<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1998
REGISTRATION NO. 333-47455
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GENESIS DIRECT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 5961 22-3449666
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
100 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
(201) 867-2800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
WARREN STRUHL
CHIEF EXECUTIVE OFFICER
GENESIS DIRECT, INC.
100 PLAZA DRIVE
SECAUCUS, NEW JERSEY 07094
(201) 867-2800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
IRA A. GREENSTEIN, ESQ. RAPHAEL S. GRUNFELD, STEPHEN H. COOPER, ESQ.
MARK L. MANDEL, ESQ. ESQ. WEIL, GOTSHAL & MANGES
MORRISON & FOERSTER LLP GENERAL COUNSEL LLP
1290 AVENUE OF THE GENESIS DIRECT, INC. 767 FIFTH AVENUE
AMERICAS 100 PLAZA DRIVE NEW YORK, NEW YORK 10153
NEW YORK, NEW YORK 10104 SECAUCUS, NEW JERSEY (212) 310-8000
(212) 468-8000 07094
(201) 867-2800
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 17, 1998
PROSPECTUS
10,125,000 SHARES
GENESIS DIRECT, INC.
COMMON STOCK
Of the 10,125,000 shares of Common Stock offered hereby, 8,577,406 shares
will be sold by Genesis Direct, Inc. ("Genesis Direct" or the "Company") and
1,547,594 shares will be sold by certain Selling Stockholders. See "Principal
and Selling Stockholders." Prior to this offering, there has been no public
market for the Common Stock. It is currently estimated that the initial public
offering price will be between $13.00 and $15.00 per share. For a discussion of
the factors to be considered in determining the initial public offering price,
see "Underwriting." The Company has applied for trading of the Common Stock on
the Nasdaq Stock Market under the symbol GEND.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR CERTAIN INFORMATION RELEVANT TO AN
INVESTMENT IN THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)...................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the Underwriters.
(2) Before deducting expenses payable by the Company estimated at $1,500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,518,750 additional shares of Common Stock solely to cover over-
allotments, if any. If the option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Stockholders will be $ , $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares are offered by the several Underwriters, subject to prior sale,
when, as and if delivered to and accepted by them and subject to certain
conditions. The Underwriters reserve the right to withdraw, cancel or modify
this offering and to reject orders in whole or in part. It is expected that
delivery of the shares will be made against payment therefor on or about ,
1998, at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New York,
New York 10167.
-----------
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
INVEMED ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1998
<PAGE>
[INSERT PHOTOS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE SHORT COVERING
TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and consolidated financial
statements and notes thereto appearing elsewhere in this Prospectus. Unless the
context otherwise requires, references in this Prospectus to the "Company" or
"Genesis Direct" are to Genesis Direct, Inc., a Delaware corporation, and its
direct and indirect wholly-owned subsidiaries and its predecessor, Genesis
Direct L.L.C., a Delaware limited liability company. As used in this
Prospectus, references to a fiscal year refer to the Company's fiscal year
ended or ending on the Saturday next preceding April 1 of the next calendar
year. Unless otherwise indicated, the information in this Prospectus (i) has
been adjusted to give effect to (a) the conversion of all outstanding shares of
the Company's Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") into 8,644,156 shares of Common Stock, (b) the conversion of
$9.75 million principal amount of the Company's outstanding Convertible
Subordinated Debentures due June 1, 2003 (the "Debentures") into 2,331,521
shares of Common Stock, (c) the conversion of an outstanding note in the amount
of $1.4 million into 128,333 shares of Common Stock and (d) a 275-for-1 split
of the Common Stock, all of which transactions will occur immediately prior to
the consummation of this offering (the "Stock Split"), and (ii) assumes that
the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Genesis Direct is a leading database-driven specialty retailer in the rapidly
growing universe of non-store shopping. With a current portfolio of 29 Company-
owned brands, the Company offers products directly to consumers in targeted
niche markets primarily through a variety of distinctive, information-rich
catalogs, as well as Internet websites and electronic media, including
television and radio. The Company's marketing efforts are supported by a
customer database of over 10 million names, a 450-station call center at its
Secaucus, New Jersey headquarters and a custom-designed 500,000 square foot
distribution center strategically located in Memphis, Tennessee. For the nine
months ended December 27, 1997, the Company had net sales of approximately
$81.5 million.
The Company currently offers more than 15,000 products within four distinct,
but interrelated, market categories: sports (including licensed and non-
licensed apparel, accessories, home furnishings, equipment and limited edition
collectibles), kids (including toys, games, crafts, clothing and educational
and developmental materials), gifts and collectibles (including mechanical
toys, dolls, and music- and entertainment-related products and memorabilia) and
institutional/business-to-business (including educational, recreational and
therapeutic products for schools, camps and therapists). The Company has
established a variety of strategic relationships including, in the sports
market, with the National Basketball Association, the National Hockey League,
Major League Baseball, the National Association of Stock Car Auto Racing
(NASCAR) and the NFL Quarterback Club. Pursuant to these relationships, the
Company produces the exclusive official catalogs of these organizations and
offers through them licensed and non-licensed merchandise directly to consumers
and institutions, including, in the case of the NBA, the NHL, Major League
Baseball and NASCAR, through the leagues' websites.
In recent years, retailing in the United States has been characterized by a
rapidly growing shift to non-store sales through such media as printed
catalogs, broadcast and cable television infomercials, home shopping channels
and the Internet. According to the Direct Marketing Association ("DMA"), an
industry trade group, these alternative forms of non-store retailing, which in
1997 accounted for approximately $382.0 billion in sales, are expected to grow
approximately 9% per annum for the next five years. This growth is due to the
convenience of home shopping for time-constrained, dual-career consumer
households and the increasingly high level of customer service and reliability
offered by leading direct marketing firms. The traditional catalog segment of
the
3
<PAGE>
United States direct marketing industry, which, according to the DMA, generated
approximately $79.0 billion in total sales in 1997, is highly fragmented. The
Company believes that there are over 12,000 catalog companies in existence,
most of which lack the necessary capital, support systems and economies of
scale to effectively exploit available opportunities for growth. The Company
believes it is well-positioned to pursue an active consolidation strategy in
this market because of its high capacity order-taking, processing and
fulfillment infrastructure, its well-developed expertise in catalog design and
merchandising, its use of sophisticated statistical modeling and cross-
marketing segmentation techniques and its development of detailed criteria for
identifying and evaluating potential acquisition candidates. Since its
inception, the Company has completed 14 acquisitions of catalog businesses, of
which all but one were acquired since November 1996.
The Company was founded in June 1995 by Warren Struhl, Hunter Cohen and David
Sable, who presently serve, respectively, as its chief executive, chief
operating and chief marketing officers. Prior to forming the Company, Mr.
Struhl was the principal shareholder and chief executive officer, and Messrs.
Cohen and Sable were directors, of PaperDirect, Inc., a leading direct marketer
of high quality business papers and presentation materials, founded by Mr.
Struhl in October 1989 and sold in August 1993. Since its inception, Genesis
Direct has received $166.7 million of funding from various sources, including
the founders and major institutional investors, which has been utilized to
acquire and start up catalogs and to build an infrastructure in anticipation of
further growth.
OPERATING STRATEGY
The key elements of the Company's operating strategy are as follows:
. TARGET AND PENETRATE NICHE MARKETS. The Company identifies and focuses
its efforts on penetrating niche markets that it believes are
underserved by retail stores and other catalogs, that will be responsive
to its innovative direct marketing techniques and in which it can become
a market leader. The Company then acquires a variety of catalogs within
the target market, each of which it transforms into a readily
identifiable brand by investing heavily to enhance the catalog's image.
In addition, the Company trains a core group of specialized customer-
responsive employees to serve that market and seeks to establish
innovative strategic relationships with other participants in that
market. The Company also employs sophisticated database management
techniques and systems to cross-sell product offerings designed for one
niche market to customers in its other niche markets. The Company
believes that by targeting several niche markets and serving each market
with multiple brands, it reduces its reliance on any particular market
or brand.
. DEVELOP CENTRALIZED STATE-OF-THE-ART INFRASTRUCTURE. Since its
inception, the Company has invested approximately $20.4 million to
develop an order-taking, processing and fulfillment infrastructure with
sufficient capacity and operational flexibility to service increased
sales volume and exploit strategic or market opportunities as they
occur. In addition to its state-of-the-art call center and distribution
center, the Company has invested in sophisticated management information
systems and database technologies that effectively coordinate a full
range of functions from catalog production and mailing to order-taking
and fulfillment. The Company's substantial investment in infrastructure
allows it to quickly consolidate and integrate newly acquired catalogs
and to introduce new catalogs. The Company believes that, as sales
volume increases through acquisitions and internal growth, it can
leverage its infrastructure to reduce the per order cost of fulfillment.
The Company believes that, without significant additional capital
expenditures beyond its fiscal 1998 spending plan, its current systems
infrastructure, call center and distribution center can accommodate up
to $1.0 billion in annual sales.
. OFFER PROPRIETARY, PERSONALIZED AND HARD-TO-FIND PRODUCTS. The Company
seeks to increase its gross margins by offering proprietary and
personalized products, as well as products that are difficult
4
<PAGE>
to find in retail stores and other catalogs. The Company strives to
offer customers in each of its target markets a broader merchandise
selection than is generally offered by traditional retailers and smaller
direct marketers. The Company has established a department dedicated to
the development of proprietary products and the personalization of
products within each of the Company's target markets. As part of this
initiative, the Company is currently building a customization facility
in its distribution center that will enable it to personalize most of
its products by means of etching, laser engraving and embroidery.
. UTILIZE MULTIPLE MARKETING CHANNELS. To reach potential customers, the
Company uses multiple marketing channels, including mail, Internet
websites, television and radio advertisements, infomercials, airplane
seat-backs, hotel rooms, sports events and trade shows. The Company
currently takes on-line orders for products from Internet websites under
two of its brands and maintains informational websites for eight of its
other brands. In addition, under exclusive arrangements with the NBA,
NHL and Major League Baseball, the Company maintains the on-line store
on those leagues' websites, where potential customers can receive
information, view merchandise, enter inquiries and orders and request
catalogs.
. BUILD LIFETIME CUSTOMER RELATIONSHIPS. The Company's objective is to
make every customer a customer for life. Through its niche marketing
strategy and sophisticated database, enhanced with up-to-date
demographic information, the Company offers products intended to satisfy
customer preferences as they evolve over their lifetimes. In addition,
the Company strives to provide consistently prompt, knowledgeable and
courteous service and rapid order fulfillment. In its 450-station call
center, calls are routed to the customer service representative most
knowledgeable about the products within the particular catalog brand in
question. Because of the high level of automation at its distribution
center and the strategic location of that center at a shipping hub for
such carriers as Federal Express, UPS and the U.S. Postal Service, the
Company is able to provide next-day delivery, if requested, on orders
received prior to 11:00 p.m. EST. The Company continually strives to
develop the Genesis Direct name into an umbrella seal-of-approval symbol
associated with superior service and product quality.
. ATTRACT AND RETAIN EXPERIENCED MANAGEMENT TEAM. The Company seeks to
attract and retain highly qualified management personnel with extensive
experience. To date, the Company has assembled some of the country's
most experienced professionals in direct marketing or related
industries. The Company has also retained many of the former owners of
the acquired catalog companies, who bring extensive expertise in their
respective niche markets.
GROWTH STRATEGY
The key elements of the Company's growth strategy are as follows:
. PURSUE STRATEGIC ACQUISITIONS. As a result of its acquisition of 14
catalog businesses, the Company has developed considerable expertise in
identifying and evaluating appropriate acquisition candidates and in
integrating the operations and expanding the sales of acquired
companies. The Company believes that the fragmented direct marketing
industry provides significant consolidation opportunities and is
pursuing an aggressive but disciplined acquisition strategy focused
primarily on catalog brands that complement existing brands in its
targeted niche markets. In particular, the Company seeks catalog brands
that have been unable to realize their growth and profitability
potential due to capital constraints and infrastructure limitations. To
date, the typical acquisition candidate has demonstrated a high average
order value and a low rate of merchandise returns and is believed to
have the potential to eventually achieve at least $25.0 million in
annual sales, realize high rates in customer retention and successfully
offer higher margin proprietary products.
5
<PAGE>
. INCREASE REVENUES OF ACQUIRED CATALOGS. The Company believes that, in
addition to achieving synergies through the integration of acquired
catalogs, there are opportunities to substantially increase the revenues
of acquired catalogs by utilizing the Company's database to efficiently
target a more precise group of potential customers based on demographic
information and individual purchase behavior. In addition, the Company
believes that its superior customer service and its development of each
acquired catalog into a readily identifiable brand can increase the
revenue opportunities of those catalogs.
. DEVELOP NEW BRANDS. The Company uses its existing customer database to
create and introduce new catalog brands. The Company currently has eight
active start-up catalog brands and intends to introduce and develop
additional new catalog brands featuring original merchandise concepts
that will allow it to penetrate further distinct segments of its niche
markets. For example, the Company has recently used its customer lists
in the sports and kids market segments to start-up S.K.U.S.A. (an
acronym for Sports Kids U.S.A.), through which the Company offers hard-
to-find "sports lifestyle" products for children, including apparel,
home furnishings and toys.
. EXPAND AND LEVERAGE CUSTOMER DATABASE. The Company is continually
expanding its customer database through a variety of techniques,
including catalog and list acquisitions, renting of mailing lists and
strategic alliances. Examples of strategic alliances that enhance the
Company's customer database are its exclusive arrangements with
professional sports leagues that allow the Company access to the
leagues' databases, Internet websites and advertising opportunities. The
Company uses sophisticated statistical modeling and segmentation
techniques to develop purchasing profiles of the customers in its
database, which facilitates cross-marketing, cross-selling and more
precisely focused catalog distributions and marketing efforts.
. EXPAND INTERNATIONAL SALES. The demographic and technological trends
that are driving the retail consumer shift to non-store shopping in the
United States are also present in many international markets. The
Company believes that its catalog development expertise and existing
infrastructure will enable it to expand into certain of those markets,
particularly those with a strong interest in U.S. sports-related
products. The Company intends, where appropriate, to produce foreign
language versions of several of its catalogs. In addition, the Company's
distribution center in Memphis, Tennessee is strategically placed at the
hub of courier services serving international markets to permit rapid
direct-to-consumer overseas order fulfillment. The Company is currently
expanding its operations into France, Germany, Japan and the United
Kingdom and expects to launch an extension of its 1-800-Pro-Team brand
in several of those countries.
. GENERATE MULTIPLE REVENUE STREAMS. The Company intends to generate
multiple revenue streams within its target markets by permitting third-
party direct marketers to sell non-competing goods and services to its
customers, by including third-party/vendor advertising in Company
catalogs and by renting its customer lists to non-competing vendors. For
example, through several of its sports brands, the Company offers MBNA
credit cards with sports team logos.
ANTICIPATED FOURTH QUARTER AND YEAR-END RESULTS
For the three months ended March 28, 1998, the Company expects to report a
net loss of approximately $19.0 million to $20.0 million on net sales of
approximately $23.0 million to $24.0 million, and for the fiscal year then
ended the Company expects to report a net loss of approximately $76.0 million
to $77.0 million on net sales of approximately $104.0 million to $105.0
million. Definitive results for those periods are subject to final review and
audit. Management believes that the Company's historical results of operations
are not necessarily indicative of future operating results.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company..................... 8,577,406 shares
The Selling Stockholders........ 1,547,594 shares
Common Stock to be outstanding
after this offering(1)........... 28,652,741 shares
Use of proceeds................... For general corporate purposes, including
debt reduction, acquisitions, capital
expenditures and working capital. See "Use
of Proceeds."
Proposed Nasdaq Stock Market
symbol........................... GEND
</TABLE>
- --------
(1) Excludes (a) 1,598,162 shares of Common Stock issuable upon the exercise of
stock options outstanding as of April 15, 1998 at a weighted average
exercise price of $12.32 per share and (b) 275,000 shares of Common Stock
issuable upon the exercise of outstanding warrants at a price of $10.91 per
share. In addition, upon consummation of this offering, the Company will
grant to certain executive officers additional options to purchase an
aggregate of 1,155,000 shares. See "Management--Option Grants in Last
Fiscal Year," "--Stock Option Plan" and Note 11 to the Company's
Consolidated Financial Statements.
RISK FACTORS
See "Risk Factors" for a discussion of certain risks that should be
considered in connection with an investment in the Common Stock.
---------
The Company's executive offices are located at 100 Plaza Drive, Secaucus, New
Jersey 07094 and its telephone number is (201) 867-2800.
---------
Hand-in-Hand(R), The Music Stand(R), Gifts For Grandkids(R), The Voyager's
Collection(R), 1-800-Pro-Team(R), Manny's Baseball Land(R) and Competitive Edge
Golf(R) are registered trademarks of the Company. Genesis Direct(TM),
Childswork/Childsplay(TM), Command Performance(TM), From The Sidelines(TM), Hot
Off The Ice(TM), Nothin' But Hoops(TM), S.K.U.S.A.(TM), Sports Kids USA(TM),
The Training Camp(TM), Lilliput(TM), Ninos(TM), Sportime(TM), Abilitations(TM),
Chime Time(TM), Sportime Senior Products(TM), Active Minds(TM) and Soccer
Madness(TM) are trademarks or service marks of the Company.
7
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following Summary Consolidated Financial and Operating Data of the
Company are qualified by reference to and should be read in connection with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Consolidated Financial Statements and notes thereto and the
Pro Forma Condensed Combined Financial Statements and notes thereto, which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
PERIOD FROM FISCAL YEAR FISCAL NINE MONTHS ENDED NINE MONTHS
JUNE 8, 1995 ENDED YEAR ENDED ------------------------- ENDED
(INCEPTION) THROUGH MARCH 29, MARCH 29, DECEMBER 28, DECEMBER 27, DECEMBER 27,
MARCH 30, 1996(1) 1997(1) 1997(2) 1996 1997 1997(3)
------------------- ----------- ---------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... -- $ 18,537 $ 157,369 $ 6,051 $ 81,505 $ 130,967
Gross profit............ -- 8,089 66,098 2,633 19,362 41,395
Selling, general and
administrative
expenses............... $ 2,710 20,711 85,010 8,246 73,053 95,131
------- --------- --------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (18,912) (5,613) (53,691) (53,736)
Interest expense, net... 5 888 4,605 112 3,163 3,354
------- --------- --------- --------- --------- ---------
Net loss................ (2,715) (13,510) (23,517) (5,725) (56,854) (57,090)
Dividends accruing on
Series A Preferred
Stock.................. -- -- 1,373 -- 1,032 2,123
------- --------- --------- --------- --------- ---------
Net loss attributable to
Common Stockholders.... $(2,715) $ (13,510) $ (24,890) $ (5,725) $ (57,886) $ (59,213)
======= ========= ========= ========= ========= =========
Net loss per share
attributable to Common
Stockholders (4)....... $ (4.49) $ (4.60) $ (8.22) $ (2.73) $ (6.57) $ (6.65)
======= ========= ========= ========= ========= =========
Weighted average number
of shares outstanding.. 605,000 2,933,700 3,028,025 2,093,300 8,810,175 8,904,500
======= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1997
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(5) AS ADJUSTED(6)
-------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 7,615 $ 18,924 $ 94,502
Working capital (deficiency).......... (378) 11,472 93,050
Total assets.......................... 110,294 150,323 225,901
Debentures............................ 30,000 20,250 --
Other long-term debt, less current
portion.............................. 7,852 7,840 7,840
Series A Preferred Stock.............. 72,390 -- --
Total stockholders' equity
(deficiency)......................... (42,518) 65,341 169,919
</TABLE>
- --------
(1) The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. Accordingly, the year
ended March 29, 1997 is referred to as "Fiscal 1996" and the period from
June 8, 1995 (inception) through March 30, 1996 is referred to as "Fiscal
1995."
(2) Prepared on a pro forma basis to reflect the acquisition of Biobottoms,
Inc. ("Biobottoms"), scheduled to close in April 1998 and described under
"Use of Proceeds" (the "Biobottoms Acquisition"), and all acquisitions
completed after March 31, 1996 and before the date hereof, as if such
acquisitions were completed as of March 31, 1996. See "Pro Forma Condensed
Combined Financial Statements."
(3) Prepared on a pro forma basis to reflect the Biobottoms Acquisition and all
acquisitions completed after March 30, 1997 and before the date hereof, as
if such acquisitions were completed as of March 30, 1997. See "Pro Forma
Condensed Combined Financial Statements."
(4) The net loss per share is based upon the weighted average number of shares
of Common Stock outstanding during each period. See Note 2 to the Company's
Consolidated Financial Statements and Note 4 to the Company's Pro Forma
Condensed Combined Financial Statements.
(5) Prepared on a pro forma basis to reflect (i) the Biobottoms Acquisition and
the acquisition completed after December 27, 1997 and before the date
hereof, as if they had been completed as of December 27, 1997, (ii) the
sale, on December 29, 1997, of 22,942 shares of Series A Preferred Stock
for aggregate proceeds of $22,942,000, (iii) the issuance of the $6.3
million Bridge Note (as defined under "Use of Proceeds") on April 8, 1998
and (iv) the following transactions which will occur immediately prior to
the consummation of this offering: (a) the conversion of all outstanding
shares of Series A Preferred Stock into 8,644,156 shares of Common Stock;
(b) the conversion of $9.75 million principal amount of outstanding
Debentures into 2,331,521 shares of Common Stock; and (c) the conversion of
an outstanding note in the amount of $1.4 million into 128,333 shares of
Common Stock. See "Pro Forma Condensed Combined Financial Statements."
(6) Prepared on a pro forma as adjusted basis to reflect (i) the Biobottoms
Acquisition and the acquisition completed after December 27, 1997 and
before the date hereof, as if they had been completed as of December 27,
1997, (ii) the sale, on December 29, 1997, of 22,942 shares of Series A
Preferred Stock for aggregate proceeds of $22,942,000, (iii) the issuance
of the $6.3 million Bridge Note on April 8, 1998, (iv) the following
transactions which will occur immediately prior to the consummation of this
offering: (a) the conversion of all outstanding shares of Series A
Preferred Stock into 8,644,156 shares of Common Stock; (b) the conversion
of $9.75 million of outstanding Debentures into 2,331,521 shares of Common
Stock; and (c) the conversion of an outstanding note in the amount of $1.4
million into 128,333 shares of Common Stock, and (v) the sale by the
Company of 8,577,406 shares of Common Stock in this offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds." Pursuant to the terms of the Debentures, the Company will redeem
approximately $20.25 million principal amount of Debentures plus accrued
interest and prepayment premium through May 11, 1998, the anticipated date
of redemption. Approximately $5.3 million of the cash prepayment premium
will be recorded as an extraordinary item in the period in which the
redemption occurs. See "Pro Forma Condensed Combined Financial Statements."
8
<PAGE>
RISK FACTORS
Prospective investors should carefully consider all of the information in
this Prospectus and, in particular, should evaluate the following risks in
connection with an investment in the Common Stock being offered hereby.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES
The Company was organized in June 1995 and, accordingly, has had only a
limited operating history. Since its formation, the Company has expended
significant funds to acquire other direct marketing businesses, to create and
develop various marketing vehicles and brands and to build an order processing
and distribution infrastructure capable of supporting future operations on a
scale substantially in excess of current levels. As a result, the Company has
incurred losses since its inception and expects to continue to incur losses
through fiscal 1998. The Company had an accumulated deficit of approximately
$73.1 million at December 27, 1997 and had a net loss of $57.9 million for the
nine months then ended. The Company expects that, for the three months ended
March 28, 1998, it will report a net loss of approximately $19.0 million to
$20.0 million and, for the fiscal year then ended, it will report a net loss
of approximately $76.0 million to $77.0 million. There can be no assurance
that the Company will be able to achieve profitability. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
NEED FOR ADDITIONAL CAPITAL
The Company will require substantial additional capital in order to pursue
its acquisition strategy, grow its database, enhance its existing brands and
merchandise lines and introduce and develop new brands and merchandise lines.
Additional capital may be sought through public or private offerings of equity
or debt securities as well as additional bank borrowings. The Company does not
have any commitments for additional financing and there can be no assurance
that such financing will be available when and to the extent required or that,
if available, such financing will be obtainable on acceptable terms.
RISKS ASSOCIATED WITH ACQUISITIONS
To date, the Company has acquired 14 catalog businesses, of which all but
one were acquired since November 1996. The Company's continued growth will
depend in part upon its ability to identify other direct marketing companies
that are suitable acquisition candidates, to acquire those companies upon
appropriate terms and to effectively integrate and expand their operations
within its own infrastructure. There can be no assurance that the Company will
be able to continue to identify candidates that it deems suitable for
acquisition or that the Company will be able to consummate desired
acquisitions on acceptable terms and integrate and expand the operations of
acquired companies, without excessive costs, delays or other problems.
DEPENDENCE ON KEY OPERATING SYSTEMS AND THIRD-PARTY SERVICE PROVIDERS
The Company's ability to provide high quality customer service, process and
fulfill orders and manage inventory depends, to a large degree, on the
efficient and uninterrupted operation of its call center, distribution center
and management information systems and on the timely performance of vendors,
catalog printers, shipping companies and the U.S. Postal Service. Any material
disruption or slowdown in the operation of the Company's call center,
distribution center or management information systems, or comparable
disruptions or slowdowns suffered by its principal service providers, could
cause delays in the Company's ability to receive, process and fulfill customer
orders and may cause orders to be canceled, lost or delivered late, goods to
be returned or receipt of goods to be refused. In the course of replacing and
upgrading its systems, the Company has occasionally experienced temporary
system shutdowns, slowdowns and processing problems. For example, between
September and December 1997, the Company experienced a temporary inability of
its call center software to interface with its distribution center software,
resulting in a higher than normal rate of order cancellations that the Company
believes accounted for a significant percentage of the loss for the nine
months ended December 27, 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company plans to upgrade
certain of the equipment and operating systems at its distribution center. The
Company has taken a number of precautions to prevent disruptions in the
operation of its call center, distribution
9
<PAGE>
center and management information systems, including in connection with the
future upgrades, but there can be no assurance that the Company will not
experience systems failures or other disruptions that could have a material
adverse effect on the Company's results of operations.
FLUCTUATIONS IN COSTS OF PAPER AND POSTAGE
Paper and postage are significant components of the Company's operating
costs. Paper stock represents the largest element of the cost of printed
merchandise catalogs and paper-based packaging products, such as shipping
cartons, constitute a significant element of distribution expense. Paper
prices have historically been volatile, increasing dramatically in 1995 and
declining in 1996 and 1997. Future price increases could have a material
adverse effect on the Company's results of operations. Postage for catalog
mailings is also a significant element of the Company's operating expense. The
Company generally mails its catalogs by third-class mail service. Third-class
postage rates increase periodically and can be expected to increase in the
future, and there can be no assurance that future increases will not adversely
impact the Company's operating margins.
HIGH FIXED COSTS
Operation and maintenance of the Company's call center, distribution center
and management information systems involve substantial fixed costs. Catalog
mailings entail substantial paper, postage, merchandise acquisition and human
resource costs, including costs associated with catalog development and
increased inventories, virtually all of which are incurred prior to the
mailing of the catalog. If net sales from catalog mailings are substantially
below expectations, the Company's results of operations may be adversely
effected. In addition, the Company continually evaluates the results of its
mailings and will discontinue a catalog, particularly a start-up catalog, if
it determines that the catalog's results are not satisfactory, in which event
it may not recover its investment in developing and mailing that catalog.
RELIANCE ON VENDORS
The Company currently purchases merchandise from more than 1,000
unaffiliated vendors. In some instances, the Company's purchases from a
particular vendor may account for a significant percentage of that vendor's
total sales, resulting in more favorable terms for the Company than might
otherwise be available. However, there can be no assurance that the Company
will continue to be able to procure merchandise on such favorable terms. The
Company does not have any long-term contracts with its vendors and competes
with other purchasers for the vendors' production capacity. No vendor
accounted for more than 10% of the Company's inventory purchases in the nine
months ended December 27, 1997.
QUARTERLY AND SEASONAL FLUCTUATIONS
The Company's net sales and results of operations have fluctuated and can be
expected to continue to fluctuate on a quarterly basis as a result of such
factors as the timing of new merchandise offerings and brand introductions,
fluctuations in response rates, paper and postage costs and merchandise return
rates, shifts in the timing of holidays and changes in the Company's
merchandise mix. In addition, the Company's sales, particularly its catalog
sales, generally are higher in the second and fourth calendar quarters, which
correspond to the first and third quarters of its fiscal year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
MERCHANDISE RETURNS
As part of its customer service commitment, the Company maintains an
unconditional merchandise return policy, which allows customers to return any
non-personalized merchandise, at any time and for any reason, regardless of
condition. The Company has established an allowance for merchandise returns
based on historical return rates. There can be no assurance that the Company's
merchandise returns will not exceed its reserves. Any significant increase in
the Company's merchandise return rate could have a material adverse effect on
its results of operations.
10
<PAGE>
DEPENDENCE ON KEY PERSONNEL
The Company depends to a significant extent upon the efforts of its senior
management team, particularly its founders and principal executive officers,
Warren Struhl, Hunter Cohen and David Sable, each of whom is party to an
employment agreement with the Company. See "Management." The Company maintains
$5.0 million of key man life insurance on Mr. Struhl. The Company's future
success will depend on its ability to retain key managers and to attract and
employ additional qualified management personnel.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new
competitors as well as increased competition from established companies.
Within each merchandise category the Company has significant competitors and
may face new competition from new entrants or existing competitors who focus
on market segments currently served by the Company. These competitors include
large retail operations, including some with catalog operations, other catalog
and direct marketing companies and internet retailers. Increased competition
could result in pricing pressures, increased marketing expenditures and loss
of market share and could have a material adverse effect on the Company's
results of operations.
INTERNATIONAL OPERATIONS
The Company is currently expanding its operations into several international
markets, including France, Germany, Japan and the United Kingdom. In so doing,
the Company will be subject to risks generally associated with doing business
abroad, such as foreign government regulation, economic conditions, exchange
rate fluctuations, duties, taxes and disruptions or delays in shipments. In
addition, the Company's sales historically have been derived from customers in
the United States and most of its information on buying patterns and consumer
preferences is based on those customers. As a result, predicting foreign
consumer demand may present a higher than normal risk of error.
COLLECTION OF STATE SALES TAXES
Various states have sought to impose on direct marketers having no physical
presence in the state the burden of collecting state sales and use taxes on
the sale of merchandise shipped to that state's residents. However, the U.S.
Supreme Court has reaffirmed its 1967 holding in National Bellas Hess v. Ill.
Dept. of Revenue, 368 U.S. 753, that a state, absent Congressional
legislation, may not impose tax collection obligations on an out-of-state mail
order company whose only contacts with the taxing state are the distribution
of catalogs and other advertisement materials through the mail, and whose
subsequent delivery of purchased goods occurs by mail or interstate common
carriers. Recently, the DMA entered into negotiations with various state
taxing authorities towards reaching an agreement for the collection of sales
tax in connection with catalog sales pursuant to uniform rules that would
reduce the cost of compliance with the laws of multiple taxing jurisdictions.
Such an agreement would have required catalog companies that chose to become a
party thereto, to collect sales and use taxes in return for the simplified
collection procedures. Due to objections voiced by members of the catalog
industry and catalog customers, the negotiations were suspended.
YEAR 2000 RISK
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not
be able to differentiate between the year 2000 and 1900. Failure to address
this problem could result in system failures and the generation of erroneous
data. The Company is reviewing its computer programs and systems to ensure
that the programs and systems will function properly and be year 2000
compliant. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
systems will be year
11
<PAGE>
2000 compliant. However, while the estimated cost of these efforts are not
expected to be material to the Company's financial position or any year's
results of operations, there can be no assurance to this effect. In addition,
the Company cannot predict the effect of the year 2000 problem on entities
with which the Company transacts business, and there can be no assurance that
the effect of the year 2000 problem on such entities will not have a material
adverse effect on the Company's business, financial condition or results of
operations.
BENEFITS OF THE OFFERING TO EXISTING STOCKHOLDERS
Of the net proceeds from this offering, the Company plans to use (i)
approximately $28.3 million to redeem approximately 67.5% of its outstanding
Debentures, all of which are owned by GE Investment Private Placement Partners
II, a Limited Partnership ("GEIPPP II"), a principal stockholder of the
Company, and to exchange the balance of the Debentures for newly-issued shares
of Common Stock and (ii) approximately $6.4 million to repay the entire $6.3
million principal amount (issued with original issue discount) of the Bridge
Note held by GEIPPP II, together with accrued interest thereon. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions."
GOVERNMENT REGULATION
The Company's direct mail operations are subject to regulation by the U.S.
Postal Service, the Federal Trade Commission and various state, local and
private consumer protection and other regulatory authorities. In general,
these regulations govern the manner in which orders may be solicited, the form
and content of advertisements, information which must be provided to
prospective customers, the time within which orders must be filled,
obligations to customers if orders are not shipped within a specified period
of time and the time within which refunds must be paid if the ordered
merchandise is unavailable or returned. From time to time, the Company has
modified its methods of doing business and its marketing operations in
response to such regulation. To date, such regulation has not had a material
adverse effect on the Company's business, financial condition or results of
operations. However, there can be no assurance that any future regulatory
requirements or actions will not have a material adverse effect on the
Company's business, financial condition or results of operations.
POTENTIAL EFFECTS OF ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Company's Amended and Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Amended
and Restated By-laws (the "By-laws") could delay or impede the removal of
incumbent directors and could make it more difficult for a third party to
acquire, or could discourage acquisition bids for, control of the Company.
Such provisions could limit the price that certain investors might be willing
to pay in the future for shares of the Common Stock. For example, the
Certificate of Incorporation provides for a classified Board of Directors with
staggered three-year terms. In addition, shares of preferred stock may be
issued by the Board of Directors of the Company without stockholder approval
on such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any preferred stock that may be issued in the
future. The Company has no current plans to issue any shares of preferred
stock. See "Description of Capital Stock--Anti-takeover Effects of Certain
Provisions of the Certificate of Incorporation and By-laws."
DILUTION
Purchasers of Common Stock in this offering will experience immediate and
substantial dilution in the pro forma net tangible book value per share of
such Common Stock from the initial public offering price. See "Dilution."
DIVIDENDS
The Company does not anticipate paying any cash dividends on its Common
Stock in the foreseeable future. See "Dividend Policy."
12
<PAGE>
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for the Common
Stock. Although application has been made to list the Common Stock on the
NASDAQ Stock Market, there can be no assurance that an active public market
will develop or be sustained after this offering or that the market price of
the Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock will be determined through
negotiations among the Company, the Selling Stockholders and the Underwriters.
See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of Common Stock to be sold in this offering will be freely
tradable. The remaining shares of Common Stock, representing approximately
64.7% of the outstanding Common Stock upon completion of this offering, will
be deemed "restricted securities" under the Securities Act of 1933, as amended
(the "Securities Act"), and, as such, will be subject to restrictions on the
timing, manner and volume of sales of such shares. Certain holders of those
shares will have the right to request the registration of their shares under
the Securities Act following the completion of a period of 180 days after the
date of this Prospectus, which, upon the effectiveness of such registration,
would permit the free transferability of such shares. See "Shares Eligible for
Future Sale."
The Company, its executive officers and directors and each of its current
stockholders have agreed that, subject to certain limited exceptions, for a
period of 180 days after the date of this Prospectus, without the prior
written consent of Bear, Stearns & Co. Inc., they will not, directly or
indirectly, offer to sell, sell or otherwise dispose of any shares of Common
Stock. See "Underwriting."
No predictions can be made as to the effect, if any, that future sales of
shares or the availability of shares for future sale, will have on the market
price for Common Stock prevailing from time to time. The sale of a substantial
number of shares held by existing stockholders, whether pursuant to a
subsequent public offering or otherwise, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could materially impair the Company's future ability to raise capital through
an offering of equity securities. See "Shares Eligible for Future Sale" and
"Underwriting."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from this offering are estimated to be
approximately $110,178,000 ($129,952,000 if the Underwriters' over-allotment
option is exercised in full), based upon an assumed initial public offering
price of $14.00 per share. The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders.
Of such proceeds, (i) approximately $28.3 million will be used to redeem a
portion of the Company's outstanding Debentures, aggregating $20.25 million in
principal amount (which bear interest at 8% per annum and are due on June 1,
2003) plus a prepayment premium, all of which are owned by GEIPPP II,
(ii) approximately $6.4 million will be used to repay the entire $6.3 million
principal amount (issued with original issue discount of $300,000), together
with accrued interest from April 8, 1998 at a rate of 15% per annum, of a
promissory note held by GEIPPP II (the "Bridge Note"), (iii) approximately
$40.0 million will be used for future acquisitions and (iv) approximately
$17.0 million will be used for capital expenditures. The balance of the
proceeds will be used for general corporate purposes, including working
capital. Pending application, the net proceeds will be invested in short-term,
investment-grade, interest-bearing obligations.
Proceeds from the Bridge Note are being used (a) to pay for the expansion
and upgrading of the infrastructure at the Company's distribution center, (b)
to fund the Biobottoms Acquisition and (c) to provide additional working
capital. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Certain
Relationships and Related Transactions."
The Company's acquisition of Biobottoms is scheduled to close on or before
April 30, 1998. Biobottoms is engaged in the direct marketing of children's
apparel. Payment of the aggregate preliminary purchase price of $2.27 million
will include (i) $1.0 million of cash, (ii) $1.17 million of notes payable on
or before July 1999 together with interest at an annual rate of 7.0% and (iii)
$100,000 of non-compete payments due in equal annual installments of $50,000
on the first and second anniversaries of the closing of the acquisition.
In addition, the Company continually evaluates potential acquisitions. The
Company has held preliminary discussions with a number of such acquisition
candidates and has entered into one non-binding letter of intent with respect
to a potential acquisition. The Company has no outstanding contracts or
obligations with respect to any future acquisitions.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common Stock and
does not expect to pay dividends in the foreseeable future. The Company's
current policy is to retain all of its earnings to finance future growth. Any
future declaration of dividends will be subject to the discretion of the Board
of Directors of the Company and will depend upon, among other things, the
future earnings, results of operations, capital requirements and general
financial condition of the Company, general economic conditions and other
factors. The Company's existing loan agreements with its lenders generally
restrict its ability to pay dividends or make other distributions on the
Common Stock without the prior approval of the lenders. The Company
anticipates that any future credit facility or other indebtedness that the
Company may enter into or incur may contain a similar restriction.
14
<PAGE>
DILUTION
At December 27, 1997, the Company had a pro forma net tangible book value of
approximately $4,872,000 or $0.24 per share. "Net tangible book value" per
share represents net tangible assets (total assets less liabilities and cost
in excess of net assets acquired) of the Company on a consolidated basis,
divided by the total number of shares outstanding before this offering. After
giving effect to (i) the Biobottoms Acquisition and the acquisition completed
after December 27, 1997 and before the date hereof, as if they had been
completed as of December 27, 1997, (ii) the sale, on December 29, 1997, of
22,942 shares of Series A Preferred Stock for aggregate proceeds of
$22,942,000, (iii) the issuance of the $6.3 million Bridge Note on April 8,
1998, (iv) the following transactions which will occur immediately prior to
the consummation of this offering: (a) the conversion of all outstanding
shares of Series A Preferred Stock into 8,644,156 shares of Common Stock;
(b) the conversion of $9.75 million principal amount of outstanding Debentures
into 2,331,521 shares of Common Stock; and (c) the conversion of an
outstanding note in the amount of $1.4 million into 128,333 shares of Common
Stock, and (v) the receipt of approximately $110,178,000 of estimated net
proceeds from the sale by the Company of 8,577,406 shares of Common Stock in
this offering (at an assumed initial public offering price of $14.00 per
share) and the application of the estimated net proceeds as described under
"Use of Proceeds," the pro forma net tangible book value at December 27, 1997
would have been approximately $109,450,000, or $3.82 per share of Common
Stock. This represents an immediate increase in pro forma net tangible book
value of $3.58 per share of Common Stock to existing stockholders and an
immediate dilution to new investors of $10.18 per share of Common Stock. The
following table illustrates such dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $14.00
Pro forma net tangible book value per share as of
December 27, 1997(1)....................................... $0.24
Increase per share attributable to new investors............ 3.58
-----
Pro forma net tangible book value per share after this
offering..................................................... 3.82
------
Dilution per share to new investors........................... $10.18
======
</TABLE>
The following table sets forth at December 27, 1997, the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid by the existing holders of Common Stock and by
new investors purchasing shares of Common Stock sold by the Company in this
offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ -------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 20,053,335 70.0% $138,679,000 53.6% $ 6.92
New investors................ 8,577,406 30.0 120,083,684 46.4 14.00
---------- ----- ------------ -----
Total...................... 28,630,741 100.0% $258,762,684 100.0%
========== ===== ============ =====
</TABLE>
- --------
(1) Includes the conversion of the Series A Preferred Stock into 8,644,156
shares of Common Stock, the conversion of $9.75 million principal amount
of Debentures into 2,331,521 shares of Common Stock, the conversion of an
outstanding note in the amount of $1.4 million into 128,333 shares of
Common Stock and the issuance of 91,575 shares of Common Stock in
connection with the acquisition of Select Service & Supply, Inc. ("Select
Service") in January 1998.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 27, 1997 (i) on an actual basis, (ii) on a pro forma basis to give
effect to (a) the Biobottoms Acquisition and the acquisition completed after
December 27, 1997 and before the date hereof, as if they had been completed as
of December 27, 1997, (b) the sale, on December 29, 1997, of 22,942 shares of
Series A Preferred Stock for aggregate proceeds of $22,942,000, (c) the
issuance of the $6.3 million Bridge Note on April 8, 1998 and (d) the
following transactions which will occur immediately prior to the consummation
of this offering: (1) the conversion of all outstanding shares of Series A
Preferred Stock into 8,644,156 shares of Common Stock; (2) the conversion of
$9.75 million principal amount of outstanding Debentures into 2,331,521 shares
of Common Stock; and (3) the conversion of an outstanding note in the amount
of $1.4 million into 128,333 shares of Common Stock, and (iii) on a pro forma
as adjusted basis to give further effect to the sale by the Company of
8,577,406 shares of Common Stock in this offering and the application of the
net proceeds therefrom as described under "Use of Proceeds." Pursuant to the
terms of the Debentures, the Company will redeem approximately $20.25 million
of principal amount of Debentures plus accrued interest and prepayment premium
through May 11, 1998, the anticipated date of redemption. A portion of such
cash prepayment premium approximating $5.3 million will be recorded as an
extraordinary item in the period in which the redemption occurs. This table
should be read in conjunction with the Consolidated Financial Statements and
the notes thereto appearing elsewhere in the Prospectus. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Pro Forma Condensed Combined Financial Statements."
<TABLE>
<CAPTION>
DECEMBER 27, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 7,615 $ 18,924 $ 94,502
======== ======== ========
Short-term debt:
Revolving line of credit..................... $ 264 $ 264 $ 264
Current portion of notes and long-term debt.. $ 7,001 $ 15,185 $ 9,185
======== ======== ========
Long-term debt:
Convertible Subordinated Debentures due June
1, 2003..................................... $ 30,000 $ 20,250 $ --
Other long-term debt, less current portion... 7,852 7,840 7,840
Series A Cumulative Convertible Preferred
Stock, $.01 par value, 122,000 shares
authorized; 71,358 shares issued and
outstanding (actual) and no shares issued and
outstanding (pro forma and pro forma as
adjusted)..................................... 72,390 -- --
Stockholders' equity:
Common Stock, $.01 par value; 275,000,000
shares authorized; 8,857,750 shares issued
and outstanding (actual); 20,053,335 shares
issued and outstanding (pro forma) and
28,630,741 shares issued and outstanding
(pro forma as adjusted)(1).................. 89 201 286
Additional paid-in capital................... 30,472 138,219 248,312
Accumulated deficit.......................... (73,079) (73,079) (78,679)
-------- -------- --------
Total stockholders' (deficiency) equity.... (42,518) 65,341 169,919
-------- -------- --------
Total capitalization....................... $ 67,724 $ 93,431 $177,759
======== ======== ========
</TABLE>
- --------
(1) Excludes (a) 1,847,450 shares of Common Stock reserved for issuance under
the Option Plan, of which 1,065,625 shares of Common Stock are issuable
upon the exercise of outstanding stock options with a weighted average
exercise price of $10.91 per share, and (b) 275,000 shares of Common Stock
issuable upon the exercise of outstanding warrants at a price of $10.91
per share. See "Management--Stock Option and Incentive Plans" and Note 11
to Consolidated Financial Statements.
16
<PAGE>
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet of the
Company as of December 27, 1997 gives effect to (i) the acquisition of Select
Service on January 7, 1998, (ii) the sale of 22,942 shares of Series A
Preferred Stock for aggregate proceeds of $22,942,000 on December 29, 1997,
(iii) the Biobottoms Acquisition and (iv) the issuance of the $6.3 million
Bridge Note on April 8, 1998, net of original issue discount. The pro forma
combined balance sheet also gives effect to (i) the conversion of all
outstanding shares of Series A Preferred Stock into 8,644,156 shares of Common
Stock, (ii) the conversion of $9.75 million principal amount of Debentures
into 2,331,521 shares of Common Stock, and (iii) the conversion of an
outstanding note in the amount of $1.4 million into 128,333 shares of Common
Stock, as if all such transactions had been completed as of December 27, 1997.
The following unaudited pro forma combined statements of operations for the
year ended March 29, 1997 and the nine months ended December 27, 1997 give
effect to the acquisition of each of Manny's Baseball Land, Inc. ("Manny's
Baseball"), Athletic Supply of Dallas, Inc. ("Athletic Supply"), Lilliput
Motor Company, Ltd. ("Lilliput"), First Step Designs, Ltd. ("First Step"), The
Thursley Group, Inc. ("Thursley"), Duclos Direct Marketing, Inc. ("Duclos")
(collectively, the "Fiscal 1996 Acquisitions"), and the Center for Applied
Psychology, Inc., Artesania, Inc., Global Friends Collection, Inc., Fanfare
Enterprises, Inc., H&L Productions, Inc., Zig Zag Imports, Inc. and Select
Service (collectively, the "Fiscal 1997 Acquisitions"), and the Biobottoms
Acquisition and the financing of each such acquisition, as if all such
transactions had occurred at the beginning of the respective periods.
Disclosure regarding the results of operations for each of the Company's
Fiscal 1997 Acquisitions, except for Select Service (which is individually
significant), has been presented on a combined basis rather than individually
since each acquisition is individually insignificant. Disclosure regarding the
results of operations for Biobottoms has been presented separately because it
is scheduled to close in April 1998.
The following unaudited pro forma condensed combined financial statements
have been prepared assuming the Select Service acquisition was, and the
Biobottoms Acquisition will be, accounted for under the purchase method of
accounting. Under the purchase method of accounting, the assets acquired and
liabilities assumed will be recorded at their fair values at the date of
acquisition. The total purchase price has been allocated to the assets
acquired and liabilities assumed based upon estimates of their respective fair
values which are subject to revision.
The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. The Company's historical
consolidated financial statements include the results of operations of each of
the acquired businesses for the period subsequent to the date of acquisition.
Each of the Fiscal 1996 Acquisitions and the Fiscal 1997 Acquisitions had
fiscal years which differ from the Company's fiscal year-end. The historical
results of operations for the Fiscal 1996 Acquisitions (except for Duclos
Direct Marketing, Inc., whose fiscal year ends within 93 days of that of the
Company) and the Fiscal 1997 Acquisitions presented below have been adjusted
to conform to the Company's year-end for purposes of the Pro Forma Condensed
Combined Statements of Operations. For the twelve months ended March 29, 1997,
the adjustments were accomplished by adding subsequent unaudited interim
period results through March 1997 to the most recent historic fiscal year end
of the acquired company prior to March 29, 1997 and deducting the comparable
preceding year unaudited interim period results. Similarly, for the nine
months ended December 27, 1997, the adjustments were accomplished by adding
subsequent unaudited interim period results through December 1997 to the most
recent historic fiscal year end of the acquired company prior to December 27,
1997 and deducting any period prior to March 30, 1997.
The unaudited Pro Forma Condensed Combined Statements of Operations are not
necessarily indicative of operating results which would have been achieved had
the foregoing transactions been completed at the beginning of the respective
periods and should not be construed as representative of future operating
results.
These unaudited Pro Forma Condensed Combined Financial Statements should be
read in conjunction with the accompanying notes, the Company's historical
consolidated financial statements, the historical financial statements of
certain of the Fiscal 1996 Acquisitions and Fiscal 1997 Acquisitions including
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," all included elsewhere in this
Prospectus.
17
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
DECEMBER 27, 1997 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS
FOR FOR EQUITY
ACQUISITIONS TRANSACTIONS PRO FORMA
GENESIS AND RELATED PRO FORMA AND COMBINED
DIRECT, INC. SELECT SERVICE BIOBOTTOMS FINANCINGS COMBINED CONVERSIONS (AS ADJUSTED)
------------ -------------- ---------- ------------ --------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash & Cash $ 7,615 $ 397 $ 1 $ 18,954 $ 18,924
Equivalents........... $ 22,942 (a) $ (30)(e)
6,000 (b)
(17,001)(c)
(1,000)(d)
Accounts Receivable.... 5,619 3,658 302 -- 9,579 -- 9,579
Merchandise Inventory,
net................... 22,993 3,844 3,297 -- 30,134 -- 30,134
Prepaid expenses &
other current assets.. 3,615 1,963 1,324 -- 6,902 -- 6,902
-------- ------- ------ -------- -------- -------- --------
Total current assets.. 39,842 9,862 4,924 10,941 65,569 (30) 65,539
Intangibles & goodwill.. 47,579 -- -- 11,571 (c) 60,469 -- 60,469
1,319 (d)
Property, equipment and
leasehold improvements,
net.................... 19,857 1,333 368 -- 21,558 -- 21,558
Other assets............ 1,656 115 626 (1,000)(c) 1,397 -- 1,397
Note Receivable......... 1,360 -- -- -- 1,360 -- 1,360
-------- ------- ------ -------- -------- -------- --------
$110,294 $11,310 $5,918 $ 22,831 $150,353 $ (30) $150,323
======== ======= ====== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable....... $ 14,373 $ 1,410 $2,896 $ -- $ 18,679 $ -- $ 18,679
Accrued liabilities.... 15,309 971 494 -- 16,774 (483)(f) 16,291
Current portion of
notes and
long-term debt........ 7,265 2,892 1,514 6,000 (b) 15,449 -- 15,449
(2,892)(c)
670 (d)
Other current 3,273
liabilities........... -- -- 250 (c) 3,648 3,648
125 (c) --
-------- ------- ------ -------- -------- -------- --------
Total current
liabilities.......... 40,220 5,273 4,904 4,153 54,550 (483) 54,067
Notes & long-term debt,
less current portion... 7,852 84 63 750 (c) 9,165 (1,325)(g) 7,840
(84)(c) --
500 (d)
Subordinated notes--
related parties........ 30,000 -- -- -- 30,000 (9,750)(h) 20,250
Other liabilities....... 2,350 -- -- 375 (c) 2,825 -- 2,825
100 (d)
Series A Preferred 72,390 -- -- 22,942 (a) 95,332 --
stock.................. (95,332)(i)
Total stockholders'
equity (deficiency).... (42,518) 5,953 951 (5,953)(c) (41,519) (30)(e) 65,341
999 (c) 483 (f)
(951)(d) 1,325 (g)
9,750 (h)
95,332 (i)
-------- ------- ------ -------- -------- -------- --------
$110,294 $11,310 $5,918 $ 22,831 $150,353 $ (30) $150,323
======== ======= ====== ======== ======== ======== ========
</TABLE>
18
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL 1996 ACQUISITIONS FISCAL 1997
------------------------------------------------------- ACQUISITIONS
GENESIS MANNY'S ATHLETIC EXCLUDING
DIRECT, INC. BASEBALL SUPPLY LILLIPUT FIRST STEP THURSLEY DUCLOS SELECT SERVICE SELECT SERVICE BIOBOTTOMS
------------ -------- -------- -------- ---------- -------- ------ -------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales....... $ 18,537 $11,269 $21,732 $794 $ 8,306 $ 604 $6,287 $40,733 $27,877 $21,230
Cost of Goods
Sold........... 10,448 8,119 9,013 572 5,503 332 3,711 22,460 17,434 13,679
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Gross Profit.... 8,089 3,150 12,719 222 2,803 272 2,576 18,273 10,443 7,551
Selling, general
and
administrative
expenses....... 20,711 3,787 12,875 156 3,976 724 2,912 18,587 8,445 8,318
-- -- -- -- -- -- -- -- -- --
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Income (Loss)
from
operations..... (12,622) (637) (156) 66 (1,173) (452) (336) (314) 1,998 (767)
Interest
expense........ 1,162 141 152 23 299 86 14 247 137 136
Interest
income......... 274 22 -- -- 8 -- -- 28 -- --
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Income (Loss)
before income
taxes.......... (13,510) (756) (308) 43 (1,464) (538) (350) (533) 1,861 (903)
Income taxes
(benefit)...... -- -- 164 3 -- 1 30 -- -- 83
--------- ------- ------- ---- ------- ----- ------ ------- ------- -------
Net Income
(Loss)......... $ (13,510) $ (756) $ (472) $ 40 $(1,464) $(539) $ (380) $ (533) $ 1,861 $ (986)
======= ======= ==== ======= ===== ====== ======= ======= =======
Dividends
accruing on
Series A
Preferred
Stock.......... --
---------
Net loss
attributable to
common
stockholders... $ (13,510)
=========
Pro forma loss
per share...... $ (4.61)
=========
Weighted average
number of
common shares
outstanding.... 2,933,700
=========
<CAPTION>
ADJUSTMENTS
FOR THE PRO FORMA
ACQUISITIONS COMBINED
-------------- ----------
<S> <C> <C>
Net Sales....... $ -- $ 157,369
Cost of Goods
Sold........... -- 91,271
-------------- ----------
Gross Profit.... -- 66,098
Selling, general
and
administrative
expenses....... (33)(a) 85,010
4,552 (b) --
-------------- ----------
Income (Loss)
from
operations..... (4,519) (18,912)
Interest
expense........ 3,775 (c) 4,937
(1,235)(d) --
Interest
income......... -- 332
-------------- ----------
Income (Loss)
before income
taxes.......... (7,059) (23,517)
Income taxes
(benefit)...... (281)(e) --
-------------- ----------
Net Income
(Loss)......... $(6,778) $ (23,517)
Dividends
accruing on
Series A
Preferred
Stock.......... (1,373)(f) (1,373)
-------------- ----------
Net loss
attributable to
common
stockholders... $(8,151) $ (24,890)
============== ==========
Pro forma loss
per share...... $ (8.22)
==========
Weighted average
number of
common shares
outstanding.... 3,028,025
==========
</TABLE>
19
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED MARCH 29, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADJUSTMENTS
FISCAL 1997 ACQUISITIONS FOR THE
------------------------------------------ ACQUISITIONS
GENESIS FANFARE H & L ZIG-ZAG & PREFERRED
DIRECT, ENTERPRISES, PRODUCTIONS, IMPORTS, SELECT STOCK PRO FORMA
INC. INC. INC. INC. SERVICE BIOBOTTOMS OFFERING COMBINED
---------- ------------ ------------ -------- ------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............... $ 81,505 $2,018 $5,903 $4,100 $24,173 $13,268 $ -- $ 130,967
Cost of Goods Sold...... 62,143 512 3,312 2,937 12,441 8,227 -- 89,572
---------- ------ ------ ------ ------- ------- ------- ----------
Gross Profit............ 19,362 1,506 2,591 1,163 11,732 5,041 -- 41,395
Selling, general and
administrative
expenses............... 73,053 2,240 1,981 1,393 9,113 6,176 1,175 (b) 95,131
---------- ------ ------ ------ ------- ------- ------- ----------
Income (Loss) from
operations............. (53,691) (734) 610 (230) 2,619 (1,135) (1,175) (53,736)
Interest expense........ 3,163 35 -- -- 147 177 214 (c) 3,377
(359)(d)
Interest income......... -- 23 -- -- -- -- -- 23
---------- ------ ------ ------ ------- ------- ------- ----------
Income (Loss) before
income taxes........... (56,854) (746) 610 (230) 2,472 (1,312) (1,030) (57,090)
Income taxes (benefit).. -- -- -- -- -- (193) (193)(e) --
---------- ------ ------ ------ ------- ------- ------- ----------
Net Income (Loss)....... (56,854) (746) 610 (230) 2,472 (1,119) (1,223) (57,090)
Dividends accruing on
Series A
Preferred Stock........ (1,032) (1,091)(f) (2,123)
---------- ------ ------ ------ ------- ------- ------- ----------
Net loss attributable to
common stockholders.... $ (57,886) $ (746) $ 610 $ (230) $ 2,472 $(1,119) $(2,314) $ (59,213)
========== ====== ====== ====== ======= ======= ======= ==========
Pro forma loss per
share.................. $ (6.57) $ (6.65)
========== ==========
Weighted average number
of
common shares
outstanding............ 8,810,175 8,904,500
========== ==========
</TABLE>
20
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BACKGROUND AND DESCRIPTION OF TRANSACTIONS
Adjustments for the Acquisitions and Related Financings
Genesis Direct, Inc. (in the form of its predecessor entity Genesis Direct
L.L.C.) was organized in June 1995. During Fiscal 1996 and for the nine months
ended December 27, 1997, the Company completed the acquisition of twelve
businesses, consisting of the Fiscal 1996 Acquisitions and the Fiscal 1997
Acquisitions (other than Select Service) and Biobottoms all of which are
engaged in the catalog and direct marketing business. All of these
acquisitions were accounted for under the purchase method of accounting. The
operating results of each acquired business is included in the historic
financial statements of the Company from the date of the respective
acquisition.
Subsequent to December 27, 1997, the Company completed the sale of 22,942
shares of its Series A Preferred Stock for aggregate proceeds of $22,942,000.
The principal use of these proceeds was the acquisition of Select Service.
Dividends on the Series A Preferred Stock are cumulative from the date of
issuance at an annual rate of 6% and are payable in cash or shares of Common
Stock, at the option of the Company. Upon liquidation or conversion, in
connection with a "qualifying sale or qualifying public offering" (as
defined), dividends are payable only to the extent required to yield the
holders of Series A Preferred Stock an "annualized compound rate of return"
(as defined) of 30%. The Company at its option may redeem all shares, but not
less than all shares, of Series A Preferred Stock on or after January 31, 2005
at an amount equal to liquidation value. Liquidation value is $1,000 per share
plus any unpaid dividends. As of December 27, 1997, dividends of $1.032
million have accrued on the Series A Preferred Stock. The holders of Series A
Preferred Stock may elect to require the Company to redeem all such shares on
any date on or after January 31, 2005. Upon such redemption, the holders would
be entitled to receive the liquidation value in cash. If the Company fails to
redeem all such shares, the dividend rate shall be increased to 14% per annum,
payable quarterly in cash until such shares are redeemed. The Series A
Preferred Stock is convertible, at the holders option, at any time into shares
of Common Stock at an initial conversion price of $10.91 per share, subject to
adjustment. The Series A Preferred Stock is subject to automatic conversion
upon the completion of (i) a qualifying public offering at an initial
conversion of $10.91 per share, subject to adjustment. Potential adjustments
to the initial conversion price for both optional and automatic conversions
would result principally from the issuance or sale of certain "equity
instruments" (as defined) at less than the initial conversion price per share
by the Company prior to the date of such conversions. In all cases, fractional
shares resulting from conversion of Series A Preferred Stock will be exchanged
for cash.
In January 1998, the Company completed the acquisition of certain assets and
assumed certain liabilities of Select Service, a company engaged in the direct
marketing of licensed and other sports merchandise. Payment of the aggregate
preliminary purchase price of approximately $20.4 million consisted of (i)
$18.1 million of cash, (ii) a $1.0 million promissory note payable in equal
semi-annual installments of $250,000 commencing July 1998 through January 2000
together with interest at an annual rate of 8%, (iii) $.5 million of non-
compete payments due in equal quarterly installments of $31,250 commencing
January 1998 through January 2002 and (iv) the issuance of 91,575 shares of
Common Stock. The Common Stock was valued at $10.91 per share (the conversion
price per share of the Series A Preferred Stock described above, the proceeds
of which were used to finance the acquisition). Prior to December 27, 1997,
the Company deposited $1.0 million in an escrow account for purposes of
completing the transaction. The excess of the preliminary purchase price over
the estimated fair value of the net assets acquired (approximately $11.0
million) has been recorded as goodwill. The acquisition has been accounted for
under the purchase method of accounting.
On or prior to April 30, 1998, the Company is scheduled to acquire
Biobottoms, a company engaged in the direct marketing of children's apparel.
Payment of the aggregate preliminary purchase price of $2.27 million will
include (i) $1.0 million of cash, (ii) $1.17 million of notes, together with
interest at an annual rate of 7.0%, of which $670,000 is due within four
months after this offering and the balance is due 15 months after the closing
of the acquisition, and (iii) $100,000 of non-compete payments due in equal
annual installments of $50,000 on the first and second anniversaries of the
closing of the acquisition. The excess of the preliminary purchase price
21
<PAGE>
over the estimated fair value of the net assets acquired (approximately
$619,000 as of December 27, 1997) will be recorded as goodwill. The
acquisition will be accounted for under the purchase method of accounting. The
Agreement has not been finalized and the above described terms are subject to
change.
In April 1998, the Company issued to GEIPP, a principal stockholder of the
Company, the $6.3 million Bridge Note. A portion of the proceeds from the
Bridge Note will be used to finance the Biobottoms Acquisition. Cash proceeds
from the issuance of the Bridge Note were $6.0 million, resulting in original
issue discount of $300,000. The Bridge Note bears interest at a rate of 15%
per annum, payable quarterly in arrears commencing June 30, 1998, increasing
to 30% per annum if the full principal is not repaid by January 1, 1999. The
Bridge Note will be prepaid in full from the proceeds of this offering.
Adjustments for Equity Conversions
From inception through December 27, 1997, the Company issued $30.0 million
principal amount of Debentures. The Debentures bear interest at 8% and are due
June 1, 2003. The Debentures are convertible at the option of the holder, at
an initial price of $4.18 per share, into 7,173,913 shares of Common Stock at
any time after the earlier of (i) June 25, 2001, (ii) an "initial public
offering" (as defined) or (iii) a "change in control event" (as defined). At
the time of such conversion, the Company has the option to redeem up to 67.5%
of the principal amount of the Debentures surrendered for conversion. The
Debentures are also redeemable at the option of the Company any time after the
earlier of (i) an initial public offering or (ii) June 25, 1998, at an amount
which provides a total annualized return of 30% of the principal amount being
redeemed. At the date of redemption, however, the holders have the right to
convert up to 32.5% of the principal amount being redeemed. For purposes of
the pro forma balance sheet, the Company has assumed that an aggregate
principal amount $9.75 million of Debentures will be converted into 2,331,521
shares of Common Stock.
In connection with the acquisition of H&L Productions, Inc. the Company
issued to one of the sellers a note in the principal amount of $1.325 million.
In the event the Company completes this offering, the holder may elect to
convert the balance of this note into Common Stock at a rate of $10.91 per
share. In the event of such conversion, the principal amount of the note for
purposes of calculating the number of shares into which the note will be
converted will be deemed to be $1.4 million. The amount of this increase, less
the amount of interest actually accrued on the note through the date of
conversion, will result in the recognition of additional interest expense by
the Company upon conversion.
2. HISTORICAL FINANCIAL STATEMENTS
Each of the Fiscal 1996 Acquisitions and the Fiscal 1997 Acquisitions had
fiscal years which differ from the Company's fiscal year-end. The historical
results of operations for the Fiscal 1996 Acquisitions (except for Duclos
Direct Marketing, Inc.) and the Fiscal 1997 Acquisitions have been adjusted to
conform to the Company's year-end for purposes of the Pro Forma Condensed
Combined Statements of Operations. The historical financial data presented in
the Pro Forma Condensed Combined Statements of Operations for the year ended
March 29, 1997 and for the nine months ended December 27, 1997 represent the
results of operations of the Company and each of the Fiscal 1996 Acquisitions
and the Fiscal 1997 Acquisitions for the year and the nine months ended March
29, 1997 and December 27, 1997, respectively (except that the results of
operations of Duclos Direct Marketing, Inc. are as of January 31, 1997 for
purposes of inclusion in the year ended March 29, 1997). Such data is derived
from the respective financial statements of such companies.
22
<PAGE>
3. PRO FORMA ADJUSTMENTS
Balance Sheet
<TABLE>
<C> <S> <C>
(a) Record sale and aggregate proceeds of Series A Preferred
Stock......................................................... $ 22,942
(b) Record issuance and proceeds from Bridge Note payable:
Cash.......................................................... 6,000
Notes payable--current, net of original issue discount of
$300......................................................... 6,000
(c) Purchase accounting adjustments to reflect Select Service
assets and liabilities at
estimated fair value:
Cash.......................................................... (17,001)
Other assets.................................................. (1,000)
Intangibles and goodwill...................................... 11,571
Liabilities not assumed:
Notes, current portion........................................ 2,892
Notes......................................................... 84
Stockholders' Equity.......................................... 5,953
Record financing used to complete acquisition:
Notes issued to sellers--current.............................. (250)
Notes issued to sellers--non-current.......................... (750)
Common stock issued to sellers................................ (999)
Other liabilities--current.................................... (125)
Other liabilities--non-current................................ (375)
(d) Purchase accounting adjustments to reflect Biobottoms assets
and liabilities at
estimated fair value:
Cash.......................................................... (1,000)
Intangibles and goodwill...................................... 1,319
Stockholders' Equity.......................................... 951
Record financing used to complete acquisition:
Notes issued to seller--current............................... (670)
Notes issued to seller--non-current........................... (500)
Other liabilities............................................. (100)
(e) Redemption in cash of Series A Preferred Stock fractional
shares upon conversion........................................ (30)
(f) Record forgiveness of deferred interest on Debentures......... 483
(g) Record conversion of seller note.............................. 1,325
(h) Record conversion of Debentures............................... 9,750
(i) Record conversion of Series A Preferred Stock................. 95,332
</TABLE>
23
<PAGE>
Statement of Operations
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<C> <S> <C> <C>
(a) Eliminate amortization of historic
basis goodwill and other intangibles
recorded by acquired companies...... $ 33
(b) Record additional amortization of
goodwill and other intangibles
resulting from business
acquisitions, including aggregate
goodwill of $53.4 million, of which
$45.1 million is amortized over
forty years and $8.3 million is
amortized over ten years, $7.2
million of customer lists amortized
over three years and $4.3 million of
non-compete agreements amortized
over their respective terms,
principally four years.............. 4,552 $1,175
(c) Record incremental interest expense
as of the beginning of the period
presented attributable to additional
indebtedness resulting from the
portion of acquisition consideration
funded through borrowings or
issuance of notes or other
obligations to sellers including
$30.0 million of debentures payable
with interest at 8.0% per annum, an
aggregate of $15.4 million of seller
notes and other obligations payable
to sellers with interest at 12% per
annum, an aggregate of $7.22 million
of seller notes or other obligations
with interest at rates ranging from
5.76% to 8.0% per annum and $1.0
million of bridge note financing
with interest at 15% per annum...... 3,775 214
(d) Eliminate interest expense
attributable to indebtedness not
assumed in business acquisitions.... 1,235 359
(e) Elimination of provision (benefit)
for income taxes assuming inclusion
of all acquired entities in the
consolidated tax return of the
Company............................. (281) (193)
(f) Accrued dividends on $22,942 of
Series A Preferred Stock............ 1,373 1,091
</TABLE>
4. PRO FORMA LOSS PER SHARE
Pro forma loss per share is based on 2,933,700 and 8,810,175 weighted
average number of shares of Common Stock outstanding for the year ended March
29, 1997 and for the nine months ended December 27, 1997, respectively, each
increased by an aggregate of 94,325 shares representing the total shares of
Common Stock issued in connection with the acquisitions of Zig Zag Imports,
Inc. (2,750 shares) and Select Service (91,575 shares) as if such shares were
outstanding from the beginning of the respective periods.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of March 30,
1996 and for the period from June 8, 1995 (inception) through March 30, 1996,
as of March 29, 1997 and for the fiscal year ended March 29, 1997 and as of
December 27, 1997 and the nine months ended December 27, 1997 and December 28,
1996 has been derived from the Company's Consolidated Financial Statements.
The selected consolidated financial data as of March 30, 1996, March 29, 1997
and December 27, 1997 and for the periods from June 8, 1995 (inception)
through March 30, 1996, the fiscal year ended March 29, 1997 and the nine
months ended December 27, 1997 have been derived from the Company's historical
financial statements which have been audited by Ernst & Young LLP, independent
auditors whose report thereon appears elsewhere in this Prospectus. The
results for the nine months ended December 28, 1996 have been derived from the
Company's unaudited Consolidated Financial Statements and, in the opinion of
the Company, include all adjustments (consisting only of normal, recurring
adjustments) necessary to present fairly such information in accordance with
generally accepted accounting principles applied on a consistent basis. The
results for the nine months ended December 27, 1997 are not necessarily
indicative of the results for the full fiscal year. The selected consolidated
financial data are qualified by reference to and should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations", the Consolidated Financial Statements and notes thereto, the
Pro Forma Condensed Combined Financial Statements and notes thereto, and other
financial information appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 8, 1995 PRO FORMA PRO FORMA
(INCEPTION) FISCAL YEAR FISCAL YEAR NINE MONTHS ENDED NINE MONTHS
THROUGH ENDED ENDED ------------------------- ENDED
MARCH 30, MARCH 29, MARCH 29, DECEMBER 28, DECEMBER 27, DECEMBER 27,
1996(1) 1997(1) 1997(2) 1996 1997 1997 (3)
------------ ----------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... -- $ 18,537 $ 157,369 $ 6,051 $81,505 $ 130,967
Gross profit............ -- 8,089 66,098 2,633 19,362 41,395
Selling, general and
administrative
expenses............... $ 2,710 20,711 85,010 8,246 73,053 95,131
------- --------- --------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (18,912) (5,613) (53,691) (53,736)
Interest expense, net... 5 888 4,605 112 3,163 3,354
------- --------- --------- --------- --------- ---------
Net loss................ (2,715) (13,510) (23,517) (5,725) (56,854) (57,090)
Dividends accruing on
Series A Preferred
Stock.................. -- -- 1,373 -- 1,032 2,123
------- --------- --------- --------- --------- ---------
Net loss attributable to
Common Stockholders.... $(2,715) $ (13,510) $ (24,890) $ (5,725) $ (57,886) $ (59,213)
======= ========= ========= ========= ========= =========
Net loss per share
attributable to Common
Stockholders(4)........ $ (4.49) $ (4.60) $ (8.22) $ (2.73) $ (6.57) $ (6.65)
======= ========= ========= ========= ========= =========
Weighted average number
of shares outstanding.. 605,000 2,933,700 3,028,025 2,093,300 8,810,175 8,904,500
======= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1997
-------------------------------------
PRO FORMA
MARCH 30, 1996 MARCH 29, 1997 ACTUAL PRO FORMA(5) AS ADJUSTED(6)
-------------- -------------- -------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Cash and cash
equivalents............ $ 240 $ 8,184 $ 7,615 $ 18,924 $ 94,502
Working capital
(deficiency)........... (1,197) (53) (378) 11,472 93,050
Total assets............ 1,186 56,866 110,294 150,323 225,901
Debentures.............. -- 22,500 30,000 20,250 --
Other long-term debt,
less current portion... -- 4,918 7,852 7,840 7,840
Series A Preferred
Stock.................. -- -- 72,390 -- --
Total stockholders'
equity (deficiency).... (515) 8,375 (42,518) 65,341 169,919
</TABLE>
- --------
footnotes on next page
25
<PAGE>
(1) The Company's fiscal year is a 52/53 week year that ends on the Saturday
next preceding April 1 of the next calendar year. Accordingly, the year
ended March 29, 1997 is referred to as "Fiscal 1996" and the period from
June 8, 1995 (inception) through March 30, 1996 is referred to as "Fiscal
1995."
(2) Prepared on a pro forma basis to reflect the Biobottoms Acquisition and
all acquisitions completed after March 31, 1996 and before the date
hereof, as if such acquisitions were completed as of March 31, 1996. See
"Pro Forma Condensed Combined Financial Statements."
(3) Prepared on a pro forma basis to reflect the Biobottoms Acquisition and
all acquisitions completed after March 30, 1997 and before the date
hereof, as if such acquisitions were completed as of March 30, 1997. See
"Pro Forma Condensed Combined Financial Statements."
(4) The net loss per share is based upon the weighted average number of shares
of Common Stock outstanding during each period. See Note 2 to the
Company's Consolidated Financial Statements and Note 4 to the Company's
Pro Forma Condensed Combined Financial Statements.
(5) Prepared on a pro forma basis to reflect (i) the Biobottoms Acquisition
and the acquisition completed after December 27, 1997 and before the date
hereof, as if they had been completed as of December 27, 1997, (ii) the
sale, on December 29, 1997, of 22,942 shares of Series A Preferred Stock
for aggregate proceeds of $22,942,000 (iii) the issuance of the $6.3
million Bridge Note on April 8, 1998 and (iv) the following transactions
which will occur immediately prior to the consummation of this offering:
(a) the conversion of all outstanding shares of Series A Preferred Stock
into 8,644,156 shares of Common Stock; (b) the conversion of $9.75 million
principal amount of outstanding Debentures into 2,331,521 shares of Common
Stock; and (c) the conversion of an outstanding note in the amount of $1.4
million into 128,333 shares of Common Stock. See "Pro Forma Condensed
Combined Financial Statements."
(6) Prepared on a pro forma as adjusted basis to reflect (i) all acquisitions
completed after December 27, 1997 and before the date hereof, as if they
had been completed as of December 27, 1997, (ii) the sale, on December 29,
1997, of 22,942 shares of Series A Preferred Stock for aggregate proceeds
of $22,942,000, (iii) the issuance of the $6.3 million Bridge Note on
April 8, 1998, (iv) the following transactions which will occur
immediately prior to the consummation of this offering: (a) the conversion
of all outstanding shares of Series A Preferred Stock into 8,644,156
shares of Common Stock; (b) the conversion of $9.75 million principal
amount of outstanding Debentures into 2,331,521 shares of Common Stock;
and (c) the conversion of an outstanding note in the amount of $1.4
million into 128,333 shares of Common Stock, and (v) the sale by the
Company of 8,577,406 shares of Common Stock in this offering and the
application of the net proceeds therefrom as described under "Use of
Proceeds." Pursuant to the terms of the Debentures, the Company will
redeem approximately $20.25 million of principal amount of Debentures plus
accrued interest and prepayment premium through May 11, 1998, the
anticipated date of redemption. A portion of such cash prepayment premium
approximating $5.3 million will be recorded as an extraordinary item in
the period in which the redemption occurs. See "Pro Forma Condensed
Combined Financial Statements."
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and the related notes thereto which are included
elsewhere in this Prospectus. Except for the historical information contained
herein, the discussion in this Prospectus contains forward-looking statements
that involve risks and uncertainties, such as statements of the Company's
plans, objectives, expectations and intentions. The cautionary statements made
in this Prospectus shall be read as being applicable to all related forward-
looking statements wherever they appear in this Prospectus. The Company's
actual results could differ materially from those anticipated in such forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed before and in the section
entitled "Risk Factors," as well as those discussed elsewhere in this
Prospectus.
OVERVIEW
Genesis Direct is a leading database-driven specialty retailer in the
rapidly growing universe of non-store shopping. With a current portfolio of 29
Company-owned brands, the Company offers products directly to consumers in
targeted niche markets primarily through a variety of distinctive,
information-rich catalogs, as well as Internet websites and electronic media,
including television and radio. The Company intends to continue its expansion
program through acquisitions and start-ups of a variety of catalog brands
which it believes have the potential, among other things, to produce high
gross margins, low merchandise return rates, high average orders and repeat
customers. The Company believes it is well-positioned to pursue an active
consolidation strategy in the fast-growing, highly fragmented direct marketing
industry.
Since its inception, the Company has concentrated on building an
infrastructure necessary to manage its operating and growth strategies. To
date, the Company has invested approximately $20.4 million on its state-of-
the-art call center, distribution center and management information systems
and database technologies that effectively coordinate the call center, order-
taking, distribution and fulfillment functions. Because of the Company's
desire to build a state-of-the-art infrastructure and to become a leading
database-driven specialty catalog-based retailer as rapidly as possible, the
Company has accumulated a significant amount of expenses in a very short time
and, as a result, has not been profitable. The Company had an accumulated
deficit of approximately $73.1 million at December 27, 1997 and had a net loss
of $57.9 million for the nine months then ended. For the three months ended
March 28, 1998, the Company expects to report a net loss of approximately
$19.0 million to $20.0 million on net sales of approximately $23.0 million to
$24.0 million, and for the fiscal year then ended the Company expects to
report a net loss of approximately $76.0 million to $77.0 million on net sales
of approximately $104.0 million to $105.0 million. Management believes that
the Company's historical results of operations are not indicative of future
operating results.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected items
from the Company's statement of operations expressed as a percentage of net
sales. Any trends reflected by the following table may not be indicative of
future results.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------------------
PERIOD FROM
JUNE 8, 1995 NINE MONTHS ENDED
(INCEPTION) THROUGH FISCAL YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
------------------- ----------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... -- 100.0% 100.0% 100.0%
Gross profit............ -- 43.6 40.5 23.8
Selling, general and
administrative
expenses............... 100.0% 111.7 126.8 89.6
Loss from operations.... 100.0 68.1 86.3 65.9
Interest expense........ -- 6.3 5.3 3.9
Net loss................ 100.0 72.9 88.1 69.8
</TABLE>
27
<PAGE>
NINE MONTHS ENDED DECEMBER 27, 1997 COMPARED TO NINE MONTHS ENDED DECEMBER 28,
1996
Net Sales. Net sales increased to $81.5 million in the nine months ended
December 27, 1997 from $6.5 million in the nine months ended December 28,
1996. This increase was attributable to acquisitions completed and start-ups
launched during the 1997 period, revenue growth from existing catalogs and the
1996 acquisitions (which were completed in December 1996) being included for
the entire 1997 period.
Gross Profit. Gross profit increased to $19.4 million or 23.8% of sales for
the 1997 period compared to $2.6 million or 40.5% for the 1996 period. This
increase was attributable to the acquisitions completed and start-ups launched
during the 1997 period and the 1996 acquisitions being included for the entire
1997 period. The decrease in the gross profit percentage primarily occurred in
the period between September and December 1997, when the Company experienced a
temporary inability of its call center software to interface with its
distribution center software resulting in lost sales revenues, reduced gross
margins and increased per order fulfillment costs. The Company believes that
this disruption contributed significantly to the loss for the nine month
period ended December 27, 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of direct response advertising and
promotion costs, administrative payroll and related costs, fixed distribution
and telemarketing costs, integration costs for acquisitions and depreciation
and amortization. Selling, general and administrative expenses increased to
$73.1 million in the 1997 period, from $8.2 million in the 1996 period.
Selling, general and administrative expenses as a percentage of net sales
decreased to 89.6% in the 1997 period from 127% in the 1996 period. This
decrease was due to increased sales volume resulting from the acquisitions
completed and start-ups launched during 1997 and the 1996 acquisitions being
included for the entire 1997 period, offset in part by increased costs
associated with the Company's decision to invest in infrastructure in order to
take advantage of its opportunities for future growth in new markets and
channels as well as to integrate new brands. In connection with the Company's
acquisitions, amortization of acquired intangibles of $2.9 million is included
in selling, general and administrative expenses in the 1997 period as compared
to $30,000 in the 1996 period.
Interest expense. Interest expense increased to $3.2 million in the nine
months ended December 27, 1997 from $0.3 million in the nine months ended
December 28, 1996, primarily as a result of a higher average debt balance.
FISCAL YEAR ENDED MARCH 29, 1997 ("FISCAL 1996") COMPARED TO PERIOD FROM JUNE
8, 1995 THROUGH MARCH 30, 1996 ("FISCAL 1995")
Net Sales and Gross Profit. Net sales in Fiscal 1996, the first year of the
Company's sales, were $18.5 million. Gross profit was $8.1 million in Fiscal
1996. As a percentage of net sales, gross profit was 43.6% in Fiscal 1996.
Such net sales and gross profit were attributable to the acquisitions
completed and start-ups launched during Fiscal 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $20.7 million in Fiscal 1996 from $2.7
million in Fiscal 1995. This increase was due to (i) the Company's decision to
invest in infrastructure in order to take advantage of its opportunities for
future growth in new markets and channels as well as to integrate new brands
and (ii) the acquisitions completed and start-ups launched during Fiscal 1996.
Interest expense. Interest expense increased to $1.16 million in Fiscal 1996
from $5,000 in Fiscal 1995, primarily as a result of the issuance of $22.5
million principal amount of convertible debt in Fiscal 1996 and $10.2 million
in notes related to the acquisitions completed during Fiscal 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 27, 1997, the Company had cash of $7.6 million and a working
capital deficit of $0.4 million. The Company's capitalization, defined as the
sum of long-term debt, redeemable preferred stock and stockholders' equity, at
December 27, 1997 was $67.7 million.
28
<PAGE>
The Company's principal capital needs arise from (i) the acquisition and
start-up of new catalog businesses, (ii) the funding of operating losses
arising from maintaining the infrastructure necessary to support future
acquisitions and the investment in growing these new acquisitions through
prospect mailings, (iii) growing the customer database and (iv) capital
expenditures related to the telemarketing and fulfillment centers.
The Company's ability to acquire new catalog businesses will depend on a
number of factors, including the ability of management of the Company to
identify target businesses and to negotiate acceptable acquisition terms, the
availability of adequate financing and other factors, many of which are beyond
the control of the Company. Through December 27, 1997, the Company acquired 13
businesses for an aggregate of $32.8 million cash, $30,000 of Common Stock,
$17.2 million of notes and certain other deferred payments and up to $1.9
million in contingent payments. There can be no assurance that the Company
will be successful in identifying and acquiring new businesses or that the
Company can integrate such new businesses into its operations.
Since its inception, the Company has received $166.7 million of funding from
various sources, including the founders and major institutional investors as
well as a $5.0 million term loan. From June 1996 through April 1997, the
Company raised $62.2 million of capital commitments from GEIPPP II and Genesis
Direct, L.P. ("GDLP"). See "Certain Relationships and Related Transactions."
The $62.2 million consisted of $32.2 million of Common Stock and $30.0 million
of Debentures to GEIPPP II. In September and December 1997, the Company raised
a total of $94.3 million through the issuance of Series A Preferred Stock to
GEIPPP II, GDLP and several other private equity funds. The proceeds of these
financings were used to fund the Company's acquisitions, working capital needs
and capital expenditure program. In April 1998, the Company raised a total of
$6.0 million through the issuance of the Bridge Note to GEIPPP II. Proceeds
from the Bridge Note are being used (i) to pay for the expansion and upgrading
of the infrastructure at the Company's distribution center, (ii) to fund the
Biobottoms Acquisition and (iii) to provide additional working capital.
In May 1997, the Company entered into a $25.0 million revolving credit
facility and a $5.0 million term loan with The CIT Group/Business Credit Inc.
(the "Credit Facility"). The Credit Facility is collateralized by
substantially all of the Company's assets. The $25.0 million revolving credit
portion of the Credit Facility bears interest at a variable rate equal to
Prime Rate of The Bank of New York plus 1/2% or LIBOR plus 3%. The $5.0
million term loan is payable over five years and bears interest at the Prime
Rate plus 1/2%. The Credit Facility contains a covenant with respect to the
maintenance of specified consolidated net worth.
During the nine months ended December 27, 1997, net cash used by operating
activities was $57.4 million. Net cash used in investing activities was $30.1
million, consisting primarily of cash paid for acquisitions, net of cash
acquired, of $13.4 million and cash paid for additions to property and
equipment of $16.9 million. Net cash provided by financing activities was
$87.2 million consisting primarily of the $85.6 million raised from GEIPPP II
and GDLP and other holders of Series A Preferred Stock as set forth above.
During Fiscal 1996, net cash used by operating activities was $13.5 million.
Net cash used by investing activities was $25.0 million, consisting primarily
of cash paid for acquisitions of $19.2 million and cash paid for additions to
property and equipment of $3.0 million. Net cash provided by financing
activities resulted from $44.9 million raised by GEIPPP II and GDLP as set
forth above.
The Company expects to make capital expenditures which will total
approximately $17.0 million during fiscal 1998 to invest in its existing
state-of-the-art infrastructure, to exploit new channels of distribution and
to increase its activities in international markets. However, no assurance can
be made with respect to the actual timing and amount of the expenditures. The
Company anticipates that its cash, proceeds from this offering and financing
available under the Credit Facility will be sufficient to meet the Company's
liquidity requirements for its operations for at least the next 12 months.
There can be no assurances that additional sources of financing will not be
required during such time or thereafter.
As of March 29, 1997, the Company had approximately $10.0 million of federal
tax net operating loss carryforwards which expire in 2012. The Company also
has approximately $8.6 million of state tax net operating loss carryforwards
which expire principally in 2004. In addition, the Company incurred
approximately $46 million of tax losses for the nine-month period ended
December 27, 1997.
29
<PAGE>
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change." In general,
an ownership change is deemed to occur if the percentage of stock of a
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period.
As a result of cumulative changes in the Company's ownership which have
occurred, including this offering, the Company's net operating loss
carryforwards may be subject to annual limitations.
SEASONALITY
The Company's business is subject to seasonal fluctuations. Management
anticipates that approximately 50% of the Company's net revenues will be
derived from the fall and holiday seasons. As a result, the Company expects
its sales and results of operations generally to be the lowest in the second
quarter of each fiscal year, which precedes the back-to-school and holiday
purchases. The Company's quarterly results may fluctuate as a result of
numerous factors, including the timing of acquisitions, the timing, quantity
and cost of catalog mailings, the response rates to such mailings, the timing
of merchandise deliveries, the merchandise mix, pricing and presentation of
products offered and sold, market acceptance of the Company's merchandise
(including new merchandise categories or products introduced) and the hiring
and training of additional personnel. Accordingly, results of operations in
any quarter will not necessarily be indicative of the results that may be
achieved for a full fiscal year or any future quarters. Results of operations
are affected not only by the seasonality of the Company's net revenues, but
also by seasonal variations in product mix and the fixed portion of the
Company's operating expenses.
INFLATION
Results of operations have not been significantly affected by inflation
since the Company's inception. Management expects that in the normal course of
business, the Company will be able to offset the effects of increased costs
through operating efficiencies and selected price increases.
YEAR 2000 ISSUE
Year 2000 compliance is the ability of computer hardware and software to
respond to the problems posed by the fact that computer programs have
traditionally been written using two digits rather than four to define the
applicable year. As a consequence, unless modified, computer systems will not
be able to differentiate between the year 2000 and 1900. Failure to address
this problem could result in system failures and the generation of erroneous
data. The Company is reviewing its computer programs and systems to ensure
that the programs and systems will function properly and be year 2000
compliant. The Company presently believes that, with certain modifications to
existing software and the installation of certain new software, its computer
system will be year 2000 compliant. The estimated cost of these efforts are
not expected to be material to the Company's financial position or any year's
results of operations, although there can be no assurance to this effect. In
addition, the year 2000 problem may impact other entities with which the
Company transacts business, and the Company cannot predict the effect of the
year 2000 problem on such entities.
RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
Recent pronouncements of the Financial Accounting Standards Board ("FASB")
which are not required to be adopted at December 27, 1997, include the
following Statements of Financial Accounting Standards ("SFAS"):
SFAS No. 129, "Disclosure of Information about Capital Structure," which
will be effective for the Company for the fiscal year ending March 27, 1999,
consolidates existing disclosure requirements. This new standard contains no
change in disclosure requirements for the Company.
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income (all changes in equity during a
period except those resulting from investments by and distributions to owners)
and its components in the financial statements. This new standard, which will
be
30
<PAGE>
effective for the Company for the fiscal year ending March 27, 1999, is not
currently anticipated to have a significant impact on the Company's financial
statements based on the current financial structure and operations of the
Company.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information," which will be effective for the Company for the fiscal year
ending March 27, 1999, establishes standards for reporting information about
operating segments in the annual financial statements, selected information
about operating segments in interim financial reports and disclosures about
products and services, geographic areas and major customers. This new standard
may require the Company to report financial information on the basis that is
used internally for evaluating segment performance and deciding how to
allocate resources to segments, which may result in more detailed information
in the notes to the Company's financial statements than is currently required
and provided. The Company has not yet determined the effects, if any, of
implementing SFAS No. 131 on its reporting of financial information.
31
<PAGE>
BUSINESS
Genesis Direct is a leading database-driven specialty retailer in the
rapidly growing universe of non-store shopping. With a current portfolio of 29
Company-owned brands, the Company offers products directly to consumers in
targeted niche markets primarily through a variety of distinctive,
information-rich catalogs, as well as Internet websites and electronic media,
including television and radio. The Company's marketing efforts are supported
by a customer database of over 10 million names, a 450-station call center at
its Secaucus, New Jersey, headquarters and a custom-designed 500,000 square
foot distribution center strategically located in Memphis, Tennessee. For the
nine months ended December 27, 1997, the Company had net sales of
approximately $81.5 million.
MARKET OVERVIEW
According to the DMA, in recent years, retailing in the United States has
been characterized by a rapidly growing shift to non-store sales through such
media as printed catalogs, broadcast and cable television infomercials, home
shopping channels and the Internet. These alternative forms of non-store
retailing, which in 1997 accounted for approximately $382.0 billion in sales,
are expected to grow approximately 9% per annum for the next five years. The
Company believes that this growth is due to the convenience of home shopping
for time-constrained, dual-career consumer households and the increasingly
high level of customer service and reliability offered by leading direct
marketing firms. The Company also believes that, on a percentage basis, the
fastest growing portion of the home shopping market will be on-line shopping
via the Internet. According to estimates published by the Yankee Group, a
Boston-based research firm, Internet-driven sales in 1997 totaled $2.7
billion. The Yankee Group predicts that consumer Internet-driven sales will
grow to $10.0 billion by the year 2000 and $32.0 billion by the year 2002. In
addition, the Yankee Group estimates that the total number of on-line
households grew from 15.5 million in 1996 to 20.0 million in 1997.
The DMA has also found that the traditional catalog segment of the United
States direct marketing industry, which generated approximately $79.0 billion
in total sales in 1997, is highly fragmented. There are over 12,000 consumer
catalog companies in existence, most of which lack the necessary capital,
support systems and economies of scale to effectively exploit available
opportunities for growth. The Company believes that the most successful
catalog marketers will be those with a critical mass of at least $25.0 million
in annual sales, whether through internal growth or acquisition. There will
also be a need to recognize the strategic importance of developing a presence
in electronic media and capitalizing on expanding international markets. In
order to implement these strategies, catalog operators require capital and
management and development expertise.
According to Marketing Logistics, an industry consulting and research group,
international consumers and businesses have spent more than $94.0 billion in
1995 buying from direct marketing sources. Germany and Japan offer
particularly interesting direct marketing opportunities. According to the U.S.
Commerce Department, catalog sales in Germany were estimated to have reached
$24.0 billion in 1995. Research conducted by the U.S. and Foreign Commercial
Service, as of 1996, shows that Germany was the world's second largest mail
order market with spending on mail order products in 1995 averaging $293 per
capita, second only to the United States. Moreover, according to research
conducted by the German postal service, the apparel return ratio in Germany is
lower than the ratio experienced by most countries. In addition, according to
the U.S. Commerce Department, catalog sales in Japan reached $20.0 billion in
1995, with United States catalogers generating over $1.0 billion of such
annual sales. With the advent of the single European market, there should also
be opportunity for catalog growth, as well as other remote shopping growth, in
the rest of the European community.
THE GENESIS DIRECT STRATEGY
The Company's objective is to become the leading provider of a broad array
of branded consumer and business catalogs offered in a variety of traditional
and innovative markets. The key elements of the Company's operating and growth
strategies are set forth below:
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<PAGE>
OPERATING STRATEGY
The key elements of the Company's operating strategy are as follows:
. TARGET AND PENETRATE NICHE MARKETS. The Company identifies and focuses
its efforts on penetrating niche markets that it believes are
underserved by retail stores and other catalogs, that will be responsive
to its innovative direct marketing techniques and in which it can become
a market leader. The Company then acquires a variety of catalogs within
the target market, each of which it transforms into a readily
identifiable brand by investing heavily to enhance the catalog's image.
In addition, the Company trains a core group of specialized customer-
responsive employees to serve that market and seeks to establish
innovative strategic relationships with other participants in that
market. The Company also employs sophisticated database management
techniques and systems to cross-sell product offerings designed for one
niche market to customers in its other niche markets. The Company
believes that by targeting several niche markets and serving each market
with multiple brands, it reduces its reliance on any particular market
or brand.
. DEVELOP CENTRALIZED STATE-OF-THE-ART INFRASTRUCTURE. Since its
inception, the Company has invested approximately $20.4 million to
develop an order-taking, processing and fulfillment infrastructure with
sufficient capacity and operational flexibility to service increased
sales volume and exploit strategic or market opportunities as they
occur. In addition to its state-of-the-art call center and distribution
center, the Company has invested in sophisticated management information
systems and database technologies that effectively coordinate a full
range of functions from catalog production and mailing to order-taking
and fulfillment. The Company's substantial investment in infrastructure
allows it to quickly consolidate and integrate newly acquired catalogs
and to introduce new catalogs. The Company believes that, as sales
volume increases through acquisitions and internal growth, it can
leverage its infrastructure to reduce the per order cost of fulfillment.
The Company believes that, without significant additional capital
expenditures beyond its fiscal 1998 spending plan, its current systems
infrastructure, call center and distribution center can accommodate up
to $1.0 billion in annual sales.
. OFFER PROPRIETARY, PERSONALIZED AND HARD-TO-FIND PRODUCTS. The Company
seeks to increase its gross margins by offering proprietary and
personalized products, as well as products that are difficult to find in
retail stores and other catalogs. The Company strives to offer customers
in each of its target markets a broader merchandise selection than is
generally offered by traditional retailers and smaller direct marketers.
The Company has established a department dedicated to the development of
proprietary products and the personalization of products within each of
the Company's target markets. As part of this initiative, the Company is
currently building a customization facility in its distribution center
that will enable it to personalize most of its products by means of
etching, laser engraving and embroidery.
. UTILIZE MULTIPLE MARKETING CHANNELS. To reach potential customers, the
Company uses multiple marketing channels, including mail, Internet
websites, television and radio advertisements, infomercials, airplane
seat-backs, hotel rooms, sports events and trade shows. The Company
currently takes on-line orders for products from Internet websites under
two of its brands and maintains informational websites for eight of its
other brands. In addition, under exclusive arrangements with the NBA,
NHL and Major League Baseball, the Company maintains the on-line store
on those leagues' websites, where potential customers can receive
information, view merchandise, enter inquiries and orders and request
catalogs.
. BUILD LIFETIME CUSTOMER RELATIONSHIPS. The Company's objective is to
make every customer a customer for life. Through its niche marketing
strategy and sophisticated database, enhanced with up-to-date
demographic information, the Company offers products intended to satisfy
preferences as they evolve over their lifetimes. In addition, the
Company strives to provide consistently prompt, knowledgeable and
courteous service and rapid order fulfillment. In its 450-station call
center, calls are routed to the customer service representative most
knowledgeable about the products within the
33
<PAGE>
particular catalog brand in question. Because of the high level of
automation at its distribution center and the strategic location of that
center at a shipping hub for such carriers as Federal Express, UPS and
the U.S. Postal Service, the Company is able to provide next-day
delivery, if requested, on orders received prior to 11:00 p.m. EST. The
Company continually strives to develop the Genesis Direct name into an
umbrella seal-of-approval symbol associated with superior service and
product quality.
. ATTRACT AND RETAIN EXPERIENCED MANAGEMENT TEAM. The Company seeks to
attract and retain highly qualified management personnel with extensive
experience. To date, the Company has assembled some of the country's
most experienced professionals in direct marketing or related
industries. The Company has also retained many of the former owners of
the acquired catalog companies, who bring extensive expertise in their
respective niche markets.
GROWTH STRATEGY
The key elements of the Company's growth strategy are as follows:
. PURSUE STRATEGIC ACQUISITIONS. As a result of its acquisition of 14
catalog businesses, the Company has developed considerable expertise in
identifying and evaluating appropriate acquisition candidates and in
integrating the operations and expanding the sales of acquired
companies. The Company believes that the fragmented direct marketing
industry provides significant consolidation opportunities and is
pursuing an aggressive but disciplined acquisition strategy focused
primarily on catalog brands that complement existing brands in its
targeted niche markets. In particular, the Company seeks catalog brands
that have been unable to realize their growth and profitability
potential due to capital constraints and infrastructure limitations. To
date, the typical acquisition candidate has demonstrated a high average
order value and a low rate of merchandise returns and is believed to
have the potential to eventually achieve at least $25.0 million in
annual sales, realize high rates in customer retention and successfully
offer higher margin proprietary products.
. INCREASE REVENUES OF ACQUIRED CATALOGS. The Company believes that, in
addition to achieving synergies through the integration of acquired
catalogs, there are opportunities to substantially increase the revenues
of acquired catalogs by utilizing the Company's database to efficiently
target a more precise group of potential customers based on demographic
information and individual purchase behavior. In addition, the Company
believes that its superior customer service and its development of each
acquired catalog into a readily identifiable brand can increase the
revenue opportunities of those catalogs.
. DEVELOP NEW BRANDS. The Company uses its existing customer database to
create and introduce new catalog brands. The Company currently has eight
active start-up catalog brands and intends to introduce and develop
additional new catalog brands featuring original merchandise concepts
that will allow it to penetrate further distinct segments of its niche
markets. For example, the Company has recently used its customer lists
in the sports and kids market segments to start-up S.K.U.S.A. (an
acronym for Sports Kids U.S.A.), through which the Company will offer
hard-to-find "sports lifestyle" products for children, including
apparel, home furnishings and toys.
. EXPAND AND LEVERAGE CUSTOMER DATABASE. The Company is continually
expanding its customer database through a variety of techniques,
including catalog and list acquisitions, renting of mailing lists and
strategic alliances. Examples of strategic alliances that enhance the
Company's customer database are its exclusive arrangements with
professional sports leagues that allow the Company access to the
leagues' databases, Internet websites and advertising opportunities. The
Company uses sophisticated statistical modeling and segmentation
techniques to develop purchasing profiles of the customers in its
database, which facilitates cross-marketing, cross-selling and more
precisely focused catalog distributions and marketing efforts.
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. EXPAND INTERNATIONAL SALES. The demographic and technological trends
that are driving the retail consumer shift to non-store shopping in the
United States are also present in many international markets. The
Company believes that its catalog development expertise and existing
infrastructure will enable it to expand into certain of those markets,
particularly those with a strong interest in U.S. sports-related
products. The Company intends, where appropriate, to produce foreign
language versions of several of its catalogs. In addition, the Company's
distribution center in Memphis, Tennessee is strategically placed at the
hub of courier services serving international markets to permit rapid
direct-to-consumer overseas order fulfillment. The Company is currently
expanding its operations into France, Germany, Japan and the United
Kingdom and expects to launch an extension of its 1-800-Pro-Team brand
in several of those countries.
. GENERATE MULTIPLE REVENUE STREAMS. The Company intends to generate
multiple revenue streams within its target markets by permitting third-
party direct marketers to sell non-competing goods and services to its
customers, by including third-party/vendor advertising in Company
catalogs and by renting its customer lists to non-competing vendors. For
example, through several of its sports brands, the Company offers MBNA
credit cards with sports team logos.
THE GENESIS DIRECT PORTFOLIO OF BRANDS
The Company currently organizes its product offerings within four distinct,
but interrelated, market categories, each with a specific market focus
designed to appeal to a particular customer profile: sports, kids, gifts and
collectibles and institutional/business to business. The Company has trained a
core group of specialized customer-responsive managers and employees to serve
each of those markets and is establishing innovative and strategic
relationships with participants in each market. In addition, the Company has
retained and seeks to incentivize a majority of the former owners of its
acquired catalog companies who have expertise in merchandising to customers in
their targeted niche markets. The Company also employs sophisticated database
management techniques and systems to cross-sell product offerings designed for
one niche market to customers in its other niche markets.
SPORTS
The Company has developed a strategy of building specialty sports brands,
each focused on a single sport, plus one multi-sport brand. Sports merchandise
includes licensed and non-licensed apparel, accessories, home furnishings,
equipment and limited edition collectibles, as well as fantasy packages which
offer customers the opportunity to interact with sports celebrities. The
Company believes that an important factor in the success of its sports brands
is its ability to offer a much greater selection of licensed merchandise
compared to traditional retailers. In particular, in many communities there is
strong demand for non-local team products that is generally not fulfilled by
local retailers because of capacity constraints. In addition, serving the
sports market segment adds selling seasons to the traditional holiday seasons
through marketing efforts around major sporting events, such as the Super
Bowl, the World Series, the NBA Championship and the Stanley Cup. The Company
has exclusive "Official Catalog" relationships with the NBA, the NHL, Major
League Baseball and NASCAR, as well as a strategic relationship with the NFL.
Hot Off The Ice, the first Genesis Direct start-up catalog, was launched
during the 1996 holiday period. Under an exclusive arrangement with the NHL,
Hot off The Ice is marketed as the "Official Catalog of the Coolest Game on
Earth." Hot Off The Ice offers licensed and non-licensed hockey-related
products and collectibles. Hot Off The Ice has access to the NHL's proprietary
database for its Hot Off The Ice mailings. In addition, Hot Off The Ice
reaches customers as the exclusive store on the NHL's website. The average
order value for Hot Off The Ice merchandise for fiscal 1997 was approximately
$83.
Nothin' But Hoops, a start-up catalog, was launched in October 1997. Under
an exclusive arrangement with the NBA, Nothin' But Hoops is marketed as the
"Official Catalog of the NBA." Nothin' But Hoops offers
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licensed NBA products, non-licensed basketball products and basketball
collectibles. The Company has access to the NBA's proprietary database for its
Nothin' But Hoops mailings. In addition, Nothin' But Hoops reaches customers
as the exclusive store on the NBA's website, through NBA-provided television,
radio and print advertisements at no additional fee to the Company and through
the ability to distribute advertising materials at sports events. The average
order value for Nothin' But Hoops merchandise for fiscal 1997 from launch was
approximately $82.
Manny's Baseball Land, a start-up catalog, was launched in March 1998. Under
an exclusive arrangement with Major League Baseball, Manny's Baseball Land is
marketed as the "Official Catalog of Major League Baseball." Manny's Baseball
Land is based on the well-known and established brand name "Manny's Baseball
Land," which was started in 1949 outside of Yankee Stadium. Manny's Baseball
Land offers baseball-related products, including licensed Major League
Baseball products.
From The Sidelines, a start-up catalog, was launched in July 1997. From the
Sidelines was previously operated under the name Athletic Supply, which was
acquired by the Company in December 1996. During 1997, the Company changed the
acquired catalog's focus from multi-sport to football and launched the new
catalog under the name From The Sidelines, offering licensed and non-licensed
football products and memorabilia. The average order value for From The
Sidelines merchandise for fiscal 1997 from launch was approximately $85. In
connection with the Athletic Supply acquisition, the Company acquired the
Official NFL Quarterback Club catalog, which offers limited edition
autographed football collectibles. The average order value for Official NFL
Quarterback Club merchandise for the period from acquisition to date was
approximately $85.
The Official NASCAR Catalog, acquired in October 1997, offers licensed
NASCAR merchandise, including apparel and collectibles. The Company also owns
NASCAR Shoptalk, a television infomercial on ESPN, and the Official NHRA
Catalog, which offers licensed National Hot Rod Association merchandise
including apparel and collectibles. In addition, the Company has a related
commercial promotions business, through which it markets its products through
various sports activities and events, often in connection with well-known
consumer product companies. The Company hopes to capitalize from the
anticipated increased media attention resulting from NASCAR's planned
promotional events surrounding its 50th anniversary in 1998. The average order
value for The Official NASCAR Catalog merchandise for the period from
acquisition to date was approximatelly $72.
1-800-Pro-Team was acquired in December 1996. 1-800-Pro-Team is a source for
team or league logo merchandise that is typically hard-to-find, with an
emphasis on professional team licensed products. 1-800-Pro-Team is not only a
strong brand with a loyal customer base of its own, but is also used as a
prospecting vehicle, bringing customers with strong potential to the single-
sport catalogs. The Company upgraded the look and feel of the catalog
following its acquisition and has implemented an aggressive customer
acquisition plan to take advantage of the former owners' under-utilization of
direct-mail prospecting opportunities. The average order value for 1-800-Pro-
Team merchandise for fiscal 1997 was approximately $69. 1-800-Pro-Team is also
mailed under an exclusive arrangement with Sears to a portion of the Sears
mailing list under the name Sears My Team. The average order value for Sears
My Team merchandise for fiscal 1997 was approximately $69. In May 1998, the
Company plans to launch 1-800-Pro-Team in the United Kingdom, France, Germany
and Japan (under the catalog name USA ProSports Direct).
Competitive Edge Golf was acquired in March 1997. Competitive Edge Golf
offers proprietary and non-proprietary golf products, including equipment,
apparel and novelties that appeal both to golf fans and players. The founder
of Competitive Edge Golf was retained after the acquisition to manage and
develop the brand. The average order value for Competitive Edge Golf
merchandise for fiscal 1997 was approximately $112.
Soccer Madness was acquired in October 1997. Soccer Madness offers brand-
name merchandise, including soccer shoes, apparel, equipment, bags, watches,
jewelry and accessories. As with Competitive Edge Golf, Soccer Madness appeals
to participants as well as fans and capitalizes on the growing popularity of
soccer in the United States. The Company also offers soccer merchandise in
Japan through a Japanese language version of Soccer Madness. The average order
value for Soccer Madness merchandise for the period from acquisition to date
was approximately $85.
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ProSports Liquidators, a start-up catalog, was launched in March 1998.
ProSports Liquidators offers discounted merchandise from the Company's various
sports catalogs and is mailed primarily to the Company's less responsive or
discount-driven customers.
KIDS
The kids market is one of the principal entry points for the lifetime
customer that the Company hopes to develop. Through its various brands in the
kids market, the Company seeks to give families helpful, trusted choices in
providing for their children's needs as they grow and change. The Company
takes a lifestage approach to the market and creates and acquires catalogs
that offer high quality products and serve children's needs in all aspects of
life, from the nursery through high school, from schoolwork to school
clothing, for playtime and family time. Kids merchandise includes toys, games,
crafts, clothing and educational and developmental materials. Through its
sophisticated database marketing, the Company is able to track the demographic
changes in its customer households and prospective households, thereby
targeting appropriate offerings to each lifestage.
Gifts For Grandkids, which was acquired in October 1995, celebrates the
unique relationship between generations of family members and enhances the
experience of gift giving and receiving for all ages. Products offered range
from infant toys and dolls to room furnishings and outdoor play products.
Gift-giving grandparents can also purchase personalized products for special
occasions and special kids. The brand has established its own niche in the
market and the catalog has received consistent national publicity as one of
the premium children's gift catalogs. The average order value for Gifts For
Grandkids merchandise for fiscal 1997 was approximately $70.
Hand-in-Hand was acquired in February 1997. Under Hand-in-Hand, the Company
offers a selection of high quality, distinctive products for infants,
toddlers, and young children, serving both consumers through the Hand-in-Hand
Consumer Catalog and child care professionals and institutions through the
Hand-in-Hand Professional Catalog. The products offered focus on the lifestyle
of children and their families and include toys, furniture, arts and crafts,
videos, books and apparel. Hand-in-Hand has been carefully nurtured as a high
quality, high value brand that will make a contribution to children's lives.
The Company also offers such merchandise in Japan through a version of Hand-
in-Hand that is selectively translated into Japanese. The average order value
for Hand-in-Hand merchandise for fiscal 1997 was approximately $81.
The Training Camp, a start-up catalog, was launched in May 1997 and offers
unique children's developmental sports training products, methods and
equipment to inspire and help improve "whole child" development and introduce
children to the fun and rewards of sports and good sportsmanship. In print
catalog and website format, The Training Camp offers unique, safe and high-
value items including play products that help develop motor skills, such as
ball throwing machines, basketball shooting training devices and sports
parenting videos. Additionally, the catalog and website include tips from
renowned coaches in a number of athletic disciplines on the fundamentals of
the sport for which equipment is being sold. The average order value for The
Training Camp merchandise for fiscal 1997 from launch was approximately $92.
S.K.U.S.A., a start-up catalog, was launched in March 1998 using the
Company's customer lists in the sports and kids market segments. S.K.U.S.A.
offers hard-to-find "sports lifestyle" products for children, including
apparel, home furnishings and toys.
Biobottoms, a catalog offering a wide selection of natural fiber children's
apparel, is scheduled to be acquired on or before April 30, 1998. The Company
believes that Biobottoms will enable the Company to offer an enhanced
selection of children's merchandise.
GIFTS AND COLLECTIBLES
Gifts and collectibles offers unique, hard-to-find items for gift givers and
collectors. This segment markets nostalgic themed entertainment- and music-
related memorabilia and collectible items, including personalized sweatshirts
with designs of musical instruments, miniature toy mechanical cars,
collectible dolls and limited edition hand-signed lithographs from well-known
musical groups. Many of the gifts and collectibles catalog brands have high
gross margins, low stock-keeping unit ("SKU") counts, low inventory
obsolescence, high customer loyalty and few competitors.
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Lilliput was acquired in December 1996. Lilliput offers a collection of
unique, hand-crafted, limited production, primarily European-made mechanical
toys, including automobiles, airplanes, building blocks, musical toys, steam
engines and trains. Lilliput owns exclusive North American distribution rights
for models and mechanical toy cars produced by Schuco of Germany and Gonio of
the Czech Republic. The founders of Lilliput were retained after the
acquisition, and have applied their knowledge of merchandising and developing
proprietary products through all of the Company's target markets. The average
order value for Lilliput merchandise for fiscal 1997 was approximately $196.
The Voyager's Collection was acquired in March 1997 and is an example of the
use of alternate distribution channels, a component of the Company's overall
strategy. When acquired, the catalog was distributed only to consumers in
upscale hotel rooms throughout the United States and provided travel products
to the discriminating and time-sensitive business traveler. Since the
acquisition, the Company has supplemented the catalog with product offerings
from its numerous other catalogs. Including merchandise from other Genesis
Direct catalogs allows The Voyager's Collection to be not only a strong
catalog with a loyal customer base of its own, but also used as a prospecting
vehicle, bringing customers with high potential to other Genesis Direct
catalogs. In addition, the Company has entered into an agreement with a major
commercial airline for the exclusive right to distribute The Voyager's
Collection catalogs in seat pockets on the airline's domestic flights and in
its passenger clubs in domestic airports. The Company plans to enlarge The
Voyager's Collection's customer base by distributing its catalog in other
travel-related areas, including additional commercial airliners and hotel
rooms. The average order value for The Voyager's Collection merchandise for
fiscal 1997 was approximately $110.
Global Friends business was acquired in June 1997 by acquisition of tangible
assets and license to use and option to acquire certain intellectual property
which license and option expires if the option is not exercised by April 30,
1998. Global Friends offers proprietary theme dolls each from a different
country or region with related books, videos and playkits to create an
educational and fun experience for young girls. To further promote the Global
Friends brand, customers can join a Pen Pal club and communicate with other
customers from around the world by letter and through the Internet on Global
Friends' website. The average order value for Global Friends merchandise for
fiscal 1997 from acquisition was approximately $110.
Command Performance, a start up catalog, was launched in July 1997. Command
Performance includes a variety of music- and entertainment-related
collectibles and memorabilia, including limited edition lithographs of album
cover art autographed by musicians and videocassettes of classic television
series. Also included are a variety of music and music-related products. The
average order value for Command Performance merchandise for fiscal 1997 from
launch was approximately $91.
The Music Stand was acquired in August 1997. The Music Stand offers music-
related gifts and collectibles, including a substantial number of products
which can be personalized. The average order value for The Music Stand
merchandise for fiscal 1997 from acquisition was approximately $54.
In May 1998, the Company plans to launch Romance Boutique, a start-up
catalog that will offer romantic gifts, such as lingerie, fragrance products,
candles and candy.
INSTITUTIONAL/BUSINESS-TO-BUSINESS
The institutional/business-to-business marketing segment offers educational,
recreational and therapeutic products for schools, camps and therapists. The
Company believes that developing catalogs in the institutional/business-to-
business niche market is important strategically for several reasons. Since
sales to businesses and institutions generally do not peak during the holiday
season, as do sales to individual consumers, catalog brands in the
institutional/business-to-business market may serve to reduce the seasonal
fluctuation in the Company's sales. The Company plans to explore opportunities
for extending many of the product offerings in its consumer catalogs into the
institutional and business markets.
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Childswork/Childsplay was acquired in April 1997, and was the Company's
first investment in the school and professional markets.
Childswork/Childsplay, created by the widely recognized child psychologist and
founder of the catalog, Dr. Lawrence Shapiro, an industry leader in special
education products, helps parents, educators, therapists and other mental
health professionals who work with socially and emotionally challenged
children. Childswork/Childsplay offers proprietary learning tools that
encourage children to work through problems while enjoying books, games and
special activities. Dr. Shapiro was retained by the Company after the
acquisition and continues to manage and develop the catalog. The average order
value for Childswork/Childsplay merchandise for fiscal 1997 was approximately
$109.
Ninos was acquired in April 1997. Ninos, a pioneer in the bilingual
children's direct marketing category, provides quality Spanish-language
educational toys, books and audio-visual products to parents and bilingual
educators nationwide. The products range from reference books to translations
of popular English books and videos that teach Spanish and/or Hispanic
culture. The founder of Ninos was retained by the Company after the
acquisition to manage the catalog and to assist the Company in serving other
bilingual markets. The average order value for Ninos merchandise for fiscal
1997 was approximately $109.
Sportime was acquired in January 1998. Sportime, which is an innovator of
proprietary products and owner of several patents and trademarks, offers
schools, camps, parks and other institutions traditional recreational and
athletic products including balls, rackets, hockey sticks, nets, parachutes
and jump ropes as well as innovative physical education products that enable
children to learn important social, athletic and creative skills through play.
Examples of the innovative products offered by Sportime include the Co-oper
Blanket, designed to teach groups cooperation skills, Perceptual Motorugs, to
teach balance, coordination, visual perception and spatial planning, and a
variety of teacher resources. The Company also offers Sportime merchandise in
Canada, several countries in Europe (under the catalog name Spordas),
Australia, New Zealand and Japan (through a Japanese language version). The
average order value for Sportime merchandise for fiscal 1997 from acquisition
was approximately $198.
Abilitations, which was acquired together with Sportime, offers equipment
for development and restoration of physical and mental ability to physical,
recreational and occupational therapists. The average order value for
Abilitations merchandise for fiscal 1997 from acquisition was approximately
$136.
Chime Time, which was acquired together with Sportime, offers movement-
related products to the pre-school market. The average order value for Chime
Time merchandise for fiscal 1997 from acquisition was approximately $160.
Senior Products, which was acquired together with Sportime, offers age-
appropriate physical, social and recreation activities to senior groups. The
average order value for Senior Products merchandise for fiscal 1997 from
acquisition was approximately $83.
Active Minds, which was acquired together with Sportime and initially mailed
in February 1998, offers creative movement-oriented educational products for
the pre-school and grade school markets. The average order value for Active
Minds merchandise from the initial mailing was approximately $65.
MARKETING
The Company's marketing strategy is to invest in the Genesis Direct name as
an "umbrella seal of approval" associated with superior service and product
quality. Each catalog includes or will include the Genesis Direct logo and tag
line to further draw a connection between the individual catalog, Genesis
Direct and sister catalogs. The message creates a credible link between each
brand, ultimately enabling the Company to fulfill its mission of "Every
Customer--A Customer For Life," through cross-selling between and among brands
as customers' needs develop and change.
The Company seeks to transform each catalog into a well-known brand through
a variety of marketing methods, including: enhancing logos, investing in easy-
to-remember toll-free phone numbers, introducing proprietary products labeled
with a brand's logo, enhancing the look, feel, and tone of the catalog,
establishing a brand personality that appeals to the target market, developing
a dialogue with customers through contests,
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surveys, e-mail, and "customer care" programs, adding value through
information-rich materials and event promotions and developing strategic
alliances with other participants in the niche market. Finally, the Company
expands the prospecting efforts and merchandise selection, broadening into
areas that match the interests of a very clearly defined target market.
GROWING THE CUSTOMER DATABASE. The Company believes that building a large
and loyal customer base is critical to its growth strategy. The Company grows
its customer database through catalog and list acquisitions, renting of
mailing lists and strategic alliances. Examples of strategic alliances that
enhance the Company's customer database are the Company's exclusive
arrangements with professional sports leagues that allow the Company to use
the leagues' databases, Internet websites and advertising opportunities. As of
December 27, 1997, Genesis Direct had a proprietary mailing list of
approximately 10 million individuals, of which approximately 1.2 million have
purchased from the Company's businesses in the last twelve months.
CUSTOMER DATABASE MANAGEMENT; CUSTOMER SEGMENTATION. In March 1998, the
Company introduced a state-of-the-art marketing database system to allow it to
use more sophisticated and efficient methods to analyze the performance of
each catalog mailing and predict future performance of products and customers.
This marketing database system allows the Company to segment its customer base
according to many variables and to analyze each segment's performance and
buying patterns. Names will be selectable not only by frequency and monetary
value of purchases, but by specific product, product category, brand, market
segment, or overall Company purchase behavior. Statistical models will also be
able to analyze promotional history, individual vs. household buying
information, merchandise return information and externally enhanced
information such as creditworthiness and household demographics. The resulting
information is used to refine the frequency and name selection for Genesis
Direct's various mailings to maximize the productivity of each market segment.
This analysis also enables the Company to strengthen the merchandising of its
catalogs through analysis of various products' roles in enhancing the long-
term profitability of particular customer segments.
In addition, database analysis of product purchase history combined with
demographic information allows the Company to identify important cross-selling
opportunities. For example, the Company intends to mail S.K.U.S.A. to existing
sports catalog customers who have been purchasers of children's products.
SPECIAL PROMOTIONS. The Company uses special promotions to strengthen brand
image and to enhance customer retention and is currently testing many concepts
and innovations through its mailings and product offerings. For example, prior
to the Super Bowl, From The Sidelines, in cooperation with the NFL, tested an
exclusive product promotion, "Super Bowl In A Box," a box containing items
that appeal to avid football fans, including a hat and T-shirt, each with the
Super Bowl teams logos, an official Super Bowl program and coupons for
discounts on future From The Sidelines purchases. A postcard promoting the
product, which could be ordered by dialing 1-800-SUPERBOWL, was mailed to a
test group of From The Sidelines customers and was promoted in radio and print
advertisements. Another example of a special promotion was a full-color 1998
calendar produced by the Company and inserted free of charge into all outgoing
packages in the sports brands during the Holiday season of 1997. The calendar
advertises promotions on each page which encourage customers to purchase all
year long from each brand in the sports market segment. These tests were
successful and the Company plans to develop similar promotions in the future.
ALTERNATE MEDIA. The Company has developed an Alternate Media department
dedicated to evaluating and developing new channels of distribution for the
Company. Currently, the Alternate Media Department focuses on three areas: (i)
the Internet and other forms of electronic commerce, (ii) television,
including short and long form television infomercials, and (iii) promotional
books and videos. The Company also plans to employ new technologies that it
believes will enable it to effectively bring its brands to its customers.
The Company currently conducts on-line transactions on two of its websites.
The Company also takes catalog requests and provides information on eight of
its other websites, including its recently completed corporate website. The
Company continues to expand its web presence by placing its catalog brands
into high traffic, high profile sites as well as smaller associate sites
through strategic relationships with third parties
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including the NHL, the NBA, Major League Baseball and NASCAR. These strategic
relationships reduce the Company's web marketing and production costs,
increases traffic into the on-line stores and allows the Company to take
advantage of its partners' access to other media, such as television, print
and radio. The Company has recently licensed, from InterWorld, an Internet
software package that will enhance the Company's ability to allow customers to
obtain products by placing secure orders over the world-wide web. As a result,
the Company expects to incur lower expenses to build and maintain appealing
websites. In addition, acquiring electronic commerce capability should result
in higher margins as the Company can cross-market its products across several
media including print, web and television without the need for catalogs,
thereby saving the cost of producing, printing and mailing catalogs.
The Company has begun the expansion of its television efforts and produced
its first television and radio spots this year with the NBA and Classic Sports
Network. The Company has also acquired the rights to a series of ESPN programs
called NASCAR Shoptalk, a television infomercial featuring famous drivers,
that airs after NASCAR events. The Company plans to replicate this infomercial
format for several of its product lines and has produced the first two in a
series of The Training Camp videos, and the first The Training Camp book,
which was published by a division of Simon & Schuster in Spring 1998.
MERCHANDISING
MERCHANDISE SELECTIONS. The Company's objective in selecting its merchandise
is to offer products that are reflective of the identities and interests of
its target customers. The Company's merchandising personnel utilize the
Company's proprietary databases and their niche market expertise to identify
merchandise in each market that appeal to their customers. By providing
customers with products that are (i) exclusive or hard-to-find, (ii)
proprietary or in limited editions and (iii) personalized or customized, the
Company believes it achieves higher gross margins and lower return rates than
those that generally prevail in the industry.
A critical element of the Company's merchandising strategy is to offer
proprietary and limited edition products. The Company works closely with its
vendors to develop and source such products. Many of the Company's brands
currently offer such products, including Command Performance, Competitive Edge
Golf, Childswork/Childsplay and Sportime. The Company has developed in-house
new product development expertise to create unique products which appeal to
the Company's niche market customers. Based on its experience, the Company
believes that proprietary and limited edition products have high gross
margins.
Personalized and customized products have already proven to be strong
sellers with high margin potential in The Music Stand, Gifts For Grandkids and
many of the sports catalogs. The Company is committed to further developing
its personalization capabilities and is building a 20,000-square-foot
customization facility (that is expected to be fully operational by August
1998) in its distribution center that will enable it to personalize and
customize most of its products by means of etching (for example, trophies and
awards), laser engraving (for example, desk accessories) and embroidery (for
example, caps and sweatshirts).
The Company continually adds new merchandise and refines existing
merchandise categories in an effort to promote additional purchases from
target customers and increase retention rates by responding to customers'
changing preferences. The Company has begun increasing the page counts of its
catalogs to accommodate the introduction of new, related or similar
merchandise and merchandise categories. The Company's merchandising personnel
continually evaluate the performance of the Company's existing products and
make merchandise placement and promotion decisions based on item quality,
sales trends, customer demand, performance histories, current inventory
positions and the projected success of each item. Merchandising personnel also
plan the introduction and testing of new items. Consequently, the Company's
merchandise mix is continually refined as new items are introduced and tested
and as items which do not meet the Company's performance standards are
replaced.
Satisfying customer preferences requires the Company to maintain a wide
assortment of products. Currently, the Company has 45,000 SKUs, with
capability to expand to 130,000 SKUs. This large capacity enables the Company
to offer significant depth and breadth of merchandise selection, particularly
in sports apparel. Licensed
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sports apparel is an example of a merchandise category that is not readily
available in a wide selection through traditional retailers, has high gross
margins and low return rates since it is generally non-fitted with limited
fashion risk.
PRODUCT PRESENTATION. Genesis Direct catalogs and websites include full
color photographs displaying the merchandise as well as product descriptions
and pricing information. Merchandise is described in a manner designed to
stimulate the reader's interest, highlight lifestyle and use of product and
convey the unique spirit of each item to the customer, thereby promoting the
purchase decision. Many of the catalogs and websites include additional
information of interest to the niche market customer. For example, several of
the sports catalogs include season game schedules and sports trivia and tips
and The Voyager's Collection includes travel tips. Merchandise narratives are
often presented in a thematic manner or "voice" designed to deliver the
catalog brand's essence to each customer and to personalize the catalog
shopping experience.
The Company has an in-house design team that designs new catalogs and
upgrades acquired catalogs. The in-house design team is responsible for all
catalog design and an in-house desktop publishing studio that controls all
aspects of the final digital preparation of the catalogs. These capabilities
allow the Company to preserve each catalog's distinctive character and also
allow the Company greater control of the catalog production schedule, which
the Company believes reduces the lead time necessary to produce catalogs and
reduces the costs of preparing pages for printing.
OPERATIONS
The Company has invested heavily to develop an infrastructure that
effectively integrates the call center, order entry, distributions,
fulfillment and inventory management functions.
CALL CENTER. The Company maintains a highly efficient, state-of-the-art call
center in Secaucus, New Jersey. The Company offers prompt, knowledgeable and
courteous order entry services through the use of its easy-to-remember toll-
free telephone numbers, which may be called 24 hours a day, seven days a week
to place orders, request a catalog, or make merchandise inquiries. The Company
has 450 customer service stations installed in its call center. During the
1997 holiday season, the Company had 551 full-time, part-time or seasonal
trained customer service representatives on staff. Once a call is received by
the Company, it is automatically routed to the best available customer service
representative who is knowledgeable about the particular catalog in question.
The Company closely tracks forecasted demand and hires and trains new customer
service representatives and seasonal customer service representatives as
required to maintain its service standards. All of the Company's customer
service representatives undergo a two-week training program and receive
ongoing training at "Genesis University," the Company's on-site training
facility. Customer service representatives are trained in responding to all
customer inquiries as well as in up-selling and cross-selling and are
compensated in part based on gross margins. Since becoming fully operational
in August 1997, the Company's call center handled approximately 1.5 million
calls and handled approximately 27,300 calls on its peak sales day.
The Company uses an integrated management information system that allows
telephone orders to be captured on-line and mail orders to be efficiently
entered. As the Company's sales representative processes the order, the
Company's on-line data processing system provides, among other things,
customer history information, merchandise availability information,
merchandise specifications, available substitutes and accessories, expected
shipping date and order number. Customers can pay with major credit cards,
checks or money orders. All credit charges are pre-authorized prior to
shipping the order and credit authorization occurs coincident with order
processing. The Company has also recently implemented a deferred billing
program for several of its catalogs that enables customers to defer payment
for merchandise over several months.
DISTRIBUTION AND ORDER FULFILLMENT. The Company's 500,000 square foot
distribution center in Memphis, Tennessee is efficiently integrated with the
Company's order entry systems to enable the Company to send out most orders on
the same day they are placed.
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Once a customer's telephone order is completed, the Company's computer
system forwards the order to the Company's distribution center, where all
necessary distribution and shipping documents are printed to facilitate
processing. Thereafter, the orders are prepared, packed and shipped
continually throughout the day with the last shipment for the day leaving the
distribution center at 1:30 a.m. EST. Shipped orders are bar-coded and scanned
and the merchandise and ship date are entered automatically into the customer
order file for access by sales agents. A system of conveyors automatically
routes totes and boxes carrying merchandise throughout the distribution center
for fulfillment of orders and replenishment of inventory. A unique feature of
the conveyor system design is its ability to rapidly receive, shelve and
integrate products of acquired companies into the distribution center. An
electronic link between the Company's distribution center and its headquarters
allows senior management to monitor its distribution center operations at any
time.
The distribution center is strategically placed at the hub of courier
services as well as convenient access to U.S. Postal Service priority mail all
serving domestic and international markets to permit rapid order fulfillment.
The distribution center's location near courier hubs enables the Company to
ship orders until midnight, and for an expedited delivery fee the customer can
receive merchandise by 8:00 a.m. the next day. Currently, approximately 90% of
the in-stock orders placed before 5:00 p.m. EST are shipped on the same day of
the order.
INVENTORY MANAGEMENT. The Company's broad assortment of products is
carefully controlled through sophisticated inventory management techniques. As
of December 27, 1997, the Company's inventory management system contained over
45,000 SKUs. Purchases are forecasted down to the SKU level using a database
system that takes into account historical category results, seasonality
models, market expectations and product and raw material lead times. The
Company believes that its centralized inventory management system enables it
to maintain high levels of inventory accuracy and to continuously measure and
analyze inventory levels and compare them against demand. This helps the
Company to lower inventory levels, increase turns, maintain high fill rates,
reduce mark-downs and increase gross margins. If an overstock position
develops, the Company acts quickly to dispose of the excess inventory at the
highest possible margin by moving the product through several promotional
distribution channels, including price promotions in current season catalogs,
end-of-season clearance catalogs and sales flyers in outbound packages.
The Company regularly evaluates the performance of its brands and catalog
mailings and adjusts its mailings in response to anticipated market demand.
Despite circulation adjustments and inventory forecasting techniques, the
Company has designed a process for selling any excess inventory. In March
1998, the Company launched Pro Sports Liquidators, a start-up catalog. Pro
Sports Liquidators, which is mailed primarily to the Company's less responsive
or discount driven customers, offers discounted merchandise selected from the
Company's various sports catalogs and is an important component of the
Company's inventory management for the sports market segment.
INFORMATION SYSTEMS AND TECHNOLOGY
The Company has adopted a "best of breed" philosophy and flexible systems
architecture as the foundation of its information systems strategy. The
Company has implemented a variety of widely used, state-of-the-art systems,
each uniquely qualified for use in a specific functional area. These systems
are widely used by leading companies in the direct marketing industry for
catalog management, order-taking (mail and telephone), Internet/electronic
commerce, order fulfillment, inventory management, inventory forecasting,
catalog production, and financial management. The systems are electronically
integrated to facilitate seamless data flow in support of the Company's
operations.
The Company's software systems operate on a variety of hardware platforms,
including Hewlett Packard 3000, Hewlett Packard 9000, IBM AS400 and Sun Sparc
systems. The Company believes its systems architecture, systems investment and
implementation of a Siemens telephone switch provide the Company with a
reliable, redundant and scaleable systems environment facilitating both
current operations and future growth.
The Company's telecommunications system strategy is designed to reduce the
risk of telephone delays and capacity constraints, as well as optimize the
routing of calls to the most skilled customer service representatives.
43
<PAGE>
In the event the call center is unable to receive incoming calls due to
factors such as natural disasters, equipment or electrical failures, the
Company's telecommunications system has the capacity to route calls to a third
party call service bureau to ensure that service interruptions can be
minimized.
The Company's information systems are engineered to provide quick response
and minimize the risk of data loss and operational delays due to system
failure. Critical processing systems operate in a redundant manner such that
all data is duplicated simultaneously on backup systems. In the event that one
of the Company's critical business systems fails, the Company is equipped to
transact business on a real-time back-up system with minimal downtime.
REGULATION
The direct response business as conducted by the Company is subject to the
Mail or Telephone Order Merchandise Trade Regulation and related regulations
promulgated by the Federal Trade Commission. While the Company believes it is
in compliance with such regulations, no assurance can be given that new laws
or regulations will not be enacted or adopted which might adversely affect the
Company's operations.
COMPETITION
The markets for the Company's merchandise are highly competitive, and the
recent growth in these markets has encouraged the entry of many new
competitors as well as increased competition from established companies.
Although the Company believes that it does not compete directly with any
single company with respect to its entire range of merchandise, within each
merchandise category the Company has significant competitors and may face new
competition from new entrants or existing competitors who focus on market
segments currently served by the Company. These competitors include large
retail operations, including some with catalog operations, other catalog and
direct marketing companies and international competitors.
EMPLOYEES
As of April 10, 1998, the Company had approximately 800 full-time employees,
260 part-time employees, 35 seasonal employees and 30 consultants or temporary
employees. As of December 1997, the Company had approximately 850 full-time
employees, 370 part-time employees, 130 seasonal employees and 185 consultants
or temporary employees. During the Company's peak selling season, which
includes November and December, the Company utilizes a substantial number of
seasonal employees. None of the Company's employees is currently covered by
collective bargaining agreements. The Company considers its employee relations
to be excellent.
PROPERTIES
The Company leases a 500,000 square foot distribution center in Memphis,
Tennessee and 100,000 square feet of office space for its principal executive
and administrative offices and its call center in Secaucus, New Jersey. The
Memphis lease expires in 2007 and the Secaucus lease expires in 2005. In
addition, the Company currently leases smaller office and
warehouse/distribution space in several locations in the United States. The
Company intends to integrate the call center and distribution center
operations of these locations with its facilities in Memphis and Secaucus, but
may retain a small office presence in several of these locations. The Company
also leases office space in Windsor, England for its international
headquarters. The Windsor lease is terminable by either party upon three
months notice.
LEGAL PROCEEDINGS
The Company is party to claims and litigation that arise in the normal
course of business. Management believes that the ultimate outcome of these
claims and litigation will not have a material impact on the financial
position or results of operations of the Company.
44
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL
The executive officers, directors and other key personnel of the Company and
their ages are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS
Warren Struhl................ 36 Chairman of the Board of Directors,
President and Chief Executive Officer(1)(2)
Hunter C. Cohen.............. 41 Chief Operating Officer and a director(2)
David M. Sable............... 43 Chief Marketing Officer and a director(2)
Ronald R. Benanto............ 49 Vice President and Chief Financial Officer
Raphael S. Grunfeld.......... 50 Vice President, General Counsel and
Secretary
Edward Spiegel............... 59 Director
David W. Wiederecht.......... 42 Director(1)(2)
OTHER KEY PERSONNEL
James D. Abrams.............. 52 Vice President of Kids Marketing
Kathleen M. Davis............ 36 Vice President of Human Resources
George A. D'Amico............ 42 Vice President of Customer Service and
Sales
Dominic J. DiMascia.......... 38 Vice President of Information Systems
Linda C. Ireland............. 38 Vice President of Personalization and
Product Development
Alan J. Kipust............... 35 Vice President of Operations and
Institutional/Business-to-Business
Dale G. Marksberry........... 48 Vice President of Distribution Center
George J. Mollo Jr........... 46 Vice President of Merchandise Operations
and Inventory Control
Douglas S. Rose.............. 35 Vice President of Corporate Development
Mitchel E. Rothschild........ 43 Vice President of Sports Marketing
Stephen H. Samuels........... 48 Vice President of Alternate Media
Monica E. Schulze-Hodges..... 34 Vice President of Product Marketing
Charles S. Silver............ 44 Vice President of Gifts and Collectibles
Edward D. Wallo.............. 48 Vice President of International
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Executive Committee.
EXECUTIVE OFFICERS AND DIRECTORS
WARREN STRUHL. Mr. Struhl has served as Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since its founding in
June 1995. He founded PaperDirect, Inc. in 1989 and served as its President
until he joined the Company. PaperDirect, Inc. was sold to Deluxe Corporation
in August 1993. From 1984 to 1989, Mr. Struhl was Vice President of JMB Realty
Corporation. Mr. Struhl is a director of CyberShop, Inc.
HUNTER C. COHEN. Mr. Cohen has served as Chief Operating Officer and a
director of the Company since its founding in June 1995. From 1993 until he
joined the Company, he served as Chief Financial Officer of PaperDirect. From
March 1990 to June 1993, Mr. Cohen was President of The Soundcoat Company,
Inc., a multinational noise control materials manufacturer.
DAVID M. SABLE. Mr. Sable has served as Chief Marketing Officer and a
director of the Company since its founding in June 1995. From 1990 to 1995, he
was the Executive Vice President and Director of Account Management at Young &
Rubicam. Mr. Sable served as a director of PaperDirect from 1989 to 1993. He
is a member of the U.S. Postal Service Marketing Advisory Board.
45
<PAGE>
RONALD R. BENANTO. Mr. Benanto has served as Vice President and Chief
Financial Officer of the Company since February 1998. From 1991 until December
1997, he served as Senior Vice President of Finance, Chief Financial Officer
and Treasurer of Viewlogic Systems, Inc., a publicly traded electronic design
automation software company. From 1988 to 1991, Mr. Benanto served as Vice
President of Finance and Operations and Chief Financial Officer of Symbolics,
Inc., a public artificial intelligence company.
RAPHAEL S. GRUNFELD. Mr. Grunfeld has served as Vice President, Secretary
and General Counsel of the Company since November 1995. From 1992 to 1995, Mr.
Grunfeld was General Counsel and Secretary to First Capital Asset Management,
Inc. and Executive Vice President of its operating subsidiaries including
newspaper, media, money management and public companies. From 1990 to 1992,
Mr. Grunfeld was an attorney with Baer Marks & Upham and from 1986 to 1990,
Mr. Grunfeld was an attorney with Skadden, Arps, Slate, Meagher & Flom LLP.
EDWARD SPIEGEL. Mr. Spiegel has served as a director of the Company since
January 1998. Since December 1996, Mr. Spiegel has served as a limited partner
and consultant to The Goldman Sachs Group, L.P. From December 1984 to November
1996, Mr. Spiegel served as a general partner of The Goldman Sachs Group, L.P.
where he was responsible for the New York Institutional Sales Department.
DAVID W. WIEDERECHT. Mr. Wiederecht has served as a director of the Company
since June 1996. Since 1978, Mr. Wiederecht has served in various capacities
at General Electric Company ("GE"); currently he serves as Vice President-
Alternative Investment of GE Investment Corporation, a subsidiary of GE. Mr.
Wiederecht is a director of Elephant & Castle Group, Inc.
Directors of the Company are elected by holders of Common Stock for a three-
year term, and are divided into three classes with staggered terms that
currently have expiration dates as follows: (a) Class A Directors--1999, (b)
Class B Directors--2000 and (c) Class C Directors--2001. As of the date
hereof, Mr. Cohen serves as Class A Director, Mr. Sable and Mr. Spiegel serve
as Class B Directors and Mr. Struhl and Mr. Wiederecht serve as Class C
Directors. The Company intends to add two additional directors as soon as
practicable following this offering but has not yet identified potential
nominees for those positions.
OTHER KEY PERSONNEL
JAMES D. ABRAMS. Mr. Abrams has served as Vice President of Kids Marketing
since October 1996. From December 1991 to September 1996, Mr. Abrams served in
various positions with Biobottoms, Inc., a direct marketer of children's
apparel and, most recently, as its President. Mr. Abrams' prior experience
includes senior financial and operational positions at Williams-Sonoma, Inc.
and The Gap. He was co-founder and President of Kinderzimmer, a start-up
venture specializing in children's playthings and furniture.
KATHLEEN M. DAVIS. Ms. Davis has served as Vice President of Human Resources
since June 1995. From November 1993 to May 1995, she was Director of Human
Resources for Noble Centers, a not-for-profit social service agency serving
people with developmental disabilities. From May 1989 to November 1993, she
worked for Resort Condominiums International, an international vacation
exchange and travel company where she held positions in corporate recruitment,
human resources consulting and employment services management.
GEORGE A. D'AMICO. Mr. D'Amico has served as Vice President of Customer
Service and Sales since January 1997. From 1991 to January 1997, he served in
various capacities, including as Director of Corporate Sales and Vice
President of Sales and Distribution of Micro Warehouse, Inc., a computer
catalog company.
DOMINIC J. DIMASCIA. Mr. DiMascia has served as Vice President of
Information Systems since August 1996. From November 1993 to July 1996, Mr.
DiMascia was Vice President Product Development for Smith Gardner &
Associates, a software vendor for the direct marketing and catalog industry.
From January 1991 to November 1993, Mr. DiMascia was President of Target
Information Systems Inc., a catalog management systems vendor. Prior to that,
Mr. DiMascia also held positions in applications development and client
services for Hanover Direct, Inc., Coral Group and QVC Network, Inc.
46
<PAGE>
LINDA C. IRELAND. Ms. Ireland has served as Vice President of
Personalization and Product Development since joining the Company in September
1997. From June 1988 to August 1997, Ms. Ireland served in various capacities
at Deluxe Corporation, including as Group Product Manager of Deluxe Business
Forms and Supplies and as Director of Merchandising and Business Development
at PaperDirect.
ALAN J. KIPUST. Mr. Kipust has served as Vice President of Operations since
joining the Company in October 1997 and has also served as Vice President of
Institutional/Business-to-Business since January 1998. From March 1996 to
September 1997, Mr. Kipust was an Executive Consultant at Banker's Trust. From
1989 to 1995 he was Senior Vice President of PaperDirect.
DALE G. MARKSBERRY. Mr. Marksberry has served as Vice President of the
Distribution Center since January 1997. From April 1995 to January 1997, Mr.
Marksberry served as Vice President/General Manager of Logistics for Nobody
Beats The Wiz, where he was responsible for the construction and operation of
distribution centers. From January 1993 to April 1995, Mr. Marksberry was
Operations Manager of Sears Logistics Services (SLS) distribution center in
Delano, CA which serviced approximately one third of Sears U.S. retail stores.
From 1991 to January 1993, Mr. Marksberry served as National Manager of Sears
Store Support Transportation, where he supervised the liquidation of the Sears
support fleet.
GEORGE J. MOLLO, JR. Mr. Mollo has served as Vice President of Merchandise
Operations and Inventory Control since September 1997. From January 1997 to
September 1997, Mr. Mollo worked as an inventory operations consultant. From
May 1996 to January 1997, Mr. Mollo was Director of Merchandise Planning and
Operations of Time Warner Music Sound Exchange. From January 1994 to December
1995, he was Director of Merchandise Operations of Disney Direct, Inc. From
1985 to 1993, he served in various capacities at J. Crew Group Inc., including
as Vice President of Merchandise Planning and Inventory Operations of J. Crew,
Inc. from November 1990 to December 1993.
DOUGLAS S. ROSE. Mr. Rose has served as Vice President of Corporate
Development since he joined the Company in June 1996. From April 1995 to May
1996, Mr. Rose was an independent investment banker providing merger and
acquisition advisory services to middle-market companies. From June 1993 to
March 1995, Mr. Rose was Managing Director of Grendel Capital Co., a private
investment firm. From March 1989 to June 1993, Mr. Rose was Vice President of
Niederhoffer and Niederhoffer, Inc., a merger and acquisition advisory firm.
MITCHEL E. ROTHSCHILD. Mr. Rothschild has served as Vice President of Sports
Marketing since February 1997 and served as a consultant to the Company from
November 1996 to February 1997. Mr. Rothschild was the General Manager of
Viewer's Edge from January 1991 to October 1996. From 1984 to 1991, Mr.
Rothschild served as Vice President of Prentice Hall Media, a direct marketer
of educational media. From 1979 to 1984, Mr. Rothschild served in the
Circulation Department at Time Inc. and became Circulation Director in 1984.
STEPHEN H. SAMUELS. Mr. Samuels has served as Vice President of Alternate
Media since he joined the Company in July 1996. From 1989 to 1996, Mr. Samuels
served as President of NMI, a television production company. Mr. Samuels was
an executive producer of television programming and documentary features that
have won awards including the Academy Award.
MONICA E. SCHULZE-HODGES. Ms. Schulze-Hodges has served as Vice President of
Marketing since April 1996. From October 1991 to February 1996, she served in
various capacities, including as Vice President of Marketing, at PaperDirect.
From June 1985 to August 1989, Ms. Schulze-Hodges served in various
capacities, including as Vice President of Retail and Mail Order, for
Inkadinkado, a manufacturer/distributor of decorative rubber stamps.
CHARLES S. SILVER. Mr. Silver has served as Vice President of Gifts and
Collectibles since May 1997. Mr. Silver was Senior Vice President and General
Manager of Time Warner Music Sound Exchange Catalog from January 1996 to March
1997. From October 1991 to December 1995, Mr. Silver served in various
capacities, including as Vice President and General Manager, of Disney Direct,
Inc., which included the Disney catalog, Play Clothes, Child Craft and Just
Kids catalogs. From October 1984 to October 1991, Mr. Silver served in various
capacities at J. Crew, including as Vice President of Marketing.
47
<PAGE>
EDWARD D. WALLO. Mr. Wallo has served as Vice President of International
since November 1996. From July 1994 to October 1996, Mr. Wallo worked as an
international marketing consultant. From 1977 to 1994 (with the exception of
1982 to 1984), Mr. Wallo served in various capacities, including as Country
General Manager and Vice President of Marketing, at Inmac Corp., a business-
to-business catalog company, and resided in six countries: the United Kingdom,
France, Germany, Italy, Japan and the U.S.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has an Executive Committee and a
Compensation Committee. Subject to the supervision of the Board of Directors,
the Executive Committee is responsible for the operations of the Company in
the ordinary course of business. The Executive Committee is composed of
Messrs. Struhl, Cohen, Sable and Wiederecht. The Compensation Committee is
responsible for reviewing and establishing the compensation structure for the
Company's officers and directors, including salary rates, participation in
incentive compensation and benefit plans, 401(k) plans, stock option and
purchase plans and other forms of compensation, and, after the effective date
of the initial registration of the Company's Common Stock under Section 12(g)
of the Securities Exchange Act of 1934 (the "Securities Exchange Act"),
administering the Company's Stock Option/Stock Issuance Plan. See "--Stock
Option and Incentive Plans." The Compensation Committee is composed of Messrs.
Struhl and Wiederecht.
Subsequent to this offering, the Board of Directors will establish an Audit
Committee. The Audit Committee will be comprised solely of independent
directors and will be responsible for recommending the firm to be appointed as
independent accountants to audit the Company's financial statements,
discussing the scope and results of the audit with the independent
accountants, reviewing the functions of the Company's management and
independent accountants with respect to the Company's financial statements and
performing such other related duties and functions as are deemed appropriate
by the Audit Committee and the Board of Directors.
DIRECTORS COMPENSATION
No compensation has been paid by the Company to its directors prior to this
offering. Upon completion of the offering, directors who are not employees of
the Company will receive compensation to be determined by the Board of
Directors.
48
<PAGE>
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to the Company's four most highly compensated executive
officers other than the Chief Executive Officer whose total annual salaries
and bonuses exceeded $100,000 for services rendered in all capacities to the
Company during Fiscal 1997. Fiscal 1997 covers the period from March 30, 1997
through March 28, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS (#) COMPENSATION (1)
--------------------------- ---------- --------------------- ----------------
<S> <C> <C> <C> <C>
Warren Struhl
Chief Executive Officer .... $300,000 -- 137,500 $16,205
Hunter Cohen
Chief Operating Officer..... 300,000 -- 137,500 18,765
David Sable
Chief Marketing Officer..... 300,000 -- 137,500 22,289
Barry Curtis
Chief Financial Officer(2).. 183,333 $ 5,000 -- 3,147
Raphael Grunfeld
General Counsel............. 175,000 5,000 -- 10,583
</TABLE>
- --------
(1) Includes (a) Company contributions under the Company's 401(k) Plan of
$1,731 for each of Messrs. Struhl, Cohen and Sable and of $4,750 for Mr.
Grunfeld, (b) Company payments of health insurance premiums of $4,309 for
each of Messrs. Struhl, Cohen, Sable and Grunfeld and of $3,147 for Mr.
Curtis and (c) Company payments of premiums on life insurance of $10,165
for Mr. Struhl, $12,725 for Mr. Cohen, $16,249 for Mr. Sable and $1,525
for Mr. Grunfeld, the value of each of which belongs in part to the
Company and in part to the individuals.
(2) Mr. Curtis resigned as Chief Financial Officer of the Company in January
1998. Ronald Benanto has served as Chief Financial Officer of the Company
since February 1998.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
to each of the executives named in the Summary Compensation Table during
Fiscal 1997:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
NUMBER OF SHARES PERCENTAGE OF APPRECIATION FOR
NAME UNDERLYING OPTIONS GRANTED OPTION TERM(2)
- ---- OPTIONS TO EMPLOYEES EXERCISE PRICE EXPIRATION ---------------------
GRANTED DURING FISCAL YEAR PER SHARE DATE 5% 10%
---------------- ------------------ -------------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Warren Struhl........... 137,500(1) 12.5% $16.36 March 2, 2008 $193,342 $1,640,614
Hunter Cohen............ 137,500(1) 12.5% 16.36 March 2, 2008 193,342 1,640,614
David Sable............. 137,500(1) 12.5% 16.36 March 2, 2008 193,342 1,640,614
</TABLE>
- --------
(1) This option becomes fully exercisable on March 2, 1999.
(2) The amounts shown in these columns represent the potential realizable
values using the options granted and the exercise price. The assumed rates
of stock price appreciation are set by the Securities and Exchange
Commission's executive compensation disclosure rules and are not intended
to forecast appreciation of the Common Stock.
49
<PAGE>
Upon the consummation of this offering, the Company will grant to each of
Messrs. Struhl, Cohen and Sable options to purchase a total of 385,000 shares
of Common Stock as follows: (1) options to purchase 165,000 shares with an
exercise price equal to the greater of $23.64 and the Price to Public shown on
the cover page of this Prospectus, exercisable on March 2, 2000 and (2)
options to purchase 220,000 shares with an exercise price equal to the greater
of $30.91 and the Price to Public shown on the cover page of this Prospectus
exercisable on March 2, 2001.
FISCAL YEAR-END OPTION VALUES
To date, no options have been exercised by the executives named in the
Summary Compensation Table. The following table sets forth certain information
concerning the number of shares covered by both exercisable and unexercisable
stock options as of March 31, 1998. Also reported are values of "in-the-money"
options that represent the positive spread between the respective exercise
prices of outstanding stock options and the fair market value of the Company's
Common Stock as of March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT VALUE OF IN-THE-MONEY
TO UNEXERCISED OPTIONS AT OPTIONS AT FISCAL YEAR
FISCAL YEAR-END END(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Warren Struhl............... 0 137,500 $0 $0
Hunter Cohen................ 0 137,500 0 0
David Sable................. 0 137,500 0 0
Barry Curtis................ 5,500 0 0 0
Raphael Grunfeld............ 5,500 22,000 0 0
</TABLE>
- --------
(1) Based on estimated fair market value of $10.91 per share on March 31,
1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements (the "Employment
Agreements") with Warren Struhl, David Sable and Hunter Cohen (the "Senior
Executives") to serve as Chief Executive Officer, Chief Marketing Officer and
Chief Operating Officer, respectively, from March 1, 1998 through February 28,
2001. The term of the Employment Agreements will be extended automatically for
additional one-year periods on March 1 of each year beginning in 1999, unless
the Company provides notice of termination at least 90 days prior to any such
extension date. In addition, the Employment Agreements will remain in effect
for at least 24 months following a Change of Control (as defined in the
Employment Agreements). The Company has agreed to nominate each of the Senior
Executives as a director of the Company during the period from March 1, 1998
through February 28, 2001.
Pursuant to the Employment Agreements, each of the Senior Executives
receives an annual base salary of $300,000, increasing to $400,000 upon the
consummation of this offering, subject to annual review and increase. In
addition, (1) each Senior Executive is entitled to receive a bonus of up to
50% of his annual base salary depending on performance results and (2) the
Company pays annual premiums on split-dollar life insurance policies in the
amount of $4,000,000 for each of the Senior Executives. The Employment
Agreements further provide for grants to each of the Senior Executives of
options to purchase 522,500 shares of Common Stock as described above under
the heading "Option Grants in Last Fiscal Year."
If a Senior Executive's employment is terminated either by the Company
without Cause (as defined in the Employment Agreements) or by such Senior
Executive for Good Reason (as defined in the Employment Agreements), the
Company shall pay to such Senior Executive two times the Senior Executive's
annual base salary plus two times the highest annual bonus paid to the Senior
Executive during the 36-month period ending the date of termination.
50
<PAGE>
If the Senior Executive's employment is terminated by the Company for Cause,
or by the Senior Executive without Good Reason, then for a period of one year
after the termination of his employment, the Senior Executive may not engage
in any business which competes with the business conducted by the Company.
If the Senior Executive terminates his employment with the Company without
Good Reason, then for a period of two years after such termination, or for a
period of one year after his employment is terminated for any other reason,
the Senior Executive may not solicit or hire any employee of the Company.
STOCK OPTION PLAN
The Board of Directors and the Company's stockholders adopted the Genesis
Direct Long-Term Incentive Plan in February 1997, and adopted amendments to
such plan in December 1997 and April 1998 (as so amended, the "Option Plan").
As of the consummation of this offering, a total of 4,125,000 shares of Common
Stock will be reserved for issuance upon exercise of outstanding options under
the Option Plan. The purpose of the Option Plan is to attract and retain
qualified personnel and to provide additional incentive to executive and other
key employees of the Company.
The Option Plan provides for the granting to executives and other key
employees of the Company incentive stock options intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended, and non-
qualified stock options, stock appreciation rights, restricted stock,
performance shares and units and other stock-based awards. To date, the
Company has granted only incentive stock options and non-qualified stock
options under the Option Plan. The Option Plan is administered by the
Compensation Committee which determines the terms of the options granted under
the Option Plan, including the exercise price, number of shares subject to the
option and exercisability. The exercise price may not be less than the fair
market value as of the date of grant of the shares subject to option and the
term of the option may not exceed ten years. Generally, unless the
Compensation Committee otherwise determines, no option may be transferred by
the optionee other than by will or the laws of descent or distribution. Each
option may be exercised during the lifetime of the optionee only by the
optionee.
As of April 15, 1998, options to purchase 1,598,162 shares of Common Stock
were outstanding under the Option Plan at a weighted average exercise price of
$12.32 per share.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's proposed 1998 Employee Stock Purchase Plan (the "Stock
Purchase Plan"), was approved by the Board of Directors in April 1998 and is
anticipated to be approved by the Company's stockholders prior to consummation
of this offering. The Stock Purchase Plan is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Code in order to
provide employees of the Company with an opportunity to purchase Common Stock
through payroll deductions. An aggregate of 250,000 shares of Common Stock has
been reserved for purchase under the Stock Purchase Plan, subject to
adjustment in the event of a stock split, stock dividend or other similar
change in the Common Stock or the capital structure of the Company. All
employees of the Company (and employees of "subsidiary corporations" of the
Company (as defined in the Code) designated by the administrator of the Stock
Purchase Plan) whose customary employment is for more than five months in a
calendar year and 20 hours per week are eligible to participate in the Stock
Purchase Plan, subject to a six month waiting period after hiring. Non-
employee directors and consultants, as well as employees who are subject to
the rules or laws of a foreign jurisdiction that prohibit or make impractical
the participation in the Stock Purchase Plan, are not eligible to participate
in the Stock Purchase Plan.
The Stock Purchase Plan designates Purchase Periods and Exercise Dates.
During a Purchase Period, participating employees may use payroll deductions
to create a fund that will be applied to purchase shares of Common Stock.
Purchase Periods are periods of up to 27 months in duration. The initial
Purchase Period may begin on the date of this Prospectus. Additional Purchase
Periods may commence from time to time thereafter and may overlap a Purchase
Period already in progress. "Exercise Dates" are the dates on which the funds
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accumulated during the Purchase Period are applied to purchase Common Stock.
Exercise Dates occur at six- month intervals.
On the first day of each Purchase Period, a participating employee is
granted the right to purchase shares of Common Stock. During the Purchase
Period, deductions are made from the pay of participants in amounts authorized
by them up to a statutory limit, and are credited to their accounts under the
Stock Purchase Plan. On each Exercise Date, the funds in the participant's
account are used to purchase shares of Common Stock. The price per share of
such Common Stock is a percentage between 85% and 100% of the lesser of the
fair market value of the Common Stock on the (a) first day of the Purchase
Period and (b) the Exercise Date. The participant's purchase right is
exercised in this manner on every Exercise Date arising in the Purchase Period
unless the participant withdraws from the Stock Purchase Plan before that
date.
Payroll deductions may range from 1% to 10% (in whole percentage increments)
of a participant's regular base pay and bonuses, exclusive of overtime, shift-
premiums or commissions. Participants may not make direct cash payments to
their accounts. The maximum amount of shares of Common Stock that a
participant may purchase under the Stock Purchase Plan during the calendar
year is $25,000.
The Stock Purchase Plan will be administered by the Board of Directors or a
committee designated by the Board, which will have the authority to terminate
or amend the Stock Purchase Plan (subject to specified restrictions) and
otherwise to administer the Stock Purchase Plan and to resolve all questions
relating to the administration of the Stock Purchase Plan. In the event of a
merger of the Company with or into another corporation, the sale of
substantially all of the assets of the Company, or certain other transactions
in which the stockholders of the Company before the transaction own less than
50% of the total combined voting power of the Company's outstanding securities
following the transaction, the administrator of the Stock Purchase Plan may
elect to shorten the Purchase Period then in progress.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Chairman of the Compensation Committee is Mr. Struhl, who is Chairman of
the Board of Directors, President and Chief Executive Officer of the Company.
No other member of the Compensation Committee was at any time during the
fiscal year ended March 29, 1997, or at any other time, an officer or employee
of the Company.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 25, 1996, the Company entered into a Note and Stock Purchase
Agreement (as amended, the "Note and Stock Purchase Agreement") with GEIPPP II
and GDLP. Pursuant to the Note and Stock Purchase Agreement, between June 1996
and April 1997, the Company issued (i) to GEIPPP II, an aggregate of 2,750,000
shares of Common Stock and $30.0 million principal amount of Debentures, in
consideration of $40.0 million in cash and (ii) to GDLP, an aggregate of
6,105,000 shares of Common Stock, in consideration of $20.0 million in cash
and $2.2 million in value by contribution of GDLP's interest in Genesis Direct
L.L.C., the Company's predecessor. Upon consummation of this offering, $9.75
million principal amount of GEIPPP II's Debentures will be converted into
2,331,521 shares of Common Stock and approximately $28.3 million from the
proceeds of this offering will be used to redeem the remaining amount of the
Debentures. Following such conversion and redemption, the Company will no
longer have any obligations under the Debentures, but GEIPPP II will continue
to be a principal stockholder of the Company.
On September 30, 1997, the Company entered into a Stock Purchase Agreement
("Stock Purchase Agreement") with certain investors, including GEIPPP II,
GDLP, Genesis Direct II, L.P. ("GDLP II"), First Union Capital Partners, Inc.
("First Union"), Strategic Investment Partners, Ltd. and Invemed Associates,
Inc., one of the underwriters of this offering, pursuant to which such
investors purchased an aggregate of 71,358 shares of Series A Preferred Stock
from the Company for an aggregate purchase price of $71,358,000. The Stock
Purchase Agreement contemplated the sale of additional shares of Series A
Preferred Stock. On December 29, 1997, the Stock Purchase Agreement was
supplemented to reflect the sale by the Company of an additional 22,942 shares
of Series A Preferred Stock for an aggregate purchase price of $22,942,000 to
certain investors, including the Warren Struhl Family Partnership and Genesis
Acquisition Corp., an affiliate of Bear, Stearns & Co. Inc., one of the
underwriters of this offering. The 94,300 shares of Series A Preferred Stock
issued pursuant to the Stock Purchase Agreement will automatically convert
into 8,644,156 shares of Common Stock immediately prior to consummation of
this offering.
On April 8, 1998, the Company issued to GEIPPP II the $6.3 million Bridge
Note (with original issue discount of $300,000). The Company will use
approximately $6.4 million of the net proceeds of this offering to prepay the
entire $6.3 million principal amount of the Bridge Note, together with accrued
interest thereon from April 8, 1998 at a rate of 15% per annum.
As noted above, GDLP, a principal stockholder of the Company, owns
6,105,000 shares of Common Stock. In addition, GDLP owns 2,732 shares of
Series A Preferred Stock which will automatically be converted into 250,433
shares of Common Stock upon consummation of this offering. Pursuant to the
GDLP partnership agreement, Genesis Direct Management LLC ("GD Management"),
the general partner of GDLP, has voting power over all of the shares of stock
owned by GDLP. The voting members of GD Management are Warren Struhl, Hunter
Cohen, David Sable, Ted Struhl, the Warren Struhl Family Partnership and the
Ted Struhl Family Partnership. Warren Struhl, Hunter Cohen and David Sable are
directors and executive officers of the Company, Ted Struhl is Warren Struhl's
brother, Warren Struhl is the managing partner of the Warren Struhl Family
Partnership and Ted Struhl is the managing partner of the Ted Struhl Family
Partnership.
GD Management is also the general partner of GDLP II, which owns 8,709
shares of Series A Preferred Stock which will automatically be converted into
798,325 shares of Common Stock immediately prior to consummation of this
offering. Pursuant to the GDLP II partnership agreement, GD Management has
voting power over all of the shares of stock owned by GDLP II.
David Wiederecht and Edward Spiegel, directors of the Company, were
designated as directors by GEIPPP II pursuant to the Note and Stock Purchase
Agreement. Mr. Wiederecht is Vice President--Investments for the Investment
Division of General Electric Company, an affiliate of GE. Mr. Spiegel is a
limited partner of The Goldman Sachs Group, L.P., which is an affiliate of
Goldman, Sachs & Co., one of the underwriters of this offering. The Company
and GEIPPP II have agreed that, following the consummation of this offering
and for so long as GEIPPP II continues to own certain threshold amounts of
shares of the Company, GEIPPP II may continue to designate two nominees to the
Board of Directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of April 15, 1998, except as otherwise
provided, information with respect to beneficial ownership of the Common Stock
by (i) each director, (ii) each executive officer named in the Summary
Compensation Table under "Management", (iii) the executive officers and
directors as a group and (iv) each person known to the Company who
beneficially owns 5% or more of the outstanding shares of the Common Stock.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares beneficially owned. Unless
otherwise indicated, the address of each person listed below is c/o Genesis
Direct, Inc., 100 Plaza Drive, Secaucus, NJ 07094.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED BEFORE OWNED AFTER
THE OFFERING THE OFFERING
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE SOLD NUMBER PERCENTAGE
- ------------------------ --------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
GE Private Placement
Partners II, a Limited
Partnership(1)............. 8,117,979 40.1% -- 8,117,979 28.1%
Genesis Direct, L.P.(2)(3).. 6,355,433 36.1 683,192 3,000,533 10.5
Genesis Direct II,
L.P.(2)(3)................. 798,325 4.5 48,686 -- --
Genesis Direct Management
L.L.C.(2)(3)............... 7,153,758 40.6 -- 3,760,236 13.1
First Union Capital Part-
ners, Inc.(6).............. 1,100,000 6.2 -- 1,100,000 3.8
Genesis Acquisition
Corp.(7)................... 1,375,000 7.8 -- 1,375,000 4.8
Strategic Investment Part-
ners Ltd.(8)............... 1,358,041 7.7 679,020 679,021 2.4
Stan Druckenmiller.......... 9,166 * 4,583 4,583 *
Arminio Fraga............... 2,291 * 1,145 1,146 *
Gerald Kerner............... 1,375 * 687 688 *
Paul McNulty................ 2,291 * 1,145 1,146 *
Sean Warren................. 1,833 * 916 917 *
WERCO--Genesis Direct
L.L.C...................... 75,808 * 18,221 57,587 *
NATC Holding Company, Ltd... 18,333 * 18,333 -- --
Mark Graham................. 91,666 * 91,666 -- --
Ted Struhl(3)(4)............ 1,448,636 8.2 -- 761,448 2.7
Warren Struhl(3)(4)(5)...... 2,723,436 15.5 -- 1,431,522 5.0
Hunter Cohen(3)(4)(5)....... 1,100,963 6.2 -- 578,700 2.0
David Sable(3)(4)(5)........ 1,100,963 6.2 -- 578,700 2.0
Raphael Grunfeld(3)(9)...... 6,397 * -- 6,397 *
Barry Curtis(10)............ 5,500 * -- 5,500 *
Edward Spiegel.............. -- -- -- -- --
David Wiederecht(1)......... -- -- -- -- --
All current officers and
directors as a group
(7 persons)(3)(4)(5)....... 4,936,362 28.0 -- 2,600,845 9.1
</TABLE>
- --------
*Less than 1%.
(1) Includes (1) 30,125 shares of Series A Preferred Stock which will be
converted into 2,761,458 shares of Common Stock immediately prior to the
consummation of this offering, (2) warrants to purchase 275,000 shares of
Common Stock which are currently exercisable and (3) 2,331,521 shares of
Common Stock which will be issued upon the conversion of a portion of the
Debentures immediately prior to the consummation of this offering. Mr.
Wiederecht, a Director of the Company, is an officer of an affiliate of
GEIPPP II. Mr. Wiederecht disclaims beneficial ownership of the shares
owned by GEIPPP II. The address of GEIPPP II is c/o GE Investment
Management Incorporated, General Electric Investment Corporation, 3003
Summer Street, Stamford, CT 06904.
(2) The shares beneficially owned before this offering (a) by GDLP include
2,732 shares of Series A Preferred Stock, which will be converted into
250,433 shares of Common Stock, and (b) by GDLP II consist of 2,903 shares
of Series A Preferred Stock, which will be converted into 798,325 shares
of Common Stock, such conversions to be effective immediately prior to the
consummation of this offering. GD Management is the
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<PAGE>
General Partner of each of GDLP and GDLP II as well as a limited partner of
GDLP. By virtue of its position as General Partner of GDLP and GDLP II, GD
Management may be deemed to beneficially own all of the shares owned by
GDLP and GDLP II.
(3) In connection with this offering, GDLP is distributing a portion of its
interest, and GDLP II is distributing all of its interest, in the Common
Stock on a pro rata basis to its respective partners, who have been
granted the right to sell in this offering all of the shares they would
receive in such distribution. Of the 3,354,900 shares of Common Stock
being distributed to the partners of GDLP, 683,192 shares are being sold
in this offering, and of the 798,325 shares of Common Stock being
distributed to the partners of GDLP II, 46,686 shares are being sold in
this offering. GD Management has elected to retain all of the shares of
Common Stock it will receive in the distribution. The actual number of
shares to be distributed by GDLP and GDLP II will depend on the Price to
Public shown on the cover page of this Prospectus. The amounts indicated
in table above as "Shares Sold" and "Shares Beneficially Owned After The
Offering" for GDLP and GDLP II have been calculated based on an assumed
public offering price of $14.00.
(4) The voting members of GD Management are Warren Struhl, Hunter Cohen,
David Sable, Ted Struhl, and certain family trusts and partnerships of
such persons. By virtue of their voting interests in GD Management, each
of Warren Struhl, Hunter Cohen, David Sable and Ted Struhl may be deemed
to beneficially own that portion of the total number of shares of Common
Stock held by GDLP and GDLP II equal to his percentage interest in GD
Management. However, each of them disclaims beneficial ownership of the
shares beneficially owned by the other partners of GDLP and GDLP II.
(5) Messrs. Struhl, Sable and Cohen are not selling any shares in this
offering. The reduction in their beneficial ownership after the offering
is due to the distribution of shares by GDLP and GDLP II. As described
above, through their respective interests in GD Management, Messrs.
Struhl, Sable and Cohen share voting and dispositive rights over all of
the shares held by GDLP and GDLP II (including those that are
beneficially owned by the other partners of GDLP and GDLP II).
Accordingly, when shares are distributed by GDLP and GDLP II, Messrs.
Struhl, Sable and Cohen will share voting and dispositive rights with
respect to fewer shares. However, their pecuniary interest in the Company
will not change as a result of such distribution.
(6) The number of shares beneficially owned before this offering consists of
12,000 shares of Series A Preferred Stock which will be converted into
1,100,000 shares of Common Stock immediately prior to the consummation of
this offering. The address of First Union Capital Partners, Inc. is One
First Union Center, 301 S. College Street, 5th Floor, Charlotte, NC
28288-0732.
(7) The number of shares beneficially owned before this offering consists of
15,000 shares of Series A Preferred Stock which will be converted into
1,375,000 shares of Common Stock immediately prior to the consummation of
this offering. The address of Genesis Acquisition Corp. is c/o Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, NY 10167.
(8) The number of shares beneficially owned before this offering consists of
14,815 shares of Series A Preferred Stock which will be converted into
1,358,041 shares of Common Stock immediately prior to the consummation of
this offering. The address of Strategic Investments is c/o Curacao
International Trust Company N.V., Kaya Flamboyan 9, Willemstad, Curacao,
Netherlands Antilles.
(9) Consists of (1) 5,500 shares of Common Stock issuable upon the exercise
of currently exercisable options granted to Mr. Grunfeld and (2) pursuant
to Mr. Grunfeld's limited partnership interest in GDLP, 897 shares of
Common Stock owned by GDLP prior to this offering, of which 554 will be
distributed to Mr. Grunfeld as shares upon the consummation of this
offering.
(10) Consists of 5,500 shares of Common Stock issuable upon the exercise of
currently exercisable options granted to Mr. Curtis.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Prior to the consummation of this offering, the Company's Certificate of
Incorporation and By-laws will be amended and restated in their entirety. The
following description of the Company's capital stock and certain provisions of
such Amended and Restated Certificate of Incorporation (the "Restated
Certificate of Incorporation") and such Amended and Restated By-laws (the
"Restated By-laws") is qualified in its entirety by the provisions of such
Certificate of Incorporation and such By-laws (which are included as exhibits
to the Registration Statement of which this Prospectus is a part).
Immediately prior to the consummation of this offering, the Company will
effect a 275-for-1 stock split of its current outstanding Common Stock. The
Restated Certificate of Incorporation authorizes 275,000,000 shares of Common
Stock, par value $0.01 per share, and 500,000 shares of preferred stock, par
value $0.01 per share (the "Preferred Stock").
COMMON STOCK
There will be 28,652,741 shares of Common Stock outstanding upon completion
of this offering.
All outstanding shares of Common Stock are, and the shares offered hereby
will be, fully paid and nonassessable. The holders of Common Stock are
entitled to one vote for each share held of record on all matters voted upon
by stockholders and may not cumulate votes. Thus, the owners of a majority of
the Common Stock outstanding may elect all of the directors if they choose to
do so, and the owners of the balance of such shares would not be able to elect
any directors. Subject to the rights of holders of any future series of
undesignated Preferred Stock that may be designated, each share of outstanding
Common Stock is entitled to participate equally in any distribution of net
assets made to the stockholders in a liquidation, dissolution or winding up of
the Company and is entitled to participate equally in dividends as and when
declared by the Board of Directors. There are no redemption, sinking fund,
conversion or preemptive rights with respect to the shares of Common Stock.
All shares of Common Stock have equal rights and preferences.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 500,000 shares of Preferred Stock in one or more
series with such designations and such powers, preferences and rights, and
such qualifications, limitations or restrictions (which may differ with
respect to each series) as the Board of Directors may fix by resolution.
The Board of Directors is empowered to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive, conversion and voting rights and preferences).
Accordingly, the Board of Directors, without stockholder approval, may issue
shares of Preferred Stock with terms that could adversely affect the voting
power and other rights of holders of Common Stock.
On September 29, 1997, the Company filed a Certificate of Designation
designating Series A Preferred Stock. In September and December 1997, the
Company issued 94,300 shares of Series A Preferred Stock, all of which will
convert automatically upon the consummation of this offering into an aggregate
of 8,644,156 shares of Common Stock. Accordingly, upon the consummation of
this offering, no shares of Preferred Stock will be outstanding, and the
Company has no present plans to issue any shares of Preferred Stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Restated Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a company will not be personally liable to the company or its
stockholders for monetary damages for breach of their fiduciary duties as
directors, except liability for (i) any breach of their duty of loyalty to the
company or its stockholders, (ii) acts or omissions not in good faith or
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<PAGE>
which involve intentional misconduct or a knowing violation of law, (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions or
(iv) any transaction from which the directors derived an improper personal
benefit. The Restated Certificate of Incorporation also provides that the
Company shall indemnify any director or officer to the maximum extent provided
by Delaware law, and that such right of indemnification shall continue as to a
person who has ceased to be a director or officer of the Company.
Responsibility for determinations with respect to such indemnification will be
made by the Board of Directors. In addition the Company intends to enter into
indemnity agreements (the "Indemnity Agreements") with its directors and
officers that further indemnifies them to the maximum extent permitted by
Delaware law.
The limited liability provisions in the Restated Certificate of
Incorporation with respect to directors, and the indemnification provisions
with respect to directors and officers in the Restated Certificate of
Incorporation and pursuant to the Indemnity Agreements may discourage
stockholders from bringing a lawsuit against directors for breach of their
fiduciary duty and also may have the effect of reducing the likelihood of
derivative litigation against directors and officers, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders. Furthermore, a stockholder's investment in the Company may be
adversely affected to the extent that costs of settlement and damage awards
against the Company's directors and officers are paid by the Company pursuant
to the indemnification provisions contained in the Restated Certificate of
Incorporation described above.
CERTAIN PROVISIONS OF DELAWARE LAW AND CERTAIN CERTIFICATE OF INCORPORATION
AND BY-LAW PROVISIONS
THE DELAWARE BUSINESS COMBINATION ACT. Upon completion of this offering, the
Company will be subject to Section 203 (the "Delaware Business Combination
Act") of the General Corporation Law of the State of Delaware ("DGCL") which
imposes a three-year moratorium on business combinations between a Delaware
corporation whose stock generally is publicly traded or held of record by more
than 2,000 stockholders and an "interested stockholder" (in general,
stockholder owning 15% or more of a corporation's outstanding voting stock) or
an affiliate or associate thereof unless (a) prior to an interested
stockholder becoming such, the board of directors of the corporation approved
either the business combination or the transaction resulting in the interested
stockholder becoming such, (b) upon consummation of the transaction resulting
in an interested stockholder becoming such, the interested stockholder owns
85% of the voting stock outstanding at the time the transaction commenced
(excluding, from the calculation of outstanding shares, shares beneficially
owned by directors who are also officers and certain employee stock plans) or
(c) on or after an interested stockholder becomes such, the business
combination is approved by (i) the board of directors and (ii) holders of at
least 66 2/3% of the outstanding shares (other than those shares beneficially
owned by the interested stockholder) at a meeting of stockholders. The term
"business combination" is defined generally to include mergers or
consolidations between a Delaware corporation and an "interested stockholder"
involving the assets or stock of the corporation or its majority-owned
subsidiaries and transactions which increase an "interested stockholder's"
percentage ownership of stock.
SUPERMAJORITY VOTING REQUIREMENTS. The Restated Certificate of Incorporation
and Restated By-laws provide that certain provisions in the Restated
Certificate of Incorporation and Restated By-laws may not be amended, altered,
changed or repealed in any respect, and new provisions inconsistent therewith
may not be adopted unless such action is approved by the affirmative vote of
the holders of at least eighty percent (80%) of the votes represented by the
outstanding shares of capital stock of the Company entitled to vote in the
election of Directors.
ADVANCE NOTICE PROVISIONS. The Restated By-laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors or to bring other business before an annual meeting of stockholders
of the Company. The Restated By-laws provide that only persons who are
nominated by, or at the direction of, the Board of Directors, or by a
stockholder who has given timely written notice to the Secretary of the
Company prior to the meeting at which directors are to be elected, will be
eligible for election as directors of the Company. Under the Restated By-laws,
for notice of stockholder nominations to
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<PAGE>
be made at an annual meeting to be timely, such notice must be received by the
Company not less than 60 days nor more than 90 days prior to the anniversary
date of the immediately preceding annual meeting of stockholders or, in the
event that the annual meeting is called for a date that is not within 30 days
before or after such anniversary date, notice by the stockholder to be timely
must be received not later than the close of business on the tenth day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. Under the Restated By-laws, a
stockholder's notice must also contain certain information specified in the
Restated By-laws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION
AND BY-LAWS
Certain provisions of the Restated Certificate of Incorporation and Restated
By-laws and the DGCL, summarized in the following paragraphs, could discourage
potential acquisition proposals and could delay or prevent a change in control
of the Company. These provisions are intended to enhance the likelihood of
continuity and stability in the composition of the Board of Directors and in
the policies formulated by the Board of Directors and to discourage certain
types of transactions that may involve an actual or threatened change of
control of the Company, such as an unsolicited acquisition proposal. Because
these provisions could have the effect of discouraging a third party from
acquiring control of the Company, they may inhibit fluctuations in the market
price of shares of Common Stock that could otherwise result from actual or
rumored takeover attempts and, therefore could deprive stockholders of an
opportunity to realize a takeover premium. These provisions also may have the
effect of limiting the price that certain investors might be willing to pay in
the future for shares of the Company's Common Stock and of preventing changes
in the management of the Company.
CLASSIFIED BOARD OF DIRECTORS. The Restated Certificate of Incorporation
provides for the Board of Directors to be divided into three classes of
directors serving staggered three-year terms. As a result, approximately one-
third of the Board of Directors will be elected each year. Classification of
the Board of Directors expands the time required to change the composition of
a majority of directors and may tend to discourage a proxy contest or other
takeover bid for the Company. Moreover, under the DGCL in the case of a
corporation having a classified board of directors, the stockholders may
remove a director only for cause. In addition, the Restated By-laws provide
that any director or the entire Board of Directors may be removed from office
at any time, but only for cause and by the affirmative vote of at least a
majority of all of the outstanding shares of capital stock of the Company
entitled to vote in the election of directors at a meeting of stockholders
called for that purpose. These provisions, when coupled with the provisions of
the Restated By-laws authorizing (with a limited exception) only the Board of
Directors to fill vacant directorships, will preclude stockholders of the
Company from removing incumbent directors without cause, and simultaneously
gaining control of the Board of Directors by filling the vacancies with their
own nominees.
PREFERRED STOCK. It is possible that the ability of the Board of Directors
to issue Preferred Stock may have the effect of discouraging attempts, through
the acquisition of a substantial number of shares of Common Stock, to acquire
control of the Company with a view to effecting a merger, sale or exchange of
assets or a similar transaction. For example, the Board of Directors could
issue such shares as a dividend to holders of Common Stock or place such
shares privately with purchasers who may side with the Board of Directors in
opposing a takeover bid. The anti-takeover effects of the undesignated
Preferred Stock may deny stockholders the receipt of a premium on their Common
Stock and may also have a depressive effect on the market price of the Common
Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could adversely affect market prices prevailing from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions lapse could
adversely affect the prevailing market price and the ability of the Company to
raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 28,652,741 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the 10,125,000 shares sold in this offering will be
freely tradable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act
("Affiliates"). The remaining 18,527,741 shares of Common Stock held by
existing stockholders are "restricted securities" as that term is defined in
Rule 144 under the Securities Act (the "Restricted Shares"). Restricted Shares
may be sold in the public market only if registered or if they qualify for an
exemption from registration under Rules 144, 144(k) or 701 promulgated under
the Securities Act, which rules are summarized below. Holders of substantially
all of those shares will have the right to request the registration of their
shares under the Securities Act following the completion of a period of 180
days after the date of this Prospectus, which, upon the effectiveness of such
registration, would permit the free transferability of such shares.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an Affiliate of the Company, or person (or persons whose shares
are aggregated) who has beneficially owned Restricted Shares for at least one
year, will be entitled to sell in any three-month period a number of shares
that does not exceed the greater of (i) one percent of the then outstanding
shares of the Company's Common Stock or (ii) the average weekly trading volume
of the Company's Common Stock in the Nasdaq Stock Market during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. A person (or
person whose shares are aggregated) who is not deemed to have been an
Affiliate of the Company at any time during the 90 days immediately preceding
the sale and who has beneficially owned Restricted Shares for at least two
years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above.
The Company, its executive officers, directors and all of its stockholders
have agreed that, subject to certain exceptions, they will not, without the
prior written consent of Bear, Stearns & Co. Inc., directly or indirectly,
sell, offer, contract to sell, transfer the economic risk of ownership in,
make any short sale, pledge or otherwise dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for or any
other rights to purchase or acquire shares of Common Stock owned by them
during the 180-day period commencing on the date of this Prospectus. The
Company may, however, issue shares of Common Stock upon the exercise of stock
options that are currently outstanding, and may grant additional options under
the Option Plan, provided that, without the prior written consent of Bear,
Stearns & Co. Inc., such additional options shall not be exercisable during
such period. All of the Restricted Shares are subject to the lock-up
agreements described in this paragraph. Upon the expiration of the lock-up
period, 16,332,693 of the shares subject to such lock-up agreements will be
eligible for sale under Rule 144 subject to the volume and other restrictions
of Rule 144. The remaining 2,195,048 shares will become eligible for sale
pursuant to Rule 144 upon expiration of applicable holding periods.
Any employee, officer or director of or consultant to the Company who
purchased or was awarded shares or options to purchase shares pursuant to a
written compensatory plan or contract is entitled to rely on the resale
provisions of Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
Prospectus. In addition, non-Affiliates may sell Rule 701 shares without
complying with the public information, volume and notice provisions of Rule
144. Rule 701 is available for stockholders of the Company as to all shares
issued pursuant to the exercise of options granted prior to this offering.
59
<PAGE>
The Company intends to file a registration statement under the Securities
Act covering shares of Common Stock reserved for issuance under the Option
Plan. Based on the number of options outstanding and shares to be reserved for
issuance under the Option Plan upon the consummation of this offering, such
registration statement would cover 4,125,000 shares. Such registration
statement is expected to be filed and to become effective as soon as
practicable after the date of this Prospectus. Shares registered under such
registration statement will, subject to Rule 144 volume limitations applicable
to Affiliates, be available for sale in the open market, unless such shares
are subject to vesting restrictions with the Company or the lock-up agreements
described above. See "Management."
60
<PAGE>
UNDERWRITING
The underwriters of this offering named below (the "Underwriters"), for whom
Bear, Stearns & Co. Inc., Goldman, Sachs & Co., Smith Barney Inc., Invemed
Associates, Inc. and Morgan Keegan & Company, Inc. are acting as
representatives, have severally agreed with the Company and the Selling
Stockholders, subject to the terms and conditions of the Underwriting
Agreement (the form of which has been filed as an exhibit to the Registration
Statement on Form S-1 of which this Prospectus is a part), to purchase from
the Company and the Selling Stockholders the aggregate number of shares of
Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc...................................
Goldman, Sachs & Co.......................................
Smith Barney Inc. ........................................
Invemed Associates, Inc. .................................
Morgan Keegan & Company, Inc..............................
----------
Total................................................. 10,125,000
==========
</TABLE>
The nature of the obligations of the Underwriters is such that all of the
Common Stock must be purchased if any is purchased. Those obligations are
subject, however, to various conditions, including the approval of certain
matters by counsel. The Company and the Selling Stockholders have agreed to
indemnify the Underwriters against certain liabilities, including liabilities
under the Securities Act, and, where such indemnification is unavailable, to
contribute to payments that the Underwriters may be required to make in
respect of such liabilities.
The Company and the Selling Stockholders have been advised that the
Underwriters proposed to offer the Common Stock directly to the public
initially at the public offering price set forth on the cover page of this
Prospectus and to certain selected dealers at such price less a concession not
to exceed $ per share, that the Underwriters may allow, and such selected
dealers may reallow, a concession to certain other dealers not to exceed $
per share and that after the commencement of this offering, the public
offering price and the concessions may be changed.
The Company has granted to the Underwriters an option to purchase in the
aggregate up to 1,518,750 additional shares of Common Stock solely to cover
over-allotments, if any. The option may be exercised in whole or in part at
any time within 30 days after the date of this Prospectus. To the extent the
option is exercised, the Underwriters will be severally committed, subject to
certain conditions, including the approval of certain matters by counsel, to
purchase the additional shares of Common Stock in proportion to their
respective purchase commitments as indicated in the preceding table.
The underwriters have reserved for sale at the initial public offering price
up to 500,000 shares of Common Stock for sale to certain directors, officers
and employees of the Company, business affiliates and related persons who have
expressed an interest in purchasing shares. The number of shares available for
sale to the general public will be reduced to the extent any reserved shares
are purchased. Any reserved shares not so purchased will be offered by the
Underwriters on the same basis as the other shares offered hereby.
61
<PAGE>
The Company, its executive officers, directors and principal stockholders
have agreed that, subject to certain limited exceptions, for a period of 180
days after the date of this Prospectus, without the prior written consent of
Bear, Stearns & Co. Inc., they will not directly or indirectly, offer or agree
to sell, sell or otherwise dispose of any shares of Common Stock (or
securities convertible into, exchangeable for or evidencing the right to
purchase shares of Common Stock).
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations among the Company, the Selling Stockholders and the
representatives of the Underwriters. Among the factors to be considered in
making such determination will be the Company's financial and operating
history and condition, its prospects and prospects for the industry in which
it does business in general, the management of the Company, prevailing equity
market conditions and the demand for securities considered comparable to those
of the Company.
In order to facilitate this offering, certain persons participating in this
offering may engage in transactions that stabilize, maintain or otherwise
affect the price of the Common Stock during and after this offering.
Specifically, the Underwriters may over-allot or otherwise create a short
position in the Common Stock for their own account by selling more shares of
Common Stock than have been sold to them by the Company. The Underwriters may
elect to cover any such short position by purchasing shares of Common Stock in
the open market or by exercising the over-allotment option granted to the
Underwriters. In addition, the Underwriters may stabilize or maintain the
price of the Common Stock by bidding for or purchasing shares of Common Stock
in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in this offering are reclaimed if shares of Common Stock previously
distributed in this offering are repurchased in connection with stabilization
transactions or otherwise. The effect of these transactions may be to
stabilize or maintain the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that
it discourages resales thereof. No representation is made as to the magnitude
or effect of any such stabilization or other transactions. Such transactions
may be effected on the Nasdaq Stock Market or otherwise and, if commenced, may
be discontinued at any time.
Certain of the Underwriters and their affiliates have from time to time
provided, and may continue to provide, investment banking services and general
financing and banking transactions to the Company and certain of its
affiliates for such Underwriters or affiliates have received and will receive
fees and commissions. As of April 15, 1998, Genesis Acquisition Corp. an
affiliate of Bear, Stearns & Co. Inc., held 15,000 shares of Series A
Preferred Stock (which will be converted into 1,375,000 shares of Common Stock
immediately prior to the consummation of this offering). In addition, as of
such date, certain directors, officers and employees of Bear, Stearns & Co.
Inc. held 806 shares of Series A Preferred Stock (which will be converted into
73,883 shares of Common Stock immediately prior to the consummation of this
offering). As of April 15, 1998, Invemed Associates, Inc. and certain of its
directors, officers and affiliates held 1,937 shares of Series A Preferred
Stock (which will be converted into 177,558 shares of Common Stock immediately
prior to the consummation of this offering). Such shares of Series A Preferred
Stock were purchased in September and December 1997 at a purchase price of
$1,000 per share. For a period of one year from the date of purchase of the
Series A Preferred Stock described in this paragraph, the holders of such
stock may not sell, transfer, assign, pledge or hypothecate the Series A
Preferred Stock or the Common Stock issuable upon conversion thereof. Edward
Spiegel, a director of the Company, is a limited partner of an affiliate of
Goldman, Sachs & Co.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Morrison & Foerster LLP, New York, New York. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Weil, Gotshal & Manges LLP, New York, New York.
62
<PAGE>
EXPERTS
The consolidated financial statements and schedule of Genesis Direct, Inc.,
and its predecessor entity, Genesis Direct LLC at March 30, 1996, March 29,
1997, and December 27, 1997 and for the period from June 8, 1995 (date of
inception) to March 30, 1996, the year ended March 29, 1997 and the nine month
period ended December 27, 1997 and appearing in the Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, and the information under the caption "Selected Consolidated
Financial Data" for each of the aforementioned periods, appearing in this
Prospectus and Registration Statement have been derived from consolidated
financial statements audited by Ernst & Young LLP, as set forth in their
report thereon appearing elsewhere herein. Such consolidated financial
statements, schedule and selected financial data are included in reliance upon
such report given the authority of such firm as experts in accounting and
auditing.
The financial statements of Manny's Baseball Land, Inc. for the year ended
December 31, 1995 and for the period January 1, 1996 to December 3, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Select Service & Supply Co., Inc. at December
31, 1997, and for the year then ended, appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The statements of income and cash flows of Athletic Supply of Dallas, Inc.
for each of the years in the three-year period ended June 30, 1996 and for the
period from July 1, 1996 to December 20, 1996, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick
LLP refers to a change in the method of accounting for income taxes in fiscal
1994.
The financial statements of Lilliput Motors Corporation for the years ended
August 31, 1995 and 1996, appearing in this Prospectus and Registration
Statement have been audited by Boscia Goldenberg & Company, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
The financial statements of First Step Designs Ltd. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
The financial statements of The Thursley Group, Ltd. for the years ended
December 31, 1995 and 1996, appearing in this Prospectus and Registration
Statement have been audited by Mendlowitz Weitsen, LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
The financial statements of Duclos Direct Marketing, Inc. for the years
ended January 31, 1996 and 1997, appearing in this Prospectus and Registration
Statement have been audited by Mendlowitz Weitsen, LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein, and are
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
63
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby (as amended, the "Registration
Statement"). This Prospectus does not contain all of the information set forth
in the Registration Statement and the exhibits and schedules thereto. For
further information with respect to the Company and such Common Stock,
reference is made to the Registration Statement and the exhibits and schedules
filed as a part thereof. Statements contained herein as to the contents of any
documents are not necessarily complete. In each instance, reference is made to
the copy of such document filed as an exhibit to the Registration Statement,
and each such statement is qualified in its entirety by such reference. Copies
of the Registration Statement, including exhibits and schedules filed
therewith, may be inspected without charge at the Commission's principal
office in Washington, D.C. or obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. The Commission maintains a World Wide Website on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding companies that file electronically with the
Commission. The Company has filed the Registration Statement, including the
exhibits and schedules thereto, electronically with the Commission via the
Commission's Electronic Data Gathering, Analysis, and Retrieval (EDGAR)
system.
The Company intends to distribute to its stockholders annual reports
containing audited financial statements examined by an independent public
accountant and will make available copies of quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained herein under "Prospectus Summary," "Risk
Factors," "Pro Forma Condensed Combined Financial Statements," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," including,
without limitation, those concerning (i) the Company's strategy, (ii) the
Company's expansion plans, (iii) the Company's capital expenditures, (iv) the
number of catalogs expected to be acquired by the Company in the near future,
and (v) the terms upon which such catalogs will be acquired, contain forward-
looking statements (within the meaning of Section 27A of the Securities Act)
concerning the Company's operations, economic performance and financial
condition. Because such statements involve risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause such differences include, but are
not limited to, those discussed under "Risk Factors." The Company undertakes
no obligation to publicly release the result of any revisions to these
forward-looking statements that may be made to reflect any future events or
circumstances.
64
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
GENESIS DIRECT, INC.
Report of Independent Auditors.......................................... F-3
Consolidated Balance Sheets at March 30, 1996, March 29, 1997 and
December 27, 1997...................................................... F-4
Consolidated Statements of Operations for the period June 8, 1995
(inception) to March 30, 1996 and the year ended March 29, 1997 and the
nine-month periods ended December 28, 1996 (unaudited) and December 27,
1997................................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency) for the
period June 8, 1995 (inception) to March 30, 1996 and the year ended
March 29, 1997 and the nine-month period ended December 27, 1997....... F-6
Consolidated Statements of Cash Flows for the period June 8, 1995
(inception) to March 30, 1996 and the year ended March 29, 1997 and the
nine-month periods ended December 28, 1996 (unaudited) and December 27,
1997................................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
MANNY'S BASEBALL LAND, INC.
Report of Independent Auditors.......................................... F-22
Statements of Operations for the year ended December 31, 1995 and the
period January 1, 1996 to December 2, 1996............................. F-23
Statements of Cash Flows for the year ended December 31, 1995 and the
period January 1, 1996 to December 2, 1996............................. F-24
Notes to Financial Statements........................................... F-25
ATHLETIC SUPPLY OF DALLAS, INC.
Report of Independent Auditors.......................................... F-26
Statements of Income for the years ended June 30, 1994, 1995 and 1996,
for the six months ended December 31, 1995 (unaudited) and for the
period from July 1, 1996 to December 20, 1996.......................... F-27
Statements of Cash Flows for the years ended June 30, 1994, 1995 and
1996, for the six months ended December 31, 1995 (unaudited) and July
1, 1996 to December 20, 1996........................................... F-28
Notes to Financial Statements........................................... F-29
LILLIPUT MOTORS COMPANY, LTD.
Independent Auditors' Report............................................ F-35
Statements of Operations for the years ending August 31, 1996 and 1995
and the four month periods ended December 24, 1996 (unaudited) and
December 31, 1995 (unaudited).......................................... F-36
Statements of Cash Flows for the years ending August 31, 1996 and 1995
and the four month periods ended December 24, 1996 (unaudited) and
December 31, 1995 (unaudited).......................................... F-37
Notes to Financial Statements........................................... F-38
FIRST STEP DESIGNS LTD.
Report of Independent Public Accountants................................ F-40
Statements of Operations for the years ended December 31, 1995 and 1996
and the period from January 1, 1997 to February 6, 1997................ F-41
Statements of Cash Flows for the years ended December 31, 1995 and 1996
and the period from January 1, 1997 to February 6, 1997................ F-42
Notes to Financial Statements........................................... F-43
THE THURSLEY GROUP, INC.
Independent Auditors' Report............................................ F-46
Statements of Operations for the years ended December 31, 1996 and
1995................................................................... F-47
Statements of Cash Flows for the years ended December 31, 1996 and
1995................................................................... F-48
Notes to Financial Statements........................................... F-49
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
DUCLOS DIRECT MARKETING, INC.
Independent Auditors' Report............................................ F-51
Statements of Operations for the years ended January 31, 1997 and 1996.. F-52
Statements of Cash Flows for the years ended January 31, 1997 and 1996.. F-53
Notes to Financial Statements........................................... F-54
SELECT SERVICE AND SUPPLY CO., INC.
Report of Independent Auditors.......................................... F-57
Balance Sheet at December 31, 1997...................................... F-58
Statement of Income and Retained Earnings for the year ended December
31, 1997............................................................... F-59
Statement of Cash Flows for the year ended December 31, 1997............ F-60
Notes to Financial Statements........................................... F-61
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Genesis Direct, Inc.
We have audited the accompanying consolidated balance sheets of Genesis
Direct, Inc. and subsidiaries and its predecessor entity, Genesis Direct, LLC
as of December 27, 1997, March 29, 1997 and March 30, 1996, and the related
consolidated statements of operations, common stockholders' equity
(deficiency) and cash flows for the nine month period ended December 27, 1997,
the year ended March 29, 1997, and the period from June 8, 1995 (date of
inception) to March 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Genesis
Direct, Inc. and subsidiaries and its predecessor entity, Genesis Direct, LLC
at December 27, 1997, March 29, 1997 and March 30, 1996, and the consolidated
results of their operations and their cash flows for the nine month period
ended December 27, 1997, the year ended March 29, 1997, and the period from
June 8, 1995 (date of inception) to March 30, 1996, in conformity with
generally accepted accounting principles.
Hackensack, New Jersey
February 16, 1998 Ernst & Young LLP
The foregoing report is in the form that will be signed upon the completion of
the Common Stock split described in Note 16 to the consolidated financial
statements.
Hackensack, New Jersey
/s/ Ernst & Young LLP
April 16, 1998
F-3
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents,
including restricted cash of
$240, $2,440 and $2,200,
respectively................. $ 240 $ 8,184 $ 7,615
Accounts receivable, less
allowances of $-0-, $254 and
$1,090, respectively......... 1,042 5,619
Merchandise inventory, net.... 50 7,017 22,993
Prepaid expenses.............. 84 2,456 3,193
Other current assets.......... 270 82
Note receivable, current
portion...................... 340
------ ------- --------
Total current assets......... 374 18,969 39,842
Intangibles, net of accumulated
amortization of $21, $549 and
$2,601, respectively.......... 295 6,294 8,129
Goodwill, net of accumulated
amortization of $-0-, $270 and
$1,154, respectively.......... 27,684 39,450
Property, equipment and
leasehold improvements, net... 417 3,536 19,857
Note receivable, less current
portion....................... 1,360
Other assets................... 100 383 1,656
------ ------- --------
$1,186 $56,866 $110,294
====== ======= ========
LIABILITIES AND COMMON
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable.............. $ 213 $ 6,205 $ 14,373
Accrued expenses.............. 636 6,885 15,309
Current portion of notes
payable and long-term debt... 722 5,274 7,265
Other current liabilities..... 658 3,273
------ ------- --------
Total current liabilities.... 1,571 19,022 40,220
Notes payable and long-term
debt, less current portion.... 4,918 7,852
Debentures--related parties.... 22,500 30,000
Other liabilities.............. 130 2,051 2,350
Series A Preferred Stock
(liquidation value $1,000 per
share), 122,000 shares
authorized, 71,358 shares
issued and outstanding at
December 27, 1997............. 72,390
Common stockholders' equity
(deficiency):
Common stock, par value $.01
per share; 82,500,000 shares
authorized, 6,792,500 and
8,857,750 shares issued and
outstanding at March 29, 1997
and December 27, 1997,
respectively.................. 68 89
Capital contributions......... 2,200
Additional paid-in capital.... 24,532 30,472
Accumulated deficit........... (2,715) (16,225) (73,079)
------ ------- --------
Total common stockholders'
equity (deficiency)......... (515) 8,375 (42,518)
------ ------- --------
Total liabilities and common
stockholders' equity........ $1,186 $56,866 $110,294
====== ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD
JUNE 8, 1995
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
-------------- -------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $ 18,537 $ 6,501 $ 81,505
Cost of goods sold...... 10,448 3,868 62,143
--------- --------- ---------
Gross profit............ 8,089 2,633 19,362
Selling, general and
administrative
expenses............... $ 2,710 20,711 8,246 73,053
------- --------- --------- ---------
Loss from operations.... (2,710) (12,622) (5,613) (53,691)
Interest expense........ 5 1,162 345 3,163
Interest income......... 274 233
------- --------- --------- ---------
Net loss................ (2,715) (13,510) (5,725) (56,854)
Dividends accruing on
Series A Preferred
Stock.................. (1,032)
------- --------- --------- ---------
Net loss attributable to
common stockholders.... $(2,715) $ (13,510) $ (5,725) $ (57,886)
======= ========= ========= =========
Basic net loss per
share.................. $ (4.49) $ (4.60) $ (2.73) $ (6.57)
======= ========= ========= =========
Weighted average common
shares outstanding..... 605,000 2,933,700 2,093,300 8,810,175
======= ========= ========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
GENESIS DIRECT, TOTAL
L.L.C. SHARES OF ADDITIONAL STOCKHOLDERS'
MEMBERS' COMMON COMMON PAID-IN ACCUMULATED EQUITY
CONTRIBUTIONS STOCK STOCK CAPITAL DEFICIT (DEFICIENCY)
--------------- --------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 8, 1995
(inception):
Capital
contributions........ $ 2,200 $ 2,200
Net loss.............. $ (2,715) (2,715)
------- --------- --- ------- -------- --------
Balance at March 30,
1996................... 2,200 (2,715) (515)
Capital contribution
to Genesis Direct,
Inc.................. (2,200) 605,000 $ 6 $ 2,194
Issuance of Common
Stock................ 6,187,500 62 22,338 22,400
Net loss.............. (13,510) (13,510)
------- --------- --- ------- -------- --------
Balance at March 29,
1997................... 6,792,500 68 24,532 (16,225) 8,375
Issuance of Common
Stock................ 2,062,500 21 7,479 7,500
Common stock purchase
warrant issued in
connection with
Debentures........... 203 203
Issuance Costs of
Series A Preferred
Stock................ (740) (740)
Dividends accruing on
Series A Preferred
Stock................ (1,032) (1,032)
Issuance of Common
Stock in connection
with business
acquisitions......... 2,750 30 30
Net loss.............. (56,854) (56,854)
------- --------- --- ------- -------- --------
Balance at December 27,
1997................... $ -- 8,857,750 $89 $30,472 $(73,079) $(42,518)
======= ========= === ======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 8, 1995
(DATE OF NINE MONTHS ENDED
INCEPTION) TO YEAR ENDED -----------------------------------
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 28, 1996 DECEMBER 27, 1997
-------------- -------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss................ $(2,715) $(13,510) $(5,725) $(56,854)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 52 1,303 165 4,275
Provision for losses on
accounts receivable.... 125 836
Non-cash interest
expense................ 966 247 2,440
Changes in operating
assets and liabilities
net of businesses
acquired:
Accounts receivable..... 1,102 (466) (4,744)
Merchandise inventory... (50) (161) 735 (10,595)
Prepaid expenses and
other current assets... (84) (1,569) (486) 1,824
Accounts payable and
accrued liabilities.... 849 (1,038) 1,545 6,134
Other assets............ (100) (221) (980) (1,002)
Other liabilities....... 80 (333) 174 242
------- -------- ------- --------
Net cash used in
operating activities... (1,968) (13,461) (4,666) (57,444)
CASH FLOWS FROM
INVESTING ACTIVITIES
Intangibles............. (42) (550) (507) (56)
Acquisition of property,
equipment and leasehold
improvements........... (448) (3,000) (2,617) (16,902)
Cash paid for acquired
businesses, net of cash
acquired............... (224) (19,223) (15,568) (13,376)
(Increase) decrease in
restricted cash........ (240) (2,200) 240
------- -------- ------- --------
Net cash used in
investing activities... (954) (24,973) (18,692) (30,094)
CASH FLOWS FROM
FINANCING ACTIVITIES
Proceeds from (repayment
of) line of credit..... 722 (722) (722) 264
Proceeds from issuance
of Debentures--related
parties................ 22,500 15,000 7,500
Proceeds from sale of
Common Stock........... 2,200 22,400 14,900 7,500
Proceeds from sale of
Series A Preferred
Stock, net of issuance
costs.................. 44,437
Proceeds from bridge
note borrowing......... 26,175
Proceeds from term
loan................... 5,000
Payments of notes
payable................ (3,667)
------- -------- ------- --------
Net cash provided by
financing activities... 2,922 44,178 29,178 87,209
------- -------- ------- --------
Net increase (decrease)
in cash and cash
equivalents............ 5,744 5,820 (329)
Cash and cash
equivalents at
beginning of period.... 5,744
------- -------- ------- --------
Cash and cash
equivalents at end of
period................. $ -- $ 5,744 $ 5,820 $ 5,415
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION Interest
paid................... $ 5 $ 197 $ 108 $ 1,659
======= ======== ======= ========
SUPPLEMENTAL DISCLOSURES
OF NON-CASH INVESTING
AND FINANCING
ACTIVITIES
Acquisitions:
Liabilities assumed.... $ 17,029 $11,613 $ 8,145
Issuance of notes
payable............... 9,349 9,239 4,138
Issuance of Common
Stock................. 30
Conversion of debt to
Series A Preferred
Stock.................. 26,175
Reduction of seller
notes payable in
connection with the
subsequent sale of net
assets acquired........ 1,000
</TABLE>
See accompanying notes.
F-7
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 27, 1997
1. ORGANIZATION
Genesis Direct, Inc. and subsidiaries (collectively "Genesis Direct" or the
"Company") is engaged in catalog, direct and database marketing serving
customers principally in the United States, Europe and Japan. The Company's
current catalog business offers a broad range of consumer products.
Genesis Direct, LLC, the predecessor to Genesis Direct, Inc., was formed on
June 8, 1995 to develop a direct marketing company through the acquisition and
start-up of catalog businesses. On June 25, 1996, the assets and liabilities
of Genesis Direct, LLC were contributed to Genesis Direct, Inc. in exchange
for 2,200 shares of Common Stock. The assets and liabilities contributed by
Genesis Direct, LLC were valued at their carryover basis in accordance with
accounting for predecessor companies. The 2,200 shares issued in exchange for
the contribution of assets and liabilities were assigned a value equal to the
original cash contributions to Genesis Direct, LLC by its members.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
For the period subsequent to June 25, 1996, the consolidated financial
statements include the accounts of Genesis Direct, Inc. and its wholly-owned
subsidiaries. Prior to June 25, 1996, the financial statements included the
accounts of Genesis Direct, LLC. All significant intercompany accounts and
transactions have been eliminated.
Basis of Presentation
All amounts, except share and per share data are presented in thousands,
unless otherwise indicated.
Fiscal Year
The Company's fiscal year ends on the Saturday next preceding April 1,
resulting in either a 52 or 53 week fiscal year. The year ended March 29, 1997
("fiscal 1996") was a 52-week year and the period ended March 30, 1996
("fiscal 1995") was from inception on June 8, 1995. The nine months ended
December 27, 1997 is included in fiscal 1997.
Cash Equivalents
Cash equivalents consist of highly liquid investments with original
maturities of three months or less when purchased.
Restricted Cash
Restricted cash represents amounts deposited in a bank to support letters of
credit in connection with certain of the Company's lease obligations.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist of cash and
cash equivalents and trade accounts receivable. The Company restricts its
temporary cash investments to financial institutions with high credit
standing. Accounts receivable include sales to a national retailer under a
fulfillment agreement. The Company believes the credit risk related to this
customer is not significant. The remaining portion of accounts receivable
represent sales to governmental agencies and other institutional customers
throughout the United States. The Company performs periodic credit evaluation
of these customers but does not require collateral.
F-8
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Merchandise Inventory, Net
Merchandise inventory, consisting principally of finished goods, is stated
at the lower of cost (first-in, first-out) or market. Merchandise inventory
reflects valuation reserves of approximately $1,390 and $4,120 at March 29,
1997 and December 27, 1997, respectively.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets, ranging from five to ten years. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
life of the improvement or the remainder of the lease term.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Long-Lived Assets
The Company periodically assesses long-lived assets, including goodwill and
other intangibles for recoverability. The Company's assessment at December 27,
1997 is based on undiscounted projected operating results of the acquired
businesses. Management believes that these projections are reasonable,
however, actual future operating results may differ.
Fair Values of Financial Instruments
The estimated fair values of financial instruments have been determined by
the Company using available market information including current interest
rates and appropriate valuation methodologies. The fair value of financial
instruments does not materially differ from their carrying values.
Revenue Recognition
Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns, net of exchanges, is recorded based upon historical
experience.
Advertising and Promotion Costs
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7, Reporting of Advertising Costs. Advertising
costs other than direct response are expensed at the time the initial
advertising takes place. Direct response advertising costs, consisting
primarily of catalog design, printing and postage expenditures, are amortized
over the period during which associated net revenues are expected, generally
approximating three months or less. Direct response and other advertising
expenses were $3,740 and $35,841 for fiscal 1996 and nine months ended
December 27, 1997, respectively. As of March 29, 1997 and December 27, 1997,
approximately $1,379 and $2,421, respectively, of direct response and other
advertising costs are included in prepaid expenses.
Income Taxes
Deferred income taxes are determined using the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-9
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Business Combinations
The Company has accounted for all business combinations under the purchase
method of accounting. Under this method the purchase price is allocated to the
assets and liabilities of the acquired enterprise as of the acquisition date
based on their estimated respective fair values and, under certain
circumstances, are subject to revision for a period not to exceed one year
from the date of acquisition. In certain cases, the purchase price is subject
to adjustment based upon the verification of financial position and results of
operations of the acquired business as of a specified date. The results of
operations of the acquired enterprises are included in the Company's
consolidated financial statements for the period subsequent to the
acquisitions.
Goodwill
Goodwill represents the cost in excess of fair value of the net assets of
businesses acquired and is being amortized over periods from ten to forty
years.
Intangibles
Intangible assets include the cost of agreements not-to-compete entered into
in connection with certain business combinations and costs to acquire customer
mailing lists. The costs of non-compete agreements are amortized over the
terms of the agreements. The costs of acquired customer lists are amortized
over the period which the acquired company, based on historical experience,
retains its customers, generally three years.
Computer Software
The Company capitalizes the cost of computer software purchased from third
parties. Internal costs incurred to modify purchased software and to develop
software for internal use are expensed as incurred.
Loss Per Share
Loss per share amounts for all periods are based on the provisions of
Statement of Financial Accounting Standards No. 128 Earnings Per Share.
Diluted loss per share is not presented since the effect of all potentially
dilutive securities is anti-dilutive. In addition, no shares have been issued
since inception for amounts representing nominal consideration.
All common share and per share information reflects a 275 for-one stock
split. See Note 16.
Interim Financial Statements
The financial information with respect to the nine-month period ended
December 28, 1996 is unaudited. In the opinion of management, such information
contains all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for the period.
The results of operations for interim periods are not necessarily indicative
of the results of operations for the full fiscal year due to, among other
things, the seasonality of the Company's revenues.
3. NOTE RECEIVABLE
The note was received in connection with the sale of certain assets, bears
interest at 6% and is payable in 20 quarterly installments beginning January
1998.
4. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
F-10
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Equipment, furniture and
fixtures................. $163 $2,293 $ 6,476
Computer equipment and
software................. 285 1,372 7,617
Leasehold improvements.... 406 7,638
---- ------ -------
448 4,071 21,731
Lease accumulated depreci-
ation.................... 31 535 1,874
---- ------ -------
$417 $3,536 $19,857
==== ====== =======
</TABLE>
Depreciation expense was approximately $32, $505 and $1,339 for fiscal 1995,
fiscal year 1996 and the nine months ended December 27, 1997, respectively.
5. ACCRUED EXPENSES
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Sales returns................ $ 169 $ 1,395
Employee compensation........ $ 83 627 2,088
Interest..................... 966 1,832
Reorganization costs......... 2,212 2,780
Accrued inventory............ 15 2,265
Due to customers............. 709 1,467
Other........................ 553 2,187 3,482
---- ------ -------
$636 $6,885 $15,309
==== ====== =======
</TABLE>
6. ACQUISITIONS
Fiscal 1997
In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Artesania, Inc. ("Ninos"). Ninos is engaged in the direct
marketing of children's bilingual educational products. The aggregate purchase
price, including all direct costs, was approximately $1,358. The cost of the
acquisition exceeded the fair value of the acquired net assets by
approximately $1,298 which has been recorded as goodwill.
In April 1997, Genesis acquired certain assets and assumed certain
liabilities of Center for Applied Psychology, Inc. ("Childswork/Childsplay").
Childswork/Childsplay is engaged in the direct marketing of children's
educational products to the school and professional markets. The aggregate
purchase price, including all direct costs, was approximately $2,245. The cost
of the acquisition exceeded the fair value of the acquired net assets by
approximately $997 which has been recorded as goodwill.
In June 1997, Genesis acquired certain assets from and entered into a
license agreement with Global Friends Collection, Inc. ("Global Friends").
Global Friends is engaged in the direct marketing of collectible dolls and
related merchandise. The preliminary aggregate purchase price, including all
direct costs, was approximately $1,394 and was partially financed through the
issuance of a $210 non-interest bearing note payable to the seller. This note
has been discounted to its present value using an effective annual interest
rate of 12%. The cost of the acquisition exceeded the fair value of the
acquired assets by approximately $718 which has been recorded as goodwill.
In August 1997, Genesis acquired all of the outstanding common stock of
Fanfare Enterprises, Inc. ("Fanfare"). Fanfare is engaged in the direct
marketing of consumer products relating to the performing arts. The
preliminary aggregate purchase price, including all direct costs, was
approximately $4,888 and was partially financed through the issuance of a $500
interest bearing (8%) note payable to the sellers. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $2,549
which has been recorded as goodwill.
F-11
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
In October 1997, the Company acquired certain assets and assumed certain
liabilities of H&L Productions, Inc. ("NASCAR"). NASCAR is engaged in the
direct marketing of licensed NASCAR merchandise and other collectibles. The
preliminary aggregate purchase price, including all direct costs, was
approximately $6,455 and was partially financed through the issuance of an
aggregate of $1,325 interest bearing (5.76%) convertible notes and $1,075
interest bearing (5.76%) notes payable to the sellers. The cost of the
acquisition exceeded the fair value of the acquired net assets by
approximately $5,820 which has been recorded as goodwill. The principal former
stockholder, who is employed by the Company, is also entitled to certain
additional payments based on operating results for the year ended December 31,
1997. The portion of such additional payments, if any, attributable to
operating results subsequent to the date of acquisition will be accounted for
as compensation expense in accordance with Emerging Issues Task Force (EITF)
Issue No. 95-8.
In October 1997, Genesis acquired all of the outstanding common stock of Zig
Zag Imports, Inc. ("Soccer Madness"). Soccer Madness is engaged in the direct
marketing of licensed and other sports merchandise. The preliminary aggregate
purchase price, including all direct costs, was approximately $3,090 and was
partially financed through the issuance of 2,750 shares of Common Stock valued
at $10.91 per share and $1,050 interest-bearing (7.0%) notes payable to the
sellers. The cost of the acquisition exceeded the fair value of the acquired
net assets by approximately $2,516 which has been recorded as goodwill.
The following unaudited pro forma summary presents the combined results of
operations as if the fiscal 1997 acquisitions had occurred on March 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<S> <C> <C>
Net sales................................... $108,262 $93,526
Net loss.................................... (23,758) (57,846)
Pro forma loss per share.................... $ (8.56) $ (6.68)
</TABLE>
The unaudited pro forma information is not necessarily indicative either of
results of operations that would have occurred had the acquisitions been made
on March 31, 1996 or future results of operations of the combined companies.
Fiscal 1996
In December 1996, Genesis acquired all of the outstanding common stock of
Athletic Supply of Dallas, Inc. ("ASD"). ASD is engaged in the direct
marketing of licensed and other sports merchandise. The aggregate purchase
price, including all direct costs, was approximately $10,000 and was partially
financed through the issuance of $5,000 of non-interest bearing notes payable
to the sellers. These notes payable have been discounted to their present
value at an effective annual interest rate of 12%. The cost of the acquisition
exceeded the fair value of the acquired net assets by approximately $11,413
which has been recorded as goodwill.
In October 1997, the Company completed the sale of the assets and
liabilities of the fulfillment operations of ASD to one of ASD's former
shareholders. The aggregate proceeds from the sale were approximately $2.7
million, including a $1.0 million reduction in the outstanding principal
balance of the existing seller note payable. The amounts of loss from
operations and allocated interest costs for the period prior to the sale which
were excluded from the determination of net loss in accordance with EITF Issue
No. 87-11 were not material. The sale resulted in a reduction of goodwill of
approximately $2.8 million.
F-12
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
6. ACQUISITIONS (CONTINUED)
In December 1996, Genesis acquired certain assets and assumed certain
liabilities of Manny's Baseball Land, Inc. ("ProTeam"). ProTeam is engaged in
the direct marketing of licensed and other sports merchandise. The aggregate
purchase price, including all direct costs, was approximately $10,932 and was
partially financed through the issuance of $5,275 of non-interest bearing
notes payable to the sellers. These notes payable have been discounted to
their present value at an effective annual interest rate of 12%. The cost of
the acquisition exceeded the fair value of the acquired net assets by
approximately $11,351 which has been recorded as goodwill.
In February 1997, Genesis acquired certain assets and assumed certain
liabilities of First Step Design Ltd. ("Hand In Hand"). Hand In Hand is
engaged in the direct marketing of children's games, educational material, and
related products. The aggregate purchase price, including all direct costs,
was approximately $2,486. The cost of the acquisition exceeded the fair value
of the acquired net assets by approximately $2,119 which has been recorded as
goodwill.
During fiscal 1996, in separate transactions, Genesis acquired certain
assets and assumed certain liabilities of Lilliput Motor Company, Inc., Duclos
Direct Marketing, Inc. and The Thursley Group, Inc., all of which are engaged
in direct marketing of consumer products. The aggregate purchase price for
these businesses, including all direct costs, was approximately $2,416, and
was partially financed through the issuance of $800 of non-interest bearing
notes payable to the sellers. These notes payable have been discounted to
their present value at an effective annual interest rate of 12%. The cost of
the acquisitions exceeded the fair value of acquired businesses' net assets by
approximately $2,917 which has been recorded as goodwill.
In conjunction with each of the transactions described above, certain
individuals and the Company entered into agreements not-to-compete. These
agreements cover periods ranging from six months to four years from the date
of the respective transactions. The cost of these agreements totaled
approximately $2,610 and $1,119 for the acquisitions completed during fiscal
1996 and the nine months ended December 27, 1997, respectively. Such amounts
are generally payable over the term of the agreements. These obligations have
been discounted to their present value at an effective annual interest rate of
12%.
In connection with certain of the transactions described above, the Company
has adopted, although in certain cases not finalized, plans to relocate the
operations of the acquired businesses. Such plans are finalized when the date
of integration of the acquired business into the Company's call center and
distribution center is determined, which, in all cases, has been within one
year of the date of consummation of the acquisition. The Company has recorded
estimated liabilities aggregating approximately $2,212 (of which $578 has been
paid through December 27, 1997) and $1,146 for fiscal 1996 and the nine months
ended December 27, 1997, respectively, related principally to employee
termination costs and remaining lease obligations. The ultimate amounts
incurred may differ from the amounts recorded. Any such differences will
result in an adjustment to these estimated liabilities and a corresponding
adjustment to goodwill, unless the differences result from events occurring
after the consummation date, which differences will be expensed when incurred.
In connection with certain of the transactions described above, the Company
has pledged all of its member interests in the respective LLC subsidiary
formed for the purpose of acquiring the business of the sellers and provided a
guarantee of the notes payable.
F-13
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. SERIES A PREFERRED STOCK
In September 1997, the Company sold 71,358 shares of Series A Cumulative
Convertible Preferred Stock ("Series A Preferred Stock") including 36,413
shares to the holders of all of the shares of the Company's common stock and
outstanding debentures. Dividends at an annual rate of 6% are cumulative from
the date of issuance and are payable in cash or shares of Common Stock, at the
option of the Company. Upon liquidation or conversion, in connection with a
qualifying sale or initial public offering, as defined, dividends are payable
only to the extent required to yield the holders of Series A Preferred Stock
an annualized compound rate of return, as defined, of 30%.
The Company at its option may redeem all shares, but not less than all
shares, of Series A Preferred Stock on or after January 31, 2005 at an amount
equal to liquidation value. Liquidation value is $1,000 per share plus any
unpaid dividends. As of December 27, 1997 dividends of $1,032 have accrued on
Series A Preferred Stock. The holders of Series A Preferred Stock may elect to
require the Company to redeem all such shares on any date on or after January
31, 2005. Upon such mandatory redemption, the holder would be entitled to
receive the liquidation value in cash. If the Company fails to redeem all such
shares the dividend rate shall be increased to 14% per annum, payable
quarterly in cash until such shares are redeemed.
The Series A Preferred Stock is convertible, at the holders option, at any
time into shares of Common Stock at an initial conversion price of $10.91 per
share, subject to adjustment. The Series A Preferred Stock is subject to
automatic conversion upon the completion of (i) a qualifying initial public
offering, as defined, at an initial conversion of $10.91 per share, subject to
adjustment. Potential adjustments to the initial conversion price for both
optional and automatic conversions would result principally from the issuance
or sale of certain equity instruments, as defined, at less than the initial
conversion price per share by the Company prior to the date of such
conversions.
The holders of Series A Preferred Stock are entitled to vote together with
the holders of shares of Common Stock as a single class. Each holder of Series
A Preferred Stock is entitled to that number of votes such holder would be
entitled if the holder had converted the shares of Series A Preferred Stock
into shares of Common Stock.
The purchase of an aggregate of 26,175 shares of Series A Preferred Stock
was completed through the conversion in September 1997 of $26,175,000
principal amount of 8% notes payable issued by the Company during August and
September 1997. Such notes payable were automatically convertible into shares
of the Series A Preferred Stock at a conversion price of $3.63 per share.
F-14
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. NOTES PAYABLE AND LONG-TERM DEBT
The Company's notes payable and long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 30, 1996 MARCH 29, 1997 DECEMBER 27, 1997
-------------- -------------- -----------------
<S> <C> <C> <C>
Revolving credit note payable
to bank...................... $722 $ 264
Term loan payable to bank..... 5,000
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, due in quarterly
installments of $500 through
March 1998................... $ 4,414 2,548
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, balance due in
December 1998................ 4,682 2,377
5.76% notes payable to sellers
in a business acquisition,
due in semi-annual
installments of $442
beginning April 1998......... 1,075
5.76% convertible note
("convertible note") payable
to sellers in a business
acquisition, due in semi-
annual installments of $442
(subject to adjustment)
beginning April 1999......... 1,325
7% notes payable to sellers in
a business acquisition, due
in annual installments of
$350 beginning October 1998.. 1,050
8% notes payable to sellers in
a business acquisition, due
in April 1998................ 500
Non-interest bearing notes
payable (discounted at 11.4%)
to sellers in a business
acquisition, due February
1998......................... 321 347
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
acquisition, due December
1998......................... 533 268
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
combination, due March 1999.. 242 174
Non-interest bearing notes
payable (discounted at 12%)
to sellers in a business
combination, due in annual
installments of $105
beginning June 1998.......... 189
---- ------- -------
722 10,192 15,117
Less current portion.......... 722 5,274 7,265
---- ------- -------
$-- $ 4,918 $ 7,852
==== ======= =======
</TABLE>
The principal balance of the convertible note is subject to reduction based
on a measurement of operating results, as defined, of the acquired business.
The determination of such reduction, if any, has not been finalized and will
result in a reduction of goodwill. In the event the Company completes an
initial public offering of its Common Stock, the holder may elect to convert
the balance of this note into Common Stock at a rate of $10.91 per share.
F-15
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The principal balances of certain of the seller notes described above are
subject to adjustments to reflect finalization of the applicable purchase
transaction. Such potential adjustments principally relate to measurements of
financial targets and indemnification provisions of the purchase agreements.
In May 1997, the Company entered into a $30 million revolving credit and
term loan facility (the "Credit Agreement"), with a commercial lender. Under
the Credit Agreement, the Company may borrow up to $25 million (including $2
million reserved for issuance of letters of credit) under a revolving credit
facility based on eligible collateral which includes specified percentages of
certain accounts receivable and inventory. As of December 27, 1997, based on
existing collateral the Company had approximately an additional $17 million
available under the revolving credit facility. All borrowings under the
revolving credit facility bear interest at the prime rate plus 0.5% or LIBOR
plus 3%, at the Company's option. The term loan bears interest at the prime
rate plus 0.5% with annual payments of $800 beginning in May 1998 and the
balance payable in May 2002. The term loan is also subject to certain
mandatory prepayments should the Company prepay any portion of the outstanding
principal balance of the debentures in connection with an initial public
offering of its stock. The amount of any such required prepayment is based on
a formula specified in the Credit Agreement. Among other things, the Credit
Agreement restricts the Company's ability to incur additional indebtedness,
pay dividends on Common Stock and requires the Company to maintain a specified
level of consolidated net worth, as defined.
The revolving credit note payable in existence at March 30, 1996 was repaid
and was not renewed.
Short-term borrowings at March 30, 1996 and December 27, 1997 were at
weighted-average interest rates of 9% and 9.25%, respectively.
As of December 27, 1997, maturities, excluding imputed interest, of notes
payable and long-term debt over the next three months and the succeeding five
fiscal years are as follows:
<TABLE>
<S> <C>
Three months ending March 28, 1998.................................. 1,096
1998................................................................ 7,348
1999................................................................ 2,481
2000................................................................ 1,592
2001................................................................ 800
2002................................................................ 1,800
</TABLE>
9. DEBENTURES PAYABLE--RELATED PARTIES
On June 25, 1996, the Company entered into a Note and Stock Purchase
Agreement (as amended, the "Note and Stock Purchase Agreement") with GE
Investment Private Placement Partners II ("GEIPPP II") and Genesis Direct LP
("GDLP"). Pursuant to the Note and Stock Purchase Agreement, between June 1996
and April 1997, the Company issued to GEIPPP II 2,750,000 shares of the
Company's common stock and $30.0 million principal amount of Debentures, in
consideration of $40.0 million in cash.
The Debentures are subordinated to all other outstanding obligations, bear
interest at 8% and are due June 1, 2003. The Debentures are convertible, at an
initial conversion price of $4.18 per share, into 7,173,913 shares of Common
Stock at any time after the earlier of (i) June 25, 2001, (ii) a qualified
initial public offering, as defined, or (iii) a change in control event, as
defined. At the time of such conversion, the Company has the option to redeem
up to 75% of the principal amount of the Debentures surrendered for
conversion. The Debentures also are redeemable at the option of the Company
any time after the earlier of (i) a qualified initial public offering, as
defined, or (ii) June 25, 1998 at an amount which provides a total annualized
return of 30% of the principal amount being redeemed ("prepayment interest
rate"). Any such redemption will result in the difference between
F-16
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. DEBENTURES PAYABLE--RELATED PARTIES (CONTINUED)
interest accrued and interest due at the prepayment interest rate being
recorded as an extraordinary charge to earnings in the period in which the
prepayment occurs. At the date of redemption, however, the holders of the
Debentures, have the right to convert up to 32 1/2 percent of the principal
amount being redeemed. The Debentures provide for mandatory prepayment at the
option of the holders upon occurrence of defined mandatory prepayment events
which principally relate to the continued involvement and ownership of the
founders. The holder of the Debentures is also one of the Company's principal
common stockholders.
The Debentures bear interest at an annual rate of 8% (payable semi-annually
on December 1 and June 1) with 6% of such interest deferred through June 1,
1997, 4% deferred through June 1, 1998 and 2% deferred through June 1, 1999.
The deferred interest bears interest at 8% and is payable, at the Company's
option, in either cash or Common Stock at the earlier of either June 1, 2003
or a conversion or redemption of the Debentures as described above. Total
interest expense on the Debentures was $667 and $1,793 for the year ended
March 29, 1997 and the nine months ended December 27, 1997, respectively.
10. STOCKHOLDERS' EQUITY
In conjunction with a subsequent sale of Series A Preferred Stock the
parties to the Note and Stock Purchase Agreement entered into Amendment No. 3
to the Note and Stock Purchase Agreement. In consideration for entering into
such amendment, the Company issued to a holder of the Debentures and Common
Stock four warrants each to purchase up to 68,750 shares of the Common Stock
at an initial price of $10.91 per share, subject to adjustment. The warrants
are exercisable at any time after the Company completes an initial public
offering of its Common Stock. In the event the Company does not complete such
an initial public offering the warrants expire on September 25, 1998, March
17, 1999, May 25, 1999 and July 4, 1999, respectively. The warrants had a fair
value of $200 at the date of grant which has been accounted for as additional
paid-in capital and interest expense.
As of December 27, 1997 the Company has reserved shares of Common Stock for
issuance as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
<S> <C>
Conversion of outstanding Series A Preferred Stock...... 6,600,000
Conversion of outstanding Debentures.................... 2,331,521
Exercise of common stock purchase warrants.............. 275,000
Conversion of seller note payable....................... 128,333
Exercise of common stock options........................ 1,847,450
----------
Total shares reserved................................. 11,182,304
==========
</TABLE>
11. STOCK OPTION PLAN
During fiscal 1996, the Company's Board of Directors adopted the Genesis
Direct, Inc. Employee Stock Option Plan (the "Plan"). Under the terms of the
Plan, the Board of Directors or committee thereof may grant stock options,
stock appreciation rights, or restricted stock at such prices as may be
determined by the Board of Directors. The maximum number of shares subject to
the Plan is 1,847,450. The options vest ratably over five years and expire
after ten years. Vested options are exercisable at the end of year ten or
earlier in the event the Company completes an initial public offering of its
Common Stock.
F-17
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. STOCK OPTION PLAN (CONTINUED)
Option activity under the plan is as follows:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
---------
<S> <C>
Outstanding at March 31, 1996...................................... --
Granted.......................................................... 498,025
Forfeited........................................................ --
---------
Outstanding at March 29, 1997...................................... 498,025
Granted.......................................................... 607,200
Forfeited........................................................ 39,600
---------
Outstanding at December 27, 1997................................... 1,065,625
=========
</TABLE>
All grants made under the Plan have been at an exercise price of $10.91 per
share. No options were exercisable at March 29, 1997 or December 27, 1997.
The weighted-average grant date fair value of options was $2.91 and $2.95
per share for fiscal 1996 and nine months ended December 27, 1997,
respectively. At December 27, 1997, the outstanding options have a weighted
average remaining contractual life of 9.4 years.
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25") and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123")
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions for the year
ended March 27, 1997 and the nine month period ended December 27, 1997:
weighted-average risk-free interest rate of 6.5%; no dividends; a near-zero
volatility factor of the expected market price of Common Stock and a weighted-
average expected life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
Had the Company accounted for its employee stock options under the fair
value method of SFAS No. 123, the impact on the Company's net loss for the
year ended March 29, 1997 would have been approximately $22 ($.01 per share)
and approximately $208 ($.02 per share) for the nine months ended December 27,
1997. The pro forma impact of accounting for stock options under SFAS No. 123
could be significant in future periods.
F-18
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS
The Company leases certain office and distribution facilities, as well as
certain equipment, under long-term operating leases. Lease terms range from
five to ten years, with renewal options of up to ten years. In addition,
certain of the leases require the Company to pay additional rents based on
costs of operating the property and contain certain escalation clauses.
Future minimum lease payments under the leases for the next three months and
the succeeding five fiscal years are approximately as follows:
<TABLE>
<S> <C>
Three months ending March 28, 1998.................................... $1,338
1998.................................................................. 5,387
1999.................................................................. 4,947
2000.................................................................. 4,751
2001.................................................................. 4,457
2002.................................................................. 3,891
Thereafter............................................................ 8,758
</TABLE>
Rent expense was $86, $428 and $3,204 for fiscal 1995, fiscal 1996 and the
nine month period ended December 27, 1997, respectively.
13. INCOME TAXES
No provision (benefit) for income taxes has been recorded for fiscal 1995,
fiscal 1996 or for the nine month period ended December 27, 1997 due to the
fact that the Company was an LLC for the period from June 8, 1995 (date of
inception) to June 21, 1996 and due to net operating losses incurred in the
subsequent periods for which a full valuation allowance has been provided.
Significant components of the Company's deferred tax liabilities and assets
are as follows:
<TABLE>
<CAPTION>
MARCH 29, 1997 DECEMBER 27, 1997
-------------- -----------------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment............ $ 245 $ --
Goodwill................................. 1,149 2,172
------ -------
Total deferred tax liabilities......... 1,394 2,172
Deferred tax assets:
Accounts receivable...................... 522
Inventory................................ 527 3,157
Intangible assets........................ 73 229
Property and equipment................... 135
Accrued liabilities...................... 2,670 4,201
Net operating loss carryforwards......... 3,913 3,913
------ -------
Total deferred tax assets.................. 7,183 12,157
Valuation allowance........................ 5,789 9,985
------ -------
Net deferred tax assets.................... 1,394 2,172
------ -------
Net deferred tax (assets) liabilities...... $ -- $ --
====== =======
</TABLE>
F-19
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13. INCOME TAXES (CONTINUED)
As of March 29, 1997, the Company has approximately $10.0 million of federal
tax net operating loss carryforwards which expire in 2012. The Company also
has approximately $8.6 million of state tax net operating loss carryforwards
which expire principally in 2004. In addition, the Company incurred
approximately $46 million of tax losses for the nine-month period ended
December 27, 1997 that are not reflected in the gross deferred tax assets
above.
The Tax Reform Act of 1986 enacted a complex set of rules limiting the
potential utilization of net operating loss carryforwards and tax credit
carryforwards in periods following a corporate "ownership change". In general,
an ownership change is deemed to occur if the percentage of stock of a loss
corporation owned (actually, constructively and, in some cases, deemed) by one
or more "5% stockholders" has increased by more than 50 percentage points over
the lowest percentage of such stock owned during a three-year testing period.
As a result of cumulative changes in the Company's ownership which have
occurred, including the proposed initial public offering, the Company's net
operating loss carryforwards may be subject to annual limitations.
14. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows employees
meeting certain eligibility requirements to contribute up to 15% of their
annual compensation. The Company matches these contributions at a rate of 50%
of the employees' pre-tax contributions up to a maximum of 6% of the
employee's annual compensation. The Company's contributions for fiscal 1996
and the nine months ended December 27, 1997 were $26 and $34, respectively.
15. SALES AND USE TAX
A 1992 Supreme Court decision confirmed that the Commerce Clause of the
United States Constitution prevents a state from requiring the collection of
its use tax by a mail order company unless the company has a physical presence
in the state. However, there continues to be uncertainty due to inconsistent
application of the Supreme Court decision by state and federal courts. The
Company attempts to conduct its operations in compliance with its
interpretation of the applicable legal standard, but there can be no assurance
that such compliance will not be challenged.
In recent challenges, various states have sought to require companies to
begin collection of use taxes and/or pay taxes from previous sales. The
Company has not received assessments from any state. The amount of potential
assessments, if any, cannot be reasonably estimated.
The Supreme Court decision also established that Congress has the power to
enact legislation which would permit states to require collection of use taxes
by mail order companies. Congress has from time to time considered proposals
for such legislation. The Company anticipates that any legislative change, if
adopted, would be applied only on a prospective basis.
16. SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 27, 1997, the Company completed the acquisition of
certain assets and certain liabilities of Select Service & Supply Co., Inc.
("Sportime"). Sportime is engaged in the direct marketing of licensed and
other sports merchandise. Payment of the aggregate preliminary purchase price
of approximately $20.4 million included cash of $18.1 million, a $1.0 million
8% term note, $.5 million of non-compete payments due in equal quarterly
installments through January 2002 and the issuance of 91,575 shares of
Common Stock valued at $10.91 per share. Prior to December 27, 1997, the
Company deposited $1.0 million in an escrow account for purposes of completing
this transaction. This amount is included in other assets at December 27,
1997.
F-20
<PAGE>
GENESIS DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
16. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Subsequent to December 27, 1997, the Company completed the sale of 22,942
shares of its Series A Cumulative Convertible Preferred Stock for aggregate
proceeds of $22,942.
In March 1998, the Board of Directors of the Company proposed to
stockholders for approval a 275 for 1 stock split. All common share and per
share information in the accompanying financial statements has been
retroactively restated to reflect this reverse stock split, which will be
effective upon consummation of the initial public offering.
In March 1998, the Company's Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering of Common Stock.
In March 1998, the Company amended its Credit Agreement with a commercial
lender dated May 1997. Pursuant to the amendment, the Company is no longer
required to prepay the term loan in connection with an initial public offering
of its stock.
Subsequent to December 27, 1997, the Company's Board of Directors approved
grants of stock options to employees and executives who are also principal
stockholders and granted an aggregate of 120,037 stock options to employees at
an exercise price of $10.91 per share and an aggregate of 412,500 stock
options to certain executives at an exercise price of $16.36 per share. The
employee options vest ratably over five years and expire after ten years. The
executive options vest in full on March 2, 1999 and expire after ten years. In
addition, the Company's Board of Directors approved grants to certain
executives aggregating 495,000 stock options at an exercise price of $23.64
and 660,000 stock options at an exercise price of $30.91. Such options will be
granted upon the completion of the Company's initial public offering and will
vest in full on March 2, 2000 and March 2, 2001, respectively, and expire
after ten years from the date of grant. In addition, effective upon the
consummation of the initial public offering, a total of 4,125,000 shares of
Common Stock will be reserved for issuance upon exercise of options granted
under the Option Plan.
F-21
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Manny's Baseball Land, Inc.
We have audited the accompanying statements of operations and cash flows of
Manny's Baseball Land, Inc. for the period from January 1, 1996 to December 2,
1996 and the year ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Manny's
Baseball Land, Inc. for the period from January 1, 1996 to December 2, 1996
and the year ended December 31, 1995 in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Hackensack, New Jersey
June 6, 1997
F-22
<PAGE>
MANNY'S BASEBALL LAND, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 2, 1996
----------------- ----------------
<S> <C> <C>
Net sales.................................. $19,405,069 $15,741,956
Cost of goods sold......................... 11,621,420 9,775,489
----------- -----------
Gross profit............................... 7,783,649 5,966,467
Selling, general and administrative
expense................................... 7,205,494 6,825,745
----------- -----------
Income (loss) from operations.............. 578,155 (859,278)
Interest expense........................... 192,451 187,619
Interest and other income.................. 21,189 22,086
----------- -----------
Net income (loss).......................... $ 406,893 $(1,024,811)
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
MANNY'S BASEBALL LAND, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JANUARY 1 TO
DECEMBER 31, 1995 DECEMBER 2, 1996
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................... $ 406,893 $(1,024,811)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization............. 217,553 274,047
Provision for losses on accounts
receivable............................... 10,011 48,715
Changes in other operating assets and
liabilities:
Accounts receivable...................... (43,428) (159,176)
Merchandise inventory.................... 144,938 (230,440)
Prepaid expenses......................... (82,220) (134,928)
Deposits................................. (28,286) 29,514
Accounts payable......................... (1,297,603) 949,983
Accrued liabilities...................... (40,793) 158,111
----------- -----------
Net cash used in operating activities...... (712,935) (88,985)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment...... (644,667) (359,476)
----------- -----------
Net cash used in investing activities...... (644,667) (359,476)
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to stockholders.............. (597,354) (35,986)
Net borrowings under revolving line of
credit.................................... 1,703,101 579,737
Proceeds from long-term borrowings......... 354,000 118,460
Principal payments on long-term debt....... (102,145) (161,941)
----------- -----------
Net cash provided by financing activities.. 1,357,602 500,270
Net increase in cash....................... -- 51,809
Cash overdraft at beginning of period...... -- --
----------- -----------
Cash at end of period...................... $ -- $ 51,809
=========== ===========
</TABLE>
See accompanying notes.
F-24
<PAGE>
MANNY'S BASEBALL LAND, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Manny's Baseball Land, Inc. (the Company) is a mail order company that sells
authentic professional sports attire. The Company's primary market is the
United States, other markets include Canada, Europe and the Pacific Basin
area.
On December 2, 1996, substantially all assets and liabilities of the Company
were acquired by a third party, Genesis Direct Five, LLC. ("Genesis"), in
exchange for cash of $5,925,000 and promissory notes of $5,275,000.
The financial statements of the Company have been prepared as supplemental
information about the entity which Genesis will own following consummation of
the acquisition. The Company previously operated as a separate independent
entity. The results of operations and cash flows do not reflect any
adjustments relating to the acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Sales are recorded at the time of shipment and a provision for anticipated
merchandise returns is recorded based upon historical experience.
Property and Equipment
Depreciation of furniture and equipment has been provided on the straight-
line method over the estimated useful lives of five to seven years.
Depreciation expense was $205,761 and $264,706 for the year ended December 31,
1995 and the period ended December 2, 1996, respectively.
Income Taxes
The Company has elected to be treated as an S Corporation under the
provisions of the Internal Revenue Code, which eliminates federal income taxes
at the corporate level.
Direct Response Advertising and Promotion Costs
Direct response advertising costs, consisting primarily of catalog
production and postage expenditures, are amortized over the period during
which associated net revenues are expected, generally two months or less.
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7 Reporting of Advertising Costs. Direct
response and other advertising expenses were $2,365,988 and $2,310,295 for the
year ended December 31, 1995 and the period ended December 2, 1996,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows employees
meeting certain eligibility requirements to contribute up to 15% of their
annual compensation. The Company may contribute to such plan at a
discretionary rate determined yearly by the Board of Directors. The Company's
contributions for the year ended December 31, 1995 and the period ended
December 2, 1996 were approximately $7,740 and $12,095, respectively.
4. COMMITMENTS
Rent expense for the year ended December 31, 1995 and the period ended
December 2, 1996 was approximately $87,000 and $100,000 respectively.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Athletic Supply of Dallas, Inc.:
We have audited the accompanying statements of income and cash flows of
Athletic Supply of Dallas, Inc. for each of the years in the three-year period
ended June 30, 1996, and for the period from July 1, 1996 to December 20,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Athletic
Supply of Dallas, Inc. for each of the years in the three-year period ended
June 30, 1996, and for the period from July 1, 1996 to December 20, 1996, in
conformity with generally accepted accounting principles.
As discussed in note 1 to the financial statements, the Company changed its
methods of accounting for income taxes in fiscal 1994.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
April 18, 1997
F-26
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED JUNE 30, ENDED TO
------------------------------------- DECEMBER 31, DECEMBER 20,
1994 1995 1996 1995 1996
----------- ----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales,
net.................. $26,561,643 $30,973,035 $23,985,590 $21,051,801 $15,990,059
Fulfillment revenues.. -- 2,409,052 5,612,748 2,869,138 2,986,556
Other................. 617,207 341,256 586,651 109,296 783,471
----------- ----------- ----------- ----------- -----------
27,178,850 33,723,343 30,184,989 24,030,235 19,760,086
Operating expenses:
Cost of sales......... 12,679,741 15,050,116 11,464,346 10,146,476 8,009,108
Selling, general and
administrative....... 12,711,937 17,774,347 17,122,691 11,626,390 11,588,454
----------- ----------- ----------- ----------- -----------
25,391,678 32,824,463 28,587,037 21,772,866 19,597,562
----------- ----------- ----------- ----------- -----------
Operating income.... 1,787,172 898,880 1,597,952 2,257,369 162,524
Other income (expense):
Interest expense...... (17,314) (207,521) (267,623) (163,908) (106,287)
Interest income....... 1,298 1,568 149 -- --
----------- ----------- ----------- ----------- -----------
(16,016) (205,953) (267,474) (163,908) (106,287)
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations before
income taxes....... 1,771,156 692,927 1,330,478 2,093,461 56,237
Income taxes (note 4)... 613,802 266,971 527,379 244,000 31,301
----------- ----------- ----------- ----------- -----------
Income from
continuing
operations......... 1,157,354 425,956 803,099 1,849,461 24,936
Discontinued operations
(note 2):
Loss from operations
of discontinued
retail division (net
of income tax benefit
of $8,694 in 1994 and
$42,138 in 1995)..... (16,876) (67,312) -- -- --
Loss on disposal of
retail division (net
income tax benefit of
$77,000 in 1995 and
$26,693 in 1996)..... -- (123,000) (42,640) -- --
----------- ----------- ----------- ----------- -----------
Income before
extraordinary
item............... 1,140,478 235,644 760,459 1,849,461 24,936
Extraordinary item--gain
on extinguishment of
debt (net of income
taxes of $96,690) (note
3)..................... -- 183,392 -- -- --
----------- ----------- ----------- ----------- -----------
Income before
cumulative effect
of a change in
accounting method.. 1,140,478 419,036 760,459 1,849,461 24,936
Cumulative effect of a
change in method of
accounting for income
taxes (note 4)......... 873,351 -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income.......... 2,013,829 419,036 760,459 1,849,461 24,936
Preferred stock
dividends.............. -- -- 41,493 -- 20,509
----------- ----------- ----------- ----------- -----------
Income available to
common stock....... $ 2,013,829 $ 419,036 $ 718,966 $ 1,849,461 $ 4,427
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS JULY 1, 1996
YEARS ENDED JUNE 30, ENDED TO
----------------------------------- DECEMBER 31, DECEMBER 20,
1994 1995 1996 1995 1996
----------- ---------- ---------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............ $ 2,013,829 $ 419,036 $ 760,459 $1,849,461 $ 24,936
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 163,859 264,442 371,334 203,070 204,976
Provision for doubtful
accounts............. (8,988) (10,643) 5,892 -- 54,990
Inventory writedown... -- -- -- -- 700,000
Deferred income
taxes................ (268,243) 54,117 136,282 (362,576)
Changes in assets and
liabilities:
Accounts receivable.. 6,241 (759,102) 66,328 (440,676) (1,020,175)
Income taxes......... (150,000) 11,550 308,051 162,738 (237,493)
Inventories.......... (1,650,187) (618,243) 1,026,940 274,610 (129,496)
Prepaid expenses..... (27,377) (145,902) 204,182 (83,455) (187,563)
Other assets......... (13,833) (11,748) 20,627 12,630 --
Accounts payable..... 444,107 841,179 (1,565,299) (829,306) 2,062,790
Customer deposits.... (6,552) 258,296 (174,829) 21,127 583,860
Accrued expenses..... 137,754 513,287 (691,643) 532,176 968,573
----------- ---------- ---------- ---------- ----------
Net cash provided by
operating
activities......... 640,610 816,269 468,324 1,702,375 2,662,822
----------- ---------- ---------- ---------- ----------
Cash flows used in
investing activities--
additions to property
and equipment......... (239,015) (1,016,133) (543,337) (242,382) (335,700)
----------- ---------- ---------- ---------- ----------
Cash flows from
financing activities:
Proceeds received on
borrowings from
stockholders......... 580,000 -- -- --
Proceeds received from
long-term debt....... -- 1,130,000 900,000 --
Proceeds from issuance
of preferred stock... -- -- 600,000 406,601 --
Net (payments made)
proceeds received
under line of
credit............... -- 986,009 (250,000) (2,000,000) (1,750,000)
Payments made on
borrowings from
stockholders......... (360,000) (321,000) -- --
Payments made on long-
term debt............ (316,557) (726,648) (1,036,682) (6,305) --
Preferred stock
issuance costs....... -- -- (211,398) --
Principal payments
under capital lease
obligations.......... (8,176) (42,978) (64,294) (40,308)
Purchase of treasury
stock................ -- (950,000) -- --
----------- ---------- ---------- ---------- ----------
Net cash provided by
(used in) financing
activities......... (104,733) 75,383 (62,374) (1,599,704) 1,790,308
----------- ---------- ---------- ---------- ----------
Net change in cash and
cash equivalents...... 296,862 (124,481) (137,387) (139,711) 536,814
Cash and cash
equivalents at
beginning of period... 12,922 309,784 185,303 185,304 47,916
----------- ---------- ---------- ---------- ----------
Cash and cash
equivalents at end of
period................ $ 309,784 $ 185,303 $ 47,916 $ 45,539 $ 584,730
=========== ========== ========== ========== ==========
Supplemental
disclosure:
Noncash investing
activity--property
and equipment
acquired under
capital leases....... $ 178,741 $ 64,379 $ 28,538 $ -- $ 13,764
=========== ========== ========== ========== ==========
Interest paid......... $ 17,314 $ 197,466 $ 267,624 $ 176,528 $ 119,399
=========== ========== ========== ========== ==========
Income taxes paid..... $ 150,000 $ 178,855 $ 56,354 $ 30,000 $ 631,372
=========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-28
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General Information
Athletic Supply of Dallas, Inc. (the Company) is engaged in the sale of
sports related apparel and other related products primarily through a mail
order catalog merchandising operation. The mail order operation markets its
products throughout the United States and Canada.
In fiscal year 1995, the Company expanded its business to include a
fulfillment operation for Sears, Roebuck and Co. (Sears) tool and healthcare
products. The Company receives a fixed fee for each call processed by its
telemarketing center and for each item filled through its warehouse. In June
1996, the Company further expanded its business when it entered into an
agreement with Sears and its designated vendors to provide operating systems
and support for catalog order processing for the Sears Wish Book.
The Company discontinued the operations of its retail division, consisting
of one retail store, on December 31, 1995 (see note 2).
On December 20, 1996, all outstanding common stock of the Company was
purchased by Genesis Direct (Genesis) for $10,000,000, consisting of
$5,000,000 cash and a $5,000,000 promissory note. The accompanying financial
statements do not reflect any basis adjustments as a result of this
transaction.
(b) Cash Equivalents
The Company considers cash equivalents to be all highly liquid investments
with original maturities of three months or less. Cash equivalents consisted
of money market accounts of $23,666, $114,906, $3,374, and $6,661, at June 30,
1994, 1995 and 1996, and December 20, 1996, respectively.
(c) Inventories
Inventories are stated at the lower of average cost or market. An allowance
of $700,000 was recorded for the period ended December 20, 1996 to reflect the
reduction of certain inventory items to their estimated net realizable value.
(d) Property and Equipment
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized
straight-line over the shorter of the lease term or estimated useful life of
the asset.
Depreciation and amortization charged to expense was $129,715, $230,298, and
$337,190, for the years ended June 30, 1994, 1995 and 1996, respectively and
$187,902 for the period from July 1, 1996 to December 20, 1996.
Costs of maintenance and repairs are charged to expense when incurred. Upon
retirement or other disposition, the cost of assets and related accumulated
depreciation and amortization are removed from the accounts and any resulting
gain or loss is recognized in operations.
(e) Goodwill
Goodwill is amortized over 40 years on a straight-line basis. Included in
selling, general and administrative expenses is goodwill amortization of
$34,144 for each of the years ended June 30, 1994, 1995 and 1996, and
F-29
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$17,072 for the period from July 1, 1996 to December 20, 1996, for the excess
of the purchase price over the fair market value of assets acquired at the
date of purchase.
(f) Revenue Recognition
Revenues from merchandise sales are recognized upon shipment of products.
Fulfillment revenues are recognized as services are rendered. The Company has
an in-house mailing list consisting of approximately 700,000 customers from
which $152,000, $167,000, $112,000, and $53,000 of rental list income was
generated in the years ended June 30, 1994, 1995 and 1996, and the period from
July 1, 1996 to December 20, 1996, respectively. This income is included in
other revenues in the accompanying statements of income.
(g) Income Taxes
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes
(Statement 109). Statement 109 requires a change from the deferred method of
accounting for income taxes of APB Opinion 11 to the asset and liability
method of accounting for income taxes. Under the asset and liability method of
Statement 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to 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. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective July 1, 1993, the Company adopted Statement 109 and has reported
the cumulative effect of that change in the method of accounting for income
taxes in the statement of income for the year ended June 30, 1994.
(h) Advertising Costs
Advertising costs for newspaper and other media are expensed as incurred.
Direct response advertising costs, which consist primarily of catalog
preparation, printing and postage costs, are capitalized and amortized over
the period during which the benefits of the catalogs are expected, not to
exceed six months.
Advertising expense was $3,756,328, $5,695,737, and $4,654,400 for the years
ended June 30, 1994, 1995 and 1996, respectively, and $112,296 for the period
from July 1, 1996 to December 20, 1996.
(i) Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(j) Unaudited Interim Information
The financial information for the six months ended December 31, 1995 is
unaudited, and certain information and disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been omitted. In the opinion of management, all adjustments,
consisting of normal recurring adjustments necessary to fairly present the
results of operations and cash flows with respect to such interim financial
statements, have been included.
F-30
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(2) DISCONTINUED OPERATIONS
On June 30, 1995, the Company adopted a formal plan to discontinue
operations of its retail division. Operations of the retail division were
discontinued on December 31, 1995. Sales for the discontinued operations of
the retail division were $3,528,852, $3,143,369, and $627,118 for the years
ended June 30, 1994, 1995 and 1996, respectively.
(3) NOTES PAYABLE AND LONG-TERM DEBT
In July 1994, the Company repaid in full its then existing notes payable to
bank and recognized an extraordinary gain of $280,082. The Company then
entered into a new debt agreement with another bank consisting of a $1,000,000
term note and a $2,000,000 revolving note, both of which were collateralized
by substantially all the assets of the Company. Repayment of the notes was
guaranteed by the president of the Company up to a maximum of $2,000,000. The
interest rate on the notes was .75% per annum above the lender's prime rate
and interest was payable monthly.
Effective July 14, 1995, the Company entered into a new debt agreement with
a different lender and repaid in full its obligations to the previous lender.
The new debt agreement consisted of a $900,000 term note ($600,000 outstanding
at December 20, 1996) and a $3,500,000 revolving note (repaid in full on
December 18, 1996), both of which are collateralized by substantially all the
assets of the Company. The interest rate on the debt agreement is .50% per
annum above the lender's prime rate (8.75% at December 20, 1996) and is
payable monthly. Repayment of the Company's obligations under the new debt
agreement was guaranteed by the president of the Company up to a maximum of
$2,000,000.
Principal payments on the new term note are due in three equal annual
installments of $300,000, with the final payment due on January 10, 1998.
The new debt agreement requires the Company to maintain a minimum tangible
net worth and to comply with other financial and nonfinancial covenants.
Also on July 14, 1995, the Company borrowed $400,000 from Sears. The Sears
borrowings, which are subordinated to borrowings under the bank debt
agreement, bear interest at 9% per annum and are payable in two installments
of $200,000 plus accrued interest.
In connection with the purchase of the common stock of the Company by
Genesis, the outstanding balance of $600,000 on the term note was repaid in
full on December 20, 1996 by Genesis on behalf of the Company.
(4) INCOME TAXES
Total income tax expense was allocated as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JUNE 30, JULY 1, 1996 TO
--------------------------- DECEMBER 20,
1994 1995 1996 1996
-------- -------- ------- ---------------
<S> <C> <C> <C> <C>
Income from continuing
operations.................. $613,802 266,971 527,379 31,301
Discontinued operations...... (8,694) (119,138) (26,693) --
Extraordinary item........... -- 96,690 -- --
-------- -------- ------- ------
$605,108 244,523 500,686 31,301
======== ======== ======= ======
</TABLE>
F-31
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense attributable to income from continuing operations
consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
-------- --------- --------
<S> <C> <C> <C>
Year ended June 30, 1994:
Federal...................................... $ -- $ 613,802 $613,802
======== ========= ========
Year ended June 30, 1995:
Federal...................................... 208,181 26,071 234,252
State franchise.............................. 27,553 5,166 32,719
-------- --------- --------
235,734 331,237 266,971
======== ========= ========
Year ended June 30, 1996:
Federal...................................... 421,604 46,616 468,220
State franchise.............................. 53,014 6,145 59,159
-------- --------- --------
474,618 52,761 527,379
======== ========= ========
Period from July 1, 1996 to December 20, 1996:
Federal...................................... 376,152 (346,260) 29,892
State franchise.............................. 17,725 (16,316) 1,409
-------- --------- --------
$393,877 $ 362,576 $ 31,301
======== ========= ========
</TABLE>
Income tax expense attributable to continuing operations differs from the
"expected" tax expense (computed by applying the 34% U.S. federal corporate
rate to income from continuing operations before income taxes) as follows:
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JUNE 30, JULY 1, 1996 TO
--------------------------- DECEMBER 20.
1994 1995 1996 1996
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
Computed "expected" tax expense
............................... $602,193 $235,592 $452,362 $19,121
State franchise taxes, net of
federal income tax benefit..... -- 21,595 39,045 930
Increase in income taxes
resulting from amortization of
excess cost over net assets
acquired, meals and
entertainment, and officers'
life insurance................. 11,609 11,609 11,609 8,524
Other........................... -- (1,828) 24,363 2,726
-------- -------- -------- -------
$613,802 $266,971 $527,379 $31,301
======== ======== ======== =======
</TABLE>
(5) LEASES
The Company leases warehouse and office space under operating leases that
expire at various dates through 2000. The Company also leases computer,
telephone, and other equipment under capital leases that expire at various
dates through the year 2000.
F-32
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
A summary of the minimum rental commitments under noncancellable operating
leases and the present value of future minimum capital lease payments as of
December 20, 1996 is as follows:
<TABLE>
<CAPTION>
PERIODS
ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
-------- -------- ---------
<S> <C> <C>
1997................................................... $ 30,148 247,646
1998................................................... 63,864 270,556
1999................................................... 47,402 176,600
2000................................................... 6,049 87,500
-------- --------
147,463 $782,302
========
Less amount representing interest (at 10%)............. 17,036
--------
Present value of minimum capital lease payments........ $130,427
========
</TABLE>
The 1997 payments are for the period December 21, 1996 to June 30, 1997.
Rent expense for the years ended June 30, 1995 and 1996 and the period from
July 1, 1996 to December 20, 1996 was $614,044, $536,504 and $259,345,
respectively.
(6) STOCKHOLDERS' EQUITY
In January and March 1995, the Company repurchased a total of 2,444,596
shares of its common stock, representing 55% ownership, from two principal
shareholders for $950,000. The shares were constructively retired during the
year ended June 30, 1995.
In June 1995, the Company's Board of Directors (Board) approved an amendment
to the Company's Articles of Incorporation to increase the number of common
shares authorized to 10 million and to authorize 5 million shares of Series A
preferred stock at a par value of $2.50 per share. The par value of the Series
A preferred stock was subsequently reduced to $1.75 per share.
In June 1995, the Company's Board approved a 43.11 to 1 common stock split,
increasing outstanding shares at June 30, 1995 to 2 million with a par value
of $20,000. All share disclosures have been retroactively restated to reflect
the common stock split.
In July 1995, 342,857 shares of Series A preferred stock were issued at
$1.75 per share. The Series A preferred stock has a cumulative annual dividend
of 5% of the original purchase price per share and has a liquidation value
equal to the greater of $1.80 per share plus unpaid dividends or such amount
per share of preferred stock as would have been payable and each such share
been converted into common stock immediately prior to liquidation (as defined
in the Series A Preferred Stock and Warrant Purchase Agreement). The stock is
convertible, at any time, into an equal number of shares of the Company's
common stock. The conversion ratio may be adjusted from time to time upon the
occurrence of various capital stock transactions. Holders of the Series A
preferred stock may require the Company to redeem the shares at any time
subsequent to January 14, 1998 at an amount equal to the liquidation value.
The Company may redeem the shares, at an amount equal to the liquidation
value, at the earlier of the closing of an initial public offering on July 14,
2001. As of December 20, 1996, $62,002 in cumulative preferred stock dividends
is in arrears.
In connection with the issuance of the Series A preferred stock, the Company
issued warrants to purchase 68,514 shares of the Series A preferred stock. The
exercise price of the warrants is $2.16 per share. The warrants may be
exercised for all or any lesser number of shares at any time and from time to
time between issuance and January 14, 1998. The exercise price may be adjusted
from time to time upon the occurrence of various capital stock transactions.
F-33
<PAGE>
ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) RELATED PARTY TRANSACTIONS
In consideration for the Company president's guaranty of borrowings under
the Company's debt agreements discussed in note 3, the Company has agreed to
pay him a fee equal to .167% in fiscal 1995 and .333% in fiscal 1996 and
thereafter of the outstanding balance under the agreements, up to a maximum of
$2,000,000. Such fee amounted to $20,506 and $52,835 for the years ended June
30, 1995 and 1996, respectively, and $44,889 for the period from July 1, 1996
to December 20, 1996.
The Company leases an office/warehouse building, used by the mail order
division, from its president and stockholder. Rentals paid during each of the
years ended June 30, 1994, 1995 and 1996, and during the period from July 1,
1996 to December 20, 1996, amounted to $100,000, and $50,000, respectively.
(8) LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising from the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's results of operations or cash flows.
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of Lilliput Motor Company, Ltd.:
We have audited the accompanying statements of operations and cash flows of
Lilliput Motor Company, Ltd. for the years ending August 31, 1996 and 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit,
also, includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of Lilliput
Motor Company, Ltd. for the years ending August 31, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ Boscia Goldenberg & Company
Wayne, New Jersey
February 2, 1998
F-35
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31, FOUR MONTH PERIODS ENDED
------------------ -----------------------------------
1996 1995 DECEMBER 24, 1996 DECEMBER 31, 1995
-------- -------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............... $871,062 $855,793 $520,490 $501,380
Cost of sales........... 608,180 583,965 369,604 275,685
-------- -------- -------- --------
Gross profit.......... 262,882 271,828 150,886 225,695
Selling, general and ad-
ministrative expenses.. 253,510 235,362 111,782 126,026
-------- -------- -------- --------
Income from opera-
tions................ 9,372 36,466 39,104 99,669
Other income (Expense)
Gain on sale of as-
sets................. 1,127 -- --
Interest expense...... (22,817) (16,282) -- --
Other income.......... 90 8 6
-------- -------- -------- --------
(21,690) (16,192) 8 6
-------- -------- -------- --------
(Loss) income before
benefit of (provision
for) income taxes...... (12,318) 20,274 39,112 99,675
Tax benefit of net oper-
ating loss carryback
(Provision for federal
income tax)........... 1,848 (3,041) (5,275) (36,640)
-------- -------- -------- --------
Net (Loss) Income....... $(10,470) $ 17,233 $ 33,837 $ 63,035
======== ======== ======== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-36
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST
31, FOUR MONTH PERIODS ENDED
------------------- -------------------------
DECEMBER 24, DECEMBER 31,
1996 1995 1996 1995
--------- -------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income.............. $ (10,470) $ 17,233 $ 33,837 $ 63,035
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation and
amortization................ 12,988 24,753 864 6,079
Gain on sale of assets....... (1,127)
(Decrease) increase in de-
ferred income taxes......... (1,848) 3,041
Change in assets and
liabilities:
Decrease (increase) in
accounts receivable......... 27,053 (24,431) (22,553) (16,304)
Increase in inventories...... (78,677) (59,206) (14,053) (54,417)
Decrease in prepaid
advertising................. 8,675 (45,158) --
Increase in accounts
payable..................... 58,769 22,614 90,501 77,136
Increase (decrease) in
current portion of long term
debt........................ 80,032 (25,000) (35,016) (35,579)
Increase in other
liabilities................. 1,311 8 5,198 114
--------- -------- -------- --------
Net cash provided by (used
in) operating activities.. 88,031 (32,313) 13,620 76,704
--------- -------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of office furniture
and equipment................. (10,362) -- -- (4,187)
Increase in improvements to
building...................... (6,690) (2,828)
Proceeds from sale of assets... 59,938 255
Purchase of antiques held for
investment.................... (7,740) (20,000) (10,619)
--------- -------- -------- --------
Net cash provided from
(used in) investing
activities................ 41,836 (26,435) (13,447) (4,187)
--------- -------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
(Repayment) proceeds of long-
term debt..................... (145,422) 44,020 (173) (4,921)
Proceeds from issuance of
preferred stock............... 6,300 20,000
--------- -------- -------- --------
Net increase in cash from
financing activities...... (139,122) 64,020 (173) (4,921)
--------- -------- -------- --------
Net (Decrease) Increase in Cash.. (9,255) 5,272 -- 67,596
Cash, beginning of the year...... 9,255 3,983 -- 9,255
--------- -------- -------- --------
Cash, end of the year............ $ 0 $ 9,255 $ 0 $ 76,851
========= ======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
CASH PAID DURING THE PERIOD FOR:
Interest....................... $ 22,817 $ 16,282 $ 0 $ 0
========= ======== ======== ========
Income taxes................... $ 0 $ 0 $ 0 $ 0
========= ======== ======== ========
</TABLE>
The accompanying notes are integral part of these financial statements.
F-37
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS--Lilliput Motor Company, Ltd. (the Company) is engaged in mail
order sales of collectibles and toys. The Company markets and sells its
products throughout the United States and has several customers in other
countries. The warehouse and office facility are located in Yerington, Nevada.
INVENTORIES--Inventories consist primarily of collectibles and toys held for
resale. Cost of sales is computed at the lower of cost (first-in, first-out)
or market.
DEPRECIATION--The Company follows the policy of charging to costs and
expenses annual amounts of depreciation which allocate the cost of the office
furniture and equipment, tooling equipment and buildings over their estimated
useful lives. The Company employs the straight-line method for office
furniture and equipment and buildings and the units-of-production method for
tooling equipment for determining the annual charge for depreciation. The
range of estimated useful lives used are:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Office furniture and equipment......................................... 5
Buildings and improvements............................................. 30
</TABLE>
Depreciation expense was $12,906 and $24,334 for the years ended August 31,
1996 and 1995, respectively.
CATALOG COSTS--Most catalog costs are deemed to have a short-term benefit
associated only with the production and mailing of a particular catalog. These
short-term catalog costs are recorded to prepaid catalog costs as incurred and
are charged off to operating expenses as the stream of revenue attributable to
the catalog is realized.
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 in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. COMMITMENTS
On January 25, 1995, the Company entered into a three year non-cancellable
lease on an office copy machine. The lease has been accounted for as an
operating lease. For the years ending August 31, 1996 and 1995, monthly rental
payments were $1,252 and $835, respectively, and are included in selling,
general and administrative expenses on the statements of operations.
Future minimum lease payments under this lease are as follows:
<TABLE>
<S> <C>
1997.................................................................. $1,252
1998.................................................................. 417
Thereafter............................................................ None
</TABLE>
F-38
<PAGE>
LILLIPUT MOTOR COMPANY, LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
AUGUST 31, 1996 AND 1995
3. INCOME TAXES
Primarily due to timing differences in recognition of depreciation for tax
and financial statement presentation, the Company has taxable income (loss)
which differs from that for financial statement purposes.
The amounts of net operating losses available for carryover at August 31,
1996 and their dates of expiration are as follows:
<TABLE>
<CAPTION>
AMOUNT EXPIRATION DATE
------- ---------------
<S> <C> <C>
$ 838 August 31, 2007
23,863 August 31, 2011
-------
Total................................................ $24,701
=======
</TABLE>
4. RELATED PARTY TRANSACTIONS
During the years ending August 31, 1996 and 1995 the Company borrowed
amounts from common stockholders totaling $11,938 and $14,453, respectively.
These notes were non-interest bearing. The funds were for working capital.
On May 8, 1995, a preferred stockholder loaned $20,000 to the Company. This
loan bears interest at 10%. The funds were used for working capital. Interest
paid on this note was $2,000 and $333 for the years ending August 31, 1996 and
1995, respectively.
During the year ending August 31, 1995, the Company borrowed $25,000 at 10%
interest per year from a trust which was represented by an attorney who
performed legal services for the Company. Interest paid on this note was
$3,072 and $2,283 for the years ending August 31, 1996 and 1995, respectively.
On August 6, 1996 property located at 1247 Missouri Lane, Yerrington, Nevada
was sold to a common stockholder. The outstanding mortgage balance was assumed
by the stockholder. This property was purchased by the Company on April 27,
1993. The sale resulted in a gain to the Company in the amount of $1,127.
5. SUBSEQUENT EVENT
On December 24, 1996 all of the assets except the building located at 321
South Main Street, Yerington, Nevada were acquired by Genesis Direct, Inc.
(Genesis). All liabilities existing on December 24, 1996 except the mortgage
obligation on the building located at 321 South Main Street, Yerington, Nevada
were assumed by Genesis. The operating lease commitment referred to in Note 2
was also assumed by Genesis.
F-39
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To First Step Designs Ltd:
We have audited the accompanying statements of operations and cash flows of
First Step Designs Ltd. (a Massachusetts corporation) for the years ended
December 31, 1995 and 1996 and the period ended February 6, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations and
cash flows of First Step Designs Ltd. for the years ended December 31, 1995
and 1996 and February 6, 1997 in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
March 18, 1997
F-40
<PAGE>
FIRST STEP DESIGNS LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1997 TO
------------------------ FEBRUARY 6,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales................................ $10,821,510 $ 9,779,931 $ 453,534
Costs and Expenses:
Cost of sales.......................... 5,966,864 5,321,397 262,690
Selling and marketing.................. 3,572,276 3,311,257 202,397
General and administrative............. 2,136,544 2,496,440 261,412
----------- ----------- ---------
Loss from operations................. (854,174) (1,349,163) (272,965)
Interest Expense, Net.................... (197,532) (269,304) (29,873)
----------- ----------- ---------
Net loss............................. $(1,051,706) $(1,618,467) $(302,838)
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these finacial statements.
F-41
<PAGE>
FIRST STEP DESIGNS LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
YEARS ENDED JANUARY 1,
DECEMBER 31, 1997 TO
------------------------ FEBRUARY 6,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net loss................................ $(1,051,706) $(1,618,467) $(302,838)
Adjustments to reconcile net loss to net
cash used in operating activities--
Amortization of deferred compensation.. 17,014 6,070 605
Depreciation and amortization.......... 32,810 73,583 9,570
Changes in current assets and
liabilities--
Accounts receivable................... (99,820) 42,469 3,311
Inventories........................... (130,633) (48,006) (70,383)
Prepaid expenses...................... (187,909) (74,253) (63,043)
Accounts payable and accrued
expenses............................. 69,852 517,000 161,341
----------- ----------- ---------
Net cash used in operating
activities.......................... (1,350,392) (1,101,604) (261,437)
----------- ----------- ---------
Cash Flows From Investing Activities:
Purchases of property and equipment...... (30,292) (272,176) --
----------- ----------- ---------
Net cash used in investing
activities.......................... (30,292) (272,176) --
----------- ----------- ---------
Cash Flows From Financing Activities:
Obligations under a capital lease...... -- 13,130 (450)
Proceeds from notes payable to
stockholder............................. 1,629,548 696,793 272,684
Proceeds from notes payable to a bank.... 350,000 650,000 --
Payments on convertible notes payable.... (33,333) -- --
Payments on notes payable to
stockholder............................. (200,000) (500,000) --
Proceeds from the exercise of stock
options................................. 2,550 -- --
----------- ----------- ---------
Net cash provided by financing
activities.......................... 1,748,765 859,923 272,234
----------- ----------- ---------
Net Increase (Decrease) in Cash.......... 368,081 (513,857) 10,797
Cash, Beginning of Period................ 209,867 577,948 64,091
----------- ----------- ---------
Cash, End of Period...................... $ 577,948 $ 64,091 $ 74,888
----------- ----------- ---------
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the year for interest... $ 7,937 $ 72,511 $ 7,190
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION
First Step Designs Ltd. (the Company) has been a direct marketer of products
for infants, toddlers and young children since 1985 and operates principally
in the United States.
On February 6, 1997, the Company entered into a purchase agreement with
Genesis Direct Ten, LLC (the Buyer), whereby substantially all of the assets
and certain liabilities of the Company, as defined, were acquired for a
purchase price of approximately $2,000,000 of which $350,000 is payable one
year from the closing date. Under the agreement, the purchase price is subject
to adjustment based upon the balance sheet at closing. These amounts were used
to partially satisfy the Company's debt obligations.
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements reflect the application of certain
accounting policies as described in this note and other notes to financial
statements.
(a) Mailing List
Through prospective mailing, the Company has historically achieved an order
response rate of 1% to 4%. Customers added to the Company's house file are
expected to provide a recurring revenue base. The house file is also rented to
third parties as an additional source of revenue. Net rental fees derived from
house file rentals totaled approximately $85,000 and $149,000 for the years
ended December 31, 1995 and 1996, respectively, and totaled approximately
$16,000 for the period ending February 6, 1997.
(b) Revenue Recognition
Revenue from product sales is recognized at the time of shipment. Revenue
from mailing list rentals are recognized at the time of shipment of the names
rented.
(c) Inventories
The Company values inventories at the lower of cost (first-in, first-out) or
market. Inventories are comprised of purchased finished goods.
(d) Prepaid Marketing Costs
Costs related to the production and distribution of marketing materials to
potential customers are capitalized. These costs are charged to operations
over the estimated period in which revenues are derived from the mailings,
which is generally four months.
(e) Depreciation and Amortization
The Company provides for depreciation and amortization, computed on both the
straight-line and accelerated methods, by charges to operations in amounts
that allocate the cost of fixed assets over their estimated useful lives:
furniture and fixtures, 7 years or MACRS; equipment, 5 years; equipment under
capital lease and leasehold improvements, 5 years or the life of the lease, if
shorter.
(f) Income Taxes
The Company has elected to be treated as a subchapter S corporation for
federal and state income tax purposes. Under this election, the taxable income
and losses of the Company are reported on the individual tax returns of its
stockholders.
F-43
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Use of Estimates
The preparation of the statements of operations and cash flows in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(3) RELATED PARTY TRANSACTIONS
For the years ended December 31, 1995 and 1996, and for the period ending
February 7, 1997, the Company recorded $180,000, $197,000 and $23,000 of
interest expense, respectively, relating to notes payable to a stockholder of
the Company.
(4) COMMITMENTS
The Company conducts its operations in leased facilities and leases certain
equipment under agreements expiring through June 2008. The future minimum
operating lease payments under these agreements as of December 31, 1996 were
approximately as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1997............................ $ 105,000
1998............................ 75,000
1999............................ 78,000
2000............................ 80,000
2001............................ 85,000
Thereafter...................... 585,000
----------
$1,008,000
==========
</TABLE>
Rental expense charged to operations for the years ended December 31, 1995 and
1996 and the period ended February 6, 1997 was approximately $77,000, $97,000
and $9,000, respectively.
(5) COMMON STOCK
(a) Stock Option Plan
On August 5, 1993, the Company adopted the First Step Designs Ltd. 1993
Stock Option Plan (the Plan). The Plan provides for the granting of incentive
and nonqualified stock options. The number of options granted and the vesting
of the options are at the discretion of the Board of Directors. The Company
has reserved 150,000 shares of common stock pursuant to the Plan.
<TABLE>
<CAPTION>
NUMBER
OF SHARES PRICE
--------- ---------
<S> <C> <C>
Balance, December 31, 1994 27,216 $.01-$.29
Exercised............................................. (15,309) .01- .29
Terminated............................................ (11,907) .01- .29
------- ---------
Balance, December 31, 1995 -- $ --
Granted............................................... 400 .45
Terminated............................................ (100) .45
------- ---------
Balance, December 31, 1996.............................. 300 $ .45
======= =========
Exercisable, December 31, 1996.......................... 300 $ .45
======= =========
Balance, February 6, 1997............................... 300 $ .45
======= =========
</TABLE>
F-44
<PAGE>
FIRST STEP DESIGNS LTD.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The value of these options under the provision of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
is insignificant. These options terminated with the sale of the business.
(b) Stock Grants
On November 30, 1995, 61,919 shares of stock were issued to an executive of
the Company. Of these shares, 35,385 are no longer subject to forfeiture,
while the balance vests ratably through August 31, 1999. The value of this
restricted stock award, as calculated under SFAS 123, is equal to the
compensation calculated under APB No. 25.
In connection with the sale of the Company's assets, as discussed in Note 1,
this compensation arrangement was terminated. Pursuant to the terms of this
compensation agreement, the Company repurchased 15,480 shares of stock, from
the executive for $.01 per share.
(6) FIRST STEP DESIGNS LTD. SAVINGS AND RETIREMENT PLAN
During 1994, the Company established the First Step Designs Ltd. Savings and
Retirement Plan (the Savings and Retirement Plan). In January 1997, this plan
was terminated. Previously, all employees were eligible to participate in the
Savings and Retirement Plan and were able to contribute specified percentages
of their salaries, a portion of which could be matched by the Company. In
addition, the Company was able to make contributions to the Savings and
Retirement Plan at the discretion of the Board of Directors. There were no
discretionary contributions made in 1995, 1996 or the one month period ended
February 1, 1997.
F-45
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE THURSLEY GROUP, INC.
New York, New York
We have audited the accompanying statements of operations and cash flows of
THE THURSLEY GROUP, INC. for the years ended December 31, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits of the statements of operations and
cash flows provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations of
THE THURSLEY GROUP, INC. for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Mendlowitz Weitsen, LLP
East Brunswick, New Jersey
February 26, 1997
F-46
<PAGE>
THE THURSLEY GROUP, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Sales.................................................... $ 603,521 $ 347,601
Cost of Goods Sold....................................... 271,524 155,250
--------- ---------
Gross Profit............................................. 331,997 192,351
Operating Expenses
Selling expenses....................................... 660,169 638,323
General and administrative expenses.................... 123,734 138,363
--------- ---------
Loss From Operations..................................... (451,906) (584,335)
Other Income (Expense), net.............................. (85,576) (19,005)
--------- ---------
Loss Before Provision for Income Taxes................... (537,482) (603,340)
Provision For Income Taxes............................... 1,306 3,769
--------- ---------
Net Loss................................................. $(538,788) $(607,109)
========= =========
</TABLE>
See notes to financial statements
F-47
<PAGE>
THE THURSLEY GROUP, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss................................................ $(538,788) $(607,109)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 4,782 6,929
(Increase) decrease in:
Accounts receivable................................... 5,895 (8,547)
Inventories........................................... (16,198) (25,500)
Prepaid expenses...................................... (47,680) 23,475
Security deposits..................................... 653 --
Increase (decrease) in:
Accounts payable and accrued expenses................. 126,263 76,152
Taxes payable......................................... 5,079 7,089
Payroll taxes withheld................................ (2,877) (9,855)
--------- ---------
75,917 69,743
--------- ---------
Net cash (used) by operating activities.............. (462,871) (537,366)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of trade note................... 26,101 150,000
Proceeds from issuance of floating rate convertible de-
bentures.............................................. 397,723 150,000
Proceeds from issuance of common stock................. 499 25,971
--------- ---------
Net cash provided by financing activities............ 424,323 325,971
--------- ---------
Net (Decrease) in Cash................................... (38,548) (211,395)
Cash, beginning.......................................... 61,016 272,411
--------- ---------
Cash, end................................................ $ 22,468 $ 61,016
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense....................................... $ 5,658 $ --
========= =========
Income Tax............................................. $ 1,006 $ 2,869
========= =========
</TABLE>
See notes to financial statements
F-48
<PAGE>
THE THURSLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
THE THURSLEY GROUP, INC. (the "Company") incorporated in Delaware in 1993
and maintains offices in New York City. The Company created The Voyager's
Collection--a catalog of merchandise for business travelers. The catalog was
launched in December 1994 and is distributed in the rooms of many upscale
hotels throughout the United States.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term debt securities purchased with a maturity of three months or less
to be cash equivalents.
Accounts Receivable
The Company uses the direct write-off method of recognizing uncollectible
accounts receivable. Under this method, accounts are charged to operations
when they are deemed by management to be uncollectible. The effects of using
the direct write-off method approximates those of the allowance method.
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided on the
straight line basis over the estimated useful lives of the assets. Additions
and betterments are capitalized, whereas costs of maintenance and repairs are
charged to expense as incurred. Depreciation expense for December 31, 1996 and
1995 was $4,782 and $6,928, respectively.
Inventory
Inventories are stated at the lower of cost or market using the first in,
first out cost method and consists completely of finished goods.
Income Tax
The Company has adopted FASB Statement No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax
basis of assets and liabilities that will result in taxable or deductible
amounts in the future based on enacted tax laws and rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. Income tax expense is the tax
payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities. The only provision made was for
the minimum statutory taxes. No credit has been taken for tax loss
carryforwards that aggregate $1,613,852 and will expire in years 2008 to 2011.
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 at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
F-49
<PAGE>
THE THURSLEY GROUP, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996
NOTE 2--INTEREST
A promissory note is payable in the principal amount of $176,101 with 0%
interest to a supplier. The Company defaulted on the terms of the note at
which time all outstanding balances immediately became due. An accrual for
interest has been estimated at 15% per year for one and a half years. Interest
charged to expense was $26,415 and $13,208 as of December 31, 1996 and 1995,
respectively.
Additional accrued interest on convertible debenture as of December 31, 1996
was $29,778.
NOTE 3--COMMITMENTS AND CONTINGENCIES
The Company entered into two consulting agreements expiring on May 31, 1998
with payment to be made in stock options. The maximum obligation under the
contracts is $1,600 per month before conversion into options. The number of
shares per option is equal to 125% of cash amount divided by the per share net
value of common stock on the issue date. Net value is defined as the per share
price paid by the most recent arm's length purchaser of common stock from the
Company, less the exercise price of $0.01 per share.
The Company rented office space under a noncancellable lease until January
31, 1995. Commencing February 1, 1995 the Company began renting this space on
a month to month basis. The annual rent as of December 31, 1996 and 1995 was
$23,087 and $33,509, respectively.
NOTE 4--PENSION PLANS
The Company has a defined contribution SEP pension plan that covers all
qualified employees effective as of January 1996. There were no company
contributions made for 1996.
NOTE 5--SUBSEQUENT EVENTS
On February 18, 1997, the Company entered into an asset purchase agreement
which calls for the sale of substantially all the assets of the Company,
including, without limitation, all inventory, catalogs, mailing lists,
contracts with suppliers and hotels, business goodwill, the names "The
Thursley Group" and "The Voyager's Collection" and all other assets, tangible
and intangible. The closing is expected to take place in March 1997.
F-50
<PAGE>
INDEPENDENT AUDITOR'S REPORT
DUCLOS DIRECT MARKETING, INC.
New York, NY
We have audited the accompanying statements of operations and cash flows of
DUCLOS DIRECT MARKETING, INC. for the years ended January 31, 1997 and 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statements of operations and
cash flows are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
statements of operations and cash flows. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements of operations
and cash flows. We believe that our audits of the statements of operations and
cash flows provide a reasonable basis for our opinion.
In our opinion, the statements of operations and cash flows referred to
above present fairly, in all material respects, the results of operations of
DUCLOS DIRECT MARKETING, INC. for the years ended January 31, 1997 and 1996,
in conformity with generally accepted accounting principles.
/s/ Mendlowitz Weitsen, LLP
East Brunswick, New Jersey
February 21, 1997
F-51
<PAGE>
DUCLOS DIRECT MARKETING, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C>
Sales
Sales.............................................. $6,785,361 $6,391,919
Less returns and allowances........................ 498,170 575,759
---------- ----------
Sales, net......................................... 6,287,191 5,816,160
Cost of sales........................................ 2,697,079 2,680,014
---------- ----------
Gross profit......................................... 3,590,112 3,136,146
---------- ----------
Operating expenses
Selling expenses................................... 3,481,435 2,690,324
General and administrative expenses................ 479,681 365,071
---------- ----------
Total operating expenses......................... 3,961,116 3,055,395
---------- ----------
Operating income (loss).............................. (371,004) 80,751
---------- ----------
Other income (expense)
Miscellaneous income............................... 35,493 --
Interest expense................................... (14,039) (7,746)
---------- ----------
Total other income (expense)..................... 21,454 (7,746)
---------- ----------
Income before provision (benefit) for income taxes... (349,550) 73,005
Provision (benefit) for income taxes................. 30,200 (1,426)
---------- ----------
Net income (loss).................................... $ (379,750) $ 74,431
========== ==========
</TABLE>
See Notes to Financial Statements.
F-52
<PAGE>
DUCLOS DIRECT MARKETING, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED JANUARY 31, 1997 AND 1996
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31,
1997 1996
----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $(379,750) $ 74,431
Adjustment to reconcile net income to net cash
used by operating activities:
Depreciation................................ 14,095 12,764
Bad debts................................... 6,900 11,100
Deferred taxes (benefit).................... 30,200 (7,100)
Changes in assets and liabilities:
Decrease (increase) in:
Accounts receivable....................... (29,808) (19,492)
Inventory................................. (187,530) 33,180
Income taxes refundable................... (17,755) (27,045)
Prepaid expenses.......................... (44,789) (116,262)
Security deposit.......................... -- (100)
(Decrease) increase in:
Accounts payable and accrued expenses..... 254,715 42,928
Refunds payable........................... 69,468 11,148
Unearned revenue.......................... 9,039 --
Taxes payable............................. 8,302 (832)
--------- ---------
Net cash provided by (used for)
operating activities................... (266,913) 14,720
--------- ---------
Cash flows used for investing activities
Purchase of equipment......................... (5,454) (11,590)
--------- ---------
Cash flows provided by financing activities
Proceeds from notes........................... 268,500 --
Proceeds of loan from officer................. 2,700 2,550
Proceeds from sale of business................ 100,000 --
Payments on notes payable..................... (14,978) (3,491)
Payments on capital lease obligations......... (8,700) (1,140)
--------- ---------
Net cash provided by (used for)
financing activities................... 347,522 (2,081)
--------- ---------
Net increase in cash............................ 75,155 1,049
Cash, beginning................................. 10,732 9,683
--------- ---------
Cash, end....................................... $ 85,887 $ 10,732
========= =========
Supplementary disclosures of cash flow
information:
Cash paid during the year for:
Interest.................................... $ 11,339 $ 5,196
========= =========
Income taxes................................ $ 17,756 $ 32,719
========= =========
Non cash transactions
During 1996, equipment was leased for $19,515. This lease is
recorded as a capital lease.
</TABLE>
See Notes to Financial Statements.
F-53
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
JANUARY 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DUCLOS DIRECT MARKETING, INC. ("the Company"), organized in New York in
1982, is a manufacturer, marketer and distributor of golf equipment and
related clothing and supplies. Its "Competitive Edge" catalog was first mailed
in 1983.
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 contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenues from sales are generally recognized at the time the order is
shipped to the customer. The Company allows for merchandise to be returned
within thirty days of receipt by the customer. The Company has provided for an
estimate of returned merchandise based on prior experience.
Accounts receivable
Provision for losses on trade accounts receivable is made in amounts
required to maintain an adequate allowance to cover anticipated bad debts.
Accounts receivable are charged against the allowance when it is determined by
the Company that payment will not be received. Any subsequent receipts are
credited to the allowance. At year end, the allowance is adjusted by
management based on a review of the accounts receivable. The allowance for
uncollectible accounts was $46,500 at January 31, 1997 and $39,600 at January
31, 1996.
Inventories
Inventories are stated at the lower of cost (first in, first out) or market.
Advertising expenses
The Company's policy for direct response advertising costs consisting of,
production, printing and mailing of its catalogs, is for it to be capitalized
and amortized over a four month period based on a formula which considers the
life of a catalog in terms of orders received over the time between mailings.
The unamortized costs are included in prepaid expenses.
Equipment and furniture
Equipment and furniture is stated at cost. Depreciation is provided
principally on the double declining balance methods over the estimated useful
lives of the assets, which range from 5 to 7 years. Additions and betterments
are capitalized whereas costs of maintenance, repairs and minor replacements
are charged to operations as incurred.
Income taxes
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of fixed assets,
F-54
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1997
allowances for doubtful accounts and returned merchandise for financial and
income tax reporting. The deferred tax liability represents the future tax
return consequences of those timing differences, which will either be taxable
or deductible when the assets and liabilities are recovered or settled.
Deferred taxes are also recognized for operating losses that are available to
offset future taxable income and tax credits that are available to offset
future federal income taxes.
2. RELATED PARTY TRANSACTIONS
The amount due to officer is an open obligation, bearing interest at 5% per
annum. Accrued interest of $2,700 for 1997 and $2,550 for 1996 is included in
interest expense.
The Company created and placed advertising for a company owned by a relative
of the Company's sole stockholder. The revenues earned of $30,645 for 1997 and
$-0- for 1996 are included in miscellaneous income. The accounts receivable
included $15,355 from this entity.
3. INCOME TAXES
The provision for income taxes differs from the amount of income tax
determined by applying the federal and state statutory rates to pre-tax
income. The differences are primarily due to the provision for doubtful
accounts and the provision for sales returns and allowances. Taxes have been
provided for state and local purposes as required by those jurisdictions.
Summary of the provisions are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Current tax
Federal................................................... $ -- $ 268
State..................................................... -- 2,981
City...................................................... -- 2,425
------- -------
-- 5,674
------- -------
Deferred tax (benefit)
Federal................................................... 15,700 (3,700)
State..................................................... 5,200 (1,200)
City...................................................... 9,300 (2,200)
------- -------
30,200 (7,100)
------- -------
Provision (benefit) for income taxes........................ $30,200 $(1,426)
======= =======
</TABLE>
For tax purposes, the Company has sustained a net operating loss of
approximately $300,000 which can be carried forward to offset future taxable
income. This net operating loss, if unused, will expire in the year 2012.
4. COMMITMENTS
The Company leases its office and warehouse space. The ten year lease
expires December 31, 2002. The annual basic rent is $121,275 and will increase
each January 1 by 5% over the previous year. In addition to the basic rent,
the Company is charged a portion of the real estate taxes.
F-55
<PAGE>
DUCLOS DIRECT MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
JANUARY 31, 1997
Minimum annual rent for the next six years, exclusive of real estate taxes,
is as follows:
<TABLE>
<S> <C>
January 31,
1998............................................................... $134,263
1999............................................................... 140,976
2000............................................................... 148,025
2001............................................................... 155,426
2002............................................................... 163,197
Thereafter.......................................................... 156,426
</TABLE>
Rent expense, including the additional charge for real estate taxes and rent
taxes, was $141,213 for 1997 and $123,722 for 1996.
The Company has an obligation to purchase merchandise from a supplier over
the next several months. The total of the purchase orders is $200,000.
5. SALE OF BUSINESS
On December 20, 1996 the Company entered into an agreement for the sale of
substantially all of its assets, which will be consummated in March 1997.
F-56
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Select Service & Supply Co., Inc.
We have audited the accompanying balance sheet of Select Service & Supply
Co., Inc. as of December 31, 1997, and the related statements of income and
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Select Service & Supply
Co., Inc. as of December 31, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Hackensack, New Jersey
January 30, 1998
F-57
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................. $ 397,012
Accounts receivable, less allowance of $131,700.................. 3,657,754
Inventories...................................................... 3,844,340
Deferred advertising costs and other current assets.............. 1,962,695
-----------
Total current assets........................................... 9,861,801
Property, equipment and leasehold improvements, net................ 1,333,243
Other assets....................................................... 115,211
-----------
Total assets................................................... $11,310,255
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank............................................ $ 2,866,000
Accounts payable................................................. 1,410,261
Accrued expenses................................................. 970,370
Current portion of long-term debt................................ 26,074
-----------
Total current liabilities...................................... 5,272,705
Long-term debt, less current portion............................... 84,226
Stockholders' equity:
Class A common stock, $.10 par value; authorized 100,000 shares,
issued and
outstanding 1,000 shares........................................ 100
Class B common stock, non-voting, $.10 par value; authorized
900,000 shares,
issued and outstanding 99,000 shares............................ 9,900
Additional paid-in capital....................................... 32,889
Retained earnings................................................ 5,910,435
-----------
Total stockholders' equity..................................... 5,953,324
-----------
Total liabilities and stockholders' equity..................... $11,310,255
===========
</TABLE>
See accompanying notes.
F-58
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Net sales.......................................................... $29,257,897
Cost of goods sold................................................. 15,314,982
-----------
Gross profit....................................................... 13,942,915
Selling, general and administrative expenses....................... 11,654,280
-----------
Income from operations............................................. 2,288,635
Interest expense................................................... (181,289)
Other income....................................................... 232,199
-----------
Net income......................................................... 2,339,545
Retained earnings at beginning of year............................. 5,612,680
Dividends.......................................................... (2,041,790)
-----------
Retained earnings at end of year................................... $ 5,910,435
===========
</TABLE>
See accompanying notes.
F-59
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash flows from operating activities
Net income....................................................... $2,339,545
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.................................. 356,644
Gain on sale of property and equipment......................... (10,909)
Changes in operating assets and liabilities:
Accounts receivable.......................................... 1,195
Inventories.................................................. (110,306)
Deferred advertising costs and other current assets.......... (349,173)
Accounts payable and accrued expenses........................ 421,308
Other liabilities............................................ (97,415)
----------
Net cash provided by operating activities.................. 2,550,889
Cash flows from investing activities
Purchase of property and equipment............................... (691,721)
Proceeds from disposition of property and equipment.............. 13,650
----------
Net cash used in investing activities...................... (678,071)
Cash flows from financing activities
Increase in revolving line of credit............................. 554,000
Principal payment on long-term debt.............................. (24,471)
Payment of notes to related parties.............................. (75,000)
Payment of dividends............................................. (2,041,790)
----------
Net cash used in financing activities...................... (1,587,261)
----------
Net increase in cash............................................... 285,557
Cash at beginning of year.......................................... 111,455
----------
Cash at end of year................................................ $ 397,012
==========
Supplemental disclosures of cash flow information
Interest paid.................................................... $ 179,977
==========
</TABLE>
See accompanying notes.
F-60
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION
The Company is engaged in catalog and direct sales primarily to education
systems, camps and church organizations, principally in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. Accounts receivable represent sales to
government agencies and other institutional customers throughout the United
States. The Company periodically performs credit evaluations of its customers
but generally does not require collateral.
Inventory
Inventories are valued at the lower of cost or market with cost determined
by the first-in, first-out method.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation of assets, including leasehold improvements, is computed using
the straight-line method over the lesser of the estimated useful lives of the
assets or the lease term. Leasehold improvements are amortized on a straight-
line basis over the shorter of the life of the improvement or the remainder of
the lease term. Amortization of leasehold improvements is included in
depreciation expense.
Fair Values of Financial Instruments
The fair value of financial instruments does not materially differ from
their carrying value.
Revenue Recognition
Sales are recorded at the time of shipment and a provision of anticipated
merchandise returns, net of exchanges, is recorded based upon historical
experience.
Direct Response Advertising and Promotion Costs
Recognition of advertising costs is in accordance with the provisions of the
AICPA Statement of Position 93-7, Reporting of Advertising Costs. Direct
response advertising costs, consisting primarily of catalog design, printing
and postage expenditures, are amortized over the period during which
associated net revenues are expected, generally approximating nine months or
less. Direct response advertising expenses were $2,882,924 for the year ended
December 31, 1997. As of December 31, 1997, approximately $1,816,000 of direct
response advertising costs have been deferred.
Income Taxes
The Company and its stockholders have elected to be treated as an S
Corporation under the Internal Revenue Code for federal and state purposes.
Therefore, no provision for income taxes has been made as the Company's income
will be included in the personal income tax returns of the stockholders.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-61
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property, equipment and leasehold improvements consist of the following:
<TABLE>
<S> <C>
Equipment, furniture and fixtures................................ $2,640,360
Leasehold improvements........................................... 105,659
----------
2,746,019
Less accumulated depreciation.................................... 1,412,776
----------
$1,333,243
==========
</TABLE>
Depreciation expense, including amortization of leasehold improvements was
approximately $351,246 for the year ended December 31, 1997.
4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<S> <C>
Employee compensation.............................................. $109,478
Customer prepayments............................................... 455,633
Other.............................................................. 405,259
--------
$970,370
========
</TABLE>
5. NOTES PAYABLE AND LONG-TERM DEBT
The Company maintains a revolving line of credit with a bank which provides
for borrowings of up to $5.0 million (including $1.0 million available for
letters of credit) based on eligible collateral. The note is payable on
demand, bears interest payable monthly at the lower of LIBOR plus 1.25% or the
banks prime rate minus .25%, and is secured by certain trade accounts
receivable, inventory, equipment and life insurance. The rate in effect at
December 31, 1997 was 7.2%.
Long-term debt consists of secured notes payable to commercial lenders,
which bear interest at various rates (weighted-average of approximately 14.4%
at December 31, 1997) and are payable in varying monthly installments of
principal and interest through April 2004. The loans are secured by equipment
with a carrying value of $102,000 at December 31, 1997.
As of December 31, 1997, maturities of long-term debt are as follows:
<TABLE>
<S> <C>
1998................................................................. $26,074
1999................................................................. 20,896
2000................................................................. 20,430
2002................................................................. 24,047
2003................................................................. 16,463
</TABLE>
6. STOCKHOLDERS' EQUITY
During 1997, the Company's Board of Directors and shareholders approved a
Restatement and Amendment by the Entirety of the Articles of Incorporation
(the "Plan of Reorganization") which authorized two new classes of common
stock which replaced the then existing single class of common stock. As a
result of the Plan of Reorganization, each of the previously existing 900
shares of common stock was converted into 1 and one-ninth
F-62
<PAGE>
SELECT SERVICE & SUPPLY CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997
shares of the newly authorized Class A common stock and 110 shares of the
newly authorized Class B Non-Voting Common Stock. As a result of these
conversions, $1,000 was reclassified from additional paid-in capital to Class
B Non-Voting Common Stock.
7. RELATED PARTY TRANSACTIONS AND COMMITMENTS
At December 31, 1996 the Company had outstanding notes payable to related
parties which represented amounts due to individuals related to the Company's
stockholders. The notes carried interest at 12%, and were payable on demand.
These notes were fully repaid in 1997. Interest expense relating to these
notes totaled approximately $7,550 in 1997.
The Company leases office and warehouse facilities under a 15 year non-
cancelable operating lease with a related party which expires in 2005. In
addition to the fixed rental, the lease requires the Company to pay additional
rents based on certain operating costs of the facility including property
taxes. Future minimum rental commitments under this agreement are as follows:
<TABLE>
<S> <C>
1998................................................................ $315,600
1999................................................................ 315,600
2000................................................................ 315,600
2001................................................................ 315,600
2002................................................................ 315,600
Thereafter.......................................................... 798,000
</TABLE>
Rent expense under this agreement was approximately $316,000 in 1997.
8. EMPLOYEE BENEFIT PLAN
The Company has established a defined contribution employee savings plan
pursuant to Internal Revenue Code Section 401(k) which allows all employees
meeting certain eligibility requirements to contribute a portion of their
annual compensation. Company contributions are at the discretion of the
Company's Board of Directors. The Company accrued a contribution of $45,200
for the year ended December 31, 1997.
9. SUBSEQUENT EVENT
On January 8, 1998, Genesis Direct, Inc. acquired certain of the Company's
assets and assumed certain of the Company's liabilities. These financial
statements represent the historical carrying values of the assets and
liabilities, and no adjustments have been recorded related to this
transaction.
F-63
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THIS OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AU-
THORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET
FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HERE-
OF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 14
Dilution................................................................. 15
Capitalization........................................................... 16
Pro Forma Condensed Combined Financial Statements........................ 17
Selected Consolidated Financial Data..................................... 25
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 32
Management............................................................... 45
Certain Relationships and Related Transactions........................... 53
Principal and Selling Stockholders....................................... 54
Description of Capital Stock............................................. 56
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 63
Available Information.................................................... 64
Special Note Regarding Forward-Looking Statements........................ 64
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,125,000 SHARES
(LOGO TO COME)
GENESIS DIRECT, INC.
COMMON STOCK
------------
PROSPECTUS
------------
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
INVEMED ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the sale
of Common Stock being registered (all amounts are estimated except the SEC
registration fee, the NASD filing fee and the NASDAQ Stock Market listing
fee).
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ----------
<S> <C>
SEC registration fee.......................................... $ 53,100
NASD filing fee............................................... 18,500
NASDAQ Stock Market listing fee............................... 95,000
Printing and engraving expenses............................... 350,000
Legal fees and expenses....................................... 400,000
Accounting fees and expenses.................................. 400,000
Transfer agent fees and expenses.............................. 15,000
Miscellaneous................................................. 168,400
----------
Total..................................................... $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is incorporated under the laws of the State of Delaware. Section
145 of the General Corporation Law of the State of Delaware ("Section 145")
provides that a Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person was an officer, director, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding, provided such person acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the corporation's best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that his conduct was
illegal. A Delaware corporation may indemnify any person who is, or is
threatened to be made, a party to any threatened, pending or completed action
or suit by or in the right of the corporation by reason of the fact that such
person was a director, officer, employee or agent of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may
include expenses (including attorneys' fees) actually and reasonably incurred
by such person in connection with the defense or settlement of such action or
suit, provided such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the corporation's best interests except
that no indemnification is permitted without judicial approval if the officer
or director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
Section 145.
In that regard, the Certificate of Incorporation provides that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or was
a director or officer of such corporation, or is or was serving
II-1
<PAGE>
at the request of such corporation as a director, officer or member of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. Indemnification in
connection with an action or suit by or in the right of such corporation to
procure a judgment in its favor is limited to payment of settlement of such an
action or suit except that no such indemnification may be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable for negligence or misconduct in the performance of his duty to the
indemnifying corporation unless and only to the extent that the Court of
Chancery of Delaware or the court in which such action or suit was brought
shall determine that, despite the adjudication of liability but in
consideration of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the court shall deem
proper.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
All references in this Item 15 to Common Stock reflect a 275-for-1 split
effective immediately prior to the consummation of the offering of the Common
Stock pursuant to this Registration Statement.
Between February 1997 and March 1998, the Company issued options to purchase
an aggregate of 1,598,162 shares of Common Stock to certain of its officers
and employees under its 1997 Long-Term Incentive Plan. Such securities were
sold in transactions that were exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act").
In June and December 1996, and March and April 1997, the Company issued an
aggregate of 8,855,000 shares of Common Stock to investors for an aggregate
consideration of $32.2 million. The transactions were exempt from registration
under Section 4(2) of the Securities Act.
In September and December 1997, the Company issued an aggregate of 94,300
shares of Series A Preferred Stock, which will convert into 8,644,157 shares
of Common Stock upon consummation of this offering, to investors for an
aggregate consideration of $94.3 million. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
In October 1997 and January 1998, the Company issued an aggregate of 116,325
shares of Common Stock, valued at $1,269,000, to certain persons in connection
with the acquisition by the Company of certain assets, stock or licenses, as
the case may be, of such persons. The transactions were exempt from
registration under Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant, as amended to
date.**
3.2 Certificate of Designation of the Registrant.**
3.3 Form of Amended and Restated Certificate of Incorporation of the
Registrant.*
3.4 By-laws of the Registrant.**
3.5 Form of Amended and Restated By-laws of the Registrant.*
4.1 Specimen certificates for shares of the Registrant's Common
Stock.*
5.1 Opinion of Morrison & Foerster LLP.*
10.1 Credit Agreement with CIT Group Business Credit, Inc., as
administrative agent.*
10.2 Lease Agreement relating to property in Memphis, Tennessee, as
amended to date.*
10.3 Sublease Agreement relating to property in Secaucus, New Jersey.*
10.4 Form of Employment Agreement between the Registrant and Warren
Struhl.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
10.5 Form of Employment Agreement between the Registrant and Hunter
Cohen.*
10.6 Form of Employment Agreement between the Registrant and David
Sable.*
10.7 Form of the Registrant's Long-Term Incentive Plan.*
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Morrison & Foerster LLP (contained in Exhibit 5.1).*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of KPMG Peat Marwick LLP.*
23.4 Consent of Boscia Goldenberg & Company.*
23.5 Consent of Arthur Anderson LLP.*
23.6 Consent of Mendlowitz Weitsen, LLP.*
23.7 Consent of Direct Marketing Association.*
23.8 Consent of Marketing Logistics.*
23.9 Consent of Yankee Group.*
24.1 Power of Attorney (included on page II-4 hereof).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* Filed herewith.
** Previously filed.
(B) FINANCIAL STATEMENTS AND SCHEDULE:
(1) Financial Statements:
Financial Statements filed as a part of this Registration Statement are
listed in the Index to Financial Statements on page F-1.
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE NO. DESCRIPTION
------------ -----------
<S> <C>
II Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment of the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-3
<PAGE>
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offerings of such securities at that time
shall be deemed to be the initial bona fide offerings thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SECAUCUS,
STATE OF NEW JERSEY, ON APRIL 17, 1998.
Genesis Direct, Inc.
/s/ Warren Struhl
By: _________________________________
Warren Struhl
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON
THE DATES INDICATED.
SIGNATURE TITLE DATE
--------- ----- ----
Chief Operating
* Officer and Director April 17,
- ------------------------------------- 1998
HUNTER C. COHEN
Chief Marketing
* Officer and Director April 17,
- ------------------------------------- 1998
DAVID M. SABLE
Chief Financial
* Officer (Principal April 17,
- ------------------------------------- Financial and 1998
RONALD R. BENANTO Accounting Officer)
Director
* April 17,
- ------------------------------------- 1998
EDWARD SPIEGEL
Director
* April 17,
- ------------------------------------- 1998
DAVID W. WIEDERECHT
*By: /s/ Warren Struhl Chairman of the Board April 17,
- ------------------------------------- of Directors, 1998
WARREN STRUHL President and Chief
Executive Officer
(Principal Executive
ATTORNEY-IN-FACT PURSUANT TO A POWER Officer)
OF ATTORNEY FILED WITH THE
REGISTRATION STATEMENT.
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Genesis Direct, Inc.
We have audited the consolidated financial statements of Genesis Direct,
Inc., and its predecessor entity, Genesis Direct LLC at December 27, 1997,
March 29, 1997, and March 30, 1996, and the nine-month period ended December
27, 1997, the year ended March 29, 1997, and for the period from June 8, 1995
(date of inception) to March 30, 1996, and have issued our report thereon
dated February 16, 1998 (included elsewhere in this Registration Statement).
Our audits also included the financial statement schedule listed in Item 16(b)
of this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Hackensack, New Jersey
February 16, 1998
S-1
<PAGE>
SCHEDULE II
GENESIS DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ----------------------- ------------- ----------
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS -- DEDUCTIONS -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ---------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED MARCH 30,
1996
Deducted from asset ac-
counts:
Allowance for doubtful
accounts............... $ 0 $ 0
Inventory Valuation Re-
serve.................. 0 0
Deferred tax valuation
allowance.............. 0 0
YEAR ENDED MARCH 29,
1997
Deducted from asset ac-
counts:
Allowance for doubtful
accounts............... 0 254 254
Inventory Valuation Re-
serve.................. 0 1,390 1,390
Deferred tax valuation
allowance.............. 0 5,789(1) 5,789
YEAR ENDED DECEMBER 27,
1997
Deducted from asset ac-
counts:
Allowance for doubtful
accounts............... 254 836 1,090
Inventory Valuation Re-
serve.................. 1,390 3,060 330(2) 4,120
Deferred tax valuation
allowance.............. 5,789 4,196(1) 9,985
</TABLE>
- --------
(1)Includes amounts resulting from business combinations.
(2)Inventory liquidations.
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
----------- ----------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of the Registrant, as
amended to date.**
3.2 Certificate of Designation of the Registrant.**
3.3 Form of Amended and Restated Certificate of
Incorporation of the Registrant.*
3.4 By-laws of the Registrant.**
3.5 Form of Amended and Restated By-laws of the
Registrant.*
4.1 Specimen certificates for shares of the Registrant's
Common Stock.*
5.1 Opinion of Morrison & Foerster LLP.*
10.1 Credit Agreement with CIT Group Business Credit, Inc.,
as administrative agent.*
10.2 Lease Agreement relating to property in Memphis,
Tennessee, as amended to date.*
10.3 Sublease Agreement relating to property in Secaucus,
New Jersey.*
10.4 Form of Employment Agreement between the Registrant and
Warren Struhl.*
10.5 Form of Employment Agreement between the Registrant and
Hunter Cohen.*
10.6 Form of Employment Agreement between the Registrant and
David Sable.*
10.7 Form of the Registrant's Long-Term Incentive Plan.*
21.1 Subsidiaries of the Registrant.**
23.1 Consent of Morrison & Foerster LLP (contained in
Exhibit 5.1).*
23.2 Consent of Ernst & Young LLP.*
23.3 Consent of KPMG Peat Marwick LLP.*
23.4 Consent of Boscia Goldenberg & Company.*
23.5 Consent of Arthur Anderson LLP.*
23.6 Consent of Mendlowitz Weitsen, LLP.*
23.7 Consent of Direct Marketing Association.*
23.8 Consent of Marketing Logistics.*
23.9 Consent of Yankee Group.*
24.1 Power of Attorney (included on page II-4 hereof).**
27.1 Financial Data Schedule.**
</TABLE>
- --------
* Filed herewith.
** Previously filed.
<PAGE>
DRAFT OF
04/16/98
EXHIBIT 1.1
10,125,000 Shares of Common Stock
GENESIS DIRECT, INC.
UNDERWRITING AGREEMENT
----------------------
, 1998
--------- --
Bear, Stearns & Co. Inc.
Goldman, Sachs & Co.
Smith Barney Inc.
Invemed Associates, Inc.
Morgan Keegan & Company, Inc.
as Representatives of the
several Underwriters named
in Schedule I annexed hereto
----------
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
Genesis Direct, a Delaware corporation (the "Company"), and each of
the selling stockholders listed on Schedule II hereto (the "Selling
-----------
Stockholders"), hereby confirm their respective agreements with you as follows:
1. Underwriters. The term "Underwriters", as used herein, refers
collectively to you and the other underwriters named in Schedule I hereto, for
----------
whom you are acting as representatives. Except as may be expressly set forth
below, any reference to you in this Underwriting Agreement shall be solely in
your capacity as representatives of the Underwriters, and the Company and the
Selling Stockholders shall be entitled to act and rely upon any statement,
request, notice, consent, waiver or agreement purportedly on behalf of any
Underwriter made or given by Bear, Stearns & Co. Inc. ("Bear, Stearns").
2. Description of Stock. The Company and the Selling Stockholders
severally propose to sell to the Underwriters an aggregate of 10,125,000 shares
(the "Firm Shares") of Common Stock, par value $.01 per share (the "Common
Stock"), of the Company, upon the terms and subject to the conditions set forth
herein. Of the Firm Shares, 8,577,406 are to be issued and sold by the Company
and 1,547,594 in the aggregate are to be sold severally by the Selling
Stockholders. The Company also proposes to grant to the Underwriters the option
to purchase from the
<PAGE>
Company, for the sole purpose of covering over-allotments, if any, in connection
with the sale of the Firm Shares, an aggregate of up to 1,518,750 additional
shares (the "Additional Shares") of Common Stock upon the terms and subject to
the conditions set forth herein and for the purposes set forth in Section 5(b)
hereof. The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "Shares."
3. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Underwriter that:
(a) The Company meets the requirements for the use of a Registration
Statement on Form S-1 under the Securities Act of 1933 (the "Act"), and has
prepared and filed with the Securities and Exchange Commission (the
"Commission"), pursuant to the Act and the rules and regulations
promulgated by the Commission thereunder (the "Regulations"), a
registration statement on Form S-1 (File No. 333-47455) relating to the
Shares and may have filed one or more amendments thereto, including a
preliminary prospectus relating to the offering of the Shares. The Company
next proposes to file with the Commission a further amendment to the
registration statement, including therein a final prospectus, necessary to
permit the registration statement to become effective or, if no amendment
is required for that purpose, then promptly following the effectiveness of
the registration statement, the Company proposes to file with the
Commission, in accordance with Rules 430A and 424(b)(1) or Rule 424(b)(4)
of the Regulations, a final prospectus with respect to the offering of the
Shares, the final prospectus so filed in either case to include all Rule
430A Information (as hereinafter defined) and to conform, in content and
form, to the last printer's proof thereof furnished to and approved by you
immediately prior to such filing. As used in this Underwriting Agreement,
(i) "Effective Date" means the date that the registration statement
hereinabove referred to, or the most recent post-effective amendment
thereto, if any, is declared effective by the Commission, (ii)
"Registration Statement" means such registration statement as last amended
prior to the time the same was declared effective by the Commission,
including all exhibits and schedules thereto and all Rule 430A Information
deemed to be included therein at the Effective Date pursuant to Rule 430A
of the Regulations, (iii) "Rule 430A Information" means information with
respect to the Shares and the public offering thereof permitted, pursuant
to the provisions of paragraph (a) of Rule 430A of
2
<PAGE>
the Regulations, to be omitted from the form of prospectus included in the
Registration Statement at the time it is declared effective by the
Commission, (iv) "Prospectus" means the form of final prospectus relating
to the Shares first filed with the Commission pursuant to Rule 424(b) of
the Regulations or, if no filing pursuant to Rule 424(b) is required, the
form of final prospectus included in the Registration Statement at the
Effective Date and (v) "Preliminary Prospectus" means any preliminary
prospectus (as described in Rule 430 of the Regulations) with respect to
the Shares that omits Rule 430A Information.
(b) The Registration Statement conforms and on the Effective Date
will conform, and the Prospectus on the date thereof and on the date first
filed with the Commission pursuant to Rule 424(b) of the Regulations (if
required) will conform, in all material respects with the applicable
requirements of the Act and the Regulations. On the Effective Date, the
date the Prospectus is first filed with the Commission pursuant to Rule
424(b) of the Regulations (if required), at all times subsequent thereto to
and including the Closing Date (as defined in Section 5(a)(ii) hereof) and,
if later, the Additional Closing Date (as defined in Section 5(b)(ii)
hereof), when any post-effective amendment to the Registration Statement
becomes effective or any supplement to the Prospectus is filed with the
Commission, and during such longer period as the Prospectus may be
required to be delivered under the Act in connection with sales of Shares
by the Underwriters or a dealer, the Registration Statement and the
Prospectus (as amended or supplemented if the Company shall have filed with
the Commission an amendment or supplement thereto) did not and will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make
the statements made therein (in the case of the Prospectus, in light of the
circumstances under which they were made) not misleading. No order
preventing or suspending the use of any Preliminary Prospectus has been
issued by the Commission, and when any Preliminary Prospectus was first
filed with the Commission (whether filed as part of the Registration
Statement or an amendment thereof or pursuant to Rule 424(a) of the
Regulations) and when any amendment thereof or supplement thereto was
first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto conformed in all material
respects with the applicable requirements of the Act and the Regulations
thereunder and did not contain an untrue statement of a
3
<PAGE>
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading. No
representation and warranty, however, is made in this subsection 3(b) by
the Company with respect to written information contained in or omitted
from the Registration Statement, the Prospectus, any Preliminary
Prospectus, or any amendment or supplement in reliance upon and in
conformity with written information with respect to the Underwriters and
the plan of distribution of the Shares furnished to the Company on behalf
of any Underwriter by Bear, Stearns expressly for use in connection with
the preparation thereof.
(c) Each contract, agreement, instrument, lease, license or other item
required to be described in the Registration Statement or the Prospectus or
filed as an exhibit to the Registration Statement has been so described or
filed, as the case may be.
(d) Ernst & Young LLP, whose separate report appears in the
Prospectus, are independent public accountants with respect to the Company,
as required by and within the meaning of the Act and the Regulations. The
consolidated financial statements and schedules (including the related
notes) of the Company, its subsidiaries and their predecessors (the
"Company Financials") included in the Registration Statement or any
Preliminary Prospectus, or to be included in the Prospectus fairly present
the consolidated financial position, results of operations and cash flows
of the Company, its subsidiaries and their predecessors and the other
information purported to be shown therein at the respective dates and for
the respective periods to which they apply. The Company Financials have
been prepared in accordance with generally accepted accounting principles
as in effect in the United States ("US GAAP") consistently applied
throughout the periods involved, and are, in all material respects, in
accordance with the books and records of the Company, its subsidiaries and
their predecessors, as the case may be. The financial statements
(including the related notes) of the other entities listed in the "Index to
Financial Statements" in the Preliminary Prospectus (the "Acquired Company
Financials") included in the Registration Statement or any Preliminary
Prospectus, or to be included in the Prospectus fairly present the
financial position, results of operations and cash flows of such entities
and the other information purported to be shown therein at the respective
dates and for the respective
4
<PAGE>
periods to which they apply. The Acquired Company Financials have been
prepared in accordance with US GAAP consistently applied throughout the
periods involved, and are, in all material respects, in accordance with the
books and records of such entities. The "pro forma" financial information
included in the Registration Statement or any Preliminary Prospectus, or to
be included in the Prospectus, fairly present the information purported to
be shown therein at the respective dates thereof and for the respective
periods covered thereby and all adjustments have been properly applied.
The assumptions in such pro forma financial information are reasonable. No
other financial statements are required by Form S-1 or otherwise to be
included in the Registration Statement or the Prospectus other than those
included therein.
(e) Subsequent to the respective dates as of which information is
given in the Registration Statement, except as set forth in the
Registration Statement or as may be set forth in the Prospectus, there has
not been any material adverse change in the business, properties,
operations, condition (financial or other) or results of operations of the
Company and the subsidiaries (as defined below) taken as a whole, whether
or not arising from transactions in the ordinary course of business, and
since the date of the latest balance sheet of the Company included in the
Registration Statement, and except as described in the Registration
Statement or as may be described in the Prospectus, (i) neither the Company
nor any of its subsidiaries (A) has incurred or undertaken any liabilities
or obligations, direct or contingent, that are, individually or in the
aggregate, material to the Company and its subsidiaries taken as a whole,
or (B) entered into any transaction not in the ordinary course of business
that is material to the Company and its subsidiaries taken as a whole; and
(ii) the Company has not declared or paid any dividend on or made any
distribution of or with respect to any shares of its capital stock or
redeemed, purchased or otherwise acquired or agreed to redeem, purchase or
otherwise acquire any shares of its or its subsidiaries' capital stock. As
used in this Underwriting Agreement, the term "subsidiary" means any
corporation, partnership, joint venture, association, company, business
trust or other entity in which the Company directly or indirectly (i)
beneficially owns or controls a majority of the outstanding voting
securities having by the terms thereof ordinary voting power to elect a
majority of the board of directors (or other body fulfilling a
substantially similar function)
5
<PAGE>
of such entity (irrespective of whether or not at the time any class or
classes of such voting securities shall have or might have voting power by
reason of the happening of any contingency) or (ii) has the authority or
ability to control the policies of such entity (including, but without
limitation thereto, any partnership of which the Company or a subsidiary is
a general partner or owns or has the right to obtain a majority of limited
partnership interests and any joint venture in which the Company or a
subsidiary has liability similar to the liability of a general partner of a
partnership or owns or has the right to obtain a majority of the joint
venture interests).
(f) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Underwriting
Agreement and to issue, sell and deliver the Shares in accordance with the
terms and conditions hereof. This Underwriting Agreement has been duly and
validly authorized, executed and delivered by the Company and is a legal
and binding obligation of the Company, enforceable against the Company in
accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforcement is sought in a proceeding at law or in equity), and
except insofar as rights to indemnification and contribution contained
herein may be limited by federal or state securities laws or related public
policy.
(g) The Company's execution and delivery of, and its performance of
its obligations under, this Underwriting Agreement and the consummation of
the transactions con templated hereby, will not (i) conflict with or result
in a breach of any of the terms and provisions of, or constitute a default
under (or an event that with notice or lapse of time, or both, would
constitute a default under) or require approval or consent under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant to
the terms of (A) any agreement, contract, indenture, mortgage, lease,
license, arrangement or understanding to which the Company or any of its
subsidiaries is a party, or to which any of its properties is subject, that
is material to the Company and the subsidiaries taken as a whole
(hereafter, collectively, "Material
6
<PAGE>
Contracts") (except for those conflicts, breaches or defaults for which
consent or approval has been obtained by the Company prior to the date
hereof, and copies evidencing such consent or approval have been provided
to Bear, Stearns) or (B) any governmental franchise, license or permit
heretofore issued to the Company or any of its subsidiaries that is
material to the Company and its subsidiaries taken as a whole (hereafter,
collectively, "Material Permits"), (ii) violate or conflict with any
provision of the certificate of incorporation, by-laws or similar governing
instruments of the Company or any of its subsidiaries listed on Schedule
--------
III hereto (the "Material Subsidiaries") or (iii) violate or conflict with
---
any judgment, decree, order, statute, rule or regulation of any court or
any public, governmental or regulatory agency or body having jurisdiction
over the Company or any Material Subsidiary or any of its respective
properties or assets, except for those violations or conflicts, that,
individually or in the aggregate, would not have a material adverse effect
on the Company and its subsidiaries taken as a whole (hereafter, a
"Material Adverse Effect").
(h) No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over the
Company or any of its subsidiaries or any of its respective properties or
assets is required for the Company's execution and delivery of, and its
performance of its obligations under, this Underwriting Agreement, and the
consummation of the transactions contemplated hereby, except the
registration of the Shares under the Act and the Securities Exchange Act of
1934, as amended (the "Exchange Act"), the authorization of the Shares for
trading on the Nasdaq Stock Market and such filings and registrations as
may be required under state securities or "Blue Sky" laws and the
securities laws of foreign jurisdictions in connection with the purchase
and distribution of the Shares by the Underwriters.
(i) All of the currently outstanding shares of capital stock of the
Company, and all of the outstanding shares of capital stock (or similar
interests) of each of its subsidiaries, have been duly and validly
authorized and issued, are fully paid and nonassessable and were not issued
in violation of or subject to any preemptive rights. The shares of Common
Stock of the Company to be outstanding on the Closing Date, including the
Shares, have been duly authorized and, when issued (and, in the case of the
Shares,
7
<PAGE>
delivered and sold in accordance with the terms of this Underwriting
Agreement) will be validly issued, fully paid and nonassessable, and will
not have been issued in violation of or be subject to any preemptive
rights. Upon delivery of and payment for the Shares in accordance with
this Underwriting Agreement, the Underwriters will receive valid title to
those of the Shares to be purchased by them from the Company, free and
clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements and voting trusts. The Company has, as of the
date hereof, and will have, as of the Closing Date and the Additional
Closing Date, if any, an authorized and outstanding capitalization as set
forth in the Registration Statement and as shall be set forth in the
Prospectus, both on an historical basis and as adjusted to give effect to
the offering of the Shares. The Company's capital stock conforms to the
description thereof set forth in the Registration Statement and as shall be
set forth in the Prospectus. The Company owns directly or indirectly such
percentage of the outstanding capital stock (or similar interests) of each
of its subsidiaries as is set forth opposite the name of such subsidiary in
Schedule IV hereto, free and clear of all claims, liens, security
-----------
interests, pledges, charges, encumbrances, stockholders agreements and
voting trusts, except as otherwise described in said Schedule IV.
-----------
(j) There is no commitment, plan or arrangement to issue, and no
outstanding option, warrant or other right calling for the issuance of, any
shares of capital stock (or similar interests) of the Company or of any of
its subsidiaries or any security or other instrument that by its terms is
convertible into, exchangeable for or evidencing the right to purchase
capital stock (or similar interests) of the Company or such subsidiary,
except as described in the Registration Statement and as shall be described
in the Prospectus.
(k) The Company has no subsidiaries other than those listed in
Schedule IV hereto. Each of the Company and its subsidiaries has been duly
-----------
organized and is validly existing as a corporation or limited liability
company in good standing under the laws of its jurisdictions of
incorporation. Each of the Company and the Material Subsidiaries is duly
qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
qualification necessary,
8
<PAGE>
except for those failures to be so qualified or in good standing that will
not in the aggregate have a Material Adverse Effect. Each of the Company
and the Material Subsidiaries has all requisite corporate power and
authority, and all necessary consents, approvals, authorizations, orders,
registrations, filings, qualifications, licenses and permits of and from
all public, regulatory or governmental agencies and bodies, to own, lease
and operate its properties and conduct its business as now being conducted
and as described in the Registration Statement and as shall be described in
the Prospectus (except for those the absence of which, individually or in
the aggregate, would not have a Material Adverse Effect), and no such
consent, approval, authorization, order, registration, qualification,
license or permit contains a materially burdensome restriction that is not
adequately disclosed in the Registration Statement and the Prospectus.
Neither the Company nor any Material Subsidiary has received any notice of
proceedings relating to revocation or modification of any such consents,
approvals, authorizations, orders, registrations, filings, qualifications,
licenses or permits (except for those the revocation or modification of
which would not have a Material Adverse Effect).
(l) Neither the Company nor any of its subsidiaries, nor to the
knowledge of the Company, any other party, is in violation or breach of, or
in default under (nor has an event occurred that with notice, lapse of time
or both, would constitute a default under), any Material Contract, and each
Material Contract is in full force and effect, and is the legal, valid and
binding obligation of the Company or such subsidiary, as the case may be,
and (subject to applicable bankruptcy, insolvency, and other laws affecting
the enforceability of creditors' rights generally) is enforceable as to the
Company or such subsidiary, as the case may be, in accordance with its
terms. Neither the Company nor any Material Subsidiary is in violation of
its certificate of incorporation, by-laws or similar governing instrument.
(m) There is no litigation, arbitration, claim, governmental or other
proceeding or investigation pending or, to the best knowledge of the
Company, threatened with respect to the Company or any of its subsidiaries,
or any of its respective operations, businesses, properties or assets,
except as described in the Registration Statement and as shall be described
in the Prospectus, that, individually or in the aggregate, would have a
Material Adverse Effect.
9
<PAGE>
Neither the Company nor any Material Subsidiary is, or, to the best
knowledge of the Company, with the giving of notice or lapse of time or
both would be, in violation of or in non-compliance with the requirements
of any Material Permit or the provisions of any law, rule, regulation,
order, judgment or decree, including, without limitation, all applicable
federal, state and local laws and regulations relating to (i) zoning, land
use, protection of the environment, human health and safety or hazardous or
toxic substances, wastes, pollutants or contaminants and (ii) employee or
occupational safety, discrimination in hiring, promotion or pay of
employees, employee hours and wages or employee benefits, except for such
violations or failures of compliance that, individually or in the
aggregate, would not have a Material Adverse Effect.
(n) Except as described in the Registration Statement and as shall be
described in the Prospectus, the Company and each of its subsidiaries have
(i) good and marketable title to all real and personal properties owned by
them, free and clear of all liens, security interests, pledges, charges,
encumbrances and mortgages, and (ii) valid, subsisting and enforceable
leases for all real and personal properties leased by them, in each case,
subject to such exceptions as, individually or in the aggregate, do not
have and are not reasonably likely to have a Material Adverse Effect. No
real property owned, leased, licensed or used by the Company or by a
Material Subsidiary lies in an area that is, or to the best knowledge of
the Company will be, subject to zoning, use or building code restrictions
that would prohibit, and no state of facts relating to the actions or
inaction of another person or entity or his, her or its ownership, leasing,
licensing or use of any real or personal property exists that would
prevent, the continued effective ownership, leasing, licensing or use of
such real property in the business of the Company or such Material
Subsidiary as presently conducted or as the Prospectus indicates are
contemplated to be conducted, subject to such exceptions as, individually
or in the aggregate, do not have and are not reasonably likely to have a
Material Adverse Effect.
(o) The Company, directly or through one or more of its subsidiaries,
owns or has the right under license to use all patents, patent rights,
licenses, inventions, copyrights, trademarks, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), service marks and trade
names (collectively, "Intellectual
10
<PAGE>
Property") necessary to conduct its business as now conducted and proposed
to be conducted as disclosed in the Registration Statement and as shall be
disclosed in the Prospectus. Neither the Company nor any of its
subsidiaries has received notice of infringement of or conflict with the
asserted rights of others with respect to any Intellectual Property. To
the best knowledge of the Company, there is no infringement by others of
any Intellectual Property of the Company or any of its subsidiaries that
has had or may in the future have a Material Adverse Effect.
(p) To the Company's best knowledge, neither the Company or any of its
subsidiaries, nor any director, officer or employee of the Company or any
such subsidiary has, directly or indirectly, used any corporate funds for
unlawful contributions, gifts, entertainment, or other unlawful expenses
relating to political activity; made any unlawful payment to foreign or
domestic government officials or employees or to foreign or domestic
political parties or campaigns from corporate funds; violated any provision
of the Foreign Corrupt Practices Act of 1977, as amended; or made any
bribe, rebate, payoff, influence payment, kickback, or other unlawful
payment.
(q) Except as set forth in the Registration Statement, no person or
entity has the right, by contract or otherwise, to require registration
under the Act of shares of capital stock or other securities of the Company
or any of its subsidiaries solely because of the filing or effectiveness of
the Registration Statement and the consummation of the transactions
contemplated by this Underwriting Agreement.
(r) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations) has taken or will take, directly
or indirectly, prior to the termination of the offering of the Shares
contemplated by this Underwriting Agreement, any action designed to
stabilize or manipulate the price of the Common Stock, or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock.
(s) Neither the Company nor any of its subsidiaries is, or intends to
conduct its business in such a manner that it would become, and after
giving effect to the offering and sale of the Shares and the application of
the proceeds thereof as described in the Prospectus, neither the Company
nor any subsidiary will be, an "investment company" or a
11
<PAGE>
company "controlled" by an "investment company" as such terms are defined
in the Investment Company Act of 1940, as amended (the "Investment Company
Act").
(t) Except as may be set forth in the Prospectus, the Company has not
incurred any liability for a fee, commission or other compensation on
account of the employment of a broker or finder in connection with the
transactions contemplated by this Underwriting Agreement.
(u) The Company and each of its subsidiaries maintain systems of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with US GAAP and
to maintain accountability for assets; (iii) the access to the respective
assets of the Company and each such subsidiary, as the case may be, is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(v) Other than as disclosed in the Registration Statement and as shall
be disclosed in the Prospectus, no labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the best knowledge of the
Company, is imminent that, individually or in the aggregate, is or is
reasonably likely to have a Material Adverse Effect, and the Company is not
aware of any existing or imminent labor disturbance by the employees of any
of its principal suppliers or contractors that reasonably can be expected
to have a Material Adverse Effect.
(w) (i) All United States Federal income tax returns of the Company
and each of its subsidiaries required by law to be filed have been filed
and all taxes shown by such returns or otherwise assessed that are due and
payable have been paid, except assessments against which appeals have been
or will be promptly taken and (ii) the Company and its subsidiaries have
filed all other tax returns that are required to have been filed by them
pursuant to the applicable laws of all other jurisdictions, except, as to
each of the foregoing clauses (i) and (ii), insofar as the failure to file
such returns, individually or in the aggregate, would not have a Material
Adverse Effect, and the
12
<PAGE>
Company and its subsidiaries have paid all taxes due pursuant to said
returns or pursuant to any assessment received by the Company or any such
subsidiary, except for such taxes, if any, as are being contested in good
faith and as to which adequate reserves have been provided in accordance
with US GAAP. The charges, accruals and reserves on the consolidated books
of the Company in respect of any tax liability for any years not finally
determined are adequate to meet any assessments or re-assessments for
additional tax for any years not finally determined, except to the extent
of any inadequacy that would not have a Material Adverse Effect.
(x) Each of the Company and its subsidiaries is insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as are prudent and customary in the businesses in which the
Company and its subsidiaries are engaged. Neither the Company nor any of
its subsidiaries has any reason to believe that it will not be able to
renew its existing insurance coverage from similar insurers as may be
necessary to continue its business.
(y) Except as disclosed in the Registration Statement and as shall be
disclosed in the Prospectus, there are no business relationships or related
party transactions of the nature described in Item 404 of Regulation S-K of
the Commission involving the Company or any other persons referred to in
such Item 404, except for such transactions that would be considered
immaterial under such Item 404.
4. Representations and Warranties of the Selling Stockholders. Each
of the Selling Stockholders, with respect to itself and severally and not
jointly, represents and warrants to, and agrees with, each Underwriter that:
(a) Such Selling Stockholder has been duly organized and is validly
existing as a corporation or partnership, as the case may be, in good
standing (if such concept is applicable) under the laws of its jurisdiction
of organization.
(b) Such Selling Stockholder is the sole owner of the number of
Shares set forth opposite its name on Schedule II hereto, and, upon
-----------
delivery of and payment for the Shares to be sold by the Selling
Stockholder to each Underwriter in accordance with this Underwriting
Agreement, each Underwriter will receive valid title to such Shares, free
13
<PAGE>
and clear of all liens, security interests, pledges, charges, encumbrances,
stockholders' agreements and voting trusts.
(c) There is no commitment, plan or arrangement to transfer, and no
outstanding option, warrant or other right calling for the transfer of, any
of the Shares to be sold by such Selling Stockholder to the Underwriters
pursuant to this Underwriting Agreement.
(d) This Underwriting Agreement has been duly and validly executed and
delivered by such Selling Stockholder and is a legal and binding obligation
of such Selling Stockholder, enforceable against such Selling Stockholder
in accordance with its terms, subject to applicable bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and other similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair dealing (regardless of
whether enforcement is sought in a proceeding at law or in equity), and
except insofar as right to indemnification and contribution contained
herein may be limited by federal or state securities laws or related public
policy.
(e) The execution, delivery and performance by such Selling
Stockholder of this Underwriting Agreement and the consummation of the
transactions contemplated thereby, including the purchase, delivery and
sale of the Shares to be delivered and sold by such Selling Stockholder
thereunder, will not (i) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default under (or an event that
with notice or lapse of time, or both, would constitute a default under) or
require approval or consent under, or result in the creation or imposition
of any lien, charge or encumbrance upon any property or assets of such
Selling Stockholder pursuant to the terms of any material agreement,
contract, indenture, mortgage, lease, license, arrangement or understanding
to which such Selling Stockholder is a party, or to which any of its
properties is subject or (ii) violate or conflict with any provision of the
certificate of incorporation, by-laws or similar governing instruments of
such Selling Stockholder or any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory agency or
body having jurisdiction over such Selling Stockholder or any of its
properties or assets.
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<PAGE>
(f) No consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction over such
Selling Stockholder or any of its properties or assets is required for such
Selling Stockholder's execution and delivery of, and performance of its
obligation under, this Underwriting Agreement and the consummation of the
transactions contemplated thereby, except for the registration of the
Shares under the Act and the Exchange Act, the authorization of the Shares
for trading on the Nasdaq Stock Market and such filings and registration as
may be required under state securities or "Blue Sky" Laws and the
securities laws of foreign jurisdictions in connection with the purchase
and distribution of the Shares by the Underwriters.
(g) To the extent that any statements or omissions are made in the
Registration Statement, the Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information
furnished to the Company by such Selling Stockholder specifically for use
therein, on the Effective Date, the date the Prospectus is first filed with
the Commission pursuant to Rule 424(b) of the Regulations (if required), at
all times subsequent thereto to and including the Closing Date, when any
post-effective amendment to the Registration Statement becomes effective or
any supplement to the Prospectus is filed with the Commission, and during
such longer period as the Prospectus may require to be delivered in
connection with sales of Shares by the Underwriters or a dealer, the
Registration Statement and the Prospectus (as amended or supplemented if
the Company shall have filed with the Commission an amendment or supplement
thereto) did not and will not contain an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein (in the case of the
Prospectus, in light of the circumstances under which they were made) not
misleading. Such Selling Stockholder has reviewed the most recent
Preliminary Prospectus, the Prospectus (if the same shall be in existence)
and the Registration Statement, and the information regarding such Selling
Stockholder set forth therein is complete and accurate. From the Effective
Date through the Closing Date, such Selling Stockholder will advise Bear,
Stearns in writing if and to the extent that such information does not
conform with the requirements of the Act and the Regulations or contains
any untrue statement of a material fact or omits to state any material fact
15
<PAGE>
required to be stated therein or necessary in order to make the statements
made therein (in the case of the Prospectus, in light of the circumstances
under which they were made) not misleading.
(h) The sale by such Selling Stockholder of Shares pursuant to this
Underwriting Agreement is not prompted by any adverse information
concerning the Company known to such Selling Stockholder as a result of
communications with, or information provided by, the Company or any of its
affiliates that is not set forth in the Registration Statement or the
Prospectus.
(i) Such Selling Stockholder has not taken or will not take, directly
or indirectly, prior to the termination of the offering of the Shares
contemplated by this Underwriting Agreement, any action designed to
stabilize or manipulate the price of the Common Stock, or that might
reasonably be expected to cause or result in stabilization or manipulation
of the price of the Common Stock.
5. Purchase, Sale and Delivery of the Shares.
(a)(i) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Company agrees to issue and sell
to each of the Underwriters an aggregate of 8,577,406 shares of Common
Stock and the Selling Stockholders, severally and not jointly, agree
to sell to the Underwriters an aggregate of 1,547,594 shares of Common
Stock (each such Selling Stockholder to sell the number of Shares set
forth opposite its name in Schedule II hereto under the caption
-----------
"Number of Firm Shares to be Sold"), and each Underwriter agrees,
severally and not jointly, to purchase from the Company and the
Selling Stockholders, the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I hereto, all at a purchase price
----------
per share of $______ (the "Purchase Price"). Subject to Section 14,
the number of Firm Shares to be purchased from the Company and the
Selling Stockholders by each Underwriter (as adjusted by Bear, Stearns
to eliminate fractions) shall be determined by multiplying the
aggregate number of Firm Shares to be sold by the Company or the
Selling Stockholders, as the case may be, as set forth above by a
fraction (A) the numerator of which is the total number of Firm Shares
set forth opposite the name of such Underwriter in
16
<PAGE>
Schedule I hereto and (B) the denominator of which is the total number
----------
of Firm Shares.
(ii) Delivery of the Firm Shares and payment of the
Purchase Price therefor shall be made at the offices of Bear, Stearns
& Co. Inc. at 245 Park Avenue, New York, New York 10167, or such other
location in the New York City metropolitan area as Bear, Stearns shall
determine and advise the Company and the Selling Stockholders upon at
least two full business days' (as defined in Section 20 hereof) notice
in writing. Such delivery and payment shall be made at 10:00 A.M.,
New York City time, on the third full business day following the
determination of the Purchase Price, or at such other time as may be
agreed upon by Bear, Stearns, the Company and the Selling
Stockholders. The time and date of such delivery and payment are
herein called the "Closing Date." Delivery of the Firm Shares shall
be made to or upon the order of Bear, Stearns, for the respective
accounts of the Underwriters, against payment to the Company or the
Selling Stockholders as the case may be, of the aggregate Purchase
Price therefor by wire transfer of same day funds to the respective
accounts of the Company and each Selling Stockholder, as the case may
be, designated in writing to Bear, Stearns at least two business days
prior to the Closing Date.
(iii) Certificates for the Firm Shares shall be
registered in such name or names and in such authorized denominations
as Bear, Stearns may request in writing at least two full business
days prior to the Closing Date, provided that, if so specified by
Bear, Stearns, the Firm Shares may be represented by a global
certificate registered in the name of Cede & Co., as nominee of the
Depositary Trust Company ("Cede"). Bear, Stearns shall be permitted
to examine and package such certificates for delivery at least one
full business day prior to the Closing Date, unless the Firm Shares
are to be represented by a global certificate.
(b)(i) The Company hereby grants to the Underwriters an
option (the "Option") to purchase from the Company the Additional
Shares at the Purchase Price, for the sole purpose of covering over-
allotments, if any, in the offering of the Firm Shares by the
Underwriters. The Option shall be exercisable by the Underwriters on
one occasion only, at any time before the expiration of
17
<PAGE>
30 days from the date of the Prospectus, for the purchase of all or
part of the Additional Shares, such exercise to be made by notice,
given by Bear, Stearns to the Company in the manner specified in
Section 16 hereof, which notice shall set forth the aggregate number
of Additional Shares with respect to which the Option is being
exercised, the denominations and the name or names in which
certificates evidencing the Additional Shares so purchased are to be
registered, and the date and time of delivery of such Additional
Shares, which date may be at or subsequent to the Closing Date and
shall not be less than two nor more than ten days after such notice.
Subject to Section 14, the aggregate number of Additional Shares so
purchased from the Company by each Underwriter (as adjusted by Bear,
Stearns to eliminate fractions) shall be determined by multiplying the
total number of such Additional Shares to be sold by the Company by a
fraction (A) the numerator of which is the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and
----------
(B) the denominator of which is the total number of Firm Shares.
(ii) Delivery of the Additional Shares so purchased and
payment of the Purchase Price therefor shall be made at the offices of
Bear, Stearns & Co. Inc. at 245 Park Avenue, New York, New York 10167,
or such other location in the New York City metropolitan area as Bear,
Stearns shall determine and advise the Company upon at least two full
business days' notice in writing. Such delivery and payment shall be
made at 10:00 A.M., New York City time, on the date designated in such
notice or at such other time and date as may be agreed upon by Bear,
Stearns and the Company. The time and date of such delivery and
payment are herein called the "Additional Closing Date." Delivery of
the Additional Shares shall be made to or upon the order of Bear,
Stearns, for the respective accounts of the Underwriters, against
payment to the Company of the aggregate Purchase Price therefor by
wire transfer of same day funds to the account of the Company
designated in writing to Bear, Stearns at least two business days
prior to the Additional Closing Date.
(iii) Certificates for the Additional Shares purchased by
the Underwriters, when so delivered, shall be registered in such name
or names and in such
18
<PAGE>
authorized denominations as Bear, Stearns shall have requested in the
notice of exercise of the Option, provided that, if so specified
therein, such Additional Shares may be represented by a global
certificate registered in the name of Cede. Bear, Stearns shall be
permitted to examine and package such certificates for delivery at
least one full business day prior to the Additional Closing Date,
unless the Additional Shares are to be represented by a global
certificate.
(c) The Underwriters shall not be obligated to purchase any Firm
Shares from the Company or the Selling Stockholders except upon tender to
the Underwriters by the Company or the Selling Stockholders, as the case
may be, of all of the Firm Shares and the Underwriters shall not be
obligated to purchase any Additional Shares from the Company except upon
tender to the Underwriters by the Company of all of the Additional Shares
specified in the notice of exercise of the Option. The Company or the
Selling Stockholders shall not be obligated to sell or deliver any Firm
Shares or Additional Shares, as the case may be, except upon tender of
payment by the Underwriters for all the Firm Shares or the Additional
Shares, as the case may be, agreed to be purchased by the Underwriters
hereunder.
6. Offering.
(a) The Company and the Selling Stockholders have been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Underwriting Agreement have become effective as in your judgment is
advisable. The Company and the Selling Stockholders have been further
advised by you that the Shares are to be offered to the public initially at
a price of $_____ per share and to certain dealers selected by you at a
price that represents a concession not in excess of $0.___ per share, and
that any Underwriter may allow, and such dealers may reallow, a further
concession, not in excess of $0.__ a share, to any Underwriter or to
certain other dealers, and that after the initial offering of the Shares,
the public offering price and such concessions may be changed by you.
(b) It is understood by all parties that approximately 500,000 Firm
Shares ("Directed Shares") will initially be reserved by the Underwriters
for offer and sale at the price to the public set forth above and upon the
terms set forth
19
<PAGE>
in the Prospectus to directors, officers, employees and other persons
associated with the Company (the "Directed Share Purchasers") who have
heretofore delivered to Bear, Stearns indications of interest to purchase
Directed Shares in form satisfactory to Bear, Stearns, and that any
allocation of such Directed Shares among the Directed Share Purchasers
shall be made in accordance with timely directions received by Bear,
Stearns from the Company; provided, however, that under no circumstances
-------- -------
will Bear, Stearns or any other Underwriter be liable to the Company or to
any of the Directed Share Purchasers for any action taken or omitted in
good faith in connection with transactions effected with the Directed Share
Purchasers. It is further understood that any such Directed Shares that
are not purchased by Directed Share Purchasers will be offered by the
Underwriters for sale to the public upon the terms set forth in Section
6(a) hereof.
7. Covenants of the Company. The Company covenants and agrees with
each Underwriter that:
(a) The Company shall use its best efforts to cause the Registration
Statement to become effective as promptly as possible and to maintain it in
effect. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Regulations, or filing of the Prospectus with
the Commission is otherwise required under Rule 424(b) of the Regulations,
the Company shall file the Prospectus, properly completed, with the
Commission pursuant to Rule 424(b) of the Regulations within the time
period therein prescribed and shall provide evidence satisfactory to you of
such timely filing. The Company shall promptly advise you (and, if
requested, confirm such advice in writing), (i) when the Registration
Statement or any post-effective amendment thereto has become effective,
(ii) of the initiation or threatening of any proceedings for, or receipt by
the Company of any notice with respect to, the suspension of the
qualification of the Shares for sale in any jurisdiction or the issuance by
the Commission of any order suspending the effectiveness of the
Registration Statement and (iii) of receipt by the Company or any
representative of or attorney for the Company of any other communications
from the Commission relating to the Company, the Registration Statement,
any Preliminary Prospectus, the Prospectus or the transactions contemplated
by this Underwriting Agreement. The Company shall make every reasonable
effort to prevent the issuance of an order suspending the effectiveness of
the Registration Statement
20
<PAGE>
or any post-effective amendment thereto and, if any such order is issued,
to obtain its lifting as soon as possible. The Company shall not file any
amendment to the Registration Statement or any amendment of or supplement
to the Prospectus before or after the Effective Date to which you shall
reasonably object after being timely furnished in advance a copy thereof
unless the Company shall conclude, upon the advice of counsel, that any
such amendment must be filed at a time prior to obtaining such consent.
(b) Within the time during which the Prospectus is required to be
delivered under the Act, the Company shall comply with all requirements
imposed upon it by the Act, as now or hereafter amended, and by the
Regulations, as from time to time in force, so far as necessary to permit
the continuance of sales of or dealings in the Shares as contemplated by
the provisions hereof and by the Prospectus. If, during such period, any
event shall occur as a result of which the Prospectus as then amended or
supplemented include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they
were made, not misleading, or if it shall be necessary at any time to amend
the Registration Statement or supplement the Prospectus to comply with the
Act and the Regulations, the Company shall notify you promptly and prepare
and file with the Commission an appropriate post-effective amendment to the
Registration Statement or supplement to each Prospectus (in form and
substance reasonably satisfactory to you) that will correct such statement
or omission and shall use its best efforts to have any such post-effective
amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company shall promptly deliver to you two manually-signed
copies of the Registration Statement, including exhibits and all amendments
thereto, and to those persons (including your counsel) whom you identify to
the Company, such number of conformed copies of the Registration Statement,
with exhibits, each Preliminary Prospectus, the Prospectus and all
amendments of and supplements to such documents, if any, as you may
reasonably request.
(d) The Company shall cooperate with the Underwriters and Weil,
Gotshal & Manges LLP ("Underwriters' Counsel") in connection with their
efforts to qualify or register the Shares for sale under the state
securities (or "Blue Sky") or foreign laws of such jurisdictions as you
shall request,
21
<PAGE>
shall execute such applications and documents and furnish such information
as reasonably may be required for such purpose and shall comply with such
laws so as to continue such registrations and qualifications in effect for
so long as may be required to complete the distribution of the Shares;
provided, however, that in connection therewith the Company shall not be
-------- -------
required to (i) qualify as a foreign corporation in any jurisdiction in
which it is not so qualified as of the date hereof, (ii) file a consent to
service of process in any jurisdiction in any action other than one arising
out of the offering or sale of the Shares in such jurisdiction or (iii)
become subject to taxation in any jurisdiction in which it is not now so
subject.
(e) The Company shall make generally available (within the meaning of
Section 11(a) of the Act) to its security holders and to you, in such
numbers as you reasonably may request for distribution to the Underwriters,
as soon as practicable but in no event later than 45 days after the end of
its fiscal quarter in which the first anniversary date of the Effective
Date occurs, an earnings statement, covering a period of at least twelve
consecutive full calendar months commencing after the effective date of the
Registration Statement, that satisfies the provisions of Section 11(a) of
the Act and Rule 158 of the Regulations.
(f) During a period of 180 days from the date of this Underwriting
Agreement, the Company shall not, without the prior written consent of
Bear, Stearns, (i) issue, sell, offer or agree to sell, or otherwise
dispose of, directly or indirectly, any shares of its capital stock (or any
securities convertible into, exercisable for or exchangeable for shares of
its capital stock) other than (a) the Company's issuance of shares of
Common Stock in connection with the 275-for-one stock split, (b) the
Company's issuance and sale of Shares in accordance with this Underwriting
Agreement and (c) the issuance of up to such number of shares of Common
Stock (or options exercisable for up to such number of shares) reserved for
issuance pursuant to the Company's Stock Option Plan as specified in the
Registration Statement, or (ii) acquire, or agree or commit to acquire or
publicly announce its intention to acquire, directly or through a
subsidiary, assets or securities of any other person, firm or corporation
in a transaction or series of related transactions that would be material
to the Company and its subsidiaries, taken as a whole. In addition, the
Company has obtained and delivered to you a written undertaking from each
of its directors, executive
22
<PAGE>
officers and principal stockholders (other than __________) that, during
the period of 180 days from the date of this Underwriting Agreement,
without the prior written consent of Bear, Stearns, such person or entity
will not sell, offer or agree to sell, or otherwise dispose of, directly or
indirectly, any shares of capital stock (or any securities convertible
into, exercisable for or exchangeable for shares of capital stock) of the
Company or any of its subsidiaries.
(g) During the three years following the Effective Date, the Company
shall furnish to Bear, Stearns, in such quantity as Bear, Stearns may
reasonably request for distribution to the Underwriters, copies of (i) all
reports of the Company to its stockholders, (ii) all reports, financial
statements, and proxy or information statements filed by the Company with
the Commission, any national securities exchange or the Nasdaq Stock Market
and (iii) such other information concerning the Company and its affairs as
Bear, Stearns may reasonably request from time to time.
(h) The Company shall apply the proceeds from the sale of the Shares
to be sold by it under this Underwriting Agreement in the manner set forth
under "Use of Proceeds" in the Prospectus. The Company shall take such
steps as shall be necessary to ensure that neither the Company nor any
subsidiary shall become an "investment company" or a company "controlled"
by an "investment company" within the meaning of such terms under the
Investment Company Act.
(i) The Company shall use its best efforts promptly to cause the
Shares to be traded on the Nasdaq Stock Market and shall take all actions
necessary to comply with the rules and regulations of the Nasdaq Stock
Market in order to maintain the trading of the Shares on the Nasdaq Stock
Market.
(j) The Company shall comply with all registration, filing and
reporting requirements of the Exchange Act and the rules and regulations
thereunder, which may from time to time be applicable to the Company.
(k) The Company shall comply with all provisions of all undertakings
contained in Part II of the Registration Statement.
23
<PAGE>
(l) Prior to the Closing Date and, if the Option is exercised, until
the Additional Closing Date, the Company shall issue no press release or
other communication or hold any press conference with respect to the
offering of the Shares, or the financial condition, results of operations,
operations, business properties, assets, liabilities, or prospects of the
Company, without your prior consent.
8. Covenants of the Selling Stockholders. Each Selling Stockholder,
severally and not jointly, covenants and agrees with each Underwriter that:
(a) If, within the time during which the Prospectus is required to be
delivered under the Act, such Selling Stockholder shall believe or have any
reasonable grounds to believe that the Prospectus as then amended or
supplemented includes any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements made therein, in light of the circumstances under which they
were made, not misleading, or that any of the representations of such
Selling Stockholder contained in this Underwriting Agreement are untrue,
such Selling Stockholder shall notify you and the Company promptly to such
effect.
(b) Such Selling Stockholder will not take, directly or indirectly,
prior to the termination of the offering of the Shares contemplated by this
Underwriting Agreement, any action designed to stabilize or manipulate the
price of the Common Stock, or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Common Stock.
(c) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986,
as amended, such Selling Stockholder shall deliver to you on or prior to
the Closing Date, a properly completed and executed United States Treasury
Department Form W-8 or W-9, as applicable (or other applicable form or
statement specified by Treasury Department Regulations in lieu thereof).
9. Payment of Expenses. Whether or not the transactions contemplated
by this Underwriting Agreement are consummated or this Underwriting Agreement is
terminated, and subject to Section 15(d) hereof, the Company agrees to pay all
costs and expenses incident to the performance of its obligations and the
Selling Stockholders' obligations under this Underwriting
24
<PAGE>
Agreement, including those in connection with (i) preparing, printing,
duplicating, filing and distributing the Registration Statement (including all
amendments thereof and exhibits thereto), any Preliminary Prospectus, the
Prospectus and any supplements thereto, this Underwriting Agreement and all
related agreements, and all other documents relating to the public offering of
the Shares, (ii) the issuance, transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii) the
registration and qualification if any, of the Shares under the securities laws
of foreign jurisdictions and the preparation of a memorandum with respect
thereto, or where applicable the obtaining of exemptions therefrom, including
the reasonable fees and disbursements of Underwriters' Counsel and local counsel
in connection therewith, (iv) the trading of the Shares on the Nasdaq Stock
Market, (v) the review of the terms of the public offering of the Shares by the
National Association of Securities Dealers, Inc. (the "NASD") and the reasonable
fees and disbursements of Underwriters' Counsel in connection therewith, (vi)
the printing of certificates representing the Shares and (vii) the cost and
charges of any transfer agent and registrar for the Shares.
10. Conditions of the Underwriters' Obligations. The obligations of
the several Underwriters to purchase and pay for the Shares, as provided herein,
shall be subject to (i) the accuracy of the representations and warranties of
the Company, with respect to the Shares to be purchased from the Company, and
each of the Selling Stockholders, with respect to the Shares to be purchased
from the Selling Stockholders, herein contained, as of the date hereof, as of
the Closing Date and, with respect to the Additional Shares, the accuracy of the
representations and warranties of the Company as of the Additional Closing Date,
(ii) the absence from any certificates, opinions, written statements or letters
furnished pursuant to this Section 10 to you or to Underwriters' Counsel of any
qualification or limitation not previously approved in writing by you, (iii) the
performance by the Company and each of the Selling Stockholders of their
respective obligations hereunder and (iv) the following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 P.M., New York City time, on the date of this Underwriting
Agreement or at such later time and date as shall have been consented to in
writing by Bear, Stearns. All post-effective amendments to the
Registration Statement shall have become effective. If the Company shall
have relied upon Rule 430A of the Regulations, the Prospectus shall have
been filed with the Commission in
25
<PAGE>
a timely fashion in accordance with Section 7(a) hereof. All filings
required by Rule 424 of the Regulations shall have been made and no such
filings shall have been made without your consent. No stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereof shall have been issued by the Commission or any
state securities commission and no proceedings therefor shall have been
initiated or threatened by the Commission or any state securities
commission.
(b) At the Closing Date (and, with respect to the Additional Shares,
the Additional Closing Date), you shall have received the written opinion
of Morrison & Foerster LLP, counsel for the Company, dated the date of its
delivery, addressed to the Underwriters, and in form and scope satisfactory
to Underwriters' Counsel, to the effect that:
(i) Each of the Company and the domestic subsidiaries listed in
Schedule III hereto (the "Material Domestic Subsidiaries") (x) has
------------
been duly organized and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation and (y)
has all requisite corporate power and authority, and all necessary
consents, approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and
license its respective properties and conduct its business as now
being conducted and as described in the Registration Statement and the
Prospectus, except for those the absence of which, individually or in
the aggregate, would not have a Material Adverse Effect.
(ii) The authorized capital stock of the Company is as set forth
in the Prospectus under the caption "Capitalization". All of the
outstanding shares of such capital stock have been duly and validly
authorized and issued, are fully paid and nonassessable and were not
issued in violation of or subject to any preemptive rights. The shares
of Common Stock to be outstanding on the Closing Date, including the
Shares, have been duly authorized and when issued (and, in the case of
the Shares, delivered and sold in accordance with the terms of this
Underwriting Agreement) will be validly issued, fully paid and
nonassessable. Upon delivery of and payment for the Shares to be sold
by
26
<PAGE>
the Company to each Underwriter in accordance with this Underwriting
Agreement, each Underwriter (assuming that it acquires such Shares
without notice of any adverse claim, as such term is used in Section
8-302 of the Uniform Commercial Code in effect in the State of New
York) will acquire good and marketable title to the Shares so sold and
delivered to it, free and clear of all liens, pledges, charges,
claims, security interests, restrictions on transfer, agreements or
other defects of title whatsoever (other than those resulting from any
action taken by such Underwriter). The capital stock of the Company
conforms in all material respects to the description thereof contained
in the Registration Statement and the Prospectus.
(iii) The Company has all requisite corporate right, power and
authority to execute, deliver and perform its obligations under this
Underwriting Agreement and to issue, sell and deliver the Shares in
accordance with the terms and conditions hereof. This Underwriting
Agreement has been duly and validly authorized, executed and delivered
by the Company.
(iv) To the best of such counsel's knowledge, no consent,
approval, authorization, order, registration, filing, qualification,
license or permit of or with any court or any public, governmental, or
regulatory agency or body having jurisdiction over the Company or any
Material Domestic Subsidiary or any of its respective properties or
assets is required for the Company's execution and delivery of, and
its performance of its obligations under, this Underwriting Agreement,
and the consummation of the transactions contemplated hereby,
including, without limitation, of the issuance, sale and delivery of
the Shares, except for (A) such as may be required under state
securities or "Blue Sky" laws and the securities laws of foreign
jurisdictions in connection with the purchase and distribution of the
Shares by the Underwriters (as to which such counsel need express no
opinion) and (B) such as have been made or obtained under the Act, the
Exchange Act or the rules of the Nasdaq Stock Market.
(v) The Registration Statement and the Prospectus (except for
the financial statements and the notes thereto, the financial
statement schedules and the other financial and accounting data
included therein, as to which no opinion need be expressed) comply as
to
27
<PAGE>
form in all material respects with the requirements of the Act and the
Regulations.
(vi) The Registration Statement has become effective under the
Act, and such counsel is not aware of any stop order suspending the
effectiveness of the Registration Statement and to such counsel's
knowledge no proceedings therefor have been initiated or threatened by
the Commission, and there are no other filings on the part of the
Company required by the Act or the Regulations, including those
required by Rule 424(b) of the Regulations, that to such counsel's
knowledge have not been made.
(vii) The Company is not an "investment company" or a company
"controlled" by an "investment company" as defined in the Investment
Company Act.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent certified public accountants of the
Company, representatives of the Underwriters and Underwriters' Counsel at
which the contents of the Registration Statement, the Prospectus and any
amendments thereof or supplements thereto and related matters were
discussed and, although such counsel has not undertaken to investigate or
verify independently and are not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus or any
amendments thereof or supplements thereto (except as to matters referred to
in the last sentence of clause (ii) above), no facts have come to such
counsel's attention which lead such counsel to believe that the
Registration Statement, on the effective date thereof (or any post-
effective amendment thereof as of the date of such amendment), contained an
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus, on the date thereof or the date of
such opinion, contained an untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances under which
they were made, not misleading (it being understood that such counsel need
express no view with respect to the financial statements and related notes,
the
28
<PAGE>
financial statement schedules and the other financial and accounting data
included therein).
In rendering such opinion, such counsel (i) may limit its opinions to
the corporate laws of the State of Delaware, the laws of the State of New
York and the federal laws of the United States of America, and (ii) may
rely (A) as to matters involving the application of laws other than the
laws of the State of New York and the corporate laws of the State of
Delaware and the federal laws of the United States of America, to the
extent such counsel deems proper and to the extent specified in such
opinion letter, if at all, upon a written opinion or opinions (in form and
scope reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; and (B) as to matters of fact, to the extent such counsel
may deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries. The
opinion of such counsel shall specifically state that the opinion of any
such other counsel is in form and scope satisfactory to such counsel and,
in such counsel's opinion, such counsel and you are justified in relying
thereon. A copy of the opinion of any such other counsel shall be
delivered to Underwriters' Counsel.
(c) At the Closing Date (and, with respect to the Additional Shares,
the Additional Closing Date), you shall have received the written opinion
of the General Counsel of the Company, dated the date of its delivery,
addressed to the Underwriters, and in form and scope satisfactory to
Underwriters' Counsel, to the effect that:
(i) Each of the Company and the Material Domestic Subsidiaries
is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so
qualified or in good standing that will not in the aggregate have a
Material Adverse Effect. All of the issued and outstanding capital
stock (or similar interests) of each Material Domestic Subsidiary has
been duly and validly authorized and issued, is fully paid and
nonassessable and was not
29
<PAGE>
issued in violation of or subject to any preemptive rights and is
owned by the Company or one of its subsidiaries, free and clear of all
claims, liens, security interests, pledges, charges, encumbrances,
stockholders agreements and voting trusts, except as otherwise
described in Schedule III to this Underwriting Agreement.
------------
(ii) The shares of Common Stock to be outstanding on the
Closing Date, including the Shares, will not have been issued in
violation of or be subject to any preemptive rights. To such counsel's
knowledge, there is no outstanding option, warrant or other right
calling for the issuance of any share of capital stock (or similar
interests) of the Company or of any of its subsidiaries or any
security or other instrument that by its terms is convertible into,
exercisable for or exchangeable for capital stock (or similar
interests) of the Company or any subsidiary, except as described in
the Registration Statement and the Prospectus.
(iii) The Company's execution and delivery of, and its
performance of its obligations under, this Underwriting Agreement and
the consummation of the transactions contemplated thereby, do not and,
when such performance is required pursuant to the terms thereof, will
not (A) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default under (or an event that with
notice or lapse of time, or both, would constitute a default under) or
require approval or consent under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to the terms
of any Material Contract or any Material Permit, except for those
conflicts, breaches or defaults for which consent or approval has been
obtained by the Company prior to the date hereof, (B) violate or
conflict with any provision of the certificate of incorporation, by-
laws or similar governing instruments of the Company or any Material
Domestic Subsidiary, or (C) to such counsel's knowledge, violate or
conflict with any judgment, decree, order, statute, rule or regulation
of any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any Material Domestic
Subsidiary or any of its respective properties or assets, except, with
respect to clauses (A) and (C) of this subparagraph
30
<PAGE>
(iii), for those violations or conflicts that, individually or in the
aggregate, would not have a Material Adverse Effect.
(iv) Insofar as statements in the Prospectus purport to
summarize the nature and status of litigation or the provisions of
laws, rules, regulations, orders, judgments or decrees, or the terms
of any Material Contracts or Material Permits, such statements are
correct in all material respects and are fair summaries of the matters
referred to therein.
(v) To the best of such counsel's knowledge, except as set
forth in the Registration Statement and the Prospectus, no person or
entity has the right, by contract or otherwise, to require
registration under the Act of shares of capital stock or other
securities of the Company or any of its subsidiaries solely because of
the filing or effectiveness of the Registration Statement and the
consummation of the transactions contemplated by this Underwriting
Agreement.
(vi) The Shares have been duly authorized for trading on
the Nasdaq Stock Market, subject only to official notice of issuance.
(vii) To the best of such counsel's knowledge, there is
no litigation, arbitration or governmental or other action, suit,
proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or
threatened against, or involving the properties or business of, the
Company or any of its subsidiaries, that, if resolved against the
Company or such subsidiary, individually or, to the extent involving
related claims or issues, in the aggregate, is of a character required
to be disclosed in the Registration Statement and the Prospectus that
has not been properly disclosed therein; and to the best of such
counsel's knowledge, there is no contract or document concerning the
Company or any of its subsidiaries of a character required to be
described in the Registration Statement and the Prospectus or to be
filed as an exhibit to the Registration Statement, that is not so
described or filed.
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<PAGE>
In addition, such counsel shall state that he has participated in
conferences with officers and other representatives of the Company,
representatives of the independent certified public accountants of the
Company, representatives of the Underwriters and Underwriters' Counsel at
which the contents of the Registration Statement, the Prospectus and any
amendments thereof or supplements thereto and related matters were
discussed and, although such counsel has not undertaken to investigate or
verify independently and are not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the Prospectus or any
amendments thereof or supplements thereto (except as to matters referred to
in clause (iv) above), no facts have come to such counsel's attention which
lead such counsel to believe that the Registration Statement, on the
effective date thereof (or any post-effective amendment thereof as of the
date of such amendment), contained an untrue statement of a material fact
or omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus, on the date thereof or the date of such opinion, contained an
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements made
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no view with
respect to the financial statements and related notes, the financial
statement schedules and the other financial and accounting data included
therein).
In rendering such opinion, such counsel (i) may limit its opinions to
the corporate laws of the State of Delaware, the laws of the State of New
York and the federal laws of the United States of America, and (ii) may
rely (A) as to matters involving the application of laws other than the
laws of the State of New York and the corporate laws of the State of
Delaware and the federal laws of the United States of America, to the
extent such counsel deems proper and to the extent specified in such
opinion letter, if at all, upon a written opinion or opinions (in form and
scope reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; and (B) as to matters of fact, to the extent such counsel
may deem proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of
32
<PAGE>
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and the subsidiaries. The
opinion of such counsel shall specifically state that the opinion of any
such other counsel is in form and scope satisfactory to such counsel and,
in such counsel's opinion, such counsel and you are justified in relying
thereon. A copy of the opinion of any such other counsel shall be
delivered to Underwriters' counsel.
(d) At the Closing Date, you shall have received the written opinion
of counsel for each of the Selling Stockholders, dated the date of its
delivery, addressed to the Underwriters, and in form and scope reasonably
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Selling Stockholder is the sole owner of the
number of Shares to be sold by the Selling Stockholder, and, upon
delivery of and payment for the Shares to be sold by the Selling
Stockholder to each Underwriter in accordance with this Underwriting
Agreement, each Underwriter (assuming that it acquires such Shares
without notice of any adverse claim, as such term is used in Section
8-302 of the Uniform Commercial Code in effect in the State of New
York) will acquire valid title to such Shares, free and clear of all
liens, pledges, charges, security interests, restrictions on transfer,
agreements or other defects of title whatsoever (other than those
resulting from any action by such Underwriter).
(ii) This Underwriting Agreement has been duly executed
and delivered by such Selling Stockholder and is a legal and binding
obligation of such Selling Stockholder.
In rendering such opinion, such counsel (i) may limit its opinion to
the laws of the jurisdiction in which it is licensed to practice and (ii)
may rely as to matters of fact, to the extent such counsel may deem proper,
on certificates of responsible officers of the Selling Stockholder and
certificates or other written statements of officers of departments of
jurisdictions having custody of documents respecting the corporate
existence or good standing of the Selling Stockholder. The opinion of
counsel shall specifically state that the same may be relied upon by you
and Underwriters' Counsel.
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<PAGE>
(e) At the Closing Date (and, with respect to the Additional Shares,
the Additional Closing Date), you shall have received a certificate of the
Company executed by each of the Chief Executive Officer and the Chief
Financial Officer of the Company, dated the date of its delivery, to the
effect that the conditions set forth in subsection (a) of this Section 10
have been satisfied, that the representations and warranties of the Company
set forth in Section 3 hereof are true and correct as of such Closing Date
and the obligations of the Company to be performed hereunder on or prior
thereto have been duly performed.
(f) At the Closing Date, you shall have received a certificate of each
Selling Stockholder, dated the date of its delivery, to the effect that, as
of the date of such certificate, the representations and warranties of such
Selling Stockholder set forth in Section 4 hereof are true and correct as
of the Closing Date and the obligations of the Selling Stockholder to be
performed hereunder on or prior thereto have been duly performed.
(g) At the time this Underwriting Agreement is executed and at the
Closing Date (and, with respect to the Additional Shares, the Additional
Closing Date), you shall have received a letter, from Ernst & Young, dated
the date of its delivery, addressed to the Underwriters and in form and
substance reasonably satisfactory to you, to the effect that: (i) they are
independent accountants with respect to the Company within the meaning of
the Act and the Regulations; (ii) in their opinion, the Company Financials
audited by such firm and included in the Registration Statement and the
Prospectus comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations thereunder; (iii) on the basis of procedures (but not an audit
made in accordance with generally accepted auditing standards) consisting
of a reading of the latest available unaudited interim consolidated
financial statements of the Company and its subsidiaries, a reading of the
minutes of meetings and consents of the stockholders and boards of
directors of the Company and the subsidiaries and the committees of such
boards subsequent to December 31, 1997, inquiries of certain officials of
the Company and its subsidiaries who have responsibility for financial and
accounting matters of such companies with respect to transactions and
events subsequent to December 31, 1997, and other specified procedures and
inquiries to a date not more than five days prior to the date of such
letter, nothing has
34
<PAGE>
come to their attention that would cause them to believe that: (A) the
unaudited historical consolidated financial statements of the Company, its
subsidiaries and their predecessors included in the Registration Statement
and the Prospectus do not comply as to form in all material respects with
the applicable accounting requirements of the Act and the published rules
and regulations thereunder or that any material modification should be made
to such unaudited consolidated financial statements for them to be in
conformity with US GAAP; (B) with respect to the period subsequent to
December 31, 1997 there were, as of the date of the most recent available
monthly consolidated financial data of the Company and the subsidiaries, if
any, and as of a specified date not more than five days prior to the date
of such letter, any changes in the capital stock or increases in long-term
indebtedness of the Company or any decrease in stockholders' equity of the
Company, in each case as compared with the amounts shown in the most recent
balance sheet included in the Registration Statement and the Prospectus,
except for changes or decreases that the Registration Statement and the
Prospectus disclose have occurred or may occur; (C) the unaudited pro forma
consolidated financial statements included in the Prospectus do not comply
as to form in all material respects with the applicable accounting
requirements of the Act and the applicable published rules and regulations
thereunder or the pro forma adjustments have not been properly applied to
the historical amounts in the compilation of such financial statements; or
(D) that during the period from December 31, 1997 to the date of the most
recent available monthly consolidated financial data of the Company and its
subsidiaries, if any, and to a specified date not more than five days prior
to the date of such letter, there was any decrease, as compared with the
corresponding period in the prior fiscal year, in total revenues, or total
or per share net income, except for decreases that the Prospectus discloses
have occurred or may occur; and (iv) stating that they have compared
specific dollar amounts, numbers of shares, percentages of revenues and
earnings and other financial information pertaining to the Company and its
subsidiaries set forth in the Prospectus, which have been specified by you
prior to the date of this Underwriting Agreement, to the extent that such
dollar amounts, numbers, percentages and information may be derived from
the general accounting and financial records that are subject to the
internal control structure policies and procedures of the Company's and its
subsidiaries' accounting systems or that have been derived directly from
such accounting records by
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<PAGE>
analysis or computation, and excluding any questions requiring an
interpretation by legal counsel, with the results obtained from the
application of specified readings, inquiries, and other appropriate
procedures specified by you (which procedures do not constitute an
examination in accordance with generally accepted auditing standards) set
forth in such letter, and found them to be in agreement.
(h) All proceedings taken in connection with the sale of the Shares as
contemplated by this Underwriting Agreement shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and
you shall have received from Underwriters' Counsel a written opinion, dated
as of the Closing Date and addressed to the Underwriters, with respect to
the sale of the Firm Shares, and dated as of the Additional Closing Date
with respect to the sale of the Additional Shares, and with respect to such
other matters as you reasonably may require, and the Company shall have
furnished to Underwriters' Counsel such documents as Underwriters' Counsel
may request for the purpose of enabling Underwriters' Counsel to pass upon
such matters.
(i) The NASD, upon review of the terms of the underwriting
arrangements for the public offering of the Shares, shall have raised no
objections thereto.
(j) The Shares shall have been approved for trading on the Nasdaq
Stock Market, subject to official notice of issuance.
(k) At the time this Underwriting Agreement is executed, the Company
shall have furnished to you the written undertakings referred to in the
last sentence of Section 7(f) hereof, in form and substance satisfactory to
Underwriters' Counsel.
(l) At the time this Underwriting Agreement is executed, each Selling
Stockholder shall have executed and delivered to you a United States
Treasury Department Form W-8 or W-9, as applicable (or other applicable
form or statement specified by Treasury Department Regulations in lieu
thereof).
(m) Prior to the Closing Date, and with respect to the Additional
Shares, the Additional Closing Date, the Company shall have furnished to
you such further information, certificates and documents as you may
reasonably request.
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<PAGE>
If any of the conditions specified in this Section 10 shall not have
been fulfilled when and as required by this Underwriting Agreement, or if any of
the certificates, opinions, written statements, or letters furnished to you or
to Underwriters' Counsel pursuant to this Section 10 shall not be in all
material respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder not
theretofore discharged may be canceled by you at, or at any time prior to, the
Closing Date and with respect to the Additional Shares, the Additional Closing
Date. Notice of such cancellation shall be given to the Company in writing, or
by telephone or telephonic facsimile, confirmed in writing.
11. Indemnification.
(a) The Company, and each of the Selling Stockholders, severally and
not jointly, agree to indemnify and hold harmless each Underwriter, and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any and
all losses, liabilities, claims, damages and expenses whatsoever (including
but not limited to attorneys' fees and any and all expenses reasonably
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation, provided that such
settlement was effected with the Company's or the Selling Stockholders'
written consent, as applicable, in accordance with subsection 11(c)
hereof), joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact made by the Company or the Selling
Stockholders contained in the Registration Statement or the Prospectus or
any Preliminary Prospectus, or in any supplement thereto or amendment
thereof, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein (in the case of the Prospectus, in light of
the circumstances under which they were made) not misleading; provided,
--------
however, that neither the Company nor the Selling Stockholders shall be
-------
liable under this subsection 11(a) to any Underwriter in any such case to
the extent but only to the extent that any such loss, liability, claim,
damage or expense arises out of or is based upon any
37
<PAGE>
such untrue statement or alleged untrue statement or omission or alleged
omission made in reliance upon and in conformity with written information
furnished to the Company by or on your behalf with respect to the
Underwriters; provided further, that, notwithstanding anything to the
-------- -------
contrary in this Section 11, the obligations of each Selling Stockholder
under this subsection 11(a) shall arise and the Company shall have no
obligation under this subsection 11(a), to the extent, but only to the
extent, that any loss, liability, claim, damage or expense arises out of or
is based upon any such untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by such Selling Stockholder
expressly for use in the Registration Statement or the Prospectus; provided
--------
further, that in no case shall any such Selling Stockholder be liable or
-------
responsible for any amount in excess of the net proceeds received by such
Selling Stockholder from its sale of Shares pursuant to this Underwriting
Agreement; and provided further, that with respect to any Preliminary
-------- -------
Prospectus, such indemnity shall not inure to the benefit of any
Underwriter (or the benefit of any person controlling such Underwriter) if
the person asserting any such losses, liabilities, claims, damages or
expenses purchased the Shares that are the subject thereof from such
Underwriter and if such person was not sent or given a copy of the
Prospectus at or prior to confirmation of the sale of such Shares to such
person in any case where such sending or giving is required by the Act and
the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus. These indemnity
agreements will be in addition to any liability that the Company and the
Selling Stockholders may otherwise have to any Underwriter or to any
controlling person of such Underwriter, including under this Underwriting
Agreement.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of the directors of the Company, each
of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
and each of the Selling Stockholders, against any losses, liabilities,
claims, damages and expenses whatsoever (including but not limited to
attorneys' fees and any and all expenses reasonably incurred in
investigating, preparing or defending against any litigation, commenced or
threatened, or any claim
38
<PAGE>
whatsoever, and any and all amounts paid in settlement of any claim or
litigation, provided that such settlement was effected with such
Underwriter's written consent in accordance with subsection 11(c) hereof),
joint or several, to which they or any of them may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses, liabilities,
claims, damages or expenses (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or the Prospectus or
any Preliminary Prospectus, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged omission
to state therein a material fact required to be stated therein or necessary
to make the statements therein (in the case of the Prospectus, in light of
the circumstances under which they were made) not misleading, in each case
to the extent, but only to the extent, that any such loss, liability,
claim, damage or expense arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made
in reliance upon and in conformity with written information furnished to
the Company by you or on your behalf with respect to such Underwriter
expressly for use in the Registration Statement or Prospectus; provided,
--------
however, that in no case shall such Underwriter be liable or responsible
-------
for any amount in excess of the underwriting discount applicable to the
Shares purchased by such Underwriter hereunder. This indemnity will be in
addition to any liability that the Underwriter may otherwise have to the
Company or any such director, officer or controlling person, or the Selling
Stockholders, including under this Underwriting Agreement. The Company
acknowledges that the statements set forth in the last paragraph of the
cover page, the legend concerning stabilization on page two of the
Prospectus, the statements set forth under the caption "Underwriting" in
the Prospectus constitute the only information furnished in writing by or
on behalf of any Underwriter expressly for use in the Registration
Statement, any related Preliminary Prospectus and Prospectus.
(c) Promptly after receipt by an indemnified party under subsection
11(a) or 11(b) above of notice of the assertion of any claim, such
indemnified party shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection, notify each party
against whom indemnification is to be sought in writing of the commencement
thereof (but the failure so to notify an indemnifying party shall not
relieve it from any liability
39
<PAGE>
that it may have under this Section 11 except to the extent that it has
been prejudiced in any material respect by such failure or from any
liability that it may have otherwise). In case any such action is brought
against any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ
its or their own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified party or parties
unless (i) the employment of such counsel shall have been authorized in
writing by one of the indemnifying parties in connection with the defense
of such action, (ii) the indemnifying parties shall not have employed
counsel to take charge of the defense of such action within a reasonable
time after notice of commencement of the action, or (iii) such indemnified
party or parties shall have reasonably concluded that there may be defenses
available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to direct the defense of such
action on behalf of the indemnified party or parties with respect to such
different defenses), in any of which events such fees and expenses shall be
borne by the indemnifying parties. The indemnifying party under subsection
11(a) or 11(b) above shall only be liable for the legal expenses of one
counsel for all indemnified parties in each jurisdiction in which any claim
or action is brought; provided, however, that the indemnifying party shall
-------- -------
be liable for separate counsel for any indemnified party in a jurisdiction,
if counsel to the indemnified parties shall have reasonably concluded that
there may be defenses available to such indemnified party that are
different from or additional to those available to one or more of the other
indemnified parties and that separate counsel for such indemnified party is
prudent under the circumstances. Anything in this subsection to the
contrary notwithstanding, an indemnifying party shall not be liable for any
settlement of any claim or action effected without its written consent;
provided, however, that such written consent was not unreasonably withheld.
-------- -------
40
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12. Contribution. In order to provide for contribution in
circumstances in which the indemnification provided for in subsection 11(a)
hereof is for any reason held to be unavailable from the Company or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provisions (including any investigation, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claims asserted, but after deducting in the case of
losses, claims, damages, liabilities and expenses suffered by the Company, any
contribution received by the Company from persons, other than one or more of the
Underwriters, who may also be liable for contribution, including persons who
control the Company within the meaning of Section 15 of the Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) to which the Company, the Selling
Stockholders and one or more of the Underwriters may be subject, in such
proportions as are appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders, on the one hand, and the Underwriters, on
the other hand, from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 11
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand,
in connection with the statements or omissions that resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand,
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Stockholders, respectively,
and (y) the underwriting discounts received by the Underwriters, respectively,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault of the Company and the Selling Stockholders, on the one hand, and
of the Underwriters, on the other hand, shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company and the Selling Stockholders, on the one
hand, or the Underwriters, on the other hand, and the parties' relative
41
<PAGE>
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, each of the Selling Stockholders and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 11 were determined by pro rata allocation or by any
other method of allocation that does not take account of the equitable
considerations referred to above. The Selling Stockholders' and the
Underwriters' obligations in this Section 11 to contribute are several and not
joint. Notwithstanding the provisions of this Section 11, (i) in no case shall
any Underwriter be required to contribute any amount in excess of the amount by
which the aggregate public offering price of the Shares underwritten by it and
distributed to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or such omission or alleged omission, (ii) in no case
shall any Selling Stockholder be required to contribute any amount in excess of
the amount by which the net proceeds received by such Selling Stockholder from
its sale of Shares pursuant to this Underwriting Agreement exceeds the amount of
any damages that such Selling Stockholder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or such omission or alleged
omission and (iii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes of
this Section 12, (A) each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall
have the same rights to contribution as such Underwriter and (B) each person, if
any, who controls the Company within the meaning of Section 15 of the Act or
Section 20(a) of the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to clauses
(i) and (ii) of this Section 12. Any party entitled to contribution shall,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties under this Section 12, notify such
party or parties from whom contribution may be sought, but the omission to so
notify such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 12 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its written consent; provided, however,
-------- -------
that such written consent was not unreasonably withheld.
42
<PAGE>
13. Survival of Representations and Agreements. All representations
and warranties, covenants and agreements of the Underwriters, the Company and
the Selling Stockholders contained in this Underwriting Agreement, including
without limitation the agreements contained in Sections 7, 8 and 9 hereof, the
indemnity agreements contained in Section 11 hereof and the contribution
agreements contained in Section 12 hereof, shall remain operative and in full
force and effect regardless of any investigation made by or on behalf of the
Underwriters or any controlling person of any Underwriter or by or on behalf of
the Company, any of its officers and directors, or the Selling Stockholders and
shall survive delivery of the Shares to and payment for the Shares by the
Underwriters. The representations contained in Section 3 hereof and the
agreements contained in this Section 11 and Sections 7, 8, 9, 11, 12 and 15(d)
hereof shall survive the termination of this Underwriting Agreement including
pursuant to Section 14 or 15 hereof; provided, however, that if this
-------- -------
Underwriting Agreement is terminated pursuant to Section 14 or 15 hereof or if
for any reason the purchase of the Shares by the Underwriters as contemplated
hereunder is not consummated, the agreements contained in Sections 7 and 8
hereof shall not survive.
14. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or their
obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made pursuant
to subsection 14(b) below) exceed in the aggregate 10% of the number of
shares of Firm Shares or Additional Shares, as the case may be, that all
Underwriters have agreed to purchase hereunder, then such Firm Shares or
Additional Shares to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions
that the numbers of Firm Shares set forth opposite their respective names
in Schedule I hereto bear to the aggregate number of Firm Shares set forth
----------
opposite the names of the non-defaulting Underwriters.
(b) If such default relates to more than 10% of the Firm Shares or
Additional Shares, as the case may be, you may, in your discretion, arrange
for another party or parties (including any non-defaulting Underwriter or
Underwriters who so agree) to purchase such Firm Shares or Additional
Shares, as the case may be, to which such default relates on the terms
contained herein. If within five (5)
43
<PAGE>
calendar days after such a default you do not arrange for the purchase of
the Firm Shares or Additional Shares, as the case may be, to which such
default relates as provided in this Section 14, this Underwriting Agreement
(or, in the case of a default with respect to the Additional Shares, the
obligations of the Underwriters to purchase and of the Company to sell the
Additional Shares) shall thereupon terminate, without liability on the part
of the Company or the Selling Stockholders with respect thereto (except in
the case of the Company, as provided in Section 9 hereof, and in each case
as provided in Sections 9, 11(a) and 12 hereof) or the several non-
defaulting Underwriters (except as provided in Sections 11(b) and 12
hereof), but nothing in this Underwriting Agreement shall relieve a
defaulting Underwriter or Underwriters of its or their liability, if any,
to the other several Underwriters, the Company and the Selling Stockholders
for damages occasioned by its or their default hereunder.
(c) If the Firm Shares or Additional Shares to which the default
relates are to be purchased by the non-defaulting Underwriters, or are to
be purchased by another party or parties as aforesaid, you or the Company
shall have the right to postpone the Closing Date or Additional Closing
Date, as the case may be, for a period not exceeding five (5) business
days, in order to effect whatever changes may thereby be made necessary in
the Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus that, in the
opinion of Underwriters' Counsel, may thereby be made necessary or
advisable. The term "Underwriter" as used in this Underwriting Agreement
shall include any party substituted under this Section 12 with like effect
as if it had originally been a party to this Underwriting Agreement with
respect to such Firm Shares and Additional Shares.
15. Effective Date of Underwriting Agreement; Termination.
(a) This Underwriting Agreement shall become effective upon the later
of (i) when you and the Company and the Selling Stockholders shall have
received notification of the effectiveness of the Registration Statement
and (ii) the execution and delivery of this Underwriting Agreement by the
parties hereto. Until this Underwriting Agreement becomes effective as
aforesaid, this Underwriting Agreement may be terminated by the Company by
notifying you and the Selling
44
<PAGE>
Stockholders or by you by notifying the Company and the Selling
Stockholders without any liability of any party to any party hereunder.
Notwithstanding the foregoing, the provisions of this Section 15 and of
Sections 9, 11, 12 and 13 hereof shall at all times be in full force and
effect.
(b) This Underwriting Agreement and the obligations of the
Underwriters hereunder may be terminated by you by written notice to the
Company and the Selling Stockholders at any time at or prior to the Closing
Date (and, with respect to the Additional Shares, the Additional Closing
Date), without liability (other than with respect to Sections 11 and 12) on
the part of any Underwriter to the Company and the Selling Stockholders if,
on or prior to such date, (i) the Company or the Selling Stockholders shall
have failed, refused or been unable to perform in any material respect any
agreement on its part to be performed hereunder, (ii) any other condition
to the obligations of the Underwriters set forth in Section 10 hereof is
not fulfilled when and as required in any material respect, (iii) trading
in securities generally on the New York Stock Exchange, the American Stock
Exchange or in the over-the-counter market shall have been suspended or
materially limited, or minimum prices shall have been established on either
exchange or such market by the Commission, or by either exchange or other
regulatory body or governmental authority having jurisdiction, (iv) a
general banking moratorium shall have been declared by Federal or New York
State authorities, (v) there shall have occurred any outbreak or escalation
of armed hostilities involving the United States on or after the date
hereof, or if there has been a declaration by the United States of a
national emergency or war, the effect of which shall be, in your judgment,
to make it inadvisable or impracticable to proceed with the sale and
delivery of the Shares on the terms and in the manner contemplated in the
Prospectus, (vi) in your reasonable opinion any material adverse change
shall have occurred since the respective dates as of which information is
given in the Registration Statement or the Prospectus affecting the
business, prospects, condition (financial or other) or results of
operations of the Company and its subsidiaries taken as a whole, whether or
not arising in the ordinary course of business, other than as set forth in
the Prospectus or contemplated thereby, (vii) there shall have occurred
such a material adverse change in the financial markets in the United
States such as, in your judgment, makes it inadvisable or impracticable to
proceed with the sale and delivery of the Shares on the terms and in the
manner
45
<PAGE>
contemplated in the Prospectus, or (viii) there shall have been any
enactment, proposal, publication, decree or other promulgation of any
foreign or United States federal or state statute, regulation, rule or
order of any court or other governmental authority that would, in your
reasonable judgment, make it inadvisable or impracticable to proceed with
the sale and delivery of the Shares on the terms and in the manner
contemplated in the Prospectus. Your right to terminate this Underwriting
Agreement will not be waived or otherwise relinquished by failure to give
notice of termination prior to the time that the event giving rise to the
right to terminate shall have ceased to exist, provided that notice is
given prior to the Closing Date (and, with respect to the Additional
Shares, the Additional Closing Date).
(c) Any notice of termination pursuant to this Section 15 shall be by
telephone or telephonic facsimile, confirmed in writing by letter.
(d) If this Underwriting Agreement shall be terminated pursuant to
any of the provisions hereof (otherwise than pursuant to notification by
you as provided in subsection 15(a) or 15(b) hereof), or if the sale of the
Shares provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth herein is not satisfied or
because of any refusal, inability or failure on the part of the Company or
the Selling Stockholders to perform any agreement herein or to comply with
any provision hereof (other than by reason of a default of the
Underwriters), the Company agrees, subject to demand by you, to reimburse
the Underwriters for all reasonable out-of-pocket expenses (including the
reasonable fees and expenses of Underwriters' Counsel), incurred by the
Underwriters in connection herewith.
16. Notices. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and, if sent to any
one or more of the Underwriters, shall be hand delivered or faxed to each such
Underwriter in care of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New
York 10167, Attention: Corporate Finance Department (Fax No. 212-272-3092); and
if sent to the Company, shall be hand delivered or faxed to the Company, 100
Plaza Drive, Secaucus, New Jersey 07094, Attention: Corporate Secretary (Fax
No. 201-___-_____); and if sent to any one or more of the Selling Stockholders,
shall be hand delivered or faxed to such Selling Stockholder in care of
46
<PAGE>
_______________, _______________, Attention: __________, Esq.
(Fax No. ___-___-____).
17. Counterparts. This Underwriting Agreement may be executed in any
number of counterparts, each of which shall be an original but all of which
together shall constitute one instrument.
18. Parties. This Underwriting Agreement shall inure solely to the
benefit of, and shall be binding upon, each of the Underwriters, the Company and
the Selling Stockholders, and the controlling persons, directors, officers,
employees and agents referred to in Sections 11 and 12 hereof, and their
respective successors and assigns, and no other person shall have or be
construed to have any legal or equitable right, remedy or claim under or in
respect of or by virtue of this Underwriting Agreement or any provision herein
contained. The term "successors and assigns" shall not include a purchaser, in
its capacity as such, of Shares from the Underwriters.
19. Construction. This Underwriting Agreement shall be construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of laws.
20. Definition of Business Day. For the purposes of this
Underwriting Agreement, "business day" means any day on which the New York Stock
Exchange is open for trading.
47
<PAGE>
If the foregoing correctly sets forth the complete agreement among the
Underwriters, the Company and the Selling Stockholders, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among us.
Very truly yours,
GENESIS DIRECT, INC.
By:
-------------------------------------
Name:
Title:
SELLING STOCKHOLDERS:
[ ]
By:
-------------------------------------
Name:
Title:
[ ]
By:
-------------------------------------
Name:
Title:
[ ]
By:
-------------------------------------
Name:
Title:
48
<PAGE>
[ ]
By:
-------------------------------------
Name:
Title:
[ ]
By:
-------------------------------------
Name:
Title:
Accepted as of the date first
above written.
BEAR, STEARNS & CO. INC.
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
INVEMED ASSOCIATES, INC.
MORGAN KEEGAN & COMPANY, INC.
as Representatives of the several
Underwriters named in Schedule I
----------
annexed hereto.
By: BEAR, STEARNS & CO. INC.
By:
----------------------------
Name:
Title:
49
<PAGE>
SCHEDULE I
Number of
Firm Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
Bear, Stearns & Co. Inc. ........................................
Goldman, Sachs & Co. ............................................
Smith Barney Inc. ...............................................
Invemed Associates, Inc. ........................................
Morgan Keegan & Company, Inc. ...................................
----------
TOTAL................. 10,125,000
==========
<PAGE>
SCHEDULE II
SELLING STOCKHOLDERS
Number of
Firm Shares
Name of Selling Stockholder to be Sold
- --------------------------- -----------
---------
TOTAL.............. 1,547,594
=========
<PAGE>
SCHEDULE III
MATERIAL SUBSIDIARIES
JURISDICTION OF
NAME INCORPORATION
- ---- ---------------
<PAGE>
SCHEDULE IV
SUBSIDIARIES OF THE COMPANY
(100% owned unless otherwise indicated)
Name Jurisdiction
- ---- ------------
<PAGE>
EXHIBIT 3.3
FORM OF AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
- --------------------------------------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
- --------------------------------------------------------------------------------
Genesis Direct, Inc. (the "Corporation"), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the "GCL"),
does hereby certify as follows:
(1) The name of the Corporation is Genesis Direct, Inc. The Corporation
was originally incorporated under the name Genesis Direct, Inc. The
original certificate of incorporation of the Corporation was filed
with the office of the Secretary of State of the State of Delaware on
June 20, 1996.
(2) This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors of the Corporation (the "Board of
Directors") and by the stockholders of the Corporation in accordance
with Sections 228, 242 and 245 of the GCL.
(3) This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the certificate of incorporation of the
Corporation, as heretofore amended or supplemented.
(4) Upon the filing (the "Effective Time") of this Amended and Restated
Certificate of Incorporation pursuant to the GCL, each share of the
Corporation's common stock, par value $0.01 per share, issued and
outstanding immediately prior to the Effective Time (the "Old Common
Stock") shall be split into 275 shares of validly issued, fully paid,
and non-assessable Common Stock authorized by subparagraph (a) of
Article FOURTH of this Amended and Restated Certificate of
Incorporation without any action by the holder thereof (the "Stock
Split"). Each certificate that theretofore represented a share or
shares of Old Common Stock shall thereafter represent that number of
shares of Common Stock into which the share or shares of Old Common
represented by such certificate shall have been split.
(5) The text of the Certificate of Incorporation is amended and restated
in its entirety as follows:
FIRST. The name of the Corporation is Genesis Direct, Inc. (the
-----
"Corporation").
1
<PAGE>
SECOND. The address of the registered office of the Corporation in the
-------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of its registered agent at that
address is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
------
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH. (a) Authorized Capital Stock. The total number of shares of
------- -------------------------
stock which the Corporation shall have authority to issue is 275,500,000 shares
of capital stock, consisting of (i) 275,000,000 shares of common stock, par
value $0.01 per share (the "Common Stock"), and (ii) 500,000 shares of preferred
stock, par value $0.01 per share (the "Preferred Stock").
b) Common Stock. The powers, preferences and rights, and the
------------
qualifications, limitations and restrictions, of the Common Stock are
as follows:
(1) Ranking. Except as otherwise expressly provided in this Amended
-------
and Restated Certificate of Incorporation, the powers, preferences
and rights of the holders of Common Stock, and the qualifications,
limitations and restrictions thereof, shall be in all respects
identical.
(2) Voting. Except as otherwise expressly required by law or provided
------
in this Amended and Restated Certificate of Incorporation, and
subject to any voting rights provided to holders of Preferred
Stock at any time outstanding, the holders of any outstanding
shares of Common Stock shall vote together on all matters with
respect to which stockholders are entitled to vote under
applicable law, this Amended and Restated Certificate of
Incorporation or the By-Laws of the Corporation, or upon which a
vote of stockholders is otherwise duly called for by the
Corporation. At each annual or special meeting of stockholders,
each holder of record of shares of Common Stock on the relevant
record date shall be entitled to cast one vote in person or by
proxy for each share of the Common Stock standing in such holder's
name on the stock transfer records of the Corporation.
(3) No Cumulative Voting. The holders of shares of Common Stock shall
--------------------
not have cumulative voting rights.
(4) Amendments Affecting Stock. So long as any shares of Common Stock
--------------------------
are outstanding, the Corporation shall not, without the
2
<PAGE>
affirmative vote of at least a majority (or such higher
percentage, if any, as may then be required by applicable law) of
the outstanding shares of Common Stock voting as a single class,
(A) amend, alter or repeal any provision of Subsections 2 through
9 of this Article FOURTH so as to affect the relative rights,
preferences, qualifications, limitations or restrictions of the
Common Stock or (B) take any other action upon which class voting
is required by law.
(5) Dividends; Stock Splits. Subject to the rights of the holders of
-----------------------
Preferred Stock, and subject to any other provisions of this
Amended and Restated Certificate of Incorporation, as it may be
amended from time to time, holders of shares of Common Stock shall
be entitled to receive such dividends and other distributions in
cash, stock or property of the Corporation when, as and if
declared thereon by the Board of Directors from time to time out
of assets or funds of the Corporation legally available therefor.
(6) Liquidation, Dissolution, etc. In the event of any liquidation,
------------------------------
dissolution or winding up (either voluntary or involuntary) of the
Corporation, the holders of shares of Common Stock shall be
entitled to receive the assets and funds of the Corporation
available for distribution after payments to creditors and to the
holders of any Preferred Stock of the Corporation that may at the
time be outstanding, in proportion to the number of shares held by
them, respectively, without regard to class.
(7) Merger, etc. In the event of a merger or consolidation of the
------------
Corporation with or into another entity (whether or not the
Corporation is the surviving entity), the holders of each share of
Common Stock shall be entitled to receive the same per share
consideration on a per share basis.
(8) No Preemptive or Subscription Rights. No holder of shares of
------------------------------------
Common Stock shall be entitled to preemptive or subscription
rights.
(9) Power to Sell and Purchase Shares. Subject to the requirements of
---------------------------------
applicable law, the Corporation shall have the power to issue and
sell all or any part of any shares of any class of stock herein or
hereafter authorized to such persons, and for such consideration,
as the Board of Directors shall from time to time, in its
discretion, determine, whether or not greater consideration could
be received upon the issue or sale of the same number of shares of
another class, and as otherwise permitted by law. Subject to the
3
<PAGE>
requirements of applicable law, the Corporation shall have the
power to purchase any shares of any class of stock herein or
hereafter authorized from such persons, and for such
consideration, as the Board of Directors shall from time to time,
in its discretion, determine, whether or not less consideration
could be paid upon the purchase of the same number of shares of
another class, and as otherwise permitted by law.
c) Preferred Stock. The Board of Directors is hereby expressly authorized to
----------------
provide for the issuance of all or any shares of the Preferred Stock in one
or more classes or series, and to fix for each such class or series such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights
and such qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the Board
of Directors providing for the issuance of such class or series, including,
without limitation, the authority to provide that any such class or series
may be (i) subject to redemption at such time or times and at such price or
prices; (ii) entitled to receive dividends (which may be cumulative or non-
cumulative) at such rates, on such conditions, and at such times, and
payable in preference to, or in such relation to, the dividends payable on
any other class or classes or any other series; (iii) entitled to such
rights upon the dissolution of, or upon any distribution of the assets of,
the Corporation; or (iv) convertible into, or exchangeable for, shares of
any other class or classes of stock, or of any other series of the same or
any other class or classes of stock, of the Corporation at such price or
prices or at such rates of exchange and with such adjustments; all as may be
stated in such resolution or resolutions. Any shares of Preferred Stock
which may be redeemed, purchased or acquired by the Corporation may be
reissued except as otherwise provided by law.
FIFTH: The following provisions are inserted for the management of the
------
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
a) The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors.
b) The number of directors of the Corporation shall be as from time to time
fixed by, or in the manner provided in, the By-Laws of the Corporation.
Election of directors need not be by written ballot unless the By-Laws
so provide.
4
<PAGE>
c) The directors shall be divided into three classes, designated Class A,
Class B and Class C. Each class shall consist, as nearly as may be
possible, of one-third of the total number of directors constituting the
entire Board of Directors. The initial division of the Board of
Directors into classes shall be made by the decision of the affirmative
vote of a majority of the entire Board of Directors. The term of the
initial Class A directors shall terminate on the date of the 1999 annual
meeting; the term of the initial Class B directors shall terminate on
the date of the 2000 annual meeting; and the term of the initial Class C
directors shall terminate on the date of the 2001 annual meeting. At
each succeeding annual meeting of stockholders beginning in 1999,
successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned
among the classes so as to maintain the number of directors in each
class as nearly equal as possible, and any additional director of any
class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term
of that class, but in no case will a decrease in the number of directors
shorten the term of any incumbent director.
d) A director shall hold office until the annual meeting for the year in
which his or her term expires and until his or her successor shall be
elected and shall qualify, subject, however, to prior death,
resignation, retirement, disqualification or removal from office.
e) Subject to the terms of any one or more classes or series of Preferred
Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the
Board of Directors then in office, provided that a quorum is present,
and any other vacancy occurring on the Board of Directors may be filled
by a majority of the Board of Directors then in office, even if less
than an quorum, or by a sole remaining director. Any director of any
class elected to fill a vacancy resulting from an increase in the number
of directors of such class shall hold office for a term that shall
coincide with the remaining term of that class. Any director elected to
fill a vacancy not resulting from an increase in the number of directors
shall have the same remaining term as that of his predecessor. Subject
to the rights, if any, of the holders of shares of Preferred Stock then
outstanding, any or all of the directors of the Corporation may be
removed form office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting
power of the Corporation's then outstanding capital stock
5
<PAGE>
entitled to vote generally in the election of directors. Notwithstanding
the foregoing, whenever the holders of any one or more classes or series
of Preferred Stock issued by the Corporation shall have the right,
voting separately by class or series, to elect directors at any annual
or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be
governed by the terms of this Amended and Restated Certificate of
Incorporation applicable thereto, and such directors so elected shall
not be divided into classes pursuant to this Article FIFTH unless
expressly provided by such terms.
f) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Amended and Restated Certificate of
Incorporation, and any By-Laws adopted by the stockholders; provided,
--------
however, that no By-Laws hereafter adopted by the stockholders shall
-------
invalidate any prior act of the directors which would have been valid if
such By-Laws had not been adopted.
SIXTH: No director shall be personally liable to the Corporation or any of
------
its stockholders for monetary damages for breach of fiduciary duty as a
director, except to the extent such exemption from liability or limitation
thereof is not permitted under the GCL as the same exists or may hereafter be
amended. If the GCL is amended hereafter to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent authorized
by the GCL, as so amended. Any repeal or modification of this Article SIXTH by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SEVENTH: The Corporation shall indemnify its directors and officers to the
--------
fullest extent authorized or permitted by law, as now or hereafter in effect,
and such right to indemnification shall continue as to a person who has ceased
to be a director or officer of the Corporation and shall inure to the benefit of
his or her heirs, executors and personal and legal representatives; provided,
--------
however, that, except for proceedings to enforce rights to indemnification, the
- -------
Corporation shall not be obligated to indemnify any director or officer (or his
or her heirs, executors or personal or legal representatives) in connection with
a proceeding (or part thereof) initiated by such person unless such proceeding
(or part thereof) was authorized or consented to by the Board of Directors. The
right to indemnification conferred by this Article SEVENTH shall include the
right to be
6
<PAGE>
paid by the Corporation the expenses incurred in defending or otherwise
participating in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to time by the
Board of Directors, provide rights to indemnification and to the advancement of
expenses to employees and agents of the Corporation similar to those conferred
in this Article SEVENTH to directors and officers of the Corporation.
The rights to indemnification and to the advance of expenses conferred in
this Article SEVENTH shall not be exclusive of any other right which any person
may have or hereafter acquire under this Amended and Restated Certificate of
Incorporation, the By-Laws of the Corporation, any statute, agreement, vote of
stockholders or disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the stockholders of
the Corporation shall not adversely affect any rights to indemnification and to
the advancement of expenses of a director or officer of the Corporation existing
at the time of such repeal or modification with respect to any acts or omissions
occurring prior to such repeal or modification.
EIGHTH. Meeting of stockholders may be held within or without the State of
-------
Delaware, as the By-Laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the GCL) outside the State of Delaware at
such place or places as may be designated from time to time by the Board of
Directors or in the By-Laws of the Corporation.
NINTH. In furtherance and not in limitation of the powers conferred upon
------
it by the laws of the State of Delaware, the Board of Directors shall have the
power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of at least a majority of the entire Board of Directors shall
be required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of the shares entitled to vote at an election of directors.
TENTH. The Corporation reserves the right to amend, alter, change or
------
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Amended and
Restated Certificate of Incorporation, the Corporation's By-Laws or the GCL, and
all rights herein conferred upon stockholders are granted subject to such
reservation; provided, however, that, notwithstanding any provision of this
-----------------
Amended and Restated Certificate of Incorporation (and in addition to any other
vote that may be required by law), the affirmative vote of the holders of at
least eighty percent (80%) of the voting power of the shares entitled to vote at
an election of directors shall be required to amend, alter, change, or repeal,
or to
7
<PAGE>
adopt any provision as part of this Amended and Restated Certificate of
Incorporation inconsistent with the purpose and intent of Articles FIFTH and
NINTH of this Amended and Restated Certificate of Incorporation or this
Article TENTH.
IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated
Certificate of Incorporation to be executed on its behalf this ____ day of
_____________, 1998.
GENESIS DIRECT, INC.
By:
--------------------
Name:
Title:
8
<PAGE>
EXHIBIT 3.5
FORM OF
AMENDED AND RESTATED
BY-LAWS
of
GENESIS DIRECT, INC.
A Delaware Corporation
Effective __________ ___, 199__
1
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
GENESIS DIRECT, INC.
(hereinafter called the "Corporation" or the "Company")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the Corporation
---------- ------------------
shall be in the City of Wilmington, County of New Castle, State of Delaware.
Section 2. Other Offices. The Corporation may also have offices at such
---------- --------------
other places, both within and without the State of Delaware, as the Board of
Directors may from time to time determine.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
---------- -----------------
election of directors or for any other purpose shall be held at such time and
place either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual Meetings. The annual meetings of the stockholders shall
---------- ----------------
be held on such date and at such time as shall be designated from time to time
by the Board of Directors and stated in the notice of the meeting, at which
meetings the stockholders shall elect directors, and transact such other
business as may properly be brought before the meeting. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than ten nor more
than sixty days before the date of the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or by the
---------- -----------------
certificate of incorporation of the Corporation, as amended and restated from
time to time (the "Certificate of Incorporation"), special meetings of
stockholders, for any purpose or purposes, may be called by either (i) the
Chairman of the Board of Directors, (ii) the President, (iii) the Chief
Marketing Officer, (iv) the Chief Operating Officer, (v) the Secretary, or (vi)
the Board of Directors. Such request shall state the purpose or purposes
2
<PAGE>
of the proposed meeting. At a special meeting of the stockholders, only such
business shall be conducted as shall be specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors.
Written notice of a special meeting stating the place, date and hour of the
meeting and the purpose or purposes for which the meeting is called shall be
given not less than ten nor more than sixty days before the date of the meeting
to each stockholder entitled to vote at such meeting.
Section 4. Quorum. Except as otherwise required by law or by the
---------- -------
Certificate of Incorporation, the holders of a majority of the capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. A quorum, once established, shall
not be broken by the withdrawal of enough votes to leave less than a quorum.
If, however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in person
or represented by proxy, shall have power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be transacted which might have
been transacted at the meeting as originally noticed. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder entitled to vote at the meeting not less than ten nor more than
sixty days before the date of the meeting.
Section 5. Proxies. Any stockholder entitled to vote may do so in person
---------- -------
or by his or her proxy appointed by an instrument in writing subscribed by such
stockholder or by his or her attorney thereunto authorized, delivered to the
Secretary of the meeting; provided, however, that no proxy shall be voted or
------------------
acted upon after three years from its date, unless said proxy provides for a
longer period. Without limiting the manner in which a stockholder may authorize
another person or persons to act for him or her as proxy, either of the
following shall constitute a valid means by which a stockholder may grant such
authority:
(i) A stockholder may execute a writing authorizing another person
or persons to act for him or her as proxy. Execution may be accomplished by the
stockholder or his or her authorized officer, director, employee or agent
signing such writing or causing his or her signature to be affixed to such
writing by any reasonable means, including, but not limited to, by facsimile
signature.
(ii) A stockholder may authorize another person or persons to act
for him or her as proxy by transmitting or authorizing the transmission of a
telegram or other means of electronic transmission to the person who will be the
holder of the proxy or to a proxy solicitation firm, proxy support service
organization or like agent duly authorized by the person who will be the holder
of the proxy to receive such transmission, provided that any such telegram or
other means of electronic transmission must either set forth or
3
<PAGE>
be submitted with information from which it can be determined that the telegram
or other electronic transmission was authorized by the stockholder.
Any copy, facsimile telecommunication or other reliable reproduction of the
writing or transmission authorizing another person or persons to act as proxy
for a stockholder may be substituted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used; provided that such copy, facsimile telecommunication
--------
or other reproduction shall be a complete reproduction of the entire original
writing or transmission.
Section 6. Voting. At all meeting of the stockholders at which a quorum
---------- -------
is present, except as otherwise required by law, the Certificate of
Incorporation, these By-Laws, any question brought before any meeting of the
stockholders shall be decided by the affirmative vote of the holders of a
majority of the total number of votes of the capital stock present in person or
represented by proxy and entitled to vote on such question, voting as a single
class. The Board of Directors, in its discretion, or the officer of the
Corporation presiding at a meeting of stockholders, in his or her discretion,
may require that any votes cast at such meeting shall be cast by written ballot.
Section 7. Nature of Business at Meetings of Stockholders. No business
--------- ----------------------------------------------
may be transacted at an annual meeting of stockholders, other than business that
is either (a) specified in the notice of meeting (or any supplement thereto)
given by or at the direction of the Board of Directors (or any duly authorized
committee thereof), (b) otherwise properly brought before the annual meeting by
or at the direction of the Board of Directors (or any duly authorized committee
thereof) or (c) otherwise properly brought before the annual meeting by any
stockholder of the Company (i) who is a stockholder of record on the date of the
giving of the notice provided for in this Section 7 and on the record date for
the determination of stockholders entitled to vote at such annual meeting and
(ii) who complies with the notice procedures set forth in this Section 7.
In addition to any other applicable requirements, for business to be
properly before an annual meeting by a stockholder, such stockholder must have
given timely notice thereof in proper written form to the Secretary of the
Company.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Company not
less than sixty (60) days nor more than ninety (90) days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
provided, however, that in the event that the annual meeting is called for a
- ------------------
date that is not within thirty (30) days before or after such anniversary date,
notice by the stockholder in order to be timely must be so received not later
than the close of business on the tenth (10th) day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure of the date of the annual meeting was made, whichever first occurs.
4
<PAGE>
To be in proper written form, a stockholder's notice to the Secretary must
set forth as to each matter such stockholder proposes to bring before the annual
meeting (i) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of such stockholder, (iii) the class
or series and number of shares of capital stock of the Company which are owned
beneficially or of record by such stockholder, (iv) a description of all
arrangements or understandings between such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business and (v) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
meeting.
No business shall be conducted at the annual meeting of stockholders except
business brought before the annual meeting in accordance with the procedures set
forth in this Section 7, provided, however, that, once business has been
------------------
properly brought before the annual meeting in accordance with such procedures,
nothing in this Section 7 shall be deemed to preclude discussion by any
stockholder of any such business. If the Chairman of an annual meeting
determines that business was not properly brought before the annual meeting in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the business was not properly brought before the meeting and such
business shall not be transacted.
Section 8. Consent of Stockholders in Lieu of Meeting. Unless otherwise
--------- ------------------------------------------
provided in the Certificate of Incorporation, any action required or permitted
to be taken at any Annual or Special Meeting of Stockholders of the Corporation,
may be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt notice of
the taking of the corporate action without a meeting by less than unanimous
written consent shall be given to those stockholders who have not consented in
writing.
Section 9. List of Stockholders Entitled to Vote. The officer of the
---------- --------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder of the Corporation who is
present.
5
<PAGE>
Section 10. Stock Ledger. The stock ledger of the Corporation shall be
---------- ------------
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 9 of this Article II or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders.
Section 11. Record Date. In order that the Corporation may determine the
---------- -----------
stockholders entitled to notice of or to vote at any meeting of stockholder or
any adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights in respect of any change, conversion or
exchange of stock, or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors and which record date: (1) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall not be more than sixty nor less than ten days before the date of
such meeting; and (2) in the case of any other action, shall not be more than
sixty days prior to such other action. If no record date is fixed: (1) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; and (2) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
------------------
Directors may fix a new record date for the adjourned meeting.
Section 12. Inspectors of Election. In advance of any meeting of
---------- ----------------------
stockholders, the Board by resolution or the Chairman or President shall appoint
one or more inspectors of election to act at the meeting and make a written
report thereof. One or more other persons may be designated as alternate
inspectors to replace any inspector who fails to act. If no inspector or
alternate is present, ready and willing to act at a meeting of stockholders, the
Chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Unless otherwise required by law, inspectors may be officers,
employees or agents of the Corporation. Each inspector, before entering upon
the discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspector shall have the duties prescribed by
law and shall take charge of the polls and, when the vote is completed, shall
make a certificate of the result of the vote taken and of such other facts as
may be required by law.
ARTICLE III
DIRECTORS
---------
6
<PAGE>
Section 1. Number and Election of Directors. The Board of Directors shall
--------- --------------------------------
consist of not less than five members, the exact number of which shall be
determined from time to time by resolution adopted by the Board of Directors.
Except as provided in Section 3 of this Article III, directors shall be elected
by the stockholders at the annual meetings of stockholders by a plurality of the
votes cast, and each director so elected shall hold office until such director's
successor is duly elected and qualified, or until such director's death, or
until such director's earlier resignation or removal. Directors need not be
stockholders.
Section 2. Nomination of Directors. Only persons who are nominated in
--------- -----------------------
accordance with the following procedures shall be eligible for election as
directors of the Company, except as may be otherwise provided in the Certificate
of Incorporation with respect to the right of holders of preferred stock of the
Corporation to nominate and elect a specified number of directors in certain
circumstances. Nominations of persons for election to the Board of Directors
may be made at any annual meeting of stockholders, or at any special meeting of
stockholders called for the purpose of electing directors, (a) by or at the
direction of the Board of Directors (or any duly authorized committee thereof)
or (b) by any stockholder of the Company (i) who is a stockholder of record on
the date of the giving of the notice provided for in this Section 2 and on the
record date for the determination of stockholders entitled to vote at such
meeting and (ii) who complies with the notice procedures set forth in this
Section 2.
In addition to any other applicable requirements, for a nomination to be
made by a stockholder, such stockholder must have given timely notice thereof in
proper written form to the Secretary of the Company.
To be timely, a stockholder's notice to the Secretary must be delivered to
or mailed and received at the principal executive offices of the Company (a) in
the case of an annual meeting, not less than sixty (60) days nor more than
ninety (90) days prior to the anniversary date of the immediately preceding
annual meeting of stockholders; provided, however, that in the event that the
--------- --------
annual meeting is called for a date that is not within thirty (30) days before
or after such anniversary date, notice by the stockholder in order to be timely
must be so received not later than the close of business on the tenth (10th) day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure of the date of the annual meeting was made,
whichever first occurs; and (b) in the case of a special meeting of stockholders
called for the purpose of electing directors, not later that the close of
business on the tenth (10th) day following the day on which notice of the date
of the special meeting was mailed or public disclosure of the date of the
special meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the Secretary must
set forth (a) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person, (ii) the principal occupation or employment of the person, (iii)
the class or series and number of shares of capital stock of the Company which
are owned beneficially or of record by the
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<PAGE>
person and (iv) any other information relating to the person that would be
required to be disclosed in a proxy statement or other filings required to be
made in connection with solicitations of proxies for election of directors
pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations promulgated thereunder; and (b)
as to the stockholder giving the notice (i) the name and record address of such
stockholder, (ii) the class or series and number of shares of capital stock of
the Company which are owned beneficially or of record by such stockholder, (iii)
a description of all arrangements or understandings between such stockholder and
each proposed nominee and any other person or persons (including their names)
pursuant to which the nomination(s) are to be made by such stockholder, (iv) a
representation that such stockholder intends to appear in person or by proxy at
the meeting to nominate the persons named in its notice and (v) any other
information relating to such stockholder that would be required to be disclosed
in a proxy statement or other filings required to be made in connection with
solicitations of proxies for election of directors pursuant to Section 14 of the
Exchange Act and the rules and regulations promulgated thereunder. Such notice
must be accompanied by a written consent of each proposed nominee to being named
as a nominee and to serve as a director if elected.
No person shall be eligible for election as a director of the Company
unless nominated in accordance with the procedures set forth in this Section 2.
If the Chairman of the meeting determines that a nomination was not made in
accordance with the foregoing procedures, the Chairman shall declare to the
meeting that the nomination was defective and such defective nomination shall be
disregarded.
Section 3. Vacancies. Subject to the terms of any one or more classes or
--------- ---------
series of preferred stock, any vacancy on the Board of Directors that results
from an increase in the number of directors may be filled by a majority of the
directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Notwithstanding the foregoing, whenever the holders of any
one or more class or classes or series of preferred stock of the Corporation
shall have the right, voting separately as a class to elect directors at an
annual or special meeting of stockholders, the election, term of office, filling
of vacancies and other features of such directorships shall be governed by the
Certificate of Incorporation.
Section 4. Duties and Powers. The business of the Corporation shall be
--------- -----------------
managed by or under the direction of the Board of Directors which may exercise
all such powers of the Corporation and do all such lawful acts and things as are
not by statute or by Certificate of Incorporation or by these By-Laws required
to be exercised or done by the stockholders.
Section 5. Organization. At each meeting of the Board of Directors, the
--------- ------------
Chairman of the Board of Directors, or, in his or her absence, a director chosen
by a majority of the directors present, shall act as Chairman. The Secretary of
the Corporation
8
<PAGE>
shall act as Secretary at each meeting of the Board of Directors. In case the
Secretary shall be absent from any meeting of the Board of Directors, an
Assistant Secretary shall perform the duties of Secretary at such meeting; and
in the absence from any such meeting of the Secretary and all the Assistant
Secretaries, the Chairman of the meeting may appoint any person to act as
Secretary of the meeting.
Section 6. Resignation and Removal of Directors. Any director of the
--------- ------------------------------------
Corporation may resign at any time, by giving written notice to the Chairman of
the Board of Directors, the President or the Secretary of the Corporation. Such
resignation shall take effect at the time therein specified or, if no time is
specified, immediately; and, unless otherwise specified in such notice, the
acceptance of such resignation shall not be necessary to make it effective.
Except as otherwise required by law and subject to the rights, if any, of the
holders of shares of preferred stock then outstanding, any director or the
entire Board of Directors may be removed from office at any time, but only for
cause, and only by the affirmative vote of the holders of at least a majority in
voting power of the issued and outstanding capital stock of the Corporation
entitled to vote in the election of directors.
Section 7. Meetings. The Board of Directors of the Corporation may hold
--------- --------
meetings, both regular and special, either within or without the State of
Delaware. Regular meetings of the Board of Directors may be held at such time
and at such place as may from time to time be determined by the Board of
Directors and, unless required by resolution of the Board of Directors, without
notice. Special meetings of the Board of Directors may be called by the
Chairman of the Board of Directors, the Vice Chairman, if there be one, or a
majority of the directors then in office. Notice thereof stating the place,
date and hour of the meeting shall be given to each director either by mail not
less than forty-eight (48) hours before the date of the meeting, by telephone,
facsimile or telegram on twenty-four (24) hours notice, or on such shorter
notice as the person or persons calling such meetings may deem necessary or
appropriate in the circumstances.
Section 8. Quorum. Except as may be otherwise required by law, the
--------- ------
Certificate of Incorporation or these By-Laws, at all meetings of the Board of
Directors, a majority of the entire Board of Directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors. If a quorum shall not be present at any meeting of the Board of
Directors, the directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting of the time and
place of the adjourned meeting, until a quorum shall be present.
Section 9. Actions of Board. Unless otherwise provided by the Certificate
--------- ----------------
of Incorporation or these By-Laws, any action required or permitted to be taken
at any meeting of the Board of Directors or of any committee thereof may be
taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
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Section 10. Meetings by Means of Conference Telephone. Unless otherwise
---------- -----------------------------------------
provided by the Certificate of Incorporation or these By-Laws, members of the
Board of Directors of the Corporation, or any committee designated by the Board
of Directors, may participate in a meeting of the Board of Directors or such
Committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting pursuant to this Section 10 shall constitute
presence in person at such meeting.
Section 11. Committees. The Board of Directors may, by resolution passed
---------- ----------
by a majority of the entire Board of Directors, designate on or more committees,
each committee to consist of one or more of the directors of the Corporation.
The Board of Directors may designate one or more directors as alternate member
of any committee, who may replace any absent or disqualified member at any
meeting of any such committee. In the absence or disqualification of a member
of a committee, and in the absence of a designation by the Board of Directors of
an alternate member to replace the absent or disqualified member, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any absent or
disqualified member. Any committee, to the extent permitted by law and provided
in the resolution establishing such committee, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the Corporation. Each committee shall keep regular
minutes and report to the Board of Directors when required.
Section 12. Compensation. The directors may be paid their expenses, if
---------- ------------
any, of attendance at each meeting of the Board of Directors and may be paid a
fixed sum for attendance at each meeting of the Board of Directors or a stated
salary, or such other emoluments as the Board of Directors shall from time to
time determine. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
Section 13. Interested Directors. No contract or transaction between the
---------- --------------------
Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because such person's or their
votes are counted for such purpose if (i) the material facts as to such person's
or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less that a quorum; or
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<PAGE>
(ii) the material facts as to such person's or their relationship or interest
and as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen by
--------- -------
the Board of Directors and shall be a President, one or more Executive Vice
Presidents, a Chief Executive Officer, a Chief Operating Officer, a Chief
Marketing Officer, a Secretary, a Treasurer and a General Counsel. The Board of
Directors, in its discretion, may also choose a Chairman of the Board of
Directors (who must be a director of the Corporation) and one or more Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any
number of offices may be held by the same person, unless otherwise prohibited by
law, the Certificate of Incorporation or these By-Laws. The officers of the
Corporation need not be stockholders of the Corporation nor, except in the case
of the Chairman of the Board of Directors, need such officers be directors of
the Corporation.
Section 2. Election. The Board of Directors at its first meeting held
--------- --------
after each Annual Meeting of Stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
Board of Directors; and all officers of the Corporation shall hold office until
their successors are chosen and qualified, or until their earlier resignation or
removal. Any officer elected by the Board of Directors may be removed at any
time be the affirmative vote of a majority of the Board of Directors. Any
vacancy occurring in any office of the Corporation shall be filled by the Board
of Directors. The salaries of all officers of the Corporation shall be fixed by
the Board of Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President, any Executive Vice President
or any Vice President and any such officer may, in the name of and on behalf of
the Corporation, take all such action as any such officer may deem advisable to
vote in person or by proxy at any meeting of security holders of any corporation
in which the Corporation may own securities and at any such meeting shall
possess and may exercise any and all rights to power incident to the ownership
of such securities and which, as the owner thereof, the
11
<PAGE>
Corporation might have exercised and possessed if present. The Board of
Directors may, by resolution, from time to time confer like powers upon any
other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the Board
--------- ----------------------------------
of Directors, if there be one, shall preside at all meetings of the stockholders
and of the Board of Directors. The Chairman of the Board of Directors shall be
the Chief Executive Officer of the Corporation, and except where by law the
signature of the President is required, the Chairman of the Board of Directors
shall possess the same power as the President to sign all contracts,
certificates and other instruments of the Corporation which may authorized by
the Board of Directors. During the absence or disability of the President, the
Chairman of the Board of Directors shall exercise all the powers and discharge
all the duties of the President. The Chairman of the Board of Directors shall
also perform such other duties and may exercise such other powers as from time
to time may be assigned to him or her by these By-Laws or by the Board of
Directors.
Section 5. (a) President. The President shall, subject to the control of
--------- ---------
the Board of Directors and, if there be one, the Chairman of the Board of
Directors, have general supervision of the business of the Corporation and shall
see that all orders and resolutions of the Board of Directors are carried into
effect. The President shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these By-Laws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. The President shall be the Chief
Executive Officer of the Corporation. The President shall also perform such
other duties and may exercise such other powers as from time to time may be
assigned to him or her by these By-Laws or by the Board of Directors.
(b) Executive Vice Presidents. Each Executive Vice President
-------------------------
shall have the same powers as the President set forth in the first two sentences
of Section 5(a). In the absence of the President, an Executive Vice President
shall act as Chairman of the Board and shall preside at all meetings of
stockholders.
Section 6. Vice Presidents. At the request of the President or in his or
--------- ---------------
her absence or in the event of his or her inability or refusal to act (and if
there be no Chairman of the Board of Directors and no Executive Vice
Presidents), the Vice Presidents if there is more than one (in the order
designated by the Board of Directors) shall perform the duties of the President,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. Each Vice President shall perform such other
duties and have such other powers as the Board of Directors from time to time
may prescribe. If there be no Chairman of the Board of Directors and no
Executive Vice President or Vice President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the
12
<PAGE>
inability or refusal of the President to act, shall perform the duties of the
President, and when so acting, shall have the powers of and be subject to all
the restrictions upon the President.
Section 7. Secretary. The Secretary shall attend all meetings of the
--------- ---------
Board of Directors and all meetings of the stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committee when
required. The Secretary shall give, or cause to be given, notice of all
meetings of the stockholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or President, under whose supervision the Secretary shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings of
the stockholders and special meetings of the Board of Directors, and if there be
no Assistant Secretary, then either the Board of Directors or the President may
choose another officer to cause such notice to be given. The Secretary shall
have custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his or her signature. The
Secretary shall see that all books, reports, statements, certificates and other
documents and records required by law to be kept or filed are properly kept or
filed, as the case may be.
Section 8. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. The Treasurer shall disburse the funds of the Corporation as may be
ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all transactions as Treasurer and of the financial condition of the Corporation.
If required by the Board of Directors, the Treasurer shall give the Corporation
a bond in such sum and with such surety or sureties as shall be satisfactory to
the Board of Directors for the faithful performance of the duties of the office
of Treasurer and for the restoration to the Corporation, in case of the
Treasurer's death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in the Treasurer's
possession or under the control of the Treasurer belonging to the Corporation.
Section 9. General Counsel. The General Counsel shall have general
--------- ---------------
supervision over the legal affairs of the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise provided in
---------- ---------------------
these By-Laws, Assistant Secretaries, if there be any, shall perform such duties
and have
13
<PAGE>
such powers as from time to time may be assigned to them by the Board of
Directors, the President, any Vice President, if there be one, or the Secretary,
and in the absence of the Secretary or in the event of his or her disability or
refusal to act, shall perform the duties of the Secretary, and when so acting,
shall have all the powers of and be subject to all the restrictions upon the
Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be any,
---------- --------------------
shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of the Treasurer's disability or refusal to act, shall perform the duties
of the Treasurer, and when so acting, shall have all the powers of and be
subject to all the restrictions upon the Treasurer. If required by the Board of
Directors, and Assistant Treasurer shall give the Corporation a bond in such
surety or sureties as shall be satisfactory to the Board of Directors for the
faithful performance of the duties of the office of Assistant Treasurer and for
the restoration to the Corporation, in case of the Assistant Treasurer's death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in the Assistant Treasurer's
possession or under control of the Assistant Treasurer belonging to the
Corporation.
Section 12. Other Officers. Such other officers as the Board of Directors
---------- --------------
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the Board of Directors. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the Corporation
--------- --------------------
shall be entitled to have a certificate signed, in the name of the Corporation,
(i) by the Chairman of the Board of Directors, the President, an Executive Vice
President or a Vice President and (ii) by the Treasurer or an Assistant
Treasurer, or the Secretary or an Assistant Secretary of the Corporation,
certifying the number of shares owned by such holder of stock in the
Corporation.
Section 2. Signatures. Any or all of the signatures on a certificate may
--------- ----------
be a facsimile. In case any officer, transfer agent or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before such certificate
is issued, it may be issued by the Corporation with the same effect as if such
person were such officer, transfer agent or registrar at the date of issue.
14
<PAGE>
Section 3. Lost, Destroyed, Stolen or Mutilated Certificates. The Board
--------- -------------------------------------------------
of Directors may direct a new certificate to be issued in place of any
certificate theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate, or such person's legal
representative, to advertise to the same in such manner as the Board of
Directors shall require and/or to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable in
--------- ---------
the manner prescribed by law and in these By- Laws. Transfers of stock shall be
made on the books of the Corporation only by the person named in the certificate
or by such person's attorney lawfully constituted in writing and upon the
surrender of the certificate therefor, properly endorsed for transfer and
payment of all necessary transfer taxes; provided, however, that such surrender
------------------
and endorsement or payment of taxes shall not be required in any case in which
the officers of the Corporation shall determine to waive such requirement.
Every certificate exchanged, returned or surrendered to the Corporation shall be
marked "Canceled," with the date of cancellation, by the Secretary or Assistant
Secretary of the Corporation or the transfer agent thereof. No transfer of
stock shall be valid as against the Corporation for any purpose until it shall
have been entered in the stock records of the Corporation by an entry showing
from and to whom transferred.
Section 5. Transfer and Registry Agents. The Corporation may from time to
--------- ----------------------------
time maintain on or more transfer offices or agencies and registry offices or
agencies at such place or places as may be determined from time to time by the
Board of Directors.
Section 6. Beneficial Owners. The Corporation shall be entitled to
--------- -----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
--------- -------
Certificate of Incorporation or these By-Laws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director,
15
<PAGE>
member of a committee or stockholder, at such person's address as it appears on
the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Written notice may also be given personally or by telegram,
facsimile, telex, or cable.
Section 2. Waivers of Notice.
--------- -----------------
(a) Whenever any notice is required by law, the Certificate of
Incorporation or these By-Laws, to be given to any director, member of a
committee or stockholder, a waiver thereof in writing, signed, by the person or
persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent to notice. Attendance of a person at a
meeting, present by person or represented by proxy, shall constitute a waiver of
notice of such meeting, except where the person attends the meeting for the
express purpose of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or convened.
(b) Neither the business to be transacted at, nor the purpose of,
any regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice unless
so required by law, the Certificate of Incorporation or these By-Laws.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Subject to the requirements of the GCL and the
--------- ---------
provisions of the Certificate of Incorporation, dividends upon the capital stock
of the Corporation may be declared by the Board of Directors at any regular or
special meeting of the Board of Directors, and may be paid in cash, in property,
or in shares of the Corporation's capital stock. Before payment of any
dividend, there may be set aside out of any funds of the Corporation available
for dividends such sum or sums as the Board of Directors from time to time, in
its absolute discretion, deems proper as a reserve or reserves to meet
contingencies, or for purchasing any of the shares of capital stock, warrants,
rights, options, bonds, debentures, notes, scrip or other securities or
evidences of indebtedness of the Corporation, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for any other
proper purpose, and the Board of Directors may modify or abolish any such
reserve.
Section 2. Disbursements. All checks or demands for money and notes of
--------- -------------
the Corporation shall be signed by such officer or officers or such other person
or persons as the Board of Directors may from time to time designate.
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
--------- -----------
fixed by resolution of the Board of Directors.
16
<PAGE>
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------- --------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
INDEMNIFICATION
---------------
Section 1. Power to Indemnify in Actions, Suits or Proceedings Other than
--------- --------------------------------------------------------------
Those by or in the Right of the Corporation. Subject to Section 3 of this
- -------------------------------------------
Article VIII, the Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that such person is or was a director or officer of the
Corporation, or is or was a director or officer of the Corporation serving at
the request of the Corporation as a director or officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against expenses (including attorney's fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by such person
in connection with such action, suit or proceeding if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, such person had no reasonable cause to believe his or her conduct
was unlawful. The termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that such person did not
act in good faith and in a manner which such person reasonably believed to be in
or not opposed to the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that his or
her conduct was unlawful.
Section 2. Power to Indemnify in Actions, Suits or Proceedings by or in
--------- ------------------------------------------------------------
the Rights of the Corporation. Subject to Section 3 of this Article VIII, the
- -----------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was a director or officer of the Corporation serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees) actually and reasonably incurred by
such person in connection with the defense or settlement of such action or suit
if such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the Corporation;
except that no indemnification shall be made in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of
17
<PAGE>
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the ajudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 3. Authorization of Indemnification. Any indemnification under
--------- --------------------------------
this Article VIII (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standard of conduct set forth in
Section 1 or Section 2 of this Article VIII, as the case may be. Such
determination shall be made (i) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(ii) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (iii) by the stockholders.
To the extent, however, that a director or officer of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
such person shall be indemnified against expenses (including attorney's fees)
actually and reasonably incurred by such person in connection therewith, without
the necessity of authorization in the specific case.
Section 4. Good Faith Defined. For purposes of any determination under
--------- ------------------
Section 3 of this Article VIII, a person shall be deemed to have acted in good
faith and in a manner such person reasonably believed to be in or not opposed to
the best interests of the Corporation, or, with respect to any criminal action
or proceeding, to have had no reasonable cause to believe his or her conduct was
unlawful, if such person's action is based on the records or books of account of
the Corporation or another enterprise, or on information supplied to such person
by the officers of the Corporation or another enterprise in the course of their
duties, or on the advise of legal counsel for the Corporation or another
enterprise or on information or records given or reports made to the Corporation
or another enterprise by an independent certified public accountant or by an
appraiser or other expert selected with reasonable care by the Corporation or
another enterprise. The term "another enterprise" as used in this Section 4
shall mean any other corporation or any partnership, joint venture, trust
employee benefit plan or other enterprise of which such person is or was serving
at the request of the Corporation as a director, officer, employee or agent.
The provisions of this Section 4 shall not be deemed to be exclusive or to limit
in any way the circumstances in which a person may be deemed to have met the
applicable standard conduct set forth in Section 1 or 2 of this Article VIII, as
the case may be.
Section 5. Indemnification by a Court. Notwithstanding any contrary
--------- --------------------------
determination in the specific case under Section 3 of this Article VIII, and
notwithstanding the absence of any determination thereunder, any director or
officer may apply to the Court of Chancery of the State of Delaware or any other
court of competent jurisdiction in the State of Delaware for indemnification to
the extent to otherwise permissible under Sections 1 and 2 of this Article VIII.
The basis of such
18
<PAGE>
indemnification by a court shall be a determination by such court that
indemnification of the director or officer is proper in the circumstances
because such person has met the applicable standards of conduct set forth in
Section 1 or 2 of this Article VIII, as the case may be. Neither a contrary
determination in the specific case under Section 3 of this Article VIII not the
absence of any determination thereunder shall be a defense to such application
or create a presumption that the director or officer seeking indemnification has
not met any applicable standard of conduct. Notice of any application for
indemnification pursuant to this Section 5 shall be given to the Corporation
promptly upon the filing of such application. If successful, in whole or in
part, the director or officer seeking indemnification shall also be entitled to
be paid the expense of prosecuting such application.
Section 6. Expenses Payable in Advance. Expenses incurred by a director
--------- ---------------------------
or officer in defending or investigating a threatened or pending action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of such director or officer to repay such amount if it shall ultimately
be determined that such person is not entitled to be indemnified by the
Corporation as authorized in this Article VIII.
Section 7. Nonexclusivity of Indemnification and Advancement of Expenses.
--------- -------------------------------------------------------------
The indemnification and advancement of expenses provided by or granted pursuant
to this Article VIII shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of expenses may be entitled under
the Certificate of Incorporation or any By-Law, agreement, contract, vote of
stockholders or disinterested directors or pursuant to the direction (howsoever
embodied) of any court of competent jurisdiction or otherwise, both as to
action in such person's official capacity and as to action in another capacity
while holding such office, it being the policy of the Corporation that
indemnification of the persons specified in Section 1 and 2 of this Article VIII
shall be made to the fullest extent permitted by law. The provisions of this
Article VIII shall not be deemed to preclude the indemnification of any person
who is not specified in Section 1 or 2 of this Article VIII but whom the
Corporation has the power or obligation to indemnify under provision of the GCL
or otherwise.
Section 8. Insurance. The Corporation may purchase and maintain insurance
--------- ---------
on behalf of any person who is or was a director or officer of the Corporation,
or is or was a director or officer of the Corporation serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of such person's status as
such, whether or not the Corporation would have the power or the obligation to
indemnify such person against such liability under the provisions of this
Article VIII.
Section 9. Certain Definition. For purposes of this Article VIII,
--------- ------------------
references to "the Corporation" shall include, in addition to the resulting
corporation, any
19
<PAGE>
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors or officers, so that any
person who is or was a director or officer of such constituent corporation
serving at the request of such constituent corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, shall stand in the same position
under the provisions of this Article VIII with respect to the resulting or
surviving corporation as such person would have with respect to such constituent
corporation if its separate existence had continued. For purposes of this
Article VIII, references to "fines" shall include any excise taxes assessed on a
person with respect to an employee benefit plan; and references to "serving at
the request of the Corporation" shall include any service as a director,
officer, employee or agent of the Corporation which imposes duties on, or
involves services by, such director or officer with respect to an employee
benefit plan, its participants or beneficiaries; and a person who acted in good
faith and in a manner such person reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan shall be deemed
to have acted in a manner "not opposed to the best interests of the Corporation"
as referred to in this Article VIII.
Section 10. Survival of Indemnification and Advancement of Expenses.
---------- -------------------------------------------------------
The indemnification and advancement of expenses provided by, or granted pursuant
to, this Article VIII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person.
Section 11. Limitation on Indemnification. Notwithstanding anything
---------- -----------------------------
contained in this Article VIII to the contrary, except for proceedings to
enforce rights to indemnification (which shall be governed by Section 5 hereof),
the Corporation shall not be obligated to indemnify any director or officer (or
his or her heirs, executors or personal or legal representatives) or advance
expenses in connection with a proceeding (or part thereof) initiated by such
person unless such proceeding (or part thereof) was authorized or consented to
by the Board of Directors of the Corporation.
Section 12. Indemnification of Employees and Agents. The Corporation may,
---------- ---------------------------------------
to the extent authorized from time to time by the Board of Directors, provide
rights to indemnification and to the advancement of expenses to employees and
agents of the Corporation similar to those conferred in this Article VIII to
directors and officers of the Corporation.
ARTICLE IX
AMENDMENTS
----------
20
<PAGE>
Section 1. Amendments. These By-Laws may be altered, amended or repealed,
--------- ----------
in whole or in part, or new By-Laws may be adopted by the Board of Directors or
by the stockholders as provided in the Certificate of Incorporation
Section 2. Entire Board of Directors. As used in this Article IX and in
--------- -------------------------
these By-Laws generally, the term "entire Board of Directors" means the total
number of directors which the Corporation would have if there were no vacancies.
21
<PAGE>
EXHIBIT 4.1
COMMON STOCK
[LOGO OF GENESIS APPEARS HERE] PAR VALUE $.01
--------------
--------------
GENESIS DIRECT, INC.
CUSIP 371935107
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
- --------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
GENESIS DIRECT, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney on surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
the Corporation's duly authorized officers.
Dated:
/s/ [SIGNATURE APPEARS HERE]
[GENESIS DIRECT, INC. CORPORATE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER SEAL DELAWARE 1995 APPEARS HERE]
/s/ [SIGNATURE APPEARS HERE]
SECRETARY
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
(NEW YORK, N.Y.)
By Transfer Agent
and Registrar
Authorized Signature
- --------------------------------------------------------------------------------
BANKNOTE CORP. OF AMERICA - BROWNS SUMMIT - WALL STREET - GENESIS DIRECT, INC.,
1-804007-942 - PROOF # 1-4/13/98 ALW
<PAGE>
GENESIS DIRECT, INC.
The Corporation will furnish to any stockholder, upon request and without
charge, a full statement of the designations, relative rights, preferences and
limitations of the shares of each class and series of stock authorized to be
issued, so far as the same have been determined, and of the authority of the
board to divide the shares into classes or series and to determine and change
the relative rights, preferences and limitations of any class or series. Such
request may be made to the Secretary of the Corporation at its principal office
or to the Transfer Agent.
The following abbreviations, when used in the inscription on the face of
the certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT......Custodian........
(Cust) (Minor)
TEN ENT - as tenants by the entireties
under Uniform Gifts to
JT TEN - as joint tenants with right Minors Act.............
of survivorship and not as (State)
tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, .................hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------..........................................
................................................................................
..........................................................................Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint ........................................................................
........................................................................Attorney
to transfer the said Shares on the books of the within-named corporation with
full power of substitution in the premises.
Dated ........................
.....................................................
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR DESTROYED, THE
CORPORATION MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A
REPLACEMENT CERTIFICATE.
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of this Certificate, in every particular, without
alteration or enlargement or any change whatever.
- --------------------------------------------------------------------------------
BANKNOTE CORP. OF AMERICA - BROWNS SUMMIT - WALL STREET - GENESIS DIRECT, INC.,
1-804007-942 - PROOF # 1-4/13/98 ALW
<PAGE>
Exhibit 5.1
[LETTERHEAD OF MORRISON & FOERSTER LLP APPEARS HERE]
April 17, 1998
Genesis Direct, Inc.
100 Plaza Drive
Secaucus, NJ 07094
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 filed by Genesis Direct, Inc., a Delaware corporation (the "Company"), with
the Securities and Exchange Commission on March 6, 1998 (Registration No.
333-47455) and Amendment No. 1 thereto filed on April 17, 1998 (the
"Registration Statement"), relating to the registration under the Securities Act
of 1933, as amended, of shares of the Company's common stock, par value $0.01
per share (the "Stock"), including authorized but unissued shares being offered
by the Company (including shares subject to the underwriters' over-allotment
option) and presently issued and outstanding shares being offered by certain
selling shareholders (the "Selling Shareholders") (including shares subject to
the underwriters' over-allotment option). The Stock is to be sold to the
underwriters named in the Registration Statement for resale to the public.
As counsel to the Company, we have examined the proceedings taken by
the Company in connection with the issuance and sale by the Company of shares of
its Stock. We have also examined the proceedings taken by the Company in
connection with the sale of shares of Stock by the Selling Shareholders.
We are of the opinion that (a) the shares of Stock to be offered and
sold by the Company have been duly authorized and, when issued and sold by the
Company in the manner described in the Registration Statement and in accordance
with the resolutions adopted by the Board of Directors of the Company, will be
legally issued, fully paid and nonassessable, and (b) the shares of Stock that
may be sold by the Selling Shareholders are legally and validly issued, fully
paid and nonassessable.
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Genesis Direct, Inc.
April 17, 1998
Page 2
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to all references to us in the Registration
Statement, the prospectus constituting a part thereof and any amendments
thereto.
Very truly yours,
/s/ Morrison & Foerster LLP
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Exhibit 10.1
CREDIT AGREEMENT
dated as of May 21, 1997
among
GENESIS DIRECT, INC. AND ITS SUBSIDIARIES,
AS BORROWERS
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THE FINANCIAL INSTITUTIONS PARTY HERETO,
AS LENDERS,
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and
THE CIT GROUP/BUSINESS CREDIT, INC.,
AS ADMINISTRATIVE AGENT,
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$30,000,000
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TABLE OF CONTENTS
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Page
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ARTICLE I. DEFINITIONS: CONSTRUCTION..................................... 2
1.01. Certain Definitions........................................... 2
1.02. Construction.................................................. 21
1.03. Accounting Principles......................................... 22
ARTICLE II. THE CREDITS................................................... 22
2.01. Revolving Credit Loans and Term Loans......................... 22
2.02. Notes......................................................... 23
2.03. Notice of Borrowing; Making of Loans.......................... 23
2.04. Reduction of Revolving Credit Commitment;
Mandatory Prepayment; Optional Prepayment................ 27
2.05. Interest Rate................................................. 30
2.06. Interest Payment Dates........................................ 30
2.07. Amortization.................................................. 30
2.08. Payments...................................................... 30
2.09. Use of Proceeds............................................... 33
2.10. Eurodollar Rate Not Determinable; Illegality or Impropriety... 33
2.11. Reserve Requirements: Capital Adequacy Circumstances.......... 34
2.12. Indemnity..................................................... 36
2.13. Sharing of Setoffs............................................ 37
2.14. Continuation and Conversion of Loans.......................... 37
2.15. Taxes......................................................... 38
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ARTICLE III. LETTERS OF CREDIT............................................ 40
3.01. Letters of Credit............................................. 40
3.02. Participations................................................ 45
ARTICLE IV. BORROWING BASE; JOINT AND SEVERAL LIABILITY................... 46
4.01. Condition of Lending and Assisting in
Establishing or Opening Letters of Credit................. 46
4.02. Mandatory Prepayment.......................................... 46
4.03. Rights and Obligations Unconditional.......................... 46
4.04. Borrowing Base Certificate.................................... 47
4.05. General Provisions............................................ 47
4.06. Joint and Several Liability................................... 47
4.07. Additional Parties............................................ 48
ARTICLE V. CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT
ISSUANCE AND LENDING...................................... 48
5.01. Conditions Precedent to Effectiveness......................... 48
5.02. Conditions Precedent to Loans and Letters of Credit........... 53
ARTICLE VI. REPRESENTATIONS AND WARRANTIES................................ 54
6.01. Organization, Good Standing, etc.............................. 54
6.02. Authorization, etc............................................ 54
6.03. Governmental Approvals........................................ 55
6.04. Enforceability of Loan Documents.............................. 55
6.05. Subsidiaries.................................................. 55
6.06. Litigation.................................................... 55
6.07. Financial Condition........................................... 56
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6.08. Compliance with Law, etc. .................................... 56
6.09. ERISA......................................................... 56
6.10. Taxes, etc. .................................................. 57
6.11. Regulation G, T, U or X....................................... 57
6.12. Nature of Business............................................ 57
6.13. Adverse Agreements, etc. ..................................... 57
6.14. Holding Company and Investment Company Acts................... 58
6.15. Permits, etc. ................................................ 58
6.16. Priority, Title............................................... 58
6.17. Full Disclosure............................................... 58
6.18. Operating Lease Obligations................................... 59
6.19. Environmental Matters......................................... 59
6.20. Schedules..................................................... 59
6.21. Insurance..................................................... 59
6.22. Use of Proceeds............................................... 60
6.23. Security Documents............................................ 60
6.24. Financial Accounting Practices, etc. ......................... 60
6.25. No Material Adverse Effect.................................... 60
6.26. Real Property; Leases......................................... 60
6.27. Location of Bank Accounts..................................... 61
6.28. No Event of Default........................................... 62
6.29. Capitalized Leases............................................ 62
6.30. Tradenames.................................................... 62
6.31. Solvency...................................................... 62
6.32. Inventory..................................................... 62
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6.33. Intellectual Property......................................... 62
6.34. Material Contracts............................................ 62
6.35. Labor Relations; Collective Bargaining Agreements............. 63
6.36. Accounts...................................................... 63
ARTICLE VII. AFFIRMATIVE COVENANTS......................................... 63
7.01. Reporting Requirements........................................ 64
7.02. Compliance with Laws, etc..................................... 68
7.03. Preservation of Existence, etc................................ 68
7.04. Keeping of Records and Books of Account....................... 69
7.05. Inspection Rights............................................. 69
7.06. Maintenance of Properties, etc................................ 69
7.07. Maintenance of Insurance...................................... 69
7.08. Environmental................................................. 70
7.09. Further Assurances............................................ 71
7.10. Borrowing Base................................................ 71
7.11. Change in Collateral; Collateral Records...................... 71
7.12. Financial Accounting Practices, etc........................... 72
7.13. Cash Management System........................................ 72
7.14. Intentionally Omitted......................................... 73
7.15. Additional Subsidiaries....................................... 73
7.16. ERISA......................................................... 73
7.17. Maintenance of Equipment...................................... 74
ARTICLE VIII. NEGATIVE COVENANTS........................................... 74
8.01. Liens, etc.................................................... 74
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8.02. Indebtedness.................................................. 76
8.03. Guarantees, etc............................................... 77
8.04. Merger, Consolidation, Sale of Assets, etc.................... 77
8.05. Change in Nature of Business.................................. 78
8.06. Loans, Advances and Investments, etc.......................... 78
8.07. Dividends, Prepayments, etc................................... 79
8.08. Federal Reserve Regulations................................... 79
8.09. Transactions with Affiliates.................................. 79
8.10. Environmental................................................. 79
8.11. ERISA......................................................... 80
8.12. Minimum Consolidated Net Worth................................ 80
ARTICLE IX. DEFAULTS....................................................... 80
9.01. Events of Default............................................. 80
9.02. Consequences of an Event of Default........................... 83
9.03. Deposit for Letters of Credit................................. 84
9.04. Certain Remedies.............................................. 85
ARTICLE X. MISCELLANEOUS................................................... 85
10.01. Holidays...................................................... 85
10.02. Records....................................................... 85
10.03. Amendments and Waivers........................................ 85
10.04. No Implied Waiver; Cumulative Remedies........................ 86
10.05. Notices....................................................... 87
10.06. Expenses; Taxes; Attorneys' Fees; Indemnification............. 87
10.07. Application................................................... 89
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10.08. Severability.................................................. 89
10.09. Governing Law................................................. 89
10.10. Prior Understandings.......................................... 89
10.11. Duration; Survival............................................ 89
10.12. Counterparts.................................................. 90
10.13. Assignments; Participations................................... 90
10.14. Successors and Assigns........................................ 92
10.15. Confidentiality............................................... 93
10.16. Waiver of Jury Trial.......................................... 94
10.17. Right of Setoff............................................... 94
10.18. Headings...................................................... 94
10.19. Forum Selection and Consent to Jurisdiction................... 94
10.20. Termination................................................... 95
10.20A. Termination of this Agreement................................. 95
10.20B. Termination Upon an Event of Default.......................... 95
10.20C. Maturity of Obligations Upon Termination...................... 96
10.20D. Termination by Lenders........................................ 96
ARTICLE XI. THE ADMINISTRATIVE AGENT....................................... 96
11.01. Appointment................................................... 96
11.02. Nature of Duties.............................................. 97
11.03. Rights, Exculpation, etc...................................... 98
11.04. Reliance...................................................... 99
11.05. Indemnification............................................... 99
11.06 CIT Individually.............................................. 99
11.07. Successor Agent.............................................. 100
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11.08. Collateral Matters........................................... 100
ARTICLE XII. INCONSISTENCIES.............................................. 103
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EXHIBITS
Exhibit A-1 - Form of Revolving Credit Note
Exhibit A-2 - Form of Term Note
Exhibit B-1 - Form of Security Agreement
Exhibit B-2 - Form of Security Agreement and Mortgage - Trademarks
Exhibit C - Form of Letter of Credit Application
Exhibit D - Form of Borrowing Base Certificate
Exhibit E - Form of Assignment and Acceptance Agreement
Exhibit F - Form of Notice of Borrowing
Exhibit G - Form of Notice Letter
Exhibit H - Form of Joinder Agreement
Exhibit I-1 - Form of Leasehold Deed of Trust from Genesis Direct
Memphis Operations, LLC, Landlord Agreement, and Short
Form of Lease
Exhibit I-2 - Form of Subleasehold Mortgage from Genesis Direct
Secaucus Operations, LLC, Overlandlord Agreement,
Sublandlord Agreement, Memorandum of Overlease, and
Memorandum of Sublease
Exhibit J Form of Warehouse Waiver
SCHEDULES
Schedule 1.01(A) - Inventory Locations
Schedule 1.01(B) - Revolving Credit Commitment and Term
Loan Commitment Amount
Schedule 6.05 - Description of Subsidiaries
Schedule 6.06 - Litigation
Schedule 6.07(a) Financial Statements
Schedule 6.09 - ERISA Plans
Schedule 6.10 - Taxes
Schedule 6.18 - Operating Lease Obligations
Schedule 6.19 - Environmental Matters
Schedule 6.21 - List of Insured Properties
Schedule 6.26 - Real Property Owned and Leased
Schedule 6.27 - Location of Bank Accounts
Schedule 6.29 - Capitalized Lease Obligations
Schedule 6.30 - Tradenames
Schedule 6.34 - Material Contracts
Schedule 6.35 - List of Collective Bargaining Agreements
Schedule 6.36 - Location of Books and Records; Credit Card
Agreement
Schedule 8.01 - Existing Liens
Schedule 8.02 - Indebtedness
Schedule 8.03 - Guarantees
Schedule 8.06 - Investments
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CREDIT AGREEMENT
THIS CREDIT AGREEMENT, dated as of May 21, 1997 among GENESIS DIRECT, INC.,
a Delaware corporation (the "Parent"), LITTLE GENESIS, INC., a Delaware
corporation, GIFTS FOR GRANDKIDS, LLC, a Delaware limited liability company, HOT
OFF THE ICE, LLC, a Delaware limited liability company, BEYOND THE HORIZON, LLC,
a Delaware limited liability company, THE VOYAGER'S COLLECTION, LLC, a Delaware
limited liability company, THE TRAINING CAMP, LLC, a Delaware limited liability
company, CHILDSWORK/CHILDSPLAY, LLC, a Delaware limited liability company,
COMPETITIVE EDGE GOLF, LLC, a Delaware limited liability company, FIRST STEP
DESIGNS, LLC, a Delaware limited liability company, LILLIPUT MOTOR COMPANY, LLC,
a Delaware limited liability company, 1-800-PRO-TEAM, LLC, a Delaware limited
liability company, ATHLETIC SUPPLY OF DALLAS, LLC, a Delaware limited liability
company, NINOS, LLC, a Delaware limited liability company, GENESIS DIRECT
SECAUCUS OPERATIONS, LLC, a Delaware limited liability company, GENESIS DIRECT
MEMPHIS OPERATIONS, LLC, a Delaware limited liability company, GENESIS DIRECT
OPERATIONS, LLC, a New Jersey limited liability company, GENESIS DIRECT MEMPHIS
SERVICES, LLC, a Delaware limited liability company, and AFFINITY COLLEGE AND
UNIVERSITY CATALOGS, LLC, a Delaware limited liability company (all the
foregoing Persons, including the Parent, together with each additional Person
that becomes a Borrower pursuant to Section 4.07 hereof, a "Borrower" and
collectively, the "Borrowers"), the financial institutions from time to time
party hereto (collectively, the "Lenders" and individually, a "Lender"), and THE
CIT GROUP/BUSINESS CREDIT, INC. ("CIT"), a New York corporation, as
Administrative Agent for the Lenders (in such capacity the "Administrative
Agent").
BACKGROUND
WHEREAS, the Borrowers have requested the Administrative Agent and the
Lenders to provide the Borrowers on a joint and several basis with a $30 million
credit facility comprised of (i) a $25 million revolving credit facility,
including a $2 million subfacility for the issuance of letters of credit, and
(ii) a $5 million term loan, and, subject to the terms and conditions set forth
herein, the Lenders have agreed to provide such facility and term loan.
In consideration of the mutual covenants herein contained and intending to
be legally bound hereby, the parties hereto agree as follows:
ARTICLE I.
DEFINITIONS: CONSTRUCTION
1.01. Certain Definitions. In addition to other words and terms defined
elsewhere in this Agreement, as used herein the following words and terms shall
have the following meanings, respectively, unless the context hereof otherwise
clearly requires:
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"Accountant's Opinion" shall have the meaning given that term
in Section 7.01(a) hereof.
"Accounts" shall mean, with respect to any Borrower, all of
such Borrower's now existing and future: (a) accounts receivable (whether or not
specifically listed on schedules furnished to the Lenders), and any and all
instruments, documents, contract rights, chattel paper, general intangibles,
including, without limitation, all accounts created by or arising from any of
such Borrower's sales of goods or rendition of services to its customers, and
all accounts arising from sales or rendition of services made under any of such
Borrower's trade names or styles, whether or not presently in effect, or through
any of such Borrower's divisions; (b) unpaid seller's rights (including
rescission, replevin, reclamation and stoppage in transit) relating to the
foregoing or arising therefrom; (c) rights to any goods represented by any of
the foregoing, including rights to returned or repossessed goods; (d) reserves
and credit balances arising hereunder; (e) guarantees or collateral for any of
the foregoing; (f) insurance policies or rights relating to any of the
foregoing; and (g) cash and non-cash proceeds of any and all of the foregoing.
"Affiliate" of a Person shall mean any other Person (other
than a Subsidiary) which, directly or indirectly, is in control of is controlled
by, or is under common control with, such Person. For purposes of this
definition, "control" of a Person means the power, directly or indirectly either
to (a) vote 10% or more of the securities having ordinary voting power for the
election of directors of such Person or (b) direct or cause the direction of the
management and policies of such Person whether by contract or otherwise.
"Agent Account" shall mean an account in the name of the
Administrative Agent designated by the Administrative Agent to the Parent from
time to time into which every Borrower shall make all payments to the
Administrative Agent, for the account of the Administrative Agent or the
Lenders, as the case may be, under this Agreement.
"Agent Advances" shall have the meaning given that term in
Section 11.08 hereof.
"Agreement" shall mean this Revolving Credit Agreement as
amended, modified, supplemented or restated from time to time.
"Assignment and Acceptance" shall mean an assignment and
acceptance entered into by CIT and an assignee, and accepted by the
Administrative Agent, substantially in the form of Exhibit E hereto.
"Availability" shall mean, at any time, the difference
between (i) the Current Commitment and (ii) the sum of (A) the aggregate
outstanding principal amount of all Loans and (B) the Letter of Credit Exposure.
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"Bank" shall mean The Chase Manhattan Bank, N.A., its
successors or any other bank designated by the Administrative Agent to the
Parent from time to time that is reasonably acceptable to the Parent.
"Benefit Plan" shall mean a defined benefit plan as defined
in Section 3(35) of ERISA that is subject to Title IV of ERISA (other than a
Multiemployer Plan) and in respect of which any Borrower or any ERISA Affiliate
is or within the immediately preceding six (6) years was an "employer" as
defined in Section 3(5) of ERISA.
"Board" means the Board of Governors of the Federal Reserve
System of the United States.
"Book Value" shall mean as to any Inventory of any Borrower
in respect of which such amount is to be determined, the lower of (i) cost (as
reflected in the general ledgers of such Borrower) or (ii) market value (both
cost and market value being determined in accordance with GAAP calculated on the
first in, first out basis).
"Borrower" shall have the meaning given that term in the
introductory paragraph to this Agreement.
"Borrowing Base" shall mean an amount equal to the difference
between (i) the sum of (A) 85% of Eligible Receivables of all Borrowers and (B)
prior to the Consolidation Date, fifty percent (50%) of the Book Value of
Eligible Inventory of all Borrowers and on and after the Consolidation Date,
fifty-five percent (55%) of the Book Value of Eligible Inventory of all
Borrowers and (ii) such reserves as the Administrative Agent, in its sole
discretion, exercised reasonably, may deem appropriate.
"Borrowing Base Certificate" shall have the meaning given
that term in Section 4.04(a) hereof.
"Business Day" shall mean any day other than a Saturday,
Sunday or other day on which banking institutions are authorized or obligated to
close in New York, New York, provided, that with respect to the borrowing,
payment, conversion to or continuation of Eurodollar Loans, Business Day shall
also mean a day on which dealings in Dollars are carried on in the interbank
eurodollar market where the eurodollar and foreign currency and exchange
operations in respect of the Bank's eurodollar loans are then being conducted.
"Capitalized Lease" shall mean any lease which is required
under GAAP to be capitalized on the balance sheet of the lessee.
"Capitalized Lease Obligations" shall mean the aggregate
amount which is required under GAAP to be reported as a
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liability on the balance sheet of a Person as lessee under a Capitalized Lease.
"Cash Concentration Account" shall mean the deposit account
maintained by the Parent at the Cash Concentration Account Bank, which deposit
account shall be under the sole dominion and control of the Administrative
Agent, and from which all funds will be transferred to the Agent Account
pursuant to Section 7.13 hereof.
"Cash Concentration Account Agreement" shall mean an
agreement, in form and substance reasonably satisfactory to the Administrative
Agent, among the Cash Concentration Account Bank, the Parent and the
Administrative Agent delivered to the Administrative Agent pursuant to Section
7.13 hereof, as such Agreement may be modified and supplemented and in effect
from time to time.
"Cash Concentration Account Bank" shall mean The Chase
Manhattan Bank, N.A. or such other bank as the Parent may select with the
written approval of the Administrative Agent not to be unreasonably withheld.
"Change of Control" shall mean any person or group of persons
(within the meaning of Section 13 or 14 of the Securities Exchange Act of 1934
as amended) shall have acquired beneficial ownership (within the meaning of Rule
13d-3 promulgated by the Securities and Exchange Commission under said Act) of a
majority or more of the voting power of the then outstanding common stock of the
Parent.
"CIT" shall have the meaning given that term in the
introductory paragraph to this Agreement.
"Closing Date" shall mean the date on which the conditions
set forth in Section 5.01 hereof shall be first satisfied.
"Collateral" shall mean all of the property (tangible and
intangible) of any Person purported to be subject to the Lien purported to be
created by any Security Document heretofore or hereafter executed by such Person
as security for all or any part of the Obligations.
"Collective Bargaining Agreements" shall have the meaning
assigned to that term in Section 5.01(d) (xvii) hereof.
"Consolidation Date" shall mean the date on which the Parent
provides evidence that the inventory and systems of the Borrowers have been
consolidated in a manner satisfactory to the Majority Lenders in their sole
discretion.
"Convertible Subordinated Debenture Note and Stock Purchase
Agreement" means the Note and Stock Purchase Agreement
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dated June 25, 1996, among the Parent and the institutions party thereto
providing for the purchase of various securities, including the Convertible
Subordinated Debentures, as such agreement is in effect on the date hereof but
after giving effect to the amendments required under Section 5.01 hereof.
"Convertible Subordinated Debentures" means the Parent's
$30,000,000 aggregate principal amount of Convertible Subordinated Debentures
Due June 1, 2003.
"Credit Extension" shall mean (a) the making of any Loan by a
Lender or the Administrative Agent on behalf of the Lenders or (b) the issuance,
increase in the Stated Amount, or extension of the expiration date of any Letter
of Credit which CIT or any Lender assists any Borrower in opening or
establishing.
"Current Commitment" shall have the meaning assigned to that
term in Section 2.01 hereof.
"Depository Accounts" shall mean the blocked depository
accounts maintained by any Borrower for the collection of the cash of such
Borrower and the proceeds from the sale of the Inventory, Equipment and other
assets of any Borrower.
"Depository Account Agreements" shall mean each agreement
(which may include a notice letter in the form attached hereto as Exhibit G if
the Depository Account Bank acknowledges receipt thereof and its agreement to be
bound thereby) among a Depository Bank, one or more Borrowers and the
Administrative Agent delivered to the Administrative Agent pursuant to Section
7.13 hereof, as each such Agreement may be modified and supplemented and in
effect from time to time.
"Depository Bank" shall mean each financial institution at
which a Depository Account is maintained.
"Designated Borrowing Officer" shall mean (a) the Chief
Executive Officer, Chief Operating Officer and Chief Financial Officer of the
Parent or (b) such other officer of the Parent as shall be designated from time
to time in writing by any person specified in clause (a) of the Parent to the
Administrative Agent.
"Designated Financial Officer" of a Person shall mean the
individual designated from time to time by the Board of Directors or governing
body performing like functions of such Person to be the chief financial officer
or Treasurer of such Person (and individuals designated from time to time by the
Board of Directors or governing body performing like functions of such Person to
act in lieu of the chief financial officer or the Treasurer).
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"Disbursement Account" shall mean the blocked deposit account
maintained by the Parent at the Disbursement Account Bank into which there shall
be deposited proceeds of Loans and funds disbursed to the Borrowers by the
Administrative Agent.
"Disbursement Account Agreement" shall mean the agreement
among the Disbursement Account Bank, the Parent and the Administrative Agent
delivered to the Administrative Agent pursuant to Section 7.13 hereof, as each
such Agreement may be modified and supplemented and in effect from time to time.
"Disbursement Account Bank" shall mean The Chase Manhattan
Bank, N.A. or such other bank as the Parent may select with the written approval
of the Administrative Agent not to be unreasonably withheld.
"Dollar", "Dollars" and the symbol "$" shall mean lawful
money of the United States of America.
"Eligible Accounts Receivable" shall mean the gross amount of
the Borrowers' Accounts, that at all times continue to be acceptable to the
Administrative Agent in the exercise of its reasonable business judgment, less,
without duplication, the sum of the following items: (a) any returns, discounts,
claims, credits and allowances of any nature (whether issued, owing, granted or
outstanding) and (b) reserves for (i) sales to the United States of America or
to any agency, department or division thereof; (ii) foreign sales (which term
excludes sales to residents of the United States); (iii) accounts that remain
unpaid more than (a) in the case of Accounts owing from school districts and
other municipal entities, one hundred and twenty (120) days from the date of the
invoice and (b) in all other cases, ninety (90) days from the date of the
invoice; (iv) contras; (v) sales to any Borrower, any Subsidiary, or to any
company affiliated with any Borrower in any way; (vi) bill and hold (deferred
shipment) or consignment sales; (vii) sales to any customer which is (A)
insolvent, (B) the debtor in any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceedings under any federal or state
law or (C) negotiating, or has called a meeting of its creditors for purposes of
negotiating, a compromise of its debts; (viii) all sales to any customer if
fifty percent (50%) or more of either (1) all outstanding invoices or (2) the
aggregate dollar amount of all outstanding invoices, are unpaid more than (a) in
the case of Accounts owing from school districts and other municipal entities,
one hundred and twenty (120) days from the date of the invoice and (b) in all
other cases, ninety (90) days from the date of the invoice; (ix) any other
reasons deemed necessary by the Administrative Agent or the Majority Lenders in
its or their reasonable business judgment and which are customary in scope and
application either in the commercial finance industry or in the lending
practices of the Administrative Agent or the Majority Lenders based upon the
assessment of the Administrative Agent or the Majority Lenders; and (x) an
amount representing, historically, returns, discounts, claims, credits and
allowances.
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"Eligible Inventory" shall mean with respect to any Borrower
finished goods Inventory of such Borrower which at the time of determination
meets all the following qualifications:
(i) it is lawfully owned by such Borrower and not subject to
any Lien, other than the Lien in favor of the Administrative Agent
that secures the payment of the Obligations and it is not held on
consignment and may be lawfully sold;
(ii) it is (A) located in a Borrower's distribution centers,
warehouses or store locations listed on Schedule 1.01(A) hereto or (B)
located in other locations in the continental United States as the
Administrative Agent shall have approved in writing from time to time,
which approval shall be given upon the Parent providing the
Administrative Agent with evidence, reasonably satisfactory to the
Administrative Agent, of (1) the Administrative Agent's perfected,
first priority Lien on all Inventory of such Borrower located in such
locations and (2) the absence of any other Liens on any Inventory of
such Borrower located in such locations, which evidence may include
the results of Uniform Commercial Code, tax and judgment lien searches
in such locations and acknowledgment copies of Uniform Commercial Code
financing statements naming such Borrower (and some or all other
Borrowers), as debtor, and the Administrative Agent, as secured party,
filed in such locations;
(iii) it is determined in the reasonable judgment of the
Administrative Agent to be, when taken as a whole, substantially
similar in quality and mix (having regard for seasonal variations) to
the Inventory maintained by such Borrower in recent historical
operations prior to the Closing Date; and
(iv) it is Inventory that has been valued after deducting
the aggregate amount of reserves for (1) shrinkage, (2) lay-a-ways,
(3) displays, (4) rejected, defective, damaged, aged or otherwise
unsalable Inventory, (5) Inventory to be returned to suppliers, (6)
Inventory in-transit to third parties (other than such Borrower's
agents or warehouses), (7) supplies, (8) consignment Inventory, (9)
monthly rent for each location for which the Administrative Agent has
not received an Overlandlord Agreement, a Sublandlord Agreement, a
Landlord Agreement or Warehouse Waiver, as the case may be
substantially in the form of Exhibit I-1, I-2, or J or in such other
form as is satisfactory to the Administrative Agent (in an amount
equal to two times the monthly rent), (10) slow moving or obsolete
Inventory, (11) the amount of all sales taxes collected by the
Borrower and not yet remitted to the authority to which such taxes are
owed,
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(12) markdowns and (13) other reserves required by the Administrative
Agent in the exercise of its reasonable business judgment.
"Environmental Actions" shall mean any complaint, summons,
citation, notice, directive, order, claim, litigation, investigation,
proceeding, judgment, letter or other communication from any Governmental
Authority or any third party involving a Release (i) from or onto any of the
properties presently or formerly owned or leased by any Borrower or its
Subsidiaries or (ii) from or onto any facilities which received Hazardous
Materials from any Borrower or their respective Subsidiaries, or involving any
violation of any Environmental Law.
"Environmental Law" shall mean all federal, state and local
laws, statutes, ordinances and regulations, now or hereafter in effect relating
to the regulation and protection of human health, safety, the environment and
natural resources. Environmental Laws include but are not limited to the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. (S) 9601 et seq. ) ("CERCLA"); the Hazardous Material
Transportation Act, as amended (49 U.S.C. (S) 180 et seq.); the Resource
Conservation and Recovery Act, as amended (42 U.S.C. (S) 6901 et seq.) ("RCRA");
the Toxic Substance Control Act, as amended (15 U.S.C. (S) 2601 et seq.); the
Clean Air Act, as amended (42 U.S.C. (S) 7401 et seq.) the Federal Water
Pollution Control Act, as amended (33 U.S.C. (S) 1251 et seq.); and their state
and local counterparts or equivalents.
"Environmental Liabilities and Costs" shall mean all
liabilities, monetary obligations, Remedial Actions, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses (including
all reasonable fees, disbursements and expenses of counsel, expert and
consulting and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any Environmental
Action relating to any Environmental condition, violation of Environmental Law,
Remedial Actions or a Release of Hazardous Materials from or onto (i) any
property presently or formerly owned by any Borrower or any of its Subsidiaries
or (ii) any facility which received Hazardous Materials generated by any
Borrower or any of their respective Subsidiaries.
"Environmental Lien" shall mean any Lien securing
Environmental Liabilities and Costs incurred by a Governmental Authority.
"Equipment" shall have the meaning given that term by
Article 9 of the Uniform Commercial Code as presently in effect in the State of
New York, including, without limitation, all machinery, equipment, furnishings
and fixtures, wherever located and replacement thereof, wherever located and
whether any Borrower's interest in such Equipment is as owner or lessee or
conditional vendee, together with all attachments, components
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parts, equipment and accessories installed thereon or affixed thereto and all
proceeds of whatever sort.
"ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended, and any successor statute of similar import, and
regulations thereunder, in each case as in effect from time to time. References
to sections of ERISA shall be construed also to refer to any successor sections.
"ERISA Affiliate" shall mean any (i) corporation which is a
member of the same controlled group of corporations (within the meaning of
Section 414(b) of the IRC Code) as any Borrower, (ii) partnership or other trade
or business (whether or not incorporated) under common control (within the
meaning of Section 414(c) of the Code) with any Borrower, or (iii) member of
the same affiliated service group (within the meaning of Section 414(m) of the
IRC Code) as any Borrower, any corporation described in clause (i) above or any
partnership or trade or business described in clause (ii) above.
"Eurodollar Base Rate" shall mean, with respect to a
Eurodollar Loan for the relevant Interest Period, the rate determined by the
Administrative Agent to be the rate at which deposits in Dollars are offered by
the Bank to first-class banks in the interbank eurodollar market where the
eurodollar and foreign currency and exchange operations in respect of its
eurodollar loans are then being conducted at approximately 11:00 a.m., New York
City time, three Business Days prior to the first day of such Interest Period,
in the approximate amount of the relevant Eurodollar Loan and having a maturity
equal to such Interest Period.
"Eurodollar Loan" shall mean a Loan bearing interest at the
Eurodollar Rate.
"Eurodollar Rate" means with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for
such day in accordance with the following formula (rounded upward to the nearest
1/100 of 1%):
Eurodollar Base Rate
1.00 - Reserve Requirements
"Event of Default" shall mean any of the Events of Default
described in Section 9.01 hereof.
"GAAP" shall mean generally accepted accounting principles as
such principles shall be in effect in the United States at the relevant date.
"GDI Vista Account" shall mean the blocked investment account
maintained by the Parent at the GDI Vista Account Bank.
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"GDI Vista Account Agreement" shall mean the agreement among
the GDI Vista Account Bank, the Parent and the Administrative Agent delivered to
the Administrative Agent pursuant to Section 7.13 hereof, as such Agreement may
be modified and supplemented and in effect from time to time.
"GDI Vista Account Bank" shall mean The Chase Manhattan Bank,
N.A. or such other bank as the Parent may select with the written approval of
the Administrative Agent not to be unreasonably withheld.
"Governmental Authority" shall mean any nation or government,
any federal, state, city, town, municipality, county, local or other political
subdivision thereof or thereto and any department, commission, board, bureau,
instrumentality, agency or other entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.
"Guarantee" of or by any Person shall mean any obligation of
such Person guaranteeing any Indebtedness of any other Person (the "primary
obligor"), directly or indirectly through an agreement (i) to purchase or pay
(or advance or supply funds for the purchase or payment of) such Indebtedness or
to purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (ii) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness against
loss, or (iii) to maintain working capital, equity capital or other financial
statement condition or liquidity of the primary obligor so as to enable the
primary obligor to pay such Indebtedness; provided, however, that the term
Guarantee shall not include endorsements for collection or deposit, in either
case in the ordinary course of business.
"Hazardous Materials" shall mean (i) any element, compound or
chemical that is defined, listed or otherwise classified as a solid waste,
contaminant, pollutant, toxic pollutant, hazardous substance, extremely
hazardous substance, toxic substance, hazardous waste, or special waste under
any Environmental Law; (ii) petroleum and its refined fractions, (iii) any
polychlorinated biphenyls, (iv) any flammable, explosive or radioactive
materials; and (v) any other raw materials used or stored by any Borrower,
building components (including but not limited to asbestos-containing materials)
and manufactured products containing Hazardous Materials.
"Indebtedness" shall mean as to any Person (i) indebtedness
for borrowed money; (ii) indebtedness for the deferred purchase price of
property or services (other than current trade payables incurred in the ordinary
course of business and payable in accordance with customary practices); (iii)
indebtedness evidenced by bonds, debentures, notes or other similar instruments
(other than performance, surety and appeal or other similar bonds arising in the
ordinary course of business); (iv) obligations and liabilities secured by a Lien
upon property
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owned by such Person, whether or not owing by such Person and even though such
Person has not assumed or become liable for the payment thereof; (v) obligations
and liabilities directly or indirectly Guaranteed by such Person; (vi)
obligations or liabilities created or arising under any conditional sales
contract or other title retention agreement with respect to property used and/or
acquired by such Person, even though the rights and remedies of the lessor,
seller and/or lender thereunder are limited to repossession of such property;
(vii) Capitalized Lease Obligations; (viii) all liabilities in respect of
letters of credit, acceptances and similar obligations created for the account
of such Person, and (ix) net liabilities of such Person under interest rate cap
agreements, interest rate swap agreements, foreign currency exchange agreements
and other hedging agreements or arrangements calculated on a basis reasonably
satisfactory to the Administrative Agent and in accordance with accepted
practice.
"Indemnified Parties" shall have the meaning given that term
in Section 10.06 hereof.
"Initial Termination Date" shall have the meaning set forth
in Section 2.01 hereof.
"Interest Period" shall mean, with respect to any Eurodollar
Loan, the period commencing on the borrowing date for, or the date of any
continuation of or conversion for such Eurodollar Loan, as the case may be, and
ending one, two or three months thereafter as the Parent may elect in the
applicable notice given to the Administrative Agent pursuant to Section 2.03 or
Section 2.14, as appropriate; provided that (i) any Interest Period that would
otherwise end on a day that is not a Business Day shall be extended to the next
succeeding Business Day, unless such Business Day falls in another calendar
month, in which case such Interest Period shall end on the next preceding
Business Day; (ii) any Interest Period that begins on the last Business Day of a
calendar month or on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period shall end on the last
Business Day of the applicable calendar month; and (iii) no Interest Period for
any Loan shall end after the Termination Date. Interest shall accrue from and
include the first date of an Interest Period, but exclude the last day of such
Interest Period.
"Inventory" shall mean all goods and merchandise of the
Borrowers including, but not limited to, all finished goods, materials and
supplies of every nature used or usable in connection with the shipping,
storing, advertising or sale of such goods and merchandise, whether now owned or
hereafter acquired and all such property, the sale or disposition of which would
give rise to accounts receivable or cash.
"IRC Code" shall mean the Internal Revenue Code of 1986, as
amended, and any successor statute of similar import, and regulations
thereunder, in each case as in effect from time
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to time. References to sections of the Code shall be construed also to refer to
any successor sections.
"L/C Notice" shall have the meaning given to that term in
Section 3.01(b).
"Lease" shall mean any lease of real property to which any
Borrower is a party as lessee or lessor.
"Leasehold Mortgages" means, collectively, (i) a Leasehold
Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture
Filing from Genesis Direct Memphis Operations, LLC, substantially in the form of
Exhibit I-1 hereto, and (ii) a Leasehold Mortgage, Security Agreement,
Assignment of Leases and Rents and Fixture Filing from Genesis Direct Secaucus
Operations, LLC, substantially in the form of Exhibit I-2 hereto, each in favor
of the Administrative Agent.
"Lenders" shall have the meaning given that term in the
introductory paragraph to this Agreement.
"Letter of Credit" shall have the meaning given to that term
in Section 3.01(a).
"Letter of Credit Application" shall have the meaning given
to that term in Section 3.01(a) hereof.
"Letter of Credit Cash Collateral Account" shall mean the
deposit account maintained at the Bank or such other bank as the Administrative
Agent may select, which deposit account shall be under the sole dominion and
control of the Administrative Agent.
"Letter of Credit Exposure" shall mean, at any time, the sum
at such time of (a) the aggregate amount of all Unreimbursed Draws under Letters
of Credit (whether or not such Letters of Credit are then outstanding) and (b)
the aggregate Undrawn Letter of Credit Availability under all outstanding
Letters of Credit.
"Letter of Credit Fee" shall have the meaning given to that
term in Section 2.08(f) hereof.
"Letter of Credit Guaranty" shall mean the guaranty delivered
by CIT to the Letter of Credit Issuer, guaranteeing the Borrowers' reimbursement
obligations under a reimbursement agreement, Letter of Credit Application or
other like document.
"Letter of Credit Issuer" shall mean the issuer of the
Letters of Credit, which shall be the Bank or The Dai-Ichi Kangyo Bank, Limited,
New York Branch.
"Lien" shall mean any mortgage, deed of trust, pledge, lien,
security interest, charge or other encumbrance or security
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arrangement of any nature whatsoever, including but not limited to any
conditional sale or title retention arrangement, and any assignment, deposit
arrangement or lease intended as, or having the effect of, security.
"Loan" or "Loans" shall mean any and all Revolving Credit
Loans and Term Loans made by the Lenders or by the Administrative Agent on
behalf of the Lenders to the Borrowers or made as a result of charges made to
the Loan Account, in each case pursuant to the terms of this Agreement.
"Loan Account" shall have the meaning given that term in
Section 2.08(a) hereof.
"Loan Documents" shall have the meaning given to that term in
the definition of "Related Documents" set forth in this Section 1.01 hereof.
"Majority Lenders" shall mean, at any time, Lenders whose Pro
Rata Shares aggregate at least sixty-six and two-thirds percent (66-2/3%).
"Material Adverse Effect" shall mean, with respect to any
event, act, condition or occurrence of any nature whatsoever, a material adverse
effect (as determined in the reasonable judgment of the Majority Lenders) upon
(i) the business, operations, condition (financial or otherwise), or properties
of the Borrowers taken as a whole, (ii) the ability of the Borrowers to perform
their obligations hereunder or under any other Related Document, (iii) the Lien
arising under the Related Documents on any Collateral, (iv) the legality,
validity or enforceability of this Agreement or any Related Document or the Lien
arising under any Related Document or (v) the aggregate value of the property
included in the calculation of the Borrowing Base.
"Material Contract" means with respect to any Borrower each
contract or agreement to which such Borrower is a party which (in the reasonable
judgment of the Majority Lenders) is material to the business, operations,
condition (financial or otherwise), performance, or properties of the Borrowers
taken as a whole, including, without limitation, all agreements related to
credit card receivables.
"Minority Lenders" shall have the meaning given to that term
in Section 10.03(b) hereof.
"Multiemployer Plan" shall mean a "multiemployer plan" as
defined in Section 4001(a)(3) of ERISA and subject to Title IV of ERISA which
is, or within the immediately preceding six (6) years was, contributed to by any
Borrower or any ERISA Affiliate.
"Notes" shall mean the Revolving Credit Notes and the Term
Notes.
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<PAGE>
"Notice of Borrowing" shall have the meaning given to that
term in Section 2.03(a) hereof.
"Obligations" shall mean all indebtedness, obligations and
liabilities of one or more of the Borrowers to any Lender or the Administrative
Agent incurred under or related to this Agreement, the Notes or any other
Related Document, whether such indebtedness, obligations or liabilities are
direct or indirect, secured or unsecured, joint or several, absolute or
contingent, due or to become due, whether for payment or performance, now
existing or hereafter arising, including without limitation those which are
described in either of the following clauses (i) or (ii) :
(i) All indebtedness, obligations (including
Reimbursement Obligations) and liabilities of any nature
whatsoever, including amounts due under Section 10.06 and
Section 11.08 hereof and similar agreements contained in the
other Related Documents, from time to time arising under or
in connection with or evidenced or secured by this Agreement,
the Notes, the Letters of Credit or any other Related
Document, including but not limited to the principal amount
of Loans outstanding, together with interest thereon
(including, without limitation, all interest that accrues
after the commencement of any case, proceeding or other
action relating to the bankruptcy, insolvency or
reorganization of any Borrower), the amount of the Letter of
Credit Exposure, together with interest thereon and all
expenses, fees and indemnities hereunder or under any other
Related Document. Without limitation, such amounts include
all Loans and interest thereon and the amount of all Letter
of Credit Exposure whether or not such Loans were remade or
any Letters of Credit to which such Letter of Credit Exposure
relates were issued in compliance with the terms and
conditions hereof or in excess of any Lender's obligation to
lend and arrange for the issuance of Letters of Credit
hereunder or any Lender's obligation to participate therein.
If and to the extent any amounts in any account (including
the Agent Account, the Letter of Credit Cash Collateral
Account, the Depository Accounts, the Cash Concentration
Accounts or otherwise) constituting Collateral are applied to
Obligations hereunder, and any Lender or the Administrative
Agent is subsequently obligated to return or repay any such
amounts to any Person for any reason, the amount so returned
or repaid shall be deemed a Loan hereunder and shall
constitute an Obligation.
(ii) All indebtedness, obligations and liabilities
from time to time arising under or in connection with any
account from time to time maintained by any Borrower or by
any Lender or the Administrative Agent pursuant to the terms
of this
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Agreement or any Related Document, including but not limited
to all reimbursement obligations, service charges and
interest in connection with any overdrafts or returned items
from time to time arising in connection with any such
account, or arising under or in connection with any cash
management services or other services from time to time
performed by any Lender or the Administrative Agent pursuant
to or in connection with this Agreement or any other Related
Document.
"Office" when used in connection with the Administrative
Agent shall mean its office located at 1211 Avenue of the Americas, New York,
New York 10036 or at such other office or offices of the Administrative Agent as
may be designated in writing from time to time by the Administrative Agent to
the Borrower and when used in connection with the Bank or the Letter of Credit
Issuer shall mean the office of such entity designated in writing from time to
time by the Administrative Agent to the Borrowers. In the event Chase shall be
the Bank or the Letter of Credit Issuer, the Office for such entity shall until
further written notice from the Administrative Agent to the Borrowers be its
office located at 55 Water Street, New York, New York 10004.
"Operating Assets" shall with respect to a Borrower mean all
merchandise, inventories, furniture, fixtures and equipment (including all
transportation and warehousing equipment but excluding office equipment,
point-of-sale equipment, cash registers and data processing equipment) owned by
such Borrower or any Subsidiary.
"Operating Lease Obligations" shall mean all obligations and
indebtedness of the Borrowers and their Subsidiaries in respect of leases of
property (whether real, personal or mixed) other than Capitalized Lease
Obligations.
"Operating Property" shall mean all real property and
improvements thereon owned by any Borrower or its Subsidiary and constituting,
without limitation, any store, warehouse, service center or distribution center
wherever located, provided that such term shall not include any store,
warehouse, service center or distribution center which such Borrower's board of
directors declares by resolution not to be of material importance to the
business of the Borrower and its Subsidiaries, taken as a whole.
"Other Taxes" shall have the meaning given to that term in
Section 2.15.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or
any successor thereto.
"Permitted Investments" shall mean (a) direct obligations of
the United States of America or of any agency thereof or obligations guaranteed
as to principal and interest by the United States of America or of any agency
thereof, in either
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<PAGE>
case maturing not more than ninety (90) days from the date of acquisition
thereof by such Person; (b) deposit accounts with or certificates of deposit and
bankers' acceptances issued by any bank or trust company organized under the
laws of the United States of America or any state thereof and having capital,
surplus and undivided profits of at least $500,000,000 maturing not more than 90
days from the date of acquisition thereof by such Person: (c) commercial paper
rated A-1 or better or P-1 or better by Standard & Poor's Corporation ("S&P") or
Moody's Investors Services, Inc. ("Moody's"), respectively maturing not more
than 90 days from the date of acquisition thereof by such Person; (d)
Investments in money market funds rated AAAm or AAAm-G by S&P and Aaa by Moody's
and; (e) repurchase agreements having maturities of not more than 90 days from
the date of acquisition which are entered into with a bank or trust company
described in clause (b) above and which are secured by readily available direct
obligations of the United States of America or any agency thereof.
"Permitted Liens" shall have the meaning given that term in
Section 8.01 hereof.
"Person" shall mean an individual, corporation, partnership,
limited liability company, limited liability partnership, trust, unincorporated
association, joint venture, joint-stock company, government (including political
subdivisions), Governmental Authority or agency, or any other entity.
"Plan" shall mean an employee benefit plan defined in Section
3(3) of ERISA in respect of which any Borrower or any ERISA Affiliate is, or
within the immediately preceding six (6) years was, an "employer" as defined in
Section 3(5) of ERISA.
"Potential Default" shall mean any event or condition which,
with notice or passage of time, or any combination of the foregoing, would
constitute an Event of Default.
"Prime Loan" shall mean a Loan bearing interest at the
Regular Rate.
"Prime Rate" shall mean the interest rate per annum publicly
announced from time to time by the Bank in New York, New York as its Prime Rate,
such interest rate to change automatically from time to time effective as of the
announced effective date of each change in the Prime Rate. The Prime Rate is not
intended to be the lowest rate of interest charged by the Bank to its borrower.
"Pro Rata Share" shall mean, with respect to any Lender, a
fraction (expressed as a percentage), the numerator of which shall be the amount
of such Lender's Revolving Credit Commitment and the denominator of which shall
be the aggregate amount of all of the Lenders' Revolving Credit Commitments, as
adjusted from time to time in accordance with the provisions of
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Section 10.13 hereof, provided that, if the Revolving Credit Commitments have
been terminated, the numerator shall be the unpaid amount of such Lender's Loans
and its interest in the Letter of Credit Exposure and the denominator shall be
the aggregate amount of all unpaid Loans and Letter of Credit Exposure.
"Register" shall have the meaning given that term in Section
10.08(c) hereof.
"Regular Rate" shall mean, for any day, the Prime Rate.
"Reimbursement Obligation" shall mean the obligations of the
Borrowers to reimburse CIT or the Lenders for amounts payable by CIT or the
Lenders under a Letter of Credit Guaranty in respect of any payment made under
any Letter of Credit issued by the Letter of Credit Issuer, together with
interest thereon and all fees and expenses related thereto.
"Related Documents" or "Loan Documents" shall mean this
Agreement, the Notes, the Letters of Credit, each Letter of Credit Application,
the Letter of Credit Guaranty, the Leasehold Mortgages, the Depository Account
Agreements, and Cash Concentration Account Agreement, the Security Documents,
each notice letter delivered to a Depository Bank or other financial institution
pursuant to Section 7.13, the Assignment and Acceptance and the other documents,
instruments and agreements referred to in Section 5.01 hereof, and all other
instruments, agreements and documents from time to time delivered in connection
with or otherwise relating to any Related Document.
"Release" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, injection, discharging, injecting, escaping, leaching,
dumping or disposing (including abandonment, or discarding of barrels,
containers and other closed receptacles containing any hazardous substance,
pollutant or contaminant) of a Hazardous Material into the indoor or outdoor
environment or onto or from any property presently or formerly owned or operated
by any Borrower or any of their respective Subsidiaries, or at any disposed
facility that received Hazardous Materials generated by the Borrowers or any of
their respective Subsidiaries.
"Remedial Action" shall mean all actions taken to (i)
monitor, assess, evaluate, investigate, clean up, remove, remedy, treat, contain
or in any other way address Hazardous Materials in the indoor or outdoor
environment; (ii) prevent or minimize a Release or threatened Release of
Hazardous Materials so that the Release or threatened Release does not migrate
or endanger or threaten to endanger public health or welfare or the environment;
or (iii) perform pre-remedial studies and investigations and post-remedial
operation and maintenance activities, or any other actions authorized by 42
U.S.C. 9601.
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<PAGE>
"Reportable Event" shall mean any of the events described in
Section 4043(b) of ERISA (other than events for which the notice requirements
have been waived).
"Reserve Requirements" shall mean, for any day as applied to
a Eurodollar Loan, the aggregate (without duplication) of the rates (expressed
as a decimal fraction) of reserve requirements in effect on such day (including,
without limitation, basic, supplemental, marginal and emergency reserves under
any regulations of the Board or other Governmental Authority having jurisdiction
with respect thereto) dealing with reserve requirements prescribed for
eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in
Regulation D of the Board) maintained by a member bank of the Federal Reserve
System. Eurodollar Loans shall be deemed to constitute Eurocurrency Liabilities
and to be subject to such reserve requirements without benefit of or credit for
proration, exceptions or offsets which may be available from time to time to any
Lender or the Affiliate of any Lender under Regulation D.
"Revolving Credit Commitment" shall mean, with respect to
each Lender the amount of revolving credit commitment set forth on Schedule
1.01(B) to this Agreement or assigned to such Lender in accordance with Section
10.13 hereof, as such amounts may be reduced from time to time pursuant to the
terms of this Agreement, and "Revolving Credit Commitments" shall, collectively,
mean the aggregate amount of the Revolving Credit Commitments of all the
Lenders, the maximum amount of which shall not exceed $25,000,000.
"Revolving Credit Loans" shall have the meaning given to it
in Section 2.01(a).
"Revolving Credit Notes" shall mean the revolving credit
promissory notes of the Borrowers executed and delivered to the Lenders under
this Agreement and substantially in the form of Exhibit A-1 hereto, as modified
or restated from time to time and any promissory note or notes issued in
exchange or replacement thereof, including all extensions, renewals,
refinancings or refundings thereof in whole or part.
"Security Agreements" shall mean the Security Agreements,
substantially in the form of Exhibit B-1 and Exhibit B-2 hereto, made by the
Borrowers in favor of the Administrative Agent, for the benefit of the Lenders,
as modified and supplemented and in effect from time to time.
"Security Documents" shall mean, collectively, the Security
Agreements and the Leasehold Mortgages executed and delivered by any Borrower,
and all Uniform Commercial Code financing statements required by this Agreement
and the Security Agreements to be filed with respect to the security interests
in personal property created pursuant to such agreements, and all other
documents and agreements executed and delivered by any
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Borrower and/or its Subsidiaries in connection with any of the foregoing
documents.
"Settlement Period" shall have the meaning set forth in
Section 2.03 hereof.
"Solvent" means, with respect to any Person on a particular
date, that on such date (a) the fair value of the property of such Person is not
less than the total amount of its liabilities, (b) the present fair salable
value of the assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its existing debts as
they become absolute and matured, (c) such Person is able to realize upon its
assets and pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature and (e) such Person is not engaged in business or a transaction, and, is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
"Stated Amount" shall mean, with respect to a Letter of
Credit, the face amount thereof, drawn or undrawn, regardless of the existence
or satisfaction of any conditions or limitations on drawing.
"Subsidiary" shall mean, with respect to any Person, any
corporation, limited or general partnership, limited liability company, limited
liability partnership, trust, association or other business entity of which an
aggregate of 50% or more of the outstanding stock or other interests entitled to
vote in the election of the board of directors of such corporation (irrespective
of whether, at the time, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency), managers, trustees or other controlling persons, or an equivalent
controlling interest therein, of such Person is, at the time, directly or
indirectly, owned or controlled by such Person and/or one or more Subsidiaries
of such Person.
"Taxes" shall have the meaning given to that term in Section
2.15 hereof.
"Termination Date" shall have the meaning given that term in
Section 2.01 hereof.
"Termination Event" shall mean with respect to any Borrower
(i) a Reportable Event with respect to any Benefit Plan; (ii) the withdrawal of
such Borrower or any ERISA Affiliate from a Benefit Plan during a plan year in
which such Borrower or any ERISA Affiliate was a "substantial employer" as
defined in Section 4001 (a) (2) of ERISA; (iii) the imposition of an obligation
on such Borrower or any ERISA Affiliate under
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Section 4041 of ERISA to provide affected parties written notice of intent to
terminate a Benefit Plan in a distress termination described in Section 4041 (c)
of ERISA; or (iv) the institution by the PBGC of proceedings to terminate a
Benefit Plan.
"Term Loans" shall have the meaning given to it in Section
2.01(b).
"Term Loan Commitment" shall mean, with respect to each
Lender the amount of term loan commitment set forth on Schedule 1.01(B) to this
Agreement or assigned to such Lender in accordance with Section 10.13 hereof, as
such amounts may be reduced from time to time pursuant to the terms of this
Agreement, and "Term Loan Commitments" shall, collectively, mean the aggregate
amount of the Term Loan Commitments of all the Lenders, the maximum amount of
which shall not exceed $5,000,000.
"Term Notes" shall mean the term promissory notes of the
Borrowers executed and delivered to the Lenders under this Agreement and
substantially in the form of Exhibit A-2 hereto, as modified or restated from
time to time and any promissory note or notes issued in exchange or replacement
thereof, including all extensions, renewals, refinancings or refundings thereof
in whole or part.
"Undrawn Letter of Credit Availability" shall mean with
respect to a Letter of Credit, at any time, the maximum amount available to be
drawn under such Letter of Credit at such time, regardless of the existence or
satisfaction of any conditions or limitations on drawing.
"Unreimbursed Draws" shall mean with respect to a Letter of
Credit, at any time, the aggregate amount at such time of all payments made by
the Letter of Credit Issuer or payments made by CIT or the Lenders under a
Letter of Credit Guaranty in respect of such payments under such Letter of
Credit, to the extent not repaid by the Borrower, provided that Unreimbursed
Draws shall not include any such payments that have been charged to the Loan
Account and constitute a Loan pursuant to the terms of this Agreement.
"Unused Line Fee" shall have the meaning given to that term
in Section 2.08(e) hereof.
1.02. Construction. Unless the context of this Agreement
otherwise clearly requires, references to the plural include the singular,
the singular the plural and the part the whole and "or" has the inclusive
meaning represented by the phrase "and/or." References in this Agreement to
"determination" by the Administrative Agent include reasonable good faith
estimates by the Administrative Agent (in the case of quantitative
determinations) and reasonable good faith beliefs by the Administrative
Agent (in the case of qualitative determinations). The words "hereof",
"herein", "hereunder" and similar terms in this Agreement refer to this
Agreement as a
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whole and not to any particular provision of this Agreement. The section and
other headings contained in this Agreement and the Table of Contents preceding
this Agreement are for reference purposes only and shall not control or affect
the construction of this Agreement or the interpretation thereof in any respect.
Section, subsection and exhibit references are to this Agreement unless
otherwise specified.
1.03. Accounting Principles. Except as otherwise provided in
this Agreement, all computations and determinations as to accounting or
financial matters and all financial statements to be delivered pursuant to this
Agreement shall be made and prepared in accordance with GAAP (including
principles of consolidation where appropriate), and all accounting or financial
terms shall have the meanings ascribed to such terms by GAAP. Notwithstanding
the definition of GAAP contained in this Agreement, no change in GAAP that would
affect the method or calculation of any covenants, restrictions or standards or
definitions of terms used herein shall be given effect in such calculations
until such covenants, restrictions or standards or definitions are amended in a
manner satisfactory to the Parent and the Majority Lenders so as to reflect such
change in GAAP.
ARTICLE II.
THE CREDITS
2.01. Revolving Credit Loans and Term Loans. (a) Subject to
the terms and conditions and relying upon the representations and warranties
herein set forth, each Lender severally agrees to make loans ("Revolving Credit
Loans") to the Borrowers at any time and from time to time on or after the date
hereof and to but not including, the Termination Date, in an aggregate principal
amount for all Borrowers as a whole not exceeding at any one time its Pro Rata
Share of the Current Commitment at such time. The "Current Commitment" at any
time shall be equal to the lesser of (A) $25,000,000, as such amount may have
been reduced pursuant to the terms of this Agreement at such time, and (B) the
Borrowing Base. No Lender shall have an obligation to make Revolving Credit
Loans hereunder or arrange for the issuance of Letters of Credit on or after the
Termination Date or which, when added to the aggregate amount of all outstanding
and contemporaneous Revolving Credit Loans and the Letter of Credit Exposure at
such time, would cause the aggregate amount of all Revolving Credit Loans and
the Letter of Credit Exposure at any time to exceed the Current Commitment at
such time. The "Termination Date" means the date on which the Revolving Credit
Commitment of each Lender expires as it may be extended from time to time
pursuant to Section 10.20 hereof, which initially shall be May 21, 2002 (the
"Initial Termination Date"). Within the limits of time and amount set forth in
this Section 2.01, and subject to the provisions of this Agreement, the
Borrowers may borrow, repay and reborrow hereunder. For the convenience of the
parties, all notices (including, without limitation, Notices of Borrowing and
notices pursuant to Article IX hereof and Section 10.20 hereof) and statements
(including
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periodic statements pursuant to Section 2.08(b) hereof) to be given by or to any
Borrower shall be given by or to the Parent and all such notices and statements
so given shall be binding upon all Borrowers whether or not the Parent shall
have delivered a copy of such notice to any Borrower. Without limiting the
foregoing, notices under any Loan Document given by the Administrative Agent to
the Parent shall be deemed to have been given to all Borrowers (whether or not
the applicable provision of the Loan Document so states).
(b) Term Loans. Subject to the terms and conditions and
relying upon the representations and warranties herein set forth, each Lender
severally agrees to make a term loan ("Term Loans") to the Borrowers on the
Closing Date in an aggregate principal amount for all Borrowers as a whole of
$5,000,000. No Lender shall have any obligation to make any Term Loan after the
Closing Date, and any amount of the Term Loan that is prepaid may not be
reborrowed.
2.02. Notes. The obligation of the Borrowers to repay the
unpaid principal amount of the Revolving Credit Loans and the Term Loans made to
it by each Lender and to pay interest thereon shall be evidenced in part by a
Revolving Credit Note and Term Note, respectively, dated the date of this
Agreement in the principal amount of such Lender's Revolving Credit Commitment
and Term Loan Commitment, respectively, with the blanks appropriately filled in.
An executed Revolving Credit Note and Term Note for each Lender shall be
delivered by the Borrowers to the Administrative Agent on the date of the
execution and delivery of this Agreement.
2.03. Notice of Borrowing; Making of Loans.
(a) Whenever a Borrower desires to borrow, the Parent on
behalf of the Borrower shall provide notice to the Administrative Agent of such
proposed borrowing (a "Notice of Borrowing"), each such notice, to be given (i)
not later than 12:00 noon (New York City time) on the date of such proposed
borrowing, in the case of a borrowing consisting of Prime Loans, or (ii) not
later than 12:00 noon (New York City time) on the third Business Day before the
date of such borrowing, in the case of a borrowing consisting of Eurodollar
Loans, setting forth: (a) the date, which shall be a Business Day, on which such
borrowing is to occur, (b) whether such Loan is requested to be a Prime Loan or
a Eurodollar Loan and, if a Eurodollar Loan, the Interest Period requested with
respect thereto (which may be one, two or three months), (c) the principal
amount of the Loan being borrowed and (d) the account information where such
Loan is to be received. Such notice shall be given by telephone or in writing by
a Designated Borrowing Officer, provided, that, if requested by the
Administrative Agent, any such telephonic notice shall be confirmed in writing
by delivery to the Administrative Agent, on or before the date on which such
Loan is to be made, of a written notice substantially in the form of Exhibit F
hereto containing the original or facsimile signature of a Designated Borrowing
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Officer of the Parent. Except for a Notice of Borrowing when the Administrative
Agent will fund the related Loan pursuant to Section 2.03(e) hereof, the
Administrative Agent shall provide each Lender with prompt notice of each Notice
of Borrowing. Except as otherwise provided in Section 2.03(e), on the date
specified in such notice, each Lender shall, subject to the terms and conditions
of this Agreement, make its Pro Rata Share of such Loan in immediately available
funds by wire transfer to the Administrative Agent at its Office not later than
1:30 p.m. (New York City time). Unless the Administrative Agent determines that
any applicable conditions in Section 5.02 have not been satisfied, the
Administrative Agent shall make the funds so received from the Lenders available
to the Parent on behalf of the Borrower not later than 2:30 p.m. (New York City
time), on the date specified in such notice in immediately available funds by
(i) depositing such proceeds in the Disbursement Account of the Parent if such
Disbursement Account is located at the Bank and (ii) initiating a wire transfer
of same day funds to the Disbursement Account if such Disbursement Account is
not located at the Bank.
(b) The Administrative Agent and each Lender shall be
entitled to rely conclusively on each Designated Borrowing Officer's authority
to request a Loan on behalf of the Borrower until the Administrative Agent
receives written notice to the contrary. The Administrative Agent and the
Lenders shall have no duty to verify the authenticity of the signature appearing
on any written Notice of Borrowing and, with respect to an oral request for a
Loan, the Administrative Agent and the Lenders shall have no duty to verify the
identity of any Person representing himself as a Designated Borrowing Officer.
(c) The Administrative Agent and the Lenders shall not
incur any liability to any Borrower in acting upon any telephonic notice
referred to above which the Administrative Agent and the Lenders believe in good
faith to have been given by a Designated Borrowing Officer or for otherwise
acting in good faith under this Section 2.03 and, upon the funding of a Loan by
the Lenders (or by the Administrative Agent on behalf of the Lenders) in
accordance with this Agreement pursuant to any such telephonic notice, the
Borrowers shall have effected a Loan hereunder.
(d) Each Notice of Borrowing pursuant to this Section 2.03
shall be irrevocable and the Borrowers shall be bound to make a borrowing in
accordance therewith. Each Prime Loan shall be in a minimum amount of $100,000
and in multiples of $100,000 if in excess thereof, and each Eurodollar Loan
shall be in a minimum amount of $2,500,000 and in multiples of $100,000 if in
excess thereof, provided that the Borrowers shall not be entitled to request any
Loan that, if made, would result in an aggregate of more than four separate
Eurodollar Loans of any Lender being outstanding hereunder at any one time.
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(e) (i) Except as otherwise provided in this subsection
2.03(e), all Loans under this Agreement shall be made by the Lenders
simultaneously and proportionately to their Pro Rata Shares, it being understood
that no Lender shall be responsible for any default by any other Lender in that
other Lender's obligation to make a Loan requested hereunder nor shall the
Revolving Credit Commitment of any Lender be increased or decreased as a result
of the default by any other Lender in that other Lender's obligation to make a
Loan requested hereunder.
(ii) Notwithstanding any other provision of this
Agreement, and in order to reduce the number of fund transfers among the
Borrowers, the Lenders and the Administrative Agent, the Borrowers, the Lenders
and the Administrative Agent agree that the Administrative Agent may (but shall
not be obligated to), and the Borrowers and the Lenders hereby irrevocably
authorize the Administrative Agent to, fund, on behalf of the Lenders, Loans
pursuant to Section 2.01 hereof, subject to the procedures for settlement set
forth in subsection 2.03(f) hereof; provided, however, that (a) the
Administrative Agent shall in no event fund such Loans if the Administrative
Agent shall have received written notice from the Majority Lenders on the
Business Day prior to the day of the proposed Loan that one or more of the
conditions precedent contained in Section 5.02 hereof will not be satisfied on
the day of the proposed Loan, and (b) the Administrative Agent shall not
otherwise be required to determine that, or take notice whether, the conditions
precedent in Section 5.02 hereof have been satisfied.
(iii) Unless (A) the Administrative Agent has notified
the Lenders that the Administrative Agent, on behalf of the Lenders, will fund a
particular Loan pursuant to subsection 2.03(e) (ii) hereof, or (B) the
Administrative Agent shall have been notified by any Lender on the Business Day
prior to the day of a proposed Loan that such Lender does not intend to make
available to the Administrative Agent such Lender's Pro Rata Share of the Loan
requested on such day, the Administrative Agent may assume that such Lender has
made such amount available to the Administrative Agent on such day and the
Administrative Agent, in its sole discretion, may, but shall not be obligated
to, cause a corresponding amount to be made available to the Borrower on such
day. If the Administrative Agent makes such corresponding amount available to
the Parent on behalf of the Borrower and such corresponding amount is not in
fact made available to the Administrative Agent by such Lender, the
Administrative Agent shall be entitled to recover such corresponding amount on
demand from such Lender together with interest thereon, for each day from the
date such payment was due until the date such amount is paid to the
Administrative Agent, at the customary rate set by the Administrative Agent for
the correction of errors among banks for three Business Days and thereafter at
the Regular Rate. During the period in which such Lender has not paid such
corresponding amount to the Administrative Agent, notwithstanding anything to
the contrary contained in this Agreement or any other Related Document, the
amount so advanced by the Administrative
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Agent to any Borrower shall, for all purposes hereof, be a Loan made by the
Administrative Agent for its own account. Upon any such failure by a Lender to
pay the Administrative Agent, the Administrative Agent shall promptly thereafter
notify the Parent of such failure and the Borrowers shall immediately pay such
corresponding amount to the Administrative Agent for its own account.
(iv) Nothing in this subsection 2.03(e) shall be deemed
to relieve any Lender from its obligation to fulfill its Revolving Credit
Commitment hereunder or to prejudice any rights that the Administrative Agent or
the Borrowers may have against any Lender as a result of any default by such
Lender hereunder.
(f) (i) With respect to all periods for which the
Administrative Agent has funded Loans pursuant to subsection 2.03(e) hereof,
within fifteen (15) days after the last day of each calendar month, or such
shorter period as it may from time to time select (any such month or shorter
period being herein called a "Settlement Period"), the Administrative Agent
shall notify each Lender of the average daily unpaid principal amount of the
Loans outstanding during such Settlement Period. In the event that such amount
is greater than the average daily unpaid principal amount of the Loans
outstanding during the Settlement Period immediately preceding such Settlement
Period (or, if there has been no preceding Settlement Period, the amount of the
Loans made on the date of such Lender's initial funding), each Lender shall
promptly make available to the Administrative Agent its Pro Rata Share of the
difference in immediately available funds. In the event that such amount is less
than such average daily unpaid principal amount, the Administrative Agent shall
promptly pay over to each other Lender its Pro Rata Share of the difference in
immediately available funds. In addition, if the Administrative Agent shall so
request at any time when a Potential Default or an Event of Default shall have
occurred and be continuing, or any other event shall have occurred as a result
of which the Administrative Agent shall determine that it is desirable to
present claims against the Borrowers for repayment, each Lender shall promptly
remit to the Administrative Agent or, as the case may be, the Administrative
Agent shall promptly remit to each Lender, sufficient funds to adjust the
interests of the Lenders in the then outstanding Loans to such an extent that,
after giving effect to such adjustment, each Lender's interest in the then
outstanding Loans will be equal to its Pro Rata Share thereof. The obligations
of each Lender under this subsection 2.03(f) shall be absolute and
unconditional. Each Lender shall only be entitled to receive interest on its Pro
Rata Share of the Loans which have been funded by such Lender.
(ii) In the event that any Lender fails to make any
payment required to be made by it pursuant to subsection 2.03(f) (i) hereof, the
Administrative Agent shall be entitled to recover such corresponding amount on
demand from such Lender together with interest thereon, for each day from the
date such
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payment was due until the date such amount is paid to the Administrative Agent,
at the customary rate set by the Administrative Agent for the correction of
errors among banks for three Business Days and thereafter at the Regular Rate.
During the period in which such Lender has not paid such corresponding amount to
the Administrative Agent, notwithstanding anything to the contrary contained in
this Agreement or any other Related Document, the amount so advanced by the
Administrative Agent to the Borrowers shall, for all purposes hereof, be a Loan
made by the Administrative Agent for its own account. Upon any such failure by a
Lender to pay the Administrative Agent, the Administrative Agent shall promptly
thereafter notify the Borrowers of such failure and the Borrowers shall
immediately pay such corresponding amount to the Administrative Agent for its
own account. Nothing in this subsection 2.03(f) (ii) shall be deemed to relieve
any Lender from its obligation to fulfill its Revolving Credit Commitment
hereunder or to prejudice any rights that the Borrowers or the Administrative
Agent may have against any Lender as a result of any default by such Lender
hereunder.
2.04. Reduction of Revolving Credit Commitment; Mandatory
Prepayment; Optional Prepayment.
(a) Optional Reduction of the Revolving Credit
Commitment. (i) Subject to Section 2.04(e) hereof, the Borrowers may at any time
or from time to time and without penalty or premium reduce the Revolving Credit
Commitments of the Lenders to an amount not less than the sum of the unpaid
principal amount of all Loans then outstanding plus the principal amount of all
Loans not yet made as to which notice has been given by the Parent under Section
2.03 hereof plus the Letter of Credit Exposure at such time plus the Stated
Amount of all Letters of Credit not yet issued as to which a request has been
made unless the request is withdrawn and the Letter of Credit is not issued by
the Letter of Credit Issuer under Section 3.01 hereof. Any reduction shall be in
an amount which is an integral multiple of $1,000,000. Reduction of the
Revolving Credit Commitments of the Lenders shall be made by providing not less
than two Business Days' written notice (which notice shall be irrevocable) to
such effect to the Administrative Agent (which notice the Administrative Agent
shall promptly transmit to each Lender) . Reductions of the Revolving Credit
Commitments of the Lenders are irrevocable and may not be reinstated. Each such
reduction shall reduce the Revolving Credit Commitment of each Lender
proportionately in accordance with its Pro Rata Share.
(ii) Mandatory Termination of Revolving Credit
Commitment. On the date which is ninety (90) days after the occurrence of a
Change of Control, the Revolving Credit Commitments of all Lenders shall
automatically terminate, provided that the Revolving Credit Commitments shall
not terminate if, before the 60th day after the occurrence of a Change of
Control, all Lenders notify the Administrative Agent that they have elected not
to terminate their Revolving Credit Commitments. Nothing contained in this
Section 2.04(a) (ii) shall
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affect the rights of the Administrative Agent and the Lenders in the event of a
failure by the Borrowers to comply with Section 8.04 hereof.
(b) Mandatory Prepayment.
(i) Exceeding Current Commitment. If at any time
the Current Commitment is less than the aggregate unpaid principal amount of the
Revolving Credit Loans then outstanding plus the Letter of Credit Exposure at
such time, the Borrowers shall prepay an amount of the Revolving Credit Loans
not less than the amount of such difference or, if the Revolving Credit Loans
then outstanding are less than the amount of such difference, provide cash
collateral, or other collateral acceptable to the Administrative Agent in its
sole discretion, to the Administrative Agent in an amount equal to 105% of such
excess, which cash collateral shall be deposited and held in the Letter of
Credit Cash Collateral Account until such time as such excess no longer exists.
Any such prepayment will not otherwise reduce the Revolving Credit Commitments
of the Lenders. Concurrently with any notice of reduction of the Revolving
Credit Commitments of the Lenders, the Borrowers shall give notice to the
Administrative Agent of any mandatory prepayment which notice shall specify a
prepayment date no later than the effective date of such reduction of the
Revolving Credit Commitments of the Lenders.
(ii) Required Amortization of Term Loans. The
Borrowers shall on May 21 of each year, commencing May 21, 1998, repay $800,000
of principal of the Term Loans, and shall repay the entire unpaid principal
amount of Term Loans on May 21, 2002. If the Parent or any Borrower shall
consummate an initial public offering (an "IPO") (as such term is defined in the
Convertible Subordinated Note and Stock Purchase Agreement as in effect but
without regard to the amount of such offering) of securities, the Borrowers
shall prepay the Term Loans (which prepayment shall be applied to the
installments thereof in the inverse order of maturity) by an amount equal to the
greater of (x) $2,000,000 and (y) the product of (i) the unpaid principal amount
of the Term Loans at the time of such prepayment times (ii) the percentage that
the amount of the Convertible Subordinated Debentures that is prepaid in
connection with such IPO is of the total amount of the Convertible Subordinated
Debentures outstanding (including that portion of the principal amount of any
Convertible Subordinated Debentures for which notice of conversion has been
given to the Parent pursuant to Section 9A(b) of the Convertible Subordinated
Note and Stock Purchase Agreement) prior to such prepayment, but in no event
shall the amount of the prepayment required by this second sentence exceed the
amount of the then outstanding Term Loans. Such prepayment shall be made on the
earlier of (i) the date of consummation of such IPO and (ii) the date of any
prepayment of the Convertible Subordinated Debentures pursuant to the last
sentence of clause (a) (ii) of Paragraph 10 of the Convertible Subordinated Note
and Stock Purchase Agreement.
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(iii) Other Mandatory Prepayments. The Administrative Agent
shall on each Business Day apply funds deposited in the Agent Account in
accordance with Section 7.13 hereof, to the payment, in whole or in part, of the
Obligations outstanding (except such funds shall not be applied to the payment
of the Term Loan unless there is an Event of Default and the Administrative
Agent elects to so apply the funds). To the extent that sale proceeds referred
to in Section 8.04 hereof are required to be a mandatory prepayment, such
prepayment shall be made under this subsection (iii). The amount and
circumstances under which funds are required to be swept into the Agent Account
is set forth in Section 7.13.
(c) Optional Prepayment. The Borrowers may at any time or
from time to time prepay, in whole or in part, any or all Loans then
outstanding. Any partial prepayment of a Eurodollar Loan shall not reduce the
aggregate principal amount of such Eurodollar Loan to less than $2,500,000.
(d) Prepayment Penalty and Termination Fee. All prepayments
of Loans under this Section 2.04 shall be without premium or penalty, except as
provided in this clause (d) and except that any prepayment of Eurodollar Loans
shall be subject to the provisions of Section 2.12 hereof. The Borrowers agree
that if the Revolving Credit Commitments are terminated in whole either (x) as a
result of an Event of Default of a type described in Sections 9.01(a), Section
9.01(c) (but solely with respect to a breach of Section 7.15), Section 9.01(g),
9.01(h) or Section 9.01(j) or (y) as a result of voluntary termination by the
Borrowers at any time prior to the third anniversary of the Closing Date, the
Borrowers shall pay to the Administrative Agent for the account of the Lenders,
on the date of termination (together with any payments of principal, interest,
fees or other amounts payable hereunder or any other Related Document on such
date) an early termination fee as follows: (i) one and three quarters percent
(1.75%) (one and one half percent (1.5%) if such payment is paid from the
proceeds of or in anticipation of a public offering of equity securities of any
of the Borrowers) from the Closing Date through the date one year from the
Closing Date, (ii) one percent (1.00%) (three quarters of one percent (0.75%) if
such payment is paid from the proceeds of or in anticipation of a public
offering of equity securities of any of the Borrowers) from the date which is
one year and one day after the Closing Date through the second anniversary of
the Closing Date, (iii) one half of one percent (0.5%) from the date which is
two years and one day after the Closing Date through the third anniversary of
the Closing Date, and (iv) 0% if such payment is made at any time after the
third anniversary of the Closing Date. The early termination fee shall be
calculated by multiplying the applicable percentage above by $25,000,000.
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2.05. Interest Rate.
(a) Each Prime Loan shall bear interest at a rate per
annum for each day until paid equal to the Regular Rate as of such day plus
.50%.
(b) Each Eurodollar Loan shall bear interest at a rate
per annum equal to the Eurodollar Rate plus 3% for the Interest Period in effect
for such Eurodollar Loan.
(c) The Term Loan shall bear interest at a rate per
annum for each day until paid equal to the Regular Rate for such day plus .50%.
2.06. Interest Payment Dates. The Borrowers shall pay
interest on the unpaid principal amount of each Loan from the date of such Loan
until such principal amount shall be paid in full, which interest shall be
payable (i) if such Loan is a Prime Loan, monthly in arrears on the first day of
each month, commencing June 1, 1997, and (ii) if such Loan is a Eurodollar Loan,
on the last day of the Interest Period of such Eurodollar Loan. After maturity
of any principal amount of any Loan (by acceleration, at scheduled maturity or
otherwise), interest on such amount shall be due and payable on demand.
2.07. Amortization. To the extent not due and payable
earlier pursuant to the terms of this Agreement, the entire unpaid principal
amount of each of the Loans shall be due and payable on the Termination Date.
2.08. Payments.
(a) Time, Place and Manner. All payments and
prepayments to be made in respect of principal, interest, fees or other amounts
due from the Borrowers hereunder or under any other Related Document shall be
payable at or before 12:00 Noon, New York City time, on the day when due without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived. Such payments shall be made to the Administrative Agent for
the account of the Administrative Agent, CIT or the Lenders, as the case may be,
at the Agent Account in Dollars in funds immediately available at the Bank's
Office without setoff, counterclaim or other deduction of any nature. The
Administrative Agent shall maintain a loan account (the "Loan Account") on its
books in the name of the Borrowers in which the Borrowers will be charged with
Loans made by the Administrative Agent or the Lenders to the Borrowers hereunder
and with any other Obligations. The Borrowers and the Lenders hereby authorize
the Administrative Agent to, and the Administrative Agent may, from time to time
charge the Loan Account with any interest, fees, expenses and other Obligations
that are due and payable under this Agreement or any Related Document. The
Borrowers and the Lenders confirm that any charges which the Administrative
Agent may so make to the Loan Account as herein provided will be made as an
accommodation to the Borrowers and
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solely at the Administrative Agent's discretion and shall constitute a Loan to
the Borrowers funded by the Administrative Agent on behalf of the Lenders and
subject to subsections 2.03(e) and 2.03(f) of this Agreement. Each of the
Lenders and the Borrowers agree that the Administrative Agent shall have the
right to make such charges regardless of whether any Event of Default or
Potential Default shall have occurred and be continuing or whether any of the
conditions precedent in Section 5.02 have been satisfied. The Loan Account will
be credited upon receipt of "good funds" in the Agent Account with all amounts
actually received by the Administrative Agent from the Borrowers or others for
the account of the Borrowers. Interest on all Loans and all fees that accrue on
a per annum basis shall be computed on the basis of the actual number of days
elapsed in the period during which interest or such fee accrues and a year of
360 days. In computing interest on any Loan, the date of the making of such Loan
shall be included and the date of payment shall be excluded; provided, however,
that if a Loan is repaid on the same day in which it is made, one day's interest
shall be paid on such Loan.
(b) Periodic Statements. The Administrative Agent shall
provide the Lenders and the Parent promptly after the end of each calendar month
a summary statement (in the form from time to time used by the Administrative
Agent) of (A) the opening and closing daily balances in the Loan Account during
such month, (B) the amounts and dates of all Loans made during such month, (C)
the amounts and dates of all payments on account of the Loans made during such
month and each Lender's interest in the Loans, (D) the amount of interest
accrued on the Loans during such month, (E) any Letters of Credit issued by the
Letter of Credit Issuer during such month, specifying the Stated Amount thereof,
(F) the amount of charges to the Loan Account or Loans to be made during such
month to reimburse CIT, the Lenders or the Letter of Credit Issuer for drawings
made under Letters of Credit or payments made by CIT or the Lenders under the
Letter of Credit Guaranty, and (G) the amount and nature of any charges to the
Loan Account made during such month on account of interest, fees and expenses
and other Obligations. All entries on any such statement shall, 30 days after
the same is sent, be presumed to be correct and shall constitute prima facie
evidence of the information contained in such statement, subject to the
Borrower's and each Lender's express right to rebut such presumption by
conclusively demonstrating the existence of any error on the part of the
Administrative Agent.
(c) Apportionment of Payments. Except as otherwise
provided in this subsection, aggregate principal and interest payments shall be
apportioned among all outstanding Loans to which such payments relate and
payments of the fees required to be paid by the Borrowers under this Agreement
to the Administrative Agent (except as to amounts payable for the account of the
Administrative Agent) shall be apportioned ratably and to the extent separately
agreed to by the Administrative Agent and any Lender. All payments shall be
remitted to the Administrative Agent and all such payments and any other
amounts,
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including, without limitation, proceeds of Collateral received by the
Administrative Agent from or as to the Borrowers shall be applied subject to the
provisions of this Agreement first, to pay principal of and interest on any
Loans funded by the Administrative Agent on behalf of the Lenders (including,
without limitation, under Section 11.08 hereof) and any fees, expense
reimbursements or indemnities then due to the Administrative Agent from the
Borrower; second, to pay any fees, expense reimbursements or indemnities then
due to the Lenders or the Letter of Credit Issuer hereunder; third, to pay
interest due in respect of Loans and Unreimbursed Draws under Letters of Credit;
and fourth, to pay, prepay or provide cash collateral, if then required, in
respect of principal of Loans and Letter of Credit Exposure. The Administrative
Agent shall promptly distribute to each Lender at its primary address set forth
on the appropriate signature page hereof, or at such other address as such
Lender may designate in writing, such funds as it may be entitled to receive.
The foregoing apportionment of payments is solely for the purpose of determining
the obligations of the Borrowers hereunder and, notwithstanding such
apportionment, any Lender may on its books and records allocate payments
received by it in a manner different from that contemplated hereby. No such
different allocation shall alter the rights and obligations of the Borrowers
under this Agreement determined in accordance with the apportionments
contemplated by this Section 2.08(c). To the extent that the Borrowers make a
payment or payments to the Administrative Agent or the Administrative Agent
receives any payment or other amount, which payment(s) or proceeds or any part
thereof are subsequently invalidated, declared to be fraudulent or preferential,
set aside and/or required to be repaid to a trustee, receiver or any other party
under any bankruptcy law, state or federal law, common law or equitable cause
then, to the extent of such payment or proceeds received, the Obligations or
part thereof intended to be satisfied shall be revived and continue in full
force and effect, as if such payment or proceeds had not been received by the
Administrative Agent.
(d) Interest Upon Events of Default. To the extent permitted
by law, after there shall have occurred and so long as there is continuing an
Event of Default, all unpaid Obligations of the Borrowers hereunder or under any
Note or any other Related Document shall bear interest for each day until paid
(before and after judgment), payable on demand, at a rate per annum of 2.5%
above the Prime Rate for such day, such interest rate to change automatically
from time to time effective as of the announced effective date of each change in
the Prime Rate.
(e) Unused Line Fee. From and after the Closing Date until
the Termination Date, the Borrowers shall pay to the Administrative Agent, an
unused line fee (the "Unused Line Fee") accruing at the rate of one half of one
percent (1/2 of 1%) per annum, on the first $10,000,000 of any excess, if any,
of the aggregate Revolving Credit Commitments over the sum of the Loans and
Letter of Credit Exposure (computed on an average daily basis) outstanding from
time to time and one-quarter of one
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percent (1/4 of 1%) on any remaining excess (so computed). All Unused Line Fees
shall be payable quarterly in arrears on the last day of each March, June,
September and December, commencing June 30, 1997.
(f) Letter of Credit Fees. From and after the Closing
Date until the Termination Date, the Borrowers shall pay to the Administrative
Agent, a letter of credit fee (the "Letter of Credit Fee") at the rate of one
and three-quarters (1.75%) on the face amount of each letter of credit payable
on the date of issuance. All Letter of Credit Fees shall be payable monthly in
arrears on the first day of each month commencing June 1, 1997. The Borrowers
shall also pay the customary letter of credit fees and charges of CIT and the
Letter of Credit Issuer for the administration, issuance, amendment and
processing of any Letters of Credit issued by the Letter of Credit Issuer.
Promptly following the Administrative Agent's receipt of any Letter of Credit
Fees described above, the Administrative Agent shall pay to each Lender its Pro
Rata Share of the amount of the Letter of Credit Fees received by the
Administrative Agent.
(g) Success Fee. On the date the Parent or any other
Borrower consummates an initial public offering of equity securities, the
Borrowers shall pay to the Administrative Agent for the account of the Lenders a
success fee of $250,000.
(h) Closing Fee and Collateral Management Fee. The
Borrowers shall pay to the Administrative Agent for its own account (i) on the
Closing Date a fee of $150,000 and (ii) on the Closing Date and upon each annual
anniversary thereof, a collateral management fee of $15,000, each of such fees
being fully earned when due. All fees under this Agreement and the other Related
Documents may be charged to the Borrower's Loan Account and are non-refundable
under all circumstances (except for a computational error agreed to by the
Borrowers and the Administrative Agent).
2.09. Use of Proceeds. Each Borrower hereby covenants,
represents and warrants that, the proceeds of the Loans will be used for working
capital and general corporate purposes. Each Borrower hereby covenants,
represents and warrants that the proceeds of the Letters of Credit will be used
(A) to import Inventory in the ordinary course of the Borrower's business and
(B) for general corporate purposes, including but not limited to workers'
compensation insurance and general liability insurance programs.
2.10. Eurodollar Rate Not Determinable; Illegality or
Impropriety.
(a) In the event and on each occasion, that on or before
the day on which the Eurodollar Rate is to be determined for a borrowing that is
to include Eurodollar Loans, the Administrative Agent has determined in good
faith that, or has been advised by the Bank that, the Eurodollar Rate cannot be
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determined for any reason or the Eurodollar Rate will not adequately and fairly
reflect the cost of maintaining Eurodollar Loans or Dollar deposits in the
principal amount of the applicable Eurodollar Loans are not available in the
interbank Eurodollar market where the Eurodollar and foreign currency and
exchange operations in respect of such Bank's Eurodollar Loans are then being
conducted, the Administrative Agent shall, as soon as practicable thereafter,
give written notice of such determination to the Parent and the other Lenders.
In the event of any such determination, any request by the Parent for a
Eurodollar Loan pursuant to Section 2.03 shall, until the Administrative Agent
shall have advised the Parent and the other Lenders that the circumstances
giving rise to such notice no longer exist, be deemed to be a request for a
Prime Loan. Each determination by the Administrative Agent hereunder shall be
conclusive and binding absent manifest error.
(b) In the event that it shall be unlawful or improper for
any Lender to make, maintain or fund any Eurodollar Loan as contemplated by this
Agreement, then such Lender shall forthwith give notice thereof to the
Administrative Agent and the Borrowers describing such illegality or impropriety
in reasonable detail. Effective immediately upon the giving of such notice, the
obligation of such Lender to make Eurodollar Loans shall be suspended for the
duration of such illegality or impropriety and, if and when such illegality or
impropriety ceases to exist, such suspension shall cease, and such Lender shall
notify the Administrative Agent and the Parent. If any such change shall make it
unlawful or improper for any Lender to maintain any outstanding Eurodollar Loan
as a Eurodollar Loan, such Lender shall, upon the happening of such event,
notify the Administrative Agent and the Parent, and the Borrowers shall
immediately, or if permitted by applicable law, rule, regulation, order, decree,
interpretation, request or directive, no later than the date permitted thereby,
convert each such Eurodollar Loan into a Prime Loan.
2.11. Reserve Requirements: Capital Adequacy Circumstances.
(a) Notwithstanding any other provision herein, if any
change in applicable law or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof (whether or not having the force of
law) shall impose any tax on or change the basis of taxation of payments to the
Letter of Credit Issuer or any Lender or any Affiliate of a Lender of the
principal of or interest on any Eurodollar Loan made by such Lender or of any
amounts payable hereunder (other than taxes imposed on the overall net income of
the Letter of Credit Issuer or such Lender or such Affiliate by the jurisdiction
in which the Letter of Credit Issuer or such Lender or such Affiliate has its
principal office or by any political subdivision or taxing authority therein),
or shall impose, modify or deem applicable any reserve, special deposit or
similar requirement against
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assets of, deposits with or for the account of or credit extended by the Letter
of Credit Issuer or such Lender or Affiliate of such Lender (except any such
reserve requirement that is reflected in Reserve Requirements) or shall impose
on the Letter of Credit Issuer or such Lender or such Affiliate any other
condition affecting this agreement or any Eurodollar Loans made by such Lender
or any Letter of Credit Issuer and the result of any of the foregoing shall be
to increase the cost to the Letter of Credit Issuer or such Lender of making or
maintaining any Eurodollar Loan or issuing any Letter of Credit or to reduce the
amount of any sum received or receivable by the Letter of Credit Issuer or such
Lender hereunder (whether of principal, interest or otherwise) in respect
thereof by an amount deemed by the Letter of Credit Issuer or such Lender to be
material then the Borrowers shall pay to the Letter of Credit Issuer or such
Lender such additional amount or amounts as will compensate the Letter of Credit
Issuer or such Lender for such additional costs incurred or reduction suffered.
Any amount or amounts payable by the Borrowers to the Letter of Credit Issuer or
any Lender in accordance with the provisions of this Section 2.11(a) shall be
paid by the Borrowers to the Letter of Credit Issuer or such Lender within ten
(10) days after receipt by the Parent from the Letter of Credit Issuer or such
Lender of a statement setting forth in reasonable detail the amount or amounts
due and the basis for the determination from time to time of such amount or
amounts, which statement shall be conclusive and binding absent manifest error.
(b) If the Letter of Credit Issuer or any Lender shall have
reasonably determined that the adoption of any applicable law, rule or
regulation regarding capital adequacy, or any change therein, or any change in
the interpretation or administration thereof by any Governmental Authority,
central bank or comparable agency charged with the interpretation or
administration thereof, or compliance by the Letter of Credit Issuer or by such
Lender (or any lending office of such Lender) or by any Affiliate of such
Lender, as the case may be, with any request or directive regarding capital
adequacy (whether or not having the force of law) of any such authority, central
bank or comparable agency, has the effect of reducing the rate of return on the
Letter of Credit Issuer's or such Lender's capital or on the capital of such
Lender's Affiliate, as the case may be, as a consequence of the Letter of Credit
Issuer's obligations or such Lender's obligations under this Agreement and the
Related Documents to a level below that which the Letter of Credit Issuer or
such Lender or such Lender's Affiliate, as the case may be, could have achieved
but for such adoption, change or compliance (taking into consideration the
Letter of Credit Issuer's or such Lender's policies or such Lender's Affiliate's
policies, as the case may be, with respect to capital adequacy) by an amount
deemed by the Letter of Credit Issuer or such Lender to be material, then, from
time to time, the Borrowers shall reimburse the Letter of Credit Issuer or such
Lender for such reduction. Any amount or amounts payable by the Borrowers to the
Letter of Credit Issuer or any Lender in accordance with the provisions of this
Section 2.11 (b) shall be paid by the Borrowers to the
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Letter of Credit Issuer or such Lender within ten (10) days after receipt by the
Parent from the Letter of Credit Issuer or such Lender of a statement setting
forth (i) in reasonable detail the amount or amounts due, (ii) the basis for the
determination from time to time of such amount or amounts and (iii) that such
amount(s) have been determined in good faith, which statement shall be
conclusive and binding absent manifest error.
(c) The Letter of Credit Issuer or any Lender may demand
compensation for any increased costs or reduction in amounts received or
receivable or reduction in return on capital with respect to any period;
provided that the Letter of Credit Issuer or such Lender shall provide to the
Borrowers a certificate setting forth in reasonable detail the basis on which
such demand is made. The protection of this Section 2.11 shall be available to
the Letter of Credit Issuer or any Lender regardless of any possible contention
of the invalidity or inapplicability of the law, rule, regulations, guideline or
other change or condition which shall have occurred or been imposed.
2.12. Indemnity. The Borrowers shall indemnify each Lender
against any loss or expense that such Lender actually sustains or incurs as a
consequence of (a) any failure by the Borrowers to fulfill on the date of any
borrowing hereunder the applicable conditions set forth in Article V, (b) any
failure by any Borrower to borrow any Eurodollar Loan hereunder or to convert
any Prime Loan into a Eurodollar Loan after notice of such borrowing or
conversion has been given pursuant to Section 2.03 or Section 2.14, as the case
may be, (c) any payment, prepayment (mandatory or optional) or conversion of a
Eurodollar Loan required by any provision of this Agreement or otherwise made on
a date other than the last day of the Interest Period applicable thereto, or (d)
the occurrence of any Event of Default, including, in each such case, any loss
(including, without limitation, loss of margin) or reasonable expense sustained
or incurred in liquidating or employing deposits from third parties acquired to
effect or maintain such Loan or any part thereof as a Eurodollar Loan. Such loss
or reasonable expense shall include but not be limited to an amount equal to the
excess, if any, as reasonably determined by such Lender, of (i) its cost of
obtaining the funds for the Loan being paid, prepaid or converted or not
borrowed or converted (based on the Eurodollar Rate applicable thereto) for the
period from the date of such payment, prepayment, conversion or failure to
borrow or convert on the last day of the Interest Period for such Loan (or, in
the case of a failure to borrow or convert, the last day of the Interest Period
for such Loan that would have commenced on the date of such failure to borrow or
convert) over (ii) the amount of interest (as reasonably determined by such
Lender) that would be realized by such Lender in re-employing the funds so paid,
prepaid or converted or not borrowed or converted for such Interest Period. A
certificate of any Lender setting forth in reasonable detail any amount or
amounts that such Lender is entitled to receive pursuant to this Section 2.12
and the basis for the determination of such amount or amounts shall be
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delivered to the Borrowers and shall be conclusive and binding absent manifest
error.
2.13. Sharing of Setoffs.
Each Lender agrees that if it shall, through the exercise of
a right of banker's lien, setoff or counterclaim against the Borrowers or other
security or interest arising from, or in lieu of, such secured claim, received
by such Lender under any applicable bankruptcy, insolvency or other similar law
or otherwise, or by any other means, obtain payment (voluntary or involuntary)
in respect of any Obligation as a result of which the aggregate unpaid amount of
the Obligations owing to it shall be proportionately less than the aggregate
unpaid amount of the Obligations owing to any other Lender, it shall
simultaneously purchase from such other Lender at face value a participation in
the Obligations owing to such other Lender, so that the aggregate unpaid amount
of the Obligations and participations in Obligations held by each Lender shall
be in the same proportion to the aggregate unpaid amount of all Obligations
owing to such Lender prior to such exercise of banker's lien, setoff or
counterclaim or other event was to the aggregate unpaid amount of all
Obligations outstanding prior to such exercise of banker's lien, setoff or
counterclaim or other event; provided that if any such purchase or purchases or
adjustments shall be made pursuant to this Section 2.13 and the payment giving
rise thereto shall thereafter be recovered, such purchase or purchases or
adjustments shall be rescinded to the extent of such recovery and the purchase
price or prices or adjustments restored without interest. Each Borrower
expressly consents to the foregoing arrangements and agrees that any Lender
holding a participation in an Obligation deemed to have been so purchased may
exercise any and all rights of banker's lien, setoff or counterclaim with
respect to any and all moneys jointly and severally owing by such Borrower to
such Lender by reason thereof as fully as if such Lender had made a loan
directly to such Borrower in the amount of such participation.
2.14. Continuation and Conversion of Loans. Subject to
Section 2.03 and Section 2.10 hereof, the Borrowers shall have the right, at any
time, (i) on three (3) Business Days' prior irrevocable written or telecopy
notice given by the Parent to the Administrative Agent, to continue any
Eurodollar Loan or any portion thereof into a subsequent Interest Period or to
convert any Prime Loan or portion thereof into a Eurodollar Loan, or (ii) on one
(1) Business Day's prior irrevocable written or telecopy notice to the
Administrative Agent, to convert any Eurodollar Loan or portion thereof into a
Prime Loan, subject to the following:
(A) in the case of a continuation of a Eurodollar
Loan or portion thereof as such or a conversion of a Prime
Loan or portion thereof into a Eurodollar Loan, (1) no Event
of Default or Potential Default shall have occurred and be
continuing at the
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time of such continuation or conversion and (2) Eurodollar Loans
resulting from this Section 2.14 shall be limited in number as
provided in Section 2.03(d);
(B) in the case of a continuation or conversion of less than
all Revolving Credit Loans or Term Loans, as the case may be, the
aggregate principal amount of any Eurodollar Loan continued or
converted shall not be less than $5,000,000 and in multiples of
$1,000,000 if in excess thereof;
(C) each conversion shall be effected by the Lenders by
applying the proceeds of the new Loan to the Loan (or portion thereof)
being converted; and, in the case of a conversion from a Eurodollar
Loan to a Prime Loan, accrued interest on the Eurodollar Loan (or
portion thereof) being converted shall be jointly and severally paid
by the Borrowers at the time of conversion;
(D) if the new Loan made in respect of a conversion shall be
a Eurodollar Loan, the first Interest Period with respect thereto
shall commence on the date of conversion;
(E) no portion of any Loan shall be continued or converted to
a Eurodollar Loan with an Interest Period ending later than the
Termination Date; and
(F) if any conversion of a Eurodollar Loan shall be effected
on a day other than the last day of an Interest Period, the Borrowers
shall reimburse each Lender on demand for any loss incurred or to be
incurred by it in the reemployment of the funds released by such
conversion as provided in Section 2.12 hereof.
In the event that the Parent shall not give notice to continue any Eurodollar
Loan into a subsequent Interest Period, such Loan (unless repaid) shall
automatically become a Prime Loan at the expiration of the then current Interest
Period.
2.15. Taxes.
(a) All payments made by the Borrowers hereunder, under
the Notes or under any Loan Document will be made without setoff, counterclaim,
deduction or other defense. All such payments shall be made free and clear of
and without deduction for any present or future income, franchise, sales, use,
excise, stamp or other taxes, levies, imposts, deductions, charges, fees,
withholdings, restrictions or conditions of any nature now or hereafter imposed,
levied, collected, withheld or assessed by any jurisdiction (whether pursuant to
United States Federal, state, local or foreign law) or by any political
subdivision or taxing
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authority thereof or therein, and all interest, penalties or similar
liabilities, excluding taxes on the overall net income of the Lenders or the
Letter of Credit Issuer (such nonexcluded taxes are hereinafter collectively
referred to as the "Taxes"). If the Borrowers shall be required by law to deduct
or to withhold any Taxes from or in respect of any amount payable hereunder, (i)
the amount so payable shall be increased to the extent necessary so that after
making all required deductions and withholdings (including Taxes on amounts
payable to the Lenders or the Letter of Credit Issuer pursuant to this sentence)
the Lenders or the Letter of Credit Issuer receive an amount equal to the sum
they would have received had no such deductions or withholdings been made, (ii)
the Borrowers shall make such deductions or withholdings, and (iii) the
Borrowers shall pay the full amount deducted or withheld to the relevant
taxation authority in accordance with applicable law. Whenever any Taxes are
payable by any Borrower, as promptly as possible thereafter, the Borrowers and
the Parent shall send the Lenders, the Letter of Credit Issuer and the
Administrative Agent an official receipt showing payment. In addition, the
Borrowers agree to pay any present or future taxes, charges or similar levies
which arise from any payment made hereunder (other than related to the net
income of a Lender) or from the execution, delivery, performance, recordation or
filing of, or otherwise with respect to, this Agreement, the Notes, the Letters
of Credit or any other Loan Document (hereinafter referred to as "Other Taxes").
(b) The Borrowers will indemnify each Lender and the Letter
of Credit Issuer for the amount of Taxes or Other Taxes (including, without
limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts
payable under this Section 2.15) paid by any Lender or the Letter of Credit
Issuer and any liability (including penalties, interest and expenses for
nonpayment, late payment or otherwise) arising therefrom or with respect
thereto, whether or not such Taxes or Other Taxes were correctly or legally
asserted (provided if such Taxes or Other Taxes were not correctly or legally
asserted, the Borrowers will be subrogated to the Lender's rights to recover
such amounts of Taxes or Other Taxes actually paid). This indemnification shall
be paid within 30 days from the date on which such Lender or such Letter of
Credit Issuer makes written demand.
(c) Each Lender which is a foreign person (i.e., a Person
other than a United States Person for United States Federal income tax purposes)
hereby agrees that:
(i) it shall, no later than the Closing Date (or, in
the case of a Lender which becomes a party hereto pursuant to
Section 10.13 hereof after the Closing Date, the date upon
which such Lender becomes a party hereto) deliver to the
Parent through the Administrative Agent:
(a) two accurate and complete signed originals of
Form 4224, or
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(b) two accurate and complete signed originals of
Form 1001,
in each case indicating that such Lender is on the date of delivery thereof
entitled to receive payments of principal, interest and fees for the account of
its lending installation under this Agreement free from withholding of United
States Federal income tax;
(ii) if at any time such Lender changes its lending
installation or installations or selects an additional
lending installation it shall, at the same time or reasonably
promptly thereafter, deliver to the Parent through the
Administrative Agent in replacement for, or in addition to,
the forms previously delivered by it hereunder:
(a) if such changed or additional lending
installation is located in the United States, two accurate
and complete signed originals of Form 4224, or
(b) otherwise, two accurate and complete signed
originals of Form 1001, in each case indicating that such
Lender is on the date of delivery thereof entitled to receive
payments of principal, interest and fees for the account of
such changed or additional lending installation under this
Agreement free from withholding of United States Federal
income tax; and
(iii) it shall, promptly upon the Parent's
reasonable request to that effect, deliver to the Parent such
other forms or similar documentation as may be required from
time to time by any applicable law, treaty, rule or
regulation in order to establish such Lender's tax status for
withholding purposes.
(d) If any Borrower fails to perform its obligations
under this Section 2.15, the Borrowers shall indemnify the Lenders and the
Letter of Credit Issuer for any incremental taxes, interest or penalties that
may become payable as a result of any such failure.
ARTICLE III.
LETTERS OF CREDIT
3.01. Letters of Credit.
(a) General. In order to assist the Borrowers in establishing or
opening documentary and standby letters of credit, which shall not have
expiration dates that exceed one year from the date of issuance (the "Letters of
Credit") with the Letter of Credit Issuer, the Borrowers have requested CIT to
join in the applications for such Letters of Credit, and/or guarantee
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payment or performance of such Letters of Credit and any drafts or acceptances
thereunder through the issuance of a Letter of Credit Guaranty, thereby lending
CIT's credit to that of the Borrowers, and CIT has agreed to do so. These
arrangements shall be handled by CIT subject to the terms and conditions set
forth below. CIT shall have no obligation to arrange for the issuance of Letters
of Credit on or after the Termination Date or which, when added to the aggregate
amount of all outstanding and contemporaneous Loans and the Letter of Credit
Exposure at such time, would cause the amount of all Loans and the Letter of
Credit Exposure at any time to exceed the Current Commitment at such time. In
addition, CIT shall not be required to be the issuer of any Letter of Credit.
The Borrowers will be the account party for any application for a Letter of
Credit, which shall be substantially in the form of Exhibit C hereto or on a
computer transmission system approved by CIT and the Letter of Credit Issuer or
such other written form or computer transmission system or such other form as
may from time to time be approved by the Letter of Credit Issuer and CIT, and
shall be duly completed in a manner acceptable to CIT, together with such other
certificates, agreements, documents and other papers and information as the
Letter of Credit Issuer or CIT may request (the "Letter of Credit Application").
In the event of any conflict between the terms of the Letter of Credit
Application and this Agreement, for purposes of this Agreement, the terms of
this Agreement shall control, except that CIT shall only be requested to join in
applications for Letters of Credit which provide that the credits issued
thereunder are governed by and subject to the Uniform Customs and Practice for
Documentary Credits (1993 Revision, International Chamber of Commerce
Publication No. 500) and any amendments thereto and revisions thereof (the
"UCP") and notwithstanding anything to the contrary herein contained, the
credits issued thereunder shall be so governed by the UCP except as otherwise
provided in the letters of application.
(i) The aggregate Letter of Credit Exposure shall not exceed
$2,000,000. In addition, changes or modifications of the Letters of
Credit by the Borrowers and/or the Letter of Credit Issuer of the
terms and conditions thereof shall in all respects be subject to the
prior approval of CIT in the exercise of its reasonable discretion,
provided, however, that (x) the expiration date of all Letters of
Credit shall be no later than 15 days prior to the Termination Date
unless on or prior to 15 days prior to the Termination Date such
Letters of Credit shall be cash collateralized in an amount equal to
at least 105% of the Stated Amount of such Letters of Credit, (y) the
Letters of Credit and all documentation in connection therewith shall
be in form and substance satisfactory to CIT and the Letter of Credit
Issuer, and (z) Letters of Credit shall not be issued for the benefit
of domestic trade creditors in connection with the purchase of
Inventory by the Borrower.
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(ii) The Administrative Agent shall have the right, without
notice to the Borrowers, to charge the Loan Account with the amount of
any and all indebtedness, liability or obligation of any kind
(including indemnification for breakage costs, capital adequacy and
reserve requirement charges) incurred by the Administrative Agent, CIT
or the Lenders under the Letter of Credit Guaranty at the earlier of
(x) payment by CIT or the Lenders under the Letter of Credit Guaranty,
or (y) with respect to any Letter of Credit which is not cash
collateralized as provided in this Agreement, the occurrence of an
Event of Default. Any amount charged to the Loan Account shall be
deemed a Loan hereunder made by the Lenders to the Borrower, funded by
the Administrative Agent on behalf of the Lenders and subject to
subsections 2.03(e) and (f). Any charges, fees, commissions, costs and
expenses charged to CIT for the account of the Borrowers by the Letter
of Credit Issuer in connection with or arising out of Letters of
Credit issued pursuant to this Agreement or out of transactions
relating thereto will be charged to the Loan Account in full when
charged to or paid by CIT and any such charges by CIT to the Loan
Account shall be conclusive and binding on the Borrowers and the
Lenders absent manifest error. Each of the Lenders and the Borrowers
agrees that the Administrative Agent shall have the right to make such
charges regardless of whether any Event of Default or Potential
Default shall have occurred and be continuing or whether any of the
conditions precedent in Section 5.02 have been satisfied.
(iii) The Borrowers agree to unconditionally indemnify the
Administrative Agent, CIT and each Lender and to hold the
Administrative Agent, CIT and each Lender harmless from any and all
loss, claim or liability incurred by the Administrative Agent, CIT or
any such Lender arising from any transactions or occurrences relating
to Letters of Credit established or opened for any Borrower's account
and any drafts or acceptances thereunder, and all Obligations
thereunder, including any such loss or claim due to any action taken
by the Letter of Credit Issuer, other than for (i) any such loss,
claim or liability arising out of the gross negligence or willful
misconduct of the Administrative Agent, CIT or any Lender as
determined by a final judgment of a court of competent jurisdiction or
(ii) any loss, claim or liability for which the Letter of Credit
Issuer would be responsible under the UCP unless the Administrative
Agent, CIT or any Lender is liable to the Letter of Credit Issuer in
respect thereof.
(iv) The Borrowers further agree to hold the Administrative
Agent, CIT and each Lender harmless from any errors or omission,
negligence or misconduct by the
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Letter of Credit Issuer. The Borrowers' unconditional obligation to
the Administrative Agent, CIT and each Lender hereunder shall not be
modified or diminished for any reason or in any manner whatsoever,
other than as a result of (i) the Administrative Agent's, CIT's or
such Lender's gross negligence or willful misconduct as determined by
a final judgment of a court of competent jurisdiction or (ii) any
loss, claim or liability for which the Letter of Credit Issuer would
be responsible under the UCP unless the Administrative Agent, CIT or
any Lender is liable to the Letter of Credit Issuer in respect
thereof. Neither the Administrative Agent, CIT nor any Lender shall be
responsible for any payment against presentation of drafts, claims, or
documents which do not strictly comply with the terms of any Letter of
Credit provided the Letter of Credit Issuer determines in good faith
that such drafts, claims or documents substantially comply with the
terms of the Letter of Credit, and the Letter of Credit Issuer shall
have sole discretion to decide whether to pay against drafts, claims
or documents which in such Letter of Credit Issuer's judgment
substantially comply with the terms of such Letter of Credit. The
Borrowers agree that any charges incurred by CIT for the Borrowers'
account by the Letter of Credit Issuer shall be conclusive and binding
on the Borrowers absent manifest error and may be charged to the Loan
Account.
(v) None of the Administrative Agent, CIT, the Letter of
Credit Issuer or any of the Lenders shall be responsible for (a) the
validity or genuineness of any documents or of any endorsements
thereof even if such documents should in fact prove to be in any or
all respects invalid, fraudulent or forged; or (b) fraud by the
shipper and/or anyone else in connection with any such goods or the
shipping thereof; or (c) any breach of contract between the shipper or
vendors and the Borrower.
(vi) Without CIT's express consent in writing or through a
computer transmission, each Borrower agrees after the occurrence of an
Event of Default which is not cured within any applicable grace
period, if any, or waived by the Administrative Agent, not to (A)
clear and resolve any questions of non-compliance of documents, or (B)
give any instructions as to acceptances or rejection of any documents
or goods.
(vii) Each Borrower agrees that any necessary and material
import, export or other license or certificates for the import or
handling of Inventory required to be obtained by the Borrowers will
have been promptly procured; all foreign and domestic governmental
laws and regulations applicable to the Borrower in regard to the
shipment and importation of
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Inventory or the financing thereof will have been timely and fully
complied with, and any certificates in that regard that CIT may at any
time reasonably request will be promptly furnished. In this
connection, the Borrowers represent and warrant that all shipments
made under any such Letters of Credit are in compliance with the laws
and regulations of the countries in which the shipments originate and
terminate except where all instances of such non-compliance taken
together will not have a Material Adverse Effect. As between the
Borrowers, on the one hand, and the Administrative Agent, CIT, the
Lenders and the Letter of Credit Issuer, on the other hand, the
Borrowers assumes all risk, liability and responsibility for, and
agree to pay and discharge, all present and future local, state,
federal or foreign taxes, duties, or levies. As between the Borrowers,
on the one hand, and the Administrative Agent, CIT, the Lenders and
the Letter of Credit Issuer, on the other hand, any embargo,
restriction, laws, customs or regulations of any country, state, city,
or other political subdivision, where such Inventory is or may be
located, or wherein payments are to be made, or herein drafts may be
drawn, negotiated, accepted, or paid, shall be solely the Borrower's
risk, liability and responsibility.
(viii) Upon any payments made to the Letter of
Credit Issuer under the Letter of Credit Guaranty, CIT or the Lenders,
as the case may be, shall, without prejudice to its rights under this
Agreement (including that such unreimbursed amounts shall constitute
Loans hereunder), acquire by subrogation any rights, remedies, duties
or obligations granted or undertaken by the Borrowers to the Letter of
Credit Issuer in any Letter of Credit Application, any standing
agreement relating to Letters of Credit or otherwise, all of which
shall be deemed to have been granted to the Administrative Agent and
apply in all respects to the Administrative Agent and shall be in
addition to any rights, remedies, duties or obligations contained
herein.
(ix) In the event that the Borrowers are required to
provide cash collateral for any Letter of Credit, the Borrowers shall
deposit such cash collateral in the Letter of Credit Cash Collateral
Account, which cash collateral shall be held in the Letter of Credit
Cash Collateral Account until either all Obligations have been paid in
full in cash or cash collateral is no longer required under the terms
of this Agreement.
(b) Request for Issuance. The Borrowers may from time to
time, upon notice (an "L/C Notice") given by the Parent not later than 12:00
noon, New York City time, at least three
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Business Days in advance, request CIT to assist the Borrowers in establishing or
opening a Letter of Credit by delivering to the Administrative Agent, with a
copy to the Letter of Credit Issuer, a Letter of Credit Application, together
with any necessary related documents. CIT shall not provide support, pursuant to
the Letter of Credit Guaranty, if the Administrative Agent shall have received
written notice from the Majority Lenders on the Business Day immediately
preceding the proposed issuance day for such Letter of Credit that one or more
of the conditions precedent in Section 5.02 will not have been satisfied on such
date, and neither CIT nor the Administrative Agent shall otherwise be required
to determine that, or take notice whether, the conditions precedent set forth in
Section 5.02 have been satisfied.
3.02. Participations.
(a) Purchase of Participations. Immediately upon the
issuance by the Letter of Credit Issuer of any Letter of Credit in accordance
with the procedures set forth in Section 3.01, each Lender (other than CIT)
shall be deemed to have irrevocably and unconditionally purchased and received
from CIT, without recourse or warranty, an undivided interest and participation,
to the extent of such Lender's Pro Rata Share, in all obligations of CIT with
respect to such Letter of Credit (including, without limitation, all Undrawn
Letter of Credit Availability and Reimbursement Obligations of the Borrowers
with respect, thereto pursuant to the Letter of Credit Guaranty or otherwise).
(b) Sharing of Letter of Credit Payments. In the event
that CIT makes any payment in respect of the Letter of Credit Guaranty and the
Borrowers shall not have repaid such amount to the Administrative Agent for the
account of CIT, the Administrative Agent shall charge the Loan Account in the
amount of the Reimbursement Obligation, in accordance with Section 3.01(a) (ii)
hereof.
(c) Obligations Irrevocable. The obligations of a
Lender to make payments to the Administrative Agent for the account of the
Administrative Agent or CIT with respect to a Letter of Credit shall be
irrevocable, not subject to any qualification or exception whatsoever and shall
be made in accordance with, but not subject to, the terms and conditions of this
Agreement under all circumstances, including, without limitation, any of the
following circumstances:
(i) any lack of validity or enforceability of this
Agreement or any of the other Related Documents;
(ii) the existence of any claim, set off, defense
or other right which the Borrowers may have at any time against a
beneficiary named in a Letter of Credit or any transferee of any
Letter of Credit (or any Person for whom any such transferee may be
acting),
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the Administrative Agent, Letter of Credit Issuer, any
Lender, or any other Person, whether in connection with this
Agreement, any Letter of Credit, the transactions
contemplated herein or any unrelated transactions (including
any underlying transactions between the Borrowers or any
other party and the beneficiary named in any Letter of
Credit);
(iii) any draft, certificate or any other document
presented under the Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect;
(iv) the surrender or impairment of any security
for the performance or observance of any of the terms of any
of the Related Documents;
(y) any failure by the Administrative Agent to
provide any notices required pursuant to this Agreement
relating to Letters of Credit; or
(vi) the occurrence of any Event of Default or
Potential Default.
ARTICLE IV.
BORROWING BASE; JOINT AND SEVERAL LIABILITY
4.01. Condition of Lending and Assisting in Establishing or
Opening Letters of Credit. CIT and the other Lenders shall have no obligation to
make a Loan or assist in establishing or opening a Letter of Credit to the
extent that the aggregate unpaid principal amount of the Loans and the Letter of
Credit Exposure exceeds, or after giving effect to a requested Credit Extension
would exceed, the Current Commitment at such time.
4.02. Mandatory Prepayment. Concurrently with the delivery of
any Borrowing Base Certificate, the Parent shall give notice to the
Administrative Agent of any mandatory prepayment pursuant to Section 2.04(b)
(i), which notice shall specify a prepayment date no later than the earlier of
the date on which such Borrowing Base Certificate is given and the date on which
such Borrowing Base Certificate is required to be provided to the Lenders.
4.03. Rights and Obligations Unconditional. Without limitation
of any other provision of this Agreement, the rights of the Administrative
Agent, CIT and the Lenders and the obligations of the Borrowers under this
Article IV are absolute, unconditional and the Administrative Agent, CIT and the
Lenders shall not be deemed to have waived the condition set forth in Section
4.01 hereof or their right to payment in accordance with Section 4.02 hereof in
any circumstance whatever, including but not limited to circumstances wherein,
the Administrative Agent or
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the Lenders (knowingly or otherwise) make an advance hereunder in excess of the
Borrowing Base.
4.04. Borrowing Base Certificate.
(a) By 12:00 noon, New York City time five (5) Business
Days after the Saturday of each week (and on any other date on which the
Administrative Agent reasonably requests), the Parent shall furnish to the
Administrative Agent a certificate ("Borrowing Base Certificate") substantially
in the form attached hereto as Exhibit D, certified as true and correct by a
Designated Financial Officer, setting forth the Borrowing Base and the other
information required therein as of the Borrower's close of business on the
Saturday of the preceding week, together with such other information with
respect to the Accounts and Inventory of the Borrowers as the Administrative
Agent may reasonably request.
(b) In the event of any dispute about the eligibility
of any asset for inclusion in the Borrowing Base or the valuation thereof, the
Administrative Agent's good faith judgment shall control.
(c) The Borrowing Base set forth in a Borrowing Base
Certificate shall be effective from and including the date such Borrowing Base
Certificate is duly received by the Administrative Agent to but not including
the date on which a subsequent Borrowing Base Certificate is duly received by
the Administrative Agent, unless the Administrative Agent disputes the
eligibility of any asset for inclusion in the Borrowing Base or the valuation
thereof by notice of such dispute to the Borrower, in which case the value of
such asset shall, at the discretion of the Borrower, either not be included in
the Borrowing Base or be included in the Borrowing Base with a value reasonably
acceptable to the Administrative Agent.
(d) Each Borrowing Base Certificate shall be
accompanied by backup schedules showing the derivation thereof and containing
such detail and such other and further information as the Administrative Agent
may reasonably request from time to time.
4.05. General Provisions. Notwithstanding anything to the
contrary in this Article IV, in no event shall any single element of value or
asset be counted twice in determining the Borrowing Base.
4.06. Joint and Several Liability. The obligations of the
Borrowers under the Loan Documents are joint and several, whether or not so
stated to be so in any particular provision. To the extent applicable, each
Borrower waives any defense to payment based upon suretyship defenses. The
liability of a Person that becomes a Borrower pursuant to Section 4.07 hereof
shall include all liabilities incurred or based upon events which occurred prior
to the date such Person becoming a Borrower. Each
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Borrower agrees that all information, certificates, reports, financial
statements, warranties and statements made by the Parent to the Administrative
Agent or any of the Lenders under or pursuant to the Loan Documents shall also
be deemed to be made by such Borrower.
4.07. Additional Parties. The Borrowers shall not make or own
any investment in any Person (other than (i) Permitted Investments, (ii)
investments in a Subsidiary if the assets of such Subsidiary before and after
giving effect to such investment are less than $5,000 and (iii) investments in a
Subsidiary formed solely for the purpose of consummating an acquisition of a
majority of the securities or substantially all of the assets of a Person or a
division of such Person provided, in the case of an investment under this clause
(iii), before and as a result of giving effect to such Investment no Potential
Default or Event of Default shall have occurred and be continuing and such
Subsidiary complies with the provisions of this Section 4.07 within two (2)
Business Days after such investment is made) unless (a) such Person shall become
or be a Subsidiary on or prior to the date of such investment, (b) such Person
shall become a Borrower hereunder by the execution and delivery to the
Administrative Agent of a Joinder Agreement in the form attached hereto as
Exhibit H, (c) as a result of giving effect to such Investment, no Potential
Default or Event of Default shall have occurred and be continuing and (d) such
Person shall have delivered to the Administrative Agent such certificates,
documents, instruments and legal opinions as may be requested by the
Administrative Agent.
ARTICLE V.
CONDITIONS OF EFFECTIVENESS, LETTER OF CREDIT
ISSUANCE AND LENDING
5.01. Conditions Precedent to Effectiveness. This Agreement
shall become effective as of the Business Day when each of the following
conditions precedent shall have been satisfied and the obligation of any Lender
to make the initial Loan hereunder or the obligation of CIT or any Lender to
assist the Borrowers in obtaining the issuance of the initial Letter of Credit
hereunder shall be subject to the satisfaction of the following conditions
precedent:
(a) Payment of Fees. etc. The Borrowers shall have paid
all fees, costs, expenses and taxes then payable by any Borrower including,
without limitation, those due and payable pursuant to Sections 2.08 and l0.06
hereof. The Borrowers shall have paid to counsel to the Administrative Agent all
fees and other client charges due to such counsel on the Closing Date.
(b) Representations and Warranties; No Event of
Default. The representations and warranties contained in Article VI of this
Agreement and in each other Loan Document and certificate or other writing
delivered to the Administrative Agent, the Lenders or the Letter of Credit
Issuer pursuant hereto
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or thereto or prior to the Closing Date shall be correct in all material
respects on and as of the Closing Date as though made on and as of such date;
and no Potential Default or Event of Default shall have occurred and be
continuing on the Closing Date or would result from this Agreement becoming
effective in accordance with its terms.
(c) Legality. The making of the initial Loans and the
issuance of the initial Letter of Credit shall not contravene any law, rule or
regulation applicable to CIT, the Lenders or the Letter of Credit Issuer.
(d) Delivery of Documents. The Administrative Agent
shall have received on or before the Closing Date the following, each in form
and substance satisfactory to the Administrative Agent and, unless indicated
otherwise, dated the Closing Date (it being understood that, in the case of
limited liability companies, references below to charter, bylaws and directors
shall refer to the equivalent documents or persons, including limited liability
company agreements, certificates of formation and members):
(i) a Revolving Credit Note and Term Note payable
to the order of each Lender, duly executed by the Borrowers;
(ii) the Security Agreements, duly executed by the
Borrowers;
(iii) appropriate financing statements on Form UCC-
1, duly executed by the Borrowers to be duly filed in such
office or offices as may be necessary or, in the opinion of
the Administrative Agent, desirable to perfect the security
interests purported to be created by the Security Documents;
(iv) certified copies of requests for copies or
information on Form UCC-l1, listing all effective financing
statements which name as debtor any Borrower, tax liens and
judgment liens and which are filed in the offices referred to
in paragraph (iii) above, together with copies of such
financing statements, none of which, except as otherwise
agreed to in writing by the Administrative Agent, shall cover
any of the Collateral;
(v) a copy of the resolutions adopted by the Board
of Directors of each Borrower, certified as of the Closing
Date by authorized officers thereof, authorizing (A) in the
case of a Borrower, the borrowings hereunder and the
transactions contemplated by the Loan Documents to which such
Borrower is or will be a party, and (B) the execution,
delivery and performance by such Borrower of each Loan
Document and
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the execution and delivery of the other documents to be
delivered by such Borrower in connection therewith;
(vi) a certificate of an authorized officer of each
Borrower, certifying the names and true signatures of the
officers of such Borrower authorized to sign each Loan
Document to which such Borrower is or will be a party and
the other documents to be executed and delivered by such
Borrower in connection therewith, together with evidence of
the incumbency of such authorized officers;
(vii) a certificate, dated as of a date not more than
10 Business Days prior to the Closing Date, of the
appropriate official(s) of the state of incorporation and
each state of foreign qualification of each Borrower,
certifying as to the subsistence in good standing of, and the
payment of taxes by, such Borrower in such states and listing
all charter documents of such Borrower on file with such
official(s), together with confirmation by telephone or
telegram (where available) on the Closing Date from such
official(s) as to such matters;
(viii) a copy of the charter of each Borrower certified
as of a date not more than 10 days prior to the Closing Date
by the appropriate official(s) of the state of incorporation
of such Borrower and as of the Closing Date by an authorized
officer of such Borrower;
(ix) a copy of the by-laws of each Borrower, certified
as of the Closing Date by an authorized officer of the
Borrower;
(x) opinions of (i) Loeb & Loeb LLP, (ii) Cole, Schotz,
Meisel, Forman & Leonard (as to matters of New Jersey law)
and (iii) Baker, Donelson, Bearman & Caldwell (as to matters
of Tennessee law) in form and substance satisfactory to the
Administrative Agent as to such matters as the Administrative
Agent may request;
(xi) a certificate of the Designated Financial Officer
of each Borrower certifying as to the matters set forth in
subsection (b) of this Section 5.01;
(xii) a copy of the financial statements and
projections of the Parent and its Subsidiaries referred to in
Section 6.07 hereof, certified by a Designated Financial
Officer, it being understood that the actual results may
differ from the projections;
(xiii) a Borrowing Base Certificate current as of the
close of business on a date not earlier than
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May __, 1997, certified by the Designated Financial
Officer of each Borrower;
(xiv) a certificate of an authorized officer of the
Parent certifying the names and true signatures of those
officers of the Parent that are authorized to provide Notices
of Borrowing and all other notices under this Agreement and
the Loan Documents;
(xv) if requested by the Administrative Agent, a copy
of each Material Contract certified as a true and correct copy
thereof by the Designated Financial Officer of the appropriate
Borrower;
(xvi) a copy of financial statement projections for
the fiscal year ending March 31, 1997 and the fiscal year
ending March 31, 1998;
(xvii) copies, certified as true and correct by a
Designated Financial Officer of the Parent, of any collective
bargaining agreements or any other similar agreement or
arrangements covering the employees of the Parent or any of
its Subsidiaries (collectively, the "Collective Bargaining
Agreements")
(xviii) a certificate of insurance evidencing
insurance on the property of the Borrowers as is required by
Section 7.07 of this Agreement, naming the Administrative
Agent as additional insured and loss payee, using a long form
loss payee endorsement, for all insurance maintenance by the
Borrowers; and
(xix) (a) the Leasehold Mortgages, each in
recordable form and duly executed and acknowledged by the
applicable Borrower that is a party thereto, and, if required
by the Administrative Agent, title reports showing the absence
of any Liens on the interests of such Borrower in the
respective leaseholds subject to the Leasehold Mortgages, (b)
such memoranda of lease, in recordable form and duly
acknowledged by the parties thereto, and (c) such Landlord
Agreements, duly executed by the applicable landlord, in the
form included as part of Exhibit I-1 or 1-2 or in such other
form as may be reasonably acceptable to the Administrative
Agent; and
(xx) such other agreements, instruments, approvals,
opinions and other documents as the Administrative Agent may reasonably request.
(e) Proceedings: Receipt of Documents. All proceedings
in connection with the transactions contemplated by this Agreement and the
Related Documents and all documents incidental thereto, shall be satisfactory to
the Administrative Agent and its special counsel, and the Administrative Agent
and
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such special counsel shall have received all such information and such
counterpart originals or certified or other copies of such documents, in form
and substance reasonably satisfactory to the Administrative Agent, as the
Administrative Agent or such special counsel may reasonably request.
(f) Cash Management System. The cash management system
of the Borrowers shall be satisfactory to the Administrative Agent. In addition,
the Administrative Agent shall have received (1) an original notice letter for
each Depository Bank listed on Schedule 6.27 which will be sent to each such
Depository Bank, (2) a Cash Concentration Account Agreement executed by the
Parent and the Cash Concentration Account Bank, (3) a Disbursement Account
Agreement executed by the Parent and the Disbursement Account Bank, and (4) a
GDI Vista Account Agreement executed by the Parent and the GDI Vista Account
Bank.
(g) Audit. The Administrative Agent shall have
completed and shall be satisfied (in its sole discretion) with the results of an
audit of the Accounts, Inventory, assets and liabilities and books and records
of the Borrowers and the Borrowers shall have paid all fees and expenses payable
in connection with such audit.
(h) Appraisal. The Administrative Agent shall have
received a report on the Inventory of the Borrowers, prepared by Bauxbaum
Ginsberg & Associates, which report shall be in form and substance satisfactory
to the Administrative Agent.
(i) Lien Priority. The Lien in favor of the
Administrative Agent pursuant to the Related Documents shall be a valid and
perfected first priority Lien on the Collateral, which shall be subject to no
other Liens except for Permitted Liens.
(j) Compliance. The Administrative Agent shall have
received evidence reasonably satisfactory to the Administrative Agent of the
Borrowers' compliance with all Environmental Laws, ERISA, tax and labor matters.
(k) Legal Restraints/Litigation. On the Closing Date,
there shall be no (1) litigation, investigation or proceeding (judicial or
administrative) pending or, to the knowledge of the Borrowers or threatened,
against any Borrower or its Subsidiaries, or their assets, by any agency,
division or department of any county, city, state or federal government relating
to the use of proceeds of the Loans or the Loan Documents, (2) injunction, writ
or restraining order restraining or prohibiting the transactions contemplated
pursuant to the transactions contemplated by the Loan Documents, or (3) suit,
action, investigation or proceeding (judicial or administrative) pending or, to
the knowledge of any Borrower, threatened against any Borrower or its
Subsidiaries, or its assets, which could have a Material Adverse Effect.
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(l) Absence of Material Adverse Effect. The Administrative
Agent shall be satisfied in its reasonable judgment that there is an absence of
any Material Adverse Effect.
(m) Waivers. The Administrative Agent shall have
received such Landlord Agreements and warehouse waivers as it deems advisable.
(n) Amendment of Convertible Subordinated Note and
Stock Purchase Agreement. The subordination provisions of the Convertible
Subordinated Note and Stock Purchase Agreement shall have been amended in a
manner satisfactory to the Administrative Agent.
(o) The Administrative Agent shall have received
executed consents from third parties to any licensing agreements to which any
of the Borrowers are parties as may, in the judgment of the Administrative
Agent, be necessary or desirable for the Administrative Agent to exercise its
rights and remedies under the Security Documents.
5.02. Conditions Precedent to Loans and Letters of Credit. In
addition to the requirements of Section 5.01 hereof, the obligation of each
Lender to make any Loan and the obligation of CIT or any Lender to assist a
Borrower in obtaining the issuance of any Letter of Credit is subject to the
fulfillment, in a manner satisfactory to the Agent, of each of the following
conditions precedent:
(a) Payment of Fees, etc. The Borrowers shall have
paid all fees, costs, expenses and taxes then payable by the Borrowers pursuant
to Sections 2.08 and 10.06 hereof.
(b) Representations and Warranties; No Event of
Default. The following statements shall be true, and the submission by the
Parent to the Administrative Agent of a Notice of Borrowing with respect to a
Loan and a Borrower's acceptance of the proceeds of such Loan, or the submission
by the Parent to the Administrative Agent and the Letter of Credit Issuer of an
L/C Notice with respect to a Letter of Credit and the issuance of such Letter of
Credit shall be deemed to be a representation and warranty by the Borrowers on
the date of such Loan and the date of the issuance of such Letter of Credit
that, (i) the representations and warranties contained in Article VI of this
Agreement and in each other Loan Document and certificate or other writing
delivered to the Administrative Agent, the Lenders and the Letter of Credit
Issuer pursuant hereto on or prior to the date of such Loan or Letter of Credit
are correct in all material respects on and as of such date as though made on
and as of such date (except for representations and warranties which relate to a
specific date) and; (ii) no potential Default or Event of Default has occurred
and is continuing or would result from the making of the Loan to be made on such
date or the issuance of the Letter of Credit to be issued on such date.
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(c) Legality. The making of such Loan or the issuance of such
Letter of Credit shall not contravene any law, rule or regulation applicable to
CIT, the Lenders or the Letter of Credit Issuer.
(d) Borrowing Notice. The Administrative Agent shall have
received a Notice of Borrowing pursuant to Section 2.03 hereof no later than
12:00 noon (New York City time) three (3) Business Days prior to the date of the
proposed borrowing with respect to a Eurodollar Loan or on the date of a
proposed borrowing of a Prime Loan or an L/C Notice and a Letter of Credit
Application pursuant to Section 3.01 hereof not later than 12:00 noon (New York
City time) three Business Days prior to the proposed date of issuance of a
Letter of Credit.
(e) All Subsidiaries are Borrowers. Each Subsidiary of the
Parent or any Borrower is a Borrower pursuant to the terms of this Agreement,
except any such Subsidiary that does not have assets in excess of $5,000 and
except as otherwise permitted by Section 4.07.
ARTICLE VI.
REPRESENTATIONS AND WARRANTIES
The Borrowers hereby jointly and severally represent and warrant to
the Administrative Agent and the Lenders as follows:
6.01. Organization, Good Standing. etc. Each Borrower and
each of its Subsidiaries (i) is a corporation duly organized, validly existing
and in good standing under the laws of the state of its organization, (ii) has
all requisite power and authority to conduct its business as now conducted and
as presently contemplated and (in the case of the Borrower) to make the
borrowings hereunder and to consummate the transactions contemplated hereby and
(iii) is duly qualified to do business and is in good standing in each
jurisdiction in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary,
except, with respect to this clause (iii), where all instances of such failure
to qualify taken together will not have a Material Adverse Effect.
6.02. Authorization, etc. The execution, delivery and
performance by each Borrower of each Loan Document to which it is a party, (i)
has been duly authorized by all necessary corporate action, (ii) does not and
will not contravene its charter or bylaws, operating agreement or other
constituent document, (iii) does not and will not contravene any other
applicable law or any contractual restriction binding on or otherwise affecting
it or any of its properties or result in a default under any agreement or
instrument to which such Borrower is a party or by which such Borrower or its
properties may be subject which contravention is reasonably likely to have a
Material Adverse Effect, (iv) does not and will not result in or
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require the creation of any Lien (other than pursuant to any such Loan Document)
upon with respect to any of its properties which is reasonably likely to have a
Material Adverse Effect, and (v) does not and will not result in any suspension,
revocation, impairment, forfeiture or nonrenewal of any permit, license,
authorization or approval applicable to its operations or any of its properties
which is reasonably likely to have a Material Adverse Effect.
6.03. Governmental Approvals. No authorization, consent, approval,
license, exemption or other action by, and no registration, qualification,
designation, declaration or filing with, any Governmental Authority is or will
be necessary in connection with the execution and delivery by each Borrower of
the Loan Document to which it is a party, consummation of the transactions
therein contemplated, performance of or compliance with the terms and conditions
thereof or to ensure the legality, validity, enforceability and admissibility in
evidence thereto, except for the filings and recordings in respect of the Liens
created pursuant to the Security Documents.
6.04. Enforceability of Loan Documents. This Agreement is, and
each other Loan Document to which each Borrower is or will be a party, when
delivered hereunder, will be, a legal, valid and binding joint and several
obligation of the Borrowers, enforceable against the Borrowers in accordance
with its terms, except as may be limited by applicable bankruptcy; insolvency,
moratorium and other laws affecting the rights of creditors generally and
general principles of equity.
6.05. Subsidiaries. Schedule 6.05 hereto is a complete and
correct description of the name, jurisdiction of incorporation and ownership of
the outstanding capital stock of each Subsidiary of each Borrower in existence
on the Closing Date. All shares of such stock owned by each Borrower or one or
more of its Subsidiaries, as indicated in such Schedule, are owned free and
clear of all Liens, except for the Liens in favor of the Administrative Agent
that secure payment of the Obligations and other Liens set forth on Schedule
8.01. There are no options, warrants or other rights to acquire shares of
capital stock of any Subsidiary of the Borrower.
6.06. Litigation. Except as set forth on Schedule 6.06 hereto,
there is no pending or, to the knowledge of the Borrowers, threatened action,
suit or proceeding requesting damages in an amount in excess of $1,000,000
affecting the Borrowers or any of their respective Subsidiaries before any court
or other Governmental Authority or any arbitrator in existence. There is no
pending or, to the knowledge of the Borrowers, threatened action, suit or
proceeding affecting the Borrowers or any of their respective Subsidiaries
before any court or other Governmental Authority or any arbitrator which may
have a Material Adverse Effect.
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6.07. Financial Condition.
(a) Historical Statements. The Borrowers have heretofore
furnished to the Lenders a consolidated balance sheet of the Parent and its
consolidated subsidiaries as of December 31, 1996 and the nine month period then
ended, as certified by a Designated Financial Officer of the Parent. Schedule
6.07(a) sets forth a list of audited financial statements for various Borrowers
heretofore furnished by the Borrowers to the Lenders, as examined and reported
on by the independent public accountants specified on Schedule 6.07(a). Such
audited and unaudited financial statements (including the notes, if any,
thereto) present fairly, in all material respects, the financial condition of
the Parent and its consolidated subsidiaries or such Borrower, as the case may
be, as of the nine month period ended December 31, 1996 or such fiscal year, as
the case may be, and the results of their respective operations for the such
nine month period or fiscal year, as the case may be, all in conformity with
GAAP applied on a basis consistent with that of the preceding fiscal period
except as disclosed therein. Except as disclosed in the Schedules hereto, the
Borrowers do not have any material contingent liabilities (including liabilities
for taxes), unusual forward or long term commitments or unrealized or
anticipated losses from unfavorable commitments.
(b) The Parent has heretofore furnished to the
Lenders projections of the Borrowers for the five years ended March 31, 2002,
and such projections have been prepared in accordance with the standard set
forth in the second sentence of Section 6.17 hereof.
6.08. Compliance with Law, etc. Each of the Borrowers and
their respective Subsidiaries is not in violation of its charter or by-laws, any
law (including but not limited to violations pertaining to the conduct of its
business or the use, maintenance or operation of the real and personal
properties owned or possessed by it) or any term of any material agreement or
instrument binding on or otherwise affecting it or any of its properties, except
where all such violations taken together will not have a Material Adverse
Effect.
6.09. ERISA. (i) Each Plan is in substantial compliance with
the applicable provisions of ERISA and the IRC Code, (ii) no Termination Event
has occurred nor is reasonably expected to occur with respect to any Benefit
Plan, (iii) the most recent annual report (Form 5500 Series) with respect to
each Plan, including Schedule B (Actuarial Information) thereto, copies of which
have been filed with the Internal Revenue Service, is complete and correct in
all material respects and fairly presents the funding status of such Benefit
Plan, and since the date of such report there has been no material adverse
change in such funding status, (iv) no Benefit Plan had an accumulation or
waived funding deficiency or permitted decreases which would create a deficiency
in its funding standard account within the meaning of Section 412 of the IRC
Code at any time
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during the previous 60 months, and (v) no Lien imposed under the IRC Code or
ERISA exists or is likely to arise on account of any Benefit Plan within the
meaning of Section 412 of the IRC Code. None of the Borrowers nor any of their
respective ERISA Affiliates has incurred any withdrawal liability under ERISA
with respect to any Multiemployer Plan, and none of the Borrowers is aware of
any facts indicating that any Borrower or any of its ERISA Affiliates may in the
future incur any such withdrawal liability. Except as required by Section 4980B
of the IRC Code or as disclosed on Schedule 6.09, the Borrower does not maintain
a welfare plan (as defined in Section 3(1) of ERISA) which provides benefits or
coverage after a participant's termination of employment. None of the Borrowers
nor any of their respective ERISA Affiliates have incurred any liability under
the Worker Adjustment and Retraining Notification Act. All Plans in existence on
the Closing Date are set forth on Schedule 6.09 hereto.
6.10. Taxes, etc. All tax returns required to be filed by each
Borrower and its Subsidiaries have been properly prepared, executed and filed.
All taxes, assessments, fees and other governmental charges upon each Borrower
and its Subsidiaries or upon any of their respective properties, income, sales
or franchises which are shown thereon as due and payable have been paid, unless
payment thereof is being contested in good faith by appropriate proceedings
which stay the imposition of any penalty, fine or Lien resulting from the non-
payment thereof and with respect to which, adequate reserves therefor are being
maintained. The reserves and provisions for taxes, if any, on the books of each
Borrower are adequate for all open years and for its current fiscal period.
Except as set forth on Schedule 6.10, each Borrower does not know of any
proposed additional assessment or basis for any material assessment for
additional taxes (whether or not reserved against).
6.11. Regulation G, T, U or X. Each Borrower is not and will not
be engaged in the business of extending credit for the purpose of purchasing or
carrying margin stock (within the meaning of Regulation G, T, U or X issued by
the Board), and no proceeds of any Loan will be used to purchase or carry any
margin stock or to extend credit to others for the purpose of purchasing or
carrying any margin stock.
6.12. Nature of Business. Each Borrower is not engaged in any
business other than the direct mail catalog and internet marketing and sales
business or the leasing of commercial property in connection with such business.
6.13. Adverse Agreements. etc. None of the Borrowers or any of
their Subsidiaries is a party to any agreement or instrument, or subject to any
charter or other corporate restriction or any judgment, order, regulation,
ruling or other requirement of a court or other Governmental Authority or
regulatory body, which has a Material Adverse Effect, or, to the
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best knowledge of any Borrower, is reasonably likely to have a Material Adverse
Effect.
6.14. Holding Company and Investment Company Acts. Neither any
Borrower nor any of their respective Subsidiaries is (i) a "holding company" or
a "subsidiary company" of a "holding company" or an "affiliate" of a "holding
company", as such terms are defined in the Public Utility Holding Company Act of
1935, as amended, or (ii) an "investment company" or an "affiliated person" or
"promoter" of or "principal underwriter" of or for an "investment company", as
such terms are defined in the Investment Company Act of 1940, as amended.
6.15. Permits, etc. Each Borrower and its Subsidiaries have all
material permits, licenses, authorizations and approvals required for them
lawfully to own and operate their business.
6.16. Priority, Title. Except for Permitted Liens (including
the Liens set forth in Schedule 8.01), the Liens granted under the Security
Documents constitute and shall at all times constitute perfected, first priority
Liens on the Collateral which are subject to no other Liens other than Permitted
Liens, and each Borrower is the sole and absolute owner of the Collateral with
full right to pledge, sell, consign, transfer and create Liens therein. Except
as set forth on Schedule 8.01, no Person has any right of first refusal, option
or other preferential right to purchase any Collateral. The Borrowers will at
their expense forever warrant and, at the Administrative Agent's request, defend
the same from any and all claims and demands of any other Person other than the
Permitted Liens; and the Borrowers will not grant, create or permit to exist,
any Lien upon the Collateral, or any proceeds thereof, in favor or any other
Person other than Permitted Liens. The Borrowers and its respective Subsidiaries
have good and marketable title to all of their properties and assets, free and
clear of all Liens except Permitted Liens.
6.17. Full Disclosure. The representations or warranties made by
the Borrowers under this Agreement and the other Loan Documents, taken as a
whole, are not false or misleading in any material respect and the Loan
Documents, the schedules and exhibits thereto and the certificates, reports,
statements and other documents or information furnished to the Administrative
Agent or the Lenders in connection herewith or therewith or with the
consummation of the transactions contemplated hereby and thereby, taken as a
whole, do not contain any material misstatement of fact. To the extent any
Borrower furnishes any projections of the financial position and results of
operations of any Borrower for, or as at the end of, certain future periods,
such projections were believed at the time furnished to be reasonable, have been
or will have been prepared on a reasonable basis and in good faith by such
Borrower, and have been or will be based on assumptions believed by such
Borrower to be reasonable at the time made and upon the best
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information then available to the Borrowers, it being understood, however, that
actual results may differ from such projections.
6.18. Operating Lease Obligations. On the Closing Date, (i) each
Borrower does not have any material obligations as lessee for the payment of
rent for any real property other than the Operating Lease Obligations set forth
in Schedule 6.18 hereto and (ii) each Borrower does not have any personal
property leases providing for total rent payments in excess of $1,000,000 in the
aggregate under any single lease except as set forth on Schedule 6.18 hereto.
6.19. Environmental Matters. Except as disclosed in Schedule
6.19 hereto (i) none of the operations of any Borrower is the subject of any
federal, state or local investigation to determine whether any Remedial Action
is needed to address the presence, disposal, Release or threatened Release; (ii)
the operations of each Borrower and its Subsidiaries are in compliance with all
Environmental Laws; (iii) there has been no Release at any of the properties
owned or operated by any Borrower, its Subsidiaries or any predecessor in
interest or title, or at any disposal or treatment facility which received
Hazardous Materials generated by any Borrower, its Subsidiaries or any
predecessor in interest or title which is reasonably likely to result in
Environmental Liabilities and Costs of $250,000 or more; (iv) no Environmental
Actions have been asserted against any Borrower, its Subsidiaries or any
predecessor in interest or title nor does any Borrower or its Subsidiaries have
knowledge or notice of any threatened or pending Environmental Action against
any Borrower, its Subsidiaries or any predecessor in interest or title which, if
adversely determined, is reasonably likely to result in Environmental
Liabilities and Costs of $250,000 or more; (v) each Borrower and its
Subsidiaries have obtained all permits, approvals, authorizations and licenses
required by Environmental Laws necessary for their operations, and all such
permits, approvals, authorizations and licenses are in effect and each Borrower
and its Subsidiaries are in compliance with all terms and conditions of such
permits, approvals, authorizations and licenses; (vi) no Environmental Actions
have been asserted against any facilities that may have received Hazardous
Materials generated by any Borrower, its Subsidiaries or any predecessor in
interest or title which, if adversely determined, is reasonably likely to result
in Environmental Liabilities and Costs of $250,000 or more.
6.20. Schedules. All of the information which is required to be
scheduled to this Agreement is set forth on the Schedules attached hereto, is
correct and accurate as of the Closing Date and does not omit to state any
information material thereto.
6.21. Insurance. Each Borrower and its Subsidiaries keep their
properties adequately insured and maintain (i) insurance to such extent and
against such risks, including
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fire, as is customary with companies in the same or similar businesses, (ii)
workers compensation insurance in the amount required by applicable law, (iii)
public liability insurance in the amount customary with companies in the same or
similar business against claims for personal injury or death on properties
owned, occupied or controlled by it, and (iv) such other insurance as may be
required by law or by the Loan Documents. Schedule 6.21 hereto sets forth a list
of all insurance maintained by each Borrower and its Subsidiaries on the Closing
Date.
6.22. Use of Proceeds. The proceeds of the Loans shall be used for
working capital and general corporate purposes. The Letters of Credit will be
used (A) to import Inventory in the ordinary course of the Borrower's business,
and (B) for general corporate purposes, including but not limited to workers'
compensation insurance and general liability insurance programs.
6.23. Security Documents. The Security Documents create and grant
to the Administrative Agent, for the benefit of the Lenders, a legal, valid and
perfected first priority Lien on the Collateral subject to no other Liens except
for Permitted Liens.
6.24. Financial Accounting Practices, etc.
(a) Each Borrower and its Subsidiaries make and keep books,
records and accounts which, in reasonable detail, accurately and fairly reflect
their respective transactions and dispositions of their respective assets and
maintain a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in accordance with
management's general or specific authorization, (ii) transactions are recorded
as necessary (A) to permit preparation of financial statements in conformity
with GAAP except as previously disclosed to the Administrative Agent and (B) to
maintain accountability for assets, and (iii) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(b) Each Borrower and its Subsidiaries maintain a system of
internal procedures and controls sufficient to provide reasonable assurance that
the information required to be set forth in each Borrowing Base Certificate
(including, without limitation, information relating to the identification of
assets which are Inventory and the valuation thereof) is accurate.
6.25. No Material Adverse Effect. Since December 31, 1996, there
has not occurred any Material Adverse Effect or any event which could have a
Material Adverse Effect.
6.26. Real Property; Leases.
(a) Schedule 6.26 hereto sets forth a complete and accurate
description and list as of the Closing Date of the
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location, by state and street address, of all real property owned and leased by
each Borrower, together with, in the case of real property that is owned, a
statement as to whether such real property is the subject of a contract of sale
(and, if so, a statement as to the status of such sale).
(b) As of the Closing Date, each Borrower has valid leasehold
interests in the Leases described in Schedule 6.26 hereto. Schedule 6.26 hereto
sets forth with respect to each Lease, the commencement date, termination date,
renewal options (if any) and annual base rents. Each such Lease is valid and
enforceable in accordance with its terms in all material respects and is in full
force and effect. Neither any Borrower nor, to the knowledge of the Borrowers,
any other party to any Lease is in default of its obligations thereunder and the
Borrowers have not at any time delivered or received any notice of default which
remains uncured under any such Lease and, as of the Closing Date, no event has
occurred which, with the giving of notice or the passage of time, or both, would
constitute a default under any such Lease, except for defaults the consequence
of which in the aggregate would have no Material Adverse Effect.
(c) All permits required to have been issued to the Borrowers
with respect to the real property owned or leased by the Borrowers to enable
such property to be lawfully occupied and used for all of the purposes for which
it is currently occupied and used (separate and apart from any other
properties), have been lawfully issued and are in full force and effect, other
than such permits which if not obtained, would not have a Material Adverse
Effect, and all such real property complies in all material respects with all
applicable legal and insurance requirements.
(d) The Borrowers have not received any notice, nor does any
Borrower have any knowledge, of any pending, threatened or contemplated
condemnation proceeding affecting any real property owned or leased by any
Borrower or any Subsidiary.
(e) No portion of any real property owned or leased by any
Borrower or any of its Subsidiaries has suffered any damage by fire or other
casualty loss which has not heretofore been completely repaired and restored to
its condition existing prior to such casualty or which if not repaired or
restored is not reasonably likely to result in a Material Adverse Effect.
6.27. Location of Bank Accounts. Schedule 6.27 hereto sets
forth a complete and accurate list as of the Closing Date of all deposit and
other accounts, including the Cash Concentration Account, the Disbursement
Account, the GDI Vista Account and all Depository Accounts, maintained by each
Borrower and its Subsidiaries together with a description thereof (i.e. the bank
at which such deposit or other account is maintained and the account number and
the purpose thereof).
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6.28. No Event of Default. No event has occurred and is continuing
and no condition exists which constitutes an Event of Default or Potential
Default.
6.29. Capitalized Leases. As of the Closing Date, Capitalized
Lease Obligations of each Borrower and its Subsidiaries do not exceed $500,000
in the aggregate.
6.30. Tradenames. Schedule 6.30 hereto sets forth a complete and
accurate list as of the Closing Date of all tradenames used by the Borrowers.
6.31. Solvency. After giving effect to the transactions
contemplated by this Agreement and the Related Documents and each Credit
Extension, the Borrowers taken as a whole are Solvent.
6.32. Inventory. There is no location at which any Borrower
has any Inventory (except for Inventory in transit) other than (i) those
locations listed on Schedule 1.01(A) hereto and (ii) any other locations
approved in writing by the Administrative Agent pursuant to the definition of
"Eligible Inventory". Schedule 1.01(A) hereto contains a true, correct and
complete list, as of the Closing Date, of the legal names and addresses of each
store and warehouse at which Inventory of all of the Borrowers is stored. None
of the receipts received by any of the Borrowers from any warehouse states that
the goods covered thereby are to be delivered to bearer or to the order of a
named Person or to a named Person and such named Person's assigns.
6.33. Intellectual Property. The Borrowers own or license or
otherwise have the right to use all material licenses, permits, patents, patent
applications, trademarks, trademark applications, service marks, trade names,
copyrights, copyright applications, franchises, authorizations and other
intellectual property rights that are necessary for the operations of their
businesses and, to the knowledge of the Borrowers, without infringement upon or
conflict with the rights of any other Person with respect thereto. To the best
knowledge of the Borrowers, no slogan or other advertising device, product,
process, method, substance, part or other material now employed, or now
contemplated to be employed, by any Borrower infringes upon or conflicts with
any rights owned by any other Person, and no claim or litigation regarding any
of the foregoing is pending or threatened, except for such infringements and
conflicts which could not have, individually or in the aggregate, a Material
Adverse Effect. To the knowledge of the Borrowers, no patent, invention, device,
application, principle or any statute, law, rule, regulation, standard or code
is pending or proposed, which, individually or in the aggregate, could have a
Material Adverse Effect.
6.34. Material Contracts. Set forth in Schedule 6.34 hereto is a
complete and accurate list as of the Closing Date of all Material Contracts of
each Borrower, showing the parties and
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subject matter thereof and amendments and modifications thereto. Each such
Material Contract (i) is in full force and effect and is binding upon and
enforceable against such Borrower and, to such Borrower's knowledge, all other
parties thereto in accordance with its terms, (ii) has not been otherwise
amended or modified in any material respect, and (iii) there exists no default
under any Material Contract by such Borrower or, to such Borrower's knowledge,
any other party thereto which has not been cured or waived.
6.35. Labor Relations; Collective Bargaining Agreements.
(a) Set forth on Schedule 6.35 hereto is a list (including
dates of termination) of all Collective Bargaining Agreements as of the Closing
Date between or applicable to each of the Borrowers and any union, labor
organization or over bargaining agent in respect of the employees of each of the
Borrowers.
(b) None of the Borrowers is engaged in any unfair labor
practice that is reasonably likely to have a Material Adverse Effect. There is
(i) no significant unfair labor practice complaint pending against any Borrower
or, to the best knowledge of each Borrower, threatened against any of them,
before the National Labor Relations Board, and no significant grievance or
significant arbitration proceeding arising out of or under any Collective
Bargaining Agreement is now pending against any Borrower, or to the knowledge of
any Borrower, threatened against any of them, (ii) no significant strike, labor
dispute, slowdown or stoppage is pending against any Borrower or to the
knowledge of the Borrowers, threatened against any Borrower, and (iii) to the
knowledge of the Borrowers, no union representation question existing with
respect to the employees of any Borrower, except (with respect to any matter
specified in clause (i), (ii) or (iii) above, either individually or in the
aggregate) such as is not reasonably likely to have a Material Adverse Effect.
6.36. Accounts. The chief executive office of each Borrower
and the location of its books and records are set forth on Schedule 6.36 hereto.
All agreements related to credit card receivables, including private label
credit cards as of the Closing Date, are listed on such Schedule 6.36.
ARTICLE VII.
AFFIRMATIVE COVENANTS
So long as any principal of or interest on the Loans or the
Reimbursement Obligations or any other Obligations (whether or not due) shall
remain unpaid or the Lenders shall have any Revolving Credit Commitment
hereunder, each Borrower will, unless the Majority Lenders shall otherwise
consent in writing:
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7.01. Reporting Requirements. Furnish to the Lenders:
(a) As soon as practicable and in any event within ninety
(90) days after the close of each fiscal year of the Parent, a consolidated and
consolidating statement of operations and cash flows of the Parent and its
Subsidiaries (including all Borrowers) for such fiscal year and a balance sheet
of the Parent and its consolidated Subsidiaries (including the Borrowers) as of
the close of such fiscal year, and notes to each, all in reasonable detail,
setting forth in comparative form the corresponding figures for the preceding
fiscal year, which consolidated statement and balance sheet shall be audited and
accompanied by an opinion of Ernst & Young LLP or other independent certified
public accountants of recognized national standing selected by the Parent and
reasonably satisfactory to the Administrative Agent. The opinion of such
accountants (the "Accountant's Opinion") shall be without a "going concern"
qualification or like qualification or exception or qualification arising out of
the scope of the audit with respect to such consolidated statement and balance
sheet being prepared in compliance with GAAP and shall in any event contain a
written statement of such accountants substantially to the effect that (i) such
accountants examined such statement and balance sheet in accordance with
generally accepted auditing standards and accordingly made such tests of
accounting records and such other auditing procedures as such accountants
considered necessary in the circumstances and (ii) in the opinion of such
accountants such statement and balance sheet present fairly, in all material
respects, the financial position of the Parent and its consolidated Subsidiaries
as of the end of such fiscal year and the results of its operations and the
changes in its financial position for such fiscal year, in conformity with GAAP
(except for changes in application in which such accountants concur). A copy of
the Accountant's Opinion shall be delivered to the Administrative Agent and each
Lender and signed by such independent public accountants. Each set of the
consolidated statement and balance sheets delivered pursuant to this Section
7.01(a) shall be accompanied by (1) a certificate or report dated the date of
such statement and balance sheet by the accountants who certified or reported on
such statement and balance sheet stating in substance that they have reviewed
this Agreement and that in making the examination necessary for their
certification of such statement and balance sheet they did not become aware of
any Event of Default or Potential Default, or if they did become so aware, such
certificate or report shall state the nature and period of existence thereof, if
determinable and (2) a certificate dated the date of the delivery of such
statements and balance sheet by the Designated Financial Officer of the Parent
stating in substance that he has reviewed this Agreement and that in making the
examination necessary for this certification, he did not become aware of any
Event of Default or Potential Default, or if he did become so aware, such
certificate shall state the nature and period of existence thereof if
determinable in form and substance satisfactory to the Administrative Agent.
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(b) As soon as practicable and in any event within forty-five
(45) days after the close of each of the first three fiscal quarters of each of
the Parent's fiscal years (except sixty days for the fiscal quarters ended March
31 and June 30, 1997), unaudited consolidated statements of operations and cash
flows of the Parent and its consolidated Subsidiaries (including the Borrowers)
as of the close of such fiscal quarter and a balance sheet of the Parent and its
consolidated Subsidiaries as of the close of such fiscal quarter, and notes to
each, all in reasonable detail setting forth in comparative form the
corresponding figures for the corresponding fiscal quarter for the preceding
fiscal year, which statements and balance sheet shall be certified by a
Designated Financial Officer of the Parent as presenting fairly, in all material
respects, the financial position of the Parent and its consolidated Subsidiaries
(including the Borrowers) as of the end of such quarter and the results of its
operations and the changes in its financial position for such quarter, in
conformity with GAAP applied in a manner consistent except as otherwise
disclosed therein with that of the most recent audited financial statements
furnished to the Lenders, subject to year-end adjustments. Each set of
statements and balance sheets delivered pursuant to this Section 7.01(b) shall
be accompanied by a certificate of a Designated Financial Officer of the Parent
dated the date of delivery of such statements and balance sheet stating that he
has reviewed this Agreement and that to the best of his knowledge he did not
become aware of any Event of Default or Potential Default, or if he did become
so aware, such certificate shall state the nature and period of existence
thereof, if determinable, in form and substance satisfactory to the
Administrative Agent.
(c) As soon as practicable and in any event within thirty
(30) days after the end of each fiscal month (commencing with the fiscal month
ended October 31, 1997) of the Parent (other than the last month of each of the
first three fiscal quarters of the Parent) unaudited statements of operations
and cash flows for the Parent and its consolidated Subsidiaries (including the
Borrowers) for such fiscal month and for the period from the beginning of such
fiscal year to the end of such fiscal month, and an unaudited balance sheet of
the Parent and its consolidated Subsidiaries (including the Borrowers) as of the
end of such fiscal month, all in reasonable detail, setting forth in comparative
form the corresponding figures for the same periods during the preceding fiscal
year, and accompanied by (1) a certificate of a Designated Financial Officer of
the Parent stating that such statements present fairly, in all material
respects, the financial position of the Parent and its consolidated Subsidiaries
(including the Borrowers) as of the end of such fiscal month and the results of
its operations and cash flows for such fiscal month, applied in a manner
consistent with prior practice, and, subject to year-end adjustments, and (2) a
Certificate of the Designated Financial Officer of the Parent stating that he
has reviewed this Agreement and that to the best of his knowledge he did not
become aware of any Event of Default or Potential Default, or if he did become
so aware, such
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certificate shall state the nature and period of existence thereof, if
determinable.
(d) As soon as practicable and in any event within ten (10)
Business Days after the end of each fiscal month (including the fiscal month in
which this Agreement is executed), the Parent shall furnish to the Lenders a
monthly inventory report and accounts payable analysis in form and substance
reasonably satisfactory to the Administrative Agent and certified by a
Designated Financial Officer of the Parent, which shall be accompanied by a
reconciliation from the monthly inventory report as of the Parent's close of
business on the last day of the preceding month.
(e) As soon as practicable and in any event within ten (10)
Business Days after the end of each week (including the week in which this
Agreement is executed), the Parent shall furnish to the Lenders weekly sales
reports, weekly inventory reports and a Borrowing Base Certificate, each as of
the Parent's close of business on the Saturday of the preceding week and in form
and substance reasonably satisfactory to the Administrative Agent and certified
by a Designated Financial Officer of the Parent.
(f) As soon as possible, and in any event within five (5)
days after the occurrence of a Potential Default or an Event of Default or a
Material Adverse Effect, the written statement of the Designated Financial
Officer of the Parent, setting forth the details of the Potential Default or
Event of Default, Material Adverse Effect and the action which the Borrower
proposes to take with respect thereto.
(g) Promptly upon their becoming available, a copy of (1) all
reports financial statements or other information delivered by any to its
shareholders or the Securities Exchange Commission, (2) all reports, proxy
statements, financial statements and other information generally distributed by
the Borrower to its creditors or the financial community in general, and (3) any
accountant's management letters and any audit or other reports submitted to any
Borrower by independent accountants in connection with any annual, interim or
special audit of any Borrower.
(h) (1) As soon as possible and in any event (A) within thirty
(30) days after any Borrower or any of its ERISA Affiliates knows or has reason
to know that any Termination Event described in clause (i) of the definition of
Termination Event with respect to any Benefit Plan has occurred, and (B) within
20 days after any Borrower or any of its ERISA Affiliates knows or has reason to
know that any other Termination Event with respect to any Benefit Plan has
occurred, or that any Borrower or any of its ERISA Affiliates has failed to make
a required installment to a Benefit Plan within the meaning of Section 412(m) of
the IRC Code, a statement of the Designated Financial Officer of the Parent
describing such Termination Event
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and the action, if any, which such Borrower or such ERISA Affiliate proposes to
take with respect thereto, (2) promptly and in any event within three (3)
Business Days after receipt thereof by any Borrower or any of its ERISA
Affiliates from the PBGC, copies of each notice received by any Borrower or any
of its ERISA Affiliates of the PBGC's intention to terminate any Plan or to have
a trustee appointed to administer any Plan, (3) promptly and in any event within
30 days after the filing thereof with the Internal Revenue Service, copies of
each Schedule B (Actuarial Information) to the annual report (Form 5500 Series)
with respect to each Benefit Plan and Multiemployer Plan, (4) promptly and in
any event within five Business Days after receipt thereof by the Borrower or any
of its ERISA Affiliates from a sponsor of a Multiemployer Plan or from the PBGC,
a copy of each notice received by any Borrower or any of its ERISA Affiliates
concerning the imposition or amount of withdrawal liability under Section 4202
of ERISA or indicating that such Multiemployer Plan may enter reorganization
status under Section 4241 of ERISA, (5) promptly, and in any event within ten
(10) days after the Borrower or any of their respective ERISA affiliates is
required to send a notice of a plant closing or mass layoff (as defined in the
Worker Adjustment and Retraining Notification Act), and (6) promptly and in any
event within 30 days after any Borrower or any ERISA Affiliate takes action to
establish Benefit Plan or contribute to a Multiemployer Plan, a statement of the
Designated Financial Officer of the Parent describing such Benefit Plan or
Multiemployer Plan.
(i) Promptly after, and in any event within ten (10) days
after, an officer of any Borrower learns of any of the following, notice
thereof:
(i) the receipt by any Borrower or any of its
Subsidiaries of notification that any real or personal property of
such Borrower or such Subsidiary is subject to any Environmental
Lien;
(ii) notice of violation of any Environmental Law which
could reasonably be expected to subject the Borrower or any of its
Subsidiaries to Environmental Liabilities and Costs of $250,000 or
more; or
(iii) notice of the commencement of any Environmental
Action by any Borrower or any of its Subsidiaries of any
Environmental Law, which if adversely determined, could reasonably be
expected to subject any Borrower or any of its Subsidiaries to
Environmental Liabilities and Costs of $250,000 or more.
(j) Promptly after the commencement thereof but in any event
not later than ten (10) days after service of process with respect thereto on,
or the obtaining of knowledge thereof by any Borrower or any of its
Subsidiaries, notice of each action, suit or proceeding involving such Borrower
or any of
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its Subsidiaries before any court or other Governmental Authority or other
regulatory body or any arbitrator which could have a Material Adverse Effect.
(k) Promptly after submission to any Governmental Authority all
documents and information furnished to such Governmental Authority in connection
with any investigation of any Borrower or any of its Subsidiaries other than
routine inquiries by such Governmental Authority.
(1) As soon as available, and in any event within ten (10) Business
Days after (1) receipt or delivery thereof, copies of any material notices that
the Borrower receives or delivers in connection with any Material Contract and,
(2) any Borrower enters into a Material Contract (including, without limitation
any agreements related to credit card receivables), a copy of such Material
Contract.
(m) Within ten (10) Business Days after the end of each month, a
receivables aging report.
(n) Promptly upon request, such other information concerning the
condition or operations, financial or otherwise, of each Borrower or any of
their Subsidiaries as the Administrative Agent or any Lender from time to time
may reasonably request.
(o) By September 30, 1997, monthly financial projections for the six
months ending March 31, 1998 and the twelve months ending March 31, 1999.
7.02. Compliance with Laws, etc. Comply, and cause each of its
Subsidiaries to comply with all applicable laws, rules, regulations and orders
(including, without limitation, Environmental Laws and compliance in respect of
their businesses or use, maintenance or operation of real and personal
properties owned or leased by them), such compliance to include, without
limitation, (i) paying before the same become delinquent all taxes, assessments
and governmental charges or levies imposed upon it or upon its income or profits
or upon any of its properties, and (ii) paying all lawful claims which if unpaid
might become a Lien or charge upon any of its properties, except to the extent
contested in good faith by proper proceedings which stay the imposition of any
penalty, fine or Lien resulting from the non-payment thereof and with respect to
which adequate reserves in accordance with GAAP have been set aside for the
payment thereof, except, in the case of all such non-compliance (other than non-
compliance in the payment of federal, state and local taxes which, if unpaid,
could result in a Lien on any Collateral or any other non-compliance that may
result in a Lien on Collateral), where all such instances of non-compliance
taken together will not have Material Adverse Effect.
7.03. Preservation of Existence, etc. Except as expressly permitted by
Section 8.04, maintain and preserve its
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existence, rights and privileges, and become or remain duly qualified and in
good standing in each jurisdiction in which the character of the properties
owned or leased by them or in which the transaction of their business makes such
qualification necessary, except where all instances of such failure to qualify
or remain in good standing or such failure to maintain rights and privileges
taken together will not have a Material Adverse Effect.
7.04. Keeping of Records and Books of Account. Keep, and
cause each of its Subsidiaries to keep, adequate records and books of account,
with complete entries made in accordance with generally accepted accounting
principles consistently applied.
7.05. Inspection Rights. Permit, and cause each of its
Subsidiaries to permit, the Administrative Agent or any Lender, or any agents or
representatives thereof or such professionals or other Persons as the
Administrative Agent may designate (i) to examine and inspect the books and
records of the Borrowers and take copies and extracts therefrom at reasonable
times and during normal business hours, (ii) to verify materials, leases, notes,
receivables, deposit accounts and other assets of the Borrowers from time to
time, and (iii) to conduct, at the expense of the Borrowers, Inventory
appraisals and/or valuations at the distribution center(s) and warehouses of the
Borrowers provided that, in the absence of a continuing Event of Default, all
such action described in clauses (i) through (iii) above shall be conducted at
reasonable times, during normal business hours and upon prior notice.
7.06. Maintenance of Properties, etc. Maintain and preserve,
and cause each of its Subsidiaries to maintain and preserve, all of their
properties (including all real properties leased or owned by them) which are
necessary or useful in the proper conduct of their business in good working
order and condition, ordinary wear and tear excepted, and comply, and cause each
of its Subsidiaries to comply, at all times with the provisions of all Leases to
which each of them is a party as lessee or under which each of them occupies
property, so as to prevent any loss or forfeiture thereof or thereunder.
7.07. Maintenance of Insurance. Maintain, and cause each of
its Subsidiaries to maintain, with responsible and reputable insurance companies
or associations, insurance (including, without limitation, comprehensive general
liability, hazard and business interruption insurance) with respect to their
properties (including all real properties leased or owned by them) and business,
in such amounts and covering such risks, as is required by any Governmental
Authority or other regulatory body having jurisdiction with respect thereto or
as is carried generally in accordance with sound business practice by companies
in similar businesses similarly situated and in any event in amount, adequacy
and scope reasonably satisfactory to the Administrative Agent. All policies
covering the Collateral are to be made payable to the Administrative Agent, in
case of loss
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under a standard non-contributory "lender" or "secured party" clause and are to
contain such other provisions as the Administrative Agent may require to fully
protect the Administrative Agent's interest in the Collateral and to any
payments to be made under such policies. All original policies or true copies
thereof are to be delivered to the Administrative Agent, premium prepaid, with
the loss payable and additional insured endorsement in the Administrative
Agent's favor, and shall provide for not less than thirty (30) days prior
written notice to the Administrative Agent of the exercise of any right of
cancellation; provided, however, that original policies may be delivered not
later than thirty (30) days from the Closing Date. At the Parent's request, or
if any Borrower fails to maintain such insurance, the Administrative Agent may
arrange for such insurance, but at the Borrowers' expense and without any
responsibility on the Administrative Agent's part for: obtaining the insurance,
the solvency of the insurance companies, the adequacy of the coverage, or the
collection of claims. Upon the occurrence of an Event of Default, the
Administrative Agent shall have the sole right, in the name of the
Administrative Agent and the Borrowers, to file claims under any insurance
policies, to receive, receipt and give acquittance for any payments that may be
payable thereunder, and to execute any and all endorsements, receipts, releases,
assignments, reassignments or other documents that may be necessary to effect
the collection, compromise or settlement of any claims under any such insurance
policies.
7.08. Environmental. Comply, and cause each of its
Subsidiaries to comply in all material respects, with the requirements of all
Environmental Laws and provide to the Administrative Agent all documentation in
connection with such compliance that the Administrative Agent may reasonably
request; not cause or permit the Collateral or any property or facility owned,
operated or occupied by any Borrower or its Subsidiaries to be used for any
activities involving, directly or indirectly, the use, generation, treatment,
storage, release or disposal of any Hazardous Materials except in compliance
with applicable laws; and immediately notify the Administrative Agent of any
Release of Hazardous Materials in excess of any reportable quantity and take any
Remedial Actions required to abate such Release. On behalf of the Borrower and
its Subsidiaries, each Borrower hereby agrees to defend, indemnify, and hold
harmless the Administrative Agent, the Lenders and the Letter of Credit Issuer,
their employees, agents, officers, and directors, from and against any claims,
demands, penalties, fines, liabilities (including strict liability),
settlements, damages, costs, or expenses (including, without limitation,
attorney and consultant fees, investigation and laboratory fees, court costs,
and litigation expenses) and Environmental Liabilities and Costs arising out of
(i) any Release, or threatened Release on any property presently or formerly
owned or occupied by any Borrower or its Subsidiaries (or their predecessors in
interest or title) or at any disposal facility which received Hazardous
Materials generated by any Borrower or its Subsidiaries; (ii) any violation of
Environmental Laws (iii) any Environmental Actions; (iv) any personal injury
(including wrongful death) or property damage
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(real or personal) arising out of or related to exposure to Hazardous Materials
used, handled, generated transported or deposited by any Borrower or its
Subsidiaries (or any predecessor in interest or title); and/or (v) the breach of
any representation or warranty made by any Borrower in Section 6.19 hereof or
the breach of any covenant made by any Borrower in this Section 7.08. This
environmental indemnity shall survive the repayment of the Obligations and
discharge or release of any security interest granted under the Loan Documents.
7.09. Further Assurances. Do, execute, acknowledge and
deliver, and cause its Subsidiaries to do, execute, acknowledge and deliver, at
the sole cost and expense of the Borrower all such further acts, deeds,
conveyances, mortgages, assignments estoppel certificates, financing statements,
notices of assignment, transfers and assurances as the Administrative Agent may
require from time to time in order (a) to carry out more effectively the
purposes of this Agreement or any other Related Document, (b) to subject to
valid and perfected first priority Liens all of the Collateral, (c) to perfect
and maintain the validity, effectiveness and priority of any of the Related
Documents and the Lien intended to be created thereby, and (d) to better assure,
convey, grant, assign, transfer and confirm unto the Administrative Agent, the
Lenders and the Letter of Credit Issuer the rights now or hereafter intended to
be granted to the Administrative Agent, the Lenders and the Letter of Credit
Issuer under this Agreement any Loan Document or any other instrument under
which any Borrower or its Subsidiary may be or may hereafter become bound to
convey, mortgage or assign to the Administrative Agent, the Lenders and the
Letter of Credit Issuer.
7.10. Intentionally Omitted.
7.11. Change in Collateral: Collateral Records. Give the
Administrative Agent not less than thirty (30) days' prior written notice of any
change in the location of any Collateral, other than to locations, that as of
the date hereof, are known to the Administrative Agent and at which the
Administrative Agent has filed financing statements and otherwise fully
perfected its Liens thereon. Each Borrower shall advise the Administrative Agent
promptly of any other change in the location of any Collateral. Each Borrower
shall also advise the Administrative Agent promptly, in sufficient detail, of
any material adverse change relating to the type quantity or quality of the
Collateral or the security interests granted therein. Each Borrower agrees to
execute and deliver to the Administrative Agent for the benefit of the
Administrative Agent from time to time, solely for the Administrative Agent's
convenience in maintaining a record of the Collateral, such written statements
and schedules as the Administrative Agent may reasonably require, designating,
identifying or describing the Collateral. A Borrower's failure, however, to
promptly give the Administrative Agent such statements or schedules shall not
affect, diminish, modify or
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otherwise Limit the Administrative Agent's security interest in the Collateral.
7.12. Financial Accounting Practices, etc.
(a) Make and keep books, records and accounts which, in
reasonable detail, accurately and fairly reflect the transactions and maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization, (ii) transactions are recorded as necessary
(A) to permit preparation of financial statements in conformity with GAAP and
(B) to maintain accountability for assets, and (iii) the recorded accountability
for assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(b) Maintain a system of internal procedures and
controls sufficient to provide reasonable assurance that the information
required to be set forth in each Borrowing Base Certificate (including, without
limitation, information relating to the identification of assets which are
Eligible Inventory as provided herein and the valuation thereof) is accurate in
all material respects.
7.13. Cash Management System.
(a) (i) Cause all cash and all proceeds from Accounts
and from the sale of Inventory and Equipment and any insurance proceeds paid
with respect to Inventory and Equipment to be deposited on a daily basis (other
than a non-business day) into the Depository Accounts in the ordinary course of
business of the Borrower, (ii) cause all remittances on credit card sales to be
transferred on a daily basis other than a non-business day into the Cash
Concentration Account consistent with the terms of the relevant credit card
servicer agreement, (iii) cause all good funds in the Depository Accounts to be
transferred on a daily basis other than a non-business day (or weekly in the
case of (A) (x) the Depository Account at Wells Fargo (account number 0099-
022246), (y) The Chase Manhattan Bank (account number 785100997) and (z) PNC
Bank (account number 8611717138) and (B) any other Depository Account with the
consent of the Administrative Agent, which consent shall not be unreasonably
withheld taking into account the amount of funds in such Account), into the Cash
Concentration Account in the ordinary course of business of such Borrower,
provided that such Borrower shall in good faith estimate the good funds that are
available in each Depository Account after taking into consideration bank fees,
deposited checks returned because of insufficient funds, change orders and the
payment of deposited checks, (iv) cause all cash deposited in the Cash
Concentration Account, the Disbursement Account and the GDI Vista Account to be
sent, from and after the date the Administrative Agent shall so request (such
request to be made only after an Event of Default shall have occurred or at any
time the Availability shall be less than $2,500,000), by wire transfer
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or such other method of transfer that is acceptable to the Administrative Agent
to the Agent Account or to such other account as the Administrative Agent may
otherwise direct, (v) instruct the Administrative Agent to cause all funds
transferred to the Agent Account to be credited to the Loan Account and applied
to reduce the Obligations outstanding from time to time and (vi) take all such
actions as the Administrative Agent deems necessary or advisable to send all
cash, all proceeds from the sale of or insurance proceeds with respect to
Inventory or Equipment, all remittances or other proceeds of Collateral to the
Cash Concentration Account to be applied according to this Section 7.13. If the
Administrative Agent has instructed the Cash Concentration Account Bank in
writing to transfer the cash from the Cash Concentration Account to the Agent
Account, which instruction shall only be made after an Event of Default shall
have occurred or at any time the Availability shall be less than $2,500,000, the
Parent shall not make any withdrawals from the Cash Concentration Account, the
Disbursement Account or the GDI Vista Account. If the Administrative Agent has
not instructed the Cash Concentration Account Bank in writing to transfer the
cash from the Cash Concentration Account to the Agent Account, the Parent may
transfer funds from the Cash Concentration Account, the Disbursement Account or
the GDI Vista Account solely to pay expenses of the Borrowers which are due or
will become due within one month, provided, however, that the Parent may
transfer any sum of funds between any of the Cash Concentration Account, the
Disbursement Account and the GDI Vista Account.
(b) Upon the opening of any new Depository Account,
notify the Administrative Agent in writing of the creation of such new
Depository Account and shall execute and deliver to the Administrative Agent a
Depository Account Agreement relating to such Depository Account. If a Borrower
is unable to obtain a Depository Account Agreement from any Depository Account
Bank at such time, such Borrower shall promptly thereafter terminate such
account and not deposit any funds therein.
7.14. Intentionally Omitted.
7.15. Additional Subsidiaries. If a Person shall become a
Subsidiary of the Borrower after the Closing Date, cause such Person to comply
with the provisions of Section 4.07 hereof.
7.16. ERISA. Upon the Administrative Agent's request, deliver
to the Administrative Agent a copy of each Plan and for each such Plan (a) that
is a "single employer plan" (as defined in Section 4001 (a) (15) of ERISA), the
most recently completed actuarial valuation prepared therefore by such Plan's
regular enrolled actuary and the Schedule B, "Actuarial Information" to the IRS
Form 5500 (Annual Report) most recently filed with the Internal Revenue Service
and (b) that is a "multiemployer plan" (as defined in Section 4001 (a) (3) of
ERISA), each of the documents referred to in clause (a) either in the
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possession of such Borrower or reasonably available thereto from the sponsor or
trustees of such Plan.
7.17. Maintenance of Equipment. Maintain and preserve, and
cause each of its Subsidiaries to maintain and preserve, all of its Equipment in
as good and substantial repair and condition as the same is now or at the time
the security interest granted in the Security Agreement shall attach thereto,
reasonable wear and tear excepted, making any and all repairs and replacements
when and where necessary. Each Borrower also agrees to safeguard, protect and
hold all Equipment for the Administrative Agent's account, for the benefit of
the Lenders, and make no disposition thereof except as permitted by Section
8.04. The proceeds of any such sales permitted hereunder shall be deposited to a
Depository Account. Upon the sale, exchange, or other disposition of the
Equipment, as herein provided, the security interest provided for in the
Security Agreement shall, without break in continuity and without further
formality or act, continue in, and attach to, all proceeds, including any
instruments for the payment of money, accounts receivable, contract rights,
documents of title, shipping documents, chattel paper and all other cash and
non-cash proceeds of such sales, exchange or disposition. As to any such sale,
exchange or other disposition, the Lenders shall have all of the rights of an
unpaid seller, including stoppage in transit, replevin, rescission and
reclamation. Notwithstanding anything hereinabove contained to the contrary, the
Borrower may sell, exchange or otherwise dispose of Equipment to the extent
permitted by Section 8.04 herein.
ARTICLE VIII.
NEGATIVE COVENANTS
So long as any principal of or interest on the Loans or the
Reimbursement Obligations or any Obligations (whether or not due) shall remain
unpaid or any Lender shall have any Revolving Credit Commitment hereunder, each
Borrower will not, without the prior written consent of the Majority Lenders:
8.01. Liens, etc. Create or suffer to exist, or permit any of
its Subsidiaries to create or suffer to exist, any Lien upon or with respect to
any of their properties, rights or other assets, whether now owned or hereafter
acquired, or assign or otherwise transfer, or permit any of its Subsidiaries to
assign or otherwise transfer, any right to receive income, other than the
following ("Permitted Liens"):
(a) Liens created pursuant to the Loan Documents;
(b) Liens existing on the date hereof, as set forth in
Schedule 8.01 hereto;
(c) Liens for taxes, assessments or governmental
charges or levies to the extent that the payment thereof shall not be required
by Section 7.02 hereof;
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(d) Liens created by operation of law other than Environmental Liens, such
as materialmen's liens, mechanics' liens and other similar liens, arising in the
ordinary course of business which secure amounts not overdue for a period of
more than thirty (30) days or which are being contested in good faith by
appropriate proceedings;
(e) deposits, pledges or Liens (other than Liens arising under ERISA)
securing (1) obligations incurred in respect of workers' compensation,
unemployment insurance or other forms of governmental insurance or benefits, (2)
the performance of bids, tenders, leases, contracts (other than for the payment
of money) and statutory obligations, or (3) obligations on surety or appeal
bonds, but only to the extent such deposits, pledges or Liens are incurred or
otherwise arise in the ordinary course of business and secure obligations which
are not past due;
(f) restrictions on the use of real property and minor irregularities in
the title thereto which do not (1) secure obligations for the payment of money
or (2) materially impair the value of such property or its use by the Borrowers
in the normal conduct of such Person's business;
(g) purchase money Liens on or purchase money security interests in
equipment or real property acquired or held in the ordinary course of its
business securing Indebtedness, provided that the Liens do not extend to any
Collateral and the holders of such Liens shall expressly provide that the
Administrative Agent and the Lenders shall at all times have access to the
premises in order to acquire, hold, improve, repair, maintain, sell or otherwise
dispose of Collateral;
(h) Liens securing Capitalized or Operating Leases;
(i) to the extent the same constitutes Liens, the interest of the consignor
in Inventory held by the Borrower on consignment;
(j) Liens on real property of the Borrower which secure Indebtedness
incurred by the Borrower provided the conditions set forth in clause (g) are
satisfied with respect to such real property;
(k) Liens upon any property or assets (other than Collateral) of any
Subsidiary of any Borrower existing at the time such Subsidiary is acquired by,
merged into or consolidated with the Borrower in accordance with the terms of
this Agreement, provided that such Liens were not created in contemplation of
any such acquisition, merger or consolidation;
(l) pre-existing Liens upon any property or assets (other than Collateral)
existing at the time such property or assets are acquired by a Borrower,
provided that such Liens were not created in contemplation of such acquisition;
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(m) Renewals and replacements of the Liens described in clauses (b),
(g), (k) and (1) of this Section 8.01, provided that any such renewal or
replacement Lien shall be limited to the property or assets covered by the Lien
renewed or replaced and the Indebtedness secured by any such renewal or
replacement Lien shall be in an amount not greater than the amount of
Indebtedness secured by the Lien renewed or replaced; and
(n) Liens on the equity interests in a Borrower formed solely for the
purpose of the acquisition of substantially all the assets or securities of a
Person or a division of such Person (whether directly or by means of merger with
or into such Person) or a Person who after such acquisition will become a
Borrower which Liens secure solely Indebtedness permitted under Section 8.02(c)
to finance such acquisition.
8.02. Indebtedness. Create, incur or suffer to exist, or permit any of its
Subsidiaries to create, incur or suffer to exist, any Indebtedness, other than:
(a) Indebtedness created hereunder or under the Notes or any Letter
of Credit;
(b) Indebtedness existing on the date hereof, as set forth in
Schedule 8.02 hereto, and any extension of maturity, refinancing or other
modification of the terms thereof, provided, however, that such extension,
refinancing or modification (A) is pursuant to terms that are not less favorable
to the Borrower and its Subsidiaries than the terms of the Indebtedness being
extended, refinanced or modified, and (B) after giving effect to the extension,
refinancing or modification of such Indebtedness, the amount of such
Indebtedness outstanding is not greater than the amount of such Indebtedness
outstanding immediately prior to such extension, refinancing or modification;
(c) unsecured Indebtedness (except such Indebtedness may be secured
to the extent set forth in Section 8.01(n)), including Guarantees by the Parent
and other Borrowers of such Indebtedness, incurred to fund the acquisition of a
Person that becomes a Subsidiary as a result of such acquisition or
substantially all the assets of a Person or a division of such Person;
(d) To the extent the same constitutes Indebtedness, Indebtedness
secured by Liens or security interests permitted by Section 8.01 hereof;
(e) subordinated Indebtedness provided, however, that the amount,
rate, terms and the provisions subordinating such indebtedness to the Loans are
in form and substance acceptable to the Administrative Agent in its sole
discretion; and
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(f) Indebtedness under any Capital Lease or Operating Lease relating
to equipment entered into in the ordinary course of business.
8.03. Guarantees, etc. Become liable, or permit any of its Subsidiaries to
become liable, under any Guarantee in connection with any Indebtedness of any
other Person, other than:
(a) Guarantees by endorsement of negotiable instruments for deposit
or collection in the ordinary course of business;
(b) Guarantees existing on the date hereof, as set forth in Schedule
8.03 hereto, but not any renewal or other modification thereof; and
(c) Guarantees in respect of Indebtedness permitted by Section 8.02
hereof;
8.04. Merger. Consolidation, Sale of Assets. etc.
(a) Merge or consolidate with any Person (other than another Borrower
or a Person who after such acquisition will become a Borrower) provided that no
such merger or consolidation shall be permitted unless (i) prior to and after
giving effect to such merger or consolidation no Potential Default (including
under Section 8.12) shall have occurred or be continuing, and (ii) the Parent
gives the Administrative Agent at least 5 days' prior written notice of such
merger or consolidation and supplies the Administrative Agent with such
information, documents and financial statements and projections as it may
reasonably request).
(b) Sell, assign, lease or otherwise transfer or dispose of, or
permit any of its Subsidiaries to sell, assign, lease or otherwise transfer or
dispose of, whether in one transaction or in a series of related transactions,
any of their properties rights or other assets whether now owned or hereafter
acquired to any Person, provided that:
(i) each Borrower may sell Inventory in the ordinary course of
business, provided that the Net Proceeds of such sales of Inventory shall
be deposited in a Depository Account or a Cash Concentration Account
pursuant to the terms of Section 7.13 hereof;
(ii) each Borrower may dispose of (a) property that is not
Collateral, (b) Equipment having book value of less than $500,000 in
aggregate per fiscal year or (c) Collateral that is obsolete, worn-out, or not
used or deemed useful by the Borrower in the ordinary course of business;
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(iii) in the event any Collateral is sold,
assigned or transferred either as currently permitted
hereunder, or if consented to by the Administrative Agent at
any other time, 100% of the proceeds thereof shall be deemed
to be a mandatory prepayment hereunder; and
(iv) each Borrower may dispose of all or
part of its assets to another Borrower. In the event of a
sale or transfer of all the assets of one Borrower (a
"Selling Borrower") to another Borrower, the Selling Borrower
shall, unless a Potential Default shall have occurred and be
continuing, be released as a Borrower hereunder.
8.05. Change in Nature of Business. Make, or permit its
Subsidiaries to make, any change in the nature of its business as carried on at
the date hereof except for changes that will not fundamentally and substantively
alter the character of its business from that conducted by the Parent on the
Closing Date.
8.06. Loans, Advances and Investments, etc. Make, or permit
any of its Subsidiaries to make, any loan or advance to any Person (except as
permitted by Section 8.09(d)) or purchase or otherwise acquire, or permit any of
its Subsidiaries to purchase or otherwise acquire, any capital stock,
properties, assets or obligations of, or any interest in, any Person, other
than:
(a) Permitted Investments;
(b) investments, loans and advances, not to exceed
$500,000 in the aggregate, in Persons for which there is a letter of intent or
agreement providing for the acquisition of the stock or substantially all the
assets of such Persons;
(c) investments comprised of (i) the acquisition of the
capital stock or assets of Persons provided that, as a result of such
acquisition, such Person (in the case of the direct or indirect acquisition of
stock of such Person) and its Subsidiaries (in the case of the direct or
indirect acquisition of the capital stock of such Subsidiary) becomes a Borrower
pursuant to the provisions of Section 4.07 hereof and (ii) assets purchased by a
Borrower or a Person who, after giving effect to the acquisition of assets,
becomes a Borrower pursuant to the provisions of Section 4.07 hereof;
(d) receivables owing to the Borrower or any of its
Subsidiaries if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with the customary trade terms of the
Borrower or its applicable Subsidiary as the case may be; and
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(e) investments existing on the date hereof as set
forth in Schedule 8.06 hereto.
8.07. Dividends, Prepayments, etc. Declare or pay any
dividends (other than dividends payable solely in nonredeemable equity
securities), purchase or otherwise acquire for value any of their capital stock
now or hereafter outstanding, return any capital to their stockholders as such,
or make any other payment or distribution of assets to its stockholders as such,
or permit any of their Subsidiaries to do any of the foregoing or to purchase or
otherwise acquire for value any stock of any Borrower or make any payment on any
subordinated Indebtedness in violation of the subordination provisions thereof
other than payments to a Borrower or Parent, provided, however, that (i) within
60 days after the delivery to the Administrative Agent of consolidated audited
financial statements for a fiscal year pursuant to Section 7.01(a) demonstrating
positive consolidated net income for the fiscal year, the Parent may, so long as
no Potential Default or Event of Default shall have occurred and be continuing
or shall result from such payment, declare and pay any such dividend in an
amount not in excess of fifty (50%) percent of the such consolidated net income
and (ii) any Borrower may pay cash dividends solely to the Parent or solely to
any other Borrower which is directly or indirectly wholly owned by the Parent.
Any amount not so declared and paid pursuant to clause (ii) in the prior
sentence within such 60 day period may not be paid at any time thereafter.
8.08. Federal Reserve Regulations. Permit any Loan or the
proceeds of any Loan under this Agreement to be used for any purpose which
violates or is inconsistent with the provisions of Regulations G, T, U or X of
the Board of Governors of the Federal Reserve System.
8.09. Transactions with Affiliates. Enter into or be a party
to, or permit any of their Subsidiaries to enter into or be a party to, any
transaction with any Affiliate of any Borrower (other than another Borrower)
except (a) as otherwise provided herein, (b) for reasonable compensation to
officers and directors, (c) management fees payable to the Parent, (d)
reimbursement of reasonable expenses and related fringe benefits including
employee stock options and other employee benefit plans, indemnification rights
and advances for business purposes to employees and (e) in the ordinary course
of business in a manner and to an extent consistent with past practice and
necessary or desirable for the prudent operation of its business for fair
consideration and on terms no less favorable to such Borrower as are available
from unaffiliated third parties.
8.10. Environmental. Permit the use, handling, generation,
storage, treatment, Release or disposal of any Hazardous Material at property
owned or leased by any Borrower or its Subsidiaries except in compliance with
Environmental Laws.
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8.11. ERISA.
(a) Engage, or permit any ERISA Affiliate to engage,
in any prohibited transaction described in Section 406 of ERISA or 4975 of the
IRC Code for which a statutory or class exemption is not available or a private
exemption has not previously been obtained from the Department of Labor and that
would have a Material Adverse Effect;
(b) permit, or permit any ERISA Affiliate to permit,
any enforceable Lien from arising under Section 412(n) of the IRC Code;
(c) amend or permit any ERISA Affiliate to amend any
Benefit Plan in a manner that would require security under Section 307 of ERISA;
or
(d) request or permit any ERISA Affiliate to request
a waiver of the minimum funding requirements under Section 412 of the IRC Code
in respect of any Benefit Plan.
8.12. Minimum Consolidated Net Worth. Permit as of any
date set forth below, the sum of (x) consolidated net worth of the Parent and
its consolidated Subsidiaries plus (y) the aggregate unpaid principal amount
(or, in the case of Indebtedness issued at a discount, the unpaid accreted
amount) of the Convertible Subordinated Debentures and of any subordinated
Indebtedness issued under Section 8.02 (e) to be less than the amount set forth
opposite such date:
December 31, 1997 $30,000,000
March 31, 1998 $35,000,000
June 30, 1998 $40,000,000
September 30, 1998 $45,000,000
December 31, 1998 $50,000,000
March 31, 1999 $55,000,000
June 30, 1999 $60,000,000
September 30, 1999 $65,000,000
December 31, 1999 $70,000,000
March 31, 2000 $75,000,000
June 30, 2000 $80,000,000
September 30, 2000 $85,000,000
December 31, 2000 $90,000,000
March 31, 2001 $95,000,000
June 30, 2001 $100,000,000
September 30, 2001 $105,000,000
December 31, 2001 $110,000,000
March 31, 2002 and each
quarter thereafter $115,000,000
ARTICLE IX.
DEFAULTS
9.01. Events of Default. An Event of Default shall mean
the occurrence or existence of one or more of the following
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events or conditions (whatever the reason for such Event of Default and whether
voluntary, involuntary or effected by operation of law):
(a) (i) Any Borrower shall fail to make any payment of principal under this
Agreement on any Loan or any Reimbursement Obligation when due or (ii) any
Borrower shall fail to pay when due any other amount payable under this
Agreement or any other Related Document (including but not limited to the making
of deposits in the Depositor Accounts, or the Cash Concentration Accounts or the
Letter of Credit Cash Collateral Account) including any interest or fee due
hereunder or under any other Related Document and such failure under this clause
(ii) shall continue for a period of five (5) days; or
(b) Any representation or warranty, made or, pursuant to Section 5.02(b)
hereof, deemed made by any Borrower under this Agreement or any other Related
Document or any statement made or deemed made by any Borrower in any financial
statement certificate report or document furnished to the Administrative Agent
or the Lenders pursuant to or in connection with this Agreement or any other
Related Document, shall prove to have been false or misleading in any material
respect as of the time when made, it being understood that (i) actual results
may differ from projections and (ii) representations and warranties are not
required to be accurate on a continuous basis but only (x) on the date of
Notices of Borrowings and Borrowers' acceptance of the proceeds of such loan (y)
the submission of a Letter of Credit Application and the date of issuance of the
Letter of Credit or (2) at any date that such representations and warranties are
required to be made pursuant to this Agreement and the Related Documents; or
(c) Any Borrower shall default in the performance or observance of the
covenants contained in Sections 7.03, 7.05, 7.11, 7.13, 7.14 or 7.15 or Article
VIII hereof; or
(d) Any Borrower shall default in the performance or observance of any
other covenant, agreement or duty under this Agreement or any other Related
Document (to the extent not otherwise set forth in this Section 9.01) and such
default shall have continued unremedied for a period of ten (10) days; or
(e) Any Borrower shall have entered into any consent or settlement decree
or agreement or similar arrangement with a Governmental Authority or any
judgment, order, decree or similar action shall have been entered against any
such Person based on or arising from the violation of or pursuant to any
Environmental Law, or the generation, storage, transportation, treatment,
disposal or Release of any Hazardous Material and, in connection with any of the
foregoing, any such Person shall incur Environmental Liabilities and Costs which
are unstayed, due and owing in an amount in excess of $500,000; or
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(f) Any Borrower or any Subsidiary shall fail to pay any principal or
interest on any of its Indebtedness (excluding Indebtedness evidenced by the
Notes) in excess of $500,000, or any interest or premium thereon, when due
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such Indebtedness, or
any other default or event under any agreement or instrument relating to any
such Indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate, or to permit the
acceleration of the maturity of such Indebtedness; or any such Indebtedness in
excess of such amount shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment) or purchased,
prior to the stated maturity thereof; or
(g) Any Borrower or any Subsidiary (i) shall institute any proceeding or
voluntary case seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief or composition of it or its debts under any law relating to
bankruptcy, insolvency, reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee,
custodian or other similar official for the Borrower or any Subsidiary or for
any substantial part of its property, (ii) shall be generally not paying its
debts as such debts become due, or shall admit in writing its inability to pay
its debts generally, (iii) shall make a general assignment for the benefit of
creditors, or (iv) shall take any action to authorize or effect any of the
actions set forth above in this subsection (g); or
(h) Any proceeding shall be instituted against any Borrower or any
Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking
dissolution, liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief of debtors, or seeking the entry of an order for relief or
the appointment of a receiver, trustee, custodian or other similar official for
any Borrower or any of its Subsidiaries or for any substantial part of its
property, and either such proceeding shall remain undismissed or unstayed for a
period of thirty (30) days or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief against it or
the appointment of a receiver trustee, custodian or other similar official for
it or for any substantial part of its property) shall occur; or
(i) Any material provision of any Loan Document shall at any time for any
reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by any Borrower, or a proceeding shall be commenced
by any Borrower, or by any Governmental Authority or other regulatory body
having jurisdiction over any Borrower, seeking to establish the
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invalidity or unenforceability thereof, or any Borrower shall deny in writing
that any Borrower has any liability or obligation purported to be created under
any Loan Document; or
(j) The Security Agreement or any other Security Document,
after delivery thereof pursuant hereto, shall for any reason fail or cease to
create a valid and perfected and, except to the extent permitted by the terms
hereof or thereof first priority Lien on or security interest in any Collateral
(and, solely with respect to Equipment having a book value of $500,000 in the
aggregate, such failure shall have continued for a period of ten (10) days)
purported to be covered thereby; or
(k) One or more judgments or orders (other than a judgment
described in subsections (g) or (h) of this Section 9.01) for the payment of
money exceeding any applicable insurance or bond coverage by more than $500,000
in the aggregate shall be rendered against the Borrower or any Subsidiary and
either (i) enforcement proceedings shall have been commenced by any creditor
upon any such judgment or order or (ii) there shall be any period of twenty (20)
consecutive days during which a stay of enforcement of any such judgment or
order by reason of a pending appeal or otherwise shall not be in effect; or
(1) Any Borrower or any of its ERISA Affiliates shall have
made a complete or partial withdrawal from a Multiemployer Plan and as a result
of such complete or partial withdrawal the Borrower or such ERISA Affiliate
incurs a withdrawal liability in an annual amount exceeding $500,000 or a
Multiemployer Plan enters reorganization status under Section 4241 of ERISA,
and, as a result thereof, any Borrower's or such ERISA Affiliate's annual
contribution requirement with respect to such Multiemployer Plan increases in an
annual amount exceeding $500,000; or
(m) Any Termination Event with respect to any Benefit Plan
shall have occurred, and, thirty (30) days after notice thereof shall have been
given to the Borrower by Administrative Agent, (i) such Termination Event (if
correctable) shall not have been corrected, and (ii) the then current value of
such Benefit Plan's vested benefits exceeds the then current value of assets
allocable to such benefits in such Benefit Plan by more than $500,000 (or in the
case of a Termination Event involving liability under Section 515, 4062, 4063,
4064, 4069, 4201 or 4204 of ERISA, the liability is in excess of such amount).
9.02. Consequences of an Event of Default. If an Event of Default
shall occur and be continuing or shall exist the Administrative Agent may, and
upon the direction of the Majority Lenders, shall by notice to the Parent (it
being expressly understood that such notice shall be deemed notice to each
Borrower),
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(a) declare the Revolving Credit Commitment of each Lender
and the Current Commitment terminated, whereupon the Revolving Credit Commitment
of each Lender and the Current Commitment will terminate immediately without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived, and an action therefor shall immediately accrue; or
(b) declare the unpaid principal amount of the Notes,
interest accrued thereon, the total amount of the Letter of Credit Exposure that
is not cash collateralized in accordance with this Agreement, any fees due
hereunder and all other amounts owing by the Borrower hereunder or under the
Notes to be immediately due and payable without presentment, demand, protest or
further notice of any kind, all of which are hereby expressly waived, and an
action therefor shall immediately accrue; or
(c) give notice to the Parent (it being understood that such
notice shall be deemed to be notice to each Borrower) of the occurrence and
continuance of an Event of Default; or
(d) any time when there are no Loans outstanding, maintain
cash collateral (to the extent any Borrower has or receives cash) equal to 105%
of all outstanding Letters of Credit; or
(e) apply all funds deposited in each Cash Concentration
Account, and in the Letter of Credit Cash Collateral Account to the payment in
whole or in part, of the Obligations; or
(f) set-off amounts in the Cash Concentration Account, the
Letter of Credit Cash Collateral Account, or any other account under the
dominion and control of the Administrative Agent and apply such amounts to the
Obligations of the Borrower hereunder and under the Related Documents; provided,
however, that upon the occurrence of any Event of Default described in
subsections (g) or (h) of Section 9.01, the Loans and all Reimbursement
Obligations, all interest thereon, all fees hereunder and all other amounts
shall become and be forthwith due and payable, without presentment, demand,
protest or further notice of any kind, all of which are expressly waived by the
Borrowers.
9.03. Deposit for Letters of Credit. Upon demand to the Parent by the
Letter of Credit Issuer after the occurrence of any Event of Default, the
Borrowers shall deposit with the Administrative Agent for the benefit of the
Letter of Credit Issuer with respect to each Letter of Credit then outstanding
cash in an amount equal to the greatest amount for which such Letter of Credit
may be drawn. Such deposits shall be held by the Administrative Agent for the
benefit of the Letter of Credit Issuer in the Letter of Credit Cash Collateral
Account as
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security for, and to provide for the payment of, the Letter of Credit Exposure.
9.04. Certain Remedies. If an Event of Default occurs, each
of the Administrative Agent and the Lenders may exercise all rights and remedies
which it may have hereunder or under any other Related Document or at law or in
equity or otherwise. All such remedies shall be cumulative and not exclusive.
ARTICLE X.
MISCELLANEOUS
10.01. Holidays. Except as otherwise provided herein,
whenever any payment or action to be made or taken hereunder or under the Notes
shall be stated to be due on a day which is not a Business Day, such payment or
action shall be made or taken on the next following Business Day and such
extension of time shall be included in computing interest or fees, if any, in
connection with such payment or action.
10.02. Records. The unpaid principal amount of the Notes, the
unpaid interest accrued thereon, the interest rate or rates applicable to such
unpaid principal amount, the duration of such applicability, the Current
Commitment, the Stated Amount of each Letter of Credit, the principal amount of
all Reimbursement Obligations, the Letter of Credit Exposure, the Unused Line
Fee and Letter of Credit Fees and all other fees due hereunder shall at all
times be ascertained from the records of Administrative Agent, which shall be
conclusive and binding absent manifest error.
10.03. Amendments and Waivers. (a) No amendment or
modification of any provision of this Agreement or of the Notes or of any other
Related Document shall be effective without the written agreement of the
Majority Lenders and the Borrower and no termination or waiver of any provision
of this Agreement or of any of the Notes, or consent to any departure by the
Borrower therefrom, shall in any event be effective without the written
concurrence of the Majority Lenders, which the Majority Lenders shall have the
right to grant or withhold at their sole discretion; except that any amendment,
modification, or waiver (i) of any provision of Article II or III which
amendment, modification or waiver increases the Revolving Credit Commitment of
any Lender, reduces the principal of, or interest on, the Loans or the
Reimbursement Obligations payable to any Lender, reduces the amount of any fee
payable for the account of any Lender, or postpones or extends any date fixed
for any payment of principal of, or interest or fees on, the Loans or Letter of
Credit Exposure payable to any Lender, (ii) that increases the aggregate amount
of the Revolving Credit Commitments, of the Lenders, (iii) of the definitions of
"Termination Date", "Majority Lenders" or "Pro Rata Shares", (iv) of the
definitions of "Eligible Receivable", "Eligible Inventory" or "Borrowing Base"
if the effect of such amendment, modification or waiver is
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to increase the Availability of the Borrowers, (v) of any provision of this
Agreement or any Related Document that would permit Liens on the Collateral or
release all or a substantial portion of Collateral (except as set forth in
Section 11.08 hereof or except as otherwise permitted herein), (v) of the
mandatory termination of the Revolving Credit Commitments contained in Section
2.04(a) (ii) hereof, or (vii) of the provisions contained in this Section 10.03,
shall be effective only if evidenced by a writing signed by or on behalf of (A)
any Lender affected thereby in the case of the amendments, modifications or
waivers described in clause (i) above or (B) all Lenders in the case of
amendments to definitions or waivers described in clauses (ii) through (vii)
above. No amendment, modification, termination, or waiver of any provision of
Article XI or any other provision referring to the Administrative Agent shall be
effective without the written concurrence of Administrative Agent. Any waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which it was given. No notice to or demand on the Parent or any
other Borrower in any case shall entitle the Parent or any other Borrower to any
other or further notice or demand in similar or other circumstances. Any
amendment, modification, waiver or consent effected in accordance with this
Section 10.03 shall be binding on each Lender, each future Lender, and, if
signed by the Borrowers, on the Borrowers.
(b) Notwithstanding anything to the contrary contained in
subsection 10.03(a), in the event that any Borrower requests that this Agreement
or any other Related Document be amended or otherwise modified in a manner which
would require the unanimous consent of all of the Lenders and such amendment or
other modification is agreed to by the Majority Lenders, then with the consent
of the Borrowers and the Majority Lenders, the Borrowers and the Majority
Lenders may amend this Agreement without the consent of the Lender or Lenders
which did not agree to such amendment or other modification (collectively the
"Minority Lenders") to provide for (w) the termination of the Revolving Credit
Commitment of each of the Minority Lenders, (x) the addition to this Agreement
of one or more other Lenders, or an increase in the Revolving Credit Commitment
of one or more of the Majority Lenders, so that the Revolving Credit Commitments
after giving effect to such amendment shall be in the same aggregate amount as
the Revolving Credit Commitments immediately before giving effect to such
amendment, (y) if any Loans are outstanding at the time of such amendment, the
making of such additional Loans by such new Lenders or Majority Lenders, as the
case may be, as may be necessary to repay in full the outstanding Loans of the
Minority Lenders immediately before giving effect to such amendment and (z) the
payment of all interest, fees and other Obligations payable or accrued in favor
of the Minority Lenders and such other modifications to this Agreement as the
Borrowers and the Majority Lenders may determine to be appropriate.
10.04. No Implied Waiver; Cumulative Remedies. No course of dealing and no
--------------------------------------
delay or failure of the Lenders or the
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Administrative Agent in exercising any right power or privilege under this
Agreement, the Notes or any other Related Document shall affect any other or
future exercise thereof or exercise of any other right, power or privilege; nor
shall any single or partial exercise of any such right, power or privilege or
any abandonment or discontinuance of steps to enforce such a right, power or
privilege preclude any further exercise thereof or of any other right, power or
privilege. The rights and remedies of the Lenders or the Administrative Agent
under this Agreement, the Notes and the other Related Documents are cumulative
and not exclusive of any rights or remedies which the Lenders or the
Administrative Agent have thereunder or at law or in equity or otherwise. The
Lenders or the Administrative Agent may exercise their rights and remedies
against the Borrower and the Collateral as the Lenders and the Administrative
Agent may elect, and regardless of the existence or adequacy of any other right
or remedy.
10.05. Notices.
(a) All notices, requests, demands, directions and other
communications (collectively "Notices") under the provisions of this Agreement
or the Notes shall be in writing and shall be mailed (by certified mail, postage
prepaid and return receipt requested), telecopied, or delivered by recognized
overnight courier and shall be effective (i) if mailed, three days after being
deposited in the mails, (ii) if telecopied, when sent, confirmation received and
(iii) if delivered, upon delivery with a receipt therefor. All notices shall
be sent to the applicable party at the address stated on the signature page
hereof together with, in the case of a letter of credit request and Letter of
Credit Application sent pursuant to Section 3.01(a), a copy to the
Administrative Agent at the address for the Administrative Agent provided on the
signature page hereof, or in accordance with the last unrevoked written
direction from such party to the other parties hereto.
(b) The Lenders and the Administrative Agent may
rely, and shall be fully protected in relying, on any notice purportedly made by
or on behalf of the Borrower and the Lenders and the Administrative Agent shall
have no duty to verify the identity or authority of any Person giving such
notice. The preceding sentence shall apply to all notices whether or not made in
a manner authorized or required by this Agreement or any other Related Document.
10.06. Expenses; Taxes; Attorneys' Fees; Indemnification. The
Borrowers jointly and severally agree to pay or cause to be paid, on demand, and
to save the Administrative Agent (and, in the case of clauses (c) through (m)
below, the Lenders) harmless against liability for the payment of all reasonable
out-of-pocket expenses, regardless of whether the transactions contemplated
hereby are consummated, including but not limited to reasonable fees and
expenses of counsel for the Administrative Agent and, in the case of clauses (c)
through (m)
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below, the Lenders), accounting, due diligence, periodic field audits,
appraisals, investigations, monitoring of assets, syndication, miscellaneous
disbursements, examination, travel, lodging and meals, incurred by the
Administrative Agent (and, in the case of clauses (c) through (m) below, the
Lenders) from time to time arising from or relating to: (a) the negotiation,
preparation, execution, delivery, performance and administration of this
Agreement and the other Related Documents, (b) any requested amendments waivers
or consents to this Agreement or the other Related Documents whether or not such
documents become effective or are given, (c) the preservation and protection of
any of the Administrative Agent's and the Lenders' rights under this Agreement
or the other Related Documents, (d) the defense of any claim or action asserted
or brought against the Administrative Agent or the Lenders by any Person that
arises from or relates to this Agreement, any other Related Document
Administrative Agent's or the Lenders' claims against the Borrower, or any and
all matters in connection therewith, (e) the commencement or defense of, or
intervention in, any court proceeding arising from or related to this Agreement
or any other Related Document, (f) the filing of any petition, complaint,
answer, motion or other pleading by the Administrative Agent or the Lenders, or
the taking of any action in respect of the Collateral or other security, in
connection with this Agreement or any other Related Document, (g) the
protection, collection, lease, sale, taking possession of or liquidation of, any
Collateral or other security in connection with this Agreement or any other
Related Document, (h) any attempt to enforce any Lien on any Collateral or other
security in connection with this Agreement or any other Related Document, (i)
any attempt to collect from the Borrower, (j) the receipt of any advice with
respect to any of the foregoing, (k) all Environmental Liabilities and Costs
arising from or in connection with the past, present or future operations of
each Borrower or its Subsidiaries involving any damage to real or personal
property or natural resources or harm or injury alleged to have resulted from
any Release of Hazardous Materials on, upon or into such property, (1) any costs
or liabilities incurred in connection with the investigation, removal, cleanup
and/or remediation of any Hazardous Materials present or arising out of the
operations of any facility of any Borrower or any of its Subsidiaries, or (m)
any costs or liabilities incurred in connection with any Environmental Lien.
Without limitation of the foregoing or any other provision of any Related
Document: (x) the Borrower agrees to pay all stamp, document, transfer,
recording or filing taxes or fees (including, without limitation, mortgage
recording taxes) and similar impositions now or hereafter determined by the
Administrative Agent or any of the Lenders to be payable in connection with this
Agreement or any other Related Document, and the Borrowers jointly and severally
agree to save the Administrative Agent and the Lenders harmless from and against
any and all present or future claims, liabilities or losses with respect to or
resulting from any omission to pay or delay in paying any such taxes, fees or
impositions, and (y) if the Borrowers fail to perform any covenant or agreement
contained herein of in any other Related Document, the Administrative Agent
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may itself perform or cause performance of such covenant or agreement, and the
expenses of the Administrative Agent incurred in connection therewith shall be
reimbursed on demand by the Borrowers. The Borrowers jointly and severally agree
to indemnify and defend the Administrative Agent and the Lenders and their
directors, officers, agents, employees and affiliates (collectively, the
"Indemnified Parties") from, and hold each of them harmless against, any and all
losses, liabilities, claims, damages, costs or expenses of any nature whatsoever
(including reasonable attorneys' fees and amounts paid in settlement) incurred
by, imposed upon or asserted against any of them arising out of or by reason of
any investigation, litigation or other proceeding or claim brought or threatened
relating to, or otherwise arising out of or relating to, the execution of this
Agreement or any other Related Document, the transactions contemplated hereby or
thereby or any Loan or proposed Loan or Letter of Credit or proposed Letter of
Credit hereunder (including, but without limitation, any use made or proposed to
be made by any Borrower or any of its Affiliates of the proceeds of any thereof,
or the delivery or use or transfer of or the payment or failure to pay under any
Loan or Letter of Credit) but excluding any such losses, liabilities, claims,
damages, costs or expenses to the extent finally judicially determined to have
resulted from the gross negligence or willful misconduct of the Indemnified
Party.
10.07. Application. Except to the extent, if any, expressly
-----------
set forth in this Agreement or in the Related Documents, the Administrative
Agent and the Lenders shall have the right to apply any payment received or
applied by it in connection with the Obligations to such of the Obligations then
due and payable as it may elect.
10.08. Severability. The provisions of this Agreement are
------------
intended to be severable. If any provision of this Agreement shall be held
invalid or unenforceable in whole or in part in any jurisdiction such provision
shall, as to such jurisdiction, be ineffective to the extent of such invalidity
or unenforceability without in any manner affecting the validity or
enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
10.09. Governing Law. This Agreement and the Notes shall be
-------------
deemed to be contracts under the laws of the State of New York, without regard
to choice of law principles, and for all purposes shall be governed by and
construed and enforced in accordance with the laws of said State.
10.10. Prior Understandings. This Agreement supersedes all
--------------------
prior understandings and agreements, whether written or oral, among the parties
hereto relating to the transactions provided for herein.
10.11. Duration, Survival. All representations and warranties
------------------
of the Borrower contained herein or made in connection
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herewith shall survive the making of the Loans and the issuance of any Letter of
Credit and shall not be waived by the execution and delivery of this Agreement,
the Notes or any other Related Document, any investigation by or knowledge of
the Administrative Agent or the Lenders, the making of any Loan or the issuance
of any Letter of Credit hereunder, or any other event whatsoever. All covenants
and agreements of the Borrowers contained herein shall continue in full force
and effect from and after the date hereof so long as the Borrowers may borrow
hereunder and until the Obligations have been paid in full and no Letters of
Credit remain outstanding. Without limitation, it is understood that all
obligations of the Borrowers to make payments to or indemnify the Administrative
Agent and the Lenders (including, without limitation, obligations arising under
Section 10.06 hereof) shall survive the payment in full of the Notes and all
Reimbursement Obligations and of all other obligations of the Borrowers
thereunder and hereunder.
10.12. Counterparts. This Agreement may be executed
------------
in any number of counterparts and by the different parties hereto on separate
counterparts each of which, when so executed, shall be deemed an original, but
all such counterparts shall constitute but one and the same instrument.
10.13. Assignments, Participations.
---------------------------
(a) Each Lender may with the written consent of
the Administrative Agent, which consent shall not be unreasonably withheld,
assign to one or more commercial banks or other financial institutions a portion
of its rights and obligations under this Agreement (including, without
limitation, a portion of its Revolving Credit Commitment, the Loans owing to it
and its rights and obligations as a Lender with respect to Letters of Credit)
and the other Related Documents; provided, however, that (i) each such
assignment shall be in a principal amount of not less than $1,000,000 and in
multiples of $1,000,000 in excess thereof (or the remainder of such Lender's
Revolving Credit Commitment), and (ii) the parties to each such assignment shall
execute and deliver to the Administrative Agent, for its acceptance and
recording in the Register (as hereinafter defined), an Assignment and
Acceptance. Upon such execution, delivery acceptance and recording, from and
after the effective date specified in each Assignment and Acceptance, (A) the
assignee thereunder shall be a party hereto and to the other Related Documents
and, to the extent that rights and obligations hereunder have been assigned to
it pursuant to such Assignment and Acceptance, have the rights and obligations
(including, without limitation, the obligation to participate in Letters of
Credit) of a Lender hereunder and thereunder and (B) the assigning Lender shall,
to the extent that rights and obligations hereunder have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement.
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(b) By executing and delivering an Assignment and Acceptance,
the assignor and the assignee thereunder confirm to and agree with each other
and the other parties hereto as follows: (i) other than as provided in such
Assignment and Acceptance, the assigning lender makes no representation or
warranty and assumes no responsibility with respect to any statements,
warranties or representations made in or in connection with this Agreement or
any other Related Document or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Agreement or any other Related
Document furnished pursuant hereto; (ii) the assigning Lender makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or any of its Subsidiaries or the
performance or observance by the Borrower of any of its obligations under this
Agreement or any other Related Document furnished pursuant hereto; (iii) such
assignee confirms that it has received a copy of this Agreement and the other
Related Documents, together with such other documents and information it has
deemed appropriate to make its own credit analysis and decision to enter into
such Assignment and Acceptance; (iv) such assignee will, independently and
without reliance upon the assigning Lender, the Administrative Agent or any
Lender and based on such documents and information as it shall deem appropriate
at the time, continue to make its own credit decisions in taking or not taking
action under this Agreement and the other Related Documents; (v) such assignee
appoints and authorizes the Administrative Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement and the other
Related Documents as are delegated to the Administrative Agent by the terms
thereof together with such powers as are reasonably incidental thereto; and (vi)
such assignee agrees that it will perform in accordance with their terms all of
the obligations which by the terms of this Agreement and the other Related
Documents are required to be performed by it as a Lender.
(c) The Administrative Agent shall maintain at its
address referred to on the signature page hereto, a copy of each Assignment and
Acceptance delivered to and accepted by it and a register for the recordation of
the names and addresses of the Lenders and the Revolving Credit Commitment of,
and principal amount of the Loans owing to and the participation interest in the
Letters of Credit of, each Lender from time to time (the "Register"). The
entries in the Register shall be conclusive and binding for all purposes, absent
manifest error, and the Borrower, the Administrative Agent and the Lenders may
treat each Person whose name is recorded in the Register as a Lender hereunder
for all purposes of this Agreement. The Register shall be available for
inspection by the Borrower and any Lender at any reasonable time and from time
to time upon reasonable prior notice.
(d) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender, an assignee Lender together with the Notes subject to
such assignment, the Administrative Agent shall if such Assignment and
Acceptance has
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been completed and is in substantially the form of Exhibit E hereto, (i) accept
such Assignment and Acceptance, (ii) give prompt notice thereof to the Borrower
and (iii) record the information contained therein in the Register. Within five
Business Days after its receipt of such notice, the Borrowers, at their own
expense, shall execute and deliver to the Administrative Agent in exchange for
the surrendered Note a new Note to the order of such assignee Lender in an
aggregate principal amount equal to the Revolving Credit Commitment assumed by
it pursuant to such Assignment and Acceptance, and a new Note to the order of
the assigning Lender in an aggregate principal amount equal to the Revolving
Credit Commitment retained by it hereunder, in each case prepared by the
Administrative Agent. Such new Note shall be in an aggregate principal amount
equal to the aggregate principal amount of such surrendered Note shall be dated
the date of the Administrative Agent's acceptance of such assignment and
acceptance and shall otherwise be in substantially the form of Exhibit A hereto.
(e) Each Lender may sell participations to one or more banks
or other entities in or to all or a portion of its rights and obligations under
this Agreement and the other Related Documents (including, without limitation,
all or a portion of its Revolving Credit Commitment and the Loans owing to it
and its participation in Letters of Credit); provided that (i) such Lender's
obligations under this Agreement (including, without limitation, its Revolving
Credit Commitment hereunder) and the other Related Documents shall remain
unchanged; (ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, and the Borrower, the
Administrative Agent and the other Lenders shall continue to deal solely and
directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the other Related Documents; and (iii) a
participant shall not be entitled to require such Lender to take or omit to take
any action hereunder except (A) action directly effecting an extension of the
maturity dates or decrease in the principal amount of the Loans or Reimbursement
Obligations, or (B) action directly effecting an extension of the due dates of
or a decrease in the rate of interest payable on the Loans or the fees payable
under this Agreement, or (C) actions directly effecting a release of all or a
substantial portion of the Collateral (except as set forth in Section 11.08 of
this Agreement or any Related Document).
(f) Notwithstanding the foregoing provisions of this Section
10.13, each Lender may at any time sell, assign, transfer, or negotiate all or
any part of its rights and obligations under this Agreement and the Related
Documents to any Affiliate of such Lender.
10.14. Successors and Assigns. This Agreement and the other
----------------------
Related Documents shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns except that no Borrower may
assign or transfer any of its
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rights hereunder or thereunder without the prior written consent of all of the
Lenders except as permitted by Section 8.04.
10.15. Confidentiality. Upon delivering to any Lender or the
---------------
Administrative Agent, or permitting any Lender or the Administrative Agent to
inspect, any written information pursuant to this Agreement or the other Related
Documents, each Lender and the Administrative Agent shall treat such information
as confidential to the extent such information is conspicuously marked
confidential, relates to acquisitions of significant assets by a Borrower,
relates to sales of significant assets by a Borrower or consists of financial
performance information. Each Lender and the Administrative Agent agrees to hold
such information in confidence from the date of disclosure thereof. Subject to
the other provisions of this Section 10.15, each Lender and the Administrative
Agent may disclose confidential information to its officers, directors,
employees, attorneys, accountants or other professionals engaged by any Lender
or the Administrative Agent only after determining that such third party has
been instructed to hold such information in confidence to the same extent as if
it were a Lender. Notwithstanding the foregoing, the provisions of this Section
10.15 shall not apply to information within any one of the following categories
or any combination thereof: (i) information the substance of which, at the time
of disclosure by any Lender or the Administrative Agent, has been disclosed to
or is known to any creditor (other than information as to which such creditor is
then under an obligation of nondisclosure), or any Person other than (A) a
director, officer, employee or agent of any of the Borrower or a professional
engaged by the Borrower or (B) a Person who is then under an obligation of
nondisclosure (otherwise than as a consequence of a wrongful act of any Lender
or the Administrative Agent), (ii) information which any Lender or the
Administrative Agent had in its possession prior to receipt thereof from the
disclosing party, or (iii) information received by any Lender or the
Administrative Agent from a third party having no obligations of nondisclosure
with respect thereto. Nothing contained in this Section 10.15 shall prevent any
disclosure: (x) believed in good faith by any Lender or the Administrative Agent
to be required by any law or guideline or interpretation or application thereof
by any Governmental Authority, arbitrator or grand jury charged with the
interpretation or administration thereof or compliance with any request or
directive of any Governmental Authority, arbitrator or grand jury (whether or
not having the force of law), (y) determined by counsel for any Lender or the
Administrative Agent to be necessary or advisable in connection with enforcement
or preservation of rights under or in connection with this Agreement or any
other Related Document or (z) of any information which has been made public by a
Person other than any Lender or the Administrative Agent. The Lenders and the
Administrative Agent shall have the right to disclose any confidential
information described in this Section 10.15 to the Letter of Credit Issuer and
to an assignee or prospective assignee or to a participant or prospective
participant in Loans hereunder, provided that the assigning or selling Lender
shall have obtained from such assignee or prospective assignee or
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participant or prospective participant an agreement to hold such information in
confidence to the same extent as if it were a Lender.
10.16. Waiver of Jury Trial. BY ITS EXECUTION AND DELIVERY OF
--------------------
THIS AGREEMENT, THE ADMINISTRATIVE AGENT, EACH LENDER AND EACH BORROWER HEREBY
KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF UNDER
OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTE OR ANY OTHER RELATED DOCUMENT,
ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY OR ANY COURSE OF CONDUCT,
COURSE OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF THE
ADMINISTRATIVE AGENT, THE LENDERS, OR EACH BORROWER IN CONNECTION HEREWITH OR
THEREWITH, THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE ADMINISTRATIVE AGENT
AND THE LENDERS TO ENTER INTO THIS AGREEMENT.
10.17. Right of Setoff. Upon the occurrence and during the
---------------
continuance of any Event of Default any Lender, the Administrative Agent and the
Letter of Credit Issuer may, and is hereby authorized to, at any time from time
to time, without notice to the Parent or any other Borrower (any such notice
being expressly waived by the Borrower) and to the fullest extent permitted by
law, set off and apply any and all deposits (general or special, time or demand,
provision or final) at any time held and other Indebtedness at any time owing by
such Lender, the Administrative Agent or the Letter of Credit Issuer to or for
the credit or the account of any Borrower against any and all Obligations of any
Borrower now or hereafter existing under the Loan Documents, irrespective of
whether or not any Lender, the Administrative Agent and the Letter of Credit
Issuer shall have made any demand hereunder or thereunder and although such
Obligations may be contingent or unmatured. Each Lender, the Administrative
Agent and the Letter of Credit Issuer agrees promptly to notify the Parent after
any such setoff and application made by such Lender, the Administrative Agent or
the Letter of Credit Issuer; provided, however, that the failure to give such
notice shall not affect the validity of such setoff and application. The rights
of each Lender, the Administrative Agent and the Letter of Credit Issuer under
this Section 10.17 are in addition to the other rights and remedies (including,
without limitation, other rights of setoff under applicable law or otherwise)
which such Lender, the Administrative Agent or the Letter of Credit Issuer may
have.
10.18. Headings. Section headings herein are included for
--------
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
10.19. Forum Selection and Consent to Jurisdiction. Any
-------------------------------------------
litigation based hereon, or arising out of, under or in connection with, this
Agreement or any other Loan Document, or any course of conduct, course of
dealing, statement (whether verbal or written) or action of the Administrative
Agent, any Lender, the Administrative Agent, the Letter of Credit Issuer or
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the Borrower may be brought and maintained exclusively in the courts of the
State of New York or the United States District Court for the Southern District
of New York; provided, however, that any suit seeking enforcement against any
Collateral or other property may be brought, at the Administrative Agent's
option, in the courts of any jurisdiction where such Collateral or other
property may be found. Each Borrower hereby expressly and irrevocably submits to
the jurisdiction of the courts of the State of New York and of the United States
District Court for the Southern District of New York for the purpose of any such
litigation and irrevocably agree to be bound by any judgment rendered thereby in
connection with such litigation. Each Borrower further irrevocably consents to
the service of process (i) by registered or certified mail, postage prepaid, to
the Borrower at its address for notices contained in Section 10.05 hereof, such
service to become effective five days after such mailing, or (ii) by personal
service within or without the State of New York. Nothing herein shall affect the
right of the Administrative Agent, any Lender or the Letter of Credit Issuer to
service of process in any other manner permitted by law. Each Borrower hereby
expressly and irrevocably waives, to the fullest extent permitted by law, any
objection which it may now or hereafter have to the laying of venue of any such
litigation brought in any such court referred to above and any claim that any
such litigation has been brought in an inconvenient forum. To the extent that
any Borrower has or hereafter may acquire any immunity from jurisdiction of any
court or from any legal process (whether through service or notice attachment
prior to judgment, attachment in aid of execution or otherwise) with respect to
itself or its property, the Borrower hereby irrevocably waives such immunity in
respect of its obligations under this Agreement and the other Loan Documents.
10.20. Termination.
10.20A. Termination of this Agreement
(a) Subject to Section 10.20B below and 10.20 (A) (b), the Borrowers
or the Majority Lenders may terminate this Agreement only as of the Initial
Termination Date and then only by giving the other at least sixty (60) Business
Days' prior written notice of termination; if this Agreement is not terminated
as aforesaid, there will be one automatic annual renewal on the Initial
Termination Date.
(b) Notwithstanding the foregoing, the Borrowers may terminate this
Agreement prior to the Initial Termination Date upon thirty (30) Business Days'
prior written notice by the Parent to the Administrative Agent.
10.20B. Termination Upon an Event of Default. Notwithstanding
the foregoing, the Administrative Agent may, and if required by the Majority
Lenders to do so shall, terminate this Agreement immediately upon the occurrence
of an Event of Default.
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10.20C. Maturity of Obligations Upon Termination. All
Obligations shall become due and payable as of any termination under this
Agreement and, pending a final accounting, if the Administrative Agent
determines in its good faith judgment that there is a reasonable basis for doing
so, the Administrative Agent may withhold any balances in a Borrower's account
(unless supplied with an indemnity satisfactory to the Administrative Agent) to
cover all of the Obligations then due and payable hereunder. All of the Lenders'
and the Administrative Agent's rights, liens and security interests shall
continue after any termination until payment in full of all Loans and other
amounts then due and payable hereunder at the date of such termination.
10.20D. Termination by Lenders. All or any Lender's
obligations under this Agreement shall terminate with respect to such Lender on
the Initial Termination Date by such Lender giving the Administrative Agent, the
Borrower and the other Lenders at least ninety (90) days' prior written notice
of termination. Within sixty (60) days of receipt of such notice from any
Lender, the Administrative Agent shall either: (i) give notice to the Borrower
of termination of this Agreement in accordance with the terms hereof and
thereof, in which event the obligations of the Lenders hereunder and thereunder
shall terminate as of the Initial Termination Date, or (ii) if the other Lenders
so elect, they shall have the right to purchase the terminating Lender's or
Lenders' pro rata share of its or their interest hereunder for the full amount
thereof on a pro rata basis among such electing Lenders, together with any
accrued interest. Termination of this Agreement by any Lender as herein provided
shall not affect the Lenders' respective rights and obligations under this
Agreement incurred prior to the effective date of termination as set forth in
the preceding sentence.
ARTICLE XI.
THE ADMINISTRATIVE AGENT
11.01. Appointment. Each Lender (and each subsequent holder
of any Note by its acceptance thereof) hereby irrevocably appoints and
authorizes CIT, in its capacity as Administrative Agent (i) to receive on behalf
of each Lender any payment of principal of or interest on the Notes outstanding
hereunder and all other amounts accrued hereunder for the account of the Lenders
and paid to the Administrative Agent, and, subject to Section 2.03 of this
Agreement, to distribute promptly to each Lender its Pro Rata Share of all
payments so received, (ii) to distribute to each Lender copies of all material
notices and agreements received by the Administrative Agent and not required to
be delivered to each Lender pursuant to the terms of this Agreement, provided
that the Administrative Agent shall not have any liability to the Lenders for
the Administrative Agent `s inadvertent failure to distribute any such notice or
agreements to the Lenders, and (iii) subject to Section 10.03 of this Agreement,
to take such action as the Administrative Agent deems appropriate on its behalf
to administer the Loans, Letters of Credit and the Loan Documents and to
exercise such other powers
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delegated to the Administrative Agent by the terms hereof or the Loan Documents
(including, without limitation, the power to give or to refuse to give notices,
waivers, consents, approvals and instructions and the power to make or to refuse
to make determinations and calculations) together with such powers as are
reasonably incidental thereto to carry out the purposes hereof and thereof. As
to any matters not expressly provided for by this Agreement and the other Loan
Documents (including, without limitation, enforcement or collection of the
Notes), the Administrative Agent shall not be required to exercise any
discretion or take any action, but shall be required to act or to refrain from
acting (and shall be fully protected in so acting or refraining from acting)
upon the instructions of the Majority Lenders, and such instructions of the
Majority Lenders shall be binding upon all Lenders and all holders of Notes;
provided, however, that the Letter of Credit Issuer shall not be required to
refuse to honor a drawing under any Letter of Credit and the Administrative
Agent shall not be required to take any action which, in the reasonable opinion
of the Administrative Agent, exposes the Administrative Agent to liability or
which is contrary to this Agreement or any Loan Document or applicable law.
11.02. Nature of Duties. The Administrative Agent shall have
no duties or responsibilities except those expressly set forth in this Agreement
or in the Related Documents. The duties of the Administrative Agent shall be
mechanical and administrative in nature. The Administrative Agent shall not have
by reason of this Agreement or any Related Document a fiduciary relationship in
respect of any Lender. Nothing in this Agreement or any of the Related
Documents, express or implied, is intended to or shall be construed to impose
upon the Administrative Agent any obligations in respect of this Agreement or
any of the Related Documents except as expressly set forth herein or therein.
Each Lender shall make its own independent investigation of the financial
condition and affairs of the Borrower in connection with the making and the
continuance of the Loans hereunder and with the issuance of the Letters of
Credit and shall make its own appraisal of the creditworthiness of the Borrower
and the value of the Collateral, and the Administrative Agent shall have no duty
or responsibility, either initially or on a continuing basis, to provide any
Lender with any credit or other information with respect thereto, whether coming
into its possession before the initial Credit Extension hereunder or at any time
or times thereafter, provided that, upon the reasonable request of a Lender, the
Administrative Agent shall provide to such Lender any documents or reports
delivered to the Administrative Agent by the Borrower pursuant to the terms of
this Agreement or any Related Document. If the Administrative Agent seeks the
consent or approval of the Majority Lenders to the taking or refraining from
taking any action hereunder, the Administrative Agent shall send notice thereof
to each Lender. The Administrative Agent shall promptly notify each Lender any
time that the Majority Lenders have instructed the Administrative Agent to act
or retrain from acting pursuant hereto.
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11.03. Rights, Exculpation, etc. The Administrative Agent and
its directors, officers, agents or employees shall not be liable for any action
taken or omitted to be taken by it or them under or in connection with this
Agreement or the other Loan Documents, except for their own gross negligence or
willful misconduct as determined by a final judgment of a court of competent
jurisdiction. Without limiting the generality of the foregoing, the
Administrative Agent (i) may treat the payee of any Note as the holder thereof
until the Administrative Agent receives written notice of the assignment or
transfer thereof, pursuant to Section 10.13 hereof, signed by such payee and in
form satisfactory to the Administrative Agent : (ii) may consult with legal
counsel (including, without limitation, counsel to the Administrative Agent or
counsel to the Borrower), independent public accountants, and other experts
selected by it and shall not be liable for any action taken or omitted to be
taken in good faith by it in accordance with the advice of such counsel,
accountants or experts; (iii) makes no warranty or representation to any Lender
and shall not be responsible to any Lender for any statements, certificates,
warranties or representations made in or in connection with this Agreement or
the other Loan Documents; (iv) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms, covenants or
conditions of this Agreement or the other Loan Documents; (iv) shall not have
any duty to ascertain or to inquire as to the performance or observance of any
of the terms, covenants or conditions of this Agreement or the other Loan
Documents on the part of any Person, the existence or possible existence of any
Potential Default or Event of Default, or to inspect the Collateral or other
property (including, without limitation, the books and records) of any Person;
(v) shall not be responsible to any Lender for the due execution, legality,
validity, enforceability, genuineness, sufficiency or value of this Agreement or
the other Loan Documents or any other instrument or document furnished pursuant
hereto or thereto; and (vi) shall not be deemed to have made any representation
or warranty regarding the existence, value or collectibility of the Collateral,
the existence, priority or perfection of the Administrative Agent's Lien
thereon, or the Borrowing Base or any certificate prepared by the Borrower in
connection therewith, nor shall the Administrative Agent be responsible or
liable to the Lenders for any failure to monitor or maintain the Borrowing Base
or any portion of the Collateral. The Administrative Agent shall not be liable
for any apportionment or distribution of payments made by it in good faith
pursuant to Section 2.08(c), and if any such apportionment or distribution is
subsequently determined to have been made in error the sole recourse of any
Lender to whom payment was due but not made, shall be to recover from other
Lenders any payment in excess of the amount which they are determined to be
entitled. The Administrative Agent may at any time request instructions from the
Lenders with respect to any actions or approvals which by the terms of this
Agreement or of any of the Related Documents the Administrative Agent is
permitted or required to take or to grant, and if such instructions are promptly
requested, the Administrative Agent shall be absolutely entitled to refrain from
taking any action or
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to withhold any approval under any of the Related Documents until it shall have
received such instructions from the Majority Lenders. Without limiting the
foregoing, no Lender shall have any right of action whatsoever against the
Administrative Agent as a result of the Administrative Agent acting or
refraining from acting under this Agreement, the Notes, or any of the other
Related Documents in accordance with the instructions of the Majority Lenders.
11.04. Reliance. The Administrative Agent shall be entitled to rely
upon any written notices, statements, certificates, orders or other documents or
any telephone message believed by it in good faith to be genuine and correct and
to have been signed, sent or made by the proper Person, and with respect to all
matters pertaining to this Agreement or any of the Related Documents and its
duties hereunder or thereunder, upon advice of counsel selected by it.
11.05. Indemnification. To the extent that the Administrative Agent
is not reimbursed and indemnified by the Borrower, the Lenders will reimburse
and indemnify the Administrative Agent for and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses, advances or disbursements of any kind or nature whatsoever which may
be imposed on, incurred by, or asserted against the Administrative Agent in any
way relating to or arising out of this Agreement or any of the Related
Documents or any action taken or omitted by the Administrative Agent under this
Agreement or any of the Related Documents, in proportion to each Lender's Pro
Rata Share, including, without limitation, advances and disbursements made
pursuant to Section 11.08; provided, however, that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses, advances or disbursements for which
there has been a final judicial determination that such resulted from the
Administrative Agent's gross negligence or willful misconduct. The obligations
of the Lenders under this Section 11.05 shall survive the payment in full of the
Loans and Reimbursement Obligations and the termination of this Agreement.
11.06 CIT Individually. With respect to its Pro Rata Share of the
Revolving Credit Commitments hereunder, the Loans made by it and the Note issued
to or held by it, CIT shall have and may exercise the same rights and powers
hereunder and is subject to the same obligations and liabilities as and to the
extent set forth herein for any other Lender or holder of a Note. The terms
"Lenders" or "Majority Lenders" or any similar term shall, unless the context
clearly otherwise indicates, include CIT in its individual capacity as a Lender
or one of the Majority Lenders. CIT and its Affiliates may accept deposits from,
lend money to, and generally engage in any kind of banking, trust or other
business with the Borrower or any of its Subsidiaries as if it were not acting
as Administrative Agent pursuant hereto without any duty to account to the
Lenders. The Lenders
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acknowledge and agree that Chase and Dai-Ichi Kangyo Bank, Limited, New York
branch, as the Letter of Credit Issuer, is an Affiliate of the Administrative
Agent, and may take actions which are not in the interests of, or may have an
adverse effect on, the Lenders, or may omit to take actions which would be in
the interests of, or would have a favorable effect on, the Lenders, and the
Lenders will not assert any claim against the Administrative Agent based on
actions or omissions by the Letter of Credit Issuer and will not assert any such
actions or omissions as a defense or offset to the Lenders' obligations
hereunder.
11.07. Successor Agent.
(a) The Administrative Agent may resign from the performance
of all its functions and duties hereunder and under the other Related Documents
at any time by giving at least thirty (30) Business Days' prior written notice
to the Borrower and each Lender. Such resignation shall take effect upon the
acceptance by a successor Administrative Agent of appointment pursuant to
clauses (b) and (c) below or as otherwise provided below.
(b) Upon any such notice of resignation, the Majority Lenders
shall appoint a successor Administrative Agent who shall be reasonably
satisfactory to the Parent. Upon the acceptance of any appointment as
Administrative Agent hereunder by a successor Agent, such successor Agent, such
shall thereupon succeed to and become vested with all the rights, powers,
privileges and duties of the retiring Agent, and the retiring Administrative
Agent shall be discharged from its duties and obligations under this Agreement
and the other Related Documents. After any Agent's resignation hereunder as the
Administrative Agent, the provisions of this Article XI shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was
Administrative Agent under this Agreement and the other Related Documents.
(c) If a successor Administrative Agent shall not have been so
appointed within said thirty (30) Business Day period, the retiring Agent, with
the consent of the Borrower, shall then appoint a successor Administrative Agent
who shall serve as Administrative Agent until such time, if any, as the Majority
Lenders, with the consent of the Parent, appoint a successor Administrative
Agent as provided above.
11.08. Collateral Matters.
(a) The Administrative Agent may from time to time, during the
occurrence and continuance of an Event of Default, make such disbursements and
advances ("Agent Advances") which the Administrative Agent, in its sole
discretion, deems necessary or desirable to preserve or protect the Collateral
or any portion thereof, to enhance the likelihood or maximize the amount of
repayment by the Borrowers of the Loans and other Obligations or to pay any
other amount chargeable to the Borrower
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pursuant to the terms of this Agreement, including, without limitation, costs,
fees and expenses as described in Section 10.06. The Administrative Agent
Advances shall be repayable on demand and be secured by the Collateral. The
Administrative Agent Advances shall not constitute Loans but shall otherwise
constitute Obligations hereunder. The Administrative Agent shall notify each
Lender and the Parent in writing of each such Administrative Agent Advance,
which notice shall include a description of the purpose of such Administrative
Agent Advance. Without limitation to its obligations pursuant to Section 11.05,
each Lender agrees that it shall make available to the Administrative Agent,
upon the Administrative Agent's demand, in Dollars in immediately available
funds, the amount equal to such Lender's Pro Rata Share of each such
Administrative Agent Advance. If such funds are not made available to the
Administrative Agent by such Lender the Administrative Agent shall be entitled
to recover such funds, on demand from such Lender together with interest
thereon, for each day from the date such payment was due until the date such
amount is paid to the Administrative Agent, at the customary rate set by the
Administrative Agent for the correction of errors among banks for three (3)
Business Days and thereafter at the Regular Rate.
(b) The Lenders hereby irrevocably authorize the
Administrative Agent, at its option and in its discretion, to release any Lien
granted to or held by the Administrative Agent upon any Collateral upon
termination of the Revolving Credit Commitments and payment and satisfaction of
all Loans, Reimbursement Obligations, other Letter of Credit Exposure (whether
or not due) and all other Obligations which have matured and which the
Administrative Agent has been notified in writing are then due and payable; or
constituting property being sold or disposed of if the Parent certifies to the
Administrative Agent that the sale or disposition is made in compliance with
Section 8.04 b) hereof (and the Administrative Agent may rely conclusively on
any such certificate, without further inquiry); or constituting property in
which the Borrowers owned no interest at the time the Lien was granted or at any
time thereafter; or if approved, authorized or ratified in writing by the
Majority Lenders. Upon request by the Administrative Agent at any time, the
Lenders will confirm in writing the Administrative Agent's authority to release
particular types or items of Collateral pursuant to this Section 11.08(b).
(c) Without in any manner limiting the Administrative Agent's
authority to act without any specific or further authorization or consent by the
Majority Lenders (as set forth in Section 11.08(b)), each Lender agrees to
confirm in writing upon request by the Administrative Agent, the authority to
release Collateral conferred upon the Administrative Agent under Section
11.08(b). So long as no Event of Default is then continuing, upon receipt by the
Administrative Agent of Confirmation from the Majority Lenders of its authority
to release any particular item or types of Collateral, and upon at least five
(5) Business Days' prior written request by the Borrower the Administrative
Agent shall (and is hereby
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irrevocably authorized by the Lenders to) execute such documents as may be
necessary to evidence the release of the Liens granted to the Administrative
Agent for the benefit of the Lenders upon such Collateral; provided, however,
that (i) the Administrative Agent shall not be required to execute any such
document on terms which, in the Administrative Agent's opinion, would expose
the Administrative Agent to liability or create an obligation or entail any
consequence other than the release of such Liens without recourse or warranty
and (ii) such release shall not in any manner discharge, affect or impair the
Obligations or any Lien upon (or obligations of the Borrowers in respect of) all
interests in the Collateral retained by the Borrowers.
(d) The Administrative Agent shall have no obligation
whatsoever to any Lenders to assure that the Collateral exists or is owned by
the Borrower or is cared for, protected or insured or has been encumbered or
that the Lien granted to the Administrative Agent pursuant to the Security
Documents has been properly or sufficiently or lawfully created, perfected,
protected or enforced or is entitled to any particular priority, or to exercise
at all or in any particular manner or under any duty of care, disclosure or
fidelity, or to continue exercising, any of the rights, authorities and powers
granted or available to the Administrative Agent in this Section 11.08 or in any
of the Related Documents, it being understood and agreed that in respect of the
Collateral, or any act, omission or event related thereto, the Administrative
Agent may act in any manner it may deem appropriate, in its sole discretion,
given the Administrative Agent's own interest in the Collateral as one of the
Lenders and that the Administrative Agent shall have no duty or liability
whatsoever to any other Lender.
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<PAGE>
ARTICLE XII.
INCONSISTENCIES
If there is any inconsistency between a Leasehold Mortgage or a
Trademark Security Agreement executed by a Borrower and a Security Agreement
executed by such Borrower, including in connection with the powers or rights of
the Administrative Agent or the Lenders after an Event of Default, the
provisions of the Credit Agreement and such Security Agreement shall prevail.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto
duly authorized, have executed and delivered this Agreement as of the date first
above written.
BORROWERS
---------
GENESIS DIRECT, INC.
By: /s/ Barry Curtis
---------------------------------------
Name: Barry Curtis
Title: Chief Financial Officer
LITTLE GENESIS, INC.
By: /s/ Barry Curtis
---------------------------------------
Name: Barry Curtis
Title: Chief Financial Officer
GIFTS FOR GRANDKIDS, LLC
HOT OFF THE ICE, LLC
BEYOND THE HORIZON, LLC
THE VOYAGER'S COLLECTION, LLC
THE TRAINING CAMP, LLC
CHILDSWORK/CHILDSPLAY, LLC
COMPETITIVE EDGE GOLF, LLC
FIRST STEP DESIGNS, LLC
LILLIPUT MOTOR COMPANY, LLC
1-800-PRO-TEAM, LLC
ATHLETIC SUPPLY OF DALLAS, LLC
NINOS, LLC
GENESIS DIRECT SECAUCUS OPERATIONS, LLC
GENESIS DIRECT MEMPHIS OPERATIONS, LLC
GENESIS DIRECT OPERATIONS, LLC
GENESIS DIRECT MEMPHIS SERVICES, LLC
AFFINITY COLLEGE AND UNIVERSITY CATALOGS, LLC
By GENESIS DIRECT, INC., as
Managing Member of each of the
foregoing limited liability
companies
By:/s/ Barry Curtis
--------------------------------
Name: Barry Curtis
Title: Chief Financial Officer
- 104 -
<PAGE>
Address for Notices for all
Borrowers:
One Bridge Plaza, Suite 680
Fort Lee, New Jersey 07024-0407
Attention: Raphael Grunfeld and
Barry Curtis
Telephone: (201) 947-8181
Telecopier: (201) 947-8626
AGENT AND LENDER
----------------
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Mitchell Drucker
---------------------------------------
Name: Mitchell Drucker
Title: Senior Vice President
Address for Notices:
The CIT Group/Business Credit, Inc.
1211 Avenue of the Americas
New York, New York 10036
Attention: Frank Grimaldi
Telephone: (212) 536-1295
Telecopier: (212) 536-1259
- 105 -
<PAGE>
Exhibit 10.2
LEASE AGREEMENT
(Single Tenant Facility) - 1996
ARTICLE ONE: BASIC TERMS.
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.1. Date of Lease: February 14, 1997
Section 1.2. Landlord (include legal entity): CORPORATE ESTATES, INC., a
California corporation, and MITCHELL INVESTMENTS, LLC, a Tennessee limited
liability company
Address of Landlord: 8413 Jackson Road, Suite C
Sacramento, CA 95826
Section 1.3. Tenant (include legal entity): GENESIS DIRECT NINE, LLC, a
Delaware limited liability company
Address of Tenant: Genesis Direct Nine, LLC
One Bridge Plaza, Suite 680
Fort Lee, New Jersey 07024-0407
Section 1.4. Property: an office/warehouse building consisting of
approximately 500,000 square feet of total area currently under construction by
Landlord on the land in Shelby County, Tennessee described on the attached
Exhibit A, incorporated herein by reference, and known as 4770 Southpoint Drive.
Section 1.5. Lease Term: 10 years 2 months beginning on the "Commencement
Date" (defined in Rider Paragraph 2) or such other date as is specified in this
Lease, and ending on the last day of the month in which the date that is the ten
(10) year and two (2) month anniversary of the Commencement Date shall occur
(the "Expiration Date").
Section 1.6. Permitted Uses (See Article Five): office/warehouse, shipping,
receiving, distribution and light manufacturing
Section 1.7. Tenant's Guarantor (if none, so state): Genesis Direct, Inc.,
a Delaware corporation, pursuant to the terms of the Guaranty of even date
herewith from Tenant's Guarantor to Landlord.
Section 1.8. Brokers (See Article fourteen) (if none, so state):
Landlord's Broker: None
Tenant's Broker: Weston Companies/The Galbreath Company
Section 1.9. Commission payable to Landlord's Broker (See Article
Fourteen): None
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Section 1.10. Initial Security Deposit (See Section 3.3): $650,000.00. See
paragraph 6 of the attached Rider.
Section 1.11. Vehicle parking Spaces Allocated to Tenant: 500, as per the
Parking Specifications attached hereto as Exhibit A-1.
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) BASE RENT: ONE HUNDRED EIGHT THOUSAND THREE HUNDRED THIRTY-THREE and
33/100 DOLLARS ($108,333.33) per month, for the first 62 months, and shall be
increased on the first day of the 61st month after the Rental Commencement Date
(hereinafter defined) to ONE HUNDRED NINETEEN THOUSAND ONE HUNDRED SIXTY-SIX and
67/100 DOLLARS ($119,166.67) per month for the remaining 60 months of the Lease
term; which monthly base rent shall be payable as provided in Section 3.1.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section 4.2);
(ii) Utilities (See Section 4.3); (iii) Insurance Premiums (See Section 4.04);
(iv) Impounds for Insurance Premiums and Property Taxes (See Section 4.7); (v)
Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. Landlord's Share of Profit on Assignment or Sublease (See
Section 9.5): fifty percent (50%) of the profit (the "Landlord's Share").
Section 1.14. Riders: The following Riders are attached to and made a part
of this Lease: (If none, so state) Rider of even date, containing paragraphs
1-14.
ARTICLE TWO. LEASE TERM.
Section 2.1. Lease of Property for Lease Term. Landlord leases the Property
to Tenant and Tenant leases the Property from Landlord for the Lease Term. The
Lease Term is for the period stated in Section 1.5 above and shall begin and end
on the dates specified in Section 1.5 above, unless the beginning or end of the
Lease Term is changed under any provision of this Lease. The "Commencement Date"
shall be the date specified in Section 1.5 above for the beginning of the Lease
Term, unless delayed under any provision of this Lease.
Section 2.2. Delay in Commencement. Except as provided in paragraph 9 of
the Rider, Landlord shall not be liable to Tenant if Landlord does not deliver
possession of the Property to Tenant by April 1, 1997. Landlord's non-delivery
of the Property to Tenant on that date shall not affect this Lease or the
obligations of Tenant under this Lease except as set forth in Rider Paragraph 9
and that the Commencement Date shall be delayed until Landlord delivers
possession of the Property to Tenant and the Lease Term shall be extended for a
period equal to the delay in delivery of possession of the Property to Tenant,
plus the number of days necessary to end the Lease Term on the last day of a
month. Upon delivery of possession of the Property to Tenant, Landlord and
Tenant shall, upon such delivery, execute an amendment to this Lease setting
forth the actual Commencement Date and expiration date of the Lease. Failure to
execute such amendment shall not affect the actual Commencement Date and
Expiration Date of the Lease.
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Section 2.3. Early Occupancy. If Tenant occupies the Property prior to the
Commencement Date, Tenant's occupancy of the Property shall be subject to all of
the provisions of this Lease, except that in no event shall rent be payable by
Tenant until the Rental Commencement Date (hereinafter defined) if such
occupancy is for the purpose of preparing the Property for Tenant's occupancy of
the Property during the Lease Term.
Section 2.4. Holding Over. Tenant shall vacate the Property upon the
Expiration Date or earlier termination of this Lease. Tenant shall reimburse
Landlord for and indemnify Landlord against all damages which Landlord incurs
from Tenant's delay in vacating the Property. If Tenant does not vacate the
Property upon the Expiration Date or earlier termination of the Lease and
Landlord thereafter accepts rent from Tenant, Tenant's occupancy of the Property
shall be a "month to month" tenancy, subject to all of the terms of this Lease
applicable to a month-to-month tenancy, except that the Base Rent then in effect
shall be increased by twenty-five percent (25%).
ARTICLE THREE: BASE RENT.
Section 3.1. Time and Manner of Payment. Anything herein to the contrary
notwithstanding, Base Rent shall be abated in its entirety for the first two (2)
full months of the Lease Term. Upon execution of this Lease, Tenant shall pay
Landlord the Base Rent in the amount stated in paragraph 1.12(a) above for the
third full calendar month of the Lease Term. On the first day of the fourth full
calendar month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, and, except as otherwise set forth in this
Lease, without offset, deduction or prior demand. The Base Rent shall be payable
at Landlord's address or at such other place as Landlord may designate in
writing. Base Rent for any partial calendar month at the beginning of the Lease
term shall be prorated and shall be payable on the first day of the third full
calendar month of the Lease term.
Section 3.2. Security Deposit; Increases. Upon the execution of this Lease,
Tenant shall deposit with Landlord a cash Security Deposit in the amount set
forth in Section 1.10 above. Landlord may apply all or part of the Security
Deposit to any unpaid rent or other charges due from Tenant or to cure any other
defaults of Tenant. If Landlord uses any part of the Security Deposit, Tenant
shall restore the Security Deposit to its full amount within ten (10) days after
Landlord's written request. Tenant's failure to do so shall be a material
default under this Lease. Landlord shall keep the Security Deposit in an
interest bearing account and, until applied in accordance with the terms hereof,
shall be deemed the property of Tenant subject to a security interest (hereby
granted) in such funds in favor of Landlord. Interest on the Security Deposit
shall be added to the Security Deposit. At Tenant's option, Tenant may furnish
an irrevocable, unconditional letter of credit in such amount (the "Letter of
Credit:"). The Letter of Credit must:
(i) be in favor of Landlord or its assignee as beneficiary;
(ii) provide for automatic renewals, without amendment, for
consecutive periods of one year each, unless the issuing bank or financial
institution sends written notice to Landlord by certified or registered mail,
return receipt requested, not less than thirty (30) days next preceding the then
expiration date of the Letter of Credit, that it elects not to have such Letter
of Credit renewed;
(iii) be issued by Chase Manhattan Bank, N.A., or another financial
institution satisfactory to Landlord in Landlord's sole discretion; and
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<PAGE>
(iv) provide that it can be drawn upon by Landlord's certification
that Tenant is in default under this Lease beyond any applicable cure period. In
the event Landlord draws under the Letter of Credit and applies the proceeds to
cure a default by Tenant hereunder, the balance, if any, of such proceeds shall
be retained by Landlord and held as a cash Security Deposit and invested at
interest as above provided. Tenant shall restore the amount so applied by
Landlord in cash or in the form of a new letter of credit.
Section 3.3. Termination; Advance Payments. Upon termination of this Lease
under Article Seven (Damage or Destruction), Article Eight (Condemnation) or any
other termination not resulting from Tenant's default, and no more than fifteen
(15) days after Tenant has vacated the Property in the manner required by this
Lease, Landlord shall refund or credit to Tenant (or Tenant's successor) the
unused portion of the Security Deposit, any advance rent or other advance
payments made by Tenant to Landlord, and any amounts paid for real property
taxes and other reserves which apply to any time periods after termination of
this Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT.
Section 4.1. Additional Rent. All charges payable by Tenant other than Base
Rent are called "Additional Rent." Unless this Lease provides otherwise, Tenant
shall pay all Additional Rent then due with the next monthly installment of Base
Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.2. Property Taxes.
(a) Real Property Taxes. Tenant shall pay all Real Property Tax
(hereinafter defined) on the Property (including any fees, taxes or assessments
against, or as a result of, any tenant improvements installed on the Property by
or for the benefit of Tenant) during the Lease Term. Subject to Section 4.2(c)
and Section 4.7 below, such payment shall be made at least ten (10) days prior
to the delinquency date of the taxes. Within such ten (10)-day period, Tenant
shall furnish Landlord with reasonable evidence that the Real Property Tax has
been paid. Prior to the time that Tenant shall be obligated to pay same pursuant
to the immediately preceding sentence, Landlord shall advance to Tenant any Real
Property Tax to be paid by Tenant covering any period of time prior to or after
the Lease Term. If Tenant fails to pay the Real Property Tax when due, Landlord
may pay the taxes and Tenant shall reimburse Landlord for the amount of such tax
payment as Additional Rent. See Paragraph 8 of the attached Rider.
(b) Definition of "Real Property Tax." "Real Property Tax" means: (i) any
ad valorem fee, license fee, license tax, business license fee, commercial
rental tax, levy charge, assessment, penalty or tax imposed by any taxing
authority against the Property; (ii) any tax on the Landlord's right to receive,
or the receipt of, rent or income from the Property, provided that for such
purposes, the rent paid by Tenant for the Property shall be deemed Landlord's
sole source of income, (iii) any tax or charge for fire protection, streets,
sidewalks, road maintenance, refuse or other services provided to the Property
by any governmental agency; (iv) any tax imposed upon this transaction or based
upon a reassessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property (excluding transfer and transfer gains tax); and (v) any charge or fee
replacing any tax previously included within the definition of Real Property
Tax. "Real Property Tax" does not, however, include
4
<PAGE>
Landlord's federal, state, or local income, franchise, inheritance, estate taxes
or similar taxes.
(c) Joint Assessment. Landlord shall have the Property separately
assessed. Until the Property is separately assessed, Landlord shall reasonably
determine Tenant's share of the Real Property Tax payable by Tenant under
Section 4.2(a) from the assessor's worksheets or other reasonably available
information. Tenant shall pay such share to Landlord within fifteen (15) days
after receipt of Landlord's written statement.
(d) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to Tenant.
Tenant shall reasonably try to have personal property taxed separately from the
Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property within
fifteen (15) days after Tenant receives a written statement from Landlord for
such personal property taxes.
(e) Tenant's Right to Contest Taxes. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the Real Property Tax. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceedings or contest, Tenant shall pay when due pursuant
to such final determination, the Real Property Tax due, together with all costs,
charges, interest and penalties incidental to the proceedings. If Tenant does
not pay the Real Property Tax when due and contests such taxes, Tenant shall not
be in default under this Lease for nonpayment of such taxes if Tenant deposits
funds with Landlord or opens an interest bearing account reasonably acceptable
to Landlord in the joint names of Landlord and Tenant. The amount of such
deposit shall be sufficient to pay the Real Property Tax plus a reasonable
estimate of the interest, costs, charges and penalties which may accrue if
Tenant's action is unsuccessful, less any applicable tax impounds previously
paid by Tenant to Landlord. The deposit shall be applied to the Real Property
Tax due, as determined at such proceedings. Such Real Property Tax shall be paid
under protest from such deposit if such payment under protest is necessary to
prevent the Property from being sold under a "tax sale" or similar enforcement
proceeding.
Section 4.3. Utilities. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. Landlord shall construct the Property with all utilities brought
to the Building and with all utilities and services supplied to the Property
being separately metered.
Section 4.4. Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be ONE MILLION DOLLARS
5
<PAGE>
($1,000,000.00) per occurrence and shall be subject to periodic increase to
amounts consistent with that carried by occupants of similarly situated
properties used for the same purposes as the Property based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors, but in no event shall the amount of such
insurance be required to exceed $5,000,000.00 per occurrence. The liability
insurance obtained by Tenant under this Section 4.4(a) shall (i) be primary and
non-contributing; (ii) contain cross-liability endorsements; and (iii) insure
Landlord against Tenant's performance under Section 5.5, if the matters giving
rise to the indemnity under Section 5.5 result from the negligence of Tenant.
The amount and coverage of such insurance shall not limit Tenant's liability nor
relieve Tenant of any other obligations under this Lease. Landlord may also
obtain comprehensive public liability insurance in an amount and with coverage
determined by Landlord insuring Landlord against liability arising out of
ownership, operation, use or occupancy of the Property. The policy obtained by
Landlord shall not be contributory and shall not provide primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Such policy shall contain
an inflation Guard Endorsement and shall provide protection against all perils
included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one (1) year's Base Rent, plus estimated Real Property Tax and insurance
premiums. Tenant shall be liable for the payment of any deductible amount under
Landlord's or Tenant's insurance policies maintained pursuant to this Section
4.4, in an amount not to exceed TWENTY-FIVE THOUSAND DOLLARS ($25,000.00).
Tenant shall not knowingly do or permit anything to be done which invalidates
any such insurance policies. If Tenant notifies Landlord that it is able to
obtain a policy of insurance complying with this Section and subsection (d)below
at a lower premium than being paid for Landlord's policy, Landlord shall cause
the cancellation of its own policy and Landlord's policy shall be substituted
with the policy obtained by Tenant.
(c) Payment of Premiums. Subject to Section 4.7, Tenant shall pay all
premiums for the insurance policies described in Sections 4.4(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Section
4.4(a). If insurance policies maintained by Landlord cover improvements to real
property other than the Property, Landlord shall deliver to Tenant a statement,
subject to Tenant's approval, of the premium applicable to the Property showing
in reasonable detail how Tenant's share of the premium was computed. If the
Lease Term expires before the expiration of an insurance policy maintained by
Landlord, Tenant shall be liable only for Tenant's prorated share of the
insurance premiums. Before the Commencement Date, Landlord and Tenant shall
deliver to each other copies of all policies of insurance which the other is
required to maintain under this Section 4.4. At least thirty (30) days prior to
the expiration of any such policy, Landlord and Tenant shall deliver to the
other a renewal of any such policy as an alternative to providing a policy of
insurance. Landlord and Tenant shall have the right to provide the other a
certificate of insurance, executed by an authorized officer of the insurance
company, showing that
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the insurance which the other is required to maintain under this Section 4.4 is
in full force and effect and containing such other information which the other
party reasonably requires.
(d) General Insurance Provisions.
(i) Any insurance which Tenant or Landlord is required to
maintain under this Lease shall include a provision which requires the insurance
carrier to give the other party not less than thirty (30) days' written notice
prior to any cancellation or modification of such coverage. All such policies
shall name Landlord's mortgagee as additional insured or loss payee, as
applicable.
(ii) If Landlord or Tenant fails to deliver a policy,
certificate or renewal to the other required under this Lease within the
prescribed time period or if any such policy is canceled or modified during the
Lease Term without the other party's consent, the other party may obtain such
insurance, in which case, as applicable, Tenant shall reimburse Landlord for the
cost of such insurance within fifteen (15) days after receipt of a statement
that indicates the cost of such insurance, or Tenant shall take a credit against
the Base Rent next coming due in the amount of the cost of such insurance.
(iii) All insurance required under this Lease shall be carried
with companies holding a "General Policy Rating" of A-12 or better, as set
forth in the most current issue of "Best Key Rating Guide". Landlord and Tenant
acknowledge the insurance markets are rapidly changing and that insurance in the
form and amounts described in this Section 4.4 may not be available in the
future. Tenant acknowledges that the insurance described in this Section 4.4 is
for the primary benefit of Landlord. If at any time during the Lease Term,
Landlord or Tenant is unable to maintain the insurance required under the Lease,
they shall nevertheless maintain insurance coverage which is customary and
commercially reasonable in the insurance industry for Tenant's type of business,
and for properties like the Property, as that coverage may change from time to
time.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents or representatives
of the other, for loss of or damage to its property or the property of others
under its control, if such loss or damage is covered by any insurance policy in
force (whether or not described in this Lease) at the time of such loss or
damage. Upon obtaining the required policies of insurance, Landlord and Tenant
shall give notice to the insurance carriers of this mutual waiver of
subrogation.
(v) Tenant may carry any insurance required under this lease
in an umbrella policy or other policy covering Tenant and the Property along
with other affiliates of Tenant and their respective properties.
(vi) Landlord and Tenant each shall endeavor to secure an
appropriate clause in, or an endorsement upon, each property or casualty
insurance policy insuring the Building or the Property pursuant to which the
insurance company waives subrogation against the other party, or permits the
insured, prior to a loss, to waive any claim it may have against the other party
without invalidating the coverage under the insurance policy. If either party's
insurer shall refuse to issue such clause or endorsement even with an additional
premium, then the other party shall have the right to designate another insurer
complying with the conditions of subsection (d)(iii) of this Section 4.4 who
would be prepared to permit such clause or endorsement.
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Section 4.5. Late Charges. Tenant's failure to pay rent promptly may
cause Landlord to incur unanticipated costs. The exact amount of such costs are
impractical or extremely difficult to ascertain. Such costs may include, but are
not limited to, processing and accounting charges and late charges which may be
imposed on Landlord by any ground lease, mortgage or trust deed encumbering the
Property. Therefore, if Landlord does not receive any rent payment within ten
(10) days after it becomes due, Tenant shall pay to Landlord a late charge equal
to five percent (5%) of the overdue amount. The parties agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of such late payment; no more than one late charge shall be
applied against any payment due. Notwithstanding the foregoing, Landlord shall
not impose a late charge without giving Tenant written notice that Tenant is
delinquent in paying any rent due hereunder and allowing Tenant a period of five
(5) days from receipt of such notice to pay such delinquent rent unless Tenant
has previously been notified by Landlord of a delinquency in paying rent at any
time within the immediately preceding twelve (12) month period, in which event
no notice shall be required to be given by Landlord prior to imposition of the
late fee.
Section 4.6. Interest on Past Due Obligations. Any amount owed by
Tenant to Landlord which is not paid within ten (10) days after it first becomes
due shall bear interest at the rate of twelve percent (12%) per annum from the
due date of such amount. However, interest shall not be payable on late charges
to be paid by Tenant under this Lease. The payment of interest on such amounts
shall not excuse or cure any default by Tenant under this Lease. If the interest
rate specified in this Lease is higher than the rate permitted by law, the
interest rate is hereby decreased to the maximum legal interest rate permitted
by law.
Section 4.7. Impounds for Insurance Premiums and Real Property Taxes.
If requested by any ground lessor or lender to whom Landlord has granted a
security interest in the Property, or if Tenant is more than ten (10) days late
in the payment of rent more than three (3) times in any consecutive twelve (12)
month period, Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the
annual Real Property Tax and insurance premiums payable by Tenant under this
Lease, together with each payment of Base Rent. Unless otherwise provided in the
existing Mortgage on the Property, Landlord shall hold such payments in an
interest bearing impound account and the interest thereon shall be added to such
amount. If unknown, Landlord shall reasonably estimate the amount of Real
Property Tax and insurance premiums when due. Tenant shall pay any deficiency of
funds in the impound account to Landlord upon written request. If Tenant
defaults under this Lease and Landlord terminates this Lease or Tenant abandons
the Property, Landlord may apply any funds in the impound account to any
obligation then due under this Lease. Tenant's payments under this Section 4.7
shall be in satisfaction of Tenant's obligations for payment of Real Property
Tax under Section 4.2.
Section 4.8. Management Fees. Tenant shall reimburse Landlord monthly
for management fees in connection with the Property in an amount not to exceed
two and one-half percent (2-1/2%) of the monthly Base Rent whether or not such
fees are actually paid or incurred by Landlord. In consideration of payment of
such management fees by Tenant, Landlord shall, upon request, arrange for and
monitor performance of service contracts for landscape maintenance and trash
removal with respect to the Property. Such service contracts shall be in
Tenant's name and Tenant shall pay all charges and fees due the service provider
thereunder without markup. Should Landlord fail or refuse to provide such
services as requested and such failure or refusal continues for a period of
fifteen (15) days after notice from Tenant, Tenant may cease payment of said
management fees until such time as Landlord is requested to and does provide
such services.
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Section 4.9. Maintenance Expense. Tenant shall reimburse Landlord for
amounts paid by Landlord as Landlord's share of the costs of maintenance and
repair (but not the initial construction) of Southpoint Drive pursuant to the
Declaration of Ingress-Egress Easement recorded under Register's No. FZ 0217,
Shelby County Register's Office, in an amount not to exceed $10,000.00 for each
lease year, cumulative, but not in any event to exceed $30,000.00 per each
consecutive four (4) year period.
ARTICLE FIVE: USE OF PROPERTY.
Section 5.1. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.6 above.
Section 5.2. Manner of Use. Tenant shall not cause or permit the Property
to be used in any way which constitutes a violation of any law, ordinance, or
governmental regulation or order, which annoys or interferes with the rights of
other tenants of Landlord, or which constitutes a nuisance or waste. Tenant
shall obtain and pay for all permits, including a Certificate of Occupancy
(provided that Landlord obtains a temporary certificate of occupancy subject
only to final inspection of Tenant's materials handling and storage equipment
and racking; and all other certificates and permits, if any, required with
respect to the construction and operation of the "Shell Building"), required for
Tenant's occupancy of the Property and shall promptly take all actions necessary
to comply with all applicable statutes, ordinances, rules, regulations, orders
and requirements regulating the specific use by Tenant of the Property,
including the Occupational Safety and Health Act (as opposed to the general
compliance by the Building with applicable statutes, ordinances, rules,
regulations, orders and requirements, which shall be Landlord's obligation).
Section 5.3. Hazardous Materials. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including, without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently regulated as "hazardous" or "toxic" under applicable federal, state
or local law. Tenant shall not cause or permit any Hazardous Material to be
generated, produced, brought upon, used, stored, treated or disposed of in or
about the Property by Tenant, its agents, employees, contractors, sublessees
(other than Hazardous Materials used in compliance with applicable law for
ordinary cleaning, maintenance or office purposes provided that such Hazardous
Materials are used, handled or stored upon the Property only in the minimum
quantities necessary for such purposes) without the prior written consent of
Landlord. Landlord shall be entitled to take into account such other factors or
facts as Landlord may reasonably determine to be relevant in determining whether
to grant or withhold consent to Tenant's proposed activity with respect to
Hazardous Material. In no event, however, shall Landlord be required to consent
to the installation or use of any storage tanks on the Property.
Section 5.4. Signs and Auctions. Subject to the remaining portions of this
Section, Tenant shall not place any signs on the Property without Landlord's
prior written
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consent. Landlord will not unreasonably withhold its consent to signs proposed
by Tenant for placing on or above the doors of the Property identifying Tenant's
business. Landlord shall furnish two (2) pylon mounted signs and parking,
loading and shipping dock signage comparable to similar signage on other
buildings in Southpoint Distribution Park. No signs shall be permitted on the
Building except as provided in the previous two sentences. Tenant shall not
conduct or permit any auctions or sheriff's sales at the Property.
Section 5.5. Indemnity. Subject to Section 4.4(d)(iv) and subject to
Landlord's representations and warranties as to the permitted uses of the
Property contained in Section 6.2, Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any material misrepresentation or material breach of material warranty by
Tenant under this Lease; or (e) other acts or omissions of Tenant (excluding
immaterial representations or immaterial breaches of warranties). Tenant shall
defend Landlord against any such cost, claim or liability at Tenant's expense
with counsel reasonably acceptable to Landlord or, at Landlord's election,
Tenant shall reimburse Landlord for any reasonable legal fees or costs incurred
by Landlord in connection with any such claim. As a material part of the
consideration to Landlord, Tenant assumes all risk of damage to property or
injury to persons in or about the Property arising from any cause, and Tenant
hereby waives all claims in respect thereof against Landlord, except for any
injury or claim arising out of Landlord's negligence or willful act or failure
to act. As used in this Section, the term "Tenant" shall include Tenant's
employees, agents, contractors and invitees, if applicable.
Landlord shall indemnify Tenant against and hold Tenant harmless from
any and all costs, claims or liability arising from: (a) any breach or default
in the performance of Landlord's obligations under this Lease; (b) any material
misrepresentation or material breach of warranty by Landlord under this Lease;
(c) other acts or omissions of Landlord; or (d) any entry or testing by Landlord
on the Property under Section 5.6 below. Landlord shall defend Tenant against
any such cost, claim or liability at Landlord's expense with counsel reasonably
acceptable to Tenant or, at Tenant's election, Landlord shall reimburse Tenant
for any reasonable legal fees or costs incurred by Tenant in connection with any
such claim. As used in this Section, the term "Landlord" shall include
Landlord's employees, agents, contractors and invitees, if applicable.
Notwithstanding anything herein to the contrary, Landlord shall have no
liability to Tenant for damages to Tenant's property, inventory or other
personalty, or for consequential damages or damages for loss of Tenant's
business, except if caused by Landlord's gross negligence or willful misconduct.
Section 5.6. Landlord's Access. Landlord or its agents may enter the
Property at all reasonable times during business hours to show the Property to
potential buyers, investors or (during the last six (6) months of the Lease
Term) tenants, without interfering with the conduct of Tenant's business, to
inspect and conduct tests in order to monitor Tenant's compliance with all
applicable environmental laws and all laws governing the presence and use of
Hazardous Material; or for any other purpose Landlord deems necessary, or to
comply with Landlord's repair and maintenance obligations under this Lease.
Landlord shall give Tenant prior notice of such entry, except in the case of an
emergency. Landlord may place customary "For Sale" or "For Lease" signs on the
Property during the last six (6) months of the Lease Term.
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Section 5.7. Quiet Possession. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may peaceably and quietly occupy and
enjoy the Property for the full Lease Term, subject to the provisions of this
Lease. Landlord expressly warrants that all rights of Honeywell Inc.
to lease the Property have been terminated.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Existing Conditions. Tenant accepts the Property in its
condition as of the Commencement Date, subject to all recorded matters listed on
Exhibit A-2, laws, ordinances, and governmental regulations and orders and to
Landlord's completion of the building in accordance with Rider Paragraph 1.
Except as provided herein, Tenant acknowledges that neither Landlord nor any
agent of Landlord has made any representation as to the condition of the
Property or the suitability of the Property for Tenant's intended use. Tenant
represents and warrants that Tenant has made its own inspection of and inquiry
regarding the condition of the Property and is not relying on any
representations of Landlord or any Broker with respect thereto, except as set
forth in this Lease.
Section 6.2. Exemption of Landlord from Liability. Landlord represents
that the zoning applicable to the Premises permits the construction and
completion of the Property (including the parking) and for operation of the
Property for the purposes permitted hereby. Landlord warrants that the Property,
upon "substantial completion" (hereinafter defined) shall be free from defects.
Landlord shall not be liable for any damage or injury to the person, business
(or any loss of income therefrom), goods, wares, merchandise or other property
of Tenant, Tenant's employees, invitees, customers or any other person in or
about the Property, whether such damage or injury is caused by or results from:
(a) fire, steam, electricity, water, gas or rain; (b) the breakage, leakage or
obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing,
air conditioning or lighting fixtures or any other cause; (c) conditions arising
in or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant unless Landlord negligently or willfully obstructs such access.
Section 6.3. Intentionally Deleted.
Section 6.4. Tenant's Obligations.
(a) Except as provided in Article Seven (Damage Destruction) and
Article Eight (Condemnation) and Rider Paragraphs 4 and 12, Tenant shall keep
all portions of the Property (including nonstructural, interior, exterior, and
landscaped areas, systems and equipment) in good order, condition and repair
(including interior repainting and refinishing, as needed). If any portion of
the Property or any system or equipment in the Property which Tenant is
obligated to repair cannot be fully repaired or restored, Tenant shall promptly
replace such portion of the Property or system or equipment or equipment in the
Property, regardless of whether the benefit of such replacement extends beyond
the Lease Term; but if the benefit or useful life of such replacement extends
beyond the Lease Term (as such term may be extended by exercise of any options),
the useful life of such replacement shall be prorated over the remaining portion
of the Lease Term (as extended, if extended), and Tenant shall be liable only
for that portion of the cost which is applicable
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to the Lease Term (as extended, if extended) and Tenant shall not be obligated
to undertake such replacement until Landlord has deposited with Tenant Tenant's
reasonable estimate of the cost of such replacement. Notwithstanding the
foregoing, in no event shall Tenant be obligated to undertake any replacement
during the last year of the Lease Term (as extended, if extended). Tenant shall
maintain a preventive maintenance contract providing for the regular inspection
and maintenance of the heating and air conditioning system by a licensed heating
and air conditioning contractor. If any part of the Property is damaged by any
act or omission of Tenant, Tenant shall pay Landlord the cost of repairing or
replacing such damaged property, whether or not Landlord would otherwise be
obligated to pay the cost of maintaining or repairing such property. It is the
intention of Landlord and Tenant that at all times Tenant shall maintain the
portions of the Property which Tenant is obligated to maintain in a condition
commensurate with the other buildings in the Project used for purposes similar
to the Property, subject to ordinary wear and tear.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.4, at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.4, Landlord may as necessary to avoid
further damage to or deterioration of the Building or deterioration of
landscaping plants and/or materials, upon ten (10) days' prior notice to Tenant
(except that no notice shall be required in the case of an emergency), enter the
Property and perform such maintenance or repair (including replacement, as
needed) on behalf of Tenant. In such case, Tenant shall reimburse Landlord for
all costs incurred in performing such maintenance or repair immediately upon
demand.
(c) If Landlord fails to maintain the Property or perform any other
obligation of Landlord as required under this Lease, Tenant, upon ten (10) days'
prior notice to Landlord (except no notice shall be required in the case of an
emergency), may perform such maintenance or repair (or replacement, if needed)
or other obligation on behalf of Landlord and shall take a credit against the
Base Rent for all reasonable costs incurred in performing such maintenance or
repair. Tenant shall not perform such maintenance or repair if Landlord within
such ten (10) day period commences performance and thereafter continues
diligently to complete performance of such obligation.
Section 6.5. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or improvements
to the exterior of the Property or which are visible from the outside of the
Building without Landlord's prior written consent. Landlord's consent shall not
be required for (i) non-structural alterations to the interior of the Building
which do not exceed $50,000.00 in each instance; and (ii) painting and other
decorative alterations, installations and modifications of Tenant's materials
storage and handling equipment and other trade fixtures. Landlord may require
Tenant to provide demolition and/or lien and completion bonds in form and amount
reasonably satisfactory to Landlord but in no event in excess of 105% of the
contracted cost of the proposed alteration. Tenant shall promptly remove any
alterations, additions, or improvements constructed in violation of this Section
6.5(a) upon Landlord's written request. All alterations, additions, and
improvements shall be done in a good and workmanlike manner, in conformity with
all applicable laws and regulations, and by a contractor reasonably approved by
Landlord. Upon completion of any such work, Tenant shall provide Landlord with
"as built" plans, copies of all construction contracts (if any), and proof of
payment for all labor and materials. Landlord shall not unreasonably withhold
its consent to structural changes to the Building to accommodate Tenant's
materials handling equipment provided such changes do not reduce the original
clear height or column
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spacing of the Building or otherwise materially adversely affect the ordinary
function of the Building as a warehouse.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.6. Condition upon Termination. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received on the Commencement Date, except for ordinary wear
and tear which Tenant was not otherwise obligated to remedy under any provision
of this Lease. However, Tenant shall not be obligated to repair any damage which
Landlord is required to repair under Article Seven (Damage or Destruction) or
Rider Paragraph 4. In addition, Landlord may require Tenant to remove only those
alterations, additions or improvements (made without Landlord's consent or made
with Landlord's consent conditioned upon removal by Tenant at expiration of the
Lease term) prior to the expiration of the Lease and to restore the Property to
its prior condition, all at Tenant's expense. All other alterations, additions
and improvements shall, at Tenant's option, be surrendered to Landlord upon the
expiration or earlier termination of the Lease, except that Tenant may remove
any of Tenant's machinery or equipment which can be removed without material
damage to the Property and Tenant's materials storage and handling equipment and
all non-affixed personalty of Tenant. Tenant shall repair, at Tenant's expense,
any damage to the Property caused by the removal of any such machinery or
equipment (other than ordinary wear and tear). In no event, however, shall
Tenant remove any of the following materials or equipment (which shall be deemed
Landlord's property) without Landlord's prior written consent; any power wiring
or power panels; lighting or lighting fixtures; wall coverings; window blinds;
carpets or other floor coverings; heaters, air conditioners or any other heating
or air conditioning equipment; fencing or security gates; or other similar
building operating equipment and permanently affixed decorations. It is
expressly understood that Tenant shall not be obligated to remove any structural
changes made to accommodate Tenant's materials handling equipment provided such
changes do not reduce the original clear height of or column spacing of the
Building or otherwise materially adversely affect the ordinary function of the
Building as a warehouse.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.1. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than ten percent (10%) of the Property is untenantable or
inaccessible as a result of such damage), this Lease shall remain in effect and
Landlord shall repair the damage as soon as reasonably possible. Landlord may
elect (but is not required unless Landlord has received insurance applicable
thereto) to repair any damage to Tenant's fixtures, equipment, or improvements.
Subject to the provisions of Section 13.12 hereof, if for any reason Landlord
has not restored and repaired the damage to the Building and the Property within
ninety (90) days after the date of said casualty, then Tenant shall have the
option to terminate this Lease at any time thereafter prior to the substantial
completion of the repair and restoration of the damage to the Building and the
Property by Landlord by
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giving written notice to Landlord, which notice shall specify a date for
expiration of the Lease, which date shall not be more than ninety (90) days
after the giving of such notice.
(b) Tenant shall pay Landlord the "deductible amount" (if any) under
Landlord's insurance policies.
(c) If the damage to the Property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.2. Substantial or Total Destruction.
(a) If the Property is substantially or totally destroyed by any cause
whatsoever (i.e., the damage to the Property is greater than partial damage as
described in Section 7.1 or if such damage, regardless of the size of the
portion damaged, renders the Building unfit for the operation of Tenant's
business), and if the Property can be rebuilt within six (6) months after the
date of destruction, Landlord shall rebuild the Property at Landlord's own
expense, and this Lease shall remain in full force and effect. Landlord shall
rebuild the Property at Landlord's sole expense, except that Tenant shall pay
Landlord the "deductible amount" (if any) under Landlord's insurance policies.
In addition and subject to the provisions of Section 13.12 hereof, if for any
reason Landlord has not restored and repaired the damage to the Building and the
Property within six (6) months after the occurrence of said casualty and the
removal of Tenant's equipment and other property sufficient to allow Landlord's
contractor to begin restoration and repair, time being strictly of the essence,
then Tenant shall have the option to terminate this Lease at any time thereafter
prior to the substantial completion of the repair and restoration of the damage
to the Building and the Property by giving written notice to Landlord, which
notice shall specify a date for expiration of the Lease, which date shall not be
more than ninety (90) days after the giving of such notice.
(b) If the substantial or total damage to the Property occurs during
the last twelve (12) months of the Lease Term, either Landlord or Tenant may
elect to terminate this Lease as of the date the damage occurred by giving
written notice to the other within sixty (60) days after Tenant's notification
to Landlord of the occurrence of the damage.
Section 7.3. Temporary Reduction of Rent. If the Property is destroyed
or damaged, any rent payable during the period of such damage, repair and/or
restoration shall be reduced according to the degree, if any, to which Tenant's
use of the Property is impaired. Except for such possible reduction in rent,
including but not limited to Base Rent, insurance premiums, Real Property Tax
and management fee, Tenant shall not be entitled to any compensation, reduction,
or reimbursement from Landlord as a result of any damage, destruction, repair,
or restoration of or to the Property.
Section 7.4. Waiver. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.2 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
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ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the Building is taken, or
if any condemnation renders the Property unfit for Tenant's business as then
being conducted, Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the
Landlord within thirty (30) days after receipt of written notice of such taking
(or in the absence of such notice, within thirty (30) days after the condemning
authority takes title or possession). If Tenant does not terminate and provided
that the Building can be restored to an economically usable unit, this Lease
shall remain in effect as to the portion of the Property not taken, except that
the Base Rent and Additional Rent shall be reduced in proportion to the
reduction in the floor area of the Property. Any Condemnation award or payment
shall be distributed in the following order: (a) first, to any ground lessor,
mortgagee or beneficiary under a deed of trust encumbering the Property, the
amount of its interest in the Property; (b) second, to Tenant, only the amount
of any award specifically designated for loss of or damage to Tenant's trade
fixtures or removable personal property; and (c) third, to Landlord, the
remainder of such award, whether as compensation for reduction in the value of
the leasehold, the taking of the fee, or otherwise. Tenant may also make a claim
for an award for Tenant's loss of business and relocation costs. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.1. Landlord's Consent Required. No portion of the Property or
of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.2 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.5 below. Any attempted transfer without consent
shall be void and shall constitute a non-curable breach of this Lease. If Tenant
is a partnership, any cumulative transfer of more than fifty percent (50%) of
the partnership interests shall be deemed an assignment of this Lease requiring
Landlord's consent. Except as set forth below, if Tenant is a corporation, any
change in the ownership of a controlling interest of the voting stock of the
corporation shall be deemed an assignment of this Lease requiring Landlord's
consent. For the purposes hereof, "control" shall be deemed to mean ownership of
not less than 50% of all of the voting stock of such corporation or not less
than 50% of all of the legal and equitable interest in any other business
entities.
Section 9.2. Tenant Affiliate. Notwithstanding Section 9.1 above,
Tenant may assign this Lease or sublease the Property, without Landlord's
consent, to any corporation which controls, is controlled by or is under common
control with Tenant, or to any corporation resulting from the merger of or
consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's
Affiliate shall assume in writing all of Tenant's obligations under this Lease.
This Article IX shall not apply in connection with a bona fide sale or other
transfer by Tenant of its business or substantially all of its assets, or the
sale of all
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or substantially all of Tenant's corporate stock or other interests in
connection with such sale or other transfer of its business, provided such sale
or other transfer is the primary purpose of the transaction and the assignment
or other transfer of this lease is merely incidental thereto. Any assignment or
subletting of this lease in connection with such sale or transfer (whether
direct, by operation of law, or default by virtue of the sale of stock) shall be
nonetheless subject to Landlord's prior written consent which Landlord shall not
unreasonably withhold or delay, provided (i) the proposed assignee, sublessee or
new stockholder is a reputable person of good character and of sound financial
condition and Landlord has been furnished with reasonable proof thereof; (ii)
the form of the proposed sublease or instrument of assignment shall be in form
reasonably satisfactory to Landlord and shall comply with the provisions of this
lease; (iii) the successor to Tenant has a net worth computed in accordance with
generally accepted accounting principles at least equal to the lesser of (A) the
net worth as shown on the consolidated financial statements of Tenant's parent,
Genesis Direct, Inc. immediately prior to such transaction, or (B) the net worth
as shown on the consolidated financial statements of Genesis Direct, Inc. on
January 31, 1997; and (iv) proof satisfactory to Landlord of such net worth
shall have been delivered to Landlord at least ten (10) days prior to the
effective date of any such transaction. In addition, Tenant shall have the right
to retain a sublease interest in the Property and/or a reassignment of this
Lease as collateral security for any obligation which the purchaser of Tenant's
business shall owe to Tenant or its stockholders in connection with any such
transaction.
Section 9.3. No Release of Tenant. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
Section 9.4. Offer to Terminate. If Tenant desires to assign the Lease
or sublease eighty percent (80%) or more of the Property, Tenant shall have the
right to offer, in writing, to terminate the Lease as of a date specified in the
offer. If Landlord elects in writing to accept the offer to terminate within
twenty (20) days after notice of the offer, the Lease shall terminate as of the
date specified and all the terms and provisions of the Lease governing
termination shall apply; and Landlord shall pay to Tenant (which obligation to
pay shall survive the termination of this Lease) fifty percent (50%) of the
"profit" Landlord receives or may receive from any reletting of the Property
over the period that would have been the original Lease term but for such
termination. If Landlord does not so elect, the Lease shall continue in effect
until otherwise terminated and the provisions of Section 9.5 with respect to any
proposed transfer shall continue to apply. As used in this Section 9.4, the term
"profit" shall mean all amounts Landlord receives from such reletting which
exceed the amounts which would have been received from Tenant over the original
Lease Term, less costs and expenses incurred directly by Landlord in connection
with the execution and performance of the new lease for broker's commissions,
advertising, legal fees and expenses, tenant improvements, and renovations, and
concessions. Tenant's share of the "profit" received by Landlord shall be paid
as received by Landlord, after recovery by Landlord of all of the foregoing
costs and expenses.
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Section 9.5. Landlord's Consent.
(a) Tenant's request for consent to any transfer described in Section
9.1 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord reasonably deems relevant. Landlord shall have the
right to withhold consent, if reasonable, or to grant consent, based on the
following factors: (i) the business of the proposed assignee or subtenant and
the proposed use of the Property: (ii) the net worth and financial reputation of
the proposed assignee or subtenant: (iii) Tenant's material compliance with all
of its material obligations under the Lease: and (iv) such other factors as
Landlord may reasonably deem relevant. If Landlord objects to a proposed
assignment solely because of the net worth and/or financial reputation of the
proposed assignee, Tenant may nonetheless sublease (but not assign), all or a
portion of the Property to the proposed transferee, but only on the other terms
of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the
Lease the Landlord's Share (stated in Section 1.13) of the Profit (defined
below) on such transaction as and when received by Tenant, unless Landlord gives
written notice to Tenant and the assignee or subtenant that Landlord's Share
shall be paid by the assignee or subtenant to Landlord directly. The "Profit"
means (A) all amounts paid to Tenant for such assignment or sublease, including
"key" money (other than amounts paid for the purchase of Tenant's fixtures and
improvements), monthly rent in excess of the monthly rent payable under the
Lease, and all fees and other consideration paid for the assignment or sublease,
including fees under any collateral agreements, less (B) costs and expenses
directly incurred by Tenant in connection with the execution and performance of
such assignment or sublease for real estate broker's commissions, advertising,
legal fees and expenses, moving expenses, transfer taxes and costs of renovation
or construction of tenant improvements required under such assignment or
sublease. Tenant is entitled to recover such cost and expenses before Tenant is
obligated to pay the Landlord's Share to Landlord. The Profit in the case of a
sublease of less than all the Property shall be calculated as the rent allocable
to the subleased space as a percentage on a square footage basis.
(ii) Tenant shall provide Landlord a written statement
certifying all amounts to be paid from any assignment or sublease of the
Property within thirty (30) days after the transaction documentation is signed,
and Landlord may inspect Tenant's books and records, only as they apply to such
transaction, to verify the accuracy of such statement. On written request,
Tenant shall promptly furnish to Landlord copies of all the transaction
documentation, all of which shall be certified by Tenant to be complete, true
and correct. Landlord's receipt of Landlord's Share shall not be consent to any
further assignment or subletting. The breach of Tenant's obligation under this
Section 9.5(b) shall be a material default of the Lease.
Section 9.6. No Merger. No merger shall result from Tenant's sublease
of the Property under this Article Nine and Tenant's surrender of this Lease to
Landlord or the termination of this Lease in any other manner. In any such
event, Landlord may terminate any or all subtenancies or succeed to the interest
of Tenant as sublandlord under any or all subtenancies.
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ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.1. Defaults. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the Property
results in the cancellation of any insurance described in Section 4.4;
(b) If Tenant fails to pay rent or any other charge when due and continues
to do so for ten (10) days after written notice from Landlord;
(c) If Tenant fails to perform any of Tenant's non-monetary obligations
under this Lease for a period of thirty (30) days after written notice from
Landlord; provided that if more than thirty (30) days are required to complete
such performance, Tenant shall not be in default if Tenant commences such
performance within the thirty (30)-day period and thereafter diligently pursues
its completion. However, Landlord shall not be required to give such notice if
Tenant's failure to perform constitutes a non-curable breach of this Lease as
specified in subsection (d) immediately following. The notice required by this
Section is intended to satisfy any and all notice requirements imposed by law on
Landlord and is not in addition to any such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within sixty (60) days; (iii) if a trustee or receiver is appointed to
take possession of substantially all of Tenant's assets located at the Property
or of Tenant's interest in this Lease and possession is not restored to Tenant
within sixty (60) days; or (iv) if substantially all of Tenant's assets located
at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
sixty (60) days. If a court of competent jurisdiction determines that any of the
acts described in this subparagraph (d) is not a default under this Lease, and a
trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.2. Remedies. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any lawful
means, in which case this Lease shall terminate and Tenant shall immediately
surrender possession of the Property to Landlord. In such event, Landlord shall
be entitled to recover from Tenant all damages incurred by Landlord by reason of
Tenant's default, including (i) the worth at the time of the award of the unpaid
Base Rent, Additional Rent and other charges which Landlord had earned at the
time of the termination; (ii) the worth at the time of the award of the amount
by which the unpaid Base Rent, Additional Rent and other charges which Landlord
would have earned after termination until the time of the award exceeds the
amount of such rental loss that Tenant proves Landlord could have reasonably
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avoided;(iii) the worth at the time of the award of the amount by which the
unpaid Base Rent, and other charges which Tenant would have paid for the balance
of the Lease Term after the time of award exceeds the amount of such rental loss
that Tenant proves Landlord could have reasonably avoided; and (iv) any other
amount (not accounted for in clauses (i), (ii) or (iii) above) necessary to
compensate Landlord (but not consequential damages) for all the detriment
proximately caused by Tenant's failure to perform its obligations under the
Lease or which in the ordinary course of things would be likely to result
therefrom, including, but not limited to, any costs or expenses Landlord incurs
in maintaining or preserving the Property after such default, the cost of
recovering possession of the Property, expenses of reletting, including
necessary renovation or alteration of the Property, Landlord's reasonable
attorneys' fee incurred in connection therewith, and any real estate commission
paid or payable. As used in subparts (i) and (ii) above, the "worth at the time
of the award" is computed by allowing interest on unpaid amounts at the rate per
annum of one percent (1%) over the then prime rate, or such lesser amount as may
then be the maximum lawful rate. As used in subpart (iii) above, the "worth at
the time of the award" is computed by discounting such amount at the discount
rate of the Federal Reserve Bank of San Francisco at the time of the award, plus
one percent (1%). If Tenant has abandoned the Property for one (1) year or
more, Landlord shall have the option of (i) retaking possession of the Property
and recovering from Tenant the amount specified in this Section 10.2(a), or (ii)
proceeding under Section 10.2(b);
(b) Maintain Tenant's right to possession, in which case this Lease
shall continue in effect whether or not Tenant has abandoned the Property. In
such event, Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to recover the rent as it becomes
due;
(c) Pursue any other remedy now or hereafter available to Landlord under
the laws or judicial decisions of the state in which the Property is located.
Section 10.3. Repayment of "Free" Rent. The rent that would be payable
during the first two months of the Term but for the abatement thereof is called
the "Abated Rent". If this Lease terminates as a result of Tenant's default and
failure to cure within any applicable grace period, the Abated Rent shall
immediately become due and payable in full and this Lease shall be enforced as
if there were no such rent abatement or other rent concession. In such case,
Abated Rent shall be calculated based on the full initial rent payable under
this Lease.
Section 10.4. Automatic Termination. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.2 hereof (none of which actions may be taken until
expiration of any applicable grace period), including the filing of an unlawful
detainer action against Tenant. On such termination, Landlord's damages for
default shall include all costs and fees, including reasonable attorneys' fees
that Landlord incurs in connection with the filing, commencement, pursuing
and/or defending of any action in any bankruptcy court or other court with
respect to the Lease; the obtaining of relief from any stay in bankruptcy
restraining any action to evict Tenant; or the pursuing of any action with
respect to Landlord's right to possession of the Property. All such damages
suffered (apart from Base Rent and other rent payable hereunder) shall
constitute pecuniary damages which must be reimbursed to Landlord prior to
assumption of the Lease by Tenant or any successor to Tenant in any bankruptcy
or other proceeding.
Section 10.5. Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
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ARTICLE ELEVEN. PROTECTION OF LENDERS.
Section 11.1. Subordination. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall reasonably cooperate with Landlord and
any lender which is acquiring a security interest in the Property or the Lease.
Tenant shall execute such further documents and assurances as such lender may
require, provided that Tenant's obligations under this Lease shall not be
increased (except for the performance of ministerial acts), and Tenant shall
not be deprived of its rights under this Lease. Tenant's right to quiet
possession of the Property during the Lease Term shall not be disturbed if
Tenant pays the rent and performs all of Tenant's obligations under this Lease
and is not otherwise in default beyond any applicable grace periods. If any
ground lessor, beneficiary or mortgagee elects to have this Lease prior to the
lien of its ground lease, deed of trust or mortgage and gives written notice
thereof to Tenant, this Lease shall be deemed prior to such ground lease, deed
of trust or mortgage whether this Lease is dated prior or subsequent to the date
of said ground lease, deed of trust or mortgage or the date of recording
thereof.
Section 11.2. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, this Lease shall not be terminated and Tenant
shall attorn to the transferee or successor to Landlord's interest in the
Property and recognize such transferee or successor as Landlord under this
Lease. Tenant waives the protection of any statute or rule of law which gives or
purports to give Tenant any right to terminate this Lease or surrender
possession of the Property upon the transfer of Landlord's interest.
Section 11.3. Signing of Documents. Tenant shall sign and deliver any
instrument or documents reasonably necessary or appropriate to evidence any such
attornment or subordination or agreement to do so. If Tenant fails to do so
within twenty (20) days after written request, Tenant hereby makes, constitutes
and irrevocably appoints Landlord, or any transferee or successor of Landlord,
the attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.4. Non-Disturbance-Agreement.
Anything contained in this Lease to the contrary notwithstanding,
Tenant's subordination or attornment to a ground lessor or the holder of a deed
of trust or mortgage is conditioned on Tenant's receipt from such lessor or
holder of a Non-Disturbance Agreement.
"Non-Disturbance Agreement" shall mean an agreement, in recordable
form, executed, acknowledged and delivered by a holder or lessor to Tenant,
providing in substance that so long as no default exists under this Lease which
is continuing after notice and beyond the expiration of any applicable grace
period, (i) the holder or the lessor, as applicable, shall not name or join
Tenant nor any person claiming through or under Tenant as a party defendant to
any action for foreclosure or other enforcement of the remedies under the
mortgage, deed of trust or lease as applicable; (ii) the leasehold, possession
and use of the Property in accordance with the terms of this Lease and all other
rights of Tenant (and any person claiming through or under Tenant) under this
Lease shall not be interfered with, affected or disturbed in any way by reason
of the subordination of this Lease to such mortgage, deed of trust or lease or
any sale pursuant to any foreclosure, deed or assignment in lieu of foreclosure
or similar device; (iii) this Lease
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shall not be terminated in connection with, or by reason of, foreclosure or
other proceedings or by reason of a transfer of the Landlord's interest under
this Lease pursuant to the taking of a deed or assignment in lieu of foreclosure
or similar device, or by reason of the termination or expiration of a ground
lease or by other enforcement proceeding with respect to any mortgage, deed of
trust or ground lease, and this Lease shall be unaffected by any of the
foregoing proceedings.
Section 11.5. Estoppel Certificates.
(a) Upon either party's written request, the other party shall execute,
acknowledge and deliver a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
canceled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; and (iv) that the
other party is not in default under this Lease (or, if the other party is
claimed to be in default, stating why). Such a statement shall be delivered
within ten (10) days after request. Tenant may give any such statement by
Landlord to any prospective purchaser or encumbrancer of the Property. Landlord
may give any such statement by Tenant to any prospective purchaser, investor,
subtenant or assignee. Any Party may rely conclusively upon such statement as
true and correct.
(b) If either party does not deliver such statement to the other within
such ten (10) day period, the other party, and any prospective purchaser or
encumbrancer, investor, subtenant or assignee, as applicable, may conclusively
presume and rely upon the following facts: (i) that the terms and provisions of
this Lease have not been changed except as otherwise represented; (ii) that this
Lease has not been canceled or terminated except as otherwise represented; (iii)
that not more than one month's Base Rent or other charges have been paid in
advance; and (iv) that the other party is not in default under the Lease. In
such event, the party failing to deliver the statement shall be estopped from
denying the truth of such facts.
Section 11.6. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord in connection with Tenant's request for consent to
a sublease, a sale or financing transaction with regard to the Building or in
connection with Rider Paragraph 11, or for any other reason which Landlord may
reasonably request, Tenant shall deliver to Landlord such financial statements
as Landlord reasonably requires to verify the net worth of Tenant or any
assignee or subtenant; it being understood, however, that Tenant has not made
any representation or warranty regarding its net worth and the failure to
maintain or obtain any level of net worth shall have no effect on Tenant's
rights hereunder. In addition, Tenant shall deliver to any lender designated by
Landlord any financial statements of Tenant and/or its parent required by such
lender to facilitate the financing or refinancing of the Property. Tenant
represents and warrants to Landlord that each such financial statement is a true
and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in the foregoing sentence.
ARTICLE TWELVE: LEGAL COSTS
Section 12.1. Legal Proceedings. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this
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Lease, whether or not suit is commenced or judgment entered. Such costs shall
include legal fees and costs incurred for the negotiation of a settlement,
enforcement of rights or otherwise. Furthermore, if any action for breach of or
to enforce the provisions of this Lease is commenced, the court in such action
shall award to the party in whose favor a judgment is entered, a reasonable sum
as attorneys' fees and costs. The losing party in such action shall pay such
attorneys' fees and costs. Tenant shall also indemnify Landlord against and hold
Landlord harmless from all costs, expenses, demands and liability Landlord may
incur if Landlord becomes or is made a party to any claim or action (a)
instituted by Tenant against any third party, or by any third party against
Tenant, or by or against any person holding any interest under or using the
Property by license of or agreement with Tenant; (b) for foreclosure of any lien
for labor or material furnished to or for Tenant or such other person; (c)
otherwise arising out of or resulting from any act or transaction of Tenant or
such other person; or (d) necessary to protect Landlord's interest under this
Lease in a bankruptcy proceeding, or other proceeding under Title 11 of the
United States Code, as amended. Tenant shall defend Landlord against any such
claim or action at Tenant's expense with counsel reasonably acceptable to
Landlord or, at Landlord's election, Tenant shall reimburse Landlord for any
reasonable legal fees or costs Landlord incurs in any such claim or action.
Landlord shall also indemnify Tenant against and hold Tenant
harmless from all costs, expenses, demands and liability Tenant may incur if
Tenant becomes or is made a party to any claim or action (a) instituted by
Landlord against any third party, or by any third party against Landlord, or by
or against any person holding any interest under or using the property by
license of or agreement with Landlord; (b) for foreclosure of any lien for labor
or material furnished to or for Landlord or such other person; (c) otherwise
arising out of or resulting from any act or transaction of Landlord or such
other person; or (d) necessary to protect Tenant's interest under this Lease in
a bankruptcy proceeding, or other proceeding under Title 11 of the United States
Code, as amended. Landlord shall defend Tenant against any such claim or action
at Landlord's expense with counsel reasonably acceptable to Tenant or, at
Tenant's election, Landlord shall reimburse Tenant for any reasonable legal fees
or costs Tenant incurs in any such claim or action.
Section 12.2. Landlord's Consent. Tenant shall pay Landlord's
reasonable out-of-pocket attorneys' fees incurred in connection with Tenant's
request for Landlord's consent under Article Nine (Assignment and Subletting),
or in connection with any other act which Tenant proposes to do and which
requires Landlord's consent under the terms of this Lease.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.1. Non-Discrimination. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.2. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the then
current owner or owners of the fee title to the Property or the leasehold estate
under a ground lease of the Property at the time in question. Each Landlord is
obligated to perform the obligations of Landlord under this Lease only during
the time such Landlord owns such interest or title.
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Any Landlord who transfers its title or interest in an arms'-length transaction
for value is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds that Tenant
previously paid if such funds have not yet been applied under the terms of this
Lease.
(b) Subject to Tenant's rights under Section 13 of the attached Rider
and under Section 6.4(c): except in the event of an emergency, Tenant shall give
written notice of any failure by Landlord to perform any of its obligations
under this Lease to Landlord and to any ground lessor, mortgagee or beneficiary
under any deed of trust encumbering the Property whose name and address have
been furnished to Tenant in writing. Landlord shall not be in default under this
Lease unless Landlord (or such ground lessor, mortgagee or beneficiary) fails to
cure such non-performance within thirty (30) days after receipt of Tenant's
notice. However, if such non-performance reasonably requires more than thirty
(30) days to cure, Landlord shall not be in default if such cure is commenced by
Landlord or such mortgagee within such thirty (30) day period and thereafter
diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property and the proceeds
thereof, and neither the Landlord nor its partners, shareholders, officers or
other principals shall have any personal liability under this Lease, except to
the extent of the proceeds of the Property.
Section 13.3. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or invalidate the remainder of such provision or
this Lease, which shall remain in full force and effect.
Section 13.4. Interpretation. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conducts, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's expressed or
implied permission (other than Landlord, its agents, employees, contractors,
invitees or successors).
Section 13.5. Incorporation of Prior Agreements; Modifications. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.6. Notices. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.3 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes with copies to the address specified in Section 1.3
above and to Tenant's Guarantor, Genesis Direct, Inc., One Bridge Plaza, Suite
680, Fort Lee, New Jersey 07024-0407, and Greenberg, Traurig, Hoffman, Lipoff,
Rosen & Quentel, 153 East 53rd Street, New York, New York 10022, Attention:
Stephen L. Rabinowitz, Esq. Notices to Landlord shall be delivered to the
address
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specified in Section 1.02 above. All notices shall be effective upon delivery.
Either party may change its notice address upon written notice to the other
party.
Section 13.7. Waivers. All waivers must be in writing and signed by the
waiving party. Landlord's failure to enforce any provision of this Lease or its
acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future. No
statement on a payment check from Tenant or in a letter accompanying a payment
check shall be binding on Landlord. Landlord may, with or without notice to
Tenant, negotiate such check without being bound to the conditions of such
statement.
Section 13.8. No Recordation. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded against the Property and the expansion lot. The party
requiring such recording shall pay all transfer taxes and recording fees.
Section 13.9. Binding Effect; Choice of Law. This Lease binds any party
who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. Corporate Authority; Partnership Authority. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's Board of
Directors authorizing the execution of this Lease or other evidence of such
authority reasonably acceptable to Landlord. If Tenant is a partnership, each
person or entity signing this Lease for Tenant represents and warrants that he
or it is a general partner of the partnership, that he or it has full authority
to sign for the partnership and that this Lease binds the partnership and all
general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. Joint and Several Liability. All parties signing this
Lease as Tenant, or Landlord, shall be jointly and severally liable for all
obligations of Tenant, or Landlord, as applicable.
Section 13.12. Force Majeure. If either Landlord or Tenant cannot
perform any of its obligations due to events beyond such party's reasonable
control, the time provided for performing such obligations shall be extended by
a period of time equal to the duration of such events. Events beyond a party's
reasonable control include, but are not limited to, acts of God, war, civil
commotion, labor disputes, strikes, fire, flood or other casualty, shortages of
labor or material, government regulation or restriction and weather conditions
but shall not include insufficiency of funds. Without limiting Tenant's rights
under the other provisions of this Lease giving Tenant the right to abatement of
Rent, this provision shall not extend the time for performance by Tenant of any
of Tenant's financial obligations hereunder, including without limitation the
timely payment of Rent.
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Section 13.13. Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
ARTICLE FOURTEEN: BROKERS
Section 14.1. Broker's Fee. When this Lease is signed by and delivered
to both Landlord and Tenant, Landlord shall pay a real estate commission to
Tenant's Broker named in Section 1.8 above, as provided in the written agreement
between Landlord and Tenant's Broker.
Section 14.2. Agency Disclosure; No Other Brokers. Landlord and Tenant
each warrant that they have dealt with no other real estate broker(s) in
connection with this transaction except: See paragraph 7 of the attached Rider.
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment in Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability Act, and The Americans With
Disabilities Act.
Landlord and Tenant have signed this Lease at the place and on the
dates specified adjacent to their signatures below and have initialed all Riders
which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on February 24, 1997 CORPORATE ESTATES, INC.
at Sacramento, California
By: /s/ Linda M. Stanley
----------------------------
Linda M. Stanley
Its: President
Signed on February 25, 1997 MITCHELL INVESTMENTS, LLC
at Memphis, TN
By: /s/ Dudley Mitchell
----------------------------
Dudley Mitchell
Its: Chief Manager
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"TENANT"
Signed on February 13, 1997 GENESIS DIRECT NINE, LLC
at Ft. Lee, NJ
By: Genesis Direct Inc.
---------------------------
Its: Managing Member
---------------------------
By: /s/ Hunter Cohen
---------------------------
Its: EVP, COO
---------------------------
<PAGE>
RIDER
DATED FEBRUARY __, 1997, TO LEASE AGREEMENT DATED FEBRUARY 14, 1997,
BETWEEN CORPORATE ESTATES, INC. and MITCHELL INVESTMENTS, LLC, AS LANDLORD, AND
GENESIS DIRECT NINE, LLC, AS TENANT
If there is any inconsistency between this Rider and the Lease to which it is
attached, the provisions of this Rider shall prevail.
1. Construction of the Building. Landlord currently has under
construction a warehouse/office building consisting of approximately 500,000
square feet (the "Building") on the real property described in the attached
Exhibit A to this Lease and Rider. The Building will be constructed in
accordance with the Building Specifications attached as Exhibit B. Landlord will
cause the Building to be constructed in accordance with all applicable federal,
state and local laws, regulations, codes and ordinances, including, but not
limited to, applicable requirements of the Americans with Disabilities Act.
Landlord shall construct the Building (including installation of all restroom
facilities required to satisfy building code requirements) and all exterior
lighting, landscaping, parking areas and driveways and painting of the interior
and exterior walls at Landlord's sole cost; however, Tenant shall pay all costs
of constructing Tenant's office improvements in the Building in accordance with
plans and specifications to be prepared by Landlord and approved by Tenant, such
costs to be paid by Tenant promptly in progress payments during the course of
construction under Landlord's construction contract for such office
improvements. Landlord shall submit the approved plans for Tenant's office
improvements for bids and advise Tenant of the price to construct said
improvements. Tenant shall have the opportunity to eliminate or add construction
items after receipt of bids in order to adjust the bid price to an amount which
is acceptable to Tenant prior to Landlord's contracting for such improvements.
2. Term of Lease. The term of the Lease shall commence on the date (the
"Commencement Date") that is the later of (i) April 1, 1997, and (ii) the date
the entire Building including all office improvements is "substantially
completed" (as hereinafter defined) and extend for a period often (10) years and
two (2) months from such date plus the number of days necessary to end the Lease
Term on the last day of a month. Provided that Tenant approves the plans and the
costs for construction of Tenant's office improvements on or before February 15,
1997, Landlord covenants to deliver the entire Building in "substantially
completed" condition on or before April 1, 1997.
As used herein, the term "substantially completed" shall mean that the
Building including Tenant's office improvements has been completed to the point
that it may be safely and lawfully occupied (including issuance of a temporary
certificate of occupancy subject only to final inspection of Tenant's materials
handling and storage equipment and racking by applicable governmental
authorities and all other certificates and permits) for the intended use,
subject only to correction of minor defects or imperfections commonly referred
to as "punch list" items; provided that all "punch list" items shall be
completed within 30 days after Tenant has completed installation of its
materials storage and delivery system.
Notwithstanding the above, if Tenant fails or neglects to approve
either the plans or the costs for construction of Tenant's office improvements
in writing by February 15, 1997, through no fault of Landlord, and the "Base
Building" (defined as the entire Building
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and parking facilities less Tenant's office improvements) is substantially
completed on April 1, 1997, the term of this Lease shall commence on April 1,
1997. Tenant shall be allowed possession of the Building subject to the presence
and activities of the contractor engaged to construct Tenant's office
improvements. Tenant shall not hinder or delay said contractor. Landlord shall
be allowed one day after Apr11 1, 1997, for every day after February 15, 1997,
that Tenant's plans and costs are not approved by Tenant in writing within which
to substantially complete said office improvements; and provided that said
office improvements are substantially completed within such extended period,
Tenant shall have no claim for abatement of rent pursuant to Paragraph 13 below;
or any claim for a penalty under Paragraph 9 below.
3. Rental Commencement. Base Rent shall commence to be payable on
June 1, 1997 (the "Rental Commencement Date"); provided that any delay in
occurrence of the Commencement Date after April 1, 1997 shall extend the Rental
Commencement Date by a like number of days.
4. Maintenance, Repairs, Expenses. Notwithstanding Sections 6.03 and
6.04 of this Lease, the Landlord shall be responsible for maintenance and
repair, and replacement if necessary, of the roof, exterior walls (excluding
painting), subsurface utilities and structural aspects of the Building including
the floors and foundation and the replacement of any pavement and parking
surfaces which fail or deteriorate to the degree that they must be replaced (as
opposed to patched or repaired) unless the necessity for replacement of such
surfaces arises out of Tenant's abuse as opposed to ordinary wear and tear
during the Lease Term and any renewal term. Tenant will be responsible for all
other expenses of maintenance and repair in accordance with Section 6.4 of this
Lease. In addition, Tenant shall be responsible for payment of all operating
expenses associated with the Building including without limitation the
following:
(a) Real Estate Tax applicable to the Building and the land on which
it is located in accordance with Section 4.2 of this Lease;
(b) expenses of fire and hazard insurance (including loss of rents)
on the Building and liability insurance protecting both Tenant
and Landlord in accordance with Section 4.4 of this Lease;
(c) sprinkler security/fire protection system;
(d) landscape maintenance (provided that Landlord, at its expense,
provides the initial planting of such landscaping);
(e) utilities in accordance with Section 4.3 of this Lease;
(f) parking lot sweeping and lighting (electrical and maintenance)
expense;
(g) property management expense as provided in Section 4.8 of this
Lease.
5. Options to Renew.
(a) Tenant shall have the option to renew this Lease for an
additional five (5) year period (the "First Renewal Term") at the end of the
initial Lease Term, and the option to renew for an additional five (5) year
period at the end of the First Renewal Term (the "Second Renewal Term"). Each
renewal shall be on the same terms as provided
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<PAGE>
herein except that the base rental during each such renewal term shall be equal
to the greater of (a) 95% of the "Fair Market Rental Value" of the Building, as
determined as of the first day of such renewal term pursuant to subparagraph (b)
below; or (b) the rental for the immediately preceding term of the Lease. To be
effective, each such option must be exercised by written notice from Tenant to
Landlord not later than six months prior to the end of the then current term.
(b) In determining the Fair Market Rental Value of the
Building, Landlord shall first inform Tenant of a proposed rental rate within
ten (10) days after receipt of Tenant's notice of exercise of Tenant's renewal
option. If Tenant does not agree with the proposed rental rate, then at Tenant's
expense, the Fair Market Rental Value of the Building shall be determined by an
appraisal done by a Member of the Appraisal Institute ("Institute") with no less
than ten (10) years' experience in the Memphis, Tennessee metropolitan area, the
arrangements for which must be made by Tenant and which must be completed within
forty-five (45) days after receipt of Landlord's proposed rental rate ("Tenants
Renewal Appraisal"). In the event that Landlord does not agree with Tenant's
Renewal Appraisal, then Landlord may, at Landlord's expense, obtain another
appraisal from an Institute member, with no less than ten (10) years' experience
in the Memphis, Tennessee metropolitan area ("Landlord's Renewal Appraisal")
which must be completed, within forty-five (45) days of receipt of Tenant's
Renewal Appraisal. In the event that the two rental rates determined by Tenant's
Renewal Appraisal and Landlord's Renewal Appraisal differ by less than ten
percent (10%), the Fair Market Rental Rate shall be the average of the two
rental rates determined by Tenant's Renewal Appraisal and Landlord's Renewal
Appraisal. In the event that the two rental rates determined by Tenant's Renewal
Appraisal and Landlord's Renewal Appraisal differ by greater than 10%, the
appraisers designated by Landlord and Tenant shall within twenty (20) days
designate a third Institute member to make a third appraisal. The Fair Market
Rental Rate as determined by the appraisal of the third Institute member shall
then be averaged with either Tenant's Renewal Appraisal or Landlord's Renewal
Appraisal, whichever shall be closest to the appraisal of the third Institute
member and the results of said averaging shall be binding on the parties.
Tenant's Renewal Appraisal and Landlord's Renewal Appraisal as well as the
appraisal of the third Institute member (if applicable) shall be based upon the
rental rates then being charged for similar buildings in the immediate area and
shall take into consideration all relevant factors including without limitation,
the age of the Building, term of the renewal and the fact that Landlord will not
be incurring concessions, if any, then being offered in the Market such as rent
abatement and improvement allowances. Each party shall bear the expense of the
appraiser designated by it with the expense of the third appraiser being shared
equally by the parties.
(c) if Tenant is in material default under any of the terms,
covenants or conditions of the Lease after notice and the expiration of the
applicable grace periods on the date of giving the option notice or the date the
Renewal Term(s) is to commence, the Renewal Term(s) in question shall not
commence and the Lease shall expire at the end of the then existing term.
6. Security Deposit/Application to Rent. Provided no uncured
material default of Tenant then exists, at the end of each twelve month period
of the Lease Term: (i) if the Security Deposit is in cash, Landlord shall apply
one-sixth of the Security Deposit provided in Section 1.10 to the next due
installment of base rent, which payment shall be in lieu of Tenant's Base Rent
payment for such month, or (ii) if the Security Deposit is in the form of a
letter of credit, the Security Deposit shall be reduced by one-sixth of the
original principal amount thereof.
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<PAGE>
7. Brokerage. Tenant has represented that its exclusive agents in this
transaction are The Weston Companies and The Galbreath Company, whom Landlord
has agreed under separate agreement to pay a commission in the event the Lease
is executed. Except for the foregoing commissions, Tenant agrees to indemnify
and hold Landlord harmless from the claims of all brokers claiming to have been
engaged by Tenant in connection with this transaction.
8. PILOT Program. Upon the request of Tenant, Landlord will cooperate
with Tenant in seeking a property tax "freeze" with respect to the Building and
land under the Payment in Lieu of Taxes (PILOT) Program including without
limitation by entering into a quit-claim and leaseback transaction as may be
necessitated by the PILOT Program. All costs associated therewith shall be borne
by Tenant including all reasonable fees and charges of Landlord's attorney in
connection with review and approval of the documents required to place the
Building in the PILOT Program. All benefits accruing from the PILOT Program will
inure to Tenant's benefit. Tenant shall assume all obligations imposed on
Landlord with respect to the Property and Building by the Industrial Development
Board of the City of Memphis and County of Shelby, Tennessee (except those with
which Tenant cannot reasonably comply, e.g., payment of Landlord's taxes and
maintaining Landlord in good standing), as a condition to receiving such tax
"freeze" and Tenant shall indemnify and hold Landlord harmless from and against
any and all loss, cost or expense in connection therewith.
9. Penalty for Late Delivery. In the event Landlord is late in
delivering the Base Building (as defined in Paragraph 2 above) in substantially
completed condition by April 1, 1997, the Rental Commencement Date shall be
extended in accordance with Rider Paragraph 3 and Landlord will credit against
the Base Rent payments first due under this Lease an amount equal to $5,000.00
for each day Landlord is late. The amount of the daily penalty will increase by
$5,000.00 per day if the delay continues for as much as two weeks and will
increase by an additional $5,000.00 per day for each period of two weeks
thereafter until Landlord has delivered the Building "substantially completed".
Furthermore, for purposes of this paragraph, Landlord shall have a period of
forty-five (45) days after approval by Tenant in writing of the plans and costs
of Tenant's office improvements to cause said office improvements to be
substantially completed. In the event Landlord is late in delivering said office
improvements within said 45-day period, Landlord shall credit against the Base
Rent payments first due hereunder a further $5,000.00 per day penalty (which
shall increase as provided above) as provided above for late delivery of the
Base Building, until said office improvements are substantially completed.
Landlord will not be obligated for such penalty in the event that Landlord is
prevented from delivering the Base Building on or before April 1, 1997 (the
"Delivery Date") or Tenant's office improvements within said 45-day period by
events beyond Landlord's reasonable control as provided in Section 13.12 of the
Lease. If Landlord has not delivered the Base Building "substantially completed"
by July 1, 1997, Tenant may terminate this Lease by written notice given at any
time prior to November 1, 1997.
10. Expansion.
(a) Landlord agrees to hold available for the exclusive benefit
of Tenant for a period of up to five years from the Commencement Date the land
lying north of the Building shown on Exhibit C (the "Expansion Lot") for
construction of an expansion of the Building of between approximately 50,000 -
100,000 square feet (the "Expansion Building"). Landlord shall hold the
Expansion Lot for the first three years at no cost to Tenant. Thereafter, a
payment of $20,000.00 per year shall be required to reserve the Expansion Lot
for years four and five. Each such annual payment shall be made in advance, on
or before the first day of each Lease Year. If Tenant fails to pay the required
annual payment within thirty (30) days of its due date, Landlord's obligation to
reserve such land shall terminate.
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(b) If Tenant notifies Landlord that it elects to build the
Expansion Building prior to the end of the fifth lease year, Landlord shall
construct the Expansion Building subject to the following conditions: (i) a
building shell (the "Base Warehouse Building") substantially in accordance with
the specification of the Building shall be constructed at Landlord's cost and
expense; (ii) the construction of all office improvements or any upgrade to the
Base Warehouse Building shall be at Tenant's cost and expense; (iii) the
Expansion Building shall be between approximately 50,000 and 100,000 rentable
square feet, subject to Tenant's needs, as determined by Tenant and applicable
zoning, subdivision and sits conditions; (iv) the plans, specifications and
construction schedule for the Expansion Building shall be mutually agreed upon
between Landlord and Tenant; (v) the Expansion Building shall not be attached to
the Building unless otherwise agreed.
(c) The Base Rent for the Expansion Building will be at the
then Fair Market Rental Value computed in accordance with the provisions of
Paragraph 5(b) of this Rider. The security for the Expansion Building will be
determined as follows: (i) twelve months of the initial Base Rent if the net
worth as shown on the consolidated financial statements of Genesis Direct, Inc.
("GDI") at the time of the commencement of the lease for the Expansion Building
(the "Expansion Commencement") is $10,000,000.00 or less; (ii) six months of the
initial Base Rent if the net worth as shown on the consolidated financial
statements of GDI at the Expansion Commencement is greater than $10,000,000.00.
One-sixth of the security for the Expansion Building lease will be returned at
the end of each 12 month period under the Expansion Lease in accordance with the
provisions of Paragraph 6 of this Rider. Otherwise, the Expansion Building will
be leased on substantially the same terms and conditions of this Lease.
(d) The term of the lease of the Expansion Building shall be
the greater of (i) seven (7) years from the date of Expansion Commencement and
(ii) a term expiring on the Expiration Date, in the event that the term of the
lease of the Expansion Building extends beyond the Expiration Date, Tenant shall
be deemed to have exercised its option for the First Renewal Term, the length of
which shall be adjusted so that it shall be coterminous with the then remaining
term of the lease of the Expansion Building. Thereafter, Tenant shall have
options to renew this Lease as to either or both the Building and the Expansion
Building (as if this Lease and the lease for the Expansion Building were two (2)
separate and distinct leases) for two periods of five (5) years each, upon the
terms and at the base rental determined according to Paragraph 5(a) above,
except that if the First Renewal Term is adjusted to a term less than five (5)
years, as provided in the second (2nd) sentence of this Paragraph 10(d), Tenant
shall have the option to renew this Lease (but not the lease for the Expansion
Building) for a "Third Renewal Term" of five (5) years, upon the terms and at
the base rental determined according to Paragraph 5(a) above. Each of said
options must be exercised as provided in said Paragraph 5(a) to be effective.
11. Payment of Option Cancellation Fee. In addition to all other
payments required hereunder, Tenant shall pay to Landlord upon execution of this
Lease the sum of $162,000.00 being one-half of the fee to be paid to Honeywell
Inc. in consideration of relinquishment by Honeywell Inc. of the option/right of
refusal it currently holds on the Building; provided that in consideration
thereof, Landlord shall deliver to Tenant a copy of an executed amendment to the
Honeywell Inc. lease, in recordable form, terminating all rights of Honeywell
with respect to the Building.
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12. Landlord's Construction Warranty. Landlord shall repair or replace
any defects in materials or workmanship in the Building or in any of its systems
of which Landlord receives notice within one (1) year of the date of substantial
completion of the Building. Landlord and Tenant shall share equally the cost of
repairing any defects in materials or workmanship in the Building systems [i.e.,
HVAC, sprinkler, plumbing, and lighting (but not light bulbs and not including
any fixtures, wiring or equipment installed by Tenant)] of which Landlord
receives notice between the first and third anniversaries of substantial
completion of the Building. Landlord shall have no liability for any
consequential damages suffered by Tenant as a result of any such defect nor any
liability for damages to Tenant's property; however, Landlord will assign to
Tenant any right of Landlord to recover for any such damages against Landlord's
contractor or such contractor's insurance carrier upon request. Nothing in this
paragraph is intended to limit Landlord's obligations under Paragraph 4 of this
Rider.
13. Abatement of Rent When Tenant is Prevented from Using Premises. In
addition to Tenant's rights under Section 7.3, in the event that Tenant is
prevented from using, and does not use, the Building or any portion thereof, for
ten (10) consecutive business days (the "Eligibility Period") as a result of any
repair, maintenance or alteration performed by Landlord after the date hereof
and required by this Lease, which substantially interferes with Tenant's use of
the Building, then the Rent shall be abated or reduced, as the case may be,
after expiration of the Eligibility Period for such time that Tenant continues
to be so prevented from using, and does not use, the Building or any portion
thereof, in the proportion that the area of the portion of the Building that
Tenant is prevented from using and does not use, bears to the total area of the
Building.
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14. Optional Parking Areas. Tenant shall have the option, exercisable at any
time during the period commencing on the date of this Lease and ending on the
fifth (5th) anniversary of the Commencement Date, by written notice to Landlord,
to require Landlord to pave and stripe for parking the two areas indicated on
Exhibit "D" attached hereto and made a part hereof. In the event Tenant
exercises such option, Landlord shall promptly pave and stripe such areas, and
upon the completion of such work, Tenant shall pay to Landlord, as Additional
Rent, the reasonable out-of-pocket expenses paid by Landlord for same, as
substantiated by paid invoices and other evidence reasonably satisfactory to
Tenant. If Tenant exercises such option within thirty (30) days after the date
of this Lease, Landlord agrees that the expense for such paving and striping
shall be $178,000.00, which shall be paid to Landlord on the Commencement Date
of this Lease (provided that such work has been substantially completed by the
Commencement Date), and which shall be in addition to all other amounts due from
Tenant to Landlord as elsewhere in this Lease provided. If such option is
exercised, the additional parking area shown on Exhibit D which is located on
the Expansion Lot shall become a part of the Property demised hereunder for the
entire term of this Lease and any extension thereof pursuant to Tenant's renewal
options (regardless of whether or not Tenant exercises its rights under
Paragraph 10 above, but, except for the cost of paving and striping, there shall
be no additional, or increases of, Base Rent or Additional Rent, including,
without limitation, any payments of Real Property Tax attributable to parking
area located on the expansion lot, notwithstanding anything contained in the
Lease or this Rider which may be deemed to the contrary.
LANDLORD:
CORPORATE ESTATES, INC.
By: /s/ Linda M. Stanley
----------------------------
Linda M. Stanley, President
MITCHELL INVESTMENTS, LLC
By: /s/ Dudley Mitchell
---------------------------
Dudley Mitchell, Chief Manager
TENANT:
GENESIS DIRECT NINE, LLC
By: Genesis Direct, Inc.
---------------------------
Its: Managing Member
--------------------------
By: /s/ Hunter Cohen
---------------------------
Its: EVP, COO
--------------------------
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<PAGE>
Exhibit 10.3
ITT CORPORATION
Sublandlord
and
GENESIS DIRECT SECAUCUS OPERATIONS, LLC
Subtenant
----------------------------------------------------------
SUBLEASE AGREEMENT
DATED AS OF FEBRUARY , 1997
----------------------------------------------------------
100 Plaza Drive
Portion of 1st, 3rd and 4th Floors
Secaucus, New Jersey
<PAGE>
TABLE OF CONTENTS
-----------------
1. Sublease Premises/Use................................................. 2
---------------------
2. Term.................................................................. 2
----
3. Rent: Sublease Fixed Rent: Sublease Additional Rent................... 5
---------------------------------------------------
4. Real Estate Tax and Operating Expense Payments........................ 7
----------------------------------------------
5. Applicability of Overlease Provisions.................................12
-------------------------------------
6. Subordination.........................................................19
-------------
7. Quiet Enjoyment.......................................................20
---------------
8. Condemnation..........................................................20
------------
9. Assignment, Subletting, and Mortgaging................................22
--------------------------------------
10. Damage and Destruction................................................26
----------------------
11. Security..............................................................28
--------
12. Electric/Gas Energy...................................................31
-------------------
13. Parking...............................................................32
-------
14. Definition of Sublandlord.............................................32
-------------------------
15. Notices...............................................................33
-------
16. Broker................................................................34
------
17. Inspection............................................................34
----------
18. Right of First Offer..................................................34
--------------------
19. Subtenant's Work/Sublandlord's Work...................................43
-----------------------------------
20. Sublandlord's Systems and Equipment...................................49
-----------------------------------
21. Building Name.........................................................49
-------------
22. Representations. Warranties and Covenants of Sublandlord..............49
--------------------------------------------------------
23. Representations. Warranties and Covenants of Subtenant................51
------------------------------------------------------
24. Roof..................................................................52
----
25. Subtenant's Right to Provide Cleaning Services........................52
----------------------------------------------
26. Capitalized Terms.....................................................53
-----------------
<PAGE>
EXHIBITS
--------
Exhibit A Overlease
Exhibit B-I Floor Plan of First Floor Space
Exhibit B-2 Floor Plan of Third Floor Space
Exhibit B-3 Floor Plan of Fourth Floor Space
Exhibit C Genesis Indemnity Letter
Exhibit D Inside Parking Area
Exhibit E Outside Parking Area
Exhibit F Sublandlord's Personal Property
Exhibit G Roof Space
Exhibit H Letter of Credit
Exhibit I Preliminary Plans
<PAGE>
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (hereinafter "Sublease"), made as of this 14th
day of February, 1997 (hereinafter the "Effective Date"), between ITT
CORPORATION (formerly known as ITT Destinations, lnc.), a Nevada corporation,
with its offices at 1330 Avenue of the Americas, New York, New York 10019
(hereinafter "Sublandlord"), and GENESIS DIRECT SECAUCUS OPERATIONS, LLC, a
Delaware limited liability company, with its offices at One Bridge Plaza, Suite
680, Fort Lee, New Jersey 07024-0407 (hereinafter "Subtenant").
WITNESSETH:
WHEREAS, Sublandlord is the tenant under that certain Agreement of
Lease dated March 28, 1989, between Meadow Park Associates (hereinafter
"Overlandlord"), as landlord, and ITT Corporation, a Delaware corporation
(hereinafter "Original Tenant"), as tenant, as amended by Letter Agreement dated
March 28, 1989, First Lease Modification Agreement dated November 17, 1989,
Letter Agreement dated March 26, 1991 and Second Lease Modification Agreement
dated March 31, 1992 (said Agreement of Lease, Letter Agreement dated March 28,
1989, First Lease Modification Agreement, Letter Agreement dated March 26, 1991
and Second Lease Modification Agreement are annexed hereto as Exhibit A and are
hereinafter the "Overlease"), which Overlease demised portions of the first
(1st), third (3rd) and fourth (4th) floors (hereinafter the "Overlease
Premises") of the building (hereinafter the "Building") known as 100 Plaza
Drive, Secaucus, New Jersey, in the Plaza at Harmon Meadow and certain
appurtenant parking and other rights as described in the Overlease.
WHEREAS, Sublandlord is the successor-in-interest to Original Tenant
as tenant under the Overlease pursuant to Lease Assignment Agreement dated as of
December 15, 1995, between Original Tenant and Sublandlord.
WHEREAS, Subtenant herein desires to sublet from Sublandlord the
following portions of the Overlease Premises: (a) the entire portion of the
first (1st) floor of the Overlease Premises containing 4,529 square feet of
Gross Floor Space and being more particularly described in Exhibit B-I annexed
hereto; (b) the entire portion of the third (3rd) floor of the Overlease
Premises containing 37,103 square feet of Gross Floor Space and being more
particularly described in Exhibit B-2 annexed hereto; and (c) that portion of
the fourth (4th) floor of the Overlease Premises containing 60,833 square feet
of Gross Floor Space and being more particularly described in Exhibit B-3
annexed hereto (said premises being sublet hereunder are sometimes hereinafter
collectively referred to as the "Sublease Premises"), consisting of an aggregate
of 102,465 square feet of Gross Floor Space and Sublandlord is willing to sublet
the Sublease Premises upon the terms and conditions hereinafter set forth.
<PAGE>
NOW, THEREFORE, in consideration of the premises and Ten Dollars
($10.00) and other good and valuable consideration, the receipt and adequacy of
which is hereby acknowledged, Sublandlord and Subtenant hereby covenant and
agree as follows:
1. Sublease Premises/Use. Sublandlord hereby leases to Subtenant and
Subtenant leases and hires from Sublandlord, the Sublease Premises as the same
are more particularly described in Exhibits B-1, B-2 and B-3 annexed hereto,
together with the right to (i) the exclusive use of parking spaces as set forth
in Paragraph 13 of this Sublease, (ii) the use of the roof of the Building as
set forth in Paragraph 24 of this Sublease, and (iii) the right to use in common
with Overlandlord, Sublandlord and other tenants in the Building and their
invitees, customers and employees, all lobby areas, stairways, elevators,
toilets and other Interior Common Areas in the Building, as well as the right to
use in common with Overlandlord, Sublandlord and other tenants in the Entire
Premises, their invitees, customers and employees, the peripheral roads/overpass
and Exterior Common Areas as set forth in Section 7.02 and 7.03 of the
Overlease; subject, however, to the provisions of Paragraph 13 of this Sublease.
The Sublease Premises shall be used by Subtenant for general and executive
office uses and attendant administration uses, and any other uses permitted
under the Overlease, and for no other purposes. Subtenant expressly covenants
and agrees with Sublandlord that the Sublease Premises may not be used by
Subtenant for any use or in any manner which shall violate any of the terms of
the Overlease.
2. Term. (a) The term of this Sublease (hereinafter the "Term") shall
commence on the date (hereinafter the "Sublease Commencement Date") which is the
latest to occur of (i) the date that this Sublease has been fully executed and
delivered to Sublandlord and Subtenant, and (ii) the date Overlandlord shall
have (1) granted written consent (hereinafter the "Consent") to this Sublease
and to Subtenant's Work (as hereinafter defined) as set forth on the final plan
(as hereinafter defined) and (2) agreed (hereinafter the "Restoration Waiver")
in writing that Sublandlord shall have no obligation at the expiration of the
Overlease to remove Subtenant's Work encompassed within the final plan and
restore the Sublease Premises to their condition prior to the making of such
Subtenant's Work, and shall end at 11:59 p.m. on March 30, 2005 (hereinafter the
"Sublease Expiration Date"), or on such earlier date upon which this Sublease
shall terminate for any reason. Subject to the provisions of the next succeeding
sentence, Sublandlord shall deliver the Sublease Premises to Subtenant on the
Sublease Commencement Date, free of all tenancies (except for the Overlease) and
occupants. Except as otherwise expressly provided in subsection (d) of this
Paragraph 2, notwithstanding that the Sublease Commencement Date shall have
occurred, Subtenant shall have no right to occupy the Sublease Premises and
Sublandlord shall have no obligation to deliver the Sublease Premises to
Subtenant until the first of the following events shall occur (the first to
occur of such events being hereinafter referred to as the "Sublease Occupancy
Event"): (i) Subtenant shall have notified Sublandlord in writing that it has
obtained the Grant (as hereinafter defined) and (ii) Subtenant shall have failed
to timely exercise Subtenant's Termination Right (as
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<PAGE>
hereinafter defined). If within thirty (30) days following the Effective Date,
Sublandlord shall have failed to obtain the Consent and the Restoration Waiver
from Overlandlord, Subtenant shall have the right to terminate this Sublease on
written notice to Sublandlord given within ten (10) business days after the
expiration of said thirty (30) day period, unless prior to the exercise by
Subtenant of such right of termination Sublandlord shall have obtained the
Consent and the Restoration Waiver. In addition, if Sublandlord fails to make
available possession of the Sublease Premises to Subtenant in accordance with
the terms hereof on the latest to occur of (a) the date Sublandlord delivers the
Consent and the Restoration Waiver to Subtenant, and (b) the date on which the
first of the following shall occur: (i) Subtenant shall have notified
Sublandlord that it has obtained the Grant, and (ii) March 20, 1997, provided
Subtenant has not exercised Subtenant's Termination Right prior to said date,
then, (i) Subtenant shall have the right to terminate this Sublease on written
notice to Sublandlord given within ten (10) business days after the latest to
occur of the dates described in (a) and (b) of this sentence above, unless prior
to the exercise by Subtenant of such right of termination Sublandlord shall have
made available to Subtenant such possession of the Sublease Premises. If the
Sublease is not terminated by Subtenant pursuant to its right to do so under the
immediately preceding sentence, then, the Rent Commencement Date (as hereinafter
defined) shall be delayed one day for each day that Sublandlord fails to so make
available possession of the Sublease Premises to Subtenant from and after the
latest to occur of the dates described in (a) and (b) of said immediately
preceding sentence. Sublandlord may terminate this Sublease upon ten (10) days
written notice to Subtenant, if within thirty (30) days following the Effective
Date it is unable to obtain the Consent and the Restoration Waiver, unless prior
to the exercise by Sublandlord of such right of termination Sublandlord obtains
the Consent and the Restoration Waiver. If this Sublease shall so terminate as
provided in this subsection (a) of Paragraph 2, (a) this Sublease shall be
deemed null and void and of no further force or effect (except with respect to
the provisions of Paragraph 16 hereof which shall survive such termination), and
(b) Sublandlord shall promptly return to Subtenant any amount paid by Subtenant
upon Subtenant's execution of this Sublease for Sublease Fixed Rent.
(b) Subtenant shall have the right (herein "Subtenant's
Termination Right"), by written notice of termination given to Sublandlord on or
after March 14, 1997, but prior to March 20, 1997, to terminate this Sublease if
the New Jersey Economic Development Authority's Board (hereinafter the "Board")
shall not have approved by March 14,1997 the award of the State of New Jersey
Business Employment Incentive Program Grant (herein the "Grant") to Subtenant
with respect to Subtenant's use of the Sublease Premises for its business use,
provided, however, Subtenant's Termination Right shall automatically expire if
the Board shall approve the Grant prior to the exercise by Subtenant of
Subtenant's Termination Right. If this Sublease shall so terminate (a) this
Sublease shall be deemed null and void and of no further force or effect, except
with respect to the provisions of Paragraph 2(d) and 16 hereof which shall
survive such termination, and (b) Sublandlord shall promptly return to
3
<PAGE>
Subtenant any amount paid by Subtenant upon the Subtenant's execution of this
Sublease for Sublease Fixed Rent.
(c) The award of the Grant, pending the approval of the
Board, is a material factor in Subtenant's expansion plans for New Jersey.
Subtenant would not expand to the Sublease Premises but for the award of this
Grant. Subtenant agrees to use reasonable efforts to pursue the obtaining of the
Board's approval of the Grant, and to advise Sublandlord promptly as to whether
it obtained or failed to obtain the Board's approval of the Grant.
(d) If the Sublease Commencement Date shall have occurred but
the Sublease Occupancy Event shall not have occurred, then Subtenant shall have
the right, upon one (1) days prior written notice (hereinafter the "Early
Occupancy Notice") to Sublandlord, to occupy the Sublease Premises for the
limited purpose of performing Subtenant's Work (as said term is hereinafter
defined), provided that Subtenant delivers to Sublandlord, concurrently with the
giving of the Early Occupancy Notice, (1) a letter of indemnity (hereinafter the
"Genesis Indemnity Letter") from Genesis Direct, Inc. to Sublandlord in the form
of Exhibit C annexed hereto, (2) a certified copy of a resolution of the Board
of Directors of Genesis Direct, Inc. authorizing the execution and delivery to
Sublandlord of the Genesis Indemnity Letter and an incumbency certificate with
respect to officer(s) of Genesis Direct, Inc. executing the Genesis Indemnity
Letter, and (3) a Two Million Dollar ($2,000,000) unconditional, irrevocable
commercial letter of credit, in form and substance reasonably satisfactory to
Sublandlord (the form attached hereto as Exhibit H is satisfactory to
Sublandlord), and issued by a member bank of the New York Clearinghouse
Association acceptable to Sublandlord in its reasonable discretion, payable upon
presentation by Sublandlord to such bank at its counters in New York City of a
sight draft, without presentation of any other documents, statements or
authorizations, which letter of credit shall provide for the continuance of such
credit for the period of at least ninety (90) days from the date of its delivery
to Sublandlord. If the Subtenant shall exercise Subtenant's Termination Right,
Sublandlord shall have the right to draw on such letter of credit at sight for
the full sum thereof. Sublandlord shall have the right to retain the full
proceeds of the letter of credit as liquidated damages for the damage incurred
by Sublandlord as a result of the exercise by Subtenant of Subtenant's
Termination Right and arising from the performance of all or a portion of
Subtenant's Work, including, without limitation, (a) any damage done to the
Sublease Premises as a result of the performance of Subtenant's Work, (b) the
cost to Sublandlord of restoring the Sublease Premises, (c) loss by Sublandlord
of rental that could have been earned with respect to the Sublease Premises had
the Term of the Sublease not been terminated by Subtenant, and (d) loss by
Sublandlord of rental that could have been earned with respect to the Sublease
Premises during periods required to restore the Premises following Subtenant's
exercise of Subtenant's Termination Right. Sublandlord and Subtenant agree that
Sublandlord's actual damages in the event of Subtenant's performance of
Subtenant's Work (in whole or in part) and Subtenant's exercise of Subtenant's
Termination Right would be difficult or impossible to determine and that, after
negotiations, the proceeds of the letter of credit, to wit,
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$2,000,000, has been selected as Sublandlord's and Subtenant's best estimate of
Sublandlord's damages. Performance of Subtenant's Work is subject to compliance
with the provisions of Paragraph 19 of this Sublease and Article 15 of the
Overlease to the extent incorporated into this Sublease. Notwithstanding the
said letter of credit and the foregoing liquidated damages provision, Subtenant
shall remain responsible for all costs incurred for the performance of
Subtenant's Work and hereby agrees to indemnify and hold harmless Sublandlord
from and against any and all loss, cost, damage, expense or liability that
Sublandlord may incur by reason of Subtenant's failure to pay all costs incurred
for or with respect to the performance of Subtenant's Work. Except as
specifically provided in the next succeeding sentence, the $2,000,000 letter of
credit and the proceeds thereof shall not be Security Funds. The parties agree
that if a Sublease Occupancy Event shall occur and Subtenant's Termination Right
shall not have been exercised, Sublandlord shall return the $2,000,000 letter of
credit to Subtenant concurrently with the delivery to Sublandlord of the
Security Funds (as said term is hereinafter defined) and from and after the
occurrence of a Sublease Occupancy Event and until the Security Funds are so
delivered to Sublandlord, said $2,000,000 letter of credit shall be and shall
be deemed to be the Security Funds, limited in amount, however, to the sum as
specified in Paragraph 11 of this Sublease. Any controversy arising with respect
to the $2,000,000 letter of credit shall be decided by the United States
District Court for the Southern District of New York, which shall have exclusive
jurisdiction over such controversy, and the parties hereby consent to personal
jurisdiction and venue in that court. If Subtenant exercises the Subtenant's
Termination Right Sublandlord shall promptly refund to Subtenant any Sublease
Fixed Rent paid by Subtenant to Sublandlord on execution of this Sublease.
3. Rent: Sublease Fixed Rent: Sublease Additional Rent.
(a) Payment of Rent - Subtenant agrees to pay rent
(hereinafter the "Rent") for the Sublease Premises to Sublandlord, which at all
times during the Term shall consist of: (i) fixed rent (hereinafter "Sublease
Fixed Rent") which, for the period commencing on the two hundred tenth (210th)
day including and after the date that this Sublease has been fully executed and
delivered to Sublandlord and Subtenant, and the Consent has been granted
(hereinafter the "Rent Commencement Date"), to and including the Sublease
Expiration Date, shall be Twelve and 50/100 Dollars ($12.50) per square foot of
Gross Floor Space per annum (i.e., $1,280,812.50 per annum for 102,465 square
feet of Gross Floor Space) payable in equal monthly installments of One Hundred
Six Thousand Seven Hundred Thirty-Four and 38/100 Dollars ($106,734.38); and
(ii) additional charges (hereinafter the "Sublease Additional Charges") which
shall be all amounts that become payable by Subtenant to Sublandlord hereunder
other than the Sublease Fixed Rent. Subtenant shall pay to Sublandlord, as
Sublease Additional Charges, during the Term, Real Estate Taxes and Operating
Expenses as set forth in Paragraph 4 hereof.
(b) The Sublease Fixed Rent shall be payable in equal monthly installments,
each payable in advance on the first day of each and every calendar
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month of the Term and without deduction or offset, except as may otherwise be
provided herein, and, except that the first monthly installment due under this
Sublease shall be paid to Sublandlord on the execution hereof. If the Term
commences or ends on a day other than the first or last day, respectively, of a
calendar month, then the second and final monthly installments of Sublease Fixed
Rent shall be prorated in the proportion that the number of days this Sublease
is in effect during the first and last partial month bears to the total number
of days in such calendar month, and such prorated rent for the last partial
month of the Term shall be payable on the first day of such month.
(c) The Rent shall be paid in lawful money of the United
States to Sublandlord at its office at the address above set forth, or such
other place as Sublandlord shall designate by notice to Subtenant. Subtenant
shall pay the Rent promptly when due without notice or demand therefor (except
as to Subtenant Additional Charges of which Subtenant shall be notified) and
without any abatement, deduction or setoff for any reason whatsoever, except as
may be expressly provided in this Sublease. If Subtenant makes any payment to
Sublandlord by check, same shall be by check of Subtenant and Sublandlord shall
not be required to accept the check of any other Person, and any check received
by Sublandlord shall be deemed received subject to collection. Subtenant shall
assume the risk of lateness or failure of delivery of the mails, with respect to
payments made by Subtenant by mail, and no lateness or failure of the mails will
excuse Subtenant from its obligation to have made the payment in question when
required under this Sublease.
(d) No payment by Subtenant or receipt or acceptance by
Sublandlord of a lesser amount than the correct Rent shall be deemed to be other
than a payment on account, nor shall any endorsement or statement on any check
or any letter accompanying any check or payment be deemed an accord and
satisfaction, and Sublandlord may accept such check or payment without prejudice
to Sublandlord's right to recover the balance or pursue any other remedy in this
Sublease or at law provided.
(e) If Subtenant is in default in payment of Rent beyond the
expiration of any applicable grace and notice periods, Subtenant waives
Subtenant's right, if any, to designate the items to which any payments made by
Subtenant are to be credited and Sublandlord may apply any payments made by
Subtenant to such items as Sublandlord sees fit, irrespective of and
notwithstanding any designation or request by Subtenant as to the items to which
any such payments shall be credited.
(f) Any Sublease Additional Charge required of Subtenant by
Sublandlord shall be stated in a written notice to Subtenant from Sublandlord
and accompanied with reasonable supporting documentation and Subtenant shall
have fifteen (15) days from notice of such in which to make said payment;
provided, however, Real Estate Taxes and Operating Expenses shall be invoiced
and paid in accordance with the provisions of Paragraph 4.
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(g) All such sums payable by Subtenant to Sublandlord are
sometimes hereinafter collectively referred to as, and shall collectively
constitute, "rent" for all purposes hereunder, at law and in equity.
4. Real Estate Tax and Operating Expense Payments
----------------------------------------------
(a) Definitions. As used in this Sublease, the term "Real
Estate Taxes" shall have the meaning given to it and shall be calculated as
provided in the Overlease; the terms "Operating Expenses" and "Additional
Charges" shall have the respective meanings given to them in the Overlease; the
term "Sublease Operation Year" shall mean each consecutive twelve (12) month
period commencing January 1, 1997; the term "Sublease Base Year" shall mean the
Sublease Operation Year commencing January 1, 1997; the term "Subtenant's
Fraction" shall mean that fraction which is the proportion of the Gross Floor
Space of the Sublease Premises to the Gross Floor Space of the Overlease
Premises (i.e., .9169), if the Gross Floor Space of the Overlease Premises
should change during the Term of this Sublease, then Subtenant's Fraction shall
be adjusted accordingly and such adjustment shall pertain to all periods
subsequent to such change; and the term "Subtenant's Proportionate Shares"
shall mean the respective percentages obtained by multiplying by Subtenant's
Fraction (a), with respect to Real Estate Taxes, the respective percentages for
Tenant's Proportionate Share set forth in Exhibit K of the Overlease, as such
percentages were adjusted pursuant to the provisions of Paragraph 6 of the
Second Lease Modification Agreement constituting a part of the Overlease, and
(b) with respect to Operating Expenses and "Overlandlord's Electricity and Gas
Costs" (as said term is defined in Paragraph 12 of this Sublease), the
respective percentages for Tenant's Proportionate Share set forth in Exhibit L
of the Overlease, as such percentages were adjusted pursuant to the provisions
of Paragraph 6 of said Second Lease Modification Agreement. If there shall be a
further adjustment in Tenant's Proportionate Share by reason of any further
change in the Gross Floor Space of the Overlease Premises, there shall be an
appropriate adjustment to the percentages of Tenant's Proportionate Share for
purposes hereof as of the date of such change.
(b) Subtenant's Share of Costs - Subtenant shall pay, as
--------------------------
Sublease Additional Charges, Subtenant's Proportionate Shares of the amounts by
which Additional Charges for Real Estate Taxes and Operating Expenses payable by
Sublandlord under the Overlease for any Sublease Operational Year subsequent to
the Sublease Base Year exceed the Additional Charges for Real Estate Taxes and
Operating Expenses payable by Sublandlord under the Overlease for the Sublease
Base Year. As an Operation Year under the Overlease and a Sublease Operation
Year under this Sublease include different fiscal periods (i.e., April 1 - March
31 Operation Year under the Overlease and January 1 - December 31 Sublease
Operation Year under this Sublease), it is agreed for purposes of this Sublease
that (i) Real Estate Taxes and Operating Expenses accruing during an Operation
Year under the Overlease shall be deemed to have accrued in equal monthly
amounts during such Operation Year and (ii) Additional Charges for Real Estate
Taxes and Operating
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Expenses payable by Sublandlord under the Overlease for any such Operation Year
shall be deemed to have been paid by Sublandlord in corresponding equal monthly
amounts over such Operation Year.
(c) For each Sublease Operation Year during the Term
subsequent to the Sublease Base Year, Sublandlord shall estimate Subtenant's
Sublease Additional Charges for Real Estate Taxes (which estimate may be changed
by Sublandlord from time to time, but not more than four (4) times per year) and
Subtenant shall pay to Sublandlord one-twelfth (1/12th) of Subtenant's Sublease
Additional Charges for Real Estate Taxes so estimated on the first day of each
month of such Sublease Operation Year in advance. If at any time Sublandlord
changes its estimate of Subtenant's Sublease Additional Charges for Real Estate
Taxes for the then current Sublease Operation Year or partial Sublease Operation
Year, Sublandlord shall give notice to Subtenant of such change and within
twenty (20) business days after such notice Sublandlord and Subtenant shall
adjust for any overpayment or underpayment during the prior months of the then
current Sublease Operation Year or partial Sublease Operation Year. After the
end of each Sublease Operation Year and after the end of the Term, Sublandlord
shall submit to Subtenant a statement in reasonable detail of Subtenant's actual
Sublease Additional Charges for Real Estate Taxes for such Sublease Operation
Year or partial Sublease Operation Year, and if Subtenant's actual Sublease
Additional Charges for Real Estate Taxes so stated for such Sublease Operation
Year are more or less than the amount paid therefor Subtenant shall pay to
Sublandlord the deficiency, or Sublandlord shall refund to Subtenant the excess,
within twenty (20) business days after submission of such statement. If
Subtenant is in default hereunder beyond the expiration of any applicable grace
and notice periods on the date any such payment to Subtenant is otherwise due,
payment of such refund will be suspended until such time, if any, that such
default is cured. The provisions hereof shall survive the expiration or sooner
termination of the Term.
(d) If Sublandlord shall receive a refund of Real Estate Taxes
for any Fiscal Tax Year subsequent to Fiscal Tax Year ending December 31, 1997,
Sublandlord at Sublandlord's election shall either pay to Subtenant, or permit
Subtenant to credit against subsequent payments under this Paragraph, an amount
equal to Subtenant's Proportionate Share (applicable to the category of Real
Property to which the refund related) of the refund, less Sublandlord's actual,
out-of-pocket reasonable costs and expenses, including, but not limited to,
third party, independent appraisal, accounting and legal fees of obtaining the
same, but in no event shall Subtenant be paid or credited with any share of such
refund in excess of amounts paid by Subtenant with respect to such refunded Real
Estate Taxes. There shall be an appropriate adjustment to the extent any part of
such fiscal tax year is outside of the Term of this Sublease.
(e) For each Sublease Operation Year during the Term
subsequent to the Sublease Base Year, Sublandlord shall estimate, based on
Overlandlord's estimates of Additional Charges for Operating Expenses,
Subtenant's Sublease
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Additional Charges for Operating Expenses (which estimate may be changed by
Sublandlord from time to time, based upon actual changes in Additional Charges
for Operating Expenses payable or to be payable pursuant to the provisions of
Section 6.03(b) of the Overlease) and Subtenant shall pay to Sublandlord
one-twelfth (1/12th) of Subtenant's Sublease Additional Charges so estimated on
the first day of each month of such Sublease Operation Year in advance. If at
any time Sublandlord changes its estimate of Subtenant's Sublease Additional
Charges for Operating Expenses for the then current Sublease Operation Year or
partial Sublease Operation Year as aforesaid, Sublandlord shall give notice to
Subtenant of such change and within twenty (20) business days after such notice
Sublandlord and Subtenant shall adjust for any overpayment or underpayment
during the prior months of the then current Sublease Operation Year or partial
Sublease Operation Year. Nothing contained herein shall be construed to limit
the right of Overlandlord from time to time, based upon actual changes in
Operating Expenses payable or to be payable pursuant to the provisions of
Section 6.03(b) of the Overlease, during any period to reasonably revise its
estimates of the expenses which are the subject of this Paragraph and to reflect
such revision by prospective adjustment in billings to Sublandlord in which case
Sublandlord shall be entitled to make a corresponding proportionate adjustment
in billings to Subtenant for Subtenant's monthly installments payable under this
Paragraph 4 over the remainder of the period. After the end of each Sublease
Operation Year and after the end of the Term, Sublandlord shall submit to
Subtenant a statement in reasonable detail of Subtenant's actual Sublease
Additional Charges for Operating Expenses for such Sublease Operation Year or
partial Sublease Operation Year, and if Subtenant's actual Sublease Additional
Charges for Operating Expenses so stated for such Sublease Operation Year are
more or less than the amount paid therefor Subtenant shall pay to Sublandlord
the deficiency, or Sublandlord shall refund to Subtenant the excess, within
twenty (20) business days after submission of such statement. If Subtenant is in
default hereunder beyond the expiration of any applicable grace and notice
periods on the date such payment is otherwise due, payment of such refund will
be suspended until such time, if any, that such default is cured. The provisions
hereof shall survive the expiration or sooner termination of the Term.
(f) (i) Each such statement given by Sublandlord pursuant to
subparagraph 4(c) or subparagraph 4(e), or with respect to any other Sublease
Additional Charges, shall be conclusive and binding upon Subtenant, unless
within thirty (30) days after the receipt thereof Subtenant shall notify
Sublandlord in writing that it disputes the correctness of the statement, and
within thirty (30) days thereafter shall specify in writing the particular
respects in which the statement is claimed to be incorrect. If such dispute is
not settled by agreement within thirty (30) days thereafter, either party may
submit the dispute to arbitration as provided in Article 36 of the Overlease
incorporated into this Sublease. Notwithstanding the foregoing, Subtenant may
not dispute any such statement on the basis of any incorrectness in the
statement given by the Overlandlord to Sublandlord pursuant to Section 6.02 or
Section 6.03 of the Overlease or with respect to any other Additional Charges
under the Overlease and any such dispute with respect thereto must be initiated
by Subtenant as provided in
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subparagraph 4(f)(ii) below. Subtenant shall, within twenty (20) days after
receipt of such statement, or, if later, the date of the payment for which the
statement is rendered, pay the Sublease Additional Charges in accordance with
Sublandlord's statement, without prejudice to Subtenant's right to dispute the
correctness of the statement or any item thereof and to have the same settled by
arbitration as aforesaid. If the dispute shall be determined in Subtenant's
favor, Sublandlord shall forthwith pay to Subtenant the amount of Subtenant's
overpayment resulting from compliance with Sublandlord's statement, together
with interest in the case of arbitration from the date of payment by Subtenant
to the date of refund by Sublandlord of the amount of the arbitration award at
the lowest of the prime rates or minimum commercial lending rates, however
described, for ninety (90) day loans in United States currency to the most
responsible and reliable commercial customers then being charged by Citibank,
N.A. or Chase Manhattan Bank in New York City.
(ii) Within fifteen (15) days after the receipt by Sublandlord of any
statement given by Overlandlord to Sublandlord pursuant to Section 6.02 or
Section 6.03 of the Overlease or with respect to any other Additional Charges
under the Overlease, Sublandlord shall deliver a copy of such statement to
Subtenant, and such statement shall be conclusive and binding upon Subtenant
unless within five (5) days after the receipt thereof, Subtenant shall notify
Sublandlord in writing that it disputes the correctness of such statement with a
direction to Sublandlord to send notice to Overlandlord that the statement is in
dispute, and within twenty (20) days thereafter Subtenant shall specify to
Sublandlord in writing the particular respects in which the statement is claimed
to be incorrect. Sublandlord shall, after receipt of such timely notices from
Subtenant and at the sole cost and expense of Subtenant, including without
limitation, actual, out-of-pocket reasonable costs and expenses for third party,
independent attorneys' fees and consulting costs incurred by Sublandlord,
dispute the correctness of such statement with Overlandlord pursuant to the
provisions of Section 6.04 of the Overlease. Sublandlord agrees that it will not
settle the dispute with respect to such statement without the consent of
Subtenant which consent Subtenant agrees, shall not be unreasonably withheld or
delayed. If the dispute is not settled within the period provided for under
Section 6.04 of the Overlease, then Sublandlord, may and, at the written request
of Subtenant timely received will, submit the dispute to arbitration as provided
in Article 36 of the Overlease. Any arbitration determination or award or
agreement made between Sublandlord and Overlandlord, with respect to such
dispute shall be binding upon Subtenant. Anything contained in this Paragraph
4(f)(ii) to the contrary notwithstanding, Subtenant shall have no right to
dispute any such statement if Subtenant is then in default under this Sublease
beyond the expiration of any applicable grace and notice periods. Whether or not
requested by Subtenant, Sublandlord shall have the right to dispute the
correctness of any such statement pursuant to Section 6.04 of the Overlease and
any agreement reached with respect to such dispute, whether as a result of
arbitration or otherwise shall be conclusive and binding upon Subtenant;
provided, however, that any such agreement, except any agreement reached as a
result of arbitration, shall be subject to approval by Subtenant, which
approval, Subtenant agrees, will not be unreasonably withheld or delayed.
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(g) With respect to any amounts demanded as Sublease
Additional Charges by Sublandlord pursuant to this Sublease, Subtenant shall be
entitled to review Sublandlord's books, records and accounts relating to such
charges during regular business hours at Sublandlord's offices upon not less
than forty-eight (48) hours written notice to Sublandlord. Subtenant agrees to
bear the reasonable costs of duplicating and other expenses sustained by
Sublandlord by reason of Subtenant's review. Subtenant shall have the right to
request that Sublandlord examine the books and records of Overlandlord pursuant
to Section 6.05 of the Overlease, which examination may be conducted by
accountants approved by Sublandlord and Subtenant, at the sole cost and expense
of Subtenant. If Sublandlord shall also elect to examine Overlandlord's books
and records pursuant to Section 6.05 of the Overlease where Subtenant shall not
have requested that Sublandlord make such examination, the actual, out-of-pocket
reasonable costs of such examination shall be payable to the extent of any
refund or savings resulting therefrom before any credit or refund is provided to
Subtenant.
(h) If any Sublease Operation Year of the Term is less than a
full Sublease Operation Year, an appropriate adjustment will be made in each of
the elements used to calculate Sublease Additional Charges payable by Subtenant
pursuant to this Paragraph 4 for such Sublease Operation Year.
(i) If Subtenant's Proportionate Share (of the excess) for any
category of Real Estate Taxes or Operating Expenses shall be adjusted during any
Sublease Operation Year of the Term, Subtenant's Proportionate Share for the
affected category in that Sublease Operation Year shall be the weighted average
of all of Subtenant's Proportionate Shares for such category which existed
during that Sublease Operation Year, based on the number of months each such
Proportionate Share existed during the Sublease Operation Year.
(j) With respect only to Fiscal Tax Years occurring after the
Sublease Base Year, if requested by Subtenant in writing, Sublandlord shall, as
provided in Section 6.06 of the Overlease, promptly request Overlandlord in
writing to protest any Real Estate Taxes, assessment or levy on the Land,
Building, Exterior Common Areas or Peripheral Roads/Overpass (all as such terms
are defined in the Overlease) during the Term and execute and file a petition
with the Court having jurisdiction for a review thereof. All expenses incurred
by Sublandlord under the terms of said Section 6.06 of the Overlease by reason
of any such request by Subtenant shall be reimbursed by Subtenant to Sublandlord
within twenty (20) days after written demand therefor. To the extent such
expenses are deducted and recovered by Overlandlord from the savings, if any, in
Real Estate Taxes before distribution of proportionate shares under the
Overlease to Overlandlord, Sublandlord shall credit the amount of such deduction
from Sublease Fixed Rent thereafter accruing, limited however to the amount of
the reimbursement made by Subtenant to Sublandlord for such expenses.
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5. Applicability of Overlease Provisions.
(a) In General - This Sublease is subject and subordinate to
the Overlease, the terms of which, except to the extent hereafter expressly
provided, are incorporated herein by this reference.
(b) Rights of Subtenant - Except as otherwise provided
herein, Subtenant hereby (i) covenants and agrees to perform all of the
obligations undertaken by Sublandlord with respect to the Sublease Premises and
(ii) shall, with respect to the Sublease Premises, be entitled to the benefit of
the provisions of the Overlease to the extent applicable hereto and/or the other
provisions of this Sublease, which are for the benefit of the "Tenant"
thereunder, provided that Sublandlord shall have the exclusive right to enforce
all "Tenant" rights under the Overlease, including the applicable provisions of
the Overlease incorporated herein as aforesaid.
(c) Performance of Overlease Obligations - Except to the
extent of those provisions of the Overlease that are herein expressly provided
to be inapplicable to this Sublease, Subtenant's agreement to perform the
obligations undertaken of Sublandlord under the Overlease shall be applicable
from the Sublease Commencement Date to the Sublease Expiration Date, with
Sublandlord being substituted for the "Landlord" and Subtenant being substituted
for the "Tenant" under the Overlease, and shall include all obligations and
liabilities under the Overlease insofar as they may relate to the Sublease
Premises, except that Sublandlord and Subtenant acknowledge, confirm, covenant
and agree that:
(i) the Sublease Term and Sublease Premises shall be as set
forth herein;
(ii) the term "Demised Premises" for the purposes of this
Sublease shall mean the Sublease Premises;
(iii) the liability of Sublandlord with respect to compliance
with any laws, regulations or Legal Requirements,
including, without limitation, under Article 12 and/or
Section 39.19 of the Overlease, shall be strictly
limited and relate only to the acts and omissions and
conduct of the Sublandlord or Sublandlord's agents,
servants, employees, contractors, subcontractors,
licensees, invitees, officers, directors, partners,
members and subtenants (other than Subtenant) and
Sublandlord shall have absolutely no obligation or
liability whatsoever under any environmental laws and
regulations or with respect to any Hazardous Materials
for the acts of any other person, party or entity;
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(vi) Sublandlord shall have absolutely no liability or
obligation to indemnify, defend or hold harmless
Subtenant with respect to any acts or conduct or
omissions referred to in Overlease which shall be the
conduct of Overlandlord, Landlord's Representatives (as
such term is defined in the Overlease) or any other
person, party or entity other than Sublandlord and/or
Sublandlord's agents, servants, employees, contractors,
subcontractors, licensees, invitees, officers,
directors, partners, members and subtenants (other than
Subtenant);
(vii) (a) Without regard to the fact that the commencement
date of Subtenant's obligation to pay Additional
Charges for Operating Expenses is deferred until the
expiration of the Sublease Base Year, Subtenant
shall pay Sublandlord within twenty (20) days after
demand, costs incurred by Sublandlord and billed by
Overlandlord for (i) extra cleaning work in the
Sublease Premises required because of (a) misuse or
neglect on the part of Subtenant or its subtenants
or its or their employees or visitors, (b) use of
portions of the Sublease Premises for preparation,
serving, or consumption of food or beverages, data
processing or reproduction operations, private
lavatories or toilets, or other special purposes
requiring greater or more difficult cleaning work
than office areas, (c) interior glass partitions or
unusual quantity of interior glass surfaces, and (d)
non-Building standard materials or finishes
installed by Subtenant or at its request, (ii)
removal from the Sublease Premises of any refuse and
rubbish of Subtenant in excess of that ordinarily
accumulated in business office occupancy or, if
requested by Subtenant, at times other than
Overlandlord's standard cleaning times;
(b) Sublandlord shall not have any obligation to provide
or install any additional risers, feeders or other
equipment or service under this Sublease or the
Overlease; and
(c) If any charge payable by Sublandlord under the terms
of the Overlease as Additional Rent or otherwise,
for heat or air-conditioning service during non-
Business Hours, for any excess electrical use or for
other additional service provided by Overlandlord
is attributable to use by Subtenant or Subtenant's
request therefor, Subtenant shall be obligated to
pay the same directly to Overlandlord or to
reimburse Sublandlord for the same within twenty
(20) days after demand;
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(viii) Subtenant shall have no right to resort to self-help
and in any instance where self help would be
available to Sublandlord, Subtenant's sole right
shall be to notify Sublandlord in writing of
Overlandlord's failure to provide services which
notice shall set forth such failures in reasonable
detail and Sublandlord shall thereafter (at
Subtenant's sole cost and expense) use reasonable
efforts to cause Overlandlord to restore such
service in accordance with subparagraph (xiv) of
this Paragraph 5;
(ix) no right of offset shall exist on the part of
Subtenant against Sublandlord for any act, conduct
or omission of Overlandlord or Landlord's
Representatives, except to the extent that a
corresponding right of offset shall actually exist
and be availed of by Sublandlord with respect to the
portions of the Sublease Premises in question in
favor of Sublandlord under the Overlease; Subtenant
agrees to promptly give written notice to
Sublandlord of any situation which shall entitle
Sublandlord to an offset under the Overlease which
relates to the Sublease Premises or any portion
thereof;
(x) Subtenant shall not have the right to commence any
proceeding or to take any other action to contest
the Real Estate Taxes for the Sublease Premises;
(xi) notwithstanding any provisions of the Overlease with
respect thereto, any grace period afforded to
Subtenant under this Sublease upon the occurrence of
any default or failure of performance on the part of
Subtenant shall expire five (5) days prior to the
expiration of the applicable grace period afforded
under the Overlease;
(xii) Sublandlord shall not have any obligation to install
any electric meters under Section 18.01 of the
Overlease and Subtenant shall not have any right to
install or have separate electric meters installed
in the Sublease Premises;
(xiii) notwithstanding the provisions of Section 7.05 of
the Overlease, Subtenant shall have no right to
restrict access to those portions of the Entire
Premises which are not included within the Sublease
Premises;
(xiv) in the event of any default (including, without
limitation, any default with respect to a warranty
or representation made by Overlandlord under the
Overlease) on the part of Overland lord, Subtenant
shall not have the right to commence any legal
action or proceeding or
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take any other action against Overlandlord;
Subtenant's sole right shall be to give written
notice to Sublandlord specifying the defaults of
Overlandlord in question and requesting that the
Sublandlord make demand upon Overlandlord to
perform; and Sublandlord shall thereafter use
reasonable efforts in pursuing such action as may be
necessary in the reasonable judgment of Sublandlord,
whether in the form of legal action or proceedings
or arbitration proceedings or otherwise to cause
Overlandlord to perform, with any counsel or
representatives to be selected by Sublandlord and
satisfactory to Subtenant but at the sole cost and
expense of Subtenant, and that Subtenant agrees that
it shall indemnify and hold harmless Sublandlord
from any and all liabilities, including reasonable
attorneys' fees, court costs, fines and penalties
which Sublandlord incurs by reason thereof and,
within twenty (20) days after Sublandlord's request,
shall reimburse to Sublandlord such expenses, costs,
legal fees and other charges incurred in connection
therewith;
(xv) in the case of any matters for which the consent or
approval of Sublandlord is sought and the consent or
approval of Overlandlord is also required under the
terms of the Overlease, Sublandlord shall have no
liability if Overlandlord shall withhold or delay
its consent or approval, provided that Sublandlord
agrees to promptly transmit to Overlandlord any
requests for consent or approval and accompanying
documentation;
(xvi) any default or failure of performance by Subtenant
under any of the terms, provisions, covenants or
agreements contained in this Sublease shall
constitute a default under this Sublease permitting
Sublandlord, after the expiration of any relevant
grace and cure period, to exercise all rights and
remedies contemplated by the Sublease or available
at law or in equity;
(xvii) Sublandlord shall not be required to maintain any
insurance required to be maintained by Overlandlord
under the terms of the Overlease and all policies of
insurance maintained by Subtenant (except workers'
compensation) shall be separate policies and shall
name Overlandlord and Sublandlord as additional
insureds;
(xviii) the references in Section 15.04 and Article 24 of
the Overlease to "Tenant's Parking Area" shall, for
purposes of this Sublease, be deemed to mean
"Subtenant's Parking Area", and the thirty (30) day
period referred to in Section 24.03 of the Overlease
is hereby deemed to be a forty (40) day period;
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(xix) Subtenant shall have no right to obtain or to
require that the Overlandlord or Sublandlord obtain
a separate non-disturbance and attornment agreement
with respect to this Sublease pursuant to Article 9
of the Overlease;
(xx) the terms "Fixed Rent" and "Additional Charges" as
used in Article 29 of the Overlease, shall, for
purposes of this Sublease, be deemed to mean,
respectively, "Sublease Fixed Rent" and "Sublease
Additional Charges";
(xxi) for purposes of this Sublease, the reference to
"Article 11" in Section 39.04 of the Overlease shall
be deemed to be a reference to Paragraph 9 of this
Sublease; and
(xxii) promptly following the occurrence of the
Commencement Date, Sublandlord, pursuant to Section
20.02 of the Overlease, will request that
Overlandlord provide cleaning services to the
Overlease Premises. Such notice shall request that
such cleaning services not be commenced until
Subtenant begins to occupy all or a part of the
Sublease Premises for its business purposes.
(d) Limitations of Sublandlord's Liability. Subtenant
covenants and agrees that Sublandlord shall have no obligation or liability to
Subtenant with respect to the following:
(i) to maintain, repair, replace or restore the
Building, the Entire Premises, the Common Areas and
for any improvements or structures therein;
(ii) to make available and/or provide any service or
services under or pursuant to the Overlease or to
remedy any failure of such service or service,
except to use reasonable efforts to make demands
upon Overlandlord as provided herein;
(iii) to cause the Sublease Premises, or the Building or
the Entire Premises, or the Common Areas to be
constructed, altered, maintained, repaired or
restored in accordance with the provisions of The
Americans with Disabilities Act (hereinafter the
"ADA") or any Environmental Laws or any statute or
regulation or perform any obligations with respect
thereto;
(iv) to remedy any non-compliance with Environmental Laws
or with respect to Hazardous Materials not caused by
Sublandlord or Sublandlord's agents, servants,
employees, contractors,
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subcontractors, licensees, invitees, officers,
directors, partners, members, or subtenants (other
than Subtenant); and
(v) to provide any rights of access to the Sublease
Premises as contemplated by the Overlease.
Except as otherwise expressly provided herein, Subtenant covenants and agrees to
look solely to Overlandlord with respect to the performance of any and all of
the representations, warranties, covenants, agreements, obligations and
liabilities of "Landlord" under the Overlease incorporated herein by reference
or contemplated by this Sublease to be performed by Overlandlord.
(e) Overlease Provisions Not Applicable. Sublandlord and
Subtenant expressly acknowledge and agree that the following sections of the
Overlease shall not be applicable to this Sublease except as hereafter in this
Paragraph provided:
Agreement of Lease
Article 1 - Definitions - except as said definitions may be
applicable to other provisions of the Overlease which shall be
incorporated herein or such definitions are used in this Sublease;
Article 2 - Demise and Term
Article 3 - Rent
Section 4.01; Section 4.03 (provided, however, Sublandlord
agrees not to give Overlandlord its consent to use of the Building
outside the Demised Premises for any purpose other than general and
executive business offices and uses accessory to a first class office
building (i.e., restaurant, newsstand, etc.) without first obtaining
Subtenant's written consent thereto)
Article 5 - Preparation of Demised Premises
Article 6 - Tax and Operating Expense Payments
Section 7.03; Section 7.04
Article 8 - Security
Section 9.02; Section 9.03
Article 10 - Quiet Enjoyment
Article 11 - Assignment, Subletting and Mortgaging
Section 15.05
Article 18 - Electric / Gas Energy
Section 20.02 (as amended by Paragraph 1 of the First Lease
Modification Agreement) other than the first two sentences of the
first unnumbered paragraph of said Section 20.02 (the first sentence
of which begins with the words "Landlord shall cause the Demised
Premises"), the second unnumbered paragraph of said Section 20.02
(which unnumbered paragraph begins with the words "Landlord, its
cleaning contractor"), and the balance of the third unnumbered
paragraph of said Section 20.02 beginning with the fourth
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sentence of said unnumbered paragraph (which sentence begins with the
words "Operating Expenses for each Operation Year");
Section 21.04 and the last sentence of Article 21 following
said Section
21.04;
Section 23.03
Article 25 - Eminent Domain
Section 26.02
Section 32.02
Article 33 - Broker
Article 34 - Notices
Section 39.10; Section 39.11
Section 39.13; Section 39.14; Section 39.16
Section 39.17; Section 39.18
Second Lease Modification Agreement
Sections 1 to and including Section 11.
(f) Exhibits to Overlease. Except to the extent of
provisions specifically incorporated into this Sublease from the Overlease by
reference, the Exhibits to the Overlease shall not be applicable.
(g) Demands on Overlandlord. Upon written request by
Subtenant, Sublandlord agrees to promptly and in good faith to make demand upon
Overland lord for the performance, for the benefit of the Sublease Premises and
Subtenant, of any obligations imposed upon Overlandlord by the applicable
provisions of the Overlease or to obtain any required consent and/or approval of
Overlandlord pursuant to the terms of the Overlease and Sublandlord will, as
permitted by law, use reasonable efforts to pursue the matter with due
diligence, including prosecution of suit if required by Subtenant, at
Subtenant's sole cost and expense (with all such fees and expenses to be
advanced by Subtenant to Sublandlord at Sublandlord's request) but by counsel
selected by Sublandlord and satisfactory to Subtenant and Subtenant shall
indemnify and hold harmless Sublandlord from any and all liabilities incurred
(including, without limitation, court costs and reasonable attorneys' fees) as a
result thereof. Notwithstanding anything herein contained to the contrary,
except as expressly provided herein, all dealings with Overlandlord concerning
matters pertaining to the Sublease Premises or the Overlease shall be by and
through Sublandlord only (notwithstanding the foregoing provisions of this
subparagraph, Subtenant shall have the right to request non-Business Hours
services provided by Overlandlord (i.e., after hours HVAC) directly from
Overlandlord if Overlandlord determines that such procedure is acceptable to
it). In the event that Sublandlord shall elect to terminate the Overlease
pursuant to Articles 24 or 25 or Section 39.19(g) of the Overlease entitling
Sublandlord to terminate the Overlease, a copy of Sublandlord's notice to the
Overlandlord shall be concurrently given to Subtenant and this Sublease shall
terminate on the day preceding the date therein specified as the date of
termination of the Overlease.
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(h) No Liability for Non-Performance by Overlandlord.
Sublandlord shall not be liable for any act or failure to act caused by the
default of Overlandlord. Except as otherwise expressly provided herein,
Subtenant agrees that performance of the "Landlord's" obligations under the
applicable provisions of the Overlease incorporated herein by reference will be
required only of Overlandlord; and in no event shall any negligent act or
omission of Overlandlord be imputed to Sublandlord or result in the imposition
of liability upon Sublandlord for such negligent act or omission on the part of
Overlandlord.
(i) Abatement of and Offset Against Rent-Limitation.
Notwithstanding anything to the contrary contained in this Sublease or the
Overlease, Subtenant shall not be entitled to any abatement of or offset against
Rent hereunder for the failure of Overlandlord to supply services or perform any
obligation, unless Sublandlord shall receive an abatement of or offset against
rent or additional rent under the Overlease for such failure, in which case
Subtenant shall be entitled to an appropriate abatement or offset with respect
to the Rent payable hereunder. In no event shall any such abatement or offset
hereunder exceed, in the case of abatement, that amount allowed as abatement of
rent or additional rent under the Overlease with respect to the Sublease
Premises and, in the case of an offset, the amount expended by Subtenant
hereunder and permitted by the Overlease to be offset against rent or additional
rent thereunder with respect to the Sublease Premises.
(j) Defaults Caused By Subtenant. During the Term of this
Sublease, Subtenant further covenants not to violate any of the provisions of
the Overlease or to take or omit to take any action which shall place
Sublandlord in default under the terms and provisions of the Overlease.
(k) Rights of Sublandlord. Except as otherwise provided
herein, the rights of Sublandlord herein under the applicable provisions of the
Overlease incorporated herein by reference shall be the same as the rights of
Overlandlord (as Landlord) thereunder.
(I) Superseding Effect - If there is any conflict or
inconsistency between a provision of this Sublease and an applicable provision
of the Overlease as incorporated herein, the provisions of this Sublease shall
prevail.
6. Subordination.
(a) This Sublease is subject and subordinate to the Overlease
and to all ground leases and underlying leases of the Land and/or the Building
now or hereafter existing and to all mortgages with respect to which the
Overlease is or shall become subject and subordinate. This Paragraph shall be
self-operative and no further instrument of subordination shall be required.
Nevertheless, Subtenant shall within five
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(5) business days after demand, execute any and all instruments reasonably
requested by Sublandlord to evidence such subordination.
(b) This Sublease shall also be subject to and Subtenant
accepts this Sublease as subject to any amendments and supplements to the
Overlease hereafter made between Sublandlord and Overlandlord, provided that any
such amendment or supplement to the Overlease will not prevent or adversely
affect the use by Subtenant of the Sublease Premises in accordance with the
terms of this Sublease, increase the obligations of Subtenant or materially
decrease its rights under this Sublease or in any other way adversely affect
Subtenant, shorten the Term of this Sublease or increase the Rental required to
be paid by Subtenant under the terms of this Sublease.
7. Quiet Enjoyment. Upon paying the Rent reserved hereunder and
observing and performing all of the covenants, conditions and provisions on
Subtenant's part to be observed and performed hereunder, Subtenant shall
peacefully and quietly have, hold and enjoy the Sublease Premises for the entire
Term, subject to all the provisions of this Sublease and the Overlease.
8. Condemnation.
(a) If the whole of the Building shall be taken by any public
or quasi-public authority under the power of condemnation, eminent domain or
expropriation, or in the event of conveyance subsequent to the commencement of
an action under such power of the whole of the Building in lieu thereof, this
Sublease shall terminate as of the date of vesting of title on such taking
(hereinafter the "Date of Taking"). If twenty-five percent (25%) or less of the
Gross Floor Space of the Sublease Premises shall be so taken or conveyed and the
remaining part, in Subtenant's reasonable judgment, is adequate for Subtenant's
operation thereat, this Sublease shall terminate only in respect of the part so
taken or conveyed as of the Date of Taking; provided, however, that if the
remaining part of the Sublease Premises is, in Subtenant's reasonable judgment,
inadequate for Subtenant's operation as of the Date of Taking, Subtenant shall
have the right to terminate this Sublease as to the remaining part upon notice
given to Sublandlord within twenty (20) days after the Date of Taking, said
termination to be effective on the last day of the month following the month in
which said notice is given. If more than twenty-five percent (25%) of the Gross
Floor Space of the Sublease Premises shall be so taken or conveyed, this
Sublease shall terminate only in respect of the part so taken or conveyed as of
the Date of Taking but either party shall have the right to terminate this
Sublease as to the remaining part upon notice given to the other party within
twenty (20) days after the Date of Taking, said termination to be effective on
this last day of the month following the month in which the notice is given.
(b) In addition to the right of termination of this Sublease
as aforesaid, if any parking spaces in Subtenant's Parking Area are so taken or
conveyed and in Subtenant's reasonable judgment the remaining parking spaces in
Subtenant's Parking Area are inadequate for Subtenant's operations in the
Sublease Premises, Subtenant
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<PAGE>
shall advise Sublandlord in writing of the number of additional parking spaces
(up to the number taken) needed to provide adequate parking to Subtenant, and if
Sublandlord and/or Overlandlord does not within twenty (20) days thereafter
provide such number of substitute spaces (i) elsewhere in the Entire Premises or
immediately adjacent thereto or (ii) in parking areas acceptable to Subtenant
with transportation to/from the Building and such substitute parking areas,
acceptable to Subtenant, Subtenant may by written notice to Sublandlord, either
terminate this Sublease in its entirety on the last day of the month following
the month in which said notice is given or be reimbursed by Sublandlord for
Subtenant's cost of providing alternative parking and/or transportation.
Following a substitution of spaces by Sublandlord and/or Overland lord as
aforesaid, Subtenant's Parking Area shall consist of the part of Subtenant's
Parking Area remaining after such taking or conveyance plus the spaces so
substituted.
(c) If this Sublease shall be terminated in its entirety as a
result of any such taking or conveyance, Rent shall be apportioned as of the
Date of Taking, and any Rent paid for any period after said Date of Taking shall
be promptly repaid to Subtenant. If this Sublease notwithstanding any such
taking or conveyance shall continue in effect as to any part of the Sublease
Premises, the Rent shall be apportioned and adjusted as of the Date of Taking on
the basis of the Gross Floor Space of such part; and any Rent paid for the part
so taken or conveyed for any period after the Date of Taking shall be promptly
repaid to Subtenant.
(d) If this Sublease notwithstanding any such taking or
conveyance shall continue in effect, Overlandlord, pursuant to the Overlease,
is obligated to make all necessary alterations so as to constitute the remaining
Building and Sublease Premises a complete architectural and tenantable unit,
except for the Subtenant's Property and any Tenant's Property (as defined in the
Overlease) remaining in the Sublease Premises.
(e) All awards and compensation for any taking or conveyance,
whether for the whole or a part of the Entire Premise, the Sublease Premises or
otherwise, shall be property of Overlandlord or Sublandlord as their interests
shall appear, and Subtenant hereby assigns to Sublandlord all of Subtenant's
right, title and interest in and to any and all such awards and compensation,
including, without limitation, any award or compensation for the value of the
unexpired portion of the Term. Subtenant shall be entitled to claim, prove and
receive in the condemnation proceedings such award or compensation as may be
allowed for the Subtenant's Property and for interruption or loss of business,
good will, and depreciation or injury to and cost of removal of the Subtenant's
Property and the relocation but only if such award or compensation shall be made
by the condemning authority in addition to, and shall not result in a reduction
of, the award or compensation made by it to Sublandlord or Overlandlord.
(f) If during the Term the temporary use or occupancy of all
or any part of the Sublease Premises shall be taken by a public or quasi-public
authority under
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the power of condemnation or eminent domain or expropriation, Rent shall, as
appropriate, abate in full or be reduced in proportion to the part so taken for
the period of such temporary use and occupancy and any Rent paid for the part so
taken for any period after the date of possession shall be promptly repaid to
Subtenant. However, if such temporary use or occupancy shall be of the entire
Sublease Premises, or if less than the entire Sublease Premises and the
remaining part of the Sublease Premises is, in Subtenant's reasonable judgment,
inadequate for Subtenant's operation and such temporary use or occupancy shall
continue for thirty (30) days or more, Subtenant may upon ten (10) days written
notice to Sublandlord terminate this Sublease in its entirety, as of the last
day of the month following the month in which notice is given, whereupon Rent
shall be apportioned as of the date possession for such temporary use or
occupancy shall have been taken and any Rent paid for any period after said date
shall be promptly repaid to Subtenant. If there is a temporary use or occupancy
of Subtenant's Parking Area by such public or quasi-public authority to the
degree described in Paragraph 8(b) for a period of thirty (30) days or more,
then the provisions of said Paragraph 8(b) shall be applicable to such temporary
use or occupancy during the period of such temporary use or occupancy.
(g) Nothing contained herein shall grant or extend to
Subtenant any right to terminate the Overlease in whole or in part or limit or
impair any right of Sublandlord to exercise any right of termination with
respect to the Overlease including, without limitation, any right of termination
which may arise solely from any taking of all or portions of the Sublease
Premises; in the event that Sublandlord shall exercise any right of termination
with respect to the Overlease, Sublandlord shall furnish a copy of the notice of
termination to Subtenant promptly after such notice is furnished to Overlandlord
(but the requirement to furnish a copy of such notice shall in no way limit or
condition any such right of termination of Sublandlord).
(h) Subtenant shall have no right to join in any application
by the Overland lord or Sublandlord for the payment of all or any portion of the
condemnation award due to Overland lord and/or Sublandlord.
9. Assignment, Subletting and Mortgaging.
(a) Subtenant shall not, whether voluntarily, involuntarily,
or by operation of law or otherwise, (i) assign or otherwise transfer this
Sublease, or offer or advertise to do so, (ii) sublet the Sublease Premises or
any part thereof, or offer or advertise to do so, or allow the same to be used,
occupied or utilized by anyone other than Subtenant except as otherwise provided
herein, or (iii) mortgage, pledge, encumber or otherwise hypothecate this
Sublease in any manner whatsoever, without in each instance obtaining the prior
written consent of Sublandlord (which consent with respect to Sublandlord shall
not be unreasonably withheld, conditioned or delayed) and Overlandlord in
accordance with the provisions of the Overlease. Notwithstanding anything herein
to the contrary, Subtenant shall have the right, without the consent of
Sublandlord (but with the requirement to obtain the prior written consent of
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Overlandlord in accordance with the provisions of the Overlease), to assign
this Sublease to any affiliated company, or to sublet or otherwise permit the
use or occupancy of the Sublease Premises or any part or parts thereof to or by
any such company or companies for a term or terms expiring concurrently with or
prior to the expiration of the term of this Sublease; subject, however, in all
respect to all the covenants, conditions and provisions contained in this
Sublease and the Overlease, and provided that Subtenant gives Sublandlord a copy
of the assignment and the assignee expressly agrees in writing to be bound by
all of the provisions of this Sublease. The term "affiliated company" as used in
this Sublease shall mean any corporation or other person or entity controlling,
controlled by or under common control with Subtenant (control to be deemed to
exist with the direct or indirect beneficial ownership of fifty percent (50%)
or more of (i) the outstanding voting securities of any corporation or (ii) the
total partnership or beneficial interest in or under any other type of entity).
In any case herein where Subtenant has requested, in accordance with the notice
provisions of this Sublease, the consent of Sublandlord to (i) any assignment or
other transfer of this Sublease or (ii) a subletting of the Sublease Premises or
any part thereof, then, in either case, if Sublandlord has not within twenty
(20) days after its receipt of such request for consent notified Subtenant in
writing of either (a) its consent to such request or (b) its decision not to
consent to such request, then Sublandlord shall be deemed to have granted its
consent to such request. Any such request for consent shall be accompanied by
(a) an identification of the proposed assignee, transferee or subtenant, (b) a
statement of the business in which the assignee, transferee or subtenant is
engaged, and (c) a statement of the assignee's, transferee's or subtenant's
intended use of the Sublease Premises (or part thereof), which use does not
violate the provisions of this Sublease.
(b) (i) Subtenant shall pay to Sublandlord, as Sublease
Additional Charges, in connection with any assignment of this Sublease or any
sublease of all or any portion of the Sublease Premises (other than an
assignment or sublease to an Affiliate, provided such assignment or sublease is
for a good business purpose and is not done principally to avoid the obligations
of Subtenant hereinafter set forth in this Subsection 9(b)), an amount equal to
fifty (50%) percent of the following amounts:
(1) In the case of an assignment, an amount
(hereinafter called the "Assignment Profit")
equal to all sums and other consideration
actually paid to Subtenant by the assignee for
such assignment (including, but not limited to,
sums paid for the sale of Subtenant's fixtures,
leasehold improvements, equipment, furniture,
furnishings or other personal property in excess
of the greater of the book value or the fair
market value thereof) after first deducting
therefrom the amount of "Subtenant's Costs" (as
such term is hereinafter defined); and
(2) In the case of a sublease, an amount (hereinafter
called the "Sublease Profit") equal to any rents,
additional charges or
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other consideration actually paid under the
sublease to Subtenant by the subtenant which is
in excess of the Sublease Fixed Rent and Sublease
Additional Charges accruing during the term of
the sublease in respect of the subleased space
(at the rate per square foot payable by Subtenant
hereunder) pursuant to the terms hereof
(including, but not limited to, sums paid for the
sale or rental of Subtenant's fixtures, leasehold
improvements, equipment, furniture, furnishings
or other personal property in excess of the
greater of the book value or the fair market
value thereof) after first deducting therefrom
the amount of "Subtenant's Costs" (as such term
is hereinafter defined);
The sums payable under clauses (1) and (2) of this Subsection 9(b)(i) shall be
paid to Sublandlord within twenty (20) days after the same is paid to Subtenant
by the assignee or subtenant, as the case may be.
(ii) For purposes hereof, the term "Subtenant's Costs" shall
mean:
(1) the amount of any reasonable broker's fee or commissions
paid to a broker as a result of any assignment or
subletting by Subtenant hereunder and reasonable counsel
fees and disbursements incurred with respect to such
assignment or subletting;
(2) the cost to Subtenant of any additional improvements,
alterations or changes made to prepare or separate the
space in question for the occupancy of the subtenant or
assignee thereof or work allowance or cash payment
granted by Subtenant to such subtenant or assignee in
lieu of or in addition to Subtenant's performance of any
such improvements, alterations or changes or other
allowance (including, without limitation, any relocation
allowance or any rent abatement or concession at
Subtenant's rental cost under this Lease) granted by
Subtenant as consideration for the sublease or
assignment;
(3) reasonable advertising expenses directly related to the
assignment of this Sublease or subletting of the space;
and
(4) any rent abatement and/or concession (at Subtenant's
rental cost under this Lease) and other payments, if
any, of Sublease Fixed Rent or Sublease Additional
Charges under this Sublease (to the extent Subtenant is
not otherwise reimbursed therefore) made by Subtenant to
Sublandlord for the periods subsequent to the assignment
or subletting for the Sublease Premises (in
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the case of an assignment of the entire Lease) or the
portion thereof so assigned or sublet.
(iii) Subtenant shall be permitted to deduct from any sums
required to be paid by Subtenant to Sublandlord pursuant to Subsection 9(b)(i)
above any reasonable costs incurred by Subtenant in connection with enforcing
any rights of Subtenant under any assignment or sublease made pursuant to
Subsection 9(b)(i).
(c) If this Sublease is assigned, whether or not in violation
of this Sublease, Sublandlord may collect rent from the assignee. If the
Sublease Premises or any part thereof are sublet or used or occupied by anybody
other than Subtenant, whether or not in violation of this Sublease, Sublandlord
may, after default by Subtenant, and expiration of Subtenant's time to cure such
default, collect rent from the subtenant or occupant. In either event,
Sublandlord may apply the net amount collected to the Rent, but no such
assignment, subletting, occupancy or collection shall be deemed a waiver of any
of the provisions of Paragraph 9(a), or the acceptance of the assignee (unless
the assignment is with Sublandlord's and Overlandlord's consent pursuant to
Paragraph 9(a)), subtenant or occupant as tenant, or release of Subtenant from
the performance by Subtenant of Subtenant's obligations under this Sublease. The
consent by Sublandlord and/or Overlandlord to any assignment, mortgaging,
subletting or use or occupancy by others shall not in any way be considered to
relieve Subtenant from obtaining the express written consent of Sublandlord and
Overlandlord to any other or further assignment, mortgaging or subletting or use
or occupancy by others. Reference in this Sublease to use or occupancy by others
(that is, anyone other than Subtenant) shall not be construed as limited to
subtenants and those claiming under or through subtenants, immediately or
remotely.
(d) Any permitted assignment or transfer made with
Sublandlord's and Overlandlord's consent pursuant to Paragraph 9(a), shall be
made only if, and shall not be effective until, the assignee shall execute,
acknowledge and deliver to Sublandlord an agreement whereby the assignee shall
assume Subtenant's obligations under this Sublease from and after the date of
the assignment and whereby the assignee shall agree that all of the provisions
in this Paragraph 9 shall, notwithstanding such assignment or transfer, continue
to be binding upon it in respect to all future assignments and transfers.
Notwithstanding any assignment or transfer, whether or not in violation of the
provisions of this Sublease, and notwithstanding the acceptance of Rent by
Sublandlord from an assignee, transferee, or any other party, the original
Subtenant and any other person(s) who at any time was or were Subtenant shall
remain fully liable for the payment of the Rent and for Subtenant's other
obligations under this Sublease.
(e) The listing of any name other than that of Subtenant,
whether on the doors of the Sublease Premises or the Building directory, or
otherwise, shall not operate to vest any right or interest in this Sublease or
in the Sublease Premises, nor shall it be deemed to be the consent of
Sublandlord to any assignment or transfer of
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this Sublease or to any sublease of the Sublease Premises or to the use or
occupancy thereof by others.
(f) Without limiting any of the provisions of Article 27 of
the Overlease incorporated into this Sublease, if pursuant to the Federal
Bankruptcy Code (or any similar law hereafter enacted having the same general
purpose), Subtenant is permitted to assign this Sublease notwithstanding the
restrictions contained in this Sublease, adequate assurance of future
performance by an assignee expressly permitted under such Code shall be deemed
to mean the deposit of cash or cash equivalent negotiable securities in an
amount equal to the sum of one (1) year's Sublease Fixed Rent plus an amount
equal to the Sublease Additional Charges for the Sublease Operation Year
preceding the year in which such assignment is intended to become effective,
which deposit shall be held by Sublandlord for the balance of the Term, as
security for the full performance of all the assignee's obligations under this
Sublease, in accordance with Paragraph 11 of this Sublease.
10. Damage and Destruction.
(a) Notwithstanding the provisions of Article 24 of the
Overlease, which are incorporated herein by reference, in the event of damage or
destruction to the Sublease Premises which cannot reasonably be repaired by
Overlandlord within one hundred eighty (180) days after the date of damage,
Subtenant may elect, by giving written notice to Sublandlord within seven (7)
days of receipt by Subtenant of a copy of Overlandlord's notice (hereinafter
"Overlandlord's Notice") of the estimated date by which the Demised Premises and
Tenant's Parking Area shall be substantially repaired, to terminate this
Sublease as to all of the Sublease Premises effective as of the date of the
occurrence of the casualty, and in the event that such notice is given this
Sublease shall terminate at the expiration of said seven (7) day period.
Sublandlord shall promptly furnish to Subtenant a copy of Overlandlord's Notice.
If the estimated date set forth in Overlandlord's Notice is not more than one
hundred eighty (180) days after the date of damage, or Subtenant shall not have
terminated this Sublease pursuant to the provisions of the first sentence of
this subparagraph 10(a), then, if Overlandlord has not substantially repaired
the Sublease Premises and/or Subtenant's Parking Area by the later of (j) one
hundred and eighty (180) days after the date of such damage or (ii) the
estimated date specified in Overlandlord's Notice, which period may be extended
by not more than thirty (30) days by fire or other casualty, strikes, lockouts
or other labor difficulties, unavailability of materials or any other cause
beyond the reasonable control of Overlandlord, Subtenant may, within seven (7)
days after the expiration of the applicable period, terminate this Sublease by a
written notice as of the date specified therein which shall be not earlier than
twenty (20) days after the date of the giving of such notice and unless
Overlandlord shall have substantially repaired the Sublease Premises and/or
Subtenant's Parking Area before said termination date, this Sublease shall
terminate as of said date. If Subtenant does not terminate this Sublease as
heretofore provided in this subparagraph 10(a), Subtenant shall have no further
right to terminate this Sublease pursuant to this subparagraph 10(a). For
purposes of this
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subparagraph 10(a), subparagraph 10(b) and subparagraph 10(c) the term "repair"
and the term "substantially repaired" shall have the respective meanings given
to them in Section 24.01 of the Overlease.
(b) Subject to the provisions of subparagraph 10(d), if all
or part of the Sublease Premises shall be damaged or destroyed or rendered
completely or partially untenantable on account of fire or other casualty, the
Rent shall be abated or reduced, as the case may be, in the proportion that the
untenantable area of the Sublease Premises (calculated on a Gross Floor Space
basis) bears to the Gross Floor Space of the Sublease Premises for a period from
the date of damage to the date the Sublease Premises shall be substantially
repaired; provided, however, should Subtenant reoccupy a portion of the Sublease
Premises during the period the repair is taking place and prior to the date that
the Sublease Premises is substantially repaired, Rent allocable to such
reoccupied portion, based on Gross Floor Space, shall be payable by Subtenant
from the date of such occupancy. In addition, if sixty-nine (69) or more parking
spaces in Subtenant's Parking Area are not reasonably accessible or usable for
parking as a result of damage or destruction by fire or other casualty and the
Rent is reduced by less than twenty-five percent (25%) pursuant to the
provisions of this Paragraph, then from the date of damage to the date that
accessibility and usability is restored, Subtenant shall be reimbursed by
Sublandlord for the cost incurred by Subtenant in providing (i) substitute
parking and/or transportation; provided, however, Sublandlord may reduce
(pro-rata) or eliminate such reimbursement obligation by providing substitute
parking within the Entire Premises or immediately adjacent thereto or (ii)
substitute parking in Secaucus or North Bergen, New Jersey, and transportation
to/from the Building and such substitute parking acceptable to Subtenant.
(c) If this Sublease shall be terminated by Sublandlord, or
by Overlandlord as a result of the exercise of its rights under the Overlease,
or by Subtenant pursuant to the provisions of this Paragraph, Rent shall be
apportioned as of the date of termination and any Rent paid for any period after
said date shall be promptly repaid to Subtenant.
(d) Except as in this Paragraph otherwise provided, Subtenant
shall not be entitled to terminate this Sublease and no damages, compensation or
claim shall be payable by Sublandlord for inconvenience, loss of business or
annoyance arising from any repair of the Building, including the Sublease
Premises or Subtenant's Parking Area.
(e) If by reason of some act or omission on the part of
Subtenant or any of its partners, directors, officers, servants, employees, or
agents, Overlandlord or any Superior Lessor or any Superior Mortgagee shall be
unable to collect rent insurance proceeds pursuant to the insurance required to
be carried by Overlandlord pursuant to Article 13 of the Overlease that would
otherwise have been payable as a result of damage or destruction or
untenantability of the Building by fire or other casualty, then, without
prejudice to any other remedies which may be available against
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Subtenant, there shall be no abatement or reduction of the Rent during the Term
if by reason of such act or omission there shall be no abatement or reduction of
the Rent payable under the Overlease during the term thereof.
(f) The provisions of this Paragraph 10 shall be deemed an
express agreement governing any case of damage or destruction of the Sublease
Premises and/or Subtenant's Parking Area by fire or other casualty, and any law
providing for such a contingency in the absence of an express agreement, now or
hereafter in force, shall have no application in such case.
(g) Nothing contained herein shall grant or extend to
Subtenant any right to terminate the Overlease in whole or in part or limit or
impair any right of Sublandlord to exercise any right of termination with
respect to the Overlease by reason of any damage or destruction, including,
without limitation, any right of termination which may arise from any damage or
destruction of all or portions of the Sublease Premises in the event that
Sublandlord shall exercise any right of termination with respect to the
Overlease. Sublandlord shall furnish a copy of the notice of termination to
Subtenant promptly after such notice is furnished to Overlandlord (but the
requirement to furnish a copy of such notice shall in no way limit or condition
any such right of termination of Sublandlord).
11. Security.
(a) Within five (5) business days following the occurrence of
a Sublease Occupancy Event, Subtenant shall have deposited and shall thereafter
maintain at all times with Sublandlord as a security deposit for the faithful
performance and observance by Subtenant of the covenants, agreements, terms,
provisions and conditions of this Sublease, the sum of One Million Two Hundred
Fifty Thousand and 00/100 Dollars ($1,250,000.00) as the same may be reduced as
hereinafter provided (hereinafter "Security Funds") either in the form of cash,
a letter of credit, or any combination of the two. Any such letter of credit(s)
shall be an unconditional, irrevocable commercial letter of credit, in form and
substance reasonably satisfactory to Sublandlord (the form attached hereto as
Exhibit H is satisfactory to Sublandlord), and issued by a member bank of the
New York Clearinghouse Association acceptable to Sublandlord from time to time
in its reasonable discretion, payable upon presentation by Sublandlord to such
bank at its counters in New York City of a sight draft, without presentation of
any other documents, statements or authorizations, which letter of credit shall
provide (i) for the continuance of such credit for the period of at least one
(1) year from the date thereof, (ii) for the automatic extension of such letter
of credit for additional periods of one (1) year from the initial and each
future expiry date thereof (the last such extension to provide for the
continuance of such letter of credit for at least thirty (30) days beyond the
Sublease Expiration Date) unless such bank gives Sublandlord notice of its
intention not to renew such letter of credit not less than thirty (30) days
prior to the initial or any future expiry date of such letter of credit, and
(iii) that in the event such notice is given by such bank, Sublandlord shall
have the right to draw
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on such letter or credit at sight for the balance remaining under such letter of
credit and hold and apply the proceeds thereof as Security Funds (as hereinafter
defined). If such bank shall give notice to Sublandlord of its intention not to
renew the letter of credit, Sublandlord shall give Subtenant prompt written
notice (hereinafter a "Draw Notice") of its intention to draw on such letter of
credit at sight for the balance remaining under such letter of credit as
hereinafter provided, which Draw Notice shall be given at least ten (10) days
prior to the date on which Sublandlord intends to draw on the letter of credit
unless less than ten (10) business days then remain before the expiry date
thereof, in which case the Sublandlord shall give such notice as is practical
under the circumstances. If Subtenant fails to deliver a replacement or
substitute letter of credit complying with the requirements of this Paragraph
within such ten (10) business day period (or any shorter period provided for in
the preceding sentence), then Sublandlord shall have the right to draw on such
letter of credit at sight for the balance remaining under such letter of credit
and hold and apply the proceeds thereof. Subtenant shall pay Sublandlord's
reasonable attorneys' fees and other actual, out-of-pocket reasonable costs in
connection with the draw down, replacement, substitution or amendment of such
letter of credit. Whenever Subtenant shall deliver a proper replacement letter
of credit or shall otherwise be entitled to the return of a letter of credit
hereunder, Sublandlord (or the named beneficiary of the letter of credit being
replaced) shall deliver the letter of credit being replaced to Subtenant
together with a letter addressed to the issuer of the letter of credit stating
that Sublandlord (or such beneficiary) renounces all right, title and interest
in and to such letter of credit and authorizing the return thereof to such
issuer for cancellation.
(b) Each letter of credit and other Security Funds to be
deposited and maintained with Sublandlord (or the proceeds thereof) shall be
held by Sublandlord as security for the faithful performance and observance by
Subtenant of the terms, provisions and conditions of this Sublease, and in the
event that (x) any default occurs under this Sublease and is not cured by
Subtenant within any applicable grace and notice periods, or (y) Sublandlord
transfers its right, title and interest under this Sublease to a third party and
the bank issuing such letter of credit does not consent to the transfer of such
letter of credit to such third party, or (z) Sublandlord is entitled to draw on
the letter of credit pursuant to the provisions of subparagraph 11(a), then, in
any such event, Sublandlord may draw on such letter of credit, and the proceeds
of such letter of credit shall then be held and applied as security (and be
replenished, if necessary) in accordance with this Paragraph 11. Anything to the
contrary contained herein notwithstanding, provided Subtenant is not in default
under this Sublease beyond the expiration of applicable grace and notice
periods, (i) Subtenant shall have the right at any time to post a letter of
credit meeting the requirements as above provided in the then amount of any
Security Funds held in cash, and concurrently with such posting to receive the
return from Sublandlord of all such cash, together with all interest, if any,
earned thereon, or (ii) to deposit with Sublandlord, as Security Funds, an
equal amount of cash in substitution for all or part of a letter of credit.
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(c) It is agreed that in the event Subtenant defaults in respect
of any of the covenants, agreements, terms, provisions and conditions of this
Sublease (after notice and the expiration of any applicable grace and notice
periods), including, but not limited to, the payment of Sublease Fixed Rent or
Sublease Additional Charges, Sublandlord may use, apply or retain such part of
the Security Funds as shall be equal to the payment of any Sublease Fixed Rent,
Sublease Additional Charges or any other sum as to which Subtenant is in default
as aforesaid, or for any sum which Sublandlord may reasonably expend or may be
required to reasonably expend by reason of Subtenant's default in respect of any
of the covenants, agreements, terms, provisions and conditions of this Sublease,
including, but not limited to, any damages or deficiency in the re-letting of
the Sublease Premises, whether such damages or deficiency occurred before or
after summary proceedings or other re-entry by Sublandlord. Sublandlord shall
not be required to so use, apply or retain any part of the Security Funds, but
if any part thereof is so used, applied or retained in accordance with the
provisions of this Paragraph, Subtenant shall, within five (5) business days
after demand, deposit with Sublandlord an amount equal to the amount so used,
applied or retained.
(d) In the event that Subtenant shall then not be in default of
any of the terms, provisions, covenants, agreements and conditions of this
Sublease:
(i) the amount of the Security Funds required hereunder shall be;
(1) reduced to $1,000,000 on the second (2nd) anniversary of
the Sublease Commencement Date;
(2) reduced to $750,000 on the fourth (4th) anniversary of
the Sublease Commencement Date;
(3) reduced to $500,000 on the fifth (5th) anniversary of
the Sublease Commencement Date; and
(4) reduced to $250,000 on the sixth (6th) anniversary of
the Sublease Commencement Date; and
(ii) the remaining letter of credit and/or any remaining balance
of cash Security Funds, as applicable, will be returned to
Subtenant after the date fixed as the end of this Sublease
and after delivery of entire possession of the Sublease
Premises to Sublandlord.
(e) In the event of any assignment or transfer or conveyance of
Sublandlord's interest in the Overlease or this Sublease, Sublandlord shall have
the right to transfer the Security Funds, including, without limitation, the
letter of credit, as applicable, to the grantee or transferee and, upon the
grantee's or transferee's acknowledgment of receipt thereof, Sublandlord shall
thereupon be released by
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Subtenant from all liability for the return of such Security Funds; and
Subtenant agrees to look solely to Sublandlord's successor for the return of
said Security Funds; and it is agreed that the provisions hereof shall apply to
every transfer or assignment made of the Security Funds to a new Sublandlord.
Subtenant further covenants that it will not assign or encumber or attempt to
assign or encumber the Security Funds and that neither Sublandlord nor its
successors or assigns shall be bound by any such assignment, encumbrances,
attempted assignment or attempted encumbrances. Sublandlord agrees to deposit in
an FDIC insured institution, the cash Security Funds in a segregated,
interest-bearing account and, with respect to cash Security Funds only, after
deducting any administrative fees permitted by law, to pay the interest to
Subtenant annually, provided Subtenant is not then in monetary default or
otherwise in material default in the performance of its obligations under this
Lease beyond the expiration of any applicable grace and notice periods.
(f) Notwithstanding anything herein to the contrary, it is
agreed that Sublandlord's use, application or retention of a security deposit
made pursuant to Paragraph 9(e) hereof, shall be limited to obligations accruing
under this Sublease on and after the assignment of this Sublease as therein
contemplated.
12. Electric/Gas Energy.
(a) Pursuant to the Overlease, electricity shall be supplied
to the Sublease Premises by Overlandlord to provide lighting therein and to
service Subtenant's office equipment, and Subtenant shall pay to Sublandlord,
as Sublease Additional Charges for such service, sums equal to the amounts as
determined by submeter(s) (installed by Overlandlord for the purpose of
measuring electric consumption within the Sublease Premises), at charges, terms
and rates set, from time to time, during the Term by the Public Utility
Corporation ("PUC") serving the Building under the service classification in
effect pursuant to which Overlandlord purchases electricity and used in
computing its charges to Overlandlord of electricity for the entire Building
(i.e., at the price per kilowatt-hour billed by the PUC to Overlandlord for the
total electric consumption in the entire Building). If by the Commencement Date,
Sublandlord shall have been unable to segregate by submetering the electricity
servicing the Sublease Premises from the electricity servicing the Industries
Premises (as hereinafter defined), then, until such service shall be so
segregated, the determination of the amount of electricity used to service the
Sublease Premises shall be equitably determined based on the quantity of
electricity used by ITT Industries, Inc. for the most recent electricity billing
period prior to the Commencement Date. Sublandlord shall not be liable or
responsible for any failure, inadequacy or defect in the character or supply of
electric current furnished to the Sublease Premises, unless due to the gross
negligence or willful misconduct of Sublandlord or Sublandlord's agents,
servants, employees, contractors, subcontractors, licensees, invitees (other
than Overlandlord), officers, directors, partners or members or subtenants
(other than Subtenant). Subtenant shall furnish and install all lighting tubes
bulbs, and ballasts required in the Sublease Premises, at Subtenant's expense
All lighting tubes, bulbs
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and ballasts so installed shall become Sublandlord's property upon the
expiration or sooner termination of this Sublease.
(b) Subtenant's use of electric energy in the Sublease
Premises shall not at any time exceed the capacity of any of the electrical
conductors and equipment in or otherwise serving the Sublease Premises.
(c) Subtenant shall also pay to Sublandlord, as Sublease
Additional Charges, Subtenant's Proportionate Shares of the amounts by which (x)
Sublandlord's Additional Charges, under Section 18.03 of the Overlease, for
Overlandlord's cost of electricity and gas used by Overlandlord to operate the
Building Systems (as said term is defined in the Overlease) providing services
for the common benefit of all tenants, including Subtenant, of the Building and
to provide Interior Common Area (as said term is defined in the Overlease)
lighting (said cost of electricity and gas being hereinafter referred to as
"Overlandlord's Electricity and Gas Costs") payable by Sublandlord under the
Overlease for any Sublease Operational Year subsequent to the Sublease Base
Year, exceed (y) the Additional Charges for Overlandlord's Electricity and Gas
Costs payable by Sublandlord under the Overlease for the Sublease Base Year.
13. Parking. Sublandlord shall allocate for Subtenant's use, three
hundred and fifteen (315) parking spaces within Tenant's Parking Area of which
forty-six (46) shall be under the Building at the locations as shown on Exhibit
D annexed hereto and made a part hereof and two hundred and sixty nine (269) of
which are unreserved outside parking spaces within Tenant's Parking Area (as
Tenant's Parking Area (outside) is shown by crosshatching on Exhibit E annexed
hereto and made a part hereof) (hereinafter collectively "Subtenant's Parking
Area"). The parking spaces under the Building shall be for Subtenant's use at
all times and the balance of Subtenant's parking spaces shall be for Subtenant's
exclusive use during Business Hours. Subtenant and its subtenants and their
respective officers, employees, agents, customers and invitees shall park their
automobiles and other vehicles in (a) Subtenant's Parking Area and (b) such
other areas only where and as permitted in writing by Sublandlord. Subtenant
will, if and when so requested by Sublandlord, furnish Sublandlord with the
license plate numbers of any vehicles of Subtenant and any sub-subtenant and
their respective officers and employees, which will be parked in Subtenant's
Parking Area. Subtenant shall not permit its or its sub-subtenant's employees,
officers, agents, customers and invitees to park in any other spaces within the
Tenant's Parking Area or the Entire Premises.
14. Definition of Sublandlord. The term "Sublandlord" shall mean
Sublandlord named herein and any subsequent holder at the time in question of
the tenant's interest under the Overlease.
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15. Notices.
(a) Any notice, demand, designation, request, consent,
approval or other communication which either party hereto is required or desires
to give or make to the other shall be in writing and shall be deemed validly
given (i) when personally delivered, (ii) when deposited for "overnight
delivery" [for example, Federal Express "Standard Overnight" (delivery by next
business afternoon), United States Post Service "Express Mail" or other
nationally recognized comparable service], prepaid, with a receipt provided
therefor, or (iii) when deposited in the United States mails, registered or
certified, return receipt requested with postage prepaid, addressed in each case
as follows:
If to Sublandlord: ITT Corporation
1330 Avenue of the Americas
New York, New York 10019
Attn: Director of Real Estate
With a copy to: ITT Corporation
1330 Avenue of the Americas
New York, New York 10019
Attn: General Counsel
If to Subtenant:
(a) Prior to Occupancy: Genesis Direct Secaucus Operations, LLC
One Bridge Plaza
Suite 680
Fort Lee, New Jersey 07024-0407
Attn: Chief Operating Officer
With a copy to: Genesis Direct Secaucus Operations, LLC
One Bridge Plaza
Suite 680
Fort Lee, New Jersey 07024-0407
Attn: General Counsel
(b) After Occupancy: Genesis Direct Secaucus Operations, LLC
100 Plaza Drive
Secaucus, New Jersey 07094
Attn: Chief Operating Officer
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With a copy to: Genesis Direct Secaucus Operations, LLC
100 Plaza Drive
Secaucus, New Jersey 07094
Attn: General Counsel
In either case with a copy to: Cole, Schotz, Meisel, Forman &
Leonard, P.A.
Court Plaza North
25 Main Street
P. O. Box 800
Hackensack, New Jersey 07602-0800
Attn: Richard R. Kahn, Esq.
Either party may designate a different or additional address(es) by
notice similarly given.
(b) Any notice hereunder shall be deemed effectively given
upon its delivery or the addressee's refusal to accept delivery as indicated by
the person attempting such personal delivery, by the applicable return receipt,
if sent by registered or certified mail, or by similar reliable advice from the
recognized courier company, as the case may be.
16. Broker. Subtenant and Sublandlord represent and warrant to each
other that each has had no conversations or negotiations with any broker except
Cushman and Wakefield of New Jersey, Inc. (hereinafter "C&W") and Charles
Klatskin Co., Inc. (hereinafter "Klatskin") (hereinafter collectively "Broker"),
concerning the subleasing of the Sublease Premises. Sublandlord agrees to pay
the commission due in respect of this Sublease to C&W pursuant to a separate
agreement, and C&W has agreed to pay a portion of said commission to Klatskin.
Landlord and Tenant shall indemnify each other against liability in connection
with a breach of the indemnitor's representation and warranty in this Paragraph
and in connection with any claim for a brokerage commission arising out of any
conversations or negotiations had by indemnitor with any broker other than
Broker.
17. Inspection. Subtenant acknowledges that Subtenant has inspected
the Sublease Premises and agrees to accept the same in an "as is" condition,
subject to completion of Sublandlord's Work (as hereinafter defined).
18. Right of First Offer. Sublandlord grants to Subtenant a right of
first offer (hereinafter the "First-Offer Right") with respect to that space
located on the fourth (4th) floor of the Building shown by cross-hatching on
Exhibit E hereto (hereinafter the "First-Offer Space"). Subtenant's First-Offer
Right shall be on the following terms and conditions:
(a) Superior Rights. The First-Offer Right shall begin only after
the expiration or earlier termination of that certain sublease dated December
15, 1995,
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between ITT Destinations, Inc. (now known as ITT Corporation, a Nevada
corporation), as sublandlord, and ITT Corporation, a Delaware corporation (the
successor to which by merger is ITT Industries, Inc., an Indiana corporation),
as subtenant, as such sublease may have been or may hereafter be modified or
amended, including, without limitation, all renewals and extensions of such
sublease (whether or not such renewal and extension is under an express
provision of such sublease or consummated under a sublease amendment or a new
sublease) (such sublease as modified or amended, renewed and extended being
hereinafter referred to as the "ITT Industries Sublease").
(b) Procedure for Sublandlord's Offer. Sublandlord shall
provide Subtenant with written notice (hereinafter the "First-Offer Notice")
from time to time when Sublandlord determines that any First-Offer Space will
become available for sublease to third parties. Sublandlord shall provide the
First-Offer Notice to Subtenant within one hundred eight (180) days before the
First-Offer Space will be available for sublease. The First-Offer Notice shall:
(i) Describe the First-Offer Space that will become
available for sublease (hereinafter the "Specific
First-Offer Space") and the date (hereinafter the
"Availability Date") that it will be available for
subletting (which date shall be no less than sixty
(60) days after the date of the First Offer Notice);
(ii) State Sublandlord's determination of the Fair Market Rental
Value of that space (as defined in subparagraph 18(i) below)
determined on a per square foot of Gross Floor Space basis;
and
(iii) State the number of square feet of Gross Floor Space
included within such space.
(c) Procedure for Subtenant's Acceptance. If Subtenant wishes
to exercise Subtenant's First-Offer Right with respect to the Specific
First-Offer Space, Subtenant shall, within twenty (20) business days after
delivery of the First-Offer Notice to Subtenant, deliver notice to Sublandlord
of Subtenant's intention to exercise its First-Offer Right with respect to all
the Specific First-Offer Space. The annual fixed rent (Sublease Fixed Rent) for
Specific First-Offer Space shall be as follows:
(i) if the commencement of the term of the subleasing of the
Specific First-Offer Space shall commence prior to January
1, 1999, the annual fixed rent shall be the lesser of (i) a
sum equal to Eighteen Dollars ($18.00) per each square foot
of Gross Floor Space contained within the Specific First-
Offer Space and (ii) a sum equal to seventy-five percent
(75%) of the Fair Market Rental Value of the Specific First
Offer Space as of the Availability Date;
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(ii) if the commencement of the term of the subleasing of the
Specific First-Offer Space shall commence on or after
January 1, 1999, but before January 1, 2001, the annual
fixed rent shall be the lesser of (i) a sum equal to Sixteen
Dollars ($16.00) per each square foot of Gross Floor Space
contained within the Specific First Offer Space and (ii) a
sum equal to seventy-five percent (75%) of the Fair Market
Rental Value of the Specific First Offer Space as of the
Availability Date;
(iii) if the commencement of the term of the subleasing of the
Specific First-Offer Space shall commence on or after
January 1, 2001, but before January 1, 2003, the annual
fixed rent shall be the lesser of (i) a sum equal to
Fourteen Dollars ($14.00) per each square foot of Gross
Floor Space contained within the Specific First Offer Space
and (ii) a sum equal to seventy-five percent (75%) of the
Fair Market Rental Value of the Specific First Offer Space
as of the Availability Date; and
(iv) if the commencement of the term of the subleasing of the
Specific First-Offer Space shall commence on or after
January 1, 2003, the annual fixed rent shall be the lesser
of (i) a sum equal to Twelve Dollars ($12.00) per each
square foot of Gross Floor Space contained within the
Specific First Offer Space and (ii) a sum equal to seventy-
five percent (75%) of the Fair Market Rental Value of the
Specific First Offer Space as of the Availability Date.
If Subtenant, concurrently with Subtenant's exercise of the First-Offer Right,
notifies Sublandlord that it does not accept Sublandlord's determination of the
Fair Market Rental Value set forth in the First-Offer Notice, the Fair Market
Rental Value of the Specific First-Offer Space shall be determined in accordance
with the procedure set forth in subparagraph 18(j) below. Otherwise, the Fair
Market Rental Value shall be as set forth in Sublandlord's First-Offer Notice.
Subtenant must elect to exercise its First-Offer Right, if at all, only with
respect to all the space offered by Sublandlord to Subtenant at any particular
time, and Subtenant may not elect to sublease only a portion of that space.
(d) Effect of Subtenant's Failure to Exercise First-Offer
Right. If Subtenant does not exercise its First-Offer Right within the response
period specified in subparagraph 18(c) above, the First-Offer Right shall
terminate for the Specific First-Offer Space and Sublandlord shall be free to
sublease that space to anyone on any terms at any time during the Term, without
any obligation to provide Subtenant with a further right to sublease that space.
(e) Restrictions on First-Offer Right. The Subtenant may
exercise the First-Offer Right only if Subtenant occupies at least fifty (50%)
of the Sublease
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Premises as of the date of the First-Offer Notice. Subtenant shall not have the
right to Sublease First-Offer Space if Subtenant is in monetary or other
material default under this Sublease beyond the expiration of any applicable
grace and notice periods as of the date of the attempted exercise of the
First-Offer Right by Subtenant or (at Sublandlord's option) as of the scheduled
date of delivery of the Specific First-Offer Space to Subtenant. Subtenant shall
have no right to sublease the Specific First-Offer Space unless Overlandlord
shall have consented to such subletting in accordance with the provisions of the
Overlease.
(f) Delivery of First-Offer Space. If Subtenant timely and
validly exercises the First-Offer Right, Sublandlord shall tender the Specific
First-Offer Space to Subtenant on a date selected by Sublandlord (hereinafter
the "Delivery Date") that is (i) no sooner than the last to occur of (1)
Sublandlord's receipt of written consent from Overlandlord to the subleasing of
the Specific First-Offer Space to Subtenant and (2) sixty (60) days after the
date of the First-Offer Notice, and (ii) no later than one hundred eighty (180)
days after the date of the First-Offer Notice. Subtenant agrees upon request of
Sublandlord to enter into Overlandlord's usual consent to sublease form in
connection with any such subleasing. Sublandlord shall not be liable to
Subtenant or otherwise be in default under this Sublease if Sublandlord is
unable to tender the Specific First-Offer Space to Subtenant on the projected
Delivery Date due to the failure of any other subtenant to timely vacate and
surrender to Sublandlord the Specific First-Offer Space or any portion of it.
Sublandlord agrees to use reasonable efforts to cause any such other subtenant
to vacate.
(g) Terms and Conditions Applicable to First-Offer Space. If
Subtenant timely and validly exercises the First-Offer Right, then, beginning on
the Delivery Date and continuing for the balance of the Term of this Sublease:
(i) The Specific First-Offer Space shall be part of the Sublease
Premises under this Sublease (so that the term "Sublease
Premises" in this Sublease shall refer to the space in the
Sublease Premises immediately before the Delivery Date plus
the Specific First-Offer Space);
(ii) The amount of Sublease Fixed Rent for the Specific First-
Offer Space shall be the amount as determined pursuant to
subparagraph 18(c);
(iii) The Sublease Base Year shall remain January 1, 1997, with
respect to the Specific First-Offer Space.
(iv) Subtenant's Fraction (set forth in Paragraph 4(a) of this
Sublease) shall be appropriately increased based on the
number of square feet of Gross Floor Space included within
the Specific First-Offer Space;
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(v) An appropriate adjustment shall be made to Paragraph 12 of
this Sublease so that Subtenant shall be obligated to pay for
all electricity supplied to the Specific First-Offer Space;
(vi) An appropriate proportionate increase shall be made to
Subtenant's Parking Area to include the number of parking
spaces allocated to the Specific First-Offer Space under the
prior subleasing of such space;
(vii) The provisions of Paragraphs 19 and 20 of this Sublease shall
not be applicable to the Specific First-Offer Space; and
(viii) The amount of the Security Funds referred to in Paragraph 11
of this Sublease shall be increased by an amount equal to the
annual amount of Sublease Fixed Rent payable with respect to
the Specific First-Offer Space, but shall be subject to
prorata reductions at the times and under the conditions as
specified in said Paragraph 11.
Subtenant's sublease of the Specific First-Offer Space shall be on the same
terms and conditions as affect the original Sublease Premises from time to time,
except as otherwise provided in this subparagraph 18(g). Subtenant's obligation
to pay Sublease Fixed Rent with respect to the Specific First-Offer Space shall
begin as follows:
(1) if the Delivery Date with respect to the Specific First-Offer
Space shall occur prior to January 1, 1999, one hundred fifty
(150) days including and after the Delivery Date;
(2) if the Delivery Date with respect to the Specific First-Offer
Space shall occur on or after January 1, 1999, but before
January 1, 2001, one hundred twenty (120) days including and
after the Delivery Date;
(3) if the Delivery Date with respect to the Specific First Offer
Space shall occur on or after January 1, 2001, but before
January 1, 2003, ninety (90) days including and after the
Delivery Date; and
(4) if the Delivery Date with respect to the Specific First-Offer
Space shall occur on or after January 1, 2003, sixty (60) days
including and after the Delivery Date.
The obligation to pay Sublease Additional Charges with respect to the Specific
First-Offer Space shall commence on the Delivery Date. The Specific First-Offer
Space shall be subleased to Subtenant in its "as-is" condition, free of all
tenancies (except for the
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Overlease) and occupants, and Sublandlord shall not be required to construct any
improvements in, or contribute any tenant improvement allowance for, the
Specific First-Offer Space, except that if the Specific First-Offer Space is
less than all of the First-Offer Space, Sublandlord, at its sole cost and
expense, shall construct any fire-rated demising walls that may be required to
separate the Specific First-Offer Space from the balance of the First-Offer
Space. Subtenant's construction of any improvements in the Specific First-Offer
Space shall comply with Article 15 of the Overlease to the extent incorporated
into this Sublease.
(h) Confirmation of Terms. If Subtenant timely and validly
exercised the First-Offer Right, Sublandlord and Subtenant shall, no later than
thirty (30) days before the Delivery Date for the Specific First-Offer Space,
confirm in an agreement amending this Sublease, the addition of the Specific
First-Offer Space to the Sublease Premises on the terms and conditions set forth
in this Paragraph 18. The agreement amending this Sublease shall confirm:
(i) The number of square feet of Gross Floor Space of the Sublease
Premises with the addition of the Specific First-Offer Space;
(ii) Subtenant's Fraction with the addition of the number of
square feet of Gross Floor Space of the Specific First-Offer
Space to the number of square feet of Gross Floor Space of
the Sublease Premises;
(iii) The number of parking spaces, both under the Building (to
include location) and outside, included within Subtenant's
Parking Area with the addition of the Specific First Offer
Space to the Sublease Premises;
(v) The Sublease Fixed Rent commencement date for the Specific
First-Offer Space;
(vi) Subtenant's obligation to pay Sublease Additional Charges
with respect to the period from and after the Delivery Date,
including, without limitation, electricity supplied to the
Specific First-Offer Space; and
(vii) Any other terms that either party reasonably requests be
confirmed with respect to the Specific First-Offer Space.
The actual Delivery Date shall be confirmed in writing between Sublandlord and
Subtenant within thirty (30) days after the occurrence of the Delivery Date.
(i) Fair Market Rental Value. For purposes of this Paragraph 18,
Fair Market Rental Value of the Specific First-Offer Space is the rental rate,
determined in
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accordance with this subparagraph 18(i) (on a per square foot of Gross Floor
Space basis), at which tenants are leasing "comparable space" (as hereinafter
defined) on the Availability Date specified in the First-Offer Notice. For this
purpose, "comparable space" is office space that is:
(i) Not subleased;
(ii) Not subject to another tenant's expansion rights;
(iii) Not leased to a tenant that holds an ownership interest in its
landlord;
(iv) Not leased to a tenant under a renewal or extension of a
lease;
(v) Comparable in size, location and quality to the Specific
First-Offer Space;
(vi) Leased for a term comparable to Subtenant's subleasing of
the Specific First-Offer Space; and
(vii) Located in the Building and in other comparable office
buildings and office building projects located in the greater
Meadowlands market that are comparable in age, location,
quality of construction, services and amenities.
(j) Rental Rate of Comparable Space. In determining the rental
rate of comparable space (which shall be determined on a per square foot of
Gross Floor Space basis), the parties shall include all escalations and take
into consideration the following concessions:
(i) Rental abatement concessions, if any, being granted to
tenants in connection with the comparable space; and
(ii) Tenant improvements or allowances provided or to be provided
for the comparable space, taking into account the value of the
existing improvements in the Specific First-Offer Space, based
on the age, quality and layout of the improvements.
(k) Resolving Disagreement Over Fair Market Rental Value. If
Subtenant timely and effectively objects to Sublandlord's determination of Fair
Market Rental Value under subparagraph 18(c) above, the disagreement shall be
resolved under this subparagraph 18(j) as follows:
(i) Sublandlord and Subtenant shall diligently attempt in good
faith to agree on the Fair Market Rental Value on or before
the tenth (10th)
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business day after Subtenant's objection to the Fair Market
Rental Value (hereinafter "Outside Agreement Date").
(ii) If Sublandlord and Subtenant fail to reach agreement on or
before the Outside Agreement Date, Sublandlord and Subtenant
shall each make a separate determination of the Fair Market
Rental Value and notify the other party of the determination
within five (5) business days after the Outside Agreement Date.
(a) If each party makes a timely determination of the Fair
Market Rental Value, those determinations shall be
submitted to arbitration in accordance with subparagraph
18(j)(iii).
(b) If Sublandlord or Subtenant fails to make a determination
of the Fair Market Rental Value within the five (5)
business day period, that failure shall be conclusively
considered to be that party's approval of the Fair Market
Rental Value submitted within the five (5) business day
period by the other party.
(iii) If both parties make timely individual determinations of the
Fair Market Rental Value under subparagraph 18(j)(ii)(a), the
Fair Market Rental value shall be determined by arbitration
under this subparagraph 18(j)(iii).
(a) The determination of the arbitrator(s) shall be limited to
the sole issue of whether Sublandlord's or Subtenant's
submitted Fair Market Rental Value is the closest to the
actual Fair Market Rental Value as determined by the
arbitrators, taking into account the requirements of
subparagraph 18(i).
(b) The arbitrator(s) must be a licensed real estate broker or
appraiser who is a member of the American Institute of
Real Estate Appraisers who has been active in the leasing
or appraising, as the case may be, of commercial office
properties comparable to the Building in the greater
Meadowlands market over the five (5) year period ending on
the date of his/her appointment as arbitrator(s).
(c) Within fifteen (15) days after the Outside Agreement
Date, Sublandlord and Subtenant shall each appoint one
arbitrator and notify the other party of the name and
business address of such arbitrator.
(d) If each party timely appoints an arbitrator, the two (2)
arbitrators shall, within ten (10) days after the
appointment of
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the second arbitrator, agree on and appoint a third
arbitrator (who shall be qualified under the same criteria
set forth above for qualification of the initial two (2)
arbitrators) and provide notice to Sublandlord and
Subtenant of the arbitrator's name and business address.
(e) Within thirty (30) days after the appointment of the third
arbitrator, the three (3) arbitrators shall decide whether
the parties will use Sublandlord's or Subtenant's
submitted Fair Market Rental Value and shall notify
Sublandlord and Subtenant of their decision. The decision
of the majority of the three (3) arbitrators shall be
binding on Sublandlord and Subtenant.
(f) If either Sublandlord or Subtenant fails to appoint an
arbitrator within fifteen (15) days after the Outside
Agreement Date, the arbitrator timely appointed by one of
them shall reach a decision and notify Sublandlord and
Subtenant of that decision within (30) days after the
arbitrator's appointment. The arbitrator's decision shall
be binding on Sublandlord and Subtenant.
(g) If each party appoints an arbitrator in a timely manner,
but the two (2) arbitrators fail to agree on and appoint a
third arbitrator within the required period, the
arbitrators shall be dismissed without delay and the issue
of Fair Market Rental Value shall be submitted to binding
arbitration in Newark, New Jersey under the "expedited
arbitration" procedures of the commercial arbitration
rules then in effect of the American Arbitration
Association, or its successor, subject to the provisions
of this Paragraph 18.
(h) If Sublandlord and Subtenant each fail to appoint an
arbitrator in a timely manner, the matter to be decided
shall be submitted without delay to binding arbitration in
Newark, New Jersey under the "expedited arbitration"
procedures of the commercial arbitration rules then in
effect of the American Arbitration Association, or its
successor, subject to the provisions of this Paragraph 18.
(i) The cost of the arbitration shall be paid by the losing
party, but each party shall pay its own experts and
attorneys' fees.
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19. Subtenant's Work/Sublandlord's Work.
(a) Subtenant hereby covenants and agrees that Subtenant will,
at Subtenant's own cost and expense (except as hereinafter expressly provided),
and in a good and workmanlike manner and in accordance with all applicable Legal
Requirements and Insurance Requirements, perform any work or installations in
and to the Sublease Premises required to prepare the Sublease Premises for
Subtenant's occupancy (hereinafter "Subtenant's Work"), other than those items
set forth in subparagraph 19(a)(iii) (hereinafter "Sublandlord's Work").
Subtenant's Work shall be performed in accordance with the provisions of Article
15 of the Overlease to the extent incorporated into this Sublease, this
Paragraph 19 and all other applicable provisions of this Sublease (in the event
of any conflict, the provisions of this Paragraph 19 shall control).
(i) Subtenant, at Subtenant's expense, shall cause to be
prepared by an architect licensed to practice in the State
of New Jersey, a final set of plans and specifications for
Subtenant's Work (which said final set of plans and
specifications are herein called the "final plan"), which
shall contain complete information and dimensions
necessary for the construction and finishing of the
Sublease Premises and for the engineering in connection
therewith and bear the seal or other indication of
approval by such architect. One complete set of the final
plan shall be (a) submitted by Subtenant to Sublandlord
for Sublandlord's written approval, which approval shall
not be unreasonably withheld, conditioned or delayed, and
(b) submitted by Subtenant to Overlandlord for its written
consent thereto, in accordance with the provisions of the
Overlease. Sublandlord shall respond to Subtenant's
request for Sublandlord's approval of Subtenant's final
plan within five (5) business days from the submission
thereof to Sublandlord and shall respond to Subtenant's
request for Sublandlord's approval of any revisions in the
final plan within five (5) business days of submission
thereof. If no response is given by Sublandlord to
Subtenant with respect to such request for approval within
said respective periods, then Sublandlord shall be deemed
to have approved such request. If Sublandlord shall
disapprove the final plan or any revision thereof,
Sublandlord shall set forth in reasonable detail its
reasons for such disapproval. Sublandlord has approved the
preliminary plans (hereinafter "Preliminary Plans") for
Subtenant's Work (which set of Preliminary Plans are
listed on Exhibit I attached hereto and made a part
hereof). Sublandlord shall not be deemed unreasonable in
withholding its approval to the extent that the final plan
or any revisions thereof prepared by Subtenant pursuant
hereto involves the performance of work or the
installation in the Sublease Premises of materials or
equipment which are not at least equal in
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quality and class to the existing installation in the
Sublease Premises. Any request by Subtenant for
Sublandlord's approval of revisions to the final plan
shall be promptly forwarded by Sublandlord to Overlandlord
for its consent. Failure to obtain Overlandlord's written
consent to any such revision shall not be the basis for
any right to terminate this Sublease by either Sublandlord
or Subtenant. Anything in this Sublease to the contrary
notwithstanding, if, as part of Overlandlord's consent to
any revisions to the final plan Overlandlord does not
specify that Sublandlord shall have no obligation at the
expiration of the Overlease to remove Subtenant's Work
encompassed within such revisions and restore the Sublease
Premises to their condition prior to the making of such
revisions, then Sublandlord's approval of such revisions
shall be deemed revoked and such revisions shall not be
made unless and until Subtenant shall agree in writing
with Sublandlord that Subtenant, at its sole cost and
expense, shall, if demanded by Sublandlord at any time
prior to the expiration of this Sublease, remove at the
expiration of this Sublease, Subtenant's Work encompassed
within such revisions and restore the portion of the
Sublease Premises which were affected by such revisions to
their condition existing prior to the making of such
revisions.
(ii) In accordance with the final plan and any approved
revisions thereof, Subtenant, at Subtenant's expense
(except as hereinafter expressly provided), will promptly
commence and thereafter complete Subtenant's Work as
specified in the final plan within six (6) months after
the date on which Subtenant's final plan has been approved
or consented to by Sublandlord and Overlandlord (subject
to conditions of force majeure, including, without
limitation, the obtaining of requisite permits and
approvals from cognizant governmental authorities and
other conditions beyond the reasonable control of
Subtenant). Subtenant agrees that Subtenant's Work will be
made and performed (a) in such manner as not to
unreasonably interfere with Overlandlord in the
construction, maintenance, repair or operation of the
Building, and if any additional expense shall be incurred
by Overlandlord after notice to Subtenant as a result of
Subtenant's Work, Subtenant shall pay or reimburse
Sublandlord for any such additional expense within twenty
(20) days after demand, and (b) so as not to unreasonably
interfere with the business of Sublandlord, or the
occupants of other parts of the Building and to the
structural and mechanical parts of the Building and
Subtenant will, at its own cost and expense, leave all
structural and mechanical parts of the Building which
shall or may be affected by Subtenant's Work in as good
operating condition as existed immediately prior to the
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commencement of any Subtenant's Work affecting the same.
At any and all times during the progress of Subtenant's
Work, Sublandlord and Overlandlord, at no additional cost
to Subtenant, shall be entitled to have a representative
or representatives on the site to inspect Subtenant's Work
and such representative or representatives shall have
reasonable access to any and every part of the Sublease
Premises, but the provisions of this sentence shall not
create any obligation on Sublandlord's or Overlandlord's
part to perform such inspection and neither Sublandlord
nor Overlandlord shall incur any obligation, liability or
responsibility to Subtenant or any third party by reason
of such access and inspection. Before proceeding with
Subtenant's Work, Subtenant shall submit to Sublandlord
for Sublandlord's approval (which shall not be
unreasonably withheld, conditioned or delayed) and the
approval of Overlandlord in accordance with the provisions
of the Overlease, the names of the general contractor and
subcontractors who are to do Subtenant's Work. Subtenant
shall have the right, with the consent of Sublandlord and
Overlandlord to change its final plans for Subtenant's
Work, which consent by Sublandlord shall not be
unreasonably withheld, conditioned or delayed. Subtenant
shall not be required to obtain Sublandlord's consent with
respect to minor non-structural or decorative changes or
because of field conditions. Such contractors shall use
only employees for Subtenant's Work who will work
harmoniously with other employees on the job.
(iii) Sublandlord agrees to perform and complete within thirty
(30) days after the Commencement Date the following work
(herein "Sublandlord's Work") in the Overlease Premises,
at Sublandlord's sole cost and expense, in a good and
workmanlike manner, and in compliance with applicable
Legal Requirements and Insurance Requirements:
(1) Construct any fire-rated demising walls and doors
necessary to separate the Sublease Premises from the
balance of the Overlease Premises;
(2) Segregate from the submeter(s) currently measuring
electricity supplied to the Overlease Premises, the
electrical service being supplied to that portion of
the Overlease Premises subleased by the ITT
Industries Sublease (hereinafter the "Industries
Premises"); and
(3) Connect all electric service being provided to the
Industries Premises to an independent power panel.
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If Sublandlord shall fail to substantially complete
Sublandlord's Work within thirty (30) days after the
Commencement Date and such failure to complete shall cause a
material delay in Subtenant's completion of Subtenant's Work on
the fourth (4th) floor of the Sublease Premises such that
Subtenant is delayed in occupying for its business purposes,
all or a portion of the said fourth (4th) floor of the Sublease
Premises, then, provided Subtenant notifies Sublandlord within
five (5) business days after the commencement and end of each
such period of delay, the Rent Commencement Date, as it applies
to such fourth (4th) floor space that Subtenant has been so
delayed in occupying, shall be extended on a "day-for-day
basis", for each day that such occupancy by Subtenant is so
delayed by reason of such failure by Sublandlord.
(b) The following conditions shall also apply to Subtenant's Work:
(i) all Subtenant's Work shall be of material, manufacture, design
and capacity consistent with a first class office installation;
(ii) Subtenant, at Subtenant's sole cost and expense, shall (a) file
with governmental authorities any required architectural,
mechanical and electrical drawings and obtain all necessary
permits and certificates for the commencement and preparation
of Subtenant's Work and for final approval thereof upon
completion, and (b) furnish and perform all engineering and
engineering drawings in connection with Subtenant's Work.
Subtenant shall obtain Sublandlord's approval of the drawings
referred to in clauses (a) and (b) of this subparagraph
20(b)(ii), which approval shall not be unreasonably withheld,
conditioned or delayed;
(iii) Subtenant shall use an engineer approved by Sublandlord (which
approval by Sublandlord shall not be unreasonably withheld,
conditioned or delayed) and Overlandlord in accordance with the
provisions of the Overlease, with respect to the preparation of
Subtenant's engineering drawings in connection with Subtenant's
Work;
(iv) all construction workers shall use only the freight elevators.
All deliveries of materials shall be made during non-Business
Hours using the freight elevator only, except to the extent
that Overlandlord consents in writing (a) to the delivery of
materials during Business Hours and/or (b) to the use of
passenger elevators; provided, however, that such delivery
and/or use does not materially interfere with Sublandlord's or
its subtenant's access
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to that portion of the Overlease Premises not included within
the Sublease Premises. Subtenant shall coordinate delivery
schedules with Overlandlord's building manager;
(v) Subject to the Work Credit (as hereinafter defined), Subtenant
shall pay to Sublandlord within twenty (20) days after demand,
as Sublease Additional Charges, all actual, out-of-pocket costs
incurred by Sublandlord as the result of the performance of
Subtenant's Work, including, without limitation, charges
incurred by Sublandlord for the use by Subtenant of the
freight elevators at Overlandlord's then established rates
therefor, any additional services other than those specifically
hereinabove listed which Subtenant shall request from
Sublandlord, and cleaning and garbage removal within the
Sublease Premises if performed by or for the benefit of
Sublandlord at Subtenant's request. There shall be no charge to
Subtenant with respect to review of final plans or for
Subtenant's initial move (furniture, equipment, files and
personnel) into the Sublease Premises; and
(vi) Throughout the performance of Subtenant's Work, Subtenant shall
carry, or cause to be carried, workmen's compensation insurance
in statutory limits and general liability insurance, with
completed operation endorsement, for any occurrence in or about
the Building, under which Overlandlord and Sublandlord and any
Superior Lessor whose name and address shall previously have
been furnished to Subtenant shall be named as parties insured,
in such limits as Overlandlord and Sublandlord may reasonably
require with insurers reasonably satisfactory to Overlandlord
and Sublandlord. Subtenant shall furnish Landlord with
reasonably satisfactory evidence that such insurance is in
effect at or before the commencement of Subtenant's Work and at
reasonable intervals thereafter during the performance of
Subtenant's Work.
(c) It is understood that Overlandlord shall not furnish any
cleaning services to any portion of the Sublease Premises until Subtenant
commences occupancy of such portion of the Sublease Premises for the conduct of
its business. Subtenant, at Subtenant's cost, shall be responsible for removal
of Subtenant's refuse and rubbish during the period that Subtenant's Work is in
progress in the Sublease Premises.
(d)(i) So long as Subtenant is not in default in the performance of
its monetary or other material obligations under this Sublease
beyond the expiration of any applicable grace and notice
periods, Sublandlord shall provide Subtenant with an allowance
in the maximum amount of Five Hundred Twelve Thousand Three
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Hundred Twenty-Five and 00/100 Dollars ($512,325.00)
(hereinafter called the "Work Credit"), which Work Credit
shall be applied solely against the costs and expenses
incurred by Subtenant with respect to or in connection
with the performance of Subtenant's Work, including,
without limitation, architectural and engineering fees,
but excluding the costs of the initial move-in by
Subtenant into the Sublease Premises and the cost of
furniture and furnishings. In the event that the cost and
expense of such actual construction work shall exceed the
amount of the Work Credit, Subtenant shall be entirely
responsible for such excess. Anything contained in this
Sublease to the contrary notwithstanding, the obligation
of Sublandlord to pay, advance or otherwise be responsible
for the Work Credit, in whole or in part, shall not arise
unless and until a Sublease Occupancy Event shall have
occurred.
(ii) The Work Credit shall be payable to Subtenant in
installments as Subtenant's Work in the Sublease Premises
progresses, but in no event more frequently than monthly.
Prior to the payment of any such installment, Subtenant
shall deliver to Sublandlord a written request for
disbursement in a form reasonably satisfactory to
Sublandlord, which requisition shall be accompanied by (1)
invoices for Subtenant's Work performed since the last
disbursement of the Work Credit, (2) paid invoices for
Subtenant's Work performed before the last disbursement of
the Work Credit, (3) a certificate signed by Subtenant's
architect certifying that Subtenant's Work represented by
the aforesaid invoices has been satisfactorily completed
in accordance with the final plan and stating that in such
architect's opinion, the amount requisitioned does not
exceed the fair and reasonable cost of Subtenant's Work
for which the requisition is submitted, (4) a certificate
signed by an officer of Subtenant stating that to the best
knowledge and belief of Subtenant, the statements made in
the architect's certificate are true and correct, and
further stating that there are no outstanding mechanic's
or other liens filed against the Sublease Premises or the
Building as the result of Subtenant's Work, and (5) lien
waivers by contractors, subcontractors and all materialmen
for all work completed by them up to the time covered by
the previous requisition paid by Sublandlord.
(iii) Any portion of the Work Credit remaining unpaid with
respect to payments for Subtenant's Work shall be paid by
Sublandlord to Subtenant upon the completion of
Subtenant's Work and upon receipt from Subtenant of a
requisition with attachments as provided in subparagraph
(ii) above, together with (1) a certificate signed by
Subtenant's architect and an officer of Subtenant
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certifying that Subtenant's Work has been substantially
completed in accordance with the final plan, (2) all
governmental sign-offs, inspection certificates and any
permits required to be issued by any governmental entities
having jurisdiction thereover, and (3) final lien waivers
from all materialmen, contractors and subcontractors
performing Subtenant's Work for all of Subtenant's Work
performed by them. If any portion of the Work Credit
remains unadvanced following final payment towards
Subtenant's Work referred to in this paragraph (iii)
above, then, at the request of Subtenant, such remaining
portion of the Work Credit shall be credited against
Sublease Fixed Rent and Sublease Additional Charges as the
same becomes payable under this Sublease.
20. Sublandlord's Systems and Equipment. Sublandlord agrees and
Subtenant acknowledges that Sublandlord's Personal Property, as more
particularly described on Exhibit F hereto, is being left at the Sublease
Premises for Subtenant's use during the Term and at no additional cost to
Subtenant. Sublandlord shall not be responsible for the repair and maintenance
of Sublandlord's Personal Property. Sublandlord shall promptly after the
occurrence of the Commencement Date deliver to Subtenant a bill of sale to the
Sublandlord's Personal Property, other than the cafeteria property described in
said Exhibit F, which bill of sale shall be without representation or warranty
of any kind, either express or implied, other than warranty of title. Provided
Subtenant is not in default in the performance of its monetary or material
obligations under this Sublease beyond the expiration of applicable grace or
notice periods, Sublandlord shall, at the request of Subtenant, deliver such a
bill of sale to Subtenant for such cafeteria property promptly following the
eighteenth (18th) month after the Commencement Date.
21. Building Name. Sublandlord grants to Subtenant its exclusive right
(granted to Sublandlord under Section 21.04 of the Overlease) to name (and from
time to time to change such name) the Building and to have such name or its
corporate name and/or logo appear on one or more places on the exterior surfaces
of the Building, at Subtenant's sole cost and expense. Such displays shall be in
keeping with a first class office park and shall be removed by Subtenant upon
expiration or earlier termination of this Sublease. Subtenant shall also have
the nonexclusive right to install and maintain at its cost and expense, at
appropriate locations to be selected with the approval of Sublandlord and
Overlandlord, which approval by Sublandlord shall not be unreasonably withheld,
conditioned or delayed, within the Interior Common Areas of the Building, signs,
displays and directories identifying and locating corporate products and
organizational elements and personnel in the Building.
22. Representations. Warranties and Covenants of Sublandlord.
(a) Sublandlord represents and warrants to, and agrees with
Subtenant as follows as of the date of execution and delivery of this Sublease:
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(i) the Overlease is in full force and effect in accordance
with, and subject to, all of the terms, covenants,
conditions and agreements contained therein;
(ii) the Overlease has not been modified, amended or
supplemented, except as set forth herein and in the
Exhibit A annexed hereto:
(iii) Sublandlord has not given or received any notice of any
default under the Overlease, which default remains
uncured, and, to the best of its knowledge, no event has
occurred or failed to occur which with the passage of time
and/or the giving of notice would ripen into such a
default;
(iv) Sublandlord has not received any written notice of
violation of any Legal Requirements or Insurance
Requirements, or Environmental Laws or with respect to any
Hazardous Materials relating to the Demised Premises; and
(v) Sublandlord shall pay all rent and perform all obligations
required to be performed by Sublandlord under the
Overlease (and not assumed by Subtenant under this
Sublease) and shall indemnify and hold Subtenant harmless
from any and all cost, damage, liability or expense
(including, but not limited to, reasonable attorneys'
fees) incurred by Subtenant as a result of a breach of
this subparagraph (v); provided, however, Sublandlord
shall not be liable for and shall not indemnify and hold
Subtenant harmless with respect to consequential damages
arising out of the loss of use of the Sublease Premises or
any equipment or facilities therein by Subtenant or any
person, corporation, partnership, limited liability
company or any other business entity claiming through or
under Subtenant.
(vi) Sublandlord shall not (1), except as provided under
Article 24 and 25 and Subsections 39.19 (d) and (g) of the
Overlease, cancel, surrender or terminate the Overlease,
or (2) amend or modify the Overlease, the result of which
would materially and adversely affect Subtenant's rights
or obligations hereunder or with respect to the Sublease
Premises, and, any such cancellation, surrender,
termination (except as provided under said Article 24 and
25 and Subsections 39.19 (d) and (g)), amendment or
modification of the Overlease made without Subtenant's
written consent shall not be binding on Subtenant to the
extent the same materially decreases the rights or
materially increases the obligations of Subtenant with
respect to the Sublease Premises or this Sublease;
50
<PAGE>
(vii) there is no pending or, to the best of Sublandlord's
knowledge, threatened litigation affecting Sublandlord's
interest in the Overlease or the Sublease Premises;
(viii) there is no litigation pending between Sublandlord and
Overlandlord;
(ix) Sublandlord has all requisite corporate power and
authority to execute, deliver and perform its obligations
under this Sublease and the Overlease and the officer(s)
of Sublandlord executing and delivering this Sublease on
behalf of Sublandlord have the requisite authority to
perform such acts on behalf of Sublandlord;
(x) Sublandlord shall, promptly following receipt thereof,
deliver to Subtenant a copy of any notice received by it
from Overlandlord which would have any effect upon the
Sublease Premises or this Sublease. Failure by Sublandlord
to deliver to Subtenant any such notice shall have no
effect whatsoever on the performance by Subtenant of its
obligations under this Sublease;
(xi) The improvements made by or for Sublandlord within the
Sublease Premises contain no asbestos or asbestos-
containing materials; and
(xii) Sublandlord agrees that, with respect to any
nondisturbance agreement it has or may hereafter enter
into with respect to the Overlease, it will enforce for
the benefit of the Sublease Premises and Subtenant the
terms of any such agreement of nondisturbance that it has
the right to enforce.
23. Representations, Warranties and Covenants of Subtenant. Subtenant
represents and warrants to, and agrees with Sublandlord as follows as of the
date of execution and delivery of this Sublease:
(i) Subtenant has all requisite power and authority to
execute, deliver and perform its obligations under this
Sublease and the member of Subtenant executing and
delivering this Sublease on behalf of Subtenant has the
requisite authority to perform such acts on behalf of
Subtenant;
(ii) Subtenant is a limited liability company duly organized,
validly existing and in good standing under the laws of
the State of Delaware, and is in good standing under the
laws of, and is qualified to do business in, the State of
New Jersey;
51
<PAGE>
(iii) Each of Subtenant and Genesis Direct, Inc. has all
requisite power and authority to carry on the business in
which it is now engaged. Neither Subtenant nor Genesis
Direct, Inc., nor the members or principal officers, as
the case may be, of either of them, are subject to any
agreement or restriction which would prevent or limit the
ability of Subtenant, Genesis Direct, Inc., or such
members or principal officers from conducting the business
of Subtenant or Genesis Direct, Inc. as it is now being
conducted; and
(iv) Subtenant agrees that if it operates a cafeteria in the
Sublease Premises and permits other occupants of the
Building to use and purchase prepared food from such
cafeteria, it will charge the officers or employees of ITT
Industries, Inc. that are employed in the Industries
Premises, and their business guests, no more for such
prepared food than it charges Subtenant's employees.
24. Roof. Without any increase in Sublease Fixed Rent or Sublease
Additional Charges, or in Subtenant's obligations hereunder, but at no cost to
Sublandlord; Subtenant shall have the right, to the extent Sublandlord shall
have the right under the Overlease, to the exclusive use of that portion of the
roof of the Building as is identified by crosshatching on Exhibit G attached
hereto and made a part hereof, including for the installation, in accordance
with the provisions of Article 15 of the Overlease (incorporated into this
Sublease), operation and maintenance of communications operations facility
(including, but not limited to, a microwave radio station) and/or installation
of an emergency generator and fuel tank and supplemental HVAC. Subtenant shall
be responsible for any repairs or maintenance attributable to Subtenant's use of
the roof. In the event Subtenant performs any work in such exclusive roof area,
Subtenant shall coordinate same with Overlandlord's property manager so as to
avoid the possibility of interfering with any warranties in existence with
respect to the roof. Upon expiration of the Term of this Sublease, Subtenant
shall remove, at its sole cost and expense, all installations made by Subtenant
or an affiliated company from the roof and repair any damage resulting
therefrom. Subtenant recognizes that Overlandlord has the right to permit other
tenants to utilize any portions of the roof of the Building as are not subject
to Sublandlord's exclusive rights under the Overlease, provided such utilization
does not interfere with Sublandlord's exclusive use of the roof as provided in
Section 39.10 of the Overlease as modified by the Second Lease Modification
Agreement.
25. Subtenant's Right to Provide Cleaning Services. If Subtenant
subleases from Sublandlord all of the First-Offer Space pursuant to its
First-Offer Right hereunder, then, from and after the commencement of the term
of such subleasing, Subtenant shall have the option of providing its own
cleaning services to the Sublease Premises. Subtenant may, upon not less than
eighty (80) days' prior written notice to Sublandlord, exercise its option to
obtain its own cleaning services or to request that
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Sublandlord request Overlandlord to provide, or resume, such cleaning services.
Such notice shall specify the date upon which Subtenant desires that
Overlandlord shall either cease or recommence the cleaning services, as the case
may be; provided, however, such date shall not be earlier than the eightieth
(80th) day from the receipt by Sublandlord of such notice from Subtenant. Upon
receipt of such notice from Subtenant, Sublandlord shall, within twenty (20)
days thereafter, exercise its option under the Overlease to either, as the case
may be, provide its own cleaning services or have Overlandlord provide, or
resume, such cleaning services. Notwithstanding the giving of notice by
Sublandlord to Overlandlord that Sublandlord will provide its own cleaning
services, Sublandlord shall have no obligation to provide such cleaning
services, the sole obligation to provide such cleaning services shall be that of
Subtenant, and Subtenant shall provide such service to the Sublease Premises at
its sole cost and expense, during any period Overlandlord is not required under
the Overlease to provide such cleaning services. During any period that Fixed
Rent under the Overlease is reduced by reason of Sublandlord's election to
provide cleaning services to the Overlease Premises (following Subtenant's
exercise, pursuant hereto, of its option to provide its own cleaning services),
the Sublease Fixed Rent shall be reduced by the amount by which Fixed Rent under
the Overlease is so reduced.
26. Capitalized Terms. Any capitalized terms not otherwise defined in
this Sublease shall have the meanings ascribed to them in the Overlease.
IN WITNESS WHEREOF, the Sublandlord and the Subtenant have respectively
executed this Sublease as of the day and year first above written.
ITT CORPORATION
By: /S/ Mark Thomas
-------------------------------------
Name: Mark Thomas
-----------------------------------
Title: Vice President
----------------------------------
GENESIS DIRECT SECAUCUS OPERATIONS, LLC
By: GENESIS DIRECT, INC., its member, manager
By: /s/ Hunter Cohen
--------------------------------
Hunter Cohen
EVP, C.O.O.
<PAGE>
EXHIBIT 10.4
FORM OF
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of March 1, 1998,
is entered into by Genesis Direct, Inc., a Delaware corporation with its
principal place of business at 100 Plaza Drive, Secaucus, New Jersey 07094 (the
"Company"), and Warren Struhl, residing at _________________ ("Executive").
Executive is now, and since its inception has been, Chairman of the
Board of Directors, President and Chief Executive Officer of the Company. The
Company recognizes the significant contribution which Executive has made to the
success of the Company and understands that the future growth, profitability and
success of the Company will be significantly enhanced by the continued
employment of Executive. The Company, therefore, desires to offer Executive a
compensation package to incentivize him and secure his future services.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:
1. Employment. The Company shall continue to employ Executive and
----------
Executive agrees to continue such employment upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The term of this Agreement (the "Term") shall commence on
----
March 1, 1998 (the "Commencement Date"), and shall continue in effect for a
period of thirty-six (36) months, expiring on February 28, 2001, unless
otherwise extended or terminated as hereinafter provided. The Term shall be
automatically extended for additional twelve-month periods on March 1, 1999 and
on each March 1 thereafter, unless the Company notifies Executive in writing, at
least ninety (90) days prior to any such March 1 extension date that such
extension shall not take place; provided that, if a Change of Control of the
-------------
Company (as defined in Section 11) shall have occurred during the original or
extended Term of this Agreement, this Agreement shall continue in effect for a
period of not less than twenty-four (24) months beyond the month in which such
Change of Control shall have occurred.
3. Position; Duties.
----------------
(a) The Company and Executive agree that during the Term and
subject to the provisions hereof the Company shall employ Executive and
Executive shall serve as Chairman of the Board of Directors, President and Chief
Executive Officer of the Company. During the Term and subject to the provisions
hereof Executive shall report directly to and shall be subject to the direction
and supervision of the Board of Directors of the Company (the "Board"), which
supervision shall be consistent with Executive's title and position. Executive
shall have such authority and responsibilities
<PAGE>
as is delegated to him by the Board from time to time, which authority and
responsibilities shall be consistent with his title and position.
(b) Executive agrees to devote substantially all of his
business time in furtherance of the performance of his duties to the Company
hereunder and to use his best efforts to advance the business and welfare of the
Company. Notwithstanding the foregoing, Executive may devote reasonable time to
the management of his personal investments and to participation in community
and charitable affairs, so long as such activities do not meaningfully interfere
with his duties under the Agreement.
(c) Executive shall be based at the Company's headquarters in
Secaucus, New Jersey, or such other headquarters which the Company may have in
the metropolitan New York City area. Executive shall not be obligated to
relocate outside the metropolitan New York City area without his prior written
consent.
4. Member of the Board.
-------------------
(a) Throughout the first thirty-six (36) months of the Term
Executive shall serve as Chairman of the Board. Furthermore, if the Company
shall at any time during the first thirty-six (36) months of the Term have an
Executive Committee of the Board, Executive shall serve as a member of the
Executive Committee unless either Hunter Cohen or David Sable (collectively,
together with Executive, hereinafter being referred to as the "Founders") serve
on such Committee. The Company agrees that it shall nominate Executive for
election as a Director of the Company (and, if applicable, a member of its
Executive Committee) at all elections during the first thirty six (36) months of
the Term unless Executive declines to stand for election.
(b) At all times throughout the balance of the Term, at least
one of the Founders shall serve as a member of the Company's Nominating
Committee.
5. Compensation.
------------
(a) Base Salary. As compensation for Executive's employment
-----------
hereunder, the Company shall pay Executive a base salary, payable in equal
installments consistent with the Company's current payroll practices for
executives, at an annual rate of $300,000, which amount shall be increased to
$400,000 upon the earlier to occur of (i) the consummation of an IPO (as
hereinafter defined) or (ii) the date the Company secures additional capital
(other than the contemplated GE bridge note for up to $10.5 million) sufficient
to provide funding for operations and acquisitions (i.e. $50 million or more)
during the Company's 1998 fiscal year (the earlier of such dates hereinafter
being referred to as the "Implementation Date"), or such greater base salary as
the Board may from time to time approve. Executive's base salary shall be
subject to annual review and increase by the Board, with the first increase as a
result of such a review to take effect March 1, 1999. Each annual increase shall
be no less than the increase in the Consumer Price Index (as
2
<PAGE>
hereinafter defined), between the two immediately preceding February levels.
Each such adjustment shall be made retroactively when the Consumer Price Index
for the February next preceding the date of such adjustment becomes available.
For purposes of this Agreement an "IPO" is consummated the first time
a registration statement filed under the Securities Act of 1933 with the
Securities and Exchange Commission or any other Federal agency at the time
administering the Securities Act of 1933, or any similar Federal statute (other
than a registration statement filed on Form S-4 or any successor form thereto or
a registration statement filed on Form S-8 or any successor form thereto with
respect to the issuance of common stock of the Company ("Common Stock"), or
securities convertible into or exercisable or exchangeable for, Common Stock or
rights to acquire Common Stock or such securities, granted or to be granted to
employees or directors of or consultants to the Company or its subsidiaries)
respecting an offering, whether primary or secondary, of not less than 10% (or
such lesser percentage as a lead underwriter shall determine is the maximum
amount to be offered and sold pursuant to such registration statement) of the
Common Stock then out standing on a fully-diluted basis is declared effective
and the shares so registered are offered and sold which results in proceeds to
the Company of not less than $30 million.
For purposes of this Agreement, the "Consumer Price Index" means Con
sumer Price Index for All Urban Consumers, U.S. City Average, All Items (1982-
84=100), as reported by the Bureau of Labor Statistics of the U.S. Department of
Labor. In the event that the Consumer Price Index is superseded, the
superseding index shall be substituted for this Consumer Price Index in such a
manner as to implement the intent of this Agreement that the Executive's base
salary be adjusted annually, so that the purchasing power thereof be maintained
at a level amount.
(b) Bonus. In addition to the base salary provided for in Section
-----
5(a) hereof, Executive shall be entitled to participate with other executives of
the Company (as administered by the Company's Compensation Committee) in a
management incentive program or other bonus program which the Company plans to
adopt no later than the Implementation Date. Under such program Executive shall
be entitled to receive an annual bonus equal to 0% to 25% of his base salary if
performance results are less than a reasonable goal set forth by the Company in
its annual business plan (which business plan is adopted by the Board prior to
the annual performance period) and equal to 25% to 50% of his base salary if
performance results exceed the goals set forth in the Company's business plan;
provided, however, that if the Board fails to adopt an annual business plan as a
result of the failure of the Founders to present a reasonable business plan to
the Board, solely for purposes of determining the bonus payable under this
Section 5(b), the Company's Compensation Committee may substitute reasonable
goals, mutually acceptable to Executive and the Compensation Committee, based on
the individual performance of Executive. In the event that the Company does not
adopt any such plan or program, then, in lieu thereof, Executive shall be
entitled to receive an annual bonus each April, beginning with April, 1999,
during the Term in amount equal to 25% of the base salary paid to him in the 12
3
<PAGE>
months preceding such April (including base salary paid to Executive for the
period prior to the Commencement Date).
(c) Stock Option Awards.
-------------------
(i) Basic Award. The Company shall grant to
-----------
Executive 10-year options covering, in total, one thousand nine hundred (1,900)
shares of Common Stock. The option exercise price for five hundred (500) of the
shares covered by the options (the "First Option Group") shall be four thousand
five hundred dollars ($4,500) per share; the option exercise price for six
hundred (600) of the shares covered by the options (the "Second Option Group")
shall be six thousand five hundred dollars ($6,500) per share; and the option
exercise price for eight hundred (800) of the shares covered by the options (the
"Third Option Group") shall be eight thousand five hundred dollars ($8,500) per
share. The options, which shall be substantially in the form attached hereto as
Exhibit A, shall provide for vesting of the First Option Group on March 2, 1999,
- ---------
vesting of the Second Option Group on March 2, 2000, and vesting of the Third
Option Group on March 2, 2001. The First Option Group shall be granted as of
March 2, 1998. The Second and Third Option Groups shall be granted as of the
consummation of an IPO.
(ii) Additional Options and/or Equity-Based
--------------------------------------
Awards. In addition to the options described in Section 5(c)(i), at each annual
- ------
review, subject to the approval of the Compensation Committee, the Company shall
consider granting to Executive a reasonable and competitive number of options to
purchase Common Stock and/or other equity-based compensation awards, which
options and/or awards shall be reasonably calibrated to incentivize Executive to
help the Company achieve its financial goals.
(iii) General Terms. Notwithstanding the vesting
-------------
schedule described in Section 5(c)(i) and any vesting schedule with respect to
any grant made pursuant to Section 5(c)(ii), all such options shall provide
(after they have been granted) for full vesting (i) upon a Change of Control (as
defined in Section 11), and (ii) upon the termination of Executive's employment
in a termination described in Section 7 hereof. The other terms of each such
option shall, in the aggregate, be no less generous to Executive than options
which as of the date hereof have been issued to the Company's senior
executives, but in no event shall provide (other than as specified in the second
following sentence) that the option shall lapse before the earlier to occur of
(A) one (1) year following a termination of employment or (B) the expiration of
the 10-year term. All such options shall also contain provisions for cashless
exercise, tax liability protection, customary anti-dilution provisions and
registration rights for the underlying common stock. Notwithstanding the second
preceding sentence, each of the options shall provide that it will lapse 30 days
following a termination of employment if the termination is by Executive without
Good Reason (as defined in Section 7)(other than by death or for disability).
4
<PAGE>
(d) Split Dollar Life Insurance. As an additional inducement to
---------------------------
the Executive to enter this Employment Agreement, as soon as practicable, but no
later than six weeks from the date hereof, the Company shall increase from two
million dollars ($2,000,000) to four million dollars ($4,000,000) the face
amount of life insurance on the life of Executive which is covered by a written
split-dollar insurance agreement (the "Split Dollar Agreement") between the
Company and one or more family members of Executive, under which the Company
pays the full amount of annual premiums during the Term on a life insurance
policy on the life of Executive and the Company has the right to recover its
cumulative premium outlay on the earlier to occur of (i) termination of the
Split Dollar Agreement or (ii) death of the insured, and the balance of the
death benefit is payable to Executive's named beneficiary. Said increase in the
face amount of life insurance shall be accomplished either by amendment of the
existing Split Dollar Agreement to reflect the increase or by the adoption of a
second Split Dollar Agreement covering the additional two million dollars
($2,000,000) of life insurance coverage, with terms substantially similar to the
original Split Dollar Agreement.
(e) Other Benefits. Executive shall be entitled to receive such
--------------
benefits, compensation or rights as are generally made available to other
members of senior management of the Company (but not less than those made
available to other employees generally) including, without limitation, sick pay,
participation in any pension, profit sharing, deferred compensation and any
equity incentive plan and participation in any medical, disability and other
welfare benefit plan now existing or hereafter adopted by the Company; provided,
however, that in the event Executive fails to qualify for any medical or
disability insurance plan that may be adopted by the Company, the Company shall
pay to Executive an amount which would enable him to purchase an insurance plan
from another carrier which provides substantially similar benefits to those
provided to other members of senior management under the Company's plans. In
addition, to the extent that such benefit is not made available under its
general employee benefit plans, the Company shall maintain disability insurance
for Executive which provides Executive with a disability benefit equal to 50% of
his base salary (on an after-tax basis). Executive represents that as of the
date hereof he has no knowledge of any medical condition which might prevent him
from qualifying as a beneficiary under a standard medical or disability plan.
During the Term, Executive's benefits shall be maintained at least at the same
level as they are presently in effect on the date hereof.
(f) Vacation. Executive shall be entitled to four weeks of
--------
vacation time each year, to be pro-rated monthly for partial years, during the
Term. If Executive does not utilize all vacation in the year earned, one-half of
the unused vacation time in any year shall carry over to the next year.
6. Expenses and Fringe Benefits. Upon presentation by Executive of
----------------------------
documentation, expense statements, vouchers and/or such other supporting
information as the Company may reasonably request, the Company shall reimburse
Executive for all reasonable travel, entertainment and other expenses incurred
or paid by Executive in con-
5
<PAGE>
nection with, or related to, the performance of his duties, responsibilities or
services under this Agreement, which are consistent with Company policies and
Executive's practices as of the date hereof. Without limiting the foregoing,
the Company shall provide Executive with (i) a personal assistant; (ii) an
office and office furniture commensurate with his title and position; and (iii)
a first rate personal computer for his home and other technological equipment
(as is developed from time to time) which Executive reasonably determines can
meaningfully assist him in the performance of his duties and tasks hereunder.
In addition, at the beginning of the Term and each third year thereafter the
Company shall lease for Executive, for his exclusive use, a new automobile
reasonably selected by Executive, consistent with its practice as of the date
hereof, which automobile shall not cost more than $50,000. In addition to
making lease and insurance payments for the automobile, the Company shall
reimburse Executive for reasonable and proper maintenance expenses which he
incurs for such automobile.
7. Termination of Executive Without Cause or by Executive With Good
----------------------------------------------------------------
Reason.
- ------
(a) At any time prior to expiration of the Term, the Board may
terminate Executive's employment without Cause (as defined in Section 9(b)), at
any time, and Executive may terminate his employment with Good Reason (as
defined in Subsection (b) of this Section 7), subject to payment by the Company
of the severance amounts set forth in Subsections (c) and (d) of this Section 7.
(b) For purposes hereof the term "Good Reason" shall mean:
(i) during the first thirty-six (36) months of the
Term, the failure of the Company to nominate Executive for election as a
Director of the Company at any election or, if the Company has an Executive
Committee, the failure of the Company to nominate Executive for election as a
member of the Executive Committee of the Company at any election, unless (in
either case) Executive declines to stand for election or unless, in the case of
the Executive Committee, either Hunter Cohen or David Sable are nominated; and
for the balance of the Term, the failure of at least one of the Founders to
serve as a member of the Company's Nominating Committee;
(ii) any purported termination of Executive's
employment for Cause which is not effected pursuant to a notice described in
Section 9 of this Agreement;
(iii) without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with the offices
held here under, or a material alteration or diminution in the nature or status
of his responsibilities; or an adverse and material alteration in his reporting
responsibilities, titles or offices, or any removal of him or failure to re-
elect him to any of such positions, except in connec-
6
<PAGE>
tion with the termination of his employment or retirement (which shall mean his
voluntary termination of employment after having attained age 65);
(iv) any reduction in Executive's annual base salary
or bonus opportunity provided for in Section 5 or a material reduction in fringe
benefits as in effect on the date hereof or as the same may be increased during
the Term;
(v) any relocation of Executive other than as
permitted under Section 3(c); and
(vi) any material breach by the Company of any
material provision of this Agreement which the Company fails to correct within
thirty (30) working days after receiving written notice thereof; and
(vii) any termination of employment which occurs within
two years following a Change of Control other than a termination by the Company
for Cause.
Not less than ten (10) business days prior to terminating his
employment for Good Reason, Executive shall provide the Company with notice of
the same, which notice, to the extent applicable, shall provide the Company with
an opportunity to cure any of the conditions specified in clauses (i) through
(vii) of this Section 7(b) prior to the termination effective date.
In the event that Executive terminates his employment as a result of
an event or change described in clause (iii) of this Section 7(b), such
termination shall not be deemed to be for Good Reason unless Executive, within
one hundred and eighty (180) days from the time the event or change has been
brought to the attention of Executive), has notified the Compensation Committee
of such event or change.
(c) In the event Executive is terminated by the Company with out Cause
or Executive terminates his employment with Good Reason, in addition to paying
Executive all unpaid compensation and benefits accrued through the date of
termination of his employment (including any bonus for a prior year which has
not been paid and a pro rata portion of the bonus payable for the year in which
the termination occurs), the Company shall pay to Executive an amount equal to
the sum of (i) two (2) times Executive's annual base salary (based on
Executive's base salary prevailing at the time of the termination), plus (ii)
two (2) times the highest annual bonus paid to Executive during the thirty-six
(36) month period ending on the date of the termination (and, if the Company has
not paid an annual bonus to Executive during such period due to its failure to
establish a bonus program pursuant to Section 5(b), $400,000 in lieu thereof.)
In addition, during the period that the Company is obligated to provide
Executive and his dependents with continuation coverage under a group health
plan under COBRA (determined without regard to whether Executive elects to pay
the premium
7
<PAGE>
costs, but determined with regard to whether such coverage is cut off as a
result of other employer coverage becoming effective), Company shall pay the
premium costs for such coverage to the same extent that it paid such costs prior
to the termination of employment.
(d) Payment pursuant to Section 7(c) shall be made in twelve (12)
equal monthly installments on the last day of each month after termination of
this Agreement pursuant to this Section 7; provided, however, that if the
-------- -------
Executive's employment is terminated under the circumstances described in
Section 11) (following a Change of Control), payment pursuant to Section 7(c)
shall be made in a single lump sum within thirty (30) days of the termination
date.
(e) The parties hereto expressly acknowledge and agree that the
compensation and benefits payable to Executive upon a termination as specified
in this Section 7 will constitute full, reasonable and adequate compensation for
any such termination and that the payment of such compensation and benefits
shall fully satisfy and discharge any and all obligations of the Company to
Executive in connection with such termination.
(f) As a condition to making any payment provided under Section 7(c)
the Company may require Executive to execute a release, pursuant to which
release Executive and his heirs, successors and assigns relinquish and forever
discharge the Company and any director, officer, employee, shareholder or agent
of the Company from any and all claims, damages, losses, costs, expenses
liabilities or obligations, whether known or unknown (other than any such
claims, damages, losses, costs, expenses, liabilities or obligations (i) covered
by any indemnification arrangement of the Company with Executive or (ii) arising
under any written employee benefit plan or arrangement covering Executive) which
Executive has incurred or suffered or may incur or suffer as a result of
Executive's employment by the Company or the termination of such employment.
8. Termination By Executive Without Good Reason. Executive may
--------------------------------------------
terminate his employment hereunder without Good Reason, provided that Executive
first gives to the Company a written notice of intent to terminate at least one
hundred twenty (120) days prior to the effective date of any such termination.
All rights of Executive under this Agreement shall terminate upon the effective
date of the termination of employment; provided, however, the Company shall pay
-------- -------
to Executive any base salary earned through the effective date of the
termination and any other compensation and benefits provided in Sections 5 and 6
to the effective date of such termination (including any bonus for a prior year
which has not been paid, but not any portion of any bonus for the year in which
the termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c), upon a termination of Executive's employment hereunder without
Good Reason, Executive must exercise or forfeit all outstanding, unexercised
vested options within 120 days of such termination and shall forfeit all
outstanding unvested options which he has received pursuant to Section 5(c).
8
<PAGE>
9. Termination of Executive For Cause.
----------------------------------
(a) Notwithstanding anything in this Agreement to the contrary,
the Company shall have the right to terminate Executive's employment hereunder
for Cause (as defined in Subsection (b) of this Section 9) by giving to
Executive written notice of such termination as of a date (not earlier than ten
(10) days after such notice) to be specified in such notice, and his employment
hereunder shall terminate on the date so specified, whereupon Executive shall be
entitled to receive his base salary at the rate provided in Section 5(a) and any
other compensation or benefits provided in Sections 5 and 6 only to the date on
which termination shall take effect (including any bonus for a prior year which
has not been paid, but not any portion of any bonus for the year in which the
termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c), upon a termination of Executive's employment hereunder for Cause,
Executive shall forfeit all outstanding, unexercised options (including vested
options) which he has received pursuant to Section 5(c).
(b) For purposes hereof the term "Cause" shall mean (i)
Executive's willful and continued failure materially to perform his duties with
the Company (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a notice by Executive of termination for Good Reason), which is not
remedied within a reasonable period after a written demand for performance is
delivered to Executive which specifically identifies the manner in which it is
believed that Executive has not materially performed his duties; (ii) the
willful engagement by Executive in misconduct materially and demonstrably in
jurious to the Company, or (iii) Executive's conviction of a crime (A) which is
a felony involving the Company, (B) involving fraud against the Company or (C)
involving embezzlement of the Company's property. For purposes of this
Subsection (b), no act or failure to act by Executive shall be considered
"willful" unless done, or omitted to be done, by Executive without good faith
and without reasonable belief that Executive's action or omission was in the
best interest of the Company. For purposes of this Agreement, Executive shall
not be deemed to have been terminated for Cause unless and until there shall
have been delivered to Executive a copy of a resolution, duly adopted by the
affirmative vote of not less than 66-2/3% of the entire membership of the Board
(excluding Executive) at a meeting called and held for this purpose after
reasonable written notice to Executive and an opportunity for him, together with
his counsel, to be heard by the Board, finding, in the good faith opinion of the
Board, misconduct of the type described in this Section 9(b), and specifying in
detail the particulars thereof.
10. Termination In the Event of Disability or Death.
-----------------------------------------------
(a) Disability. In the event of the Disability (as hereinafter de
----------
fined) of the Executive, the Company shall have the right to terminate
Executive's employment hereunder by giving to Executive written notice of
termination. In the event Executive's employment is terminated for Disability
under this Section 10(a), Executive
9
<PAGE>
shall receive his base salary at the rate provided in Section 5(a) and any other
compensation and benefits provided in Sections 5 and 6 to the effective date of
such termination (including any bonus for a prior year which has not been paid,
but not any portion of any bonus for the year in which the termination occurs).
Such termination pursuant to this Section 10(a) shall not affect any rights
which Executive may have at the time of termination pursuant to any insurance
(including, but not limited to, disability insurance provided for under Section
5(e)) or other death benefit, bonus, retirement, severance pay or stock award
plans or arrangements of the Company, or any equity incentive plan or any
restricted stock award or options thereunder, which rights shall continue to be
governed by the terms and provisions of any such plans and agreements. As used
herein, the term "Disability" means a physical or mental incapacity or
disability which renders Executive unable substantially to perform the services
contemplated by this Agreement for six (6) consecutive calendar months or for
shorter periods aggregating one hundred eighty (180) or more business days in
any twelve (12) month period, as determined by an independent physician selected
with the approval of the Company and the Executive (or, if Executive is unable
to act, Executive's legal representative).
(b) Death. During the Term the Company shall maintain a life
-----
insurance policy or policies in the amount of four million dollars ($4,000,000)
in accordance with the Split Dollar Agreement, as provided in Section 5(d).
This Agreement in all other respects will terminate upon the death of Executive
except for the pay ment of Executive's base salary at the rate provided in
Section 5(a) and any other compensation and benefits provided in Sections 5 and
6 to the date of his death (including any bonus for a prior year which has not
been paid, but not any portion of any bonus for the year in which the death
occurs). Executive understands and agrees that the Company may purchase one or
more key man life insurance policies on his life which the Company or its
designees shall own, and the Executive agrees to take all reasonable steps to
facilitate the same, including, but not limited to, submitting to physical
examinations in conjunction with the purchase therewith.
11. Change of Control. For purposes hereof, a "Change of Control"
----------------- -----------------
shall occur or be deemed to occur if any of the following events occur:
(i) any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) other than GE Investment Private Placement Partners II, a
limited partnership, any of the Founders or Founder affiliate (a "Person") is or
becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided however, that for purposes of
-------- -------
this subsection (i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or
10
<PAGE>
related trust) sponsored or maintained by the Company or any company controlled
by the Company, or (D) any acquisition by any corporation pursuant to a
transaction which complies with clauses (A),(B) and (C) of paragraph (iii)
below;
(ii) Individuals who, as of the Commencement Date,
constitute the Board (as of such date, the Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, that
-------- -------
any individual becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be, for purposes of this Agreement, considered as though such person were
a member of the Incumbent Board, excluding any individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) The majority of the disinterested stockholders of
the Company approve a reorganization, merger or consolidation of the Company
with any other Person or the sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the Person resulting from such
Business Combination (including, without limitation, a Person which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the Outstanding Company
Voting Securities immediately prior to such Business Combination, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 50% or more of, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination, and
(C) at least a majority of the members of the Board of Directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
11
<PAGE>
12. Excise Tax Gross-Up Payment. If any payments to Executive by the
---------------------------
Company under this Agreement or otherwise ("Payments") are subject to the tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Company shall pay to Executive an additional amount
(a "Gross-Up Payment") such that the net amount retained by Executive, after
deduction of any Excise Tax on the Payments and all income taxes and Excise Tax
upon such Gross-Up Payment, shall be equal to the Payments. The determination
whether any Payments are subject to the Excise Tax shall be based on the opinion
of tax counsel selected by the Company and reasonably acceptable to the
Executive, whose fees and expenses shall be paid by the Company. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be deemed
to pay federal, state and local income taxes at the highest marginal rates. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of the
Executive's employment, at the time that the amount of such reduction is finally
deter mined, the Executive shall repay the Company the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the tax on the portion of the Gross-Up Payment being
repaid, to the extent the repayment results in a reduction in tax) plus interest
on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is deter mined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment, the Company shall make an additional Gross-Up Payment in respect to
such excess, together with interest, penalties or additions payable by the
Executive with respect thereto (and taxes payable by Executive as a result of
such additional Gross-Up Payment) at the time such excess is finally determined.
Executive and the Company shall each reasonably cooperate with each other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Payments.
13. Indemnification. Executive shall be fully indemnified by the
---------------
Company in his capacity as an officer and director of the Company to the fullest
extent permitted by Delaware law. Beginning with the consummation of an IPO,
the Company shall be required to maintain insurance therefore in an amount not
less than ten million dollars ($10,000,000).
14. Non-Compete.
-----------
(a) So long as Executive is employed by the Company and for a
period of one year after the termination of his employment other than a
termination (A) by the Company for a reason which is not for Cause or (B) by the
Executive which is for Good Reason or (C) upon expiration of the Term (due to
failure to extend the Term pursuant to Section 2), Executive shall not directly
or indirectly:
(i) as an individual proprietor, partner, stockholder,
officer, employee, director, joint venturer, investor, lender, or in any other
capacity whatso-
12
<PAGE>
ever (other than as the holder of not more than five percent (5%) of the total
outstanding stock of a publicly held company), engage directly or indirectly in
any business or entity which competes with the business conducted by the Company
in any geographic area in which the Company conducts material operations; or
(ii) solicit, divert or take away, or attempt to divert or
to take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by Executive while employed by the Company.
(b) So long as Executive is employed by the Company and (1) for
a period of two years after the termination of his employment if the termination
is by Executive without Good Reason; and (2) for a period of one year after the
termination of his employment if the termination is for any other reason,
Executive shall not directly or indirectly recruit, solicit, hire, induce, or
attempt to induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with, the Company.
(c) If any restriction set forth in this Section 14 is found by
any court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable.
(d) The restrictions contained in this Section 14 are necessary
for the protection of the business and goodwill of the Company and are
considered by Executive to be reasonable for such purpose and have been reviewed
by his counsel. Executive agrees that any breach of this Section 14 will cause
the Company substantial and irrevocable damage and, therefore, in the event of
any such breach, in addition to such other remedies which may be available, the
Company shall have the right to seek specific performance and injunctive relief.
15. Proprietary Information
------------------------
(a) Executive agrees that all information and know-how, whether
or not in writing, of a private, secret or confidential nature concerning the
Company's business, business relationships or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary Information
may include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, and customer and
supplier lists and contracts at or knowledge of customers or prospective
customers of the Company. Executive shall not disclose any Proprietary In
formation to others outside the Company or use the same for any unauthorized
purposes
13
<PAGE>
without written approval by an officer of the Company, either during or after
his employment, unless and until such Proprietary Information has become public
knowledge with out fault by Executive.
(b) Executive agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, laboratory notebooks, program
listings, or other writ ten, photographic, or other tangible material containing
Proprietary Information, whether created by Executive or others, which shall
come into his custody or possession, shall be and are the exclusive property of
the Company to be used by Executive only in the performance of his duties for
the Company.
(c) Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in this Section 15,
also extends to such types of information, know-how, records and tangible
property of customers of the Company or suppliers to the Company or other third
parties who may have disclosed or entrusted the same to the Company or to
Executive in the course of the Company's business.
(d) Other Agreements. Executive hereby represents that he is not
----------------
bound by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of his employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Executive further represents that his performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by him in confidence or in trust prior to his employment with the
Company.
16. Litigation Assistance. During the Term, at the request of the
---------------------
Company, Executive shall render reasonable assistance which the Company
considers necessary or advisable in connection with any litigation involving the
Company or any of its officers, employees or directors. In the event Executive
renders such assistance, the Company shall promptly reimburse Executive for
reasonable travel and other out-of-pocket expenses which Executive incurs in
connection therewith.
17. No Duty to Mitigate. Except as expressly provided herein in
-------------------
Section 14, Executive shall be free to accept such employment and engage in such
business as Executive may desire following the termination of his employment
hereunder. Executive shall have no duty to mitigate any payments required to be
made by the Company hereunder, and no compensation received by Executive from
such other employment or business shall reduce or affect any payments required
to be made by the Company hereunder (except to the extent expressly provided in
Section 7(c) hereunder with respect to continuation coverage under a group
health plan under COBRA).
14
<PAGE>
18. Legal Fees. The Company shall reimburse Executive for all
----------
reasonable legal fees and expenses incurred by the Executive in negotiating this
Agreement and enforcing his rights hereunder.
19. Assignment. Neither this Agreement nor any rights or benefits
----------
hereunder shall be subject to execution, attachment or similar process nor may
this Agreement or any rights or benefits hereunder be assigned, delegated,
transferred, pledged or hypothecated, without the written consent of both
parties hereto, and any such assignment, delegation, transfer, pledge,
hypothecation, execution, attachment or similar process shall be null and void.
20. Successors: Binding Agreement.
-----------------------------
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
in writing and to agree to perform its obligations under this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement prior to the effectiveness of succession shall be
a breach of this Agreement. As used in this Agreement, the term the "Company"
shall mean the Company as defined above and any successor to its business or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforce
able by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. Any
amounts payable by the Company to Executive after the date of his death, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee, or if there is no such
designee, to his estate.
21. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be valid and effective under
applicable law, but if any provision of this Agreement is found to be prohibited
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
22. Notices. All notices, requests, demands and other communication
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if mailed by United States Postal Service certified or
registered mail, pre paid, to the parties or their permitted assignees at the
Company, in the case of the Company, such address as shall constitute the
Company's headquarters, and in the case of Executive, at the last address shown
in the personnel records of the Company, or at such
15
<PAGE>
other address as shall be given in writing by either party to the other. The
date of such personal delivery or the third business day following the date of
mailing shall be deemed to be the date of such notice, demand or communication.
23. Waiver and Modification. Any waiver, alteration or modification
-----------------------
of any of the terms of this Agreement shall be valid only if made in writing and
signed by the parties hereto. Each party hereto from time to time may waive any
of his or its rights hereunder without affecting a waiver with respect to any
subsequent occurrences or transactions hereunder.
24. Captions and Headings. Captions and section headings used herein
---------------------
are for convenience only, are not a part hereof and shall not be used in
construing this Agreement.
25. Entire Agreement. This Agreement constitutes and embodies the
----------------
entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the employment
of Executive by the Company.
26. Governing Law. This Agreement shall be governed by and
-------------
interpreted in accordance with the internal laws of the State of New Jersey,
except where Federal law governs.
27. Arbitration. Any dispute or controversy arising out of or
-----------
relating to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or any breach of this
Agreement or any such document or instrument shall be settled by arbitration to
be held in the City of Hackensack, State of New Jersey, in accordance with the
rules then in effect of the American Arbitration Association or any successor
thereto. The arbitrator may grant injunctions or other relief in such dispute
or controversy. The decision of the arbitrator shall be final, conclusive, and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction, and the parties
irrevocably consent to the jurisdiction of the New Jersey courts for this
purpose.
28. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but both of which taken together
shall constitute one and the same instrument.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
GENESIS DIRECT, INC.
By:
------------------------------------
Name:
Title:
---------------------------------------
Warren Struhl
17
<PAGE>
EXHIBIT 10.5
FORM OF
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of March 1, 1998,
is entered into by Genesis Direct, Inc., a Delaware corporation with its
principal place of business at 100 Plaza Drive, Secaucus, New Jersey 07094 (the
"Company"), and Hunter Cohen, residing at _________________ ("Executive").
Executive is now, and since its inception has been, Chief Operating
Officer of the Company. The Company recognizes the significant contribution
which Executive has made to the success of the Company and understands that the
future growth, profitability and success of the Company will be significantly
enhanced by the continued employment of Executive. The Company, therefore,
desires to offer Executive a compensation package to incentivize him and secure
his future services.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:
1. Employment. The Company shall continue to employ Executive and
----------
Executive agrees to continue such employment upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The term of this Agreement (the "Term") shall commence on
----
March 1, 1998 (the "Commencement Date"), and shall continue in effect for a
period of thirty-six (36) months, expiring on February 28, 2001, unless
otherwise extended or terminated as hereinafter provided. The Term shall be
automatically extended for additional twelve-month periods on March 1, 1999 and
on each March 1 thereafter, unless the Company notifies Executive in writing, at
least ninety (90) days prior to any such March 1 extension date that such
extension shall not take place; provided that, if a Change of Control of the
-------------
Company (as defined in Section 11) shall have occurred during the original or
extended Term of this Agreement, this Agreement shall continue in effect for a
period of not less than twenty-four (24) months beyond the month in which such
Change of Control shall have occurred.
3. Position; Duties.
----------------
(a) The Company and Executive agree that during the Term and subject
to the provisions hereof the Company shall employ Executive and Executive shall
serve as Chief Operating Officer of the Company. During the Term and subject to
the provisions hereof Executive shall report directly to and shall be subject to
the direction and supervision of the Board of Directors of the Company (the
"Board"), which supervision shall be consistent with Executive's title and
position. Executive shall have such authority and responsibilities as is
delegated to him by the Board from time to time, which authority and
responsibilities shall be consistent with his title and position.
<PAGE>
(b) Executive agrees to devote substantially all of his business
time in furtherance of the performance of his duties to the Company hereunder
and to use his best efforts to advance the business and welfare of the Company.
Notwithstanding the foregoing, Executive may devote reasonable time to the
management of his personal investments and to participation in community and
charitable affairs, so long as such activities do not meaningfully interfere
with his duties under the Agreement.
(c) Executive shall be based at the Company's headquarters in
Secaucus, New Jersey, or such other headquarters which the Company may have in
the metropolitan New York City area. Executive shall not be obligated to
relocate outside the metropolitan New York City area without his prior written
consent.
4. Member of the Board.
-------------------
(a) Throughout the first thirty-six (36) months of the Term
Executive shall serve as a member of the Board. Furthermore, if the Company
shall at any time during the first thirty-six (36) months of the Term have an
Executive Committee of the Board, Executive shall serve as a member of the
Executive Committee unless either Warren Struhl or David Sable (collectively,
together with Executive, hereinafter being referred to as the "Founders") serve
on such Committee. The Company agrees that it shall nominate Executive for
election as a Director of the Company (and, if applicable, a member of its
Executive Committee) at all elections during the first thirty six (36) months of
the Term unless Executive declines to stand for election.
(b) At all times throughout the balance of the Term, at least one
of the Founders shall serve as a member of the Company's Nominating Committee.
5. Compensation.
------------
(a) Base Salary. As compensation for Executive's employment
-----------
hereunder, the Company shall pay Executive a base salary, payable in equal
installments consistent with the Company's current payroll practices for
executives, at an annual rate of $300,000, which amount shall be increased to
$400,000 upon the earlier to occur of (i) the consummation of an IPO (as
hereinafter defined) or (ii) the date the Company secures additional capital
(other than the contemplated GE bridge note for up to $10.5 million) sufficient
to provide funding for operations and acquisitions (i.e. $50 million or more)
during the Company's 1998 fiscal year (the earlier of such dates hereinafter
being referred to as the "Implementation Date"), or such greater base salary as
the Board may from time to time approve. Executive's base salary shall be
subject to annual review and increase by the Board, with the first increase as a
result of such a review to take effect March 1, 1999. Each annual increase shall
be no less than the increase in the Consumer Price Index (as hereinafter
defined), between the two immediately preceding February levels. Each such
adjustment shall be made retroactively when the Consumer Price Index for the
February next preceding the date of such adjustment becomes available.
For purposes of this Agreement an "IPO" is consummated the first time
a registration statement filed under the Securities Act of 1933 with the
Securities and
2
<PAGE>
Exchange Commission or any other Federal agency at the time administering the
Securities Act of 1933, or any similar Federal statute (other than a
registration statement filed on Form S-4 or any successor form thereto or a
registration statement filed on Form S-8 or any successor form thereto with
respect to the issuance of common stock of the Company ("Common Stock"), or
securities convertible into or exercisable or exchangeable for, Common Stock or
rights to acquire Common Stock or such securities, granted or to be granted to
employees or directors of or consultants to the Company or its subsidiaries)
respecting an offering, whether primary or secondary, of not less than 10% (or
such lesser percentage as a lead underwriter shall determine is the maximum
amount to be offered and sold pursuant to such registration statement) of the
Common Stock then outstanding on a fully-diluted basis is declared effective and
the shares so registered are offered and sold which results in proceeds to the
Company of not less than $30 million.
For purposes of this Agreement, the "Consumer Price Index" means
Consumer Price Index for All Urban Consumers, U.S. City Average, All Items
(1982-84=100), as reported by the Bureau of Labor Statistics of the U.S.
Department of Labor. In the event that the Consumer Price Index is superseded,
the superseding index shall be substituted for this Consumer Price Index in such
a manner as to implement the intent of this Agreement that the Executive's base
salary be adjusted annually, so that the purchasing power thereof be maintained
at a level amount.
(b) Bonus. In addition to the base salary provided for in Section
-----
5(a) hereof, Executive shall be entitled to participate with other executives of
the Company (as administered by the Company's Compensation Committee) in a
management incentive program or other bonus program which the Company plans to
adopt no later than the Implementation Date. Under such program Executive shall
be entitled to receive an annual bonus equal to 0% to 25% of his base salary if
performance results are less than a reasonable goal set forth by the Company in
its annual business plan (which business plan is adopted by the Board prior to
the annual performance period) and equal to 25% to 50% of his base salary if
performance results exceed the goals set forth in the Company's business plan;
provided, however, that if the Board fails to adopt an annual business plan as a
result of the failure of the Founders to present a reasonable business plan to
the Board, solely for purposes of determining the bonus payable under this
Section 5(b), the Company's Compensation Committee may substitute reasonable
goals, mutually acceptable to Executive and the Compensation Committee, based on
the individual performance of Executive. In the event that the Company does not
adopt any such plan or program, then, in lieu thereof, Executive shall be
entitled to receive an annual bonus each April, beginning with April, 1999,
during the Term in amount equal to 25% of the base salary paid to him in the 12
months preceding such April (including base salary paid to Executive for the
period prior to the Commencement Date).
(c) Stock Option Awards.
-------------------
(i) Basic Award. The Company shall grant to Executive
-----------
10-year options covering, in total, one thousand nine hundred (1,900) shares of
Common Stock. The option exercise price for five hundred (500) of the shares
covered by the options (the "First Option Group") shall be four thousand five
hundred dollars
3
<PAGE>
($4,500) per share; the option exercise price for six hundred (600) of the
shares covered by the options (the "Second Option Group") shall be six thousand
five hundred dollars ($6,500) per share; and the option exercise price for eight
hundred (800) of the shares covered by the options (the "Third Option Group")
shall be eight thousand five hundred dollars ($8,500) per share. The options,
which shall be substantially in the form attached hereto as Exhibit A, shall
---------
provide for vesting of the First Option Group on March 2, 1999, vesting of the
Second Option Group on March 2, 2000, and vesting of the Third Option Group on
March 2, 2001. The First Option Group shall be granted as of March 2, 1998. The
Second and Third Option Groups shall be granted as of the consummation of an
IPO.
(ii) Additional Options and/or Equity-Based Awards.
---------------------------------------------
In addition to the options described in Section 5(c)(i), at each annual review,
subject to the approval of the Compensation Committee, the Company shall
consider granting to Executive a reasonable and competitive number of options to
purchase Common Stock and/or other equity-based compensation awards, which
options and/or awards shall be reasonably calibrated to incentivize Executive to
help the Company achieve its financial goals.
(iii) General Terms. Notwithstanding the vesting
-------------
schedule described in Section 5(c)(i) and any vesting schedule with respect to
any grant made pursuant to Section 5(c)(ii), all such options shall provide
(after they have been granted) for full vesting (i) upon a Change of Control (as
defined in Section 11), and (ii) upon the termination of Executive's employment
in a termination described in Section 7 hereof. The other terms of each such
option shall, in the aggregate, be no less generous to Executive than options
which as of the date hereof have been issued to the Company's senior executives,
but in no event shall provide (other than as specified in the second following
sentence) that the option shall lapse before the earlier to occur of (A) one (1)
year following a termination of employment or (B) the expiration of the 10-year
term. All such options shall also contain provisions for cashless exercise, tax
liability protection, customary anti-dilution provisions and registration rights
for the underlying common stock. Notwithstanding the second preceding sentence,
each of the options shall provide that it will lapse 30 days following a
termination of employment if the termination is by Executive without Good Reason
(as defined in Section 7)(other than by death or for disability).
(d) Split Dollar Life Insurance. As an additional inducement to the
---------------------------
Executive to enter this Employment Agreement, as soon as practicable, but no
later than six weeks from the date hereof, the Company shall increase from two
million dollars ($2,000,000) to four million dollars ($4,000,000) the face
amount of life insurance on the life of Executive which is covered by a written
split-dollar insurance agreement (the "Split Dollar Agreement") between the
Company and one or more family members of Executive, under which the Company
pays the full amount of annual premiums during the Term on a life insurance
policy on the life of Executive and the Company has the right to recover its
cumulative premium outlay on the earlier to occur of (i) termination of the
Split Dollar Agreement or (ii) death of the insured, and the balance of the
death
4
<PAGE>
benefit is payable to Executive's named beneficiary. Said increase in the
face amount of life insurance shall be accomplished either by amendment of the
existing Split Dollar Agreement to reflect the increase or by the adoption of a
second Split Dollar Agreement covering the additional two million dollars
($2,000,000) of life insurance coverage, with terms substantially similar to the
original Split Dollar Agreement.
(e) Other Benefits. Executive shall be entitled to receive such
--------------
benefits, compensation or rights as are generally made available to other
members of senior management of the Company (but not less than those made
available to other employees generally) including, without limitation, sick pay,
participation in any pension, profit sharing, deferred compensation and any
equity incentive plan and participation in any medical, disability and other
welfare benefit plan now existing or hereafter adopted by the Company; provided,
however, that in the event Executive fails to qualify for any medical or
disability insurance plan that may be adopted by the Company, the Company shall
pay to Executive an amount which would enable him to purchase an insurance plan
from another carrier which provides substantially similar benefits to those
provided to other members of senior management under the Company's plans. In
addition, to the extent that such benefit is not made available under its
general employee benefit plans, the Company shall maintain disability insurance
for Executive which provides Executive with a disability benefit equal to 50% of
his base salary (on an after-tax basis). Executive represents that as of the
date hereof he has no knowledge of any medical condition which might prevent him
from qualifying as a beneficiary under a standard medical or disability plan.
During the Term, Executive's benefits shall be maintained at least at the same
level as they are presently in effect on the date hereof.
(f) Vacation. Executive shall be entitled to four weeks of vacation
--------
time each year, to be pro-rated monthly for partial years, during the Term. If
Executive does not utilize all vacation in the year earned, one-half of the
unused vacation time in any year shall carry over to the next year.
6. Expenses and Fringe Benefits. Upon presentation by Executive of
----------------------------
documentation, expense statements, vouchers and/or such other supporting
information as the Company may reasonably request, the Company shall reimburse
Executive for all reasonable travel, entertainment and other expenses incurred
or paid by Executive in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, which are consistent
with Company policies and Executive's practices as of the date hereof. Without
limiting the foregoing, the Company shall provide Executive with (i) a personal
assistant; (ii) an office and office furniture commensurate with his title and
position; and (iii) a first rate personal computer for his home and other
technological equipment (as is developed from time to time) which Executive
reasonably determines can meaningfully assist him in the performance of his
duties and tasks hereunder. In addition, at the beginning of the Term and each
third year thereafter the Company shall lease for Executive, for his exclusive
use, a new automobile reasonably selected by Executive, consistent with its
practice as of the date hereof, which automobile shall not cost more than
$50,000. In addition to making lease and insurance
5
<PAGE>
payments for the automobile, the Company shall reimburse Executive for
reasonable and proper maintenance expenses which he incurs for such automobile.
7. Termination of Executive Without Cause or by Executive With Good
----------------------------------------------------------------
Reason.
- ------
(a) At any time prior to expiration of the Term, the Board may
terminate Executive's employment without Cause (as defined in Section 9(b)), at
any time, and Executive may terminate his employment with Good Reason (as
defined in Subsection (b) of this Section 7), subject to payment by the Company
of the severance amounts set forth in Subsections (c) and (d) of this Section 7.
(b) For purposes hereof the term "Good Reason" shall mean:
(i) during the first thirty-six (36) months of the
Term, the failure of the Company to nominate Executive for election as a
Director of the Company at any election or, if the Company has an Executive
Committee, the failure of the Company to nominate Executive for election as a
member of the Executive Committee of the Company at any election, unless (in
either case) Executive declines to stand for election or unless, in the case of
the Executive Committee, either Warren Struhl or David Sable are nominated; and
for the balance of the Term, the failure of at least one of the Founders to
serve as a member of the Company's Nominating Committee;
(ii) any purported termination of Executive's
employment for Cause which is not effected pursuant to a notice described in
Section 9 of this Agreement;
(iii) without Executive's express written consent, the
assignment to Executive of any duties materially inconsistent with the offices
held hereunder, or a material alteration or diminution in the nature or status
of his responsibilities; or an adverse and material alteration in his reporting
responsibilities, titles or offices, or any removal of him or failure to re-
elect him to any of such positions, except in connection with the termination of
his employment or retirement (which shall mean his voluntary termination of
employment after having attained age 65);
(iv) any reduction in Executive's annual base salary
or bonus opportunity provided for in Section 5 or a material reduction in fringe
benefits as in effect on the date hereof or as the same may be increased during
the Term;
(v) any relocation of Executive other than as
permitted under Section 3(c); and
(vi) any material breach by the Company of any
material provision of this Agreement which the Company fails to correct within
thirty (30) working days after receiving written notice thereof; and
6
<PAGE>
(vii) any termination of employment which occurs
within two years following a Change of Control other than a termination by the
Company for Cause.
Not less than ten (10) business days prior to terminating his
employment for Good Reason, Executive shall provide the Company with notice of
the same, which notice, to the extent applicable, shall provide the Company with
an opportunity to cure any of the conditions specified in clauses (i) through
(vii) of this Section 7(b) prior to the termination effective date.
In the event that Executive terminates his employment as a result
of an event or change described in clause (iii) of this Section 7(b), such
termination shall not be deemed to be for Good Reason unless Executive, within
one hundred and eighty (180) days from the time the event or change has been
brought to the attention of Executive), has notified the Compensation Committee
of such event or change.
(c) In the event Executive is terminated by the Company without
Cause or Executive terminates his employment with Good Reason, in addition to
paying Executive all unpaid compensation and benefits accrued through the date
of termination of his employment (including any bonus for a prior year which has
not been paid and a pro rata portion of the bonus payable for the year in which
the termination occurs), the Company shall pay to Executive an amount equal to
the sum of (i) two (2) times Executive's annual base salary (based on
Executive's base salary prevailing at the time of the termination), plus (ii)
two (2) times the highest annual bonus paid to Executive during the thirty-six
(36) month period ending on the date of the termination (and, if the Company has
not paid an annual bonus to Executive during such period due to its failure to
establish a bonus program pursuant to Section 5(b), $400,000 in lieu thereof.)
In addition, during the period that the Company is obligated to provide
Executive and his dependents with continuation coverage under a group health
plan under COBRA (determined without regard to whether Executive elects to pay
the premium costs, but determined with regard to whether such coverage is cut
off as a result of other employer coverage becoming effective), Company shall
pay the premium costs for such coverage to the same extent that it paid such
costs prior to the termination of employment.
(d) Payment pursuant to Section 7(c) shall be made in twelve
(12) equal monthly installments on the last day of each month after termination
of this Agreement pursuant to this Section 7; provided, however, that if the
-------- -------
Executive's employment is terminated under the circumstances described in
Section 11) (following a Change of Control), payment pursuant to Section 7(c)
shall be made in a single lump sum within thirty (30) days of the termination
date.
(e) The parties hereto expressly acknowledge and agree that the
compensation and benefits payable to Executive upon a termination as specified
in this Section 7 will constitute full, reasonable and adequate compensation for
any such termination and that the payment of such compensation and benefits
shall fully satisfy
7
<PAGE>
and discharge any and all obligations of the Company to Executive in connection
with such termination.
(f) As a condition to making any payment provided under Section
7(c) the Company may require Executive to execute a release, pursuant to which
release Executive and his heirs, successors and assigns relinquish and forever
discharge the Company and any director, officer, employee, shareholder or agent
of the Company from any and all claims, damages, losses, costs, expenses
liabilities or obligations, whether known or unknown (other than any such
claims, damages, losses, costs, expenses, liabilities or obligations (i) covered
by any indemnification arrangement of the Company with Executive or (ii) arising
under any written employee benefit plan or arrangement covering Executive) which
Executive has incurred or suffered or may incur or suffer as a result of
Executive's employment by the Company or the termination of such employment.
8. Termination By Executive Without Good Reason. Executive may
--------------------------------------------
terminate his employment hereunder without Good Reason, provided that Executive
first gives to the Company a written notice of intent to terminate at least one
hundred twenty (120) days prior to the effective date of any such termination.
All rights of Executive under this Agreement shall terminate upon the effective
date of the termination of employment; provided, however, the Company shall pay
-------- -------
to Executive any base salary earned through the effective date of the
termination and any other compensation and benefits provided in Sections 5 and 6
to the effective date of such termination (including any bonus for a prior year
which has not been paid, but not any portion of any bonus for the year in which
the termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c), upon a termination of Executive's employment hereunder without
Good Reason, Executive must exercise or forfeit all outstanding, unexercised
vested options within 120 days of such termination and shall forfeit all
outstanding unvested options which he has received pursuant to Section 5(c).
9. Termination of Executive For Cause.
----------------------------------
(a) Notwithstanding anything in this Agreement to the contrary,
the Company shall have the right to terminate Executive's employment hereunder
for Cause (as defined in Subsection (b) of this Section 9) by giving to
Executive written notice of such termination as of a date (not earlier than ten
(10) days after such notice) to be specified in such notice, and his employment
hereunder shall terminate on the date so specified, whereupon Executive shall be
entitled to receive his base salary at the rate provided in Section 5(a) and any
other compensation or benefits provided in Sections 5 and 6 only to the date on
which termination shall take effect (including any bonus for a prior year which
has not been paid, but not any portion of any bonus for the year in which the
termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c), upon a termination of Executive's employment hereunder for Cause,
Executive shall forfeit all outstanding, unexercised options (including vested
options) which he has received pursuant to Section 5(c).
(b) For purposes hereof the term "Cause" shall mean (i)
Executive's willful and continued failure materially to perform his duties with
the Company (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure after the
issuance of a notice by Executive of termination for Good Reason), which is not
remedied within a reasonable
8
<PAGE>
period after a written demand for performance is delivered to Executive which
specifically identifies the manner in which it is believed that Executive has
not materially performed his duties; (ii) the willful engagement by Executive in
misconduct materially and demonstrably injurious to the Company, or (iii)
Executive's conviction of a crime (A) which is a felony involving the Company,
(B) involving fraud against the Company or (C) involving embezzlement of the
Company's property. For purposes of this Subsection (b), no act or failure to
act by Executive shall be considered "willful" unless done, or omitted to be
done, by Executive without good faith and without reasonable belief that
Executive's action or omission was in the best interest of the Company. For
purposes of this Agreement, Executive shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to
Executive a copy of a resolution, duly adopted by the affirmative vote of not
less than 66-2/3% of the entire membership of the Board (excluding Executive) at
a meeting called and held for this purpose after reasonable written notice to
Executive and an opportunity for him, together with his counsel, to be heard by
the Board, finding, in the good faith opinion of the Board, misconduct of the
type described in this Section 9(b), and specifying in detail the particulars
thereof.
10. Termination In the Event of Disability or Death.
-----------------------------------------------
(a) Disability. In the event of the Disability (as hereinafter
----------
defined) of the Executive, the Company shall have the right to terminate
Executive's employment hereunder by giving to Executive written notice of
termination. In the event Executive's employment is terminated for Disability
under this Section 10(a), Executive shall receive his base salary at the rate
provided in Section 5(a) and any other compensation and benefits provided in
Sections 5 and 6 to the effective date of such termination (including any bonus
for a prior year which has not been paid, but not any portion of any bonus for
the year in which the termination occurs). Such termination pursuant to this
Section 10(a) shall not affect any rights which Executive may have at the time
of termination pursuant to any insurance (including, but not limited to,
disability insurance provided for under Section 5(e)) or other death benefit,
bonus, retirement, severance pay or stock award plans or arrangements of the
Company, or any equity incentive plan or any restricted stock award or options
thereunder, which rights shall continue to be governed by the terms and
provisions of any such plans and agreements. As used herein, the term
"Disability" means a physical or mental incapacity or disability which renders
Executive unable substantially to perform the services contemplated by this
Agreement for six (6) consecutive calendar months or for shorter periods
aggregating one hundred eighty (180) or more business days in any twelve (12)
month period, as determined by an independent physician selected with the
approval of the Company and the Executive (or, if Executive is unable to act,
Executive's legal representative).
(b) Death. During the Term the Company shall maintain a life
-----
insurance policy or policies in the amount of four million dollars ($4,000,000)
in accordance with the Split Dollar Agreement, as provided in Section 5(d).
This Agreement in all other respects will terminate upon the death of Executive
except for the payment of Executive's base salary at the rate provided in
Section 5(a) and any other
9
<PAGE>
compensation and benefits provided in Sections 5 and 6 to the date of his death
(including any bonus for a prior year which has not been paid, but not any
portion of any bonus for the year in which the death occurs). Executive
understands and agrees that the Company may purchase one or more key man life
insurance policies on his life which the Company or its designees shall own, and
the Executive agrees to take all reasonable steps to facilitate the same,
including, but not limited to, submitting to physical examinations in
conjunction with the purchase therewith.
11. Change of Control. For purposes hereof, a "Change of Control"
----------------- -----------------
shall occur or be deemed to occur if any of the following events occur:
(i) any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) other than GE Investment Private Placement
Partners II, a limited partnership, any of the Founders or Founder affiliate (a
"Person") is or becomes the "beneficial owner" (as defined in Rule 13(d)(3)
under the Exchange Act), directly or indirectly, of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities"); provided however, that
-------- -------
for purposes of this subsection (i), the following acquisitions shall not
constitute a Change of Control: (A) any acquisition directly from the Company,
(B) any acquisition by the Company, (C) any acquisition by any employee benefit
plan (or related trust) sponsored or maintained by the Company or any company
controlled by the Company, or (D) any acquisition by any corporation pursuant to
a transaction which complies with clauses (A),(B) and (C) of paragraph (iii)
below;
(ii) Individuals who, as of the Commencement Date,
constitute the Board (as of such date, the Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however, that
-------- -------
any individual becoming a director subsequent to the date hereof whose election,
or nomination for election by the Company's stockholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent Board
shall be, for purposes of this Agreement, considered as though such person were
a member of the Incumbent Board, excluding any individual whose initial
assumption of office occurs as a result of an actual or threatened election
contest with respect to the election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board; or
(iii) The majority of the disinterested stockholders
of the Company approve a reorganization, merger or consolidation of the Company
with any other Person or the sale or other disposition of all or substantially
all of the assets of the Company (a "Business Combination"), in each case,
unless, following such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the Person resulting from such
10
<PAGE>
Business Combination (including, without limitation, a Person which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the Outstanding Company
Voting Securities immediately prior to such Business Combination, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 50% or more of, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination, and
(C) at least a majority of the members of the Board of Directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of
a complete liquidation or dissolution of the Company.
12. Excise Tax Gross-Up Payment. If any payments to Executive by the
---------------------------
Company under this Agreement or otherwise ("Payments") are subject to the tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Company shall pay to Executive an additional amount
(a "Gross-Up Payment") such that the net amount retained by Executive, after
deduction of any Excise Tax on the Payments and all income taxes and Excise Tax
upon such Gross-Up Payment, shall be equal to the Payments. The determination
whether any Payments are subject to the Excise Tax shall be based on the opinion
of tax counsel selected by the Company and reasonably acceptable to the
Executive, whose fees and expenses shall be paid by the Company. For purposes
of determining the amount of the Gross-Up Payment, the Executive shall be deemed
to pay federal, state and local income taxes at the highest marginal rates. In
the event that the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of the
Executive's employment, at the time that the amount of such reduction is finally
determined, the Executive shall repay the Company the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the tax on the portion of the Gross-Up Payment being
repaid, to the extent the repayment results in a reduction in tax) plus interest
on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is determined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment, the Company shall make an additional Gross-Up Payment in respect to
such excess, together with interest, penalties or additions payable by the
Executive with respect thereto (and taxes payable by Executive as a result of
such additional Gross-Up Payment) at the time such excess is finally determined.
Executive and the Company shall each reasonably cooperate with each other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Payments.
11
<PAGE>
13. Indemnification. Executive shall be fully indemnified by the
---------------
Company in his capacity as an officer and director of the Company to the fullest
extent permitted by Delaware law. Beginning with the consummation of an IPO,
the Company shall be required to maintain insurance therefore in an amount not
less than ten million dollars ($10,000,000).
14. Non-Compete.
-----------
(a) So long as Executive is employed by the Company and for a
period of one year after the termination of his employment other than a
termination (A) by the Company for a reason which is not for Cause or (B) by the
Executive which is for Good Reason or (C) upon expiration of the Term (due to
failure to extend the Term pursuant to Section 2) Executive shall not directly
or indirectly:
(i) as an individual proprietor, partner,
stockholder, officer, employee, director, joint venturer, investor, lender, or
in any other capacity whatsoever (other than as the holder of not more than five
percent (5%) of the total outstanding stock of a publicly held company), engage
directly or indirectly in any business or entity which competes with the
business conducted by the Company in any geographic area in which the Company
conducts material operations; or
(ii) solicit, divert or take away, or attempt to
divert or to take away, the business or patronage of any of the clients,
customers or accounts, or prospective clients, customers or accounts, of the
Company which were contacted, solicited or served by Executive while employed by
the Company.
(b) So long as Executive is employed by the Company and (1) for
a period of two years after the termination of his employment if the termination
is by Executive without Good Reason; and (2) for a period of one year after the
termination of his employment if the termination is for any other reason,
Executive shall not directly or indirectly recruit, solicit, hire, induce, or
attempt to induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with, the Company.
(c) If any restriction set forth in this Section 14 is found by
any court of competent jurisdiction to be unenforceable because it extends for
too long a period of time or over too great a range of activities or in too
broad a geographic area, it shall be interpreted to extend only over the maximum
period of time, range of activities or geographic area as to which it may be
enforceable.
(d) The restrictions contained in this Section 14 are necessary
for the protection of the business and goodwill of the Company and are
considered by Executive to be reasonable for such purpose and have been reviewed
by his counsel. Executive agrees that any breach of this Section 14 will cause
the Company substantial and irrevocable damage and, therefore, in the event of
any such breach, in addition to such other remedies which may be available, the
Company shall have the right to seek specific performance and injunctive relief.
12
<PAGE>
15. Proprietary Information.
-----------------------
(a) Executive agrees that all information and know-how, whether
or not in writing, of a private, secret or confidential nature concerning the
Company's business, business relationships or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary Information may
include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer programs, and customer and
supplier lists and contracts at or knowledge of customers or prospective
customers of the Company. Executive shall not disclose any Proprietary
Information to others outside the Company or use the same for any unauthorized
purposes without written approval by an officer of the Company, either during or
after his employment, unless and until such Proprietary Information has become
public knowledge without fault by Executive.
(b) Executive agrees that all files, letters, memoranda,
reports, records, data, sketches, drawings, laboratory notebooks, program
listings, or other written, photographic, or other tangible material containing
Proprietary Information, whether created by Executive or others, which shall
come into his custody or possession, shall be and are the exclusive property of
the Company to be used by Executive only in the performance of his duties for
the Company.
(c) Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in this Section 15,
also extends to such types of information, know-how, records and tangible
property of customers of the Company or suppliers to the Company or other third
parties who may have disclosed or entrusted the same to the Company or to
Executive in the course of the Company's business.
(d) Other Agreements. Executive hereby represents that he is not
----------------
bound by the terms of any agreement with any previous employer or other party to
refrain from using or disclosing any trade secret or confidential or proprietary
information in the course of his employment with the Company or to refrain from
competing, directly or indirectly, with the business of such previous employer
or any other party. Executive further represents that his performance of all the
terms of this Agreement and as an employee of the Company does not and will not
breach any agreement to keep in confidence proprietary information, knowledge or
data acquired by him in confidence or in trust prior to his employment with the
Company.
16. Litigation Assistance. During the Term, at the request of the
---------------------
Company, Executive shall render reasonable assistance which the Company
considers necessary or advisable in connection with any litigation involving the
Company or any of its officers, employees or directors. In the event Executive
renders such assistance, the Company shall promptly reimburse Executive for
reasonable travel and other out-of-pocket expenses which Executive incurs in
connection therewith.
13
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17. No Duty to Mitigate. Except as expressly provided herein in
-------------------
Section 14, Executive shall be free to accept such employment and engage in such
business as Executive may desire following the termination of his employment
hereunder. Executive shall have no duty to mitigate any payments required to be
made by the Company hereunder, and no compensation received by Executive from
such other employment or business shall reduce or affect any payments required
to be made by the Company hereunder (except to the extent expressly provided in
Section 7(c) hereunder with respect to continuation coverage under a group
health plan under COBRA).
18. Legal Fees. The Company shall reimburse Executive for all
----------
reasonable legal fees and expenses incurred by the Executive in negotiating this
Agreement and enforcing his rights hereunder.
19. Assignment. Neither this Agreement nor any rights or benefits
----------
hereunder shall be subject to execution, attachment or similar process nor may
this Agreement or any rights or benefits hereunder be assigned, delegated,
transferred, pledged or hypothecated, without the written consent of both
parties hereto, and any such assignment, delegation, transfer, pledge,
hypothecation, execution, attachment or similar process shall be null and void.
20. Successors: Binding Agreement.
-----------------------------
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
in writing and to agree to perform its obligations under this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement prior to the effectiveness of succession shall be a
breach of this Agreement. As used in this Agreement, the term the "Company"
shall mean the Company as defined above and any successor to its business or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be
enforceable by Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. Any
amounts payable by the Company to Executive after the date of his death, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee, or if there is no such
designee, to his estate.
21. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be valid and effective under
applicable law, but if any provision of this Agreement is found to be prohibited
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
14
<PAGE>
22. Notices. All notices, requests, demands and other communication
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if mailed by United States Postal Service certified or
registered mail, prepaid, to the parties or their permitted assignees at the
Company, in the case of the Company, such address as shall constitute the
Company's headquarters, and in the case of Executive, at the last address shown
in the personnel records of the Company, or at such other address as shall be
given in writing by either party to the other. The date of such personal
delivery or the third business day following the date of mailing shall be deemed
to be the date of such notice, demand or communication.
23. Waiver and Modification. Any waiver, alteration or modification
-----------------------
of any of the terms of this Agreement shall be valid only if made in writing and
signed by the parties hereto. Each party hereto from time to time may waive any
of his or its rights hereunder without affecting a waiver with respect to any
subsequent occurrences or transactions hereunder.
24. Captions and Headings. Captions and section headings used herein
---------------------
are for convenience only, are not a part hereof and shall not be used in
construing this Agreement.
25. Entire Agreement. This Agreement constitutes and embodies the
----------------
entire understanding and agreement of the parties hereto and, except as
otherwise provided hereunder, there are no other agreements or understandings,
written or oral, in effect between the parties hereto relating to the employment
of Executive by the Company.
26. Governing Law. This Agreement shall be governed by and
-------------
interpreted in accordance with the internal laws of the State of New Jersey,
except where Federal law governs.
27. Arbitration. Any dispute or controversy arising out of or
-----------
relating to this Agreement, any document or instrument delivered pursuant to, in
connection with, or simultaneously with this Agreement, or any breach of this
Agreement or any such document or instrument shall be settled by arbitration to
be held in the City of Hackensack, State of New Jersey, in accordance with the
rules then in effect of the American Arbitration Association or any successor
thereto. The arbitrator may grant injunctions or other relief in such dispute or
controversy. The decision of the arbitrator shall be final, conclusive, and
binding on the parties to the arbitration. Judgment may be entered on the
arbitrator's decision in any court having jurisdiction, and the parties
irrevocably consent to the jurisdiction of the New Jersey courts for this
purpose.
28. Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but both of which taken together
shall constitute one and the same instrument.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
GENESIS DIRECT, INC.
By:
-------------------------------------
Name:
Title:
----------------------------------------
Hunter Cohen
16
<PAGE>
EXHIBIT 10.6
FORM OF
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement"), made as of March 1, 1998,
is entered into by Genesis Direct, Inc., a Delaware corporation with its
principal place of business at 100 Plaza Drive, Secaucus, New Jersey 07094 (the
"Company"), and David M. Sable, residing at _________________ ("Executive").
Executive is now, and since its inception has been, Chief Marketing
Officer of the Company. The Company recognizes the significant contribution
which Executive has made to the success of the Company and understands that the
future growth, profitability and success of the Company will be significantly
enhanced by the continued employment of Executive. The Company, therefore,
desires to offer Executive a compensation package to incentivize him and secure
his future services.
NOW, THEREFORE, on the basis of the foregoing facts and in
consideration of the mutual covenants and agreements contained herein, the
parties hereto agree as follows:
1. Employment. The Company shall continue to employ Executive and
----------
Executive agrees to continue such employment upon the terms and subject to the
conditions hereinafter set forth.
2. Term. The term of this Agreement (the "Term") shall commence on
----
March 1, 1998 (the "Commencement Date"), and shall continue in effect for a
period of thirty-six (36) months, expiring on February 28, 2001, unless
otherwise extended or terminated as hereinafter provided. The Term shall be
automatically extended for additional twelve-month periods on March 1, 1999 and
on each March 1 thereafter, unless the Company notifies Executive in writing, at
least ninety (90) days prior to any such March 1 extension date that such
extension shall not take place; provided that, if a Change of Control of the
-------------
Company (as defined in Section 11) shall have occurred during the original or
extended Term of this Agreement, this Agreement shall continue in effect for a
period of not less than twenty-four (24) months beyond the month in which such
Change of Control shall have occurred.
3. Position; Duties.
----------------
(a) The Company and Executive agree that during the Term and
subject to the provisions hereof the Company shall employ Executive and
Executive shall serve as Chief Marketing Officer of the Company. During the Term
and subject to the provisions hereof Executive shall report directly to and
shall be subject to the direction and supervision of the Board of Directors of
the Company (the "Board"), which super vision shall be consistent with
Executive's title and position. Executive shall have such authority and
responsibilities as is delegated to him by the Board from time to time, which
authority and responsibilities shall be consistent with his title and position.
<PAGE>
(b) Executive agrees to devote substantially all of his business
time in furtherance of the performance of his duties to the Company hereunder
and to use his best efforts to advance the business and welfare of the Company.
Notwithstanding the foregoing, Executive may devote reasonable time to the
management of his personal investments and to participation in community and
charitable affairs, so long as such activities do not meaningfully interfere
with his duties under the Agreement.
(c) Executive shall be based at the Company's headquarters in
Secaucus, New Jersey, or such other headquarters which the Company may have in
the metropolitan New York City area. Executive shall not be obligated to
relocate outside the metropolitan New York City area without his prior written
consent.
4. Member of the Board.
-------------------
(a) Throughout the first thirty-six (36) months of the Term
Executive shall serve as a member of the Board. Furthermore, if the Company
shall at any time during the first thirty-six (36) months of the Term have an
Executive Committee of the Board, Executive shall serve as a member of the
Executive Committee unless either Warren Struhl or Hunter Cohen (collectively,
together with Executive, hereinafter being referred to as the "Founders") serve
on such Committee. The Company agrees that it shall nominate Executive for
election as a Director of the Company (and, if applicable, a member of its
Executive Committee) at all elections during the first thirty six (36) months of
the Term unless Executive declines to stand for election.
(b) At all times throughout the balance of the Term, at least one
of the Founders shall serve as a member of the Company's Nominating Committee.
5. Compensation.
------------
(a) Base Salary. As compensation for Executive's employment
-----------
hereunder, the Company shall pay Executive a base salary, payable in equal
installments consistent with the Company's current payroll practices for
executives, at an annual rate of $300,000, which amount shall be increased to
$400,000 upon the earlier to occur of (i) the consummation of an IPO (as
hereinafter defined) or (ii) the date the Company secures additional capital
(other than the contemplated GE bridge note for up to $10.5 million) sufficient
to provide funding for operations and acquisitions (i.e. $50 million or more)
during the Company's 1998 fiscal year (the earlier of such dates hereinafter
being referred to as the "Implementation Date"), or such greater base salary as
the Board may from time to time approve. Executive's base salary shall be
subject to annual review and increase by the Board, with the first increase as a
result of such a review to take effect March 1, 1999. Each annual increase shall
be no less than the increase in the Consumer Price Index (as hereinafter
defined), between the two immediately preceding February levels. Each such
adjustment shall be made retroactively when the Consumer Price Index for the
February next preceding the date of such adjustment becomes available.
2
<PAGE>
For purposes of this Agreement an "IPO" is consummated the first time
a registration statement filed under the Securities Act of 1933 with the
Securities and Ex change Commission or any other Federal agency at the time
administering the Securities Act of 1933, or any similar Federal statute (other
than a registration statement filed on Form S-4 or any successor form thereto or
a registration statement filed on Form S-8 or any successor form thereto with
respect to the issuance of common stock of the Company ("Common Stock"), or
securities convertible into or exercisable or exchangeable for, Common Stock or
rights to acquire Common Stock or such securities, granted or to be granted to
employees or directors of or consultants to the Company or its subsidiaries)
respecting an offering, whether primary or secondary, of not less than 10% (or
such lesser percentage as a lead underwriter shall determine is the maximum
amount to be offered and sold pursuant to such registration statement) of the
Common Stock then out standing on a fully-diluted basis is declared effective
and the shares so registered are offered and sold which results in proceeds to
the Company of not less than $30 million.
For purposes of this Agreement, the "Consumer Price Index" means Con
sumer Price Index for All Urban Consumers, U.S. City Average, All Items (1982-
84=100), as reported by the Bureau of Labor Statistics of the U.S. Department of
Labor. In the event that the Consumer Price Index is superseded, the
superseding index shall be substituted for this Consumer Price Index in such a
manner as to implement the intent of this Agreement that the Executive's base
salary be adjusted annually, so that the purchasing power thereof be maintained
at a level amount.
(b) Bonus. In addition to the base salary provided for in
-----
Section 5(a) hereof, Executive shall be entitled to participate with other
executives of the Company (as administered by the Company's Compensation
Committee) in a management incentive program or other bonus
program which the Company plans to adopt no later than the Implementation Date.
Under such program Executive shall be entitled to receive an annual bonus equal
to 0% to 25% of his base salary if performance results are less than a
reasonable goal set forth by the Company in its annual business plan (which
business plan is adopted by the Board prior to the annual performance period)
and equal to 25% to 50% of his base salary if performance results exceed the
goals set forth in the Company's business plan; provided, however, that if the
Board fails to adopt an annual business plan as a result of the failure of the
Founders to present a reasonable business plan to the Board, solely for purposes
of determining the bonus payable under this Section 5(b), the Company's
Compensation Committee may substitute reasonable goals, mutually acceptable to
Executive and the Compensation Committee, based on the individual performance of
Executive. In the event that the Company does not adopt any such plan or
program, then, in lieu thereof, Executive shall be entitled to receive an annual
bonus each April, beginning with April, 1999, during the Term in amount equal to
25% of the base salary paid to him in the 12 months preceding such April
(including base salary paid to Executive for the period prior to the
Commencement Date).
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<PAGE>
(c) Stock Option Awards.
-------------------
(i) Basic Award. The Company shall grant to
-----------
Executive 10-year options covering, in total, one thousand nine hundred (1,900)
shares of Common Stock. The option exercise price for five hundred (500) of the
shares covered by the options (the "First Option Group") shall be four thousand
five hundred dollars ($4,500) per share; the option exercise price for six
hundred (600) of the shares covered by the options (the "Second Option Group")
shall be six thousand five hundred dollars ($6,500) per share; and the option
exercise price for eight hundred (800) of the shares covered by the options (the
"Third Option Group") shall be eight thousand five hundred dollars ($8,500) per
share. The options, which shall be substantially in the form attached hereto as
Exhibit A, shall provide for vesting of the First Option Group on March 2, 1999,
- ---------
vesting of the Second Option Group on March 2, 2000, and vesting of the Third
Option Group on March 2, 2001. The First Option Group shall be granted as of
March 2, 1998. The Second and Third Option Groups shall be granted as of the
consummation of an IPO.
(ii) Additional Options and/or Equity-Based
--------------------------------------
Awards. In addition to the options described in Section 5(c)(i), at each annual
- ------
review, subject to the approval of the Compensation Committee, the Company shall
consider granting to Executive a reasonable and competitive number of options to
purchase Common Stock and/or other equity-based compensation awards, which
options and/or awards shall be reasonably calibrated to incentivize Executive to
help the Company achieve its financial goals.
(iii) General Terms. Notwithstanding the vesting
-------------
schedule described in Section 5(c)(i) and any vesting schedule with respect to
any grant made pursuant to Section 5(c)(ii), all such options shall provide
(after they have been granted) for full vesting (i) upon a Change of Control (as
defined in Section 11), and (ii) upon the termination of Executive's employment
in a termination described in Section 7 hereof. The other terms of each such
option shall, in the aggregate, be no less generous to Executive than options
which as of the date hereof have been issued to the Company's senior
executives, but in no event shall provide (other than as specified in the second
following sentence) that the option shall lapse before the earlier to occur of
(A) one (1) year following a termination of employment or (B) the expiration of
the 10-year term. All such options shall also contain provisions for cashless
exercise, tax liability protection, customary anti-dilution provisions and
registration rights for the underlying common stock. Notwithstanding the second
preceding sentence, each of the options shall provide that it will lapse 30 days
following a termination of employment if the termination is by Executive without
Good Reason (as defined in Section 7)(other than by death or for disability).
(d) Split Dollar Life Insurance. As an additional inducement to
---------------------------
the Executive to enter this Employment Agreement, as soon as practicable, but no
4
<PAGE>
later than six weeks from the date hereof, the Company shall increase from two
million dollars ($2,000,000) to four million dollars ($4,000,000) the face
amount of life insurance on the life of Executive which is covered by a written
split-dollar insurance agreement (the "Split Dollar Agreement") between the
Company and one or more family members of Executive, under which the Company
pays the full amount of annual premiums during the Term on a life insurance
policy on the life of Executive and the Company has the right to recover its
cumulative premium outlay on the earlier to occur of (i) termination of the
Split Dollar Agreement or (ii) death of the insured, and the balance of the
death benefit is payable to Executive's named beneficiary. Said increase in the
face amount of life insurance shall be accomplished either by amendment of the
existing Split Dollar Agreement to reflect the increase or by the adoption of a
second Split Dollar Agreement covering the additional two million dollars
($2,000,000) of life insurance coverage, with terms substantially similar to the
original Split Dollar Agreement.
(e) Other Benefits. Executive shall be entitled to receive such
--------------
benefits, compensation or rights as are generally made available to other
members of senior management of the Company (but not less than those made
available to other employees generally) including, without limitation, sick pay,
participation in any pension, profit sharing, deferred compensation and any
equity incentive plan and participation in any medical, disability and other
welfare benefit plan now existing or hereafter adopted by the Company; provided,
however, that in the event Executive fails to qualify for any medical or
disability insurance plan that may be adopted by the Company, the Company shall
pay to Executive an amount which would enable him to purchase an insurance plan
from another carrier which provides substantially similar benefits to those
provided to other members of senior management under the Company's plans. In
addition, to the extent that such benefit is not made available under its
general employee benefit plans, the Company shall maintain disability insurance
for Executive which provides Executive with a disability benefit equal to 50% of
his base salary (on an after-tax basis). Executive represents that as of the
date hereof he has no knowledge of any medical condition which might prevent him
from qualifying as a beneficiary under a standard medical or disability plan.
During the Term, Executive's benefits shall be maintained at least at the same
level as they are presently in effect on the date hereof.
(f) Vacation. Executive shall be entitled to four weeks of
--------
vacation time each year, to be pro-rated monthly for partial years, during the
Term. If Executive does not utilize all vacation in the year earned, one-half of
the unused vacation time in any year shall carry over to the next year.
6. Expenses and Fringe Benefits. Upon presentation by Executive of
----------------------------
documentation, expense statements, vouchers and/or such other supporting
information as the Company may reasonably request, the Company shall reimburse
Executive for all reasonable travel, entertainment and other expenses incurred
or paid by Executive in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, which are consistent
with Company policies and Executive's
5
<PAGE>
practices as of the date hereof. Without limiting the foregoing, the Company
shall provide Executive with (i) a personal assistant; (ii) an office and office
furniture commensurate with his title and position; and (iii) a first rate
personal computer for his home and other technological equipment (as is
developed from time to time) which Executive reasonably determines can
meaningfully assist him in the performance of his duties and tasks hereunder.
In addition, at the beginning of the Term and each third year thereafter the
Company shall lease for Executive, for his exclusive use, a new automobile
reasonably selected by Executive, consistent with its practice as of the date
hereof, which automobile shall not cost more than $50,000. In addition to
making lease and insurance payments for the automobile, the Company shall
reimburse Executive for reasonable and proper maintenance expenses which he
incurs for such automobile.
7. Termination of Executive Without Cause or by Executive With Good
----------------------------------------------------------------
Reason.
- ------
(a) At any time prior to expiration of the Term, the Board may
terminate Executive's employment without Cause (as defined in Section 9(b)), at
any time, and Executive may terminate his employment with Good Reason (as
defined in Subsection (b) of this Section 7), subject to payment by the Company
of the severance amounts set forth in Subsections (c) and (d) of this Section 7.
(b) For purposes hereof the term "Good Reason" shall mean:
(i) during the first thirty-six (36) months of
the Term, the failure of the Company to nominate Executive for election as a
Director of the Company at any election or, if the Company has an Executive
Committee, the failure of the Company to nominate Executive for election as a
member of the Executive Committee of the Company at any election, unless (in
either case) Executive declines to stand for election or unless, in the case of
the Executive Committee, either Warren Struhl or Hunter Cohen are nominated; and
for the balance of the Term, the failure of at least one of the Founders to
serve as a member of the Company's Nominating Committee;
(ii) any purported termination of Executive's
employment for Cause which is not effected pursuant to a notice described in
Section 9 of this Agreement;
(iii) without Executive's express written consent,
the assignment to Executive of any duties materially inconsistent with the
offices held here under, or a material alteration or diminution in the nature or
status of his responsibilities; or an adverse and material alteration in his
reporting responsibilities, titles or offices, or any removal of him or failure
to re-elect him to any of such positions, except in connection with the
termination of his employment or retirement (which shall mean his voluntary
termination of employment after having attained age 65);
6
<PAGE>
(iv) any reduction in Executive's annual base
salary or bonus opportunity provided for in Section 5 or a material reduction in
fringe benefits as in effect on the date hereof or as the same may be increased
during the Term;
(v) any relocation of Executive other than as
permitted under Section 3(c); and
(vi) any material breach by the Company of any
material provision of this Agreement which the Company fails to correct within
thirty (30) working days after receiving written notice thereof; and
(vii) any termination of employment which occurs
within two years following a Change of Control other than a termination by the
Company for Cause.
Not less than ten (10) business days prior to terminating his
employment for Good Reason, Executive shall provide the Company with notice of
the same, which notice, to the extent applicable, shall provide the Company with
an opportunity to cure any of the conditions specified in clauses (i) through
(vii) of this Section 7(b) prior to the termination effective date.
In the event that Executive terminates his employment as a result of
an event or change described in clause (iii) of this Section 7(b), such
termination shall not be deemed to be for Good Reason unless Executive, within
one hundred and eighty (180) days from the time the event or change has been
brought to the attention of Executive), has notified the Compensation Committee
of such event or change.
(c) In the event Executive is terminated by the Company with out Cause
or Executive terminates his employment with Good Reason, in addition to paying
Executive all unpaid compensation and benefits accrued through the date of
termination of his employment (including any bonus for a prior year which has
not been paid and a pro rata portion of the bonus payable for the year in which
the termination occurs), the Company shall pay to Executive an amount equal to
the sum of (i) two (2) times Executive's annual base salary (based on
Executive's base salary prevailing at the time of the termination), plus (ii)
two (2) times the highest annual bonus paid to Executive during the thirty-six
(36) month period ending on the date of the termination (and, if the Company has
not paid an annual bonus to Executive during such period due to its failure to
establish a bonus program pursuant to Section 5(b), $400,000 in lieu thereof.)
In addition, during the period that the Company is obligated to provide
Executive and his dependents with continuation coverage under a group health
plan under COBRA (determined without regard to whether Executive elects to pay
the premium costs, but determined with regard to whether such coverage is cut
off as a result of other employer coverage becoming effective), Company shall
pay the premium costs for such
7
<PAGE>
coverage to the same extent that it paid such costs prior to the termination of
employment.
(d) Payment pursuant to Section 7(c) shall be made in twelve (12)
equal monthly installments on the last day of each month after termination of
this Agreement pursuant to this Section 7; provided, however, that if the
-------- -------
Executive's employment is terminated under the circumstances described in
Section 11) (following a Change of Control), payment pursuant to Section 7(c)
shall be made in a single lump sum within thirty (30) days of the termination
date.
(e) The parties hereto expressly acknowledge and agree that the
compensation and benefits payable to Executive upon a termination as specified
in this Section 7 will constitute full, reasonable and adequate compensation for
any such termination and that the payment of such compensation and benefits
shall fully satisfy and discharge any and all obligations of the Company to
Executive in connection with such termination.
(f) As a condition to making any payment provided under Section
7(c) the Company may require Executive to execute a release, pursuant to which
release Executive and his heirs, successors and assigns relinquish and forever
discharge the Company and any director, officer, employee, shareholder or agent
of the Company from any and all claims, damages, losses, costs, expenses
liabilities or obligations, whether known or unknown (other than any such
claims, damages, losses, costs, expenses, liabilities or obligations (i) covered
by any indemnification arrangement of the Company with Executive or (ii) arising
under any written employee benefit plan or arrangement covering Executive) which
Executive has incurred or suffered or may incur or suffer as a result of
Executive's employment by the Company or the termination of such employment.
8. Termination By Executive Without Good Reason. Executive may
--------------------------------------------
terminate his employment hereunder without Good Reason, provided that Executive
first gives to the Company a written notice of intent to terminate at least one
hundred twenty (120) days prior to the effective date of any such termination.
All rights of Executive under this Agreement shall terminate upon the effective
date of the termination of employment; provided, however, the Company shall pay
-------- -------
to Executive any base salary earned through the effective date of the
termination and any other compensation and benefits provided in Sections 5 and 6
to the effective date of such termination (including any bonus for a prior year
which has not been paid, but not any portion of any bonus for the year in which
the termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c) upon a termination of Executive's employment hereunder without Good
Reason, Executive must exercise or forfeit all outstanding, unexercised vested
options within 120 days of such termination and shall forfeit all outstanding
unvested options which he has received pursuant to Section 5(c).
8
<PAGE>
9. Termination of Executive For Cause.
----------------------------------
(a) Notwithstanding anything in this Agreement to the contrary, the
Company shall have the right to terminate Executive's employment hereunder for
Cause (as defined in Subsection (b) of this Section 9) by giving to Executive
written notice of such termination as of a date (not earlier than ten (10) days
after such notice) to be specified in such notice, and his employment hereunder
shall terminate on the date so specified, whereupon Executive shall be entitled
to receive his base salary at the rate provided in Section 5(a) and any other
compensation or benefits provided in Sections 5 and 6 only to the date on which
termination shall take effect (including any bonus for a prior year which has
not been paid, but not any portion of any bonus for the year in which the
termination occurs). Notwithstanding anything to the contrary contained in
Section 5(c), upon a termination of Executive's employment hereunder for Cause,
Executive shall forfeit all outstanding, unexercised options (including vested
options) which he has received pursuant to Section 5(c).
(b) For purposes hereof the term "Cause" shall mean (i) Executive's
willful and continued failure materially to perform his duties with the Company
(other than any such failure resulting from his incapacity due to physical or
mental illness or any such actual or anticipated failure after the issuance of a
notice by Executive of termination for Good Reason), which is not remedied
within a reasonable period after a written demand for performance is delivered
to Executive which specifically identifies the manner in which it is believed
that Executive has not materially performed his duties; (ii) the willful
engagement by Executive in misconduct materially and demonstrably injurious to
the Company, or (iii) Executive's conviction of a crime (A) which is a felony
involving the Company, (B) involving fraud against the Company or (C) involving
embezzlement of the Company's property. For purposes of this Subsection (b), no
act or failure to act by Executive shall be considered "willful" unless done, or
omitted to be done, by Executive without good faith and without reasonable
belief that Executive's action or omission was in the best interest of the
Company. For purposes of this Agreement, Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
Executive a copy of a resolution, duly adopted by the affirmative vote of not
less than 66-2/3% of the entire membership of the Board (excluding Executive) at
a meeting called and held for this purpose after reasonable written notice to
Executive and an opportunity for him, together with his counsel, to be heard by
the Board, finding, in the good faith opinion of the Board, misconduct of the
type described in this Section 9(b), and specifying in detail the particulars
thereof.
10. Termination In the Event of Disability or Death.
-----------------------------------------------
(a) Disability. In the event of the Disability (as hereinafter de
----------
fined) of the Executive, the Company shall have the right to terminate
Executive's employment hereunder by giving to Executive written notice of
termination. In the event Executive's employment is terminated for Disability
under this Section 10(a), Executive
9
<PAGE>
shall receive his base salary at the rate provided in Section 5(a) and any other
compensation and benefits provided in Sections 5 and 6 to the effective date of
such termination (including any bonus for a prior year which has not been paid,
but not any portion of any bonus for the year in which the termination occurs).
Such termination pursuant to this Section 10(a) shall not affect any rights
which Executive may have at the time of termination pursuant to any insurance
(including, but not limited to, disability insurance provided for under Section
5(e)) or other death benefit, bonus, retirement, severance pay or stock award
plans or arrangements of the Company, or any equity incentive plan or any
restricted stock award or options thereunder, which rights shall continue to be
governed by the terms and provisions of any such plans and agreements. As used
herein, the term "Disability" means a physical or mental incapacity or
disability which renders Executive unable substantially to perform the services
contemplated by this Agreement for six (6) consecutive calendar months or for
shorter periods aggregating one hundred eighty (180) or more business days in
any twelve (12) month period, as determined by an independent physician selected
with the approval of the Company and the Executive (or, if Executive is unable
to act, Executive's legal representative).
(b) Death. During the Term the Company shall maintain a life
-----
insurance policy or policies in the amount of four million dollars ($4,000,000)
in accordance with the Split Dollar Agreement, as provided in Section 5(d).
This Agree ment in all other respects will terminate upon the death of Executive
except for the pay ment of Executive's base salary at the rate provided in
Section 5(a) and any other compensation and benefits provided in Sections 5 and
6 to the date of his death (including any bonus for a prior year which has not
been paid, but not any portion of any bonus for the year in which the death
occurs). Executive understands and agrees that the Company may purchase one or
more key man life insurance policies on his life which the Company or its
designees shall own, and the Executive agrees to take all reasonable steps to
facilitate the same, including, but not limited to, submitting to physical
examinations in conjunction with the purchase therewith.
11. Change of Control. For purposes hereof, a "Change of Control"
----------------- -----------------
shall occur or be deemed to occur if any of the following events occur:
(i) any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) other than GE Investment Private Placement Partners II, a
limited partnership, any of the Founders or Founder affiliate (a "Person") is or
becomes the "beneficial owner" (as defined in Rule 13(d)(3) under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding voting
securities entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided however, that for purposes of
-------- -------
this subsection (i), the following acquisitions shall not constitute a Change of
Control: (A) any acquisition directly from the Company, (B) any acquisition by
the Company, (C) any acquisition by any employee benefit plan (or
10
<PAGE>
related trust) sponsored or maintained by the Company or any company controlled
by the Company, or (D) any acquisition by any corporation pursuant to a
transaction which complies with clauses (A),(B) and (C) of paragraph (iii)
below;
(ii) Individuals who, as of the Commencement Date, constitute the
Board (as of such date, the Incumbent Board") cease for any reason to
constitute at least a majority of the Board; provided, however, that any
-------- -------
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be, for purposes of this Agreement, considered as though such person were a
member of the Incumbent Board, excluding any individual whose initial assumption
of office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
(iii) The majority of the disinterested stockholders of the Company
approve a reorganization, merger or consolidation of the Company with any other
Person or the sale or other disposition of all or substantially all of the
assets of the Company (a "Business Combination"), in each case, unless,
following such Business Combination, (A) all or substantially all of the
individuals and entities who were the beneficial owners, respectively, of the
Outstanding Company Voting Securities immediately prior to such Business
Combination beneficially own, directly or indirectly, more than 50% of the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the Person resulting from such
Business Combination (including, without limitation, a Person which as a result
of such transaction owns the Company or all or substantially all of the
Company's assets either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership of the Outstanding Company
Voting Securities immediately prior to such Business Combination, (B) no Person
(excluding any corporation resulting from such Business Combination or any
employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 50% or more of, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined voting
power of the then outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination, and
(C) at least a majority of the members of the Board of Directors of the
corporation resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement, or of the
action of the board, providing for such Business Combination; or
(iv) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
11
<PAGE>
12. Excise Tax Gross-Up Payment. If any payments to Executive by the
---------------------------
Company under this Agreement or otherwise ("Payments") are subject to the tax
(the "Excise Tax") imposed by Section 4999 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Company shall pay to Executive an additional amount
(a "Gross-Up Payment") such that the net amount retained by Executive, after
deduction of any Excise Tax on the Payments and all income taxes and Excise Tax
upon such Gross-Up Payment, shall be equal to the Payments. The determination
whether any Payments are subject to the Excise Tax shall be based on the opinion
of tax counsel selected by the Company and reasonably acceptable to the
Executive, whose fees and expenses shall be paid by the Company. For purposes
of determining the amount of the Gross-Up Pay ment, the Executive shall be
deemed to pay federal, state and local income taxes at the highest marginal
rates. In the event that the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time of termination of the
Executive's employment, at the time that the amount of such reduction is finally
deter mined, the Executive shall repay the Company the portion of the Gross-Up
Payment attributable to such reduction (plus that portion of the Gross-Up
Payment attributable to the tax on the portion of the Gross-Up Payment being
repaid, to the extent the repayment results in a reduction in tax) plus interest
on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of
the Code. In the event that the Excise Tax is deter mined to exceed the amount
taken into account hereunder at the time of the termination of the Executive's
employment, the Company shall make an additional Gross-Up Pay ment in respect to
such excess, together with interest, penalties or additions payable by the
Executive with respect thereto (and taxes payable by Executive as a result of
such additional Gross-Up Payment) at the time such excess is finally determined.
Executive and the Company shall each reasonably cooperate with each other in
connection with any administrative or judicial proceedings concerning the
existence or amount of liability for Excise Tax with respect to the Payments.
13. Indemnification. Executive shall be fully indemnified by the
---------------
Company in his capacity as an officer and director of the Company to the fullest
extent permitted by Delaware law. Beginning with the consummation of an IPO,
the Company shall be required to maintain insurance therefore in an amount not
less than ten million dollars ($10,000,000).
14. Non-Compete.
-----------
(a) So long as Executive is employed by the Company and for a period
of one year after the termination of his employment other than a termination (A)
by the Company for a reason which is not for Cause or (B) by the Executive which
is for Good Reason or (C) upon expiration of the Term (due to failure to extend
the Term pursuant to Section 2), Executive shall not directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, lender, or in any other capacity
whatso-
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ever (other than as the holder of not more than five percent (5%) of the total
outstanding stock of a publicly held company), engage directly or indirectly in
any business or entity which competes with the business conducted by the Company
in any geographic area in which the Company conducts material operations; or
(ii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers or
accounts, or prospective clients, customers or accounts, of the Company which
were contacted, solicited or served by Executive while employed by the Company.
(b) So long as Executive is employed by the Company and (1) for a
period of two years after the termination of his employment if the termination
is by Executive without Good Reason; and (2) for a period of one year after the
termination of his employment if the termination is for any other reason,
Executive shall not directly or indirectly recruit, solicit, hire, induce, or
attempt to induce, any employee or employees of the Company to terminate their
employment with, or otherwise cease their relationship with, the Company.
(c) If any restriction set forth in this Section 14 is found by any
court of competent jurisdiction to be unenforceable because it extends for too
long a period of time or over too great a range of activities or in too broad a
geographic area, it shall be interpreted to extend only over the maximum period
of time, range of activities or geographic area as to which it may be
enforceable.
(d) The restrictions contained in this Section 14 are necessary for
the protection of the business and goodwill of the Company and are considered by
Executive to be reasonable for such purpose and have been reviewed by his
counsel. Executive agrees that any breach of this Section 14 will cause the
Company substantial and irrevocable damage and, therefore, in the event of any
such breach, in addition to such other remedies which may be available, the
Company shall have the right to seek specific performance and injunctive relief.
15. Proprietary Information
------------------------
(a) Executive agrees that all information and know-how, whether or not
in writing, of a private, secret or confidential nature concerning the Company's
business, business relationships or financial affairs (collectively,
"Proprietary Information") is and shall be the exclusive property of the
Company. By way of illustration, but not limitation, Proprietary Information
may include inventions, products, processes, methods, techniques, formulas,
compositions, compounds, projects, developments, plans, research data, clinical
data, financial data, personnel data, computer pro grams, and customer and
supplier lists and contracts at or knowledge of customers or prospective
customers of the Company. Executive shall not disclose any Proprietary In
formation to others outside the Company or use the same for any unauthorized
purposes
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without written approval by an officer of the Company, either during or after
his employ ment, unless and until such Proprietary Information has become public
knowledge with out fault by Executive.
(b) Executive agrees that all files, letters, memoranda, reports,
records, data, sketches, drawings, laboratory notebooks, program listings, or
other writ ten, photographic, or other tangible material containing Proprietary
Information, whether created by Executive or others, which shall come into his
custody or possession, shall be and are the exclusive property of the Company to
be used by Executive only in the performance of his duties for the Company.
(c) Executive agrees that his obligation not to disclose or use
information, know-how and records of the types set forth in this Section 15,
also extends to such types of information, know-how, records and tangible
property of customers of the Company or suppliers to the Company or other third
parties who may have disclosed or entrusted the same to the Company or to
Executive in the course of the Company's business.
(d) Other Agreements. Executive hereby represents that he is
----------------
not bound by the terms of any agreement with any previous employer or other
party to refrain from using or disclosing any trade secret or confidential or
proprietary information in the course of his employment with the Company or to
refrain from competing, directly or indirectly, with the business of such
previous employer or any other party. Executive further represents that his
performance of all the terms of this Agreement and as an employee of the Company
does not and will not breach any agreement to keep in confidence proprietary
information, knowledge or data acquired by him in confidence or in trust prior
to his employment with the Company.
16. Litigation Assistance. During the Term, at the request of the
---------------------
Company, Executive shall render reasonable assistance which the Company
considers necessary or advisable in connection with any litigation involving the
Company or any of its officers, employees or directors. In the event Executive
renders such assistance, the Company shall promptly reimburse Executive for
reasonable travel and other out-of-pocket expenses which Executive incurs in
connection therewith.
17. No Duty to Mitigate. Except as expressly provided herein in
-------------------
Section 14, Executive shall be free to accept such employment and engage in such
business as Executive may desire following the termination of his employment
hereunder. Executive shall have no duty to mitigate any payments required to be
made by the Company hereunder, and no compensation received by Executive from
such other employment or business shall reduce or affect any payments required
to be made by the Company hereunder (except to the extent expressly provided in
Section 7(c) hereunder with respect to continuation coverage under a group
health plan under COBRA).
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<PAGE>
18. Legal Fees. The Company shall reimburse Executive for all
----------
reasonable legal fees and expenses incurred by the Executive in negotiating this
Agree ment and enforcing his rights hereunder.
19. Assignment. Neither this Agreement nor any rights or benefits
----------
hereunder shall be subject to execution, attachment or similar process nor may
this Agreement or any rights or benefits hereunder be assigned, delegated,
transferred, pledged or hypothecated, without the written consent of both
parties hereto, and any such assignment, delegation, transfer, pledge,
hypothecation, execution, attachment or similar process shall be null and void.
20. Successors: Binding Agreement.
-----------------------------
(a) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business or assets of the Company to assume expressly
in writing and to agree to perform its obligations under this Agreement in the
same manner and to the same extent that the Company would be required to perform
it if no such succession had taken place. Failure of the Company to obtain an
assumption of this Agreement prior to the effective ness of succession shall be
a breach of this Agreement. As used in this Agreement, the term the "Company"
shall mean the Company as defined above and any successor to its business or
assets as aforesaid which assumes and agrees to perform this Agreement by
operation of law, or otherwise.
(b) This Agreement shall inure to the benefit of and be enforce able
by Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. Any amounts payable by
the Company to Executive after the date of his death, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to his
devisee, legatee or other designee, or if there is no such designee, to his
estate.
21. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be valid and effective under
applicable law, but if any provision of this Agreement is found to be prohibited
or invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
22. Notices. All notices, requests, demands and other communication
-------
hereunder shall be in writing and shall be deemed to have been duly given if
personally delivered or if mailed by United States Postal Service certified or
registered mail, prepaid, to the parties or their permitted assignees at the
Company, in the case of the Com pany, such address as shall constitute the
Company's headquarters, and in the case of Executive, at the last address shown
in the personnel records of the Company, or at such
15
<PAGE>
other address as shall be given in writing by either party to the other. The
date of such personal delivery or the third business day following the date of
mailing shall be deemed to be the date of such notice, demand or communication.
23. Waiver and Modification. Any waiver, alteration or modification
-----------------------
of any of the terms of this Agreement shall be valid only if made in writing and
signed by the parties hereto. Each party hereto from time to time may waive any
of his or its rights hereunder without affecting a waiver with respect to any
subsequent occurrences or transactions hereunder.
24. Captions and Headings. Captions and section headings used herein
---------------------
are for convenience only, are not a part hereof and shall not be used in
construing this Agreement.
25. Entire Agreement. This Agreement constitutes and embodies the entire
----------------
understanding and agreement of the parties hereto and, except as otherwise pro
vided hereunder, there are no other agreements or understandings, written or
oral, in effect between the parties hereto relating to the employment of
Executive by the Company.
26. Governing Law. This Agreement shall be governed by and interpreted
-------------
in accordance with the internal laws of the State of New Jersey, except where
Federal law governs.
27. Arbitration. Any dispute or controversy arising out of or relating to
-----------
this Agreement, any document or instrument delivered pursuant to, in connection
with, or simultaneously with this Agreement, or any breach of this Agreement or
any such document or instrument shall be settled by arbitration to be held in
the City of Hackensack, State of New Jersey, in accordance with the rules then
in effect of the American Arbitration Association or any successor thereto. The
arbitrator may grant injunctions or other relief in such dispute or controversy.
The decision of the arbitrator shall be final, conclusive, and binding on the
parties to the arbitration. Judgment may be entered on the arbitrator's decision
in any court having jurisdiction, and the parties irrevocably consent to the
jurisdiction of the New Jersey courts for this purpose.
28. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall be deemed an original, but both of which taken together shall
constitute one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
GENESIS DIRECT, INC.
By:
------------------------------
Name:
Title:
--------------------------------
David M. Sable
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<PAGE>
Exhibit 10.7
GENESIS DIRECT, INC.
1997 LONG-TERM INCENTIVE PLAN
(AS AMENDED TO DATE OF CONSUMMATION OF
INITIAL PUBLIC OFFERING)
1. Purpose
The purpose of this Plan is to further the growth in earnings and market
appreciation of Genesis Direct, Inc. (the "Company") by providing long-term
incentives to officers, employees, directors and consultants of the Company
and its present and future subsidiaries, partnerships and joint ventures.
The Company intends that the Plan will help attract, retain and motivate
officers and key employees of high caliber and good potential and promote
the alignment of the Participant's interests with that of the Company's
shareholders.
2. Definitions
As used in the Plan, the following words shall have the following meanings:
"Award" means an award made to a Participant pursuant to the Plan and
described in Paragraph 5, including, without limitation, an award of
Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation
Rights, Restricted Stock, Performance Units, Performance Shares, or Other
Stock-Based Awards or any combination of the foregoing.
"Award Agreement" means an agreement between the Company and a Participant
that sets forth the terms, conditions and limitations applicable to an
Award.
"Board" means the Board of Directors of the Company, as constituted from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the Compensation Committee of the Board.
"Employee" means any officer or other employee of the Company or a
Subsidiary, or any consultant, director or advisor, within the meaning of
Regulation Section 230.701 of the Securities Act of 1933, as amended,
providing bona fide services to the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
<PAGE>
"Fair Market Value" means, as of any date:
(a) the value of a Share as determined in accordance with any
applicable resolutions or regulations of the Committee in effect
at the relevant time; or
(b) if the Stock of the Company is publicly traded, the average of
the highest and lowest prices at which the Stock is traded on
such date on the principal market on which the Stock is traded,
or if the Stock is not traded on such date, on the immediately
preceding date on which the Stock is traded.
"Incentive Stock Option" means an option intended to be and designed as an
incentive stock option which meets the requirements of Section 422 of the
Code.
"Nonqualified Stock Option" means an option that is not intended to be nor
designated as an Incentive Stock Option.
"Other Stock-Based Awards" means any Award other than a Stock Option, Stock
Appreciation Right, Restricted Stock, Performance Unit or Performance Share
that is valued by reference to or otherwise based upon Stock of the
Company.
"Participant" means an Employee who, as of any date, has been granted one
or more Awards under the Plan which are still outstanding (i.e., have not
been exercised, forfeited or terminated).
"Performance Goals" means, with respect to any Performance Period,
performance goals based on any of the following criteria and established
by the Committee prior to the beginning of such Performance Period or
performance goals based on any of the following criteria and established by
the Committee after the beginning of such Performance Period that meet the
requirements to be considered pre-established performance goals under
Section 162(m) of the Code: earnings or earnings growth; return on equity,
assets or investment; revenues; expenses; stock price; market share;
charge-offs; or reductions in non-performing assets. Such Performance
Goals may be particular to an Employee or the division, department, branch,
line of business, Subsidiary or other unit in which the Employee works, or
may be based on the performance of the Company generally.
"Performance Period" means (when and if applicable) the period of time
designated by the Committee during which Performance Goals will be measured
in connection with an Award.
"Plan" means the Genesis Direct, Inc. 1997 Long-Term Incentive Plan.
"Public Offering" means any event pursuant to which the Company's Stock
becomes publicly traded, including without limitation, an initial public
offering by the Company by registration under the Securities Act of 1933,
as amended, or a
2
<PAGE>
reorganization, consolidation, merger, or other business arrangement
between the Company and a publicly traded corporation pursuant to which the
shareholders of the Company become shareholders of a publicly traded
corporation.
"Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange
Commission pursuant to the Exchange Act, as amended from time to time.
"Other Stock-Based Awards" means any Award other than a Stock Option, Stock
Appreciation Right, Restricted Stock, Performance Unit or Performance Share
that is valued by reference to or otherwise based upon Stock of the
Company.
"Stock" or "Share" means common stock of the Company which may be
authorized but unissued or issued and reacquired.
"Stock Options" means the collective reference to Incentive Stock Options
and Nonqualified Stock Options.
"Subsidiary" means any corporation, partnership, joint venture or other
entity in which the Company has at least a fifty percent beneficial
ownership interest; provided, however, that when used in conjunction with
an Incentive Stock Option, "Subsidiary" means any corporation which in
relation to the Company satisfies Section 424(f) of the Code.
3. Administration
(a) The Plan shall be administered by the Committee. Members of the
Committee shall qualify to administer and make Awards under the Plan
for purposes of Section 162(m) of the Code and Rule 16b-3 (and any
other applicable rule) promulgated under Section 16(b) of the
Exchange Act to the extent that the Company is subject to such rules.
The Committee may adopt its own rules or procedures, and the action
of a majority of the Committee, taken a meeting or taken without a
meeting by a writing signed by such majority, shall constitute action
by the Committee. The Committee shall have the power and authority
to administer, construe and interpret the Plan, to make rules for
carrying it out and to make changes in such rules. Any such
interpretations, rules, and administration shall be consistent with
the basic purposes of the Plan.
(b) The Committee may delegate to the Chief Executive Officer and to
other senior officers of the Company its duties under the Plan
subject to such conditions and limitations as the Committee shall
prescribe, except that only the Committee may designate and make
Awards to Participants who are subject to Section 16 of the Exchange
Act and Section 162(m) of the Code.
(c) The Committee may employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company, and
the officers
3
<PAGE>
and directors of the company shall be entitled to rely upon the
advice, opinions or valuations of any such persons. All actions taken
and all interpretations and determinations made by the Committee in
good faith shall be final and binding upon all Participants, the
Company and all other interested persons. No member of the Committee
shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards
made under the Plan, and all members of the Committee shall be fully
protected by the Company with respect to any such action,
determination or interpretation.
4. Eligibility
Subject to the terms hereof, the Committee, in its discretion, may grant
Awards to any Employee. Notwithstanding the preceding sentence, Awards to
members of the Committee may only be granted by the Board. No Employee
shall be entitled as a matter of right to receive an Award, nor shall the
grant of an Award entitle an Employee to receive any future Award. The
terms, conditions and limitations of each Award under the Plan shall be set
forth in an Award Agreement, in a form approved by the Committee or the
Board, consistent, however, with the terms of the Plan; provided, however,
that such Award Agreement shall contain provisions dealing with the
treatment of Awards in the event of the termination, death or disability of
a Participant.
5. Awards
As the Committee may determine, the following types of Awards may be
granted under the Plan to Employees, either alone, in combination or on an
alternative basis:
(a) Incentive Stock Options: These are options to purchase Stock which
satisfy the requirements of Section 422 of the Code and which are
designated by the Committee as intended to be Incentive Stock
Options. At the time of the Award, the Committee shall determine, and
shall have included in the Award Agreement or other Plan rules, the
option exercise period, the option price, and such other conditions
or restrictions as may be appropriate. In addition to other
restrictions-contained in the Plan, an option granted under this
Paragraph 5(a), (i) may not be exercised more than 10 years after-the
date is granted, (ii) may not have an option price less than the Fair
Market Value of Company Stock on the date the option is granted,
(iii) must otherwise comply with the requirements of Code Section
422, and (iv) must be designated as an "Incentive Stock Option" by
the Committee. To the extent the aggregate fair market value
(determined as of the time the Incentive Stock Option is granted) of
the stock with respect to which Incentive Stock Options become
exercisable for the first time be an individual during any calendar
year under all plans of the Company or any Subsidiary exceeds ONE
HUNDRED THOUSAND DOLLARS ($100,000), such
4
<PAGE>
options shall be treated as Nonqualified Stock Options. Subject to
the foregoing restrictions, an Incentive Stock Option may be granted
with respect to a full or fractional number of Shares of Company
Stock. Payment of the option price shall be made (i) in cash or in
shares of Stock, or a combination thereof, or (ii) any other
reasonable method specified in the applicable Award Agreement,
including, but no limited to, a cashless exercise pursuant to which
the number of Shares of Company Stock issuable upon exercise of an
option is reduced by a number of shares having a Fair Market Value
equal to the option's exercise price.
(b) Nonqualified Stock Options. These are options to purchase Stock which
are not designated by the Committee as "Incentive Stock Options." At
the time of the Award, the Committee shall determine, and shall have
included in the Award Agreement or other Plan rules, the option
exercise period, the option price, and such other conditions or
restrictions as may be appropriate. In addition to the other
restrictions contained in the Plan, an option granted under this
Paragraph 5(b) may not be exercised more than 10 years after the date
it is granted. Subject to the foregoing restrictions, a Nonqualified
Stock Option may be granted with respect to a full or fractional
number of Shares of Company Stock. Payment of the option price shall
be made (i) in cash or in shares of Stock, or a combination thereof,
or (ii) any other reasonable method specified in the applicable Award
Agreement, including, but not limited to, a cashless exercise
pursuant to which the number of Shares of Company Stock issuable upon
exercise of an option is reduced by a number of shares having a Fair
Market Value equal to the option's exercise price.
(c) Stock Appreciation Rights: These are rights that on exercise entitle
the holder to receive the excess of (i) the Fair Market Value of a
share of Stock on the date of exercise over (ii) the Fair Market
Value on the date of Award or, if connected with a previously issued
stock option, the Fair Market Value at the time such previously
issued stock option was granted (the "base value"), multiplied by
(iii) the number of rights exercised as determined by the Committee.
Stock Appreciation Rights granted under the Plan may, but need not
be, granted in tandem with a Stock Option under Paragraphs 5(a) or
5(b). The Committee, in the Award Agreement or by other Plan rules,
may impose such restrictions or conditions on the exercise of Stock
Appreciation Rights as it deems appropriate, and may terminate,
amend, or suspend such Stock Appreciation Rights at any time. No
Stock Appreciation Right granted under this Plan may be exercised
more than 10 years after the date it is granted.
(d) Restricted Stock: Restricted Stock is Company Stock delivered to a
Participant with or without payment of consideration subject to such
conditions, terms and restrictions (including performance-based or
employment-based vesting, forfeiture conditions and transfer
restrictions) on the Participant's right to transfer or sell such
stock. The number of shares of Restricted Stock and the restrictions
or conditions on such shares
5
<PAGE>
shall be as the Committee determines, in the Award Agreement or by
other Plan rules, and the certificate for the Restricted Stock shall
bear evidence of the restrictions or conditions.
(e) Performance Shares and Performance Units: An Award of Performance
Shares or Performance Units shall entitle a Participant to receive
Stock or a cash payment specified by the Committee, depending upon
the attainment of certain Performance Goals over a Performance
Period. The Performance Period and Performance Goals shall be
specified by the Committee and may relate to the performance of the
Company or one or more Subsidiaries or a combination thereof. At the
time an Award of such shares or units is made, the Committee shall,
in the Award Agreement, determine the base value of the Award or
specify a formula for determining such value. The Committee may
adjust previously established performance criteria and other terms
and conditions of an Award at any time prior to the determination of
the payment amount, to reflect major unforeseen events such as
changes in laws, regulations or accounting policies or procedures,
mergers, acquisitions or divestitures or extraordinary, unusual or
non-recurring items or events; provided, however, that the Committee
may refrain from making any such adjustment in order to comply with
Section 162(m) of the Code.
Payment pursuant to an Award of Performance Shares or Performance
Units shall be made following the Committee's determination of the
extent to which the Performance Goals were satisfied, and shall be
made in the form of Stock, cash or a combination thereof, as the
Committee may determine. Payment shall be made as promptly as
practicable following the end of the Performance Period unless
deferred subject to such terms and conditions as may be prescribed by
the Committee.
(f) Other Stock-Based Awards: Other Stock Based Awards may be granted to
such Employees as the Committee may select, at any time and from time
to time as the Committee shall determine. The Committee shall have
complete discretion in determining the number of Shares subject to
such Awards, the consideration for such Awards and the terms,
conditions and limitations pertaining to same including, without
limitation, restrictions based upon the achievement of specific
business objectives, tenure, and other measurements of individual or
business performance, and/or restrictions under applicable federal or
state securities laws, and conditions under which same will lapse.
Such Awards may include the issuance of Stock in payments of amounts
earned under other incentive compensation plans of the Company. The
terms, restrictions and conditions of the Award need not be the same
with respect to each Participant.
The Committee may, in its sole discretion, direct the Company to
issue Shares subject to such restrictive legends and/or stop
transfer instructions as the Committee deems appropriate.
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<PAGE>
6. Limitations and Conditions
(a) The number of Shares available for Awards under this Plan is limited
to 6,718; provided, however, that as of the date the Company
consummates a Public Offering, such number shall be increased to
4,125,000. The limitations contained in this paragraph are subject to
further adjustment, as provided in Paragraph 9 hereof. To the extent
that any Award is canceled or forfeited, or terminates, expires, or
lapses for any reason, any unissued Shares subject to such Award shall
again be available for grant under the Plan.
(b) No Awards shall be made under the Plan beyond ten years after the
effective date of the Plan, but the terms of Awards made on or before
the expiration thereof may extend beyond such expiration. The
Committee may provide for limitations or conditions of an Award at the
time the Award is granted or amended, or at the time the terms or
conditions of an Award are changed.
(c) Nothing in this Plan shall interfere with or limit in any way the
right of the Company or any Subsidiary to terminate any Participant's
employment at any time, nor confer upon any Participant any right to
continue in the employ of the Company or any Subsidiary.
(d) Deferral of Award payouts may be provided for, at the sole discretion
of the Committee, in the Award Agreements.
(e) Participants shall not have any of the rights or privileges of
stockholders of the Company with respect to any Shares purchasable in
connection with any Award, unless and until certificates representing
such Shares have been issued by the Company to such Participants,
except as otherwise specifically provided.
(f) Except as otherwise provided in this Paragraph 6, no Stock Option or
other Award under the Plan shall be sold, transferred, assigned or
otherwise alienated or hypothecated by the Participant, other than by
will or by the laws of descent and distribution, and all Stock Options
shall be exercisable during the Participant's lifetime only by the
Participant or the Participant's legal representative. The Committee
may, if permitted by state law and the rules and regulations governing
any exchange on which the Company's Stock is traded, establish
guidelines providing for the transfer, without payment of
consideration, of any Nonqualified Stock Option by the Participant to
a member of the Participant's immediate family or to a trust or
partnership whose beneficiaries are members of the Participant's
immediate family. For purposes of this Paragraph, the term "immediate
family" shall include the Participant's spouse, children,
grandchildren, parents and siblings.
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<PAGE>
(g) Except as specifically provided in a retirement or other benefit plan
of the Company, Awards under this Plan shall not be deemed
compensation for purposes of computing benefits or contributions under
any retirement plan of the Company or its Subsidiaries, and shall not
affect any benefits under any other benefit plan of any kind or any
benefit plan subsequently instituted under which the availability or
amount of benefits is related to level of compensation. This Plan is
not a "Retirement-Plan" or "Welfare Plan" under the Employee
Retirement Income Security Act of 1974, as amended.
(h) Unless the Committee determines otherwise, no benefit or promise under
the Plan shall be secured by any specific assets of the Company or any
of its Subsidiaries, nor shall any assets of the Company or any of its
Subsidiaries be designated as attributable or allocated to the
satisfaction of the Company's obligations under the Plan.
(i) Notwithstanding anything to the contrary hereunder, no grant or Award
shall be made under the Plan which would be prohibited by operation of
any applicable law or contractual agreement between the Company and
any third-party.
7. Dividends and Dividend Equivalents
The Committee may provide that Awards earn dividends or dividend
equivalents. Such dividend equivalents may be paid currently or may be
credited to an account established by the Committee under the Plan in the
name of the Participant. Any crediting of dividends or dividend equivalents
may be subject to such restrictions and conditions as the Committee may
establish, including reinvestment in additional Shares or Share
equivalents.
8. Transfers and Leaves of Absence
For purposes of the Plan: (a) the transfer of a Participant's employment
without an intervening period of separation from the Company to any
Subsidiary or vice versa or from one Subsidiary to another shall not be
deemed a termination of employment, and (b) a Participant who is granted in
writing a leave of absence shall be deemed to have remained in the employ
of the Company during such leave of absence; provided, however, that no
Awards may be granted to an Employee while absent on leave.
9. Adjustments
In the event of a reclassification, recapitalization, merger,
consolidation, reorganization, issuance of warrants, rights or debentures,
stock dividends, stock
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split or reverse stock split, cash dividend, property dividend, including,
without limitation, a distribution of the stock of a Subsidiary,
combination or exchange of shares, repurchase of shares, or any other
change in corporate structure, which, in the judgment of the Board,
materially affects the value of the Company's Shares, the Board shall
determine, in its discretion, the appropriate adjustments, if any, to (a)
the number of Shares which may be issued under the Plan, (b) the number of
Shares issuable and the exercise price per Share pursuant to an outstanding
Award therefore granted under this Plan and, (c) the number of Shares which
may underlie an Award.
10. Amendment and Termination
(a) The Committee shall have the authority to make such amendments to any terms
and conditions applicable to outstanding Awards as are consistent with this
Plan; provided, however, that subject to Paragraph 9 hereof, no Award shall
be modified in a manner adverse to the Participant without the
Participant's consent, except as such modification is provided for or
contemplated in the terms of the Award.
(b) The Board may terminate, amend or modify the provisions of this Plan
(including any performance criteria or conditions which must be achieved in
order for an Employee to receive an Award or Awards) at any time and from
time to time; provided, however, that an amendment which requires
stockholder approval in order for the Plan to continue to comply with Rule
16b-3, Section 162(m) of the Code or any other law, regulation or stock
exchange requirement shall not be effective unless approved by the
requisite vote of stockholders. The termination, amendment or modification
of the Plan may be in response to changes in the Code, the Exchange Act,
national securities exchange regulations or for other reasons deemed
appropriate by the Board.
11. Foreign Options and Rights
The Committee may, consistent with the purposes and intent of this Plan,
make Awards to Employees who are subject to the laws of nations other than
the United States, which Awards may have terms and conditions that differ
from the terms otherwise provided in the Plan, for the purpose of complying
with foreign laws.
12. Withholding Taxes
The Company shall have the right to deduct from any cash payment made under
the Plan any federal, state or local income or other taxes required by law
to be withheld with respect to such payment. It shall be a condition to the
obligation of the Company to deliver shares upon the exercise of a Stock
Option or Stock Appreciation Right, upon payment of Performance units or
shares, upon delivery of Restricted Stock or upon exercise, settlement or
payment of any Other Stock-Based Award that the Participant pay to the
Company such amount as may be
9
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requested by the Company for the purpose of satisfying any liability for
such withholding taxes. Any Award Agreement may provide that the
Participant may elect, in accordance with any conditions set forth in
such Award Agreement, to pay a portion or all of such withholding taxes
in shares of Stock.
13. Indemnification
Each current or former member of the Committee, and of the Board, shall be
indemnified and held harmless by the Company, to the fullest extent
permissible under the Company's Certificate of Incorporation and By-laws
and applicable law against any loss, cost, liability or expense that may
be imposed upon, or reasonably incurred by him or her in connection with
or resulting from any claim, action, suit or proceeding to which the
member may be a party or in which the member may be involved by reason of
any action taken or failure to act under the Plan and against and from any
and all amounts paid by the member in settlement thereof, with the
Company's approval, or paid by the member in satisfaction of any judgment
in any such action, suit or proceeding against the member, provided such
member shall give the Company an opportunity, at its own expense, to
handle and defend the same before the member undertakes to handle and
defend it on his or her own behalf. The foregoing right of indemnification
shall not be exclusive of any other rights of idemnification to which the
member may be entitled under the Company's Certificate of Incorporation or
By-laws, as a matter of law, or otherwise, or any power that the Company
may have to indemnify them or hold them harmless.
14. Successors
The terms of the Plan shall be binding upon the Company and its successors
and assigns.
15. Requirements of Law and Other Limitations
(a) The granting of Awards and the issuance of Shares under the Plan
shall be subject to all applicable laws, rules and regulations, and
to such approval by any governmental agencies or national securities
exchanges as may be required.
(b) In the event any provision of the Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not
affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision
had not been included.
(c) To the extent not preempted by federal law, the Plan and all Award
Agreements, shall be constructed in accordance with and governed
by the laws of the State of New Jersey.
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(d) Notwithstanding anything herein to the contrary, no Award
shall be granted under the Plan which is inconsistent with
or exceeds the Company's ability to make a grant hereunder,
whether such inability or limitation is the result of any
applicable law or is the result of an agreement between the
Company or its shareholders and a shareholder or debtholder
of the Company, and to the extent that any Award granted
hereunder exceeds such ability or limitation, such Award shall
be null and void.
16. Effective Date and Termination Dates
The Plan shall be effective on and as of the date of its approval by
the stockholders of the Company and shall terminate ten years later,
subject to earlier termination by the Board pursuant to Paragraph 10.
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports: dated February 16, 1998, with respect to the financial
statements and schedule of Genesis Direct, Inc.; dated June 6, 1997, with
respect to the financial statements of Manny's Baseball Land, Inc.; and dated
January 30, 1998 with respect to the financial statements of Select Service &
Supply Co., Inc. in Amendment No. 1 to the Registration Statement (Form S-1,
No. 333-47455) and related Prospectus of Genesis Direct, Inc. for the
registration of 10,125,000 shares of its common stock.
Ernst & Young LLP
Hackensack, New Jersey
The foregoing consent is in the form that will be signed upon the completion
of the common stock split described in Note 16 to the consolidated financial
statements.
/s/ Ernst & Young LLP
Hackensack, New Jersey
April 16, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Genesis Direct, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus. Our report refers to a
change in the method of accounting for income taxes in fiscal 1994.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
April 16, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF THE INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors of
Genesis Direct, Inc.:
As independent certified public accountants, we hereby consent to the use of
our report and to all references to our Firm included in this registration
statement.
/s/ Boscia, Goldenberg & Company
Wayne, New Jersey
April 15, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in this registration
statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 15, 1998
<PAGE>
EXHIBIT 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports: dated February 21, 1997, with respect to Duclos Direct
Marketing, Inc.; and dated February 26, 1997 with respect to The Thursley
Group, Inc. in the Registration Statement (Form S-1) and related Prospectus of
Genesis Direct, Inc.
/s/ Mendlowitz Weitsen, LLP
East Brunswick, New Jersey
April 15, 1998
<PAGE>
EXHIBIT 23.7
CONSENT
The undersigned, on behalf of the Direct Marketing Association (the "DMA"),
hereby consents to the use by Genesis Direct, Inc. of certain statistical
information of the DMA in a registration statement filed or to be filed with
the Securities and Exchange Commission.
Direct Marketing Association
/s/ Direct Marketing Association
By: ___________________________________
Name: /s/ Ann Zeller
Title: Vice President, Information &
Special Projects
Dated: April 14, 1998
<PAGE>
EXHIBIT 23.8
CONSENT
The undersigned, on behalf of Marketing Logistics, hereby consents to the
use by Genesis Direct, Inc. of certain statistical information of Marketing
Logistics in a registration statement filed or to be filed with the Securities
and Exchange Commission.
Marketing Logistics
/s/ Arnold L. Fishman
By: ___________________________________
Name: Arnold L. Fishman
Title:
Dated: April 13, 1998
<PAGE>
EXHIBIT 23.9
CONSENT
The undersigned, on behalf of Yankee Group, hereby consents to the use by
Genesis Direct, Inc. of certain statistical information* of Yankee Group in a
registration statement filed or to be filed with the Securities and Exchange
Commission.
YANKEE GROUP
By: /s/ John F. Clain
------------------------------
Name: John F. Clain
Title: Regional Director
Dated: April 16, 1998
* with submitted corrections
