Tenant agrees that Tenant will not be relieved of the obligations to
pay the Basic Rent or any Additional Rent in case of damage to or destruction of
the Premises.
c. Tenant agrees that it will remain obligated under this Lease in
accordance with its terms, and that it will not take any action to terminate,
rescind or avoid this Lease, notwithstanding (i) the bankruptcy, insolvency,
reorganization, composition, readjustment, liquidation, dissolution or
winding-up or other proceeding affecting Landlord or its successor in interest,
or (ii) any action with respect to this Lease which may be taken by any trustee
or receiver of Landlord or its successor in interest or by any court in any such
proceeding.
d. Tenant waives all rights which may now or hereafter be conferred by
law (i) to quit, terminate or surrender this Lease or the Premises or any part
thereof, or (ii) to any abatement, suspension, deferment or reduction of the
Fixed Rent, Additional Rent or any other sums payable under this Lease, except
as otherwise expressly provided herein.
7. SERVICES
Prior to Substantial Completion of each component of the Improvements,
the cost of all necessary services for such undelivered component shall be
included in the Project Budget and paid as a Cost of the Project. After
Substantial Completion of each component, Tenant shall, at Tenant's sole cost
and expense, supply the completed component with electricity, heating,
ventilating and air conditioning, water, natural gas, lighting, replacement for
all lights, restroom supplies, telephone service, window washing, security
service, janitor, scavenger and disposal services (including hazardous and
biological waste disposal), and such other services as Tenant determines to
furnish to the Premises. Landlord shall not be in default hereunder or be liable
for any damage or loss directly or indirectly resulting from, nor shall the
Fixed Rent or Additional Rent be abated or a constructive or other eviction be
deemed to have occurred by reason of, the installation, use or interruption of
use of any equipment in connection with the furnishing of any of the foregoing
services, any failure to furnish or delay in furnishing any such services,
whether such failure or delay is caused by accident or any condition beyond the
control of Landlord or Tenant or by the making of repairs or improvements to the
Premises, or any limitation, curtailment, rationing or restriction on use of
water, electricity, gas or any form of energy serving the Premises, whether such
results
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from mandatory governmental restriction or voluntary compliance with
governmental guidelines. Tenant shall pay the full cost of all of the foregoing
services and all other utilities and services supplied to the Premises as
Additional Rent.
8. REPAIRS AND MAINTENANCE; REPLACEMENT
a. Prior to Substantial Completion of each component of the
Improvements, the costs of all repairs, maintenance and replacements for such
incomplete component shall be included in the Project Budget and paid as a Cost
of the Project. After Substantial Completion of each component of the
Improvements, Tenant shall, at its own sole cost and expense, keep the such
component(s) in good order and condition as a first class office, research and
development, light manufacturing and assembly, warehouse and repair/refurbishing
facility, at all times on and after Substantial Completion of each component of
the Premises to and including the date of the termination of the Term, by lapse
of time or otherwise. Tenant shall promptly and adequately repair the Premises
and all its component parts, and replace or repair all landscaping and all
damaged or broken fixtures and appurtenances, including by not limited to,
parking lot surface and stripes, mechanical systems, electrical and lighting
systems, plumbing and sewage systems, interior and exterior walls, roof,
foundations, floor slabs, columns and structural steel so as to preserve and
protect the useful life, utility and value of such components, and in all events
so as to preserve the effectiveness of any warranty relating thereto, such
repairs and replacements to be at least equal in quality and class to the
original work. If any building system or component which is then being used
shall become obsolete or uneconomic to repair, Tenant shall remove such item
from the Premises and, promptly replace it with an item of comparable initial
value and function. Tenant shall be entitled to the obsolete or uneconomic unit
and may sell it for Tenant's own account. Promptly upon installation of any
equipment constituting a part of a building system, Tenant shall deliver to
Landlord the original warranty (which shall specify Landlord as the owner of the
equipment) relating to such equipment. Tenant shall deliver to Landlord a
written statement showing all removals and replacements of such systems or
components during the preceding calendar year, including manufacturers, model
numbers, and serial numbers. Landlord, may upon forty-eight (48) hours prior
notice cause independent private inspectors to make inspections of any building
and building systems on the Premises or segments thereof to determine Tenant's
compliance under this paragraph 8. Tenant shall be entitled to treat the cost of
any fixtures, equipment and signs provided by Tenant and not required by the
terms of this Lease as leasehold improvements; however, all such items shall be
subject to the terms of this Lease.
Landlord shall use commercially reasonable efforts to cause the General
Contractor to comply with the terms of the Construction Contract. Landlord and
Tenant agree to cooperate in good faith regarding issues relating to the design
and construction of the Improvements. If Landlord fails, for a period of ten
(10) days after notice, to take appropriate action under any contract relating
to the Premises (other than this Lease, the Mortgage and other documents
securing the loan represented by the Mortgage) Tenant shall have the right, in
Landlord's name, to take commercially reasonable action under any such contract,
provided such action of Tenant shall not expose Landlord to any liability or
result in the loss of Landlord's rights under any such contract for which Tenant
has not indemnified Landlord and posted such security as Landlord may reasonably
request).
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Landlord may, but is not required to, after ten (10) days notice to
Tenant (except in the case of emergency, in which case Tenant shall be given
notice contemporaneously with entry), enter the Premises and make such repairs,
alterations, replacements or maintenance as Landlord reasonably deems necessary
to protect persons or property or to maintain the Improvements in accordance
with the terms of this Lease, in a diligent fashion, and Tenant shall pay
Landlord as Additional Rent forthwith upon being billed for same by Landlord the
cost thereof plus an administrative fee of five percent (5%) of such cost. Such
amounts shall bear interest at the Overdue Rate from the date of billing until
paid. The foregoing right of entry is in addition to other rights of entry by
Landlord under the terms of this Lease.
b. It is intended by Tenant and Landlord that, after Substantial
Completion of each component of the Improvements, Landlord shall have no
obligation, in any manner whatsoever, to repair or maintain such component(s)
(or any equipment therein), whether structural or nonstructural, all of which
obligations are intended, as between Landlord and Tenant, to be those of Tenant.
Tenant expressly waives the benefit of any statute now or in the future in
effect which would otherwise afford Tenant the right to make repairs at
Landlord's expense or to terminate this Lease because of Landlord's failure to
keep the Premises in good order, condition and repair.
c. Tenant shall maintain on the Premises, and turn over to Landlord
upon expiration or termination of this Lease, then current operating manuals for
the equipment then located on the Premises.
d. Tenant covenants not to install any underground storage tank on the
Land.
9. DESTRUCTION OF OR DAMAGE TO PREMISES
a. If, after Substantial Completion of each component of the Premises,
such component or any part thereof are damaged by fire or other casualty during
the Term of this Lease, Tenant shall repair such damage and restore the Premises
to substantially the same or better condition as existed before the occurrence
of such fire or other casualty using materials of the same or better grade than
that of the materials being replaced, so that the value and utility of the
Premises (considered as unencumbered by this Lease) shall not be decreased, and
this Lease shall remain in full force and effect. Such repair and replacement by
Tenant shall be done in accordance with paragraph 22 and the standards of
paragraph 8 and Tenant shall, at its expense, obtain all permits required for
such work. An architect or engineer selected by Landlord shall review, at
Tenant's expense, all plans and specifications and all draw requests hereunder.
In no event shall Fixed Rent or Additional Rent abate, nor shall this Lease
terminate by reason of such damage or destruction. Tenant may, at its sole cost
and expense, participate with Landlord in the negotiation of the amount of the
proceeds with the insurer, but Tenant shall have no right to prevent Landlord
from agreeing to a settlement so long as the settlement will provide sufficient
funds to pay the cost the restoration work required by this paragraph. Provided
no Event of Default is continuing under this Lease, and provided Tenant has (i)
delivered to Landlord plans and specifications and a budget for such repair and
restoration (all of which Landlord shall have approved in its reasonable
judgment), and (ii) deposited with Landlord or the Proceeds Trustee hereinafter
mentioned cash in the sum equal to the excess, if any, of the total
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cost set forth in such approved budget over the amount of insurance proceeds
received on account of such casualty, then Landlord shall make available to
Tenant all insurance proceeds actually received by Landlord on account of such
casualty, for application to the costs of such approved repair and restoration,
as set forth below. In lieu of the cash required by the preceding sentence,
Tenant may deposit a clean irrevocable evergreen letter of credit for an
equivalent amount drawn on a bank acceptable to Landlord and Mortgagee.
b. If Tenant is obligated to repair and restore pursuant to paragraph
9(a), then in the event the estimated cost of reconstruction is equal to or less
than five hundred thousand dollars ($500,000), insurance proceeds (net of the
cost of collection thereof) up to such amount shall be paid over to Tenant for
the sole purpose of reconstruction. In the event the estimated cost of
reconstruction is in excess of five hundred thousand dollars ($500,000), all
insurance proceeds (net of the cost of collection thereof) shall be paid to or
deposited with either a bank or trust company designated by Landlord, subject to
the reasonable approval of Tenant (herein called the "Proceeds Trustee") in the
name of the Proceeds Trustee as trustee for Landlord and Tenant and disbursed in
the manner hereinafter provided. In the event Landlord mortgages the Premises
with a First Mortgage, the mortgagee thereunder may, at its option, be appointed
Proceeds Trustee for so long as such First Mortgage remains outstanding and such
Mortgagee does not control Landlord or is not controlled by or under common
control with Landlord. Insurance proceeds shall be deposited in an interest
bearing account and interest shall be distributed to Tenant upon completion of
said installation, repair, replacement or rebuilding, provided no Event of
Default has occurred and is continuing hereunder, and any proceeds remaining
after payment of all costs of reconstruction shall (unless an Event of Default
shall have occurred and be continuing hereunder) be paid to Tenant, unless
Mortgagee applies such remaining proceeds to the principal amount secured by the
Mortgage, in which case there shall be a credit against monthly Fixed Rent equal
to the reduction in fixed monthly debt service resulting from such application,
or, if there is no reduction in debt service, Tenant shall be paid the amount of
such remaining proceeds upon the earlier to occur of the maturity of the debt
secured by the Mortgage, the refinancing of the Mortgage or the sale of the
Premises. All checks drawn on said account shall be signed by the Proceeds
Trustee. Insurance proceeds shall be disbursed to Tenant by the Proceeds Trustee
under the following procedure:
i. No more frequently than once per calendar month, Tenant may
request that Landlord reimburse Tenant out of such insurance proceeds for costs
incurred by Tenant for work in place to repair and restore the Premises and not
previously reimbursed and for the cost of construction materials stored on site
at the Premises. Tenant's request shall certify that all work for which
reimbursement is requested was performed in compliance with the plans and
specifications approved by Landlord pursuant to paragraph 8 and all applicable
laws, and shall include reasonably satisfactory evidence of the costs incurred
by Tenant and unconditional lien releases in form and substance required by
applicable law executed by all mechanics, materialmen, laborers, suppliers and
contractors who performed any portion of the repair work or supplied materials.
ii. Within fifteen (15) days after receiving Tenant's request,
Landlord shall approve or disapprove Tenant's request, which approval shall not
be unreasonably withheld, delayed or conditioned by notice to Tenant. If
Landlord approves all or any portion of a request and Proceeds Trustee has
received (and not previously disbursed) insurance proceeds, then the Proceeds
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Trustee shall send to or upon the written order of Tenant a check or wire
transfer in the amount approved by Landlord. If Landlord disapproves all or any
portion of a request, then Landlord's notice shall state the reasons for that
disapproval. Landlord's failure to deliver a notice approving or disapproving a
request shall be conclusively deemed Landlord's disapproval of the request.
10. INSURANCE, HOLD HARMLESS AND INDEMNIFICATION
a. Landlord shall not be liable to Tenant for any damage to or loss or
theft of any property or for any bodily or personal injury, illness or death of
any person in, on or about the Premises arising at any time and from any cause
whatsoever after Substantial Completion of any component of the Improvements, as
to such component. Tenant waives all claims against Landlord arising from any
liability described in this paragraph 10(a), except to the extent caused by the
gross negligence or willful misconduct of Landlord.
b. At all times after Substantial Completion of each component of the
Improvements, as to such completed component, Tenant hereby agrees to indemnify
and defend Landlord against and hold Landlord harmless from all claims, demands,
liabilities, damages, losses, costs and expenses, including reasonable
attorneys' fees and disbursements, arising from or related to any use or
occupancy of the Premises, or any condition of the Premises, or any default in
the performance of Tenant's obligations hereunder, or any damage to any property
(including property of employees and invitees of Tenant) or any bodily or
personal injury, illness or death of any person (including employees and
invitees of Tenant) occurring in, on or about the Premises or any part thereof
or any part of the building or the land constituting a part of the Premises
arising at any time and from any cause whatsoever or occurring outside the
Premises when such damage, bodily or personal injury, illness or death is caused
by any act or omission of Tenant or its agents, officers, employees,
contractors, invitees or licensees. This paragraph 10(b) shall survive the
termination of this Lease with respect to any damage, bodily or personal injury,
illness or death occurring prior to such termination.
c. Prior to Substantial Completion of each component of the
Improvements, as to such incomplete component, insurance premiums shall be
included in the Project Budget. From and after Substantial Completion of each
component of the Improvements, Tenant shall, at all times and during the term of
this Lease and at Tenant's sole cost and expense, obtain and keep in force
comprehensive commercial general liability and special cause of loss insurance,
including contractual liability (specifically covering this Lease), cross
liability, fire legal liability, and premises operations, all on an "occurrence"
policy form, with a minimum combined single limit in the amount of ten million
dollars ($10,000,000) per occurrence for bodily or personal injury to, illness
of, or death of persons and damage to property occurring in, on or about the
Premises, and such insurance shall name Landlord and Mortgagee as additional
insureds. Such insurance may be effected though the use of both primary and
umbrella coverage. Tenant shall, at Tenant's sole cost and expense, be
responsible for insuring Tenant's furniture, equipment, fixtures, computers,
office machines and personal property.
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d. From and after Substantial Completion of each component of the
Improvements, as to such completed component, Tenant shall thereafter, at all
times during the Term of this Lease and at Tenant's sole cost and expense,
obtain and keep in force worker's compensation and employer's liability
insurance in all states in which the Premises and any other operations of the
Tenant are located and any other state in which the Tenant or its contractors or
subcontractors may be subject to any statutory or other liability arising in any
manner whatsoever out of the actual or alleged employment of others.
e. From and after Substantial Completion of each component of the
Improvements, as to such completed component, Tenant shall thereafter, at all
times during the Term of this Lease after Substantial Completion, at Tenant's
sole cost and expense, obtain and keep in force or reimburse Landlord for the
cost of (a) insurance against loss (including earthquake and flood if the
Premises are located in an active seismic zone or a designated flood hazard
area) or damage to the Premises by fire and all other risks of physical loss
(including earthquake and flood) covered by insurance of the type now known as
"all risk," with difference in conditions coverage, in an amount not less than
the full replacement cost of those portions of the Premises on which Landlord's
Work is complete (without deduction for depreciation), including the cost of
debris removal and such endorsements as Landlord may reasonably require, and
containing "Replacement Cost" and "Agreed Amount" endorsements; (b) boiler and
machinery insurance covering pressure vessels, air tanks, boilers, machinery,
pressure piping, heating, ventilation and air conditioning equipment, and
elevator and escalator equipment, provided the Premises contain equipment of
such nature and insurance against loss of occupancy or use arising from any
breakdown of any such items, in such amounts as Landlord may reasonably
determine; (c) business interruption insurance for not less than one year of
Fixed Rent if the Premises are destroyed or rendered untenantable by any cause
insured against (it being understood that the existence of such insurance does
not reduce Tenant's obligation to pay Fixed Rent without diminution); and (d)
insurance in amounts and against such other risks as Landlord or Mortgagee may
reasonably require and against such risks as are customarily insured against by
operators of similar properties. In addition, during any period when any
demolition or construction on the Land is underway by Tenant, Tenant shall
maintain the following insurance: (i) completed value builders risk insurance
for the Premises, including all building materials thereon, covering loss or
damage from fire, lightning, extended coverage periods, sprinkler, leakage,
vandalism, malicious mischief and perils insured in an amount not less than the
cost, as estimated by Landlord, of the construction of alterations to the
Improvements, and (ii) worker's compensation insurance covering the full
statutory liability as an employer of the contractor performing the work of such
construction or alterations. Tenant may provide any required insurance coverage
by a combination of primary, excess and umbrella policies.
f. All insurance required to be maintained by Tenant under this
paragraph 10 and all renewals thereof shall be issued by good and responsible
companies qualified to do and doing business in the state of where the Premises
are located and having a Standard and Poor's Corporation claims paying ability
rating of at least "AA" and shall be reasonably satisfactory to Landlord. All
deductible amounts in excess of $100,000 under each such insurance policy shall
be subject to Landlord's prior written approval, which shall not be unreasonably
withheld. Each policy to be maintained by Tenant shall expressly provide that
the policy shall not be canceled or altered without thirty (30) days' prior
notice to Landlord and shall remain in effect notwithstanding any such
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cancellation or alteration until such notice shall have been given to Landlord
and such period of thirty (30) days shall have expired. All insurance under this
paragraph 10 to be maintained by Tenant (other than business interruption
insurance) shall name Landlord and any other parties designated by Landlord as
an additional insured and loss payee, shall be primary and noncontributing with
any insurance which may be carried by Landlord, shall afford coverage for all
claims based on any act, omission, event or condition that occurred or arose (or
the onset of which occurred or arose) during the policy period, and shall
expressly provide that Landlord, although named as an insured, shall
nevertheless be entitled to recover under the policy for any loss, injury or
damage to Landlord. Tenant may carry such insurance under "blanket" policies,
provided such policies expressly reserve an amount of coverage for the Premises
equal to the amount required by this Lease. Upon the issuance of each such
policy to be maintained by Tenant, Tenant shall deliver each such policy or a
certified copy and a certificate thereof (Acord 27 form) to Landlord for
retention by Landlord. Upon fifteen (15) days prior notice, Landlord shall have
the right from time to time to effect insurance for the benefit of Tenant or
Landlord or both of them and all premiums paid by Landlord shall be payable by
Tenant as Additional Rent on demand. Tenant shall pay to Landlord, immediately
upon demand all costs incurred by Landlord to obtain and maintain in effect the
policies of insurance required under this paragraph 10 or otherwise required by
Landlord.
g. Tenant waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Tenant insuring or covering the Premises, or any portion or
any contents thereof, or any operations therein, all rights of subrogation which
any insurer might otherwise, if at all, have to any claims of Tenant against
Landlord. Landlord waives on behalf of all insurers under all policies of
property, liability and other insurance (excluding workers' compensation) now or
hereafter carried by Landlord insuring or covering the Premises or any portion
or any contents thereof, or any operations therein, all rights of subrogation
which any insurer might otherwise, if at all, have to any claims of Landlord
against Tenant. Tenant shall, prior to or immediately after the date of this
Lease, procure from each of the insurers under all policies of property,
liability and other insurance (excluding workers' compensation) now or hereafter
carried by Tenant insuring or covering the Premises, or any portion or any
contents thereof, or any operations therein, a waiver of all rights of
subrogation which the insurer might otherwise, if at all, have to any claims of
Tenant against Landlord as required by this paragraph 10(g). Tenant shall have
the right to adjust losses under all policies of property insurance required by
this Lease and Landlord shall have the right to participate in such process. If
Tenant fails to adjust losses in a diligent manner, Landlord may, upon two (2)
business days notice assume control of the adjustment process.
h. During the continuance of an Event of Default, upon notice from
Landlord, Tenant shall pay to Landlord on the first day of each calendar month
an amount equal to one twelfth (1/12th) of the premiums for the insurance
required by this paragraph 10, as reasonably estimated by Landlord on the basis
of bills and estimates thereof. Such amounts shall be held by Landlord or
Mortgagee, and if held by Mortgagee, such funds shall be held without interest,
and shall not be deemed to be trust funds and may be commingled with the general
funds of Mortgagee. If such funds are held by Landlord, they shall be deemed to
be trust funds and shall be held in a separate interest bearing account with
interest payable to Tenant. Landlord shall apply such amounts to the payment of
the insurance premiums with respect to which such amounts were paid, subject to
any rights of the
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Mortgagee thereto. Landlord shall make no charge for holding and applying such
amounts. If at any time the amount on deposit pursuant to this paragraph shall
be less than the amount deemed necessary by Landlord to pay such premiums as
they become due, Tenant shall pay to Landlord the amount necessary to make the
deficiency within five (5) days after notice from Landlord requesting payment
thereof. Upon the expiration or termination of the term of this Lease (other
than as a result of an Event of Default), Landlord shall promptly refund to
Tenant any amount held by Landlord pursuant to this paragraph.
11. COMPLIANCE WITH LAWS, COVENANTS
Tenant shall, after Substantial Completion of each component of the
Improvements, as to such completed component, and thereafter throughout the Term
promptly comply or cause compliance with or remove or cure any violation of any
and all present and future laws, including, without limitation, the Americans
with Disabilities Act of 1990, as the same may be amended from time to time,
ordinances (zoning or otherwise), orders, rules, regulations and requirements of
all Federal, State, municipal and other governmental bodies having jurisdiction
over the Premises and the appropriate departments, commissions, boards and
officers thereof, and the orders, rules and regulations of the Board of Fire
Underwriters where the Premises are situated, or any other body now or hereafter
constituted exercising lawful or valid authority over the Premises, or any
portion thereof, or the sidewalks, curbs, roadways, alleys or entrances adjacent
or appurtenant thereto, or exercising authority with respect to the use or
manner of use of the Premises, or such adjacent or appurtenant facilities, and
whether the compliance, curing or removal of any such violation and the costs
and expenses necessitated thereby shall have been foreseen or unforeseen,
ordinary or extraordinary, and whether or not the same shall be presently within
the contemplation of Landlord or Tenant or shall involve any change in
governmental policy, or require structural or extraordinary repairs, alterations
or additions by Tenant and irrespective of the amount of the costs thereof. From
and after Substantial Completion of each component of the Improvements, as to
such completed component(s),Tenant, at its sole cost and expense, shall comply
with all agreements, contracts, easements, restrictions, reservations or
covenants, if any, running with the land, or hereafter created by Tenant or
consented to by Tenant or requested by Tenant and Tenant shall also comply with,
observe and perform all provisions and requirements of all policies of insurance
at any time in force with respect to the Premises and required to be obtained
and maintained under the terms of paragraph 10 hereof and shall comply with all
development permits issued by governmental authorities issued in connection with
development of the Premises. Tenant shall have the right, upon notice to
Landlord, to contest at its sole cost and expense the validity or applicability
of any law, order, rule or regulation, provided such contest shall not create
any civil or criminal liability of Landlord or create any lien on the Premises
or the Fixed Rent.
If Tenant shall at any time fail to pay any Imposition in accordance
with the provisions of paragraphs 5 or 25, or to take out, pay for, maintain and
deliver any of the insurance policies or certificates of insurance provided for
in paragraph 10, or shall fail to make any other payment or perform any other
act on its part to be made or performed hereunder (other than acts subject to
cure pursuant to paragraph 8(a)) , then Landlord, after five (5) days prior
notice to Tenant (or with only contemporaneous oral notice in situations where
Landlord reasonably determines that delay is likely
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to cause harm to Landlord's interest in the Premises), and without waiving or
releasing Tenant from any obligation of Tenant contained in this Lease, may, but
shall be under no obligation to do so,
i. pay any Imposition payable by Tenant pursuant to this Lease;
ii. take out, pay for and maintain any of the insurance policies
provided for in paragraph 10; or
iii. make any other payment or perform any other act on Tenant's
part to be paid or performed hereunder, except that any time permitted to Tenant
to perform any act required by this paragraph shall be extended for such period
as may be necessary to effectuate such performance, provided Tenant is
continuously, diligently and in good faith prosecuting such performance.
Landlord may enter upon the Premises for any such purpose and take all
such action therein or thereon as may be necessary therefor. All sums,
reasonable under the circumstances, actually so paid by Landlord and all costs
and expenses, including reasonable attorneys' fees, incurred by Landlord in
connection with the performance of any such act, together with interest thereon
at the Overdue Rate and an administrative fee equal to 5% of all such costs and
expenses, shall be paid by Tenant to Landlord on demand and submission of
reasonable evidence of such expenditures. Landlord shall not be limited in the
proof of any damages which Landlord may claim against Tenant arising out of or
by reason of Tenant's failure to provide and keep in force insurance as
aforesaid, to the amount of the insurance premium or premiums not paid or
incurred by Tenant, and which would have been payable upon such insurance, but
Landlord shall also be entitled to recover, as damages for such breach, the
uninsured amount of any loss, damages, costs and expenses of suit, including
reasonable attorney's fees, suffered or incurred by reason of damage to or
destruction of the Premises, or any portion thereof or other damage or loss
which Tenant is required to insure against hereunder, occurring during any
period when Tenant shall have failed or neglected to provide insurance as
aforesaid.
12. PARTIAL TAKING
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If less than substantially all of the office building component or the
warehouse component of the Improvements or the related Land shall be taken or
either component is temporarily taken for public or quasi-public purposes on or
after Substantial Completion of any component of the Improvements, Tenant will
promptly, at its sole cost and expense, restore, repair, replace or rebuild the
affected component(s) so taken in conformity with the requirements of paragraphs
8 and 22 as nearly as practicable to the condition, size, quality of workmanship
and market value thereof immediately prior to such taking, without regard to the
adequacy of any condemnation award for such purpose. There shall be no abatement
of Rent during such period of restoration. Tenant may, at its sole cost and
expense, participate with Landlord in the negotiation of the amount of the award
with the condemning authority, but Tenant shall have no right to prevent
Landlord from agreeing to a settlement so long as the settlement will provide
sufficient funds to pay the cost of the restoration work required by this
paragraph. In performing its obligations, Tenant shall be entitled to all
condemnation proceeds available to Landlord under the same terms and conditions
for disbursement set forth for casualty proceeds in paragraph 9 hereof. Tenant
shall, at its sole cost and expense, negotiate and, if necessary, litigate, the
amount of the award, and Landlord shall have the right to participate in such
process, and if Tenant fails to diligently prosecute such efforts, Landlord may
take control of the process. Any condemnation proceeds in excess of the amounts
as are made available to Tenant for restoration or repair of the Premises and
the cost of collection thereof, shall be the sole and exclusive property of
Landlord. Tenant shall have the right to participate in condemnation proceedings
with Landlord, and shall be entitled to receive any award made by the condemning
authority in respect of business loss or, if available, business relocation and
any other claim permitted by law which does not, in any such case, diminish
Landlord's recovery. After receipt of Landlord of any condemnation proceeds not
required for the restoration of the Premises or the cost of collection thereof,
Fixed Rent shall be reduced dollar-for-dollar by the amount of any reduction in
debt service on the First Mortgage occasioned by the prepayment resulting from
such condemnation proceeds. Landlord agrees to use commercially reasonable
efforts to cause its lenders to agree to reamortize their loans after
application of condemnation awards, rather than apply such awards in the inverse
order of loan payments. If there is no reduction in debt service as a result of
such application by Mortgagee, Tenant shall receive an amount equal to the
amount so applied by Mortgage upon the earlier to occur of the refinancing of
the Mortgage or the sale of the Premises.
13. SUBSTANTIAL TAKING
If all or substantially all of either or both of the office building
component or the warehouse component(s) of the Improvements or the related Land
shall be taken for public or quasi-public purposes after Substantial Completion
of either such component, and if Tenant determines that such event has rendered
the either or both of such components unavailable for use or unsuitable for
restoration for continued use and occupancy in Tenant's business, then Tenant,
in lieu of rebuilding as contemplated by Paragraph 12, shall, not later than
ninety (90) days after such occurrence, deliver to Landlord (i) notice of its
intention to terminate this Lease as to the affected component on a date
occurring not more than ninety-five (95) days nor less than sixty (60) days
after such notice (the "Termination Date"), (ii) a certificate by the president
or a vice president of Tenant describing the event giving rise to such
termination, stating that such event has rendered the affected component
unavailable for use or unsuitable for restoration for continued use and
occupancy in Tenant's business and that such termination will not violate any
operating agreement or covenant then in
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effect, and (iii) an irrevocable offer to purchase any remaining portion of the
affected component and the related condemnation award at a price equal) 35% of
the Offer Amount in the case of the office building component and 65% of the
Offer Amount in the case of the warehouse component, plus in either case any
prepayment premium or breakage fees charged by Mortgagee. Landlord shall accept
or reject such offer by notice given to Tenant not later than thirty (30) days
after receipt of Tenant's notice, and if Landlord fails to act, it shall be
deemed to have accepted the offer. If Landlord shall have accepted such offer or
is deemed to have accepted such offer, on the Termination Date, Landlord shall
convey by quitclaim deed to Tenant any remaining portion of the affected
component free of liens and encumbrances (except those existing on the
Commencement Date, exclusive of the Mortgage, or thereafter created with the
written consent of the Tenant), along with the right to receive any condemnation
award to which Landlord is entitled. If Landlord rejects such offer, this Lease
shall terminate as to the affected component on the Termination Date except for
liabilities which accrued prior thereto. Upon completion of such sale (if
applicable) and in all events upon the payment of all Fixed Rent and Additional
Rent payable through the Termination Date, this Lease shall terminate as to the
affected component on the Termination Date, except with respect to liabilities
which arose on or prior to the Termination Date. If any subdivision, lot split
or similar procedure is required in order for Landlord to comply with this
paragraph, the Termination Date shall be postponed until completion of such
procedure, and all costs associated with such procedure shall be paid by Tenant.
After the Termination Date, this Lease shall continue in full force and effect
with respect to the building component unaffected by such taking or notice of
taking.
14. DEFAULT: EVENTS OF DEFAULT
The occurrence of any one or more of the following events ("Event of
Default") shall constitute a breach of this Lease by Tenant:
a. Tenant fails to pay any Fixed Rent as and when such Fixed Rent
becomes due, and such failure continues for five (5) days after notice thereof;
or
b. Tenant fails to pay any Additional Rent as and when such Additional
Rent becomes due and payable and such failure continues for more than ten (10)
days after Landlord gives notice thereof to Tenant; or
c. Tenant fails to (i) cause any lien to be removed or bonded against
in accordance with paragraph 20 hereof or (ii) deliver evidence of the insurance
coverage required to be maintained pursuant to paragraph 10 hereof, and such
failure continues for a period of five (5) business days after Tenant receives
notice thereof; or
d. Tenant fails to perform or breaches any other agreement or covenant
of this Lease to be performed or observed by Tenant as and when performance or
observance is due and such failure or breach continues for more than thirty (30)
days after Landlord's giving notice thereof to Tenant; provided, however, that
if, by the nature of such agreement or covenant, such failure or breach cannot
reasonably be cured within such period of thirty (30) days (it being agreed that
the agreements and covenants of paragraph 24 are not subject to this proviso),
an Event of Default shall not exist as long as Tenant commences with due
diligence and dispatch the curing of such failure
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or breach within such period of thirty (30) days and, having so commenced,
thereafter prosecutes with diligence and dispatch and completes the curing of
such failure or breach within a reasonable time not to exceed one hundred eighty
(180) days; or
e. Tenant (i) files, or consents by answer or otherwise to the filing
against it of, a petition for relief or reorganization or arrangement or any
other petition in bankruptcy or for liquidation or to take advantage of any
bankruptcy, insolvency or other debtors' relief law of any jurisdiction, (ii)
makes an assignment for the benefit of its creditors, (iii) consents to the
appointment of a custodian, receiver, trustee or other officer with similar
powers of Tenant or of any substantial part of Tenant's property, or (iv) takes
action for the purpose of any of the foregoing; or
f. A court or government authority enters an order, and such order is
not vacated within ninety (90) days, (i) appointing a custodian, receiver,
trustee or other officer with similar powers with respect to Tenant or with
respect to any substantial part of Tenant's property, or (ii) constituting an
order for relief or approving a petition for relief or reorganization or
arrangement or any other petition in bankruptcy, insolvency or other debtors'
relief law of any jurisdiction, or (iii) ordering the dissolution, winding-up or
liquidation of Tenant;
g. An event of default shall occur under any loan agreement or
indenture of Tenant securing an amount in excess of five million dollars
($5,000,000) and the lender(s) thereunder have accelerated the maturity of the
debt secured thereby;
h. Tenant shall abandon the Premises and such abandonment shall
continue for thirty (30) consecutive days (provided, that if Tenant gives
Landlord notice of its vacating the Premises, Landlord will give notice to
Tenant of the acts or omissions constituting abandonment of the Premises, in
which case Tenant shall have ten (10) days to cure such deficiencies provided,
however, that if, by their nature such deficiencies cannot reasonably be cured
within such period of ten (10) days, an Event of Default shall not exist as long
as Tenant commences with due diligence and dispatch the curing of such
deficiencies within such period of ten (10) days and, having so commenced,
thereafter prosecutes with diligence and dispatch and completes the curing of
such deficiencies within a reasonable time not to exceed one hundred eighty
(180) days ), or the Premises are vacant and remain vacant for a period of one
hundred eighty (180) days (other than incident to remodeling or any casualty or
taking) unless Tenant is using diligent efforts to assign this Lease or sublet
the Premises (in each case to the extent permitted hereunder), as evidenced by
engaging a recognized commercial real estate broker or undertaking other action
clearly demonstrating meaningful effort to so assign this Lease or sublet the
Premises.
i. If, as of the time when the same shall have been made, any
representation or warranty of Tenant set forth herein or in any consent, notice,
certificate, demand, request or other instrument delivered by or on behalf of
Tenant in connection with or pursuant to this Lease, the Construction Contract
or any of the Construction Loan Documents or the transactions contemplated
hereby or thereby shall prove to have been incorrect or misleading in any
material respect when made;
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j. Any judgment or order for the payment of money in excess of one
hundred thousand ($100,000) shall be rendered against Tenant and not paid within
thirty (30) days after the right to appeal shall have expired; and
k. This Lease or any estate of Tenant hereunder is levied upon under
any execution and such attachment or execution is not vacated within thirty (30)
days.
Landlord may treat the occurrence of any one or more of the foregoing
Events of Default as a breach of this Lease. For so long as such Event of
Default continues, Landlord, at its option and with or without further notice or
demand of any kind to Tenant or any other person, may have any one or more of
the remedies provided in this Lease, in addition to all other remedies and
rights provided at law or in equity.
15. REMEDIES
In the event of any Event of Default, Landlord may, in addition to, and
not in derogation of any remedies for any preceding breach, with or without
notice of demand (except as otherwise expressly provided herein) and without
limiting Landlord in the exercise of any right or remedy which Landlord may have
by reason of such Event of Default:
a. Landlord shall have the right at any time to give a termination
notice to Tenant and, on the date specified in such notice, Tenant's right to
possession shall terminate and this Lease shall terminate. Upon such
termination, Landlord shall have the right to recover from Tenant:
i. The worth at the time of determination of all unpaid Rent
which had been earned at the time of termination;
ii. The worth at the time of determination of the amount of all
unpaid Rent for the balance of the term of this Lease after the time of
determination less the worth at the time of determination of the net amount, if
any, which Tenant proves could reasonably have been earned from the Premises for
such period (whether or not Landlord has attempted to mitigate damages); and
iii. All other amounts necessary to compensate Landlord for all
the detriment proximately caused by Tenant's failure to perform all of Tenant's
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom (including, for example, costs of collection, costs
of reletting, including brokerage commissions and tenant finish costs, and
similar real estate-related damages, but excluding remote or speculative
damages). The "worth at the time of determination" of the amounts referred to in
clause (i) above shall be computed by allowing interest at the Overdue Rate. The
"worth at the time of determination" of the amount referred to in clause (ii)
above shall be computed by discounting such amount at eight percent (8%) per
annum. For the purpose of determining unpaid Rent under clause (i) and (ii)
above, the Rent reserved in this Lease shall be deemed to be the total Rent
payable by Tenant under paragraph 4 hereof.
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b. Even though Tenant has breached this Lease, this Lease shall
continue in effect for so long as Landlord does not terminate Tenant's right to
possession, and Landlord shall have the right to enforce all its rights and
remedies under this Lease, including the right to recover all Rent as it becomes
due under this Lease. Acts of maintenance or preservation or efforts to relet
the Premises or the appointment of a receiver upon initiative of Landlord to
protect Landlord's interest under this Lease shall not constitute a termination
of Tenant's right to possession unless notice of termination is given by
Landlord to Tenant. Landlord shall have unrestricted rights of entry for such
purposes following an Event of Default. Landlord shall be entitled to an
administrative fee of five percent (5%) of all amounts expended under this
paragraph 15.
c. All agreements and covenants to be performed or observed by Tenant
under this Lease shall be at Tenant's sole cost and expense and without any
abatement of Fixed Rent or Additional Rent. If Tenant fails to pay any sum of
money to be paid by Tenant or to perform any other act to be performed by Tenant
under this Lease as and when due or required to be performed, Landlord shall
have the right, but shall not be obligated, and without waiving or releasing
Tenant from any obligations of Tenant, to make any such payment or to perform
any such other act on behalf of Tenant in accordance with this Lease, upon ten
(10) days notice to Tenant (except in the case of emergencies, in which case no
advance notice is required). All sums so paid by Landlord and all necessary
incidental costs plus an administrative fee equal to five percent (5%) of such
sum shall be deemed Additional Rent hereunder and shall be payable by Tenant to
Landlord on demand, together with interest on all such sums from the date of
expenditure by Landlord to the date of repayment by Tenant at the Overdue Rate.
Landlord shall have, in addition to all other rights and remedies of Landlord,
the same rights and remedies in the event of the nonpayment of such sums (plus
interest at the Overdue Rate) by Tenant as in the case of default by Tenant in
the payment of Rent.
d. (i) Prior to Final Completion of all of the Improvements, Landlord
may elect, as its exclusive remedy for an Event of Default hereunder caused by
Tenant's fraud, illegal acts, misapplication of funds, bankruptcy or other
willful misconduct, to charge Tenant a fee (which Tenant hereby agrees to pay
upon request during the continuance of an Event of Default) equal to the Offer
Amount, or, as Landlord's exclusive remedy for any other Event of Default, to
charge Tenant a fee (which Tenant hereby agrees to pay upon request during the
continuance of such Event of Default, equal to eighty-nine and nine tenths
percent (89.9%) of the Cost of the Project to Date as determined in accordance
with generally accepted accounting principles, less the sum of any Additional
Rent or other non-reimbursed payments previously made by Tenant. Upon payment of
such fee, this Lease shall terminate and neither Landlord nor Tenant shall
thereafter have any obligation to the other by reason of this Lease.
(ii) After Final Completion of all of the Improvements, the occurrence of an
Event of Default shall constitute an irrevocable offer by Tenant to purchase the
Property for a price equal to the greater of (x) the Offer Amount plus any
prepayment premium or breakage fee charged by Landlord's Mortgagee, or (y) the
present value of the remaining payments of Fixed Rent for the balance of the
then current term, discounted to present worth using a discount rate of ten
percent (10%) per annum. If Landlord accepts such offer by notice given within
ninety (90) days after the occurrence of the Event of Default, Landlord shall
convey its interest in the Property to Tenant as provided in paragraph 13 at a
closing held within thirty (30) days of such acceptance notice against payment
of
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the purchase price by Tenant. Unless Landlord shall have accepted such offer as
herein provided, such offer shall be deemed to be rejected and this Lease shall
continue, subject to termination as otherwise provided in this paragraph 15.
e. If Tenant abandons or surrenders the Premises, or is dispossessed by
process of law or otherwise, any movable furniture, equipment, trade fixtures or
personal property belonging to Tenant and left in the Premises shall be deemed
to be abandoned, at the option of Landlord, and Landlord shall have the right to
sell or otherwise dispose of such personal property in any commercially
reasonable manner. If Tenant abandons the Premises, Landlord shall have the
right, but not the obligation, to sublet the Premises on reasonable terms for
the account of Tenant, and Tenant shall be liable for all costs of such
subletting, including without limitation the cost of preparing the Premises for
subtenants and normal and customary leasing commissions paid to brokers. The net
profit from any such subletting shall be applied toward the damages that Tenant
then owes hereunder.
f. In addition to the aforementioned remedies available to Landlord, if
the Event of Default arises from Tenant's failure to comply with its obligations
under any term of provision of paragraph 20(a) of this Lease, then Landlord
shall be entitled to exercise any or all of the following remedies, either
singly or cumulatively:
i. Increase Fixed Rent by the greater of (i) twelve and one half
percent (12.5%) of any moneys paid by Landlord in connection with such Event of
Default, or (ii) the amount by which Landlord's mortgage financing costs
increase as a result of such Event of Default;
ii. Demand immediate payment of all sums due in connection with
such Event of Default, together with an administrative fee of five percent (5%)
of such amount, plus interest thereon at the Overdue Rate until paid; and
iii. Recover from Tenant all other damages and expenses that
Landlord may have sustained by reason of such Event of Default, including,
without limitation, reasonable costs and expenses incurred in the completion of
the Tenant's Work by either Lender or Landlord, and reasonable attorneys' fees
and expenses, which damages and expenses shall be paid by Tenant as they are
incurred by Landlord or Lender, respectively, together with an administrative
fee of five percent (5%), plus interest thereon at the Overdue Rate until paid.
The administrative fee shall not be payable with respect to legal fees incurred
by Landlord.
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16. SUBORDINATION
a. SUBORDINATION, NON-DISTURBANCE. Tenant agrees at any time hereafter,
and from time to time within twenty (20) days of request of Landlord, to execute
and deliver to Landlord a commercially reasonable instrument subjecting and
subordinating this Lease to the lien of any mortgage, deed of trust, security
instrument, ground or underlying lease or other document of like nature
(hereinafter collectively referred to as "Superior Mortgage") which at any time
may be placed upon the Premises, or any portion thereof, by Landlord, and to any
replacements, renewals, amendments, consolidations, modifications, extensions or
refinancing thereof, and to each and every advance made under any Superior
Mortgage. Such instrument shall require that all insurance proceeds and
condemnation awards shall be applied as provided in this Lease. It is agreed,
nevertheless, that so long as there exists no Event of Default, such
subordination agreement or other instrument, release or document (herein
"Subordination Agreement") shall not interfere with, hinder or reduce Tenant's
right to quiet enjoyment under this Lease, nor the right of Tenant to continue
to occupy the Premises, and all portions thereof, and to conduct its business
thereon in accordance with the covenants, conditions, provisions, terms and
agreements of this Lease. The costs of preparing and recording such document
shall be borne by Landlord, but Tenant shall be responsible for its own counsel
fees.
b. MORTGAGEE PROTECTION CLAUSE. In the event of any act or omission of
Landlord constituting a default by Landlord, Tenant shall not exercise any
remedy until Tenant has given Landlord and any Mortgagee of the Premises notice
of such act or omission, and until a reasonable period of time (not less than
ten (10) business days) to allow Landlord or the Mortgagee to remedy such act or
omission. However, if such act or omission cannot, with due diligence and in
good faith, be remedied within such period or cannot be cured simply by the
payment of money, the Landlord and the Mortgagee shall be allowed such further
period of time as may be reasonably necessary provided that it commences
remedying the same with due diligence and in good faith and thereafter
diligently prosecutes such cure, provided such cure period shall not extend
beyond two hundred seventy (270) days after the notice of such default. Nothing
herein contained shall be construed or interpreted as requiring any Mortgagee
receiving such notice to remedy such act or omission.
c. ATTORNMENT. If any Mortgagee shall succeed to the rights of Landlord
under this Lease or to ownership of the Premises, whether through possession or
foreclosure or the delivery of a deed to the Premises in lieu of foreclosure,
then such Mortgagee shall automatically be deemed to have recognized this Lease
and to assume the obligations of Landlord hereunder accruing on and after the
date such Mortgagee acquired title to the Premises, and Tenant shall attorn to
and recognize such Mortgagee as Tenant's landlord under this Lease and shall
promptly execute and deliver any instrument that such Mortgagee may reasonably
request to evidence such attornment (whether before or after the making of the
Mortgage). In the event of any other transfer of Landlord's interest hereunder,
such transferee shall automatically be deemed to have recognized this Lease and
to assume the obligations of Landlord hereunder accruing on and after the date
of such transfer, Tenant shall attorn to and recognize such transferee as
Tenant's landlord under this Lease and shall promptly execute and deliver any
instrument that such transferee and Landlord may reasonably request to evidence
such attornment.
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d. CONSENT TO ASSIGNMENT. Upon ten (10) days' advance notice, Tenant
agrees to execute, acknowledge and deliver a document consenting to the
assignment by Landlord of this Lease to a Mortgagee, in a form then customary
after negotiation with institutional lenders, with such changes therein as may
be reasonably requested by the Mortgagee which shall not adversely affect any
significant right of Tenant under this Lease or increase Tenant's obligations
under this lease in any material respect.
17. LANDLORD'S RIGHT OF ENTRY
Landlord, Mortgagee and their respective designees shall have the right
to enter the Premises at any time during normal business hours and any part of
the Premises on two (2) days advance notice and to inspect the same, post
notices of non-responsibility, monitor construction, perform appraisals, perform
environmental site assessments and engineering studies, exhibit the Premises to
prospective purchasers and mortgagees, and examine Tenant's books and records
pertaining to the Premises, insurance policies, certificates of occupancy and
other documents, records and permits in Tenant's possession with respect to the
Premises, all of which shall be customary and adequate and reasonably
satisfactory to Landlord. Landlord shall use reasonable efforts to minimize the
interference with Tenant's business during any such entry, and shall repair any
damage caused by Landlord during any such entry.
18. NOTICES
Notices, statements, demands, or other communications required or
permitted to be given, rendered or made by either party to the other pursuant to
this Lease or pursuant to any applicable law or requirement of public authority,
shall be in writing (whether or not so stated elsewhere in this Lease) and shall
be deemed to have been properly given, rendered or made, when received by
overnight delivery or overnight courier (of if such delivery is refused) or
facsimile transmission with a confirmation copy sent by overnight delivery or by
overnight courier delivery addressed to the other parties as follows:
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To Landlord: ACRE HPC, LLC
c/o American Corporate Real Estate, LLC
800 Third Avenue, 40th Floor
New York, New York 10022
Attention: Barclay G. Jones, III
With a copy to: ACRE HPC, LLC
c/o American Corporate Real Estate LLC
One Financial Center, 29th Floor
Boston, Massachusetts 02111
Attention: R. Michael Dorsch, III
With a copy to: ACRE HPC, LLC
c/o William E. Simon & Sons Realty, L.L.C.
10990 Wilshire Boulevard, Suite 500
Los Angeles, California 90024
Attention: Philip T. Fitzgerald
With a copy to: Day, Berry & Howard LLP
260 Franklin Street
Boston, Massachusetts 02110
Attention: Lewis A. Burleigh, Esq.
To Tenant: The Holmes Group, Inc.
233 Fortune Boulevard
Milford, Massachusetts 01757
Attention: Ira B. Morgenstern, Senior Vice President
With a copy to: Posternak, Blankstein & Lund, L.L.P.
100 Charles River Plaza
Boston, Massachusetts 02114
Attention: Donald H. Siegel, P.C.
With a copy to: The Holmes Group, Inc.
233 Fortune Boulevard
Milford, Massachusetts 01757
Attention: Paul Izzo, Esq., General Counsel
Any party listed in this paragraph 18 may, by notices as aforesaid,
designate a different address for addresses for notice, statements, demands or
other communications intended for it.
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19. ESTOPPEL CERTIFICATES; FINANCIAL DATA
a. At any time and from time to time, Tenant shall, within twenty (20)
days after written request by Landlord, execute, acknowledge and deliver to
Landlord a certificate certifying: (a) that this Lease is unmodified and in full
force and effect (or, if there have been modifications, that this Lease is in
full force and effect as modified, and stating the date and nature of each
modification); (b) the Commencement Date and the Expiration Date determined in
accordance with paragraph 3 and the date, if any, to which all Rent and other
sums payable hereunder have been paid; (c) the amount of Fixed Rent currently
payable monthly, (d) that no notice has been received by Tenant of any default
by Tenant hereunder which has not been cured, except as to defaults specified in
such certificate; (e) to the best of Tenant's knowledge, that Landlord is not in
default under this Lease, except as to defaults specified in such certificate;
and (f) to the best of Tenant's knowledge, such other matters as may be
reasonably requested by Landlord or any actual or prospective purchaser or
mortgage lender. Any such certificate may be relied upon by Landlord and any
actual or prospective purchaser or mortgage lender of the Premises or any part
thereof.
At any time and from time to time, Landlord shall, within twenty (20)
days after written request by Tenant, execute, acknowledge and deliver to Tenant
a certificate certifying: (a) that this Lease is unmodified and in full force
and effect (or, if there have been modifications, that this Lease is in full
force and effect as modified, and stating the date and nature of each
modification); (b) the Commencement Date and the Expiration Date determined in
accordance with paragraph 3 and the date, if any, to which Fixed Rent and other
sums payable hereunder have been paid; (c) the amount of Fixed Rent currently
payable monthly, (d) that no notice has been received by Landlord of any default
by Landlord hereunder which has not been cured, except as to defaults specified
in such certificate; (e) to the best of Landlord's knowledge, that Tenant is not
in default under this Lease, except as to defaults specified in such
certificate; and (f) to the best of Landlord's knowledge, such other matters as
may be reasonably requested by Tenant. Any such certificate may be relied upon
by Tenant and any permitted assignee of Tenant.
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b. Tenant shall deliver to Landlord and to any lender or purchaser
designated by Landlord the following information: within ninety (90) days after
the end of each fiscal year of Tenant, an audited balance sheet of Tenant and
its consolidated subsidiaries as at the end of such year, an audited statement
of profits and losses of Tenant and its consolidated subsidiaries for such year,
and an audited statement of cash flows of Tenant and its consolidated
subsidiaries for such year, setting forth in each case, in comparative form, the
corresponding figures for the preceding fiscal year in reasonable detail and
scope and certified by independent certified public accountants of recognized
national standing selected by Tenant; and within forty-five (45) days after the
end of each of the first three fiscal quarters of Tenant a balance sheet of
Tenant and its consolidated subsidiaries as at the end of such quarter,
statements of profits and losses of Tenant and its consolidated subsidiaries for
such quarter and a statement of cash flows of Tenant and its consolidated
subsidiaries for such quarter, setting forth in each case, in comparative form,
the corresponding figures for the similar quarter of the preceding year, in
reasonable detail and scope, and certified to be true and complete by a
financial officer of Tenant having knowledge thereof, subject to year-end
adjustment; the foregoing financial statements all being prepared in accordance
with generally accepted accounting principles, consistently applied. So long as
Tenant is a reporting company under the Securities and Exchange Act of 1934, as
amended, the foregoing requirements of this paragraph 19(b) will be satisfied by
the delivery of Tenant's Forms 10-K, 10-Q and annual reports promptly upon their
filing with the Securities and Exchange Commission. Together with the annual
financial statements described above, Tenant shall upon request by Landlord, not
more than once in a calendar year, deliver to Landlord an annual operating
statement of the Property in detail reasonably satisfactory to Landlord and
certified to be true, complete and correct by an officer of Tenant. Landlord
agrees to take reasonable steps to assure that any information designated by
Tenant as "non-public" will be kept confidential.
c. Upon ten (10) days' prior notice, Tenant will permit Landlord and
its professional representatives to visit Tenant's offices, and discuss Tenant's
affairs and finances with appropriate officers, and will make available such
information as Landlord may reasonably request bearing on the Tenant, the
Premises or this Lease, provided that Landlord shall agree to maintain the
confidentiality of any information reasonably designated by Tenant as
"nonpublic".
20. MECHANICS' LIENS
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a. Except for liens created through the act of Landlord or its agents,
Tenant shall not suffer or permit any mechanic's lien or other lien to be filed
or recorded for more than thirty (30) days against the Premises, equipment or
materials supplied or claimed to have been supplied to the Premises at the
request of Tenant, or anyone holding the Premises, or any portion thereof,
through or under Tenant. If any such mechanic's lien or other lien shall at any
time be filed or recorded against the Premises, or any portion thereof, Tenant
shall cause the same to be discharged of record within thirty (30) days after
the date of filing or recording of the same. However, in the event Tenant
desires to contest the validity of any lien it shall (i) on or before thirty
(30) days prior to the due date thereof (but in no event later than thirty (30)
days after the filing or recording thereof), notify Landlord, in writing, that
Tenant intends to so contest same; (ii) on or before the due date thereof, if
such lien involves an amount in excess of fifty thousand dollars ($50,000) or if
any Mortgagee so requires, bond over such lien or deposit with Landlord or the
title company insuring over such lien, security (in form and content reasonably
satisfactory to Landlord or Mortgagee) for the payment of the full amount of
such lien, and from time to time deposit additional security so that, at all
times, adequate security will be available for the payment of the full amount of
the lien together with all interest, penalties, costs and other charges in
respect thereof. An unconditional title insurance endorsement issued by Fidelity
National Title Insurance Company insuring Landlord and Mortgagee against loss by
reason of any such lien shall be deemed to be adequate security. For purposes of
this paragraph 20(a), the term "liens created through the act of Landlord" means
only liens that result from the actions or omissions of Landlord directly, and
such term expressly excludes any liens filed or recorded against the Premises
by, or as a result of any act or omission of, Tenant, any lender of Tenant, or
any contractor (including General Contractor), subcontractor or supplier to
Tenant of materials with respect to the Improvements, it being understood that
the discharge of all of such liens shall be the responsibility of Tenant
pursuant to the terms of this paragraph 20.
b. If Tenant complies with the foregoing, and Tenant continues, in good
faith, to contest the validity of such lien by appropriate legal proceedings
which shall operate to prevent the collection thereof and the sale or forfeiture
of the Premises, or any part thereof, to satisfy the same, Tenant shall be under
no obligation to pay such lien until such time as the same has been decreed, by
court order, to be a valid lien on the Premises. Any surplus deposit retained by
Landlord, after the payment of the lien shall be repaid to Tenant. Provided that
nonpayment of such lien does not cause Landlord to be in violation of any of its
contractual undertakings, Landlord agrees not to pay such lien during the period
of Tenant's contest. However, if Landlord pays for the discharge of a lien or
any part thereof (other than liens relating to the initial construction of the
Improvements) from funds of Landlord, any amount paid by Landlord, together with
all costs, fees and expenses in connection therewith (including reasonable
attorney's fees of Landlord) plus an administrative fee equal to five percent
(5%) of such costs and expenses, shall be repaid by Tenant to Landlord on demand
by Landlord, together with interest thereon at the Overdue Rate. Except for
liens relating to the initial construction of the Improvements, Tenant shall
indemnify and defend Landlord against and save Landlord and the Premises, and
any portion thereof, harmless from and against all losses, costs, damages,
expenses, liabilities, suits, penalties, claims, demands and obligations,
including, without limitation, reasonable attorney's fees, resulting from the
assertion, filing, foreclosure or other legal proceedings with respect to any
such mechanic's lien or other lien or the attempt by Tenant to discharge same as
above provided.
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c. All materialmen, contractors, artisans, engineers, mechanics,
laborers and any other Person now or hereafter furnishing any labor, services,
materials, supplies or equipment to Tenant with respect to the Premises, or any
portion thereof, are hereby charged with notice that they must look exclusively
to Tenant to obtain payment for the same, except with respect to labor,
services, materials, supplies and equipment authorized by the Approved Plans.
Notice is hereby given that Landlord shall not be liable for any labor,
services, materials, supplies, skill, machinery, fixtures or equipment furnished
or to be furnished to Tenant upon credit, and that no mechanic's lien or other
lien for any such labor, services, materials, supplies, machinery, fixtures or
equipment shall attach to or affect the estate or interest of Landlord in and to
the Premises, or any portion thereof.
d. Tenant shall not create and, subject to the provisions of paragraphs
20(a) and 20(b) hereof, shall not permit or suffer and shall promptly discharge
and satisfy of record, any other lien, encumbrance, charge, security interest,
or other right or interest which, as a result of Tenant's action or inaction
contrary to the provisions hereof, shall be or become a lien, encumbrance,
charge or security interest upon the Premises, or any portion thereof, or the
income therefrom, other than Permitted Encumbrances.
21. END OF TERM
a. Upon the expiration or earlier termination of the Term of this
Lease, Tenant shall surrender the Premises to Landlord in good condition and
repair as a first class facility and suitable for the same use in which the
Premises was originally received from Landlord except as repaired, rebuilt or
altered as required or permitted by this Lease (or, in the case of termination
pursuant to paragraph 13, as condemned) and except for damage caused by
Landlord, and shall surrender all keys to the Premises to Landlord at the place
then fixed for notices to Landlord and shall inform Landlord of all combinations
on locks, safes and vaults, if any. Except as otherwise provided herein, Tenant
shall at such time remove all of its property (including Tenant's Trade
Fixtures) therefrom and all alterations and improvements placed thereon by
Tenant and not consented to by Landlord for which the consent of Landlord is
required pursuant to this Lease, if so requested by Landlord. Tenant shall
repair any damage to the Premises caused by such removal, and any and all such
property not so removed when required shall, at Landlord's option, become the
exclusive property of Landlord or be disposed of by Landlord, at Tenant's cost
and expense, without further notice to or demand upon Tenant.
b. If the Premises are not surrendered as above set forth, Tenant shall
indemnify, defend and hold Landlord harmless from and against loss or liability
resulting from the delay by Tenant in so surrendering Premises, including,
without limitation, any claim made by any succeeding occupant founded on such
delay. Tenant's obligation to observe or perform this covenant shall survive the
expiration or other termination of this Lease. In addition to the foregoing, and
in addition to the Additional Rent, Tenant shall pay to Landlord a sum equal to
150% of the monthly Fixed Rent which would otherwise be due hereunder for each
month or portion thereof for which Tenant shall remain in possession of the
Premises or any part thereof after the termination of the Term or of Tenant's
rights of possession, whether by lapse of time or otherwise. The provisions of
this
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paragraph 21(b) shall not be deemed to limit or constitute a waiver of any other
rights or remedies of Landlord provided herein, at law or at equity.
c. All property of Tenant not removed on or before the last day of the
Term of this Lease shall be deemed abandoned. Tenant hereby agrees that Landlord
may remove all property of Tenant, including Tenant's Trade Fixtures, from the
Premises upon termination of this Lease and to cause its transportation and
storage, all at the sole cost and risk of Tenant and Landlord shall not be
liable for damage, theft, misappropriation or loss thereof and Landlord shall
not be liable in any manner in respect thereto and Landlord shall be entitled to
dispose of such property, as Landlord deems fit, without the requirement of an
accounting. Tenant shall pay all costs and expenses of such removal,
transportation and storage. Tenant shall reimburse Landlord upon demand for any
expenses reasonably and actually incurred by Landlord with respect to removal or
storage of abandoned property and with respect to restoring said Premises to
good order, condition and repair.
d. Except for surrender upon the expiration or earlier termination of
the Term hereof as expressly provided herein, no surrender to Landlord of this
Lease or of the Premises shall be valid or effective unless agreed to and
accepted in writing by Landlord.
22. ALTERATIONS
a. Tenant may make alterations, additions or improvements to the
Premises without Landlord's consent only if (i) such alterations, additions or
improvements will be in compliance with all applicable laws, codes, rules,
regulations and ordinances, (ii) such alterations, additions or improvements
will not reduce the fair market value or utility of the Premises, considered as
unencumbered by this Lease, and (iii) such alterations, additions or
improvements will not modify in any way the structural, exterior or roof
elements of the Premises or mechanical, electrical, plumbing, utility or life
safety systems (as opposed to components of a system) of the Premises, but
Tenant shall give prior notice of any such alterations, additions or
improvements to Landlord. In all other cases, Landlord's prior written consent
shall be required, which approval shall not be withheld, delayed or conditioned
if (a) the work to be done would not, in Landlord's reasonable judgment,
adversely affect the value, character, rentability or usefulness of the Premises
or any part thereof. In no event shall Tenant be permitted to install
underground storage tanks or fuel systems on the Premises.
b. All alterations, additions or improvements requiring Landlord's
consent shall be made at Tenant's sole cost and expense as follows:
i. Tenant shall submit to Landlord, for Landlord's approval,
complete plans and specifications for all work to be done by Tenant. Such plans
and specifications shall be prepared by the licensed architect(s) and
engineer(s) approved by Landlord, shall comply with all applicable codes,
ordinances, rules and regulations, shall not adversely affect the structural
elements of the Premises, shall be in a form sufficient to secure the approval
of all government authorities with jurisdiction over the Premises, and shall be
otherwise satisfactory to Landlord in Landlord's reasonable discretion.
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ii. Landlord shall notify Tenant within thirty (30) days whether
Landlord approves or disapproves such plans and specifications. Tenant may
submit to Landlord revised plans and specifications for Landlord's prior
approval, which approval shall not be withheld or delayed if (a) the work to be
done would not, in Landlord's reasonable judgment, adversely affect the value,
character, rentability or usefulness of the Premises or any part thereof, or (b)
the work to be done shall be required by any Law (hereinafter defined). Tenant
shall pay all costs, including the fees and expenses of the licensed
architect(s) and engineer(s), in preparing such plans and specifications. If
Landlord does not respond within such thirty (30) day period, Tenant may send
Landlord a second notice, prominently stating that failure to respond within ten
(10) days shall result in the deemed approval of the plans and specifications
delivered to Landlord as to which no response was made for more than thirty (30)
days. If Landlord fails to respond within such ten (10) day period, such plans
and specifications shall be deemed approved by Landlord.
iii. All changes (other than field changes for which no change
order is prepared, and which will be reflected in the final "as built" plans) in
the plans and specifications approved by Landlord shall be subject to Landlord's
prior written approval, which shall not be unreasonably withheld, delayed or
conditioned. If Tenant wishes to make such change in approved plans and
specifications, Tenant shall have such architect(s) and engineer(s) prepare
plans and specifications for such change and submit them to Landlord for
Landlord's written approval. Landlord shall notify Tenant in writing promptly
whether Landlord approves or disapproves such change. After Landlord's written
approval of such change, such change shall become part of the plans and
specifications approved by Landlord.
iv. Tenant shall obtain and comply with all building permits and
other government permits and approvals required in connection with the work.
Tenant shall, through Tenant's licensed contractor, perform the work
substantially in accordance with the plans and specifications approved in
writing by Landlord. Tenant shall pay the entire cost of all work (including the
cost of all utilities, permits, fees, taxes, and property and liability
insurance premiums in connection therewith) required to make the alterations,
additions or improvements. Under no circumstances shall Landlord be liable to
Tenant for any damage, loss, cost or expenses incurred by Tenant on account of
any plans and specifications, contractors or subcontractors, design of any work,
construction of any work, or delay in completion of any work.
v. Tenant shall give notice to Landlord of the date on which
construction of any work to be done by outside contractors will be commenced at
least ten (10) days prior to such date. Landlord shall have the right to post
and keep posted on the Premises any notices that may be provided by law or which
Landlord may deem to be proper for the protection of Landlord and the Premises
from such liens, and to take any other action Landlord deems necessary to remove
or discharge liens or encumbrances at the expense of Tenant.
vi. All alterations, additions, fixtures and improvements,
whether temporary or permanent in character, made in or to the Premises by
Tenant, shall become part of the Premises and Landlord's property, except those
which are readily removable without causing material damage to the Premises
(which shall be and remain the property of Tenant). Upon termination or
expiration
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of this Lease, Tenant shall, at Tenant's expense, remove all movable furniture,
equipment, trade fixtures, office machines and other personal property
(including Tenant's Trade Fixtures) from the Premises and repair all damage
caused by such removal. Termination of this Lease shall not affect the
obligations of Tenant pursuant to this paragraph 22(b) to be performed after
such termination.
vii. Notwithstanding the foregoing paragraphs, if at any time
during the Term of this Lease, Tenant wishes to make alterations, modifications,
expansions or improvements to the Premises which are not required to be made by
the terms of this Lease, and the cost thereof exceeds five hundred thousand
dollars ($500,000), Landlord agrees, subject to the further conditions of this
subparagraph (vii), upon ninety (90) days advance notice including detailed
plans of such alteration, modification, expansion or improvement, to reimburse
the cost thereof promptly upon completion of construction thereof. Landlord
shall cooperate in Tenant's efforts to obtain any easements, permits or licenses
required for such alterations, modifications, expansions or improvements. Any
alterations, modifications, expansions or improvements funded by Landlord shall
be the property of Landlord and shall be fully subject to the terms of this
Lease. In all events, Fixed Rent hereunder (including escalations thereof as
provided in the Basic Lease Information) shall be increased by an amount at
least sufficient to amortize the entire amount expended by Landlord in
connection therewith over the then remaining Term of this Lease at an interest
rate equal to the rate that Landlord could obtain on a hypothetical loan from an
institutional investor for an unsecured loan of the same amount and maturity.
Landlord's failure to fund the cost of any such acquisition and/or expansion
shall not constitute a default by Landlord hereunder and shall not give Tenant
any right to abate Rent or to terminate this Lease. Tenant shall have the right,
in its sole discretion, to finance the cost of any alterations, modifications,
expansions or improvements on the Land out of its own cash flow (in which case
there will be no increase in Fixed Rent due to such investment), provided no
mortgage or other encumbrance is placed on Landlord's or Tenant's interest
therein and provided that Landlord's ownership of such assets and the subjection
of such assets to this Lease is confirmed in a manner reasonably satisfactory to
Landlord, in a way that preserves Tenant's right to amortize its investment as a
leasehold improvement.
viii. Landlord agrees that Tenant may, at its sole cost and
expense, install, maintain and replace on the roof or parapet of the
Improvements (at a location to be approved by Landlord, such approval not to be
unreasonably withheld, delayed or conditioned) a microwave satellite dish,
aerials and other electronic transmission and receiving equipment for use in
connection with Tenant's business at the Premises (and not for any other
purpose).
23. MEMORANDUM OF LEASE
The parties agree to promptly execute a Memorandum of Lease in
recordable form and either of the parties shall have the right, without notice
to the other party, to record such Memorandum of Lease.
24. SUBLETTING/ASSIGNMENT
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a. Tenant shall not, directly or indirectly, without the prior written
consent of Landlord, assign this Lease or any interest herein or sublease the
Premises or any part thereof, or permit the use or occupancy of the Premises by
any person or entity other than Tenant and its Affiliates. No consent shall be
required for any sublease which otherwise complies with this paragraph 24 so
long as either (x) Tenant or its Affiliates shall occupy at least fifty percent
(50%) of the square footage of the Premises and of each component building
thereof, or (y) if more than fifty percent (50%) of the Premises or any
component building thereof is occupied by one or more persons other than Tenant
and its Affiliates, each such other person shall have a credit rating at least
as high as that of Tenant at the date of such subleasing. If Tenant has obtained
Landlord's consent to an assignment of its interest under this Lease, Tenant may
be released from further liability hereunder if the assignee has a credit rating
at least as high as that of Tenant on the date of the assignment, and in no
event lower than BBB by Standard and Poor's Rating Service (or the equivalent
rating of another major nationally recognized statistical rating agency if
Standard and Poor's Rating Service is no longer rating Tenant's debt). Tenant
shall in all other cases remain primarily liable (and not liable merely as a
guarantor or surety) for the performance by any assignee or subtenant of all
obligations of Tenant under this Lease, as if no assignment or sublease had been
made. This Lease shall not, nor shall any interest herein, be assignable as to
the interest of Tenant involuntarily or by operation of law without the prior
written consent of Landlord. A merger or consolidation of Tenant with another
entity other than an entity controlled by Tenant, the sale of substantially all
the assets of Tenant to another entity, the change of more than fifty percent
(50%) of the members of the board of directors within a twelve month period
(excluding any change of designees made by a person previously entitled to
designate members of Tenant's board of directors) or the change of the owners of
fifty percent (50%) of more of voting securities of Tenant within a twelve month
period (excluding transfers by a shareholder to an affiliate controlled by or
under common control with such shareholder, and at any time that a majority of
Tenant's stock is publicly held, a transfer among members of the public provided
that no related group of public holders shall have acquired more than 51% of
Tenant's stock) shall be deemed to be an assignment subject to this paragraph,
and Landlord's consent to an assignment described in this sentence shall not be
unreasonably withheld, delayed or conditioned. Notwithstanding the foregoing, if
Tenant's unsecured senior debt is then rated by Standard and Poors Rating
Service or an equivalent rating agency, and assignment caused by events
described in the immediately preceding sentence shall not require Landlord's
consent if within thirty (30) days after the later of such event or the public
announcement of such event, Tenant's credit rating is not downgraded or put on
credit watch with negative implications. Any of the foregoing acts without such
prior written consent of Landlord shall be void and shall, at the option of
Landlord, constitute a default that entitles Landlord to terminate this Lease.
Tenant agrees that the instrument by which any assignment to which Landlord
consents is accomplished shall expressly provide that the assignee will perform
all of the covenants to be performed by Tenant under this Lease as and when
performance is due after the effective date of the assignment or sublease and
that Landlord will have the right to enforce such covenants directly against
such assignee. Any purported assignment without an instrument containing the
foregoing provisions shall be void.
b. If Landlord consents in writing or if Landlord's consent is not
required, Tenant may complete the intended assignment or sublease subject to the
following conditions: (i) no assignment or sublease shall be valid and no
assignee or subtenant shall take possession of the Premises or any
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part thereof until an executed duplicate original of such assignment or
sublease, in compliance with paragraph 24(a), has been delivered to Landlord,
(ii) no assignee or subtenant shall have a right further to assign or sublease
otherwise than in compliance with this paragraph 24, and (iii) Landlord shall be
entitled to eighty percent (80%) of any net profit on any subletting or
assignment, except a subletting or assignment inherent in a merger,
consolidation, sale of substantially all assets of Tenant or purchase of
substantially all voting securities of Tenant.
c. No assignment or sublease whatsoever shall release Tenant from
Tenant's obligations and liabilities under this Lease (which shall continue as
the obligations of a principal and not of a guarantor or surety) or alter the
primary liability of Tenant to pay all Rent and to perform all obligations to be
paid and performed by Tenant. The acceptance of Rent by Landlord from any other
person or entity shall not be deemed to be a waiver by Landlord of any provision
of this Lease. Consent to one assignment or sublease shall not be deemed consent
to any subsequent assignment or sublease. If any assignee, subtenant or
successor of Tenant defaults in the performance of any obligation to be
performed by Tenant under this Lease, Landlord may proceed directly against
Tenant without the necessity of exhausting remedies against such assignee,
subtenant or successor. Landlord may consent to subsequent assignments or
subleases or amendments or modifications to this Lease with assignees,
subtenants or successor of Tenant, without notifying Tenant or any successor of
Tenant and without obtaining any consent thereto from Tenant or any successor of
Tenant, and such action shall not release Tenant from liability under this
Lease.
d. After an assignment of Tenant's interest in this Lease, Landlord
shall not exercise remedies on account of a default or Event of Default
hereunder unless Landlord shall have given notice to the Tenant named herein as
well as the tenant in possession of the Premises, of such default or Event of
Default as provided in paragraph 14. If this Lease shall be terminated as a
result of such default or Event of Default because, by its nature it was not
susceptible of cure by Tenant named herein, then Tenant named herein, if it has
cured all defaults susceptible of cure by such person (including all defaults
that can be cured by the payment of money) shall be entitled to possession of
the Premises for the remainder of the Term under all the terms and conditions of
this Lease as it exists on the date of delivery or as subsequently modified with
the consent of the named Tenant.
25. HAZARDOUS MATERIAL
a. Prior to Substantial Completion of each component of the
Improvements, the costs of complying with all Environmental Laws as to the
incomplete component shall be included in the Project Budget and paid as a Cost
of the Project. After Substantial Completion of each component of the
Improvements, as to each completed component, Tenant (i) shall comply, and cause
the Premises to comply, with all Environmental Laws (as hereinafter defined)
applicable to the Premises (including the making of all submissions to
governmental authorities required by Environmental Laws and the carrying out of
any remediation program specified by such authority), (ii) shall prohibit the
use of the Premises for the generation, manufacture, refinement, production, or
processing of any Hazardous Material (as hereinafter defined) or for the
storage, handling, transfer or transportation of any Hazardous Material (other
than in connection with the operation, business and maintenance of the Premises
and in commercially reasonable quantities as a consumer thereof and supplier of
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consumer products and in compliance with Environmental Laws), (iii) shall not
permit to remain, install or permit the installation on the Premises of any
surface impoundments, underground storage tanks, pcb-containing transformers or
asbestos-containing materials, and (iv) shall cause any alterations of the
Premises to be done in a way so as to not expose in an unsafe manner the persons
working on or visiting the Premises to Hazardous Materials and in connection
with any such alterations shall remove any Hazardous Materials present upon the
Premises which are not in compliance with Environmental Laws or which present a
danger to persons working on or visiting the Premises.
b. "Environmental Laws" means the Resource Conservation and Recovery
Act of 1976, as amended, 42 U.S.C. ss.ss.6901, ET SEQ. (RCRA), as amended, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments and Reauthorization Act of 1986, 42 U.S.C.
ss.ss.9601 ET SEQ. (CERCLA), as amended, the Toxic Substance Control Act, as
amended, 15 U.S.C. ss.ss.2601 ET SEQ., the Federal Insecticide, Fungicide and
Rodenticide Act, as amended, 7 U.S.C. ss.ss.136 ET SEQ., and all applicable
federal, state and local environmental laws, ordinances, rules and regulations,
as any of the foregoing may have been or may be from time to time amended,
supplemented or supplanted, and any other federal, state or local laws,
ordinances, rules and regulations, now or hereafter existing relating to
regulations or control of Hazardous Material or materials. The term "Hazardous
Materials" as used in this Lease shall mean substances defined as "hazardous
substances", "hazardous materials", "hazardous wastes" or "toxic substances" in
any applicable federal, state or local statute, rule, regulation or
determination, including but not limited to the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C.
ss.ss.9601, ET SEQ.; the Hazardous Materials Transportation Act, 49 U.S.C.
ss.ss.1801, ET SEQ.; the Resource, Conservation and Recovery Act of 1976, 42
U.S.C. ss.ss.6901, ET SEQ.; and, asbestos, pcb's, radioactive substances,
methane, volatile hydrocarbons, petroleum or petroleum-derived substances or
wastes, radon, industrial solvents or any other material as may be specified in
applicable law or regulations.
c. After Substantial Completion of each component of the Improvements,
as to each completed component Tenant agrees to protect, defend, indemnify and
hold harmless Landlord, its directors, officers, employees and agents, and any
successors to Landlord's interest in the chain of title to the Premises, their
direct or indirect partners, directors, officers, employees, and agents, from
and against any and all liability, including all foreseeable and all
unforeseeable damages including but not limited to attorney's and consultant's
fees, fines, penalties and civil or criminal damages, directly or indirectly
arising out of the use, generation, storage, treatment, release, threatened
release, discharge, spill, presence or disposal of Hazardous Materials from, on,
at, to or under the Premises thereafter during the Term of this Lease, and
including, without limitation, the cost of any required or necessary repair,
response action, remediation, investigation, cleanup or detoxification and the
preparation of any closure or other required plans, whether such action is
required or necessary prior to or following transfer of title to the Premises.
This agreement to indemnify and hold harmless shall be in addition to any other
obligations or liabilities Tenant may have to Landlord at common law under all
statutes and ordinances or otherwise, and shall survive following the date of
expiration or earlier termination of this Lease for five (5) years, except where
the event giving rise to the liability for which indemnity is sought arises out
of Tenant's acts, in which case the agreement to indemnify shall survive the
expiration or termination of this Lease without limit of time. Prior to Final
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Completion of both components of the Improvements, the foregoing indemnity shall
be limited to Landlord. Tenant expressly agrees that the representations,
warranties and covenants made and the indemnities stated in this Lease are not
personal to Landlord, and the benefits under this Lease may be assigned to
subsequent parties in interest to the chain of title to the Premises, which
subsequent parties in interest may proceed directly against Tenant to recover
pursuant to this Lease. Tenant, at its expense, may institute appropriate legal
proceedings with respect to environmental matters of the type specified in this
paragraph 25(c) or any lien for such environmental matters, not involving
Landlord or its Mortgagee as a defendant (unless Landlord or its mortgagee is
the alleged cause of the damage), conducted in good faith and with due
diligence, provided that such proceedings shall not in any way impair the
interests of Landlord or Mortgagee under this Lease or contravene the provisions
of any first mortgage. Counsel to Tenant in such proceedings shall be reasonably
approved by Landlord if Landlord is a defendant in the same proceeding. Landlord
shall have the right to appoint co-counsel, which co-counsel will cooperate with
Tenant's counsel in such proceedings. The fees and expenses of such co-counsel
shall be paid by Landlord, unless such co-counsel are appointed because the
interests of Landlord and Tenant in such proceedings, in such counsel's opinion,
are or have become adverse, or Tenant or Tenant's counsel is not conducting such
proceedings in good faith or with due diligence.
d. After Substantial Completion of each component of the Improvements,
as to the completed component, Tenant, upon two (2) days prior notice shall
permit such persons as Landlord or any assignee of Landlord may designate and
(unless an Event of Default has occurred and is continuing) approved by Tenant,
which approval shall not be unreasonably withheld or delayed ("Site Reviewers"),
to visit the Premises from time to time and perform environmental site
investigations and assessments ("Site Assessments") on the Premises for the
purpose of determining whether there exists on the Premises any environmental
condition which may result in any liability, cost or expense to Landlord or any
other owner or occupier of the Premises. Such Site Assessments may include both
above and below the ground testing for environmental damage or the presence of
Hazardous Material on the Premises and such other tests on the Premises as may
be necessary to conduct the Site Assessments in the reasonable opinion of the
Site Reviewers. Tenant shall supply to the Site Reviewers such historical and
operational information regarding the Premises as may be reasonably requested by
the Site Reviewers to facilitate the Site Assessments (other than information
previously supplied in writing to Landlord by Tenant) and shall make available
for meetings with the Site Reviewers appropriate personnel having knowledge of
such matters. The cost of performing and reporting all Site Assessments shall be
paid by Landlord unless an Event of Default has occurred and is continuing or
unless the Site Reviewers discover an environmental condition causing the
Premises requiring action reasonably estimated by Landlord to cost five thousand
dollars ($5,000) or more, in either of which events such cost will be paid by
Tenant and if not promptly paid by Tenant then together with an administrative
fee equal to five percent (5% )of such cost within ten (10) days after demand by
Landlord with interest to accrue at the Overdue Rate. Landlord, promptly after
request by Tenant and payment by Tenant to the extent required as aforesaid,
shall deliver to Tenant copies of reports, summaries or other compilations of
the results of such Site Assessments (it being agreed that if Tenant is to pay
for a report, Landlord shall deliver to Tenant excerpts from the report showing
the facts which make Tenant responsible for the cost of the report). Tenant's
sole remedy for Landlord's breach of the preceding sentence shall be a mandatory
injunction, and not a termination of this Lease or a withholding or reduction of
Rent.
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e. Tenant shall notify Landlord in writing, promptly upon Tenant's
learning thereof, of any:
i. notice or claim to the effect that Tenant is or may be liable
to any Person as a result of the release or threatened release of any Hazardous
Material into the environment from the Premises;
ii. notice that Tenant is subject to investigation by any
governmental authority evaluating whether any remedial action is needed to
respond to the release or threatened release of any Hazardous Material into the
environment from the Premises;
iii. notice that the Premises are subject to an environmental
lien; and
iv. notice of violation to Tenant or awareness by Tenant of a
condition which might reasonably result in a notice of violation of any
applicable Environmental Law that could have a material adverse effect upon the
Premises.
f. If required by the Lender in accordance with the Construction Loan
Documents after Substantial Completion of any component of the Improvements,
Tenant shall deliver, at Tenant's expense, to Landlord, Lender and any other
parties to the financing arrangements contemplated by the Construction Loan
Documents, the updated environmental site assessment report or reports of such
completed component(s) and related Land, which reports shall (i) confirm the
substance of the previous reports, (ii) reveal no additional actual or potential
environmental liabilities, and (iii) confirm that the construction of the
Improvements to date effected no change in compliance with Environmental Laws
and otherwise satisfies the requirements of this subparagraph. If such
environmental site assessment reports, as updated, recommend or reveal the need
for additional review or remediation, Tenant, at its own expense as to
Substantially Completed components of the Improvement and related Land, shall
provide such additional environmental site assessment reports or remediation as
are required by Landlord, Lender or any other party to such financing
arrangements. The cost of performing and reporting all other Site Assessments
shall be paid by Landlord unless an Event of Default has occurred and is
continuing or unless the Site Reviewers discover a material environmental
condition causing the Premises not to be in compliance with applicable
Environmental Laws, in either of which events such cost together with an
administrative fee equal to five percent (5%) thereof will be paid by Tenant
within ten (10) days after demand by Landlord with interest to accrue at the
Overdue Rate. The results of the environmental site assessment reports shall be
reasonably satisfactory to Landlord, Lender and any other parties to the
financing arrangements.
26. EARLY TERMINATION Upon irrevocable notice given to Landlord not later than
June 1, 2009 and provided that no Event of Default shall have occurred and be
continuing hereunder, Tenant shall have the right to terminate this Lease as of
December 1, 2010, provided Tenant pays (x) if the Premises are leased to a third
party as of the date of termination, a termination fee equal to the Fixed Rent
that would be payable hereunder for the year following such termination date,
(y)
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if the Premises are not leased to a third party as of the date of termination, a
termination fee equal to the Fixed Rent that would be payable hereunder for the
year following such termination date, plus Fixed Rent at the rate applicable to
the year following such termination date and Additional Rent until the Premises
are leased to a third party (but in no event for a period longer than two (2)
years), plus the reasonable cost of marketing the Premises, including brokerage
commissions and refitting the Premises for a new tenant, but offset by any rent
paid by a new tenant during such two year period in excess of the Fixed Rent
that would be payable hereunder during such period.
27. TENANT ALLOWANCE; FINANCING.
If Landlord proposes to refinance any Mortgage, Tenant shall cooperate
in the process, and shall negotiate in good faith any request made by a
prospective Mortgagee for changes or modifications to this Lease, and shall not
unreasonably withhold its consent to any such proposed change or modification so
long as the same does not adversely affect any significant right of Tenant under
this Lease or increase Tenant's obligations under this Lease. Tenant shall
permit Landlord and the proposed Mortgagee, at their expense, to meet with
management personnel of Tenant at Tenant's offices and to discuss the Tenant's
business and finances. On request of Landlord, Tenant agrees to provide any such
prospective Mortgagee the information to which Landlord is entitled hereunder.
If any such information is non-public and designated as such by Tenant, Landlord
will take reasonable steps to assure the confidentiality of such information.
Tenant agrees to execute, acknowledge and deliver documents reasonably requested
by the prospective Mortgagee (such as a consent to the financing (without
encumbering Tenant's assets), a consent to assignment of lease, and a
subordination, non-disturbance and attornment agreement meeting the standards
set forth in paragraph 16), customary for tenants to sign in connection with
mortgage loans to their landlords, so long as such documents are either in form
then customary among institutional lenders (provided the same do not adversely
change Tenant's rights or obligations in a way not previously changed by loan
documents previously executed by Tenant in connection with an earlier Mortgage).
Landlord shall pay Tenant's reasonable legal fees with regard to any financing
of the Premises other than the initial construction loan, the initial permanent
financing and subsequent refinancings occurring at least five (5) years after
the last financing in which Landlord did not pay for Tenant's legal expenses.
28. REPRESENTATIONS AND WARRANTIES OF TENANT. Tenant warrants and represents to
Landlord as follows as of the Closing Date:
a. ORGANIZATION AND POWER. Tenant (i) is a corporation duly formed,
validly existing and in good standing under the laws of the Commonwealth of
Massachusetts and is duly qualified as a foreign corporation and in good
standing in all other jurisdictions in which such qualification is required in
order for Tenant to carry on its business as now conducted, except where the
failure to be so qualified will not have a material adverse effect on Tenant;
and (ii) has the full corporate power, authority and legal right to lease the
Premises from Landlord and to execute, deliver and perform the Operative
Documents to which it is a party.
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b. FULL DISCLOSURE. No written statement delivered to Landlord or
Lender by Tenant in connection with the negotiation of the transactions
contemplated hereby or contained in this Lease or any other Operative Document
to which Tenant is a party contains any untrue statement of a material fact or
omits a material fact necessary to make the statements contained therein or
herein not misleading in any material respect. There is no fact peculiar to
Tenant which is not disclosed in writing which materially and adversely affects
Tenant's ability to perform under this Lease or any other Operative Document to
which Tenant is a party.
c. LITIGATION. There is no action, suit or proceeding pending, or to
the best of Tenant's knowledge threatened, against or affecting Tenant at law or
in equity before any court, or by or before any federal, state, municipal or
other governmental department, commission, board, bureau, agency, or
instrumentality or arbitrator which if adversely determined (i) individually or
in the aggregate would materially and adversely affect the performance by Tenant
of its obligations under this Lease or any other Operative Document to which it
is a party or the business and operations of Tenant, taken as a whole, or (ii)
would affect in any material respect the consummation or validity of the
Operative Documents to which it is a party, or the transactions contemplated
thereby.
d. FINANCIAL INFORMATION. There has been no material adverse change in
the condition of Tenant, financial or otherwise, since December 31, 1998.
Landlord acknowledges receipt of Tenant's form 10Q as of September 30, 1999 and
its form S-4 filed with the Securities and Exchange Commission on May 6, 1999
(as supplemented by filings made on June 18, July 2 and July 14, 1999), and
agrees that the state of facts disclosed therein shall not be deemed to
constitute a material adverse change from Tenant's condition as of December 31,
1998. The foregoing acknowledgment shall not constitute a standard of
materiality for any other purpose than this subparagraph.
e. NO DEFAULTS. No Default or Event of Default has occurred and is
continuing. Tenant is not in default in the payment of the principal or interest
on any indebtedness for borrowed money or for its deferred purchase of property
or in default under any instrument or agreement under and subject to which any
such indebtedness has been issued or under any lease, in each case involving the
likelihood of any actions or proceedings against it which will materially and
adversely affect Tenant or its ability to perform under this Lease, under this
Lease or any other Operative Document to which Tenant is a party.
f. NO VIOLATION. Neither the execution, delivery or performance by
Tenant of this Lease or the other Operative Documents to be delivered by Tenant
nor compliance herewith or therewith (i) conflicts or will conflict with or
results or will result in a breach of or constitutes or will constitute a
default under (A) any law in effect as of the Closing Date or (B) any order,
writ, injunction or decree of any court or other governmental authority, or (ii)
results or will result in the creation or imposition of any lien, charge or
encumbrance upon its property pursuant to such agreement or instrument except
for Permitted Encumbrances. Neither the execution, delivery or performance by
the Tenant of this Lease, or the Operative Documents to be delivered by Tenant
nor compliance by Tenant herewith or therewith conflicts or will conflict with
or results or will result in a breach of or constitutes or will constitute a
default under (x) the articles of organization or by-laws of Tenant,
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(y) any agreement or instrument to which Tenant is a party or by which it is
bound, or (z) the terms of any agreement pursuant to which Tenant has borrowed
money.
g. OPERATIVE DOCUMENTS ARE LEGAL AND AUTHORIZED. This Lease and the
other Operative Documents to which Tenant is a party have been duly authorized
by Tenant by all necessary corporate action (including any necessary action by
its shareholders) and duly executed and delivered by it, and, assuming the due
authorization, execution and delivery thereof by the other parties thereto, are
legal, valid and binding obligations of Tenant enforceable against it in
accordance with their respective terms.
h. INSURANCE. All insurance required by Article 10 of this Lease to be
maintained by Tenant at the date hereof is in effect, and all premiums now due
and payable in respect of such insurance have been paid.
i. CONSENTS. No consent, license, approval or authorization of, or
filing, registration or declaration with, or exemption or other action by, any
governmental or public body, authority, bureau or agency (including courts)
under the laws of the United States of America or the Commonwealth of
Massachusetts, or of any other state is required in connection with the
execution and delivery or performance by Tenant of this Lease or any other
Operative Document to which it is a party. All actions, consents and approvals
of Tenant required to be performed on or prior to the Closing Date in connection
with the transactions contemplated by the Operative Documents have been
performed in accordance with their respective terms or have been obtained and
remain in full force and effect as of the Closing Date.
j. APPROVALS. Tenant holds or, if not required on the date hereof, will
obtain in the ordinary course on or before the date required, all licenses,
certificates, consents, approvals, and permits from governmental authorities
materially necessary to perform its obligations under this Lease, to use and
operate the Premises in accordance with the provisions of this Lease and to
enter into and perform this Lease and the other Operative Documents.
k. COMPLIANCE; TAXES. The Improvements, if constructed in accordance
with the Approved Plans, will comply with all zoning, subdivision and other land
use laws and regulations, including without limitation the Americans with
Disabilities Act. Upon completion of the Improvements, Tenant will use and
occupy the Premises, and the Premises are acceptable (or will be upon completion
of the Improvements) to Tenant, for its business purposes. There are no eminent
domain proceedings pending, or to Tenant's knowledge, threatened with respect
thereto. Tenant is not in default in the payment of any taxes levied or assessed
against it or its assets, non-payment of which would materially and adversely
affect Tenant or its ability to perform under this Lease, under this Lease or
any other Operative Document to which Tenant is a party.
l. LEASE. Tenant has unconditionally accepted the Premises to the
extent set forth under the terms and conditions of this Lease, and no offset
exists with respect to any Fixed Rent or other sums payable under this Lease and
no Fixed Rent or other sum payable under this Lease has been prepaid.
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m. USE. The Permitted Encumbrances do not interfere in any material
respect with the intended use by Tenant of the Premises.
n. ERISA. Tenant is not entering into this Lease or any other Operative
Document or transaction contemplated hereby or thereby, directly or indirectly,
in connection with any arrangement in any way involving any employee benefit
plan or related trust with respect to which it is a party-in-interest, all
within the meaning of ERISA and the Code.
o. PROPERTY RELATED INFORMATION. All information provided by or on
behalf of Tenant to the engineers in connection with the environmental site
assessment reports contemplated by this Lease or to the Appraiser in connection
with the Closing Appraisal is, to the best of Tenant's knowledge, true, accurate
and complete in all material respects.
p. LOCATION OF OFFICE AND RECORDS. Tenant's principal place of business
is 233 Fortune Boulevard, Milford, Massachusetts. Tenant will keep its corporate
records concerning this Lease and the Premises in its offices at such address
until completion of the Improvements, at which time all such records shall be
kept at the Premises. Tenant will notify Landlord and Lender promptly (but in no
event later than five days after any such change) of any change in any of the
information set forth in this paragraph 28(p).
29. REPRESENTATIONS AND WARRANTIES OF LANDLORD. Landlord represents and warrants
to Tenant as follows as of the Closing Date:
a. ORGANIZATION AND POWER. (i) Landlord is a limited liability company
duly formed, validly existing and in good standing under the laws of the State
of Delaware and duly qualified to transact business in the Commonwealth of
Massachusetts; and (ii) Landlord has full power and authority (A) to execute,
deliver and perform the terms and provisions of this Lease and the other
Operative Documents to which Landlord is a party, and (B) to acquire and hold a
fee or leasehold estate in the Premises.
b. AGREEMENTS LEGAL AND AUTHORIZED. This Lease and the other Operative
Documents to which Landlord is a party have been duly authorized by Landlord and
duly executed and delivered by it and, assuming the due authorization, execution
and delivery thereof by the other parties thereto, are legal, valid and binding
obligations of Landlord, enforceable against it in accordance with their
respective terms.
c. LITIGATION. There is no action, suit or proceeding pending, or to
the best of Landlord's knowledge threatened, against or affecting Landlord at
law or in equity before any court, or by or before any federal, state, municipal
or other governmental department, commission, bound, bureau, agency, or
instrumentality or arbitration which, if adversely determined, would materially
and adversely affect the Premises or would question the right, power and
authority of Landlord to enter into or perform this Lease or any other Operative
Document to which it is a party.
d. NO VIOLATION. Neither the execution, delivery or performance by
Landlord of this Lease or the other Operative Documents to be delivered by
Landlord nor compliance herewith or therewith
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(i) conflicts or will conflict with or results or will result in a breach of or
constitutes or will constitute a default under (A) any law in effect as of the
date of delivery of this Lease or (B) any order, writ, injunction or decree of
any court or other governmental authority, or (ii) results or will result in the
creation or imposition of any lien, charge or encumbrance upon its property
pursuant to such agreement or instrument, except the liens and security
interests created, and as permitted, by the Operative Documents. Neither the
execution, delivery or performance by the Landlord of this Lease, or the
Operative Documents to be delivered by Landlord nor compliance by Landlord
herewith or therewith conflicts or will conflict with or results or will result
in a breach of or constitutes or will constitute a default under (x) the
certificate of formation or limited liability company agreement of Landlord or
(x) any agreement or instrument to which Landlord is a party or by which it is
bound.
e. CONSENTS. No consent, license, approval or authorization of, or
filing, registration or declaration with, or exemption or other action by, any
governmental or public body, bureau or agency (including courts) under the laws
of the Commonwealth of Massachusetts is required in connection with the
execution and delivery or performance by Landlord of this Lease or any other
Operative Document to which Landlord is a party.
30. LANDLORD'S WORK.
a. Upon the request of Tenant and in consideration of Tenant's
agreement to enter into this Lease of the Premises, Landlord has entered into
the Construction Contract and will use commercially reasonable efforts to cause
the General Contractor to complete the construction and performance of work
thereunder in accordance with the Approved Plans. Tenant will lease the
Improvements, once constructed, from Landlord in accordance with the terms and
conditions of this Lease, and Landlord and Tenant therefore agree that Tenant
should have certain rights and obligations with respect to the performance of
Landlord's Work.
Landlord and Tenant acknowledge that the Approved Plans for
Landlord's Work are not yet complete. Landlord and Tenant agree that any
proposed plan or specification of a portion of Landlord's Work or a proposed
revision of an Approved Plan shall be submitted from time to time by General
Contractor simultaneously to both Landlord and Tenant. Landlord agrees to
promptly give commercially reasonable consideration to all proposed plans and
changes to plans. Landlord agrees that it will not withhold, delay or condition
its approval of a plan or specification which is approved by Tenant provided the
work depicted on such plan or described in such specification, when considered
together with the work depicted or described in the existing Approved Plans: (i)
will not increase the total cost of the Improvements set forth in the
Construction Contract, and (ii) does not materially adversely affect the
anticipated soundness, structural integrity, value, utility, operation or useful
life of the Improvements; provided, however, that Landlord may not withhold its
approval of a plan pursuant to clause (i) above if Tenant shall agree to
reimburse the cost of the affected element(s) of the Improvements in the manner
set forth in section 30(j) below. If Tenant shall seek Landlord's consent to a
plan which contains element(s) which materially adversely affect the value,
utility, operation or useful life of the Improvements, Landlord may require, as
a condition to such consent, that upon expiration or termination of this Lease,
Tenant shall restore the Premises to the physical construction and condition
they would have been in if such element(s) included in
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the plan had not been approved. Upon approval by Landlord and Tenant as provided
in this paragraph, the proposed plan or specification shall be an Approved Plan.
b. So long as no Event of Default has occurred and is continuing
hereunder, Landlord agrees that Landlord shall not enter into any amendment of,
agree to any consent under, or give any waivers or approvals pursuant to the
terms of the Construction Contract without obtaining the prior written consent
of Tenant if such amendment, consent, waiver or approval would have the effect
of (i) increasing any of Tenant's financial obligations under this Lease (other
than an increase in Fixed Rent by reason of increased investment by Landlord, as
contemplated in the Basic Lease Information), (ii) impairing or delaying in any
material way Tenant's use or occupancy of the Improvements as contemplated by
the Approved Plans, (iii) altering in any material adverse respect any of the
Approved Plans or materially adversely affecting the soundness, structural
integrity, value, utility, operation or useful life of the Improvements, or (iv)
otherwise adversely affecting Tenant's rights to the use or occupancy of the
Improvements as contemplated by the Approved Plans.
c. So long as no Event of Default has occurred and is continuing
hereunder, Landlord and Tenant agree that any Change Orders for Landlord's Work
requiring the consent of Landlord pursuant to the terms of the Construction
Contract shall require the consent of both Landlord and Tenant. Accordingly, so
long as no Event of Default has occurred and is continuing hereunder, Landlord
agrees not to give its consent to any Change Order unless Landlord shall first
have received Tenant's prior written consent to such Change Order. Each of
Landlord and Tenant agrees that it shall not unreasonably withhold, condition or
delay its consent to any Change Order if such Change Order, when considered
together with all other Change Orders executed and delivered to such date, (i)
will not increase the total cost of the Improvements except as the cost of
completion in accordance with Approved Plans necessitates the increased cost;
and (ii) does not materially adversely affect the soundness, structural
integrity, value, utility, operation or useful life of the Improvements, so long
as the Construction Contract and the payment and performance bond relating
thereto shall have been amended to reflect such Change Order for Landlord's
Work; provided, however, that Landlord may not withhold its approval of a Change
Order pursuant to clause (i) above if Tenant shall agree to reimburse the cost
of the affected element(s) of the Improvements in the manner set forth in
section 30(j) below. In addition, each of Landlord and Tenant agree that it
shall not unreasonably withhold, condition or delay its consent to any Change
Order if such Change Order is based on the topography or configuration of the
Land, local zoning requirements, or the location of adjacent buildings, and
Landlord agrees to permit the cost of such Change Order to be paid out of the
contingency reserve provided in the Project Budget or, to the extent permitted
by the lender under the Construction Loan, the contingency reserve provided in
the Construction Contract. If Tenant shall seek Landlord's consent to a Change
Order which contains element(s) which materially adversely affect the value,
utility, operation or useful life of the Improvements, Landlord may require, as
a condition to such consent, that upon expiration or termination of this Lease,
Tenant shall restore the Premises to the physical construction and condition
they would have been in if such element(s) included in the Change Order had not
been approved.
d. Upon delivery, installation, testing or completion of construction
(including punch list items) of any aspect of
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Landlord's Work, as appropriate, Tenant shall inspect such aspect of Landlord's
Work and, unless Tenant gives Landlord timely written notice of any defect in or
other objection to such aspect of Landlord's Work, (i) Tenant shall be deemed to
have accepted such aspect of Landlord's Work under this Lease and (ii) Tenant
shall be deemed to have agreed that such aspect of Landlord's Work is
satisfactory to Tenant in all respects and suitable for its purposes hereunder.
The foregoing acceptance of Landlord's Work shall not limit Tenant's rights, if
any, as against General Contractor or against third parties in respect of their
warranties with respect thereto.
e. Without limiting the generality of the preceding subparagraph (i)
from time to time at Landlord's request and (ii) in any event at such time as a
component of the Improvements is Substantially Complete and any punchlist items
with respect to such component have been addressed by General Contractor, Tenant
shall execute and deliver an instrument confirming Tenant's acceptance of
Landlord's Work or any appropriate portion thereof.
f. Tenant has received and reviewed copies of the Construction Contract
and the Construction Loan Documents and accepts their terms. Landlord hereby
grants to Tenant, to the extent of its right to do so under the Construction
Contract, the rights of Tenant described in the Construction Contract. In
furtherance of the foregoing and not in limitation thereof, Tenant, at Tenant's
sole cost and expense, agrees to cooperate with Landlord in all reasonable
respects in (i) delivering prompt written responses to Landlord and, if
requested, to General Contractor, in connection with any proposed amendment of,
consents under, or giving of any waivers or approvals pursuant to the terms of
the Construction Contract, (ii) delivering prompt written responses to Landlord
and, if requested, to General Contractor, in connection with any Change Orders
under the Construction Contract, (iii) satisfying conditions precedent to the
advance of proceeds under the Construction Loan involving Tenant, (iv)
delivering prompt written responses to Landlord and, if requested, to Lender, in
connection with any proposed amendment of, consents under, or giving of any
waivers or approvals pursuant to the terms of any of the Construction Loan
Documents, (v) providing any estoppel certificates, documents, certificates or
opinions reasonably requested by Landlord, General Contractor or Lender in
connection with the transactions contemplated by the Construction Contract, this
Lease and the Construction Loan Documents, and (vi) otherwise carrying out the
effect and intent of the Construction Contract, this Lease and the Construction
Loan Documents.
g. Tenant shall at all times during the construction of the
Improvements keep and maintain accurate books, records and accounts showing all
materials ordered and received, and all disbursements and accounts payable in
connection with the construction of the Improvements, and shall make such books,
records and accounts available to Landlord, upon two business days' advance
notice, for inspection and copying during normal business hours at the office of
Tenant as set forth in the preliminary caption of this Lease.
h. Tenant acknowledges and agrees that, in dealing with Landlord under
the terms and provisions of this paragraph 30, Tenant shall be entitled to rely
only on communications and statements of one of Landlord's Authorized
Representatives, or such other person as Landlord may designate from time to
time by written notice to Tenant.
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<PAGE> 56
i. Tenant shall give Landlord prompt written notice of any incident of
Force Majeure, commencement of any litigation, or other interruption of the
construction of the Project or which may materially interfere with the ability
to complete the warehouse component of the Improvements by September 1, 2000, or
to complete the office building component of the Improvements by December 1,
2000.
j. If Tenant shall have agreed to pay the increased cost shown on a
proposed plan or described in a proposed specification or required by a proposed
Change Order pursuant to section 30(a) or 30(c), respectively, Tenant shall
reimburse the cost of such element(s) of the Improvements in question as
leasehold improvement(s) promptly after Final Completion, at a price equal to
the increased cost of the work described in such plan, specification or Change
Order under the design/build agreement between Landlord and General Contractor,
plus the interest paid by Landlord used to pay for such costs pursuant to loan
terms arranged by Tenant, so that the ratio between Tenant's equity investment
and the Construction Loan will, upon completion of the Improvements, remain
constant, in which case any changes in Fixed Rent will be determined pursuant to
the terms of this Lease. It is understood that Landlord will fund neither its
equity investment nor a draw under the Construction Loan to pay for any such
cost, but that such costs shall be initially paid by an accommodation third
party non-recourse loan to Landlord secured either by an assignment of Tenant's
cost reimbursement agreement or a letter of credit under Tenant's credit line.
31. RESERVED.
32. TENANT'S RIGHT OF FIRST REFUSAL.
a. Tenant shall have a one time right of first refusal with respect to
the Premises as hereinafter set forth. If at any time this Lease is in full
force and effect, Landlord shall receive a bona fide offer from any third party
for the purchase of the Premises, which offer Landlord shall desire to accept,
Landlord shall promptly deliver to Tenant a copy of such offer (the "Offer
Notice"). The delivery of the Offer Notice to Tenant shall constitute a written
offer by Landlord to sell the Premises to Tenant upon the same terms and
conditions as set forth in the Offer Notice. Provided that no Event of Default
has occurred and is continuing, Tenant may, within twenty (20 )business days
after receipt of the Offer Notice, elect to purchase the Premises on the same
terms and conditions as those set forth in the Offer Notice by delivering to
Landlord within said twenty (20) business days a written acceptance of such
offer together with a non-refundable deposit equal to five percent (5%) of the
gross purchase price (or such larger deposit as may be required by the terms of
the third party offer). If Tenant accepts the offer, Landlord shall convey the
Premises to Tenant in accordance with the provisions of paragraph (b) below
(except that the deed shall be subject to any encumbrances contemplated by the
Offer Notice) and Tenant shall pay to Landlord the purchase price and other
consideration as set forth in the Offer Notice. If Tenant fails to accept the
offer within the time period herein specified, Tenant's right of first refusal
under this Lease shall terminate and be null and void and Landlord shall be free
to, but not obligated to, complete the proposed sale of the Premises, provided
that the terms on which such sale is consummated are not more favorable to the
purchaser (except in DE MINIMIS respects) than the terms offered to Tenant
pursuant to the Offer Notice. Tenant's right of first refusal shall become null
and void upon the first sale of the
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<PAGE> 57
Premises to a bona fide third party. The term, "the right of first refusal" in
this paragraph shall be inapplicable to a transfer to any Person affiliated with
Landlord. The provisions of this paragraph shall not apply to or prohibit: (i)
any mortgaging, subjection to deed of trust or other hypothecation of Landlord's
interest in the Premises; (ii) any sale of the Premises pursuant to a private
power of sale, under, or judicial foreclosure of, any mortgage, deed of trust or
other security instrument or devise to which Landlord's interest in the Premises
is now or hereafter subject; (iii) any transfer of Landlord's interest in the
Premises to a mortgagee, beneficiary under deed of trust or other holder of a
security interest therein by deed in lieu of foreclosure; or (iv) any transfer
of the Premises to any governmental or quasi-governmental agency with power of
condemnation.
b. If Tenant shall accept such offer, the title closing shall take
place within 20 business days after such acceptance. Landlord shall deliver to
Tenant a Massachusetts quitclaim deed conveying the Premises as provided in
paragraph (a) above and a certificate in customary form pursuant to section 1445
of the Internal Revenue Code of 1986, as amended; all costs of such transfer,
and any closing and due diligence costs which the proposed purchaser would pay,
shall be paid by Tenant. Unless all Rent and other sums due hereunder are paid
in full at or prior to the title closing, Landlord may, at Landlord's option,
terminate Landlord's obligation to convey the Premises pursuant to this
paragraph.
33. MISCELLANEOUS PROVISIONS.
a. This Lease and all of the covenants and provisions hereof shall
inure to the benefit of, and be binding upon, the parties hereto and the heirs,
personal representatives, successors and permitted assigns of the parties.
b. The titles and headings appearing in this Lease are for reference
only and shall not be considered a part of this lease or in any way to modify,
amend or affect the provisions thereof.
c. This Lease contains the complete agreement of the parties with
reference to the leasing of the Premises, and may not be amended except by an
instrument in writing signed by Landlord and Tenant and consented by Mortgagee
(if any).
d. Any provision or provisions of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate any other
provision hereof, and the remaining provisions hereof shall nevertheless remain
in full force and effect.
e. This Lease may be executed in one or more counterparts, and may be
signed by each party on a separate counterpart, each of which, taken together,
shall be an original, and all of which shall constitute one and same instrument.
f. The term "Landlord" as used in this Lease shall mean only the owner
or owners at the time in question of the Premises and in the event of any
transfer of such title or interest, Landlord named in this Lease (and in case of
any subsequent transfers, then the grantor) shall be relieved from and after the
date of such transfer of all liability as respects Landlord's obligations
thereafter to be performed hereunder, provided that any funds in the hands of
Landlord or the then grantor at the
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<PAGE> 58
time of such transfer, in which Tenant has an interest, shall be delivered to
the grantee. The obligations contained in this Lease to be performed by Landlord
shall, subject as aforesaid, be binding on Landlord's successors and assigns,
only during their respective periods of ownership.
g. This Lease shall be governed by and construed and enforced in
accordance with and subject to the laws of the state where the Premises are
located.
h. Any claim based on or in respect of any liability of Landlord under
this Lease shall be enforced only against the Premises and insurance proceeds
and condemnation awards relating to the Premises, and not against any other
assets, properties or funds of (1) Landlord or any director, officer,
shareholder, general partner, limited partner, or direct or indirect partners,
employee or agent of Landlord or its general partners (or any legal
representative, heir, estate, successor or assign of any thereof), (2) any
predecessor or successor partnership or corporation (or other entity) of
Landlord or its general partners, either directly or through Landlord or its
predecessor or successor partnership or corporation (or other Person) of
Landlord or its general partners, and (3) any other person. Landlord shall not
attempt to enforce any provision of this Lease against any officer, director or
individual shareholder in his or her individual capacity.
i. Without the written approval of Landlord and Tenant, no Person other
than Landlord (including its direct and indirect partners), Mortgagee, Tenant
and their respective successors and assigns shall have any rights under this
Lease.
j. There shall be no merger of the leasehold estate created hereby by
reason of the fact that the same Person may own directly or indirectly, (1) the
leasehold estate created hereby or any interest in this Lease or such leasehold
estate and (2) the fee estate in the Premises. Notwithstanding any such combined
ownership, this Lease shall continue in full force and effect until terminated
by an instrument executed by both Landlord and Tenant.
k. The Land includes approximately nine and one-quarter (9.25) acres of
land abutting Central Street which is zoned for residential use and which Tenant
wishes to have excluded from this Lease upon completion of the subdivision of
such land (for purposes of this section, the term "subdivision" shall include a
so-called "Approval Not Required" determination by the governmental authorities
having jurisdiction that the plan(s) showing the new lots created does not
require approval under the Subdivision Control Law). Landlord agrees to
cooperate, at Tenant's expense, in obtaining such subdivision and, if obtained,
Landlord agrees to convey such land, for nominal non-monetary consideration, to
Tenant or upon Tenant's written direction, provided that such conveyance will
not result in the Premises being in violation of any applicable law, order,
rule, ordinance or regulation. If Tenant makes application for such subdivision
and approval thereof is granted prior to repayment of the Construction Loan,
Landlord agrees to (i) use commercially reasonable efforts (which efforts shall
not require any payment other than nominal processing or recording costs or the
fees of the construction lender's counsel, which Tenant shall pay) to cause the
construction lender to release the land so subdivided from the Premises securing
the Construction Loan, and (ii) to exclude such land or subdivided portion
thereof from any mortgage thereafter granted by Landlord to the maximum degree
possible and still be able to obtain a 75% loan-to-value permanent loan. If
Tenant has not made application for such subdivision or such approval has not
been granted at the time of the Construction Loan, Landlord agrees that any
mortgage thereafter granted by Landlord shall provide
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<PAGE> 59
for release of such land without the requirement of any payment other than
nominal processing or recording costs, provided that the release of such land
will not reduce the loan value of the Premises. Such costs, and all costs of
such conveyance, including transfer taxes and Landlord's reasonable attorneys'
fees, shall be paid by Tenant.
l. Tenant shall pay the fees and expenses of any and all professionals
retained by it in connection with the transactions contemplated by the
Construction Contract, this Lease and the Construction Loan Documents, to the
extent that such fees and expenses are not included within the Cost of the
Project.
m. Tenant agrees to indemnify and hold harmless the Indemnified Parties
from and against any and all liability and loss with respect to or resulting
from the non-payment or delayed payment of any fees and expenses including any
interest or penalties thereon payable by Tenant hereunder.
n. Whenever in this Lease either party is required to take an action
within a particular time period, delays caused by acts of God, war, major
casualty, strike, labor shortage or other cause beyond the reasonable control of
such party shall not be counted in determining the time in which such
performance must be completed (except in the case of the obligation to pay
money) so long as such party shall, promptly after the commencement of such
delay, shall give the other party notice thereof and estimating the duration
thereof.
o. If at any time a dispute shall arise as to any amount to be paid by
one party to the other hereunder, the obligor may make payment "under protest",
and such payment shall not be deemed a voluntary payment, and the right of the
obligor to contest its liability for such payment shall survive such payment.
p. Landlord and Tenant each represent that they have dealt with no
broker, finder or other person who could legally charge a commission in
connection with Landlord's acquisition of the Land or with this Lease, other
than The Binswanger Companies, whose commission shall be included in the Project
Budget and paid as a Cost of the Project.
q. The relationship between Landlord and Tenant under this Lease is
solely that of landlord and tenant. Landlord shall have no liabilities
whatsoever as an "employer" of Tenant, nor shall Landlord have any
responsibility to provide any benefits normally associated with employee status.
Tenant covenants and agrees that it neither hold itself out as, nor claim to be
an officer, director, partner or employee of Landlord by reason of any term or
provision of this Lease, and that it will not by reason hereof make any claim,
demand or application to or for any right or privilege applicable to an officer,
director, partner or employee of Landlord.
r. To facilitate Tenant's financing of personal property, Landlord
hereby waives all liens, claims, demands or rights, including the right to levy
or distrain for unpaid rent, which Landlord may have or hereafter acquire on any
personal property located on the Premises. Before any such equipment lessor or
secured party may remove any personal property form the Premises, it shall enter
into an agreement with Landlord to repair any damage to the Premises caused by
such removal.
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<PAGE> 60
[SIGNATURE PAGE FOLLOWS]
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<PAGE> 61
IN WITNESS WHEREOF, the parties have hereunto set their hands under
seal as of the day and year first above written.
LANDLORD:
ACRE HPC, LLC
By ACRE SIMON, L.L.C.
Its sole member
By AMERICAN CORPORATE REAL ESTATE, LLC
Its Operating Member
By: /s/ R. Michael Dorsch III
-----------------------------------
R. Michael Dorsch III
Its Authorized Representative
TENANT:
THE HOLMES GROUP, INC.
By: /s/ Ira B. Morgenstern
-----------------------------------
Name: Ira B. Morgenstern
Title: Senior Vice President
<PAGE> 62
EXHIBIT A
LEGAL DESCRIPTION - LAND
Beginning at a point on the northerly sideline of Central Street, said point
being the southeasterly corner of the described lot;
Thence running for three courses along the northerly sideline of Central Street:
along a curve to the right with a radius of 500.00 feet and a length of
295.79 feet to a point;
along a curve to the left with a radius of 525.00 feet and a length of
306.82 feet to a point; N 77(degree) 47' 49" W a distance of 310.39
feet to a point;
Thence turning and running by land of Buchanan N 04(degree) 36' 24" E a distance
of 578.65 feet to a drill hole;
Thence turning and running by land of Domingos along the wall for five courses:
N 10(degree) 31' 26" W a distance of 29.85 feet to a drill hole;
N 12(degree) 28' 53" W a distance of 398.14 feet to a drill hole;
N 12(degree) 55' 11" W a distance of 241.06 feet to a drill hole;
N 13(degree) 11' 37" W a distance of 244.30 feet to a drill hole;
N 10(degree) 18' 04" W a distance of 117.25 feet to a drill hole;
Thence turning and continuing by land of Domingos S 81(degree) 38' 23" E a
distance of 33.73 feet to a drill hole;
Thence running by land of Comeau for two courses:
S 81(degree) 33' 14" E a distance of 396.00 feet to a point;
S 80(degree) 34' 42" E a distance of 284.22 feet to a point on the
westerly sideline of Industrial Road;
Thence turning and running along the sideline of Industrial Road for five
courses:
S 36(degree) 33' 09" W a distance of 158.77 feet to a point;
along a curve to the right with a radius of 25.00 feet and length of
24.71 feet to a point;
along a curve to the left with a radius of 75.00 feet and a length of
383.88 feet to a point;
along a curve to the right with a radius of 25.00 feet and a length of
24.71 feet to a point;
N 36(degree) 33' 09" E a distance of 189.51 feet to a point on the
easterly sideline of Industrial Road;
Thence turning and running by land of Comeau for three courses:
S 80(degree) 34' 42" E a distance of 29.76 feet to a point;
S 81(degree) 44' 55" E a distance of 528.89 feet to a drill hole;
S 79(degree) 52' 36" E a distance of 376.94 feet to a drill hole;
<PAGE> 63
Thence turning and continuing by land of Comeau S 13(degree) 49' 13" W a
distance of 600.18 feet to a drill hole;
Thence running by land of Kenny, Balducci, Pratt and Pratt S 25(degree) 30' 18"
W a distance of 673.00 feet to a drill hole;
Thence running by land of Pratt S 25(degree) 28' 56" W a distance of 508.57 feet
to a point;
Thence turning and running by land of Parrella S 77(degree) 04' 43" W a distance
of 45.83 feet to an iron rod;
Thence continuing by land of Parrella S 00(degree) 45' 24" E a distance of 7.92
feet to the point of beginning.
The above-described parcel contains 2,093,824 square feet, or 48.068 acres, more
or less, as shown on a plan entitled "Plan of Land, Milford, Mass." prepared by
GLM Engineering Consultants, Inc., dated March 12, 1999, and recorded in Plan
Book 746 as Plan 30.
<PAGE> 64
EXHIBIT B
DESCRIPTION OF EQUIPMENT, PERSONAL PROPERTY AND FIXTURES
ELEVATORS
<PAGE> 65
EXHIBIT C
PERMITTED ENCUMBRANCES
<PAGE> 66
EXHIBIT D
PROJECT BUDGET
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE HOLMES GROUP, INC.
(1) Holmes Manufacturing Corp. (Massachusetts corporation)
(2) Holmes Air (Taiwan) Corp. (Massachusetts corporation)
(3) Holmes Air (Canada) Corp. (Ontario corporation)
(4) Holmes Products (Far East) Limited (Bahamian corporation)
(a) Esteem Industries Limited (Hong Kong corporation)
(i) Dongguan Huixun Electrical Products Co., Ltd.
(Chinese corporation)
(b) Raider Motor Corporation (Bahamian corporation)
(i) Dongguan Raider Motor Corporation Ltd. (Chinese
corporation)
(c) Holmes Products (Europe) Limited (UK corporation)
(d) Dongguan Holmes Products Ltd. (Chinese corporation)
(5) Holmes Motor Corp. (Delaware corporation)
(6) The Rival Company (Delaware corporation)
(a) Patton Electric Company, Inc. (Indiana corporation)
(i) Patton Electric Hong Kong, Limited (Hong Kong
corporation)(A)
(b) Patton Building Products, Inc. (f/k/a FASCO Consumer Products,
Inc.) (Delaware corporation)
(c) Waverly Products Company, Ltd. (Jamaican corporation)(B)
(d) Rival Consumer Sales Corporation (Missouri corporation)
(e) The Rival Company of Canada, Ltd. (f/k/a Bionaire, Inc.)
(Canadian corporation)
(f) Bionaire International, B.V. (Netherlands corporation)
(g) Rival De Mexico S.A. de C.V. (Mexican corporation)(C)
- -----------------------------
<PAGE> 2
(A) Patton Electric Hong Kong, Limited is owned jointly by Patton Electric
Company, Inc. (99.9%) and The Rival Company (0.1%).
(B) Waverly Products Company, Ltd. is owned jointly by The Rival Company (99%)
and Patton Electric Company, Inc. (1%).
(C) Rival De Mexico S.A. de C.V. is owned 99.9% by The Rival Company directly
and 0.1% held in trust for The Rival Company.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-94709) of The Holmes Group, Inc. of our report
dated March 23, 2000 relating to the consolidated financial statements and
financial statement schedule, which appears in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF THE HOLMES GROUP, INC. AND IS QUALIFIED IN IT ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 6,647
<SECURITIES> 0
<RECEIVABLES> 152,321
<ALLOWANCES> 10,057
<INVENTORY> 112,660
<CURRENT-ASSETS> 285,297
<PP&E> 133,240
<DEPRECIATION> 78,892
<TOTAL-ASSETS> 456,496
<CURRENT-LIABILITIES> 73,613
<BONDS> 338,710
0
0
<COMMON> 20
<OTHER-SE> 37,780
<TOTAL-LIABILITY-AND-EQUITY> 456,496
<SALES> 506,833
<TOTAL-REVENUES> 506,833
<CGS> 363,654
<TOTAL-COSTS> 363,654
<OTHER-EXPENSES> 10,448<F1>
<LOSS-PROVISION> 1,297
<INTEREST-EXPENSE> 33,472
<INCOME-PRETAX> 823
<INCOME-TAX> (87)
<INCOME-CONTINUING> 1,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,812
<EPS-BASIC> 0<F2>
<EPS-DILUTED> 0<F2>
<FN>
<F1>Product development expenses
<F2>The Company's shares are not publicly traded.
</FN>
</TABLE>
