<PAGE>
As Filed with the Securities and Exchange Commission on August 26, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ASD SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Texas 7389 75-2737041
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
3737 Grader Street, Suite 110
Garland, Texas 75041
(214) 348-7200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Norman Charney
Chief Executive Officer
3737 Grader Street, Suite 110
Garland, Texas 75041
(214) 348-7200
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Mark S. Solomon, Esq. L. Steven Leshin, Esq.
J. David Washburn, Esq. Jenkens & Gilchrist, P.C.
Arter & Hadden LLP Suite 3200
1717 Main Street, Suite 4100 1445 Ross Avenue
Dallas, Texas 75201 Dallas, Texas 75202
(214) 761-2100 (214) 855-4500
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of Each Class of Proposed Maximum Aggregate
Securities to be Registered Offering Price(1) Amount of Registration Fee
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<S> <C> <C>
Common Stock, $.0001 par
value.................... $57,500,000 $15,985.00
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
---------------
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, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
[LOGOSM]
PROSPECTUS
Shares
ASD SYSTEMS, INC.
Common Stock
-----------
This is an initial public offering of shares of our common stock. We are
offering shares of our common stock. We anticipate that the initial public
offering price of our shares will be between $ and $ per share.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "ASDS."
Investing in our common stock involves a high degree of risk. See "Risk
Factors" beginning on page 7 to read about certain risks that you should
consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price.......................................... $ $
Underwriting discounts and commissions......................... $ $
Proceeds, before expenses, to us............................... $ $
</TABLE>
-----------
The underwriters may purchase up to an additional shares of common stock
from us at the initial public offering price, less the underwriting discount,
to cover over-allotments.
-----------
Bear, Stearns & Co. Inc.
Prudential Securities
Friedman Billings Ramsey
The date of this prospectus is , 1999.
<PAGE>
INSIDE FRONT FACING PAGE:
[Company Logo]
FROM CLICK TO CONSUMER(SM)
[star-burst across center of page]
They found your Web site.
They placed an order.
NOW WHAT?
We provide the proprietary software and comprehensive fulfillment service
solutions that support the complete commerce-related operations of Internet
retailers and direct marketing companies.
We use our systems to integrate and manage our clients' commerce-related
operations, including their Web sites, call centers, fulfillment centers and
drop-ship vendors.
Our clients can also outsource their operations to our scalable network of
call centers and strategically located fulfillment centers. We integrate and
manage each service center, thus providing a consistently high standard of
service.
Our solution is an alternative to the complexities and risks of developing
and maintaining commerce-related operations in house.
Our entire solution is priced on a per-transaction basis, reducing our
clients' initial costs and speeding their time to market, while providing
us with a recurring revenue stream.
<PAGE>
INSIDE FRONT COVER FOLD OUT:
[Title] The Ultimate Shopping Experience(SM)
[FLOW CHART GENERALLY DEPICTING FLOW OF CUSTOMER ORDER THROUGH
FULFILLMENT USING ASD SYSTEMS, INC.'S SERVICE OFFERING AND PROPRIETARY SOFTWARE
(as more particularly described below)]
[Company Logo]
From Click to Consumer(SM)
[ICON "WEB SITES" with line to larger ICON located at center of page "ASD'S
PROPRIETARY SOFTWARE"]
WEB SITES
* The client's Web site is integrated in real-time to the fulfillment
centers and the rest of our infrastructure.
* The client's customer has access to real-time inventory and order
status.
* The client's customer can come to the site to change an order or check
on its status, even if the order was placed through the call center
only seconds prior.
[ICON "CALL CENTERS" with line to larger ICON located at center of page "ASD'S
PROPRIETARY SOFTWARE"]
CALL CENTERS
* Our systems integrate multiple call centers in real-time, including
the client's, ASD's and third-party call centers.
* A customer service representative in any of the call centers can
provide immediate and accurate customer service -- regardless of where
or when the order was placed.
* Our call center network, which includes call centers in multiple
cities, is fully scalable and can supplement or support a client's
entire call center needs.
[ICON "FULLFILLMENT CENTERS" with line to larger ICON located at center of page
"ASD'S PROPRIETARY SOFTWARE"]
FULLFILLMENT CENTERS
* Our systems integrate multiple fulfillment centers in real-time,
including the client's, ASD's and third-party fulfillment centers.
* The client can take advantage of our network of strategically located
fulfillment centers to reduce shipping costs and time in transit by
shipping each order from the warehouse closest to the customer.
* Our fulfillment network currently integrates eight company-owned and
third-party warehouses.
* This network can be scaled to meet the needs of our clients -- both
today and as they grow.
[map of United States showing general location of eight warehouses with semi-
circles generally indicating area served by each warehouse]
<PAGE>
[ICON "DROP-SHIP VENDORS" with line to larger ICON located at center of page
"ASD'S PROPRIETARY SOFTWARE"]
DROP-SHIP VENDORS
* Our systems also integrate the client's vendors into the fulfillment
network, while maintaining the same standards of real-time customer
support.
[ICON "RETAIL STORES" with line to larger ICON located at center of page "ASD'S
PROPRIETARY SOFTWARE"]
RETAIL STORES
* We are expanding the functionality of our systems to further
enhance the shopping experience by integrating the client's retail
stores to its Web site and call centers.
* The client's customers will have the added option of confirming
availability and price at the closest retail store.
CLIENT BENEFITS:
* Network of strategically located fulfillment centers reduces shipping
costs and decreases time in transit through zone skipping.
* Robust nature of our solution allows clients to focus on core
competencies.
* Integrated fulfillment and customer support operations allow clients
with multiple channels (Web sites and catalogs) to gain significant
operating efficiencies and greater customer control over the
purchasing process.
* Scalability of services provides clients with the necessary capacity
without absorbing the costs of building and maintaining
infrastructure.
* Real-time integration across Web sites, call centers, fulfillment
centers and vendors results in improved customer service levels.
* Per-transaction pricing allows clients to grow without absorbing the
non-revenue generating expenses associated with facilities, software
and staff.
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all the information that
may be important to you. You should read the entire prospectus, especially the
section captioned "Risk Factors" and the financial statements and notes, before
deciding to invest in shares of our common stock.
Our Business
Our proprietary software and comprehensive service solutions enable Internet
retailers and direct marketing businesses to outsource their order management
and fulfillment operations. Our systems automate and integrate in real-time Web
sites, call centers, fulfillment centers and drop-ship vendors. We operate and
manage a scalable network of company-owned and third-party call centers and
fulfillment centers. Our systems and services offer our clients an alternative
to the costs, complexity and risks associated with developing and maintaining
these commerce-related operations in-house. Our systems and services are priced
on a per-transaction basis, reducing our clients' initial infrastructure costs
and speeding their time to market, while providing us with recurring revenue.
Our systems differentiate us by integrating multiple sales channels,
including Web sites and call centers, thus giving our clients' customers
greater control over their shopping experience. For clients that have retail
stores, we are currently expanding the functionality of our systems to further
enhance the shopping experience by integrating these stores into our systems.
We anticipate that this integration will give our clients' customers the added
option of confirming availability and price at the closest retail store.
We believe that we are well positioned to meet the needs of the rapidly
growing number of Internet retailers and direct marketing companies. Our
founders each have over 14 years of experience in systems development and
operations in the direct marketing industry. Our business was originally
developed to manage the commerce-related operations of direct marketing
companies. However, we have transitioned our business to meet the growing
demands of electronic commerce businesses. Our clients currently include Sears
Roebuck, EDS for Sony's Metreon.com, Toys "R" Us, HoneyBaked Ham of Georgia and
King World Direct.
Our Market Opportunity
The Internet is quickly becoming an important communications medium and sales
channel for both consumers and businesses worldwide. International Data
Corporation, or IDC, projects that total worldwide commerce conducted on the
Internet will grow from an estimated $50 billion in 1998 to an estimated $1.3
trillion in 2003. IDC also projects that the number of Web buyers worldwide
will increase from 31 million in 1998 to approximately 183 million in 2003.
The acceptance of electronic commerce has spurred the growth in the number of
Internet retailers and spending on established Internet commerce operations.
Forrester Research predicts that 82% of U.S. companies with over 1,000
employees will be doing business online by the year 2002. In addition, IDC
estimates that the market for Internet commerce application software alone is
expected to grow from approximately $444 million in 1998 to approximately $10.1
billion in 2002.
Store based retailers are increasingly adopting electronic commerce
strategies to remain competitive. According to the Boston Consulting Group and
Shop.org, 62% of online retail revenues in 1998 were from retailers who had
business pre-existing the Web. According to IDC, Internet-related spending
among large retailers is expected to increase from an estimated $4.2 billion in
1998 to an estimated $17.5 billion in 2002.
1
<PAGE>
Historically, Internet retailers and direct marketing companies have had two
choices when deciding how to handle their order management and fulfillment
operations. They could either:
. Establish and maintain the required operations in-house leading to:
significant initial and continuing costs; delayed time to market; lack
of real-time, end-to-end systems integration; and lack of scalable
infrastructure; or
. Outsource specific components of their operations to multiple service
providers that specialize in providing specific services (e.g., software
development, systems integration, call center operation, or fulfillment
center operation) and do not typically have the capability to offer an
integrated, comprehensive solution.
The ASD Systems Solution
We believe that our solutions offer the following benefits to Internet
retailers and direct marketing companies for outsourcing their commerce-related
operations:
. Cost savings and faster time to market;
. Comprehensive and reliable outsourced operations;
. Scalability; and
. High levels of customer service.
Our Growth Strategy
Our objective is to be a leading provider of comprehensive order management
and fulfillment systems and services to Internet retailers and direct marketing
companies. We intend to pursue this objective by:
. Capitalizing on Internet commerce growth. We intend to aggressively
market our solutions to the growing number of Internet retailers, which
we expect will provide the greatest opportunity for our growth.
. Expanding our sales and marketing efforts. We have doubled our sales and
marketing team from three to six individuals since June 1, 1999, and we
will continue expanding our sales and marketing efforts in the future.
. Building on our strategic relationships. We intend to grow our client
base by capitalizing on our strategic relationships with Web developers,
systems integrators, Internet consultants, technology companies, call
centers and fulfillment centers. We believe that these relationships
will provide us with increased market recognition, access to new sales
opportunities and the ability to provide our clients with additional
services.
. Leveraging scalable systems and third-party infrastructure. We intend to
continue expanding our third-party call center and fulfillment center
network as necessary to provide our clients with the scalability
necessary to grow their businesses.
. Developing and supporting systems functionality. We will continue
working closely with our new and existing clients to develop advanced
features required by them to meet the changing needs of their
businesses.
. Maintaining high levels of client satisfaction. We intend to continue
providing high levels of client service, which we expect will result in
long-term client relationships.
----------------
Our principal executive offices are located at 3737 Grader Street, Suite 110,
Garland, Texas 75041, and our telephone number at this location is
214.348.7200. Our Web site address is www.asdsystems.com. The information
contained in our Web site does not constitute part of this prospectus.
2
<PAGE>
THE OFFERING
Common stock being
offered.................... shares
Common stock to be
outstanding after the
offering...................
shares
Use of proceeds............. We have no current specific allocations for the
net proceeds of this offering. We generally
intend to use the net proceeds of this offering
to: expand our sales and marketing activities;
fund capital expenditures, software development
activities and technical support; make possible
acquisitions; and for general corporate purposes,
including working capital.
Proposed Nasdaq National
Market symbol..............
ASDS
ADDITIONAL SHARES MAY BE ISSUED AFTER THIS OFFERING.
The common stock to be outstanding after this offering is based on and
includes:
. the number of shares outstanding as of June 30, 1999; and
. shares of common stock issuable upon the mandatory conversion of
our Series A convertible preferred stock, assuming an initial public
offering price of $ per share.
This calculation excludes:
. 1,457,500 shares of common stock issuable upon exercise of outstanding
options, each with an exercise price of $1.00 per share (of which
options exercisable for 982,500 shares had vested as of June 30, 1999);
. 700,000 shares reserved for future issuance under our Long-Term
Incentive Plan;
. 1,000,000 shares issuable upon exercise of outstanding stock purchase
warrants with a weighted average exercise price of $1.70 per share; and
. shares of common stock issuable upon exercise of outstanding common
stock purchase warrants with an exercise price of $ per share,
assuming an initial public offering price of $ per share.
Please see "Certain Transactions" and "Description of Capital Stock."
----------------
3
<PAGE>
Unless we indicate otherwise, all information in this prospectus:
. reflects the conversion of all outstanding shares of our Series A
convertible preferred stock into shares of our common stock
contemporaneously with the closing of this offering (based on an initial
public offering price of $ per share); however, the actual number of
shares of common stock issuable upon conversion of these shares will be
more than this if the initial public offering price is less than $ per
share;
. reflects the redemption of all outstanding shares of our Series B
redeemable preferred stock for an aggregate cash payment by us of $6.0
million contemporaneously with the closing of this offering;
. assumes the underwriters do not exercise their option to purchase
additional shares of common stock after the closing of this offering and
that no other person exercises any other outstanding stock option or
stock purchase warrant after June 30, 1999; and
. reflects the reclassification of (1) our Series A voting common stock
into the sole class of common stock and (2) our Series B non-voting
common stock into Series C non-voting preferred stock, in each case,
effective August 23, 1999 and the subsequent reclassification of the
Series C non-voting preferred stock as common stock effected
contemporaneously with the closing of this offering.
----------------
The ASD Systems name and logo, "From Click to Consumer," "The Ultimate
Shopping Experience" and the names of products and services offered by ASD
Systems (including those referred to in "Business") are trademarks, registered
trademarks, service marks or registered service marks of ASD Systems. All other
trademarks appearing in this prospectus are the property of their respective
holders.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth summary financial data for ASD Systems, Inc.
and its predecessors. The following summary financial data has been derived
from our audited and unaudited financial statements and the notes to those
statements included in this prospectus beginning on page F-1. You should read
this information together with the information under "Selected Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 20. You should not assume that the summary
financial data is indicative of our future performance. The summary financial
data for all periods ending on or prior to December 31, 1997, include
information derived from the order management and fulfillment business of our
predecessors Athletic Supply of Dallas, Inc. (which operated the business from
January 1, 1995 to December 20, 1996), Athletic Supply of Dallas, LLC (which
operated the business from December 21, 1996 to October 13, 1997) and ASD
Partners, Ltd. (which operated the business from October 14, 1997 to December
31, 1997). The unaudited pro forma net income (loss) information for the
periods ended December 31, 1995, December 20, 1996, October 13, 1997 and
December 31, 1997 reflect a tax provision computed by applying the anticipated
effective tax rate of approximately 37% to pretax income. The unaudited pro
forma basic and diluted net income (loss) per share information for the periods
ended on or prior to December 31, 1997 have been calculated as if based on the
number of shares of common stock outstanding at January 1, 1998. The
information for the periods ended December 31, 1995, June 30, 1998 and June 30,
1999 have been derived from our unaudited financial statements which, in the
opinion of management, include all adjustments, consisting of only normal
recurring adjustments necessary for a fair presentation of the results of
operations for such periods.
<TABLE>
<CAPTION>
SIX MONTHS
PREDECESSORS ENDED JUNE 30,
--------------------------------------------------------- ----------------
PERIOD FROM
JANUARY 1, 1995 PERIOD FROM PERIOD FROM PERIOD FROM
(INCEPTION) JANUARY 1, 1996 DECEMBER 21, OCTOBER 14, YEAR
THROUGH THROUGH 1996 THROUGH 1997 THROUGH ENDED
DECEMBER 31, DECEMBER 20, OCTOBER 13, DECEMBER 31, DECEMBER 31,
1995 1996 1997 1997 1998 1998 1999
--------------- --------------- ------------ ------------ ------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues................ $5,279 $6,826 $4,882 $2,574 $ 8,020 $ 3,366 $ 4,679
Cost of revenues........ 1,308 2,094 2,686 1,248 5,051 2,424 3,316
------ ------ ------ ------ ------- ------- -------
Gross profit............ 3,971 4,732 2,196 1,326 2,969 942 1,363
Operating expenses:
Selling, general, and
administrative
expenses.............. 2,616 2,819 2,649 1,074 4,258 1,960 3,013
Depreciation and
amortization.......... 121 517 367 252 1,084 448 574
------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 2,737 3,336 3,016 1,326 5,342 2,408 3,587
------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 1,234 1,396 (820) -- (2,373) (1,466) (2,224)
Interest expense, net... -- -- -- 27 233 70 69
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $1,234 $1,396 $ (820) $ (27) $(2,606) $(1,536) $(2,293)
====== ====== ====== ====== ======= ======= =======
Basic and diluted net
loss per share......... $ (0.43) $ (0.26) $ (0.24)
======= ======= =======
UNAUDITED PRO FORMA
DATA:
Net income (loss)....... $ 777 $ 879 $ (820) $ (27)
====== ====== ====== ======
Basic and diluted net
income (loss) per
share.................. $ 0.13 $ 0.15 $(0.14) $(0.01)
====== ====== ====== ======
Shares used in computing
basic and diluted net
income (loss) per
share.................. 6,000 6,000 6,000 6,000 6,000 6,000 9,735
====== ====== ====== ====== ======= ======= =======
</TABLE>
5
<PAGE>
The balance sheet data is shown:
. on an actual basis;
. on a pro forma basis reflecting a private placement in August 1999 of
our Series A convertible preferred stock, our Series B redeemable
preferred stock and common stock purchase warrants, exercisable for a
number of shares of our common stock determinable by reference to our
initial public offering price, for aggregate proceeds of $11,500,000,
after deducting estimated expenses; and
. on an as adjusted basis reflecting (1) our receipt of the estimated net
proceeds from the shares of common stock we are selling in this
offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and expenses, (2) the
conversion of all Series A convertible preferred stock into shares
of our common stock upon consummation of this offering, also assuming an
initial public offering price of $ per share and (3) the redemption
of all Series B redeemable preferred stock upon consummation of this
offering for $6.0 million.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 202 $11,702 $
Working capital
(deficit).............. (982)
Total assets............ 4,539
Long-term debt
(including current
maturities)............ 2,163 2,163
Series B mandatorily
redeemable preferred
stock.................. --
Shareholders' equity.... 209
</TABLE>
6
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors and all other
information contained in this prospectus before you decide whether to purchase
our common stock. Investing in our common stock is speculative and involves a
high degree of risk. Any of the following risks, as well as other risks and
uncertainties that are not yet identified or that we currently believe are
immaterial, could harm our business, financial condition and operating results,
could cause the trading price of our common stock to decline and could result
in a complete loss of your investment. Please see the "Special Note Regarding
Forward-Looking Statements; Market Data" immediately following this section of
the prospectus.
Risks Related to Our Business
We have a history of losses and negative cash flow and anticipate continued
losses.
Since our formation on January 1, 1998, we have incurred operating losses and
negative cash flow. As of June 30, 1999, we had an accumulated deficit of
approximately $4.9 million and a working capital deficit of approximately
$982,000. In addition, for the periods ended October 13, 1997 and December 31,
1997, predecessors to the company also experienced net losses. We have not
achieved profitability and expect to continue to incur operating losses for the
foreseeable future. We anticipate that our business will generate operating
losses until we are successful in generating significant additional revenues to
support our level of operating expenses. We cannot assure you that we will ever
achieve or sustain profitability or that our operating losses will not increase
in the future. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
Our business is difficult to evaluate because we have an extremely limited
operating history.
We were formed in January 1998 to acquire the order management and
fulfillment business of an affiliated predecessor entity. This business,
although significantly different in focus and scale, was originally commenced
in January 1995 by another predecessor to service the fulfillment needs of a
single client. Accordingly, our business has had an extremely limited operating
history, which makes evaluation of our prospects difficult. In addition, our
business prospects and market are relatively unproven. An investor in our
common stock must consider the risks, uncertainties and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving markets, including the market of
outsourced order management systems and services. These risks and difficulties
include our ability to:
. increase awareness of our systems and services;
. offer compelling solutions to our clients' order management
requirements;
. maintain and expand our network of third-party call centers and
fulfillment centers;
. implement and improve operational, financial and management information
systems;
. respond effectively to the offerings of competitors;
. expand the scale of our operations to meet client demands;
. continue to develop and upgrade our technology; and
. attract, retain and motivate qualified personnel.
If we fail to adequately address any of these risks or difficulties, our
business would likely suffer and it is likely that we would not meet our
financial projections. We would expect our business, operating results and
financial condition to be materially adversely affected if our revenues do not
meet our projections and, in such event, our net losses in a given quarter
would be even greater than expected. Please see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements for detailed information on our extremely limited operating history.
7
<PAGE>
Sears currently represents a significant majority of our business and our
success depends in part on our ability to retain them as a client.
If Sears, our largest client, was to substantially reduce or stop its use of
our services prior to the time we were able to obtain significant additional
clients and thereby reduce our reliance on it, our business, operating results
and financial condition would be materially adversely affected. Sears, Roebuck
and Co. and Sears Wish Book, Inc., a subsidiary of Sears, Roebuck and Co.,
collectively accounted for approximately 84% of our gross revenues during the
year ended December 31, 1998 and for approximately 78% in the first six months
of 1999. We have used the term "Sears" throughout this prospectus to refer to
both of these affiliated Sears entities. "Sears Roebuck" has been used to refer
to Sears, Roebuck and Co. which operates the Craftsman Power and Hand Tool and
Home Healthcare catalogs and "Sears Wish Book" has been used to refer to Sears
Wish Book, Inc., which operates the annual holiday catalog. Our contract with
Sears Roebuck expires July 1, 2001, unless earlier terminated. Our arrangement
to provide Sears Wish Book with services is generally renewed on a year to year
basis, and was last renewed on July 2, 1999 for a period expiring August 31,
2000. We presently anticipate that our agreement with Sears Roebuck and our
arrangement with Sears Wish Book will be extended upon their scheduled
termination dates; however, our loss of Sears as a client would have a material
adverse effect on our business and may affect our relationship with King World
Direct, Inc., which is a distributor of Sears merchandise. A termination by
Sears would result in significant lost revenue and the loss of an important
client reference that, we believe, will be instrumental in securing future
clients. Moreover, to the extent that Sears' financial performance does not
meet expectations and our revenues attributable to Sears consequently decline,
our financial performance would also be negatively impacted, perhaps
materially. We cannot assure you that Sears will be a client of ours in future
periods.
Our significant client contracts are either short-term or terminable with
minimal notice.
Each of our clients has the option to terminate its contract with us for any
reason after giving us 180 or fewer days prior written notice. King World
Direct and Toys "R" Us may terminate their contracts after giving as few as 30
and 60 days prior written notice. The Sears Wish Book arrangement is governed
by a course of conduct between the parties and a letter agreement which
provides that the arrangement is immediately terminable by Sears Wish Book at
any time and will automatically terminate if we do not negotiate a definitive
contract by August 31, 2000. The terms of our client contracts typically range
from six months to three years. We presently only have eight clients. The
termination by one or any number of our clients, or the failure by our clients
to renew the terms of their contracts, may have a material adverse effect on
our business, including our financial performance and revenue stream or may
result in the loss of an important client reference.
If we fail to properly manage our growth, our business could be adversely
affected.
Our business is growing at a relatively rapid pace, and we intend to continue
the expansion of our operations in the foreseeable future to pursue existing
and potential market opportunities. If we do not manage the growth of our
business effectively, our results of operations or financial conditions would
be materially adversely affected. Our growth places significant demands on our
management and operational resources. In order to manage our growth
effectively, we must continue to invest in our systems and internal and third-
party call centers and fulfillment centers, and continue to expand, train and
manage our work force.
Our business is seasonal and we expect our quarterly revenues and operating
results to fluctuate.
Our revenues and business are seasonal. Many retail businesses, including
Sears and other clients, sell more products during the holiday season than in
any other portion of the year. For example, the Sears Wish Book catalog is
mailed only twice per year during the third and fourth calendar quarters.
Accordingly, because we generate the vast majority of our revenue on a per-
transaction basis, we recognize a disproportionate portion of our annual
revenue in the last three months of the year. As a result of our seasonal
business, we have additional risks in processing a large volume of transactions
in short time periods. Therefore, we believe that period-to-
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<PAGE>
period comparisons of our results of operations should not be relied upon as an
indication of future performance. We expect to continue to experience seasonal
fluctuation of revenues and operating results in the future.
Failure of our computer and communications systems could result in our
failure to provide timely and error-free services to our clients.
Our success largely depends on the efficient and uninterrupted operation of
our computer and communications hardware and software systems. Substantially
all of our computer and communications hardware and software is located at our
Dallas, Texas facility. Our systems and operations may be vulnerable to damage
or interruption from fire, flood, power loss, telecommunications failure,
break-ins, the occurrence of significant human error and similar events. We do
not currently have a formal disaster recovery plan or carry sufficient business
interruption insurance to compensate us for losses that may occur. We generally
do not maintain redundant systems. Servers are vulnerable to computer viruses,
physical or electronic break-ins and similar disruptions, which could lead to
interruptions, delays, loss of data or our inability to provide timely and
error-free services to our clients. The occurrence of any of the foregoing
risks could have a material adverse effect on our business, prospects,
financial condition and results of operations and may also harm our reputation.
We may be exposed to potential liability for actual or perceived failure to
provide required services.
Because our clients rely on our services to satisfy their customer order
requirements, we may be exposed to potential liability claims for damages
caused to an enterprise, including special or consequential damages, as a
result of an actual or perceived failure of our services. Our failure or
inability to meet a client's expectations in the performance of our services or
to do so in the time frame required by the client, regardless of our
responsibility for the failure, could:
. result in a claim for substantial damages against us by the client;
. discourage other clients from engaging us for these services; and
. damage our business reputation.
We cannot predict the outcome of any potential legal claims.
We may not be able to satisfy the unique and sophisticated requirements of
our clients.
Our target market, consisting of Internet retailers and direct marketing
companies, has unique and sophisticated requirements. In addition, some clients
have pre-existing complex infrastructures consisting of call centers,
fulfillment centers and other business processes. Accordingly, our software
application rarely fits exactly into a new client's operations and we must be
able to customize the software accordingly and generally within a relatively
short time frame. If we are unable to satisfy a particular client's
expectations by customizing our software in a relatively short period of time
or if we otherwise mismanage the implementation of our software systems and
fulfillment operations, our clients could become dissatisfied and elect to
terminate their relationships with us.
If we are unable to respond to rapid changes in technology, our systems could
become obsolete and revenues could be lost.
The market for our order management systems and services is characterized by
rapid technological change, frequent new systems enhancements, evolving
industry standards and rapidly changing client requirements. The introduction
of systems incorporating new technologies and the emergence of new industry
standards could render existing systems obsolete which could ultimately result
in lost revenues. Our future success will depend, in part, on our ability to
anticipate changes, enhance our current systems, develop and introduce new
systems that keep pace with technological advancements and address the
increasingly sophisticated needs of our clients. New systems or enhancements to
existing systems may not adequately meet the requirements of our current and
prospective clients and may never achieve any degree of significant market
acceptance.
9
<PAGE>
Our development of a next-generation browser-based software application may
not be successful and may cause business disruption.
We are currently developing a next-generation browser-based application of
our proprietary software that is intended to serve as our sole platform in
providing an outsourced order management and fulfillment solution for our
clients. To date, we have expended in excess of $1.4 million on software
development, a significant majority of which has been expended on the
development of this browser-based application. Software development of the
browser-based application has been in progress for over 18 months and has
experienced numerous delays. To complete this development, we must, among other
things, ensure that this technology will function efficiently at high volumes,
integrate properly with the Internet and our client and third-party service
providers, offer all the functionality demanded by our clients and assimilate
all of the sales, reporting and other functions currently offered by the
current version of our software. This development effort could fail
technologically or could take more time or be more costly than expected. Even
if we successfully address all of these challenges, we must then work with our
current clients to transition them to our new system, which could also create a
risk of business disruption. We can provide no assurance that we will be
successful in deploying the new browser-based software system.
Our failure to make timely upgrades to increase the capacity of our network
may reduce demand for our services.
Due to the limited deployment of our services to date, the ability of our
network of company-owned facilities and third-party service providers to
connect to and manage a substantially larger number of clients is as yet
unknown. Our network may not be scalable to expected client levels while
maintaining adequate service quality. Upgrading our infrastructure may cause
delays or failures in our systems. As a result, we may be unable to develop a
network of third-party service providers capable of supporting outsourced
operations at a commercially viable level. Failure to achieve or maintain such
a network could significantly reduce demand for our services and our business
and prospects could suffer.
We depend on third-party relationships, many of which are short-term or
terminable, to perform services for our clients.
We depend, and will continue to depend, on a number of third-party service
providers to perform services for our clients. Outside parties on which we
depend include:
. Web designers;
. call centers;
. fulfillment centers; and
. shipping companies.
Many of our arrangements with third-party service providers are not exclusive
and are short-term or may be terminated at the convenience of either party. We
cannot assure you that third-parties regard our relationship with them as
important to their own respective businesses and operations. They may reassess
their commitment to us at any time in the future and may develop their own
competitive services or products.
We intend to provide only a portion of the call center and fulfillment
operations that will be necessary to operate our business. We will rely on
third-party organizations that have the appropriate expertise, capacity,
systems and willingness to complete our network of service providers. As the
demand for these services grows, we believe that there will be increasing
competition for the best third-party service providers, which could result in
significantly higher fees payable to such parties or the inability to maintain
such relationships altogether.
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We cannot assure you that we will be able to maintain relationships with
third-parties that provide services to our clients or that we will be able to
locate or secure additional relationships as demanded by future business. In
addition, we cannot assure you that the services provided by these third-
parties will meet the needs or expectations of our clients.
Our success depends on our ability to protect our proprietary technology.
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect the
proprietary rights in our software and services. However, we will not be able
to protect our intellectual property if we are unable to enforce our rights or
if we do not detect unauthorized use of our intellectual property. In addition,
these legal protections only provide us with limited protection. If we litigate
to enforce our rights, it would be expensive, divert management resources and
may not be adequate to protect our business.
We have not filed any United States patent applications with respect to our
order management systems, nor do we have any patent applications pending. As a
result, we currently do not have patented technology that would preclude or
inhibit competitors from entering our market. Moreover, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending. As of the date of this prospectus, we have not secured
registration on any of our service marks in the United States nor have we
pursued registration in any foreign country. We cannot be certain that future
patents, registered trademarks or registered service marks, if any, will be
granted or that any future patent, trademark or service mark will not be
challenged, invalidated or circumvented, or that rights granted under any
patents, trademarks or service marks that may be issued in the future will
actually provide a competitive advantage to us.
We generally enter into confidentiality agreements with our employees and
consultants and with our clients and corporations with whom we have strategic
relationships. We attempt to maintain control over access to and distribution
of our software documentation and other proprietary information. However, the
steps we have taken to protect our technology and intellectual property may be
inadequate. Our competitors may independently develop technologies that are
substantially equivalent or superior to ours or may have jointly developed such
technologies under agreements giving them co-equal rights to exploit those
technologies.
Our success depends on retaining our current key personnel and attracting
additional personnel, particularly in the areas of customer support and
technical services.
Our success will depend largely on the continuing efforts of our executive
officers and senior management, especially those of Norman Charney, our
President and Chief Executive Officer, and Paul M. Jennings, our Chief
Information Officer and Chief Operating Officer. Our business may be adversely
affected if the services of these officers or any of our other key personnel
become unavailable to us. We have not entered into employment agreements with
any employees other than Messrs. Charney and Jennings. Even with these
employment agreements, there is a risk that these individuals will not continue
to serve for any particular period of time. While we have obtained a key person
life insurance policy on the life of Mr. Charney and Mr. Jennings in the amount
of $1.0 million each, these amounts may not be sufficient to offset the loss of
their services.
We are currently expanding our customer support and technical services
organizations and will need to increase our staff further to support expected
new customers and the expanding needs of existing customers. The initiation of
new customers, the anticipated use of a browser-based order management and
fulfillment software application, the customization of our software, the
integration of these solutions into existing fulfillment systems and the
ongoing customer support can be complex. Accordingly, we need highly trained
customer support, technical personnel and outside consultants. Hiring customer
support and technical personnel is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of our systems and services. Our inability to attract, train or
retain the number of highly qualified customer support and technical services
personnel that our business needs, or the inability to hire qualified outside
consultants to perform these tasks, may cause our business and prospects to
suffer.
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<PAGE>
The integration of key new employees and officers into our management team
may interfere with our operations.
We have recently hired a number of key employees and officers, each of whom
has been with us for less than six months. In addition, we intend to hire
additional key employees and officers to support our business growth. To
integrate into our company, such individuals must spend a significant amount of
time learning our business model and management system, in addition to
performing their regular duties. If we fail to complete this integration in an
efficient manner, our business and prospects will suffer.
Risks Related to Our Industry
We cannot accurately predict the size of our market, and if our market is not
as large as we expect, our business prospects will suffer.
Our business was originally developed to manage the commerce-related
operations of direct marketing companies. However, we have transitioned our
business to meet the growing demands of electronic commerce businesses.
Accordingly, our growth will largely depend on the development and widespread
acceptance of the Internet as a medium for commerce. Use of the Internet by
consumers is at an early stage of development, and market acceptance of the
Internet as a medium for commerce is subject to a high level of uncertainty.
The growth projections for Internet-related activities that we have cited in
this prospectus are only estimates by industry analysts and may not prove to be
accurate. Accordingly, our estimates of the size of our market or the potential
demand for our services may turn out to be inaccurate. If use of the Internet
as a medium for commerce stops growing, our business prospects will be harmed.
Predicting market size is also complicated by the fact that not all potential
clients will outsource their order management and fulfillment operations.
Potential clients may resist outsourcing for a number of reasons including:
. risks or perceived risks of providing third-party service providers with
access to their proprietary technology or information;
. a desire to retain control over inventory, customer service, shipping
and related order processing functions;
. concerns associated with consigning large amounts of inventory to a
third-party; and
. concerns over the level of service to be expected from a third-party
service provider and the ability to properly measure acceptable levels
of service.
If the Internet retailing or direct marketing industries, or any significant
existing or potential client, concludes that the disadvantages of outsourcing
order management and fulfillment operations outweigh the advantages, our
business and prospects will suffer.
Our systems and services will need to achieve widespread market acceptance
for us to succeed.
Even if the Internet grows at the rate we anticipate, our systems and
services must achieve widespread market acceptance for us to succeed. We
believe that our potential to grow and increase our market acceptance depends
principally on the following factors, some of which are beyond our control:
. the differentiation and quality of our systems and services;
. the extent of our third-party service provider network coverage;
. our ability to provide timely and effective client support;
. our pricing strategies as compared to our competitors;
. our industry reputation;
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<PAGE>
. the effectiveness of our marketing strategy;
. concerns about transaction security; and
. general economic conditions, such as downturns in the systems markets.
The relationships with our clients would likely be compromised if our
security measures were to fail.
The relationships with our clients may be adversely affected if the security
measures that we use to protect their proprietary or confidential information,
such as sales information, or the confidential information of their customers,
such as credit card numbers, are ineffective. We may be required to expend
significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by breaches. In addition,
security breaches could expose us to a risk of litigation and possible
liability. Our security measures may be inadequate to prevent security
breaches, and our business would be harmed if we do not prevent them.
Problems related to the "Year 2000 Issue" could adversely affect our
business.
We are exposed to various risks arising out of the change of the millennium
which could adversely affect our business and operating results. Risks are
posed if, despite our investigation and remediation efforts, one or more of the
following occurs:
. our proprietary software contains undetected errors or defects
associated with the Year 2000 problem;
. third-party hardware and software used with our software experiences
problems that are wrongly attributed to us;
. our internal information technology systems or non-information
technology systems, including telecommunications systems and utilities,
experience problems; and
. our third-party service providers or other suppliers experience Year
2000 problems.
The occurrence of any of the foregoing could result in delays or loss of
revenue, diversions of our development resources, damage to our reputation,
increased service costs and litigation expenses. In addition, regardless of
whether we experience Year 2000 problems, enterprises may reduce their spending
on systems and related services during the latter part of 1999 and into 2000 in
connection with the potential effects of the Year 2000 or to concentrate their
resources on remediation.
Government regulation and legal uncertainties could increase the cost and add
additional burdens to our doing business on the Internet.
Due to the increasing popularity of the Internet, laws and regulations
applicable to Internet communications, commerce, advertising and direct
marketing are becoming more prevalent. The adoption or modification of such
laws or regulations could inhibit the growth of Internet use and decrease the
acceptance of the Internet as a communications and commercial medium, which
could have a material adverse effect on our business, results of operations and
financial condition.
Further, due to the global nature of the Internet, governments of states or
foreign countries may attempt to regulate Internet transmissions. We cannot be
certain that violations of domestic or foreign laws or regulations will not be
alleged by applicable governments or that we will not violate such laws or
regulations or new laws or regulations will not be enacted in the future.
Moreover, the applicability of existing laws or regulations governing issues
such as intellectual property ownership, libel, consumer protection, personal
privacy, taxation, quality of services, and distribution is uncertain with
regards to the Internet. Legal compliance may prove difficult for us and may
harm our business, operating results and financial condition.
Purchasing on the Internet could decrease if retailers become subject to
sales and other taxes.
If one or more states or any foreign country successfully asserts that
retailers should collect sales or other taxes on the sale of products made over
the Internet, use of the Internet as a sales channel is likely to decrease.
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In addition, retailers with operations in several states may already be subject
to state sales taxes for shipments into such states. Some customers may be
discouraged from purchasing products on the Internet if they become required to
pay sales tax in connection with such purchases. If this were to occur, the
demand for our systems and services would likely decrease.
Risks Related to This Offering
The number of shares of common stock issuable to the VantagePoint funds is
determinable by reference to our initial public offering price and could result
in additional dilution to the shareholders in this offering.
The precise number of shares of common stock to be issued by us upon the
conversion of our Series A convertible preferred stock effective upon the
closing of this offering is determined, in part, by reference to our initial
public offering price. In addition, the number of shares of common stock
issuable upon exercise of purchase warrants issued in connection with the
preferred stock financing and the exercise price thereof are also determined by
reference to our initial public offering price. For purposes of this
preliminary prospectus, we have assumed an initial public offering price of $
per share which represents the mid-point of the range of anticipated initial
public offering prices. To the extent our initial public offering price is less
than $ per share:
. the number of shares of common stock to be outstanding after this
offering will be increased;
. the number of shares attributed to the VantagePoint directors will
increase;
. the dilution to new investors will increase;
. shareholders' equity could change as a result of the value attributed to
the warrants;
. the number of shares of common stock held by the VantagePoint funds
after the offering will increase; and
. the price per share paid by the VantagePoint funds will decrease.
Investors in this offering are urged to read the final prospectus to determine
the exact number of shares of common stock to be beneficially held by the
VantagePoint funds at the time of closing this offering.
Our stock will likely be subject to substantial price and volume fluctuations
due to a number of factors, some of which are beyond our control.
Stock prices and trading volumes for many Internet-related companies
fluctuate widely for a number of reasons, including some reasons that may be
unrelated to their businesses or results of operations. This market volatility,
as well as general domestic or international economic, market and political
conditions, could materially adversely affect the price of our common stock
without regard to our operating performance. In addition, our operating results
may be below the expectations of public market analysts and investors. If this
were to occur, the market price of our common stock could significantly
decrease.
We are at risk of securities class action litigation due to our expected
stock price volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. In the future we may be the target of similar litigation.
Securities litigation may result in substantial costs and divert management's
attention and resources, which may seriously harm our business and results of
operations and may also harm our reputation.
Management could spend or invest the proceeds of this offering in ways with
which the shareholders may not agree.
We have no current specific allocations for the net proceeds from this
offering. We generally intend to use the net proceeds of this offering to fund
the expansion of our sales and marketing activities and to fund capital
expenditures and software development. In addition, we may use a portion of the
net proceeds to make possible acquisitions and for general corporate purposes.
Pending such uses, we intend to invest the net
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<PAGE>
proceeds of this offering in short-term, investment-grade instruments,
certificates of deposit or direct or guaranteed obligations of the United
States. Our board of directors and management will have substantial flexibility
and broad discretion in applying the net proceeds of this offering, and
investors will be relying on the judgment of our management regarding the
application of these proceeds. The failure of management to apply such funds
effectively could have a material adverse effect on our business and financial
condition. See "Use of Proceeds."
After this offering, our executive officers, directors, and their affiliates,
in the aggregate, will control % of our voting stock, or % if the over-
allotment option is exercised.
Our executive officers, directors and their affiliates own a large enough
stake in us to have an influence on the matters presented to shareholders. As a
result, these shareholders may have the ability to control all matters
requiring shareholder approval, including the election and removal of
directors, the approval of significant corporate transactions, such as any
merger, consolidation or sale of all or substantially all of ASD Systems'
assets, and the control of the management and affairs of ASD Systems.
Accordingly, such concentration of ownership may have the effect of delaying,
deterring or preventing a change in control of ASD Systems, impede a merger,
consolidation, takeover or other business combination involving ASD Systems or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of ASD Systems, which in turn could have an
adverse effect on the market price of ASD Systems' common stock.
We have anti-takeover defenses that could delay or prevent a takeover that
shareholders may consider favorable.
Certain provisions of our amended and restated articles of incorporation and
bylaws and the provisions of Texas law could have the effect of delaying,
deterring or preventing an acquisition of ASD Systems. For example, our board
of directors is divided into three classes to serve staggered three-year terms,
we may authorize the issuance of up to 2,077,778 shares of "blank check"
preferred stock, our shareholders may take action only by a vote at a meeting
or by unanimous written consent and our shareholders are limited in their
ability to make proposals at shareholder meetings. See "Description of Capital
Stock" for a further discussion of these provisions.
Shares eligible for future sale in the open market could depress our stock
price.
Sales of substantial amounts of our common stock (including shares issued
upon the exercise of outstanding options and warrants) in the public market
following this offering, or the appearance that a large number of shares is
available for sale, could depress the market price for our common stock. The
number of shares of common stock available for sale in the public market will
be limited by agreements under which the holders of our outstanding shares of
common stock have agreed not to sell or otherwise dispose of any of their
shares for a period of 180 days after the date of this prospectus, subject to
certain consents and exceptions. Bear, Stearns & Co. Inc. may, in its sole
discretion and at anytime without notice, release all or any portion of the
shares subject to such agreements. In addition to the adverse effect a price
decline could have on holders of our common stock, that decline would likely
impede our ability to raise capital through the issuance of additional shares
of common stock or other equity securities. In addition, the holders of
restricted shares of our stock are entitled to certain rights with respect to
registration of such shares for sale in the public market. If these holders
sell in the public market, such sales could have a material adverse effect on
the market price of our common stock. See "Shares Eligible for Future Sale."
The liquidity of our common stock is uncertain since it has not been publicly
traded.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in our company will lead to the
development of an active, liquid trading market. Active trading markets
generally result in lower price volatility and more efficient execution of buy
and sell orders for investors. The initial public offering price will be
determined by negotiations between us and the representatives of the
underwriters and may bear no relationship to the price at which the common
stock will trade upon completion of this offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS; MARKET DATA
This prospectus contains forward-looking statements. These statements relate
to future events or our future financial performance. In some cases, you can
identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. Forward-looking statements are speculative and
uncertain and not based on historical facts. Because forward-looking statements
involve risks and uncertainties, there are important factors that could cause
actual results to differ materially from those expressed or implied by these
forward-looking statements, including those discussed under "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance, or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements after the date of this prospectus or to conform such statements to
actual results.
This prospectus contains market data related to the Internet generally and
our industry segment specifically. This data was derived from reports generated
by the research firms of Boston Consulting Group, Forrester Research, Inc. and
International Data Corporation. In preparing these reports, the research firms
assumed certain events, trends and activities will occur and/or continue and
these firms project information based, in part, on those assumptions. If the
market research firms are wrong about any of their assumptions, then their
projections may also be wrong. We have retained Forrester Research to act as an
outside consultant to us on a number of matters, including the industry
generally, market trends and matters involving ASD Systems specifically. As of
the date of this prospectus, we have paid Forrester Research an aggregate of
$33,000 for such services.
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USE OF PROCEEDS
The net proceeds from the sale of shares of common stock sold in this
offering are estimated to be approximately $ million, after deducting
underwriting discounts and $ for estimated offering expenses payable by
us. This assumes an initial public offering price of $ per share. If the
underwriters' over-allotment option is exercised in full, the net proceeds are
estimated to be approximately $ on this same basis.
We have no current specific allocations for the net proceeds from this
offering. We generally intend to use the proceeds of this offering for the
following:
. expand our sales and marketing activities;
. fund capital expenditures, software development activities and technical
support; and
. fund working capital and other general corporate purposes.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to these
transactions.
We have not yet determined the actual expected expenditures, and thus cannot
estimate the amounts to be used for each purpose discussed above. The amounts
and timing of these expenditures will vary significantly depending on a number
of factors, including such factors as the amount, if any, of cash generated by
our operations and the market response to our service offerings. Accordingly,
our management will have broad discretion in the application of the net
proceeds. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the proceeds.
Pending such uses, the net proceeds will be primarily invested in short-term,
investment-grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States. See "Risk Factors--Risks Related to this
Offering-- Management could spend or invest the proceeds of this offering in
ways with which the shareholders may not agree."
DIVIDEND POLICY
We have not declared or paid any dividends on our capital stock since our
inception and do not anticipate declaring or paying dividends in the
foreseeable future. Our current policy is to retain earnings, if any, to
finance the expansion of our business. The future payment of dividends will
depend on the results of operations, financial condition, capital expenditure
plans and other factors that we deem relevant and will be at the sole
discretion of our board of directors. Our credit facility with Comerica Bank-
Texas currently restricts our ability to pay dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999:
. on an actual basis;
. on a pro forma basis reflecting a private placement in August 1999 of
our Series A convertible preferred stock, our Series B redeemable
preferred stock and common stock purchase warrants, exercisable for a
number of shares of our common stock determinable by reference to our
initial public offering price, for aggregate proceeds of $11,500,000,
after deducting estimated expenses; and
. on an as adjusted basis reflecting (1) our receipt of the estimated net
proceeds from the shares of common stock we are selling in this
offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and expenses, (2) the
conversion of all Series A convertible preferred stock into shares
of our common stock upon consummation of this offering, also assuming an
initial public offering price of $ per share and (3) the redemption of
all Series B redeemable preferred stock upon consummation of this
offering for $6.0 million.
This information should be read in conjunction with the more detailed
financial statements and notes thereto included elsewhere in this prospectus.
See "Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1999
------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
---------- ---------- ------------
(in thousands, except share and
per share amounts)
<S> <C> <C> <C>
Long-term obligations, less current
portion.................................. $ 1,794 $ 1,794 $ 1,794
Series B redeemable preferred stock,
$.0001 par value; none authorized actual;
1,111,111 shares authorized pro forma and
pro forma as adjusted; none issued and
outstanding actual; 1,111,111 shares
issued and outstanding pro forma; and
none issued and outstanding as adjusted.. --
Shareholders' equity:
Series A convertible preferred stock,
$.0001 par value; none authorized
actual; 1,111,111 shares authorized pro
forma and pro forma as adjusted; none
outstanding actual; 1,111,111 shares
issued and outstanding on a pro forma
basis; none outstanding on an as
adjusted basis......................... --
Series C non-voting preferred stock,
$.0001 par value; none authorized
actual; 3,200,000 shares authorized pro
forma and pro forma as adjusted; none
issued and outstanding actual; none
issued and outstanding pro forma; and
none issued and outstanding as
adjusted............................... --
Common stock, $.0001 par value;
15,000,000 shares authorized actual;
50,000,000 shares authorized; pro forma
and pro forma as adjusted 10,500,000
shares issued and outstanding actual;
10,500,000 shares issued and
outstanding on a pro forma basis and
issued and outstanding on an as
adjusted basis......................... 1
Additional paid-in capital................ 5,106
Accumulated deficit....................... (4,898)
---------- ---------- ---------
Total shareholders' equity............ 209
---------- ---------- ---------
Total capitalization................ $ 2,003 $ $
========== ========== =========
</TABLE>
18
<PAGE>
DILUTION
As of June 30, 1999, our pro forma net tangible book value was $ in the
aggregate, or $ per share. Pro forma net tangible book value per share
represents our total tangible assets (total assets less intangible assets) less
total liabilities, divided by the pro forma number of outstanding shares of
common stock outstanding as of June 30, 1999. Dilution per share represents the
difference between the amount per share paid by investors in this offering of
common stock and the net tangible book value per share after the offering.
After giving effect to the sale of shares of common stock and after our
application of the estimated net proceeds from the offering, our pro forma net
tangible book value as of June 30, 1999 would have been $ in the aggregate,
or $ per share. This represents an immediate increase in pro forma net
tangible book value of $ per share to new investors purchasing shares of
common stock in the offering. If the public offering price is higher or lower,
the dilution to the new investors will increase or decrease accordingly. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.............................. $
Pro forma net tangible book value per share before the offering.... $
Increase in pro forma net tangible book value per share
attributable to new investors.....................................
Pro forma net tangible book value per share after the offering.....
----
Dilution in pro forma net tangible book value per share to new
investors......................................................... $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1999, the
total number of shares of common stock purchased from us, the total
consideration paid to us and the average price per share paid by existing
shareholders and by new investors purchasing shares in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ ------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... .0% $ .0% $
New investors.................. .0 $ .0% $
---------- ----- ----------- -----
Total........................ 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
If the underwriters over-allotment is exercised in full, the number of shares
of common stock held by existing shareholders will be reduced to % of the
total number of shares of common stock to be outstanding after this offering
and will increase the number of shares of common stock held by the new
investors to , or % of the total number of shares of common stock to be
outstanding immediately after this offering. See "Principal Shareholders."
The foregoing tables and calculations are based on and include:
. the number of shares outstanding as of June 30, 1999; and
. shares of common stock to be issued upon the conversion of all
outstanding shares of Series A convertible preferred stock, assuming an
initial public offering price of $ per share.
The foregoing tables and calculations exclude:
. 1,457,500 shares of common stock issuable upon exercise of outstanding
options, each with an exercise price of $1.00 per share (of which
options exercisable for 982,500 shares had vested as of June 30, 1999);
. 700,000 shares reserved for future issuance under our Long-Term
Incentive Plan;
. 1,000,000 shares issuable upon exercise of outstanding stock purchase
warrants with a weighted average exercise price of $1.70 per share; and
. shares of common stock issuable upon exercise of outstanding common
stock purchase warrants with an exercise price of $ per share,
assuming an initial public offering price of $ per share.
19
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
financial statements, the notes to such statements and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 22 of this prospectus. The statement of
operations data for the period from January 1, 1996 through December 20, 1996;
the period from December 21, 1996 through October 13, 1997; the period from
October 14, 1997 through December 31, 1997 and the year ended December 31, 1998
and the balance sheet data at December 20, 1996; October 13, 1997; December 31,
1997; and December 31, 1998 are derived from our audited financial statements
included elsewhere in this prospectus. The statement of operations for the year
ended December 31, 1995 and the interim results for the periods ended June 30,
1998 and 1999 are derived from our unaudited statements which reflect all
adjustments necessary for a fair presentation of that data.
The selected financial data for all periods ending on or prior to December
31, 1997, include information derived from the order management and fulfillment
business of our predecessors Athletic Supply of Dallas, Inc. (which operated
the business from January 1, 1995 to December 20, 1996), Athletic Supply of
Dallas, LLC (which operated the business from December 21, 1996 to October 13,
1997) and ASD Partners, Ltd. (which operated the business from October 14, 1997
to December 31, 1997). The unaudited pro forma net income (loss) information
for the periods ended December 31, 1995, December 20, 1996, October 13, 1997
and December 31, 1997 reflect a tax provision computed by applying the
anticipated effective tax rate of approximately 37% to pretax income. The
unaudited pro forma basic and diluted net income (loss) per share information
for the periods ended on or prior to December 31, 1997 have been calculated as
if based on the number of shares of common stock outstanding at January 1,
1998.
<TABLE>
<CAPTION>
Six Months
Predecessors Ended June 30,
--------------------------------------------------------- ----------------
Period from
January 1, 1995 Period from Period from Period from
(Inception) January 1, 1996 December 21, October 14, Year
through through 1996 through 1997 through Ended
December 31, December 20, October 13, December 31, December 31,
1995 1996 1997 1997 1998 1998 1999
--------------- --------------- ------------ ------------ ------------ ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenues................ $5,279 $6,826 $4,882 $2,574 $ 8,020 $ 3,366 $ 4,679
Cost of revenues........ 1,308 2,094 2,686 1,248 5,051 2,424 3,316
------ ------ ------ ------ ------- ------- -------
Gross profit............ 3,971 4,732 2,196 1,326 2,969 942 1,363
Operating expenses:
Selling, general, and
administrative
expenses.............. 2,616 2,819 2,649 1,074 4,258 1,960 3,013
Depreciation and
amortization.......... 121 517 367 252 1,084 448 574
------ ------ ------ ------ ------- ------- -------
Total operating
expenses.............. 2,737 3,336 3,016 1,326 5,342 2,408 3,587
------ ------ ------ ------ ------- ------- -------
Operating income
(loss)................. 1,234 1,396 (820) -- (2,373) (1,466) (2,224)
Interest expense, net... -- -- -- 27 233 70 69
------ ------ ------ ------ ------- ------- -------
Net income (loss)....... $1,234 $1,396 $ (820) $ (27) $(2,606) $(1,536) $(2,293)
====== ====== ====== ====== ======= ======= =======
Basic and diluted net
loss per share......... $ (0.43) $ (0.26) $ (0.24)
======= ======= =======
Unaudited Pro Forma
Data:
Net income (loss)....... $ 777 $ 879 $ (820) $ (27)
====== ====== ====== ======
Basic and diluted net
income (loss) per
share.................. $ 0.13 $ 0.15 $(0.14) $(0.01)
====== ====== ====== ======
Shares used in computing
basic and diluted net
income (loss) per
share.................. 6,000 6,000 6,000 6,000 6,000 6,000 9,735
====== ====== ====== ====== ======= ======= =======
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
December 31, December 20, October 13, December 31, December 31, June 30,
1995 1996 1997 1997 1998 1998
------------ ------------ ----------- ------------ ------------ -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ -- $ -- $ -- $ 97 $ -- $ 18
Working capital
(deficit).............. (219) 1,126 (1,629) (442) (2,551) (507)
Total assets............ 1,801 2,693 1,262 3,624 3,266 2,940
Long-term debt
(including current
maturities)............ 935 -- -- 1,754 1,414 3,437
Division equity
(deficit).............. (866) 2,263 820
Partners' capital....... 943
Shareholders' equity
(deficit).............. (1,664) (428)
</TABLE>
The June 30, 1999 balance sheet data set forth below is shown:
. on an actual basis;
. on a pro forma basis reflecting a private placement in August 1999 of
our Series A convertible preferred stock, our Series B redeemable
preferred stock and common stock purchase warrants, exercisable for a
number of shares of our common stock determinable by reference to our
initial public offering price, for aggregate proceeds of $11,500,000,
after deducting estimated expenses; and
. on an as adjusted basis reflecting (1) our receipt of the estimated net
proceeds from the shares of common stock we are selling in this
offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and expenses, (2) the
conversion of all Series A convertible preferred stock into shares
of our common stock upon consummation of this offering, also assuming an
initial public offering price of $ per share and (3) the redemption
of all Series B redeemable preferred stock upon consummation of this
offering for $6.0 million.
<TABLE>
<CAPTION>
At June 30, 1999
-----------------------------
Pro Forma
Actual Pro Forma As Adjusted
------ --------- -----------
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 202 $11,702 $
Working capital
(deficit).............. (982)
Total assets............ 4,539
Long-term debt
(including current
maturities)............ 2,163 2,163
Series B mandatorily
redeemable preferred
stock.................. --
Shareholders' equity
(deficit).............. 209
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of operations
of our company should be read in conjunction with the financial statements and
the notes to those statements included elsewhere in this prospectus. This
discussion contains forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors" and "Special Note Regarding Forward-
Looking Statements; Market Data" elsewhere in this prospectus.
Overview
Our proprietary software and comprehensive service solutions enable Internet
retailers and direct marketing businesses to outsource their order management
and fulfillment operations. Our systems automate and integrate in real-time Web
sites, call centers, fulfillment centers and drop-ship vendors. We operate and
manage a scalable network of company-owned and third-party call centers and
fulfillment centers.
We derive our revenues from systems services, call center services,
fulfillment services and, to a much lesser extent, other services, consisting
of client management services, Web site related services and consulting
services. We typically charge on a per-transaction basis for systems
processing, on a per-minute basis for call center services and on a per-item
basis for fulfillment services. Additional fees are billed for other services.
We price our services based on a variety of factors including the depth and
complexity of the services provided, the amount of required systems
customization, length of contract and other factors. Our revenues are
recognized as our services are rendered and the majority of our clients are
billed on a weekly basis. Our client contracts can be cancelled on 180 or fewer
days notice.
Our expenses are comprised of:
. cost of revenues, which consists primarily of compensation and related
expenses for our call center and fulfillment center and the variable
costs of third-party call center and fulfillment center services;
. selling, general and administrative, which consists primarily of
compensation and related expenses for sales and marketing staff,
customer service and administrative personnel and software development
technicians; occupancy costs; software development costs; and marketing
programs; and
. depreciation and amortization expense.
The order management and fulfillment business currently operated by us was
commenced in January 1995 by Athletic Supply of Dallas, Inc. Athletic Supply of
Dallas, Inc. was a direct marketing cataloger for a variety of sports
merchandise, including licensed sports products of the NFL, NHL, NBA and Major
League Baseball and the Sears "My Team" catalogs. In January 1995, Athletic
Supply of Dallas began providing order management and fulfillment services
relating to the Sears Roebuck Power and Hand Tool and Home Healthcare catalogs
using the proprietary software that had been developed for its own catalog
operations. On December 20, 1996, Athletic Supply of Dallas, Inc. was sold, in
its entirety, to Genesis Direct, Inc. On October 14, 1997, ASD Partners, Ltd.,
a limited partnership controlled by Norman Charney, acquired all of the
software, the call center and fulfillment center assets and the Sears contracts
previously owned by Athletic Supply of Dallas from Genesis Direct, Inc.
Effective January 1, 1998, ASD Partners, Ltd. transferred this business to ASD
Systems, Inc. in connection with our conversion into a corporation.
According to applicable reporting procedures and policies, the "Summary
Financial Data" and "Selected Financial Data" included in this prospectus
correspond to these differing periods of predecessor ownership. However, we
believe that period-to-period comparisons of revenues and operating results,
particularly of incongruent periods, are not necessarily meaningful. We have
therefore included as supplemental disclosure under "--Supplemental comparison
of the years ended December 31, 1998 and December 31, 1997 (unaudited)" a
comparison of certain selected financial data derived from audited financial
statements for the year ended December 31, 1998 to certain unaudited,
internally prepared selected financial data for the year ended December 31,
1997. See "--Supplemental comparison of the periods ended December 31, 1998 and
December 31, 1997 (unaudited)."
22
<PAGE>
Results of Operations
Comparison of the six months ended June 30, 1999 to the six months ended June
30, 1998.
Revenues. Our revenues increased 39% to $4.7 million for the six months ended
June 30, 1999 from $3.4 million for the six months ended June 30, 1998. Sears
accounted for 78% of total revenues for the six months ended June 30, 1999 and
90% of total revenues for the six months ended June 30, 1998. The increase in
revenue over the period was due primarily to an increase in the number of
clients from 5 to 8.
Cost of Revenues. Cost of revenues increased 37% to $3.3 million for the six
months ended June 30, 1999 from $2.4 million for the six months ended June 30,
1998. The increase in cost of revenues was primarily due to the addition of
call center, fulfillment center and technical service personnel to support our
anticipated growth. As a percentage of revenues, cost of revenues was 71% for
the period ended June 30, 1999 and 72% for the period ended June 30, 1998.
Sales, General and Administrative Expense. For the six months ended June 30,
1999, our selling, general and administrative, or SG&A, expense was $3.0
million compared to $2.0 million for the same period of 1998, an increase of
50%. The majority of this increase in total SG&A expense was associated with
the salaries and related benefits of additional personnel such as executive,
financial, sales and marketing, not included in cost of revenues. We anticipate
that the amount of SG&A expense, in absolute dollars, will continue to increase
in subsequent periods as we are required to hire additional personnel to meet
our growth strategies and comply with our obligations as a public company. As a
percentage of revenues, SG&A expense increased to 64% in the first six months
of 1999 from 58% for the same period of 1998 due to an increase in expenses to
expand our sales and marketing, administrative and systems infrastructure in
anticipation of future revenue growth.
Operating Loss. For the six months ended June 30, 1999, our operating loss
was $2.3 million compared with $1.5 million for the six months ended June 30,
1998. Approximately $387,000 of the increase in loss was attributable to
increased salaries and approximately $128,000 was attributable to an increase
in expanded facilities expense. In addition, approximately $200,000 in loss was
due to increased professional and consulting fees. The total increase in
expenses was partially offset by decreases in certain other expenses and the
effect of capitalizing software development costs.
Comparison of periods ended December 31, 1998, December 31, 1997, October 13,
1997 and December 20, 1996.
For purposes of this comparison:
. the period ended December 31, 1998 represents a 365-day period from
January 1, 1998 through December 31, 1998;
. the period ended December 31, 1997 represents a 79-day period from
October 14, 1997 through December 31, 1997;
. the period ended October 13, 1997, represents a 297-day period from
December 21, 1996 through October 13, 1997; and
. the period ended December 20, 1996 represents a 355-day period from
January 1, 1996 through December 20, 1996.
These periods correspond to the different periods of our predecessors'
ownership of the business currently operated by us. As a result, these periods
necessarily reflect inconsistent management regimes and cost structures. In
addition, interim periods were affected by the seasonal nature of our business.
See "--Overview" and "--Seasonality."
23
<PAGE>
Prior to October 1997, our business was part of larger operations that were
focused principally on direct marketing of sports licensed products. We did not
begin to focus on expanding the clients of our order management and fulfillment
business or transition our business to meet the demands of Internet retailers
until January 1998. Consequently, we believe that period-to-period comparisons
of revenues and operating results, particularly in light of the incongruent
periods, are not necessarily meaningful.
Revenues. Prior to January 1998, our predecessors were not focused on growing
the revenues related to the order management and fulfillment business now
comprising our business. For the period ended December 31, 1998, our revenues
were $8.0 million compared to $2.6 million for the period ended December 31,
1997, $4.9 million for the period ended October 13, 1997 and $6.8 million for
the period ended December 20, 1996. The general increase in revenue over this
period was due primarily to an increase in the number of clients from 2 at
December 20, 1996 to 6 at December 31, 1998.
Cost of Revenues. For the period ended December 31, 1998, our cost of
revenues was $5.1 million compared to $1.2 million for the period ended
December 31, 1997, $2.7 million for the period ended October 13, 1997 and $2.1
million for the period ended December 20, 1996. As a percentage of revenues,
cost of revenues was 63% for the period ended December 31, 1998, 48% for the
period ended December 31, 1997, 55% for the period ended October 13, 1997 and
31% for the period ended December 20, 1996. This general increase in the cost
of revenues, as a percentage of revenues, was due to an increase in expenses to
expand our sales and marketing, administrative and systems infrastructure in
anticipation of future revenue growth.
Sales, General and Administrative Expense. For the period ended December 31,
1998, our total SG&A expense was $4.3 million compared to $1.1 million for the
period ended December 31, 1997, $2.6 million for the period ended October 13,
1997 and $2.8 million for the period ended December 20, 1996. As a percentage
of revenues, SG&A expense was 53% for the period ended December 31, 1998, 42%
for the period ended December 31, 1997, 54% for the period ended October 13,
1997 and 41% for the period ended December 20, 1996. As a general trend, SG&A
expense as a percentage of revenues increased modestly due to an increase in
expenses to expand our sales and marketing, administrative and systems
infrastructure in anticipation of future revenue growth. In addition, we
increased our software development activities in 1998 in connection with the
development of our browser-based application. Interim periods were affected by
the seasonal nature of our business.
Operating Income (Loss). For the period ended December 31, 1998, our
operating loss was $2.4 million compared to operating income for the period
ended December 31, 1997 of $1,000, operating loss for the period ended October
13, 1997 of $820,000 and operating income for the period ended December 20,
1996 of $1.4 million. As a general trend, our operating results were negatively
impacted by the expansion of our software development efforts and an expanded
sales and marketing, administrative and systems infrastructure in anticipation
of future growth.
Supplemental comparison of years ended December 31, 1998 and December 31,
1997 (unaudited).
The following table sets forth selected financial data for the 365-day period
ended December 31, 1998 and the 365-day period ended December 31, 1997.
Management prepared the financial data for the year ended December 31, 1997 by
combining the historical financial data for the period from December 21, 1996
through October 13, 1997 with the historical financial data for the period from
October 14, 1997 through December 31, 1997 and subtracting the internally
prepared results for the period from December 21, 1996 through December 31,
1996. Although the resulting information has not been audited by our
independent auditors, we believe that the preparation and inclusion of this
data provides a basis upon which a more meaningful comparison can be made to
the financial data for the year ended December 31, 1998. The financial data for
the period ended December 31, 1997 has been prepared on substantially the same
basis as the historical statements, consisting of only normal recurring
adjustments necessary for a fair presentation of the results of operations for
such period.
24
<PAGE>
This financial information should be read in conjunction with the audited
financial statements and the notes attached to those financial statements
included elsewhere in this prospectus. In view of the rapidly evolving nature
of our business and our limited operating history, we believe that period-to-
period comparisons of revenues and operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
Due to the changes in ownership of the business occurring in 1996 and 1997
and the consequential differences in management and cost structure applicable
to each such owner, we have elected to set forth below only a comparison of
gross revenues, cost of revenues, gross profit, total SG&A expenses and
operating income (loss) before depreciation and amortization.
<TABLE>
<CAPTION>
Year Ended
-------------------------
December 31, December 31,
1997 1998
------------ ------------
(in thousands)
<S> <C> <C>
Revenues............................................ $7,328 $8,020
Cost of revenues.................................... 3,866 5,051
------ ------
Gross profit........................................ 3,462 2,969
Selling, general and administrative expenses........ 3,442 4,258
------ ------
Operating income (loss) before depreciation and
amortization....................................... 20 (1,289)
====== ======
</TABLE>
Revenues. Our revenues increased 9% to $8.0 million for the year ended
December 31, 1998 from $7.4 million for the year ended December 31, 1997. The
increase in revenue was due primarily to an increase in the number of clients
from 2 to 6. Most of the clients we added in 1998 began generating revenue in
the fourth quarter.
Cost of Revenues. Cost of revenue increased 28% to $5.1 million for the year
ended December 31, 1998 from $3.9 million for the year ended December 31, 1997.
As a percentage of revenues, cost of revenues were 63% for the year ended
December 31, 1998 and 53% for the year ended December 31, 1997. The increase in
the cost of revenues was primarily due to the increased salaries and related
benefits expense of additional call center and fulfillment center personnel
required in order to support additional client service volume.
Sales, General and Administrative Expense. For the year ended December 31,
1998, our total SG&A expense increased 16% to $4.3 million from $3.7 million
for the year ended December 31, 1997. As a percentage of revenues, SG&A expense
increased to 53% for the year ended December 31, 1998 from 50% for the year
ended December 31, 1997, primarily due to the expansion of our software
development and an expanded sales and marketing, administrative and systems
infrastructure in anticipation of future growth.
Operating Income (Loss) Before Depreciation and Amortization. Operating
income (loss) before depreciation and amortization for the year ended December
31, 1998 was $(1.3) million compared to $20,000 for the year ended December 31,
1997. This loss was due to the expansion of our software development efforts
and an expanded sales and marketing, administrative and systems infrastructure
in anticipation of future growth.
25
<PAGE>
Quarterly Results of Operational Data
The following table sets forth selected unaudited statements of operations
data for each of the previous six quarters ended June 30, 1999. The financial
information for each quarter has been prepared on substantially the same basis
as the audited statements included in other parts of this prospectus and, in
the opinion of management, includes all adjustments, consisting of only normal
recurring adjustments necessary for a fair presentation of the results of
operations for such periods. This financial information should be read in
conjunction with the audited financial statements and the notes attached to
those financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Quarter Ended
----------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31, June 30,
1998 1998 1998 1998 1999 1999
--------- -------- ------------- ------------ --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $1,945 $1,421 $1,596 $3,058 $ 2,200 $ 2,479
Cost of revenues........ 1,281 1,143 1,034 1,543 1,669 1,647
------ ------ ------ ------ ------- -------
Gross profit............ 664 278 562 1,465 531 832
Operating expenses:
Selling, general and
administrative
expenses.............. 1,035 925 1,007 1,291 1,291 1,722
Depreciation and
amortization.......... 216 232 323 313 321 253
------ ------ ------ ------ ------- -------
Total operating
expenses............... 1,251 1,157 1,330 1,604 1,612 1,975
------ ------ ------ ------ ------- -------
Operating (loss)........ (587) (879) (768) (139) (1,081) (1,143)
Interest expense, net... 37 33 81 82 38 30
------ ------ ------ ------ ------- -------
Net loss................ $ (624) $ (912) $ (849) $ (221) $(1,119) $(1,173)
====== ====== ====== ====== ======= =======
</TABLE>
Factors Affecting Operating Results
We have experienced significant fluctuations in our results of operations
from quarter to quarter. As a result of these fluctuations, period-to-period
comparison of our operating results is not necessarily meaningful and should
not be relied upon as an indicator of future performance. We expect our future
operating results to fluctuate. Factors that could cause these fluctuations
include:
. demand for and market acceptance of our order management and fulfillment
systems and services;
. client retention;
. fluctuations in third-party call center and fulfillment center costs;
. timing and magnitude of capital expenditures;
. costs relating to the expansion of our operations and the development of
our browser-based application;
. introduction of new systems and services or enhancements by us or our
competitors;
. the ability to meet the technological demands of our clients;
. changes in our pricing policies or those of our competitors; and
. economic conditions specific to the order management and fulfillment
industry, as well as generally.
As a result of these and other factors, our future operating results may fall
below the expectations of securities analysts and investors. In this event, the
price of our common stock could decrease significantly.
26
<PAGE>
Seasonality
Our revenues and business are seasonal. Many retail businesses, including
Sears and other clients, sell more products during the holiday season than in
any other portion of the year. For example, the Sears Wish Book catalog is
mailed only twice per year during the third and fourth calendar quarters.
Accordingly, because we generate the vast majority of our revenue on a per-
transaction basis, we recognize a disproportionate portion of our annual
revenue in the last three months of the year. As a result of our seasonal
business, we have additional risks in processing a large volume of transactions
in short time periods. Therefore, we believe that period-to-period comparisons
of our results of operations should not be relied upon as an indication of
future performance. We expect to continue to experience seasonal fluctuation of
revenues and operating results in the future.
Liquidity and Capital Resources
Since inception on January 1, 1998, we have financed our operations
principally through funds from the private placement of equity securities. Such
funds have historically been supplemented with short-term borrowings under a
revolving credit facility maintained with Comerica Bank-Texas. As of June 30,
1999, we had a working capital deficit of $982,000.
For the six months ended June 30, 1999, net cash used in operating activities
was approximately $1.4 million compared to approximately $1.3 million for the
six months ended June 30, 1998. Significant uses of cash in operations for the
six months ended June 30, 1999 include costs associated with increased sales
and marketing activities to promote our services and capital expenditures in
connection with systems infrastructure.
Our capital expenditures amounted to approximately $1.6 million for the six
months ended June 30, 1999, $180,000 for the year ended December 31, 1998 and
$126,000 for the period ended December 31, 1997. For the six months ended June
30, 1999, capital expenditures included the purchase of technical equipment,
including the replacement of a significant portion of call center workstations,
data center servers and the upgrading of our telecommunications switches. In
addition, we consolidated all of our technical development and programming
personnel into a new facility requiring upgraded equipment.
Effective August 23, 1999, we completed an additional round of equity
financing with VantagePoint Venture Partners III (Q), L.P. and VantagePoint
Communications Partners, L.P. through the issuance of our Series A convertible
preferred stock, Series B redeemable preferred stock and certain common stock
purchase warrants exercisable for a number of shares determinable by reference
to our initial public offering price. This transaction resulted in aggregate
cash proceeds to us of approximately $11.5 million, after deducting estimated
expenses. The net proceeds from the preferred stock financing are available for
general corporate purposes. We intend to use the net proceeds from the
preferred stock financing to repay all or a portion of our credit facility with
Comerica Bank-Texas and another $6.0 million to redeem our Series B redeemable
preferred stock upon the closing of this offering.
We maintain a $4.0 million credit facility with Comerica Bank consisting of a
$2.0 million revolving line of credit and a $2.0 million term note. The
revolving credit line matures on May 13, 2000 and borrowings are limited to a
borrowing base defined as $750,000 plus 80% of eligible accounts receivable.
Borrowings under our revolving credit facility bear interest at the bank's
prime rate plus 1%, which was 8.75% at June 30, 1999. The term note matures
November 13, 2002 and bears interest at prime plus 1%, which is payable
monthly. All borrowings under our credit facility with Comerica Bank are
collateralized by our assets. Our credit agreement also requires us to comply
with some standard financial covenants such as a minimal amount of tangible net
worth, a minimal quick ratio, a maximum amount of debt to tangible net worth
and a minimal amount of net income. At August 23, 1999, our outstanding debt
under both the revolving credit facility and term note was approximately $3.4
million.
We are currently negotiating with Comerica Bank to replace the current credit
facility after the consummation of this offering with a separate facility on
terms more favorable to us. However, we have no
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present commitments or arrangements assuring us of any future debt financing,
and there can be no assurance that any such debt financing will be available to
us on favorable terms, or at all. To the extent we are unable to negotiate for
a more favorable revolving credit facility, we may retain the existing facility
with Comerica Bank or consider additional financing alternatives, including
debt financings (other than the current facility) with one or more banks, or
the additional issuance of equity securities. If we do not obtain additional
financing, either debt financing or otherwise, we believe that our existing
cash resources will be adequate to continue expanding our operations on a
reduced scale.
We believe that the remaining net proceeds from the preferred stock financing
closed in August 1999 and the proceeds from this offering will be sufficient to
meet our working capital and capital expenditure requirements for at least the
next 12 months. The execution of our business plan will require substantial
additional capital to fund our operating losses, working capital needs, sales
and marketing expenses, lease payments and capital expenditures thereafter.
While we have no material commitments for capital expenditures, we anticipate
making up to approximately $2.2 million of capital expenditures for technical
equipment in the next 12 months. Actual capital requirements may vary based
upon the timing and success of the expansion of our operations. Our capital
requirements may change based upon technological and competitive developments.
In addition, several factors may affect our capital requirements, including:
. Demand for our systems and services or our anticipated cash flow from
operations being less than anticipated;
. Our projections relating to the development of the browser-based
application of our software proves to have been inaccurate;
. We engage in acquisitions or other strategic transactions; or
. We accelerate or otherwise alter the schedule of our expansion plans.
At December 31, 1998, we had approximately $2.6 million of federal net
operating loss carryforwards available to offset future taxable income which,
if not utilized, will expire in 2018. The future benefit of our net operating
loss carryforwards may be limited as a result of the various ownership changes
that have occurred during 1999. Our total deferred tax assets have been fully
reserved due to the uncertainty of future taxable income. Accordingly, no tax
benefit has been recognized in the periods presented.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk relates to changes in interest rates for
borrowings under our revolving credit facility. These borrowings bear interest
at variable rates. Based on our borrowings during 1998, a hypothetical 10%
increase in interest rates would have increased our annual interest expense by
approximately $120,000 and would have increased our cash flow deficit by
approximately $100,000.
YEAR 2000 ISSUES
IMPACT OF THE YEAR 2000. The Year 2000 issue refers to the potential for
computer programs or systems which store or process date-related information
using two digits rather than four to represent the year. These programs or
systems may not be able to properly distinguish between a year in the 1900's
and a year in the 2000's. Failure of these programs or systems to make such a
distinction between the two centuries could cause the programs or systems to
yield erroneous results or even fail to perform normal business activities.
STATE OF READINESS. We have developed a Year 2000 program that was structured
to address our Year 2000 exposure. Our Year 2000 program focuses on certain
tasks that address critical Year 2000 issues. These tasks include assessing
each of the following:
. Our computer hardware and proprietary software, including data,
networks, servers and workstations;
. Third-party hardware and software used with our software;
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. Our telecommunications systems, utilities, computer room systems and
office equipment;
. The Year 2000 compliance of our third-party service providers, drop-ship
vendors and other vendors.
We are also conducting a letter survey of landlords requesting information as
to the readiness and reliability of building systems including security access
and environmental control systems.
We have substantially completed the process of determining the Year 2000
readiness of our computer systems and software, including the hardware and
software that enable us to provide and deliver our order management and
fulfillment solutions. We believe that our internal systems, as a whole, are
Year 2000 compliant. Our remaining Year 2000 tasks include:
. Completing our review of Year 2000 compliance by critical third-party
service providers, drop-ship vendors and others;
. Replacing our internal accounting system; and
. Working with landlords to assess Year 2000 issues in building systems.
We are not currently aware of any Year 2000 problems that would have a
material adverse effect on our business, financial condition or results of
operations. We intend to complete our assessment, and the replacement or
remediation of any non-Year 2000 compliant technologies, by October 31, 1999.
COSTS. As of June 30, 1999, we had incurred approximately $2.0 million in
costs in connection with Year 2000 compliance efforts. We estimate that the
total remaining cost of our Year 2000 compliance efforts will be approximately
$200,000. Most of these expenses relate to the acquisition of upgraded hardware
and related electronic equipment. Costs associated with time spent by employees
in the evaluation and implementation phases of Year 2000 compliance matters
have been incurred in the normal course of our business. If we encounter
unexpected difficulties, or if we are unable to obtain compliance information
from material third-parties, we may need to spend additional amounts to ensure
that our systems are Year 2000 compliant.
RISKS. To the extent that our Year 2000 compliance assessments are finalized
without identifying any additional material non-compliant programs or systems
operated by us or third-parties, the most reasonably likely worst case Year
2000 scenario would involve an outside system failure which would be beyond our
control. Examples of these risks inherent in our business are as follows:
. Significant and continuing interruption of electrical power to our data
center operations could materially and negatively effect our ability to
provide such data center operations. In an attempt to manage the
possible impact of this risk, we have installed back-up generator power
systems at our data center.
. Significant and continuing interruption of telecommunications and data
network services in our data center could materially and negatively
impact our ability to provide data center operations. We have conducted
detailed assessments of the components of our telecommunications
infrastructure and have added upgraded and additional telecommunications
equipment.
. If a service provided by us is found to cause damage to a client because
of Year 2000 noncompliance causing business interruptions of a material
nature, claims of mismanagement, misrepresentation or breach of contract
could be filed against us. We cannot predict the outcome of any
potential legal claims.
CONTINGENCY PLAN. We have not yet developed a contingency plan to address the
worst-case risks that might occur if technologies we are dependent on are not
Year 2000 compliant. The results of our assessments, our subsequent testing and
the responses received from all third-party service providers and others will
be taken into account in determining the need for and nature and extent of any
contingency plan. If determined to be necessary, we intend to have any required
contingency plan developed by October 31, 1999.
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New Accounting Pronouncements
As of January 1, 1998, we have adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which requires
additional disclosures with respect to certain changes in assets and
liabilities that previously were not required to be reported as results of
operations for the period.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivatives
and Similar Financial Instruments and Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. We will be required to adopt SFAS 133 at
the beginning of fiscal year 2000. SFAS 133 is not expected to have a
significant impact on us.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed for or Obtained for Internal Use." SOP 98-1 requires all costs
related to the development of internal use of software other than those
incurred during the application development stage to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for our fiscal year ending December 31, 1999. Prior to this
date, we will expense such costs as incurred. As a result of adopting SOP 98-1,
we expect to capitalize approximately $1.1 million relating to internal use of
software development projects in 1999 that otherwise would have been expensed
as incurred.
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BUSINESS
Overview
Our proprietary software and comprehensive service solutions enable Internet
retailers and direct marketing businesses to outsource their order management
and fulfillment operations. Our systems automate and integrate in real-time Web
sites, call centers, fulfillment centers and drop-ship vendors. We operate and
manage a scalable network of company-owned and third-party call centers and
fulfillment centers. Our systems and services offer our clients an alternative
to the costs, complexity and risks associated with developing and maintaining
these commerce-related operations in-house. Our systems and services are priced
on a per-transaction basis, reducing our clients' initial infrastructure costs
and speeding their time to market, while providing us with recurring revenue.
Our systems differentiate us by integrating multiple sales channels,
including Web sites and call centers, thus giving our clients' customers
greater control over their shopping experience. The customer can research
products, access real-time item availability and pay for the order through
either a Web site or by calling a customer service representative in any of our
integrated call centers. The customer can then either visit the Web site or
call an 800 number for customer service or real-time order status, regardless
of how the order was originally entered. Once the order is placed, our systems
instantly and automatically route the order to the fulfillment center closest
to the customer or drop-ship vendor, reducing shipping costs and time-in-
transit. For clients that have retail stores, we are expanding the
functionality of our systems to further enhance the shopping experience by
integrating the stores into our systems. We anticipate that this integration
will give our clients' customers the added option of confirming availability
and price at the closest retail store.
We believe that we are well positioned to meet the needs of the rapidly
growing number of Internet retailers and direct marketing companies. Our
founders each have over 14 years of experience in systems development and
operations in the direct marketing industry. Our business was originally
developed to manage the commerce-related operations of direct marketing
companies. However, we have transitioned our business to meet the growing
demands of electronic commerce businesses. Our clients currently include Sears
Roebuck, EDS for Sony's Metreon.com, Toys "R" Us, HoneyBaked Ham of Georgia and
King World Direct.
Industry Background
Growth of Electronic Commerce
The Internet is quickly becoming an important communications medium and sales
channel for both consumers and businesses worldwide. International Data
Corporation projects that the number of Internet users worldwide will grow from
approximately 142 million in 1998 to approximately 502 million in 2003. IDC
also projects that total worldwide commerce conducted on the Internet will grow
from an estimated $50 billion in 1998 to an estimated $1.3 trillion in 2003 and
the number of Web buyers worldwide will increase from 31 million in 1998 to
approximately 183 million in 2003.
The acceptance of electronic commerce has spurred the growth in the number of
Internet retailers and spending on establishing Internet commerce operations.
Forrester Research predicts that 82% of U.S. companies with over 1,000
employees will be doing business online by the year 2002. In addition, IDC
estimates that the market for Internet commerce application software alone is
expected to grow from approximately $444 million in 1998 to approximately $10.1
billion in 2002.
Store based retailers are increasingly adopting electronic commerce
strategies to remain competitive. According to the Boston Consulting Group and
Shop.org, 62% of online retail revenues in 1998 were from retailers who had
business pre-existing the Web. While many traditional brick-and-mortar
retailers have already established a presence on the Internet, we expect that
the increased pressure to maintain market share will motivate traditional
store-based retailers to further enhance their electronic commerce operations.
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Store-based retailers face numerous hurdles in competing with pure Internet
retailers. These hurdles include traditional retailers' physical and
geographical constraints and their reduced flexibility to adjust merchandising,
pricing and sales strategies compared to Internet retailers. We believe that
the competition faced by traditional store-based retailers in competing with
pure Internet retailers will result in an increased focus on their electronic
commerce operations including Web site functionality and integration of Web
sites, order management systems, call center operations and fulfillment
operations. According to IDC, Internet-related spending among large retailers
is expected to increase from an estimated $4.2 billion in 1998 to an estimated
$17.5 billion in 2002.
Growth of the Outsourcing Industry
The trend toward outsourcing business processes is growing. According to a
survey conducted by Forrester Research, companies are motivated to outsource
one or more discrete business processes in order to gain better technical
expertise, cut costs, focus on core competencies, and solve IT staffing
problems. We believe that the proliferation of the Internet as a sales channel
will result in additional growth in the outsourcing of business processes. This
growth is being driven by: the increasing need to service a highly dispersed
customer base; the increasing technological complexity of modern business
processes and the relative lack of skilled personnel trained in such
technology; the need to integrate, on a real-time basis, an ever growing number
of components, including Web sites, call centers, fulfillment centers, vendors
and retail outlets; and the trend toward focusing on core competencies.
Industry Challenges
Internet retailers and other direct marketing companies traditionally have
had two choices when deciding how to handle their order management and
fulfillment operations, each of which has presented unique challenges:
In-House Alternative
Retailers choosing to retain order management and fulfillment operations in-
house have faced a variety of challenges, including:
. Significant initial and continuing costs. Developing in-house
application software, maintaining an in-house call center, data center
and fulfillment service can be expensive and difficult to manage,
especially for start-up enterprises. Given the significant initial costs
and economies of scale inherent in commerce-related operations, it is
difficult for many distributors to justify the costs of maintaining
these functions in-house.
. Delayed time to market. Establishing the necessary commerce-related
infrastructure in-house can significantly delay market entry for both
Internet retailers and direct marketing companies. However, the rapid
rise of the Internet as a sales channel and the actual or perceived
threat of new competitors eroding market share has motivated many
retailers to attempt to establish or extend their presence on the Web in
an accelerated fashion. To establish this type of infrastructure,
retailers are required to:
. internally develop or customize software to manage the various order
processes, including fulfillment operations, call center operations,
inventory management, payment processing, shipping and tracking,
returns processing, accounting and other specialized functions;
. establish call centers, fulfillment facilities and data centers;
. integrate each of the discrete software applications and facilities;
and
. hire and train technology professionals, qualified call center and
fulfillment center staff and other support personnel.
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. Need to provide real-time, end-to-end integration. Real-time, end-to-end
integration is critical to a successful commerce-related operation
because it reduces the time required to process an order, facilitates
superior customer service, reduces human error and permits management to
track and analyze data at all stages of the order life cycle. We believe
that a significant majority of electronic commerce customer support
functions are basic and not linked with existing systems. For example,
only a relatively small percentage of Web sites permit their customers
to check their account or order status on line. We believe that many
companies do not possess the necessary expertise to design and implement
a solution to this problem.
. Need for a scalable infrastructure. Retailers electing to maintain
operations in-house face the continual challenge of scaling their
infrastructure to meet changing customer demands. To remain competitive,
these companies must reconcile current, anticipated and seasonal buying
patterns with available warehouse and call center capacity. While excess
capacity results in costly operating inefficiencies, insufficient
capacity can lead to customer dissatisfaction and missed sales
opportunities.
Traditional Outsourcing Alternative
Internet retailers and direct marketing companies choosing to outsource their
commerce-related operations have traditionally sought solutions from a variety
of service providers including software companies, technology consultants, call
centers, fulfillment centers and Web developers. However, the ability to
provide and integrate these functions has typically been beyond the
capabilities of most single-function service providers and has therefore
required companies to outsource their operations to multiple nonintegrated
providers.
The ASD Systems Solution
We believe that our solutions offer the following benefits to Internet
retailers and direct marketing companies for outsourcing their commerce-related
operations:
. Cost savings and faster time to market. By outsourcing their commerce-
related operations to us, our clients avoid the significant initial and
ongoing capital investments associated with acquiring and maintaining
the necessary systems and facilities. Because our clients pay for our
services as they are needed, their operating costs are generally lower
and more predictable. Furthermore, our network of strategically located
fulfillment centers allows our clients to reduce shipping costs and
decrease time in transit by shipping from multiple locations. Lastly,
our systems and services permit businesses to expand their existing
operations or enter into new markets on an accelerated time frame by
eliminating the time they would require to develop their own commerce-
related operations.
. Comprehensive and reliable outsourced operations. Using our proprietary
systems, we actively manage and integrate in real-time Web sites, call
centers, fulfillment centers and drop-ship vendors. We believe that a
single source solution provides our clients with greater efficiency,
higher customer service levels and greater management control. We
believe that the comprehensive nature of our solution allows our clients
to remain focused on their core competencies.
. Scalability. Both our systems and network of call centers and
fulfillment centers can be scaled to meet our clients' changing growth
requirements. We currently maintain relationships with multiple third-
party call centers and fulfillment centers that have been integrated
with our systems to provide scalability. We expand this network of
service providers as necessary to support the requirements of our
clients. We also ship from additional warehouses that are owned by, or
under contract with, our clients. Our systems can also be scaled to
support our network as needed. We believe that our clients directly
benefit from our scalable solution because they are ensured of the
appropriate processing capacity at each stage of their business life
cycle.
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. Superior customer service. One of our service objectives is to
differentiate our clients by enabling them to provide superior customer
service. Our systems allow our clients' customers to instantly access
inventory availability, order status details and delivery information
through either a call center representative or the client's Web site.
Similarly, our clients have the ability to monitor all aspects of their
commerce-related operations online. At engagement, each client is
assigned an account team consisting of technical, systems and customer
support personnel. That account team actively works with the client to
customize our services and systems in order to create a feature set that
increases the client's ability to control inventory, service its
customers and maintain the efficiency of their commerce-related
operations.
Our Growth Strategy
Our objective is to be a leading provider of comprehensive order management
and fulfillment systems and services to Internet retailers and direct marketing
companies. We intend to pursue this objective by:
. Capitalizing on Internet commerce growth. We intend to aggressively
market our solutions to the growing number of Internet retailers. We
believe these companies can significantly benefit from our solutions and
will provide us with the greatest opportunity for growth.
. Expanding our sales and marketing efforts. We plan to actively market
our solutions to both Internet retailers and direct marketing companies.
To accomplish this objective, we have increased our sales and marketing
team from three to six individuals since June 1, 1999. We anticipate
using a portion of the net proceeds derived from this offering to
further enhance our sales and marketing capabilities. We believe that
our investment in sales and marketing will enable us to compete
effectively for larger contracts.
. Building on our strategic relationships. We intend to grow our client
base by leveraging our strategic relationships with Web developers,
systems integrators, Internet consultants, technology companies, call
centers and fulfillment centers. In addition to providing us with
increased market recognition and access to new sales channels, we
believe that these alliances will allow us to provide our clients with
additional services.
. Leveraging scalable systems and third-party infrastructure. Our scalable
systems and integrated network of third-party call centers and
fulfillment centers provides us with the ability to support our clients'
needs as our business grows. These third-party relationships allow us to
increase our revenues without investing in additional facilities and
personnel.
. Developing and supporting systems functionality. We plan to continue to
work closely with our clients to develop advanced features required by
them to meet the needs of their businesses. We believe that by
developing these specialized features for our clients, we will become an
increasingly important part of their businesses and will solidify long-
term relationships. In addition, we intend to continue leveraging the
knowledge gained and functionality created for particular clients to
expand the depth of our solution for other clients.
. Maintaining high levels of client satisfaction. We work closely with our
clients to understand and address their technical requirements and
business objectives. In doing so, we seek to optimize the efficiency of
our services, ensure a smooth transition to our outsourced solution and
identify those additions that may need to be made to our services or
systems as clients' needs change over time. We continually monitor
numerous metrics of operations including order abandonment rates,
customer satisfaction levels, on-time delivery performance, returns
processing, inventory accuracy, credit card settlement and daily
balancing.
Our growth strategy involves substantial risk. We cannot provide any
assurance that we will be successful in implementing our strategy or that it
will lead to the achievement of our objectives. If we are unable to implement
our growth strategy effectively, our business, results of operations and
financial condition would be materially adversely affected.
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Our Services
Our systems and services allow our clients to outsource some or all of their
commerce-related operations. We typically charge on a per-transaction basis for
systems processing, on a per-minute basis for call center services and on a
per-item basis for fulfillment services. Additional fees are billed for other
services.
Systems Services
Our systems support and integrate order capturing, processing and
fulfillment. We do not sell or license our software on a stand-alone basis;
rather, we install and operate our systems as a service. Our systems services
include customizing our proprietary software, integrating applications,
managing data centers and supporting networks for our clients. Our systems also
form the foundation for our scalable call center and fulfillment services.
While some of our clients use their own call center services or fulfillment
services, all of our clients use our systems services.
We have invested significant resources in developing and improving our
proprietary software to automate and integrate each of the key commerce-related
operations. Our proprietary software consists of the following three modules:
<TABLE>
<CAPTION>
Order-entry module Processing module Fulfillment module
- -------------------------- ----------------------- -----------------------
<S> <C> <C>
. Order entry through .Order routing . Inventory control and
both Web sites and call .Credit card processing replenishment
centers .Back order processing . Purchase order management
. Customer service from .Payment settlement . Invoice generation
both Web sites and call .Forecasting . Pick, pack and ship
centers processing
. Manifest generation
. Returns processing
</TABLE>
Our systems also integrate vendors using online or electronic data
interchange capabilities. As a result, our systems provide access to both order
and inventory status. In addition, our systems generate summary reports for our
clients that are posted on the Internet so that they may be retrieved from
remote and multiple locations.
Our payment processing services support both traditional call center payment
processing as well as Web site payment processing. We also handle credit
denials. We provide the systems module and conduct and manage the payment
processing function.
Our data center supports around-the-clock systems hosting and maintenance and
has a help desk for clients' inquiries. Certain systems installations also have
built-in redundancy that enables remote call centers and fulfillment centers to
remain fully operable should connectivity be lost.
Call Center Services
Our call center services include both order acquisition and post-sale
customer support. Our call center network is comprised of our company-owned
call center and a network of third-party call centers. We contract with third-
party call centers that meet our criteria of service standards, financial
stability, available capacity and systems compatibility. The third-party call
centers use our call center software and are integrated into our network. As a
result, our third-party call centers are able to provide customers with real-
time customer support--regardless of whether the order originated in that call
center, in another call center or over the Web. Each third-party call center is
evaluated, trained and continuously monitored by us to ensure that it adheres
to the standards established by us and our clients. The involvement of our
third-party call centers in servicing a client is transparent because each is
fully integrated and each provides the same high standards of service.
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Our third-party call center network currently includes four call centers,
which can provide access to thousands of call center representatives. This
network is fully scalable and can be customized to meet the particular service
needs and capacity requirements of Internet retailers and direct marketing
companies. Our network can either provide supplementary call center services
for clients whose centers are running at capacity or can support the entire
call center needs for our clients. Our call center services are available 24
hours per day, 365 days per year.
Our internal call center handled approximately 41% of all calls received
during the 12-month period ended June 30, 1999, and our network of third-party
call centers handled the remaining 59% of calls received during that period. We
anticipate that the percentage of calls handled by our internal call center
will decrease over time as the demand for our services increases and we add
additional third-party call centers to our network.
Fulfillment Services
Our fulfillment center network is comprised of our company-owned fulfillment
center and a network of third-party fulfillment centers. We contract with
third-party fulfillment centers that meet our criteria of service standards,
financial stability, available capacity and system compatibility. Our third-
party fulfillment network, which is currently comprised of eight strategically
located fulfillment centers, can expand as our clients' needs grow. At present,
the fulfillment centers are located in Sparks, Nevada; Indianapolis, Indiana;
Harrisburg, Pennsylvania; Atlanta, Georgia; Dallas, Texas; Los Angeles,
California; and two centers in Chicago, Illinois. This network of third-party
fulfillment centers allows our clients to reduce shipping costs and decrease
time in transit by shipping from multiple locations. When an order is entered
either through a Web site or call center, our systems locate the fulfillment
center closest to the customer that has the item in stock. Consequently, the
customer gets the order more quickly without paying a premium for delivery.
Our third-party fulfillment centers are fully integrated into our systems.
Therefore, these fulfillment centers are capable of facilitating real-time
fulfillment, order status, inventory allocations and physical inventory counts.
Each third-party fulfillment center is evaluated, trained and continuously
monitored by us to ensure that it adheres to the standards established by us
and our clients. As with our network of third-party call centers, a third-party
fulfillment center's involvement in servicing a client is transparent because
each is fully integrated and each provides the same high standards of service.
Our third-party fulfillment center network is scalable and can be customized
to meet the particular service needs and capacity requirements of our clients.
Our fulfillment centers:
. Facilitate real-time order tracking;
. Accommodate semi- and fully-automated picking methods;
. Offer specialized services such as customized packaging, gift wrapping
and product personalization;
. Integrate with various shipping carriers; and
. Provide inventory management services such as purchasing, receiving,
returns processing and replenishment.
Our fulfillment services are designed to assist our clients in achieving
their objectives for inventory levels and initial fill rates. Initial fill
rates are the rates at which inventory is in stock when a customer first orders
the item. Our solutions provide access to a team of experienced inventory
managers who are available to ensure that product is available for order
fulfillment. The account managers use our systems to streamline inventory
replenishment, thereby minimizing back orders.
Our internal fulfillment center handled approximately 47% of all items
shipped during the 12-month period ended June 30, 1999, and our network of
third-party fulfillment centers handled the remaining 53% of items shipped
during that period. We anticipate that the percentage of items shipped by our
internal fulfillment center will decrease over time as the demand for our
services increases and we add additional third-party fulfillment centers to our
network.
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Other Services
Client management. Each client is assigned an account team consisting of
account managers, data administrators, programmers and one or more help desk
representatives. In addition, technical support is provided by our data center,
which monitors network operations 24 hours per day, 365 days per year. This
team ensures that client requests are met promptly and issues are resolved as
quickly as possible. Our account team is responsible for meeting with clients'
management on strategic planning issues, such as improving inventory turns and
generating cross-sell opportunities. Our client services team is experienced in
direct marketing operations and applies its collective experience and knowledge
to improving each client's operations.
Web site related services. We also provide Web site design and hosting
services in addition to our systems services. Traditionally, we have partnered
with a third-party Web design firm to provide this end-to-end electronic
commerce solution.
Consulting services. We offer consulting services on an as-needed basis to
potential clients to help them understand and define their order management and
fulfillment needs and to demonstrate how our services and systems could support
those needs.
Client Relationships
Following is a chart illustrating the various services we currently provide
to our clients, listed alphabetically.
<TABLE>
<CAPTION>
Fulfillment
Call Center Center Other
Systems Services Services Services Services
-------------------------------------------------------------------------------------------------------------
Fulfillment Inventory Web Site
Web Site Call Center Center Payment Order Customer Replenish- Client Related
Integration Integration Integration Processing Acquisition Support Fulfillment ment Management Services
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
e4L X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
EDS for Sony's X X X X X
Metreon.com
- ----------------------------------------------------------------------------------------------------------------------------------
HoneyBaked Ham X X X X X
of Georgia
- ----------------------------------------------------------------------------------------------------------------------------------
King World
Direct X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Music In Motion X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Sears Craftsman X X X X X X X X X
Tools
- ----------------------------------------------------------------------------------------------------------------------------------
Sears Healthcare X X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Sears Wish Book X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
Toys "R" Us X X X X X X X
- ----------------------------------------------------------------------------------------------------------------------------------
United Media X X X X X X X
</TABLE>
For the fiscal year ended December 31, 1998 and in the first six months of
1999, Sears, our largest client, accounted for approximately 84% and 78% of our
gross revenues, respectively. The termination by one or any number of our
clients, or the failure by our clients to renew the terms of their contracts,
may have a material adverse effect on our business, including our financial
performance and revenue stream, or may result in the loss of an important
client reference. See "Risk Factors--Risks Related to Our Business--Sears
currently represents a significant majority of our business and our success
depends in part on our ability to retain them as a client" and "--Our
significant client contracts are either short-term or terminable with minimal
notice."
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Select Client Case Studies
We have described below three of our client relationships that illustrate the
comprehensive and diverse range of our systems and services.
Sears Roebuck's Craftsman Power and Hand Tools
Sears Roebuck markets a broad line of power and hand tools through its
Craftsman Power and Hand Tools catalog and Web site. Our relationship with the
Craftsman Power and Hand Tools catalog and Web site demonstrates the
scalability and comprehensive nature of our systems and services. In addition
to providing the commerce-related operations for the Craftsman catalog, we also
provide services to Sears Roebuck in connection with its Home Healthcare
catalog. Sears Roebuck was our first client in 1995 and, together with Sears
Wish Book, continues to remain our largest client.
We began supporting the commerce-related operations of the Craftsman Power
and Hand Tool catalog in 1995. Currently, we provide call center services,
including order acquisition and customer support, as well as payment processing
and fulfillment services for the catalog. Fulfillment is now provided from
multiple warehouses, one of which is specially equipped to process large, heavy
items. We have also integrated certain vendors into the Craftsman fulfillment
network, allowing such vendors to ship directly to the customer. In addition,
we manage the Craftsman catalog inventory by replenishing depleting stock. In
1996, Sears Roebuck elected to expand its direct marketing activities to
include electronic commerce. Accordingly, Sears Roebuck retained ASD Systems to
integrate a Craftsman Web site into the back-office infrastructure previously
established for its catalog operations.
As a result of the ASD Systems solution, Craftsman's customers now have
access to current inventory availability and order status and are able to place
orders and receive customer support from either the 800 number or the Web site.
Customers placing orders through either channel can contact a customer service
representative only seconds after placing the order and that representative
will know exactly who the customer is and what was ordered.
We have incorporated numerous customized features into the Sears Roebuck
service offering including features that facilitate warranty exchanges,
multiple pricing methods and customer service agents that are trained in the
use of various Craftsman products.
The HoneyBaked Ham Company of Georgia
The HoneyBaked Ham Company of Georgia is a nationally recognized retailer and
direct marketer of gourmet hams and other specialty foods. Our relationship
with HoneyBaked Ham demonstrates our ability to integrate various sales
channels and facilities, including a catalog, an electronic commerce Web site,
over 100 company-owned retail stores, multiple warehouses, a customer support
center and a substantial business-to-business operation. We are implementing
our solution for HoneyBaked Ham in three phases.
The first phase, which has been completed, involved the integration of our
order management systems with HoneyBaked Ham's existing customer service center
and refrigerated fulfillment centers. Using our systems, we integrated the
HoneyBaked Ham warehouse, three third-party fulfillment centers and our own
call center, which is responsible for taking catalog orders. We are also
providing HoneyBaked Ham with payment processing and customized activity
reporting.
During the second phase, we intend to integrate HoneyBaked Ham's commerce-
enabled Web site into the commerce-related operations established for it during
the first phase. As with our other multi-channeled clients, we believe that
this real-time integration will allow HoneyBaked Ham to realize greater
efficiencies and control over its direct marketing operations. In addition,
HoneyBaked Ham expects to improve customer service by enabling its customers to
receive immediate and accurate inventory and order status through either the
Web site
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or a call center representative. The systems are expected to support
personalized cross sells and up sells through both the Web site and call
center.
During the third and final phase, we anticipate integrating HoneyBaked Ham's
direct marketing operation with its participating retail stores. This
integration will give HoneyBaked Ham's customers the choice of either picking
the product up from the closest store or having it shipped from the appropriate
fulfillment center. Upon completion of the third phase, we expect that our
systems will provide HoneyBaked Ham and its customers with real-time
connectivity across all three sales channels (the catalog, the Web site and the
retail stores) and the back-office services, such as customer support and
fulfillment.
EDS for Sony's Metreon.com
Electronic Data Systems (EDS) contracted with us to provide its client
Metreon, Sony's new entertainment center in San Francisco, with the order
management and fulfillment systems and services for its commerce-enabled Web
site, Metreon.com. Our involvement in this project illustrates our ability to
work with technology partners to deliver an end-to-end electronic commerce
solution. This particular implementation was built using Microsoft's Site
Server Commerce Edition, and Microsoft took an active role in consulting on the
implementation of this project.
While EDS' E.Solutions division developed the online storefront and marketing
strategy, we provided the site with real-time integration to our
infrastructure, including payment processing, call center and fulfillment
services. The real-time nature of this integration ensures that the Metreon.com
customer receives up-to-the-moment information, including inventory
availability and order status. The customer knows when a product is out of
stock, and his or her credit card transaction is not processed unless the item
is in stock.
Through our systems and services, Metreon.com has gained access to the
necessary electronic commerce infrastructure without incurring the substantial
expenses associated with facilities, software and staff. We believe that our
per-transaction pricing model accelerated Metreon's time to market and will
ease its growth.
Sales and Marketing
Sales Strategy
Direct sales channel. A majority of our sales and marketing efforts are
focused on our direct sales channel, which we have identified to include
Internet retailers and direct marketing companies. Within this channel, we
believe that Internet retailers will provide us with the greatest opportunity
for growth. Accordingly, since June 1, 1999, we hired two additional sales
executives and one additional marketing coordinator who are responsible for
marketing our solutions to Internet retailers, Web developers and others
directly involved in Internet commerce. We intend to add up to five additional
sales professionals to our sales organization by the end of 1999. As of July
1999, we had a sales organization consisting of six sales professionals with an
average of 10 years of sales experience.
Indirect sales channel. We are also committed to expanding our indirect sales
channel by forming additional relationships with Web developers, systems
integrators, Internet consultants, technology companies, call centers and
fulfillment centers:
. Web developers. We believe that our comprehensive service offering
strongly complements a Web developer's efforts and capabilities. While a
Web developer specializes in front-end Web design and marketing, we
specialize in providing the order management and fulfillment systems and
services supporting the commerce-related operations.
. Systems integrators and Internet consultants. We believe that systems
integrators and Internet consultants are actively seeking outsourcing
solutions to support their clients' operations. As a result, we
anticipate that these entities will find our comprehensive service
offering an attractive alternative.
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For example, we intend to capitalize on our existing relationship with
EDS, which provided us with the opportunity to partner on a project for
Sony's Metreon.com.
. Technology companies. We believe that there are numerous software
companies, Web-hosting companies, Internet service providers and value-
added resellers targeting our potential clients. We believe that we can
assist these enterprises in differentiating themselves from their
competitors by providing additional services to complete their proposed
solutions.
. Call centers and fulfillment centers. We anticipate that our network of
call centers and fulfillment centers will provide us with significant
opportunities for expanding sales in the future. Because each of our
third-party service providers is familiar with our proprietary systems
and level of service, we believe that they will be more likely to
recommend our complete set of services to their clients.
Marketing Strategy
Our primary marketing goal is to identify and target executives of potential
clients that have authority over their respective company's electronic
commerce initiatives and order management and fulfillment operations. Initial
sales activities typically include a demonstration of our capabilities
followed by one or more detailed technical reviews.
We use a variety of marketing programs to build market awareness of our
brand name and our systems and services. A broad mix of programs are used to
accomplish these goals, including:
. advertising;
. direct mail campaigns;
. technology and strategy updates with industry analysts;
. public relations activities;
. relationship marketing programs;
. seminars, trade shows and speaking engagements; and
. Web site marketing.
Software Development
We have made substantial investments in the development of our proprietary
software. To date, our software development activity has been directed towards
extending the functionality of our current systems as well as developing a
next-generation browser-based version of our systems. Development input is
obtained primarily through discussions with the users of our systems, as well
as professional consultants, employees and prospective clients.
We are designing the next-generation of our system to be a component,
browser-based system that will encompass some of the technological advances
offered by companies such as Microsoft, IBM, Sun Microsystems and Lucent
Technologies. These advances include integration of telephony technology for
call center operations, distributed component technologies for improved data
processing and the latest in software engineering tools and techniques. Our
next-generation system is expected to make use of Java, Distributed Network
Architecture, on-line transaction processing, application messaging and XML.
The architecture of our browser-based application is designed on a multi-
tiered open platform using layers representing presentation, business logic
and database services.
The systems will not only use the Internet to facilitate information
exchange, but as a browser-based application, will run within the confines of
a Web browser. One benefit of this application is that access to our systems
will only require a connection to the Internet and the applicable Web address
and password. The more
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universal browser-based system is also expected to considerably speed up and
simplify the integration between the client's commerce-related operations and
our solutions. In addition, this system is expected to allow for a more rapid
and straightforward deployment of a client's particular feature requests. The
systems should also simplify and speed up any necessary maintenance. This
browser-based application should benefit Internet retailers by giving them
customized, flexible and quick access to our commerce-related order management
systems and services. See "Risk Factors--Risks Related to Our Business--Our
development of a next-generation browser-based software application may not be
successful and may cause business disruption."
For the year ended December 31, 1998 we incurred approximately $1.0 million
of software development expense and for the six months ended June 30, 1999, we
incurred an additional $403,000 of such costs which have been capitalized in
1999. We expect that we will continue to commit significant resources to
software development in the future including over the course of the next 12
months. Prior to January 1, 1999, all software development costs were expensed
as incurred.
As of June 30, 1999, four full-time employees were engaged in software
development. In addition, most of our technical staff and management team and
certain outside consultants contribute to design and development activities. We
plan to increase our technical services organization by up to an additional
eight employees by the end of 1999. We believe that recruiting and retaining
highly trained technical personnel and consultants is essential to our success.
To the extent we are unable to successfully attract and retain our technical
staff, or to the extent we are unable to hire qualified outside consultants to
perform these tasks, our business and results of operations may be harmed. See
"Risk Factors--Risks Related to Our Business--Our success depends on retaining
our current key personnel and attracting additional personnel, particularly in
the areas of customer support and technical services."
COMPETITION
The markets in which we operate are characterized by intense competition from
several types of service providers, including call centers (such as West
TeleServices Corporation; Matrixx Marketing, Inc.; and APAC TeleServices,
Inc.); system integrators (such as EDS; Perot Systems Corporation and Andersen
Consulting); software providers (such as Smith Gardner and Associates, Inc.;
CommercialWare, Inc.; Ariba, Inc.; Commerce One, Inc.; and IBM); traditional
fulfillment companies (such as GENCO Distribution System and ODC Integrated
Logistics); outsourcing divisions of direct marketing companies (such as
Keystone Fulfillment, Inc. and Fingerhut Companies, Inc.); order processing
companies (such as OrderTrust) and electronic commerce service providers (such
as ComAlliance; Digital River, Inc.; Pandesic LLC and INTERSHOP Communications,
Inc.). Our competitors may also operate in areas not identified above. We
expect there are other competitors that we have not identified. We believe that
we compete with these and our other competitors on the basis of our technical
capabilities, scope of service, industry experience, past contract performance,
service level and price.
We expect to face further competition from new market entrants and possible
alliances between competitors in the future. In particular, we believe that
traditional catalog companies looking to fully utilize excess capacity by
outsourcing may enter the market and provide competition in the future. Certain
of our current and potential future competitors have greater financial,
technical, market and other resources than we do. As a result, these
competitors may be able to respond more quickly to new or emerging technologies
and changes in client requirements or to devote greater resources to the
development, promotion and sales of their services than we can.
There can be no assurance that we will be able to compete successfully with
existing or new competitors or that competition will not have a material
adverse effect on our business, financial condition and operating results.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent on our ability to develop and
maintain the proprietary aspects of our technology and operate without
infringing on the proprietary rights of others. We rely on a
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combination of copyrights, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect the proprietary rights of our
software and services. However, we will not be able to protect our intellectual
property if we are unable to enforce our rights or if we do not detect
unauthorized use of our intellectual property. In addition, these legal
protections only provide us with limited protection. If we litigate to enforce
our rights, it would be expensive, divert management resources and may not be
adequate to protect our business.
We have not filed any United States patent applications with respect to our
order management systems, nor do we have any patent applications pending. As a
result, we currently do not have patented technology that would preclude or
inhibit competitors from entering our market. Moreover, none of our technology
is patented abroad, nor do we currently have any international patent
applications pending. As of the date of this prospectus, we have not secured
registration on any of our service marks in the United States nor have we
pursued registration in any foreign country. We cannot be certain that any
future patents, registered trademark or registered service marks, if any, will
be granted or that any future patent, trademark or service mark will not be
challenged, invalidated or circumvented, or that rights granted under any
patents, trademarks or service marks that may be issued in the future will
actually provide a competitive advantage to us.
We generally enter into confidentiality agreements with our employees and
consultants and with our clients and corporations with whom we have strategic
relationships. We attempt to maintain control over access to and distribution
of our software documentation and other proprietary information. However, the
steps we have taken to protect our technology and intellectual property may be
inadequate. Our competitors may independently develop technologies that are
substantially equivalent or superior to ours or may have jointly developed such
technologies under agreements giving them co-equal rights to exploit those
technologies.
Employees
As of June 30, 1999, we had a total of 453 employees. Of the total employees,
6 were in sales and marketing, 262 were in call center operations, 17 were in
finance and administration, 81 were in software development and support and 87
were in fulfillment. Our employees are not represented by any collective
bargaining unit, and we have never experienced a work stoppage. We believe our
relations with our employees to be good. From time to time we also employ
independent contractors to support our professional services, product
development, sales, marketing and business development organizations.
Our future success will depend, in part, on our ability to attract, retain
and motivate highly qualified technical and management personnel for whom
competition is intense. As part of our retention efforts, we seek to minimize
turnover of key employees by emphasizing our industry experience, the nature of
our work, our work environment, our encouragement of technical enhancements and
our competitive compensation packages.
Facilities
Our headquarters are currently located at a leased facility in Garland,
Texas, consisting of approximately 100,000 square feet of fulfillment center
space and 13,000 square feet of office space under a lease expiring in March
2003. Our call center and systems operation center is located in Dallas, Texas
within one mile of our corporate offices in a 20,000 square foot building owned
by Norm Charney, our President and Chief Executive Officer. This facility is
the subject of a lease expiring May 2000. See "Certain Transactions." We have
also leased an aggregate of 29,000 square feet of additional space in Dallas,
Texas near our headquarters building for our data processing personnel and
additional warehouse space.
Legal Matters
From time to time we may be involved in litigations that arise through the
normal course of business operations. As of the date of this prospectus, we are
not a party to any litigation we believe could reasonably be expected to have a
material adverse affect on our business or results of operation.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors and their ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Norman Charney.......... 49 Chairman of the Board, Chief Executive Officer and President
Paul M. Jennings........ 45 Chief Operating Officer, Chief Information Officer and Director
Stace S. Hunt........... 34 Senior Vice President--Sales
James P. Cormier........ 41 Vice President--Operations
James H. McAlister...... 42 Vice President--Finance
Jonathan R. Bloch....... 45 Director
Alan E. Salzman......... 46 Director
Paul G. Sherer.......... 41 Director
Kevin P. Yancy.......... 47 Director
</TABLE>
Norman Charney is a co-founder of ASD Systems and has served as Chairman of
the Board, Chief Executive Officer and President since inception and in similar
capacities for ASD Partners, Ltd. (a predecessor of ASD Systems) from October
1997 through December 1997. Mr. Charney was President and a director of
Athletic Supply of Dallas, Inc. (a prior predecessor of ASD Systems) from 1981
through December 1996 when this entity was sold, in its entirety, to Genesis
Direct, Inc. From December 1996 through October 1997, Mr. Charney was employed
in various executive capacities by Athletic Supply of Dallas. Mr. Charney is a
Certified Public Accountant and received his B.Com. in business from McGill
University in Montreal, Canada.
Paul M. Jennings is a co-founder of ASD Systems and has served as our Chief
Information Officer, Chief Operating Officer and as a director since inception.
Mr. Jennings served in similar capacities with ASD Partners, Ltd. from October
1997 through December 1997. For more than ten years prior to joining ASD
Partners, Ltd., Mr. Jennings served as director of MIS for Athletic Supply of
Dallas. Mr. Jennings received a B.S. in finance from the University of Texas at
Dallas.
Stace S. Hunt has served as our Senior Vice President--Sales since June 1999.
Prior to joining us, Mr. Hunt was employed for one month by IBM as a principal
in the national accounts program of the e-business division. From June 1991 to
July 1992, Mr. Hunt was a sales manager with RGB Systems (a multimedia and
computer display systems company). From December 1989 to June 1991 and then
from August 1992 to April 1999 Mr. Hunt was employed by EDS in various
capacities, including sales executive, manager, service line manager and
project manager. Mr. Hunt received his B.A. in communications from Stephen F.
Austin University.
James P. Cormier joined us in June 1999 as Vice President--Operations,
responsible for call center logistics, client services training and system
operations. Prior to joining us, Mr. Cormier was Senior Vice President for
Connextions International (a fulfillment, call center and database management
company) from May 1998 through April 1999, where he was responsible for a
start-up division focused on call center and fulfillment business. From
November 1993 through May 1998, Mr. Cormier was the Senior Vice President of
Operations for NEST Entertainment (a direct sales, consumer entertainment
products company), where he was responsible for systems operations including
management information systems, distribution and inbound/outbound
telemarketing.
James H. McAlister has served as our Vice President--Finance since joining us
in April 1999. From July 1993 through August 1998, Mr. McAlister was the
Controller for MilBrands, Inc., a privately held military food broker, where he
was responsible for supervising that company's accounting, computer systems and
customer service departments. MilBrands was sold in August 1998. From the date
of sale through February 1999, Mr. McAlister was responsible for the transition
of the business of Milbrands to the new owner. Mr. McAlister is a Certified
Public Accountant and received a B.B.A. degree from the University of Iowa.
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Jonathan R. Bloch has served as a director of ASD Systems since March 10,
1999. Since June 1997, Mr. Bloch has served as a Senior Vice President and is
now Managing Director of the technology division of Chanin Capital Partners (an
investment bank and financial advisor). He has served as the Chairman of the
Board of Directors of Old Tucson Co. (an amusement park) since January 1997.
From September 1995 to June 1997, Mr. Bloch served as Chief Executive Officer
of Resource Recovery Techniques of Arizona (a water treatment company), where
he was responsible for general administration. From August 1995 to June 1997,
Mr. Bloch was the Managing Member and General Manager of Santa Monica
Amusements, Inc. (an amusement park on the Santa Monica pier). From April 1992
to August 1995, Mr. Bloch was Chief Executive Officer of the California
Fertility Associates (a medical clinic), where he was responsible for general
administration and management. He received a B.A. from the University of
California at Berkeley and a J.D. from the University of San Diego School of
Law.
Alan E. Salzman has served as a director of ASD Systems since August 23,
1999. Mr. Salzman is a founder and managing partner of VantagePoint Venture
Partners, a venture capital firm focused on the Internet, data networking and
communications services. From March 1995 to March 1998, Mr. Salzman was a
general partner with Canaan Partners, a venture capital firm. Prior to that,
Mr. Salzman was a partner with Brobeck, Phleger & Harrison, LLP, a law firm.
Mr. Salzman received a B.A. from the University of Toronto, a J.D. from
Stanford Law School and an L.L.M. from the University of Brussels. Mr. Salzman
is a member of the board of directors of Cybergold, Inc.
Paul G. Sherer has served as a director of ASD Systems since August 23, 1999.
Mr. Sherer is a venture partner of VantagePoint Venture Partners. Prior to
joining VantagePoint, Mr. Sherer was Managing Director, Investment Banking and
Head of Telecom and Enterprise Communication Technology for Robertson, Stephens
& Company from January 1994 to June 1998, where he was responsible for
worldwide relationship management. Prior to that, Mr. Sherer was Robertson,
Stephens' Senior Research Analyst for Telecom and Enterprise Communication
Technology. Mr. Sherer received an A.B. from Duke University and an MBA from
Stanford Graduate School of Business.
Kevin P. Yancy has served as a director of ASD Systems since March 10, 1999.
Mr. Yancy has served as President of Spyglass Equities, Inc. (a private equity
investments affiliate of The Staubach Company) since June 1999. From July 1997
through June 1999, he served as Senior Vice President of Staubach Financial
Services, Inc. (a real estate financial services firm) where he specialized in
private equity investments. From November 1995 through June 1997, Mr. Yancy
managed his personal investments. From 1991 through October 1995, Mr. Yancy
served as Chairman, CEO and President of InterNational Bank of McAllen, Texas.
Mr. Yancy currently serves on the board of directors of Aeris Communications,
Inc. of San Jose, California; HyperGraphics Corporation of Denton, Texas; Lone
Star Bank of Dallas, Texas and Mouse Products, Inc. of Dallas, Texas. Mr. Yancy
earned his B.B.A. in accounting from Baylor University, Waco, Texas and
practiced as a Certified Public Accountant with Coopers and Lybrand from 1975
through 1983.
Each officer serves at the discretion of the board of directors of ASD
Systems. There are no family relationships among any of our officers or
directors.
Board of Directors
Classified Board. We currently have authorized six directors. Our board is
divided into three classes: Class A, whose term will expire at the annual
meeting of the shareholders to be held in 2000, Class B, whose term will expire
at the annual meeting of the shareholders to be held in 2001, and Class C,
whose term will expire at the annual meeting of the shareholders to be held in
2002. The Class A directors are Paul Jennings and Paul Sherer; the Class B
directors are Kevin Yancy and Jonathan Bloch and the Class C directors are
Norman Charney and Alan Salzman. At each annual meeting of the shareholders
after the initial classification, the successors to directors whose term will
expire will be elected to serve from the time of election and qualification
until the third annual meeting following election or until that director's
earlier resignation or removal. This classification of the board of directors
may have the effect of delaying or preventing changes of control or management
of ASD Systems. See "Description of Capital Stock--Anti-Takeover, Limited
Liability and Indemnification Provisions."
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Board Committees. The audit committee consists of Mr. Yancy and Mr. Sherer.
The audit committee makes recommendations to the board of directors regarding
the selection of independent accountants, reviews the results and scope of
audit and other services provided by our independent accountants and reviews
and evaluates our audit and control functions. The compensation committee
consists of Mr. Salzman and Mr. Bloch. The compensation committee makes
recommendations to the board of directors concerning salaries and incentive
compensation for our senior management. The compensation committee also reviews
our benefit plans. We have not currently elected a Long-Term Incentive Plan
committee to administer the stock incentive plan.
Compensation Committee Interlocks and Insider Participation. Prior to August
25, 1999, we did not have a compensation committee or other committee of the
board of directors performing similar functions. Decisions concerning
compensation of executive officers generally have been made by Mr. Charney in
consultation with the other members of the board of directors. None of the
executive officers or directors, other than Mr. Yancy, currently serve on the
compensation committee of another entity or on any other committee of the board
of directors of another entity performing similar functions.
Director Compensation. Directors currently do not receive any cash
compensation from us for their services as members of the board of directors,
although members are reimbursed for actual and reasonable out of pocket
expenses in connection with attendance at board of directors and committee
meetings. Directors are eligible to participate in our 1999 Long-Term Incentive
Plan. See "--Long-Term Incentive Plan."
Designations. As part of the shareholders agreement executed in connection
with the common stock financing closed in January and February 1999, Messrs.
Bloch and Yancy have been nominated and appointed to serve on our board of
directors. In addition, as part of the amended and restated shareholders
agreement executed in connection with the preferred stock financing closed in
August 1999, Messrs. Salzman and Sherer have been nominated and appointed to
serve on our board of directors. Although these provisions terminate upon the
closing of our initial public offering, we expect Messrs. Bloch, Yancy, Salzman
and Sherer to continue to serve as directors.
Employment Agreements
Norman Charney. On December 14, 1998, we entered into an employment agreement
with Norman Charney to serve as our Chief Executive Officer and President. The
agreement is effective through December 31, 2001 and will automatically renew
for successive one-year periods unless either Mr. Charney or we give written
notice of termination at least 30 days prior to the expiration date of the
agreement. Under the agreement, Mr. Charney receives a base salary of $250,000
per year plus an automatic annual increase of $10,000 effective each December
14. Mr. Charney is also eligible to receive other salary increases and bonus
awards at the discretion of the board of directors.
Pursuant to the agreement, Mr. Charney may be terminated by us at any time
for cause. "Cause" generally is defined in the agreement to include (1) the
gross negligence or willful misconduct by Mr. Charney in the performance of his
services, (2) the failure by Mr. Charney to perform his duties as assigned to
him by the board of directors, (3) any violation by Mr. Charney of the
confidentiality and non-interference provisions of the agreement and (4) Mr.
Charney's mental or physical incapacitation to such an extent that he is unable
to perform his duties for an extended period of time.
Paul M. Jennings. On October 14, 1997, ASD Partners, Ltd., one of our
predecessor entities, entered into an employment agreement with Paul M.
Jennings, our Chief Information Officer and Chief Operating Officer. This
agreement was assigned to us on January 1, 1998. ASD Partners, Ltd. currently
exists as a holding company for the shares of ASD Systems, Inc. owned by its
partners.
The employment agreement with Mr. Jennings is effective through October 14,
2002 and will automatically renew for successive one-year periods unless either
Mr. Jennings or we give written notice of
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termination at least 30 days prior to the expiration date of the agreement.
Under the agreement, Mr. Jennings receives a base salary of $150,000 per year
plus an automatic annual increase of $12,500 effective each October 14. Mr.
Jennings is also eligible to receive other salary increases and bonus awards at
the discretion of the board of directors. Pursuant to the agreement, Mr.
Jennings may be terminated by us at any time for cause. The definition of
"cause" in Mr. Jennings' agreement is similar to the definition used in Mr.
Charney's agreement described above.
In connection with Mr. Jennings employment agreement, he and ASD Partners
entered into a Right of Repurchase and Option Agreement giving ASD Partners,
its general partner, and the limited partners of ASD Partners, other than Mr.
Jennings, the right to repurchase all or a portion of Mr. Jennings' interest in
ASD Partners upon the termination of Mr. Jennings' employment agreement for any
reason. The purchase price payable for Mr. Jennings' interest in ASD Partners
varies depending on Mr. Jennings' then applicable base salary as follows:
<TABLE>
<CAPTION>
Exercise date Total purchase price
------------- --------------------
<S> <C>
January 1, 1999--December 31,
1999........................ 66% of annual base salary;
January 1, 2000--December 31,
2002........................ 100% of annual base salary;
January 1, 2003--thereafter.. as agreed between the parties, or, to the extent
agreement has not been reached, the last
stipulated purchase price plus or minus the net
earnings or losses attributable to Mr. Jennings'
interest in ASD Partners, Ltd. from the date of
expiration of the last stipulated purchase price
until the termination date.
</TABLE>
The board of directors can, among other things, provide for accelerated
vesting of the shares of common stock subject to outstanding options held by
any executive officer or director of ASD Systems, including Messrs. Charney and
Jennings, in connection with certain changes of control of ASD Systems. See "--
Long-Term Incentive Plan."
Executive Compensation
Summary compensation. The following table provides summary information
concerning compensation paid by us to our named executive officers, which are
our Chief Executive Officer and our one other executive officer who earned more
than $100,000 in salary and bonus for all services rendered in all capacities
during the fiscal year ended December 31, 1998. We may refer to these officers
as our named executive officers in other parts of this prospectus. For a list
of our current executive officers, see "--Executive Officers and Directors."
<TABLE>
<CAPTION>
Annual Compensation
--------------------- All Other
Name and Position Salary Bonus Compensation
----------------- ---------------------------------
<S> <C> <C> <C>
Norman Charney,
Chief Executive Officer and President....... $ 247,500 -- $625
Paul M. Jennings,
Chief Operating Officer and Chief
Information Officer......................... $ 153,125 -- $ 0
</TABLE>
"All Other Compensation" consists of matching 401(k) contributions made by
ASD Systems on behalf of the named executive officers.
In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted for the named
executive officers because the aggregate amount of these perquisites and other
personal benefits was less than the lesser of $50,000 or 10% of the total of
annual salary and bonuses for each of the named executive officers in 1998.
James P. Cormier, our Vice President--Operations, joined us in June 1999. His
annual salary is $135,000. In addition, Mr. Cormier has been granted
significant stock option awards in connection with his employment. See "--Long-
Term Incentive Plan."
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Stock options granted in the year ended December 31, 1998. No stock options
were granted to the named executive officers during the year ended December 31,
1998.
Year-end option values. Neither of the named executive officers exercised any
stock options during the year ended December 31, 1998 and neither of these
individuals held any options as of that date. On February 10, 1999, Mr.
Jennings was granted an option to acquire 957,500 shares of our common stock
outside of our Long-Term Incentive Plan with an exercise price of $1.00 per
share. Mr. Charney currently does not hold any stock options.
Long-Term Incentive Plan
Benefits; Purpose; Shares. Our 1999 Long-Term Incentive Plan, approved by the
board of directors on May 12, 1999, and amended on August 22, 1999, provides
for the issuance to qualified participants of up to 1,200,000 shares of our
common stock pursuant to the grant of stock options. The purpose of our Long-
Term Incentive Plan is to promote our interests and the interests of our
shareholders by using investment interests in ASD Systems to attract, retain
and motivate eligible persons, to encourage and reward their contributions to
the performance of ASD Systems and to align their interests with the interests
of our shareholders. As of June 30, 1999, options to purchase 500,000 shares of
common stock had been awarded, each with an exercise price of $1.00 per share,
under the Long-Term Incentive Plan. Of these, options to purchase 450,000
shares of common stock have been awarded to employees and are intended to
qualify as Incentive Stock Options, or ISOs, under Section 422 of the Internal
Revenue Code. The remaining options to purchase 50,000 shares of common stock
are nonqualified stock options, or NQSOs. As of June 30, 1999, options
exercisable for 25,000 shares had vested under the terms of the Long-Term
Incentive Plan and the applicable option agreements.
Eligibility. Our employees, officers, directors, consultants and advisors are
eligible to be granted awards under the plan. However, only our employees are
eligible to receive ISOs.
Administration. Our board of directors, or to the extent we subsequently
elect a Long-Term Incentive Plan committee, that committee, is authorized to
administer the plan and has discretion to determine which eligible persons will
be granted stock options, the number of shares subject to options, the period
of exercise of each option and the terms and conditions of such options.
Generally, the administrators of the plan have broad authority to amend the
plan to take into account changes in applicable securities and tax laws and
accounting rules, as well as other developments.
Stock options. Under our plan, we may grant ISO's or NQSO's. A stock option
may have a term of not more than ten years. The administrators of our Long-Term
Incentive Plan determine the exercise price per share for each option which
cannot be less than the fair market value of our common stock on the date of
the grant. In the case of an ISO granted to an employee who, at the time of the
grant, owns common stock with more than 10% of the total combined voting power
of our outstanding common stock, the price per share of common stock cannot be
less than 110% of the fair market value of our common stock on the date of
grant. Once listed, the fair market value of our common stock is its closing
price on the Nasdaq National Market.
Effect of termination. Generally, if a participant's service to us is
terminated for reasons other than just cause dismissal (as defined in our
plan), retirement, permanent disability or death, then the participant's
options, whether or not vested, shall expire and become unexercisable as of the
earlier of the date the options would expire in accordance with their terms had
the participant remained in our service, or 30 days after the date of
employment or relationship termination. Upon retirement, permanent disability
or death, the participant's unexercised options shall, whether or not vested,
expire and become unexercisable as of the earlier of the date the options would
expire in accordance with their terms had the participant remained in our
service, or 90 days after the date of employment or relationship termination.
In the event of a just cause dismissal of a participant, all of such
participant's options, whether or not vested, shall expire and become
unexercisable as of the date of such just cause dismissal.
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Federal income tax consequences-ISO. The federal income tax consequences, in
general, of the grant and exercise of an ISO under our Long-Term Incentive Plan
are as follows:
. In general, an employee will not recognize taxable income upon the grant
or exercise of an ISO and we will not be entitled to any business
expense deduction with respect to the grant or exercise of an ISO.
. If the employee holds the shares for at least two years after the date
of grant and for at least one year after the date of exercise, the
difference, if any, between the sales price of the shares and the
exercise price of the option will be treated as long-term capital gain
or loss upon subsequent disposition of the shares.
. If the employee disposes of the shares prior to satisfying the holding
period requirements, the employee will recognize ordinary income at the
time of the disposition, generally in an amount equal to the excess of
the fair market value of the shares at the time the option was exercised
over the exercise price of the option. Generally, we will be allowed a
business expense deduction to the extent an employee recognizes ordinary
income. The balance of the gain realized, if any, will be short-term or
long-term capital gain, depending upon whether the shares have been held
for at least one year after the date of exercise.
Federal income tax consequences-NQSO. The federal income tax consequences, in
general, of the grant and exercise of an NQSO under our Long-Term Incentive
Plan are as follows:
. In general, a recipient who receives a NQSO will recognize no income at
the time of the grant of the option.
. Upon exercise of an NQSO, a recipient will recognize ordinary income in
an amount equal to the excess of the fair market value of the shares on
the date of exercise over the exercise price of the option. Generally,
we will be entitled to a business expense deduction in the amount and at
the time the recipient recognizes ordinary income.
. The basis in shares acquired upon exercise of an NQSO will equal the
fair market value of such shares at the time of exercise, and the
holding period of the shares, for capital gain purposes, will begin on
the date of exercise.
Effect of a change in control. Our Long-Term Incentive Plan provides that, in
the event of certain changes of control involving the liquidation of ASD
Systems, the disposition of substantially all of our assets, certain
reorganizations, mergers or consolidations of ASD Systems or the acquisition by
any person (other than the Staubach affiliated shareholders or any person
currently controlling more than 50% of ASD Systems' combined voting power), one
of the following shall occur with respect to the plan and any unexercised
options:
. they may be assumed or substituted by the successor corporation;
. our board of directors may provide for adjustments in the terms and
conditions of the unexercised options, such as acceleration of their
vesting or their automatic conversion into the underlying shares or
other consideration; or
. they shall automatically terminate, provided that any unexercised
options shall be immediately exercisable prior to the change of control.
Termination. The Long-Term Incentive Plan will terminate on May 12, 2009.
401(k) Plan
Our employees are eligible to participate in the ASD Systems 401(k) plan
adopted by us in October of 1998. Pursuant to the 401(k) plan, employees may
elect to reduce their current compensation by up to the lesser of 20% of
eligible compensation or the statutorily prescribed annual limit ($10,000 in
1999) and
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contribute this amount to the 401(k) plan. The trustee under the 401(k) plan,
at the direction of each participant, invests the assets of the 401(k) plan in
up to 20 different investment funds. The 401(k) plan is intended to qualify
under Section 401(a) of the Internal Revenue Code of 1986 so that contributions
by employees to the 401(k) plan, and income earned on plan contributions, are
not taxable to employees until withdrawn, and so that the contributions by
employees will be deductible by us when made. We will make matching
contributions to the 401(k) plan in an amount equal to 25% of the first 4% of
an employee's pretax contributions. An employee becomes eligible for the
matching contribution only if he or she makes a pretax contribution.
Additionally, we may make annual discretionary profit sharing contributions in
amounts to be determined annually by our board of directors.
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CERTAIN TRANSACTIONS
Common Stock Financing
We issued 4,500,000 shares of common stock in a private placement which
closed in two tranches in January and February of 1999 raising an aggregate of
$4,500,000 in working capital for ASD Systems. Of these shares, 2,375,000 were
purchased by a group of persons affiliated with Staubach Financial Services. We
refer to this group as the Staubach affiliated shareholders. We engaged CKM
Capital, LLC to assist us with that private placement and paid CKM a commission
of $281,250, or 6.25% of the aggregate amount raised, as consideration for
their services. In addition, we issued various affiliates of CKM common stock
purchase warrants which, after this offering, will be exercisable for an
aggregate of 1,000,000 shares of our common stock at the following exercise
prices: 500,000 shares of common stock exercisable for $1.00 per share; 300,000
shares of common stock exercisable for $2.00 per share; and 200,000 shares of
common stock exercisable for $3.00 per share. These warrants expire on February
5, 2004. We also pay CKM a financial advisory fee of $5,000 per month, plus
reasonable out-of-pocket expenses. For the six months ended June 30, 1999, we
paid CKM an aggregate of $20,000 under this arrangement which was terminated as
of July 31, 1999.
As part of our private placement, we executed a shareholders' agreement with
each of our then current shareholders. As part of this shareholders' agreement,
Mr. Bloch and Mr. Yancy were nominated and appointed to the board of directors
of ASD Systems. Mr. Bloch is Senior Vice President and Managing Director of an
affiliate of CKM and Mr. Yancy is President of Spyglass Equities, Inc., a
private equity investments affiliate of The Staubach Company. Mr. Yancy is also
a member of the Staubach affiliated shareholders. The shareholders' agreement
was amended and restated as part of the preferred stock financing described
below and, although the provisions of the amended and restated shareholders'
agreement concerning appointment to the board terminate upon the closing of our
initial public offering, we expect Messrs. Bloch and Yancy to continue to serve
as directors.
Preferred Stock Financing
Securities. On August 23, 1999, we issued (1) 1,111,111 shares of our Series
A convertible preferred stock, (2) 1,111,111 shares of our Series B redeemable
preferred stock and (3) common stock purchase warrants exercisable for a number
of shares determinable by reference to our initial public offering price, in a
private placement generating net proceeds of $11,500,000 for additional working
capital. VantagePoint Venture Partners III (Q), L.P. acquired two-thirds of the
aggregate securities placed in the preferred stock financing and VantagePoint
Communications Partners, L.P. acquired the remaining one-third of the
securities placed. We refer to these entities collectively as the VantagePoint
funds. We sold the securities pursuant to a securities purchase agreement under
which we made standard representations, warranties and covenants among other
provisions we deem customary in venture capital financings of this nature. Upon
completion of this offering, the Series A convertible preferred stock will
automatically convert into that number of shares of our common stock equal to
1,111,111 X $5.40/conversion price, where the conversion price is equal to the
lesser of:
. $5.40 per share; or
. One-third of the initial public offering price of our common stock.
The effect of this floating exercise price is that the preferred investors
will be entitled to at least 1,111,111 shares of our common stock upon closing
of this offering. There is no cap on the actual number of shares of common
stock issuable to the VantagePoint funds upon closing this offering. To the
extent that the initial public offering price is above $16.20 per share, the
conversion price will not be adjusted upward to decrease the number of shares
issuable upon conversion. Assuming an initial public offering price of $ per
share, we will issue shares of common stock to the VantagePoint funds upon
conversion of the Series A convertible preferred stock. $ represents the mid-
point of the range of the anticipated initial public offering prices. See "Risk
Factors--Risks Related to this Offering--The number of shares of common stock
issuable to the VantagePoint funds is determinable by reference to our initial
public offering price and could result in additional dilution to the
shareholders in this offering."
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Upon completion of this offering, the Series B redeemable preferred stock
will automatically be redeemed by us for an aggregate redemption price of $6.0
million. In addition, we issued to the VantagePoint funds common stock purchase
warrants exercisable for 130% of the number of shares of common stock received
upon conversion of the Series A preferred stock at a per share exercise price
equal to 110% of the conversion price (as determined above). The warrants
vested immediately and, after this offering, will remain exercisable until the
third anniversary of the closing of this offering.
Registration Rights. According to the terms of the amended and restated
shareholders' agreement executed in connection with the preferred stock
financing, the VantagePoint funds and the original parties to the shareholders'
agreement executed in connection with our January/February 1999 common stock
financing, acquired certain registration rights with respect to their capital
stock of ASD Systems. See "Description of Capital Stock--Registration Rights."
Director Arrangements. As part of the Series A convertible preferred stock
financing, the VantagePoint funds acquired the right to have two designees
appointed to our board of directors. Accordingly, we have added to our board of
directors effective August 23, 1999 Messrs. Salzman and Sherer. Mr. Salzman is
a managing member of the general partner of the VantagePoint funds, and Mr.
Sherer is a venture partner of the VantagePoint funds. Although the provisions
of the amended and restated shareholders' agreement concerning appointment to
the board terminate upon closing of our initial public offering, we expect
Messrs. Salzman and Sherer to continue to serve as directors.
Arrangement with CKM. We engaged CKM to assist us with the preferred
securities financing and paid CKM a commission of $420,000, or 3.5% of the
aggregate amount raised as consideration for their services. Mr. Bloch, a
director of ASD Systems, is Senior Vice President and Managing Director of an
affiliate of CKM.
Call Center/Data Center Facility
We presently lease a 20,000 square foot facility from our Chief Executive
Officer and President, Norman Charney, that we use as our internal call center
and data center. Our annual rental expense for this facility is $100,000 and
our lease expires on May 15, 2000. We presently intend to renew this lease upon
expiration for a term and rental to be negotiated between Mr. Charney and the
unaffiliated members of the board of directors at an appropriate time after an
independent real estate appraisal.
Guarantees of Indebtedness and Guarantee Fees
Mr. Charney was the guarantor of up to $2.5 million borrowed under our
previous credit facility with Comerica Bank-Texas. This guarantee was
terminated effective August , 1999. Effective June 24, 1999, Mr. Charney will
be paid a guarantee fee of 1% of the average daily outstanding principal amount
of the loan in each 30 day period. Through August 25, 1999, the fees under this
arrangement amounted to approximately $43,000. No fees were paid to Mr. Charney
prior to June 24, 1999. Mr. Charney has also executed a limited guarantee with
respect to amounts that we owe under our lease for our corporate headquarters
and fulfillment center. Mr. Charney presently guarantees up to $400,000 of
amounts due under such lease, with such guarantee decreasing by the amount of
$100,000 each year. Mr. Charney receives no compensation for this guarantee.
Employment and Indemnification Agreements
We have entered into employment agreements and indemnification agreements
with Messrs. Charney and Jennings, who are directors and named executive
officers. We have also entered into indemnification agreements with the
remainder of our directors. See "Description of Capital Stock--Anti-Takeover,
Limited Liability and Indemnification Provisions."
We believe that each of the transactions described above was made on terms no
less favorable to us than could have been obtained from unaffiliated third-
parties.
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Promoters of ASD Systems
Each of Norman Charney, our Chief Executive Officer and President, and Paul
Jennings, our Chief Operating Officer and Chief Information Officer, is a co-
founder of ASD Systems and may be deemed a promoter for purposes of federal
securities laws. In connection with our incorporation in January 1998, we
acquired the assets and liabilities comprising our business from ASD Partners,
Ltd., a Texas limited partnership controlled by Messrs. Charney and Jennings,
for 6,000,000 shares of our common stock. ASD Partners, Ltd., acquired these
assets and liabilities from Athletic Supply of Dallas, LLC., a wholly-owned
subsidiary of Genesis Direct, Inc., on October 14, 1997 for approximately $2.7
million. ASD Partners, Ltd. funded the acquisition by (1) issuing a promissory
note for $1.7 million to Genesis Direct and (2) causing Mr. Charney to forgive
$1.0 million otherwise payable under a note from Genesis Direct. The note was
originally issued to Mr. Charney in connection with the sale by Mr. Charney of
his stock in Athletic Supply of Dallas, Inc., a predecessor to our business, to
Genesis Direct in December 1996. All other material transactions with such
persons are described in this section or elsewhere in this prospectus. See
"Management."
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PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 30, 1999, and as adjusted to reflect
the sale of the shares of common stock offered by this prospectus, by:
. each of our named executive officers and directors;
. all of our executive officers and directors as a group; and
. each person, or group of affiliated persons, known to us to own
beneficially more than 5% of our common stock.
In accordance with the rules of the SEC, the table gives effect to the shares
of common stock that could be issued upon the exercise of outstanding options
and common stock purchase warrants within 60 days of June 30, 1999. In
addition, "Number of shares beneficially owned" and "Percentage of ownership--
Before this offering" reflects the conversion of all of our shares of Series A
convertible preferred stock into shares of common stock, assuming an
initial public offering price of $ per share, upon the consummation of this
offering. The actual number of shares of common stock issuable upon conversion
of the Series A convertible preferred stock may be different than this amount.
See "Risk Factors--Risks Related to this Offering--The number of shares of
common stock issuable to the VantagePoint funds is determinable by reference to
our initial public offering price and could result in additional dilution to
the shareholders in this offering." Unless otherwise noted in the footnotes to
the table and subject to community property laws where applicable, the
following individuals have sole voting and investment control with respect to
the shares beneficially owned by them. The address of each executive officer
and director is c/o ASD Systems, Inc., 3737 Grader Street, Suite 110, Garland,
Texas 75041.
We have calculated the percentages of shares beneficially owned based on
10,500,000 shares of common stock outstanding before this offering and
shares of common stock outstanding after the offering. An asterisk indicates
ownership of less than one percent.
<TABLE>
<CAPTION>
Percentage of ownership
---------------------------
Number of shares Before this After this
Person or group beneficially owned offering offering
--------------- ------------------ ------------ -----------
<S> <C> <C> <C>
Named Executive Officers
and Directors:
Norman Charney(1)(7).... 6,000,000
Paul M. Jennings(2)..... 957,500
Jonathan R. Bloch(3).... 805,000
Alan E. Salzman(4)......
Paul G. Sherer(4).......
Kevin P. Yancy(5)....... 343,087
All executive officers
and directors as a
group (9 persons)(6)...
Beneficial Owners of 5%
or More of
Our Outstanding Common
Stock
ASD Partners, Ltd.(7)... 6,000,000
CKM Software
Partners(8)............ 800,000
Staubach affiliated
shareholders(9)........ 2,375,000
VantagePoint Venture
Partners III (Q),
L.P.(10)...............
VantagePoint
Communications
Partners, L.P.(10).....
</TABLE>
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- --------
(1) Represents shares of common stock held by ASD Partners, Ltd., a Texas
limited partnership.
(2) Represents options to purchase 957,500 shares of common stock at an
exercise price of $1.00 per share. Does not include shares of common stock
held by ASD Partners, Ltd., in which Mr. Jennings owns a 5% limited
partnership interest.
(3) Includes 800,000 shares of common stock acquirable upon exercise of
warrants held by CKM Software Partners discussed in Note 8 and options to
purchase an additional 5,000 shares of common stock at an exercise price
of $1.00 per share. Mr. Bloch's address is 11100 Santa Monica Blvd., Suite
830, Los Angeles, California 90025.
(4) Represents the shares held by the VantagePoint funds described in note 10.
Mr. Salzman is the managing member of the general partner of the
VantagePoint funds and Mr. Sherer is a venture partner of the VantagePoint
Funds. Each of Messrs. Salzman and Sherer disclaim beneficial ownership of
the shares held by the VantagePoint funds other than those in which he may
own a pecuniary interest.
(5) Includes net options to purchase 263,087 shares of common stock from the
Staubach affiliated shareholders at an exercise price equal to $1.00 plus
interest at the rate of 10% compounded annually from January 29, 1999 per
share and options to purchase an additional 5,000 shares of common stock
at an exercise price of $1.00 per share. Excludes the 2,300,000 shares of
common stock held by the Staubach affiliated shareholders (other than
those held by Mr. Yancy directly) discussed in note 9.
(6) Includes the shares of common stock acquirable upon exercise of the stock
options and warrants discussed in notes 2, 3, 4 and 5 above.
(7) The general partner of ASD Partners, Ltd. is ASD GP, Inc. Mr. Charney is
the sole shareholder and President of ASD GP, Inc. The address of ASD
Partners, Ltd. and ASD GP, Inc. is c/o ASD Systems, Inc., 3737 Grader
Street, Suite 110, Garland, Texas 75041.
(8) Includes warrants to purchase 800,000 shares of common stock at the
following exercise prices: 400,000 shares of common stock exercisable for
$1.00 per share; 240,000 shares of common stock exercisable for $2.00 per
share; and 160,000 shares of common stock exercisable for $3.00 per share.
CKM Software Partners is a California general partnership held by Jonathan
Bloch and Larry Barels. The address of CKM Software Partners is c/o
Jonathan Bloch, 11100 Santa Monica Blvd., Suite 830, Los Angeles,
California 90025.
(9) Represents shares held by 44 persons and entities affiliated with Staubach
Financial Services, an affiliate of The Staubach Company. Each of these
persons and entities acquired their shares in connection with our private
placement closed in January and February of 1999 and, as part of such
transaction, most executed a voting agreement providing a voting committee
with the power to vote their shares. The voting committee consists of Mr.
Yancy, James C. Leslie and A. Brant Bryan. The voting committee has voting
power over (but no pecuniary interest in) the shares held by the other
persons and entities comprising the Staubach affiliated shareholders.
After this offering, Messrs. Yancy, Leslie and Bryan will not have the
right to vote the shares held by the Staubach affiliated shareholders. The
address of Messrs. Yancy, Leslie and Bryan is c/o The Staubach Company,
15601 Dallas Parkway, Suite 400, Addison, Texas 75001.
(10) Includes shares of common stock that will be issued to the
VantagePoint funds upon the closing of this offering in connection with
the conversion of the Series A convertible preferred stock, assuming an
initial public offering price of $ per share. Also includes shares of
common stock issuable upon exercise of the common stock purchase warrant
issued to the VantagePoint funds in connection with the preferred stock
financing, also assuming an initial public offering price of $ per share.
The address for the VantagePoint funds is c/o VantagePoint Venture
Partners, 1001 Bayhill Drive, Suite 100, San Bruno, California 94066.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 50,000,000 shares of common stock,
par value $.0001 per share, and 7,500,000 shares of preferred stock, $.0001 par
value per share. Our preferred stock has been divided into three series;
namely, the Series A convertible preferred stock and the Series B redeemable
preferred stock issued in connection with our August 1999 preferred stock
financing and the Series C non-voting preferred stock which, prior to the
offering made hereby, was available for issuance upon exercise of employee
stock options and certain purchase warrants issued in connection with our
January/February 1999 common stock financing. As of the date of this
prospectus, there are outstanding:
. 10,500,000 shares of common stock, held of record by 60 shareholders;
. warrants to purchase a number of shares of common stock determinable by
reference to our initial public offering price;
. 1,111,111 shares of Series A convertible preferred stock, all of which
will be automatically converted into shares of our common stock upon
completion of this offering;
. 1,111,111 shares of Series B redeemable preferred stock, all of which
will be automatically redeemed for cash upon completion of this
offering;
. no shares of our Series C non-voting preferred stock;
. options to purchase an aggregate of 1,457,500 shares of our Series C
non-voting preferred stock at an exercise price of $1.00 per share
which, upon completion of this offering, will be deemed to represent
options to acquire a like number of shares of our common stock without
modification to the exercise price thereof; and
. warrants to purchase 1,000,000 shares of our Series C non-voting
preferred stock at a weighted average exercise price of $1.70 per share
which, upon completion of this offering, will be deemed to represent
warrants to acquire a like number of shares of our common stock without
modification to the exercise price thereof.
There will be shares of common stock outstanding after giving effect to
the sale of the shares of common stock to the public in this offering assuming:
. no exercise of the underwriters' over-allotment option;
. no exercise of outstanding stock options or warrants; and
. the conversion of our shares of Series A convertible preferred stock
into shares of common stock upon completion of this offering
(assuming an initial public offering price of $ ).
See "Risk Factors--Risks Related to this Offering--The number of shares of
common stock issuable to the VantagePoint funds is determinable by reference to
our initial public offering price and could result in additional dilution to
the shareholders in this offering."
The following summary of the material provisions of our common stock,
preferred stock, amended and restated articles of incorporation and bylaws is
qualified by reference to the provisions of applicable law and to our amended
and restated articles of incorporation and bylaws included as exhibits to the
registration statement of which this prospectus is a part.
Common Stock
The holders of common stock are entitled to one vote per share on all matters
to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, that may be declared from
time to time by the board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding-up, the holders of
common stock are entitled to share ratably in all assets remaining after
payment of
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liabilities, subject to prior distribution rights of holders of preferred
stock, if any. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
Prior to August 23, 1999, we had two classes of common stock, namely, the
Series A common stock and Series B non-voting common stock. We reclassified our
Series A common stock as our only class of common equity and our Series B non-
voting common stock as Series C non-voting preferred stock effective August 23,
1999 to facilitate this offering.
Preferred Stock
"Blank Check" Preferred. Our board of directors has the authority to issue
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of such series, without further vote or action by the shareholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of ASD Systems without further action by our
shareholders and may adversely affect the voting, dividend and other rights of
the holders of common stock. As further discussed below, the issuance of
preferred stock with voting and conversion rights may adversely affect the
voting power of the holders of common stock, including the loss of voting
control to others. At present, we have no plans to issue any shares of
preferred stock after this offering.
Series A Convertible Preferred Stock. We issued 1,111,111 shares of our
Series A convertible preferred to the VantagePoint funds in connection with our
August 1999 preferred stock financing. Upon consummation of this offering, all
of the shares of Series A convertible preferred stock will be converted into
that number of shares of our common stock equal to 1,111,111 X 5.40/conversion
price, where the conversion price is equal to the lesser of:
. $5.40 per share; or
. One-third of the initial public offering price of our common stock.
The effect of this floating exercise price is that the preferred investors
will be entitled to at least 1,111,111 shares of our common stock upon closing
of this offering. There is no cap on the actual number of shares of common
stock issuable to the VantagePoint funds upon closing this offering. To the
extent that the initial public offering price is $16.20 per share or more, the
conversion price will not be adjusted upward to decrease the number of shares
issuable upon conversion. Assuming an initial public offering price of $ per
share, we will issue shares of common stock to the VantagePoint funds upon
conversion of the Series A convertible preferred stock. $ represents the mid-
point of the range of our anticipated initial public offering prices.
We will not have any shares of Series A convertible preferred stock
outstanding after this offering.
Series B Redeemable Preferred Stock. We issued 1,111,111 shares of our
Series B redeemable preferred stock to the VantagePoint funds in connection
with our August 1999 preferred stock financing. Upon completion of this
offering, the Series B redeemable preferred stock will be redeemed by us for an
aggregate redemption price of $6.0 million.
We will not have any shares of Series B redeemable preferred stock
outstanding after this offering.
Series C Non-Voting Preferred Stock. The Series C non-voting preferred stock
was created for purposes of permitting the participants under our Long-Term
Incentive Plan and the holders of certain other options and warrants to
participate as shareholders of ASD Systems upon exercise of their respective
instruments without granting such holders the right to vote on matters
submitted to the shareholders of ASD Systems generally. Our
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<PAGE>
shares of common stock and the shares of Series C non-voting preferred stock
have similar rights, preferences, privileges and restrictions thereof,
including dividend rights and liquidation rights, except, however, the Series C
non-voting preferred stock is non-voting. In connection with the filing of our
amended and restated articles of incorporation we elected to reclassify our
common stock and Series C non-voting preferred stock into a single class of
common equity effective upon the closing of this offering. As a result of this
reclassification, all outstanding options and warrants to acquire Series C non-
voting preferred stock will be deemed to represent instruments to acquire the
same number of shares of our common stock, without modification to the
applicable exercise price, upon closing. The board of directors believes that
this action preserves the value and purpose of the options granted under the
Long-Term Incentive Plan and the warrants granted as partial compensation in
connection with our January/February 1999 common stock financing.
We will not have any shares of Series C non-voting preferred stock
outstanding after this offering.
STOCK PURCHASE WARRANTS
In connection with the common stock financing closed in January/February
1999, we issued to various affiliates of CKM common stock purchase warrants
which, after this offering, will be exercisable for an aggregate of 1,000,000
shares of our common stock at the following exercise prices: 500,000 shares of
common stock exercisable for $1.00 per share; 300,000 shares of common stock
exercisable for $2.00 per share; and 200,000 shares of common stock exercisable
for $3.00 per share. These warrants expire on February 5, 2004.
On August 23, 1999, as part of our preferred stock financing, we issued to
the VantagePoint funds, common stock purchase warrants exercisable for 130% of
the number of shares of common stock received upon conversion at a per share
exercise price equal to 110% of the conversion price (as determined above). The
warrants will vest immediately and will remain exercisable until the third
anniversary of the closing date of this offering. Assuming an initial public
offering price of $ per share, the warrants issued to the VantagePoint funds
will be exercisable for an aggregate of shares of common stock and will carry
an exercise price of $ per share upon completion of this offering.
REGISTRATION RIGHTS
Pursuant to the amended and restated shareholders' agreement, after this
offering, the holders of approximately shares of common stock will be
entitled to certain rights with respect to the registration of such shares
under the Securities Act. Under these registration rights, in the event we
elect to register any of our shares of common stock for purposes of effecting
any public offering after the completion of the offering described in this
prospectus, the holders of the shares are entitled to include their shares of
common stock in the registration. Such holders are also entitled to certain
demand registration rights within one year of this offering under certain
circumstances pursuant to which they may require us to file a registration
statement under the Securities Act with respect to their shares of common
stock, and we are required to use our best efforts to effect such registration.
All of these registration rights are subject to conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in such registration and our right not to effect a demand
registration within 90 days prior to, and 120 days subsequent to, an offering
of our securities. All expenses in connection with any registration, other than
underwriting discounts and commissions, will be paid by us.
ANTI-TAKEOVER, LIMITED LIABILITY AND INDEMNIFICATION PROVISIONS
ARTICLES OF INCORPORATION AND BYLAWS. Pursuant to our amended and restated
articles of incorporation, our board of directors may issue additional shares
of common stock or establish one or more series of preferred stock having the
number of shares, designations, relative voting rights, dividend rates,
liquidation and other rights, preferences and limitations that the board of
directors may fix without shareholder approval. Any additional issuance of
common stock or designation of rights, preferences, privileges and limitations
with respect to preferred stock could have the effect of impeding or
discouraging the acquisition of control of us by
57
<PAGE>
means of a merger, tender offer, proxy contest or otherwise, including a
transaction in which our shareholders would receive a premium over the market
price for their shares, and thereby protects the continuity of our management.
Specifically, if in the due exercise of its fiduciary obligations, the board of
directors were to determine that a takeover proposal was not in our best
interest, shares could be issued by the board of directors without shareholder
approval in one or more transactions that might prevent or render more
difficult or costly the completion of the takeover by:
. diluting the voting or other rights of the proposed acquiror or
insurgent shareholder group;
. putting a substantial voting block in institutional or other hands that
might undertake to support the incumbent board of directors; or
. effecting an acquisition that might complicate or preclude the takeover.
Our amended and restated articles of incorporation and bylaws provide that,
conteporoneously with the closing of this offering, the board of directors
shall be divided into three classes of one or more directors each, with each
class elected for three-year terms expiring in successive years. Our amended
and restated articles of incorporation also allow the board of directors to fix
the number of directors in the bylaws with no minimum or maximum number of
directors required. Cumulative voting in the election of directors is
specifically denied in the amended and restated articles of incorporation. The
effect of these provisions may be to delay or prevent a tender offer or
takeover attempt that a shareholder might consider to be in his or her best
interest, including attempts that might result in a premium over the market
price for the shares held by the shareholders.
Our amended and restated articles of incorporation and bylaws provide that
special meetings of shareholders generally can be called only by the President,
Chief Executive Officer or the board of directors or by holders of at least 25%
of our voting stock and provide for an advance notice procedure for the
nomination, other than by or at the direction of the board of directors or a
committee of the board of directors of candidates for election as directors as
well as for other shareholder proposals to be considered at annual meetings of
shareholders. In general, we must receive notice of intent to nominate a
director or raise business at such meetings not less than 30 nor more than 60
days before the meeting. The notice must contain certain information concerning
the person to be nominated or the matters to be brought before the meeting and
concerning the shareholder submitting the proposal. These provisions of the
bylaws:
. may preclude a nomination for the election of directors or preclude the
conduct of business at a particular annual meeting if the proper
procedures are not followed; and
. may discourage or deter a third-party from conducting a solicitation of
proxies to elect its own slate of directors or otherwise attempting to
obtain control of us, even if the conduct of such solicitation or
attempt might be beneficial to us and our shareholders.
Texas Takeover Statute. Upon completion of this offering, we will be subject
to Part Thirteen of the Texas Business Corporation Act, which became effective
on September 1, 1997. Subject to certain exceptions, Part Thirteen prohibits a
Texas corporation which is an issuing public corporation from engaging in any
business combination with any affiliated shareholder for a period of three
years following the date that such shareholder became an affiliated
shareholder, unless:
. prior to such date, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
shareholder becoming an affiliated shareholder; or
. the business combination is approved by at least two-thirds of the
outstanding voting shares that are not beneficially owned by the
affiliated shareholder or an affiliate or associate of the affiliated
shareholder at a meeting of shareholders called not less than six months
after the affiliated shareholder's share acquisition date.
In general, Part Thirteen defines an affiliated shareholder as any entity or
person beneficially owning 20% or more of the outstanding voting stock of the
issuing public corporation and any entity or person affiliated
58
<PAGE>
with or controlling or controlled by such entity or person. Part Thirteen
defines a business combination to include, among other similar types of
transactions, any merger, share exchange, or conversion of an issuing public
corporation involving an affiliated shareholder.
Part Thirteen may have the effect of inhibiting a non-negotiated merger or
other business combination that we may be involved in.
Limited Liability and Indemnification. Our amended and restated articles of
incorporation limit the liability of our directors for monetary damages for an
act or omission in the director's capacity as a director, except to the extent
otherwise required by the Texas Business Corporation Act. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission. Our amended and restated articles of
incorporation permit us to indemnify our directors and officers to the fullest
extent permitted by Texas law, including in circumstances in which
indemnification is otherwise discretionary under Texas law.
Under Texas law, a corporation may indemnify a director or officer or other
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director, officer, employee or
agent of the corporation, if it is determined that such person:
. conducted himself or herself in good faith;
. reasonably believed, in the case of conduct in his or her official
capacity as a director or officer of the corporation, that his or her
conduct was in the corporation's best interests, and, in all other
cases, that his or her conduct was at least not opposed to the
corporation's best interests; and
. in the case of any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful.
Any such person may be indemnified against judgments, penalties (including
excise and similar taxes), fines, settlements and reasonable expenses actually
incurred by the person in connection with the proceeding. If the person is
found liable to the corporation or is found liable on the basis that personal
benefit was improperly received by the person, the indemnification is limited
to reasonable expenses actually incurred by the person in connection with the
proceeding, and must not be made in respect of any proceeding in which the
person is found liable for willful or intentional misconduct in the performance
of his or her duty to the corporation. Insofar as indemnification for
liabilities under the Securities Act may be permitted to directors, officers or
persons controlling ASD Systems pursuant to the foregoing provisions, ASD
Systems has been informed that, in the opinion of the SEC, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
We have entered into indemnification agreements with each of our directors
that provide for indemnification and expense advancement in addition to the
indemnification provided by the amended and restated articles and bylaws. We
believe that these provisions and agreements are necessary to attract and
retain qualified directors.
Market Information
Prior to this offering, there was no established public market for our common
stock. We have made an application to list our common stock on the Nasdaq
National Market under the symbol "ASDS."
Transfer Agent and Registrar
The Bank of New York will be the transfer agent and registrar for the common
stock.
59
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for our common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares of common stock
for sale will have on the market price of the common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through the sale of equity securities. See "Risk Factors--
Risks Related to this Offering--The liquidity of our common stock is uncertain
since it has not been publicly traded."
Upon the closing of this offering, we will have an aggregate of shares of
common stock outstanding, assuming no exercise of the underwriters' over-
allotment option and no exercise of outstanding options or warrants. To the
extent that the underwriters elect to exercise the over-allotment option, there
will be shares of common stock outstanding after this offering. See "Risk
Factors--Risks Related to This Offering--The number of shares of common stock
issuable to the VantagePoint funds is determinable by reference to our initial
public offering price and could result in additional dilution to the
shareholders in this offering." Of the outstanding shares, of the shares
sold in this offering will be freely tradable, except that any shares held by
"affiliates" (as that term is defined in Rule 144 promulgated under the
Securities Act) may only be sold in compliance with the limitations described
below. Additional shares will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
Number
of Shares Date
--------- ----
<C> <S>
At various times after 180 days from the date of this prospectus
subject, in some cases, to volume limitations; and
Upon the filing of a registration statement on Form S-8 to register
the offer and sale of shares of our common stock issuable upon the
exercise of options granted under our Long-Term Incentive Plan
</TABLE>
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock; or
. the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to restrictions.
In addition, a person who is not deemed to have been an affiliate at any time
during the 90 days preceding a sale and who has beneficially owned the shares
proposed to be sold for at least two years would be entitled to sell such
shares under Rule 144(k) without regard to the requirements described above. To
the extent that shares were acquired from an affiliate, such person's holding
period for the purpose of effecting a sale under Rule 144 commences on the date
of transfer from the affiliate.
Our directors, officers and shareholders who hold an aggregate of shares,
together with the holders of options and warrants to purchase shares of
common stock have agreed that they will not offer, sell or agree to sell,
directly or indirectly, or otherwise dispose of any shares of common stock
without the prior written consent of Bear, Stearns & Co. Inc. for a period of
180 days from the date of this prospectus. Please see "Underwriting."
As of the date of this prospectus, we have granted options to purchase up to
1,457,500 shares of common stock including options exercisable for 500,000
shares of common stock granted to certain employees, officers, directors and
consultants under the Long-Term Incentive Plan. Of these shares, 982,500 had
vested as of the date of this prospectus. Within 180 days after the date of
this prospectus, we intend to file a registration statement on Form S-8 under
the Securities Act to register the shares of common stock reserved for issuance
to our employees, officers, directors and consultants. Upon the effective date
of this registration statement, shares of common stock issued upon exercise of
options granted under our Long-Term Incentive Plan will be for sale in the open
market.
60
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the underwriters and us, each of the underwriters named below, through
their representatives Bear, Stearns & Co. Inc.; Prudential Securities
Incorporated; and Friedman, Billings, Ramsey & Co., Inc., has severally agreed
to purchase from us the aggregate number of shares of common stock set forth
opposite its name below:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Bear, Stearns & Co. Inc............................................
Prudential Securities Incorporated.................................
Friedman, Billings, Ramsey & Co., Inc..............................
---
Total............................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters are subject to approval of certain legal matters by counsel and to
various other conditions. The nature of the underwriters' obligations is such
that they are committed to purchase and pay for all of the above shares of
common stock if any are purchased.
The underwriters propose to offer the shares of common stock directly to the
public at the public offering price set forth on the cover page of this
prospectus and at such price less a concession not in excess of $ per share
of common stock to other dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters may allow, and such dealers may
reallow, concessions not in excess of $ per share of common stock to certain
other dealers. After this offering, the offering price, concessions and other
selling terms may be changed by the underwriters. The common stock is offered
subject to receipt and acceptance by the underwriters and to certain other
conditions, including the right to reject orders in whole or in part.
We have granted a 30-day over-allotment option to the underwriters to
purchase up to an aggregate of additional shares of our common stock
exercisable at the public offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of 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 following table summarizes the compensation to be paid to the
underwriters by us and the expenses payable by us, at the public offering price
of $ per share.
<TABLE>
<CAPTION>
Total
-----------------------------
Per Without With
Share Over-allotment Over-allotment
----- -------------- --------------
<S> <C> <C> <C>
Public offering price..................... $ $ $
Underwriting discounts and commissions
payable by us............................ $ $ $
Expenses payable by us.................... $ $ $
</TABLE>
61
<PAGE>
The underwriters do not expect to confirm sales of common stock to any
accounts over which they exercise discretionary authority.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities specified in the underwriting agreement under the
Securities Act or will contribute to payments that the underwriters may be
required to make in respect of those liabilities.
Our directors and officers and shareholders who hold shares, together
with the holders of options and warrants to purchase shares of common
stock, have agreed that they will not offer, sell, enter into a derivative
transaction that is the equivalent of a sale of, or agree to sell, directly or
indirectly, or otherwise dispose of any shares of common stock in the public
market without the prior written consent of Bear, Stearns & Co. Inc. for a
period of 180 days from the date of this prospectus.
We have applied to list our common stock on the Nasdaq National Market under
the symbol "ASDS."
Prior to this offering, there has been no public market for our common stock.
Consequently, the initial offering price for the common stock will be
determined by negotiations between us and the underwriters. Among the factors
to be considered in these negotiations will be:
. our results of operations in recent periods;
. our financial condition;
. estimates of our prospects and the industry in which we compete;
. an assessment of our management;
. the general state of the securities markets at the time of this
offering; and
. the prices of similar securities of generally comparable companies.
We cannot assure you that an active or orderly trading market will develop
for the common stock or that the common stock will trade in the public markets
subsequent to this offering at or above the public offering price.
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 we have sold to them. The underwriters may elect to cover any
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 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 of common stock. No representation is made as to the
magnitude or effect of any of these activities. These activities may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
An affiliate of Bear, Stearns & Co. Inc. owns a 2% limited partnership
interest in the VantagePoint funds, and, as a result, maintains an indirect
interest in a portion of the Series A convertible preferred stock, Series B
redeemable preferred stock and common stock purchase warrants acquired by the
VantagePoint funds in August 1999. See "Certain Transactions--Preferred Stock
Financing."
62
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered in this offering will be
passed upon for us by Arter & Hadden LLP, Dallas, Texas. Certain other legal
matters in connection with this offering will be passed upon for the
underwriters by Jenkens & Gilchrist, a Professional Corporation, Dallas, Texas.
EXPERTS
The financial statements of ASD Systems, Inc. as of December 31, 1998 and for
the year ended December 31, 1998, the financial statements of ASD Partners,
Ltd. as of December 31, 1997 and for the period October 14, 1997 to December
31, 1997, the financial statements of the fulfillment division of Athletic
Supply of Dallas, LLC as of October 13, 1997 and for the period December 21,
1996 to October 13, 1997 and the financial statements of the fulfillment
division of Athletic Supply of Dallas, Inc. as of December 20, 1996 and for the
period January 1, 1996 to December 20, 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 on the authority of such firm
as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. 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 ASD Systems and the
common stock offered in this offering, reference is made to such registration
statement, schedules and exhibits. Statements contained in this prospectus
regarding the contents of any contract or any other document are not
necessarily complete and, in each instance, reference is hereby made to the
copy of such contract or other document filed as an exhibit to the registration
statement. As a result of this offering, we will be subject to the
informational requirements of the Securities Exchange Act of 1934 and,
consequently, will be required to file annual and quarterly reports, proxy
statements and other information with the SEC. These reports, proxy statements
and other information may also be inspected at the offices of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006. The registration
statement, including exhibits, may be inspected without charge at the SEC's
principal office in Washington, D.C., and copies of all or any part thereof may
be obtained from the Public Reference Section, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of the
prescribed fees. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1.800.SEC.0330. The SEC maintains a Web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with it. The address
of the SEC's Web site is http://www.sec.gov.
63
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Index to Financial Statements............................................. F-1
ASD Systems, Inc.
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30, 1999
(Unaudited).............................................................. F-3
Statements of Operations for the Period from October 14, 1997 to December
31, 1997, for the Year Ended December 31, 1998 and for the Six Months
Ended June 30, 1998 and 1999 (Unaudited)................................. F-4
Statement of Partners' Capital and Stockholders' Equity (Net Capital
Deficiency) for the Period from October 14, 1997 to December 31, 1997,
for the Year ended December 31, 1998 and for the Six Month Period Ended
June 30, 1999 (Unaudited)................................................ F-5
Statements of Cash Flows for the Period from October 14, 1997 to December
31, 1997, for the Year Ended December 31, 1998 and for the Six Month
Period Ended June 30, 1999 (Unaudited)................................... F-6
Notes to Financial Statements............................................. F-7
Fulfillment Division of Athletic Supply of Dallas, LLC
Report of Independent Auditors............................................ F-17
Balance Sheet as of October 13, 1997...................................... F-18
Statement of Operations and Division Deficit for the Period from December
21, 1996 to October 13, 1997............................................. F-19
Statement of Cash Flows for the Period from December 21, 1996 to October
13, 1997................................................................. F-20
Notes to Financial Statements............................................. F-21
Fulfillment Division of Athletic Supply of Dallas, Inc.
Report of Independent Auditors............................................ F-24
Balance Sheet as of December 20, 1996..................................... F-25
Statement of Income and Division Equity for the Period from January 1,
1996 to December 20, 1996................................................ F-26
Statement of Cash Flows for the Period from January 1, 1996 to December
20, 1996................................................................. F-27
Notes to Financial Statements............................................. F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
ASD Systems, Inc.
We have audited the accompanying balance sheets of ASD Systems, Inc. (the
"Company") as of December 31, 1997 and 1998, and the related statements of
operations and cash flows for the period from October 14, 1997 to December 31,
1997 and for the year ended December 31, 1998, statement of partner's capital
for the period from October 14, 1997 to December 31, 1997, and statement of
stockholders' equity for the year ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ASD Systems, Inc. at December
31, 1997 and 1998, and the results of its operations and its cash flows and for
the period October 14, 1997 to December 31, 1997 and for the year ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
August 5, 1999
(except for Note 11, as to which the
date is August 23, 1999)
F-2
<PAGE>
ASD SYSTEMS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- ----------- ---
(unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 96,852 $ 280 $ 201,691
Accounts receivable, less allowance of
doubtful accounts of $0 at December
31, 1997 and $50,000 at December 31,
1998 and June 30, 1999............... 757,945 1,334,226 1,352,749
---------- ---------- ----------
Total current assets................ 854,797 1,334,506 1,554,440
Property and equipment, net............. 2,738,347 1,868,097 2,928,621
Other assets............................ 31,043 63,350 55,850
---------- ---------- ----------
Total assets............................ $3,624,187 $3,265,953 $4,538,911
========== ========== ==========
Liabilities, Partners' Capital, and
Stockholders' Equity (Net Capital
Deficiency)
Current liabilities:
Revolving credit line................. $ -- $2,400,000 $ 700,000
Accounts payable...................... 407,202 643,111 746,687
Accrued liabilities................... 520,050 472,842 720,942
Current portion of long term debt..... 340,000 340,000 340,000
Current portion of capital lease
obligations.......................... 29,130 29,319 29,068
---------- ---------- ----------
Total current liabilities........... 1,296,382 3,885,272 2,536,697
Capital lease obligations............... 24,888 24,220 --
Long term debt.......................... 1,360,000 1,020,000 1,793,665
Commitments and contingencies
Partners' capital....................... 942,917 -- --
----------
Total liabilities and partners'
capital............................ $3,624,187 -- --
==========
Stockholders' equity
Series A Common stock, $0.0001 par
value:
Authorized shares--15,000,000
Issued and outstanding--6,000,000 at
December 31, 1998 and 10,500,000 at
June 30, 1999........................ 600 1,050
Series B Common stock, $0.0001 par
value:
Authorized shares--5,000,000
Issued and outstanding-- none........ -- --
Additional paid-in capital............ 941,818 5,105,791
Accumulated deficit................... (2,605,957) (4,898,292)
---------- ----------
Total stockholders' equity (net
capital deficiency)................ (1,663,539) 208,549
---------- ----------
Total liabilities and stockholders'
equity (net capital deficiency).... $3,265,953 $4,538,911
========== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ASD SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from Six Months Ended June 30,
October 14, 1997 to December --------------------------
December 31, 1997 31, 1998 1998 1999
------------------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues................ $2,574,467 $ 8,020,021 $ 3,366,096 $ 4,679,351
Cost of revenues........ 1,248,232 5,051,297 2,424,590 3,315,668
---------- ----------- ------------ ------------
Gross profit............ 1,326,235 2,968,724 941,506 1,363,683
Operating expenses:
Selling, general, and
administrative ex-
penses................. 1,074,096 4,257,780 1,959,886 3,013,199
Depreciation and amorti-
zation................. 251,722 1,083,994 448,491 574,017
---------- ----------- ------------ ------------
Total operating ex-
penses................. 1,325,818 5,341,774 2,408,377 3,587,216
Operating income
(loss)................ 417 (2,373,050) (1,466,871) (2,223,533)
Interest expense........ (27,500) (232,907) (69,541) (68,802)
---------- ----------- ------------ ------------
Net loss................ $ (27,083) $(2,605,957) $ (1,536,412) $ (2,292,335)
========== =========== ============ ============
Basic and diluted net
loss per share......... $ -- $ (0.43) $ (0.26) $ (0.24)
========== =========== ============ ============
Shares used in computing
basic and diluted net
loss per share......... -- 6,000,000 6,000,000 9,734,807
========== =========== ============ ============
Pro forma basic and di-
luted net loss per
share.................. $ (0.01)
==========
Shares used in computing
pro forma basic and di-
luted net loss per
share.................. 6,000,000
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ASD SYSTEMS, INC.
STATEMENT OF PARTNERS' CAPITAL AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)
<TABLE>
<CAPTION>
Stockholders' Equity (Net Capital Deficiency)
---------------------------------------------------------------------------------
Total
Common Stock Common Stock Stockholders'
Class A Class B Additional Equity
Partners' ----------------- ------------- Paid-in Accumulated (Net Capital
Capital Shares Amount Shares Amount Capital Deficit Deficiency)
---------- ---------- ------ ------ ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 14,
1997................... $ -- -- $ -- -- $ -- $ -- $ -- $ --
Contribution of a note
receivable to the
partnership........... 1,000,000 -- -- -- -- -- -- --
Contribution of cash to
the partnership....... 10,000 -- -- -- -- -- -- --
Distribution to the
partners.............. (40,000) -- -- -- -- -- -- --
Net loss............... (27,083) -- -- -- -- -- -- --
---------- ---------- ------ --- ----- ---------- ----------- ----------
Balance at December 31,
1997................... $ 942,917 -- -- -- -- -- -- --
==========
Conversion from a
partnership to a
corporation through
the issuance of common
stock................. 6,000,000 600 -- -- 941,818 -- 942,418
Net loss............... -- -- -- -- -- (2,605,957) (2,605,957)
---------- ------ --- ----- ---------- ----------- ----------
Balance at December 31,
1998................... 6,000,000 600 -- -- 941,818 (2,605,957) (1,663,539)
Issuance of common
stock................. 4,500,000 450 -- -- 4,163,973 -- 4,164,423
Net loss (unaudited)... -- -- -- -- -- (2,292,335) (2,292,335)
---------- ------ --- ----- ---------- ----------- ----------
Balance at June 30, 1999
(unaudited)............ 10,500,000 $1,050 -- $ -- $5,105,791 $(4,898,292) $ 208,549
========== ====== === ===== ========== =========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ASD SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
October 14, 1997 Six Months Ended June 30,
to December --------------------------
December 31, 1997 31, 1998 1998 1999
----------------- ----------- ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating Activities
Net loss................ $ (27,083) $(2,605,957) $ (1,536,412) $ (2,292,335)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization......... 251,722 1,083,994 253,382 574,017
Provision for doubtful
accounts............. -- 50,000 -- --
Changes in operating
assets and
liabilities:
Accounts
receivable......... (337,300) (626,281) 536,301 (18,523)
Other assets........ (31,043) (32,806) (34,806) 7,500
Accounts payable.... 407,202 235,909 (160,418) 103,576
Accrued
liabilities........ 10,599 (47,209) (312,497) 248,100
--------- ----------- ------------ ------------
Net cash provided by
(used in) operating
activities............. 274,097 (1,942,350) (1,254,450) (1,377,665)
Investing Activities
Purchases of property
and equipment.......... (126,015) (180,776) (121,843) (1,634,541)
Cash acquired through
stock issuance......... -- 96,852 -- --
--------- ----------- ------------ ------------
Net cash used in
investing activities... (126,015) (83,924) (121,843) (1,634,541)
Financing Activities
Borrowings on revolving
line of credit......... -- 2,400,000 1,500,000 700,000
Payments on revolving
line of credit......... -- -- -- (2,400,000)
Contributions from
partners............... 10,000 -- -- --
Distributions to
partners............... (40,000) -- -- --
Proceeds from issuance
of Common Stock........ -- -- -- 4,164,423
Borrowings of long-term
debt................... -- -- -- 943,665
Payments of long-term
debt................... -- (340,000) (170,000) (170,000)
Payments of capital
lease obligations...... (21,230) (33,446) (31,983) (24,471)
--------- ----------- ------------ ------------
Net cash provided by
(used in) financing
activities............. (51,230) 2,026,554 1,298,017 3,213,617
--------- ----------- ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 96,852 280 (78,276) 201,411
Cash and cash
equivalents at
beginning of year...... -- -- 96,852 280
--------- ----------- ------------ ------------
Cash and cash
equivalents at end of
year................... $ 96,852 $ 280 $ 18,576 $ 201,691
========= =========== ============ ============
Noncash Investing and
Financing Activities
Assets acquired under
capital leases......... $ -- $ 32,968 $ 32,968 $ --
========= =========== ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the six months ended June 30, 1999 and
1998 is unaudited)
Description of Business
ASD Systems, Inc. (the "Company") provides comprehensive order management and
fulfillment services to internet retailers and traditional direct marketing
companies in the United States. The Company is headquartered in Garland, Texas.
At June 30, 1999, the Company had an accumulated deficit of $4,898,292.
Management believes the cash on hand at June 30, 1999, availability under its
line of credit, and additional funding received subsequent to year end (see
Note 10) will enable the Company to continue to meet its current debt and other
obligations.
Basis of Presentation
As of December 31, 1998, the Company is wholly-owned by ASD Partners, Ltd., a
Texas limited partnership (the "Partnership"). The Partnership was formed
effective October 14, 1997 to purchase certain assets (including software, call
center and fulfillment facilities) and assume certain liabilities of Athletic
Supply of Dallas, LLC, a wholly owned subsidiary of Genesis Direct, Inc.
("Genesis"), for $2,700,000. The Partnership funded the acquisition by (1)
issuing a promissory note for $1,700,000 to Genesis and (2) causing the
majority partner of the Partnership and former employee of Athletic Supply of
Dallas, LLC to forgive $1,000,000 of a note receivable due from Genesis. The
original note due to the majority partner of the Partnership was for
approximately $3,400,000 with an interest rate of 6.35%. The forgiveness of the
$1,000,000 represents the forgiveness of the September 1997, June 1998 and
March 1999 payments due on the note. The forgiveness was recorded as a
contribution to the Partnership. This acquisition was accounted for as a
purchase.
On January 1, 1998, the Company was formed as a Texas corporation and issued
6,000,000 shares of Series A Common Stock to the Partnership in exchange for
substantially all of the assets and liabilities of the Partnership. The
transaction was accounted for as a merger of companies under common control
similar to a pooling. The recorded value of the total assets acquired and
liabilities assumed amounted to $3,624,187 and $2,681,270 respectively.
On December 20, 1996, Genesis purchased all the outstanding common stock of
Athletic Supply of Dallas, Inc. ("Athletic Supply") for $10,000,000, consisting
of $5,000,000 in cash and a $5,000,000 promissory note due to the Athletic
Supply common stockholders. The acquisition was accounted for as a purchase.
Athletic Supply was a catalog sales company that sold sports apparel and
provided fulfillment services to retailers and direct marketing companies.
Cash and Cash Equivalents
The Company classifies all highly liquid investments with original maturties
of three months or less to be cash equivalents. Cash equivalents are stated at
cost, which approximates fair value.
Accounts Receivable and Concentration of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of its accounts receivable
from customers. At December 31, 1997 and 1998, and June 30, 1999, 79%, 42% and
28%, respectively, of accounts receivable were due from one customer. The
Company generally does not require collateral. The Company maintains an
allowance for doubtful accounts for potential credit losses. The Company's
allowance for doubtful accounts was $50,000 December 31, 1998 and June 30,
1999, respectively. During the year ended December 31, 1998, the Company
recorded a provision for uncollectible accounts of $50,000. During the period
from October 14, 1997 to December 31, 1997 and for the six month period ended
June 30, 1999, the Company did not record a provision for uncollectible
accounts nor write off any bad debts.
F-7
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment acquired under capital
leases is stated at the lower of the present value of future minimum lease
payments or fair value of the equipment at the inception of the lease.
Depreciation and amortization of property and equipment, other than leasehold
improvements, are provided over the estimated useful lives of the assets
(ranging from three to seven years) using the straight-line method. Leasehold
improvements are amortized on a straight-line basis over the shorter of the
respective lease term or estimated useful life of the asset.
REVENUE RECOGNITION
Revenues relate primarily to order management and fulfillment services and
are recognized on a per transaction basis as the services are rendered.
Cost of revenues consists primarily of direct labor costs for providing order
management and fulfillment services and, to a lesser extent, the cost of
contracting for third party call center and fulfillment center services.
The Company has two major customers, Sears, Roebuck, and Co. and Sears Wish
Book, Inc. (collectively "Sears"). These affiliated entities accounted for 94%,
84%, 90% and 78% of the Company's revenues for the period from October 14, 1997
to December 31, 1997, the year ended December 31, 1998, the six months ended
June 30, 1998 and the six months ended June 30, 1999, respectively. The Company
has contracted with Sears to provide services relating to the Craftsman Power
and Hand Tools and Home Healthcare catalogs until July 1, 2001 and certain
other services relating to the Sears Wish Book catalog on a year to year basis.
The Sears Wish Book contract was last renewed on July 2, 1999 for a period
expiring August 31, 2000. Each of the Company's agreements with Sears may be
terminated by Sears prior to their scheduled termination dates.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Amounts expensed were
approximately $18,000 for the period from October 14, 1997 to December 31, 1997
and $100,000 for the year ended December 31, 1998, $41,000 for the six month
period ended June 30, 1998 and $55,000 for the six month period ended June 30,
1999.
SOFTWARE DEVELOPMENT
Software development costs were expensed as incurred through December 31,
1998. Amounts expensed were approximately $1,000,000 and $600,000 for the year
ended December 31, 1998 and the six month period ended June 30, 1998,
respectively. There were no software development costs incurred during the
period from October 14, 1997 to December 31, 1997. Effective January 1, 1999,
with the adoption of SOP 98-1 as discussed below, software development costs
are being capitalized.
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 financial statements and accompanying
notes. Actual results could differ from those estimates.
INCOME TAXES
For the period October 14, 1997 through December 31, 1997, the Company was a
partnership and was not subject to federal income taxes. The losses were
included in the partner's individual federal and state tax returns, and as
such, no provision for income taxes has been recorded on an historical basis in
the accompanying
F-8
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
statement of operation for the period October 14, 1997 through December 31,
1997. On January 1, 1998, the Partnership transferred the assets and
liabilities of the Partnership to ASD Systems, Inc. a C Corporation.
Subsequently, the Company has accounted for taxes under the liability method,
which gives consideration to the future tax consequences associated with
differences between the financial accounting and tax basis of assets and
liabilities.
A benefit for income taxes on a pro forma basis as if the Company were liable
for federal and state income taxes as a taxable corporate entity for the period
from October 14, 1997 to December 31, 1997 is not presented, due to the
uncertainty of utilization of the loss carryforwards in future periods.
Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived assets to be Disposed of,"
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and when the future
estimated undiscounted cash flows generated by those assets are not sufficient
to recover the assets' carrying amount. The evaluation of an impairment loss is
determined by comparing the amount of undiscounted cash flows to be generated
by the asset to the asset's carrying amount.
Net Loss Per Share and Pro Forma Net Loss Per Share
Basic and diluted net loss per share is computed based on the loss applicable
to common shareholders divided by the weighted average number of shares of
common stock outstanding during each period. Potentially dilutive securities
consisting of warrants and stock options were not included in the calculation
as their effect is antidulitive. If the Company had reported net income for the
six months ended June 30, 1999, the dilutive shares calculation would have
included additional shares of 1,824,719. The number of dilutive shares
representing warrants and stock options was determined by using the treasury
stock method. The number of dilutive shares representing convertible preferred
stock was determined by using the if converted method.
The pro forma basic and diluted net loss per share when the Company was a
partnership is computed based on net loss divided by the number of shares
outstanding when the Partnership sold assets to the Company.
Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25
(APB 25), "Accounting for Stock Issued to Employees," in accounting for its
employee stock options and stock based awards. Under APB 25, if the exercise of
an employee's stock option equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized. The
additional disclosures required under Statement of Financial Accounting
Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation," are
not included as there were no options granted as of December 31, 1998.
Fair Value of Financial Investments
The Company's financial instruments, including accounts receivables, accounts
payable, and borrowings under its revolving credit line and term loan debt
approximate fair value due to their short term value. Based on prevailing
interest rates at December 31, 1998, management believes that the fair value of
long-term debt approximates its book value.
F-9
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130 (SFAS 130), "Reporting Comprehensive
Income," which requires disclosure of total comprehensive income in interim and
annual financial statements. The Company adopted SFAS 130 during 1998. The
Company had no items of other comprehensive income in the period from October
14, 1997 to December 31, 1997 and for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivatives
and Similar Financial Instruments and Hedging Activities," which provides a
comprehensive and consistent standard for the recognition and measurement of
derivatives and hedging activities. The Company will be required to adopt SFAS
133 at the beginning of fiscal year 2000. SFAS 133 is not expected to have a
significant impact on the Company.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 (SOP 98-1), "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal Use." SOP 98-1 requires all
costs related to the development of internal use software, other than those
incurred during the application development stage, to be expensed as incurred.
Costs incurred during the application development stage are required to be
capitalized and amortized over the estimated useful life of the software. SOP
98-1 is effective for the Company's fiscal year ending December 31, 1999. Prior
to January 1, 1999, the Company expensed such costs as incurred. As a result of
adopting SOP 98-1, the Company capitalized approximately $403,000 related to
internal use software development projects during the six month period ended
June 30, 1999.
Unaudited Interim Financial Statements
The unaudited interim financial statements as of June 30, 1999, and for the
six months ended June 30, 1998 and 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with Rule 10-01 of Regulation S-X. Accordingly, they do not include the
information and footnotes required by generally accepted accounting principles
for complete financial statements. They do reflect all adjustments (consisting
of only normal recurring entries) which, in the opinion of the Company's
management, are necessary for a fair presentation of the results for the
interim periods presented.
The results of operations for the six month period ended June 30, 1999 are
not necessarily indicative of the results that may be expected for any other
interim period or for the full year.
2. Detail of Certain Balance Sheet Accounts
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- June 30,
1997 1998 1999
---------- ---------- -----------
(unaudited)
<S> <C> <C> <C>
Software................................. $1,164,054 $1,164,054 $1,567,478
Furniture, fixtures, and equipment....... 1,713,208 1,767,805 2,701,532
Other.................................... 112,807 140,748 225,388
---------- ---------- ----------
2,990,069 3,072,607 4,494,398
Less accumulated depreciation and
amortization............................ 251,722 1,204,510 1,565,777
---------- ---------- ----------
Net property and equipment............... $2,738,347 $1,868,097 $2,928,621
========== ========== ==========
</TABLE>
The cost and accumulated amortization of assets acquired under capital leases
were $140,304 and $12,716 respectively at December 31, 1997 and $149,304 and
$54,655 respectively at December 31, 1998.
F-10
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1997 1998 1999
-------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Accrued vacation expense....................... $164,054 $181,824 $201,824
Accrued salary expense......................... 128,152 152,902 365,624
Accrued property taxes......................... 161,542 36,622 46,000
Other.......................................... 66,302 101,494 107,494
-------- -------- --------
Total accrued liabilities.................... $520,050 $472,842 $720,942
======== ======== ========
</TABLE>
3. Revolving Line of Credit
On July 21, 1998, the Company entered into a credit agreement with a bank
which provides for a $2,500,000 revolving credit line which is payable on
demand. At December 31, 1998, there were $2,400,000 in borrowings outstanding.
Borrowings under the agreement bear interest at the lender's prime rate plus 1%
(9.5% at December 31, 1998) and accrued interest is payable monthly. The
weighted average interest rate on the revolving line of credit was 8.25% for
the year ended December 31, 1998. Borrowings are also collateralized by
substantially all the assets of the Company, and are guaranteed up to a maximum
of $500,000 by the President and primary stockholder of the Company. There was
no fee or remuneration for his agreement with the President to guaranty the
indebtedness under the revolving credit agreement.
4. Long-term Debt
Long term debt relates to a long-term note due to Genesis (see Note 1) for
$1,700,000. The note bears interest at a rate of 6% and principal and interest
payments are due quarterly beginning January 14, 1998. The note is collaterized
by all the assets acquired from Genesis. The note matures on October 14, 2002.
The scheduled maturities of this note are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 340,000
2000............................................................. 340,000
2001............................................................. 340,000
2002............................................................. 340,000
----------
Total scheduled maturities..................................... $1,360,000
==========
</TABLE>
Interest expense under the revolving line of credit and long-term debt was
approximately $214,000 for the year ended December 31, 1998 and $41,000 and
$95,000 for the six month periods ended June 30, 1998 and 1999, respectively.
There was no interest expense for the period from October 14, 1997 to December
31, 1997.
5. Income taxes
The provision for income taxes is reconciled with the federal statutory rate
for the year ended December 31, 1998 is as follows:
<TABLE>
<S> <C>
Provision computed at federal statutory rate..................... $(886,025)
State income taxes, net of federal tax effect.................... (76,166)
Change in deferred tax assets valuation allowance................ 946,835
Other............................................................ 15,356
---------
$ --
=========
</TABLE>
F-11
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant components of the deferred tax asset at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward................................. $ 793,185
Property and equipment.......................................... 128,595
Accrued expenses................................................ 6,570
Allowance for doubtful accounts................................. 18,485
---------
Total deferred tax assets......................................... 946,835
Less valuation allowance.......................................... (946,835)
---------
Net deferred taxes................................................ $ --
=========
</TABLE>
The Company has federal net operating loss carryforwards of $2,145,483 at
December 31, 1998, which if not utilized, will expire in 2018. The Company's
total deferred tax assets have been fully reserved due the uncertainty of
future taxable income. Accordingly, no tax benefit has been recognized in the
accompanying financial statement.
6. Leases
As of December 31, 1998, the Company was obligated under various capital
leases and noncancelable operating lease agreements for facilities and
equipment. The major capital leases contain various bargain purchase options. A
summary of future minimum lease payments follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ----------
<S> <C> <C>
1999................................................... $ 36,226 $ 481,507
2000................................................... 10,126 410,007
2001................................................... 8,705 372,507
2002................................................... 8,705 372,507
2003................................................... 2,902 62,085
-------- ----------
Total payments due................................... 66,664 $1,698,613
==========
Less amounts representing interest..................... 13,125
--------
Present value of minimum lease payments................ 53,539
Less current portion................................... (29,319)
--------
Noncurrent portion..................................... $ 24,220
========
</TABLE>
Rental expense under noncancelable operating leases for facilities and
equipment approximated $75,000 for the period from October 14, 1997 to December
31, 1997, $503,000 for the year ended December 31, 1998, $261,000 for the six
months ended June 30, 1998 and $381,000 for the six month period ended June 30,
1999.
The Company leases an office/warehouse building from its President and
significant shareholder for annual rental expense of $100,000. The lease
expires on May 15, 2000.
In connection with the Company's lease of its corporate office and warehouse
facility, the significant shareholder has executed a limited guaranty with
respect to payments by the Company under such lease. Such guaranty is presently
for a maximum amount of $500,000 but decreases by $100,000 increments on
January 1 of each year, commencing January 1, 1999. The President is not
entitled to receive a fee or any other remuneration for his agreement to
guaranty this obligation.
F-12
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Common Stock
The Series A common stockholders are entitled to vote on all matters
submitted to a vote of the Company's stockholders, and are entitled to certain
preemptive rights with respect to subsequent issues by the Company of all
equity securities or securities convertible into equity securities. The Series
B common stockholders are not entitled to any such voting or preemptive rights.
The Series A and Series B common stockholder are entitled to ratably receive
dividends, if any are declared by the Board of Directors. Upon liquidation,
dissolution or winding up of the Company, the Series A and Series B common
stockholders are entitled to share ratably any distribution of the Company's
assets and surplus funds.
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 financial condition, results of operations or cash flows.
9. Employee Benefit Plan
On October 1, 1998, the Company adopted a plan known as the ASD Systems
Employees Profit Sharing Plan & Trust (the "401k Plan") to provide retirement
and incidental benefits for its employees. The 401k Plan covers substantially
all employees who meet minimum age and service requirements. Employees vest at
20% per year, for five years of service, to share in the Company's matching
contribution. As allowed under Section 401(k) of the Internal Revenue Code, the
401k Plan provides tax deferred salary deductions for eligible employees.
Employees may contribute from 1% to 19% of their annual compensation to the
401k Plan, limited to a maximum amount as set by the Internal Revenue Service.
The Company matches employee contributions at the rate of $0.25 per each $1.00
of contribution on the first 4% of deferred compensation. Company matching
contributions to the 401k Plan were approximately $6,000 for the year ended
December 31, 1998 and $9,000 for the six month period ended June 30, 1999.
There were no contributions for the six month period ended June 30, 1998.
F-13
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Computations of Basic and Diluted Net Loss Per Common Share
<TABLE>
<CAPTION>
Period from
October 14, 1997 Six months ended June 30,
to December 31, --------------------------
December 31, 1997 1998 1998 1999
------------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic
and diluted net loss
per common share..... $(27,083) $(2,605,957) $ (1,536,412) $ (2,292,335)
========= =========== ============ ============
Denominator:
Denominator for basic
net loss per common
share--weighted-
average shares....... 6,000,000 6,000,000 6,000,000 9,734,807
Effect of dilutive
securities:
Employee stock
options.............. -- -- -- --
Warrants.............. -- -- -- --
--------- ----------- ------------ ------------
Basic and diluted net
loss per common share.. $ (0.01) $ (0.43) $ (0.26) $ (0.24)
========= =========== ============ ============
</TABLE>
The Company was a partnership during the period from October 14, 1997 to
December 31, 1997. The net loss per common share--basic and diluted for the
period ended December 31, 1997 was calculated based on the number of shares of
common stock outstanding at January 1, 1998.
11. Subsequent Events
Private Placement
On January 29, 1999 and February 5, 1999, the Company sold, respectively,
2,750,000 and 1,750,000 shares of Series A Common Stock at $1.00 per share to a
group of third party accredited investors for total gross proceeds of
$4,500,000. As a condition of investment each investor was required to execute
a Shareholder Agreement which generally restricts any transfers of shares of
the Company's Series A Common Stock and provides rights of first refusal to the
Company and certain of the Company's other shareholders.
The Company also issued warrants, exercisable for up to 1,000,000 shares of
Series B Common Stock to an affiliate of the placement agent providing services
to the Company in the private placement. The warrants are exercisable at any
time at the following prices: 500,000 shares at $1.00 per share, 300,000 shares
at $2.00 per share, and 200,000 shares at $3.00 per share, and the warrants
expire five years from the date of grant. The majority of the net proceeds of
the offering were used to repay the then outstanding revolving line balance of
$2,500,000 under the credit agreement described in Note 3.
Amended Credit Agreement
On June 24, 1999, the credit agreement described in Note 3 was amended to
provide the Company with a $4,000,000 credit facility consisting of a
$2,000,000 revolving line of credit and a $2,000,000 term note. The revolving
credit line matures on May 13, 2000 and borrowings are limited to a borrowing
base defined as $750,000 plus 80% of eligible accounts receivable. Any
borrowings under the revolving line of credit bear interest at the bank's prime
rate plus 1% (8.75% at June 30, 1999) and accrued interest is payable monthly
F-14
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
starting July 13, 1999. Until November 13, 1999, the Company can borrow up to a
maximum of $2,000,000 under the term note for the purchases of property and
equipment. On November 13, 1999, the borrowings outstanding under the term note
are set and the principal payments are payable monthly starting December 13,
1999 and until the note matures on November 13, 2002. At any time borrowings
are outstanding, the term note bears interest at prime plus 1% and accrued
interest is payable monthly starting July 13, 1999. All borrowings under the
amended credit agreement are collaterized by all the Company's assets and are
guaranteed by the President and majority shareholder under a guaranty agreement
up to a maximum $2,500,000. In June 1999, the Board of Directors approved a
plan to pay the President and majority shareholder a fee of 1% of the average
amount guaranteed by him each month under the bank facility. The fee is to be
computed and paid each month commencing July 1999. The amended credit agreement
also requires the Company to comply with financial covenants such as a minimal
amount of tangible net worth, a minimal quick ratio, a maximum amount of debt
to tangible net worth, and a minimal amount of net income, as defined.
Stock Options
On May 12, 1999, the Company adopted the 1999 Long-Term Incentive Plan (the
"Plan") to provide for the grant of stock options to management, directors, and
other persons, as determined by the Board of Directors of the Company.
Currently, under the Plan, an aggregate of 1,200,000 shares of Series B common
stock are authorized for issuance, and no one employee may be granted more than
50,000 options in one calendar year. Additionally, the Plan provides for the
grant of incentive stock options (ISOs) and non-qualified stock options (NQSOs)
at an exercise price equal to the fair market value of the Series B common
stock on the date of the grant. The option vesting periods per grant as
determined by the Board of the Directors and expire 10 years from the date of
grant.
On March 12, 1999 and April 30, 1999, options exercisable for 410,000 and
40,000 shares of Series B Common Stock, respectively were granted to employees
at an exercise price of $1.00 per share in accordance with the Plan. As
determined by the Board of Directors, the options vest ratably over five years.
On March 12, 1999, options exercisable for 50,000 shares of Series B Common
Stock were issued to directors and a consultant at an exercise price of $1.00
per share. As determined by the Board of Directors, 50% of the options vested
immediately and 50% vest on the first anniversary of the grant date.
On February 10, 1999 in a separate transaction outside of the Plan, an
executive of the Company was granted an option exercisable for 957,500 shares
of Series B Common Stock. The stock options are exercisable at any time at a
price of $1.00 per share which equaled the fair value of the Series B common
stock on the date the grant. The term of the options is five years.
Preferred Stock
On August 23, 1999, the Company sold to outside investors, 1,111,111 shares
of its Series A and 1,111,111 shares of Series B Preferred Stock for a gross
proceeds of approximately $12,000,000. The Series A Preferred Stock is
convertible into Common Stock at an initial conversion price of $5.40 per
share. In the event of an initial public offering (IPO), or an acquisition of
the Company prior to January 1, 2000, the conversion price will be the lesser
of $5.40 per share or one third of the issue price of the stock in the IPO or
acquisition. After January 1, 2000, the conversion price will be $2.93 per
share. The Series A Preferred Stock is not redeemable by the Company.
F-15
<PAGE>
ASD SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Series B Preferred Stock is redeemable by the Company at any time at
$5.40 per share plus any declared and accrued dividends. The Stock is
manditorily redeemable upon an acquisition or IPO at $5.40 per share.
In connection with the transaction, the investors were issued warrants to
purchase additional shares of common stock equal to 1.3 times the number of
shares of common stock which is issuable with respect to Series A Preferred
Stock at an exercise price equal to 110% of the conversion price in effect
above.
Also in connection with the sale of the Series A and B Preferred Stock, the
Company amended and restated its Articles of Incorporation to establish Series
A voting common stock into the sole class of common stock, and to convert
Series B non-voting Common Stock into shares of Series C non-voting Preferred
Stock.
As part of the sale of the Series A and B Preferred Stock, the Company paid
$420,000 to a director of the Company in consideration for commissions on the
sale of the preferred stock.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Athletic Supply of Dallas, LLC
We have audited the accompanying balance sheet of the Fulfillment Division of
Athletic Supply of Dallas, LLC (the "Division") as of October 13, 1997 and the
related statements of operations and division deficit and cash flows for the
period from December 21, 1996 to October 13, 1997. These financial statements
are the responsibility of the division'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 the Fulfillment Division of
Athletic Supply of Dallas, LLC at October 13, 1997, and the results of its
operations and its cash flows for the period December 21, 1996 to October 13,
1997, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
August 5, 1999
F-17
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
BALANCE SHEET
October 13, 1997
<TABLE>
<S> <C>
Assets
Current assets
Accounts receivable............................................... $ 454,166
----------
Total current assets............................................ 454,166
Property and equipment, net....................................... 782,648
Other assets...................................................... 25,582
----------
Total assets.................................................... $1,262,396
==========
Liabilities and Division Deficit
Current liabilities
Accounts payable.................................................. $ 35,378
Accrued liabilities............................................... 563,681
Due to Athletic Supply of Dallas, LLC............................. 1,483,745
----------
Total current liabilities....................................... 2,082,804
Commitments and contingencies.......................................
Division deficit.................................................... (820,408)
----------
Total liabilities and division deficit.......................... $1,262,396
==========
</TABLE>
See accompanying notes.
F-18
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
STATEMENT OF OPERATIONS AND DIVISION DEFICIT
<TABLE>
<CAPTION>
Period from
December 21, 1996
to
October 13, 1997
-----------------
<S> <C>
Revenues...................................................... $4,881,787
Cost of revenue............................................... 2,685,838
----------
Gross profit.................................................. 2,195,949
Selling, general, and administrative expenses................. 3,016,357
----------
Net loss...................................................... (820,408)
Division deficit, December 21, 1996........................... --
----------
Division deficit, October 13, 1997............................ $ (820,408)
==========
</TABLE>
See accompanying notes.
F-19
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
December 21, 1996
to
October 13, 1997
-----------------
<S> <C>
Operating Activities
Net loss.................................................... $ (820,408)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation.............................................. 367,300
Changes in operating assets and liabilities:
Accounts receivable..................................... 1,092,308
Accounts payable........................................ (110,617)
Accrued liabilities..................................... 279,182
----------
Net cash provided by operating activities................... 807,765
Investing Activities
Purchases of property and equipment......................... (38,665)
----------
Net cash used in investing activities....................... (38,665)
Financing Activities
Financing provided to Athletic Supply LLC................... (769,100)
----------
Net cash used in financing activities....................... (769,100)
Net change in cash and cash equivalents..................... --
Cash and cash equivalents at beginning of year.............. --
----------
Cash and cash equivalents at end of year.................... $ --
==========
Net assets acquired by parent allocated to the division..... $2,252,845
==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
NOTES TO FINANCIAL STATEMENTS
1. Description of the Business, Basis of Presentation, and Summary of
Significant Accounting Policies
Basis of Presentation and Description of Business
The Fulfillment Division (the "Division") of Athletic Supply of Dallas LLC
(the "Parent") provides comprehensive order management and fulfillment services
to internet retailers and traditional direct marketing companies in the United
States. The Parent is a subsidiary of Genesis Direct Inc. ("Genesis") which
acquired the Parent on December 20, 1996 by purchasing all the common stock of
Athletic Supply of Dallas Inc. ("Athletic Supply") for $10,000,000, consisting
of $5,000,000 in cash and $5,000,000 promissory note due to the Athletic Supply
common stockholders. On October 14, 1997, certain assets and liabilities of the
Division were sold by Genesis to ASD Partners Ltd. for $2,700,000, consisting
of (1) a $1,700,000 promissory note due to Genesis and (2) causing the majority
partner and executive of the Parent and Athletic Supply to forgive a $1,000,000
note receivable from Genesis.
The accompanying financial statements reflect the financial position and
results of operations of the Fulfillment Division of Athletic Supply of Dallas,
LLC for the period December 21, 1996 to October 13, 1997. The balance sheet as
of October 13, 1997 has been prepared using the historical basis of accounting
and includes all of the assets and liabilities specifically identifiable to the
Division. Only specific assets and liabilities could be included because
corporate accounting systems of the Parent were not designed to track cash
receipts and payments on a division specific basis.
The statement of operations for the period December 21, 1996 to October 13,
1997 includes all revenue and costs directly attributable to the Division,
including the allocation of facilities, salaries and employee benefits.
Specifically, the Division was allocated rent expense of approximately $242,000
for the period December 21, 1996 to October 13, 1997.
All of the allocations reflected in the financial statements are based on
assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the division had been operated on a stand-
alone basis during the period December 21, 1996 to October 13, 1997 nor are
they necessarily indicative of future costs to support the operations of the
division.
Accounts Receivable and Concentration of Credit Risk
Financial instruments, which potentially subject the division to
concentrations of credit risk, consist primarily of its accounts receivable
from customers. At October 13, 1997, 97% of accounts receivable were due from
one customer. The Company generally does not require collateral. During the
period from December 21, 1996 to October 13, 1997, the Division did not record
a provision for uncollectible accounts nor write off any bad debts.
Property and Equipment
Property and equipment are stated at cost. Equipment allocated to the
Division and acquired under capital leases by the Parent is stated at the lower
of the present value of future minimum lease payments or fair value of the
equipment at the inception of the lease. Depreciation and amortization of
property and equipment, other than leasehold improvements, are provided over
the estimated useful live of the assets (ranging from three to seven years)
using the straight-line method. Leasehold improvements allocated to the
Division are amortized on a straight-line basis over the shorter of the
respective lease term or estimated useful life of the asset.
F-21
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenues relate primarily to order management and fulfillment services and
are recognized on a per transaction basis as the services are rendered.
Cost of revenues consist of direct labor costs for providing order management
and fulfillment services and, to a lesser extent, the cost of contracting for
third party call center and fulfillment center services.
The Division had one major customer, Sears, Roebuck, and Co ("Sears"), a
major national retailer that accounted for 95% of its revenues for the period
from December 21, 1996 to October 13, 1997.
Advertising Costs
Advertising costs are expensed as incurred. Amounts expensed were
approximately $18,000 for the period from December 21, 1996 to October 13,
1997.
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 financial statements and accompanying
notes. Actual results could differ from those estimates.
Income Taxes
During the period from December 21, 1996 to October 13, 1997, the Division
was not a taxable entity and was part of the taxable entity of the Parent. A
provision for income taxes on a pro forma basis, as if the Division were liable
for federal and state income taxes as a taxable corporate entity for the period
December 21, 1996 to October 13, 1997, is not presented as the Parent had zero
tax expense due to the loss carryforward being fully reserved.
2. Detail of Certain Balance Sheet Accounts
Property and equipment are stated at cost and consist of the following at
October 13, 1997:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment............................... $2,535,335
Leasehold improvements........................................... 113,218
----------
2,648,553
Less accumulated depreciation and amortization................... 1,865,905
----------
Net property and equipment....................................... $ 782,648
==========
Accrued liabilities consists of the following at October 13, 1997:
Accrued vacation expense......................................... $ 164,054
Accrued salary expense........................................... 347,712
Accrued property taxes........................................... 51,915
Other............................................................ --
----------
Total accrued liabilities........................................ $ 563,681
==========
</TABLE>
F-22
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, LLC
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Due to Athletic Supply of Dallas, LLC
The Division utilized the Parent's centralized cash management services and
processes related to receivables, payables, payroll, and other activities. The
amounts due the Parent represent funding supplied by the Parent for capital
expenditures, payment of operating and capital lease obligations, and other
working capital needs. There were no intercompany transfers and no amounts were
paid to the Parent in repayment of the financing provided.
F-23
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Athletic Supply of Dallas, Inc.
We have audited the accompanying balance sheet of the Fulfillment Division of
Athletic Supply of Dallas, Inc. (the "Division") as of December 20, 1996 and
the related statements of operations and division equity and cash flows for the
for the period from January 1, 1996 to December 20, 1996. These financial
statements are the responsibility of the division'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 the Fulfillment Division of
Athletic Supply of Dallas, Inc. at December 20, 1996, and the results of its
operations and its cash flows for the period January 1, 1996 to December 20,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Dallas, Texas
August 5, 1999
F-24
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, INC.
BALANCE SHEET
December 20, 1996
<TABLE>
<S> <C>
Assets
Current assets:
Accounts receivable............................................... $1,546,474
Due from Athletic Supply of Dallas, Inc........................... 9,775
----------
Total current assets............................................ 1,556,249
Property and equipment, net......................................... 1,111,283
Other assets........................................................ 25,582
----------
Total assets.................................................... $2,693,114
==========
Liabilities and Division Equity
Current liabilities:
Accounts payable.................................................. $ 145,995
Accrued liabilities............................................... 284,499
----------
Total current liabilities....................................... 430,494
Commitments and contingencies
Division equity..................................................... 2,262,620
----------
Total liabilities and division equity........................... $2,693,114
==========
</TABLE>
See accompanying notes.
F-25
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENT OF INCOME AND DIVISION EQUITY
<TABLE>
<CAPTION>
Period from
January 1, 1996
to
December 20, 1996
-----------------
<S> <C>
Revenues...................................................... $6,825,743
Cost of revenue............................................... 2,093,727
----------
Gross profit.................................................. 4,732,016
Selling, general, and administrative expenses................. 3,335,800
----------
Net income.................................................... 1,396,216
Division equity, January 1, 1996.............................. 866,404
----------
Division equity, December 20, 1996............................ $2,262,620
==========
Pro forma information:
Net income as presented....................................... $1,396,216
Pro forma income taxes........................................ 516,600
----------
Pro forma net income.......................................... $ 879,616
==========
</TABLE>
See accompanying notes.
F-26
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Period from
January 1, 1996
to
December 20, 1996
-----------------
<S> <C>
Operating Activities
Net income.................................................. $1,396,216
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 517,162
Changes in operating assets and liabilities:
Accounts receivable..................................... (831,272)
Accounts payable........................................ 85,964
Accrued liabilities..................................... 284,500
----------
Net cash provided by operating activities................. 1,452,570
Investing Activities
Purchases of property and equipment......................... (568,215)
----------
Net cash used in investing activities....................... (568,215)
Financing Activities
Financing provided to parent................................ (884,355)
----------
Net cash used in financing activities....................... (884,355)
----------
Net increase in cash and cash equivalents...................
Cash and cash equivalents at beginning of year.............. $ --
----------
Cash and cash equivalents at end of year.................... $ --
==========
</TABLE>
See accompanying notes.
F-27
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Description of the Business, Basis of Presentation, and Summary of
Significant Accounting Policies
Basis of Presentation and Description of Business
The Fulfillment Division (the "Division") of Athletic Supply of Dallas, Inc.
(the "Parent") was formed in January 1995 to provide comprehensive order
management systems and fulfillment services to internet retailers and
traditional direct marketing companies in the United States. On December 20,
1996, all outstanding common stock of the Parent was sold to Genesis Direct
Inc. ("Genesis") for $10,000,000, consisting of $5,000,000 in cash and
$5,000,000 promissory note due to the common stockholders.
The accompanying financial statements reflect the financial position and
results of operations of the Fulfillment Division for the period January 1,
1996 to December 20, 1996. The balance sheet as of December 20, 1996 has been
prepared using the historical basis of accounting and includes all of the
assets and liabilities specifically identifiable to the Division. Only specific
assets and liabilities were included because the Parent's corporate accounting
systems were not designed to track cash receipts and payments on a division
specific basis.
The statement of operations for the period January 1, 1996 to December 20,
1996 includes all revenue and costs directly attributable to the Division,
including an allocation of the costs of facilities, salaries, and employee
benefits. Specifically, the Division was allocated rent expense of $272,000 for
the period from January 1, 1996 to December 20, 1996.
All of the allocations reflected in the financial statements are based on
assumptions that management believes are reasonable under the circumstances.
However, these allocations and estimates are not necessarily indicative of the
costs that would have resulted if the Division had been operated on a stand-
alone basis during the period January 1, 1996 to December 20, 1996 nor are they
necessarily indicative of future costs to support the operations of the
Division.
Accounts Receivable and Concentration of Credit Risk
Financial instruments, which potentially subject the division to
concentrations of credit risk, consist primarily of its accounts receivable
from customers. At December 20, 1996, 83% of accounts receivable was due from
one customer. The Division generally does not require collateral from
customers. During the period from January 1, 1996 to December 20, 1996, the
Division did not record a provision for uncollectible accounts nor write off
any bad debts.
Property and Equipment
Property and equipment are stated at cost. Equipment allocated to the
Division and acquired under capital leases by the Parent is stated at the lower
of the present value of future minimum lease payments or fair value of the
equipment at the inception of the lease. Depreciation and amortization of
property and equipment, other than leasehold improvements, are provided over
the estimated useful live of the assets (ranging from three to seven years)
using the straight-line method. Leasehold improvements allocated to the
Division are amortized on a straight-line basis over the shorter of the
respective lease term or estimated useful life of the asset.
Revenue Recognition
Revenues relate primarily to order management and fulfillment services and
are recognized on a per transaction basis as the services are rendered.
Cost of revenues consist of direct labor costs for providing order management
and fulfillment services and, to a lesser extent, the cost of contracting for
third party call center and fulfillment center services.
F-28
<PAGE>
FULFILLMENT DIVISION OF ATHLETIC SUPPLY OF DALLAS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Division had one major customer, Sears, Roebuck, and Co ("Sears"), a
major national retailer that accounted for 98% of its revenues for the period
from January 1, 1996 to December 20, 1996.
Advertising Costs
Advertising costs are expensed as incurred. Amounts expensed were
approximately $43,000 for the period from January 1, 1996 to December 20, 1996.
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 financial statements and accompanying
notes. Actual results could differ from those estimates.
Income Taxes
During the period from January 1, 1996 to December 20, 1996, the Division was
not a taxable entity and was part of the taxable entity of the Parent. A
provision for income taxes on a pro forma basis as if the Division were liable
for federal and state income taxes as a taxable corporate entity for the period
January 1, 1996 to December 20, 1996 is presented. The pro forma income tax
provision has been computed by applying the anticipated effective tax rate of
approximately 37% to pretax income.
2. Detail of Certain Balance Sheet Accounts
Property and equipment are stated at cost and consist of the following at
December 20, 1996:
<TABLE>
<S> <C>
Furniture, fixtures, and equipment.............................. $ 2,496,670
Leasehold improvements.......................................... 113,218
-----------
2,609,888
Less accumulated depreciation and amortization.................. (1,498,605)
-----------
Net property and equipment...................................... $ 1,111,283
===========
</TABLE>
Accrued liabilities consists of the following at December 20, 1996:
<TABLE>
<S> <C>
Accrued salary expense............................................. $156,470
Accrued property taxes............................................. 55,145
Other.............................................................. 72,884
--------
Total accrued liabilities.......................................... $284,499
========
</TABLE>
3. Due from Athletic Supply of Dallas, LLC
The Division utilized the Parent's centralized cash management services and
processes related to receivables, payables, payroll, and other activities. The
amounts due from the Parent represent funding supplied to the Parent out of
excess working capital of the Division. There were no intercompany transfers
and no amounts were paid to the Parent in repayment of the financing previously
provided.
F-29
<PAGE>
[Company logo at center of page]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither ASD Systems, Inc. nor any underwriter has authorized anyone
to provide prospective investors with different or additional information.
This prospectus is not an offer to sell nor is it seeking an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
The information contained in this prospectus is correct only as of the date of
this prospectus, regardless of the time of the delivery of this prospectus or
any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to in-
form themselves about and to observe the restrictions of that jurisdiction re-
lated to this offering and the distribution of this prospectus.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements; Market Data........... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 31
Management............................................................... 43
Certain Transactions..................................................... 50
Principal Shareholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 60
Underwriting............................................................. 61
Legal Matters............................................................ 63
Experts.................................................................. 63
Additional Information................................................... 63
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1999 (25 days after the date of this Prospectus), all dealers
effecting transactions in these securities, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO]SM
ASD SYSTEMS, INC.
Common Stock
---------------------------
PRELIMINARY PROSPECTUS
---------------------------
Bear, Stearns & Co. Inc.
Prudential Securities
Friedman Billings Ramsey
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Set forth below are the expenses in connection with the issuance and
distribution of the securities being registered hereby other than the
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission and NASD registration fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $ 15,985
Nasdaq National Market listing fee.............................. 95,000
NASD fee........................................................ 6,250
Legal fees and expenses (other than Blue Sky fees and
expenses)...................................................... 350,000
Blue Sky fees and expenses...................................... 5,000
Printing and engraving expenses................................. 250,000
Accounting fees and expenses.................................... 250,000
Transfer Agent and Registrar fees and expenses.................. 15,000
Miscellaneous................................................... 112,765
----------
Total......................................................... $1,100,000
==========
</TABLE>
ASD Systems, Inc. will bear all of the foregoing fees and expenses.
Item 14. Indemnification of Directors and Officers.
The registrant has authority under Articles 2.02A.(16) and 2.02-1 of the
Texas Business Corporation Act to indemnify its directors and officers to the
extent provided for in such statute. The registrant's amended and restated
articles of incorporation permit indemnification of directors and officers to
the fullest extent permitted by law.
The Texas Business Corporation Act provides, in part, that a corporation may
indemnify a director or officer or other person who was, is, or is threatened
to be made a named defendant or respondent in a proceeding because the person
is or was a director, officer, employee or agent of the corporation, if it is
determined that such person:
. conducted himself in good faith;
. reasonably believed, in the case of conduct in his official capacity as
a director or officer of the corporation, that his conduct was in the
corporation's best interests, and, in all other cases, that his conduct
was at least not opposed to the corporation's best interests; and
. in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful.
A corporation may indemnify a person under the Texas Business Corporation Act
against judgments, penalties, including excise and similar taxes, fines,
settlement, and reasonable expenses actually incurred by the person in
connection with the proceeding. If the person is found liable to the
corporation or is found liable on the basis that personal benefit was
improperly received by the person, the indemnification is limited to reasonable
expenses actually incurred by the person in connection with the proceeding, and
shall not be made in respect of any proceeding in which the person shall have
been found liable for willful or intentional misconduct in the performance of
his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
II-1
<PAGE>
Article Twelve of the registrant's amended and restated articles of
incorporation provides that, to the fullest extent permitted by the Texas
Business Corporation Act as the same exists or as it may hereafter be amended,
no director of the registrant shall be personally liable to the registrant or
its shareholders for monetary damages for breach of fiduciary duty as a
director.
We have entered into indemnification agreements with each of our directors
that provide for indemnification and expense advancement to the fullest extent
permitted under the Texas Business Corporation Act.
Concurrent with the completion of this offering, the registrant will carry
directors and officers liability insurance with policy limits of $ .
Reference is made to Section of the underwriting agreement to be filed as
Exhibit 1.1 hereto, indemnifying the officers and directors of the registrant
against certain liabilities.
Item 15. Recent Sales of Unregistered Securities.
Since its formation on January 1, 1998, the registrant has sold the following
securities:
. On January 1, 1998, the registrant issued 6,000,000 shares of common
stock to ASD Partners, Ltd., a predecessor to the business of the
registrant, in exchange for the assignment of substantially all of the
assets and liabilities of ASD Partners, Ltd.
. In January and February 1999, the registrant issued an aggregate of
4,500,000 shares of common stock for an aggregate purchase price of
$4,500,000 to the Staubach affiliated shareholders and other independent
investors.
. On February 5, 1999, the registrant issued various affiliates of CKM
Capital LLC stock purchase warrants exercisable for an aggregate of
1,000,000 shares of Series B non-voting common stock at the following
exercise prices: 500,000 at $1.00 per share, 300,000 at $2.00 per share
and 200,000 at $3.00 per share. These warrants were issued in connection
with the services performed by CKM for the registrant in the private
placement referred to in the second paragraph above. CKM also received
$281,250 as additional consideration for services rendered. Upon
completion of this offering, the warrants will be exercisable for a like
number of shares of our common stock, without modification to the
exercise price.
. On February 10, 1999, the registrant granted an option exercisable for
957,500 shares of Series B non-voting common stock to Mr. Paul Jennings
at an exercise price of $1.00 per share. Upon completion of this
offering, this option shall be exercisable for a like number of shares
of our common stock, without modification to the exercise price.
. On March 12, 1999, the registrant granted various options exercisable
for an aggregate of 50,000 shares of Series B non-voting common stock to
directors, officers and consultants of the registrant pursuant to its
Long-Term Incentive Plan, each of which had an exercise price of $1.00
per share. Upon completion of this offering, these options shall be
exercisable for a like number of shares of our common stock, without
modification to the exercise price.
. On March 13, 1999, the registrant granted incentive stock options for an
aggregate of 410,000 shares of Series B non-voting common stock to the
employees of the registrant pursuant to its Long-Term Incentive Plan,
each of which had an exercise price of $1.00 per share. Upon completion
of this offering, these options shall be exercisable for a like number
of shares of our common stock, without modification to the exercise
price.
. On April 30, 1999, the registrant granted incentive stock options for
40,000 shares of common stock to officers of the registrant pursuant to
its Long-Term Incentive Plan at an exercise price of $1.00 per share.
Upon completion of this offering, these options shall be exercisable for
a like number of shares of our common stock, without modification to the
exercise price.
II-2
<PAGE>
. On August 23, 1999, the registrant issued (1) 1,111,111 shares of Series
A convertible preferred stock, (2) 1,111,111 shares of Series B
redeemable preferred stock and (3) common stock purchase warrants
exercisable for a number of shares of common stock determinable by
reference to our initial public offering price, to VantagePoint Venture
Partners III (Q), L.P. and VantagePoint Communications Partners, L.P.
for an aggregate purchase price of $12,000,000. All of the shares of the
Series A convertible preferred stock are convertible into shares of
common stock contemporaneously with the closing of this offering and all
of the shares of Series B redeemable preferred stock will be redeemed
for cash upon completion of this offering. The common stock purchase
warrants are exercisable for 130% of the number of shares of common
stock received upon conversion at an exercise price equal to 110% of the
conversion price.
All transactions described above were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of such act as
transactions by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the registrant, to information about the
registrant.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of ASD Systems, Inc.
3.2 Amended and Restated Bylaws of ASD Systems, Inc.
4.1 Form of Common Stock Certificate*
4.2 1999 Long-Term Incentive Plan for ASD Systems, Inc.
4.3 Form of Stock Option Agreement under 1999 Long-Term Incentive Plan
4.4 401(k) Plan for ASD Systems, Inc.
5.1 Opinion of Arter & Hadden LLP as to legality of securities being offered*
10.1 Agreement, dated January 4, 1995, between Sears, Roebuck and Co. and ASD
Systems, Inc., as amended June 11, 1998 and April 20, 1999+
10.2 Form of ASD Certified Service Provider Agreement
10.3 Revolving Credit Agreement between ASD Systems, Inc. and Comerica Bank-
Texas, dated May 13, 1999
10.4 Forms of Employee Nondisclosure Agreements
10.5 Net Commercial Lease Agreement, dated November 1, 1986, between Norman
Charney and ASD Systems, Inc., as amended May 31, 1991 and March 15, 1996
10.6 Multi-Tenant Industrial Triple Net Lease Agreement, dated January 1,
1998, between ASD Systems, Inc. and Catellus Development Corporation
10.7 Real Property Lease Agreement, dated May 1, 1999, between ASD Systems,
Inc. and AMB Property II, L.P.
10.8 Employment Agreement, dated as of December 14, 1998, between ASD Systems,
Inc. and Norman Charney
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.9 Employment Agreement, dated as of October 14, 1997, between ASD
Partners, Inc. and Paul M. Jennings
10.10 Form of Indemnification Agreements with directors
10.11 Stock Option Agreement dated as of February 10, 1999 between ASD Systems
and Paul M. Jennings
10.12 Amended and Restated Shareholders' Agreement, dated as of August 23,
1999, between ASD Systems, Inc., and certain holders of equity
securities of ASD Systems, Inc.
10.13 Securities Purchase Agreement, dated as of August 23, 1999, between ASD
Systems, Inc., VantagePoint Venture Partners III (Q), L.P., and
VantagePoint Communications Partners, L.P.
10.14 Form of Warrant granted to VantagePoint Venture Partners III (Q), L.P.
and VantagePoint Communications Partners, L.P.
10.15 Form of Warrant granted to affiliates of CKM Capital LLC
23.1 Consent of Arter & Hadden LLP (included in their opinion filed as
Exhibit 5.1)*
23.2 Consent of Ernst and Young LLP
24.1 Power of Attorney (included on Page II-6)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
+ Confidential treatment has been requested with respect to certain provisions
of this agreement.
(b) Financial Statement Schedules
No financial statement schedules of ASD Systems are included in Part II of
this registration statement because the information required to be set forth
therein is not applicable or is shown in the Consolidated Financial Statements
or the Notes thereto.
Item 17. Undertakings.
(f) Equity offerings of nonreporting registrants. 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.
(h) Request for acceleration of effective date. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder 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.
(i) Rule 430A. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as a part
of this registration statement in reliance upon Rule
II-4
<PAGE>
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 purposes of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Garland,
State of Texas, on August 26, 1999.
ASD Systems, Inc.
/s/ Norman Charney
By: _________________________________
Norman Charney
Chief Executive Officer and
President
POWER OF ATTORNEY
Know all persons by these presents that each individual whose signature
appears below constitutes and appoints Mr. Norman Charney and Mr. Paul M.
Jennings and both of them, his true and lawful attorneys-in-fact and agents,
with full power of substitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement, and to sign any
registration statement for the same offering covered by this registration
statement that is to be effective upon filing pursuant to Rule 462 promulgated
under the Securities Act, and all post-effective amendments thereto, and to
file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents or any of them, or his or their substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on the 26th day of August, 1999, below
by or on behalf of the following persons in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C> <C>
/s/ Norman Charney Chairman of the Board, Chief
______________________________________ Executive Officer and President
Norman Charney (Principal Executive Officer)
/s/ Paul M. Jennings Chief Operating Officer, Chief
______________________________________ Information Officer and Director
Paul M. Jennings
/s/ James H. McAlister Vice President--Finance (Acting
______________________________________ Principal Financial and Accounting
James H. McAlister Officer)
/s/ Jonathan R. Bloch Director
______________________________________
Jonathan R. Bloch
/s/ Alan E. Salzman Director
______________________________________
Alan E. Salzman
/s/ Paul G. Sherer Director
______________________________________
Paul G. Sherer
/s/ Kevin P. Yancy Director
______________________________________
Kevin P. Yancy
</TABLE>
II-6
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
Pursuant to the provisions of Article 4.07 of the Texas Business
Corporation Act, ASD Systems, Inc., a Texas corporation (the "Corporation"),
hereby adopts these Amended and Restated Articles of Incorporation (the
"Restated Articles"), which accurately reflect the original Articles of
Incorporation and all amendments thereto that are in effect to date
(collectively, the "Original Articles") and as further amended by such Restated
Articles as hereinafter set forth and which contain no other change in any
provision thereof.
ARTICLE I
The name of the Corporation is ASD Systems, Inc.
ARTICLE II
The Original Articles are amended by these Restated Articles as follows:
(a) ARTICLE FOUR is amended in its entirety to (i) eliminate the designations of
two separate series of common stock and to increase the number of authorized
shares of common stock from 20,000,000 to 50,000,000, (ii) to authorize up to
7,500,000 shares of a preferred stock of which 1,111,111 shares are designated
Series A Preferred Stock, 1,111,111 shares are designated Series B Preferred
Stock, and 3,200,000 shares are designated as Series C Preferred Stock, each
such series with certain rights and preferences, and (iii) to vest in the Board
of Directors the authority to issue additional shares of preferred stock in one
or more series and to set the designations, rights and preferences of the
preferred stock; (b) ARTICLE TEN is amended to provide that upon the closing and
funding of an initial public offering, the provisions of ARTICLE TEN authorizing
action of the shareholders by consent of the shareholders holding the number of
shares necessary to approve such action at a meeting of the shareholders shall
become null and void and of no force or effect, and from such date the
shareholders may act by consent only if signed by the holder or holders of all
shares entitled to vote with respect to the action that is the subject of the
consent; (c) ARTICLE THIRTEEN is amended in its entirety to provide that
contracts or transactions between the Corporation and one or more of its
directors or officers, or any other corporation or organization in which its
directors or officers are directors or officers or have a financial interest,
shall not be void or voidable solely for that reason if certain conditions are
met; (d) ARTICLE FOURTEEN is added to classify the Board of Directors into three
(3) classes as nearly equal in number as possible, each of which, after an
interim arrangement, would serve for three (3) years, with one class being
elected each year, upon the closing and funding of an underwritten initial
public offering by the Corporation of shares of Common stock pursuant to an
effective registration statement under the Securities Act of 1933, as amended,
or any comparable statement under any similar federal statute then in force; (e)
ARTICLE FIFTEEN is added to provide that a special meeting of the shareholders
may only be called by the President, Chief Executive Officer, or Board of
Directors of the Corporation or such other person as may be authorized by the
Bylaws or by the holders of not less than 25% of all shares entitled to vote at
such meeting; and (f) ARTICLE SIXTEEN is added regarding adoption, revision and
repeal of Bylaws.
RESTATED ARTICLES OF INCORPORATION - Page 1
<PAGE>
ARTICLE III
Each such amendment made by the Restated Articles has been effected in
conformity with the provisions of the Texas Business Corporation Act and the
Original Articles and each amendment made by the Restated Articles was duly
adopted by the shareholders of the Corporation on August 22, 1999.
ARTICLE IV
The number of shares outstanding at the time of adoption of the Restated
Articles was 10,500,000 shares of Series A Common Stock, all of which shares of
Series A Common Stock were entitled to vote on the Restated Articles as so
amended. The holders of at least two thirds of the shares outstanding and
entitled to vote on the Restated Articles have signed a consent or consents
pursuant to Article 9.10 and the Original Articles adopting the Restated
Articles and any written notice required by Article 9.10 has been given.
ARTICLE V
The Original Articles are hereby superseded by the following Restated
Articles, which accurately copy the entire text thereof as amended as set forth
above:
ASD SYSTEMS, INC.
ARTICLE ONE
The name of the Corporation is ASD Systems, Inc.
ARTICLE TWO
The period of duration of the Corporation is perpetual.
ARTICLE THREE
The purpose for which the Corporation is organized is the transaction of
any and all lawful business for which corporations may be incorporated under the
Texas Business Corporation Act.
ARTICLE FOUR
The aggregate number of shares which the Corporation shall have the
authority to issue is 57,500,000 shares, consisting of (i) 50,000,000 shares of
Common Stock, par value $.0001 per share (the "Common Stock"), and (ii)
------------
7,500,000 shares of Preferred Stock, par value $.0001 per share (the "Preferred
---------
Stock").
- -----
Each share of the Corporation's Series A Common Stock issued and
outstanding immediately prior to the taking effect of this ARTICLE FOUR is
hereby changed into one share of Common Stock.
RESTATED ARTICLES OF INCORPORATION - Page 2
<PAGE>
The aggregate stated capital of the common stock issued and outstanding
upon the taking effect of this ARTICLE FOUR shall be the same as the aggregate
stated capital of the common stock issued and outstanding immediately prior to
the taking effect of this ARTICLE FOUR.
Each certificate representing one or more shares of Series A Common Stock
issued and outstanding immediately prior to the taking effect of this ARTICLE
FOUR shall thereafter represent the same number of shares of Common Stock; and
the Corporation shall issue to or upon the order of each holder of record, as of
the close of business on the day this ARTICLE FOUR takes effect, an additional
certificate or certificates representing one share of Common Stock for each
share of Series A Common Stock theretofore represented by such outstanding share
certificate.
The following is a statement of the designations, preferences, limitations,
and relative rights, including voting rights, in respect of the classes of stock
of the Corporation and of the authority with respect thereto expressly vested in
the Board of Directors of the Corporation:
COMMON STOCK
A. Each share of Common Stock of the Corporation shall have identical
rights and privileges in every respect. The holders of shares of Common Stock
shall be entitled to vote upon all matters submitted to a vote of the
shareholders of the Corporation and shall be entitled to one vote for each share
of Common Stock held.
B. Subject to the prior rights and preferences, if any, applicable to
shares of the Preferred Stock or any series thereof, the holders of shares of
the Common Stock shall be entitled to receive such dividends (payable in cash,
stock, or otherwise) when, if and as may be declared thereon by the Board of
Directors at any time and from time to time out of any funds of the Corporation
legally available therefor.
C. In the event of any voluntary or involuntary liquidation, dissolution,
or winding-up of the Corporation, after distribution in full of the preferential
amounts, if any, to be distributed to the holders of shares of the Preferred
Stock or any series thereof, the holders of shares of the Series A Preferred
Stock (as defined below) and Series B Preferred Stock (as defined below) and the
Common Stock shall be entitled to receive all of the remaining assets of the
Corporation available for distribution to its shareholders, pro rata based on
the number of shares of Common Stock held by each (assuming full conversion of
such Series A Preferred Stock). A liquidation, dissolution, or winding-up of
the Corporation, as such terms are used in this paragraph C shall be deemed to
be occasioned by or include (i) the acquisition of the Corporation by another
entity by means of any transaction or series of related transactions (including,
without limitation, any reorganization, merger or consolidation but, excluding
any merger effected exclusively for the purpose of changing the domicile of the
Corporation); or (ii) a sale of all or substantially all of the assets of the
Corporation; unless the Corporation's shareholders of record as constituted
------
immediately prior to such acquisition or sale will, immediately after such
acquisition or sale (by virtue of securities issued as consideration for the
Corporation's acquisition or sale or otherwise) hold at least 50% of the voting
power of the surviving or acquiring entity (such acquisition or sale being
referred to herein as an "Acquisition").
-----------
RESTATED ARTICLES OF INCORPORATION - Page 3
<PAGE>
PREFERRED STOCK
D. Subject to compliance with applicable rights which have been or may be
granted to the Preferred Stock or series thereof in a Certificate of Designation
or the Corporation's Articles of Incorporation ("Protective Provisions"), shares
---------------------
of the Preferred Stock may be issued from time to time in one or more series,
the shares of each series to have such designations, preferences, limitations,
and relative rights, including voting rights, as shall be stated and expressed
herein or in a resolution or resolutions providing for the issue of such series
adopted by the Board of Directors of the Corporation. Each such series of
Preferred Stock shall be designated so as to distinguish the shares thereof from
the shares of all other series and classes. The Board of Directors of the
Corporation is hereby expressly authorized, subject to the limitations provided
by law, to establish and designate series of the Preferred Stock, to fix the
number of shares constituting each series, and to fix the designations and the
preferences, limitations, and relative rights, including voting rights, of the
shares of each series and the variations of the relative rights and preferences
as between series, and to increase and to decrease the number of shares
constituting each series, provided that the Board of Directors may not decrease
the number of shares within a series to less than the number of shares within
such series that are then issued. The relative powers, rights, preferences, and
limitations may vary between and among series of Preferred Stock in any and all
respects so long as all shares of the same series are identical in all respects,
except that shares of any such series issued at different times may have
different dates from which dividends thereon cumulate. Subject to applicable
Protective Provisions, the authority of the Board of Directors of the
Corporation with respect to each series shall include, but shall not be limited
to, the authority to determine the following:
(a) The designation of such series;
(b) The number of shares initially constituting such series;
(c) The rate or rates and the times at which dividends on the shares
of such series shall be paid, the periods in respect of which dividends are
payable, the conditions upon such dividends, the relationship and
preferences, if any, of such dividends to dividends payable on any other
class or series of shares, whether or not such dividends shall be
cumulative, partially cumulative, or noncumulative, if such dividends shall
be cumulative or partially cumulative, the date or dates from and after
which, and the amounts in which, they shall accumulate, whether such
dividends shall be share dividends, cash or other dividends, or any
combination thereof, and if such dividends shall include share dividends,
whether such share dividends shall be payable in shares of the same or any
other class or series of shares of the Corporation (whether now or
hereafter authorized), or any combination thereof, and the other terms and
conditions, if any, applicable to dividends on shares of such series;
(d) Whether or not the shares of such series shall be redeemable or
subject to repurchase at the option of the Corporation or the holder
thereof or upon the happening of a specified event, if such shares shall be
redeemable, the terms and conditions of such redemption, including but not
limited to the date or dates upon or after which such shares shall be
redeemable, the amount per share which shall be payable upon such
redemption,
RESTATED ARTICLES OF INCORPORATION - Page 4
<PAGE>
which amount may vary under different conditions and at different
redemption dates, and whether such amount shall be payable in cash,
property, or rights, including securities of the Corporation or another
corporation;
(e) The rights of the holders of shares of such series (which may vary
depending upon the circumstances or nature of such liquidation,
dissolution, or winding up) in the event of the voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation and the
relationship or preference, if any, of such rights to rights of holders of
stock of any other class or series.
(f) Whether or not the shares of such series shall have voting powers
and, if such shares shall have such voting powers, the terms and conditions
thereof, including, but not limited to, the right of the holders of such
shares to vote as a separate class either alone or with the holders of
shares of one or more other classes or series of stock and the right to
have more (or less) than one vote per share; provided, however, that the
right to cumulate votes for the election of directors is expressly denied
and prohibited;
(g) Whether or not a sinking fund shall be provided for the redemption
of the shares of such series and, if such a sinking fund shall be provided,
the terms and conditions thereof;
(h) Whether or not a purchase fund shall be provided for the shares of
such series and, if such a purchase fund shall be provided, the terms and
conditions thereof;
(i) Whether or not the shares of such series, at the option of either
the Corporation or the holder or upon the happening of a specified event,
shall be convertible into stock of any other class or series and, if such
shares shall be so convertible, the terms and conditions of conversion,
including, but not limited to, any provision for the adjustment of the
conversion rate or the conversion price;
(j) Whether or not the shares of such series, at the option of either
the Corporation or the holder or upon the happening of a specified event,
shall be exchangeable for securities, indebtedness, or property of the
Corporation and, if such shares shall be so exchangeable, the terms and
conditions of exchange, including, but not limited to, any provision for
the adjustment of the exchange rate or the exchange price; and
(k) Any other preferences, limitations, and relative rights as shall
not be inconsistent with the provisions of this Article Four or the
limitations provided by law.
E. Except as otherwise required by law, in the Corporation's Articles of
Incorporation, or in any resolution of the Board of Directors creating any
series of Preferred Stock, the holders of shares of Preferred Stock and all
series thereof who are entitled to vote shall vote together with the holders of
shares of Common Stock, and not separately by class.
F. One Million One Hundred Eleven Thousand One Hundred Eleven (1,111,111)
shares of authorized Preferred Stock are hereby designated as Series A Preferred
Stock (the "Series A Preferred Stock"). The Series A Preferred Stock shall have
------------------------
the powers, preferences and
RESTATED ARTICLES OF INCORPORATION - Page 5
<PAGE>
rights, and the qualifications, limitations and restrictions, in respect of each
class of stock of the Corporation, specified herein.
1. Dividend Rights.
---------------
(a) Subject to the rights of series of Preferred Stock which may from
time to time come into existence, the holders of shares of Series A
Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the
holder thereof to receive, directly or indirectly, additional shares
of Common Stock of the Corporation) on the Common Stock or Series C
Preferred Stock of the Corporation, but pari pasu with the Series B
Preferred Stock, when, as and if declared by the Board of Directors at
the rate of $0.54 per share per annum (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like
after the date upon which each share of Series A Preferred Stock was
first issued (the "Original Issue Date")) and in addition (as
-------------------
determined on a per annum basis and an as-converted basis for the
Series A Preferred Stock), an amount equal to the cash dividends paid
on any other outstanding shares of the Corporation. Such dividends
shall not be cumulative. The holders of the outstanding Series A
Preferred Stock can waive any dividend preference that such holders
shall be entitled to receive under this Section 1 upon the affirmative
vote or written consent of the holders of at least a majority of the
Series A Preferred Stock then outstanding.
(b) In the event the Corporation shall declare a distribution payable
in securities of other persons, evidences of indebtedness issued by
the Corporation or other persons, assets (excluding cash dividends) or
options or rights to purchase any such securities or evidences of
indebtedness, then, in each such case the holders of the Series A
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of the Series A Preferred Stock
were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series A Preferred Stock are
convertible as of the record date fixed for the determination of the
holders of Common Stock of the Corporation entitled to receive such
distribution.
(c) Any dividend or distribution which is declared by the Corporation
and payable with assets of the Corporation other than cash shall be
governed by the provisions of subsection (2)(c)(ii) of this Section F
of Article Four.
2. Liquidation Preference
-----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, subject to the rights of
series of Preferred Stock that may from time to time come into
existence, the holders of Series A Preferred Stock shall be entitled
to receive, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of Common Stock by reason of
their ownership thereof, but pari pasu with the Series B
RESTATED ARTICLES OF INCORPORATION - Page 6
<PAGE>
Preferred Stock, an amount per share equal to $5.40 per share of
Series A Preferred Stock (as adjusted for any stock dividends,
combinations or splits with respect to such shares) (the "Original
--------
Series A Issue Price"), plus all declared but unpaid dividends on such
--------------------
share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series A Preferred Stock shall be
insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then, subject to the rights of series
of Preferred Stock that may from time to time come into existence, the
entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the
Series A Preferred Stock and Series B Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to
receive.
(b) After the distribution described in subsection (a) above has been
paid, subject to the rights of series of Preferred Stock which may
from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be
distributed among the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Common Stock pro rata
based on the number of shares of Common Stock held by each (assuming
full conversion of all such Series A and Series B Preferred Stock).
(c) (i) For purposes of this Section 2, a liquidation, dissolution
or winding up of the Corporation shall be deemed to be
occasioned by, or to include an Acquisition.
(ii) In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as
follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability:
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the
average of the closing prices of the securities on
such exchange over the thirty-day period ending
three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing
bid or sale prices (whichever is applicable) over
the thirty-day period ending three (3) days prior
to the closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as
mutually determined by the Corporation and the
holders of at
RESTATED ARTICLES OF INCORPORATION - Page 7
<PAGE>
least a majority of the voting power of all the
then outstanding shares of Series A Preferred
Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free
marketability (other than restrictions arising solely
by virtue of a shareholder's status as an affiliate or
former affiliate) shall be to make an appropriate
discount from the market value determined as above in
(A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of
the voting power of all the then outstanding shares of
Series A Preferred Stock.
(iii) In the event the requirements of this subsection 2(c)
are not complied with, the Corporation shall forthwith
either:
(A) cause such closing to be postponed until such time as
the requirements of this Section 2 have been complied
with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the Series
A Preferred Stock shall revert to and be the same as
such rights, preferences and privileges existing
immediately prior to the date of the first notice
referred to in subsection 2(c)(iv) hereof.
(iv) The Corporation shall give each holder of record of Series A
Preferred Stock written notice of such impending transaction
not later than the date the Corporation shall give written
notice to the shareholders of the Corporation of the
shareholders meeting called to approve such transactions or
at which such transaction will be proposed for approval by
the shareholders, and shall also notify such holders in
writing of the final approval of such transaction. The
first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions
of this Section 2, and the Corporation shall thereafter give
such holders prompt notice of any material changes.
3. Conversion. The holders of the Series A Preferred Stock shall have
----------
conversion rights as follows (the "Conversion Rights"):
-----------------
(a) Right to Convert. Each share of Series A Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after
the date of issuance of such share at the office of the Corporation or
any transfer agent for such stock, into such number of fully paid and
nonassessable shares of Common Stock as is determined by dividing the
Original Series A Issue Price (as set forth in Section 2(a) above), by
the Conversion Price (as defined below) applicable to
RESTATED ARTICLES OF INCORPORATION - Page 8
<PAGE>
such share, determined as hereafter provided, in effect on the date
the certificate is surrendered for conversion. The initial Conversion
Price per share for shares of Series A Preferred Stock shall be the
Original Series A Issue Price; provided, however, that the Conversion
Price for the Series A Preferred Stock shall be subject to adjustment
as set forth in subsection 3(d).
(b) Automatic Conversion.
--------------------
(i) Each share of Series A Preferred Stock shall automatically
be converted into shares of Common Stock at the Conversion
Price at the time in effect (including by application of
Section (d)(v) hereof) upon the earlier of (x) the date
specified by vote or written consent or agreement of at
least two thirds (2/3) of the shares of Series A Preferred
Stock then outstanding or (y) at the time of the closing of
the Corporation's sale of its Common Stock in a bona fide,
underwritten public offering pursuant to an effective
registration statement under the Securities Act of 1933, (an
"Initial Public Offering"). Upon such automatic conversion,
-----------------------
any declared and unpaid dividends shall be paid on such
converted shares in accordance with subsection 3(c)(ii).
(ii) Upon the closing of an Initial Public Offering, the
outstanding shares of Series A Preferred Stock to be
converted shall be converted automatically without any
further action by the holder thereof and whether or not the
certificates representing such shares are surrendered to the
Corporation or any transfer agent for the Series A Preferred
Stock; provided, however, that the Corporation shall not be
obligated to issue certificates evidencing the shares of
Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series A Preferred
Stock are either delivered to the Corporation or its
transfer agent as provided below, or the holder notifies the
Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an
agreement reasonably satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in
connection with such certificates.
(c) Mechanics of Conversion.
-----------------------
(i) Before any holder of Series A Preferred Stock shall be
entitled to convert the same into shares of Common Stock
pursuant to subsection 3(a), he shall surrender the
certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to
the Corporation at its principal corporate office, of the
election to convert the same and shall state therein the
number of shares of Series A Preferred Stock being converted
and the name or names in which the certificate or
certificates for shares of
RESTATED ARTICLES OF INCORPORATION - Page 9
<PAGE>
Common Stock are to be issued. The Corporation shall, as
soon as practicable thereafter, issue and deliver at such
office to such holder of Series A Preferred Stock, or to the
nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to
which such holder shall be entitled as aforesaid and shall
promptly pay in cash or, to the extent sufficient funds are
not then legally available therefor, Common Stock (at such
Common Stock's fair market value determined by the Board of
Directors of the Corporation as of the date of such
conversion), any declared and unpaid dividends on the shares
of Series A Preferred Stock being converted. Such conversion
shall be deemed to have been made immediately prior to the
close of business on the date of such surrender of the
shares of Series A Preferred Stock to be converted, or at
the time of the Initial Public Offering , or Acquisition, as
applicable and the person or persons entitled to receive the
shares of Common Stock issuable upon such conversion shall
be treated for all purposes as the record holder or holders
of such shares of Common Stock as of such date.
(ii) Upon the occurrence of an automatic conversion of the Series
A Preferred Stock pursuant to subsection 3(b), the holder
shall surrender the certificates representing such shares of
Series A Preferred Stock at the office of the Corporation or
any transfer agent for the Series A Preferred Stock.
Thereupon, there will be issued and delivered to the holder
promptly at such office and in its name as shown on such
surrendered certificate or certificates (or in the name of
its nominee or nominees), a certificate or certificates for
the number of shares of Common Stock into which the shares
of the Series A Preferred Stock surrendered were convertible
on the date on which such automatic conversion occurred, and
the Corporation shall promptly pay in cash or, at the option
of the Corporation, Common Stock (at such Common Stock's
fair market value determined by the Board of Directors as of
the date of such conversion), or, at the option of the
Corporation, both, all declared and unpaid dividends on the
shares of the Series A Preferred Stock being converted, to
and including the date of such conversion.
(d) Conversion Price Adjustments of Series A Preferred Stock for
------------------------------------------------------------
Certain Dilutive Issuances, Splits, Combinations and Other
----------------------------------------------------------
Matters. The Conversion Price of the Series A Preferred Stock
-------
shall be subject to adjustment from time to time as follows:
(i) (A) If the Corporation shall issue, after the Original
Issue Date, any Additional Stock (as defined below)
without consideration or for a consideration per share
less than the Conversion Price for the Series A
Preferred Stock in effect immediately prior to the
issuance of such Additional Stock, the Conversion Price
for the Series A Preferred Stock in
RESTATED ARTICLES OF INCORPORATION - Page 10
<PAGE>
effect immediately prior to each such issuance shall
forthwith (except as otherwise provided in this clause
(i)) be adjusted to a price determined by multiplying
such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Series A
Preferred Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that
the aggregate consideration received by the Corporation
for such issuance would purchase at such Conversion
Price; and the denominator of which shall be the number
of shares of Series A Preferred Stock outstanding
immediately prior to such issuance plus the number of
shares of such Additional Stock (as hereinafter
defined).
(B) No adjustment of the Conversion Price for the Series A
Preferred Stock shall be made in an amount less than
one cent per share, provided that any adjustments which
are not required to be made by reason of this sentence
shall be carried forward and shall be either taken into
account in any subsequent adjustment made prior to
three (3) years from the date of the event giving rise
to the adjustment being carried forward, or shall be
made at the end of three (3) years from the date of the
event giving rise to the adjustment being carried
forward. Except to the limited extent provided for in
subsections (E)(3) and (E)(4), no adjustment of such
Conversion Price pursuant to this subsection 3(d)(i)
shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately
prior to such adjustment.
(C) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of
cash received by the Corporation.
(D) In the case of the issuance of the Common Stock for a
consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the
fair value thereof as determined in good faith by the
Board of Directors.
(E) In the case of the issuance of options to purchase or
rights to subscribe for Common Stock, securities by
their terms convertible into or exchangeable for Common
Stock or options to purchase or rights to subscribe for
such convertible or exchangeable securities, the
following provisions shall apply for all purposes of
this subsection 3(d)(i) and subsection 3(d)(ii):
RESTATED ARTICLES OF INCORPORATION - Page 11
<PAGE>
(1) The aggregate maximum number of shares of Common
Stock deliverable upon exercise of such options to
purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time
such options or rights were issued and for a
consideration equal to the consideration
(determined in the manner provided in subsections
3(d)(i)(C) and (d)(i)(D)), if any, received by the
Corporation upon the issuance of such options or
rights plus the minimum exercise price provided in
such options or rights for the Common Stock
covered thereby.
(2) The aggregate maximum number of shares of Common
Stock deliverable upon conversion of or in
exchange for any such convertible or exchangeable
securities or upon the exercise of options to
purchase or rights to subscribe for such
convertible or exchangeable securities and
subsequent conversion or exchange thereof shall be
deemed to have been issued at the time such
securities were issued or such options or rights
were issued and for a consideration equal to the
consideration, if any, received by the Corporation
for any such securities and related options or
rights (excluding any cash received on account of
accrued interest or accrued dividends), plus the
minimum additional consideration, if any, to be
received by the Corporation upon the conversion or
exchange of such securities or the exercise of any
related options or rights (the consideration in
each case to be determined in the manner provided
in subsections 3(d)(i)(C) and (d)(i)(D)).
(3) In the event of any change in the number of shares
of Common Stock deliverable or in the
consideration payable to the Corporation upon
exercise of such options or rights or upon
conversion of or in exchange for such convertible
or exchangeable securities, including, but not
limited to, a change resulting from the
antidilution provisions thereof, the Conversion
Price of the Series A Preferred Stock to the
extent in any way affected by or computed using
such options, rights or securities, shall be
recomputed to reflect such change, but no further
adjustment shall be made for the actual issuance
of Common Stock or any payment of such
consideration upon the exercise of
RESTATED ARTICLES OF INCORPORATION - Page 12
<PAGE>
any such options or rights or the conversion or
exchange of such securities.
(4) Upon the expiration of any such options or rights,
the termination of any such rights to convert or
exchange or the expiration of any options or
rights related to such convertible or exchangeable
securities, the Conversion Price of the Series A
Preferred Stock, to the extent in any way affected
by or computed using such options, rights or
securities or options or rights related to such
securities, shall be recomputed to reflect the
issuance of only the number of shares of Common
Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the
exercise of such options or rights, upon the
conversion or exchange of such securities or upon
the exercise of the options or rights related to
such securities.
(5) The number of shares of Common Stock deemed issued
and the consideration deemed paid therefor
pursuant to subsections 3(d)(i)(E)(1) and (2)
shall be appropriately adjusted to reflect any
change, termination or expiration of the type
described in either subsection 3(d)(i)(E)(3) or
(4).
(ii) "Additional Stock" shall mean any shares of Common Stock
issued (or deemed to have been issued pursuant to subsection
3(d)(i)(E)) by the Corporation after the Original Issue Date
other than
(A) shares Common Stock issued pursuant to a transaction
described in subsection 3(d)(iii) hereof,
(B) up to 2,157,500 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or the like) of Common Stock or
Series C Preferred Stock issued or issuable to
employees, directors or consultants of the Corporation
pursuant to stock purchase, stock option, or other
agreements approved by the Board of Directors,
(C) up to 1,000,000 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or the like) of Common Stock or
Series C Preferred Stock issued or issuable pursuant to
outstanding warrants, existing on the Original Issue
Date and such number of shares issuable upon exercise
of warrants initially issued to holders of Series A
Preferred Stock or Series B Preferred Stock, and
RESTATED ARTICLES OF INCORPORATION - Page 13
<PAGE>
(D) shares of Common Stock issued upon conversion of the
Series A Preferred Stock or the Series C Preferred
Stock.
(iii) In the event the Corporation should at any time or from
time to time after the Original Issue Date fix a record date
for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or
other distribution payable in additional shares of Common
Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter
referred to as "Common Stock Equivalents") without payment
------------------------
of any consideration by such holder for the additional
shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable
upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution,
split or subdivision if no record date is fixed), the
Conversion Price for the Series A Preferred Stock shall be
appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and
those issuable with respect to such Common Stock Equivalents
with the number of shares issuable with respect to Common
Stock Equivalents determined from time to time in the manner
provided for deemed issuances in subsection 3(d)(i)(E).
(iv) If the number of shares of Common Stock outstanding at any
time after the Original Issue Date is decreased by a
combination of the outstanding shares of Common Stock,
reverse stock split or the like, then, following the record
date of such combination, the Conversion Price for the
Series A Preferred Stock shall be appropriately increased so
that the number of shares of Common Stock issuable on
conversion of each share of such series shall be decreased
in proportion to such decrease in outstanding shares.
(v) Initial Public Offering or Acquisition. In the event of an
--------------------------------------
Initial Public Offering or Acquisition, the Conversion Price
of the Series A Preferred Stock will be subject to
adjustment based on the issue price to the public of the
Corporation's Common Stock in the Initial Public Offering
(the "Issue Price") or the price determined by dividing the
aggregate consideration paid and liabilities assumed (but
net of liabilities not assumed) in the Acquisition by the
total shares of Common stock of the Corporation (calculated
on a fully diluted basis) outstanding at the time of the
closing of the Acquisition (the "Acquisition Price"), as
-----------------
follows:
RESTATED ARTICLES OF INCORPORATION - Page 14
<PAGE>
(A) The Conversion Price will be adjusted downward at the
time of an Initial Public Offering to a price, if less than
the Conversion Price then in effect, equal to 1/3 of the
Issue Price, provided that (assuming there has not
previously been an Acquisition), if an Initial Public
Offering does not occur on or prior to January 1, 2000, the
Conversion Price will be adjusted downward to a fixed price,
if less than the Conversion Price then in effect, equal to
$2.93 (as adjusted to reflect stock dividends, stock splits,
combinations, recapitalizations or the like); pursuant to
the provisions hereof.
(B) The Conversion Price will be adjusted downward at the
time of an Acquisition to a price, if less than the
Conversion Price then in effect, equal to 1/3 of the
Acquisition Price, provided that (assuming there has not
previously been an Initial Public Offering), if an
Acquisition does not occur on or prior to January 1, 2000,
the Conversion Price will be adjusted downward to a fixed
price, if less than the Conversion Price then in effect,
equal to $2.93 (as adjusted to reflect stock dividends,
stock splits, combinations, recapitalizations or the like).
(e) Other Distributions. In the event the Corporation shall declare a
-------------------
distribution payable in securities, evidences of indebtedness issued
by the Corporation or other persons, assets (excluding cash dividends)
or options or rights not referred to in subsection 3(d)(iii), then, in
each such case for the purpose of this subsection 3(e), the holders of
the Series A Preferred Stock shall be entitled to a proportionate
share of any such distribution as though they were the holders of the
number of shares of Common Stock of the Corporation into which their
shares of Series A Preferred Stock are convertible as of the record
date fixed for the determination of the holders of Common Stock of the
Corporation entitled to receive such distribution.
(f) Recapitalizations. If at any time or from time to time there
-----------------
shall be a recapitalization of the Common Stock (other than a
subdivision, combination or merger or sale of assets transaction
provided for elsewhere in this Section 3 or Section 2) provision shall
be made so that the holders of the Series A Preferred Stock shall
thereafter be entitled to receive upon conversion of such series the
number of shares of stock or other securities or property of the
Company or otherwise, to which a holder of Common Stock deliverable
upon conversion would have been entitled on such recapitalization. In
any such case, appropriate adjustment shall be made in the application
of the provisions of this Section 3 with respect to the rights of the
holders of the Series A Preferred Stock after the recapitalization to
the end that the provisions of this Section 3 (including adjustment of
the Conversion Price then in effect and the number of shares issuable
upon conversion of the Series A Preferred Stock) shall be applicable
after that event as nearly equivalent as may be practicable.
RESTATED ARTICLES OF INCORPORATION - Page 15
<PAGE>
(g) No Impairment. The Corporation will not, by amendment of its
-------------
Amended and Restated Articles of Incorporation or through any
reorganization, recapitalization, transfer of assets, consolidation,
merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance
of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking
of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series A Preferred
Stock against impairment.
(h) No Fractional Shares and Certificate as to Adjustments.
------------------------------------------------------
(i) No fractional shares shall be issued upon the conversion of
any share or shares of the Series A Preferred Stock, and the
number of shares of Common Stock to be issued shall be
rounded to the nearest whole share. Whether or not
fractional shares are issuable upon such conversion shall be
determined on the basis of the total number of shares of
Series A Preferred Stock the holder is at the time
converting into Common Stock and the number of shares of
Common Stock issuable upon such aggregate conversion. If,
after the aforementioned aggregation, the conversion would
result in the issuance of any fractional share, the
Corporation will, in lieu of issuing any fractional share,
pay cash equal to the product of such fraction multiplied by
the Common Stock's fair market value (as determined by the
Board of Directors) on the date of conversion.
(ii) Upon the occurrence of each adjustment or readjustment of
the Conversion Price of Series A Preferred Stock pursuant to
this Section 3, the Corporation, at its expense, shall
promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to
each holder of Series A Preferred Stock a certificate
setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment
is based. The Corporation shall, at its expense and upon
the written request at any time of any holder of Series A
Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for such series
of Preferred Stock at the time in effect, and (C) the number
of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the
conversion of a share of Series A Preferred Stock.
(i) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled to
receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise
acquire any shares of stock of any class or any other securities or
property, or to
RESTATED ARTICLES OF INCORPORATION - Page 16
<PAGE>
receive any other right, the Corporation shall mail to each holder of
Series A Preferred Stock, at the same time the Corporation shall give
written notice to the shareholders of the Corporation of such record
date, a notice specifying the date on which any such record is to be
taken for the purpose of such dividend, distribution or right, and the
amount and character of such dividend, distribution or right.
(j) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred
Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares
of the Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series
A Preferred Stock, in addition to such other remedies as shall be
available to the holder of such Preferred Stock, the Corporation will
take such corporate action as may, in the opinion of its counsel, be
necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to
obtain the requisite shareholder approval of any necessary amendment
to its Articles of Incorporation.
(k) Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of Series A Preferred Stock shall
be deemed given if deposited in the United States mail, postage
prepaid, and addressed to each holder of record at his address
appearing on the books of the Corporation.
4. Redemption. The Series A Preferred Stock shall not be redeemable by
----------
the Corporation.
5. Voting Rights.
-------------
(a) General. The holder of each share of Series A Preferred Stock
-------
shall have the right to one vote for each share of Common Stock into
which such Series A Preferred Stock could then be converted, and with
respect to such vote, such holder shall have full voting rights and
powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to
notice of any shareholders' meeting in accordance with the Bylaws of
this Corporation, and shall be entitled to vote, together with holders
of Common Stock, with respect to any question upon which holders of
Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an
as-converted basis (after aggregating all shares into which shares of
Series A Preferred Stock held by each holder could be converted) shall
be rounded to the nearest whole number (with one-half being rounded
upward).
(b) Voting for the Election of Directors. So long as the initial
------------------------------------
purchasers of the Series A Preferred Stock and the Series B Preferred
Stock shall hold an
RESTATED ARTICLES OF INCORPORATION - Page 17
<PAGE>
aggregate of at least 1,111,111 shares of Series A Preferred Stock
(including any Common Stock resulting from a conversion of the Series
A Preferred Stock) and Series B Preferred Stock (subject to adjustment
to reflect stock dividends, stock splits, combinations,
recapitalizations and the like) the holders of a majority in interest
of the then outstanding shares of Series A Preferred Stock shall be
entitled to elect one (1) director of this Corporation at each
election of directors.
In the case of any vacancy (other than a vacancy caused by removal) in
the office of a director occurring among the directors elected by the
holders of Series A Preferred Stock pursuant to this Section 5(b), the
successor shall be elected by the holders of a majority of the shares
of Series A Preferred Stock, to hold office for the unexpired term of
the director whose place or places shall be vacant. Any director who
shall have been elected by the holders of Series A Preferred Stock or
by any director so elected as provided in the immediately preceding
sentence hereof may be removed during the aforesaid term of office,
either with or without cause, by, and only by, the affirmative vote of
the holders of the shares of Series A Preferred Stock, given either at
a special meeting of such shareholders duly called for that purpose or
pursuant to a written consent of shareholders, and any vacancy thereby
created may be filled by the holders of that class or series of stock
represented at the meeting or pursuant to unanimous written consent.
Upon the closing of an Initial Public Offering, the provisions of this
Section 5(b) shall terminate.
6. Protective Provisions. So long as any shares of Series A Preferred
---------------------
Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock and Series B Preferred Stock:
(a) authorize or issue, or obligate itself to issue, any equity
security (including any other security convertible into or exercisable
for any equity security by recertification or otherwise) other than
(A) shares Common Stock issued pursuant to a transaction
described in subsection 3(d)(iii) hereof,
(B) up to 2,157,500 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or the like) of Common Stock or
Series B Preferred Stock issued or issuable to
employees, directors or consultants of the Corporation
pursuant to stock purchase, stock option, or other
agreements approved by the Board of Directors,
(C) up to 1,000,000 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or the like) of Common Stock or
Series B Preferred Stock issued or issuable pursuant to
outstanding warrants, existing on the Original Issue
Date and such number of
RESTATED ARTICLES OF INCORPORATION - Page 18
<PAGE>
shares issuable upon exercise of warrants initially
issued to holders of Series A Preferred Stock, and
(D) shares of Common Stock issued upon conversion of the
Series A Preferred Stock or the Series B Preferred
Stock.
(E) shares of Common Stock issued in an Initial Public
Offering resulting in aggregate gross proceeds to the
Corporation of at least $35,000,000 and at a price per
share reflecting at least a $175,000,000 pre-money
equity market capitalization for the Corporation (a
"Qualified IPO").
--------------
(b) amend the Articles of Incorporation or Bylaws of the Corporation
so as to alter or change the rights, preferences, privileges or powers
of, or the restrictions provided for the benefit of, the shares of
Series A Preferred Stock, including any amendments to the rights or
powers of the Common Stock, or amend the Articles of Incorporation in
a manner that materially adversely affects the rights of the Series A
Preferred Stock provided that the foregoing shall not prohibit any
amendment to effect any changes to the number of authorized or
outstanding shares of Common Stock in connection with any stock split
or reverse stock split undertaken in contemplation of an initial
public offering pursuant to which the Conversion Price of the Series A
Preferred Stock would be appropriately adjusted;
(c) redeem, repurchase or otherwise acquire any outstanding capital
stock;
(d) declare or pay any dividends on the Common Stock;
(e) sell, convey, or otherwise dispose of all or substantially all of
its property, assets or business or merge into or consolidate with any
other corporation (other than a wholly-owned subsidiary of the
Corporation and in which the Corporation is the surviving corporation
in the merger) or effect any transaction or series of related
transactions in which the stockholders of the Corporation immediately
prior to such transactions own less than fifty percent (50%) of the
outstanding voting power of the surviving corporation;
(f) increase or decrease (other than by redemption or conversion) the
number of authorized shares of Preferred Stock;
(g) increase the size of the Board of Directors in excess of seven (7)
authorized members; and
(h) effect the liquidation or dissolution of the Corporation.
7. Status of Converted Stock. In the event any shares of Series A
-------------------------
Preferred Stock shall be converted pursuant to Section 3 hereof, the
shares so converted shall be cancelled and shall not be issuable by
the Corporation. The Articles of Incorporation of the Corporation
shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
RESTATED ARTICLES OF INCORPORATION - Page 19
<PAGE>
G. One Million One Hundred Eleven Thousand One Hundred Eleven (1,111,111)
shares of authorized Preferred Stock are hereby designated as Series B Preferred
Stock (the "Series B Preferred Stock"). The Series B Preferred Stock shall have
------------------------
the powers, preferences and rights, and the qualifications, limitations and
restrictions, in respect of each class of stock of the Corporation, specified
herein.
1. Dividend Rights.
---------------
(a) Subject to the rights of series of Preferred Stock which may from
time to time come into existence, the holders of shares of Series B
Preferred Stock shall be entitled to receive dividends, out of any
assets legally available therefor, prior and in preference to any
declaration or payment of any dividend (payable other than in Common
Stock or other securities and rights convertible into or entitling the
holder thereof to receive, directly or indirectly, additional shares
of Common Stock of the Corporation) on the Common Stock or Series C
Preferred Stock of the Corporation, but pari pasu with the Series A
Preferred Stock, when, as and if declared by the Board of Directors at
the rate of $0.54 per share per annum (as adjusted to reflect stock
dividends, stock splits, combinations, recapitalizations or the like
after the date upon which each share of Series B Preferred Stock was
first issued (the "Original Issue Date")) and in addition (as
-------------------
determined on a per annum basis and an as if it was convertible into
Common Stock on the same basis as the Series A Preferred Stock), an
amount equal to the cash dividends paid on any other outstanding
shares of the Corporation. Such dividends shall not be cumulative.
The holders of the outstanding Series B Preferred Stock can waive any
dividend preference that such holders shall be entitled to receive
under this Section 1 upon the affirmative vote or written consent of
the holders of at least a majority of the Series B Preferred Stock
then outstanding.
(b) In the event the Corporation shall declare a distribution payable
in securities of other persons, evidences of indebtedness issued by
the Corporation or other persons, assets (excluding cash dividends) or
options or rights to purchase any such securities or evidences of
indebtedness, then, in each such case the holders of the Series B
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of the Series B Preferred Stock
were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series B Preferred Stock would
be convertible if they were convertible into Common Stock on the same
basis as the Series A Preferred Stock as of the record date fixed for
the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
(c) Any dividend or distribution which is declared by the Corporation
and payable with assets of the Corporation other than cash shall be
governed by the provisions of subsection (2)(c)(ii) of this Section G
of Article Four.
2. Liquidation Preference
-----------------------
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, subject to the rights of
series of
RESTATED ARTICLES OF INCORPORATION - Page 20
<PAGE>
Preferred Stock that may from time to time come into existence, the
holders of the Series B Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets of
the Corporation to the holders of Common Stock by reason of their
ownership thereof, but pari pasu with the Series A Preferred Stock, an
amount per share equal to $5.40 per share of Series B Preferred Stock
(as adjusted for any stock dividends, combinations or splits with
respect to such shares) (the "Original Series B Issue Price"), plus
-----------------------------
all declared but unpaid dividends on such share. If upon the
occurrence of such event, the assets and funds thus distributed among
the holders of the Series B Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential
amount, then, subject to the rights of series of Preferred Stock that
may from time to time come into existence, the entire assets and funds
of the Corporation legally available for distribution shall be
distributed ratably among the holders of the Series A Preferred Stock
and Series B Preferred Stock in proportion to the preferential amount
each such holder is otherwise entitled to receive.
(b) After the distribution described in subsection (a) above has been
paid, subject to the rights of series of Preferred Stock which may
from time to time come into existence, the remaining assets of the
Corporation available for distribution to shareholders shall be
distributed among the holders of Series A Preferred Stock, Series B
Preferred Stock, Series C Preferred Stock and Common Stock pro rata
based on the number of shares of Common Stock held by each (assuming
full conversion of all such Series A and Series B Preferred Stock and
assuming that the Series B Preferred Stock was convertible into Common
Stock at then existing conversion price for the Series A Preferred
Stock).
(c) (i) For purposes of this Section 2, a liquidation, dissolution
or winding up of the Corporation shall not be deemed to be
occasioned by, or to include an Acquisition, unless the
Corporation breaches its redemption obligation arising out
of an Acquisition as set forth in Section 4 below.
(ii) In any of such events, if the consideration received by the
Corporation is other than cash, its value will be deemed its
fair market value. Any securities shall be valued as
follows:
(A) Securities not subject to investment letter or other
similar restrictions on free marketability:
(1) If traded on a securities exchange or through
NASDAQ-NMS, the value shall be deemed to be the
average of the closing prices of the securities on
such exchange over the thirty-day period ending
three (3) days prior to the closing;
(2) If actively traded over-the-counter, the value
shall be deemed to be the average of the closing
bid or
RESTATED ARTICLES OF INCORPORATION - Page 21
<PAGE>
sale prices (whichever is applicable) over
the thirty-day period ending three (3) days prior
to the closing; and
(3) If there is no active public market, the value
shall be the fair market value thereof, as
mutually determined by the Corporation and the
holders of at least a majority of the voting power
of all the then outstanding shares of Series B
Preferred Stock.
(B) The method of valuation of securities subject to
investment letter or other restrictions on free
marketability (other than restrictions arising solely
by virtue of a shareholder's status as an affiliate or
former affiliate) shall be to make an appropriate
discount from the market value determined as above in
(A) (1), (2) or (3) to reflect the approximate fair
market value thereof, as mutually determined by the
Corporation and the holders of at least a majority of
the voting power of all the then outstanding shares of
Series B Preferred Stock.
(iii) In the event the requirements of this subsection 2(c) are
not complied with, the Corporation shall forthwith either:
(A) cause such closing to be postponed until such time as
the requirements of this Section 2 have been complied
with; or
(B) cancel such transaction, in which event the rights,
preferences and privileges of the holders of the
Series B Preferred Stock shall revert to and be the
same as such rights, preferences and privileges
existing immediately prior to the date of the first
notice referred to in subsection 2(c)(iv) hereof.
(iv) The Corporation shall give each holder of record of Series B
Preferred Stock written notice of such impending transaction
not later than the date the Corporation shall give written
notice to the shareholders of the Corporation of the
shareholders meeting called to approve such transactions or
at which such transaction will be proposed for approval by
the shareholders, and shall also notify such holders in
writing of the final approval of such transaction. The
first of such notices shall describe the material terms and
conditions of the impending transaction and the provisions
of this Section 2, and the Corporation shall thereafter give
such holders prompt notice of any material changes.
3. Conversion. The holders of the Series B Preferred Stock shall have no
----------
conversion rights
RESTATED ARTICLES OF INCORPORATION - Page 22
<PAGE>
4. Redemption.
----------
(a) (i) This Corporation (i) may at any time, and from time to
time, redeem all of the outstanding shares of Series B
Preferred Stock pro rata among the holders thereof in cash
at the Series B Redemption Price (as defined below), and
(ii) shall, in the event of an Initial Public Offering or
Acquisition, redeem all of the then outstanding shares of
Series B Preferred Stock in each case on the Redemption Date
(as defined below).
(ii) To effect a redemption under Section 4(a)(i) of this
Section G of Article Four, the Corporation shall give
written notice by mail, postage prepaid, to the holders of
such Series B Preferred Stock then outstanding to be
redeemed that such shares of Series B Preferred Stock will
be redeemed on the date set forth in the notice, which date
shall not be more than 30 days after the date of such notice
(the "Redemption Date"). The holders of such shares of
---------------
Series B Preferred Stock shall be entitled to receive an
amount equal to the Original Series B Issue Price for each
share (such amount per share to be appropriately adjusted to
reflect any subsequent stock dividends, combinations,
splits, recapitalizations and the like) of Series B
Preferred Stock to be redeemed and held by each such holder
plus any declared and accrued but unpaid dividends on such
share (the "Series B Redemption Price") on the Redemption
-------------------------
Date. The notice shall further call upon such holders to
surrender to this Corporation on or before such Redemption
Date at the place designated in the notice such holder's
certificate or certificates representing the shares to be
redeemed. On or after such Redemption Date, each holder of
shares of Series B Preferred Stock called for redemption
shall surrender the certificate evidencing such shares to
this Corporation. In the event of an Acquisition or an
Initial Public Offering, the Redemption Date shall be the
date of the closing of any such transaction.
(b) From and after the Redemption Date, unless there shall have been a
default in payment of the Series B Redemption Price, all rights of the
holders with respect to such redeemed shares of Series B Preferred
Stock shall cease and such shares shall not thereafter be transferred
on the books of this Corporation or be deemed to be outstanding for
any purpose whatsoever.
5. Voting Rights.
-------------
(a) General. The holder of each share of Series B Preferred Stock
-------
shall have the right to one vote for each share of Common Stock into
which such Series B Preferred Stock could then be converted if it was
convertible into Common Stock at the same Conversion Price as the
Series A Preferred Stock, and with respect to such vote, such holder
shall have full voting rights and powers equal to the voting rights
and powers of the holders of Common Stock, and shall be entitled,
RESTATED ARTICLES OF INCORPORATION - Page 23
<PAGE>
notwithstanding any provision hereof, to notice of any shareholders'
meeting in accordance with the Bylaws of this Corporation, and shall
be entitled to vote, together with holders of Common Stock, with
respect to any question upon which holders of Common Stock have the
right to vote. Fractional votes shall not, however, be permitted and
any fractional voting rights available on an as-converted basis (after
aggregating all shares into which shares of Series B Preferred Stock
held by each holder could be converted as aforesaid) shall be rounded
to the nearest whole number (with one-half being rounded upward).
(b) Voting for the Election of Directors. So long as the initial
------------------------------------
purchasers of the Series A Preferred Stock and the Series B Preferred
Stock shall hold an aggregate of at least 1,111,111 shares of Series A
Preferred Stock (including any Common Stock resulting from a
conversion of the Series A Preferred Stock) and Series B Preferred
Stock (subject to adjustment to reflect share dividends, stock splits,
combinations, recapitalizations and the like) the holders of a
majority in interest of the then outstanding shares of Series B
Preferred Stock shall be entitled to elect one (1) director of this
Corporation at each election of directors.
In the case of any vacancy (other than a vacancy caused by removal) in
the office of a director occurring among the directors elected by the
holders of Series B Preferred Stock pursuant to this Section 5(b), the
successor shall be elected by the affirmative vote of the holders of a
majority of the shares of Series B Preferred Stock, to hold office for
the unexpired term of the director whose place or places shall be
vacant. Any director who shall have been elected by the holders of
Series B Preferred Stock may be removed during the aforesaid term of
office, either with or without cause, by, and only by, the affirmative
vote of the holders of the shares of Series B Preferred Stock, given
either at a special meeting of such shareholders duly called for that
purpose or pursuant to a written consent of shareholders, and any
vacancy thereby created may be filled by the holders of that class or
series of stock represented at the meeting or pursuant to unanimous
written consent. Upon the closing of an Initial Public Offering, the
provisions of this Section 5(b) shall terminate.
6. Protective Provisions. So long as any shares of Series B Preferred
---------------------
Stock are outstanding, the Corporation shall not without first
obtaining the approval (by vote or written consent, as provided by
law) of the holders of at least a majority of the then outstanding
shares of Series A Preferred Stock and Series B Preferred Stock:
(a) authorize or issue, or obligate itself to issue, any equity
security (including any other security convertible into or exercisable
for any equity security by recertification or otherwise) other than
(A) shares Common Stock issued pursuant to a transaction
described in subsection 3(d)(iii) of Section F hereof,
(B) up to 2,157,500 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or
RESTATED ARTICLES OF INCORPORATION - Page 24
<PAGE>
the like) of Common Stock or Series C Preferred Stock
issued or issuable to employees, directors or
consultants of the Corporation pursuant to stock
purchase, stock option, or other agreements approved by
the Board of Directors,
(C) up to 1,000,000 shares (as adjusted to reflect stock
dividends, stock splits, combinations,
recapitalizations or the like) of Common Stock or
Series C Preferred Stock issued or issuable pursuant to
outstanding warrants, existing on the Original Issue
Date and such number of shares issuable upon exercise
of warrants initially issued to holders of Series A
Preferred Stock and Series B Preferred Stock, and
(D) shares of Common Stock issued upon conversion of the
Series A Preferred Stock or the Series C Preferred
Stock.
(E) shares of Common Stock issued in a Qualified IPO.
(b) amend the Articles of Incorporation or Bylaws of the Corporation
so as to alter or change the rights, preferences, privileges or powers
of, or the restrictions provided for the benefit of, the shares of
Series B Preferred Stock, including any amendments to the rights or
powers of the Common Stock, or amend the Articles of Incorporation in
a manner that materially adversely affects the rights of the Series B
Preferred Stock provided that the foregoing shall not prohibit any
amendment to effect any changes to the number of authorized or
outstanding shares of Common Stock in connection with any stock split
or reverse stock split undertaken in contemplation of an initial
public offering;
(c) redeem, repurchase or otherwise acquire any outstanding capital
stock;
(d) declare or pay any dividends on the Common Stock;
(e) sell, convey, or otherwise dispose of all or substantially all of
its property, assets or business or merge into or consolidate with any
other corporation (other than a wholly-owned subsidiary of the
Corporation and in which the Corporation is the surviving corporation
in the merger) or effect any transaction or series of related
transactions in which the stockholders of the Corporation immediately
prior to such transactions own less than fifty percent (50%) of the
outstanding voting power of the surviving corporation;
(f) increase or decrease (other than by redemption or conversion) the
number of authorized shares of Preferred Stock;
(g) increase the size of the Board of Directors in excess of seven (7)
authorized members; and
(h) effect the liquidation or dissolution of the Corporation.
RESTATED ARTICLES OF INCORPORATION - Page 25
<PAGE>
H. 3,200,000 shares of authorized Preferred Stock are hereby designated as
Series C Preferred Stock (the "Series C Preferred Stock"). The Series C
------------------------
Preferred Stock shall have the powers, preferences and rights, and the
qualifications, limitations and restrictions, in respect of each class of stock
of the Corporation, specified herein.
1. Voting Rights. Except as otherwise provided herein or required by
-------------
law, the holders of the Series C Preferred Stock shall have no voting
power whatsoever, and no holder of Series C Preferred Stock shall vote
or otherwise participate in any proceeding which actions shall be
taken by the Corporation or the stockholders thereof or be entitled to
notification as to any meeting of the Board of Directors or
stockholders of the Corporation.
2. Dividends. Subject to the prior rights of holders of stock at the
---------
time outstanding, having prior rights as to dividends, or may from
time to time come into existence, the holders of Series C Preferred
Stock shall be entitled to receive dividends out of funds legally
available therefor at such times and in such amounts which, if and as
declared by the Board of Directors in their sole discretion; provided,
--------
however, no dividend shall be paid on or declared or set apart for,
-------
shares of Series C Preferred Stock unless at the same time the
provisions of subsection F.1. and G.1. are complied with and a like
dividend shall be fixed for each share of Common Stock then issued and
outstanding.
3. Liquidation. Upon any liquidation, dissolution or winding up of the
-----------
Corporation, whether voluntary or involuntary, the assets of the
Corporation shall be distributed as provided in subsection F.2 and
G.2. of this Article Four.
4. Conversion of Outstanding Shares. Upon the closing and funding of an
--------------------------------
underwritten initial public offering by the Corporation of shares of
Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, or any comparable statement under
any similar federal statute then in force, (a) each share of the
Series C Preferred Stock theretofore outstanding shall, without any
action on the part of the holder thereof, be automatically converted
into and reconstituted as one (1) share of Common Stock; (b) each
holder of the outstanding shares of stock so converted and
reconstituted pursuant to the immediately preceding clause (a) shall
be entitled to receive, in exchange for the certificate of
certificates representing the outstanding shares so converted and
reconstituted in such holder's name, a new certificate or certificates
representing such shares as so converted registered in such holder's
name; provided, however, that the failure of any such holder to so
-------- -------
exchange such holder's certificate or certificates shall in no way
affect the conversion and reconstitution of such holder's shares as
aforesaid.
Each share of the Corporation's Series B Common Stock issued and
outstanding immediately prior to the taking effect of this ARTICLE FOUR is
hereby changed into one share of Series C Preferred Stock. Each certificate
representing one or more shares of Series B Common Stock issued and outstanding
immediately prior to the taking effect of this ARTICLE FOUR shall thereafter
represent the same number of shares of Series C Preferred Stock; and the
Corporation shall issue to or upon the order of each holder of record, as of the
close of business
RESTATED ARTICLES OF INCORPORATION - Page 26
<PAGE>
on the date this ARTICLE FOUR takes effect, an additional certificate or
certificates representing one share of Series C Preferred Stock for each share
of Series B Common Stock theretofore represented by such outstanding share
certificate.
ARTICLE FIVE
The Corporation shall not commence business until it has received for the
issuance of shares consideration of the value of one thousand dollars
($1,000.00), consisting of money, labor done or property actually received.
ARTICLE SIX
The street address of the Corporation's current registered office is 3737
Grader Street, Suite 110, Garland, Texas 75041, and the name of its initial
registered agent at such address is Norman Charney.
ARTICLE SEVEN
The number of directors shall be fixed by the Bylaws of the Corporation,
but shall in no event be less than one (1).
ARTICLE EIGHT
At each election for directors, every shareholder entitled to vote at such
election shall have the right to vote, in person or by proxy, the number of
shares owned by such shareholder for as many persons as there are directors to
be elected. Cumulative voting shall not be permitted.
ARTICLE NINE
No shareholder of the Corporation shall, by reason of such shareholder
holding shares of any class, have any preemptive or preferential right to
purchase or subscribe for any shares of any class of the Corporation, now or
hereafter to be authorized, or any notes, debentures, bonds, or other securities
convertible into or carrying options or warrants to purchase shares of any
class, now or hereafter to be authorized, whether or not the issuance or sale of
any such shares, or such notes, debentures, bonds, or other securities, would
adversely affect the dividend or voting rights of such shareholder, other than
such rights, if any, as the Board of Directors, in its discretion, may grant to
the shareholders to purchase such additional, unissued or treasury securities;
and the Corporation may issue or sell additional, unissued or treasury shares of
any class of the Corporation, or any notes, debentures, bonds, or other
securities convertible into or carrying options or warrants to purchase shares
of any class, without offering the same in whole or in part to the existing
shareholders of any class (except for contractual preemptive rights, if any).
ARTICLE TEN
Any action required by the Texas Business Corporation Act to be taken at
any annual or special meeting of shareholders, or any action which may be taken
at any annual or special meeting of shareholders, may be taken without a
meeting, without prior notice, and without a
RESTATED ARTICLES OF INCORPORATION - Page 27
<PAGE>
vote, if a consent or consents in writing, setting forth the action so taken,
shall be signed by the holder or holders of shares having not less than the
minimum number of votes that would be necessary to take such action at a meeting
at which the holders of all shares entitled to vote on the action were present
and voted. Upon the closing and funding of an underwritten public offering by
the Corporation of shares of Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or any comparable
statement under any similar federal statute then in force, the foregoing
provisions of this ARTICLE TEN shall become null and void and of no force and
effect and from such date the shareholders of the Corporation shall not be
authorized or permitted to act by written consent except upon the consent or
consents in writing signed by the holder or holders of all shares entitled to
vote with respect to the action that is the subject of the consent.
ARTICLE ELEVEN
The Corporation shall, to the full extent permitted by law, (i) indemnify
any person who was or is a party or is threatened to be made a named defendant
or respondent to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, any
appeal in such action, suit or proceeding, and any inquiry or investigation that
could lead to such an action, suit, or proceeding, because such person is or was
a director or officer of the Corporation, or, while a director or officer of the
Corporation, is or was serving at the request of the Corporation as a director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, against
judgments, penalties (including excise and similar taxes), fines, settlements,
and reasonable expenses (including attorneys fees) actually incurred by such
person in connection with such action, suit, or proceeding, and (ii) advance
reasonable expenses to such person in connection with such action, suit or
proceeding. The rights provided in this article shall not be deemed exclusive of
any other rights permitted by law, to which such person may be entitled under
any provision of the bylaws, a resolution of shareholders or directors, an
agreement or otherwise.
ARTICLE TWELVE
1. A director of the Corporation shall not be personally liable to the
Corporation or its shareholders for monetary damages for an act or omission in
the director's capacity as a director of the Corporation, except to the extent a
director is found liable for (a) a breach of the director's duty of loyalty to
the Corporation or its shareholders, (b) an act or omission not in good faith
that constitutes a breach of duty of the director to the Corporation or an act
or omission that involves intentional misconduct or a knowing violation of the
law, (c) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office, or (d) an act or omission for which the liability of a
director is expressly provided by an applicable statute.
2. If the laws of Texas are hereafter amended to authorize further
elimination or limitation of the personal liability of directors, then the
liability of a director of the Corporation, in addition to the limitation on the
personal liability provided herein, shall be limited to the fullest extent
permitted by the laws of Texas as amended. Any repeal or modification of this
ARTICLE TWELVE by the shareholders of the Corporation shall be prospective only
and shall
RESTATED ARTICLES OF INCORPORATION - Page 28
<PAGE>
not adversely affect any limitation on the personal liability of a director at
the time of such repeal or modification.
ARTICLE THIRTEEN
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, 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 his or their votes are counted for such purpose, if:
(a) The material facts as to his 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 vote of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or
(c) 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 shareholders.
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.
This provision shall not be construed to invalidate a contract or
transaction which would be valid in the absence of this provision or to subject
any director or officer to any liability that he would not be subject to in the
absence of this provision.
RESTATED ARTICLES OF INCORPORATION - Page 29
<PAGE>
ARTICLE FOURTEEN
Upon the closing and funding of an underwritten initial public offering by
the Corporation of shares or common stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended, or any comparable
statement under any similar federal statute then in force, the members of the
Board of Directors shall be classified, with respect to the time for which they
severally hold office, into three (3) classes, as nearly equal in number as
possible, as shall be provided in the manner specified in the Corporation's
Bylaws, one class to hold office initially for a term expiring at the next
succeeding annual meeting of shareholders following the closing and funding of
such an offering, another to hold office initially for a term expiring at the
second succeeding annual meeting of shareholders following the closing and
funding of such an offering, and another to hold office initially for a term
expiring at the third succeeding annual meeting of shareholders following the
closing and funding of such an offering, with the members of each new class to
hold office until their successors have been duly elected and have qualified. At
each annual meeting of the shareholders of the Corporation, the successors to
the class of directors whose term expires at the meeting shall be elected to
hold office for a term expiring at the annual meeting held in the third year
following the year of their election.
ARTICLE FIFTEEN
A special meeting of the shareholders of the Corporation may only be called
by the President, Chief Executive Officer, or Board of Directors of the
Corporation or the holders of not less than 25 percent of all the shares
entitled to vote at the proposed special meeting or by such other person or
persons as may be so authorized by the Bylaws of the Corporation.
ARTICLE SIXTEEN
The power to amend or repeal the Corporation's Bylaws and to adopt new
Bylaws shall be reserved exclusively to the Board of Directors of the
Corporation.
RESTATED ARTICLES OF INCORPORATION - Page 30
<PAGE>
EXECUTED as of August 22, 1999.
ASD SYSTEMS, INC.
By:/s/ Norman Charney
--------------------------------
Norman Charney, President
RESTATED ARTICLES OF INCORPORATION - Page 31
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS OF
ASD SYSTEMS, INC.
1. OFFICES
1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be
located in Garland, Texas.
1.2 OTHER OFFICES. The Corporation may also have offices at such other
places within or without the State of Texas as the Board of Directors may from
time to time determine or the business of the Corporation may require.
2. MEETINGS OF SHAREHOLDERS
2.1 ANNUAL MEETING. The annual meeting of shareholders for the election
of Directors and such other business as may properly be brought before the
meeting shall be held at such place within or without the State of Texas and at
such date and time as shall be designated by the Board of Directors and stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
2.2 SPECIAL MEETINGS. Special meetings of the shareholders may be called
(a) by the President or the Board of Directors, or (b) by the holders of at
least 25% of all the shares entitled to vote at the proposed meeting. The
record date for determining shareholders entitled to call a special meeting
shall be the date the first shareholder signs the call and notice of that
meeting. Only business within the purpose or purposes described in the notice
of a special meeting of shareholders may be conducted at such meeting.
2.3 NOTICE AND WAIVERS OF NOTICE.
(a) Written notice stating the place, date and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which
the meeting is called, shall be delivered not less than 10 nor more than 60
days before the date of the meeting, either personally or by mail, by or at
the direction of the President, the Secretary, or the officer or persons
calling the meeting, to each shareholder entitled to vote at such meeting.
If mailed, such notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it
appears on the share transfer records of the Corporation.
(b) Notice may be waived in writing signed by the person or persons
entitled to such notice. Such waiver may be executed at any time before or
after the holding of such meeting. Attendance at a meeting shall
constitute a waiver of notice, except where the person attends for the
express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called.
(c) Any notice required to be given to any shareholder, under any
provision of the Texas Business Corporation Act, as amended (the "Act"),
the Articles of Incorporation or these Bylaws, need not be given to the
shareholder if (1) notice of two consecutive annual meetings and all
notices of meetings held during the period between those annual meetings,
if any, or (2) all (but in no event less than two) payments (if sent by
first class mail) of distributions or interest on securities during a 12-
month period have been mailed to that person, addressed at his address as
shown on the records of the Corporation, and have been returned
undeliverable. Any action or meeting taken or held without notice to such
a person shall have the same force and effect as if the notice had been
duly given and, if the action taken by the Corporation is reflected in any
articles or document filed with the Secretary of State, those articles or
that document may state that notice was duly given to all persons to whom
notice was required to be given. If such a person delivers to the
Corporation a written notice setting forth his then current address, the
requirement that notice be given to that person shall be reinstated.
2.4 RECORD DATE. For the purpose of determining shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or entitled to receive payment of any dividend, the Board of Directors may in
advance establish a record date which must be at least 10 but not more than 60
days prior to
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such meeting. If the Board of Directors fails to establish a record date, the
record date shall be the date on which notice of the meeting is mailed.
2.5 VOTING LIST.
(a) The officer or agent having charge of the stock transfer books
for shares of the Corporation shall make, at least ten days before each
meeting of shareholders, a complete list of the shareholders entitled to
vote at such meeting or any adjournment thereof, arranged in alphabetical
order, with the address of and the number of shares held by each, which
list, for a period of ten days prior to such meeting, shall be kept on file
at the registered office of the Corporation and shall be subject to
inspection by any shareholder at any time during usual business hours. Such
list shall also be produced and kept open at the time and place of the
meeting and shall be subject to the inspection of any shareholder during
the whole time of the meeting. The original stock transfer book shall be
prima facie evidence as to who are the shareholders entitled to examine
such list or transfer books or vote at any meeting of shareholders.
(b) Failure to comply with the requirements of this section shall not
affect the validity of any action taken at such meeting.
(c) An officer or agent having charge of the stock transfer books who
shall fail to prepare the list of shareholders or keep the same on file for
a period of ten days, or produce and keep it open for inspection as
provided in this section, shall be liable to any shareholder suffering
damage on account of such failure, to the extent of such damage. In the
event that such officer or agent does not receive notice of a meeting of
shareholders sufficiently in advance of the date of such meeting reasonably
to enable him to comply with the duties prescribed by these Bylaws, the
Corporation, but not such officer or agent shall be liable to any
shareholder suffering damage on account of such failure, to the extent of
such damage.
2.6 QUORUM OF SHAREHOLDERS. With respect to any matter, a quorum shall
be present at a meeting of shareholders if the holders of a majority of the
shares entitled to vote on that matter are represented at the meeting, in person
or by proxy, unless otherwise provided in the Articles of Incorporation in
accordance with the Act. Unless otherwise provided in the Articles of
Incorporation, the shareholders represented in person or by proxy at a meeting
of shareholders at which a quorum is not present may adjourn the meeting until
such time and to such place as may be determined by a vote of the holders of a
majority of the shares represented in person or by proxy at that meeting.
2.7 WITHDRAWAL OF QUORUM. Unless otherwise provided in the Articles of
Incorporation, once a quorum is present at a meeting of shareholders, the
shareholders represented in person or by proxy at the meeting may conduct such
business as may properly be brought before the meeting until it is adjourned,
and the subsequent withdrawal from the meeting of any shareholder or the refusal
of any shareholder represented in person or by proxy to vote shall not effect
the presence of a quorum at the meeting.
2.8 VOTING ON MATTERS OTHER THAN THE ELECTION OF DIRECTORS. With respect
to any matter, other than the election of Directors or a matter for which the
affirmative vote of the holders of a specified portion of the shares entitled to
vote is required by the Act, the affirmative vote of the holders of a majority
of the shares represented in person or by proxy at a meeting of shareholders at
which a quorum is present shall be the act of the shareholders, unless otherwise
provided in the Articles of Incorporation.
2.9 VOTING IN THE ELECTION OF DIRECTORS. Directors shall be elected in
the manner provided in the Articles of Incorporation.
2.10 METHOD OF VOTING. The holders of outstanding shares of capital stock
of the Corporation shall be entitled to vote on matters submitted to a vote of
shareholders as provided in the Articles of Incorporation. Any shareholder may
vote either in person or by proxy executed in writing by the shareholder. No
proxy shall be valid after 11 months from the date of its execution, unless
otherwise provided in the proxy.
2.11 ACTION WITHOUT MEETINGS.
(a) To the extent so provided in the Articles of Incorporation, any
action required by law to be taken at any annual or special meeting of
shareholders, or any action that may be taken at any annual or
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special meeting of shareholders, may be taken without a meeting, without
prior notice, and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holder or holders
of shares having not less than the minimum number of votes that would be
necessary to take such action at a meeting at which the holders of all
shares entitled to vote on the action were present or represented and
voted.
(b) Every written consent shall bear the date of signature of each
shareholder who signs the consent. No written consent shall be effective
to take the action that is the subject of the consent unless, within 60
days after the date of the earliest dated consent delivered to the
Corporation in the manner required by law, a consent or consents signed by
the holder or holders of shares having not less than the minimum number of
votes that would be necessary to take the action that is the subject of the
consent delivered to the Corporation by delivery to its registered office,
to its principal office or to an officer or agent of the Corporation having
custody of the books in which proceedings of meetings of shareholders are
recorded. Delivery shall be by hand or certified or registered mail,
return receipt requested. Delivery to the Corporation's principal office
shall be addressed to the President or the Chief Executive Officer of the
Corporation.
(c) A telegram, telex, cablegram, or similar transmission by a
shareholder, or a photographic, photostatic, facsimile, or similar
reproduction of a writing signed by a shareholder, shall be regarded as
signed by the shareholder for purposes of this section.
(d) Prompt notice of the taking of any action by shareholders without
a meeting by less than unanimous written consent shall be given to those
shareholders who did not consent in writing to the action.
(e) Upon the closing and funding of an underwritten initial public
offering by the Corporation of shares of common stock pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, or any comparable statement under any similar federal statute then
in force, the foregoing paragraphs (a), (b), (c) and (d) of this Section
2.11 shall be superseded and replaced in their entirety by the following.
Any action required by law to be taken at any annual or special meeting of
shareholders may be taken without a meeting, without prior notice, and
without a vote, if a consent or consents in writing, setting forth the
action so taken, shall be signed by all the shareholders entitled to vote
with respect to the subject matter thereof. Such consents shall have the
same force and effect as a unanimous vote of the shareholders. The
Secretary shall file such consents with the minutes of the meetings of the
shareholders.
2.12 CONDUCT OF MEETING. The Chairman of the Board, if such office has
been filled, and, if not or if the Chairman of the Board is absent or otherwise
unable to act, the Chief Executive Officer shall preside at all meetings of
shareholders and if the Chairman of the Board and the Chief Executive Officer
are absent or otherwise unable to act, the President shall preside at meetings
of the shareholders. The Secretary shall keep the records of each meeting of
shareholders. In the absence or inability to act of any such officer, such
officer's duties shall be performed by the officer given the authority to act
for such absent or non-acting officer under these Bylaws or by a person
appointed by the meeting.
2.13 SHAREHOLDER PROPOSALS AT ANNUAL MEETINGS. At an annual meeting of
the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting, business must be specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, otherwise
properly brought before the meeting by or at the direction of the Board of
Directors or otherwise properly brought before the meeting by a shareholder. In
addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a shareholder, the shareholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a shareholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 30 days nor
more than 60 days prior to the meeting; provided, however, that in the event
that less than 40 day's notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A shareholder's notice to the
Secretary shall set forth as to each matter the shareholder proposes to bring
before the annual meeting, (i) a brief description of the business desired to be
brought before the
AMENDED AND RESTATED BYLAWS - Page 3
<PAGE>
annual meeting and the reasons for conducting such business at the annual
meeting, (ii) the name and record address of the shareholder proposing such
business, (iii) the class and number of shares of the Corporation that are
beneficially owned by the shareholder, and (iv) any material interest of the
shareholder in such business. Notwithstanding anything in these Bylaws to the
contrary, no business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this section 2.13, provided,
however, that nothing in this section 2.13 shall be deemed to preclude
discussion by any shareholder of any business properly brought before the annual
meeting in accordance with said procedure.
2.14 NOMINATIONS OF PERSONS FOR ELECTION TO THE BOARD OF DIRECTORS. In
addition to any other applicable requirements, only persons who are nominated in
accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of shareholders by or at the direction of
the Board of Directors, by any nominating committee or person appointed by the
Board of Directors or by any shareholder of the Corporation entitled to vote for
the election of Directors at the meeting who complies with the notice procedures
set forth in this section 2.14. Such nominations, other than those made by or
at the direction of the Board of Directors, shall be made pursuant to timely
notice in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 30 days nor more
than 60 days prior to the meeting; provided, however, that in the event that
less than 40 days' notice or prior public disclosure of the date of the meeting
is given or made to shareholders, notice by the shareholder to be timely must be
so received not later than the close of business on the 10th day following the
day on which such notice of the date of the meeting was mailed or such public
disclosure was made. Such shareholder's notice shall set forth (a) as to each
person whom the shareholder proposes to nominate for election or re-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 and number of shares of the Corporation beneficially owned by the person,
and (iv) any other information relating to the person that is required to be
disclosed in solicitations for proxies for election of Directors pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as
to the shareholder giving the notice, (i) the name and record address of the
shareholder, and (ii) the class and number of shares of the Corporation
beneficially owned by the shareholder. The Corporation may require any proposed
nominee to furnish such other information as may reasonably be required by the
Corporation to determine the eligibility of such proposed nominee to serve as a
Director of the Corporation. No person shall be eligible for election as a
Director of the Corporation unless nominated in accordance with the procedures
set forth herein. These provisions shall not apply to nomination of any persons
entitled to be separately elected by holders of preferred stock.
2.15 INSPECTORS. The Board of Directors may, in advance of any meeting of
shareholders, appoint one or more inspectors to act at such meeting or any
adjournment thereof. If any of the inspectors so appointed shall fail to appear
or act, the Chairman of the meeting shall, or if inspectors shall not have been
appointed, the Chairman of the meeting may, appoint one or more inspectors. Each
inspector, before entering upon the discharge of his duties, shall take and sign
an oath faithfully to execute the duties of inspector at such meeting with
strict impartiality and according to the best of his ability. The inspectors
shall determine the number of shares of capital stock of the Corporation
outstanding and the voting power of each, the number of shares represented at
the meeting, the existence of a quorum, and the validity and effect of proxies
and shall receive votes, ballots, or consents, hear and determine all challenges
and questions arising in connection with the right to vote, count and tabulate
all votes, ballots, or consents, determine the results, and do such acts as are
proper to conduct the election or vote with fairness to all shareholders. On
request of the Chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request, or matter determined by them and shall
execute a certificate of any fact found by them. No Director or candidate for
the office of Director shall act as an inspector of an election of Directors.
Inspectors need not be shareholders.
3. DIRECTORS
3.1 POWERS. The powers of the Corporation shall be exercised by or under
authority of, and the business and affairs of the Corporation and all corporate
powers shall be managed under the direction of, the Board of Directors.
3.2 NUMBER, TERM OF OFFICE AND QUALIFICATIONS.
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(a) The property and business of the Corporation shall be managed and
controlled by a Board of Directors consisting of six Directors or such
other number of Directors as shall be determined from time to time by the
Board of Directors.
(b) Upon the closing and funding of an underwritten initial public
offering by the Corporation of shares of common stock pursuant to an
effective registration statement under the Securities Act of 1933, as
amended, or any comparable statement under any similar federal statute then
in force, the Board of Directors shall be divided into three classes, to be
known as Classes "A," "B" and "C", with the term of office of one class
expiring each year. Class A shall consist of one or more Directors, each
to hold office for an initial term expiring on the date of the next
succeeding annual meeting of shareholders following the closing and funding
of such an offering; Class B shall consist of one or more Directors, each
to hold office for an initial term expiring on the date of the second
succeeding annual meeting of shareholders following the closing and funding
of such an offering; and Class C shall consist of one or more Directors,
each to hold office for an initial term expiring on the date of the third
succeeding annual meeting of shareholders following the closing and funding
of such an offering, or, in each case, until his successor shall be elected
and shall have qualified. Subject to the foregoing, at each annual meeting
of shareholders a single class of Directors shall be elected to succeed the
Directors whose terms shall have expired, and to hold office for a term
expiring at the third succeeding annual meeting of shareholders. In the
event of an increase or decrease in the number of Directors, any newly
created or eliminated Directorships shall be apportioned among the classes
so as to make all classes as nearly equal as possible; provided, however,
that no decrease in the number of Directors shall have the effect of
shortening the term of an incumbent Director.
(c) Any vacancy occurring in the Board of Directors may be filled by
the affirmative vote of 60% of the remaining Directors. A Director elected
to fill a vacancy shall be elected for the unexpired term of his
predecessor in office. Any Directorship to be filled by reason of an
increase in the number of Directors shall be filled by election at an
annual meeting or at a special meeting of shareholders called for that
purpose or may be filled by the Board of Directors for a term of office
continuing only until the next election of one or more directors by the
shareholders; provided that the Board of Directors may not fill more than
two such directorships during the period between any two successive annual
meetings of shareholders. Directors need not be residents of the State of
Texas or shareholders of the Corporation.
3.3 ELECTION. The Directors shall be elected at the annual meetings of
the shareholders, and each Director elected shall serve until his successor
shall have been elected and qualified.
3.4 REMOVAL OF DIRECTORS. At any meeting of shareholders called
expressly for the purpose of removing a Director, any Director or the entire
Board of Directors may be removed, with or without cause, by a vote of the
holders of a majority of the shares then entitled to vote at an election of
Directors.
4. MEETINGS OF THE BOARD OF DIRECTORS
4.1 PLACE. Meetings of the Board of Directors, regular or special, may
be held either within or without the State of Texas.
4.2 REGULAR MEETINGS. Regular meetings of the Board of Directors shall
be held at such dates and times and at such places as shall from time to time be
determined by the Board of Directors. Regular meetings may be held with or
without notice, as determined by the Board of Directors.
4.3 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
called by the Chairman of the Board of Directors or the Chief Executive Officer
or the President and shall be called by the Secretary on the written request of
any two Directors. Notice of each special meeting of the Board of Directors
shall be given to each Director at least 48 hours before the meeting is
scheduled to convene.
4.4 NOTICE AND WAIVER OF NOTICE. Attendance of a Director at any meeting
shall constitute a waiver of notice of such meeting, except where a Director
attends for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened. Except as may
be otherwise provided by law or by the Articles of Incorporation or by these
Bylaws, neither the business to be
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transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
4.5 QUORUM OF DIRECTORS; VOTE REQUIRED. At all meetings of the Board of
Directors a majority of the 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 Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
4.6 ACTION WITHOUT MEETINGS. Any action required or permitted to be
taken at a meeting of the Board of Directors or any committee may be taken
without a meeting if a consent in writing, setting forth the action so taken, is
signed by all the members of the Board of Directors or committee, as the case
may be.
4.7 COMMITTEES.
(a) The Board of Directors, by resolution adopted by a majority of
the full Board of Directors, may designate from among its members one or
more committees, each of which shall be comprised of one or more of its
members, and may designate one or more of its members as alternate members
of any committee, who may, subject to any limitations imposed by the Board
of Directors, replace absent or disqualified members at any meeting of that
committee. Any such committee, to the extent provided in such resolution
shall have and may exercise all of the authority of the Board of Directors,
subject to the limitations set forth below and in the Act.
(b) No committee of the Board of Directors shall have the authority
of the Board of Directors in reference to:
1. amending the Articles of Incorporation, except that a
committee may, to the extent provided in the resolution designating
that committee or in the Articles of Incorporation or the Bylaws,
exercise the authority of the Board of Directors vested in it in
accordance with Article 2.13 of the Act;
2. proposing a reduction of the stated capital of the
Corporation in the manner permitted by Article 4.12 of the Act;
3. approving a plan of merger or share exchange of the
Corporation;
4. recommending to the shareholders the sale, lease, or
exchange of all or substantially all of the property and assets of
the Corporation otherwise than in the usual and regular course of its
business;
5. recommending to the shareholders a voluntary dissolution of
the Corporation or a revocation thereof;
6. amending, altering, or repealing these Bylaws of the
Corporation or adopting new Bylaws of the Corporation;
7. filling vacancies in the Board of Directors;
8. filling vacancies in or designating alternate members of any
such committee;
9. filling any Directorship to be filled by reason of an
increase in the number of Directors;
10. electing or removing officers of the Corporation or members
or alternate members of any such committee;
11. fixing the compensation of any member or alternate members
of such committee; or
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12. altering or repealing any resolution of the Board of
Directors that by its terms provides that it shall not be so
amendable or repealable.
(c) Unless the resolution designating a particular committee, the
Articles of Incorporation, or these Bylaws expressly so provide, no
committee of the Board of Directors shall have the authority to authorize a
distribution or to authorize the issuance of shares of the Corporation.
(d) The designation of a committee of the Board of Directors and the
delegation thereto of authority shall not operate to relieve the Board of
Directors, or any member thereof, of any responsibility imposed by law.
4.8 COMPENSATION. The Directors shall receive such compensation for
their services as Directors as may be determined by resolution of the Board of
Directors. Each Director shall be reimbursed for travel and other reasonable
out-of-pocket expenses incurred by such Director in attending regular and
special meetings of the Board of Directors or any committee. The receipt of
compensation or reimbursement of expenses shall not preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor.
5. OFFICERS
5.1 ELECTION, NUMBER, QUALIFICATION, TERM, COMPENSATION. The officers of
the Corporation shall be elected by the Board of Directors and shall consist of
a Chief Executive Officer, a President, a Vice President, a Secretary and a
Treasurer. The Board of Directors may also elect a Chairman of the Board,
additional Vice Presidents, one or more assistant secretaries and assistant
treasurers and such other officers and assistant officers and agents as it shall
deem necessary, who shall hold their offices for such terms and shall have such
authority and exercise such powers and perform such duties as shall be
determined from time to time by the Board by resolution not inconsistent with
these Bylaws. Two or more offices may be held by the same person. None of the
officers need be Directors except the President. The Board of Directors shall
have the power to enter into contracts for the employment and compensation of
officers for such terms as the Board deems advisable. The salaries of all
officers of the Corporation shall be fixed by the Board of Directors.
5.2 REMOVAL. The officers of the Corporation shall hold office until
their successors are elected or appointed and qualify, or until their death or
until their resignation or removal from office. Any officer elected or
appointed by the Board of Directors may be removed at any time by the Board,
with or without cause. Such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
shall not of itself create contract rights.
5.3 VACANCIES. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise shall be filled by the Board of
Directors.
5.4 AUTHORITY. Officers and agents shall have such authority and perform
such duties in the management of the Corporation as may be provided in these
Bylaws.
5.5 CHAIRMAN OF THE BOARD. The Chairman of the Board, if one is elected,
shall preside at all meetings of the Board of Directors and of the shareholders
and shall have such other powers and duties as may from time to time be
prescribed by the Board of Directors upon written directions given to him
pursuant to resolutions duly adopted by the Board of Directors.
5.6 VICE CHAIRMAN OF THE BOARD. The Vice Chairman of the Board, if
elected, shall preside at meetings of the Board of Directors and of shareholders
in the absence of the Chairman of the Board. The Vice Chairman of the Board
shall have such other powers and duties as from time to time may be prescribed
by the Board of Directors.
5.7 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have
general control and management of all the business and affairs of the
Corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. He shall preside at all meetings of the
shareholders and of the Board of Directors unless a Chairman of the Board or
Vice Chairman of the Board has been elected, in which event the Chief Executive
Officer shall preside at all meetings of the shareholders and the Board of
Directors in the absence or
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disability of the Chairman of the Board or the Vice Chairman of the Board. The
Chief Executive Officer shall have authority to sign all contracts of the
Corporation.
5.8 PRESIDENT. If a Chief Executive Officer has not been elected, the
President shall be the chief executive officer of the Corporation, shall have
general and active management of the business and affairs of the Corporation and
shall see that all orders and resolutions of the Board of Directors are carried
into effect. The President shall perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe.
The President shall sign all certificates of stock of the Corporation. The
President shall have authority to sign all contracts of the Corporation. The
President shall participate at all meetings of the shareholders and of the Board
of Directors. In the absence or disability of the Chairman of the Board, Vice
Chairman of the Board and the Chief Executive Officer, the President shall
preside at meetings of the shareholders and of the Board of Directors.
5.9 VICE PRESIDENT. Vice Presidents, including executive vice presidents
and senior vice presidents, in the order of their seniority, unless otherwise
determined by the Board of Directors, shall, in the absence or disability of the
President, perform the duties and have the authority and exercise the powers of
the President. They shall perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe
or as the Chief Executive Officer or President may from time to time delegate.
5.10 SECRETARY. The Secretary shall attend all meetings of the Board of
Directors and all meetings of shareholders and record all of the proceedings of
the meetings of the Board of Directors and of the shareholders in a minute book
to be kept for that purpose and shall perform like duties for the standing
committees when required. He shall give, or cause to be given, notice of all
meetings of the shareholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or the Chief Executive Officer or President, under whose supervision he shall
be. He shall keep in safe custody the seal of the Corporation and, when
authorized by the Board of Directors, shall affix the same to any instrument
requiring it and, when so affixed, it shall be attested by his signature or by
the signature of an Assistant Secretary or of the Treasurer.
5.11 TREASURER.
(a) The Treasurer shall have custody of the corporate funds and
securities and shall keep full and accurate accounts and records of
receipts, disbursements and other transactions 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.
(b) 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 Chief Executive Officer or President
and the Board of Directors, at its regular meetings, or when the Chief
Executive Officer or President or Board of Directors so requires, an
account of all his transactions as Treasurer and of the financial condition
of the Corporation.
(c) If required by the Board of Directors, the Treasurer shall give
the Corporation a bond of such type, character and amount as the Board of
Directors may require.
5.12 ASSISTANT SECRETARY AND ASSISTANT TREASURER. In the absence of the
Secretary or Treasurer, an Assistant Secretary or Assistant Treasurer,
respectively shall perform the duties of the Secretary or Treasurer. Assistant
Treasurers may be required to give bond as provided in section 5.11(c). The
assistant secretaries and assistant treasurers, in general shall have such
powers and perform such duties as the Treasurer or Secretary, respectively, or
the Board of Directors or Chief Executive Officer or President may prescribe.
6. INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS
6.1 RIGHT TO INDEMNIFICATION. Subject to the limitations and conditions
as provided in this Article 6, and in Section 2.02-1 of the TBCA (relating among
other matters to liability for receipt of an improper personal benefit or
liability to the Corporation), as from time to time amended, each person who
was, is or is threatened to be made a named defendant or respondent in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative (hereinafter a
"proceeding"), or any
AMENDED AND RESTATED BYLAWS - Page 8
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appeal in such a proceeding or any inquiry or investigation that could lead to
such a proceeding, by reason of the fact that he or she, is or was a director or
officer of the Corporation or while a director or officer of the Corporation is
or was serving at the request of the Corporation as a director, officer,
partner, venturer, proprietor, trustee, employee, agent or similar functionary
of another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan or other enterprise shall be
indemnified by the Corporation against judgments, penalties (including excise
and similar taxes), fines, settlements and reasonable expenses (including,
without limitation, attorneys' fees) actually incurred by such person in
connection with such proceeding if and only if it is determined that such person
met the standard of conduct required in 6.2 below and, as to expenses, that such
expenses are reasonable, such determinations to be made in accordance with the
procedures described in Section 6.3 below; provided that if such person is found
liable to the Corporation or is found liable on the basis that personal benefit
was improperly received by such person, indemnification is limited to reasonable
expenses actually incurred by such person in connection with the proceeding and
shall not be made in respect of any proceeding in which such person shall have
been found liable for willful or intentional misconduct in the performance of
his or her duty to the Corporation. It is expressly acknowledged that the
indemnification provided in this Article 6 could involve indemnification for
negligence or under theories of strict liability.
6.2 STANDARD OF CONDUCT. The Corporation shall indemnify a person
pursuant to Section 6.1 above if, and only if, it is determined that such
person: (i) conducted himself or herself in good faith; (ii) reasonably
believed: (a) in the case of conduct in his or her official capacity as a
director of the Corporation, that his or her conduct was in the Corporation's
best interest; and (b) in all other cases, that his or her conduct was at least
not opposed to the Corporation's best interest; and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful.
6.3 DETERMINATION WHETHER STANDARD OF CONDUCT MET; REASONABLENESS OF
EXPENSES. Determination of whether the standard of conduct has been met for
indemnification under this Section 6.1 must be made: (i) by a majority vote of a
quorum consisting of directors who at the time of the vote are not named
defendants or respondents in the proceeding; (ii) if such a quorum cannot be
obtained, by a majority vote of a committee of the board of directors,
designated to act in the matter by a majority vote of all directors, consisting
solely of two or more directors who at the time of the vote are not named
defendants or respondents in the proceeding; (iii) by special legal counsel
selected by the board of directors or a committee of the board of directors by
vote as set forth in clause (i) or (ii) of this sentence, or, if such a quorum
cannot be obtained and such a committee cannot be established, by a majority
vote of all directors; or (iv) by the shareholders in a vote that excludes the
shares held by directors who are named defendants or respondents in the
proceeding. Determination as to reasonableness of expenses must be made in the
same manner as the determination that the standard of conduct has been met,
except that if the determination that the standard of conduct has been met is
made by special legal counsel, determination of the reasonableness of expenses
must be made by special legal counsel.
6.4 MANDATORY INDEMNIFICATION OF EXPENSES. The Corporation shall
indemnify a director against reasonable expenses incurred by him in connection
with a proceeding in which he is a named defendant or respondent because he is
or was a director if he has been wholly successful, on the merits or otherwise,
in the defense of the proceeding.
6.5 SURVIVAL; AMENDMENT. Indemnification under this Article 6 shall
continue as to a person who has ceased to serve in the capacity which initially
entitled such person to indemnity hereunder. The rights granted pursuant to this
Article 6 shall be deemed contract rights, and no amendment, modification or
repeal of this Article 6 shall have the effect of limiting or denying any such
rights with respect to actions taken or proceedings arising prior to any such
amendment, modification or repeal.
6.6 ADVANCE PAYMENT. The right to indemnification conferred in this
Article 6 shall include the right to be paid or reimbursed by the Corporation
the reasonable expenses incurred by a person of the type entitled to be
indemnified under Section 6.1 who was, is or is threatened to be made a named
defendant or respondent in a proceeding in advance of the final disposition of
the proceeding and without any determination as to the person's ultimate
entitlement to indemnification; provided, however, that the payment of such
expenses incurred by any such person in advance of the final disposition of a
proceeding, shall be made only upon delivery to the Corporation of a written
affirmation by such director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification under this
Article 6 and a written undertaking, by or on behalf of such person, to repay
all amounts so advanced if it shall ultimately be determined that such
indemnified person is not entitled to be indemnified under this Article 6 or
otherwise.
AMENDED AND RESTATED BYLAWS - Page 9
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6.7. INDEMNIFICATION OF EMPLOYEES AND AGENTS. The Corporation, by
adoption of a resolution of the Board of Directors, may (but shall not be
required to) indemnify and advance expenses to an employee or agent of the
Corporation to the same extent and subject to the same conditions under which it
may indemnify and advance expenses to directors and officers under this Article
6; and, the Corporation may (but shall not be required to) indemnify and advance
expenses to persons who are not or were not directors, officers, employees or
agents of the Corporation but who are or were serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan or other enterprise against any liability asserted against that
person and incurred by that person in such a capacity or arising out of such
individual's status as such a person to the same extent that it may indemnify
and advance expenses to directors under this Article 6.
6.8 APPEARANCE AS A WITNESS. Notwithstanding any other provision of this
Article 6, the Corporation may pay or reimburse expenses incurred by a director
or officer in connection with his or her appearance as a witness or other
participation in a proceeding at a time when he or she is not a named defendant
or respondent in the proceeding.
6.9 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the
advancement and payment of expenses conferred in this Article 6 shall not be
exclusive of any other right which a director or officer or other person
indemnified pursuant to Section 3 of this Article 6 may have or hereafter
acquire under any law (common or statutory), provision of the Amended and
Restated Articles of Incorporation or these bylaws, agreement, vote of
shareholders or disinterested directors or otherwise.
6.10 INSURANCE. The Corporation may purchase and maintain insurance and,
to the extent permitted by the Act, similar arrangements, at its expense to
protect itself and any person who is or was serving as a director, officer,
employee or agent of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, venturer, proprietor, trustee,
employee, agent or similar functionary of another foreign or domestic
corporation, partnership, joint venture, proprietorship, employee benefit plan,
trust or other enterprise against any expense, liability or loss, whether or not
the Corporation would have the power to indemnify such person against such
expense, liability or loss under this Article 6.
6.11 SHAREHOLDER NOTIFICATION. To the extent required by law, any
indemnification of or advance of expenses to a director or officer in accordance
with this Article 6 shall be reported in writing to the shareholders with or
before the notice or waiver of notice of the next shareholders' meeting or with
or before the next submission to shareholders of a consent to action without a
meeting and, in any case, within the twelve month period immediately following
the date of the indemnification or advance.
6.12 SAVINGS CLAUSE. If this Article 6 or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify and hold harmless each director,
officer or any other person indemnified pursuant to this Article 6 as to costs,
charges and expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement with respect to any action, suit or proceeding, whether
civil, criminal, administrative or investigative to the full extent permitted by
any applicable portion of this Article 6 that shall not have been invalidated
and to the fullest extent permitted by applicable law.
7. CERTIFICATES REPRESENTING SHARES
7.1 CERTIFICATES. The shares of the Corporation shall be represented by
certificates signed by the President or a Vice President and the Secretary or an
Assistant Secretary of the Corporation, and may be sealed with the seal of the
Corporation or a facsimile thereof. The signatures of the President or Vice
President and the Secretary or Assistant Secretary upon a certificate may be
facsimiles if the certificate is countersigned by a transfer agent, or
registered by a registrar, other than the Corporation itself or an employee of
the Corporation. The certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued. Each certificate
shall state on the face thereof the holder's name, the number and class of
shares, and the par value of such shares or a statement that such shares are
without par value.
7.2 PAYMENT, ISSUANCE. Shares may be issued for such consideration, not
less than the par value thereof, as may be fixed from time to time by the Board
of Directors. The consideration for the payment of
AMENDED AND RESTATED BYLAWS - Page 10
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shares shall consist of money paid, labor done or property actually received.
Shares may not be issued until the full amount of the consideration fixed
therefor has been paid.
7.3 LOST, STOLEN OR DESTROYED 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
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, prescribe such terms and conditions as it
deems expedient and may require such indemnities as it deems adequate to protect
the Corporation from any claim that may be made against it with respect to any
such certificate alleged to have been lost or destroyed.
7.4 REGISTRATION OF TRANSFER. Shares of stock shall be transferable only
on the books of the Corporation by the holder thereof in person or by his duly
authorized attorney. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, a new
certificate shall be issued to the person entitled thereto and the old
certificate canceled and the transaction recorded upon the books of the
Corporation.
7.5 REGISTERED OWNER. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as of the record date as the
owner of shares to receive dividends or other distributions, and to vote as such
owner, 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
the laws of the State of Texas. The person in whose name the shares are or were
registered in the stock transfer books of the Corporation as of the record date
shall be deemed to be the owner of the shares registered in his name at that
time. Neither the Corporation nor any of its officers, Directors, or agents
shall be under any liability for making such a distribution to a person in whose
name shares were registered in the stock transfer books as of the record date or
to the heirs, successors, or assigns of the person, even though the person, or
his heirs, successors, or assigns, may not possess a certificate for shares.
8. DIVIDENDS
8.1 DECLARATION AND PAYMENT. Subject to the Act and the Articles of
Incorporation, dividends may be declared by the Board of Directors, in its
discretion, at any regular or special meeting, pursuant to law and may be paid
in cash, in property or in the Corporation's own shares.
8.2 RESERVES. Before payment of any dividend, the Board of Directors, by
resolution, may create a reserve or reserves out of the Corporation's surplus or
designate or allocate any part or all of such surplus in any manner for any
proper purpose or purposes, and may increase, create, or abolish any such
reserve, designation, or allocation in the same manner.
9. GENERAL PROVISION
9.1 FISCAL YEAR. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
9.2 SEAL. The corporate seal shall be in such form as may be prescribed
by the Board of Directors. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any manner reproduced.
9.3 MINUTES. The Corporation shall keep correct and complete books and
records of account and shall keep minutes of the proceedings of its shareholders
and Board of Directors, and shall keep at its registered office or principal
place of business, or at the office of its transfer agent or registrar, a record
of its shareholders, giving names and addresses of all shareholders and the
number and class of the shares held by each.
9.4 AMENDMENT. The power to amend or repeal these Bylaws and adopt new
Bylaws shall be reserved exclusively to the Board of Directors. These Bylaws
may be altered, amended or repealed and new Bylaws may be adopted by the Board
of Directors, at any meeting of the Board of Directors at which a quorum is
present, provided notice of the proposed alteration, amendment, or repeal is
contained in the notice of the meeting.
AMENDED AND RESTATED BYLAWS - Page 11
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9.5 NOTICE. Any notice to Directors or shareholders shall be in writing
and shall be delivered personally or mailed to the Directors or shareholders at
their respective addresses appearing on the books of the Corporation. Notice by
mail shall be deemed to be given at the time when the same shall be deposited in
the United States mail, postage prepaid. Notice to Directors may also be given
by facsimile transmittal. Whenever any notice is required to be given under the
provisions of applicable statutes or of the Articles of Incorporation or of
these Bylaws, a waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent to the giving of such notice.
Dated: August 24, 1999
<PAGE>
EXHIBIT 4.2
ASD SYSTEMS, INC.
1999 LONG TERM INCENTIVE PLAN
Adopted Effective May 12, 1999
Amended August 22, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I PURPOSE OF PLAN............................................... 1
ARTICLE II EFFECTIVE DATE AND TERM OF PLAN1............................. 1
2.1 Term of Plan1....................................................... 1
2.2 Effect on Stock Options............................................. 1
2.3 Shareholder Approval................................................ 1
ARTICLE III SHARES SUBJECT TO PLAN...................................... 1
3.1 Number of Shares.................................................... 1
3.2 Source of Shares.................................................... 1
3.3 Availability of Unused Shares....................................... 2
3.4 Adjustment Provisions............................................... 2
3.5 Reservation of Shares............................................... 2
ARTICLE IV ADMINISTRATION OF PLAN....................................... 3
4.1 Administering Body.................................................. 3
4.2 Authority of Administering Body..................................... 3
4.3 No Liability........................................................ 4
4.4 Amendments.......................................................... 4
4.5 Other Compensation Plans............................................ 5
4.6 Plan Binding on Successors.......................................... 5
4.7 References to Successor Statutes, Regulations and Rules............. 5
4.8 Issuances for Compensation Purposes Only............................ 5
4.9 Invalid Provisions.................................................. 5
4.10 Governing Law...................................................... 5
ARTICLE V GENERAL AWARD PROVISIONS...................................... 5
5.1 Participation in the Plan........................................... 6
5.2 Stock Option Documents.............................................. 6
5.3 Exercise of Stock Options........................................... 6
5.4 Payment For Stock Options........................................... 6
5.5 No Employment Rights................................................ 7
5.6 Restrictions Under Applicable Laws and Regulations.................. 7
5.7 Additional Conditions............................................... 8
5.8 No Privileges of Stock Ownership.................................... 8
5.9 Nonassignability.................................................... 9
5.10 Information to Optionees........................................... 9
5.11 Withholding Taxes.................................................. 10
5.12 Legends on Stock Options and Stock Certificates.................... 10
5.13 Effect of Termination of Employment on Stock Options............... 10
5.14 Limits on Stock Options to Certain Eligible Persons................ 11
ARTICLE VI STOCK OPTIONS................................................ 11
6.1 Nature of Stock Options............................................. 11
6.2 Option Exercise Price............................................... 11
6.3 Option Period and Vesting........................................... 12
6.4 Special Provisions Regarding Incentive Stock Options................ 12
ARTICLE VII REORGANIZATIONS............................................. 12
7.1 Corporate Transactions Not Involving a Change in Control............ 13
i
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7.2 Corporate Transactions Involving a Change in Control................ 13
ARTICLE VIII DEFINITIONS................................................ 13
ii
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ASD SYSTEMS, INC.
1999 LONG TERM INCENTIVE PLAN
--------------------------------------------------------
ARTICLE I
PURPOSE OF PLAN
The Company has adopted this Plan to promote the interests of the Company
and its shareholders by using investment interests in the Company to attract,
retain and motivate its management and other persons, to encourage and reward
their contributions to the performance of the Company and to align their
interests with the interests of the Company's shareholders. Capitalized terms
not otherwise defined herein shall have the meanings ascribed to them in Article
VIII.
ARTICLE II
EFFECTIVE DATE AND TERM OF PLAN
2.1 Term of Plan. This Plan became effective as of the Effective Date and
shall continue in effect until the Expiration Date, at which time this Plan
shall automatically terminate.
2.2 Effect on Stock Options. Stock Options may be granted during the Plan
Term, but no Stock Options may be granted after the Plan Term. Notwithstanding
the foregoing, each Stock Option properly granted under this Plan during the
Plan Term shall remain in effect after termination of this Plan until such Stock
Option has been exercised, terminated or expired in accordance with its terms
and the terms of this Plan.
2.3 Shareholder Approval. This Plan shall be approved by the Company's
shareholders within 12 months after the Effective Date. The effectiveness of any
Stock Options granted prior to such shareholder approval shall be subject to
such shareholder approval.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 Number of Shares. The maximum number of shares of Common Stock that
may be issued pursuant to Stock Options granted under this Plan shall be
1,200,000, subject to adjustment as set forth in Section 3.4.
3.2 Source of Shares. The Common Stock to be issued under this Plan will
be made available, at the discretion of the Board, either from authorized but
unissued shares of Common Stock or from previously issued shares of Common Stock
reacquired by the Company, including without limitation shares purchased on the
open market.
<PAGE>
3.3 Availability of Unused Shares. Shares of Common Stock subject to
unexercised portions of any Stock Option granted under this Plan that expire,
terminate or are canceled, and shares of Common Stock issued pursuant to Stock
Options under this Plan that are reacquired by the Company pursuant to the terms
of the Stock Options under which such shares were issued, will again become
available for the grant of further Stock Options under this Plan.
3.4 Adjustment Provisions.
(a) If the outstanding shares of Common Stock of the Company are
increased, decreased or exchanged for a different number or kind of shares or
other securities, or if additional shares or new or different shares or other
securities are distributed in respect of such shares of Common Stock (or any
stock or securities received with respect to such Common Stock), through merger,
consolidation, sale or exchange of all or substantially all of the assets of the
Company, reorganization, recapitalization, reclassification, stock dividend,
stock split, reverse stock split, spin-off or other distribution with respect to
such shares of Common Stock (or any stock or securities received with respect to
such Common Stock), an appropriate and proportionate adjustment may be made in
(1) the maximum number and kind of shares subject to this Plan as provided in
Section 3.1, (2) the number and kind of shares or other securities subject to
then outstanding Stock Options and/or (3) the price for each share or other unit
of any other securities subject to the then outstanding Stock Options.
(b) No fractional interests will be issued under this Plan resulting from
any adjustments.
(c) To the extent any adjustments relate to stock or securities of the
Company, such adjustments shall be made by the Administering Body (as defined in
Article VIII hereof), whose determination in that respect shall be final,
binding and conclusive.
(d) The grant of Stock Options pursuant to this Plan shall not affect in
any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(e) No adjustment to the terms of an Incentive Stock Option shall be made
unless such adjustment either (i) would not cause such Option to lose its status
as an Incentive Stock Option or (ii) is agreed to in writing by the
Administering Body and the Recipient.
3.5 Reservation of Shares. The Company will at all times reserve and keep
available such number of shares of Common Stock as shall equal at least the
number of shares of Common Stock subject to then outstanding Stock Options
issuable in shares of Common Stock under this Plan.
2
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ARTICLE IV
ADMINISTRATION OF PLAN
4.1 Administering Body.
(a) Subject to the provisions of Section 4.1(b)(ii), this Plan shall be
administered by the Board or by the Long Term Incentive Plan Committee of the
Board appointed pursuant to Section 4.1(b).
(b) (i) The Board in its sole discretion may from time to time appoint a
Long Term Incentive Plan Committee of not less than two Board members to
administer this Plan and, subject to applicable law, to exercise all of the
powers, authority and discretion of the Board under this Plan. The Board may
from time to time increase or decrease (but not below two) the number of members
of the Long Term Incentive Plan Committee, remove from membership on the Long
Term Incentive Plan Committee all or any portion of its members, and/or appoint
such person or persons as it desires to fill any vacancy existing on the Long
Term Incentive Plan Committee, whether caused by removal, resignation or
otherwise. The Board may disband the Long Term Incentive Plan Committee at any
time and revest in the Board the administration of this Plan.
(ii) Reserved.
(iii) The Long Term Incentive Plan Committee shall report to the Board
the names of Eligible Persons granted Stock Options, the number of shares of
Common Stock covered by each Stock Option and the terms and conditions of each
such Stock Option.
4.2 Authority of Administering Body.
(a) Subject to the express provisions of this Plan, the Administering Body
shall have the power to interpret and construe this Plan and any Stock Option
Documents or other documents defining the rights and obligations of the Company
and Optionees hereunder and thereunder, to determine all questions arising
hereunder and thereunder, to adopt and amend such rules and regulations for the
administration hereof and thereof as it may deem desirable, and otherwise to
carry out the terms of this Plan and such Stock Option Documents and other
documents. The interpretation and construction by the Administering Body of any
provisions of this Plan or of any Stock Option shall be conclusive and binding.
Any action taken by, or inaction of, the Administering Body relating to this
Plan or any Stock Options shall be within the absolute discretion of the
Administering Body and shall be conclusive and binding upon all persons.
Subject only to compliance with the express provisions hereof, the Administering
Body may act in its absolute discretion in matters related to this Plan and any
and all Stock Options.
(b) Subject to the express provisions of this Plan, the Administering Body
may from time to time in its discretion select the Eligible Persons to whom, and
the time or times at which, Stock Options shall be granted, the nature of each
Stock Option, the number of shares of Common Stock that make up or underlie each
Stock Option, the period for the exercise of each Stock Option, and such other
terms and conditions applicable to each individual Stock Option as
3
<PAGE>
the Administering Body shall determine. The Administering Body may grant at any
time new Stock Options to an Eligible Person who has previously received Stock
Options whether such prior Stock Options are still outstanding, have previously
been exercised as a whole or in part, or are canceled in connection with the
issuance of new Stock Options. The Administering Body may grant Stock Options
singly, in combination or in tandem with other Stock Options, as it determines
in its discretion. Any and all terms and conditions of the Stock Options,
including exercise price, may be established by the Administering Body without
regard to existing Stock Options.
(c) Any action of the Administering Body with respect to the
administration of this Plan shall be taken pursuant to a majority vote of the
authorized number of members of the Administering Body or by the unanimous
written consent of its members; provided, however, that (i) if the Administering
Body is the Long Term Incentive Plan Committee and consists of two members, then
actions of the Administering Body must be unanimous and (ii) if the
Administering Body is the Board, actions taken at a meeting of the Board shall
be valid if approved by directors constituting a majority of the required quorum
for such meeting.
4.3 No Liability. No member of the Board or the Long Term Incentive Plan
Committee or any designee thereof will be liable for any action or inaction with
respect to this Plan or any Stock Option or any transaction arising under this
Plan or any Stock Option, except in circumstances constituting bad faith of such
member.
4.4 Amendments.
(a) The Administering Body may, insofar as permitted by applicable law,
rule or regulation, from time to time suspend or discontinue this Plan or revise
or amend it in any respect whatsoever, and this Plan as so revised or amended
will govern all Stock Options hereunder, including those granted before such
revision or amendment; provided, however, that no such revision or amendment
shall alter, impair or diminish any rights or obligations under any Stock Option
previously granted under this Plan, without the written consent of the Optionee.
Without limiting the generality of the foregoing, the Administering Body is
authorized to amend this Plan to comply with or take advantage of amendments to
applicable laws, rules or regulations, including amendments to the Securities
Act, Exchange Act or the IRC or any rules or regulations promulgated thereunder.
No shareholder approval of any amendment or revision shall be required unless
(i) such approval is required by applicable law, rule or regulation or (ii) an
amendment or revision to this Plan would materially increase the number of
shares subject to this Plan (as adjusted under Section 3.4), materially modify
the requirements as to eligibility for participation in this Plan, extend the
final date upon which Stock Options may be granted under this Plan, or otherwise
materially increase the benefits accruing to Recipients in a manner not
specifically contemplated herein, or affect this Plan's compliance with Rule
16b-3 or applicable provisions of or regulations under the IRC, and shareholder
approval of the amendment or revision is required to comply with Rule 16b-3 or
applicable provisions of or rules under the IRC.
(b) The Administering Body may, with the written consent of an Optionee,
make such modifications in the terms and conditions of a Stock Option as it
deems advisable. Without limiting the generality of the foregoing, the
Administering Body may, in its discretion with the
4
<PAGE>
written consent of Optionee, at any time and from time to time after the grant
of any Stock Option accelerate or extend the vesting or exercise period of any
Stock Option as a whole or in part, and adjust or reduce the exercise price of
Stock Options held by such Optionee by cancellation of such Stock Options and
granting of Stock Options at lower or exercise prices or by modification,
extension or renewal of such Stock Options. In the case of Incentive Stock
Options, Recipients acknowledge that extensions of the exercise period may
result in the loss of the favorable tax treatment afforded incentive stock
options under Section 422 of the IRC.
(c) Except as otherwise provided in this Plan or in the applicable Stock
Option Document, no amendment, revision, suspension or termination of this Plan
will, without the written consent of the Optionee, alter, terminate, impair or
adversely affect any right or obligation under any Stock Option previously
granted under this Plan.
4.5 Other Compensation Plans. The adoption of this Plan shall not affect
any other stock option, incentive or other compensation plans in effect for the
Company, and this Plan shall not preclude the Company from establishing any
other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, whether or not approved by shareholders.
4.6 Plan Binding on Successors. This Plan shall be binding upon the
successors and assigns of the Company.
4.7 References to Successor Rules. Any reference in this Plan to a
particular statute, regulation or rule shall also refer Statutes, Regulations
and to any successor provision of such statute, regulation or rule.
4.8 Issuances for Compensation Purposes Only. This Plan constitutes an
"employee benefit plan" as defined in Rule 405 promulgated under the Securities
Act. Stock Options to eligible employees or directors shall be granted for any
lawful consideration, including compensation for services rendered, promissory
notes or otherwise. Stock Options to consultants and advisors shall be granted
only in exchange for bona fide services rendered by such consultants or advisors
and such services must not be in connection with the offer and sale of
securities in a capital-raising transaction.
4.9 Invalid Provisions. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision were not contained herein.
4.10 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the internal laws of the State of Texas, without giving effect
to the principles of the conflicts of laws thereof.
ARTICLE V
GENERAL AWARD PROVISIONS
5
<PAGE>
5.1 Participation in the Plan .
(a) A person shall be eligible to receive grants of Stock Options under
this Plan if, at the time of the grant of the Stock Option, such person is an
Eligible Person.
(b) Incentive Stock Options may be granted only to Eligible Persons
meeting the employment requirements of Section 422 of the IRC.
(c) Notwithstanding anything to the contrary herein, the Administering
Body may, in order to fulfill the purposes of this Plan, modify grants of Stock
Options to Recipients who are foreign nationals or employed outside of the
United States to recognize differences in applicable law, tax policy or local
custom.
5.2 Stock Option Documents.
(a) Each Stock Option granted under this Plan shall be evidenced by an
agreement duly executed on behalf of the Company and by the Recipient or, in the
Long Term Incentive Plan Committee's discretion, a confirming memorandum issued
by the Company to the Recipient, setting forth such terms and conditions
applicable to the Stock Option as the Long Term Incentive Plan Committee may in
its discretion determine. Stock Option Documents may but need not be identical
and shall comply with and be subject to the terms and conditions of this Plan, a
copy of which shall be provided to each Recipient and incorporated by reference
into each Stock Option Document. Any Stock Option Document may contain such
other terms, provisions and conditions not inconsistent with this Plan as may be
determined by the Long Term Incentive Plan Committee.
(b) In case of any conflict between this Plan and any Stock Option
Document, this Plan shall control.
5.3 Exercise of Stock Options. No Stock Option shall be exercisable
except in respect of whole shares, and fractional share interests shall be
disregarded. Not less than 100 shares of Common Stock (or such other amount as
is set forth in the applicable Stock Option Documents) may be purchased at one
time and Stock Options must be exercised in multiples of 100 unless the number
purchased is the total number at the time available for purchase under the terms
of the Stock Option. A Stock Option shall be deemed to be exercised when the
Secretary or other designated official of the Company receives written notice of
such exercise from the Optionee, together with payment of the exercise price
made in accordance with Section 5.4 and any amounts required under Section 5.11.
Notwithstanding any other provision of this Plan, the Administering Body may
impose, by rule and/or in Stock Option Documents, such conditions upon the
exercise of Stock Options (including without limitation conditions limiting the
time of exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including without limitation Rule 16b-3 and Rule 10b-5
under the Exchange Act, and any amounts required under Section 5.12 or other
applicable section of or regulation under the IRC.
5.4 Payment For Stock Options.
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(a) The exercise price or other payment for a Stock Option shall be
payable upon the exercise of a Stock Option pursuant to a Stock Option granted
hereunder by cash.
(b) [intentionally omitted].
(c) The Administering Body may, in the exercise of its discretion, (i)
allow exercise of Stock Options in a broker-assisted or similar transaction in
which the exercise price is not received by the Company until promptly after
exercise, and/or (ii) allow the Company to loan the exercise price to the
Optionee, if the exercise will be followed by a prompt sale of some or all of
the underlying shares and a portion of the sale proceeds is dedicated to full
payment of the exercise price and amounts required pursuant to Section 5.11.
5.5 No Employment Rights. Nothing contained in this Plan (or in Stock
Option Documents or in any other documents related to this Plan or to Stock
Options granted hereunder) shall confer upon any Eligible Person or Recipient
any right to continue in the employ of the Company or any Affiliated Entity or
constitute any contract or agreement of employment or engagement, or interfere
in any way with the right of the Company or any Affiliated Entity to reduce such
person's compensation or other benefits or to terminate the employment or
engagement of such Eligible Person or Recipient, with or without cause. Except
as expressly provided in this Plan or in any statement evidencing the grant of
Stock Options pursuant to this Plan, the Company shall have the right to deal
with each Recipient in the same manner as if this Plan and any such statement
evidencing the grant of Stock Options pursuant to this Plan did not exist,
including without limitation with respect to all matters related to the hiring,
discharge, compensation and conditions of the employment or engagement of the
Recipient. Any questions as to whether and when there has been a termination of
a Recipient's employment or engagement, the reason (if any) for such
termination, and/or the consequences thereof under the terms of this Plan or any
statement evidencing the grant of Stock Options pursuant to this Plan shall be
determined by the Administering Body and the Administering Body's determination
thereof shall be final and binding.
5.6 Restrictions Under Applicable Laws and Regulations.
(a) All Stock Options granted under this Plan shall be subject to the
requirement that, if at any time the Company shall determine, in its discretion,
that the listing, registration or qualification of the shares subject to Stock
Options granted under this Plan upon any securities exchange or under any
federal, state or foreign law, or the consent or approval of any government
regulatory body, is necessary or desirable as a condition of, or in connection
with, the granting of such Stock Options or the issuance, if any, or purchase of
shares in connection therewith, such Stock Options may not be exercised as a
whole or in part unless and until such listing, registration, qualification,
consent or approval shall have been effected or obtained free of any conditions
not acceptable to the Company. During the term of this Plan, the Company will
use its reasonable efforts to seek to obtain from the appropriate regulatory
agencies any requisite qualifications, consents, approvals or authorizations in
order to issue and sell such number of shares of its Common Stock as shall be
sufficient to satisfy the requirements of this Plan. The inability of the
Company to obtain from any such regulatory agency having jurisdiction thereof
the qualifications, consents, approvals or authorizations deemed by the Company
to be necessary for
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the lawful issuance and sale of any shares of its Common Stock hereunder shall
relieve the Company of any liability in respect of the nonissuance or sale of
such stock as to which such requisite authorization shall not have been
obtained.
(b) The Company shall be under no obligation to register or qualify the
issuance of Stock Options or underlying shares under the Securities Act or
applicable state securities laws. Unless the issuance of Stock Options and
underlying shares have been registered under the Securities Act and qualified or
registered under applicable state securities laws, the Company shall be under no
obligation to issue any Stock Options or underlying shares of Common Stock
covered by any Stock Options unless the Stock Options and underlying shares may
be issued pursuant to applicable exemptions from such registration or
qualification requirements. In connection with any such exempt issuance, the
Administering Body may require the Optionee to provide a written representation
and undertaking to the Company, satisfactory in form and scope to the Company
and upon which the Company may reasonably rely, that such Optionee is acquiring
such Stock Options and underlying shares for such Optionee's own account as an
investment and not with a view to, or for sale in connection with, the
distribution of any such shares of stock, and that such person will make no
transfer of the same except in compliance with any rules and regulations in
force at the time of such transfer under the Securities Act and other applicable
law, and that if shares of stock are issued without such registration, a legend
to this effect (together with any other legends deemed appropriate by the
Administering Body) may be endorsed upon the securities so issued. The Company
may also order its transfer agent to stop transfers of such shares. The
Administering Body may also require the Optionee to provide the Company such
information and other documents as the Administering Body may request in order
to satisfy the Administering Body as to the investment sophistication and
experience of the Optionee and as to any other conditions for compliance with
any such exemptions from registration or qualification.
5.7 Additional Conditions. Any Stock Option may also be subject to such
other provisions (whether or not applicable to any other Stock Option or
Optionee) as the Administering Body determines appropriate including without
limitation provisions to assist the Optionee in financing the purchase of Common
Stock through the exercise of Stock Options, provisions for the forfeiture of or
restrictions on resale or other disposition of shares of Common Stock acquired
under any form of benefit, provisions giving the Company the right to repurchase
shares of Common Stock acquired under any form of benefit in the event the
Optionee elects to dispose of such shares, and provisions to comply with federal
and state securities laws and federal and state income tax withholding
requirements.
5.8 No Privileges of Stock Ownership. Except as otherwise set forth
herein, an Optionee shall have no rights as a shareholder with respect to any
shares issuable or issued in connection with the Stock Option until the date of
the receipt by the Company of all amounts payable in connection with exercise of
the Stock Option and performance by the Optionee of all obligations thereunder.
Status as an Eligible Person shall not be construed as a commitment that any
Stock Option will be granted under this Plan to an Eligible Person or to
Eligible Persons generally. No person shall have any right, title or interest in
any fund or in any specific asset (including shares of capital stock) of the
Company by reason of any Stock Option granted hereunder. Neither this Plan (or
any documents related hereto) nor any action taken pursuant
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hereto (or thereto) shall be construed to create a trust of any kind or a
fiduciary relationship between the Company and any Person. To the extent that
any Person acquires a right to receive Stock Options hereunder, such right shall
be no greater than the right of any unsecured general creditor of the Company.
5.9 Nonassignability. No Stock Option granted under this Plan shall be
assignable or transferable except (a) by will or by the laws of descent and
distribution, or (b) subject to the final sentence of this Section 5.9, upon
dissolution of marriage pursu0ant to a qualified domestic relations order or, in
the discretion of the Administering Body and under circumstances that would not
adversely affect the interests of the Company, pursuant to a nominal transfer
that does not result in a change in beneficial ownership; provided, however,
that the Administering Body may in the applicable Stock Option Document
evidencing Stock Options granted hereunder or at any time thereafter provide
that Stock Options granted hereunder may be transferred without consideration by
the Recipient, subject to such rules as the Administering Body may adopt to
preserve the purposes of the Plan, to one or more Permitted Transferees;
provided further, that the Recipient gives the Administering Body advance
written notice describing the terms and conditions of the proposed transfer and
the Administering Body notifies the Recipient in writing that such transfer
would comply with the requirements of the Plan and any applicable Stock Option
Document. The terms of any Stock Option transferred to Permitted Transferees in
accordance with the immediately preceding sentence shall apply to the Permitted
Transferee, except that (a) Permitted Transferees shall not be entitled to
transfer any Stock Options, other than by will or the laws of descent and
distribution; and (b) Permitted Transferees shall not be entitled to exercise
any transferred Stock Options unless there shall be in effect a registration
statement on an appropriate form covering the shares of Common Stock to be
acquired pursuant to the exercise of such Stock Option if the Administering Body
determines that such a registration statement is necessary or appropriate.
During the lifetime of an Optionee, Stock Options shall be exercisable only by
the Optionee or such person's guardian or legal representative.
Notwithstanding the foregoing, (a) no Stock Option owned by an Optionee
subject to Section 16 of the Exchange Act may be assigned or transferred in any
manner inconsistent with Rule 16b-3, and (b) Incentive Stock Options (or other
Stock Options subject to transfer restrictions under the IRC) may not be
assigned or transferred in violation of Section 422(b)(5) of the IRC (or any
comparable or successor provision) or the regulations thereunder, and nothing
herein is intended to allow such assignment or transfer.
5.10 Information to Optionees.
(a) The Administering Body in its sole discretion shall determine what, if
any, financial and other information shall be provided to Optionees and when
such financial and other information shall be provided after giving
consideration to applicable federal and state laws, rules and regulations,
including without limitation applicable federal and state securities laws, rules
and regulations.
(b) The furnishing of financial and other information that is confidential
to the Company shall be subject to the Optionee's agreement that the Optionee
shall maintain the confidentiality of such financial and other information,
shall not disclose such information to third
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parties, and shall not use the information for any purpose other than evaluating
an investment in the Company's securities under this Plan. The Optionee
expressly acknowledges that the number of shares exercisable under options
granted hereunder, and the terms thereof, shall be confidential. The
Administering Body may impose other restrictions on the access to and use of
such confidential information and may require an Optionee to acknowledge the
Optionee's obligations under this Section 5.10(b) (which acknowledgment shall
not be a condition to the Optionee's obligations under this Section 5.10(b)).
5.11 Withholding Taxes. Whenever the granting, vesting or exercise of
any Stock Option granted under this Plan, or the transfer of any shares issued
upon exercise of any Stock Option, gives rise to tax or tax withholding
liabilities or obligations, the Administering Body shall have the right to
require the Optionee to remit to the Company an amount sufficient to satisfy any
federal, state and local withholding tax requirements prior to issuance of such
shares. The Administering Body may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company (or by withholding a portion of the stock otherwise issuable in
connection with Stock Options).
5.12 Legends on Stock Options and Stock Certificates. Each Stock Option
Document and each certificate representing shares acquired upon exercise of
Stock Options shall be endorsed with all legends, if any, required by applicable
federal and state securities and other laws to be placed on the Stock Option
Document and/or the certificate. The determination of which legends, if any,
shall be placed upon Stock Option Documents or the certificates shall be made by
the Administering Body in its sole discretion and such decision shall be final
and binding.
5.13 Effect of Termination of Employment on Stock Options
(a) Termination for Just Cause. Subject to Section 5.13(c), and except
as otherwise provided in a written agreement between the Company and the
Optionee which may be entered into at any time before or after termination of
employment of the Recipient, in the event of a Just Cause Dismissal of a
Recipient, all of the Optionee's unexercised Stock Options, whether or not
vested, shall expire and become unexercisable as of the date of such Just Cause
Dismissal.
(b) Termination Other than for Just Cause Dismissal. Subject to Section
5.13(c) and except as otherwise provided in a written agreement between the
Company and the Optionee, which may be entered into at any time before or after
termination of employment, (or if Optionee is not an employee of the Company,
Optionee's status as a director, consultant or advisor to the Company), in the
event of a Recipient's termination of employment or relationship with the
Company for:
(i) any reason other than for Just Cause Dismissal, death, Permanent
Disability or normal retirement, then the Optionee's Stock Options, whether or
not vested, shall expire and become unexercisable as of the earlier of (A) the
date such Stock Options would expire in accordance with their terms had the
Recipient remained employed and (B) thirty days after the date of employment
termination,
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(ii) death, Permanent Disability or normal retirement, then the
Optionee's unexercised Stock Options shall, whether or not vested, expire and
become unexercisable as of the earlier of (A) the date such Stock Options would
expire in accordance with their terms had the Recipient remained employed (or
otherwise been affiliated with the Company as a director, consultant or
advisor), and (B) ninety days after the date of employment or relationship
termination.
(c) Alteration of Vesting and Exercise Periods. Notwithstanding anything
to the contrary in Section 5.13(a) or Section 5.13(b), the Administering Body
may in its discretion designate shorter or longer periods to exercise Stock
Options following a Recipient's termination of employment; provided, however,
that any shorter periods determined by the Administering Body shall be effective
only if provided for in the instrument that evidences the grant to the Optionee
of such Stock Options or if such shorter period is agreed to in writing by the
Optionee. Notwithstanding anything to the contrary herein, Stock Options shall
be exercisable by a an Optionee following such Optionee's termination of
employment only to the extent that installments thereof had become exercisable
on or prior to the date of such termination; and provided, further, that the
Administering Body may, in its discretion, elect to accelerate the vesting of
all or any portion of any Stock Options that had not become exercisable on or
prior to the date of such termination.
(d) Leave of Absence. In the case of any employee on an approved leave
of absence, the Administering Body may make such provision respecting
continuance of Stock Options as the Administering Body in its discretion deems
appropriate, except that in no event shall a Stock Option be exercisable after
the date such Stock Option would expire in accordance with its terms had the
Recipient remained continuously employed.
5.14 Limits on Stock Options to Certain Eligible Persons. Notwithstanding
any other provision of this Plan, in order for the compensation attributable to
Stock Options hereunder to qualify as Performance-Based Compensation, no one
Eligible Person shall be granted any Stock Options with respect to more than
50,000 shares of Common Stock in any one calendar year. The limitation set forth
in this Section 5.14 shall be subject to adjustment as provided in Section 3.4
or under Article VII, but only to the extent such adjustment would not affect
the status of compensation attributable to Stock Options hereunder as
Performance-Based Compensation.
ARTICLE VI
STOCK OPTIONS
6.1 Nature of Stock Options. Stock Options may be Incentive Stock
Options or Non-qualified Stock Options.
6.2 Option Exercise Price. The exercise price for each Stock Option
shall be determined by the Administering Body as of the date such Stock Option
is granted. The exercise price shall be no less than the Fair Market Value of
the Common Stock subject to the Option. The Administering Body may, with the
consent of the Optionee and subject to compliance with statutory or
administrative requirements applicable to Incentive Stock Options, amend the
terms
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of any Stock Option to provide that the exercise price of the shares remaining
subject to the Stock Option shall be reestablished at a price not less than 100%
of the Fair Market Value of the Common Stock on the effective date of the
amendment. No modification of any other term or provision of any Stock Option
that is amended in accordance with the foregoing shall be required, although the
Administering Body may, in its discretion, make such further modifications of
any such Stock Option as are not inconsistent with this Plan.
6.3 Option Period and Vesting. Stock Options granted hereunder shall
vest and may be exercised as determined by the Administering Body, except that
exercise of such Stock Options after termination of the Recipient's employment
shall be subject to Section 5.13. Without limiting the provisions hereof, no
option may be exercised to the extent not vested. Each Stock Option granted
hereunder and all rights or obligations thereunder shall expire on such date as
shall be determined by the Administering Body, but not later than 10 years after
the date the Stock Option is granted and shall be subject to earlier termination
as provided herein or in the Stock Option Document. The Administering Body may,
in its discretion at any time and from time to time after the grant of a Stock
Option, accelerate vesting of such Option as a whole or in part by increasing
the number of shares then purchasable, provided that the total number of shares
subject to such Stock Option may not be increased. Except as otherwise provided
herein, a Stock Option shall become exercisable, as a whole or in part, on the
date or dates specified by the Administering Body and thereafter shall remain
exercisable until the expiration or earlier termination of the Stock Option.
6.4 Special Provisions Regarding Incentive Stock Options.
(a) Notwithstanding anything in this Article VI to the contrary, the
exercise price and vesting period of any Stock Option intended to qualify as an
Incentive Stock Option shall comply with the provisions of Section 422 of the
IRC and the regulations thereunder. As of the Effective Date, such provisions
require, among other matters, that (i) the exercise price must not be less than
the Fair Market Value of the underlying stock as of the date the Incentive Stock
Option is granted, and not less than 110% of the Fair Market Value as of such
date in the case of a grant to a Significant Shareholder; and (ii) that the
Incentive Stock Option not be exercisable after the expiration of five years
from the date of grant in the case of an Incentive Stock Option granted to a
Significant Shareholder.
(b) The aggregate Fair Market Value (determined as of the respective
date or dates of grant) of the Common Stock for which one or more Options
granted to any Recipient under this Plan (or any other option plan of the
Company or any of its subsidiaries or affiliates) may for the first time become
exercisable as Incentive Stock Options under the federal tax laws during any one
calendar year shall not exceed $100,000.
(c) Any Options granted as Incentive Stock Options pursuant to this
Plan that for any reason fail or cease to qualify as such shall be treated as
Non-qualified Stock Options.
ARTICLE VII
REORGANIZATIONS
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7.1 Corporate Transactions Not Involving a Change in Control. If the
Company shall consummate any Reorganization not involving a Change in Control in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any securities, cash or other consideration (including without
limitation a different number of shares of Common Stock), each Stock Option
outstanding under this Plan shall thereafter be exercisable, in accordance with
this Plan, only for the kind and amount of securities, cash and/or other
consideration receivable upon such Reorganization by a holder of the same number
of shares of Common Stock as are subject to that Stock Option immediately prior
to such Reorganization, and any adjustments will be made to the terms of the
Stock Option in the sole discretion of the Administering Body as it may deem
appropriate to give effect to the Reorganization.
7.2 Corporate Transactions Involving a Change in Control. As of the
effective time and date of any Change in Control, this Plan and any then
outstanding Stock Options (whether or not vested) shall automatically terminate
unless (a) provision is made in writing in connection with such transaction for
the continuance of this Plan and for the assumption of such Stock Options, or
for the substitution for such Stock Options of new awards covering the
securities of a successor entity or an affiliate thereof, with appropriate
adjustments as to the number and kind of securities and exercise prices, in
which event this Plan and such outstanding Stock Options shall continue or be
replaced, as the case may be, in the manner and under the terms so provided; or
(b) the Board otherwise has provided or shall provide in writing for such
adjustments as it deems appropriate in the terms and conditions of the then-
outstanding Stock Options (whether or not vested), including without limitation
(i) accelerating the vesting of outstanding Stock Options and/or (ii) providing
for the cancellation of Stock Options and their automatic conversion into the
right to receive the securities, cash and/or other consideration that a holder
of the shares underlying such Stock Options would have been entitled to receive
upon consummation of such Change in Control had such shares been issued and
outstanding immediately prior to the effective date and time of the Change in
Control (net of the appropriate option exercise prices). If, pursuant to the
foregoing provisions of this Section 7.2, this Plan and the Stock Options shall
terminate by reason of the occurrence of a Change in Control without provision
for any of the actions described in clause (a) or (b) hereof, then any Optionee
holding outstanding Stock Options shall have the right, at such time immediately
prior to the consummation of the Change in Control as the Board shall designate,
to exercise the Optionee's Stock Options to the full extent not theretofore
exercised, including any installments which have not yet become vested.
ARTICLE VIII
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined shall have
the meanings set forth below:
"Administering Body" shall mean the Board as long as no Long Term Incentive
Plan Committee has been appointed and is in effect and shall mean the Long Term
Incentive Plan Committee as long as the Long Term Incentive Plan Committee is
appointed and in effect.
"Affiliated Entity" means any Parent Corporation or Subsidiary Corporation.
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"Board" means the Board of Directors of the Company.
"Change in Control" means the following and shall be deemed to occur if any
of the following events occur:
(a) Any Person (other than Norm Charney or the Staubach Affiliated
Shareholders (as defined in that certain Shareholders Agreement dated as of
January 29, 1999 among the Company and certain of its shareholders) or
affiliates thereof) becomes after the Effective Date the beneficial owner
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of the combined voting power of the Company's then outstanding securities
entitled to vote generally in the election of directors; or
(b) Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(i) a reorganization or merger or consolidation that would result in
the voting securities of the Company outstanding immediately prior thereto
continuing to represent, either by remaining outstanding or by being
converted into voting securities of another entity, more than fifty percent
(50%) of the combined voting power of the voting securities of the Company
or such other entity outstanding immediately after such reorganization or
merger or consolidation (or series of related transactions involving such a
reorganization or merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to implement
a recapitalization or reincorporation of the Company (or similar
transaction) that does not result in a material change in beneficial
ownership of the voting securities of the Company or its successor; or
(c) Approval by the shareholders of the Company or any order by a court of
competent jurisdiction of a plan of liquidation of the Company.
Notwithstanding the foregoing, a Change in Control of the type described in
paragraph (b) or (c) shall be deemed to be completed on the date it occurs, and
a Change in Control of the type described in paragraph (a) shall be deemed to be
completed as of the date the entity or group attaining 50% or greater ownership
has elected its representatives to the Company's Board of Directors and/or
caused its nominees to become officers of the Company with the authority to
terminate or alter the terms of employee's employment.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Series C Preferred Stock of the Company, par value
$0.0001 per share, as constituted on the effective date of the Amended and
Restated Articles of Incorporation of the Company dated August 22, 1999, and as
thereafter adjusted as a result of any one or more events requiring adjustment
of outstanding Stock Options under Section 3.4 above.
"Company" means ASD SYSTEMS, INC., a Texas corporation.
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"Effective Date" means May 12, 1999, which is the date this Plan was
adopted by the Board.
"Eligible Person" shall include directors, officers, employees, consultants
and advisors of the Company or of any Affiliated Entity.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Expiration Date" means the tenth anniversary of the Effective Date.
"Fair Market Value" of a share of the Company's capital stock as of a
particular date shall be: (a) if the stock is listed on an established stock
exchange or exchanges (including for this purpose, the Nasdaq National Market),
the average of the highest and lowest sale prices of the stock quoted for such
date as reported in the Transactions Index of each such exchange, as published
in The Wall Street Journal and determined by the Administering Body, or, if no
sale price was quoted in any such Index for such date, then as of the next
preceding date on which such a sale price was quoted; or (b) if the stock is not
then listed on an exchange or the Nasdaq National Market, the average of the
closing bid and asked prices per share for the stock in the over-the-counter
market as quoted on The Nasdaq Small Cap Market on such date (in the case of (a)
or (b), subject to adjustment as and if necessary and appropriate to set an
exercise price not less than 100% of the Fair Market Value of the stock on the
date an option is granted); or (c) if the stock is not then listed on an
exchange or quoted in the over-the-counter market, an amount determined in good
faith by the Administering Body; provided, however, that (i) when appropriate,
the Administering Body, in determining Fair Market Value of capital stock of the
Company, may take into account such other factors as it may deem appropriate
under the circumstances and (ii) if the stock is traded on the Nasdaq Small Cap
Market and both sales prices and bid and asked prices are quoted or available,
the Administering Body may elect to determine Fair Market Value under either
clause (i) or (ii) above. Notwithstanding the foregoing, the Fair Market Value
of capital stock for purposes of grants of Incentive Stock Options shall be
determined in compliance with applicable provisions of the IRC.
"Immediate Family" means the Recipient's spouse, children or grandchildren
(including adopted and stepchildren and grandchildren).
"Incentive Stock Option" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC, or any successor statute
thereto.
"IRC" means the Internal Revenue Code of 1986, as amended.
"Just Cause Dismissal" shall mean a termination of a Recipient's employment
for any of the following reasons: (a) the Recipient violates any reasonable
rule or regulation of the Board, the Company's Chief Executive Officer or the
Recipient's superiors that results in damage to the Company or which, after
written notice to do so, the Recipient fails to correct within a reasonable
time; (b) any willful misconduct or gross negligence by the Recipient in the
responsibilities
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assigned to the Recipient; (c) any willful failure to perform the Recipient's
job as required to meet Company objectives; (d) any wrongful conduct of a
Recipient which has an adverse impact on the Company or which constitutes a
misappropriation of Company assets; (e) the Recipient's performing services for
any other person or entity that competes with the Company while the Recipient is
employed by the Company, without the written approval of the Chief Executive
Officer of the Company; or (f) any other conduct that the Administering Body
determines constitutes Just Cause for Dismissal; provided, however, that if a
Recipient is party to an employment agreement with the Company providing for
just cause dismissal (or some comparable notion) of Recipient from Recipient's
employment with the Company, "Just Cause Dismissal" for purposes of this Plan
shall have the same meaning as ascribed thereto or to such comparable notion in
such employment agreement.
"Non-qualified Stock Option" means a Stock Option that is not an Incentive
Stock Option.
"Optionee" means a Recipient or the Recipient's successor in interest.
"Parent Corporation" means any Parent Corporation as defined in Section
424(e) of the IRC.
"Performance-Based Compensation" means performance-based compensation as
described in Section 162(m) of the IRC. If the amount of compensation an
Eligible Person will receive under any Stock Option is not based solely on an
increase in the value of Common Stock after the date of grant or award, the Long
Term Incentive Plan Committee, in order to qualify Stock Options as performance-
based compensation under Section 162(m) of the IRC, can condition the grant,
award, vesting or exercisability of such Stock Options on the attainment of a
preestablished, objective performance goal For this purpose, a preestablished,
objective performance goal may include one or more of the following performance
criteria: (a) book value; (b) earnings per share (including earnings before
interest, taxes and amortization); (c) cash flow; (d) return on equity; (e)
total shareholder return; (f) return on capital; (g) return on assets or net
assets; (h) income or net income; (i) operating income or net operating income;
(j) net interest income; (k) net margin; (l) operating margin; (m) return on
operating revenue; (n) attainment of stated goals related to the Company's
capitalization, costs, financial condition or results of operations; and (o) any
other similar performance criteria.
"Person" means any person, entity or group, within the meaning of Section
13(d) or 14(d) of the Exchange Act, but excluding (a) the Company and its
subsidiaries, (b) any employee stock ownership or other employee benefit plan
maintained by the Company that is qualified under ERISA and (c) an underwriter
or underwriting syndicate that has acquired the Company's securities solely in
connection with a public offering thereof.
"Permanent Disability" shall mean that the Recipient becomes physically or
mentally incapacitated or disabled so that the Recipient is unable to perform
substantially the same services as the Recipient performed prior to incurring
such incapacity or disability (the Company, at its option and expense, being
entitled to retain a physician to confirm the existence of such incapacity or
disability, and the determination of such physician to be binding upon the
Company and the
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Recipient), and such incapacity or disability continues for a period of three
consecutive months or six months in any 12-month period or such other period(s)
as may be determined by the Long Term Incentive Plan Committee with respect to
any Stock Option, provided that for purposes of determining the period during
which an Incentive Stock Option may be exercised pursuant to Section 5.13(b)(ii)
hereof, Permanent Disability shall mean "permanent and total disability" as
defined in Section 22(e) of the IRC.
"Permitted Transferee" means (a) the Recipient's Immediate Family; (b) a
trust solely for the benefit of the Recipient and/or his or her Immediate
Family; or (c) a partnership or limited liability company the partners or
shareholders of which are limited to the Recipient and his or her Immediate
Family.
"Plan" means this 1999 Long Term Incentive Plan of the Company.
"Plan Term" means the period during which this Plan remains in effect
(commencing on the Effective Date and ending on the Expiration Date).
"Recipient" means a person who has received Stock Options under this Plan.
"Reorganization" means any merger, consolidation or other reorganization.
"Rule 16b-3" means Rule 16b-3 under the Exchange Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Significant Shareholder" is an individual who, at the time a Stock Option
is granted to such individual under this Plan, owns more than 10% of the
combined voting power of all classes of stock of the Company or of any Parent
Corporation or Subsidiary Corporation (after application of the attribution
rules set forth in Section 424(d) of the IRC).
"Stock Option" means a right to purchase stock of the Company granted under
Article VI of this Plan to an Eligible Person.
"Stock Option Document" means the agreement or confirming memorandum
setting forth the terms and conditions of Stock Options.
"Long Term Incentive Plan Committee" means the committee appointed by the
Board to administer this Plan pursuant to Section 4.1.
"Subsidiary Corporation" means any Subsidiary Corporation as defined in
Section 425(f) of the IRC.
17
<PAGE>
EXHIBIT 4.3
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
pursuant to the
ASD SYSTEMS, INC. 1999 LONG TERM INCENTIVE PLAN
This NONQUALIFIED STOCK OPTION AGREEMENT (the "Agreement") is made and entered
into by and between ASD SYSTEMS, INC., a Texas Corporation (the "Company"), and
______________ (the "Optionee"), effective as of ___________, ______ (the "Date
of Grant").
1. Grant of Option. The Company hereby grants to the Optionee and the
---------------
Optionee hereby accepts, subject to the terms and conditions hereof, a
nonqualified stock option (the "Option") to purchase up to _______ shares of
Company's Series B Common Stock (the "Common Stock") at the Exercise Price per
share set forth in Section 4 below. The Optionee acknowledges that the Common
Stock is nonvoting.
2. Governing Plan. This Option is granted pursuant to the Company's 1999
--------------
Long Term Incentive Plan (the "Plan"), a copy of which is attached hereto.
Capitalized terms used but not otherwise defined herein have the meanings as set
forth in the Plan. The Optionee agrees to be bound by the terms and conditions
of the Plan, which are incorporated herein by reference and which control in
case of any conflict with this Agreement.
3. Expiration of the Option. The Option (to the extent not earlier
------------------------
exercised or terminated due to cessation of the Optionee's employment or
otherwise in accordance with the Plan) will expire at the end of business on
_______, 20__, _____ (___) years from the Date of Grant of the option. The
Option may terminate sooner under certain circumstances, including, without
limitation, termination of the Optionee's employment or other relationship with
the Company, as set forth in Section 5.13 (Just Cause Dismissal, death, normal
retirement, Permanent Disability and termination other than for Just Cause
Dismissal) of the Plan. The Option may not be exercised after its expiration or
termination.
4. Exercise Plan. The "Option Price" of the Option is $_____ per share of
-------------
Common Stock. The Exercise Price is subject to adjustment as set forth in
Section 6.2 of the Plan.
5. Vesting. On each Measurement Date set forth in Column 1 below, the
-------
Option shall vest and become exercisable for the corresponding number of shares
of Common Stock set forth in Column 2 below if the Optionee's employment has not
terminated. The "Vested Portion" of the Option as of any particular date shall
be the cumulative total of all shares for which the Option has become
exercisable as of that date.
----------------------------------------------------------------
Column 1 Column 2
Shares Vesting on Measurement
Measurement Date Date
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
Notwithstanding the foregoing, in the event the Optionee's employment with
the Company and/or its subsidiaries is terminated within one (1) year after a
"Change in Control" then, immediately prior to the effective date of such
termination, all Options which have not lapsed, shall become fully vested and
exercisable (if not already vested and exercisable) by Optionee for a period of
thirty (30) days thereafter. In addition, upon a Change in Control, pursuant to
Section 7.2 of the Plan, this Option shall
1
<PAGE>
be automatically converted into the right to receive, and thereafter shall be
exercisable for, in accordance with the Plan and this Agreement, the securities,
cash and/or other consideration that a holder of the shares underlying the
Options would have been entitled to receive upon consummation of a Change in
Control had such shares been issued and outstanding immediately prior to the
effective date and time of the Change in Control (net of appropriate exercise
prices). The phrase "Change in Control" used but not otherwise defined herein
has the meaning set forth in Article VIII of the Plan.
6. Exercise of the Option. The Vested Portion (as herein defined) of the
----------------------
Option may be exercised, to the extent not previously exercised, in whole or in
part, at any time or from time to time prior to the expiration or termination of
the Option, except that no Option shall be exercisable except in respect to
whole shares, and not less than one hundred (100) shares may be purchased at one
time unless the number purchased is the total number at the time available for
purchase under the terms of the Option. Exercise shall be accomplished by
providing the Company with written notice in the form of Exhibit I hereto, which
notice shall be irrevocable when delivered and effective upon payment in full of
the Option Price in accordance with Section 5.04 of the Plan and any amounts
required in accordance with Section 5.11 of the Plan for withholding taxes, and
the satisfaction of all other conditions to exercise imposed under the Plan.
7. Payment of Option Price. Upon any exercise of the Option, the exercise
-----------------------
price for the number of shares for which the Option is then being exercised and
the amount of any federal, state and local withholding shall be paid in full to
the Company in cash or in such other form as the Long Term Incentive Plan
Committee deems acceptable at the time of exercise.
8. Nontransferability of Option. The Option shall not be transferable or
----------------------------
assignable by the Optionee, other than in accordance with Section 5.9 of the
Plan or by will or the laws of descent and distribution (or as otherwise
permitted by the Long Term Incentive Plan Committee in its sole discretion), and
shall be exercisable during the Optionee's lifetime only by him or her or by his
or her legal representative(s) or guardian(s).
9. Administration. The Plan and this Agreement shall be administered and
--------------
may be definitively interpreted by the Long Term Incentive Plan Committee, and
the Optionee agrees to accept and abide by the decisions of such Long Term
Incentive Plan Committee concerning administration and interpretation of the
Plan and this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on behalf of the
Company by its duly authorized officer, and by the Optionee in acceptance of the
above-mentioned Option, subject to the terms and conditions of the Plan and of
this Agreement, all as of the day and year first above written.
ASD SYSTEMS, INC.
/s/
-------------------------------------------
By: Norm Charney, President
OPTIONEE
/s/
-------------------------------------------
2
<PAGE>
NOTICE OF EXERCISE
under
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
pursuant to the
ASD SYSTEMS, INC. 1999 LONG TERM INCENTIVE PLAN
To: ASD Systems, Inc. (the "Company")
From: _____________________
Date: _____________________
Pursuant to the ASD Systems, Inc. 1999 Long Term Incentive Plan (the
"Plan") and the Nonqualified Stock Option Agreement (the "Agreement") between
the Company and myself effective ______________________, I hereby exercise my
Option as follows:
<TABLE>
---------------------------------------------------------------------------------------------
<S> <C>
Number of shares of Common Stock I wish to purchase under the Option
---------------------------------------------------------------------------------------------
Exercise Price per share $
---------------------------------------------------------------------------------------------
Total Exercise Price $
---------------------------------------------------------------------------------------------
"Vested Portion" of Option (see definition in Section 5 of the Agreement)
---------------------------------------------------------------------------------------------
Number of shares I have previously purchased by exercising the Option
---------------------------------------------------------------------------------------------
Expiration Date of the Option
---------------------------------------------------------------------------------------------
</TABLE>
I hereby represent, warrant, and covenant to the Company that:
a. I am acquiring the Common Stock for my own account, for investment,
and not for distribution or resale, and I will make no transfer of such Common
Stock except in compliance with applicable federal and state securities laws and
in accordance with the provisions of the Plan.
b. I can bear the economic risk of the investment in the Common Stock
resulting from this exercise of the Option, including a total loss of my
investment.
c. I am experienced in business and financial matters and am capable of
(i) evaluating the merits and risks of an investment in the Common Stock; (ii)
making an informed investment decision regarding exercise of the Option; and
(iii) protecting my interests in connection therewith.
I acknowledge that I must pay the exercise price in full and make
appropriate arrangements for the payment of all federal, state and local tax
withholdings due with respect to the Option exercised herein, before the stock
certificate evidencing the shares of Common Stock resulting from this exercise
of the Option will be issued to me.
Attached in full payment of the exercise price for the Option exercised
herein is ( ) a check made payable to the Company in the amount of
$___________________.
___________________________________
<PAGE>
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
pursuant to the
ASD SYSTEMS, INC. 1999 LONG TERM INCENTIVE PLAN
This INCENTIVE STOCK OPTION AGREEMENT (the "Agreement") is made and
entered into by and between ASD SYSTEMS, INC., a Texas Corporation (the
"Company"), and ______________ (the "Optionee"), effective as of , 199
(the "Date of Grant").
1. Grant of Option. The Company hereby grants to the Optionee and
---------------
the Optionee hereby accepts, subject to the terms and conditions hereof, an
incentive stock option (the "Option") to purchase up to shares of
Company's Series B Common Stock (the "Common Stock") at the Exercise Price per
share set forth in Section 4 below. The Optionee acknowledges that the Common
Stock is nonvoting.
2. Governing Plan. This Option is granted pursuant to the Company's
--------------
1999 Long Term Incentive Plan (the "Plan"), a copy of which is attached hereto.
Capitalized terms used but not otherwise defined herein have the meanings as set
forth in the Plan. The Optionee agrees to be bound by the terms and conditions
of the Plan, which are incorporated herein by reference and which control in
case of any conflict with this Agreement.
3. Expiration of the Option. The Option (to the extent not earlier
------------------------
exercised or terminated due to cessation of the Optionee's employment or
otherwise in accordance with the Plan) will expire at the end of business on
_______, 2000, ten (10) years from the Date of Grant of the option. The Option
may terminate sooner under certain circumstances, including, without limitation,
termination of the Optionee's employment or other relationship with the Company,
as set forth in Section 5.13 (Just Cause Dismissal, death, normal retirement,
Permanent Disability and termination other than for Just Cause Dismissal) of the
Plan. The Option may not be exercised after its expiration or termination.
4. Exercise Plan. The "Option Price" of the Option is per
-------------
share of Common Stock. The Exercise Price is subject to adjustment as set forth
in Section 6.2 of the Plan.
5. Vesting. On each Measurement Date set forth in Column 1 below, the
-------
Option shall vest and become exercisable for the corresponding number of shares
of Common Stock set forth in Column 2 below if the Optionee's employment has not
terminated. The "Vested Portion" of the Option as of any particular date shall
be the cumulative total of all shares for which the Option has become
exercisable as of that date.
--------------------------------------------
Column 1 Column 2
Shares Vesting on
Measurement Date Measurement Date
--------------------------------------------
Notwithstanding the foregoing, in the event the Optionee's employment
with the Company and/or its subsidiaries is terminated within one (1) year after
a "Change in Control" (as defined below) then, immediately prior to the
effective date of such termination, all Options which have not lapsed, shall
<PAGE>
become fully vested and exercisable (if not already vested and exercisable) by
Optionee for a period of thirty (30) days thereafter. In addition, upon a Change
in Control, pursuant to Section 7.2 of the Plan, this Option shall be
automatically converted into the right to receive, and thereafter shall be
exercisable for, in accordance with the Plan and this Agreement, the securities,
cash and/or other consideration that a holder of the shares underlying the
Options would have been entitled to receive upon consummation of a Change in
Control had such shares been issued and outstanding immediately prior to the
effective date and time of the Change in Control (net of appropriate exercise
prices). The phrase "Change in Control" used but not otherwise defined herein
has the meaning set forth in Article VIII of the Plan.
6. Exercise of the Option. The Vested Portion (as herein defined)
----------------------
of the Option may be exercised, to the extent not previously exercised, in
whole or in part, at any time or from time to time prior to the expiration or
termination of the Option, except that no Option shall be exercisable except in
respect to whole shares, and not less than one hundred (100) shares may be
purchased at one time unless the number purchased is the total number at the
time available for purchase under the terms of the Option. Exercise shall be
accomplished by providing the Company with written notice in the form of Exhibit
I hereto, which notice shall be irrevocable when delivered and effective upon
payment in full of the Option Price in accordance with Section 5.04 of the Plan
and any amounts required in accordance with Section 5.11 of the Plan for
withholding taxes, and the satisfaction of all other conditions to exercise
imposed under the Plan.
7. Payment of Option Price. Upon any exercise of the Option, the exercise
-----------------------
price for the number of shares for which the Option is then being exercised and
the amount of any federal, state and local withholding shall be paid in full to
the Company in cash or in such other form as the Long Term Incentive Plan
Committee deems acceptable at the time of exercise.
8. Nontransferability of Option. The Option shall not be transferable or
----------------------------
assignable by the Optionee, other than in accordance with Section 5.9 of the
Plan or by will or the laws of descent and distribution (or as otherwise
permitted by the Long Term Incentive Plan Committee in its sole discretion), and
shall be exercisable during the Optionee's lifetime only by him or her or by his
or her legal representative(s) or guardian(s).
9. Administration. The Plan and this Agreement shall be administered
--------------
and may be definitively interpreted by the Long Term Incentive Plan Committee,
and the Optionee agrees to accept and abide by the decisions of such Long Term
Incentive Plan Committee concerning administration and interpretation of the
Plan and this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on behalf of the
Company by its duly authorized officer, and by the Optionee in acceptance of the
above-mentioned Option, subject to the terms and conditions of the Plan and of
this Agreement, all as of the day and year first above written.
ASD SYSTEMS, INC.
----------------------------
By: Norm Charney, President
OPTIONEE
----------------------------
<PAGE>
NOTICE OF EXERCISE
under
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
pursuant to the
ASD SYSTEMS, INC. 1999 LONG TERM INCENTIVE PLAN
To: ASD Systems, Inc. (the "Company")
From:_________________________________
Date:_________________________________
Pursuant to the ASD Systems, Inc. 1999 Long Term Incentive Plan (the
"Plan") and the Incentive Stock Option Agreement (the "Agreement") between the
Company and myself effective ______________________, I hereby exercise my Option
as follows:
Number of shares of Common Stock I wish to purchase under the Option
Exercise Price per share $
Total Exercise Price $
"Vested Portion" of Option (see definition in Section 5 of the Agreement)
Number of shares I have previously purchased by exercising the Option
Expiration Date of the Option
I hereby represent, warrant, and covenant to the Company that:
a. I am acquiring the Common Stock for my own account, for investment, and
not for distribution or resale, and I will make no transfer of such Common Stock
except in compliance with applicable federal and state securities laws and in
accordance with the provisions of the Plan.
b. I can bear the economic risk of the investment in the Common Stock
resulting from this exercise of the Option, including a total loss of my
investment.
c. I am experienced in business and financial matters and am capable of
(i) evaluating the merits and risks of an investment in the Common Stock; (ii)
making an informed investment decision regarding exercise of the Option; and
(iii) protecting my interests in connection therewith.
I acknowledge that I must pay the exercise price in full and make
appropriate arrangements for the payment of all federal, state and local tax
withholdings due with respect to the Option exercised herein, before the stock
certificate evidencing the shares of Common Stock resulting from this exercise
of the Option will be issued to me.
Attached in full payment of the exercise price for the Option exercised
herein is ( ) a check made payable to the Company in the amount of
$___________________.
<PAGE>
EXHIBIT 4.4
IMPORTANT INFORMATION ABOUT COVERAGE UNDER THE TEXAS LIFE,
ACCIDENT, HEALTH AND HOSPITAL SERVICE
INSURANCE GUARANTY ASSOCIATION
Texas law establishes a system, administered by the Texas Life, Accident, Health
and Hospital Service Insurance Guaranty Association (the "Association"), to
protect policyholders if their life or health insurance company fails to or
cannot meet its contractual obligations. Only the policyholders of insurance
companies which are members of the Association are eligible for this protection.
However, even if a company is a member of the Association, protection is limited
and policyholders must meet certain guidelines to qualify. (The law is found in
the Texas Insurance Code, Article 21.28-D.)
BECAUSE OF STATUTORY LIMITATIONS ON POLICYHOLDER PROTECTION, IT IS POSSIBLE THAT
THE ASSOCIATION MAY NOT COVER YOUR POLICY OR MAY NOT COVER YOUR POLICY IN FULL.
Eligibility for Protection by the Association
When an insurance company which is a member of the Association is designated as
impaired by the Texas Commissioner of Insurance, the Association provides
coverage to policyholders who are:
. residents of Texas at the time that their insurance company is
impaired
. residents of other states, ONLY if the following conditions are met:
1. The policyholder has a policy with a company based in Texas;
2. The company has never held a license in the policyholder's state
of residence;
3. The policyholder's state of residence has a similar guaranty
association; and
4. The policyholder is not eligible for coverage by the guaranty
association of the policyholder's state of residence.
Limits of Protection by the Association
Accident, Accident and Health, or Health Insurance:
. up to a total of $200,000 for one or more policies for each individual
covered.
Life Insurance:
. net cash surrender value up to a total of $100,000 under one or more
policies on any one life; or
. death benefits up to a total of $300,000 under one or more policies on
any one life.
Individual Annuities:
. net cash surrender amount up to a total of $100,000 under one or more
policies owned by one contractholder.
Group Annuities:
. net cash surrender amount up to $100,000 in allocated benefits under
one or more policies owned by one contractholder; or
. net cash surrender amount up to $5,000,000 in unallocated benefits
under one contractholder regardless of the number of contracts.
THE INSURANCE COMPANY AND ITS AGENTS ARE PROHIBITED BY LAW FROM USING THE
EXISTENCE OF THE ASSOCIATION FOR THE PURPOSE OF SALES, SOLICITATION, OR
INDUCEMENT TO PURCHASE ANY FORM OF INSURANCE.
When you are selecting an insurance company, you should not rely on coverage by
the Association.
Texas Life, Accident, Health and Hospital Texas Department of Insurance
Service Insurance Guaranty Association P.O. Box 149104
301 Congress, Suite 500 Austin, Texas 78714-9104
Austin, Texas 78701 800-252-3439
800-982-6362
<PAGE>
GROUP ANNUITY CONTRACT
Principal Life Insurance Company
711 High Street
Des Moines, Iowa 50392-0001
(515) 247-5111
in consideration of the application for this contract made by
TRUSTEES OF ASD 401(K) PLAN
(the Contractholder)
and payment of all Contributions and Annuity Premiums provided for in this
contract, agrees to make payments to the person or persons entitled to them
subject to the provisions of this contract.
This contract is delivered in Texas.
Contributions directed into a Separate Account are not guaranteed as to the
dollar amount. They will increase or decrease in dollar amount, depending on
the investment performance of such Separate Account, as set out in this
contract.
This contract is issued and accepted subject to all the terms set out in it.
This contract is executed by Principal Life Insurance Company at its Corporate
Center to take effect as of the 1st day of October, 1998 which is the Contract
Date.
/s/ /s/
Vice President and Chairman and
Corporate Secretary Chief Executive Officer
/s/
-------------------------------
Registrar
Date Oct 28, 1998
---------------------
GROUP CONTRACT NO. GA 4-34805
Flexible Investment Annuity Group Contract
With Full Crediting Rates
and Pooled Separate Accounts
<PAGE>
REMOVAL OF DIVIDEND SECTION RIDER
This rider is made part of the group annuity contract to which it is attached.
Such group annuity contract is issued by us to you. All terms defined in this
contract have the same meaning where used in this rider.
The effective date of this rider is the latest of (i) July 1, 1998 or (ii) the
date the rider was approved for use in the state of issue of this contract.
This rider modifies the contract by striking SECTION 3DIVIDENDS from the General
Provisions article of the contract and by renumbering all of the sections
thereafter to reflect the change.
PRINCIPAL LIFE INSURANCE COMPANY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
<PAGE>
SCHEDULE OF SPECIFICATIONS GA: 4-34805
-------
This schedule is a part of the contract to which it is attached. Terms defined
in the contract have the same meaning where used in this schedule.
This is schedule number 1 , effective October 1, 1998. It replaces all
---- ---------------
previous Schedules.
Plan Name: ASD 401(K) PLAN
Deposit Year:
The Initial Deposit Year begins on the Contract Date and ends on December
--------
31, 1998. Subsequent Deposit Years begin on January 1 and the same day of each
- -------- ----------
following year.
Investment Options available:
Guaranteed Interest Investments.
Separate Account Investments (elected by you):
U.S. Stock Separate Account
Bond Emphasis Balanced Separate Account
Money Market Separate Account
Stock Emphasis Balanced Separate Account
Real Estate Separate Account
Government Securities Separate Account
Bond and Mortgage Separate Account
Medium Company Blend Separate Account
International Stock Separate Account
Medium Company Value Separate Account
Stock Index Separate Account
Small Company Blend Separate Account
Large Company Value Separate Account
Large Company Blend Separate Account
Large Company Growth Separate Account
Medium Company Growth Separate Account
Small Company Growth Separate Account
Small Company Value Separate Account
International Small Company Separate Account
International Emerging Markets Separate Account
Riders and special attachments:
Texas Guaranty Association Notice
Complaint Notice
Separate Account Investment Rider
<PAGE>
Texas Variable Annuity/Separate Account Endorsement
Texas Separate Account Endorsement
Removal of Dividend Rider
Notations:
(Signatures are not required for the original Schedule 1 issued with the
Contract)
- --------------------------------- -------------------------------
Contractholder Name Registrar
- --------------------------------- -------------------------------
Title Date
- --------------------------------- -------------------------------
Date
<PAGE>
<TABLE>
<CAPTION>
IMPORTANT NOTICE AVISO IMPORTANTE
<S> <C>
To obtain information or make a complaint: Para obtener informacion o para someter una
queja:
You may call Principal Life Insurance Company's Usted puede llamar al numero de telefono
toll-free telephone number for information or gratis de Principal Life Insurance Company's
to make a complaint at para informacion o para someter una queja al
1-800-255-6613 1-800-255-6613
You may also write to Principal Life Insurance Usted tambien puede escribir a Principal
Company at: Life Insurance Company:
711 High Street 711 High Street
Des Moines, Iowa 50392-0001 Des Moines, Iowa 50392-0001
You may contact the Texas Department of Puede comunicarse con el Departmento de Seguros
insurance to obtain information on companies, de Texas para obtener informacion acerca de
coverages, rights or complaints at companias, coberturas, derechos o quejas al
1-800-252-3439 1-800-252-3439
You may write the Texas Department of Insurance Puede escribir al Departamento de Seguros de Texas
P.O. Box 149104 P.O. Box 149104
Austin, TX 78714-9104 Austin, TX 78714-9104
FAX#(512)475-1771 FAX#(512)475-1771
PREMIUM OR CLAIM DISPUTES: Should you have a DISPUTAS SOBRE PRIMAS 0 RECLAMOS: Si tiene
dispute concerning your premium or about a una disputa concerniente a su prima o a un
claim you should contact the Principal Life reclamo, debe comunicarse con el Principal
Insurance Company first. If the dispute is Life Insurance Company primero. Si no se
not resolved, you may contact the Texas resuelve la disputa, puede entonces
Department of Insurance. comunicarse con el departamento (TDI).
ATTACH THIS NOTICE TO YOUR POLICY: This notice UNA ESTE AVISO A SU POLIZA: Este aviso es
is for information only and does not become a solo para proposita de informacion y no se
part or condition of the attached document. convierte en parte o condicion del documents
adjunto.
</TABLE>
<PAGE>
TEXAS VARIABLE ANNUITY/SEPARATE ACCOUNT ENDORSEMENT
This contract was modified prior to its execution by addition of the following:
1. This contract is issued subject to the laws and regulations of the
State of Texas, including the application of such laws and rules and
requirements to the contract and to the interpretation of its
provisions, and is amended to conform therewith.
2. This contract is issued subject to the laws of the state where the
annuitant or participant resides at the time of the making of the
contract and is subject also to the rules and regulations of the state
administrative agency responsible for variable annuity regulation in
such state, including the application of such laws and rules and
requirements to the contract and to the interpretation of its
provisions; except, however, in the circumstance and only to the
extent the application of this provision to any person or circumstance
is expressly contrary to and excluded by superior law or valid statute
having and determined to have supremacy in the circumstance.
3. This contract is subject to endorsement from time to time as may be
necessary to comply with valid and appropriate rules and regulations
adopted by regulatory authorities, or as a court of final jurisdiction
shall determine, and is executed subject to that condition.
4. The Separate Accounts applicable to and identified with this contract
are divisible for various purposes in respect of regulation and
compliance with law, including divisibility as it is applicable to any
function arising from the provisions of the contract or provisions of
law and regulation.
5. Principal Life Insurance Company may effect the transfer of assets
between the Separate Accounts and other accounts for the purposes of
making adjustments necessitated by the contract, including adjustment
for any surplus or deficit which may arise in such Separate Accounts
by virtue of mortality experience, or required by governmental
authorities having jurisdiction over Principal Life Insurance Company.
Such adjustments shall be made by cash transfer only, except as is
authorized or required by regulatory authority.
6. Principal Life Insurance Company guarantees that actual expense and
actual mortality in excess of those provided for or assumed in the
contract and riders attached thereto will not adversely affect the
dollar amount of Variable Annuity benefits (if applicable) or other
contractual benefits, payments, or values; and Principal Life
Insurance Company will transfer such amounts of general corporate
funds into the Separate Accounts as are necessary to carry out this
guarantee. However, no transfer shall be made, and Principal Life
Insurance Company does not obligate itself to make any transfer which
would result in an impairment of its statutory reserves, and this
guarantee is accordingly limited.
7 . The Variable Annuity benefits, if any, of this contract are funded
solely from the assets of the Separate Accounts of which they are an
obligation; other benefits, payments, or values which are funded
solely in the assets of Separate Accounts are obligations of such
Separate Accounts; and except to the extent of such limited expense
and mortality guarantees contained herein, shall have no claim against
any other assets of Principal Life Insurance Company.
8. Variations in values or cost of accumulative units or the amount of
premium or payments applied to the investment portfolio may be made to
effect requirements of law or regulation.
9. Principal Life Insurance Company will mail to the Contractholder such
reports and information periodically as the law and regulation of
appropriate jurisdictions shall require (irrespective of any provision
of this contract which may be contrary to such law or regulation).
1
<PAGE>
10. Variable Annuity reserves will be held for the return premium death
benefit in an amount determined by the State of Texas to be
applicable. The premium required for the return premium death benefit
is presently not in excess of 1 1/2% of each premium received.
PRINCIPAL LIFE INSURANCE COMPANY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
2
<PAGE>
TEXAS SEPARATE ACCOUNT ENDORSEMENT
This Contract was modified prior to its execution by addition of the following:
The Separate Accounts which Principal Life Insurance Company has established in
which this contract can participate are
1. U.S. Stock Separate Account
2. Money Market Separate Account
3. Real Estate Separate Account
4. Bond and Mortgage Separate Account
5. International Stock Separate Account
6. Stock Index Separate Account
7. Bond Emphasis Balanced Account
8. Stock Emphasis Balanced Account
9. Government Securities Account
10. Medium Company Blend Separate Account
11. Small Company Blend Separate Account
12. Medium Company Value Separate Account
13. Large Company Value Separate Account
14. Large Company Blend Separate Account
15. Large Company Growth Separate Account
16. Medium Company Growth Separate Account
17. Small Company Growth Separate Account
18. Small Company Value Separate Account
1
<PAGE>
19. International Small Company Separate Account
20. International Emerging Markets Separate Account
PRINCIPAL LIFE INSURANCE COMPANY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
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SEPARATE ACCOUNT INVESTMENT RIDER
This rider is added to the Group Annuity Contract issued by us of which it is a
part. All terms defined in the contract have the same meaning where used in
this rider. The effective date of this rider is the latest of (i) the Contract
Date, (ii) the date this rider has been approved for use in the state of issue,
or (iii) the date stated in the amendment adding this rider to the contract.
The purpose of this rider is to allow the contract to participate in our
Separate Accounts. We reserve the right to limit both the number of Separate
Accounts available under the contract and the number available to each Member.
The following Separate Accounts may be available under this contract:
Bond and Mortgage Separate Account
Bond Emphasis Balanced Separate Account
Government Securities Separate Account
International Emerging Markets Separate Account
International Small Company Separate Account
International Stock Separate Account
Large Company Blend Separate Account
Large Company Growth Separate Account
Large Company Value Separate Account
Medium Company Blend Separate Account
Medium Company Growth Separate Account
Medium Company Value Separate Account
Money Market Separate Account
Real Estate Separate Account
Small Company Blend Separate Account
Small Company Growth Separate Account
Small Company Value Separate Account
Stock Emphasis Balanced Separate Account
Stock Index 500 Separate Account
U.S. Stock Separate Account
Although all Separate Accounts listed above may be available under this
contract, you may send us Notification indicating you want the contract
administered so that assets held under this contract will not participate in one
or more of these Separate Accounts. You may revoke your Notification by sending
us a new Notification.
1. DESCRIPTIONS OF THE SEPARATE ACCOUNTS. Each Separate Account is a
pooled Separate Account for use by our retirement plan customers. The
funds held in each Separate Account will be invested and reinvested by
us in accordance with applicable law, without regard to any investment
requirements of our general account assets or of any of our other
Separate Accounts.
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A Separate Account consists of funds we receive under group annuity
contracts or policies which permit deposit in such Separate Account
and under which amounts are directed to such Separate Account. All
income gains and losses (whether or not realized), and expenses from
the assets allocated to a Separate Account will be credited to or
charged against that Separate Account without regard to any other
income, gains or losses, or expenses we might have for our general
account or any other Separate Account. The assets of a Separate
Account will not be charged with any liabilities arising out of the
investment experience of our general account or any other Separate
Accounts outside that Separate Account. We may occasionally invest the
assets of any Separate Account in short term money market instruments,
cash or cash equivalents.
Bond and Mortgage Separate Account. Bond and Mortgage Separate Account
----------------------------------
is invested primarily in bond and mortgage-type investments similar to
our general account, including bonds and mortgages from both United
States and non-United States corporations.
Bond Emphasis Balanced Separate Account. Bond Emphasis Balanced
---------------------------------------
Separate Account is invested in other Separate Accounts established
and maintained by us. The majority of the assets will be invested in
other Separate Accounts which are invested primarily in bonds,
mortgages, commercial paper and other fixed income type investments.
The remainder of the assets of this Separate Account will be invested
in one or more of our Separate Accounts invested primarily in common
stocks and other equity investments.
Government Securities Separate Account. Government Securities Separate
--------------------------------------
Account is invested primarily in obligations issued or guaranteed by
United States governmental agencies and instrumentalities, including,
but not limited to, the Government National Mortgage Association, the
Federal National Mortgage Association, the Federal Home Loan Mortgage
Association and the Student Loan Marketing Association.
International Emerging Markets Separate Account. International
-----------------------------------------------
Emerging Markets Separate Account is invested primarily in common
stocks of corporations located in countries outside the United States
where structural changes are causing rapid economic growth and
improved standards of living. These investments may be made in either
United States or foreign currency or equivalencies.
International Small Company Separate Account. International Small
--------------------------------------------
Company Separate Account is invested primarily in stocks or other
securities of small corporations located outside the United States.
These investments may be made in either United States or foreign
currency or equivalencies.
International Stock Separate Account. International Stock Separate
------------------------------------
Account is invested primarily in a broad base of stocks or other
securities of corporations located outside the United States, but
especially in Europe, North America, and the Pacific rim. These
investments may be made in either United States or foreign currency or
equivalencies.
Large Company Blend Separate Account. Large Company Blend Separate
------------------------------------
Account is invested primarily in common stocks from large, established
companies whose stock exhibits a combination of substantial value and
good earnings growth potential. The investments may also include
derivative instruments such as options and futures, other equity
securities, or other convertible securities that may be converted to
common stocks.
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Large Company Growth Separate Account. Large Company Growth Separate
-------------------------------------
Account is invested primarily in common stocks from large, established
companies whose earnings are expected to grow at above average rates.
The investments may also include derivative instruments such as
options and futures, other equity securities, or other convertible
securities that may be converted to common stocks.
Large Company Value separate Account. Large Company Value Separate
------------------------------------
Account is invested primarily in common stocks from large, established
companies with below-average price/earnings ratios and above-average
dividend yields which we view as undervalued by the market. The
investments may also include derivative instruments such as options
and futures, other equity securities or other convertible securities
that may be converted to common stocks. If the market as a whole is
overvalued, we may hold assets of this account in fixed income
securities instead of stocks.
Medium Company Blend Separate Account. Medium Company Blend Separate
-------------------------------------
Account is invested primarily in common stocks from medium-sized,
established companies whose stock exhibits a combination of
substantial value and good earnings growth potential. The investments
may also include derivative instruments such as options and futures,
other equity securities, or other convertible securities that may be
converted to common stocks.
Medium Company Growth Separate Account. Medium Company Growth Separate
--------------------------------------
Account is invested primarily in common stocks from medium-sized,
developing companies whose earnings are expected to grow at above
average rates. The investments may also include derivative instruments
such as options and futures, other equity securities, or other
convertible securities that may be converted to common stocks.
Medium Company Value Separate Account. Medium Company Value Separate
-------------------------------------
Account is invested primarily in common stocks from medium-sized,
financially stable companies with below-average price/earnings ratios
and above-average dividend yields which we view as undervalued by the
market. The investments may also include derivative instruments such
as options and futures, other equity securities or other convertible
securities that may be converted to common stocks. If the market as a
whole is overvalued, we may hold assets of this account in fixed
income securities instead of stocks.
Money Market Separate Account. Money Market Separate Account is
-----------------------------
invested primarily in money market instruments such as the obligations
of the United States government and its agencies, commercial paper,
bank certificates of deposit and similar instruments.
Real Estate Separate Account. Real Estate Separate Account is invested
----------------------------
primarily in real estate such as office buildings, industrial
buildings, shopping centers, retail stores and similar property.
Small Company Blend Separate Account. Small Company Blend Separate
------------------------------------
Account is invested primarily in common stocks from smaller,
established companies whose stock exhibits a combination of
substantial value and good earnings growth potential. The investments
may also include derivative instruments such as options and futures,
other equity securities, or other convertible securities that may be
converted to common stocks.
Small Company Growth Separate Account. Small Company Growth Separate
-------------------------------------
Account is invested primarily in common stocks from smaller,
developing companies whose earnings are expected to grow at above
average rates. The investments may also include derivative instruments
such as options and futures, other equity securities, or other
convertible securities that may be converted to common stocks.
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Small Company Value Separate Account. Small Company Value Separate
------------------------------------
Account is invested primarily in common stocks from smaller,
financially stable companies with below-average price/earnings ratios
and above-average dividend yields which we view as undervalued by the
market. The investments may also include derivative instruments such
as options and futures, other equity securities or other convertible
securities that may be converted to common stocks. If the market as a
whole is overvalued, we may hold assets of this account in fixed
income securities instead of stocks.
Stock Emphasis Balanced Separate Account. Stock Emphasis Balanced
----------------------------------------
Separate Account is invested in other Separate Accounts established
and maintained by us. The majority of the assets will be invested in
other Separate Accounts which are invested primarily in common stocks
and other equity investments. The remainder of the assets of this
Separate Account will be invested in one or more of our Separate
Accounts invested primarily in bonds, mortgages, commercial paper and
other fixed income type investments.
Stock Index 500 Separate Account. Stock Index 500 Separate Account is
--------------------------------
invested primarily in stocks and securities of companies whose stocks
are used to calculate the Standard and Poor's 500 Stock Index (or a
similar stock index if the Standard and Poor's 500 Stock Index is no
longer calculated). The investments may also include a reasonable
amount of stock index futures, commercial paper, derivative securities
and other types of investments. In addition, some funds may be
invested in stock index accounts operated by other investment
managers. Stock Index 500 Separate Account attempts to earn a return
that mirrors the Standard & Poor's 500 Stock Index.
U.S. Stock Separate Account. U.S. Stock Separate Account is primarily
---------------------------
invested in common stocks of United States companies. The investments
may also include derivative instruments such as options and futures,
other equity securities or other convertible securities that may be
converted to common stocks. The U.S. Stock Separate Account is managed
by looking for shifts in the economy, industries that stand to benefit
from those shifts, and companies in those industries that are
undervalued by the market
2. DETERMINING SEPARATE ACCOUNT VALUES; OPERATING EXPENSES. The value of
a Separate Account is its market value (appraised market value for
Real Estate Separate Account) less Operating Expenses, if any. If
there is no readily available market, its value is the fair market
value of the assets held in such Separate Account as determined by us
using generally accepted accounting practices and applicable law. The
value of all Separate Accounts will always be expressed in U.S.
dollars. We will determine the value of a Separate Account on each
Valuation Date.
Operating Expenses are those charges which must be paid in order to
------------------
operate a Separate Account or obtain investments for a Separate
Account Operating Expenses include, but are not limited to, custodial
fees, transfer taxes, brokerage fees, processing fees, and other taxes
and fees associated with the operation of a Separate Account.
Operating Expenses will be deducted from the Separate Account
associated with a particular charge on the next Valuation Date after
the Operating Expenses have been paid or are immediately payable. In
accordance with our then-current procedures, various Separate Accounts
may share in the payment of certain Operating Expenses and, in some
cases, we may use certain fees paid to us by third parties to offset
Operating Expenses incurred by a Separate Account which would
otherwise be payable from that Separate Account.
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Valuation Date means the date we determine the value of a Separate
--------------
Account. Valuation Dates will occur on dates we determine, but at
least on the last Business Day of a calendar month. Valuation will
occur at the end of each such day, according to our then-current
procedures. For purposes of the International Stock Separate Account,
International Small Company Separate Account, and International
Emerging Markets Separate Account, only those days on which both the
value of the underlying investments is determined and we are open for
business will be Valuation Dates.
3. MANAGEMENT CHARGES. The Management Charge under each Separate Account
will be a percentage of the value of assets in such Separate Account,
subject to the equivalent of a maximum annual percentage listed in the
Table of Separate Account Features. We reserve the right to change the
Management Charge to any charge up to the maximum limit at any time by
giving you written notice at least 30 days before the date the change
is to take effect.
Management Charge means the charge consisting of the investment
-----------------
management charge and the contract expense charge applicable to this
class of contracts for each Separate Account.
The assets of Bond Emphasis Balanced Separate Account and Stock
Emphasis Balanced Separate Account will pay Management Charges under
our other Separate Accounts in which they are invested. An additional
Management Charge will be charged under these Separate Accounts only
for management services actually performed exclusively for assets held
in these Separate Accounts.
A pro rata charge will be deducted from each Separate Account on each
Valuation Date for the number of calendar days within the Valuation
Period ending on such Valuation Date.
Valuation Period means the period from the end of a Valuation Date to
----------------
the end of the next following Valuation Date.
4. SEPARATE ACCOUNT INVESTMENT. A Separate Account Investment is
established for each Member for a Separate Account for each type of
Contribution a Member directs to a Separate Account.
Where Money Market Separate Account is available and we receive
Notification from you to do so, an Unallocated Separate Investment
Account will be established for Contributions for which either i) we
do not have all the necessary information needed to allocate such
Contributions to individual Members, or ii) you have notified us that
such Contributions are to be unallocated. If Money Market Separate
Account is not available, an Unallocated Contribution Investment will
be established, using a Guaranteed Interest Investment with the
shortest Guaranteed Period available.
Unallocated Separate Account Investment means the Investment
---------------------------------------
established to hold unallocated Contributions, invested in Money
Market Separate Account, if available, and operates as if it were a
Member's Investment
5. RETURNS CREDITED TO SEPARATE INVESTMENT ACCOUNTS. Each Separate
Account Investment established under this contract will be credited
with its portion of the return associated with the appropriate
Separate Account. The return for a Separate Account will be based on
the change in value of that Separate Account less any Management
Charge.
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In order to track the returns for the Separate Account Investments
established under this contract, we will use a unit value system of
recordkeeping, unless we determine that another recordkeeping system
would be more appropriate.
6. UNIT VALUE SYSTEM OF RECORDKEEPING. Under a unit value system of
recordkeeping, we will calculate the value of a Separate Account
Investment for each Valuation Date by multiplying the number of
Separate Account units held in the Separate Account Investment by the
applicable Unit Value. A Unit Value is the dollar value for one unit.
Contributions or transfers to a Separate Account Investment increase
the number of Separate Account units credited to it. Transfers and
payments from a Separate Account Investment reduce the number of
Separate Account units. The increase or decrease in the number of
Separate Account units is calculated by dividing the dollar amount of
the contribution, transfer, or payment by the applicable Unit Value.
We will calculate the Unit Value applicable to each Separate Account
Investment on each Valuation Date. The Unit Value will be based upon
the total value of the Separate Account and the number of existing
Separate Account units.
When crediting Contributions and transfers added to a Separate Account
Investment we will use the Unit Value applicable to the Separate
Account Investment for the Valuation Date on which we accept the
Contribution or transfer. If we accept the Contribution or transfer on
a date other than a Valuation Date, we will use the Unit Value for the
next following Valuation Date.
7. DEPOSITS TO SEPARATE ACCOUNTS; RESTRICTIONS AND ORDER OF ENTRY. We
reserve the right to defer or stop your ability to direct
Contributions and transfers to a Separate Account, and we may require
you to transfer existing account balances out of a Separate Account.
We may exercise these rights if we
a) need to comply with regulation, statute, or decisional law to
which we are subject,
b) believe it would be imprudent not to do so in fulfilling our
fiduciary role as an investment advisor under ERISA,
c) believe the investment approach of the Separate Account no longer
makes sense, is excessively expensive, or does not currently have
any favorable investment opportunities available, or
d) if, in our opinion, continued operation of the Separate Account
is inappropriate.
Contributions or transfers directed to a Separate Account that we have
closed on a temporary or permanent basis will be directed to Money
Market Separate Account, if available, or to the Guaranteed Interest
Investment with the shortest Guarantee Period available under the
contract. If the Separate Account has been closed on a temporary
basis, we will treat a Contribution or transfer request as a
Notification that money should be transferred to the closed Separate
Account as soon as permitted under the terms of the contract.
Provisions for a temporarily closed Separate Account. We have
----------------------------------------------------
established the following order of entry into a Separate Account that
was temporarily closed, then reopened:
a) All amounts held in Money Market Separate Account waiting for
transfer to the Separate
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Account.
b) Any amounts held in any other Separate Account or in our general
account which are to be transferred to the Separate Account.
Within each of the above 2 categories, funds will be transferred one
customer at a time, in order from the oldest waiting Notification to
the newest Notification.
Normally, if the amount of the intended transfer is greater than the
amount open for acceptance by a previously closed Separate Account,
the entire amount of the transfer will continue to be held in the
account it was at the time of the request until the Valuation Date
when complete transfer may be made. However, we and you (the Member,
if permitted by the Plan) may mutually agree to transfer only a
portion of the intended amount to the Separate Account.
We will notify you in writing when amounts have been transferred to a
reopened Separate Account.
You or a Member, as permitted by the Plan, may revoke a request for
transfer of funds to a Separate Account by giving us Notification
before the date transfer is made. The Notification must also include
new investment directions for the intended transfer.
Provisions for a permanently closed Separate Account. We will notify
----------------------------------------------------
you in writing of our intent to permanently close a Separate Account.
You will have 60 days to request transfer as described in 8. below. If
after 60 days we have not received Notification of where to transfer a
closed Separate Account balance, we will treat the account as a
Contribution for which we do not have investment direction.
8. TRANSFERS AND PAYMENTS FROM A SEPARATE ACCOUNT INVESTMENT. We will,
upon Notification from you (the Member if permitted by the Plan), and
subject to our right to defer a transfer or payment as described in
Section 9,
a) transfer to the Member's Guaranteed Interest Investment or
another Separate Account Investment all or any portion of the
Separate Account Investment specified, or
b) transfer to another Funding Agent all or any portion of the
Member's Separate Account Investment, or
c) pay the Member an amount equal to all or any portion of the
Member's Separate Account Investment
The amount to be paid or transferred will be determined and paid or
transferred within seven Business Days after (i) the Valuation Date on
which we receive the Notification, or (ii) a later Valuation Date
specified in the Notification. Payments and transfers will be made in
accordance with our then current procedures. We will notify you in
writing of these procedures. The amount transferred or paid will be
deducted from the Separate Account Investment from which such transfer
or payment was requested on the date of such transfer or payment. Each
transfer to another Separate Account Investment may occur only on a
Valuation Date of that Separate Account
We are not responsible for the application of amounts transferred to
another Funding Agent.
9. LIMITATIONS ON TRANSFERS AND PAYMENTS FROM A SEPARATE ACCOUNT
INVESTMENT. In general, transfers and payments from a Separate Account
Investment will be made within seven Business Days after the first
Valuation Date following the
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request specified in Section 8 of this rider. We reserve the right,
however, to defer such transfers or payments up to the maximum number
of days shown in the Table of Separate Account Features for each
Separate Account. If we defer any transfer or payment under this
Section, we will determine the amount to be transferred or paid on the
date transfer or payment occurs. We will notify you in the event of
any deferment of more than 30 days under the provisions of this
Section.
These limitations will not apply to the payments to the beneficiary of
a Member due to the Member's death, payments to a Member due to
disability or retirement under the Plan and to purchases of annuity
under Article IV, Section 2 of the contract.
Special Real Estate Limitations. Because of the illiquid nature of the
-------------------------------
assets in which Real Estate Separate Account is invested, we reserve
the right to defer transfers or payments from a Real Estate Separate
Account Investment if a transfer or payment would exceed the amount of
cash and other liquid assets held in Real Estate Separate Account,
reduced by amounts committed to purchase properties or needed for
Operating Expenses.
Real Estate Separate Account may be illiquid for indefinite periods of
time. We will not manage Real Estate Separate Account to provide a
liquidity pool for requests for transfer or payment. If requests for
transfer or payment from Real Estate Separate Account are deferred,
then the deferred transfers or payments, when made, will be made in
the following order:
a) Any death benefits payable under a defined contribution plan.
b) All or a portion of each of the other requests for payment,
determined as follows:
i) the amount of the request, divided by
ii) the amount of all waiting requests, multiplied by
iii) amount we determine to be available to pay requests;
provided, however, that no more than the amount of
the request shall be paid out.
Deferred transfers or payments, when paid, will be made as of a
Valuation Date and will be based on the Real Estate Separate Account
Unit Value as of the date paid. In determining the amount available to
pay requests, we will subtract amounts payable under any other group
annuity contract which requires that we make payments from the Real
Estate Separate Account using a method other than the one described in
this Section.
We reserve the right to make payments in a different manner than
described in this Section if we (i) are required to do so under
applicable statutes, regulations, or decisional law to which we are
subject, (ii) must do so to comply with our fiduciary responsibilities
as an ERISA investment manager as described in Article II, Section 8,
or (iii) deem it necessary to make a change to maintain an equitable
distribution of assets under all of our group annuity contracts. We
will not implement a change under item (iii) before the notice to all
affected contractholders is provided and the appropriate time period
after the notice has elapsed.
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Special Limitation for Certain Separate Accounts. We reserve the right
------------------------------------------------
to make the portion of a requested transfer in excess of the specified
dollar limit in substantially equal monthly installments over a period
not to exceed the specified period, if, in the specified period which
ends on the requested date of transfer, all transfers and payments
from the total of all Separate Account Investments invested in a
particular Separate Account which is subject to the dollar limit total
the specified dollar limit or more. For purposes of this limitation,
transfers and payments from any other Separate Account investments or
funds included in the Separate Account from any other contracts or
policies issued in connection with the Plan or with any other
retirement plan of the Employer will be included as a transfer or
payment from a Separate Account Investment. If this limitation is
imposed by us, the first installment will be made one month after the
date of request, or on such later date that you specify. The specified
dollar limit and period are:
a) $1,000,000 and twelve months, respectively, for International
Stock Separate Account, International Small Company Separate
Account, International Emerging Markets Separate Account, and
Stock Index 500 Separate Account
b) $20,000,000 and 36 months, respectively, for Bond Emphasis
Balanced Separate Account, Government Securities Separate
Account, Large Company Blend Separate Account, Large Company
Growth Separate Account, Large Company Value Separate Account,
Medium Company Blend Separate Account, Medium Company Growth
Separate Account, Medium Company Value Separate Account, Small
Company Blend Separate Account, Small Company Growth Separate
Account, Small Company Value Separate Account, Stock Emphasis
Balanced Separate Account, and U.S. Stock Separate Account.
10. PLANS WHICH MAY INVEST IN THE SEPARATE ACCOUNTS. The Separate Accounts
are not registered with the federal Securities and Exchange Commission
and therefore only Plans which meet certain requirements under the
Code may invest in the Separate Accounts. If the Internal Revenue
Service or a court makes a final determination that the Plan no longer
qualifies as a Qualified Plan, we will require that you transfer any
assets invested in the Separate Accounts. If we decide that you must
transfer assets from the Separate Accounts, we will send you a notice
describing your options. Your Notification must clearly specify the
Guaranteed Interest Investment(s) or the Funding Agent to which you
want the assets transferred. If we do not receive an acceptable
Notification from you within 5 Business Days, we will transfer the
assets to the Guaranteed Interest Investment with the shortest
duration.
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11. FUNDS. We are the sole owner of all assets held in the Separate
Accounts.
PRINCIPAL LIFE INSURANCE COMPANY
CHAIRMAN AND
CHIEF EXECUTIVE OFFICER
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TABLE OF SEPARATE ACCOUNT FEATURES
Current Annual Maximum Annual Maximum Number of
Management Charge Management Charge Days allowed to
Percentage Percentage Defer
Transfers or
Payments
Bond Emphasis None 2.00___ 270
Balanced Separate
Account
Bond and Mortgage 0.45 2.00 270
Separate Account
Government Securities 0.45 2.00 90
Separate Account
International 0.69 2.00 270
Emerging Markets
Separate Account
International Small 0.69 2.00 270
Company Separate
Account
International Stock 0.69 2.00 270
Separate Account
Large Company 0.45 2.00 270
Blend Separate
Account
Large Company 0.45 2.00 270
Growth Separate
Account
Large Company 0.45 2.00 270
Value Separate
Account
Medium Company 0.45 2.00 270
Blend Separate
Account
Medium Company 0.45 2.00 270
Growth Separate
Account
Medium Company 0.45 2.00 270
Value Separate
Account
Money Market 0.45 2.00 90
Separate Account
Real Estate 1.05 None Indefinite
Separate Account
Small Company Blend 0.45 2.00 270
Separate Account
Small Company Growth 0.45 2.00 270
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Separate Account
Small Company Value 0.45 2.00 270
Separate Account
Stock Emphasis None 2.00___ 270
Balanced Separate
Account
Stock Index 500 0.35 2.00 270
Separate Account
U.S. Stock 0.45 2.00 270
Separate Account
___The maximum annual Management Charge percentage includes Management Charges
paid under this Separate Account (currently none) and the Separate Accounts in
which this Separate Account is invested.
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SCHEDULE OF SPECIFICATIONS
RIDERS TO THE CONTRACT
TABLE OF CONTENTS
ARTICLE I DEFINITIONS
Section 1 __ Parties to this Contract
Section 2 __ Other Defined Terms
ARTICLE II CONTRIBUTIONS, INVESTMENTS AND ACCOUNTS
Section 1 __ Contributions
Section 2 __ Investment Direction
Section 3 __ Guaranteed Interest Investments
Section 4 __ Separate Account Investments
Section 5 __ Nonvested Funds Accounts
Section 6 __ Transfers Between Investments
Section 7 __ Maturing Guaranteed Interest Investments
Section 8 __ Investment Manager
Section 9 __ Funds
ARTICLE III EXPENSES
Section 1 __ Expenses
Section 2 __ Billed Expenses
Section 3 __ Deducted Expenses
Section 4 __ Alternative Expense Deductions
Section 5 __ Expenses for Certain Members and Beneficiaries
Section 6 __ Associated Contracts
ARTICLE IV BENEFIT EVENTS AND OPTIONS
Section 1 __ Benefit Events
Section 2 __ Annuity Benefits
Section 3 __ Single Sum Payments
Section 4 __ Full Flexibility Option
Section 5 __ Modification in Mode of Payment of Income
Section 6 __ Facility of Payment
Section 7 __ Assignment
ARTICLE V OTHER BENEFITS
Section 1 __ Withdrawal Benefits
<PAGE>
ARTICLE VI TRANSFER TO ANOTHER FUNDING AGENT; CESSATION; CHARGES AND
LIMITATIONS
Section 1 __ Transfer to Another Funding Agent
Section 2 __ Cessation of Contributions
Section 3 __ Charges for Early Surrender of a Guaranteed Interest
Investment
Section 4 __ Limitations on Transfers and Payments from Guaranteed
Interest Investments
ARTICLE VII GENERAL PROVISIONS
Section 1 __ Certificates
Section 2 __ Beneficiary
Section 3 __ Dividends
Section 4 __ Plan and Plan Amendments
Section 5 __ Contract
Section 6 __ Contract Amendments
Section 7 __ Waiver and Modification
Section 8 __ Information, Proofs and Determination of Facts
Section 9 __ Reliance on Instructions
Section 10 __ Single Payment
Section 11 __ Overpayment
Section 12 __ Ownership
Section 13 __ Termination and Cash Out of Contract
Section 14 __ Term and Termination
Section 15 __ Qualification of Plans
Section 16 __ Our Relationship to the Plan
ARTICLE VIII DISPUTE RESOLUTION
Section 1 __ General
Section 2 __ Negotiations
Section 3 __ Mediation
Section 4 __ Arbitration,
Section 5 __ Exclusive Remedies
Section 6 __ Costs
<PAGE>
ARTICLE 1--DEFINITIONS
SECTION 1 -- PARTIES TO THIS CONTRACT.
This contract is between the Contractholder and Principal Life Insurance
Company.
Contractholder means the holder of this contract named on the face page and will
be referred to in this contract as you or your.
Principal Life Insurance Company will be referred to in this contract as we, us,
or our.
SECTION 2 -- OTHER DEFINED TERMS.
Account means the total of a Member's Guaranteed Interest Investments and
Separate Account Investments. Annuity Premium means the amount applied to
purchase an annuity for a Member.
Annuity Purchase Date means the date on which the Account of a Member is applied
to purchase an annuity benefit for the Member.
Annuity Start Date means the beginning date for annuity benefits to a Member.
Associated Contract(s) means this contract and any other group annuity
contract(s) issued by us which we have agreed in writing to treat as Associated
Contracts.
Benefit Event means, depending upon Plan provisions, termination of employment,
Retirement Date, disability (as defined in the Plan) or death. We may require
any proof of a Benefit Event we deem necessary.
Business Day means a day on which both we and the New York Stock Exchange are
open for business, or any other day which we agree will be a Business Day. If
you request a list of our Business Days for any calendar year. We will provide
you with the list.
Code means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder. Reference to the Code means such Internal Revenue Code or the
corresponding provisions of any subsequent revenue code and any regulations
thereunder.
Composite Guaranteed Rate means, on any date, the rate determined for each of
the Member's Guaranteed Interest Investments which is based on the Guaranteed
Interest Rate in effect on the date we accept the Contribution or transfer. If
more than one Contribution or transfer is accepted during a Deposit Year, the
Composite Guaranteed Rate for such Investment will be determined based on the
amount and timing of Contributions or transfers and the amount of any payment or
application on or before the end of the Deposit Year in which the Contributions
or transfers were accepted. At the end of Deposit Year, that year's Guaranteed
Interest Investments close. Each Guaranteed Interest Investment then earns the
Composite Guaranteed Rate determined for it, compounded annually, until the end
of the Guaranteed Period.
Contract Date means the date this contract is effective, as shown on the face
page.
Contributions means funds we receive and accept under Article II, Section 1. The
types of Contributions are those allowed by the Plan.
Corporate Center means our offices at 711 High Street, Des Moines, Iowa, 50392,
or any other office or address to which we direct you to send Contributions.
<PAGE>
Deposit Year means the period (not to exceed 12 months) selected for the
crediting of interest to Guaranteed Interest Investments established under this
contract, as shown on the Schedule.
Employer means the corporations or firm(s) named as employer in the Plan and any
successor by change of name, merger, purchase of stock, or purchase of assets.
ERISA means the Employee Retirement Income Security Act of 1974, as amended, and
the regulations issued by the U.S. Department of Labor.
Funding Agent means an insurance company, trustee or custodian designated by you
and authorized to transfer or receive any amount(s) transferred to or from this
contract and to apply such amount(s) for the exclusive benefit of Plan Members,
without any obligation on our part as to such application. Funding Agent will
also mean Principal Life Insurance Company when you direct us to transfer such
amounts from this contract to another group annuity contract issued by us.
Guaranteed Interest Investment means the investment established for a Member for
each Deposit Year for each Contribution type as described in Article II, Section
3.
Guaranteed Interest Rate means the annual rate of interest we declare from time
to time for contracts of this class for each Contribution to a Guaranteed
Interest Investment.
Guarantee Period means the period for which a Guaranteed Interest Investment
exists. The period or periods available may be any that we offer to contracts
of this class under the same or similar circumstances. Currently, Guarantee
Periods of two through seven years are available. We reserve the right to
change, at any time, the Guarantee Periods available for new Contributions and
transfers, including transfers from existing Guaranteed Interest Investments.
We reserve the right to limit both the number of Guarantee Periods available
under this contract and the number available to each Member.
You must give us Notification of the Guarantee Periods you select from those
available under the contract. Your selection will remain in effect until
modified by (b) and (c) below.
Your rights to change and to limit the Guarantee Periods available are subject
to the following:
a) Once established by us, the Guarantee Period for a particular
Guaranteed Interest Investment may not be changed by us. However, a
different Guarantee Period may apply to amounts maturing from such
account.
b) If a particular Guarantee Period is no longer offered, we will notify
you at least 60 days in advance.
c) For each Deposit Year, you have the right to select Guarantee Periods
or to change the selection of Guarantee Periods available to Members
by giving us Notification before the beginning of the Deposit Year for
which the selection applies. The selections for a Deposit Year cannot
be changed after its start.
Inactive Member Account means the Account of an Inactive Member.
Investments means the Guaranteed Interest Investments and/or Separate Account
Investments of the Member.
<PAGE>
Member means a person entitled to benefits under the Plan for whom an Account
exists under this contract. A Member will be considered either active or
inactive, as follows:
a) Active Member-a person who is actively participating in the Plan or an
alternate payee of a person who is actively participating in the Plan
pursuant to a Qualified Domestic Relations Order.
b) Inactive Member-a Member who is not an Active Member.
Member Account means the Account of a Member.
Nonvested Funds Account means the accounts established to hold certain Plan
funds as described in Article II, Section 5. These accounts will operate in the
same manner as a Member Account for the purpose of transfers.
Normal Retirement Date means the date, determined by the Plan, on which the
Member's normal retirement benefit will begin. If the Plan does not specify, it
will be the first day of the month on or after the later of (i) the Member's
65th birthday or (ii) the fifth anniversary of the time a Member began
participation in the Plan.
Notification means a form of notice approved by us, including written forms,
electronic transmissions, facsimiles or photocopies. We will notify you
regarding the acceptable forms of notice we will allow. At our discretion, we
may require that a specific form of notice be used in a particular case or that
a particular notice be confirmed. Notification will also include the terms
Notice, Notify and Notified.
Order of Application means the order in which we will apply the Investments of a
Member when a partial transfer or withdrawal of a portion of the Member's
Account has been requested and no other order of application has been reported
to us. The amount withdrawn or transferred from the Member's Guaranteed
Interest Investments, if any, and Separate Account Investments, if any, will be
based on the relative value of each such Investment to the Member's Account.
The amount withdrawn or transferred from Guaranteed Interest Investments will be
from the current Guaranteed Interest Investment first, then from each preceding
Guaranteed Interest Investment, with the oldest Guaranteed Interest Investment
being last applied. The amount withdrawn or transferred from Separate Account
Investments will be based on the relative values of each Separate Account
Investment.
Plan means the Employer's retirement plan in effect on the date this contract is
executed and as amended from time to time, which the Employer has designated to
us in writing as the plan funded by this contract. The name of the Plan is
shown in the Schedule.
Qualified Domestic Relations Order means a Qualified Domestic Relations Order as
defined in Internal Revenue Code Section 414(p)(1)(A).
Qualified Plan means a pension plan qualified under Section 401 of the Code, a
governmental plan meeting the requirements of Section 457 of the Code, and any
other plans which we determine may appropriately invest money in this contract.
Retirement Date means the Member's early, normal or late retirement date under
the Plan.
Schedule of Specifications means the schedule attached to and made part of this
contract. The Schedule of Specifications lists pertinent information and will
be referred to as the Schedule in this contract.
Separate Account means one or more Separate Accounts described in the Separate
Account Investment Rider and listed on the Schedule. If no Separate Account
Rider is attached to this contract and no Separate Accounts are listed on the
Schedule, this contract may not participate in any Separate Accounts.
<PAGE>
Separate Account Investment means the investment or investments established for
a Member as described in Article II, Section 4.
Unallocated Contribution Investment means the investment established to hold
Contributions which cannot be allocated to individual Members on the date we
accept them pursuant to Article II, Section 1 or Section 5. Unless we give you
written notice to the contrary, the Unallocated Contribution Investment will be
invested in Money Market Separate Account, if available, otherwise in a
Guaranteed Interest Investment with the shortest Guarantee Period available.
<PAGE>
ARTICLE II--CONTRIBUTIONS, INVESTMENTS AND ACCOUNTS
SECTION 1--CONTRIBUTIONS.
Contributions may be accepted by us under this contract on any Business Day on
or after the Contract Date, subject to the limitations of the last paragraph of
this Section and Article VII, Section 13. Contributions may be any amount
determined or allowed by the Plan and accepted by us on behalf of a Member.
Contributions in excess of those determined or allowed by the Plan for the
current Plan year may be paid to us only with our consent. To the extent
permitted by our then-established procedures we will maintain separate
accounting records for each type of Contribution.
All Contributions are payable directly to us at our Corporate Center.
Contributions will be credited to Member Investments or the Unallocated
Contribution Account as of the Business Day on which we accept the Contribution,
in accordance with our then-current procedure for crediting Contributions under
all contracts of this class. We will inform you in writing of our current
procedures for crediting Contributions.
We reserve the right to limit or refuse further Contributions under this
contract. We will give you written notice at least 60 days before the date after
which further Contributions will be limited or refused by us.
SECTION 2--INVESTMENT DIRECTION.
Each type of Contribution made on behalf of a Member may be directed to the
Guaranteed Interest Investments described in Section 3 of this Article, to any
number of the Separate Account Investments described in Section 4 of this
Article, or to any combination of such investments. We must have Notification of
investment direction from you or, if the Plan permits, from the Member, for the
portion of each type of Contribution to be held in each investment. You do not
need to approve each Member investment transfer or change of investment
direction unless you have reserved the right to do so under the Plan.
Contributions will be added to each Investment in the amount or percentage
specified in the investment direction on file with us. Future Contributions may
be directed to different Investments or the amount directed to an Investment may
be changed by filing a new Notification or investment direction with us. If a
Contribution is received for a Member for whom no Notification of investment
direction is on file with us, we will direct that Contribution to the Member's
Money Market Separate Account investment, if available, otherwise to the
Member's Guaranteed Interest Investment with the shortest Guarantee Period then
available under the contract.
SECTION 3--GUARANTEED INTEREST INVESTMENTS.
A Guaranteed Interest Investment will be established for a Member for each type
of Contribution and transfer directed to that investment for each Deposit Year.
A separate Guaranteed Interest Investment will be established for each Deposit
Year for each Guarantee Period used to hold each type of Contribution directed
to these investments. No further Contributions or transfers will be credited to
a Guaranteed Interest Investment after the close of the Deposit Year in which it
was established.
The value of a Guaranteed Interest Investment of a Member at any time during its
Guarantee Period will be equal to the sum of all Contributions and transfers to
it plus interest less any payments or transfers. Interest will be credited to
the investment daily and compounded annually on the last day of each Deposit
Year. The rate of interest credited will be the Composite Guaranteed Rate
determined for such Investment.
A Guaranteed Interest Investment will be paid or applied in full at the end of
its Guarantee Period as described in Section 7 of this Article.
<PAGE>
SECTION 4--SEPARATE ACCOUNT INVESTMENTS.
The Separate Account Investment Rider attached to this contract describes each
Separate Account. The Schedule lists the Separate Accounts available under this
contract. Unless you direct us otherwise, Members will be allowed to participate
in all listed investments. A Separate Account Investment will be established for
each Member for each type of Contribution directed to each Separate Account in
which this contract participates.
No Separate Account Investment Rider is attached to the contract and no Separate
Accounts are listed on the schedule, no Separate Account Investments are
available.
SECTION 5--NONVESTED FUNDS ACCOUNTS.
Nonvested Funds Accounts will be established to hold the nonvested portion of
Inactive Member Accounts and other Plan funds which we mutually agree to include
in Nonvested Funds Accounts. Nonvested Funds which are reserves of an annuity
cancelled under Subsection (3) of Article IV, Section 2, will be invested
according to our then-current procedures. Other Nonvested Funds will be invested
as they were prior to their transfer to Nonvested Funds Accounts. However, by
giving Notice to us, you may change the investment direction of Nonvested Funds
which are not reserves.
Nonvested portions of Inactive Member's Accounts will be held in the Nonvested
Funds Accounts until a Forfeiture occurs under the Plan. Nonvested Funds will be
applied according to Plan provisions on the earliest possible date. Any amounts
reallocated to a Member because of this Section will be considered a
Contribution under Section 1 of this Article, and the provisions of Sections 1
and 2 will apply.
SECTION 6--TRANSFERS BETWEEN INVESTMENTS.
In general, all or a portion of a Member's Investments may be transferred to
another Investment as of any date requested subject to the following:
a) We must receive Notification to transfer from you or the Member, as
permitted by the Plan. The Notification must specify the amount or
percentage to be transferred and may specify the Investments involved.
If a requested transfer from a Member's Investments does not specify
the Investments to be transferred, the Order of Application will
determine the Investments to be transferred.
b) A transfer from a Member's Guaranteed Interest Investment to a
Separate Account Investment may occur only on a Valuation Date of such
Separate Account Investment.
c) Except as provided in Section 7 of this Article, all transfers from a
Guaranteed Interest Investment are subject to charge contained in
Article VI, Section 3. All transfers are subject to the limitations
contained in Article VI, Section 4 and the Separate Account Investment
Rider.
d) All Separate Account Investment transfers are subject to the
provisions of the Separate Account Investment Rider.
Transfers will be made in accordance with our then-current procedures. Any
transfer under this Section will be an application from the Investment as of the
date of transfer.
<PAGE>
SECTION 7--MATURING GUARANTEED INTEREST INVESTMENTS.
On the day after the last day of its Guarantee Period, each Guaranteed Interest
Investment of a Member which has not been paid or transferred in full before the
end of its Guarantee Period will be transferred to a current Guaranteed Interest
Investment for that Guarantee Period, if available. If that Guarantee Period is
no longer available, then, unless otherwise directed by Notification, we will
transfer to a current Guaranteed Interest Investment with the shortest Guarantee
Period then available under the contract.
In lieu of the transfer described above, we will pay or transfer all or a part
of the Investment in accordance with any Notification received before the end of
such Guarantee Period.
SECTION 8--INVESTMENT MANAGER.
As set out in Sections 2 and 6 of this Article, the right to direct the split of
Contributions between Guaranteed Interest Investments and Separate Account
Investments and to direct any transfer between these Investments is reserved to
you and/or the Member, all in accordance with provisions of the Plan.
Your application for and our issuance of this contract constitutes your
appointment of and our acceptance and affirmation that:
a) in discharging our duties under this contract we will act at times as
an "investment manager", except for the rights described in the
preceding paragraph, and
b) we meet the qualifications needed to accept that appointment and we
acknowledge that by virtue of that appointment we will exercise
fiduciary duties with respect to the Plan.
For purposes of this section, the term "investment manager" has the same meaning
as that term has under ERISA. Our role as investment manager and the acceptance
of the accompanying fiduciary duties extends only to our management of assets
which fall within the term "plan assets" as used in ERISA, and we undertake no
other fiduciary responsibilities required to administer or maintain the Plan.
SECTION 9--FUNDS.
We are sole owner of all funds received under this contract. All Guaranteed
Interest Investments we received under this contract are and remain a part of
our general account without any duty or requirement of segregation or separate
investment on our part. Separate Account Investments will be held as stated in
the rider describing such Separate Account Investments.
<PAGE>
ARTICLE III--EXPENSES
SECTION 1--EXPENSES.
Expense charges will be determined by us periodically, but at least annually, in
accordance with the written service agreement we have with you. The amount of
such charges will be made up of the following:
a) Compensation paid or payable by us to the soliciting agent named by
you.
b) A general administration expense charge.
c) A recordkeeping expense charge.
d) Document charges.
e) Other charges may be made for services you ask us to do that are not
covered by (a) through (d). For example, there will be a charge for
preparing unusual material or additional services. We will inform you
of the charges for such services before we perform them.
SECTION 2--BILLED EXPENSES.
Expenses will be paid to us directly at our Corporate Center, unless deducted
under Section 3 of this Article. We will send you a statement of these charges
periodically in accordance with our written service agreement with you. Such
charges must be paid within 31 days from the date of the statement. If the
expense charges are not paid within 31 days after the statement date, we may
deduct all outstanding expenses from the appropriate Accounts under this
contract if this automatic deduction of expenses occurs twice in any twenty-four
month period, we may deduct expenses from the accounts as described in Section 3
of this Article thereafter until a new written service agreement is completed
with us.
SECTION 3--DEDUCTED EXPENSES.
In your written service agreement with us (or as provided in Section 2 of this
Article), an election may be made to have some or all of the expense charges
(described in Section 1 above) deducted from Member Accounts instead of having
these charges paid separately.
SECTION 4--ALTERNATIVE EXPENSE DEDUCTIONS.
As an alternative to direct deduction of expenses from Member Accounts, you may
choose in the service agreement we have with you to have some or, within our
then-current guidelines, all expenses paid by an investment return reduction to
Member Accounts. Periodically we will determine the expense charges incurred and
reduce them by the amount recovered through the investment return reduction. Any
remaining expenses will be billed or deducted in accordance with Section 2 or 3
of this Article.
SECTION 5--EXPENSES FOR CERTAIN MEMBERS AND BENEFICIARIES.
Additional expenses for services provided to (i) Members and beneficiaries who
have elected the Full Flexibility Option and (ii) Inactive Members may be
recovered by an investment reduction to the Accounts of such Members and
beneficiaries covered under contracts of this class. Periodically we will
determine the amount of the reduction necessary to recover the charges incurred.
Any remaining expenses will be billed or deducted in accordance with Section 2
or 3 of this Article.
<PAGE>
SECTION 6--ASSOCIATED CONTRACTS.
We may agree to take into account any Associated Contracts for the purpose of
determining the expenses charged under such contracts. The charges under an
Associated Contract will not be greater than if it were not an Associated
Contract.
<PAGE>
ARTICLE IV--BENEFIT EVENTS AND OPTIONS
SECTION 1--BENEFIT EVENTS.
Benefits may be payable to a Member for whom a Benefit Event has occurred under
the Plan. You must give us Notification of the Benefit Event. A Member may elect
any one or more of the following options, as permitted by the Plan:
a) Annuity benefits.
b) Single sum payment.
c) Full Flexibility Option.
If the Member does not elect a complete distribution of the Member's Account,
the remainder of the Member's Account will remain under the contract until the
earlier of the date the Member elects to receive benefits under one or more of
the options above or the date the contract terminates. The Member's Guaranteed
Interest Investments and Separate Account Investments will continue to operate
in the same manner.
SECTION 2--ANNUITY BENEFITS.
It permitted by the Plan, a Member may elect to have an annuity benefit
purchased as long as the annuity benefit complies with Plan provisions and all
of the following:
a) All or a portion of the Member's Account may be used to provide an
annuity.
b) The Member must give us Notification to provide the annuity.
c) We will not issue an annuity unless the amount applied to establish
the annuity equals or exceeds $3,500. When determining the $3,500
amount we will include the current amount used to establish the
annuity plus all previous amounts applied to establish an annuity
under this contract or any other group annuity contract issued to you.
Upon 60 days written notice to you, we may increase the $3,500 amount.
We will not increase the amount above the maximum amount which a
Qualified Plan may distribute to a Member or beneficiary without his
or her prior consent.
d) All annuities will be fixed dollar annuities.
e) The form of benefit and the contingent annuitant named (if any) cannot
be changed after the Annuity Purchase Date.
f) By written agreement with you, we may provide any options permitted by
the Plan.
Subsection (1)--Amount of Annuity Benefit. The amount of annuity purchased
under this Article and payable to a Member will be determined by us based on:
a) the Annuity Premium,
b) the annuity form chosen,
c) the age of the Member,
d) the Annuity Start Date,
<PAGE>
e) the age of the contingent annuitant (if any),
f) the frequency of payments, and
g) the annuity purchase rates applicable, as described in Subsection 2 of
this Section.
Subsection (2)--Annuity Purchase Rates. Annuities will be purchased using our
then-current purchase rates for contracts of this class. Such rates will not be
less favorable to the annuitant than the minimum amounts of Annuity which may be
purchased using rates based on an interest rate of 2 1/2%, a load of 5% and
mortality according to the 1983 Female Table a for Individual Annuity Valuation,
projected to 1999 by Scale G.
An example of the minimum amount of annuity income that could be provided by $
10,000.00 of Annuity Premium for an immediate, life annuity with installment
refund is shown in the following table:
ATTAINED AGE AMOUNT OF
(YEARS AND MONTHS) MONTHLY INCOME
45 $28.39
50 30.22
55 32.51
60 35.39
65 39.07
70 43.82
Minimum incomes for purchases made within the five- year period beginning
January 1, 2000, will be 97% of the incomes purchased under the above basis.
Minimum incomes for purchases made within any subsequent five-year period will
be 97% of the incomes for the preceding five-year period. The minimum amounts of
annuity available at other ages and for other forms of income will be determined
by us based on the same basis as the above. We will make these available to you
on request.
Subsection (3)--Cancellation of Annuity. If, under the provisions of the Plan in
effect on the Member's Annuity Start Date, you determine and report to us that
the annuity purchased for a Member is to be reduced, then the fraction you
report will- be cancelled and the amount of annuity payments paid to the member,
the beneficiary or contingent annuitant will be reduced accordingly.
The reserve for any annuity cancelled under this Section will be applied in
accordance with Article II, Section 5.
Subsection (4)--Misstatements. If the age or any other relevant fact of any
Member or contingent annuitant is found to have been misstated, the amount of
annuity payable by us will be that provided by the amount applied to provide
such annuity, determined as of the date established by the misstated information
and on the basis of the correct information. Any overpayment by us resulting
from any misstated information will be deducted from amounts thereafter payable
to a Member, the contingent annuitant or the beneficiary. Any underpayment by us
resulting from any misstatements will be paid in full with the next payment due
the Member, the contingent annuitant or beneficiary.
Subsection (5)--Commutation of Payments. If any annuity payments are to be
commuted, the commuted value of the payments will be determined by us, using the
interest rate which was used as a basis for calculating the amount of the
payments at the time the annuity was purchased.
Neither the Member, the contingent annuitant nor any beneficiary who is a
natural person taking in his or her own right has the right to commute any
annuity payments under this contract.
<PAGE>
SECTION 3--SINGLE SUM PAYMENTS.
If permitted by the Plan, a Member who has reached a Benefit Event may elect a
single sum payment equal to all or a portion of the Member's Account. Any single
sum payment made under this Section will be an application of the Member's
Account on the date paid.
Any single sum payment to a Member is subject to the delay of payment and
limitation provisions of Article VI, Section 4 and the Separate Account
Investment Rider, if any. Such amount may also be subject to the charge in
Article VI, Section 3. unless such payment is made within:
a) 60 days after we send notification to the Member of the options
available under the contract upon reaching the first Benefit Event
under the Plan, other than death, or
b) 60 days after a Member's Normal Retirement Date, if such date is later
than the date in (a) above, or
c) 120 days after we send notification to the beneficiary of the options
available under the contract, in the event of the death of the Member.
SECTION 4--FULL FLEXIBLITY OPTION.
This option provides scheduled installment payments, starting within twelve
months of the date of the Notification and continuing until the date the Account
is exhausted. Payments to the Member or beneficiary are subject to the
Distribution rules contained in the Code and the regulations thereunder.
We will pay a portion of such Account on the date or dates requested each
calendar year and continuing until the entire Account has been paid. This amount
is the scheduled amount. The unpaid portion of the Account will continue to be
credited with separate account performance under the terms of the Separate
Account Investment Rider or the interest rate otherwise available and as may be
reduced as provided in Article III, Section 5.
The Order of Application will determine from which Investments payments will be
made. However, a Member or Beneficiary may give us Notification of a different
order if a different order is desired. If we receive such notification, payments
from Guaranteed Interest Investments will be subject to the charge in Article
VI, Section 3, and the delay of payment and limitation provisions of Article VI,
Section 4 and the Separate Account Investment Rider.
If scheduled payments in any calendar year exceed the maximum amount, the excess
amount will be subject to the charge in Article VI, Section 3, and the delay of
payment and limitation provisions of Article VI, Section 4 and the Separate
Account Investment Rider. For any calendar year, the maximum amount is the
greatest of:
a) 13% of the Account balance at the beginning of the current calendar
year.
b) the Account balance at the beginning of the current calendar year
divided by the number of years of the Member's or beneficiary's life
expectancy.
c) the amount withdrawn in the preceding calendar year which was not
subject to the charge in Article VI, Section 3.
In addition to the scheduled payments, nonscheduled payments may be requested.
We may establish a minimum dollar amount for nonscheduled payments. Nonscheduled
payments may be subject to a transaction fee. Nonscheduled payments will be
subject to the charge in Article VI, Section 3, and the delay of payment and
limitation provisions of Article VI, Section 4 and the Separate Account
Investment Rider.
<PAGE>
The Member or beneficiary may request termination of the Full Flexibility Option
by one or more of the following methods: (i) requesting an excess payment equal
to the remaining balance of the Account, (ii) requesting the remaining balance
be used to purchase an annuity for such Member or beneficiary in accordance with
one of the other options of this Section, or (iii) requesting that the Full
Flexibility Option be cancelled and leaving the remaining balance under this
contract.
SECTION 5--MODIFICATION IN MODE OF PAYMENT OF INCOME.
If, at any time after a Member's Annuity Start Date or the date benefits begin
under the Full Flexibility Option, the monthly amount of income payable under
this contract to such Member or to the beneficiary or contingent annuitant would
be less than $20, we may, at our option, pay such amount less frequently, but
not less frequently than annually.
SECTION 6--FACILITY OF PAYMENT.
If any Member, alternate payee, contingent annuitant or beneficiary becomes
physically, mentally or legally incapable of accepting any payment and the
person has no legal representative or guardian who can accept the payment on the
person's behalf, we may, in the absence of Notification from you, at our option,
make such payment to the person or persons as have, in our opinion, assumed the
care and principal support of the Member, contingent annuitant or beneficiary.
However, any payment due a minor will be paid at a rate not exceeding the
greater of (i) $100.00 per month or (ii) the maximum amount permitted by the
laws of the state of issue of this contract. In no event will any such payment
exceed the maximum amount allowed under applicable law of the state of issue of
this contract. In no event will any such payment exceed the maximum amount
allowed under applicable law of the state in which this contract is delivered.
Any such payment made by us will fully discharge us to the extent of the payment
SECTION 7--ASSIGNMENT.
Except for an assignment to an alternate payee required by a Qualified Domestic
Relations Order, no benefits payable under this contract to any Member,
beneficiary or contingent annuitant are assignable, and all such benefits are
exempt from the claims of creditors to the maximum extent permitted by law.
<PAGE>
ARTICLE V--OTHER BENEFITS
SECTION 1--WITHDRAWAL BENEFITS.
Upon appropriate Notification, we will pay to a Member any portion of that
Member's Account, subject to the following:
a) The Plan must allow the Member to receive the withdrawal.
b) The Notification must be on a form we either furnish or approve and
will be accompanied (at our request) by the Member's certificate, if
any, issued as described in Article VII, Section 1.
c) Any amount withdrawn under this Section will be subject to both the
delay of payment and limitation provisions of Article VI, Section 4
and the Separate Account Investment Rider, if any, and the charge of
Article VI, Section 3.
d) We reserve the right to limit the number of withdrawals and the right
to charge for processing such withdrawals.
We will determine the amount available as of the date we receive the
Notification at our Corporate Center, or at some later date specified in the
Notification. The amount available will be that portion of the Member's Account
in which the Member is vested under the Plan. If the withdrawal is for the
purposes of a loan under the Plan, the amount of the loan will be determined by
the provisions of the Plan.
If a portion of a Member's Account is to be withdrawn, the Notification may
specify which Investments are to be applied, if no order is specified, the Order
of Application will apply.
Any payment under this Section will be an application of the Member's Account on
the date paid.
<PAGE>
ARTICLE VI--TRANSFER TO ANOTHER FUNDING AGENT; CESSATION; CHARGES
SECTION 1--TRANSFER TO ANOTHER FUNDING AGENT.
Upon Notification to us at our Corporate Center, payment of the aggregate of all
of the Guaranteed Interest investments and Separate Account Investments will be
transferred to another Funding Agent. Subject to the charge provided for in
Section 3 of this Article, and the limitations provided in Section 4 of this
Article and the separate Account Investment Rider, if any, the amount of any
Guaranteed Interest Investments and Separate Account Investments will be
determined and transferred within seven Business Days after the date we receive
your Notification. If you request payment as of some later date, the amounts to
be paid out will be determined and paid as of that date.
SECTION 2--CESSATION OF CONTRIBUTIONS.
Cessation of Contributions will be effective as of any of the following dates:
a) On the date you give us written Notification that Contributions will
cease.
b) On the date the Plan terminates.
c) On or after the date on which the Internal Revenue Service or a court
makes a final determination that the Plan no longer meets the
requirements to remain a Qualified Plan, if we have given you written
notice that cessation will occur on that date or at some later date.
d) On the date no Accounts remain under this contract.
Upon cessation of Contributions, no employees will become Members and no further
Contributions will be accepted.
All provisions of this contract will remain effective as to any Accounts which
have not been paid or applied in full.
Once all Accounts have been paid or applied in full, we will have no further
obligation under this Contract as to those Accounts.
SECTION 3--CHARGES FOR EARLY SURRENDER OF A GUARANTEED INTEREST INVESTMENT.
If a Member transfers or withdraws all or a part of a Guaranteed Interest
Investment before the end of its Guarantee Period, the transfer or withdrawal is
a surrender of that amount Transfer or withdrawal of an investment refers to
transactions from Guaranteed Interest Investments under any of the following
contract provisions:
a) Transfer between Investments, Article II, Section 6.
b) A single sum payment under Article IV, Section 3, after the periods
specified in such Section.
c) A withdrawal under Article V, Section 1.
d) A transfer to another Funding Agent under Article VI, Section 1.
We reserve the right to waive this charge for certain withdrawals. Any such
waiver will be applied in a uniform manner to all such withdrawals from
contracts of this class.
<PAGE>
If all or a portion of a Guaranteed Interest Investment is surrendered
early and the Guaranteed Interest Rate in effect for contracts of this
class for the date of surrender is greater than the Composite Guaranteed
Rate for the Investment, the amount available will be reduced by a
surrender charge equal to the following:
e) The difference between such Guaranteed Interest Rate in effect for new
Contributions for the date of surrender and the Composite Guaranteed
Rate of the Investment being surrendered, multiplied by
f) The number of years (including fractional parts of a year) remaining
in the Guarantee Period for the Guaranteed Interest Investment,
multiplied by
g) The amount being surrendered.
If the entire Guaranteed Interest Investment is surrendered, the Guaranteed
Interest Investment will be reduced on the date of surrender and the remainder
will be paid or transferred.
If a portion of the Guaranteed Interest Investment is surrendered, the
Guaranteed Interest Investment will be reduced by the amount being surrendered
plus the surrender charge, if any.
If the Guaranteed Interest Rate in effect for contracts of this class for the
date of surrender is equal to or less than the Composite Guaranteed Rate for
such account, there is no surrender charge.
SECTION 4--LIMITATIONS ON TRANSFERS AND PAYMENTS FROM GUARANTEED INTEREST
INVESTMENTS.
a) In general, payments and transfers from the Guaranteed Interest
Investments will be made in full within seven Business Days after the
requested date of payment. However, we reserve the right to defer any
payment or transfer under this contract up to 270 days. These delay
rights will not apply to payments to the beneficiary named by the
Member, payments to a Member due to disability or retirement under the
Plan or to purchases of annuity under Article IV, Section 2.
Such deferment will be based on unstable or disorderly market or
investment conditions which, in our opinion, do not allow for an
orderly investment transfer. This deferment may include, but not be
limited to, situations where regular banking has been suspended or
when an emergency or other circumstances beyond our control do not
allow for the orderly disposal and liquidation of securities or other
assets.
b) We reserve the right to make the portion of the requested payment or
transfer in excess of the greater of
i) 25% of the aggregate Guaranteed Interest Investments under the
contract on the date 12 months prior to such determination date,
or
ii) $25,000,000 in the 12 month period which ends on the date of
requested payment or transfer,
in substantially equal monthly installments over a period not to
exceed 36 months. For purposes of this limitation, payments and
transfers at investment value from our general account from any other
contracts or polices we issued in connection with the Plan will be
included as a payment or transfer from the Guaranteed Interest
Investments under this contract.
If this limitation is imposed by us, we will make the first
installment one month after the date of request, or on the date
specified in your Notification.
These delay rights will not apply to payments to the beneficiary named
by the Member, payments to
<PAGE>
a Member due to disability or retirement under the Plan or to
purchases of annuity under Article IV, Section 2.
If we defer any payment or transfer under this Section, we will determine the
amount to be paid or transferred on the actual date of payment or transfer. We
will notify you if the deferment will be more than 30 days. During any
deferment, requested funds will continue to earn interest at the same rate.
<PAGE>
ARTICLE VII--GENERAL PROVISIONS
SECTION 1--CERTIFICATES.
If a Member contributes under the Plan and the state of issue so requires, we
will prepare, for delivery to each such Member, an individual certificate
setting out a statement of the benefits to which that Member is entitled and to
whom death benefits are payable. If benefits become payable to a Member under
one of the options of Article IV, we will issue an individual certificate
setting forth the amount, form and period of payment of the annuity benefits.
SECTION 2--BENEFICIARY.
The beneficiary is the person or persons named by the Member to whom benefits
(other than any annuity payable to a contingent annuitant under the provisions
of Article IV, Section 2) are payable under this contract upon the death of the
Member, subject to the provisions of Article IV, Section 7. A Member will name
or change a Beneficiary by filing a written beneficiary designation to that
effect with us in a form acceptable to us. Any Beneficiary designation will not
have any effect until we receive it. When we receive the designation, it will be
effective as of the date it is executed by the Member, but any payments we made
before receipt of the resignation will discharge us to the extent of such
payments. We reserve the right to require the Member's Certificate for
endorsement of any change of beneficiary. Unless prohibited by the Plan or by a
prior beneficiary resignation, any person receiving benefits or payments which
might continue beyond that person's life time may Designate a beneficiary to
receive any remaining payments.
Unless otherwise specified by the Member with our consent,
a) if any beneficiary dies before the Member, any payment which would
have become payable to such beneficiary, if living, will be payable
when due to the beneficiary or beneficiaries surviving the Member in
the order provided.
b) if any beneficiary survives the Member but dies before receiving all
of the payments which would have been payable to such beneficiary, if
living, payment will be paid when due to the surviving beneficiary or
beneficiaries in the order provided.
c) if the last survivor of all named beneficiaries dies after the death
of the Member (and the contingent annuitant, if any) and before all
payments due the beneficiary have been made, the remaining payments
will be commuted and the commuted value paid to the executor or
administrator of the estate of such last survivor.
If no named beneficiary survives the Member (and the contingent annuitant, if
any), or no beneficiary has been named, any amount which would have become
payable to a beneficiary will be commuted and the commuted value paid to the
executor or administrator of the estate of the Member (the executor or
administrator of the estate of any contingent annuitant, if he survives the
Member). If no formal estate is created, we may pay out any benefits in
accordance with any state or federal law which permits us to make payments to
specific persons without the creation of a formal estate. If state or federal
law requires that we make any payments only to a formally established estate, we
will make payments in accordance with that law.
If required by the facts surrounding a particular death or deaths, we may use
the appropriate state statute dealing with simultaneous or nearly simultaneous
deaths to determine who will be treated as a survivor entitled to receive
benefits. If no state law applies, then we may rely upon the most current
version of the uniform Simultaneous Death Act to make that determination.
If the beneficiary is not a natural person taking in his or her own right (that
is, a trust or an estate), any monthly or other periodic payments will be
commuted and the commuted value paid to the beneficiary in a single sum.
<PAGE>
However, if the beneficiary is a trust established for the benefit of a natural
person and if the payment period is at least 24 months and not more than 60
months, monthly or other periodic payments may be continued to such beneficiary
for any period which is not prohibited by the Code.
SECTION 3--DIVIDENDS.
Because of the direct crediting of investment return to both Guaranteed Interest
Investments and Separate Account Investments, it is not anticipated that there
will be any surplus accruing on this contract from which dividends may be
apportioned to this contract. However, if a dividend is declared, any portion of
the divisible surplus that we determine to accrue on this contract will be
determined annually by us and will be credited to this contract on the first day
of each Deposit Year after the Contract Date. Any dividend will be applied as
directed by you in accordance with Plan provisions.
SECTION 4--PLAN AND PLAN AMENDMENTS.
You agree to furnish us with a copy of the Plan in effect on the Contract Date
and any subsequent amendments to it. No amendment to the Plan or interpretation
of the Plan language which affects our duties and obligations will have any
effect on the terms of this contract, unless: (i) we have received timely notice
of the amendment or interpretation, and (ii) we have not sent you a written
notice that we do not accept the amendment or interpretation within 60 days of
our receipt of the amendment or interpretation.
SECTION 5--CONTRACT.
This contract and your application are the entire contract between the parties.
A copy of your application is attached to this contract. We are obligated only
as provided in this contract and are not a party to nor bound by any trust or
plan.
SECTION 6--CONTRACT AMENDMENTS.
We reserve the right to amend or change this contract as follows, subject to the
limitations of item (g):
a) Any or all of the contract provisions may be changed at any time,
including retroactive changes, to the extent necessary to meet the
requirements of any law or regulation issued by any governmental
agency to which we are subject. We will give you written notice of any
such change.
b) Any or all of the contract provisions may be changed at any time,
including retroactive changes, to the extent necessary to keep the
Plan in compliance with the Code or ERISA. We will give you written
notice of any such change.
c) As of any date after the Contract Date, we may amend or change the
length of the Guarantee Period; the Order of Application; the
provisions for transferring values between accounts; the percentage in
item (a) of Article IV, Section 4; the charge contained in Article VI,
Section 3; and the items included in the Operating Expenses for
Separate Accounts under the Separate Account Investment Rider (if such
a rider is attached to this contract). We will give you 60 days
written notice of any such change.
d) We may amend or change the annuity purchase basis shown in Article IV,
Section 2, as follows:
i) For Account values accumulated during the five year period
beginning on the Contract Date, no change will be made in such
purchase rate basis.
ii) For Account values accumulated after the date which is five years
after the Contract Date, we may amend or change such basis on any
date which is later than (i) five years after the Contract Date
or (ii) five years after the latest date of amendment or change.
<PAGE>
We will give you 60 days written notice of any such change.
e) By agreement between you and us, this contract may be amended or
changed at any time as to any of its provisions, including those in
regard to coverage, benefits and the participation privileges, without
the consent of any Member, beneficiary or contingent annuitant We will
propose amendments to the contract to you by written notification
which will also indicate how you may agree to the proposed amendment.
Generally, we will indicate that you use one or more of the following
methods to agree to our proposed amendments:
i) By signing the amendment and returning a copy to us.
ii) By making Contributions after 60 days have elapsed from the date
of our written notice to you.
iii) By not declining the amendment in a written Notice to us. We will
usually propose the use of this method for procedural amendments
or amendments which increase your rights rather than changes
which limit your rights under this contract.
iv) By any other method allowed by law.
f) After 60 days notice to you, we may amend or change any term of the
contract if such amendment or change increases the options available
to you or a Member. Any amendment or change will not become effective
if you give us written Notification that you do not accept the
amendment.
g) Any amendment or change under this Section 6 is binding and conclusive
on each Member, beneficiary, or contingent annuitant, but is limited
by the following:
i) No amendment or change will apply to annuities purchased under
Article IV before the effective date of the amendment or change
except to the extent necessary in making changes in accordance
with item (a) or (b) above.
ii) No amendment or change under (c) above will affect Guaranteed
Interest Investments established prior to the date of the
amendment or change.
iii) Any change in the general administration expense charge referred
to in (c) of Section 1, Article III, will not take effect as to
any Guaranteed Interest Investments and Separate Account
Investments to be transferred to another Funding Agent, if, prior
to the date the amendment or change is to take effect, we receive
Notification from you for payment of all such Guaranteed Interest
Investments and Separate Account Investments to the other Funding
Agent in accordance with Article VI, Section 1, and such
Notification is not revoked.
SECTION 7--WAIVER AND MODIFICATION.
Only our officers may agree to (i) change any of our obligations or duties under
this contract, or (ii) waive any of your obligations or duties under this
contract.
SECTION 8--INFORMATION, PROOFS AND DETERMINATION OF FACTS.
You agree to furnish to us evidence of the age of each Member and his contingent
annuitant, if any, on or before his earliest Annuity Purchase Date and other
records, data, proofs or additional information which, in our opinion, is
necessary for the administration of this contract.
For the purposes of this contract, the determination by you as to any facts
(except age) relating to any employee is conclusive, except for fraud or willful
misstatement of fact.
<PAGE>
SECTION 9--RELIANCE ON INSTRUCTIONS.
We are not obligated to question or refuse to follow any apparently valid
instructions which we in good faith believe are valid, if we receive such
instructions from you, a Plan trustee, a Plan administrator, a Plan fiduciary,
or, if the Plan permits, a Member, alternate payee, contingent annuitant or
beneficiary. If we follow such instructions, we will have no further obligations
with respect to the amounts paid out or the actions taken. If we believe in good
faith that the law requires us not to follow an apparently valid instruction, we
are not required to act on any instruction.
SECTION 10--SINGLE PAYMENT.
We will make any payment to a Member, contingent annuitant, alternate payee or
beneficiary in accordance with any withdrawal or payment option available under
the contract only once. Any payment we make in accordance with any withdrawal or
payment option will be in lieu of any other benefit or withdrawal option and
will extinguish any claim by any Member, contingent annuitant, alternate payee
or beneficiary to receive the amount paid out.
SECTION 11--OVERPAYMENT.
In the event that we make an overpayment of any amount payable to a Funding
Agent, Member, contingent annuitant, alternate payee or beneficiary, we will
have the option to seek reimbursement of that overpayment from the individual
receiving the overpayment. If the overpayment resulted from any action by you
and we suffered a loss as a result of our good faith reliance upon your action,
you will pay us an amount equal to the overpayment.
SECTION 12--OWNERSHIP.
You are the owner of this contract. However, if the Plan is trusteed and this
contract is issued to the trustee(s), the trustee(s) of the Plan is sole owner
of all the payments, rights, options, and privileges herein granted or made
payable to any Member, beneficiary, or contingent annuitant under this contract.
This includes, without limitation, the right to distribute all or a portion of
the Member's Account, or ownership of these rights in respect of such Account,
on or after the Member's termination of employment. However, this does not
include the right to designate a Member's beneficiary unless such right has been
granted to the trustee by the Plan or trust. The trustee(s) of the Plan is
entitled to exercise all such rights, options, and privileges and to receive all
such payments at the time or times specified in this contract that such
payments, rights, options, and privileges are available to a Member. Such
exercise by the trustee(s) may be made without the consent or participation of
any Member, beneficiary or contingent annuitant
SECTION 13--TERMINATION AND CASH OUT OF CONTRACT.
We may begin cash out proceedings with regards to the funds held under this
contract on or after the date we have announced we will refuse all further
contributions under contracts of this class, subject to the following:
a) We have announced our intention to refuse further Contributions and
that we will no longer write or accept applications for contracts of
this class.
b) Once we determine we wish to cash out contracts of this class, we will
cash out all contracts of this class without exception.
c) Amounts held in any of our Separate Accounts will be available for
payment or transfer in accordance with the contract provisions or
riders making such Separate Accounts available hereunder.
d) For funds held in our general account, the following will apply:
<PAGE>
i) You may choose to transfer such funds to another Funding Agent.
No charge will be made under Article VI, Section 3, for any funds
so transferred.
ii) If no other Notification is received by us, at the end of any
Guarantee Period, we will treat the funds held in our general
account as if they are being held under the group annuity
contract then offered by us which, in our opinion, most closely
parallels the provisions of this contract. Thereafter, the
provisions of this contract will no longer apply.
iii) There will be no charge made for payment from this contract of
single sum amounts at recognized benefit events, even if the
group annuity contract described in item (d)(ii) above would not
permit such pay out without charge.
e) The annuity purchase rate guarantees in effect under this contract on
the day before the provisions of item (d)(ii) of this Section are
instituted will remain the purchase rate guarantees for any general
account funds handled in accordance with item (d)(ii).
Such purchase rate guarantees will also remain in effect for any
Separate Account funds held hereunder until paid or transferred.
f) We will not change any Composite Guaranteed Rate for amounts held in
our general account before the end of the Guarantee Period for such
amounts.
g) Your right to transfer funds held hereunder to another Funding Agent
will not be changed.
h) If we choose to make another group annuity contract available to other
contractholders of this type of contract, we will make such a group
annuity contract available to you.
i) We will give you 60 days advance written notice before we will enforce
the provisions of this Section.
SECTION 14--TERM AND TERMINATION.
Except as provided in Section 13 of this Article, or by any amendment to this
contract, this contract will continue in force as long as we hold assets for you
or are making annuity payments. If you transfer all of the assets under this
contract not associated with any annuity payments to a Funding Agent, our
obligations under this contract will cease, except to the extent that we are
making annuity payments. However, if we discover that we underpaid the Funding
Agent, we will have the obligation to pay the appropriate amount to the Funding
Agent.
SECTION 15--QUALIFICATION OF PLANS.
We assume no responsibility for ensuring that the Plan remains a Qualified Plan
or meets any of the requirements of the Code or ERISA. While we will undertake
those duties described in this contract or in the service agreement n a manner
which should help you to meet the requirements of the Code and ERISA, you agree
and acknowledge that we do not have final responsibility for making sure that
you take all appropriate steps needed to keep the Plan in compliance with the
Code and ERISA.
Notwithstanding any other provision in this contract or in any other agreement
between you and us, it the Internal Revenue Service or a court makes a final
determination that the Plan no longer qualifies as a Qualified Plan, we may
require that you transfer all assets invested in this contract to another
Funding Agent. If we decide that you must transfer assets from this contract,
we will send you a written notice describing you options. If we do not receive
an acceptable response Notice from you within five Business Days, we will return
the money held under this contract to you, or if appropriate, to a Plan trustee.
We will not accept any Notice under this Section unless the Notice clearly
specifies the Funding Agent to receive the assets.
<PAGE>
SECTION 16--OUR RELATIONSHIP TO THE PLAN.
Notwithstanding any other provision in this contract or in any other agreement
between you and us, with respect to the Plan (i) except as described in Article
II, Section 8, we act only as a service provider, and (ii) we do not act as a
Plan trustee, Plan fiduciary, or Plan administrator under ERISA or any state
law. In addition, we do not practice law and do not give any individual legal
advice to you or your Plan.
Nothing in this contract shall amend any provision of the Plan nor shall any
provision of the Plan act as an amendment to this contract. Moreover, no
provision or option available under this contract shall be available unless that
provision or option is permissible under the Plan.
<PAGE>
ARTICLE VIII--DISPUTE RESOLUTION
SECTION 1--GENERAL.
Any disputes which arise out of or related to this contract shall be resolved
under the terms of this Article.
For purposes of this Article, the phrase "any disputes which arise out of or are
related to this contract" means any and all disputes, disagreements, claims, or
controversies, which deal with or pertain to (i) the interpretation of the terms
and provisions of this contract or of any service agreement related to this
contract, (ii) the administration or operation of the contract or of any service
agreement related to this contract, or (iii) any other matter which arises
directly or indirectly from the relationship between you and us by the existence
of this contract or of any service agreement related to this contract
SECTION 2--NEGOTIATIONS.
The parties shall initially attempt to resolve any disputes which arise out of
or are related to this contract through good faith negotiations between
appropriate representatives of each party. An appropriate representative shall
include any person who has authority to settle the dispute. Normally, each party
shall name someone as their representative who is a person at a higher level of
management than the persons who usually have direct responsibility for the
administration of this contract.
The process of negotiation under this Section shall begin when either party
gives the other party a written notice of any dispute which the parties have not
successfully resolved in the ordinary course of business. Within 15 days after
the receipt of such a written notice, the receiving party shall mail a written
response to the other party. The initial notice and response shall each include
(i) a statement of the party's position and a summary of arguments supporting
that position, and (ii) the name and title of the representative who will
represent that party. Within 30 calendar days of the receipt of the original
notice, the representatives of each party shall discuss the dispute. Whenever
practicable, the representatives shall meet in person. However, if either party
believes that a personal meeting will become impractical or that telephone
negotiations will lead to a more prompt and inexpensive resolution of the
dispute, then upon either party's request a telephone conference will replace a
personal meeting.
If the dispute remains unresolved after 60 days after the receipt of the initial
notice, or if the parties fail to discuss the dispute within the 30-day period
described in the prior paragraph, either party may initiate mediation procedures
under Section 3 of this Article.
The parties agree that all such negotiations shall remain confidential. In
addition, for purposes of any litigation which may involve requests for
information about the negotiations done pursuant to this Section, the parties
agree to treat the negotiations as compromise and settlement negotiations for
purposes of any rules of evidence.
SECTION 3--MEDIATION.
If the parties have not settled the dispute by negotiations described in Section
2 of this Article, the parties shall endeavor in good faith to settle the
dispute by mediation. Unless the parties agree otherwise, the mediation shall
conform to the then current Center for Public Resources Model Procedures for
Mediation of Business Disputes. The parties shall agree on the mediator or the
method of choosing the mediator. If the parties cannot agree on the mediator or
a method for choosing a mediator, then the mediator shall be selected from the
CPR Panels of Distinguished Neutrals, with the assistance of the Center for
Public Resources, Inc.
If the dispute remains unresolved after 60 days from the date that either party
requests mediation, either party may initiate the arbitration procedures under
Section 4 of this Article.
The parties agree that all discussions during the mediation shall remain
confidential. In addition, for purposes of
<PAGE>
any litigation which may involve requests for information about the mediation
done pursuant to this Section, the parties agree to treat the mediation
discussions as compromise and settlement negotiations for purposes any rules of
evidence.
SECTION 4--ARBITRATION.
If the parties have not settled the dispute by the mediation described in
Section 3 of this Article, the dispute shall be settled by binding arbitration.
Unless the parties agree otherwise, the arbitration shall conform to the then
current Center for Public Resources Rules for Administered Arbitration of
Business Disputes and shall be decided by a sole arbitrator. The arbitrator
shall decide the dispute in accordance with (i) the law which would govern the
dispute had the parties litigated the dispute in court, (ii) the provisions of
this Article, and (iii) any other agreement between the parties regarding the
scope and nature of the arbitration proceedings. The arbitrator shall issue a
written decision which summarizes the reasoning behind the award and the
applicable legal basis for the award.
The Federal Arbitration Act (9 U.S.C. sections 1-16) will govern the arbitration
proceedings, and judgement upon the award rendered by the arbitrator may be
entered by any court having jurisdiction to do so. Unless the parties agree
otherwise, the place of arbitration shall be Des Moines, Iowa. For purposes of
determining the law applicable to the dispute, the parties agree that the filing
of the original notice of negotiations described in Section 2 shall toll the
statue of limitations, provided that the party first requesting negotiations
does not unreasonably delay any subsequent proceedings under this Article. The
arbitrator is not empowered to award damages in excess of contractual damages.
Each party hereby irrevocably waives any right to recover extra-contractual
damages, such as punitive damages, damages for pain and suffering, and damages
for emotional distress, with respect to any dispute described in this Article.
The parties agree that the arbitration award and the arbitrator's written
decision shall remain confidential.
SECTION 5--EXCLUSIVE REMEDIES.
The procedure specified in this Article shall be the sole and exclusive
procedures for the resolution by the parties of any disputes which arise out of
or are related to this contract, except as described in this Section. A party
may seek judicial injunctive relief if, in the party's sole judgement, such
action is necessary to avoid irreparable harm or to preserve the status quo.
However, even if a party seeks judicial injunctive relief as described in this
Section, the parties shall continue to participate in good faith in the
procedures described in this Article. The parties agree that no court which a
party petitions to grant the type of preliminary injunctive relief described in
this Section may award damages or resolve the dispute.
SECTION 6--COSTS.
The parties shall bear their respective costs incurred in connection with the
procedures described in this Article, except that the parties shall share
equally the fees and expenses of any mediator or arbitrator and the costs for
the facilities used for any mediation procedure or arbitration hearing.
<PAGE>
EXHIBIT 10.1
CONFIDENTIAL TREATMENT REQUESTED.
---------------------------------
CONFIDENTIAL PORTIONS OF THIS
-----------------------------
DOCUMENT HAVE BEEN REDACTED
---------------------------
AND HAVE BEEN SEPARATELY
------------------------
FILED WITH THE COMMISSION.
--------------------------
<PAGE>
ASD SYSTEMS
3737 Grader Street, Suite 110
Garland, Texas 75041
Telephone: 214.348.7200
Facsimile: 214.343.2924
April 20, 1999
Mr. David Shepherd
Vice President
Sears Shop-at-Home, Inc.
3333 Beverly Rd., E4-287B
Hoffman Estates, IL 60179
Dear Dave,
This letter confirms our agreement that ASD Systems, Inc. has increased the
prices effective January 1, 1999 with respect to the contract dated January 4,
1995 for telemarketing and fulfillment services for the Sears Power and Hand
Tool and Home Healthcare Catalogs. This agreement is in addition to the June 11,
1998 letter which references the assignment to ASD Catalogs, Inc. which has been
renamed to ASD Systems, Inc., and also confirms our agreement has been extended
until July 1, 2001.
The prices in effect from January 1, 1999 are:
Telephone calls $ [XXXXX] / each
Order $ [XXXXX] / each
Item Shipped $ [XXXXX] / each
Item Returned $ [XXXXX] / each
Sincerely,
/s/ Norm Charney
Norm Charney
President and CEO
Agreed and Accepted: /s/ Dave Shepherd
---------------------------------------
Sears, Roebuck & Co., by Dave Shepherd
4/23/99
--------------------
Date
- --------------------
[XXXXX] - Confidential Material redacted and filed separately with the
Commission.
<PAGE>
ASD CATALOGS
3737 Grader Street, Suite 110
Garland, Texas 75041
Telephone: 214.348.7200
Facsimile: 214.343.2924
June 11, 1998
Mr. Vachel Pennebaker
President
Sears Shop-at-Home, Inc.
3333 Beverly Road
Hoffman Estates, IL 60179
Dear Vachel,
This letter is to confirm our agreement that ASD Catalogs, Inc., a Texas
Corporation, a wholly owned subsidiary of ASD Systems, Ltd., is hereby assigned
the rights, privileges and responsibilities of the contract dated January 4,
1995, including the pricing change dated October 17, 1995, for telemarketing and
fulfillment services for the Sears Power and Hand Tool and Home Healthcare
Catalogs.
The prices in effect since March 1997 are:
Telephone call $[XXXXX] each
Order $[XXXXX] each
Item shipment $[XXXXX] each
Item returned $[XXXXX] each
Additionally, ASD Catalogs hereby requests that the contract described above be
extended for an additional three years through July 1, 2001.
Sincerely,
/s/ Norm Charney
Norm Charney
President
Agreed and Accepted:
/s/ VACHEL PENNEBAKER
-------------------------------------------
Sears Roebuck and Co. by Vachel Pennebaker
7-6-98
------------------
Date
- ----------------
[XXXXX] - Confidential Material redacted and filed separately with the
Commission.
<PAGE>
AGREEMENT
---------
This Agreement is made and entered into effective this 4th day of January,
1995, by and between Sears, Roebuck and Co. ("Sears"), a New York corporation
with offices at 3333 Beverly Road, Hoffman Estates, Illinois 60179, and
Athletic Supply of Dallas, Inc. ("ASD"), a Texas corporation with offices at
10850 Sanden Drive, Dallas, Texas 75238.
WITNESSETH:
WHEREAS, Sears desires to engage ASD, on a non-exclusive basis as to both
parties, to perform certain receiving, warehousing, replenishing, telemarketing,
and fulfillment services in connection with Sears's Power and Hand Tool and Home
Healthcare catalogs, as described more fully in this Agreement; and
WHEREAS, ASD represents that it has the skill and experience to properly
provide such services, and desires to do so in accordance with the terms and
conditions of this Agreement;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties agree as follows.
I. DEFINITIONS
- -- -----------
For the purpose of this Agreement, the following words and phrases shall
have the definitions set forth below:
A. "Agreement" shall mean this written agreement, as the same may be
modified in writing from time to time by mutual agreement of the
parties.
B. "Customer(s)" shall mean any person who purchases, or expresses an
interest in purchasing, any goods or services from Sears.
C. "Customer List(s)" shall mean any list, compilation, or other
memorialization of any Customers.
D. "Product(s)" shall mean any tangible goods for which ASD performs any
services on behalf of Sears pursuant to this Agreement.
E. "Service(s)" shall mean any of the services to be performed by ASD
pursuant to this Agreement.
II. ASD'S SERVICES
- --- --------------
During the term of this Agreement, ASD will, at its own expense unless
otherwise specifically provided in this Agreement or in any schedule or exhibit
hereto, and in accordance with Sears's instructions and specifications given
from time to time to ASD, provide the following services:
<PAGE>
A. Receive at ASD's facilities Products shipped by or on behalf of Sears,
or by or on behalf of any suppliers to Sears.
B. Verify that the quantity of Product received reconciles with the
quantity indicated on the bill of lading or other shipping
document(s), and promptly notify Sears and the pertinent carrier and
supplier of any shortages or overages of any Products. Match
receiving quantities to purchase orders, and file notices of claim for
any overages/shortages, including those relating to transportation
claims.
C. Inspect the Products for damage, and promptly notify Sears and the
pertinent carrier and supplier of any damage to any Product.
D. Secure any damaged or excess Product received for disposition in
accordance with Sears's instructions.
E. Provide Sears, on at least a monthly basis, with a report of all
damaged or otherwise unsalable Products in ASD's possession, including
a specification of those Products that can and cannot be shipped;
Sears will promptly review the report and direct ASD as to disposition
of such Products.
F. Promptly report to Sears receipt of the Products and forward to Sears
any necessary documentation of such receipt by ASD.
G. Protect the Products from loss and damage.
H. Establish and maintain for the entire term of this Agreement
procedures satisfactory to Sears in respect to the operation of a
warehouse at ASD's facilities, and in respect to the receiving,
handling, and protecting from damage, theft, or disappearance of
Product.
I. Generate periodic reports of Products received, shipped, and in
inventory, as reasonably requested by Sears, but in no event on a less
than monthly basis.
J. Provide inbound telemarketing and fulfillment services in accordance
with the standards and requirements set forth in Exhibit A hereto.
K. Ship Product through carriers designated by Sears, and obtain and
maintain receipts of pickup and delivery by such carriers.
L. If requested by Sears, arrange for the Products to be insured while in
the possession of a carrier.
M. Promptly forward to Sears, subject to Section VI.B., all necessary
shipping documents, including such documents detailing the billing and
agreed upon shipping and handling expenses.
N. Trace any lost or delayed shipments.
<PAGE>
O. Receive and keep a separate record of Products returned to ASD by
Customers, and Products returned by ASD to Sears's suppliers.
P. Conduct a physical inventory of Products at least annually in July of
each year, unless otherwise mutually agreed, and provide Sears with a
report of such inventory by item and stock keeping unit number. Said
inventory(ies) shall be taken at Sears's direction, at a time or times
designated by Sears, and with one or more Sears representatives
present. In addition, ASD shall provide cycle counts in accordance
with procedures agreed to with Sears.
Q. Provide inventory replenishment services in accordance with the
standards and requirements set forth in Exhibit B hereto.
R. Provide, to authorized Sears representatives, on-line access to ASD's
inventory system(s).
S. Investigate and resolve chargeback and complaint notifications.
III. ADDITIONAL SERVICES
- ---- -------------------
A. If Sears requests ASD to perform any Services beyond the scope of
Services described in Article II above ("Additional Services"), ASD
shall have the right to accept or reject such request.
B. In the event that Sears requests ASD to perform services that ASD
believes are Additional Services, then, before performing the services
in question, ASD shall notify Sears in writing that it believes the
services in question to constitute Additional Services.
C. Upon receipt of such notice, Sears will evaluate the services in
question and inform ASD in writing whether it believes the services
constitute Additional Services. If Sears agrees that the services in
question constitute Additional Services, then Sears and ASD shall
negotiate the amount for which ASD will be compensated for its
performance of the Additional Services. If Sears does not agree that
the services in question constitute Additional Services, then the
question of whether the contemplated services constitute Additional
Services shall be submitted to the alternative dispute resolution
process described in Article XVI.
IV. PAYMENT
- --- -------
A. Sears agrees to pay ASD for the Services performed hereunder in
accordance with the schedule attached hereto and made a part hereof as
Exhibit C, as the same may be amended from time to time by the mutual
written agreement of the parties. ASD shall invoice Sears, on a
weekly basis and shall provide Sears with all documents reasonably
requested by Sears to substantiate ASD's invoices. Sears shall wire
transfer to ASD, within five (5) business days of receipt of ASD's
invoice(s), the proper amount(s) due and payable for said invoice(s).
<PAGE>
B. Sears shall have the right to deduct and setoff, from any amounts
otherwise due and owing ASD, any amounts due Sears from ASD, whether
arising from this Agreement or otherwise; provided, however, that
Sears shall give ASD at least five (5) days written notice of any such
purported deduction or setoff, together with the reason(s) therefor,
prior to effecting the deduction or setoff. In the event that ASD
disputes the deduction or setoff, in whole or in part, the dispute
shall be resolved in accordance with Article XVI hereof, although
Sears may effect the deduction or setoff in the interim without
prejudice to either party's contention(s) with respect to the
propriety of the deduction or setoff.
C. ASD agrees not to withhold any Product on account of any dispute
between Sears and ASD as to charges or other amounts claimed by ASD to
be due and owing by Sears. ASD acknowledges and agrees that it is
relying upon the general credit of Sears, and ASD hereby waives and
releases any liens that ASD might otherwise have or assert with
respect to the Products.
V. RISK OF LOSS
- -- ------------
A. ASD shall be responsible for the safe handling and safekeeping of
Products delivered to ASD. ASD shall reimburse Sears for the
acquisition and shipping costs of any lost, stolen, and/or damaged
Products if the Products are lost, stolen, and/or damaged while in
ASD's possession or under ASD's control.
B. ASD agrees to pay Sears all amounts due under this section within
thirty (30) days after receipt of an invoice from Sears. Nothing
contained herein shall be construed as making ASD liable for any claim
rising out of the manufacture, safety, or design of any Product.
VI. INSPECTION OF FACILITY/RECORDS
- --- ------------------------------
A. Sears shall have the right, at any time during normal business hours,
to inspect any of ASD's facilities at which any Products are being
stored.
B. ASD shall keep and maintain and records which accurately reflect its
operations pursuant to this Agreement. ASD shall permit Sears or its
designees to inspect and copy ASD's books and records relating to any
Services performed pursuant to this Agreement, provided that Sears
gives ASD at least five (5) business days notice prior to each such
inspection. Sears shall not be permitted to inspect or copy any
documents or records that are the subject of a confidentiality
agreement between ASD and any third party, unless satisfactory
arrangements for confidentiality are made among ASD, Sears, and such
third party(ies).
C. ASD shall allow Sears to conduct periodic monitoring of ASD's
telemarketing services on an on-site or remote basis, at Sears's
election. Sears shall be allowed to visit ASD's premises at any time
telemarketing services are in progress or scheduled to be in progress
in order to monitor same without advance notice.
<PAGE>
VII. CONFIDENTIALITY
- ---- ---------------
A. ASD acknowledges and agrees that Confidential Information of Sears
will be disclosed to ASD in connection with ASD's performance under
this Agreement. "Confidential Information" shall mean information not
generally known to the public, including, but not limited to, trade
secret information about processes, Products, research, development,
manufacture, purchasing, accounting, engineering, marketing,
merchandising, selling, leasing, servicing, financing, business
systems, techniques, and operations, and information concerning the
contents of this Agreement, the identities of Customers, all Customer
lists, and the sales and shipments made to Customers; provided,
however, that nothing contained in this Agreement shall be deemed or
construed to preclude ASD from generally referring to (1) its
relationship with Sears under this Agreement, or (2) Services provided
to Sears under this Agreement, to investors or potential investors in
ASD.
B. Except as required to perform this Agreement or except as required by
any law, order, or regulation, ASD agrees not to use or disclose any
of Sears's Confidential Information during the term of this Agreement
and thereafter. In the event that ASD is served with any subpoena or
other process requiring disclosure of any of Sears's Confidential
Information, ASD shall promptly notify Sears of such subpoena or other
process prior to disclosing the Confidential Information. Sears shall
have the right to seek to quash such subpoena or other process, and
ASD agrees to reasonably cooperate with Sears in any such efforts at
Sears's expense.
C. Upon termination of this Agreement, all records and any other items
that contain, disclose, or reflect any Confidential Information,
including all copies thereof, will be returned to Sears. Until such
items have been returned to Sears, ASD shall comply with the
confidentiality obligations herein notwithstanding termination of this
Agreement.
D. "Confidential Information" shall not, however, be deemed to include
any information which:
1. Is or becomes publicly known through no wrongful act of ASD or
any third party; or
2. Is or becomes known to ASD prior to the date of this Agreement,
as shown by ASD's written records, without any obligation to keep
such information confidential; or
3. Is received by ASD from a third party which had a lawful right to
disclose it to ASD; or
4. Is used or disclosed by ASD with the prior written approval of
Sears.
<PAGE>
E. ASD shall use all reasonable efforts to have its employees, agents,
and independent contractors, if any, comply with the foregoing
confidentiality obligations.
VIII. OWNERSHIP OF PROPERTY
- ----- ---------------------
A. ASD acknowledges that the Products delivered to ASD, and all documents
received and created by ASD while performing Services under this
Agreement (including, but not limited to, orders, bills of lading,
invoices, correspondence, reports, files, and records), are the
property of Sears.
B. ASD agrees to execute a security agreement, UCC-1 financing
statements, and any other documents deemed necessary by Sears to
protect Sears' ownership of the Products, any proceeds thereof, and
any documents evidencing ownership of or any interest in said
Products.
C. ASD shall keep the Products segregated from an other property that may
be stored at the same facility, including any property of ASD'S. ASD
shall affix and maintain signs designating the Products as the
property of Sears in such a manner so as to be clearly visible to any
third parties inspecting ASD's premises.
D. ASD shall not sell, transfer, or remove any Products from ASD's
locations except to Customers in the ordinary course of business or
upon written instruction from Sears. ASD shall not, voluntarily or
involuntarily, pledge, mortgage, lease, assign, convey, or otherwise
alienate any interest in any of the Products, or allow any liens to be
placed upon any of the products.
E. Upon termination of this Agreement, ASD shall return all of the
Products to Sears or as Sears directs. If Sears wishes to prepare the
Products for shipment and removal from ASD's premises, then Sears
shall have the right to peaceably enter ASD's locations during normal
business hours to prepare and remove the Products.
F. ASD agrees that all scripts, computer tapes, ideas, and other creative
works prepared or performed by ASD for Sears pursuant to this
Agreement, and which come within the definition of "Work Made for
Hire" in Section 101 of Title 17, U.S. Code, is to be considered a
Work Made for Hire. If any such work does not come within the
definition of "Work Made for Hire" in Section 101 of Title 17, U.S.
Code, ASD agrees to assign in writing to Sears all of ASD's right,
title, and interest in and to the copyrights for such work. ASD
further agrees to execute any instruments that Sears considers
necessary to release, assign, and transfer any copyright, other right,
title, or interest ASD may have in any such work to Sears without the
payment of further consideration to ASD.
G. Sears agrees that all computer software used by ASD in connection with
this Agreement is and shall remain the confidential property of ASD.
Any software developed and paid for by Sears shall be deemed Sears's
property and within the
<PAGE>
scope of the preceding subsection. All data pertaining to the Products
and the Services performed hereunder shall be deemed the property of
Sears.
H. ASD acknowledges and agrees that no right, title or interest shall be
acquired in the name, service marks, or trademarks of Sears or of any
of its affiliates, and that upon termination of this Agreement, all
use of the same by ASD shall cease, except as may be otherwise
expressly authorized in writing-by Sears.
IX. ASD EMPLOYEES
- --- -------------
A. ASD agrees to maintain such work force as it deems appropriate to
perform the work specified under this Agreement. ASD has the full
right to determine, and the responsibility for, the method, manner,
and control of the Services to be performed under this Agreement. ASD
has the sole and exclusive right to hire, direct, supervise, and
discharge any workers employed by ASD, and to engage the services of
such other subcontractors or part-time employee as it may require.
Under no circumstances shall ASD or its employees or subcontractors
represent themselves to be employees, agents, or subcontractors of
Sears. ASD's employees and subcontractors shall not be deemed to be
loaned employees or subcontractors of Sears.
B. ASD acknowledges that no workers' compensation insurance, unemployment
insurance, pension plans, health insurance, life insurance, or other
benefits and protections made available to employees of Sears will
apply to ASD employees, agents, and independent contractors, if any.
C. ASD assumes full responsibility for all contributions, taxes, and
assessments on all payrolls, or otherwise required under applicable
federal, state, and local laws (including withholding from wages of
its employees where required). Sears will not withhold and will not
be responsible for withholding from the monies it pays ASD any amounts
for state and federal income taxes, social security taxes,
unemployment tax, workers' compensation taxes, or any other payroll
taxes owed by ASD to any governmental unit or agency.
D. ASD shall comply with all other federal, state, and local laws and
regulations regarding compensation, hours of work, and other
conditions of employment including, but not limited to, such laws and
regulations regarding minimum compensation, overtime, job safety, and
equal opportunities for employment.
X. LIENS/TAXES
- -- -----------
A. No liens or any other similar documents shall be filed or maintained
by ASD, its subcontractors, or any other person or entity acting
directly or indirectly through or under ASD against any of the
Products for or on account of any of the Services done to be done, or
for any labor or materials furnished or to be furnished in connection
with any Services hereunder. To the extent permitted by law, ASD shall
cause any contracts, subcontracts, and purchase orders used in
connection
<PAGE>
with this Agreement to contain an agreement that such liens are
prohibited or waived.
B. In the event a lien, claim of lien, notice of lien, or the like is
filed by ASD, its employees, agents, subcontractors, or any other
person acting through or under ASD against, any Products or any
interest therein, or is served upon Sears, ASD shall immediately take
all necessary steps to have such the lien waived, satisfied, or
withdrawn at no expense to Sears, unless such lien resulted from an
improper act or omission of Sears. Sears shall have the right to
withhold from any amounts otherwise due ASD the amount of such lien
until ASD has had such the lien waived, satisfied, or withdrawn.
C. In the event that ASD fails to have such lien waived, satisfied, or
withdrawn within thirty (30) days of being notified of said lien,
Sears shall have the right, but not the obligation, to take all
necessary steps to remove, discharge, or otherwise satisfy said lien,
and to deduct and setoff from any amounts otherwise due ASD all
amounts incurred by Sears in so removing, discharging, or otherwise
satisfying the lien, including, but not limited, reasonable attorneys'
fees and other legal expenses. In the event that the amount incurred
by Sears under this paragraph exceeds any amounts otherwise due ASD,
then Sears shall invoice ASD and ASD shall pay Sears the difference
within ten (10) days of the date of the invoice.
D. Each party hereto shall be solely responsible for all personal
property taxes properly charged or levied upon each party's respective
property. Without limiting the foregoing, ASD shall not be responsible
for any such taxes properly charged or levied upon any Products stored
by ASD hereunder, and Sears shall not be responsible for any such
taxes properly charged or levied upon ASD for any of its inventory,
machinery, equipment, or other property.
XI. INDEMNIFICATION
- --- ---------------
A. ASD shall protect, defend, hold harmless, and indemnify Sears, its
successors, assigns, directors, officers, and employees, and their
respective heirs and representatives from and against any and all
claims, demands, actions, liabilities, damages, judgments, losses,
fines, penalties, costs, and expenses (including reasonable attorneys'
fees and other defense costs) for any actual or alleged death of or
injury to any person, damage to or destruction of an property, or
other loss or damage actually or allegedly, directly or indirectly,
arising out of, resulting from, or connected with:
1. the performance or failure of performance of this Agreement by
ASD or any of its employees, agents, or sub-contractors; or
2. the omission or commission of any act, lawful or unlawful, by ASD
or any of its employees, agents, or sub-contractors, whether or
not such act is within the scope of employment or contract of
such employees, agents, or sub-contractors; or
<PAGE>
3. the violation of any law, statute, rule, ordinance, or regulation
by ASD or any of its employees, agents, or sub-contractors; or
4. any liens, claims, or actions made or asserted by any employees,
agents, or subcontractors of ASD, or any suppliers or materialmen
providing any materials to ASD or its subcontractors in
connection with any Services to be provided hereunder; or
5. the failure of ASD to comply with any provisions of this
Agreement, including, but not limited to, this Article XI.
B. Notwithstanding anything contained in the foregoing, ASD shall not be
obligated to indemnify Sears for any loss or damage to any person to
the extent caused by the negligence or willful misconduct of Sears,
its agents or employees.
C. Sears shall protect, defend, hold harmless, and indemnify ASD, its
successors, assigns, directors, officers, and employees, and their
respective heirs and representatives from and against any and all
claims, demands, actions, liabilities, damages, judgments, losses,
fines, penalties, costs, and expenses (including reasonable attorneys'
fees and other defense costs) for any actual or alleged death of or
injury to any person, damage to or destruction of any property, or
other loss or damage actually or allegedly, directly or indirectly,
arising out of, resulting from, or connected with:
1. the performance or failure of performance of this Agreement by
Sears or any of its employees, agents, or sub-contractors; or
2. the omission or commission of any act, lawful or unlawful, by
Sears or any of its employees, agents, or sub-contractors,
whether or not such act is within the scope of employment or
contract of such employees, agents, or sub-contractors; or
3. the violation of any law, statute, rule, ordinance, or regulation
by Sears or any of its employees, agents, or sub-contractors; or
4. the use of any Products by ASD or any of its employees, agents,
or sub-contractors; or
5. the failure of Sears to comply with any provisions of this
Agreement, including but not limited to, this Article XI.
D. The obligations of this Article XI shall survive termination of this
Agreement as to acts or omissions occurring prior to termination.
XII. INSURANCE
- ---- ---------
A. ASD agrees to obtain and maintain at all times throughout the term of
this Agreement, at ASD's expense and through an insurance carrier
rated at least
<PAGE>
A-VII by A.M. Best Company in its current Best's Insurance Reports,
insurance covering all Products in ASD's possession for their full
value against all risks of direct physical loss or damage including,
but not limited to, loss or damage caused by fire and the extended
coverage perils, vandalism, malicious mischief, sprinkler leakage,
water damage, and accidental collapse. ASD agrees to provide Sears
with a certificate of insurance containing the restriction that the
policy may not be canceled or materially changed without thirty (30)
days' prior written notice to Sears.
B. In addition, ASD agrees to obtain and maintain at all times throughout
the term of this Agreement, at ASD's expense and through an insurance
carrier rated at least A- VII by A.M. Best Company in its current
Best's Insurance Reports, the following insurance:
1. Warehouseman's Legal Liability Insurance with per occurrence
limits sufficient to fully insure the value of the Products at
replacement cost against direct physical loss to the Products.
Sears shall be named as an additional insured.
2. Commercial General Liability Insurance with limits totaling at
least One million Dollars ($1,000,000) per occurrence for bodily
injury and property damage. Sears shall be named as an
additional insured.
3. Workers Compensation in statutory amounts covering all states in
which ASD operates, and Employers Liability Insurance with a
minimum limit of One Million Dollars ($1,000,000.00) per accident
or disease. This policy shall contain a waiver of subrogation in
Sears's favor.
4. Motor Vehicle Liability Insurance covering all owned, non-owned,
and hired vehicles used in connection with ASD's operations under
this Agreement with limits of not less than One Million Dollars
($1,000,000) combined single limits for bodily injury and
property damage per occurrence.
C. The foregoing policies of insurance shall expressly provide that they
may not be canceled or materially changed without at least thirty (30)
days prior written notice to Sears. ASD shall furnish Sears with
copies of certificates evidencing the foregoing coverages upon
execution of this Agreement and thereafter throughout the initial and
any extended term of this Agreement as such insurance is due for
renewal.
D. ASD agrees to insure, at its own expense, all premises, equipment,
supplies, and all other things furnished by ASD for their replacement
value against all risks of direct physical loss or damage, including
but not limited to, loss or damage caused by fire and the extended
coverage perils, vandalism, malicious mischief, sprinkler leakage,
water damage, and accidental collapse. Sears shall not be responsible
for any damage or destruction of the premises, equipment, supplies, or
any other
<PAGE>
things furnished by ASD resulting from any risks covered by the all
risk insurance. If such damage or destruction occurs, ASD agrees that
it will rely solely upon its policies of insurance and all other
claims against Sears arising out of such damage or destruction,
including any right to subrogation by ASD's insurance carrier, are
hereby waived by ASD. ASD also agrees that it will bring no action
against Sears, its agents or employees for any claim arising out of
such damage to or destruction of the premises, equipment, supplies or
other things furnished by ASD for whatever reason or cause.
XIII. LIMITATION OF LIABILITIES
- ----- -------------------------
EXCEPT AS OTHERWISE SPECIFICALLY PROVIDED IN THIS AGREEMENT, NEITHER PARTY
SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL,
OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS,
REVENUE, OR BUSINESS) RESULTING FROM OR IN ANY WAY RELATED TO THIS AGREEMENT OR
THE TERMINATION OR NONRENEWAL OF THIS AGREEMENT, OR ARISING OUT OF OR ALLEGED TO
HAVE ARISEN OUT OF BREACH OF THIS AGREEMENT. This exclusion applies, regardless
of whether such damages are sought based on breach of warranty, breach of
contract, negligence, strict liability in tort, or any other legal theory. The
limitations set forth in this section shall not be applicable to any claims by a
third party for any personal injury or property damage.
XIV. TERM AND TERMINATION
- ---- --------------------
A. The initial term of this Agreement shall commence as of the date first
written above and shall continue for a period of three (3) years,
unless sooner terminated in accordance herewith. Thereafter, the term
of this Agreement shall be automatically extended for additional one-
year periods unless terminated in accordance with this section.
Unless either party intends not to renew this Agreement at the end of
the initial or applicable extended term, if any (in which event notice
to that effect shall be given in accordance with the following
subsection), the parties agree to enter into negotiations for the
forthcoming extended term no later than two hundred ten (210) days
prior to the expiration of the then-current term.
B. During the initial and any extended term of this Agreement, either
party may terminate this Agreement, without cause, without penalty,
and without liability as a result of such termination, by giving the
other party at least one hundred eighty (180) days prior written
notice. If Sears terminates this Agreement during the initial term
pursuant to this subsection B, then Sears agrees to pay ASD $30,000.00
monthly for the- balance of the initial term. The foregoing sentence
shall not apply to a termination by ASD pursuant to this subsection B,
nor shall it apply to a termination of this Agreement by Sears for
cause. If ASD terminates this Agreement during the initial term
pursuant to this subsection B, then ASD agrees to reimburse Sears, on
a pro rata basis, for the start-up expenses paid to ASD or on its
behalf by Sears as set forth in Exhibit D hereto, and based on the
time remaining in the initial term.
<PAGE>
C. In addition, Sears may terminate this Agreement for cause in the event
of one or more of the following:
1. the material failure of ASD to comply with any of the operating
or performance standards set forth in Exhibits A or B, which
material failure is not cured within thirty (30) days following
written notice thereof to ASD; or
2. the material failure of ASD to comply with any other provision-of
this Agreement, which material failure is not cured within thirty
(30) days following written notice thereof to ASD; or
3. any insolvency, receivership, assignment for benefit of
creditors, trusteeship, or bankruptcy proceedings are commenced
against ASD and remain undischarged for sixty (60) days, or any
such proceedings are commenced by ASD; or
4. ASD admits, in writing, its inability to pay its debts as they
come due; or
5. ASD abandons or otherwise ceases to perform Services pursuant to
this Agreement.
D. In addition, ASD may terminate this Agreement for cause in the event
of one or more of the following:
1. the material failure of Sears to comply with any of its
obligations under this Agreement, which material failure is not
cured within thirty (30) days following written notice thereof to
Sears; or
2. any insolvency, receivership, assignment for benefit of
creditors, trusteeship, or bankruptcy proceedings are commenced
against Sears and remain undischarged for sixty (60) days, or any
such proceedings are commenced by Sears; or
3. Sears admits, in writing, its inability to pay its debts as they
come due; or
4. Sears abandons or otherwise ceases to perform its obligations
under this Agreement.
E. A party intending to terminate this Agreement for cause shall give
written notice to the other party of its intention to terminate,
specifying the reason(s) for the termination and the effective date of
termination if the breach is not cured, if a cure period is provided
in subsections C or D above.
F. Upon termination and if requested by Sears, regardless of the basis
for termination, ASD shall continue to provide Services for a wind-
down period of no more than one hundred eighty (180) days, in order to
effect an orderly transition of the Services being provided hereunder.
ASD shall be compensated for such
<PAGE>
Services during the wind-down period in accordance with the then-
current fee schedule.
XV. NOTICES
- --- -------
Except as otherwise expressly provided herein, any notice given in
connection with this Agreement will be in writing and will be deemed given when
delivered personally, by certified U.S. Mail, return receipt requested, or by
overnight delivery service to the address specified herein or to such other
address s the parties may hereafter specify in writing.
Notices to ASD shall be sent to:
Athletic Supply of Dallas, Inc.
10850 Sanden Drive
Dallas, Texas 75238
Attention: Mr. Norm Charney
Notices to Sears shall be sent to:
Sears, Roebuck And Co.
Department 702CDR, E4, 235B
3333 Beverly Road
Hoffman Estates, IL 60179
Attention: National Manager of Operations -
Direct Response
XVI. ALTERNATIVE DISPUTE RESOLUTION
- ---- ------------------------------
A. Any dispute arising out of or relating to this Agreement shall be
resolved in accordance with the procedures specified in this Article
XVI, which shall be the sole and exclusive procedures for the
resolution of any such disputes.
B. The parties shall attempt in good faith to resolve any dispute arising
out of or relating to this Agreement promptly by negotiation between
executives who have authority to settle the controversy and who are at
a higher level of management than the persons with direct
responsibility for administration of this Agreement. Any party may
give the other party written notice of any dispute not resolved in the
normal course of business. Within fifteen (15) days after delivery of
the notice, the receiving party shall submit to the other a written
response. The notice and the response shall include (i) a statement
of each party's position and a summary of arguments supporting that
position, and (ii) the name and title of the executive who will
represent that party and of any other person who will accompany the
executive. Within thirty (30) days after delivery of the disputing
party's notice, the executives of both parties shall meet in Sears's
headquarters in Hoffman Estates, Illinois, at a mutually convenient
time, and thereafter as often as they reasonably deem necessary, to
attempt to resolve the dispute. All reasonable requests for
information made by one party to the other will be honored.
<PAGE>
C. If the matter has not been resolved within sixty (60) days of the
disputing party's notice, or if the parties fail to meet within thirty
(30) days, either party may initiate mediation of the controversy as
provided hereinafter.
D. If the dispute has not been resolved by negotiation as provided above,
the parties shall endeavor to settle the dispute by mediation under
the then current Center For Public Resources ("CPR") Model Procedure
For Mediation Of Business Disputes. The neutral mediator will be
selected from the CPR Panels of Neutrals, with the assistance of CPR,
unless the parties agree otherwise. The mediation shall take place in
Chicago, Illinois. The parties shall share equally in the fees and
expenses of CPR and the neutral. The parties shall bear their own
costs and expenses incurred in connection with the mediation.
E. If the dispute has not been resolved by negotiation and mediation as
provided above within one hundred twenty (120) days of the disputing
party's notice, either party may initiate litigation; provided,
however, that if one party has requested the other to participate in
negotiation and/or mediation, and the other party has failed to
participate in either, the requesting party may initiate litigation
prior to expiration of the one hundred twenty-day period.
F. The procedures specified in this Article XVI shall be the sole and
exclusive procedures for the resolution of disputes between the
parties arising out of or relating to this Agreement; provided,
however, that a party, without prejudice to the above procedures, may
file a complaint for statute of limitations reasons or to seek a
preliminary injunction or other provisional judicial relief, if in its
sole judgment such action is necessary to avoid irreparable damage or
to preserve the status quo. Despite such action, the parties will
continue to participate in good faith in the procedures specified in
this Article XVI.
G. All negotiations, discussions, and communications made or conducted
pursuant to the procedures set forth in this Article XVI are
confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence and any
other applicable rules of evidence.
XVII. AMOUNT OF BUSINESS
- ----- ------------------
Except as may otherwise be expressly set forth in this Agreement, no
promises or representations whatsoever have been made as to the potential amount
of business ASD can expect at any time during the term of this Agreement. Sears
may engage contractors other than ASD to provide services described in this
Agreement, Sears may perform such services for itself, and ASD may provide such
services for other parties. Except as is otherwise expressly set forth in this
Agreement, including any exhibits hereto, Sears shall not be liable to ASD, for
any capital expenditures or expenses, incurred for additional personnel,
supplies, facilities, or equipment in reliance upon or in anticipation of
providing Services to Sears. Except as may otherwise be expressly forth in this
Agreement, Sears shall not be obligated for any expense incurred by ASD in
connection with any increase in the number of ASD's employees or expenditures
made by ASD for additional facilities or equipment.
<PAGE>
XVIII. FORCE MAJEURE
- ------ -------------
Neither Sears nor ASD shall be liable for any failure to perform or for
delay in performance of its obligations hereunder caused by circumstances beyond
its reasonable control, including, but not limited to, fire, flood, earthquake,
other natural disasters, war, insurrection, riot, sabotage, epidemic, labor
disputes, acts of God, acts of any government or agency thereof, or judicial
action. During any period of non-performance by ASD, Sears may arrange to have
the Services, or any portion thereof, performed by others at Sears's expense.
In the event that ASD's non-performance exceeds one hundred twenty (120) days,
then Sears shall have the right to terminate this Agreement by giving notice
thereof to ASD. If Sears terminates this Agreement pursuant to the preceding
sentence, Sears will not be obligated to pay ASD the amount set forth in Section
XIV.B.
XIX. INDEPENDENT CONTRACTOR
- ---- ----------------------
ASD is-an independent contractor. Nothing contained in or performed
pursuant to this Agreement shall be construed as creating a partnership, agency,
or joint venture, and except as otherwise expressly provided in this Agreement,
neither party shall become bound by any representation, act, or omission of the
other party. Neither party shall have any authority to obligate or to otherwise
act as representative of, or agent for, the other party for any purpose, and
neither party shall make any representation or hold itself out as having such
authority.
XX. ASSIGNMENT
- --- ----------
This Agreement shall be personal to Sears and ASD and cannot be assigned or
transferred by either party, either voluntarily or by operation of law, without
the prior written consent of the other party. The sale or transfer of a
majority of a party's stock, the-sale or transfer of substantially all of a
party's assets, or any other transaction or event that has the effect of
shifting control of a party shall be deemed an assignment or transfer requiring
the other party's prior written consent in order to assign or transfer this
Agreement; provided, however, that ASD may, either (1) acquire certain of its
outstanding shares of common stock from OTF Equities, Inc. and Chemical Bank, or
(2) issue additional shares of common stock to Norman Charney upon the exercise
of outstanding stock options, and neither of the foregoing events shall be
deemed to be an assignment or transfer requiring Sears's consent.
XXI. PUBLICITY
- ---- ---------
Sears and ASD agree not to use the other's name or reveal the terms of this
Agreement in any advertising, promotional activities, or publicity releases, and
each party will refrain from making any reference to this Agreement or to the
other party in the solicitation of business, unless the other party gives its
prior written consent to such action; provided, however, that nothing contained
in this Agreement shall be deemed or construed to preclude ASD from generally
referring to (1) its relationship with Sears under this Agreement, or (2)
Services provided to Sears under this Agreement, to investors or potential
investors in ASD.
<PAGE>
XXII. LICENSES, PERMITS, COMPLIANCE WITH LAW
- ----- --------------------------------------
ASD, at its own expense, shall obtain all permits and licenses that may be
required under any applicable federal, state, or local law, ordinance, rule, or
regulation by virtue of any act performed by ASD or its employees, agents, or
sub-contractors in connection with this Agreement. ASD shall in the performance
of this Agreement comply fully with all applicable federal, state, and local
laws, ordinances, rules, and regulations.
XXIII. MISCELLANEOUS
- ------ -------------
A. No change, amendment to, or modification of this Agreement shall be
effective unless it is reduced to writing and signed by both parties.
B. All rights and remedies are cumulative, and the exercise of any right
of remedy herein provided shall be without prejudice to the right to
exercise any other right or remedy provided herein, at law or in
equity.
C. No waiver of any provision or breach shall be implied by failure to
enforce any rights or remedy herein provided, and no express waiver
shall affect any provision or breach other than that to which the
waiver is applicable and only for that occurrence.
D. This Agreement shall be deemed effective when received and executed by
Sears in Hoffman Estates, Illinois. Sears shall send ASD a fully
executed counterpart of this Agreement within three (3) business days
of the execution of this Agreement by Sears in Hoffman Estates,
Illinois. This Agreement will be construed in accordance with the
laws of the State of Illinois, without giving effect to that state's
conflict of laws principles.
E. This Agreement will be binding upon and inure to the benefit of the
parties' respective permitted successors and assigns.
F. In the event any provision of this Agreement is held to be illegal or
unenforceable for any reason, the validity or enforceability of the
remaining provisions will not be affected.
G. In the event of any irreconcilable conflict between any term or
provision in the body of this Agreement and any exhibit or schedule
hereto, the former shall control.
H. Section headings are provided for convenience only. They do not modify
or affect the meaning of any provision herein and will not serve as a
basis for interpretation or construction of this Agreement.
I. This Agreement, including all exhibits and schedules hereto,
constitutes the complete, final, and exclusive agreement between the
parties relating to the matters set forth herein and supersedes all
prior agreements, whether written or oral, and all other
communications between the parties relating to the subject matter of
this Agreement and shall control over any conflicting terms and
<PAGE>
conditions in any purchase order, acceptance, acknowledgment, or other
standard forms used by the parties in performing this Agreement.
J. Nothing contained in this Agreement shall be deemed or construed to
apply to any agreements between ASD and any affiliate of Sears.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
SEARS, ROEBUCK AND CO. ATHLETIC SUPPLY OF DALLAS, INC.
By: /S/ John H. Costello By: /S/ Norm Charney
---------------------- --------------------
Name: John H. Costello Name: Norm Charney
-------------------- ------------------
Its: Sr. Ex. VP-Marketing Its: President
--------------------- ------------------
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is entered into as of _________, 199__, by and
between ATHLETIC SUPPLY OF DALLAS, INC., a Texas corporation (hereinafter called
"ASD"), and SEARS, ROEBUCK AND CO., a New York corporation (hereinafter called
"Sears").
WHEREAS, Sears and ASD have entered into a warehousing agreement dated, as
of ___________________, 199___ (hereinafter referred to as the "Warehousing
Agreement") whereby Sears utilizes ASD to provide receiving, warehousing and
shipping services with respect to tools and health care items purchased by Sears
from third parties and shipped to ASD (all of said goods being hereinafter
referred to as the "Collateral"); and
WHEREAS, Sears owns the Collateral and ASD acknowledges Sears's ownership
of the Collateral; and
VHEREAS, the Collateral is and will be located at or on the premises of ASD
at 9830 Cartwheel Drive, Dallas, Texas 75238, and possibly at other locations
operated by ASD; and
WHEREAS, ASD agrees that Sears may continue to store the Collateral on said
premises of ASD pursuant to the Warehousing Agreement until Sears gives ASD
instructions to ship Collateral to Sears's customers or otherwise make the
Collateral available to Sears; and
WHEREAS, Sears and ASD desire to have this Security Agreement secure
Sears's ownership of the collateral and all of ASD's obligations to Sears with
respect to the Collateral under the Warehousing Agreement;
NOW, THEREFORE, Sears and ASD hereby mutually agree as follows:
1. ASD hereby grants to Sears a continuing security interest in the
Collateral described in Paragraph 2 hereof to secure Sears's ownership of the
Collateral and the performance of all obligations of ASD to Sears under the
Warehousing Agreement.
2. The Collateral of this Security Agreement shall consist of the entire
inventory of tools and health care goods purchased by Sears from various
manufacturers and suppliers, and which are shipped to ASD on or on behalf of
Sears, whether now or hereafter located on the premises of ASD at 9830 Cartwheel
Drive, Dallas, Texas 75238, pursuant to the Warehousing Agreement dated as of
____________, 199___, between Sears and ASD, or at such other location to which
such inventory may hereafter be removed, and all proceeds of such inventory.
3. ASD shall ship the Collateral pursuant to instructions given by Sears
as provided in the Warehousing Agreement. ASD agrees that the Warehousing
Agreement shall apply to all facilities operated by ASD at which any Collateral
is located.
4. ASD shall at all times keep the Collateral physically separated and
segregated from any property not owned by Sears. ASD shall not allow any tags,
labels, trademarks, or
<PAGE>
other Sears identification to be removed from the Collateral while in ASD's
facility, unless authorized by Sears in writing for liquidation of any portion
of the Collateral to a third party.
5. ASD shall protect the Collateral against fire and other casualty, loss,
damage, mysterious disappearance, and theft in accordance with the Warehousing
Agreement.
6. ASD shall not lend, rent, lease, or otherwise dispose of the Collateral
or any interest therein, and ASD shall not grant any liens, encumbrances, or
security interests in or on the Collateral, other than the security interest of
Sears created hereunder. ASD shall sign and execute any and all financing
statements, and other documents necessary to protect the security interest of
Sears under this Security Agreement against the rights or interests of third
persons. ASD shall at all times keep accurate and complete records of the
Collateral and its proceeds.
7. Misrepresentation or misstatement in connection with this transaction,
or noncompliance with or nonperformance of any of ASD's obligations or
agreements under this Security Agreement and ASD's failure to cure same within
thirty (30) days after receiving written notice thereof from Sears, shall
constitute a default. In addition, ASD shall be in default if bankruptcy or
insolvency proceedings are instituted by or against ASD or if ASD makes any
assignment for the benefit of creditors. In the event of any default by ASD,
Sears shall have all of the rights and remedies provided by the Uniform
Commercial Code in effect in the State of Texas. In addition, Sears may require
ASD to assemble the Collateral and, to make it available to Sears at a place
Sears designates, and Sears may remedy or waive any default without waiving the
default remedies or without waiving any other prior or subsequent default. ASD
shall pay all expenses and reimburse Sears for any expenditures, including
reasonable attorneys' fees and legal expense, in connection with Sears's
exercise of any of its rights and remedies under this Paragraph.
8. Sears may enter ASD's facility at any reasonable time to inspect the
Collateral and ASD's books and records pertaining to the Collateral or its
proceeds, or to take possession of the Collateral, and ASD shall assist Sears in
making any such inspection or in taking such possession.
9. ASD agrees and affirms that information supplied and statements made by
ASD in any financial, credit, or accounting statement prior to or pursuant to
this security Agreement are or will be true and correct. ASD further agrees and
affirms that it has not signed, filed, or consented to the filing of, any
financing statement covering the Collateral or its proceeds in any public office
in favor of anyone but Sears as provided herein; that, except for the security
interest granted in this Security Agreement, ASD has not created or granted any
lien, security interest or encumbrance adverse to Sears in or on the Collateral;
that the Collateral will be held only at ASD's facility at 9830 Cartwheel Drive,
Dallas, Texas 75238; and that ASD will not remove the Collateral or allow the
Collateral to be removed except pursuant to instructions from Sears.
10. ASD shall have all of the rights and remedies before or after default
provided in the Uniform Commercial Code in the State of Texas.
11. The terms "ASD" and "Sears", as used in this Security Agreement, shall
include the successors and permitted assigns of those parties.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Security Agreement to be
executed by their respective, duly-authorized officers as of the date first
above stated.
SEARS, ROEBUCK AND CO. ATHLETIC SUPPLY OF DALLAS, INC.
By: /S/ John H. Costello By: /S/ Norm Charney
------------------------ ---------------------------
Name: John H. Costello Name: Norm Charney
---------------------- -------------------------
Its: Sr. Ex. VP-Marketing Its: President
--------------------- -------------------------
<PAGE>
ATHLETIC SUPPLY
EXHIBIT A
INBOUND TELEMARKETING CUSTOMER SERVICE CALL STANDARDS
The following are the call center standards pertinent to this agreement:
Calls Received Total calls entered into the phone system.
Calls Handled Calls serviced by a teleservice representative (TSR).
20 Sec Rap Calls answered by a TSR within 20 seconds. (Note: For
VRU locations, calculation is for customer selection
point to live operator.)
Call Service Level % 20 Second Response Calls divided by the Calls
Received. Goal is greater or equal 95%
Calls Abandoned Calls in queue that hang up. (Note: Be sure to
include Busy Rate Internal # Calls.)
Calls Abandon % Calls Abandoned divided by the Calls Received.
Goal less than or equal to 2%.
Busy Rate Ext. # Calls that never reach the internal prompter to
Customer Service. (i.e., customer hears busy signal
immediately after dialing.)
Busy Rate Int. # Calls that reach the internal prompter, but when a
selection is made they get a busy signal. (Note:
There should also be included in the abandoned call
count.)
Busy Rate Int. % Busy Rate Internal # divided by the Calls Received.
Avg. Delay in Queue The time a delayed call spends in queue before a TSR
answers the call.
Avg. Talk Time The time spent, on line, between the customer and the
TSR.
Avg. Handle Time The time spent to complete the customer transaction.
(Note: This would be Talk Time + Off-Line Wrap Up
time to fulfill the customer's request.)
Avg. Speed of Answer The time spent waiting for a TSR to answer.
(Note: For VRU locations, calc is from customer
selection point to live operator.)
<PAGE>
FULFILLMENT CENTER STANDARDS
The fulfillment center is responsible for performing the functions detailed
below. Primary functions are receiving, stocking, picking, packing, shipping
and processing returns as a result of orders received through the order
processing system and in compliance with Sears Direct Response standards.
Receiving
- ---------
. Receiving mailable products for domestic vendors. Product should be received
and available for sale within 24 hours of receipt.
. Transmitting receipts and adjustments to the order processor/order processing
system.
Stocking
- --------
. Placing stock in warehouse locations maintaining 100% inventory accuracy in
stocking locations.
Picking
- -------
. Receive customer orders from the order processor and picking orders for
consolidation and distribution.
Packing
- -------
. Provide quality packing of single and multiple item orders for shipment to
Sears Direct Response customers.
. Packaging materials are to be provided by the fulfillment center.
Shipping
- --------
. Ship all orders within 24 hours of receipt of the order from the order
processing system.
. Transmit confirmation of shipment to the order processing system daily.
. Capability to ship mailable product via UPS, Federal Express and USPS (3rd,
4th and Priority Mail).
<PAGE>
Customer Returns Processing
- ---------------------------
. Returns are to be received, inspected, and processed within 48 hours of
receipt. Returns processing includes:
1. Transmission of returns confirmations to order processor for adjustments to
customer accounts and inventory.
2. Restocking resoluble returns.
3. Segregation of non salable returns for sale, liquidation, transfer to Sears
Returns Centers and/or disposal.
<PAGE>
ATHLETIC SUPPLY
EXHIBIT B
REPLENISHMENT SERVICES
Replenishment services will include the following items:
Sears Responsibilities:
Provide an annual item sales estimate, manufacturer and shipping point
information and percent completion data to Athletic Supply.
Athletic Supply Responsibilities:
Provide the systems and other resources to maintain a 95% initial fill rate at 6
annual inventory turns for tool mailable products and 8 annual inventory turns
for mailable Healthcare products based on forecasts and percent complete.
Replenishment services include forecasting, order placement, order punch up and
systems updates on order status.
<PAGE>
ATHLETIC SUPPLY
EXHIBIT C
PRICING
The following price schedule applies to this contract.
Warehousing/Replenishment to include: receiving, stocking, picking, packing,
shipping and reburying product defined as mailable tool and home healthcare
products contained in Sears Power and Hand Tool and Home Healthcare Catalogs.
This price includes store supplies, shipping boxes and dunnage.
Pricing - $[XXXXX] per item shipped
Returns will be priced at $[XXXXX] per item returned.
Call Center Services to include all phone answering, order calls, customer
service, medicare filing, telephone expense, inbound 800 expense and clerical
support associated with Call Center operations.
Pricing - $[XXXXX] per call
An analysis of Medicare processing expense will occur by 4/l/95 to determine if
a processing surcharge is necessary.
Accessorial Charges - Any other services that may be required and not covered in
this agreement will be billed at an additional rate per hour. All charges are
to be approved, in writing, by the National Manager - Operations Sears Direct
Response prior to incurring expense.
Price Increases - A maximum of [XXXXX] per year, beginning in 1996, for the life
of the contract.
Sears agrees to pay ASD a minimum monthly payment of $[XXXXX] during the term
and subject to the provisions of this contract.
ASD's bid also includes, in the pricing for warehouse, replenishment and call
center (#6).
Sears to pay for the following items:
- purchase of medicare filing package
- purchase of sales tax package (if necessary)
- all EDI charges, leased line costs, hardware and system to interact with
ASD system
- all bad debt costs
- all bank charges
- all credit card fees
- all postage expenses
- all shipping and freight expenses
- all merchandise recartoning and refurbishing expenses
[XXXXX] - Confidential Material redacted and filed separately with the
Commission.
<PAGE>
ATHLETIC SUPPLY
EXHIBIT D
PAYMENT SCHEDULE
ONE TIME EXPENSE
A one-time up-front charge of $[XXXXX] is to be paid to Athletic Supply to cover
start up expenses. The payment will be made in three installments of $[XXXXX]
each in December, after the signing of this agreement, January 15, 1995 and
March 1, 1995.
This payment will include all start up expenses, including but not limited to:
Warehouse planning and layout
One month's deposit required for new warehouse space
8 network stations
3 printers
Telephone equipment and installation
T1 telephone bridge
Conveyor
Racks
Forklift
Software development
Set-up costs
Metal detector
Employees training
[XXXXX] - Confidential Material redacted and filed separately with the
Commission.
<PAGE>
EXHIBIT 10.2
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ASD Certified Service Provider (CSP) Agreement
Welcome to the ASD Certified Service Provider, (CSP) network. We have pre-
approved you as an ASD CSP; (Certified Service Provider) based on your
application. Final approval / certification is contingent upon the execution of
this agreement and integration into ASD's proprietary software. Once certified
as an ASD Certified Service Provider your company will receive the necessary
technical support and training on the software.
This Agreement dated ________ day of ______________, 199_, by and between
_______________________________________________with offices located at
____________________________________________ (herein referred to as CSP) and ASD
Systems, Inc. (ASD) a Texas Corporation, with general offices at 3737 Grader
Street, Suite 110, Garland, Texas 75041.
Whereas CSP is desirous of using ASD's proprietary software and / or fully
integrating their software and / or other systems into ASD's proprietary
software and CSP network for the purpose of obtaining final approval and
Certification from ASD.
Whereas ASD is willing to make available access to it's proprietary software for
the sole purpose of servicing customers / clients of ASD and /or customers /
clients of other CSPs for which ASD will be compensated for the use of it's
software or other services provided as outlined in attached exhibits.
Now therefore, in consideration of the mutual covenants and agreements contained
herein, the parties hereto agree as follows:
When your company has attained final approval and ASD has awarded your company
Certification status you will agree to use the emblem and title of the CSP
program as required in the attached exhibits and only in a form approved by ASD
Systems.
This CSP Agreement and any related documents are the complete agreement
(collectively "the agreement") regarding your participation in the CSP Program
and replaces any oral or written communications between us.
By signing below each of us agrees to the terms of this Agreement. Once signed,
any reproduction of the Agreement made by reliable means (for example,
reprinting, photocopying or facsimile) will be considered an original to the
extent permitted under applicable law.
Our approval of your company is not an approval for you to purchase any of the
software offered by ASD Systems.
Our certification of your site / company will be subject to periodic review and
re-certification.
The term "Certified Site" means a site controlled and operated by you that meets
the requirements as stated in the Exhibits. ASD will confirm in written form the
certification of your site/s.
The CSP is an independent contractor. Neither of us is a legal representative or
agent of the other. Neither of us is Legally a partner of the other. Neither of
us is responsible for the debts incurred by the other. Neither of us is an
employee or franchisee of the other, nor does this Agreement create a joint
venture between us.
Each of us is free to enter into similar agreements with others, and
Neither of us will assume nor create any obligations on behalf of the other nor
make representations or warranties about the other, other than those authorized.
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Neither of us will bring legal action against the other more than two years
after the cause of action arose, unless otherwise provided by local law without
the possibility of contractual waiver, and
Failure by either party to insist on strict performance or to exercise a right
when entitled does not prevent either party from doing so at a later time,
either in relation to a specific default or any subsequent one.
Either party may terminate this agreement without cause upon 30 days written
notice unless otherwise specified in the attached exhibits.
CSP agrees:
1. for the certified location , to achieve the necessary level of
integration to maintain the required service levels outlined in the
exhibits attached. Each CSP site must be certified and meet the
service and skill requirements as required by the attached exhibits.
2. to allow and / or permit ASD to use their name, logo, trade mark
and / or service mark in print or other advertising acknowledging
their participation with ASD and others in the CSP Program as long as
the use of such is consistent with the CSPs desired and / or previous
use
3. to provide and maintain all equipment necessary to perform the
required services outlined in each exhibit at the service levels
requested.
4. that ASD will provide CSP with information regarding or access to
ASD's proprietary software and other capabilities. CSP acknowledges
and agrees that it shall have no right, title, interests or license of
any nature in any computer programs, formats, screens, protocols or
software used in connection with the performance of the services under
this agreement provided by ASD including without limitation, those
developed in whole or in part by ASD.
5. and recognizes the proprietary and confidential nature of ASD's
proprietary software and ASD's sole and exclusive rights to the
Proprietary Software. CSP further recognizes the value and importance
of keeping the programs contained in the software confidential and
agrees to utilize commercially reasonable efforts to keep and maintain
the confidentiality of the software. Further, CSP specifically agrees
not to duplicate any portion of the software without the expressed
written consent of ASD Systems and not to disclose it to any third
party or any employee who does not have a need to know for the
purposes which ASD is allowing access to the software. CSP agrees not
to use the Proprietary Software for other than the furtherance of this
agreement.
6. to comply with the highest ethical principles in performing
services under this agreement
7. to keep and maintain all the necessary equipment used in
conjunction with this program in good working order at all times
8. to promptly notify ASD of any loss of capability or connectivity.
Failure to report such loss may result in termination of this
agreement and immediate loss of Certification and/or access to ASD's
software.
9. for sales leads provided by ASD, the CSP will report to ASD the
results of the lead. The CSP will not withhold any information about
the outcome of the lead or the interaction with the prospect and will
cooperate with ASD in the sales process if so requested by ASD.
10. to report any and all transactions or other activity taking place
on the network through their connectivity to the ASD proprietary
software or interaction with other CSPs.
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11. that you and not ASD are responsible for the results you achieve
as a result of participating in the CSP program or using the ASD
proprietary software. ASD makes no implied representations or
warranties or claims regarding the performance of it's software.
12. to publish the emblem / trademark of the certification program on
their advertising material including web site in a way acceptable and
approved by ASD.
13. that the CSP's rights under this agreement are not property
rights and, therefore, the CSP cannot transfer them to anyone else or
encumber them in any way.
14. to be year 2000 (Y2K) compliant when necessary
15. that it is prerequisite to the proper performance of the ASD
proprietary software and services hereunder that CSP provide, in
advance, complete and detailed information about the business,
transactions, input, output, required reports, process, service
requirements and other matters (data) which could impact the systems
and / or services performance provided under this agreement and
attached exhibits.
16. to indemnify and hold ASD harmless from and against any and all
claims, liabilities suits, actions, fines, damages, losses, costs and
expenses, including reasonable attorney's fees, arising out of the
death of any person, or damage to or loss or destruction of any
property, program, loss of any business arising out of the performance
of this agreement or participation in the CSP program.
17. that all material which has or will come into the possession of
the CSP in connection with this agreement or the performance thereof,
consists of confidential or proprietary data or information, or unique
software programs whose disclosure to or use by other than ASD
authorized third parties will be damaging. Both parties therefore
agree to hold such material and information in the strictest
confidence, not to make use thereof other than for the performance of
this agreement, to release it only to employees and ASD sales leads
requiring such information for the performance of this agreement or
evaluation of ASD's software for the purpose of utilization under this
agreement.
Notices. Notices required or permitted to be given the parties under this
- -------
Agreement shall be in writing and shall be sufficiently given when delivered in
person, via facsimile, by overnight mail or by certified or registered letter
to:
TO: TO: ASD Systems, Inc.
3737 Grader St., Suite 110
Garland, TX 75041
ATTN: Norm Charney
Fax: 214-343-2924
or to such other addresses or to such other individuals that the parties may
designate from time to time, in writing.
Severability. If any provision of this Agreement should be construed or held to
- ------------
be void, invalid, or unenforceable, by order, decree of judgment of a court of
competent jurisdiction, the remaining provisions of this Agreement shall not be
affected thereby but shall remain in full force and effect.
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Paragraph Headings. Headings as to the contents of particular paragraphs are
- ------------------
provided for convenience only and are in no way to be construed as part of this
Agreement or as a limitation of the scope of the particular paragraph to which
they refer. All Exhibits hereto are subject to the provision of their
agreement.
Controlling Law. The validity, interpretation and performance of this Agreement
- ---------------
and any dispute connected herewith shall be governed and construed in accordance
with the laws of the State of Texas.
Miscellaneous. This Agreement, together with any agreement of even date
- -------------
herewith and signed by the parties hereto, constitutes the sole and only
agreement between the parties hereto pertaining to the within subject matter,
and, effective as of the date of this Agreement, supersedes and cancels any and
all other oral or written agreements or understanding between or assumed by the
parties or either of them with respect to the subject matter of Agreement, but
without prejudice as to any liability which may have accumulated thereunder. No
modification or amendment of this Agreement shall be effective unless submitted
and agreed to in writing by the duly authorized representatives of the parties
hereto. No modification or amendment of any provision of this Agreement shall
be construed as a waiver, breach or cancellation of any other provision. No
waiver by either party with respect to any breach or default or of any right or
remedy, and no course of dealing, shall be deemed to constitute a continuing
waiver of any other breach or default or of any other right or remedy, unless
such waiver be in writing and signed by the party to be bound.
Non-Solicitation. CSP, or any other affiliated company or subsidiary agrees not
- ----------------
to use, contract with or hire any ASD Certified Service Provider, employee or
ex-employee of ASD or ASD Business Partner during the terms of this Agreement or
for a period of two (2) years after termination of this Agreement for any
services whatsoever offered by ASD or contemplated to be offered by ASD or have
been previously offered by ASD, without prior written approval from ASD.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective representatives on the day and year
first above written.
ASD SYSTEMS, INC.
BY: /s/ BY: /s/
------------------------------ --------------------------
Typed Name: /s/ Typed Name: Norm Charney
---------------------
Title: /s/ Title: President and CEO
--------------------------
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EXHIBIT 10.3
CREDIT AGREEMENT
BY AND BETWEEN
COMERICA BANK-TEXAS ("BANK")
AND
ASD SYSTEMS, INC. ("BORROWER")
DATED: MAY __, 1999
<PAGE>
INDEX
SECTION 1 DEFINITIONS................................................. 5
1.1 Defined Terms............................................ 5
1.2 Accounting Terms......................................... 5
1.3 Singular and Plural...................................... 5
SECTION 2. TERMS, CONDITIONS AND PROCEDURES FOR BORROWING.............. 5
SECTION 3. REPRESENTATIONS AND WARRANTIES.............................. 5
3.1 Authority................................................. 5
3.2 Due Authorization......................................... 5
3.3 Title to Property......................................... 6
3.4 Encumbrances.............................................. 6
3.5 Subsidiaries.............................................. 6
3.6 Taxes..................................................... 6
3.7 No-Defaults............................................... 6
3.8 Enforceability of Agreement and Loan Documents............ 6
3.9 Non-contravention......................................... 6
3.10 Actions, Suits, Litigation or Proceedings................. 6
3.11 Compliance with Laws...................................... 6
3.12 Consents, Approvals and Filings, Etc. .................... 6
3.13 Contracts, Agreements and Leases.......................... 7
3.14 ERISA..................................................... 7
3.15 No Investment Company..................................... 7
3.16 No Margin Stock........................................... 7
3.17 Environmental Representations............................. 7
3.18 Accuracy of Information................................... 8
SECTION 4. AFFIRMATIVE COVENANTS....................................... 8
4.1 Preservation of Existence, Etc. .......................... 8
4.2 Keeping of Books.......................................... 8
4.3 Reporting Requirements.................................... 8
4.4 Financial Covenants....................................... 10
4.5 Inspections............................................... 10
4.6 Further Assurances; Financing Statements.................. 10
4.7 Compliance with Leases.................................... 10
4.8 Indemnification........................................... 10
4.9 Governmental and Other Approvals.......................... 10
4.10 Insurance................................................. 10
4.11 Compliance with ERISA..................................... 11
4.12 Environmental Covenants .................................. 11
4.13 Year 2000 Complaint.......................................
4.14 Collateral Audits.........................................
SECTION 5. NEGATIVE COVENANTS.......................................... 12
5.1 Capital Structure, Business Objects or Purpose.............. 12
5.2 Mergers or Dispositions..................................... 12
5.3 Guaranties.................................................. 12
5.4 Debt........................................................ 12
5.5 Encumbrances................................................ 12
5.6 Acquisitions................................................
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5.7 Dividends...................................................
5.8 Investments.................................................
5.9 Transactions with Affiliates................................
5.10 Defaults on Other Obligations...............................
5.11 Prepayment of Debt..........................................
5.12 Pension Plans...............................................
5.13 Subordinate Indebtedness....................................
5.14 No Further Negative Pledges.................................
5.15 Accounts Receivable.........................................
5.16 Acquire Fixed Assets........................................
5.17 Subordinated Debt...........................................
SECTION 6. EVENTS OF DEFAULT
6.1 Events of Default...........................................
6.2 Remedies Upon Event of Default..............................
6.3 Setoff......................................................
6.4 Waiver of Certain Laws......................................
6.5 Waiver of Defaults..........................................
6.6 Receiver....................................................
6.7 Discretionary Credit and Credit Payable Upon Demand.........
6.8 Application of Proceeds of Collateral.......................
SECTION 7. MISCELLANEOUS.................................................
7.1 Accounting Principles.......................................
7.2 Taxes and Fees..............................................
7.3 Governing Law...............................................
7.4 Costs and Expenses..........................................
7.5 Notices.....................................................
7.6 Further Action..............................................
7.7 Successors and Assigns; Participation.......................
7.8 Indulgence..................................................
7.9 Amendment and Waiver........................................
7.10 Severability................................................
7.11 Headings and Construction of Terms..........................
7.12 Independence of Covenants...................................
7.13 Reliance on and Survival of Various Provisions..............
7.14 Effective Upon Execution....................................
7.15 Complete Agreement; Conflicts...............................
7.16 Exhibits and Addenda........................................
7.18 Waiver of Jury Trial........................................
7.19 Oral Agreements Ineffective.................................
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ADDENDA:
Defined Terms Addendum
Financial Covenants Addendum
Loan Terms, Conditions and Procedures Addendum
EXHIBIT:
Exhibit A - Form of Borrowing Base Certificate
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Request for Advance
SCHEDULES:
Schedule 3.5 Subsidiaries
Schedule 3.1 4 Employee Benefit Plans
Schedule 3.1 7 Environmental Disclosures
Schedule 3.19 Equity Ownership
Schedule 5.4 Debt
Schedule 5.5 Liens
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CREDIT AGREEMENT
THIS CREDIT AGREEMENT(this "Agreement") is made and delivered effective as
of the day of May, 1999, by and between ASD SYSTEMS, INC., a Texas corporation
("Borrower"), and COMERICA BANK - TEXAS, a Texas banking association ("Bank").
RECITALS
A. Borrower desires to obtain certain credit facilities from the Bank,
and tile Bank is willing to provide such credit facilities to and in favor of
Borrower.
B. Such credit facilities are subject to the terms and conditions set
forth herein and in every other Loan Document.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein contained, Borrower and Bank agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. The terms as used in this Agreement shall have the
meaning assigned to such terms in the Defined Terms Addendum.
1.2 Accounting Term. All accounting terms not specifically defined in
this Agreement shall be determined and construed in accordance with GAAP.
1.3 Singular and Plural. Where the context herein requires, the
singular number shall be deemed to include the plural, the masculine gender
shall include the feminine and neuter genders, and vice versa.
SECTION 2. TERMS, CONDITIONS AND PROCEDURES FOR BORROWING
Subject to the terms, conditions and procedures of this Agreement and each
other Loan Document including, but not limited to, the terms, conditions and
procedures set forth in the Defined Terns Addendum and Loan Terms, Conditions
and Procedures Addendum, Bank agrees to make credit available to the Borrower on
such dates and in such amounts as the Borrower shall request from time to time
or as may otherwise be agreed to by Borrower and Bank.
SECTION 3. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants, and such representations and warranties
shall be deemed to be continuing representations and warranties during the
entire life of this Agreement, and so long as Bank shall have any commitment or
obligation to make any Loans hereunder, and so long as any Indebtedness remains
unpaid and outstanding under any Loan Document, as follows:
3.1 Authority. Borrower is a Texas corporation, duly organized, validly
existing and in good standing under tile laws of the jurisdiction of its
organization and is duly qualified and authorized to do business in each other
jurisdiction in which the character its assets or the nature of its business
makes such qualification necessary.
3.2 Due Authorization. Each Borrower Party has all requisite power and
authority to execute, deliver and perform its obligations under each Loan
Document to which it is a party or is otherwise bound, all of which
<PAGE>
have been duly authorized by all necessary action, and are not in contravention
of law or the terms of any Borrower Party's organizational or other governing
documents.
3.3 Title to Property. Each Borrower Party has good title to all
property and assets purported to be owned by it, including those assets
identified on the Financial Statements most recently delivered by Borrower to
Bank.
3.4 Encumbrances. There are no security interests or other Liens or
encumbrances on, and no financing statements on file with respect to, any of the
property or assets of any Borrower Party, except for Permitted Encumbrances.
3.5 Subsidiaries. Borrower has no Subsidiaries, except as set forth in
Schedule 3.5 which Schedule sets forth the percentage of ownership of Borrower
in each such Subsidiary as of the date of this Agreement.
3.6 Taxes. Each Borrower Party has filed, on or before their respective
due dates, all federal, state, local and foreign tax returns which are required
to be filed, or has obtained extensions for filing such tax returns, and is not
delinquent in filing such returns in accordance with such extensions, and has
paid all taxes which have become due pursuant to those returns or pursuant to
any assessments received by any such party, as the case may be, to the extent
such taxes have become due, except to the extent such tax payments are being
actively and diligently contested in good faith by appropriate proceedings, and
if requested by Bank have been bonded or reserved in an amount and manner
satisfactory to Bank.
3.7 No-Defaults. There exists no default (or event which, with the
giving of notice or passage of time, or both, would result in a default) under
the provisions of any instrument or agreement evidencing, governing, securing or
otherwise relating to any Debt of any Borrower Party or pertaining to any of the
Permitted Encumbrances.
3.8 Enforceability of Agreement and Loan Documents. Each Loan Document
has been duly executed and delivered by duly authorized officer(s) or other
representative(s) of each Borrower Party, and constitutes the valid and binding
obligations of each Borrower Party, enforceable in accordance with their
respective terms, except to the extent that enforcement thereof may be limited
by applicable bankruptcy, reorganization, insolvency, moratorium or similar laws
affecting the enforcement of creditors' rights generally at the time in effect.
3.9 Non-contravention. The execution, delivery and performance by each
Borrower Party of the Loan Documents to which such Borrower Party is a party or
otherwise bound, are not in contravention of the terms of any indenture,
agreement or undertaking to which any such Borrower Party is a party or by which
it is bound, except to the extent that such terms have been waived or that
failure to comply with any such terms would not have a Material Adverse Effect.
3.10 Actions, Suits, Litigation or Proceedings. There are no actions,
suits, litigation or proceedings, at law or in equity, and no proceedings before
any arbitrator or by or before any Governmental Authority, pending, or, to the
best knowledge of Borrower, threatened against or affecting any Borrower Party,
which, if adversely determined, could materially impair the right of any
Borrower Party to carry on its business substantially as now conducted or could
have a Material Adverse Effect. No Borrower Party is under investigation by, or
is operating under any restrictions imposed by, any Governmental Authority.
3.11 Compliance with Laws. Each Borrower Party has complied with all
Governmental Requirements, including, without limitation, Environmental Laws, to
the extent that failure to so comply could have a Material Adverse Effect.
3.12 Consents, Approvals and Filings, Etc. Except as have been
previously obtained or as otherwise expressly provided in this Agreement, no
authorization, consent, approval, license, qualification or formal exemption
from, nor any filing, declaration or registration with, any Governmental
Authority and no material authorization, consent or approval from any other
Person, is required in connection with the execution, delivery and
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performance by each Borrower Party of any Loan Document to which it is a party.
All such authorizations, consents, approvals, licenses, qualifications,
exemptions, filings, declarations and registrations which have previously been
obtained or made, as tile case may be, are in full force and effect and are not
the subject of any attack, or to the knowledge of Borrower, any threatened
attack, in any material respect, by appeal, direct proceeding or otherwise.
3.13 Contracts, Agreements and Leases. To Borrower's knowledge, no
Borrower Party is in default (beyond any applicable period of grace or cure) in
complying with any provision of any material contract, agreement, indenture,
lease or instrument to which it is a party or by which it or any of its
properties or assets are bound, where such default would have a material Adverse
Effect. To Borrower's knowledge, each such contract, commitment, undertaking,
agreement, indenture and instrument is in full force and effect and is valid and
legally binding.
3.14 ERISA. Except as shown on Schedule 3.14, no Borrower Party
maintains or contributes to any employee benefit plan subject to Title IV of
ERISA. Furthermore, no Borrower Party has incurred any accumulated funding
deficiency within the meaning of ERISA or incurred any liability to the PBGC in
connection with any employee benefit plan established or maintained by such
Borrower Party, and no reportable event or prohibited transaction, as defined in
ERISA, has occurred with respect to such plans.
3.15 No Investment Company. No Borrower Party is an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, nor is any
Borrower Party "controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
3.16 No Margin Stock. No Borrower Party is engaged principally, or as
one of its important activities, directly or indirectly, in the business of
extending credit for the purpose of purchasing or carrying margin stock, and
none of the proceeds of any of the Loans will be used, directly or indirectly,
to purchase or carry any margin stock or made available by any Borrower Party in
any manner to any other Person to enable or assist such Person in purchasing or
carrying margin stock, or otherwise used or made available for any other purpose
which might violate the provisions of Regulations G, T, U, or X of the Board of
Governors of the Federal Reserve System. Terms for which meanings are provided
in Regulation U of said Board of Governors or any regulations substituted
therefor, as are from time to time in effect, are used in this Section with such
meanings, and these representations and warranties shall be immediately
effective.
3.17 Environmental Representations.
(a) No Borrower Party has received any notice of any violation of
any Environmental Law(s); and no Borrower Party is a party to
any litigation or administrative proceeding, nor, so far as is
known by Borrower, is any litigation or administrative
proceeding threatened against any Borrower Party which, in any
case, (i) asserts or alleges that any Borrower Party violated
any Environmental Law(s), (ii) asserts or alleges that any
Borrower Party is required to clean up, remove or take any
other remedial or response action due to the disposal,
depositing, discharge, leaking or other release of any
Hazardous Materials, or (iii) asserts or alleges that any
Borrower Party is required to pay all or a portion of any
past, present or future clean-up, removal or other remedial or
response action which arises out of or is related to the
disposal, depositing, discharge, leaking or other release of
any Hazardous Materials by any Borrower Party, and which,
either singularly or in the aggregate, could have a Material
Adverse Effect.
(b) To Borrower's knowledge, there are no conditions existing
currently which could subject any Borrower Party to damages,
penalties, injunctive relief or clean-up costs under any
applicable Environmental Law(s), or which require, or are
likely to require, clean-up, removal, remedial action or other
response pursuant to any applicable Environmental Law(s) by
any Borrower Party, and which, in any case, either singularly
or in aggregate, could have a Material Adverse Effect.
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<PAGE>
(c) No Borrower Party is subject to any judgment, decree, order or
citation related to or arising out of any applicable
Environmental Law(s), which, either singularly or in the
aggregate, could have a Material Adverse Effect; and, to
Borrower's knowledge, no Borrower Party has been named or
listed as a potentially responsible party by any governmental
body or agency in any matter arising under any applicable
Environmental Law(s), except as disclosed in Schedule 3.17,
and, in the event that any such matters are disclosed in said
Schedule 3.17 they will not, either singularly or in the
aggregate, have a Material Adverse Effect.
(d) Each Borrower Party has all permits, licenses and approvals
required under applicable Environmental Laws, where the
failure to so obtain or maintain any such permits, licenses or
approvals could have a Material Adverse Effect.
3.18 Accuracy of Information. The Financial Statements previously
furnished to Bank have been prepared in accordance with GAAP and fairly present
the financial condition of Borrower and, as applicable, the consolidated
financial condition of Borrower and such other Person(s) as such Financial
Statements purport to present, and the results of their respective operations as
of the dates and for the periods covered thereby; and since the date(s) of said
Financial Statements, there has been no material adverse change in the financial
condition of Borrower or any other Person covered by such Financial Statements.
No Borrower Party, nor any such other Person has any material contingent
obligations, liabilities for taxes, long-term leases or long-term commitments
not disclosed by, or reserved against ill, such Financial Statements. Each
Borrower Party is solvent, able to pay its respective debts as they mature, has
capital sufficient to carry on its business and has assets the fair market value
of which exceed its liabilities, and no Borrower Party will be rendered
insolvent, under-capitalized or unable to pay debts generally as they become due
by the execution or performance any Loan Document to which it is a party or by
which it is otherwise bound.
SECTION 4. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, so long as Bank is committed to make
any Loan under this Agreement, and until all instruments and agreements
evidencing any Loan which is payable on demand or which conditions advances upon
the Bank's discretion are fully discharged and terminated, and thereafter, so
long as any Indebtedness remains outstanding, it will, and, as applicable, it
will cause each Borrower Party within its control or under common control to:
4.1 Preservation of Existence, Etc. Preserve and maintain its existence
and except where the failure to do any of the following would not have a
Material Adverse Effect, preserve and maintain such of its rights, licenses, and
privileges as are material to the business and operations conducted by it;
qualify and remain qualified to do business in each jurisdiction in which such
qualification is material to its business and operations or ownership of its
properties, continue to conduct and operate its business substantially as
conducted and operated during the present and preceding calendar year; at all
times maintain, preserve and protect all of its franchises and trade names and
preserve all the remainder of its property and keep the same in good repair,
working order and condition; and from time to time make, or cause to be made,
all needed and proper repairs, renewals, replacements, betterments and
improvements thereto.
4.2 Keeping of Books. Keep proper books of record and account in which
full and correct entries shall be made of all of its financial transactions and
its assets and businesses so as to permit the presentation of financial
statements (including, without limitation, those Financial Statements to be
delivered to Bank pursuant hereof prepared in accordance with GAAP; and permit
Bank, or its representatives, at reasonable times and intervals, at Borrower's
cost and expense, upon reasonable prior notice, to visit any office of a
Borrower Party, discuss its financial matters with its officers, employees and
independent certified public accountants, and by this provision, Borrower
authorizes such officers, employees and accountants to discuss the finances and
affairs of any Borrower Party, and to examine any of its books and other
corporate records.
4
<PAGE>
4.3 Reporting Requirements. Furnish to Bank, or cause to be furnished
to Bank, the following:
(a) as soon as possible, and in any event within three (3)
calendar days after becoming aware of the Occurrence or
existence of each Default or Event of Default hereunder or any
material adverse change in the financial condition of any
Borrower Party, a written statement of tile chief financial
officer of Borrower (or in his or her absence, a responsible
senior officer of' Borrower), setting forth details of such
Default, Event of Default or change, and tile action which
Borrower has taken, or has caused to be taken, or proposes to
take, or to cause to be taken, with respect thereto;
(b) as soon as available, and in any event within one hundred
eighty (180) days after and as of' the end of each fiscal year
of Borrower, audited Financial Statements of Borrower and such
of' the Borrower Parties as may be required by the Bank,
consolidated, as applicable, including a balance sheet, income
statement and statement of cash flows, for and as of such
fiscal year then ending, with comparative numbers for the
preceding fiscal year, and such other comments and financial
details as are usually included in similar reports. Such
audited Financial Statements shall be prepared in accordance
with GAAP by independent certified public accountants of
recognized standing selected by Borrower and approved by Bank
and shall contain unqualified opinions as to the fairness of
the statements therein contained.
(c) as soon as available, and in any event within thirty (30) days
after and as of the end of each calendar month, including the
last such reporting period of each of Borrower's fiscal years,
Financial Statements of Borrower and such of the Borrower
Parties as may be required by the Bank, consolidated, as
applicable, for and as of such reporting period, including a
balance sheet, income statement and statement of cash flows
for and as of such reporting period then ending and for and as
of that portion of the fiscal year then ending, with
comparative numbers for the same period of the preceding
fiscal year, in each case, certified by the chief financial
officer of Borrower and, as applicable, each Subsidiary and
Borrower Party as to consistency with prior financial reports
and accounting periods, accuracy and fairness of presentation;
(d) as soon as available, and in any event within twenty (20) days
after and as of the end of each calendar month, agings and
reports of accounts receivable of Borrower and such of the
Borrower Parties as may be required by the Bank, in form and
detail satisfactory to Bank;
(e) as soon as available, and in any event within twenty (20) days
after and as of the end of each calendar month, agings and
reports of accounts payable of Borrower and such of the
Borrower Parties as may be required by the Bank, in form and
detail satisfactory to Bank;
(f) as soon as available, and in any event within twenty (20) days
after and as of- the end of each calendar month, a Borrowing
Base Certificate dated as of the end of such preceding
calendar month;
(g) simultaneously with the Financial Statements to be delivered
to Bank pursuant to Sections (b) and (c) above, a Compliance
Certificate, each dated as of the end of such month or year,
as the case may be;
(h) promptly, written notice of the occurrence of any Default or
Event of Default or of any other act, occurrence, event,
condition or circumstance which has had or could reasonably be
expected to have a Material Adverse Effect;
5
<PAGE>
(i) promptly upon receipt thereof, copies of all management
letters and other substantive reports submitted to any
Borrower Party by independent certified public accountants in
connection with any annual audit of any such party;
(j) as soon as available, and in any event within thirty (30) days
after the end of each calendar year, Financial Statements of
Guarantor for and as of such calendar year, including a
balance sheet, income statement and statement of cash flows
for and as of such calendar year then ending, certified by
Guarantor as to consistency with prior financial reports,
accuracy and fairness of presentation;
(k) promptly after filing of any of the same, a copy of Borrower's
and Guarantor's respective annual federal income tax returns;
and
(l) promptly, and in form and detail satisfactory to Bank, such
other information as Bank may request from time to time.
4.4 Financial Covenants. On a consolidated basis, Borrower will
maintain all financial Covenants set forth in the Financial Covenants Addendum.
4.5 Inspections. Permit Bank, through its authorized attorneys,
accountants and representatives, to examine each Borrower Party's books,
accounts, records, ledgers and assets and properties of every kind and
description, wherever located, at all reasonable times during normal business
hours, upon oral or written request of Bank. So long as any such inspections and
examinations occur when no Default or Event of Default has occurred and is then
continuing, Borrower shall be obligated to promptly reimburse Bank- for Bank's
cost and expenses for such inspections and examinations conducted not more
frequently than twice during any calendar year. However, Borrower shall have an
unlimited obligation to promptly reimburse Bank- for any and all such costs and
expenses incurred in connection with any and all such examinations or
inspections conducted by Bank after the occurrence of any Default or Event of
Default which is then continuing.
4.6 Further Assurances; Financing Statements. Furnish Bank, at
Borrower's expense, upon Bank's request and in form satisfactory to Bank (and
execute and deliver or cause to be executed and delivered), such additional
pledges, assignments, mortgages, lien instruments or other security instruments,
consents, acknowledgments, subordinations and financing statements covering any
or all of the Collateral pledged, assigned, mortgaged or encumbered pursuant to
any Loan Document, of every nature and description, whether now owned or
hereafter acquired by Borrower or any other Person providing such Collateral,
together with such other documents or instruments as Bank may require to
effectuate more fully the purposes of any Loan Document.
4.7 Compliance with Leases. Comply with all terms and conditions of any
leases covering any premises or property (real or personal) wherein any of the
Collateral is or may be located, or covering any of the other material personal
or real property now or hereafter owned, leased or otherwise used by any
Borrower Party in the conduct of its business, and any Governmental Requirement,
except where the failure to so comply could not cause a Material Adverse Effect.
4.8 Indemnification. Indemnify, defend and save Bank harmless from any
and all claims, losses, costs, damages, liabilities, obligations and expenses,
including, without limitation, reasonable attorneys' fees, incur-red by Bank by
reason of any Default or Event of Default, in defending or protecting the Liens
which secure or purport to secure all or any portion of the Indebtedness,
whether existing under any Loan Document or otherwise or the priority thereof,
or in enforcing the obligations of Borrower or any other Person under or
pursuant to any Loan Document, or in the prosecution or defense of any action or
proceeding concerning any matter growing out of or connected with the Collateral
or any Loan Document, INCLUDING ANY CLAIMS, LOSSES, COSTS, DAMAGES, LIABILITIES,
OBLIGATIONS, AND EXPENSES RESULTING FROM BANK'S OWN NEGLIGENCE, except and to
the extent but only to the extent caused by Bank's gross negligence or willful
misconduct.
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<PAGE>
4.9 Governmental and Other Approvals. Apply for, obtain and/or maintain
in effect, as applicable, all authorizations, consents, approvals, licenses,
qualifications, exemptions, filings, declarations and registrations (whether
with any court, governmental agency, regulatory authority, securities exchange
or otherwise) which are necessary in connection with the execution, delivery
and/or performance by any Borrower Party of any Loan Document to which it is a
party.
4.10 Insurance. Maintain insurance coverage on its physical assets and
against other business risks in such amounts and of such types as are
customarily carried by companies similar in size and nature (including, without
limitation, loss of rent and/or business interruption insurance and boiler and
machinery insurance), and in the event of acquisition of additional property,
real or personal, or of the incurrence of additional risks of any nature,
increase such insurance coverage in such manner and to such extent as prudent
business judgment and present practice would dictate; and in the case of all
policies covering property subject to any Loan Document or property in which the
Bank shall have a Lien of any kind whatsoever, other than those policies
protecting against casualty liabilities to strangers, all such insurance
policies shall provide that the loss payable thereunder shall be payable to
Borrower (or other Person providing Collateral) and Bank, with mortgagee's
clauses in favor of and satisfactory to Bank for all such policies, and such
policies shall also provide that they may not be canceled or changed without
thirty (30) days' prior-written notice to Bank. Upon the request of Bank, all of
said policies, or copies thereof, including all endorsements thereon(,-i-eon and
those required hereunder, shall be deposited with Bank.
4.11 Compliance with ERISA. In the event that any Borrower Party or any
of its Subsidiaries maintain(s) or establish(es) a Pension Plan subject to
EIZISA, (a) comply in all material respects with all requirements imposed by
ERISA as presently in effect or hereafter promulgated, including, but not
limited to, the minimum funding requirements thereof; (b) promptly notify Bank
upon the occurrence of a "reportable event" or "prohibited transaction" within
the meaning of ERISA, or that the PBGC or any Borrower Party has instituted or
will institute proceedings, to terminate any Pension Plan, together with a copy
of any proposed notice of such event which may be required to be filed with the
PBGC; and (c) furnish to Bank (or cause the plan administrator to furnish Bank)
a copy of the annual return (including all schedules and attachments) for each
Pension Plan covered by ERISA, and filed with the Internal Revenue Service by
any Borrower Party not later than thirty (30) days after such report has been so
filed.
4.12 Environmental Covenants.
(a) Comply with all applicable Environmental Laws, and maintain
all permits, licenses and approvals required under applicable
Environmental Laws, where the failure to do so Could have a
Material Adverse Effect.
(b) Promptly notify Bank, in writing, as soon as Borrower becomes
aware of any condition or circumstance which makes any of the
environmental representations or warranties set forth in this
Agreement incomplete, incorrect or inaccurate in any material
respect as of any date; and promptly provide to Bank,
immediately upon receipt thereof, copies of any material
correspondence, notice, pleading, citation, indictment,
complaint, order, decree, or other document from any source
asserting or alleging a violation of any Environmental Laws by
any Borrower Party, or of any circumstance or condition which
requires or may require, a financial contribution by any
Borrower Party, or a clean-up, removal, remedial action or
other response by or on behalf of any Borrower Party, under
applicable Environmental Law(s), or which seeks damages or
civil, criminal, or punitive penalties from any Borrower Party
or any violation or alleged violation of Environmental Law(s).
(c) Borrower hereby agrees to indemnify, defend and hold Bank, and
any of Bank's past, present and future officers, directors,
shareholders, employees, representatives and consultants,
harmless from any and all claims, losses, damages, suits,
penalties, costs, liabilities, obligations and expenses
(including, without limitation, reasonable legal
7
<PAGE>
expenses and attorneys' fees) incurred or arising out of any
claim, loss or damage of any property, injuries to or death of
any persons, contamination of or adverse effects on the
environment, or other violation of any applicable
Environmental Law(s), in any case, caused by any Borrower
Party or in any way related to any property owned or operated
by any Borrower Party or due to any acts of any Borrower Party
or any of its officers, directors, shareholders, employees,
consultants and/or representatives INCLUDING ANY CLAIMS,
LOSSES, DAMAGES, SUITS, PENALTIES, COSTS, LIABILITIES,
OBLIGATIONS OR EXPENSES, RESULTING FROM BANK'S OWN NEGLIGENCE;
provided, however, that the foregoing indemnification shall
not be applicable, and Borrower shall not be liable for any
such claims, losses, damages, suits, penalties, costs,
liabilities, obligations or expenses, to the extent (but only
to the extent) the same arise or result from any gross
negligence or willful misconduct of Bank or any of its agents
or employees.
4.13 Year 2000 Compliant. Perform all acts reasonably necessary to
ensure that (a) each Borrower Party and (b) all customers, suppliers and vendors
that are material to any Borrower Party's business, become Year 2000 Compliant
in a timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all of any Borrower Party's systems and
adopting a detailed plan, with itemized budget, for the remediation, monitoring
and testing of such systems. As used in this Section, "Year 2000 Compliant"
shall mean, in regard to any entity, that all software, hardware, firmware
equipment, goods or systems utilized by or material to the business operations
or financial condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall, immediately
upon request, provide to Bank such certifications or other evidence of each
Borrower Party's compliance with the terms of this Section as Bank may from time
to time require.
4.14 Collateral Audits. Permit Bank to conduct audits of any Borrower
Party's Accounts and Inventory as often as Bank deems such audits to be
desirable Upon Batik's request and to the extent that Borrower is obligated for
such reimbursement pursuant to the terms of Section 4.5 above, Borrower shall
reimburse Bank for the reasonable costs and expenses expended by Bank in
connection with such audits.
SECTION 5 NEGATIVE COVENANT'S
Borrower covenants and agrees that, so long as Bank is committed to make
any Loan under this Agreement and until all instruments and agreements
evidencing any Loan which is payable on demand or which conditions advances upon
the Bank's discretion are fully discharged and terminated, and thereafter, so
long as any Indebtedness remains outstanding, it will not, and it will not allow
any Borrower Party within its control or under common control to, without the
prior written consent of Bank:
5.1 Capital Structure, Business Objects or Purpose. Purchase, acquire
or redeem any of its equity ownership interests, or enter into any
reorganization or recapitalization or reclassify its equity ownership interests,
or make any material change in its capital structure or general business objects
or purpose.
5.2 Mergers or Dispositions. Change its name, enter into any merger or
consolidation, whether or not the surviving entity thereunder, or sell, lease,
transfer, relocate or dispose of all, substantially all, or any material part of
its assets (whether in a single transaction or in a series of transactions).
5.3 Guaranties. Guarantee, endorse, or otherwise become secondarily
liable for or upon the obligations or Debt of others (whether directly or
indirectly), except:
(a) guaranties in favor of and satisfactory to Bank; and
(b) endorsements for deposit or collection in the ordinary course
of business.
5.4 Debt. Become or remain obligated for any Debt, except:
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(a) Indebtedness and other Debt from time to time outstanding and
owing to Bank;
(b) current unsecured trade, utility or non-extraordinary accounts
payable arising in the ordinary course of business;
(c) Debt subordinated to the prior payment in full of the
Indebtedness upon terms and conditions approved in writing by
Bank;
(d) Debt outstanding as of the date hereof more particularly
described in Schedule 5.4 attached hereto.
5.5 Encumbrances. Create, incur, assume or suffer to exist any Lien
upon, or create, suffer or permit to exist any Lien upon any of its property or
assets, whether now owned or hereafter acquired, except for Permitted
Encumbrances.
5.6 Acquisitions. Purchase or otherwise acquire or become obligated for
the purchase of all or substantially all of the assets or business interests of
any Person or any shares of stock or other ownership interests of any Person or
in any other mariner effectuate or attempt to effectuate an expansion of present
business by acquisition.
5.7 Dividend. Declare or pay dividends on, or make any other
distribution (whether by reduction of capital or otherwise) in respect of any
shares of its capital stock or other ownership interests, excel)t (a) dividends
payable by a Subsidiary to Borrower; and (b) dividends payable solely in stock.
5.8 Investments. Make or allow to remain outstanding any investment
(whether such investments shall be of the character of investment in shares of
stock, evidences of indebtedness or other securities or otherwise) in, or any
loans, advances or extensions of credit to, any Person, other than:
(a) Borrower's current ownership interests in those Subsidiaries
of Borrower identified on Schedule 3.5 attached hereto; and
(b) any investment in direct obligations of the United States of
America or any agency thereof, or in certificates of deposit
issued by Bank, maintained consistent with Borrower's or such
Subsidiary's business practices prior to the date hereof,
provided, that no such investment shall mature more than
ninety (90) days after the date when made or the issuance
thereof.
5.9 Transactions with Affiliates. Enter into any transaction with any
of their stockholders, officers, employees, partners or any of their Affiliates,
except, subject to the terms hereof, transactions in the ordinary course of
business and on terms not less favorable than would be usual and customary in
similar transactions between Persons dealing at arm's length.
5.10 Defaults on Other Obligations. Fail to perform, observe or comply
duly with any covenant, agreement or other obligation to be performed, observed
or complied with by any Borrower Party, subject to any grace periods provided
therein, which failure could have a Material Adverse Effect.
5.11 Prepayment of Debt. Prepay any Debt (or take any actions which
impose an obligation to prepay), except, subject to the terms hereof or thereof,
Indebtedness or other Debt payable to Bank.
5.12 Pension Plan. Except in compliance with this Agreement, enter into,
maintain, or make contribute to, directly or indirectly, any Pension Plan that
is subject to ERISA.
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5.13 Subordinate Indebtedness. Subordinate any indebtedness due to it
from any Person to indebtedness of other creditors of such Person.
5.14 No Further Negative Pledges. Enter into or become subject to any
agreement (other than this Agreement or the Loan Documents) (a) prohibiting the
guaranteeing by any Borrower Party of any obligations, (b) prohibiting the
creation or assumption of any Lien upon the properties or assets of any Borrower
Party, whether now owned or hereafter acquired or (c) requiring an obligation to
become secured (or further secured) if another obligation is secured or further
secured.
5.15 Accounts Receivable. Sell or assign any Account, account
receivable, note or trade acceptance, except to the Bank.
5.16 Acquire Fixed Asset. In addition to the Equipment to be purchased
with funds advanced under tile Equipment Loan, acquire or expend for, or commit
to acquire or expend for, fixed assets by lease (including any Capitalized Lease
Obligations), purchase or otherwise in an aggregate amount that exceeds
$500,000.00 in any fiscal year.
5.17 Subordinated Debt. Make any direct or indirect payment of all or
any part of the Subordinated Debt or take any other action or omit to take any
other action in respect of any Subordinated Debt except in accordance with the
Subordination Agreement. Except to the extent expressly provided in the
Subordination Agreement, neither Borrower nor any Borrower Party shall
repurchase, redeem or retire in any way any instrument evidencing Subordinated
Debt prior to maturity or enter into any agreement (oral or written) which could
in any way be construed to amend, modify, alter or terminate any one or more
instruments or agreements evidencing, governing, guaranteeing or otherwise
relating to Subordinated Debt.
For purposes of this Section 5, if Borrower requests that the Bank provide its
written consent to any transaction or undertaking of the type described in
Sections 5.1, 5.2, 5.6 and 5.8 above, such written consent of Bank will not be
unreasonably withheld or delayed, so long as (a) no Default or Event of Default
has occurred hereunder which is then continuing, and (b) the particular
transaction or undertaking for which the Bank's written consent is then being
requested shall not cause a Default or Event of Default to occur hereunder or
cause any material adverse effect to occur with respect to the business, assets,
operations or financial condition of Borrower or any other Borrower Party.
SECTION 6. EVENTS OF DEFAULT
6.1 Events of Default. The occurrence or existence of any of the
following conditions or events shall constitute a "Default" hereunder:
(a) upon nonpayment to any principal, interest or other sums due
under the terms of this Agreement or under any Note(s), or
under any other instrument or evidence of indebtedness,
whether under this Agreement, any Note(s), or otherwise, in
any case, when due in accordance with the terms hereof or
thereof, or if any Guarantor shall fail to pay, when due, any
indebtedness, obligation or liability whatsoever of any such
Guarantor to Bank.
(b) default in the observance or performance of any of the other
conditions, covenants or agreements of Borrower set forth in
this Agreement.
(c) any representation or warranty made by any Borrower Party in
any Loan Document shall be untrue or incorrect in any material
respect;
(d) any default or event of default, as the case may be, in the
observance or performance of any of the conditions, covenants
or agreements of any Borrower Party set forth in any
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Loan Document and continuation thereof beyond any applicable
period of grace or cure provided with respect thereto;
(e) any default by any Borrower Party, in the payment of any Debt
(other than Debt owing to Bank), or in the observance or
performance of any conditions, covenants or agreements related
or given with respect thereto and, in each such case,
continuation thereof beyond any applicable grace or cure
period;
(f) the rendering of one or more judgments or decrees for the
payment of money, against any Borrower Party, and such
judgments) or decree(s) shall remain unvacated, unbonded or
unstayed, by appeal or otherwise, for a period of sixty (60)
consecutive days after the date of entry;
(g) if there shall be any change in the President, Chief Executive
Officer or Chief Operating Officer of Borrower, whether by
reason of incapacity, death, resignation, termination or
otherwise, which, in Bank's reasonable judgment, shall have a
material adverse effect upon the future prospects for the
successful operation by Borrower, of its businesses as
conducted before such change, or its ability to pay and
perform its liabilities and obligations under this Agreement,
the Indebtedness, or the Loan Documents;
(h) the failure by any Borrower Party, to meet the minimum funding
requirements under ERISA with respect to any Pension Plan
established or maintained by it; the occurrence of any
"reportable event", as defined in ER-ISA, which could
constitute grounds for termination by the PBGC of any Pension
Plan or for the appointment by the appropriate United States
District Court of a trustee to administer such Pension Plan,
and such reportable event is not corrected and such
determination is not revoked within thirty (30) days after
notice thereof has been given to the plan administrator or any
Borrower Party, as the case may be; or the institution of any
proceedings by the PBGC to terminate any such Pension Plan or
to appoint a trustee by the appropriate United States District
Court to administer any SLICII Pension Plan;
(i) if any Borrower Party, becomes insolvent or generally fails to
pay, or admits in writing its inability to pay, its debts as
they mature, or applies for, consents to, or acquiesces in the
appointment of a trustee, receiver, liquidator, conservator or
other custodian for any Borrower Party, or a substantial part
of its property, or makes a general assignment for the benefit
of creditors; or in the absence of such application, consent
or acquiescence, a trustee, receiver, liquidator, conservator
or other custodian is appointed for any Borrower Party, or for
a substantial part of its property, and the same is not
discharged within thirty (30) days or any bankruptcy,
reorganization, debt arrangement, or other proceedings under
ally bankruptcy or insolvency law, or any dissolution or
liquidation proceeding,, is instituted by or against any
Borrower Party, and, if instituted against any Borrower Party,
the same is consented to or acquiesced in by any such Borrower
Party or otherwise remains undismissed for thirty (30) days or
any warrant of' attachment is issued against any substantial
part of- the property of any Borrower Party, which is not
released within thirty (30) days of service thereof; or
(j) if any Loan Document shall be terminated, revoked, or
otherwise rendered void or unenforceable, in any case, without
Bank's prior written consent; or
(k) if Bank deems itself insecure, believing in good faith that
the prospect of payment or performance of any of tile
Indebtedness is impaired.
Any Default hereunder (in the case of any and all Defaults other than Automatic
Defaults) shall not constitute an Event of Default for purposes of this
Agreement unless and until written notice of such Default shall have first been
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given to Borrower by Bank, and Borrower shall fail to cure such Default within
five (5) days after such notice has been given with respect to any such Default.
For purposes hereof, an "Automatic Default" means any Default which is specified
in subparagraphs (h), (i), (j) and (k) of this Section 6.1. Each Automatic
Default shall automatically constitute an Event of Default for purposes hereof,
and no notice to any Borrower Party or any other person or entity of any
Automatic Default shall be required and no opportunity to cure any Automatic
Default shall be afforded.
6.2 Remedies Upon Event of Default. Upon the occurrence and at any time
during the existence or continuance of any Event of Default, but without
impairing or otherwise limiting the Bank's right to demand payment of all or any
portion of the Indebtedness which is payable on demand, at Bank's option, Bank
may give notice to Borrower declaring all or any portion of the Indebtedness
remaining unpaid and outstanding, whether under the Notes or otherwise, to be
due and payable in full without presentation, demand, protest, notice of
dishonor, notice of intent to accelerate, notice of acceleration or other notice
of any kind, all of which are hereby expressly waived, whereupon all such
Indebtedness shall immediately become due and payable. Furthermore, upon the
occurrence of a Default or Event of Default and at any time during the existence
or continuance of any Default or Event of Default, but without impairing or
otherwise limiting the right of Bank, if reserved under any Loan Document, to
make or withhold financial accommodations at its discretion, to the extent not
yet disbursed, any commitment by Bank to make any further loans to Borrower
under this Agreement shall automatically terminate; provided, should such
Default or Event of Default be cured to Bank's satisfaction, Bank may, but shall
be under no obligation to, reinstate any such commitment by written notice to
Borrower. Notwithstanding the foregoing, in the case of an Event of Default
under and notwithstanding the lack of any notice, demand or declaration by Bank,
the entire Indebtedness remaining unpaid and outstanding shall become
automatically due and payable in full, and any commitment by Bank to make any
further loans to Borrower shall be automatically and immediately terminated,
without any requirement of notice or demand by Bank upon Borrower, each of which
are hereby expressly waived by Borrower. The foregoing rights and remedies are
in addition to any other rights, remedies and privileges Bank may otherwise have
or which may be available to it, whether under this Agreement, any other Loan
Document, by law, or otherwise.
6.3 Setoff. In addition to any other rights or remedies of Bank under
any Loan Document, by law or otherwise, upon the occurrence and during the
continuance or existence of any Event of Default, Bank may, at any time and from
time to time, without notice to Borrower (any requirements for such notice being
expressly waived by Borrower), setoff and apply against any or all of tile
Indebtedness (whether or not then due), any or all deposits (general or special,
time or demand, provisional or final) at any time held by Borrower and other
indebtedness at any time owing by Bank to or for the credit or for the account
of Borrower, and any property of Borrower, from time to time in possession or
control of Bank, irrespective of whether or not Bank shall have made any demand
hereunder or for payment of the Indebtedness and although such obligations may
be contingent or unmatured, and regardless of whether any Collateral then held
by Bank is adequate to cover the Indebtedness. The rights of Bank under this
Section are in addition to any other rights and remedies (including, without
limitation, other rights of setoff) which Bank may otherwise have. Borrower
hereby grants Bank a Lien on and security interest in all such deposits,
indebtedness and other property as additional collateral for the payment and
performance of the Indebtedness.
6.4 Waiver of Certain Laws. To the extent permitted by applicable law,
Borrower hereby agrees to waive, and does hereby absolutely and irrevocably
waive and relinquish, the benefit and advantage of any valuation, stay,
appraisement, extension or redemption laws now existing or which may hereafter
exist, which, but for this provision, might be applicable to any sale made under
the judgment, order or decree of any Court, oil any claim for interest oil the
Notes, or to any security interest or other Lien contemplated by or granted
under or in connection with this Agreement or the Indebtedness.
6.5 Waiver of Defaults. No Default or Event of Default shall be waived
by Bank except in a written instrument specifying the scope and terms of such
waiver and signed by an authorized officer of Bank, and such waiver and shall be
effective only for the specific time(s) and purpose(s) given. No. single or
partial exercise of any right, power or privilege hereunder, nor any delay in
the exercise thereof, shall preclude other or further exercise of Bank's rights.
No waiver of any Default or Event of Default shall extend to any other or
further Default or Event of
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Default. No forbearance on the part of Bank in enforcing any of Bank's rights or
remedies under any Loan Documents shall constitute a waiver of any of its rights
or remedies. Borrower expressly agrees that this Section may not be waived or
modified by Bank by course of performance, estoppel or otherwise.
6.6 Receiver. Bank, in any action or suit to foreclose upon any of the
Collateral, shall be entitled, without notice or consent, and completely without
regard to the adequacy of any security for the Indebtedness, to the appointment
of a receiver of the business and premises in question, and of the rents and
profits derived therefrom. This appointment shall be in addition to any other
rights, relief or remedies afforded Bank. Such receiver, in addition to any
other rights to which he shall be entitled, shall be authorized to sell,
foreclose or complete foreclosure on Collateral for the benefit of Bank,
pursuant to provisions of applicable law.
6.7 Discretionary Credit and Credit Payable upon Demand. To the extent
that any of the Indebtedness shall, at any time, be payable upon demand, nothing
contained in this Agreement, or any other Loan Document, shall be construed to
prevent Bank from making demand, without notice and with or without reason, for
immediate payment of all or any part of such Indebtedness at any time or times,
whether or not a Default or Event of Default has occurred or exists. In the
event that such demand is made upon any portion of the Indebtedness, the Bank,
at its election, may terminate any commitment by Bank to make any further loans
to Borrower under this Agreement or otherwise. Furthermore, to the extent any
Loan Document authorizes [lie Bank, at its discretion, to make or to decline to
make financial accommodations to the Borrower, nothing contained in this
Agreement or any other Loan Document shall be construed to limit or impair such
discretion or to commit or otherwise obligate the Bank to make any such
financial accommodations
6.8 Application of Proceeds of Collateral. Notwithstanding anything to
the contrary set forth in any Loan Document, after an Event of Default, the
proceeds of any of the Collateral, together with any offsets, voluntary
payments, and any other sums received or collected in respect of the
Indebtedness, may be applied in such order and manner as determined by Bank in
its sole and absolute discretion.
SECTION 7. MISCELLANEOUS
7.1 Accounting Principles. Except to the extent expressly stated to the
contrary herein, where the character or amount of any asset or liability or item
of income or expense is required to be determined, or any consolidation or other
accounting computation is required to be made for purposes of this Agreement, it
shall be done in accordance with GAAP, and all accounting terms not specifically
defined in this Agreement shall be construed in accordance with GAAP.
7.2 Taxes and Fees. Unless otherwise prohibited by applicable law,
should any tax (other than a tax based upon the net income of Bank) or recording
or filing fee become payable in respect of any Loan Document, any of the
Collateral, any of the Indebtedness or any amendment, modification or supplement
hereof or thereof, Borrower agrees to pay such taxes (or reimburse Bank therefor
promptly following demand for reimbursement), together with any interest or
penalties thereon, and agrees to hold Bank harmless with respect thereto.
7.3 Governing Law. Each Loan Document shall be deemed to have been
delivered in the State of Texas, and shall be governed by and construed and
enforced in accordance with the laws of the State of Texas, except to the extent
that the Uniform Commercial Code, other personal property law or real property
law of another jurisdiction where Collateral is located is applicable, and
except to the extent expressed to the contrary in any Loan Document. Whenever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited by 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.
7.4 Costs and Expenses. Borrower shall pay Bank, on demand, all costs
and expenses, including, without limitation, reasonable attorneys' fees and
legal expenses, incurred by Bank in perfecting, revising, protecting or
enforcing any of its rights or remedies against any Borrower Party or any
Collateral, or otherwise incurred by Bank in connection with any Default or
Event of Default or the enforcement of the Loan Documents or
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the Indebtedness. Following Bank's demand upon Borrower for the payment of any
such costs and expenses, and until the same are paid in full, the unpaid amount
of such costs and expenses shall constitute Indebtedness and shall bear interest
at the Default Rate.
7.5 Notices. All notices and other communications provided for in any
Loan Document (unless otherwise expressly stipulated therein) or contemplated
thereby, given thereunder or required by law to be given, shall be in writing
(unless expressly provided to the contrary). If personally delivered, such
notices shall be effective when delivered, and in the case of mailing or
delivery by overnight courier, such notices shall be effective when placed in
all envelope and deposited at a post office or official depository under the
exclusive care and custody of the United States Postal Service or delivered to
an overnight courier, postage prepaid, in each case addressed to the parties as
set forth on the signature page of this Agreement, or to such other address as a
party shall have designated to the other in writing in accordance with this
Section. In the case of mailing, the mailing shall be by overnight courier or
certified or first class mail. The giving of at least five (5) days' notice
before Bank shall take any action described in any notice shall conclusively be
deemed reasonable for all purposes-, provided, that this shall not be deemed to
require Bank to give such five (5) days' notice, or any notice, if not
specifically required to do so in this Agreement.
7.6 Further Action. Borrower, from time to time, upon written request
of Bank, will promptly make, execute, acknowledge and deliver, or cause to be
made, executed, acknowledged and delivered, all such further and additional
instruments, and promptly take all such further action as may be reasonably
required to carry out the intent and purpose of the Loan Documents, and to
provide for the Loans thereunder and payment of the Notes, according to the
intent and purpose therein expressed.
7.7 Successors and Assign; Participation. This Agreement shall be
binding upon and shall inure to the benefit of Borrower and Bank and their
respective successors and assigns. The foregoing shall not authorize any
assignment or transfer by Borrower, of any of its respective rights, duties or
obligations hereunder, such assignments or transfers being expressly prohibited.
Bank, however, may freely assign, whether by assignment, participation or
otherwise, its rights and obligations hereunder, and is hereby authorized to
disclose to any such assignee or participant (or proposed assignee or
participant) any financial or other information in its knowledge or possession
regarding any Borrower Party or the Indebtedness.
7.8 Indulgence. No delay or failure of Bank in exercising any right,
power or privilege hereunder or under any of the Loan Documents shall affect
such right, power or privilege, nor shall any single or partial exercise thereof
preclude any further exercise thereof, nor the exercise of any other right,
power or privilege available to Bank. The rights and remedies of Bank hereunder
are cumulative and are not exclusive of any rights or remedies of Bank.
7.9 Amendment and Waiver. No amendment or waiver of any provision of
any Loan Document, nor consent to any departure by any Borrower Party therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Bank, and then such waiver or consent shall be effective only in the specific
instances) and for the specific time(s) and purpose(s) for which given.
7.10 Severability. In case any one or more of the obligations of any
Borrower Party under any Loan Document shall be invalid, illegal or
unenforceable in any jurisdiction, the validity, legality and enforceability of
the remaining obligations of such Borrower Party shall not in any way be
affected or impaired thereby, and such invalidity, illegality or
unenforceability in one jurisdiction shall not affect the validity, legality or
enforceability of the obligations of such Borrower Party under any Loan Document
in any other jurisdiction.
7.11 Headings and Construction of Terms. The headings of the various
sub-Sections hereof are for convenience of reference only and shall in no way
modify or affect any of the terms or provisions hereof. Where the context herein
requires, the singular number shall include the plural, and any gender shall
include any other gender.
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7.12 Independence of Covenants. Each covenant hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any such covenant, the fact that it would be permitted by an exception to, or
would be otherwise within the limitations of, another covenant shall not avoid
the occurrence of any Default or Event of Default.
7.13 Reliance on and Survival of Various Provisions. All terms,
covenants, agreements, representations and warranties of any Borrower Party made
in any Loan Document, or in any certificate, report, financial statement or
other document furnished by or on behalf of any Borrower Party in connection
with any Loan Document, shall be deemed to have been relied upon by Bank,
notwithstanding any investigation heretofore or hereafter made by Bank or on
Bank's behalf, and those covenants and agreements of Borrower set forth in
Sections 4.8 and 4.12 hereof (together with any other indemnities of Borrower
contained elsewhere in any Loan Document) shall survive the termination of this
Agreement and the repayment in full of the Indebtedness.
7.14 Effective Upon Execution. This Agreement shall become effective
upon the execution hereof by Bank and Borrower, and shall remain effective until
the Indebtedness under this Agreement and each of the Notes and the related Loan
Documents shall have been repaid and discharged in full and no commitment to
extend any credit hereunder (whether optional or obligatory) remains
outstanding.
7.15 Complete Agreement & Conflicts. The Loan Documents contain the
entire agreement of the parties thereto, and none of the parties shall be bound
by anything not expressed in writing. In the event that and to the extent that
any of the terms, conditions or provisions of any of the other Loan Documents
are inconsistent with or in conflict with any of the terms, conditions or
provisions of this Agreement, the applicable terms, conditions and provisions of
this Agreement shall govern and control.
7.16 Exhibits and Addenda. The following Addenda, Exhibits and Schedules
are attached to this Agreement and are incorporated into this Agreement by this
reference and made a part hereof for all purposes:
Addenda:
Defined Terms Addendum
Financial Covenants Addendum
Loan Terms, Conditions and Procedures Addendum
Exhibits:
Exhibit A - Form of Borrowing Base Certificate
Exhibit B - Form of Compliance Certificate
Exhibit C - Form of Request for Advance
Schedules:
Schedule 3.5 Subsidiaries
Schedule 3.14 Employee Benefit Plans
Schedule 3.17 Environmental Disclosures
Schedule 5.4 Debt
Schedule 5.5 Liens
7.17 Separate Loan. Notwithstanding anything to the contrary contained
in this Agreement or any other Loan Document, to the extent the loan agreement
or promissory note which evidences a specified portion of the Indebtedness
(herein referred to as a "Separate Loan"), or any security agreement, mortgage,
deed of trust or other document which specifically secures such Separate Loan
(collectively referred to as the "Separate Loan Documents"), expressly
stipulates that the Separate Loan shall only be secured by specifically
identified collateral or that the collateral described in the Separate Loan
Documents shall not secure any Indebtedness other than the Separate Loan, the
applicable provisions of the Separate Loan Documents shall control. Furthermore,
to the extent any Separate Loan Document expressly stipulates that a default or
event of default under the Loan Documents shall not, unless otherwise expressly
stipulated in a Separate Loan Document, constitute a default or event of default
with respect to the Separate Loan, the applicable provisions of the Separate
Loan Documents shall control.
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7.18 WAIVER OF JURY TRIAL. BANK AND BORROWER EACH ACKNOWLED THAT THE
RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH
OF THEM, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT, WITH COUNSEL
OF THEIR CHOICE, KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT
EITHER OF THEM MAY HAVE TO A TRIAL BY JURY IN ANY LITIGATION BASED UPON OR
ARISING OUT OF ANY LOAN DOCUMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED BY THE
LOAN DOCUMENTS OR ANY COURSE OF CONDUCT, DEALING, STATEMENTS (WHETHER ORAL OR
WRITTEN), OR ACTION OF EITHER OF THEM. THESE PROVISIONS SHALL NOT BE DEEMED TO
HAVE BEEN MODIFIED IN ANY RESPECT OR RELINQUISHED BY BANK OR BOROWER,E XCEPT BY
A WRITTEN INSTRUMENT EXECUTED BY EACH OF THEM.
7.19 ORAL AGREEMENTS INEFFECTIVE. THIS AGREEMENT AND THE OTHER "LOAN
AGREEMENTS" (AS DEFINED IN SECTION 26.02(A)(2) OF THE TEXAS BUSINESS & COMMERCE
CODE, AS AMENDED) REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES, AND THIS
AGREEMENT AND THE OTHER WRITTEN LOAN AGREEMENTS MAY NOT BE CONTRADICTED BY
EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS BETWEEN THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
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WITNESS the due execution hereof as of the day and year first above
written.
COMERICA BANK - TEXAS ASD SYSTEMS, INC.,
a Texas corporation
By: By:
-------------------------------- ----------------------------------
Name: Name:
------------------------------ --------------------------------
Title: Title:
----------------------------- -------------------------------
Address: 1601 Elm Street Address: 3737 Grader Street, Suite 110
Dallas, Texas 75201 Garland, Texas 75041
P.O. Box 650282
Dallas, Texas 75262-0282
Attn: Mr. Gary Orr, Chief Credit Attn: President
Officer
Telefax No.: (214) _____ - ________ Telefax No.: (214) _____ - ________
with a copy to: 804 Congress Avenue, Suite 320
Austin, Texas 78701
Attn: Ms. Robin Ingari, Senior Vice President
Telefax No.: (512) 427-7120
DEFINED TERMS ADDENDUM
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following terms shall
have the following respective meanings:
"Account Debtor" shall mean the party who is obligated on or Linder any
Account.
"Accounts," "Chattel Paper," "Documents," "Equipment," "Fixtures," "General
Intangibles," "Goods," "Instruments" and "Inventory" shall have the respective
meanings assigned to them in the UCC on the date of this Agreement.
"Accounts Receivable" shall mean and include all Accounts, Chattel Paper,
General Intangibles, contract rights, deposit accounts, documents and
Instruments now owned or hereafter acquired by Borrower.
"Affiliate" shall mean, when used with respect to any Person, any other
Person which, directly or indirectly, controls or is controlled by or is under
common control with such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and "under
common control with"), with respect to any Person, shall mean possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership of voting
securities, by contract or otherwise.
"Affiliate Receivables" shall mean, as of any time of determination, any
amounts in respect of loans or advances owing to Borrower from any of its
Subsidiaries or Affiliates at such time.
"Agreement" shall mean this Credit Agreement, including tile Defined Terms
Addendui-n, the Financial Covenants Addendum and the Loan Terms, Conditions and
Procedures Addendum, together with all exhibits and schedules, as it may be
amended from time to time.
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"Applicable Interest Rate" shall mean, with respect to the Indebtedness
from time to time outstanding, under any Note the rate or rates provided in such
Note as the Applicable Interest Rate.
"Approved Account Debtors" shall mean Sears Tool & Health, Blair
Corporation, The lioneybaked Hani Corporation, Quantum Corporation and any other
Account Debtor of Borrower hereafter approved and designated by Bank in writing
as an Approved Account Debtor for purposes hereof.
"Bankruptcy Code" shall mean Title I I of the United States Code, as
amended, or any successor act or code.
"Borrower Party," shall mean Borrower, each of its Subsidiaries (whether or
not a party to any Loan Document) and each other Person who or which shall be
liable for the payment or performance of all or any portion of the Indebtedness
or who or which shall own any property that is subject to (or purported to be
subject to) a Lien which secured all or any portion of the Indebtedness.
"Borrowing Base Certificate" shall mean a certificate in the form of
Exhibit A.
"Borrowing Base Limitation" shall mean eighty percent (80%) of Eligible
Accounts.
"Business Day" shall mean any day, other than a Saurday, Sunday or holiday,
on which the Bank is open to carry on all or substantially all of its normal
commercial lending business in Dallas, Texas.
"Capitalized Lease Obligation" shall mean any Debt represented by
obligations under a lease that is required to be capitalized for financial
reporting purposes in accordance with GAAP.
"Collateral" shall mean all property, assets and rights in which a Lien or
other encumbrance in favor of or for the benefit of Bank is or has been granted
or arises or has arisen, or may hereafter be granted or arise, under or in
connection with any Loan Document, or otherwise, to secure the payment or
performance of the Indebtedness.
"Compliance Certificate" shall mean a certificate to be furnished by
Borrower to Bank, in the form of Exhibit B, certified by the chief financial
officer of Borrower (or in such officer's absence, another responsible officer
of Borrower) pursuant to Section 4.3 of this Agreement, certifying that, as of
the date thereof, no Default or Event of Default shall have occurred and be
continuing, or if any Default or Event of Default shall have occurred and be
continuing, specifying in detail the nature and period of existence thereof and
any action taken or proposed to be taken by Borrower with respect thereto, and
also certifying as to whether Borrower is in compliance with the financial
covenants contained in the Financial Covenants Addendum to this Agreement (which
certificate shall set forth, in reasonable detail, the calculations and the
resultant ratios and financial tests determined thereunder).
"Consolidated" or "consolidated" shall mean, when used with reference to
any financial term in this Agreement, the aggregate for two or more persons of
the amounts signified by such temi for all such persons determined on a
consolidated basis in accordance with GAAP. Unless otherwise specified herein,
references to "consolidated" financial statements or data of the Borrower
includes consolidation with its Subsidiaries in accordance with GAAP.
"Current Assets" shall mean, in respect of a Person and as of any
applicable date of deteniiination, all assets of such Person that should be
classified as current in accordance with GAAP, except that all inventories of
such Person shall be specifically excluded from Current Assets.
"Current Liabilities" shall mean, in respect of a Person and as of any
applicable date of determination, (a) all liabilities of such Person that should
be classified as current in accordance with GAAP, including, without limitation,
any portion of the principal of the Indebtedness classified as current at such
time, plus (b) to the extent not otherwise included, the aggregate principal
balance of the Revolving Loans outstanding at such time, whether or not
classified as current in accordance with GAAP.
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"Debt" shall mean, as of any applicable date of determination thereof,
all items of Indebtedness, obligation or liability of a Person, whether matured
or unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP. In the case of Borrower, the term "Debt" shall include,
without limitation, the Indebtedness.
"Debt-to-Worth Ratio" shall mean, in respect of a Person and as of any
applicable date of determination thereof, the ratio of (a) the total Debt of
such Person at such time leu Subordinated Debt of such Person at such time to
(b) the Tangible Net Worth of such Person at such time.
"Default" shall mean any condition or event which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default.
"Default Rate" shall mean, at any time of determination thereof with
respect to the applicable portion of the Indebtedness, a per annum rate of
interest equal to the sum of the contractual rate of interest which would apply
to such Indebtedness if the Default Rate was not then in effect plus three
percent (3%).
"Disbursement Date" shall mean the date upon which Bank niakes a Loan
under this Agreement.
"Eligible Account" shall mean an Account (but shall not include interest
and service charges thereon) arising in the ordinary course of Borrower's
business which meets each of the following requirements.
(a) it is not owing more than ninety (90) days aftei the date of tile
original invoice or other writing evidencing such Account and is
not more than sixty (60) days past due;
(b) it is not owing by an Account Debtor who has failed to pay twenty-
five percent (25%) or more of the aggregate amount of its Accounts
owing to Borrower within ninety (90) days after the dates of the
respective invoices or other writing evidencing such Accounts and
within sixty (60) days after the applicable due dates thereof.
(c) it is not owing by an Account Debtor (other than an Approved
Account Debtor) whose total Accounts owing to Borrower exceed
twenty percent (20%) of the aggregate Accounts owing to Borrower by
all Account Debtors, or if the total Accounts owing to Borrower by
such Account Debtor (other than an Approved Account Debtor) exceed
twenty percent (20%) of the aggregate of all Accounts owing to
Borrower by all Account Debtors, such Accounts of such Account
Debtor up to such twenty percent (20%) limit shall be included
within Eligible Accounts (subject to compliance with all other
Eligible Account criteria) and only those Accounts of such Account
Debtor exceeding such twenty percent (20%) limit shall be excluded
from Eligible Accounts (it being understood that such 20%
concentration limit shall not apply to any and all Accounts owing
by any Approved Account Debtor).
(d) it arises from the sale or lease of goods and such goods have been
shipped or delivered to the Account Debtor under such Account, or
it arises from services rendered and such services have been
performed;
(e) it is evidenced by an invoice, dated not later than the date of
shipment or performance, rendered to such Account Debtor or some
other evidence of billing acceptable to Bank and is not evidenced
by any Instrument or Chattel Paper;
(f) it is a valid, legally enforceable obligation of the Account Debtor
thereunder, and is not a contra account or otherwise subject to any
offset, counterclaim or other defense on the part of such Account
Debtor or to any claim on the part of such Account Debtor denying
liability thereunder in whole or in part;
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(g) it is not subject to any sale of accounts, any rights of offset or
Lien whatsoever other than to Bank;
(h) it is not owing by a Subsidiary or Affiliate of Borrower nor by an
Account Debtor which (i) does not maintain its chief executive
office in the United States of America, or (ii) is not organized
under the laws of the United States of America, or any state
thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality or other
instrumentality thereof, except for an Account owed by any such
Account Debtor which is insured or backed by credit insurance or a
letter of credit acceptable to Bank in all respects;
(i) it is not an Account billed in advance, payable on delivery, for
consigned goods, for guaranteed sales, for unbilled sales, for
progress billings, payable at a future date in accordance with its
terms, subject to a retainage or holdback by the Account Debtor or
insured by a surety company;
(j) it is not an Account owing by the United States of America or any
state or political subdivision thereof, or by any department,
agency, public body corporate or other instrumentality of any of
the foregoing, unless all necessary steps are taken to comply with
the Federal Assignment of Claims Act of 1940, as amended, or with
any comparable state law, if applicable, and all other necessary
steps are taken to perfect Bank's security interest in such
Account;
(k) it is not owing by an Account Debtor for which Borrower or any of
its Subsidiaries has received a notice of (i) the death of the
Account Debtor or any partner of the Account Debtor, (ii) the
dissolution, liquidation, termination of existence, insolvency or
business failure of the Account Debtor, (iii) the appointment of a
receiver for any part of the property of the Account Debtor, or
(iv) an assignment for the benefit of creditors, the filing of a
petition in bankruptcy, or the commencement of any proceeding under
any bankruptcy or insolvency laws by or against the Account Debtor;
and
(1) it is not owing by any Account Debtor whose obligations Bank,
acting in its sole discretion, shall have notified Borrower are not
deemed to constitute Eligible Accounts.
An Account which is at any time an Eligible Account, but which subsequently
I'ails to meet any of the foregoing requirements, shall forthwith cease to be an
Eligible Account.
"Environmental Law(s)" shall mean all laws, codes, ordinances, rules,
regulations, orders, decrees and directives issued by any federal, state, local,
foreign or other governmental or quasi-governmental authority or body (or any
agency, instrumentality or political subdivision thereoq pertaining to Hazardous
Materials or otherwise intended to regulate or improve health, safety or the
environment, including, without limitation, any hazardous materials or wastes,
toxic substances, flanunable, explosive or radioactive materials, asbestos,
and/or other similar materials; any so-called "superfund" or "superlien" law,
pertaining to Hazardous Materials on or about any of the Collateral, or any
other property at any time owned, leased or otherwise used by any Borrower
Party, or any portion thereof, including, without limitation, those relating to
soil, surface, subsurface ground water conditions and the condition of the
ambient air; and any other federal, state, foreign or local statute, law,
ordinance, code, rule, regulation, order or decree regulating, relating to, or
imposing liability or standards of conduct concerning, any hazardous, toxic,
radioactive, flammable or dangerous waste, substance or material, as now or at
any time hereafter in effect.
"Equipment" shall have the meaning assigned to such tenti in the UCC on
the date of this Agreement together with all of the following to the extent, if
any, the same are not included within such definition: all machinery, equipment,
furniture, furnishings, Fixtures, and other tangible personal property (except
Inventory) including, without limitation, data processing hardware and software,
motor vehicles, aircraft, dies, tools, jigs, and office equipment, as well as
all of such types of property that are leased and all rights and interests with
respect thereto under such leases to the extent that any such lease does not
prohibit or require a consent to the creation of a Lien in favor of the Bank
(including, without limitation, options to purchase) together with all present
and ftiture additions and accessions thereto, replacements therefor, component
and auxiliary parts and supplies used or to be
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used in connection therewith, and all substitutes for any of the foregoing, and
all manuals, drawings, instructions, warranties and rights with respect thereto
wherever any of the foregoing is located to the extent that any of the foregoing
are now owned or hereafter acquired by the Borrower and to the extent that any
other Borrower Party now or hereafter grants or purports to grant a Lien upon
all or any of the foregoing as security for all or any portion of the
Indebtedness.
"Equipment Loan" shall mean a Loan made, or to be made, in one or more
advances under the equipment loan facility to or for the credit of Borrower by
the Bank pursuant to the Loan Terms, Conditions and Procedures Addendum.
"Equipment Loan Maximum Amount" shall mean One Million Dollars ($
1,000,000.00).
"Equipment Loan Advance Termination Date" shall mean six (6) months
after the date hereof.
"Equipment Loan Maturity Date" shall mean forty-two (42) months after
the date hereof, or such earlier date on which the aggregate unpaid principal
amounts of all Equipment Loans become due and payable whether by the lapse of
time, demand for payment, acceleration or otherwise; provided, however, if any
such date is not a Business Day, then the Equipment Loan Maturity Date shall be
the next succeeding Business Day.
"Equipment Note" shall mean the promissory note of even date herewith in
the original principal amount of $ 1,000,000.00, executed and delivered by
Borrower payable to the order of Bank, as the same may be renewed, extended,
modified, increased or restated from time to time.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended, or any successor act or code.
"Event of Default" shall mean any of those conditions or events listed
in Section 6.1 of this Agreement.
"Financial Statements" shall mean all balance sheets, income statements
and other financial data, statements and reports (whether of Borrower, any Of
its Subsidiaries, any GLiaraiitor, or any other Borrower Party or otherwise)
which are required to, have been, or may from time to time hereafter-, be
furnished to Bank, for tile purposes of'. or in connection with, this Agreement,
the transactions contemplated hereby or any of the Indebtedness.
"GAAP" shall mean generally accepted accounting principles consistently
applied.
"Good Faith" or "good faith" shall have the meaning, ascribed to the
term "good faith" in Article 1.201 (19) of the UCC on the date of this
Agreement.
"Governmental Authority" shall mean the United States, each state, each
county, each city, and each other political subdivision in which all or any
portion of the Collateral is located, and each other political subdivision,
agency, or instrumentality exercising jurisdiction over Bank, any Borrower Party
or any Collateral.
"Governmental Requirements" shall mean all laws, ordinances, rules, and
regulations of any Governmental Authority applicable to any Borrower Party, any
of the Indebtedness or any Collateral.
"Guarantor(s)" shall mean, as the context dictates, any Person(s) (other
than the Borrower) who shall, at any time, guarantee or otherwise be or become
obligated for the repayment of all or any part of the Indebtedness, including,
without limitation, Norm Charney.
"Hazardous Material" shall mean and include any hazardous, toxic or
dangerous waste, substance or material defined as such in, or for purposes of,
any Environmental Law(s).
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"Indebtedness" shall mean all loans, advances, indebtedness, obligations
and liabilities of any Borrower Party to Bank under any Loan Document, together
with all other indebtedness, obligations and liabilities whatsoever of Borrower
to Bank, whether matured or urunatured, liquidated or unliquidated, direct or
indirect, absolute or contingent, joint or several, due or to become due, now
existing or hereafter arising, voluntary or involuntary, known or unknown, or
originally payable to Bank or to a third party and subsequently acquired by Bank
including, without limitation, any: late charges; loan fees or charges;
overdraft indebtedness; costs incurred by Bank in establishing, determining,
continuing or defending the validity or priority of any Lien or in pursuing any
of its rights or remedies under any Loan Document or in connection with any
proceeding involving Bank as a result of any financial acconunodation to
Borrower; debts, obligations and liabilities for which Borrower would otherwise
be liable to the Bank were it not for the invalidity or enforceability of them
by reason of any bankruptcy, insolvency or other law or for any other reason;
and reasonable costs and expenses of attorneys and paralegals, whether any suit
or other action is instituted, and to court costs if suit or action is
instituted, and whether any such fees, costs or expenses are incurred at the
trial court level or on appeal, in bankruptcy, in administrative proceedings, in
probate proceedings or otherwise provided, however, that the ten-n Indebtedness
shall not include any consumer loan to the extent treatment of such loan as part
of the Indebtedness would violate any Governmental Requirement.
"Lien" shall mean any valid and enforceable interest in any property,
whether real, personal or mixed, securing an indebtedness, obligation or
liability owed to or claimed by any Person other than the owner of such
property, whether such indebtedness is based on the conunon law or any statute
or contract and including, but not limited to, a security interest, pledge,
mortgage, assignment, conditional sale, trust receipt, lease, consignment or
bailment for security purposes.
"Loan Documents" shall mean collectively, this Agreement, the Notes, the
Subordination Agreement, any reimbursement agreement or other documentation
executed in connection with any Letter of Credit, and any other documents,
instruments or agreements evidencing, governing, securing, guaranteeing or
otherwise relating to or executed pursuant to or in connection with any of the
Indebtedness or any Loan Document (whether executed and delivered prior to,
concurrently with or subsequent to this Agreement), as such documents may have
been or may hereafter be amended from time to time.
"Loans" shall mean, collectively, the Revolving Loans and the Equipment
Loans, and "Loan" shall mean any of them.
"Material Adverse Effect" shall mean any act, event, condition or
circumstance which could materially and adversely affect the business,
operations, condition (financial or otherwise), performance or assets of any
Borrower Party, the ability of any Borrower Party to perform its obligations
under any Loan Document to which it is a party or by whch it is bound or the
enforceability of any Loan Document.
"Maximum Legal Rate" shall mean the maximum rate ot'iionLISLirious
interest per annlini permitted to be paid by Borrower or, inapplicable, another
Borrower Party or received by [lank with respect to the applicable portion of
the Indebtedness from time to time under applicable state or federal law as now
or as may be hereafter in effect, including, as to Chapter 1D of Title 79
Vernon's Texas Statutes (and as the same may be incorporated by reference in
other Texas statutes), but otherwise without limitation, that rate based upon
the "weekly ceiling rate" (as defined in (S) 303 of the Texas Finance Code).
"Net Income" shall mean the net income (or loss) of a Person for any
applicable period of determination, detemiined in accordance with GAAP, but
excluding, in any event:
(i) any gains or losses on tile sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital
assets, and any taxes on the excluded gains and any tax deductions
or credits on account of any excluded losses; and
(ii) in the case of Borrower, net earnings of any Person in which
Borrower has an ownership interest, unless such net earnings shall
have actually been received by Borrower in the form of cash
distributions.
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"Notes" shall mean, collectively, whether one or more, the Revolving
Credit Note and the Equipment Note(s), and "Note" shall mean any of them.
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
Person succeeding to the present powers and functions of the Pension Benefit
Guaranty Corporation.
"Pension Plan(s)" shall mean any and all employee benefit pension plans
of Borrower and/or any of its Subsidiaries in effect from time to time, as such
term is defined in ERISA.
"Permitted Encumbrances" shall mean:
(a) Liens in favor of the Bank;
(b) Liens for taxes, assessments or other governmental charges which
are not yet due and payable, incurred in the ordinary course of
business and for which no interest, late charge or penalty is
attaching or which are being contested in good faith by appropriate
proceedings and, if requested by Bank, bonded in an amount and
nianner satisfactory to Bank;
(c) Liens, not delinquent, arising in the ordinary course ol'business
and created by statute in connection with worker's compensation,
unemployment insurance, social security and similar statutory
obligations;
(d) Liens of mechanics, materialnien, carriers, warehousemen or other
like statutory or common law Liens securing obligations incurred in
good faith in the ordinary course of business without violation of
any Loan Document that are not yet due and payable;
(e) encumbrances consisting of existing or future zonin,, restrictions,
existing recorded rights-of-way, existing recorded easements,
existing recorded private restrictions or existing or future public
restrictions on the use of real property, none of which materially
impairs the use of such property in the operation of the business
for which it is used, and none of which is violated in any material
respect by any existing or proposed structure or land use and none
of which is prohibited by any other Loan Document; and
(f) Liens existing as of the date hereof as more particularly described
in Schedule 5.5 attached to this Agreement and Liens subsequently
approved by Bank in writing.
"Person" or "person" shall mean any individual, corporation,
partnership, joint venture, limited liability company, association, trust,
unincorporated association, joint stock company, government, municipality,
political subdivision or agency, or other entity.
"Quick Ratio" shall mean, in respect of a Person and as of any
applicable date of determination thereof, the ration of Current Assets to
Current Liabilities.
"Request for Advance" shall mean an oral or written request or
authorization for an advance of Loan proceeds which if made in writing shall be
in the form annexed hereto as Exhibit C, or in such other form as is acceptable
to Bank.
"Revolving Credit Maturity Date" shall mean one (1) year after the date
hereof, or such earlier date on which the entire unpaid principal amount of all
Revolving Loans becomes due and payable whether by tile lapse of time, demand
for payment, acceleration or otherwise; provided, however, if any such date is
not a Business Day, then the Revolving Credit Maturity Date shall be the next
succeeding Business Day.
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"Revolving Credit Maximum Amount" shall mean the lesser of (a) ONE
MILLION DOLLARS ($1,000,000.00), or (b) the Borrowing Base Limitation.
"Revolving Credit Note" shall mean the Revolving Credit Note of even
date herewith in the original principal amount of $1,000,000.00 executed by
Borrower payable to the order of the Bank, as the same may be renewed, extended,
modified, increased or restated from time to time.
"Revolving Loan" shall mean an advance made, or to be made, under the
revolving credit loan facility to or for the credit of Borrower by the Bank
pursuant to the Loan Terms, Conditions and Procedures Addendum.
"Subordinated Debt" shall mean any Debt of Borrower (other than the
Indebtedness) which has been subordinated to the Indebtedness pursuant to the
Subordination Agreement or any other agreement in form and content satisfactory
to the Bank.
"Subordination Agreement" shall mean, collectively, the subordination
agreements in form and content satisfactory to Bank making all present and
future indebtedness of Borrower to Athletic Supply of Dallas, L.L.C., as more
fully described therein subordinate to the Indebtedness.
"Subsidiary" shall mean as to any particular parent entity, any
corporation, partnership, limited liability company or other entity (whether now
existing or hereafter organized or acquired) in which more than fifty percent
(50%) of the outstanding equity ownership interests having voting rights as of
any applicable date of detemiination, shall be owned directly, or indirectly
through one or more Subsidiaries, by such parent entity.
"Tangible Net Worth" shall mean, with respect to any Person and as of
any applicable date of determiiiation, the excess of (a) the net book value of
all assets of such Person (excluding Affiliate Receivables, patent rights,
trademarks, trade names, franchises, copyrights, licenses, goodwill, and all
other intangible assets of such Person), after all appropriate deductions in
accordance with GAAP (including, without limitations reserves for doubtful
receivables, obsolescence, depreciation and amortization), over (b) all Debt of
such Person at such time less the Subordinated Debt.
"Tangible Net Worth Adjustment" shall mean an amount equal to, on any
day, the sum of (a) fifty percent (50%) of the aggregate Net Income of Borrower,
on a consolidated basis, for each calendar month ending from and after the date
hereof through and including the calendar month ending on or immediately prior
to the calendar month in which such determination day occurs, and (b) the
aggregate of all equity added to the consolidated balance sheet of Borrower
after the date hereof as a result of Borrower's issuance and sale of its stock
or any other equity interest in Borrower.
"Tax Refunds" shall mean refunds or claims for refunds of any taxes at
any time paid by Borrower to the United States of America or any state, city,
county or other governmental entity.
"Feleptione Notice Authorization" shall mean ail agreement in form
satisfactory to Bank authorizing telephonic and facsimiled notices of borrowing
and establishing a codekk,oi-d system of identification in connection therewith.
"UCC" shall mean the Uniform Commercial Code as adopted and in force in
the State of Texas, as amended.
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FINANCIAL COVENANTS ADDENDUM
SECTION 1. FINANCIAL COVENANTS.
1.1 Tangible Net Worth. Maintain a Tangible Net Worth at all times of
not less than the sum of (a) Two Million Four Hundred Thousand Dollars
($2,400,000.00) and (b) the applicable Tangible Net Worth Adjustment amount.
1.2 Quick Ratio. Maintain a Quick Ratio at all times of not less than
the ratio set forth below during the corresponding period set forth below:
Period Ratio
From the date of this Agreement through June 30, 1999 1.00:1
At all times from and after June 30, 1999 1.50:1
The Quick Ratio shall be calculated as of the end of each calendar month, and
shall be based upon the twelve (12) immediately preceding calendar months then
ending.
1.3 Debt-to-Worth Ratio. Maintain a Debt-to-Worth Ratio of not more
than .50 to 1. The Debt-to-Worth-Ratio shall be calculated as of the end of each
calendar month, and shall be based upon the twelve (12) immediately preceding
calendar months then ending.
1.4 Net Income. Have positive Net Income for the calendar month ending
October 31, 1999; have positive, cumulative Net Income for the fiscal year
ending December 31, 1999; and as of the end of each calendar month thereafter
commencing December 31, 1999, maintain positive, cumulative Net Income for the
twelve (12) imniediately preceding calendar months then ending.
LOAN TERMS, CONDITIONS AND PROCEDURES ADDENDUM
SECTION 1. REVOLVING CREDIT FACILITY
1.1 Revolving Credit Commitment. Subject to the temis and conditions
of the Loan Documents, the Bank agrees to make Revolving Loans to Borrower at
any time and from time to time from the effective date hereof until (but not
including) the Revolving Credit Maturity Date. The aggregate principal amount of
Revolving Loans at any time outstanding shall not exceed the Revolving Credit
Maximum Amount. All of such Revolving Loans shall be evidenced by the Revolving
Credit Note, under which advances, repayments and re-advances may be made,
subject to the terms and conditions of the Loan Documents.
1.2 Repayment of and Interest on the Revolving Credit Note. Each
Revolving Loan evidenced by the Revolving Credit Note from time to time
outstanding hereunder shall, from and after the date of such Revolving Loan,
bear interest at a per annum rate equal to the Applicable Interest Rate and
during the existence of an Event of Default at the Default Rate and shall be due
and payable in accordance with the terms of the Revolving Credit Note. All
unpaid principal, accrued and unpaid interest and other amounts owing under the
Revolving Credit Note shall be due and payable on the Revolving Credit Maturity
Note.
1.3 Requests for Advances. Except as hereinafter provided, Borrower
may request a Revolving Loan by submitting to Bank a Request for Advance by an
authorized officer or other representative of Borrower, subject to the
following:
(a) each such Request for Advance shall include, without limitations
the proposed amount of such Revolving Loan and the proposed
Disbursement Date, which date must be a Business Day;
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(b) each such Request for Advance shall be conununicated to Bank by
1:00 p.m. (Dallas, Texas time) on the proposed Disbursement Date;
(c) a Request for Advance, once conununicated to Bank, shall not be
revocable by Borrower;
(d) each Request for Advance, once conununicated to Bank, shall
constitute a representation, warranty and certification by Borrower
as of the date thereof that:
(i) both before and after the making of such Revolving Loan, the
obligations set forth in the Loan Documents are and shall be
valid, binding and enforceable obligations of each Borrower
Party, as applicable;
(ii) all terms and conditions precedent to ttie triaking of such
Revolving Loan have been satisfied, and shall remain
satisfied through the date of such Revolving Loan;
(iii) the making of such Revolving Loan will not cause the
aggregate outstanding principal amount of all Revolving
Loans to exceed the Revolving Credit Maximum Amount;
(iv) no Default or Event of Default shall have occurred or be in
existence, and none will exist or arise upon the making of
such Revolving Loan;
(v) the representations and warranties contains in the Loan
Documents are true and correct in all material respects and
shall be true and correct in all material respects as of the
making of such Revolving Loan; and
(vi) the Request for Advance will not violate the terms or
conditions of any contract, indenture, agreement or other
borrowing of any Borrower Party.
Bank may elect (but without any obligation to do so) to make a Revolving Loan
upon the telephonic or facsimiled request of Borrower, provided that Borrower
has first executed and delivered to Bank a Telephone Notice Authorization.
If any such Revolving Loan based upon a telephonic or facsimiled request is made
by Borrower, Bank may require Borrower to confirm said telephonic or facsimiled
request in writint, by deliverin- to Bank, on or before 11:00 a.m. (Dallas,
Texas time) on the next Business Day following the Disbursement Date of such
Revolving Loan, a duly executed written Request forAdvance,and all other
provisions of this Section 1 shall be applicable with respect to such Revolving
Loan. In addition, Borrower may authorize the Bank to automatically make
Revolving Loans pursuant to such other written agreements as may be entered into
by Bank and Borrower.
1.4 Prepayment. Borrower may prepay all or part of the outstanding
balance under the Revolving Credit Note at any time, without premium, penalty or
prejudice to the right of Borrower to reborrow under the terms of this
Agreement, subject to the terms and conditions of the Loan Documents.
1.5 Revolving Credit Maximum Amount and Reduction of Indebtedness.
Notwithstanding anything contained in this Agreement to the contrary, the
aggregate principal amount of all Revolving Loans at any time outstanding shall
not exceed the Revolving Credit Maximum Amount. If said limitations are
exceeded at any time, Borrower shall immediately, without demand by Bank, pay to
Bank an amount not less than such excess, or, if Bank, in its sole discretion,
shall so agree, Borrower shall provide Bank cash collateral in an amount not
less than such excess, and Borrower hereby pledges and grants to Bank a security
interest in such cash collateral so provided to Bank.
1.6 Use of Proceeds of Revolving loan. The proceeds of Revolving Loans
shall be used for financing working capital needs of Borrower.
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<PAGE>
1.7 Non-Application of Chapter 346 of Texas Finance Code. The
provisions of Chapter 346 of the Texas Finance Code are specifically declared by
the parties not to be applicable to any of the Loan Documents or the
transactions contemplated thereby.
1.8 [Jnused Commitment Fee. Borrower shall pay to Bank an unused
commitment fee in an amount equal to the product of (a) .25% multiplied by (b)
the difference between (i) the Revolvint, Credit Maximum Amount and (it) the
aggregate outstanding principal balance of all Revolving Loans. Such fee shall
be computed on a daily basis and shall be payable quarterly in arrears as of the
end of each of Borrower's fiscal quarters. Bank shall invoice Borrower for such
fees, which invoice shall be due and payable within fifteen ( 15) days after
receipt.
SECTION 2. EQUIPMENT LOAN FACILITY
2.1 Equipment Loan Commitment. Subject to the temis and conditions of
the Loan Documents, Bank agrees to make the Equipment Loan to Borrower in one or
more advances at any time and from time to time from and after the effective
date hereof until (but not including) the Equipment Loan Advance Termination
Date. The aggregate principal amount of Equipment Loan advances made hereunder
may not exceed the Equipment Loan Maximum Amount.
2.2 Repayment of and Interest on Equipment Loan. The Indebtedness from
time to time outstanding under and evidenced by the Equipment Note shall bear
interest at a rate per annum equal to the Applicable Interest Rate and during
the existence of an Event of Default at the Default Rate and shall otherwise be
repaid in accordance with the terms of Such Equipment Note. Borrower shall not
be pemiitted to reborrow any amounts repaid under the Equipment Note.
2.3 Use of Proceeds of Equipment Loans. The proceeds of advances of
the Equipment Loan shall be used, in their entirety, for the sole and exclusive
purpose of enabling Borrower to purchase or acquire Equipment. The principal
amount of each Equipment Loan advance shall not exceed an amount equal to one
hundred percent (100%) of the cost of any new Equipment so purchased or acquired
by Borrower and to which such Equipment Loan advance relates, in each case, as
evidenced by invoices and other documentation satisfactory to Bank.
2.4 Advances of Equipment Loan. On or before the Equipment Loan
Advance Termination Date, and except as hereinafter provided, Borrower may
request an advance under the Equipment Loan by submitting to Bank a Request for
Advance by an authorized officer or other representative of Borrower, subject to
the following:
(a) each such Request for Advance shall include, without limitation,
the proposed amount of such advance and the proposed Disbursement
Date, which date must be a Business Day;
(b) each such Request for Advance shall be communicated to Bank by 1:00
p.m. (Dallas, Texas time) on the proposed Disbursement Date;
(c) a Request for Advance, once communicated to Bank, shall not be
revocable by Borrower;
(d) each Request for Advance, once communicated to Bank, shall
constitute a representation, warranty and certification by Borrower
as of the date thereof that:
(i) both before and after the making of such advance, the
obligations set forth in each other Loan Document are and
shall be valid, binding and enforceable obligations of each
Borrower Party, as applicable;
(ii) all terms and conditions precedent to the making of such
advance have been satisfied, and shall remain satisfied
through the date of such advance;
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<PAGE>
(iii) the making of such advance will not cause the aggregate
principal amount of all advances under the Equipment Note to
exceed the Equipment Loan Maximum Amount;
(iv) no Default or Event of Default shall have occurred or be in
existence, and none will exist or arise upon the making of
such advance;
(v) the representations and warranties contained in this
Agreement, and the other Loan Documents are true and correct
in all material respects and shall be true and correct in all
material respects as of the making of such advance; and
(vi) the advance will not violate the terms or conditions of any
contract, indenture, agreement or other borrowing of any
Borrower Party.
Bank may elect (but without any obligation to do so) to make the requested
advance upon the telephonic or facsimiled request of Borrower, provided that
Borrower has first executed and delivered to Bank a Telephone Notice
Authorization. If any such advance based upon a telephonic or facsimiled
request is made by Bank, Bank may require Borrower to confimi said telephonic or
facsin-tiled request in writing by delivering to Bank, on or before 11:00 a.m.
(Dallas, Texas time) on the next Business Day following such advance, a duly
executed written Request for Advance, and all other provisions of this Section 2
shall be applicable with respect to such advance. In addition, Borrower may
authorize the Bank to automatically make advances under the Equipment Loan
pursuant to such other written agreements as may be entered into by Bank and
Borrower.
2.5 Equipment Loan Fee. As of the effective date hereof, Borrower
shall pay to Bank a commitment fee for the Equipment Loan an amount equal to
$5,000.00.
SECTION 3. FUNDING LOANS, PAYMENTS, RECOVERIES AND COLLECTIONS
3.1 Funding Loans. Subject to the satisfaction of all conditions
precedent to the making and funding of any Loan set forth in any Loan Document,
including, without limitation, those conditions precedent set forth in Section 4
of this Addendum, Bank shall make the proceeds of any such Loan available to
Borrower by 5:00 p.m. (Dallas, Texas time) on the respective Disbursement Date
of such Loan, by depositing such proceeds into such account maintained by
Borrower with Bank as Borrower shall designate in writing or as otherwise agreed
to in writing by Borrower and Bank.
3.2 Bank's Book and Records. The amount and date of each Loan
hereunder, the amount from time to time outstanding under each Note, the
Applicable Interest Rate in respect of each Loan, and the amount and date of any
repayment hereunder or under any of the Notes, shall be noted on Bank's book's
and records, which shall be conclusive evidence thereof, absent manifest error;
provided, however, any failure by Bank to make any such notation, or any error
in any such notation, shall not relieve Borrower of its obligations to pay to
Bank all amounts owing to Bank under or pursuant to the Loan Documents, in each
case, when due in accordance with the terms hereof or thereof.
3.3 Payments on Non-Business Day. In the event that any payment of any
principal, interest, fees or any other amounts payable by Borrower under or
pursuant to any Loan Document shall become due on any day which is not a
Business Day, such due date shall be extended to the next succeeding Business
Day, and, to the extent applicable, interest shall continue to accrue and be
payable at the Applicable Interest Rate(s) for and during any such extension.
3.4 Payment Procedures. Unless otherwise expressly provided in a Loan
Document, all sums payable by Borrower to Bank under or pursuant to any Loan
Document, whether principal, interest, or otherwise, shall be paid, when due,
directly to Bank at the office of Bank identified on the signature page of this
Agreement, or at such other office of Bank as Bank may designate in writing to
Borrower from time to time, in immediately available United States funds, and
without setoff, deduction or counterclaim. Bank may, in its discretion, charge
any and all deposit or other accounts (including, without limitation, any
account evidenced by a certificate of deposit or time
28
<PAGE>
deposit) of Borrower maintained with Bank for all or any part of any
Indebtedness then due and payable; provided, however, that such authorization
shall not affect Borrower's obligations to pay all Indebtedness, when due,
whether or not any such account balances maintained by Borrower with Bank are
insufficient to pay any amounts then due.
3.5 Maximum Interest Rate. At no time shall any Applicable Interest
Rate or Default Rate under this Agreement or any Note, or otherwise in respect
of any Loan or any Indebtedness hereunder, exceed the Maximum Legal Rate, giving
due consideration to the execution of this Agreement and each Note. In the event
that any interest is charged or otherwise received by Bank in excess of the
Maximum Legal Rate, Borrower hereby acknowledges and agrees that any such excess
interest shall be the result of an accidental and bonafide error, and any such
excess shall be deemed to have been payments of principal, and not of interest,
and shall be applied, first, to reduce the principal Indebtedness then
outstanding, second, any remaining excess, if any, shall be applied to reduce
any other Indebtedness, and third, any remaining excess, if any, shall be
returned to Borrower.
3.6 Receipt of Payments by Bank. Any payment by Borrower of any of the
Indebtedness made by mail will be deemed tendered and received by Bank only upon
actual receipt thereof by Bank at the address designated for such payment,
whether or not Bank has authorized payment by mail or in any other manner, and
such payment shall not be deemed to have been made in a timely manner unless
actually received by Bank on or before the date due for such payment, time being
of the essence. Borrower expressly assumes all risks of loss or liability
resulting from nondelivery or delay of delivery of any item of payment
transmitted by mail or in any other manner. Acceptance by Bank of any payment
in an amount less than the amount, then due shall be deemed an acceptance on
account only, and any failure to pay the entire amount then due shall constitute
and continue to be an Event of Default hereunder. Bank shall be entitled to
exercise any and all rights and remedies conferred upon and otherwise available
to Bank tinder any Loan Document upon the occurrence and during the continuance
of any such Event of' Default. Prior to the occurrence of any Default, Borrower
shall have the right to direct the application of any and all payments made to
Bank hereunder to the Indebtedness evidenced by the respective Notes. Borrower
waives the right to direct the application of any and all payments received by
Bank hereunder at any time or times after the occurrence and during the
continuance of any Default. Borrower further agrees that after the occurrence
and during the continuance of any Default, or prior to the occurrence of any
Default if Borrower has failed to direct such application, Bank shall have the
continuing exclusive right to apply and to reapply any and all payments received
by Bank at any time or times, whether as voluntary payments, proceeds from any
Collateral, offsets, or otherwise, against the Indebtedness in such order and in
such manner as Bank may, in its sole discretion, deem advisable, notwithstanding
any entry by Bank upon any of its books and records. Borrower hereby expressly
agrees that, to the extent that Bank receives any payment or benefit of or
otherwise upon any of the Indebtedness, and such payment or benefit, or any part
thereof, is subsequently invalidated, declared to be fraudulent or preferential,
set aside, or required to be repaid to a trustee, receiver, or any other Person
under any bankruptcy act, state or federal law, common law, equitable cause or
otherwise, then to the extent of such payment or benefit, the Indebtedness, or
part thereof, intended to be satisfied shall be revived and continued in full
force and effect as if such payment or benefit had not been made or received by
Bank, and, further, any such repayment by Bank shall be added to and be deemed
to be additional Indebtedness.
3.7 Security. Payment and performance of the Indebtedness shall be
secured by Liens on all of the assets and properties of Borrower and of usch
other Borrower Parties as Bank may require from time to time and shall be
guaranteed by the Guarantors.
3.8 Mandatory Prepayments from Sale of Collateral. If Borrower sells
any of the Collateral (other than Inventory in the ordinary course of business),
of if any of such Collateral is taken by condemnation, Borrower shall
immediately pay to Bank, unless otherwise agreed by Bank in writing, a sum equal
to the proceeds received by or behalf of Borrower from such sale or
condemnation. Any such amount shall be applied (1) prior to the occurrence of an
Event of Default (i) first, to accrued interest and then to installments of
principal, in the inverse order of their maturities, as a prepayment of the
Equipment Loan, (ii) second, to accrued interest and then to the unpaid
principal balance of the Revolving Loans, and (iii) third, to such other
Indebtedness as may be outstanding from time to time), or (2) on or after the
occurrence of an Event of Default, at Bank's option, such Indebtedness as Bank
may elect.
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<PAGE>
SECTION 4. CONDITIONS PRECEDENT
4.1 Conditions Precedent to First Loan. The obligation of the Bank to
make the first Revolving Loan or the first advance under the Equipment Loan
under or pursuant to this Agreement shall be subject to the following conditions
precedent:
(a) Execution of this Agreement, Notes and other Loan Documents.
Borrower shall have executed and delivered to Bank, or caused to
have been executed and delivered to Bank, this Agreement, the Notes
and all other Loan Documents, and this Agreement (including all
addenda, schedules, exhibits, certificates, opinions, financial
statements and other documents to be delivered pursuant hereto),
such Notes, and all other Loan Documents, shall be in full force
and effect and binding and enforceable obligations of Borrower and,
to the extent that it is a party thereto or otherwise bound
thereby, of each other Person who may be a party thereto or bound
thereby.
(b) Authority Documents. Bank shall have received: (i) copies of
resolutions of the board of directors , partners or members or
managers, as applicable, of each Borrower Party evidencing approval
of the borrowing hereunder and the transactions contemplated by the
Loan Documents, and authorizing the execution, delivery and
performance by each Borrower Party of each Loan Document to which
it is a party or by which it is otherwise bound, which resolutions
shall have been certified by a duly authorized officer, partner or
other representative, as applicable, of each Borrower Party as of
the date of this Agreement as being complete, accurate and in full
force and effect; (ii) incumbency certifications of a duly
authorized officer, partner or other representative, as applicable,
of each Borrower Party, in each case, identifying those individuals
who are authorized to execute the Loan Documents for and on behalf
of such Person(s), respectively, and to otherwise act for and on
behalf of such Person(s); (iii) certified copies of each of such
Person(s)' articles of incorporation and bylaws, partnership
agreement, certificate of limited partnership, articles of
organization, regulations or operating agreement, as applicable,
and all amendments thereto; and (iv) certificates of existence,
good standing and authority to do business, as applicable,
certified substantially contemporaneously with the date of this
Agreement, from the state or other jurisdiction of each of such
Person(s)' organization and from every other state or jurisdiction
in which such Person is required, under applicable law, to be
qualified to do business.
(c) Collateral Documents. As security and support for the payment and
performance of all Indebtedness of Borrower to Bank, Borrower shall
have furnished, executed and delivered to Bank, or shall have
caused to have been furnished, executed and delivered to Bank,
prior to or concurrently with the Disbursement Date for the initial
Loan hereunder, in form satisfactory to Bank, the following
documents, and Bank shall have received proof that appropriate
security agreements, financing statements, mortgages deeds of
trust, collateral and other documents covering the Collateral shall
have been executed and delivered by the appropriate Persons and
recorded or filed in such jurisdictions and such other steps shall
have been taken as necessary to perfect, subject only to Permitted
Encumbrances, the Liens granted thereby:
(i) Security Agreement (all Assets) executed by Borrower;
(ii) Security Agreement (Intellectual Property) executed by
Borrower;
(iii) Guaranty executed by Guarantors;
(iv) financing statements required or requested by Bank to perfect
all security interests to be conferred upon Bank under the
Loan Documents and to accord Bank a perfected security
position in the Collateral, subject only to Permitted
Encumbrances;
(v) such additional documents or certificates as may be required
by Bank and/or required under the terms of any and every Loan
Document; and
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<PAGE>
(vi) such other documents or agreements of security and
appropriate assurances of validity, perfection and priority
of Lien as Bank may request.
(d) Licenses, Permits, Approvals, Etc. To the extent necessary and
applicable, Borrower shall have received any and all necessary
authorizations, approvals and consents from all applicable
Governmental Authorities in respect of the borrowing by Borrower of
the Loans hereunder, the Loan Documents and the transactions
contemplated by any Loan Document; and Bank shall have also
received copies of each authorization, license, permit, consent,
order or approval of, or registration, declaration or filing with,
any Governmental Authority or any securities exchange or other
Person obtained or made by Borrower or any other Person in
connection with the transactions contemplated by the Loan Documents
and which is material to the financial condition of Borrower or
such other Person or the conduct of its business or the
transactions contemplated hereby or the Collateral.
(e) UCC Lien Search. Bank shall have received UCC, tax lien and
judgment lien record and copy searches, disclosing no notice of any
Liens or encumbrances filed against any of the Collateral, other
than the Permitted Encumbrances.
(f) Casualty Insurance. Borrower shall have fumished to Bank, or cause
to have been fumished to Bank, in form and content and in amounts
and with companies satisfactory to Bank, casualty insurance
policies, with loss payable and mortgagee clauses in favor of Bank,
relating to the assets and properties (including, but not limited
to, the Collateral) of Borrower any applicable Borrower Party.
(g) Approval of Bank Counsel. All actions, proceedings, instruments and
documents required to carry out the borrowings and transactions
contemplated by this Agreement or any other Loan Document or
incidental thereto, and all other related legal matters, shall have
been satisfactory to and approved by legal counsel for Bank, and
said counsel shall have been furnished with such certified copies
of actions and proceedings and such other instruments and documents
as they shall have requested.
(h) Compliance with Certain Documents and Agreements. Each Borrower
Party shall have each performed and complied with all agreements
and conditions contained in the Loan Documents applicable to it and
which are then in effect.
(i) Other Documents and Instruments. Bank shall have received such
other instruments and documents (not inconsistent with the terms
hereof) as Bank may request in connection with the making of the
Loans hereunder, and all such instruments and documents shall be
satisfactory in form and substance to Bank.
4.2 Conditions Precedent to Disbursement of All Loans. In addition to
any other terms and conditions set forth in this Agreement, including, without
limitation, those set forth Section 4.1 above, the obligation of Bank to make
any Loan under this Agreement, including, without limitation, the initial Loan
hereunder, shall be further subject to the satisfaction of each of the following
conditions precedent on or before the Disbursement Date for such Loan:
(a) Execution and Delivery of Note. Borrower shall have executed and
delivered to Bank the applicable Note, with appropriate insertions,
to evidence such Loan and the Indebtedness of Borrower in respect
thereof.
(b) Loan Documents, Binding and Enforceable. All Loan Documents shall
be in full force and effect and binding and enforceable obligations
of each Borrower Party.
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<PAGE>
(c) Representations and Warranties. Each of the representations and
warranties of each Borrower Party under any Loan Document shall be
true and correct in all material respects.
(d) No Default or Material Adverse Change. No Default or Event of
Default shall have occurred and be continuing; there shall have
been no material adverse change in the condition (financial or
otherwise), properties, business, or operations of any Borrower
Party since the date of the Financial Statements most recently
delivered to Bank prior to the date of this Agreement; and no
provision of law, any order of any Governmental Authority, or any
regulation, rule or interpretation thereof, shall have had any
material adverse effect on the validity or enforceability of any
Loan Document.
(e) Equipment Document. In the case of each Equipment Loan advance: (i)
Borrower shall have delivered to Bank invoices and such other
documents as requested by Bank to evidence Borrower's acquisition
of the respective Equipment purchased or acquired with the proceeds
of such Equipment Loan advance, or to be so purchased or acquired,
and the cost of the same; (ii) Borrower shall have delivered
evidence satisfactory to Bank that such Equipment is not be subject
to any Liens other than Pem-iitted Encumbrances; (iii) Borrower
shall have delivered evidence satisfactory to the Bank that the
Equipment is properly insured; and (iv) Borrower shall execute and
deliver, or cause to be executed and delivered, to Bank such Loan
Documents as Bank may deem necessary or appropriate for the
creation and perfection of a purchase money Lien upon such
Equipment, free and clear of all other Liens except Permitted
Encumbrances.
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<PAGE>
FORM OF BORROWING BASE CERTIFICATE
This Borrowing Base Certificate for the period beginning
__________________________ and ending _______________________ ("Current Period")
is delivered pursuant to that certain Credit Agreement (the "Credit Agreement")
dated to be effective as of __________________, 1999 by and between COMERICA
BANK - TEXAS ("Bank") and ASD SYSTEMS, INC. ("Borrower"). Ten-ns not otherwise
defined herein shall have the meaning set forth in the Credit Agreement.
Line
1. Total Accounts as of the end of the Current Period $________
2. Ineligible Accounts as of the end of the Current Period:
(a) All Accounts unpaid more than 90 days from the
invoice date or more than 60 days past due $__________
(b) All of the Accounts of Account Debtor(s) where
25% of tile Accounts of such Account Debtor(s) are
unpaid more than 90 days from invoice date or more
than 60 days past due, net of the amount included
in Line 2(a) for Account Debtor(s) $__________
(c) Accounts of any Account Debtor (other than any
Approved Account Debtor) in excess of 20% of
Borrower's aggregate Accounts $__________
(d) Intercompany and Affiliate Accounts $__________
(e) Government Accounts $__________
(f) Foreign Accounts not covered by credit insurance
of letters of credit acceptable to Bank $__________
(g) Accounts subject to any dispute or set off or
contra account $__________
(h) COD Accounts $__________
(i) Other Accounts which do not satisfy the criteria
set forth in the Credit Agreement for "Eligible
Accounts" $__________
3. Total ineligible Accounts as of the end of the Current Period (Add Line 2(a)
through Line 2(i)
4. Total Eligible Accounts as of the end of the Current Period (Line 1 minus
Line 3)
5. Accounts Advance Factor is 80%
6. Borrowing Base (I.,iiie 4 multiplied by Line 5)
7. Aggregate Amount of Revolving Credit outstanding as of the end of' the
Current Period.
8. Amount available for borrowing, if positive, or amount to be repaid, if
negative (Line 6 minus Line 7)
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<PAGE>
The undersigned hereby certifies that the above infon-nation and
computations are true and not misleading as of the date hereof, and that no
Default or Event of Default has occurred and is continuing.
BORROWER:
ASD SYSTEMS, INC.,
a Texas corporation
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
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<PAGE>
FORM COMPLIANCE CERTIFICATE
This Compliance Certificate is executed and delivered to Conierica Bank-
Texas ("Bank") by ASD Systems, Inc. ("Borrower"), this ____ day of
_________________, 199___. All capitalized terms used but not defined herein,
shall have the meanings given to such terms in that certain Credit Agreement,
dated as of May __, 1999, between Bank and Borrower (as renewed, extended,
modified and restated from time to time, the "Credit Agreement"). The
undersigned hereby certifies to Bank as follows:
(1) The undersigned is the duly elected, qualified and acting
_______________ of Borrower and, as such, is authorized to make and deliver this
Certificate.
(2) The undersigned has reviewed the provisions of the Credit Agreement
and confirms that, as of the date hereof:
(a) the representations and warranties contained in Section 3 of
the Credit Agreement are true and correct in all material respects on and as of
the date hereof with the same force and effect as though made on and as of the
date hereof;
(b) no Default or Event of Default has occurred and is continuing
or is imminent, and Borrower has complied with all of the terms, covenants and
conditions set forth in the Credit Agreement; and
(c) attached hereto as Schedule A is a report prepared by the
undersigned setting forth information and calculations that demonstrate
compliance (or noncompliance) with each of the covenants set forth in the
Financial Covenants Addendum to the Credit Agreement.
The foregoing certificate is given in my capacity as _____________ of Borrower,
and not in my individual capacity.
ASD SYSTEMS, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
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<PAGE>
SCHEDULE A TO COMPLIANCE CFRTIFICATE
1. Tangible Net Worth
(a) Borrower's Tangible Net Worth (as defined in and determined
by the Defined Terms Addendum): $__________
(b) Financial Covenants Addendum presently requires Borrower's
Tangible Net Worth be not less than: $__________
Covenant Satisfied ________________
Covenant Not Satisfied _____________
Covenant Not Tested ________________
2. Quick Ratio
(a) Current Assets of Borrower (as defined in and determined
by the Defined Terms Addendum) $__________
(b) Current Liabilities of Borrower (as defined in and
determined by the Defined Terms Addendum) $__________
(c) Quick Ratio [(a)((b)] _____ to 1.0
(d) Financial Covenants Addendum presently requires Quick Ratio
be not less than _____ to 1.0
Covenant Satisfied _______________
Covenant Not Satisfied ___________
Covenant Not Tested ______________
3. Debt-to-Worth Ratio
(a) Borrower's Debt less Subordinated Debt $__________
(b) Borrower's Tangible Net Worth: $__________
(c) Ratio of (i) Borrower's Debt less Subordinated Debt
to (ii) Borrower's Tangible Net Worth [(a) ( (b)]: _____ to 1.0
(d) Financial Covenants Addendum presently requires the
Ratio of (i) Borrower's Debt less Subordinated Debt to (ii)
Borrower's Tangible Net Worth be not more than: .50 to 1.0
Covenant Satisfied _______________
Covenant Not Satisfied ___________
Covenant Not Tested ______________
4. Net Income
(a) Net Income or (Loss) for calendar month ending ___________ $__________
(b) Net Income or (Loss) for 12-month period ending __________ $__________
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<PAGE>
FORM OF REQUEST FOR ADVANCE
(Revolving Loan)
The undersigned hereby requests COMERICA BANK-TEXAS ("Bank") to make a
Revolving Loan to the undersigned on _________, 19___ in the amount of
__________ Dollars ($________) under the Credit Agreement dated as of May ___,
1999 by and between the undersigned and Bank (herein called the "Credit
Agreement").
The undersigned represents, warrants and certifies that no Default or
Event of Default has occurred and is continuing under the Credit Agreement, and
none will exist upon the making of the Revolving Loan requested hereunder. The
undersigned further certifies that upon advancing the sum requested hereunder,
the aggregate principal amount outstanding under the Revolving Credit Note will
not exceed the Revolving Credit Maximum Amount.
The undersigned hereby authorizes Bank to disburse the proceeds of the
Revolving Loan being requested bv this Request for Advance by crediting the
account of the undersigned with Bank separately designated by the undersigned or
as the undersigned and Bank may otherwise agree.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings given to them in the Credit Agreement.
Dated this ____ day of ________ 19___.
ASD SYSTEMS, INC.,
a Texas corporation
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
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<PAGE>
FORM OF REQUEST FOR ADVANCE
(Equipment Loan)
The undersigned hereby requests COMERICA BANK-TEXAS ("Bank") to make an
advance under the Equipment Loan to the undersigned on _______________, 19__, in
the amount of _________ Dollars ($________) under the Credit Agreement dated as
of May ___, 1999, by and between the undersigned and Bank (herein called the
"Credit Agreement").
The undersigned represents, warrants and certifies that no Default or
Event of Default has occurred and is continuing under the Credit Agreenient, and
none will exist upon the making of the advance requested hereunder. The
undersigned further certifies that upon advancing the suni requested hereunder,
the aggregate principal amount advanced under the Equipment Note will not exceed
the Equipment Loan Maximum Amount.
Attached hereto are invoices for the Equipment to be financed with the
advance of funds hereby requested, and the amount of such requested funds does
not exceed 100% of the actual cost paid or to be paid by the undersigned for
such Equipment.
The undersigned hereby authorizes Bank to disburse the proceeds of the
advance being requested by this Request for Advance by crediting the account of
the undersigned with Bank separately designated by the undersigned or as the
undersigned and Bank may otherwise agree.
Capitalized terms used but not otherwise defined herein shall have the
respective meanings given to them in the Credit Agreement.
Dated this ____ day of ________ 19___.
ASD SYSTEMS, INC.,
a Texas corporation
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
SUBSIDIARIES
NONE
38
<PAGE>
EMPLOYEE BENEFIT PLANS
1. 401K Plan for certain employees and officers of ASD Systems, Inc.
ENVIRONMENTAL DISCLOSURES
NONE
39
<PAGE>
DEBT
1. The Subordinated Debt of ASD Systems, Inc. owing to Athletic Supply of
Dallas, L.L.C.
2. The following Capital Lease Obligations of ASD Systems, Inc.:
a. Citicorp - Forklift
b. NTFC Capital Corp. - New Building Telephone System
c. Alco Capital Resource, Inc. - Canon Copier
d. NTFC Capital Corp. - Alder Telephone System
40
<PAGE>
LIENS
1. UCC Filings for Capital Leases of Equipment described in Schedule 5.4.
41
<PAGE>
(Secretary of State)
FINANCING STATEMENT
(Presented for filing pursuant to the Unifon-n Commercial Code)
1. Name and Address of Debtor:
ASD Systems, Inc.
373 7 Grader, Suite I IO
Garland, Texas 75041
2. Name and Address of Secured Party:
Comerica Bank-Texas
P.O. Box 650282
Dallas, Texas 75265-0282
3. This Financing Statement covers all of Debtor's remedies, powers,
privileges, rights, titles and interests (including all power of Debtor, if
any, to pass greater title than it has itselo of even kind and character now
owned or hereafter acquired, created or arising in and to the following. as
well as all products and cash and non-cash proceeds of any of the following:
(a) all Accounts Receivable (for purposes hereof, "Accounts Receivable"
consists of all accounts, general intangibles, chattel paper, contract
rights, deposit accounts, documents and instruments);
(b) all Inventory;
(c) all Equipment and Fixtures;
(d) any and all copyright rights, copyright applications, copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and whether
or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held (collectively, the "Copyrights");
(e) any and ad] trade secrets, and any and all intellectual property rights
in computer software and computer software products nor or hereafter
existing, created, acquired or held;
(f) any and all design rights which may be available to Debtor now or
hereafter existing. created, acquired or held;
(g) all patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals,
reissues, extensions and continuations-in-part of the same
(collectively, the "Patents");
(h) any trademark and serviceman rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Debtor
connected with and symbolized by such trademarks (collectively, the
"Trademarks");
(i) any and all claims for damages by way of past, present and future
infringement of any of the rights included above, Aith the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
42
<PAGE>
(j) all licenses or other right to use any of the Copyrights, Patents or
Trademarks, and all license fees and royalties arising from such use to
the extent permitted by such license or rights;
(k) all amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks or Patents;
(1) all proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing;
(m) all goods, instruments, documents, policies and certificates of
insurance, deposits, money, investment property or other property
(except real property which is not a fixture) which are now or later in
possession or control of Secured Party, or as to which Secured Party
now or later controls possession by documents or otherwise; and
(n) all additions, attachments, accessions, parts, replacements,
substitutions, renewals, interest, dividends, distributions, rights of
any kind, products, and proceeds of or pertaining to any of the above,
including, Aithout limitation, cash or other property which were
proceeds and are recovered by a bankruptcy trustee or otherwise as a
preferential transfer by Debtor.
For purposes hereof, all capitalized terms used herein, but not otherwise
defined, shall have the meanings assigned to them in Article 9 (or, absent
definition in Article 9, in any other Article) of the Texas Business and
Commerce Code, as amended.
EXECUTED as of the day of May, 1999.
----
ASD SYSTEMS, INC.,
a Texas corporation
By:
-------------------------------
Name:
-----------------------------
Title:
-----------------------------
Equipment Note
Variable Rate-Maturity Date-Multiple Advances (Business and Commercial Loans
Only)
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION NUMBER
$1,000,000.00 May ___, 1999 November ___, 2002 75-2737041
On the Maturity Date, as stated above for value received, the undersigned
promise(s) to pay to the order of Comerica Bank-Texas Texas banking association
("Bank"), at any office of the Bank in the State of Texas. One Million Dollars
(U,S ) (or that portion of it advanced) by the Bank and not repaid as later
provided) with interest until maturity, whether by acceleration or otherwise, or
until Default. as later defined, at a per annum rate equal to the lesser of (a)
the Maximum Rate, as later defined, or (b) Bank's prime rate from time to time
in effect plus one percent (1%), and after that at a rate equal to the rate of
interest otherwise prevailing under this Note plus three percent (3%) per annum
(but in no event in excess of the Maximum Rate.) It on any day the prime rate
for that day plus 1% shall exceed (he Maximum Rate for that day, the rate of
interest applicable to this Note shall be fixed at the Maximum Rate on that day
and on each day thereafter until the total amount of interest accrued on the
unpaid principal balance of this Note equals the total amount of interest wrlich
would have accrued if there had been no Maximum Rate. The Bank's "prime rate"
is that annual rate of interest so designated by the Bank and which is changed
by the Bank from time to time. Interest rate changes will be effective for
interest computation purposes as and when the Maximum Rate or the Bank's prime
rate, as applicable, changes, subject to the limitations hereinbelow set forth,
interest shall be calculated on the basis of a 360-day year for actual number of
days the principal is
43
<PAGE>
outstanding. Accrued interest on this Note shall be payable on the ___ day of
each calendar month, commencing on June ___, 1999, until and including the
Maturity Date (set forth above). Equal principal installments in an amount equal
to 1/36 of the principal balance outstanding hereunder on the date six (6)
months after the date hereof shall be due and payable on the ___ day of each
calendar month, commencing on December __, 1999, until the Maturity Date (set
forth above), when all amounts outstanding under this Note shall be due and
payable in full. If the frequency of interest pavments is not otherwise
specified, accrued interest on this Note shall be payable monthly on the first
day of each month. If any payment of principa or interest under this Note shall
be payable on a day other than a day on which the Bank is open for business,
this payment shall be extended to the next succeeding business day and interest
shall be payable at the rate specified in this Note during this extension, a
late payment charge equal to a reasonable amount not to exceed five percent (5%)
of each late payment may be charged on any payment not received by the Bank
within ten (10) calendar days after the payment due date, but acceptance of
payment of this charge shall not waive any Default under this Note.
The term "Maximum Rate" as used herein, shall mean at the particular time in
question the maximum nonusurious rate of interest which, under applicable law,
may then be charged on this Note. If such maximum rate of interest changes
after the date hereof, the Maximum Rate shall be automatically increased or
decreased, as the case may be, without notice to the undersigned from time to
time as of the effective date of each change in such maximum rate.
The principal amount payable under this Note shall be the sum of all advances
made by the Bank to or at the request of the undersigned less principal payments
actually received by the Bank. The books and records of the Bank shall be the
best evidence of the principal amount and the unpaid interest amount owing at
any time under this Note and shall be conclusive absent manifest error No
interest shall accrue under this Note until the date of the first advance made
by the Bank; after that interest on all advances shall accrue and be computed on
the principal balance outstanding from time to time under this Note until the
same is paid in full. Advances under this Note shall be governed by the terms
of that certain Credit Agreement (the "Credit Agreement") of even date herewith
between the undersigned and the Bank, and this Note is the Equipment Note, as
defined in the Credit Agreement,
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced and whether incurred
voluntarily or involuntarily, known or unknown, or originally payable to the
Bank or to a third party and subsequently acquired by Bank including, without
limitation, any late charges; loan fees or charges overdraft indebtedness costs
incurred by Bank in establishing, determining, continuing or defending the
validity or phority of any security inte;est, pledge or other lien'or in
pursuing any its rights or remedies under any loan document (or otherwise) or in
connection with any proceeding involving the Bank as a result of any ncial
accommodation to the undersigned (or any of them); and reasonable costs and
expenses of attorneys and paralegals, whether any _____ or other action is
instituted, and to court costs if suit or action is instituted, and whether any
such fees, costs or expenses are incurred at the trial court level or on appeal,
in bankruptcy, in administrative proceedings, in probate proceedings or
otherwise (collectively "Indebtedness"), are secured by and the Bank is granted
a security interest in and lien upon all items deposited in any account of any
of the undersigned with the Bank and by all proceeds of these items (cash or
otherwise), all account balances of any of the undersigned from time to time
with the Bank, by all property of any of the undersigned from time to time in
the possession of the Bank and by any other collateral, rights and properties
described in each and every deed of trust, mortgage, security agreement, pledge,
assignment and other security or collateral agreement which has been, or will at
any time(s) later be, executed by any (or all) of the undersigned to or for the
benefit of the Bank (collectively "Collateral"). Notwithstanding the above, (i)
to the extent that any portion of the Indebtedness is a consumer loan, that
portion shall not be secured by any deed of trust, mortgage on or other security
interest in any of the undersigned's principal dwelling or in any of the
undersigned's real property which is not a purchase money security interest as
to that portion, unless expressly provided to the contrary in another place, or
(ii) if the undersigned (or any of them) has(have) given or give(s) Bank a deed
of trust or mortgage covering California real property. that deed of trust or
mortgage shall not secure this Note or any other indebtedness of the undersigned
(or any of them), unless expressly provided to the contrary in another place, or
(iii) if the undersigned (or any of them) has (have) given or give(s) the Bank a
deed of trust or mortgage covehng real property which. under Texas law.
constitutes the homestead of Such person, that deed of trust or mortgage shall
not secure this Note
44
<PAGE>
or any other indebtedness of the undersigned (or any of them) unless expressly
provided to the contrary in another place.
If an Event of Default (as defined in the Credit Agreement) occurs or if the
undersigned (or any of them) or any guarantor under a guaranty of all or part of
the Indebtedness ("guarantor") (a) faii(s) to pay any of the Indebtedness when
due, by maturity. acceleration or otherwise, or fail(s) to pay any Indebtedness
owing on a demand basis upon demand; or lb) fail(s) to comply with any of the
terms or provisions of any agreement between the undersigned (or any of them) or
any such guarantor and the Bank; or (c) become(s) insolvent or the subject of a
voluntary or involuntary proceeding in bankruptcy, or a reorganization,
arrangement or creditor composition proceeding, (if a business entity) cease(s)
doing business as a going concern, (if a natural person) die(s) or become(s)
incompetent, (if a partnership) dissolve(s) or any general partner of it dies,
becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a
corporation or a limited liability company) is the subject of a dissolution,
merger or consolidation; or (d) if any warranty or representation made by any of
the undersigned or any guarantor in connection with this Note or any of the
Indebtedness shall be discovered to be untrue or incomplete; or (e) if there is
any termination, notice of termination, or breach of any guaranty, pledge,
collateral assignment or subordination agreement relating to all or any part of
the Indebtedness; or (f) there is any failure by any of the undersigned or any
guarantor to pay when due any of its indebtedness (other than to the Bank) or in
the observance or performance of any term, covenant or condition in any document
evidencing, securing or relating to such indebtedness; or (g) if the Bank deems
itself insecure believing that the prospect of payment of this Note or any of
the Indebtedness is impaired or shall fear deterioration, removal or waste of
any of the Collateral; or (h) if there is filed or issued a levy or writ of
attachment or garnishment or other like judicial process upon the undersigned
(or any of them) or any guarantor or any of the Collateral, including without
limit, any accounts of the undersigned (or any of them) or any guarantor with
the Bank, then the Bank, upon the occurrence of any of these events (each a
"Default"), may at its option and without prior notice to the undersigned (or
any of them), declare any or all of the Indebtedness to be immediately due and
payable (notwithstanding any provisions contained in the evidence of it to the
contrary), sell or liquidate all or any portion of the Collateral, set off
against the Indebtedness any amounts owing by the Bank to the undersigned (or
any of them), charge interest at the default rate provided in the document
evidencing the relevant indebtedness and exercise any one or more of the rights
and remedies granted to the Bank by any agreement with the undersigned (or of
them) or given to it under applicable law. All payments under this Note shall
be in immediately available United States funds. without .Off or counterclaim.
If this Note is signed by two or more pa6es (whether by all as makers or by one
or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release, substitution or nonenforcement
of any security, or release or substitution of any of the undersigned, any
guarantor or any other party. whether with or without notice, shall affect the
obligations of any of the undersigned. The undersigned waive(s) all defenses or
right to discharge available under Section 3.605 of the Texas Uniform Commercial
Code and waive(s) all other suretyship defenses or right to ,discharge. The
undersigned agree(s) that the Bank has the right to sell, assign, or grant
participations or any interest in, any or all of the debtedness, and that. in
connection with this right, but without limiting its ability to make other
disclosures to the full extent allowable .ie Bank may disclose all documents and
information which the Bank now or later has relating to the undersigned or the
Indebtedness The undersigned agree(s) that the Bank may provide information
relating to this Note or the Indebtedness or relating to the undersigned to the
Bank's parent, affiliates, subsidiaries and service providers.
The undersigned agree(s) to reimburse the holder or owner of this Note upon
demand for any and all costs and expenses (including without limit, court costs,
legal expenses and reasonable attorneys' fees, whether or not suit is instituted
and, if suit is instituted, whether at the trial court level, appellate level,
in a bankruptcy, probate or administrative proceeding or otherwise) incurred in
collecting or attempting to collect this Note or incurred in any other matter or
proceeding relating to this Note.
45
<PAGE>
The undersigned acknowledge(s) and agree(s) that there are no contrary
agreements, oral or written, establishing a term of this Note and agree(s) that
the terms and conditions of this Note may not be amended, waived or modified
except in a writing signed by an officer of the Bank expressly stating that the
writing constitutes an amendment, waiver or modification of the terms of this
Note. As used in this Note, the word "undersigned" means, individually and
collectively, each maker, accommodation party, indorser and other party signing
this Note in a similar capacity. If any provision of this Note is unenforceable
in whole or part for any reason, the remaining provisions shall continue to be
effective. Chapter 346 of the Texas Finance Code (and as the same may be
incorporated by reference in other Texas statutes) shall not apply to the
Indebtedness evidenced by this Note. THIS NOTE IS MADE IN THE STATE OF TEXAS
AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLE.
This Note and all other documents, instruments and agreements evidencing,
governing, securing, guaranteeing or otherwise relating to or executed pursuant
to or in connection with this Note or the Indebtedness evidenced hereby (whether
executed and delivered prior to, concurrently with or subsequent to this Note),
as such documents may have been or may hereafter be amended from time to time
(the "Loan Documents") are intended to be performed in accordance with, and only
to the extent permitted by, all applicable usury laws. If any provision hereof
or of any of the other Loan Documents or the application thereof to any person
or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, neither the application of such provision to any other person or
circumstance nor the remainder of the instrument in which such provision is
contained shall be affected thereby and shall be enforced to the greatest extent
permitted by law It is expressly stipulated and agreed to be the intent of the
holder hereof to at all times comply with the usury and other applicable laws
now or hereafter governing the interest payable on the indebtedness evidenced by
this Note If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any amount called for under this Note or
under any of the other Loan Documents. or contracted for, charged, taken,
reserved or received with respect to the indebtedness evidenced by this Note, or
if Bank's exercise of the option to accelerate the maturity of this Note, or if
any prepayment by the undersigned or prepayment agreement results (or would, if
complied with, result) in the undersigned having paid, contracted for or being
charged for any interest in excess of that permitted by law, then it is the
express intent of the undersigned and Bank that this Note and the other Loan
Documents shall be limited to the extent necessary to prevent such result and
all excess amounts theretofore collected by Bank shall be credited on the
principal balance of this Note or, if fully paid, upon such other Indebtedness
as shall then remaining outstanding (or, if this Note and all other Indebtedness
have been paid in full, refunded to the undersigned), and the provisions of this
Note and the other Loan Documents shall immediately be deemed reformed and the
amounts thereafter collectable hereunder and thereunder reduced, without the
necessity of the execution of any new document. so as to comply with the then
applicable law, but so as to permit the recovery of the fullest amount otherwise
called for hereunder or thereunder. All sums paid, or agreed be paid, by the
undersigned for the use, forbearance, detention, taking, charging, receiving or
reserving of the indebtedness of the ersigned to Bank under this Note or arising
under or pursuant to the other Loan Documents shall, to the maximum extent
permitted by applicable law, be amortized, prorated, allocated and spread
throughout the full term of such indebtedness until payment in full so that the
rate or amount of interest on account of such indebtedness does not exceed the
usury ceiling from time to time in effect and applicable to such indebtedness
for so long as such indebtedness is outstanding. To the extent federal law
permits Bank to contract for, charge or receive a greater amount of interest,
Bank will rely on federal law instead of the Texas Finance Code, as supplemented
by Texas Credit Title, for the purpose of determining the Maximum Rate.
Additionally, to the maximum extent permitted by applicable law now or hereafter
in effect, Bank may, at its option and from time to time, implement any other
method of computing the Maximum Rate under the Texas Finance Code, as
supplemented by Texas Credit Title, or under other applicable law, by giving
notice, if required. to the undersigned as provided by applicable law now or
hereafter in effect. Notwithstanding anything to the contrary contained herein
or in any of the other Loan Documents, it is not the intention of Bank to
accelerate the matuhty of any interest that has not accrued at the time of such
acceleration or to collect unearned interest at the time of such acceleration.
THE UNDERSIGNED AND THE BANK, BY ACCEPTANCE OF THIS NOTE, ACKNOWLEDGE THAT THE
RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH
PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH
46
<PAGE>
COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL
BENEFIT, WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE
INDEBTEDNESS.
THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS
AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
By: Its:
- -------------------------- ---------------- -----------------------
OBLIGOR NAME TYPED/PRINTED SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
- -------------------------------------------------------------------------------
STREET ADDRESS CITY STATE ZIP CODE
For Bank Use Only CCAR#
LOAN OFFICER INITIALS LOAN GROUP NAME OBLIGOR NAME
LOAN OFFICER ID. NO. LOAN GROUP NO. OBLIGOR NO. NOTE NO. AMOUNT
47
<PAGE>
Master Revolving Note
Variable Rate Maturity-Date (Business and Commercial Loans Only)
- ------------------------------------------------------------------------------
AMOUNT NOTE DATE MATURITY DATE TAX IDENTIFICATION NUMBER
- ------------------------------------------------------------------------------
$1,000,000.00 May 13, 1999 May 13, 2000 75-2737041
- ------------------------------------------------------------------------------
On the Maturity Date, as stated above, for value received, the undersigned
promise(s) to pay to the order of Comerica Bank-Texas, a Texas banking
association ("Bank"), at any office of the Bank in the State of Texas, One
Million Dollars (U.S.) (or that portion of it advanced by the Bank and not
repaid as later provided) with interest until maturity, whether by acceleration
or otherwise, or until Default, as later defined, at a per annum rate equal to
the lesser of (a) the Maximum Rate, as later defined, or (b) Bank's prime rate
from time to time in effect plus one percent (1%), and after that at a rate
equal to the rate of interest otherwise prevailing under this Note plus three
percent (3%) per annum (but in no event in excess of the Maximum Rate.) If on
any day the prime rate for that day plus 1% shall exceed the Maximum Rate for
that day, the rate of interest applicable to this Note shall be fixed at the
Maximum Rate on that day and on each day thereafter until the total amount of
interest accrued on the unpaid principal balance of this Note equals the total
amount of interest which would have accrued if there had been no Maximum Rate.
The Bank's "prime rate" is that annual rate of interest so designated by the
Bank and which is changed by the Bank from time to time. Interest rate changes
will be effective for interest computation purposes as and when the Maximum Rate
or the Bank's prime rate, as applicable, changes. Subject to the limitations
hereinbelow set forth, interest shall be calculated on the basis of a 360-day
year for actual number of days the principal is outstanding. Accrued interest
on this Note shall be payable on the ___ day of each calendar month, commencing
on June ___, 1999, until the Maturity Date (set forth above), when all amounts
outstanding under this Note shall be due and payable in full. If the frequency
of interest payments is not otherwise specified, accrued interest on this Note
shall be payable monthly on the first day of each month. If any payment of
principal or interest under this Note shall be payable on a day other than a day
on which the Bank is open for business, this payment shall be extended to the
next succeeding business day and interest shall be payable at the rate specified
in this Note during this extension. A late payment charge equal to a reasonable
amount not to exceed five percent (5%) of each late payment may be charged on
any payment not received by the Bank within ten (10) calendar days after the
payment due date, but acceptance of payment of this charge shall not waive any
Default under this Note.
The term "Maximum Rate" as used herein, shall mean at the particular time in
question the maximum nonusurious rate of interest which, under applicable law,
may then be charged on this Note. If such maximum rate of interest changes
after the date hereof, the Maximum Rate shall be automatically increased or
decreased, as the case may be, without notice to the undersigned from time to
time as of the effective date of each change in such maximum rate.
The principal amount payable under this Note shall be the sum of all advances
made by the Bank to or at the request of the undersigned, less principal
payments actually received by the Bank. The books and records of the Bank shall
be the best evidence of the principal amount and the unpaid interest amount
owing at any time under this Note and shall be conclusive absent manifest error.
No interest shall accrue under this Note until the date of the first advance
made by the Bank: after that interest on all advances shall accrue and be
computed on the principal balance outstanding from time to time under this Note
until the same is paid in full. Advances under this Note shall be governed by
the terms of that certain Credit Agreement (the "Credit Agreement") of even date
herewith between the undersigned and the Bank, and this Note is the Revolving
Credit Note as defined in the Credit Agreement.
This Note and any other indebtedness and liabilities of any kind of the
undersigned (or any of them) to the Bank, and any and all modifications,
renewals or extensions of it, whether joint or several, contingent or absolute,
now existing or later arising, and however evidenced and whether incurred
voluntarily or involuntarily, known or unknown, or originally payable to the
Bank or to a third party and subsequently acquired by Bank including, without
limitation, any late charges, loan fees or charges; overdraft indebtedness,
costs incurred by Bank in establishing, determining, continuing or defending the
validity or priority of any security interest, pledge or other lien or in
pursuing any of its rights or remedies under any loan document (or otherwise) or
in connection with any proceeding involving the Bank as a result of any
financial accommodation to the undersigned (or any of them); and
1
<PAGE>
reasonable costs and expenses of attorneys and paralegals, whether any suit or
other action is instituted, and to court costs if suit or action is instituted,
and whether any such fees, costs or expenses are incurred at the trial court
level or on appeal, in bankruptcy, in administrative proceedings, in probate
proceedings or otherwise (collectively "Indebtedness"), are secured by and the
Bank is granted a security interest in and lien upon all items deposited in any
account of any of the undersigned with the Bank and by all proceeds of these
items (cash or otherwise), all account balances of any of the undersigned from
time to time with the Bank, by all property of any of the undersigned from time
to time in the possession of the Bank and by any other collateral, rights and
properties described in each and every deed of trust, mortgage, security
agreement. pledge, assignment and other security or collateral agreement which
has been, or will at any time(s) later be, executed by any (or all) of the
undersigned to or for the benefit of the Bank (collectively "Collateral").
Notwithstanding the above, (i) to the extent that any portion of the
Indebtedness is a consumer loan, that portion shall not be secured by any deed
of trust, mortgage on or other security interest in any of the undersigned's
principal dwelling or in any of the undersigned's real property which is not a
purchase money security interest as to that portion, unless expressly provided
to the contrary in another place, or (ii) if the undersigned (or any of them)
has(have) given or give(s) Bank a deed of trust or mortgage covering California
real property, that deed of trust or mortgage shall not secure this Note or any
other indebtedness of the undersigned (or any of them), unless expressly
provided to the contrary in another place, or (iii) if the undersigned (or any
of them) has (have) given or give(s) the Bank a deed of trust or mortgage
covering real property which, under Texas law, constitutes the homestead of such
person, that deed of trust or mortgage shall not secure this Note or any other
indebtedness of the undersigned (or any of them) unless expressly provided to
the contrary in another place.
If an Event of Default (as defined in the Credit Agreement) occurs or if the
undersigned (or any of them) or any guarantor under a guaranty of all or part of
the Indebtedness ("guarantor") (a) fail(s) to pay any of the Indebtedness when
due, by maturity, acceleration or otherwise, or fail(s) to pay any Indebtedness
owing on a demand basis upon demand; or (b) fail(s) to comply with any of the
terms or provisions of any agreement between the undersigned (or any of them) or
any such guarantor and the Bank; or (c) become(s) insolvent or the subject of a
voluntary or involuntary proceeding in bankruptcy, or a reorganization,
arrangement or creditor composition proceeding, (if a business entity) cease(s)
doing business as a going concern, (if a natural person) die(s) or become(s)
incompetent, (if a partnership) dissolve(s) or any general partner of it dies,
becomes incompetent or becomes the subject of a bankruptcy proceeding or (if a
corporation or a limited liability company) is the subject of a dissolution,
merger or consolidation; or (d) if any warranty or representation made by any of
the undersigned or any guarantor in connection with this Note or any of the
Indebtedness shall be discovered to be untrue or incomplete; or (e) if there is
any termination, notice of termination, or breach of any guaranty, pledge,
collateral assignment or subordination agreement relating to all or any part of
the Indebtedness; or (f) if there is any failure by any of the undersigned or
any guarantor to pay when due any of its indebtedness (other than to the Bank)
or in the observance or performance of any term, covenant or condition in any
document evidencing, securing or relating to such indebtedness; or (g) if the
Bank deems itself insecure believing that the prospect of payment of this Note
or any of the Indebtedness is impaired or shall fear deterioration, removal or
waste of any of the Collateral; or (h) if there is filed or issued a levy or
writ of attachment or garnishment or other like judicial process upon the
undersigned (or any of them) or any guarantor or any of the Collateral,
including without limit, any accounts of the undersigned (or any of them) or any
guarantor with the Bank, then the Bank, upon the occurrence of any of these
events (each a "Default"), may at its option and without prior notice to the
undersigned (or any of them), declare any or all of the Indebtedness to be
immediately due and payable (notwithstanding any provisions contained in the
evidence of it to the contrary), sell or liquidate all or any portion of the
Collateral, set off against the Indebtedness any amounts owing by the Bank to
the undersigned (or any of them), charge interest at the default rate provided
in the document evidencing the relevant Indebtedness and exercise any one or
more of the rights and remedies granted to the Bank by any agreement with the
undersigned (or any of them) or given to it under applicable law. All payments
under this Note shall be in immediately available United States funds, without
setoff or counterclaim.
This Note is signed by two or more parties (whether by all as makers or by one
or more as an accommodation party or otherwise), the obligations and
undertakings under this Note shall be that of all and any two or more jointly
and also of each severally. This Note shall bind the undersigned, and the
undersigned's respective heirs, personal representatives, successors and
assigns.
2
<PAGE>
The undersigned waive(s) presentment, demand, protest, notice of dishonor,
notice of demand or intent to demand, notice of acceleration or intent to
accelerate, and all other notices and agree(s) that no extension or indulgence
to the undersigned (or any of them) or release, substitution or nonenforcement
of any security, or release or substitution of any of the undersigned, any
guarantor or any other party, whether with or without notice, shall affect the
obligations of any of the undersigned. The undersigned waive(s) all defenses or
right to discharge available under Section 3.605 of the Texas Uniform Commercial
Code and waive(s) all other suretyship defenses or right to discharge. The
undersigned agree(s) that the Bank has the right to sell, assign, or grant
participations or any interest in, any or all of the Indebtedness, and that, in
connection with this right, but without limiting its ability to make other
disclosures to the full extent allowable, the Bank may disclose all documents
and information which the Bank now or later has relating to the undersigned or
the Indebtedness. The undersigned agree(s) that the Bank may provide
information relating to this Note or the Indebtedness or relating to the
undersigned or the Bank's parent, affiliates, subsidiaries and service
providers.
The undersigned agree(s) to reimburse the holder or owner of this Note upon
demand for any and all costs and expenses (including without limit, court costs,
legal expenses and reasonable attorneys' fees, whether or not suit is instituted
and, if suit is instituted, whether at the trial court level, appellate level,
in a bankruptcy, probate or administrative proceeding or otherwise) incurred in
collecting or attempting to collect this Note or incurred in any other matter or
proceeding relating to this Note.
The undersigned acknowledges) and agree(s) that there are no contrary
agreements. oral or written, establishing a term of this Note and agree(s) that
the terms and conditions of this Note may not be amended, waived or modified
except in a writing signed by an officer of the Bank expressly stating that the
writing constitutes an amendment, waiver or modification of the terms of this
Note. As used in this Note, the word "undersigned" means, individually and
collectively, each maker, accommodation party, indorser and other party signing
this Note in a similar capacity. If any provision of this Note is unenforceable
in whole or part for any reason, the remaining provisions shall continue to be
effective. Chapter 346 of the Texas Finance Code (and as the same may be
incorporated by reference in other Texas statutes) shall not apply to the
Indebtedness evidenced by this Note. THIS NOTE IS MADE IN THE STATE OF TEXAS
AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF
THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLE.
This Note and all other documents, instruments and agreements evidencing,
governing, securing, guaranteeing or otherwise relating to or executed pursuant
to or in connection with this Note or the Indebtedness evidenced hereby (whether
executed and delivered prior to, concurrently with or subsequent to this Note),
as such documents may have been or may hereafter be amended from time to time
(the "Loan Documents") are intended to be performed in accordance with, and only
to the extent permitted by, all applicable usury laws. If any provision hereof
or of any of the other Loan Documents or the application thereof to any person
or circumstance shall, for any reason and to any extent, be invalid or
unenforceable, neither the application of such provision to any other person or
circumstance nor the remainder of the instrument in which such provision is
contained shall be affected thereby and shall be enforced to the greatest extent
permitted by law. It is expressly stipulated and agreed to be the intent of the
holder hereof to at all times comply with the usury and other applicable laws
now or hereafter governing the interest payable on the indebtedness evidenced by
this Note. If the applicable law is ever revised, repealed or judicially
interpreted so as to render usurious any amount called for under this Note or
under any of the other Loan Documents, or contracted for, charged, taken,
reserved or received with respect to the indebtedness evidenced by this Note, or
if Bank's exercise of the option to accelerate the maturity of this Note, or if
any prepayment by the undersigned or prepayment agreement results (or would, if
complied with, result) in the undersigned having paid, contracted for or being
charged for any interest in excess of that permitted by law, then it is the
express intent of the undersigned and Bank that this Note and the other Loan
Documents shall be limited to the extent necessary to prevent such result and
all excess amounts theretofore collected by Bank shall be credited on the
principal balance of this Note or, if fully paid, upon such other Indebtedness
as shall then remaining outstanding (or, if this Note and all other Indebtedness
have been paid in full, refunded to the undersigned), and the provisions of this
Note and the other Loan Documents shall immediately be deemed reformed and the
amounts thereafter collectable hereunder and thereunder reduced, without the
necessity of the execution of any new document, so as to comply with the then
applicable law, but so as to permit the recovery of the fullest amount otherwise
called for hereunder or thereunder.
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<PAGE>
All sums paid, or agreed to be paid, by the undersigned for the use,
forbearance, detention, taking, charging, receiving or reserving of the
indebtedness of the undersigned to Bank under this Note or arising under or
pursuant to the other Loan Documents shall, to the maximum extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
term of such indebtedness until payment in full so that the rate or amount of
interest on account of such indebtedness does not exceed the usury ceiling from
time to time in effect and applicable to such indebtedness for so long as such
indebtedness is outstanding. To the extent federal law permits Bank to contract
for charge or receive a greater amount of interest, Bank will rely on federal
law instead of the Texas Finance Code, as supplemented by Texas Credit Title,
for the purpose of determining the Maximum Rate. Additionally, to the maximum
extent permitted by applicable law now or hereafter in effect, Bank may, at its
option and from time to time, implement any other method of computing the
Maximum Rate under the Texas Finance Code. as supplemented by Texas Credit
Title, or under other applicable law, by giving notice, if required, to the
undersigned as provided by applicable law now or hereafter in effect.
Notwithstanding anything to the contrary contained herein or in any of the other
Loan Documents, it is not the intention of Bank to accelerate the maturity of
any interest that has not accrued at the time of such acceleration or to collect
unearned interest at the time of such acceleration.
THE UNDERSIGNED AND THE BANK, BY ACCEPTANCE OF THIS NOTE, ACKNOWLEDGE THAT THE
RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH
PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL
OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES
ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS BUSINESS
AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
By: /S/ Its: President
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OBLIGOR NAME TYPED/PRINTED SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
By: Its:
---------------- -----------------------
SIGNATURE OF TITLE (if applicable)
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STREET ADDRESS CITY STATE ZIP CODE
- -------------------------------------------------------------------------------
For Bank Use Only CCAR#
- -------------------------------------------------------------------------------
4
<PAGE>
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LOAN OFFICER INITIALS LOAN GROUP NAME OBLIGOR NAME
- ------------------------------------------------------------------------------
LOAN OFFICER ID. NO. LOAN GROUP NO. OBLIGOR NO. NOTE NO. AMOUNT
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5
<PAGE>
Corporate Resolutions and Incumbency Certification
Authority to Procure Loans
I certify that I am the duly elected and qualified Secretary of ASD SYSTEMS,
INC.. a Texas corporation ("Corporation"), and the keeper of the records of the
Corporation; that the following is a true and correct copy of resolutions duly
adopted by the Board of Directors of the Corporation in accordance with its
bylaws and applicable statutes on or as of 1999.
-------------,
Copy of Resolutions:
it Resolved, That:
1. Any one (1) of the following officers: the President, any Vice President,
the Treasurer or the Secretary of the Corporation is authorized for on
behalf of, and in the name of the corporation to:
(a) Negotiate and procure loans, letters of credit and other credit or
financial accommodations from Comerica Bank-Texas (the "Bank") up to an
amount not exceeding $_________ (if left blank, then unlimited).
(b) Discount with the Bank commercial or other business paper belonging to
the Corporation made or drawn by or upon third parties without limit as
to amount;
(c) Purchase, sell, exchange. assign. endorse for transfer and/or deliver
certificates and/or instruments representing stocks, bonds. evidences
of indebtedness or other securities owned by the Corporation, whether
or not registered in the name of the Corporation.
(d) Give security for any liabilities of the Corporation to the Bank by
grant, security interest, assignment, lien, deed of trust or mortgage
upon any real or personal property, tangible or intangible of the
Corporation; and
(e) Execute and deliver in form and content as may be required by the Bank
any and all notes, evidences of indebtedness, applications for letters
of credit, guaranties, subordination agreements, loan and security
agreements. financing statements, assignments, liens. deeds of trust.
mortgages, trust receipts and other agreements, instruments or
documents to carry out the purposes of these Resolutions, any or all of
which may relate to all or to substantially all of the Corporation's
property and assets.
2. Said Bank be and it is authorized and directed to pay the proceeds of any
such loans or discounts as directed by the persons so authorized to sign,
whether so payable to the order of any of said persons in their individual
Capacities or not. and whether such proceeds are deposited to the individual
credit of any of said persons or not;
3. Any and all agreements. instruments and documents previously executed and
acts and things previously done to carry out the purposes of these
Resolutions are ratified, confirmed and approved as the act or acts of the
Corporation.
4. These Resolutions shall continue in force, and the Bank may consider the
holders of said offices and their signatures to be and continue to be as set
forth in a certified copy of these Resolutions delivered to the Bank, until
notice to the contrary in writing is duly served on the Bank (such notice to
have no effect on any action previously taken by the Bank in reliance on
these Resolutions).
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<PAGE>
5. Any person, corporation or other legal entity dealing with the Bank may rely
upon a certificate signed by an officer of the Bank to the effect that these
Resolutions and any agreement, instrument or document executed pursuant to
them are still in full force and effect and binding upon the Corporation.
6. The Bank may consider the holders of the offices of the Corporation and
their signatures, respectively, to be and continue to be as set forth in the
Certificate of the Secretary of the Corporation until notice to the contrary
in writing is duly served on the Bank
I further certify that the above Resolutions are in full force and effect as of
the date of this Certificate: that these Resolutions and any borrowings or
financial accommodations under these Resolutions have been properly noted in the
corporate books and records, and have not been rescinded, annulled, revoked or
modified: that neither the foregoing Resolutions nor any actions to be taken
pursuant to them are or will be in Contravention of any provision of the
articles of incorporation or bylaws of the Corporation or of any agreement,
indenture or other instrument to which the Corporation is a party of by which it
is bound: and that neither the articles of incorporation nor bylaws of the
Corporation nor any agreement, indenture or other instrument to which the
Corporation s a party or by which it is bound require the vote or consent of
shareholders of the Corporation to authorize any act, matter or thing described
n the foregoing Resolutions.
I further certify that the following named persons have been duly elected to the
offices set opposite their respective names, that they continue to hold these
offices at the present time, and that the signatures which appear below are the
genuine, original signatures of each respectively:
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<PAGE>
(PLEASE SUPPLY GENUINE SIGNATURES OF AUTHORIZED SIGNERS BELOW)
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
- ------------------------- ------------------------- ----------------------
In Witness Whereof, I have affixed my name as Secretary and have caused the
corporate seal of said Corporation to be affixed on May , 1993.
--
-----------------------------------
SECRETARY
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The Above Statements are Correct.
-----------------------------------------------
SIGNATURE OF OFFICER OR DIRECTOR OR, IF NONE, A SHAREHOLDER
OTHER THAN SECRETARY WHEN SECRETARY IS AUTHORIED TO SIGN ALONE
- --------------------------------------------------------------------------------
Failure to complete the above when the Secretary is authorized to sign alone
shall constitute a certification by the Secretary that the Secretary is the sole
Shareholder, Director and Officer of the Corporation.
- --------------------------------------------------------------------------------
3
<PAGE>
Guaranty
As of May 1999, the undersigned, for value received, unconditionally and
absolutely guarantees) to Comerica Bank-Texas ("Bank"), a Texas banking
association, payment when due, whether by stated maturity, demand, acceleration
or otherwise, of all existing and future indebtedness
("Indebtedness') to the Bank of ASD Systems, Inc. a Texas corporation
("Borrower") Indebtedness includes without limit any and all obligations or
liabilities of the Borrower to the Bank, whether absolute or contingent, direct
or indirect, voluntary or involuntary, liquidated or unliquidated, joint or
several known or unknown; originally payable to the Bank or to a third party and
subsequently acquired by the Bank including, without limitation, late charges
loan fees or charge, and overdraft indebtedness, any and all indebtedness,
obligations or liabilities for which Borrower would otherwise be liable to the
Bank were if not for the invalidity, irregularity or unenforceability of them by
reason of any bankruptcy, insolvency or other law or order of any kind, or for
any other reason any and all amendments, modifications, renewals and/or
extensions of any of the above: and all costs of collecting Indebtedness,
including without limitation attorneys' fees. Any reference in this Guaranty to
attorneys' fees shall be deemed a reference to reasonable fees, charges, costs
and expenses of counsel and paralegals whether or not a suit or action is
instituted, and to court costs if a suit or action is instituted, and whether
attorneys' fees or court costs are incurred at the trial court level, on appeal.
in a bankruptcy, administrative or probate proceeding or otherwise. All costs
shall be payable immediately by the undersigned when incurred by the Bank,
without demand, and until paid shall bear interest a the highest per annum rate
applicable to any of the Indebtedness, but not in excess of the maximum rate
permitted by law.
1. LIMITATION: The total obligation of the undersigned under this Guaranty is
UNLIMITED unless specifically limited in the Additional Provisions of this
Guaranty, and this obligation (whether unlimited or limited to the extent
specified in the Additional Provisions) shall include, IN ADDITION TO any
limited amount of principal guaranteed, all interest on that limited amount,
and all costs incurred by the Bank in collection efforts against the
Borrower and/or the undersigned or otherwise incurred by the Bank in any way
relating to the Indebtedness, or this Guaranty, including without limit
attorneys' fees The undersigned agree(s) that (a) this limitation shall not
be a limitation on the amount of Borrower's Indebtedness to the Bank; (b)
any payments by the undersigned shall not reduce the maximum liability of
the undersigned under this Guaranty unless written notice to that effect is
actually received by the Bank at, or prior to, the time of the payment: and
(c) the liability of the undersigned to the Bank shall at all times be
deemed to be the aggregate liability of the undersigned under this Guaranty
and any other guaranties previously or subsequently given to the Bank by the
undersigned and not expressly revoked, modified or invalidated in writing.
2. NATURE OF GUARANTY: This is a continuing Guaranty of payment and not of
collection and remains effective whether the Indebtedness is from time to
time reduced and later increased or entirely extinguished and later
reincurred. The undersigned deliver(s) this Guaranty based solely on the
undersigned's independent investigation of (or decision not to investigate)
the financial condition of Borrower and is (are) not relying on any
information furnished by the Bank. The undersigned assume(s) full
responsibility for obtaining any further information concerning the
Borrower's financial condition, the status of the indebtedness or any other
matter which the undersigned may deem necessary or appropriate now or later
The undersigned knowingly accept(s) the full range of risk encompassed in
this Guaranty, which risk includes, without limit, the possibility that
Borrower may incur Indebtedness to the Bank after the financial condition of
the Borrower, or the Borrower's ability to pay debts as they mature, has
deteriorated
3. APPLICATION OF PAYMENTS: The undersigned authorize(s) the Bank, either
before or after termination of this Guaranty, without notice to or demand an
the undersigned and without affecting the undersigned's liability under this
Guaranty, from time to time to (a) apply any security and direct the order
or manner of sale, and (b) apply payments received by the Bank from the
Borrower to any indebtedness of the Borrower to the Bank, in such order as
the Bank shall determine in its sole discretion, whether or not this
indebtedness is covered by this Guaranty, and the undersigned waive(s) any
provision of law regarding
1
<PAGE>
application of payments which specifies otherwise. The undersigned agree(s)
to provide to the Bank copies of the undersigned's financial statements upon
request.
4. SECURITY: The undersigned pledge(s), assign(s) and grant(s) to the Bank a
security interest in and lien upon and the right of setoff as to any and all
property of the undersigned now or later in the possession of the Bank. The
undersigned further assign(s) to the Bank as collateral for the obligations
of the undersigned under this Guaranty all claims of any nature that the
undersigned now or later has (have) against the Borrower (other than any
claim under a deed of trust or mortgage covering California real property)
with full right on the part of the Bank, in its own name or in the name of
the undersigned, to collect and enforce these claims. The undersigned
agree(s) that no security now or later held by the Bank for the payment of
any Indebtedness, whether from the Borrower, any guarantor, or otherwise,
and whether in the nature of a security interest, pledge, lien, assignment,
setoff suretyship, guaranty, indemnity, insurance or otherwise, shall affect
in any manner the unconditional obligation of the undersigned under this
Guaranty and the Bank, in its sole discretion, without notice to the
undersigned, may release, exchange, enforce and otherwise deal with any
security without affecting in any manner the unconditional obligation of the
undersigned under this Guaranty. The undersigned acknowledges) and agree(s)
that the Bank has no obligation to acquire or perfect any lien on or
security interest in any asset(s), whether realty or personalty, to secure
payment of the Indebtedness. and the undersigned is (are) not relying upon
any asset(s) in which the Bank has or may have a lien or security interest
for payment of the Indebtedness.
5. OTHER GUARANTORS: If any Indebtedness is guaranteed by two or more
guarantors, the obligation of the undersigned shall be several and also
joint, each with all and also each with any one or more of the others, and
may be enforced at the option of the Bank against each severally, any two or
more jointly, or some severally and some jointly. The Bank, in its sole
discretion, may release any one or more of the guarantors for any
consideration which it deems adequate, and may fail or elect not to prove a
claim against the estate of any bankrupt, insolvent, incompetent or deceased
guarantor, and after that, without notice to any guarantor, the Bank may
extend or renew any or all Indebtedness and may permit the Borrower to incur
additional Indebtedness without affecting in any manner the unconditional
obligation of the remaining guarantor(s). The undersigned acknowledge(s)
that the effectiveness of this Guaranty is not conditioned on any or all of
the indebtedness being guaranteed by anyone else.
6. TERMINATION: Any of the undersigned may terminate their obligation under
this Guaranty as to future Indebtedness (except as provided below) by (and
only by) delivering written notice of termination to an officer of the Bank
and receiving from an officer of the Bank written acknowledgment of delivery
provided, however, the termination shall not be effective until the opening
of business on the fifth (5th) day ("effective date") following written
acknowledgment of delivery. Any termination shall not affect in any way the
unconditional obligations of the remaining guarantor(s). whether or not the
termination is known to the remaining guarantor(s). Any termination shall
not affect in any way the unconditional obligations of the terminating
guarantor(s) as to any Indebtedness existing at the effective date of
termination or any Indebtedness created after that pursuant to any
commitment or agreement of the Bank or pursuant to any Borrower loan with
the Bank existing at the effective date of termination (whether advances or
readvances by the Bank after the effective date of termination are optional
or obligatory), or any modifications, extensions or renewals of any of this
indebtedness, whether in whole or in part, and as to all of this
Indebtedness and modifications, extensions or renewals of it, this Guaranty
shall continue effective until the same shall have been fully paid. The Bank
has no duty to give notice of termination by any guarantor(s) to any
remaining guarantor(s). The undersigned shall indemnity the Bank against all
claims, damages, costs and expenses, INCLUDING ANY CLAIMS, DAMAGES, COSTS
AND EXPENSES RESULTING FROM BANK'S OWN NEGLIGENCE, except and to the extent
(but only to the extent) caused by Bank's gross negligence or willful
misconduct, including, without limit, attorneys' fees, incurred by the Bank
in connection with any suit, claim or action against the Bank arising out of
any modification or termination of a Borrower loan or any refusal by the
Bank to extend additional credit in connection with the termination of this
Guaranty.
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<PAGE>
7. REINSTATEMENT: Notwithstanding any prior revocation, termination, surrender
or discharge of this Guaranty (or of any lien, pledge or security interest
securing this Guaranty) in whole or in part, the effectiveness of this
Guaranty, and of all liens, pledges and security interests securing this
Guaranty, shall automatically continue or be reinstated in the event that
any payment received or credit given by the Bank in respect of the
Indebtedness is returned disgorged or rescinded under any applicable state
or federal law including, without limitation, laws pertaining to bankruptcy
or insolvency, in which case this Guaranty, and all liens, pledges and
security interests securing this Guaranty, shall be enforceable against the
undersigned as if the returned, disgorged or rescinded payment or credit had
not been received or given by the Bank, and whether or not the Bank relied
upon this payment or credit or changed its position as a consequence of it.
In the event of continuation or reinstatement of this Guaranty and the
liens, pledges and security interests securing it, the undersigned agree(s)
upon demand by the Bank, to execute and deliver to the Bank those documents
which the Bank determines are appropriate to further evidence (in the public
records or otherwise) this continuation or reinstatement. although the
failure of the undersigned to do so shall not affect in any way the
reinstatement or continuation. If the undersigned do(es) not execute and
deliver to the Bank upon demand such documents, the Bank and each Bank
officer is irrevocably appointed (which appointment is coupled with an
interest) the true and lawful attorney of the undersigned (with full power
of substitution) to execute and deliver such documents in the name and on
behalf of the undersigned.
8. WAIVERS: The undersigned waive(s) any right to require the Bank to: (a)
proceed against any person or property; (b) give notice of the terms, time
and place of any public or private sale of personal property security held
from the Borrower or any other person, or otherwise comply with the
provisions to Section 9.504 of the Texas or other applicable Uniform
Commercial Code; or (c) pursue any other remedy in the Bank's power. The
undersigned waive(s) notice of acceptance of this Guaranty and presentment,
demand, protest, notice of protest, dishonor, notice of dishonor, notice of
default, notice of intent, to accelerate or demand payment or notice of
acceleration of any Indebtedness, any and all other notices to which the
undersigned might otherwise be entitled, and diligence in collecting any
Indebtedness, and all rights of a guarantor under Rule 31, Texas Rules of
Civil Procedure, Chapter 34 of the Texas Business and Commerce Code, or
Section 17.001 of the Texas Civil Practice and Remedies Code, and agree(s)
that the Bank may, once or any number of times, modify the terms of any
Indebtedness, compromise, extend, increase, accelerate, renew or forbear to
enforce payment of any or all Indebtedness, or permit the Borrower to incur
additional Indebtedness, all without notice to the undersigned and without
affecting in any manner the unconditional obligation of the undersigned
under this Guaranty.
The undersigned unconditionally and irrevocably waive(s) each and every
defense and setoff of any nature which, under principles of guaranty or
otherwise, would operate to impair or diminish in any way the obligation of
the undersigned under this Guaranty, and acknowledge(s) that each such
waiver is by this reference incorporated into each security agreement,
collateral assignment, pledge and/or other document from the undersigned now
or later securing this Guaranty and/or the Indebtedness, and acknowledge(s)
that as of the date of this Guaranty no such defense of setoff exists.
9. WAIVER OF SUBROGATION: The undersigned waive(s) any and all rights (whether
by subrogation, indemnity, reimbursement, or otherwise) to recover from the
Borrower any amounts paid by the undersigned pursuant to this Guaranty until
the Indebtedness has been paid in full.
10. SALE/ASSIGNMENT: The undersigned acknowledge(s) that the Bank has the right
to sell, assign, transfer, negotiate, or grant participations in all or any
part of the Indebtedness and any related obligations. including, without
limit, this Guaranty, without notice to the undersigned and that the Bank
may disclose any documents and information which the Bank now has or later
acquires relating to the undersigned or to the Borrower or the Indebtedness
in connection with such sale, assignment, transfer, negotiation, or grant.
The undersigned agree(s) that the Bank may provide information relating to
this Guaranty or relating to the undersigned to the Bank's parent,
affiliates, subsidiaries and service providers.
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<PAGE>
11. GENERAL: This Guaranty constitutes the entire agreement of the undersigned
and the Bank with respect to the subject matter of this Guaranty No waiver,
consent, modification or change of the terms of the Guaranty shall bind any
of the undersigned or the Bank unless in writing and signed by the waiving
party or an authorized officer of the waiving party, and then this waiver,
consent, modification or change shall be effective only in the specifc
instance and for the specific purpose given. This Guaranty shall inure to
the benefit of the Bank and its successors and assigns and shall be binding
on the undersigned and the undersigned's heirs, legal representatives,
successors and assigns including, without limit, any debtor in possession or
trustee in bankruptcy for any of the undersigned. The undersigned has (have)
knowingly and voluntarily entered into this Guaranty in good faith for the
purpose of inducing the Bank to extend credit or make other financial
accommodations to the Borrower. If any provision of this Guaranty is
unenforceable n whole or in part for any reason, the remaining provisions
shall continue to be effective THIS GUARANTY SHALL BE GOVERNED BY AND
CONSTRUE D IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS
WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
12. HEADINGS: Headings in this Agreement are included for the convenience of
reference only and shall not constitute a part of this Agreement for an,
purpose.
13. ADDITIONAL PROVISIONS:
The total obligation of the undersigned under this Guaranty shall not exceed
$500,000.00, plus all interest on that amount and all costs incurred by the
Bank in collection efforts against the Borrower and/or the undersigned,
including, without limitation, reasonable attorneys' fees.
JURY TRIAL WAIVER: THE UNDERSIGNED AND BANK, BY ACCEPTANCE OF THIS GUARANTY,
ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT
MAY BE WAIVED. EACH PARTY, AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO
CONSULT) WITH COUNSEL OF THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR
MUTUAL BENEFIT WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION
REGARDING THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS
GUARANTY OR THE INDEBTEDNESS.
15. THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS
BUSINESS AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO WRITTEN OR ORAL
AGREEMENTS BETWEEN THE PARTIES,
IN WITNESS WHEREOF, Guarantor(s) has (have) signed and delivered this Guaranty
the day and year first written above,
GUARANTOR(S):
----------------------------
Guarantor Name Typed/Printed
BY:
--------------------------------------
SIGNATURE OF
GUARANTOR'S ADDRESS:
-----------------------------------------
STREET ADDRESS
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CITY STATE ZIP CODE
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Security Agreement
(All Assets)
As of May ___, 1999, for value received, the undersigned ("Debtor") pledges,
assigns and grants to Comerica Bank-Texas ("Bank"), a Texas banking association
a continuing security interest and lien (any pledge, assignment, security
interest or other lien arising hereunder is sometimes referred to herein as a
"security interest") in the Collateral (as defined below) to secure payment when
due, whether by stated maturity, demand, acceleration or otherwise of all
existing and future indebtedness ("Indebtedness") to the Bank of Debtor.
Indebtedness includes without limit any and all obligations or liabilities of
Debtor to the Bank whether, absolute or contingent, direct or indirect,
voluntary or involuntary, liquidated or unliquidated, joint or several, known or
unknown, originally payable to the Bank or to a third party and subsequently
acquired by the Bank including, without limitation, any late charges, loan fees
or charges, and overdraft indebtedness any and all obligations or liabilities
for which Debtor would otherwise be liable to the Bank were it not for the
invalidity or unenforceability of them by reason of any bankruptcy, insolvency
or other law, or for any other reason: any and all amendments, modifications,
renewals and/or extensions of any of the above, all costs incurred by Bank in
establishing, determining, continuing. or defending the validity or priority of
any security interest, or in pursuing its rights and remedies under this
Agreement or under any other agreement between Bank and Debtor or in connection
with any proceeding involving Bank as a result of any financial accommodation to
Debtor; and all other costs of collecting Indebtedness, including without limit
attorneys' fees. Debtor agrees to pay Bank all such costs incurred by the Bank,
immediately upon demand, and until paid all costs shall bear interest at the
highest per annum rate applicable to any of the Indebtedness, but not in excess
of the maximum rate permitted by law. Any reference in this Agreement to
attorneys' fees shall be deemed a reference to reasonable fees, costs, and
expenses of both in-house and outside counsel and paralegals, whether or not a
suit or action is instituted, and to court costs if a suit or action is
instituted. and whether attorneys' fees or court costs are incurred at the trial
court level, on appeal, in a bankruptcy, administrative or probate proceeding or
otherwise.
1. Collateral shall mean all of the following property Debtor now or later owns
or has an interest in, wherever located:
(a) all Accounts Receivable (for purposes of this Agreement, "Accounts
Receivable" consists of all accounts, general intangibles. chattel
paper, contract rights, deposit accounts, documents and instruments)
(b) all Inventory,
(c) all Equipment and Fixtures,
(d) specific items listed below and/or on attached Schedule A, if any,
is/are also included in Collateral:
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(e) all goods, instruments, documents. policies and certificates of
insurance. deposits. money, investment property or other property
(except real property which is not a fixture) which are now or later in
possession or control of Bank or as to which Bank now or later controls
possession by documents or otherwise; and
(f) all additions, attachments, accessions, parts replacements,
substitutions renewals, interest, dividends, distributions, rights of
any kind (including but not limited to stock splits, stock rights,
voting and preferential rights) products and proceeds of or pertaining
to the above including, without limit, cash or other property which
were proceeds and are recovered by a bankruptcy trustee or otherwise as
a preferential transfer by Debtor.
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2. Warranties, Covenants and Agreements. Debtor warrants, covenants and agrees
as follows.
2.1 Debtor shall furnish to Bank, in form and at intervals as Bank may
request. any information Bank may reasonably request and allow Bank to
examine, inspect, and copy any of Debtor's books and records. Debtor
shall, at the request of Bank, mark its records and the Collateral to
clearly indicate the security interest of Bank under this Agreement
2.2 At the time any Collateral becomes, or is represented to be, subject to
a security interest in favor of Bank, Debtor shall be deemed to have
warranted that (a) Debtor is the lawful owner of the Collateral and has
the right and authority to subject it to a security interest granted to
Bank; (b) none of the Collateral is subject to any security interest
other than that in favor of Bank and there are no financing statements
on file, other than in favor of Bank; and (c) Debtor acquired its
rights in the Collateral in the ordinary course of its business.
2.3 Debtor will keep the Collateral free at all times from all claims,
liens. security interests and encumbrances other than those in favor of
Bank. Debtor will not, without the prior written consent of Bank. sell,
transfer or lease, or permit to be sold, transferred or leased, any or
all of the Collateral. except for Inventory in the ordinary course of
its business and will not return any Inventory to its supplier. Bank or
its representatives may at all reasonable times inspect the Collateral
and may enter upon all premises where the Collateral is kept or might
be located.
2.4 Debtor will do all acts and will execute or Cause to be executed all
writings requested by Bank to establish, maintain and continue a
perfected and first security interest of Bank in the Collateral. Debtor
agrees that Bank has no obligation to acquire or perfect any lien on or
security interest in any asset(s), whether realty or personalty, to
secure payment of the Indebtedness, and Debtor is not relying upon
assets in which the Bank may have a lien or security interest for
payment of the Indebtedness.
2.5 Debtor will pay within the time that they can be paid without interest
or penalty all taxes, assessments and similar charges which at any time
are or may become a lien, charge, or encumbrance upon any Collateral,
except to the extent contested in good faith and bonded in a manner
satisfactory to Bank. If Debtor fails to pay any of these taxes,
assessments, or other charges in the time provided above, Bank has the
option (but not the obligation) to do so, and Debtor agrees to repay
all amounts so expended by Bank immediately upon demand, together with
interest at the highest lawful default rate which could be charged by
Bank on any Indebtedness.
2.6 Debtor will keep the Collateral in good condition and will protect it
from loss, damage, or deterioration from any cause Debtor has and will
maintain at all times (a) with respect to the Collateral, insurance
under an "all risk" policy against fire and other risks customarily
insured against, and (b) public liability insurance and other insurance
as may be required by law or reasonably required by Bank, all of which
insurance shall be an amount form and content, and written by companies
as may be satisfactory to Bank, containing a lender's loss payable
endorsement acceptable to Bank. Debtor will deliver to Bank immediately
upon demand evidence satisfactory to Bank that the required insurance
has been procured. If Debtor fails to maintain satisfactory insurance.
Bank has the option (but not the obligation) to do so and Debtor agrees
to repay all amounts so expended by Bank immediately upon demand,
together with interest at the highest lawful default rate which could
be charged by Bank on any Indebtedness
2.7 On each occasion on which Debtor evidences to Bank the account balances
on and the nature and extent of the Accounts Receivable. Debtor shall
be deemed to have warranted that except as otherwise indicated (a) each
of those Accounts Receivable is valid and enforceable without
performance by Debtor of any act; (b) each of those account balances
are in fact owing; (c) there are no setoffs, recoupments, credits,
contra accounts, counterclaims or defenses against any of
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those Accounts Receivable, (d) as to any Accounts Receivable
represented by a note, tra de acceptance, draft or other instrument or
by any chattel paper or document, the same have been endorsed and/or
delivered by Debtor to Bank; (e) Debtor has not received with respect
to any Account Receivable, any notice of the death of the related
account debtor, or of the dissolution, liquidation, termination of
existence, insolvency, business failure, appointment of a receiver for,
assignment for the benefit of creditors by, or filing of a petition in
bankruptcy by or against the account debtor; and (f) as to each Account
Receivable, the account debtor is not an affiliate of Debtor, the
United States of America or any department, agency or instrumentality
of it, or a citizen or resident of any jurisdiction outside of the
United States. Debtor will do all acts and will execute all writings
requested by Bank to perform, enforce performance of, and collect all
Accounts Receivable. Debtor shall neither make nor permit any
modification, compromise or substitution for any Account Receivable
without the prior written consent of Bank. Debtor shall, at Bank's
request, arrange for verification of Accounts Receivable directly with
account debtors or by other methods acceptable to Bank.
2.8 Debtor at all times shall be in strict compliance with all applicable
laws, including without limit any laws, ordinances, directives, orders,
statutes or regulations an object of which is to regulate or improve
health, safety, or the environment ("Environmental Laws").
2.9 If Bank, acting in its sole discretion, redelivers Collateral to Debtor
or Debtor's designee for the purpose of (a) the ultimate sale or
exchange thereof: or (b) presentation, collection, renewal, or
registration of transfer thereof: or (c) loading, unloading, storing,
shipping, transshipping, manufacturing processing or otherwise dealing
with it preliminary to sale or exchange; such redelivery shall be in
trust for the benefit of Bank and shall not constitute a release of
Bank's security interest in it or in the proceeds or products of it
unless Bank specifically so agrees in writing. If Debtor requests any
such redelivery, Debtor will deliver with such request a duly executed
financing statement in form and substance satisfactory to Bank. Any
proceeds of Collateral coming into Debtor's possession as a result of
any such redelivery shall be held in trust for Bank and immediately
delivered to Bank for application on the Indebtedness. Bank may (in its
sole discretion) deliver any or all of the Collateral to Debtor, and
such delivery by Bank shall discharge Bank from all liability or
responsibility for such Collateral. Bank, at its option, may require
delivery of any Collateral to Bank at any time with such endorsements
or assignments of the Collateral as Bank may request.
2.10 At any time and Without notice, Bank may (a) cause any or all of the
Collateral to be transferred to its name or to the name of its
nominees; (b) receive or collect by legal proceedings or otherwise all
dividends, interest, principal payments and other sums and all other
distributions at any time payable or receivable on account of the
Collateral, and hold the same as Collateral, or apply the same to the
Indebtedness, the manner and distribution of the application to be in
the sole discretion of Bank; (c) enter into any extension,
subordination, reorganization, deposit, merger or consolidation
agreement or any other agreement relating to or affecting the
Collateral, and deposit or surrender control of the Collateral, and
accept other property in exchange for the Collateral and hold or apply
the property or money so received pursuant to this Agreement.
2.11 Bank may assign any of the Indebtedness and deliver any or all of the
Collateral to its assignee. who then shall have with respect to
Collateral so delivered all the rights and powers of Bank under this
Agreement, and after that Bank shall be fully discharged from all
liability and responsible, with respect to Collateral so delivered
2.12 Debtor shall defend, indemnity and hold harmless Bank, its employees,
agents, shareholders, affiliates, officers, and directors from and
against any and all claims, Damages, fines, expenses, liabilities or
causes of action of whatever kind including without limit consultant
fees, legal expenses and attorneys' fees, suffered by any of them as a
direct or indirect result of any actual or asserted violation of any
law, including without limit, Environmental Laws, or of any remediation
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relating to any property required by any law, including without limit
Environmental Laws. INCLUDING ANY CLAIMS, DAMAGES, FINES, EXPENSES,
LIABILITIES OR CAUSES OF ACTION OF WHATEVER KIND RESULTING FROM BANK'S
OWN NEGLIGENCE, extent and to the extent (but only to the extent caused
by Bank's gross negligence or willful misconduct
3 Collection of Proceeds.
3.1 Debtor agrees to collect and enforce payment of all Collateral until
Bank shall direct Debtor to the contrary. Immediately upon notice to
Debtor by Bank and at all times after that, Debtor agrees to fully and
promptly cooperate and assist Bank in the collection and enforcement of
all Collateral and to hold in trust for Bank all payments received in
connection with Collateral and from the sale, lease or other
disposition of any Collateral, all rights by way of suretyship or
guaranty and all rights in the nature of a lien or security interest
which Debtor now or later has regarding Collateral. Immediately upon
and after such notice, Debtor agrees to (a) endorse to Bank and
immediately deliver to Bank all payments received on Collateral or from
the sale, lease or other disposition of any Collateral or arising from
any other rights or interests of Debtor in the Collateral, in the form
received by Debtor without commingling with any other funds, and (b)
immediately deliver to Bank all property in Debtor's possession or
later coming into Debtor's possession through enforcement of Debtor's
rights or interests in the Collateral. Debtor irrevocably authorizes
Bank or any Bank employee or agent to endorse the name of Debtor upon
any checks or other items which are received in payment for any
Collateral, and to do any and all things necessary in order to reduce
these items to money. Bank shall have no duty as to the collection or
protection of Collateral or the proceeds of it, or as to the
preservation of any related rights, beyond the use of reasonable care
in the custody and preservation of Collateral in the possession of
Bank. Debtor agrees to take all steps necessary to preserve rights
against prior parties with respect to the Collateral. Nothing in this
Section 3.1 shall be deemed a consent by Bank to any sale, lease or
other disposition of any Collateral.
3.2 Debtor agrees that immediately upon Bank's request (whether or not any
Event of Default exists) the Indebtedness shall be on a "remittance
basis" as follows: Debtor shall at its sole expense establish and
maintain (and Bank, at Bank's option may establish and maintain at
Debtor's expense): (a) an United States Post Office lock box (the "Lock
Box"), to which Bank shall have exclusive access and control. Debtor
expressly authorizes Bank, from time to time, to remove contents from
the Lock Box, for disposition in accordance with this Agreement. Debtor
agrees to notify all account debtors and other parties obligated to
Debtor that all payments made to Debtor (other than payments by
electronic funds transfer) shall be remitted, for the credit of Debtor,
to the Lock Box, and Debtor shall include a like statement on all
invoices; and (b) a non-interest bearing deposit account with Bank
which shall be titled as designated by Bank (the "Cash Collateral
Account") to which Bank shall have exclusive access and control. Debtor
agrees to notify all account debtors and other parties obligated to
Debtor that all payments made to Debtor by electronic funds transfer
shall be remitted to the Cash Collateral Account, and Debtor, at Bank's
request, shall include a like statement on all invoices. Debtor shall
execute all documents and authorizations as required by Bank to
establish and maintain the Lock Box and the Cash Collateral Account.
3.3 All items or amounts which are remitted to the Lock Box, to the Cash
Collateral Account, or otherwise delivered by or for the benefit of
Debtor to, Bank on account of partial or full payment of, or with
respect to, any Collateral shall, at Bank's option, (i) be applied to
the payment of the Indebtedness, whether then due or not, in such order
or at such time of application as Bank may determine in its sole
discretion, or (ii) be deposited to the Cash Collateral Account. Debtor
agrees that Bank shall not be liable for any loss or damage which
Debtor may suffer as a result of Bank's processing of
items or its exercise of any other rights or remedies under this
Agreement, including without limitation indirect, special or
consequential damages, loss of revenues or profits, or any claim,
demand or action by any third party arising out of or in connection
with the processing of
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items or the exercise of any other rights or remedies under this
Agreement. Debtor agrees to indemnify and hold Bank harmless from and
against all such third party claims, demands or actions, and all
related expenses or liabilities, including, without limitation,
attorneys' fees and INCLUDING CLAIMS, DAMAGES, FINES, EXPENSES,
LIABILITIES OR CAUSES OF ACTION OF WHATEVER KIND RESULTING FROM BANK'S
OWN NEGLIGENCE e.xcept to the extent (but only to the extent) caused by
Bank's gross negligence or willful misconduct
4. Defaults, Enforcement and Application of Proceeds.
4.1 Upon the occurrence of any of the following events (each an "Event of
Default'), Debtor shall be in default under this Agreement:
(a) Any failure to pay the Indebtedness or any other indebtedness when
due, or such portion of it as may be due, by acceleration or
otherwise; or
(b) Any failure or neglect to comply with, or breach of or default
under, any term of this Agreement, or any other agreement or
commitment between Debtor or any guarantor of any of the
Indebtedness ("Guarantor") and Bank; or
(c) Any warranty, representation, financial statement, or other
information made, given or furnished to Bank by or on behalf of
Debtor or any Guarantor shall be, or shall prove to have been,
false or materially misleading when made, given, or furnished; or
(d) Any loss, theft. substantial damage or destruction to or of any
Collateral, or the issuance or filing of any attachment, levy,
garnishment or the commencement of any proceeding in connection
with any Collateral or of any other judicial process of, upon or
in respect of Debtor any Guarantor, or any Collateral; or
(e) Sale or other disposition by Debtor or any Guarantor of any
substantial portion of its assets or property or voluntary
suspension of the transaction of business by Debtor or any
Guarantor, or death, dissolution, termination of existence,
merger, consolidation, insolvency, business failure, or assignment
for the benefit of creditors of or by Debtor or any Guarantor; or
commencement of any proceedings under any state or federal
bankruptcy or insolvency laws or laws for the relief of debtors by
or against Debtor or any Guarantor; or the appointment of a
receiver, trustee, court appointee. sequestrator or otherwise, for
all or any part of the property of Debtor or any Guarantor; or
(f) Bank deems the margin of Collateral insufficient or itself
insecure, in good faith believing that the prospect of payment of
the Indebtedness or performance of this Agreement is impaired or
shall fear deterioration, removal, or waste of Collateral; or
(g) An event of default shall occur under any instrument, agreement or
other document evidencing, securing or otherwise relating to any
of the Indebtedness.
4.2 Upon the occurrence of any Event of Default, Bank may at its discretion
and without prior notice to Debtor declare any of all of the
Indebtedness to be immediately due and payable, and shall have and may
exercise any right or remedy available to it including, without
limitation. any one or more of the following rights and remedies:
(a) Exercise all the rights and remedies upon default, in foreclosure
and otherwise, available to secured parties under the provisions
of the Uniform Commercial Code and other applicable law;
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(b) Institute legal proceedings to foreclose upon the lien and
security interest granted by this Agreement, to recover
judgment for all amounts then due and owing as
Indebtedness, and to collect the same out of any Collateral
or the proceeds of any sale of it;
(c) Institute legal proceedings for the sale, under the
judgment or decree of any court of competent jurisdiction,
of any or all Collateral; and/or
(d) Personally or by agents, attorneys, or appointment of a
receiver, enter upon any premises where Collateral may then
be located, and take Possession of all or any of it and/or
render it unusable; and without being responsible for loss
or damage to such Collateral, hold, operate sell, lease, or
dispose of all or any Collateral at one or more public or
private sales, leasings or other dispositions, at places
and times and on terms and conditions as Bank may deem fit,
without any previous demand or advertisement; and except as
provided in this Agreement, all notice of sale, lease or
other disposition, and advertisement, and other notice or
demand, any right or equity of redemption, and any
obligation of a prospective purchaser or lessee to inquire
as to the power and authority of Bank to sell, lease, or
otherwise dispose of the Collateral or as to the
application by Bank of the proceeds of sale or otherwise,
which would otherwise be required by, or available to
Debtor under, applicable law are expressly waived by Debtor
to the fullest extent permitted.
At any sale pursuant to this Section 4,2, whether under the power of sale, by
virtue of judicial proceedings or otherwise, it shall not be necessary for Bank
or a public officer under order of a court to have present physical or
constructive possession of Collateral to be sold. The recitals contained in any
conveyances and receipts made and given by Bank or the public officer to any
purchaser at any sale made pursuant to this Agreement shall to the extent
permitted by applicable law, conclusively establish the truth and accuracy of
the matters stated (including, without limit, as to the amounts of the principal
of and interest on the Indebtedness, the accrual and nonpayment of it and
advertisement and conduct of the sale); and all prerequisites to the sale shall
be presumed to have been satisfied and performed. Upon any sale of any
Collateral, the receipt of the officer making the sale under judicial
proceedings or of Bank shall be sufficient discharge to the purchaser for the
purchase money, and the purchaser shall not be obligated to see to the
application of the money. Any sale of any Collateral under this Agreement shall
be a perpetual bar against Debtor with respect to that Collateral.
4.3 Debtor shall at the request of Bank, notify the account debtors or
obligors of Bank's security interest in the Collateral and direct
payment of it to Bank. Bank may, itself, upon the occurrence of any
Event of Default so notify and direct any account debtor or
obligor.
4.4 The proceeds of any sale or other disposition of Collateral
authorized by this Agreement shall be applied by Bank in such order
as the Bank in its discretion, deems appropriate including, without
limitation, the following order: first upon all expenses authorized
by the Uniform Commercial Code and all reasonable attorneys' fees
and legal expenses incurred by Bank: the balance of the proceeds of
the sale or other disposition shall be applied in the payment of
the Indebtedness, first to interest, then to principal, then to
remaining Indebtedness and the surplus, if any, shall be paid over
to Debtor or to such other person(s) as may be entitled to it under
applicable law. Debtor shall remain liable for any deficiency,
which it shall pay to Bank immediately upon demand.
4.5 Nothing in this Agreement is intended. nor shall it be construed,
to preclude Bank from pursuing any other remedy provided by law or
in equity for the collection of the Indebtedness or for the
recovery of any other sum to which Bank may be entitled for the
breach of this Agreement by Debtor. Nothing in this Agreement shall
reduce or release in any way any rights or security interests of
Bank contained in any existing agreement between Debtor or any
Guarantor and Bank.
4.6 No waiver of default or consent to any act by Debtor shall be
effective unless in writing and signed by an authorized officer of
Bank. No waiver of any default or forbearance on the part of
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Bank in enforcing any of its rights under this Agreement shall
operate as a waiver of any other default of or the same default on a
future occasion or of any rights.
4.7 Debtor irrevocably appoints Bank or any agent of Bank (which
appointment is coupled with an interest) the true and lawful
attorney of Debtor (with full power of substitution) in the name,
place and stead of, and at the expense of, Debtor:
(a) to demand, receive, sue for, and give receipts or acquittances
for any moneys due or to become due on any Collateral and to
endorse any item representing any payment on or proceeds of
the Collateral;
(b) to execute and file in the name of and on behalf of Debtor all
financing statements or other filings deemed necessary or
desirable by Bank to evidence, perfect, or continue the
security interests granted in this Agreement; and
(c) to do and perform any act on behalf of Debtor permitted or
required under this Agreement.
4.8 Upon the occurrence of an Event of Default, Debtor also agrees,
upon request of Bank, to assemble the Collateral and make it
available to Bank at any place designated by Bank which is
reasonably convenient to Bank and Debtor.
5. Miscellaneous.
5.1 Until Bank is advised in writing by Debtor to the contrary, all
notices, requests and demands required under this Agreement or by
law shall be given to, or made upon, Debtor at the first address
indicated in Section 5.15 below.
5.2 Debtor will give Bank not less than 90 days prior written notice of
all contemplated changes in Debtor's name, chief executive office
location, principal place of business location, and/or location of
any Collateral, but the giving of this notice shall not cure any
Event of Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility under
any contracts contained within the Collateral.
5.4 Bank has the right to sell, assign, transfer, negotiate or grant
participations or any interest in any or all of the Indebtedness
and any related obligations, including without limit this
Agreement. In connection with the above, but without limiting its
ability to make other disclosures to the full extent allowable,
Bank may disclose all documents and information which Bank now or
later has relating to Debtor, the Indebtedness or this Agreement,
however obtained. Debtor further agrees that Bank may provide
information relating to this Agreement or relating to Debtor or the
Indebtedness to the Bank's parent, affiliates, subsidiaries, and
service providers.
5.5 In addition to Bank's other rights, any indebtedness owing from
Bank to Debtor can be set off and applied by Bank on any
indebtedness at any time(s) either before or after maturity or
demand without notice to anyone. Any such action shall not
constitute acceptance of collateral in discharge of any portion of
the Indebtedness.
5.6 Debtor waives any right to require the Bank to: (a) proceed against
any person or property; (b) give notice of the terms, time and
place of any public or private sale of personal property security
held from Borrower or Debtor or any other person, or otherwise
comply with the provisions of Section 9.504 of the Uniform
Commercial Code; or (c) pursue any other remedy in the Bank's
power. Debtor waives notice of acceptance of this Agreement and
presentment, demand, protest,
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notice of protest, dishonor, notice of dishonor, notice of default,
notice of intent to accelerate or demand payment or notice of
acceleration of any Indebtedness, any and all other notices to
which the undersigned might otherwise be entitled and diligence in
collecting any Indebtedness, and agree(s) that the Bank may, once
or any number of times, modify the terms of any. Debtor
unconditionally and irrevocably waives each and every defense and
setoff of any nature which, under principles of guaranty or
otherwise, would operate to impair or diminish in any way the
obligation of Debtor under this Agreement, and acknowledges that
such waiver is by this reference incorporated into each security
agreement, collateral assignment, pledge and/or other document from
Debtor now or later securing the Indebtedness, and acknowledges
that as of the date of this Agreement no such defense or setoff
exists.
5.7 In the event that applicable law shall obligate Bank to give prior
notice to Debtor of any action to be taken under this Agreement,
Debtor agrees that a written notice given to Debtor at least five
days before the date of the act shall be reasonable notice of the
act and, specifically, reasonable notification of the time and
place of any public sale or of the time after which any private
sale, lease, or other disposition is to be made, unless a shorter
notice period is reasonable under the circumstances. A notice shall
be deemed to be given under this Agreement when delivered to Debtor
or when placed in an envelope addressed to Debtor and deposited,
with postage prepaid, in a post office or official depository under
the exclusive care and custody of the United States Postal Service
or delivered to an overnight courier. The mailing shall be by
overnight courier, certified, or first class mail.
5.8 Notwithstanding any prior revocation, termination, surrender, or
discharge of this Agreement in whole or in part, the effectiveness
of this Agreement shall automatically continue or be reinstated in
the event that any payment received or credit given by Bank in
respect of the Indebtedness is returned, disgorged, or rescinded
under any applicable law, including, without limitation, bankruptcy
or insolvency laws, in which case this Agreement, shall be
enforceable against Debtor as if the returned, disgorged, or
rescinded payment or credit had not been received or given by Bank,
and whether or not Bank relied upon this payment or credit or
changed its position as a consequence of it. In the event of
continuation or reinstatement of this Agreement, Debtor agrees upon
demand by Bank to execute and deliver to Bank those documents which
Bank determines are appropriate to further evidence (in the public
records or otherwise) this continuation or reinstatement, although
the failure of Debtor to do so shall not affect in any way the
reinstatement or continuation.
5.9 This Agreement and all the rights and remedies of Bank under this
Agreement shall inure to the benefit of Bank's successors and
assigns and to any other holder who derives from Bank title to or
an interest in the Indebtedness or any portion of it, and shall
bind Debtor and the heirs, legal representatives, successors, and
assigns of Debtor. Nothing in this Section 5.9 is deemed a consent
by Bank to any assignment by Debtor.
5.10 If there is more than one Debtor, all undertakings, warranties and
covenants made by Debtor and all rights, powers and authorities
given to or conferred upon Bank are made or given jointly and
severally.
5.11 Except as otherwise provided in this Agreement, all terms in this
Agreement have the meanings assigned to them in Article 9 (or,
absent definition in Article 9, in any other Article) of the
Uniform Commercial Code. "Uniform Commercial Code" means the Texas
Business and Commerce Code as amended.
5.12 No single or partial exercise, or delay in the exercise, of any
right or power under this Agreement, shall preclude other or
further exercise of the rights and powers under this Agreement. The
unenforceability of any provision of this Agreement shall not
affect the enforceability of the remainder of this Agreement. This
Agreement constitutes the entire agreement of Debtor and
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Bank with respect to the subject matter of this Agreement. No
amendment or modification of this Agreement shall be effective
unless the same shall be in writing and signed by Debtor and an
authorized officer of Bank. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
TEXAS, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
5.13 To the extent that any of the Indebtedness is payable upon demand,
nothing contained in this Agreement shall modify the terms and
conditions of that Indebtedness nor shall anything contained in
this Agreement prevent Bank from making demand, without notice and
with or without reason, for immediate payment of any or all of that
Indebtedness at any time(s), whether or not an Event of Default has
occurred.
5.14 Debtor's chief executive office and its principal place of business
is located and shall be maintained at 3737 Grader, Suite 110,
Garland, ________ County, Texas 75041. If Collateral is located at
other than the address specified above, such Collateral is located
and maintained at 10812 Alder Circle, Dallas, _________ County,
Texas 75238, and at 11052 Grader, Dallas, _________ County, Texas
75238. Collateral shall be maintained only at the locations
identified in this Section 5.14.
5.15 A carbon, photographic or other reproduction of this Agreement
shall be sufficient as a financing statement under the Uniform
Commercial Code and may be filed by Bank in any filing office.
5.17 This Agreement shall be terminated only by the filing of a
termination statement in accordance with the applicable provisions
of the Uniform Commercial Code, but the obligations contained in
Section 2.12 of this Agreement shall survive termination.
5.18 Debtor agrees to reimburse the Bank upon demand for any and all
costs and expenses (including, without limit, court costs, legal
expenses and reasonable attorneys' fees, whether or not suit is
instituted and, if suit is instituted, whether at the trial court
level, appellate level, in a bankruptcy, probate or administrative
proceeding or otherwise) incurred in enforcing or attempting to
enforce this Agreement or in exercising or attempting to exercise
any right or remedy under this Agreement or incurred in any other
matter or proceeding relating to this Security Agreement
6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT
WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO THIS
AGREEMENT OR THE INDEBTEDNESS.
7. THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS
BUSINESS AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS. OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
7. Special Provisions Applicable to this Agreement, (*None, if left blank).
Debtor:
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ASD SYSTEMS, INC., a Texas corporation
DEBTOR NAME TYPED/PRINTED
By:
------------------------------------
SIGNATURE OF
Its:
-----------------------------------
TITLE (If applicable)
Bank:
Comerica Bank-Texas,
a Texas banking association
By:
------------------------------------
SIGNATURE OF
Its:
-----------------------------------
TITLE (If applicable)
10
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Security Agreement
(Intellectual Property)
As of May ___, 1999, for value received, the undersigned ("Debtor") pledges,
assigns and grants to Comerica Bank-Texas ("Bank"), a Texas banking association
a continuing security interest and lien (any pledge, assignment, security
interest or other lien arising hereunder is sometimes referred to herein as a
"security interest") in the Collateral (as defined below) to secure payment when
due, whether by stated maturity, demand, acceleration or otherwise, of all
existing and future indebtedness ("Indebtedness") to the Bank of Debtor.
Indebtedness includes without limit any and all obligations or liabilities of
Debtor to the Bank, whether, absolute or contingent, direct or indirect,
voluntary or involuntary, liquidated or unliquidated, joint or several, known or
unknown, originally payable to the Bank or to a third party and subsequently
acquired by the Bank including, without limitation, any late charges, loan fees
or charges, and overdraft indebtedness, any and all obligations or liabilities
for which Debtor would otherwise be liable to the Bank were it not for the
invalidity or unenforceability of them by reason of any bankruptcy, insolvency
or other law, or for any other reason; any and all amendments, modifications,
renewals and/or extensions of any of the above; all costs incurred by Bank in
establishing, determining, continuing, or defending the validity or priority of
any security interest, or in pursuing its rights and remedies under this
Agreement or under any other agreement between Bank and Debtor or in connection
with any proceeding involving Bank as a result of any financial accommodation to
Debtor; and all other costs of collecting indebtedness, including without limit
attorneys' fees. Debtor agrees to pay Bank all such costs incurred by the Bank,
immediately upon demand, and until paid all costs shall bear interest at the
highest per annum rate applicable to any of the Indebtedness but not in excess
of the maximum rate permitted by law. Any reference in this Agreement to
attorneys' fees shall be deemed a reference to reasonable fees, costs, and
expenses of counsel and paralegals, whether or not a suit or action is
instituted, and to court costs if a suit or action is instituted, and whether
attorneys' fees or court costs are incurred at the trial court level, on appeal,
in a bankruptcy administrative or probate proceeding or otherwise.
1. Collateral shall mean all of the following property Debtor now or
later owns or has an interest in, wherever located:
(a) Any and all copyright rights, copyright applications. copyright
registrations and like protections in each work or authorship and
derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or
hereafter existing, created, acquired or held (collectively, the
"Copyrights");
(b) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products nor or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Debtor now or
hereafter existing, created, acquired or held;
(d) All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the
same (collectively, the "Patents");
(e) Any trademark and serviceman rights, whether registered or not,
applications to register and registrations of the same and like
protections, and the entire goodwill of the business of Debtor
connected with and symbolized by such trademarks (collectively, the
"Trademarks");
(f) Any and all claims for damages by way of past, present and future
infringement of any of the rights included above, with the right,
but not the obligation, to sue for and collect such damages for
said use or infringement of the intellectual property rights
identified above;
(g) All licenses or other right to use any of the Copyrights, Patents
or Trademarks, and all license fees and royalties arising from such
use to the extent permitted by such license or rights;
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(h) All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks or Patents;
(i) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or
warranty payable in respect of any of the foregoing;
(j) all goods, instruments, documents, policies and certificates of
insurance, deposits, money, investment properly or other properly
(except real property which is not a fixture) which are now or
later in possession or control of Bank, or as to which Bank now or
later controls possession by documents or otherwise; and
(k) all additions, attachments, accessions, parts, replacements,
substitutions, renewals, interest, dividends, distributions, rights
of any kind (including but not limited to stock splits, stock
rights, voting and preferential rights), products, and proceeds of
or pertaining to the above including, without limit, cash or other
property which were proceeds and are recovered by a bankruptcy
trustee or otherwise as a preferential transfer by Debtor.
2. Warranties, Covenants and Agreements. Debtor represents, warrants,
covenants and agrees as follows:
2.1 Debtor shall furnish to Bank, in form and at intervals as Bank may
request, any information Bank may reasonably request and allow
Bank to examine, inspect, and copy any of Debtor's books and
records and allow Bank to visit and inspect any of Debtor's plants
or facilities that manufacture, install or store products (or that
have done so during the prior 6 month period) that are sold
utilizing any of the Collateral and to inspect the products and
quality control records relating thereto. Debtor shall, at the
request of Bank, mark its records and the Collateral to clearly
indicate the security interest of Bank under this Agreement.
2.2 At the time any Collateral becomes, or is represented to be,
subject to a security interest in favor of Bank, Debtor shall be
deemed to have warranted that (a) Debtor is the lawful owner of
the Collateral and has the right and authority to subject it to a
security interest granted to Bank; (b) none of the Collateral is
subject to any security interest other than that in favor of Bank
and there are no financing statements on file, other than in favor
of Bank; and (c) Debtor acquired its rights in the Collateral in
the ordinary course of its business.
2.3 Debtor will keep the Collateral free at all times from all claims,
liens, security interests and encumbrances other than those in
favor of Bank. Debtor will not, without the prior written consent
of Bank, sell, transfer or lease, or permit to be sold,
transferred or leased, any or all of the Collateral, except for
non-exclusive licenses granted by Debtor in the ordinary course of
business. Bank or its representatives may at all reasonable times
inspect the Collateral and may enter upon all premises where the
Collateral is kept or might be located.
2.4 Debtor will do all acts and will execute or cause to be executed
all writings requested by Bank to establish, maintain and continue
a perfected and first security interest of Bank in the Collateral.
Debtor agrees that Bank has no obligation to acquire or perfect
any lien on or security interest n any asset(s), whether realty or
personalty, to secure payment of the indebtedness, and Debtor is
not relying upon assets in which the Bank may have a lien or
security interest for payment of the Indebtedness.
2.5 Debtor will pay within the time that they can be paid without
interest or penalty all taxes, assessments and similar charges
which at any time are or may become a lien, charge, or encumbrance
upon any Collateral, except to the extent contested in good faith
and bonded in a manner satisfactory to Bank. If Debtor fails to
pay any of these taxes, assessments, or other charges in the time
provided above. Bank has the option (but not the obligation) to do
so, and
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Debtor agrees to repay all amounts so expended by Bank immediately
upon demand, together with interest at the highest lawful default
rate which could be charged by Bank on any Indebtedness.
2.6 Debtor will keep the Collateral in good condition and will protect
it from loss, damage, or deterioration from any cause. Debtor has
and will maintain at all times (a) with respect to the Collateral,
insurance under an "all risk" policy against fire and other risks
customarily insured against, and (b) public liability insurance
and other insurance as may be required by law or reasonably
required by Bank, all of which insurance shall be in amount, form
and content, and written by companies as may be satisfactory to
Bank, containing a lender's loss payable endorsement acceptable to
Bank. Debtor will deliver to Bank immediately upon demand evidence
satisfactory to Bank that the required insurance has been
procured. If Debtor fails to maintain satisfactory insurance, Bank
has the option (but not the obligation) to do so and Debtor agrees
to repay all amounts so expended by Bank immediately upon demand,
together with interest at the highest lawful default rate which
could be charged by Bank on any indebtedness.
2.7 Debtor at all times shall be in strict compliance with all
applicable laws, including without limit any laws, ordinances,
directives, orders, statutes, or regulations an object of which is
to regulate or improve health, safety, or the environment
("Environmental Laws").
2.8 If Bank, acting in its sole discretion, redelivers Collateral to
Debtor or Debtor's designee for the purpose of (a) the ultimate
sale or exchange thereof; or (b) presentation, collection,
renewal, or registration of transfer thereof; or (c) loading,
unloading, storing, shipping, transshipping, manufacturing,
processing or otherwise dealing with it preliminary to sale or
exchange; such redelivery shall be in trust for the benefit of
Bank and shall not constitute a release of Bank's security
interest in it or in the proceeds or products of it unless Bank
specifically so agrees in writing. If Debtor requests any such
redelivery, Debtor will deliver with such request a duly executed
financing statement in form and substance satisfactory to Bank.
Any proceeds of Collateral coming into Debtor's possession as a
result of any such redelivery shall be held in trust for Bank and
immediately delivered to Bank for application on the Indebtedness.
Bank may (in its sole discretion) deliver any or all of the
Collateral to Debtor, and such delivery by Bank shall discharge
Bank from all liability or responsibility for such Collateral.
Bank, at its option, may require delivery of any Collateral to
Bank at any time with such endorsements or assignments of the
Collateral as Bank may request.
2.9 At any time and without notice, Bank may (a) cause any or all of
the Collateral to be transferred to its name or to the name of its
nominees; (b) receive or collect by legal proceedings or otherwise
all dividends, interest, principal payments and other sums and all
other distributions at any time payable or receivable on account
of the Collateral, and hold the same as Collateral, or apply the
same to the Indebtedness, the manner and distribution of the
application to be in the sole discretion of Bank; (c) enter into
any extension, subordination, reorganization, deposit, merger or
consolidation agreement or any other agreement relating to or
affecting the Collateral, and deposit or surrender control of the
Collateral, and accept other property in exchange for the
Collateral and hold or apply the property or money so received
pursuant to this Agreement.
2.10 Bank may assign any of the Indebtedness and deliver any or all of
the Collateral to its assignee, who then shall have with respect
to Collateral so delivered all the rights and powers of Bank under
this Agreement, and after that Bank shall be fully discharged from
all liability and responsibility with respect to Collateral so
delivered.
2.11 Debtor shall defend, indemnify and hold harmless Bank, its
employees, agents, shareholders, affiliates, officers, and
directors from and against any and all claims, damages, fines,
expenses, liabilities or causes of action of whatever kind,
including without limit consultant fees, legal expenses, and
attorneys' fees, suffered by any of them as a direct or indirect
result of any actual or
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asserted violation of any law including, without limit,
Environmental Laws, or of any remediation relating to any property
required by any law, including without limit Environmental Laws.
INCLUDING ANY CLAIMS, DAMAGES, FINES, EXPENSES, LIABILITIES OR
CAUSES OF ACTION OF WHATEVER KIND RESULTING FROM BANK'S OWN
NEGLIGENCE, except and to the extent (but only to the extent)
caused by Bank's gross negligence or willful misconduct.
2.12 Debtor is now the sole owner of the Collateral, except for non-
exclusive licenses granted by Debtor to its customers in the
ordinary course of business.
2.13 Performance of this Security Agreement does not conflict with or
result in a breach of any agreement to which Debtor is party or by
which Debtor is bound, except to the extent that certain
intellectual property agreements prohibit the assignment of the
rights thereunder to a third party without the licensor's or other
party's consent and this Agreement constitutes an assignment.
2.14 Each of the Patents is valid and enforceable, and no part of the
Collateral has been judged invalid or unenforceable, in whole or
in part, and no claim has been made that any part of the
Collateral violates the rights of any party.
2.15 Debtor shall deliver to Bank within thirty (30) days of the last
day of each fiscal quarter, a report signed by Debtor, in form
reasonably acceptable to Bank, listing any applications or
registrations that Debtor has made or fled in respect of any
patents, copyrights or trademarks and the status of any
outstanding applications or registrations. Debtor shall promptly
advise Bank of any material change in the composition of the
Collateral, including but not limited to any subsequent ownership
right of the Debtor in or to any Trademark, Patent or Copyright
not specified in this Agreement.
2.16 Debtor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use
its best efforts to detect infringements of the Trademarks,
Patents and Copyrights and promptly advise Bank in writing of
material infringements detected and (iii) not allow any
Trademarks, Patents or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Bank, which
shall not be unreasonably withheld, unless Debtor determines that
reasonable business practices suggest that abandonment is
appropriate.
2.17 Debtor shall register or cause to be registered (to the extent not
already registered) with the United States Patent and Trademark
Office or the United States Copyright Office, as applicable, those
intellectual property rights listed on Exhibits A, B and C hereto
within thirty (30) days of the date of this Agreement. Debtor
shall register or cause to be registered with the United States
Patent and Trademark Office or the United States Copyright Office,
as applicable, those additional intellectual property rights
developed or acquired by Debtor from time to time in connection
with any product prior to the sale or licensing of such product to
any third party (including without limitation revisions or
additions to the intellectual property rights listed on such
Exhibits A, B and C). Debtor shall, from time to time, execute and
file such other instruments, and take such further actions as Bank
may reasonably request from time to time to perfect or continue
the perfection of Bank's interest in the Collateral.
2.18 This Security Agreement creates, and in the case of after-acquired
Collateral, this Security Agreement will create at the time Debtor
first has rights in such after-acquired Collateral, in favor of
Bank a valid and perfected first priority security interest in the
Collateral in the United States securing the payment and
performance of the Indebtedness upon making the filings referred
to below:
2.19 Except for, and upon, the filing with the United States Patent and
Trademark office with respect to the Patents and Trademarks and
the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests created hereunder,
and, except as has been already made
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or obtained, no authorization, approval or other action by, and no
notice to or filing with, any U.S. governmental authority or U.S.
regulatory body is required either (i) for the grant by Debtor of
the security interest granted hereby or for the execution,
delivery or performance of this Security Agreement by Debtor in
the U.S. or (ii) for the perfection in the United States or the
exercise by Bank of its rights and remedies hereunder:
2.20 All information heretofore, herein or hereafter supplied to Bank
by or on behalf of Debtor with respect to the Collateral is
accurate and complete in all material respects;
2.21 Debtor shall not enter into any agreement that would materially
impair or conflict with Debtor's obligations hereunder without
Bank's prior written consent. Debtor shall not permit the
inclusion in any material contract to which it becomes a party of
any provisions that could or might in any way prevent the creation
of a security interest in Debtor's rights and interests in any
property included within the definition of the Collateral acquired
under such contracts, except that certain contracts may contain
anti-assignment provisions that could in effect prohibit the
creation of a security interest in such contracts if Debtor is
required, in its commercially reasonable judgment to accept such
provisions; and
2.22 Upon any executive officer of Debtor obtaining knowledge thereof,
Debtor will promptly notify Bank in writing of any event that
materially adversely affects the value of any of the Collateral,
the ability of Debtor to dispose of any Collateral or the rights
and remedies of Bank in relation thereto, including the levy of
any legal process against any of the Collateral.
3. Collection of Proceeds.
3.1 Debtor agrees to collect and enforce payment of all Collateral
until Bank shall direct Debtor to the contrary. Immediately upon
notice to Debtor by Bank and at all times after that, Debtor
agrees to fully and promptly cooperate and assist Bank in the
collection and enforcement of all Collateral and to hold in trust
for Bank all payments received in connection with Collateral and
from the sale, lease or other disposition of any Collateral, all
rights by way of suretyship or guaranty and all rights in the
nature of a lien or security interest which Debtor now or later
has regarding Collateral. Immediately upon and after such notice,
Debtor agrees to (a) endorse to Bank and immediately deliver to
Bank all payments received on Collateral or from the sale, lease
or other disposition of any Collateral or arising from any other
rights or interests of Debtor in the Collateral, in the form
received by Debtor without commingling with any other funds, and
(b) immediately deliver to Bank all property in Debtor's
possession or later coming into Debtor's possession through
enforcement of Debtor's rights or interests in the Collateral.
Debtor irrevocably authorizes Bank or any Bank employee or agent
to endorse the name of Debtor upon any checks or other items which
are received in payment for any Collateral, and to do any and all
things necessary in order to reduce these items to money. Bank
shall have no duty as to the collection or protection of
Collateral or the proceeds of it, or as to the preservation of any
related rights, beyond the use of reasonable care in the custody
and preservation of Collateral in the possession of Bank. Debtor
agrees to take all steps necessary to preserve rights against
prior parties with respect to the Collateral. Nothing in this
Section 3.1 shall be deemed a consent by Bank to any sale, lease
or other disposition of any Collateral.
4. Defaults, Enforcement and Application of Proceeds.
4.1 Upon the occurrence of any of the following events (each an "Event
of Default"), Debtor shall be in default under this Agreement:
(a) Any failure to pay the Indebtedness or any other indebtedness when
due, or such portion of it as may be due, by acceleration or
otherwise; or
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(b) Any failure or neglect to comply with, or breach of or default
under, any term of this Agreement, or any other agreement or
commitment between Debtor or any guarantor of any of the
Indebtedness ("Guarantor") and Bank; or
(c) Any warranty, representation, financial statement, or other
information made, given or furnished to Bank by or on behalf of
Debtor or any Guarantor shall be, or shall prove to have been,
false or materially misleading when made, given, or furnished; or
(d) Any loss, theft, substantial damage or destruction to or of any
Collateral, or the issuance or filing of any attachment, levy,
garnishment or the commencement of any proceeding in connection
with any Collateral or of any other judicial process of, upon or
in respect of Debtor, any Guarantor, or any Collateral; or
(e) Sale or other disposition by Debtor or any Guarantor of any
substantial portion of its assets or property or voluntary
suspension of the transaction of business by Debtor or any
Guarantor, or death, dissolution, termination of existence,
merger, consolidation, insolvency, business failure, or assignment
for the benefit of creditors of or by Debtor or any Guarantor; or
commencement of any proceedings under any state or federal
bankruptcy or insolvency laws or laws for the relief of debtors by
or against Debtor or any Guarantor; or the appointment of a
receiver, trustee, court appointee, sequestrator or otherwise, for
all or any part of the property of Debtor or any Guarantor; or
(f) Bank deems the margin of Collateral insufficient or itself
insecure, in good faith believing that the prospect of payment of
the Indebtedness or Performance of this Agreement is impaired or
shall fear deterioration, removal, or waste of Collateral; or
(g) An event of default shall occur under any instrument, agreement or
other document evidencing, securing or otherwise relating to any
of the Indebtedness.
4.2 Upon the occurrence of any Event of Default, Bank may at its
discretion and without prior notice to Debtor declare any or all
of the Indebtedness to be immediately due and payable, and shall
have and may exercise any right or remedy available to it
including, without limitation, any one or more of the following
rights and remedies:
(a) Exercise all the rights and remedies upon default, in foreclosure
and otherwise, available to secured parties under the provisions
of the Uniform Commercial Code and other applicable law;
(b) Institute legal proceedings to foreclose upon the lien and
security interest granted by this Agreement, to recover judgment
for all amounts then due and owing as Indebtedness, and to collect
the same out of any Collateral or the proceeds of any sale of it;
(c) Institute legal proceedings for the sale, under the judgment or
decree of any court of competent jurisdiction, of any or all
Collateral; and/or
(d) Personally or by agents. attorneys, or appointment of a receiver,
enter upon any premises where Collateral may then be located, and
take possession of all or any of it and/or render it unusable; and
without being responsible for loss or damage to such Collateral,
hold, operate, sell, lease, or dispose of all or any Collateral at
one or more public or private sales, leasings or other
dispositions. at places and times and on terms and conditions as
Bank may deem fit, without any previous demand or advertisement;
and except as provided in this Agreement, all notice of sale,
lease or other disposition. and advertisement, and other notice or
demand, any right or equity of redemption, and any obligation of a
prospective purchaser or lessee to inquire as to the power and
authority of Bank to sell, lease, or otherwise dispose of the
Collateral or as to the application by
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Bank of the proceeds of sale or otherwise, which would otherwise
be required by, or available to Debtor under, applicable law are
expressly waived by Debtor to the fullest extent permitted.
(e) Use and enjoy a nonexclusive, royalty-free license to use the
Copyrights, Patents and Trademarks.
At any sale pursuant to this Section 4.2. whether under the power of sale, by
virtue of judicial proceedings or otherwise, it shall not be necessary for Bank
or a public officer under order of a court to have present physical or
constructive possession of Collateral to be sold. The recitals contained in any
conveyances an receipts made and given by Bank or the public officer to any
purchaser at any sale made pursuant to this Agreement shall, to the extent
permitted by applicable law, conclusively establish the truth and accuracy of
the matters stated (including, without limit, as to the amounts of the principal
of and interest on the Indebtedness, the accrual and nonpayment of it and
advertisement and conduct of the sale); and all prerequisites to the sale shall
be presumed to have been satisfied and performed. Upon any sale of any
Collateral, the receipt of the office, making the sale under judicial
proceedings or of Bank shall be sufficient discharge to the purchaser for the
purchase money, and the purchaser shall not be obligated to see to the
application of the money. Any sale of any Collateral under this Agreement shall
be a perpetual bar against Debtor with respect to that Collateral.
4.3 Debtor shall at the request of Bank, notify the account debtors or
obligors of Bank's security interest in the Collateral and direct
payment of it to Bank. Bank may, itself, upon the occurrence of
any Event of Default so notify and direct any account debtor or
obligor.
4.4 The proceeds of any sale or other disposition of Collateral
authorized by this Agreement shall be applied by Bank in such
order as the Bank, in its discretion, deems appropriate including.
without limitation, the following order; first upon all expenses
authorized by the Uniform Commercial Code and all reasonable
attomeys' fees and legal expenses incurred by Bank; the balance of
the proceeds of the sale or other disposition shall be applied in
the payment of the Indebtedness, first to interest, then to
principal, then to remaining Indebtedness and the surplus, if any,
shall be paid over to Debtor or to such other person(s) as may be
entitled to it under applicable law. Debtor shall remain liable
for any deficiency, which it shall pay to Bank immediately upon
demand.
4.5 Nothing in this Agreement is intended, nor shall it be construed,
to preclude Bank from pursuing any other remedy provided by law or
in equity for the collection of the Indebtedness or for the
recovery of any other sum to which Bank may be entitled for the
breach of this Agreement by Debtor Nothing in this Agreement shall
reduce or release in any way any rights or security interests of
Bank contained in any existing agreement between Debtor or any
Guarantor and Bank.
4.6 No waiver of default or consent to any act by Debtor shall be
effective unless in writing and signed by an authorized officer of
Bank. No waiver of any default or forbearance on the part of Bank
in enforcing any of its rights under this Agreement shall operate
as a waiver of any other default or of the same default on a
future occasion or of any rights.
4.7 Debtor irrevocably appoints Bank or any agent of Bank (which
appointment is coupled with an interest) the true and lawful
attorney of Debtor (with full power of substitution) in the name,
place and stead of, and at the expense of Debtor:
(a) to demand, receive, sue for, and give receipts or
acquittances for any moneys due or to become due on any
Collateral and to endorse any item representing any payment
on or proceeds of the Collateral;
(b) to execute and file in the name of and on behalf of Debtor
all financing statements or other filings deemed necessary or
desirable by Bank to evidence, perfect, or continue the
security interests granted in this Agreement, and Debtor
further authorizes and requests that the Register of
Copyrights and the Commissioner of Patents and Trademarks
record this Security Agreement; and
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(c) to do and perform any act on behalf of Debtor permitted or
required under this Agreement;
(d) to modify, in its sole discretion, this Security Agreement
without first obtaining Debtor's approval of or signature to
such modification by amending Exhibit A, Exhibit B and
Exhibit C hereof, as appropriate, to include reference to any
right, title or interest in any Copyrights, Patents or
Trademarks acquired by Debtor after the execution hereof or
to delete any reference to any right, title or interest in
any Copyrights, Patents or Trademarks in which Debtor no
longer has or claims any right, title or interest;
4.8 Upon the occurrence of an Event of Default, Debtor also agrees,
upon request of Bank, to assemble the Collateral and make it
available to Bank at any place designated by Bank which is
reasonably convenient to Bank and Debtor.
5. Miscellaneous.
5.1 United Bank is advised in writing by Debtor to the contrary. all
notices, requests and demands required under this Agreement or by
law shall be given to, or made upon, Debtor at the first address
indicated in Section 5.15 below.
5.2 Debtor will give Bank not less than 90 days prior written notice
of all contemplated changes in Debtor's name, chief executive
office location, principal place of business location, and/or
location of any Collateral, but the giving of this notice shall
not cure any Event of Default caused by this change.
5.3 Bank assumes no duty of performance or other responsibility under
any contracts contained within the Collateral.
5.4 Bank has the right to sell, assign. transfer, negotiate or grant
participations or any interest in, any or all of the Indebtedness
and any related obligations, including without limit this
Agreement. In connection with the above, but without limiting its
ability to make other disclosures to the full extent allowable,
Bank may disclose all documents and information which Bank now or
later has relating to Debtor, the Indebtedness or this Agreement,
however obtained. Debtor further agrees that Bank may provide
information relating to this Agreement or relating to Debtor or
the Indebtedness to the Bank's parent, affiliates, subsidiaries,
and service providers.
5.5 In addition to Bank's other rights, any indebtedness owing from
Bank to Debtor can be set off and applied by Bank on any
Indebtedness at any time(s) either before or after maturity or
demand without notice to anyone. Any such action shall not
constitute acceptance of Collateral in discharge of any portion of
the Indebtedness.
5.6 Debtor waives any right to require the Bank to: (a) proceed
against any person or property; (b) give notice of the terms, time
and place of any public or private sale of personal property
security held from Debtor or any other person, or otherwise comply
with the provisions of Section 9.504 of the Uniform Commercial
Code; or (c) pursue any other remedy in the Bank's power. Debtor
waives notice of acceptance of this Agreement and presentment,
demand, protest, notice of protest, dishonor, notice of dishonor,
notice of default, notice of intent to accelerate or demand
payment or notice of acceleration of any Indebtedness, any and all
other notices to which the undersigned might otherwise be
entitled. Debtor unconditionally and irrevocably waives each and
every defense and setoff of any nature which, under principles of
guaranty or otherwise, would operate to impair or diminish in any
way the obligation of Debtor under this Agreement, and
acknowledges that such waiver is by this reference incorporated
into each security agreement, collateral assignment, pledge and/or
other document from Debtor now or later securing the
8
<PAGE>
Indebtedness, and acknowledges that as of the date of this
Agreement no such defense or setoff exists.
5.7 In the event that applicable law shall obligate Bank to give prior
notice to Debtor of any action to be taken under this Agreement,
Debtor agrees that a written notice given to Debtor at least five
days before the date of the act shall be reasonable notice of the
act and, specifically, reasonable notification of the time and
place of any public sale or of the time after which any private
sale, lease, or other disposition is to be made. unless a shorter
notice period is reasonable under the circumstances. A notice
shall be deemed to be given under this Agreement when delivered to
Debtor or when placed in an envelope addressed to Debtor and
deposited. with postage prepaid, in a post office or official
depository under the exclusive care and custody of the United
States Postal Service or delivered to an overnight courier. The
mailing shall be by overnight courier, certified, or first class
mail.
5.8 Notwithstanding any prior revocation, termination, surrender, or
discharge of this Agreement in whole or in part, the effectiveness
of this Agreement shall automatically continue or be reinstated in
the event that any payment received or credit given by Bank in
respect of the Indebtedness is returned, disgorged, or rescinded
under any applicable law, including, without limitation.
bankruptcy or insolvency laws, in which case this Agreement, shall
be enforceable against Debtor as if the returned, disgorged, or
rescinded payment or credit had not been received or given by
Bank, and whether or not Bank relied upon this payment or credit
or changed its position as a consequence of it. In the event of
continuation or reinstatement of this Agreement, Debtor agrees
upon demand by Bank to execute and deliver to Bank those documents
which Bank determines are appropriate to further evidence (in the
public records or otherwise) this continuation or reinstatement,
although the failure of Debtor to do so shall not affect in any
way the reinstatement or continuation.
5.9 This Agreement and all the rights and remedies of Bank under this
Agreement shall inure to the benefit of Bank's successors and
assigns and to any other holder who derives from Bank title to or
an interest in the Indebtedness or any portion of it, and shall
bind Debtor and the heirs, legal representatives, successors, and
assigns of Debtor. Nothing in this Section 5.9 is deemed a consent
by Bank to any assignment by Debtor.
5.10 If there is more than one Debtor, all undertakings, warranties and
covenants made by Debtor and all rights, powers and authorities
given to or conferred upon Bank are made or given jointly and
severally.
5.11 Except as otherwise provided in this Agreement, all terms in this
Agreement have the meanings assigned to them in Article 9 (or,
absent definition in Article 9, in any other Article) of the
Uniform Commercial Code. "Uniform Commercial Code" means the Texas
Business and Commerce Code as amended.
5.12 No single or partial exercise, or delay in the exercise, of any
right or power under this Agreement, shall preclude other or
further exercise of the rights and powers under this Agreement.
The unenforceability of any provision of this Agreement shall not
affect the enforceability of the remainder of this Agreement. This
Agreement constitutes the entire agreement of Debtor and Bank with
respect to the subject matter of this Agreement. No amendment or
modification of this Agreement shall be effective unless the same
shall be in writing and signed by Debtor and an authorized officer
of Bank. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF TEXAS, WITHOUT
REGARD TO CONFLICT OF LAWS PRINCIPLES.
5.13 To the extent that any of the Indebtedness is payable upon demand,
nothing contained in this Agreement shall modify the terms and
conditions of that Indebtedness nor shall anything
9
<PAGE>
contained in this Agreement prevent Bank from making demand,
without notice and with or without reason, for immediate payment
of any or all of that Indebtedness at any time(s), whether or not
an Event of Default has occurred.
5.14 A carbon, photographic or other reproduction of this Agreement
shall be sufficient as a financing statement under the Uniform
Commercial Code and may be filed by Bank in any filing office.
5.15 This Agreement shall be terminated only by the filing of a
termination statement in accordance with the applicable provisions
of the Uniform Commercial Code, but the obligations contained in
Section 2.13 of this Agreement shall survive termination.
5.16 Debtor agrees to reimburse the Bank upon demand for any and all
costs and expenses (including, without limit, court costs, legal
expenses and reasonable attomeys' fees, whether or not suit is
instituted and, if suit is instituted, whether at the trial court
level, appellate level, in a bankruptcy, probate or administrative
proceeding or otherwise) incurred in enforcing or attempting to
enforce this Agreement or in exercising or attempting to exercise
any right or remedy under this Agreement or incurred in any other
matter or proceeding relating to this Security Agreement.
6. DEBTOR AND BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS A
CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT
WAIVES ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING
THE PERFORMANCE OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS
AGREEMENT OR THE INDEBTEDNESS.
7. THIS WRITTEN LOAN AGREEMENT (AS DEFINED BY SECTION 26.02 OF THE TEXAS
BUSINESS AND COMMERCE CODE) REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
8. Special Provisions Applicable to this Agreement. (*None, If left blank)
Debtor:
ASD SYSTEMS, INC., a Texas corporation
By:
-----------------------------------
SIGNATURE OF
Its:
----------------------------------
TITLE (If applicable)
Bank:
Comerica Bank-Texas,
a Texas banking association
By:
-----------------------------------
SIGNATURE OF
Its:
-----------------------------------
TITLE
10
<PAGE>
LANDLORD'S CONSENT
<TABLE>
- -------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
5-5-1999 4-30-2003 599 140 43577
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
References in the shaded area are for Lender's use only and do no limit the applicability of this document to any particular
loan or item
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: ASD Systems, Inc. (TIN: ) Lender: Comerica Bank-Texas
3737 Grader Street, Suite 110 Austin-High Technology
Garland, TX 75041 P.O. Box 650282
Dallas, TX 75265-0282
================================================================================
THIS LANDLORD'S CONSENT is entered into among ASD Systems, Inc. ("Borrower"),
whose address Is 3737 Grader Street, Suite 110, Garland, TX 75041; Comerica Bank
- - Texas ("Lender"), whose address is P.O. Box 650282, Dallas TX 75265-0282;
and("Landlord"), whose address is _________________. Borrower and Lender have
entered into, or are about to enter into, an agreement whereby Lender has
acquired or will acquire a security interest or other interest in the
Collateral. Some or all of the Collateral may be affixed or otherwise become
located on the Premises. To induce Lender to extend the Loan to Borrower
against such security interest in the Collateral and for other valuable
consideration, Landlord hereby agrees with Lender and Borrower as follows.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined shall have the meanings attributed
to such terms in the Uniform Commercial Code. All references to dollar amounts
shall mean money of the United States of America.
Agreement. The word "Agreement' means this Landlord's Consent, as this
Landlord's Consent may be amended or modified together with all exhibits
and schedules attached to this Landlord's Consent from time to time.
Borrower. The word "Borrower" means ASD Systems, Inc.
Collateral: The word "Collateral" means certain of Borrower's personal
property in which Lender has acquired or will acquire a security
interest, including without limitation the following specific property:
All Inventory, Chattel Paper, Accounts, Equipment and General
Intangibles
Landlord. The word "Landlord" means _________________. The term
"Landlord" is used for convenience purposes only. Landlord's interest in
the Premises may be that of a fee owner, lessor, sublessor or
lienholder, or that of any other holder of an interest in the Premises
which may be, or may become, prior to the interest of Lender.
Lease. The word "Lease" means that certain lease of the Promises, dated
____, between Landlord and Borrower.
11
<PAGE>
Lender. The word "Lender" means Comerica Bank - Texas, its successors
and assigns.
Loan. The word "Loan" means the loan, or any other financial
accommodations, Lender has made or is making to Borrower.
Premises. The word "Premises" means the real property located in Dallas
County, State of Texas, commonly known as 3737 Grader Street, Suite 110,
Garland, TX 75041.
BORROWER'S ASSIGNMENT OF LEASE. Borrower hereby assigns to Lender all of
Borrower's rights in the Lease, as partial security for the Loan. The parties
intend that this assignment will be a present transfer to Lender of all of
Borrower's rights under the Lease, subject to Borrower's rights to use the
Premises and enjoy the benefits of the Lease while not in default on the Loan or
Lease. Upon full performance by Borrower under the Loan, this assignment shall
be ended, without the necessity of any further action by any of the parties.
This assignment includes all renewals of and amendments to the Lease or the
Loan, until the Loan is paid in full. No amendments may be made to the Lease
without Lender's prior written consent, which shall not be unreasonably withheld
or delayed.
CONSENT OF LANDLORD. Landlord consents to the above assignment. If Borrower
defaults under the Loan or the Lease, Lender may reassign the Lease, and
Landlord agrees that Landlord's consent to any such reassignment will not be
unreasonably withheld or delayed. So long as Lender has not entered the
Promises for the purpose of operating a business, Lender will have no liability
under the Lease, including without limitation liability to, rent. Whether or
not Lender enters into possession of the Promises for any purpose, Borrower will
remain fully liable for all obligations of Borrower as lessee under the Lease.
While Lender is in possession of the Premises, Lender will cause all payments
due under the Lease and attributable to that period of time to be made to
Landlord. If Lender later reassigns the Lease or vacates the Promises, Lender
will have no further obligation to Landlord.
LEASE DEFAULTS. Both Borrower and Landlord agree and represent to Lender that,
to the best of their knowledge, there is no breach or offset existing under the
Lease or under any other agreement between Borrower and Landlord. Landlord
agrees not to terminate the Lease, despite any default by Borrower, without
giving Lender written notice of the default and an opportunity to cure the
default within a period of sixty (60) days from the receipt of the notice. If
the default is one that cannot reasonably be cured by Lender (such as
insolvency, bankruptcy, or other judicial proceedings against Borrower), then
Landlord will not terminate the Lease so long as Landlord receives all sums due
under the Lease for the period during which Lender is in possession of the
Premises, or so long as Lender reassigns the Lease to a new lessee reasonably
satisfactory to Landlord.
DISCLAIMER OF INTEREST. Landlord hereby consents to Lender's security interest
(or other interest) in the Collateral and disclaims all interests, liens and
claims which Landlord now has or may hereafter acquire in the Collateral.
Landlord agrees that any lion or claim it may now have or may hereafter have in
the Collateral will be subject at all times to Lender's security interest (or
other present or future interest) in the Collateral and will be subject to the
rights granted by Landlord to Lender in this Agreement.
ENTRY ONTO PREMISES. Landlord and Borrower grant to Lender the right to enter
upon the Premises for the purpose of removing the Collateral from the Premises
or conducting sales of the Collateral on the Premises. The rights granted to
Lender in this Agreement will continue until a reasonable time after Lender
receives notice in writing from Landlord that Borrower no longer is in lawful
possession of the Premises. If Lender enters onto the Premises and removes the
Collateral, Lender agrees with Landlord not to remove any Collateral in such a
way that the Premises are damaged, without either repairing any such damage or
reimbursing Landlord for the cost of repair.
MISCELLANEOUS PROVISIONS. This Agreement shall extend to and bind the
respective heirs, personal representatives, successors and assigns of the
parties to this Agreement. The covenants of Borrower and Landlord respecting
subordination of the claim or claims of Landlord in favor of Lender shall extend
to, include, and be enforceable by any transferee or endorsee to whom Lender may
transfer any claim or claims to which this Agreement shall apply. Lender need
not accept this Agreement in writing or otherwise to make it effective. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Texas. It Landlord is
12
<PAGE>
other than an individual, any agent or other person executing this Agreement on
behalf of Landlord represents and warrants to Lender that he or she has full
power and authority to execute this Agreement on Landlord's behalf. Lender shall
not be deemed to have waived any rights under this Agreement unless such waiver
is in writing and signed by Lender. Without notice to Landlord and without
affecting the validity of this Consent, Lender may do or not do anything it
deems appropriate or necessary with respect to the Loan, any obligors on the
Loan, or any Collateral for the Loan; including without limitation extending,
renewing, rearranging, or accelerating any of the Loan indebtedness. No delay or
omission on the part of Lender in exercising any right shall operate as a waiver
of such right or any other right. A waiver by Lender of a provision of this
Agreement shall not constitute a waiver of or prejudice Lender's right otherwise
to demand strict compliance with that provision or any other provision. Whenever
consent by Lender is required in this Agreement, the granting of such consent by
Lender in any one instance shall not constitute continuing consent to subsequent
instances where such consent is required.
13
<PAGE>
BORROWER AND LANDLORD ACKNOWLEDGE HAVING READ ALL THE PROVISIONS OF THIS
LANDLORD'S CONSENT, AND BORROWER AND LANDLORD AGREE TO ITS TERMS. THIS
AGREEMENT IS DATED MAY 5, 1999.
BORROWER:
ASD Systems, Inc.
By:
------------------------------
Norman ___________ President VCEO
LANDLORD: LENDER:
- --------------------------------- Comerica Bank - Texas
x By:
-------------------------------- -----------------------------
Landlord's Signature Authorized Officer
14
<PAGE>
EXHIBIT 10.4
NON-DISCLOSURE AND COVENANT NOT TO COMPETE AGREEMENT
----------------------------------------------------
AGREEMENT made this _______ day of __________________, 19__ between ASD
SYSTEMS, INC., ("Company") and _____________________________ ("Applicant").
WHEREAS, Applicant has applied for employment or is currently employed with
Company in a position whereby Applicant would be or is privy to certain
information concerning the business practices, trade secrets, operation methods
and techniques of Company; and
WHEREAS, Applicant recognizes that company has invested a substantial
amount of time and money in developing its business practices, trade secrets,
operating methods and techniques, and that such business practices, trade
secrets, operating methods and techniques are of a secret and confidential
nature and are unique to the business of the Company; and
WHEREAS, Applicant further recognizes that Company would not disclose its
business practices, trade secrets, operating methods and techniques to Applicant
unless Applicant were to agree to regard them as highly confidential.
NOW THEREFORE, in order to induce Company to reveal its business practices,
trade secrets, operating methods and techniques to Applicant and for other good
and valuable considerations, Applicant agrees that Applicant will not disclose
or reveal to an other person, firm or corporation, or use directly or
indirectly, for Applicant's own benefit or the benefit of another, any of the
business practices, trade secrets, operating methods, techniques, or other
information revealed to Applicant by Company, for a period of one year from the
date of Applicant's termination of employment with Company, whether termination
be voluntary or involuntary.
Applicant recognizes that Company would not have an adequate remedy at law
if Applicant were to violate the restrictions set forth herein, and that Company
shall have the right, in addition to any other available remedies, to obtain an
injunction restraining Applicant from competing with Company or disclosing or
using in whole or in part, nay of the information, business practices, trade
secrets, or operating methods and techniques revealed to Applicant by Company
during the one year period referred to above.
Applicant agrees that Applicant's employment with the Company may be
terminated at the will of either party, at any time, with or without cause
therefore. Applicant further agrees that this Agreement should not, in any
manner, constitute any agreement by the Company to employ Applicant.
IN WITNESS WHEREOF, this Agreement has been executed this ____ day of
_________, 19__.
APPLICANT OR EMPLOYEE: ASD SYSTEMS, INC.
By: /S/ By: /S/
-------------------------- --------------------------
Title: /S/
-----------------------
<PAGE>
NON-DISCLOSURE AND INVENTION AGREEMENT
--------------------------------------
This Agreement is made between ASD SYSTEMS, INC., a Texas corporation (the
"Company") and _____________________________ ("Employee").
In consideration of the engagement or the continued engagement of the
Employee by the Company, the Company and the Employee agree as follows:
1. Definitions. "Employee" shall mean the person whose name is set forth
above, being an employee, or consultant, or any such person hired by the Company
to provide services to the Company The use of the term "Employee" herein shall
by no means constitute an admission or create any presumption that such person
is an Employee of the Company. "Company" shall mean Company's officers,
directors, agents, representatives, successors or assigns.
2. Nondisclosure of Proprietary or Confidential Information.
(a) Employee acknowledges that during Employee's employment with the
Company or while Employee is providing or rendering services to the Company,
Employee will have access to certain confidential information including, but not
limited to, trade secrets, marketing strategies, processes, formulae, plans,
devices, compilations of information, technical data, mailing lists, prices,
technical concepts, programming code, systems design, distribution methods,
names of suppliers and customers and other proprietary information and materials
originated in the Company or disclosed to the Company by others under agreements
to hold the same confidential (collectively the "Confidential Information").
(b) During Employee's employment with the Company or while Employee is
providing or rendering services to the Company or at anytime thereafter,
Employee agrees: (a) that, without the express written consent of the Company
in advance, Employee will hold in strict confidence and will not, directly or
indirectly, divulge, disclose, reveal or communicate, either any Confidential
Information to any person or entity, except in the course of Employee's services
to or on behalf of the Company; and (b) that Employee will not use any
Confidential Information for the benefit of any person or entity other than the
Company. Employee further agrees that upon the end of his/her employment with
the Company or upon the end of his/her providing or rendering services to the
Company, or upon written notice by Company, Employee will return to the Company
any and information pertaining to or documentation of the Confidential
Information, whether the Confidential Information or documentation was developed
or prepared by Employee or by others, all of which shall be owned by the
Company. Employee acknowledges that this covenant of nondisclosure and nonuse
is an integral term of this Agreement and is a material inducement to the
Company to use the services of Employee.
(c) Employee acknowledges that the Company's facilities (the "Facility")
and all equipment within the Facility, including without limitation all computer
and technical equipment are the property of the Company (collectively the
"Property"). Employee acknowledges that he/she has no proprietary rights or
ownership in or to the Property and that Employee may not remove the Property
from the Facility; provided that Employee may remove computer equipment from the
Facility for proper business purposes if he/she intends to and actually does
promptly return such Property to the Facility. Employee acknowledges that
removing the Property from the Facility does not constitute a transfer or
assignment of the Property to the Employee. Employee acknowledges that he/she
will not use the Property for matters which are not directly related to the
scope of his/her employment or consultancy with the Company.
(d) Employee acknowledges that the Company makes great efforts to ensure
that the Facility and the Property located within the Facility are secure and
that Employee has an obligation to assist the Company, to the best of such
Employee's ability, in those efforts. Employee acknowledges that the security
of the Facility and the Property is an integral part of the Company's policies
and procedures and that a breach in such security constitutes a fraud on the
integrity, honesty and high morals upon which the Company stands. Employee
agrees to promptly report to the President of the Company any action(s) which
Employee perceives to be a breach or violation of the security of the Facility
or the Property.
1
<PAGE>
3. Assignment of Inventions, Intellectual Property Rights
(a) By this Agreement, Employee agrees to disclose promptly, completely
and in writing to the Company, and further Employee assigns, and agrees to bind
Employee's heirs, executors and administrators to assign, to the Company, all
right, title and interest in and to any and all designs, inventions,
discoveries, improvements, writings, software, documentation, reports and lists
(the "Inventions"), and all intellectual property rights and any goodwill
associated therewith (collectively, the "Rights"). The Rights assigned hereby
shall be of whatever kind or character, whether discovered, conceived and/or
developed individually by Employee or jointly with others, either (i) during
Employee's employment with the Company, (ii) while Employee is providing or
rendering services to the Company, or while using the Company's time, data,
facilities and/or materials, provided the subject matter of the Inventions or
Rights is within the general scope of the duties and responsibilities of one
providing services such as those of Employee to the Company, or (iii) as a
result of Employee's knowledge of a particular interest of the Company in the
subject matter of the Inventions or Rights. Employee's obligations under this
Paragraph 3 apply without regard to whether or not an Invention, Right or
solution to a problem occurs to Employee on the job, at home or anywhere else.
(b) Employee agrees that all Inventions and Rights are the Company's
exclusive property and that all materials and work generated or performed by
Employee, during Employee's employment with the Company or while Employee is
providing or rendering services to the Company shall be considered a work made
for hire. To the extent that any such materials or work are not considered a
work made for hire, Employee hereby assigns and agrees to assign the rights in
such materials or work to the Company as set forth herein. Nothing contained in
this Agreement may be construed as impairing the shop rights of the Company in
any Inventions that are not assigned exclusively to the Company. Employee
acknowledges that these covenants regarding Inventions and Rights are integral
terms of this Agreement and are a material inducement to the Company to use
Employee's services.
(c) Employee agrees that any Inventions or Rights required to be disclosed
under Paragraph 3(a) above within one (1) year after the term of employment or
consultancy shall be presumed to have been conceived during Employee's
employment or consultancy. Employee understands that he/she may overcome the
presumption by showing that such Invention or Right was conceived after
Employee's termination.
(d) During Employee's employment with the Company or while Employee is
providing or rendering services to the Company or at anytime thereafter, upon
the Company's request and at the Company's expense, Employee agrees to, in a
timely manner, perform all acts necessary to apply for, register, secure,
maintain or enforce patents, copyrights, trademarks and any other legal rights,
title and interest in the United States and foreign countries in Inventions
and/or Rights owned by and/or assigned to the Company under this Agreement,
including, but not limited to, performing any and all acts necessary to assign
and transfer to the Company or any person or party to whom the Company is
obligated to assign its rights, Employee's entire right, title and interest in
and to such Inventions or Rights. This obligation shall survive the termination
of employment or consultancy (as the case may be), but the Company shall
compensate Employee at a reasonable rate after any such termination for time
actually spent by Employee at the Company's request on such assistance.
4. Conflict of Interest.
(a) The Company maintains high standards of ethics and requires that its
employees maintain the same standards. Therefore, Employee agrees that if he/she
is an employee of the Company, he/she will work solely for the Company while
he/she is employed by the Company. Employee agrees that he/she will not engage
in any work related to the business of the Company, or that might in any way
conflict with the interests of the Company. The Company understands that it is
necessary for its employees to enjoy social relations and normal business
courtesies, and therefore some incidental or temporary work will not be
considered a breach of this Agreement. However, if Employee has any doubts
related to such incidental or temporary work, Employee agrees that it will
inform the Company before engaging in such work.
(b) Employee represents that by execution of this Agreement, Employee's
employment or consultancy (as the case may be) with the Company and Employee's
performance of the proposed duties to the Company will not violate any
obligations that Employee has or may have to any former employer, or other
person or entity, including any obligations to keep confidential any proprietary
or confidential information of any such employer. Employee further represents
that Employee has not entered into, and will not enter into, any agreement which
conflicts with or would, if performed by Employee, cause Employee to breach this
Agreement.
2
<PAGE>
5. Other Agreements. Employee hereby represents that, except as Employee
has disclosed in writing to the Company, Employee 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/her engagement by the Company or to refrain from competing,
directly or indirectly, with the business of such previous employer or any other
party.
6. No Employment Contract. Employee understands that this Agreement does
not constitute a contract of employment and does not imply that his/her
relationship with the Company (in any capacity) will continue for any period of
time.
7. Miscellaneous.
(a) This Agreement supersedes all prior agreements, written or oral,
between Employee and the Company relating to the subject matter of this
Agreement. This Agreement may not be modified, changed or discharged in whole or
in part, except by an agreement in writing signed by Employee and the Company.
(b) This Agreement shall be binding upon Employee's heirs, executors and
administrators and shall inure to the benefit of the Company, and its successors
and assigns. Employee expressly consents to be bound by the provisions of this
Agreement for the benefit of the Company or any successor, assign, subsidiary or
affiliate thereof to whose employ Employee may be transferred without the
necessity that this Agreement be resigned at the time of such transfer.
(c) No delay or omission by the Company in exercising any right under this
Agreement will operate as a waiver of that or any other right. A waiver or
consent given by the Company on any one occasion is effective only in that
instance and will not be construed as a bar to or waiver of any right on any
other occasion. The validity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement.
(d) Employee agrees that any breach of this Agreement is likely to cause
the Company substantial and irrevocable damage and therefore, in the event of
any such breach, Employee agrees that the Company, in addition to such other
remedies which may be available, shall be entitled to seek specific performance
and other injunctive relief. It is agreed that in the event that the provisions
hereof are the subject of litigation, the prevailing party shall be entitled to
reimbursement for attorney fees and expenses incurred.
(e) This Agreement is governed by and shall be construed as sealed
instrument under and in accordance with the laws of the State of Texas. Any
action, suit, or other legal proceeding commenced to resolve any dispute arising
under or relating to any provision of this Agreement shall be commenced only in
the state or federal courts in Dallas County, Texas, and Employee and the
Company expressly consent and submit to the jurisdiction of such court.
EMPLOYEE acknowledges that he/she has carefully read this Agreement and
understands and agrees to all of the provisions in this Agreement.
EMPLOYEE:
/S/
--------------------
Name: /S/
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Date: /S/
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EXHIBIT 10.5
THIS LEASE AGREEMENT made and entered into by and between NORMAN CHARNEY
hereinafter referred to as "Landlord," and ATHLETIC SUPPLY OF DALLAS, INC.
hereinafter referred to as "Tenant",
WITNESSETH:
Landlord hereby leases to Tenant, and Tenant hereby takes from Landlord the
following described premises (hereinafter referred to as the "demised premises")
situated within the County of Dallas, State of Texas:
Lot 8, Northeast Crossing, Alder Circle, Dallas, Texas, also known as
10810, 10812, and 10814 Alder Circle, Dallas, Texas 75238.
together with all rights, privileges, easements and appurtenances belonging to
or in any way pertaining to the demised premises and together with the building
and other improvements now situated or to be erected upon the demised premises.
TO HAVE AND TO HOLD the same for a term of six (6) years beginning on
November 1, 1986, upon the following terms, conditions and covenants:
1. RENT. Tenant agrees to pay the Principal REALTOR(R) named herein,
without offset or deduction, for the account of Landlord rent for the demised
premises at the rate of $5.00 per square foot ($99,000 per year) for the first 3
years of the lease term and $5.50 per square foot ($108,900 per year) for the
second 3 years of the lease* one such monthly installment shall be due and
payable on or before the beginning date of this lease, and a like monthly
installment shall be due and payable on or before the first day of each
succeeding calendar month during the terms hereof; provided that, in the event
the term hereof shall commence or end during a calendar month, the rent for any
fractional calendar month following the commencement or preceding the end of the
term of this lease shall be pro rated by days. (If percentage rent is to be
payable to Landlord, refer to Exhibit A attached to this lease. In such case
Exhibit A shall be incorporated into and become a part of this lease when
physically attached hereto).
Tenant has deposited with Landlord, upon delivery of this lease, Eight
Thousand Two Hundred Fifty Dollars and No/100 ($8,250.00) to be applied as
follows:
(a) $8,250.00 for rent for November, 1986 Tenant or Tenant's
covenants and obligations under this lease. The security deposit is not an
advance payment of rental or the full measure of liquidated damages in case of
default by Tenant. Upon the occurrence of any event of default, Landlord may,
from time to time, without prejudice to any other remedy provided herein or
provided by law, use the security deposit to the extent necessary to make good
any arrears of rent and any other damage, injury, expense or liability caused to
Landlord by such event of default. Following any such application of the
security deposit, Tenant shall pay to Landlord, on demand, the amount so applied
in order to restore the security deposit to its original amount. If Tenant is
not in default, hereunder, any remaining balance of such deposit shall be
returned by Landlord to Tenant upon expiration or termination of this lease.
__________________
* Term, payable in equal monthly installments in advance.
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2. ACCEPTANCE OF PREMISES.
Tenant acknowledges that it has fully inspected the demised premises and
accepts the demised premises, and any buildings and improvements situated
thereon, as suitable for the purposes for which the same are leased in their
present condition, except
(If this lease provides for a building to be constructed for Tenant, refer to
Exhibit B attached to this lease. In such case this paragraph 2 shall become
inapplicable, and Exhibit B shall be incorporated into and become a part of this
lease when physically attached hereto.)
3. USE OF PREMISES.
The demised premises shall be used and occupied only for the purpose of
mail order facilities for a retail sporting goods company, and not otherwise.
Tenant shall at its own expense obtain any and all governmental licenses and
permits necessary for such use.
4. COMPLIANCE WITH LAW.
Tenant shall comply with all governmental laws, ordinances and regulations
applicable to the use of the demised premises, and shall promptly comply with
all governmental orders and directives for the correction, prevention and
abatement of nuisances in or upon, or connected with the demised premises, all
at Tenant's sole expense.
5. REAL ESTATE TAXES.
(a) Tenant agrees to pay before they become delinquent all taxes (both
general and special), assessments or governmental charges of any kind and nature
whatsoever (hereinafter collectively referred to as the "taxes"), levied or
assessed against the premises or any part thereof. Tenant shall furnish to
Landlord not later than twenty (20) days before the date any such taxes become
delinquent, official receipts of the appropriate taxing authority or other
evidence satisfactory to Landlord evidencing payment thereof. If Tenant shall
fail to pay any taxes, assessments, or governmental charges required to be paid
by Tenant hereunder, in addition to any other remedies provided herein, Landlord
may if it so elects pay such taxes, assessments, and governmental charges. Any
sums so paid by Landlord shall be deemed to be so much additional rental owing
by Tenant to Landlord and due and payable on written demand by Landlord together
with interest thereon at the rate of ten percent (10%) per annum from date paid
by Landlord to date of repayment by Tenant.
(b) All real estate taxes and assessments on the demised premises owned by
Landlord shall be prorated between Landlord and Tenant with respect to the tax
years in which this lease commences or terminates. Tenant shall pay that part
of the real estate taxes attributable to the portion of the tax year covered by
this lease.
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(c) In the event the premises constitute a portion of a multiple occupancy
building, in lieu of Tenant paying the "taxes" as above provided, Landlord
agrees to pay before they become delinquent all "taxes" lawfully levied or
assessed against such building and the grounds, parking areas, driveways and
alleys around the said building, and Tenant agrees to pay to Landlord upon
written demand the amount of Tenant's "proportional share" of all such "taxes"
paid by landlord. Tenant's "proportionate share", as used throughout this
lease, shall mean a fraction, the numerator of which is the space occupied by
Tenant and the denominator of which is the entire gross space contained in the
building.
(d) Tenant may, alone or along with any other tenants of said building, at
its or their sole cost and expense, in its or their own name(s) and/or in the
name of the Landlord, dispute and contest any "taxes" by appropriate proceedings
diligently conducted in good faith, but only after Tenant and all other tenants,
if any, joining with Tenant in such contest have deposited with Landlord the
amount so contested and unpaid, or their proportionate shares thereof as the
case may be, which shall be held by Landlord without obligations for interest
until the termination of the proceedings, at which time the amount(s) deposited
shall be applied by Landlord toward the payment of the items held valid (plus
any court costs, interest, penalties and other liabilities associated with the
proceedings), and Tenant's share of any excess shall be returned to Tenant.
Tenant further agrees to pay to Landlord upon demand Tenant's share (as among
all tenants who participated in the contest) of all court costs, interest,
penalties and other liabilities relating to such proceedings. Tenant hereby
indemnifies and agrees to hold harmless the Landlord from and against any cost,
damage or expense, including attorney's fees, in connection with any such
proceedings.
(e) If at any time during the term of this Lease, the present method of
taxation shall be changed so that in lieu of the whole or any part of any taxes,
assessments, levies or charges levied, assessed or imposed on real estate and
the improvements thereon there shall be levied, assessed or imposed on Landlord
a capital levy or other tax directly on the rents received therefrom and/or a
franchise tax, assessment, levy or charge measured by or based, in whole or in
part, upon such rents or the present or any future building or buildings on the
premises, then all such taxes, assessments, levies or charges, or the part
thereof measured or based, shall be deemed to be included within the term
"taxes" for the purpose hereof.
6. REPAIRS AND MAINTENANCE.
(a) Tenant shall at its own cost and expense keep, maintain and take good
care of the premises and make all necessary repairs thereto, interior and
exterior, structural and non-structural, ordinary and extraordinary, and shall
suffer no waste or nuisance; provided, however, that the cost of maintenance and
repair of any common party wall (any wall, divider, partition or any other
structure separating the premises from any adjacent premises occupied by other
tenants) shall be shared equally by Tenant and the Tenant occupying adjacent
premises. Tenant shall not damage any party wall or disturb the integrity and
support provided by any party wall and shall, at its cost and expense, promptly
repair any damage or injury to any party wall caused by Tenant or its employees,
agents or invitees. At the end of the term or other termination of this lease,
Tenant shall deliver the premises with all improvements thereon in good repair
and condition, reasonable wear and tear only excepted.
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(b) Tenant shall at its own cost and expense care for the grounds around
the buildings on the premises, including the regular mowing of grass, care of
shrubs and general landscaping, and maintenance of the parking areas, driveways,
alleys and shall maintain the whole of the premises in a clean and sanitary
condition,
(c) In the event the premises constitute a portion of a multiple occupancy
building, Tenant and its employees, customers, and licensees shall have the
nonexclusive right to use, in common with the other parties occupying said
building, the parking areas, driveways and alleys adjacent to said building,
subject to such reasonable rules and regulations as Landlord may from time to
time prescribe, and Tenant shall, in lieu of the obligations set forth under
subparagraph (b) above, be liable for its proportionate share of the cost and
expense of the care for the grounds around the said building, including but not
limited to, the mowing of grass, care of shrubs, general landscaping, and
maintenance of parking areas, driveways and alleys. Tenant shall at Landlord's
option either (i) pay when due its proportionate share of such costs and
expenses along with the other tenants of the building directly to the persons
performing such work, or (ii) reimburse Landlord upon demand for the amount of
its proportionate share of such costs and expenses in the event Landlord elects
to perform or cause to be performed such work.
(d) In the event the premises constitute a portion of a multiple occupancy
building, Landlord shall be responsible for coordinating any repairs and other
maintenance of any rail tracks serving or to serve the building, and Tenant
shall reimburse Landlord for Tenant's proportionate share of the costs of such
repairs and maintenance and any other sums specified in any agreement to which
Landlord is a party respecting such tracks.
(e) In the event Tenant shall fail to maintain the demised premises or any
paving, landscaping or railroad siding in accordance with this paragraph 6,
Landlord shall have the right (but not the obligation) to cause all repairs or
other maintenance to be made and the reasonable costs therefore expended by
Landlord shall be paid by Tenant on written demand.
7. ALTERATIONS, ADDITIONS AND IMPROVEMENTS.
Tenant shall not create any openings in the roof or exterior walls, or make
any alterations, additions or improvements to the demised premises without prior
written consent of Landlord. Consent for non-structural alterations, additions
or improvements shall not be unreasonably withheld by Landlord. Tenant shall
have the right to erect or install shelves, bins, machinery, air conditions or
heating equipment and trade fixtures, provided that Tenant complies with all
applicable governmental laws, ordinances and regulations. At the expiration or
termination of this lease, Tenant shall have the right to remove such items so
installed, provided Tenant is not in default at the time of such removal and
provided further that Tenant shall, at the time of removal of such items, repair
in a good and workmanlike manner any damage caused by installation or removal
thereof.
Tenant shall pay for all costs incurred or arising out of alterations,
additions or improvements in or to the demised premises and shall not permit a
mechanic's or materialmen's lien to be asserted against the demised premises.
Upon request by Landlord, Tenant shall deliver
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to Landlord proof of payment reasonably satisfactory to Landlord of all costs
incurred or arising out of any such alterations, additions or improvements.
All alternations, additions or improvements in or to the demised premises
shall become the property of Landlord at the expiration or termination of this
lease, however, Landlord may direct the removal of alterations, additions or
improvements by giving written notice to Tenant prior to the expiration or
termination of this lease. At the direction of Landlord, Tenant shall promptly
remove all alterations, additions and improvements and any other property placed
in the demised premises by Tenant and Tenant shall repair in good and
workmanlike manner any damage caused by such removal.
8. SIGNS.
Tenants shall not place or affix any signs or other objects upon or to the
roof or exterior walls of the demises premises or paint or otherwise deface the
exterior walls of the demised premises without the prior written consent of
Landlord. Any signs installed by Tenant shall conform with applicable laws and
deed and other restrictions. Tenant shall remove all signs at the termination
of this least and shall repair any damage and close any holes caused or revealed
by such removal.
9. INSURANCE, FIRE AND CASUALTY DAMAGE.
(a) Landlord agrees to maintain insurance covering the building of which
the demised premises are a part in an amount not less than 90% (or such greater
percentage as may be necessary to comply with the provisions of any co-insurance
clauses of the policy) of the "replacement cost" thereof as such term is defined
in the Replacement Cost Endorsement to be attached thereto, insuring against the
perils of Fire, Lightning, Extended Coverage, Vandalism and Malicious Mischief,
extended by Special Extended Coverage Endorsement to insure against all other
Risks of Direct Physical Loss, such coverages and endorsements to be as defined,
provided and limited in the standard bureau forms prescribed by the insurance
regulatory authority for the State in which the demised premises are situated
for use by insurance companies admitted in such state for the writing of such
insurance on risks located within such state. Subject to the provisions of
subparagraphs 9 (b) and 9 (e) below, such insurance shall be for the sole
benefit of Landlord and under its sole control. Tenant agrees to pay Landlord's
cost of maintaining such insurance on said building (or, in the event the
premises constitute a portion of a multiple occupancy building, Tenant's full
proportionate share of such cost). Said payments shall be made to Landlord
within ten days after presentation to Tenant of Landlords statement setting
forth the amount due. Any payment to be made pursuant to this subparagraph (a)
with respect to the year in which this lease commences or terminates shall bear
the same ratio to the payment which would be required to be made for the full
year as that part of such year covered by the term of this lease bears to a full
year.
(b) If the buildings situated upon the premises should be damaged or
destroyed by any peril covered by the insurance to be provided by Landlord under
subparagraph 9 (a) above, Tenant shall give immediate notice thereof to Landlord
and Landlord shall at its sole cost and expense thereupon proceed with
reasonable diligence to rebuild and repair such buildings to
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substantially the condition in which they existed prior to such damage or
destruction, except that Landlord shall not be required to rebuild, repair or
replace any part of the partitions, mixtures, additions or other improvements
which may have been placed in, on or about the premises by Tenant and except
that Tenant shall pay to Landlord upon demand any applicable deductible amounts
specified under Landlord's insurance. The rent payable hereunder shall in no
event abate by reason of any damage or destruction.
(c) If the buildings situated upon the premises should be damaged or
destroyed by a casualty other than a peril covered by the insurance to be
provided by Landlord under subparagraph 9(a) above, or if any other improvements
situated on the demised promises should be in any manner damaged or destroyed,
Tenant shall at its sole cost and expense thereupon proceed with reasonable
diligence to rebuild and -repair such buildings and/or improvements to
substantially the condition in which they existed prior to such damage or
destruction, subject to Landlord's approval of the plans and specifications for
such rebuilding and repairing, which approval shall not be unreasonably
withheld. Tenant's obligation hereunder shall not include destruction of the
premises by war, riot, civil disobedience, or flood.
(d) Tenant covenants and agrees to maintain insurance on all alterations,
additions, partitions and improvements erected by, or on behalf of, Tenant in,
on or about the demised premises in an amount not less than 90% (or such greater
percentage as may be necessary to comply with the provisions of any co-insurance
clause of the policy) of the "replacement cost" thereof as such term is defined
in the Replacement Cost Endorsement to be attached thereto. Such insurance
shall insure against the perils and be in form, including stipulated
endorsements, as provided in subparagraph 9 (b) hereof. Such insurance shall be
for the sole benefit of Tenant and under its sole control. All such policies
shall be procured by Tenant from responsible insurance companies satisfactory to
Landlord. certified copies of policies of such insurance, together with receipt
evidencing payment of premiums therefor shall be delivered to Landlord prior to
the commencement date of this lease. Not less than fifteen (15) days prior to
the expiration date of any such policies, Certified copies of renewals thereof
(bearing notations evidencing this payment of renewal premiums) shall be
delivered to Landlord. Such policies shall further provide that not less than
thirty (30) days written notice shall be given to Landlord before such policy
may be canceled or changed to reduce insurance provided thereby.
(e) Notwithstanding anything herein to the contrary, in the event the
holder of any indebtedness secured by a mortgage or deed of trust covering the
premises required that the insurance proceeds be applied to such indebtedness
then the Landlord shall have the right to terminate this lease by delivering
written notice of termination to Tenant within fifteen (15) days after such
requirement is made by any such holder, whereupon all rights and obligations
hereunder shall cease and terminate.
10. WAIVER OF SUBROGATION.
Each party hereto waives any and every claim which arises or may arise in
its favor against the other party hereto during the term of this lease or any
renewal or extension thereof for any and all loss of, or damage to, any of its
property located within or upon, or constituting a part of, the demised
premises, which loss or damage is covered by valid and collectible fire and
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extended coverage insurance policies, to the extent that such loss or damage is
recoverable under such insurance policies. Such mutual waivers shall be in
addition to, and not in limitation or derogation of, any other, waiver or
release contained in this lease with respect to any loss of, or damage to,
property of the parties hereto. Inasmuch as such mutual waivers will preclude
the assignment of any aforesaid claim by way of subrogation or otherwise to an
insurance company (or any other person), each party hereby agrees immediately to
give to each insurance company which has issued to its policies of fire and
extended coverage insurance, written notice of the terms of such mutual waivers,
and to cause such insurance policies to be properly endorsed, if necessary to
prevent the invalidation of such insurance coverages by reason of such waivers.
Landlord and its authorized agents shall have the right, during normal
business hours, to enter the demised premises (a) to inspect the general
condition and state of repair thereof, (b) to make repairs required or permitted
under this lease, (c) to show the premises to any prospective tenant or
purchaser or (d) for any other reasonable purpose.
During the final 150 days of the lease term, Landlord and its authorized
agents shall have the right to erect and maintain on or about the demised
premises customary signs advertising the property for lease or for sale.
12. UTILITY SERVICES.
Tenant shall pay the cost of all utility services, including but not
limited to initial connection charges, all charges for gas, water and
electricity used on the demised premises, and for all electric lights, lamps and
tubes.
13. ASSIGNMENT AND SUBLEASING.
Tenant shall not, without the prior written consent of Landlord, assign
this least or sublet the demised or any portion thereof. Any assignment or
subletting shall be expressly subject to all terms and provisions of this lease,
including the provisions of paragraph 3 pertaining to the use of the demised
premises. In the event of any assignment or subletting, Tenant shall remain
fully liable for the full performance of all Tenant's obligations under this
lease. Tenant shall not assign his rights hereunder or sublet the premises
without first obtaining a written agreement from assignee or sublessee whereby
assignee or sublessee agrees to be bound by the terms of this lease. No such
assignment or subletting shall constitute a novation. In the event of the
occurrence of an event of default while the demised premises are assigned or
sublet, Landlord, in addition to any other remedies provided herein or by law,
may at Landlord's option, collect directly from such assignee or subtenant all
rents becoming due under such assignment of subletting and apply such rent
against any sums due to Landlord hereunder. No direct collection by Landlord
from any such assignee or subtenant shall release Tenant from the performance of
its obligations hereunder.
14. INDEMNITY AND PUBLIC LIABILITY INSURANCE.
(a) Landlord, shall not be liable to Tenant or Tenant's employees, agents,
patrons or visitors, or to any other person whomsoever, for, any injury to
person or damage to property on
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or about the premises caused by the negligence or misconduct of Tenant, its
agents, servants or employees, or of any other person entering upon the premises
under express or implied invitation of Tenant, or caused by the buildings and
improvements located on the premises becoming out of repair, or caused by
leakage of gas, oil, water or steam or by electricity emanating from the
premises, or due to any cause whatsoever, and Tenant agrees to indemnify
Landlord and hold it harmless from any loss, expenses or claims including
attorney's fees, arising out of any such damage or injury; except injury to
persons or negligence of the Landlord.
(b) Tenant shall procure and maintain throughout the term of this lease a
policy or policies of insurance, at its sole cost and expense, insuring both
Landlord and Tenant against all claims, demands, or actions arising out of or in
connection with: (i) the premises; (ii) the condition of the premises, the
limits of such policy or policies to be in the amount of not less than $300,000
per person and $1,000,000 per occurrence in respect of injury to persons
(including death), and in the amount of not less than $50,000 per occurrence in
respect to property damage or destruction, including loss of use thereof. All
such policies, shall be procured by Tenant from responsible insurance companies
satisfactory to Landlord. Certified copies of such policies, together with
receipt evidencing of premiums therefor, shall be delivered to payment Landlord
prior to the commencement date of this lease. Not less than fifteen (15) days
prior to the expiration date of any such policies, certified copies of the
renewals thereof (bearing notations evidencing the payment of renewal premiums)
shall be delivered to Landlord. Such policies shall further provide that no
less than thirty (30) days written notice shall be given to Landlord before such
policy may be canceled or changed to reduce insurance provided thereby.
(c) If Tenant should fail to comply with the foregoing requirements
relating to insurance, Landlord may obtain such insurance, and Tenant shall pay
to Landlord on demand, as additional rental hereunder, the premium cost thereof
plus interest at the rate of ten percent (10%) per annum from the date of
payment by Landlord until repaid by Tenant.
15. CONDEMNATION.
A. If, during the term of this lease or any extension or renewal thereof,
all or a substantial part of the demised premises should be taken for any public
or quasi-public use under any governmental law, ordinance regulation or by right
of eminent domain, or should be sold to the condemnity authority under threat of
a condemnation, this lease shall terminate and the rent shall be abated during
the unexpired portion of this lease, effective from the date of taking of the
demised premises by the condemnity authority.
B. If less than a substantial part of the demised premises is taken for
public or quasi-public use under any governmental law, ordinance or regulation,
or by right of eminent domain, or is sold to the condemnity authority under
threat of condemnation, Landlord, at its option, may by written notice terminate
this lease or shall forthwith at its sole expense restore and reconstruct the
buildings and improvements (other than leasehold improvements made by Tenant or
any assignee, subtenant or other occupant of the demised premises) situated on
the demised premises in order to make the same reasonably tenantable and
suitable for the uses for which the demised
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premises are leased as defined in paragraph 3. The rent payable hereunder during
the unexpired portion of this lease shall be adjusted equitable.
C. Landlord and Tenant shall be entitled to receive and retain such
separate awards and portions of lump sum awards as may be allocated to their
respective interests in any condemnation proceedings. The termination of this
lease shall not affect the rights of the respective parties to such awards.
16. HOLDING OVER.
Should Tenant, or any of its successors in interest fail to surrender the
demised premises or any part thereof, on the expiration of the term of this
lease, such holding over shall constitute a tenancy from month to month, at a
monthly rental equal to 150% of the rent paid for the last month of the term of
this lease unless otherwise agreed in writing.
17. DEFAULT BY TENANT.
The following events shall be deemed to be events of default under this
lease;
A. Failure of Tenant to pay any installment of the rent or other sum
payable to Landlord hereunder on the date that same is due and such failure
shall continue for a period of 10 days.
B. Failure of Tenant to comply with any term, condition or covenant of
this lease, other than the payment of rent or other sum of money, and such
failure shall not be cured within 30 days after written notice thereof to
Tenant.
C. Insolvency, the making of a transfer in fraud of creditors, or the
making of an assignment for the benefit of creditors by Tenant or any guarantor
of Tenant obligations.
D. Filing of a petition under any section or chapter of the National
Bankruptcy Act, as amended, or under any similar law or statute of the United
States or any State thereof by Tenant or any guarantor of Tenant's obligations
or adjudication as a bankrupt or insolvent in proceedings filed against Tenant
or such guarantor.
E. Appointment of a receiver or trustee for all or substantially all of
the assets of Tenant or any guarantor of Tenant's obligation hereunder.
F. Abandonment by Tenant of any substantial portion of the demised
premises or cessation of the use of the demised premises for the purpose leased.
18. REMEDIES OF LANDLORD:
Upon the occurrence of any of the events of default listed in Section 19,
Landlord shall have the option to pursue any one or more of the following
remedies without any notice or demand whatsoever:
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A. Terminate this lease, in which event Tenant shall immediately
surrender the demised premises to Landlord. If Tenant fails to so surrender such
premises, Landlord may, without prejudice to any other remedy which it may have
for possession of the demised premises or arrearages in rent, enter upon and
take possession of the demised premises and expel or remove Tenant and any other
person who may be occupying such premises or any part thereof, by force if
necessary, without being liable for prosecution or any claim for damages
therefor. Tenant shall pay to Landlord on demand the amount of all loss and
damage which Landlord may suffer by reason of such termination, whether through
inability to relet the demised premises on satisfactory terms or otherwise.
B. Enter upon and take possession of the demised premises, by force if
necessary, without terminating this lease and without being liable for
prosecution or for any claim for damages therefor, and expel or remove Tenant
and any other person who may be occupying such premises or any part thereof.
Landlord may relet the demised premises and receive the rent therefor. Tenant
agrees to pay to Landlord monthly or on demand from time to time any deficiency
that may arise by reason of any such reletting. In determining the amount of
such deficiency, the brokerage commission, attorney's fees, remodeling expenses.
and other costs of reletting shall be subtracted from the amount of rent
received under such reletting.
C. Enter upon the demised premises, by force, if necessary, without
terminating this lease and without being liable for any prosecution or for any
claim for damages therefor and do whatever Tenant is obligated to do under the
terms of this lease. Tenant agrees to pay Landlord on demand for expenses which
Landlord may incur in this effecting compliance with Tenant's obligations under
this lease, together with interest thereon at the rate of 10% per annum from the
date expended until paid. Landlord shall not be liable for any damages
resulting to the Tenant from such action, whether caused by negligence of
Landlord or otherwise.
Pursuit of any of the foregoing remedies shall not preclude pursuit of any
of the other remedies herein provided or any other remedies provided by law, nor
shall pursuit of any remedy herein provided constitute a forfeiture or waiver of
any rent due to Landlord hereunder or of any damages accruing to Landlord by
reason of the violation of any of the terms, conditions and covenants herein
contained,
19. LANDLORDS LIEN.
In addition to the statutory Landlord's lien, Tenant hereby grants to
Landlord a security interest to secure payment of all rent and other sums of
money becoming due hereunder from Tenant, upon all goods, wares, equipment,
fixtures, furniture and other personal property of Tenant situated in or upon
the demised premises, together with the proceeds from the sale or lease thereof.
Such property shall not be removed without the consent of Landlord until all
arrearages in rent and other sums of money then due to Landlord hereunder shall
first have been paid and discharged. Upon the occurrence of any event of
default, Landlord may, in addition to any other remedies provided herein or by
law, enter upon the demised premises and take
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possession of any and all goods, wares, equipment, fixtures, furniture and other
personal property of Tenant situated on the premises without liability for
trespass or conversion, and sell the same at public or private sale, with or
without having such property at the sale, after giving Tenant reasonable notice
of the time and place of any such sale. Unless otherwise required by law, notice
to Tenant of such sale shall be deemed sufficient if given in the manner
prescribed in this lease at least 10 days before the time of the sale. Any
public sale made under this paragraph shall be deemed to have been conducted in
a commercially reasonable manner if held in the demised premises or where the
property is located, after the time, place and method of sale and a general
description of the types of property to be sold have been advertised in a daily
newspaper published in Dallas County, Texas, for five consecutive days before
the date of the sale. Landlord or its assigns may purchase at a public sale and,
unless prohibited by law, at a private sale. The proceeds from any disposition
dealt with in this paragraph, less any and all expenses connected with the
taking of possession, holding and selling of the property (including reasonable
attorney's fees and legal expenses), shall be applied as a credit against the
indebtedness secured by the security interest granted herein. Any surplus shall
be paid to Tenant or as otherwise required by law; Tenant shall pay any
deficiencies forthwith. Upon request by Landlord, Tenant agrees to execute and
deliver to Landlord a financing statement in form sufficient to perfect the
security interest of Landlord in the aforementioned property and proceeds
thereof under the provisions of the Uniform Commercial Code in force in the
State of Texas. The statutory lien for rent is expressly reserved; the security
interest herein granted is in addition and supplementary thereto.
20. ATTORNEYS' FEES.
If, on account of any breach or default by Landlord or Tenant of their
respective obligations under this lease, it shall become necessary for the other
to employ an attorney to enforce or defend any of its rights or remedies
hereunder, and should such party prevail, it shall be entitled to any reasonable
attorneys' fees incurred in such connection.
21. QUIET ENJOYMENT.
Landlord warrants that it has full right and power to execute and perform
this lease and to grant the estate demised herein and that Tenant, on payment of
rent and performing the covenants herein contained, shall peaceably and quietly
have, hold and enjoy the demised premises during the full term of this lease and
any extension or renewal hereof; provided, however, that Tenant accepts this
lease subject and subordinate to any recorded mortgage, deed of trust or other
lien presently existing upon the demised premises. Landlord is hereby
irrevocably vested with full power and authority to subordinate Tenant's
interest hereunder to any mortgage, deed of trust or other lien hereafter placed
on the demised premises, and Tenant agrees upon demand to execute such further
instruments subordinating this lease as Landlord may request, provided such
further subordination shall be upon the express condition that this lease shall
be recognized by the mortgagee and that the rights of Tenant shall remain in
full force and effect during the term of this lease so long as Tenant shall
continue to perform all of the covenants of this lease.
11
<PAGE>
22. WAIVER OF DEFAULT.
No waiver by the parties hereto of any default or breach of any term,
condition or covenant of this lease shall be deemed to be waiver of any
subsequent default or breach of the same or any other term, condition or
covenant contained herein.
23. REALTOR'S(R) COMMISSIONS:
24. CERTIFICATE OF OCCUPANCY.
Tenant may, prior to the commencement of the term of this lease, apply for
a Certificate of Occupancy to be issued by the municipality in which the demised
premises are located, but this lease shall not be contingent upon issuance
thereof. Nothing herein contained shall obligate Landlord to install any
additional electrical wiring, plumbing or plumbing fixtures which are not
presently existing in the demised premises, or which have not been expressly
agreed upon by Landlord in writing.
25. FORCE MAJEURE.
In the event performance by Landlord of any term, condition or covenant in
this lease is delayed or prevented by any Act of God, strike, lockout, shortage
of material or labor restriction by any governmental authority, civil riot,
flood and any other cause not within the control of Landlord, the period for
performance of such term, condition or covenant shall be extended for a period
equal to the period Landlord is so delayed or hindered.
26. EXHIBITS.
All exhibits, attachments, annexed instruments and addenda referred to
herein shall be considered a part hereof for all purposes with the same force
and effect as if copied at full length herein.
27. USE OF LANGUAGE.
Words of any gender used in this lease shall be held and construed to
include any other gender and words in the singular shall be held to include the
plural, unless the context otherwise requires.
28. CAPTIONS.
The captions or headings of paragraphs in this lease are inserted for
convenience only, and shall not be considered in construing the provisions
hereof if any question of intent should arise.
29. SUCCESSORS.
12
<PAGE>
The terms, conditions and covenants contained in this lease shall apply to,
inure to the benefit of, and be binding upon the parties hereto and their
respective successors in interest and legal representatives except as otherwise
herein expressly provided. All rights, powers, privileges, immunities and
duties of Landlord under this lease, including, but not limited to, any notices
required or permitted to be delivered by Landlord to Tenant hereunder, may, at
Landlord's option, be exercised or performed by Landlord's agent or attorney.
30. SUBLEASE.
If this lease is in fact a sublease, Tenant accepts this lease subject to
all of the terms and conditions of the lease under which Landlord holds the
demised premises as lessee. Tenant covenants that it will do no act or thing
which would constitute a violation by Landlord of its obligation under such
lease.
31. SEVERABILITY.
If any provision in this lease should be held to be invalid or
unenforceable, the validity and enforceability of the remaining provisions of
this lease shall not be affected thereby.
32. NOTICES.
Any notice or document required or permitted to be delivered hereunder may
be delivered in person or shall be deemed to be delivered, whether actually
received or not, when deposited in the United States mail, postage prepaid,
registered or certified mail, return receipt requested, addressed to the parties
at the addresses indicated below, or at such other addresses as may have
theretofore been specified by written notice delivered in accordance herewith.
LANDLORD:NORMAN CHARNEY TENANT:Athletic Supply of Dallas, Inc.
16114 Red Cedar Trail 6921 Preston Road
Dallas, Texa 75248 Dallas, Texas 75206
13
<PAGE>
33. SPECIAL CONDITIONS.
EXECUTED the day of 19 .
------ -----------------, ------
ATTEST
LANDLORD:NORMAN CHARNEY
- -----------------------------
-----------------------------
By
-----------------------------
Title
ATTEST
:Athletic Supply of Dallas, Inc.
- -----------------------------
SECRETARY
----------------------------------
By DAVID T. MARANTETTE, III
Chairman of the Board
----------------------------------
Title
14
<PAGE>
Amendment
---------
The following will amend the lease agreement between Athletic Supply of
Dallas, Inc., (Tenant) and Norman Charney (Landlord) and or assigns, dated
November 1, 1986.
Term of lease is extended until May 15, 1996.
Paragraph 1 Rent shall be $4.75 per square foot ($95,000 per year) for
the first two years and then $5.00 per square foot ($100,000
per year) for the last three years.
Paragraph 4 Is amended by the replacement with a comma of the period
following the word "expense" in the last line, and the
addition following the comma so placed, of the phrase
"except where such orders and directives shall involve
structural repairs, which shall be the sole expense of the
Landlord".
Paragraph 6(a) Is amended by striking the word "structural" following the
comma after the word exterior, and by adding the phrase "it
is understood that the landlord shall bear sole
responsibility and expense for structural repairs to the
premises".
Paragraph 7 Is amended by inserting the words "non-structural" to the
first sentence of the second paragraph between the words
"of" and "alterations".
In addition to the above amendments, it is expressly agreed between the
parties that no part of the equipment, fixtures, and machinery of the Tenant
shall be deemed to be improvements or betterments to the landlords property.
Such equipment and fixtures include, but not limited to, racks, shelves,
conveyors, computer floors and supplementary air conditioning for the computer
room, moveable partitions, furniture and packaging equipment, and loading and
unloading equipment. It will be the Tenants responsibility to pay for all
repairs and restoration to the building for damages caused by the removal of any
racks, conveyors, computer floors etc.
The maintenance and repairs of all Heating and Air Conditioning will be
paid by tenant.
1
<PAGE>
All other terms and conditions of this agreement will remain in effect.
----------------------------------
Landlord
Norman Charney
----------------------------------
Tenant
Joseph A. Sullivan
Chairman of the Board
Athletic Supply
May 31, 1991
2
<PAGE>
Amendment
---------
As approved unanimously at the January 12, 1996, Board of Directors
meeting, the following will amend the lease agreement between Athletic Supply of
Dallas, Inc., (Tenant) and Norman Charney (Landlord) and or assigns, dated
November 1, 1986 and amended May 31, 1991.
Term of lease is extended until May 15, 2000.
Paragraph 1 Rent shall be $5.00 per square foot ($100,000 per year) for the
term of the lease.
All other terms and conditions of this agreement will remain in effect.
-----------------------------------
Landlord
Norm Charney
-----------------------------------
Tenant
Bruce P. Browder III
Vice President - Finance
Athletic Supply of Dallas, Inc.
March 15, 1996
<PAGE>
EXHIBIT 10.6
MULTI-TENANT INDUSTRIAL TRIPLE NET LEASE
----------------------------------------
Effective Date: Nov. 4, 1997
(The date set forth below Landlord's signature.)
BASIC LEASE INFORMATION
-----------------------
Landlord: CATELLUS DEVELOPMENT CORPORATION,
a Delaware corporation
Landlord's Address 304 South Broadway, 4th Floor
For Notice: Los Angeles, California 90013-1209
Attn.: Asset Management
Telephone: (213) 625-5865
Fax: (213) 626-1623
With a copy to: 201 Mission Street
San Francisco, California 94105
Attn.: Legal Department
Telephone: (415) 974-4500
Fax: (415) 974-3724
Landlord's Address Catellus Development Corporation
For Payment of Rent: File #1918
P.O. Box 61000
San Francisco, California 94161-1918
Tenant: ASD SYSTEMS,
a Texas limited partnership
Tenant's Address ASD Systems
For Notice: 3737 Grader
Garland, Texas
Attn: Norman Charney
Telephone: (214) 343-7200
Fax: (214) 343-2924
Project: Gateway East Distribution Center
Building: An industrial warehouse building containing
approximately 226,411 rentable square feet as shown
on Exhibit A. The legal description for the land on
---------
which the Building is to be constructed is described
on Exhibit A-1 attached hereto.
-----------
Premises: A portion of the Building containing approximately
112,881 rentable square feet as shown in Exhibit A.
---------
<PAGE>
Premises Address:
Street: 3737 Grader Street
City and State: Garland, Texas
Tax Parcel: _______________________________________
Term: Sixty-Two (62) months
Estimated Commencement
Date: January 1, 1998
Base Rent Per Month: Thirty-One Thousand Forty-Two and 28/100 Dollars
($31,042.28) (Based on $3.30 per rentable square
foot per year)
Tenant's Share of Operating
Expenses: Forty-nine and 86/100 percent (49.86%)
Security Deposit: Thirty-One Thousand Forty-Two and 28/100 Dollars
($31,042.28)
Broker: Landlord's Broker: CB Commercial
Tenant's Broker: Trammell Crow
Lease Year: Shall refer to each twelve (12) month period during
the Term commencing on the Commencement Date and on
each anniversary thereof.
Permitted Uses: General office, administration and warehousing and
distribution of consumer goods and no other uses
shall be permitted without the prior written
consent of Landlord.
Options: Two (2) renewal options of five (5) years each
described Addendum
Guarantor: Norman Charney
--------------
Rentable Square Feet: Shall mean the total square footage of the Building
and/or the Premises, as applicable, measured from
the outside of the exterior walls of the Building
and to the center of any demising walls separating
the Premises from other premises in the Building
and will include any loading dock areas.
-2-
<PAGE>
ADDENDUM
EXHIBITS
A Premises
A-1 Land
B Work Letter
C Commencement Date Memorandum
D Insurance Certificate
E Prohibited Uses
F Rules and Regulations
G Estoppel Certificate
H Nondisturbance Agreement
I Waiver of Rights
J Guaranty
K Current CC&Rs
The Basic Lease Information set forth above and the Addendum and
Exhibits attached hereto are incorporated into and made a part of the following
Lease. Each reference in this Lease to any of the Basic Lease Information shall
mean the respective information above and shall be construed to incorporate all
of the terms provided under the particular Lease paragraph pertaining to such
information. In the event of any conflict between the Basic Lease Information
and the provisions of the Lease, the latter shall control
LANDLORD (TA) AND TENANT (NC) AGREE.
------- -------
initial initial
-iii-
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. PREMISES....................................................... 1
1.1 Premises................................................ 1
1.2 Common Area............................................. 1
1.3 Reserved Rights......................................... 1
2. TERM........................................................... 1
2.1 Commencement Date....................................... 1
2.2 Possession.............................................. 2
2.3 Early Entry............................................. 2
3. RENT........................................................... 2
3.1 Rent.................................................... 2
3.2 Late Charge and Interest................................ 3
3.3 Security Deposit........................................ 3
4. UTILITIES...................................................... 3
5. TAXES.......................................................... 4
5.1 Real Property Taxes..................................... 4
5.2 Definition of Real Property Taxes....................... 4
5.3 Personal Property Taxes................................. 4
6. OPERATING EXPENSES............................................. 5
6.1 Operating Expenses...................................... 5
6.2 Definition of Operating Expenses........................ 5
7. ESTIMATED EXPENSES............................................. 5
7.1 Payment................................................. 5
7.2 Adjustment.............................................. 6
8. INSURANCE...................................................... 6
8.1 Landlord................................................ 6
8.2 Tenant.................................................. 6
8.3 General................................................. 7
8.4 INDEMNITY............................................... 8
8.5 EXEMPTION OF LANDLORD FROM LIABILITY.................... 8
9. REPAIRS AND MAINTENANCE........................................ 9
9.1 Tenant.................................................. 9
9.2 Landlord................................................ 9
10. ALTERATIONS.................................................... 9
10.1 Trade Fixtures, Alterations............................. 9
10.2 Damage; Removal......................................... 10
10.3 Liens................................................... 10
10.4 Standard of Work........................................ 10
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
11. USE...........................................................10
12. ENVIRONMENTAL MATTERS.........................................11
12.1 Hazardous Materials....................................11
12.2 INDEMNIFICATION........................................12
13. DAMAGE AND DESTRUCTION........................................12
13.1 Casualty...............................................12
13.2 Tenant's Fault.........................................13
13.3 Uninsured Casualty.....................................13
13.4 Waiver.................................................14
13.5 Force Majeure..........................................14
14. EMINENT DOMAIN................................................14
14.1 Total Condemnation.....................................14
14.2 Condemnation...........................................14
14.3 Award..................................................15
14.4 Temporary Condemnation.................................15
15. DEFAULT.......................................................15
15.1 Events of Defaults.....................................15
15.2 Remedies...............................................16
16. ASSIGNMENT AND SUBLETTING.....................................17
17. ESTOPPEL, ATTORNMENT AND SUBORDINATION........................18
17.1 Estoppel...............................................18
17.2 Subordination..........................................18
17.3 Attornment.............................................18
18. MISCELLANEOUS.................................................18
18.1 General................................................18
18.2 Signs..................................................20
18.3 Waiver.................................................20
18.4 Financial Statements...................................20
18.5 LIMITATION OF LIABILITY................................20
18.6 Notices................................................20
18.7 Brokerage Commission...................................21
18.8 Authorization..........................................21
18.9 Holding Over...........................................21
18.10 [Intentionally Deleted]................................21
18.11 Joint and Several......................................21
18.12 Covenants and Conditions...............................21
18.13 Addenda................................................21
</TABLE>
-v-
<PAGE>
1. PREMISES.
--------
1.1 Premises. Landlord hereby leases to Tenant the Premises as shown on
--------
Exhibit A attached hereto, but excluding the Common Area (defined below) and any
- ---------
other portion of the Project. Tenant has determined that the Premises are
acceptable for Tenant's use and Tenant acknowledges that, except as set forth in
the Work Letter, if any, neither Landlord nor any broker or agent has made any
representations or warranties in connection with the physical condition of the
Premises or their fitness for Tenant's use upon which Tenant has relied directly
or indirectly for any purpose. By taking possession of the Premises, Tenant
accepts the Premises "AS-IS" and waives all claims of defect in the Premises,
except as set forth in the Work Letter. To the maximum extent permitted by law,
Tenant hereby waives all implied warranties regarding the Premises, including,
without limitation, any implied warranty that the Premises are suitable for
their intended commercial purpose.
1.2 Common Area. Tenant may, subject to rules made by Landlord, use the
-----------
following areas ("Common Area") in common with Landlord and other tenants of the
Project: refuse facilities, landscaped areas, driveways necessary for access to
the Premises, parking spaces and other common facilities designated by Landlord
from time to time for the common use of all tenants of the Project. Landlord
shall have the right, in Landlord's sole discretion, from time to time (i) to
make changes to the Common Area, including, without limitation, changes in the
location, size, shape and number of driveways, entrances, parking spaces,
parking areas, loading and unloading areas, ingress, egress, direction of
traffic, landscape areas, and walkways; (ii) to close temporarily any of the
Common Area for maintenance purposes so long as reasonable access to the
Premises remains available; (iii) to install, use, maintain, repair, alter,
relocate or replace any Common Area or to add additional buildings and
improvements to the Common Area; (iv) to use the Common Area while engaged in
making additional improvements, repairs or alterations to the Project, or any
portion thereof, and (v) to do and perform such other acts and make such other
changes in, to or with respect to the Common Area and the Project as Landlord
may, in the exercise of sound business judgment, deem to be appropriate or
prudent.
1.3 Reserved Rights. Landlord reserves the right to enter the Premises for
---------------
any reason upon reasonable notice to Tenant (except in case of an emergency)
and/or to undertake the following all without abatement of rent or liability to
Tenant: inspect the Premises and/or the performance by Tenant of the terms and
conditions hereof; make such alterations, repairs, improvements or additions to
the Premises as required hereunder, change boundary lines of the Common Areas;
install, use, maintain, repair, alter, relocate or replace any pipes, ducts,
conduits, wires, equipment and other facilities in the Building; grant easements
on the Project, dedicate for public use portions thereof and record covenants,
conditions and restrictions ("CC&Rs") affecting the Project and/or amendments to
existing CC&Rs which do not unreasonably interfere with Tenant's use of the
Premises or impose additional material monetary obligations on Tenant; change
the name of the Project; affix reasonable signs and displays, and, during the
last nine (9) months of the Term, show the Premises to prospective tenants.
2. TERM.
----
2.1 Commencement Date. The Term of the Lease shall commence ("Commencement
-----------------
Date") on the first day of the first full month following the date on which the
Premises are Substantially Complete (as hereinafter defined) except that if
Substantial Completion occurs on the first day of a month, that date shall be
the Commencement Date, and the Lease shall continue in full force and effect for
the period of time specified as the Term, or until this Lease is terminated as
otherwise provided herein. The Premises shall be deemed to be ("Substantially
Complete") on the earliest of the date on which: (1) Landlord files or causes to
be filed with the City in which the Premises are located (if required) and
delivers to Tenant an architect's notice of substantial completion, or similar
written notice that the Premises are substantially complete and Landlord
receives a sign-off from the City with respect to work to be performed by
Landlord under the Work Letter (as defined below), (2) Tenant commences business
operations in the Premises, or (3) a certificate of occupancy (or a reasonably
substantial equivalent such as a signoff from a building inspector or a
temporary certificate of occupancy) is issued for the Premises. Landlord shall
arrange for the construction of certain Tenant Improvements (as defined in the
Work Letter), if any, in accordance with and subject to the terms of the Work
Letter attached hereto as Exhibit B
---------
<PAGE>
(the "Work Letter"). Tenant shall, upon demand after delivery of the Premises to
----------------
Tenant, execute and deliver to Landlord a Commencement Date Memorandum in the
form attached hereto as Exhibit C acknowledging (i) the Possession Date and
---------
Commencement Date, (ii) the final rentable square footage of the Premises and
applicable monthly Base Rent (iii) Tenant's acceptance of the Premises. If the
Premises are not Substantially Complete on the Estimated Commencement Date as
extended by Force Majeure events and Tenant Delays (as defined in the Lease or
Work Letter, if any), this Lease shall remain in effect, Landlord shall not be
subject to any liability, and the Commencement Date shall be delayed until the
date the Premises are Substantially Complete.
2.2 Possession. Tenant's possession of the Premises during the period of
----------
time, if any, from the date on which Landlord tenders possession of the Premises
to Tenant in a Substantially Completed condition (the "Possession Date") to the
Commencement Date, shall be subject to all the provisions of this Lease and
shall not advance the expiration date. Rent shall be paid for such period at the
rate stated in the Base Lease Information, prorated on the basis of a thirty
(30) day month, and shall be due and payable to Landlord on or before the
Commencement Date. Tenant shall upon demand acknowledge in writing the
Possession Date in the form attached hereto as Exhibit C.
---------
2.3 Early Entry. Notwithstanding anything to the contrary contained in
-----------
Section 2.2 above, or elsewhere in this Lease, Tenant shall have the right to
enter the Premises thirty (30) days prior to the Commencement Date to install
trade fixtures and racking and such early entry for such purposes shall not
constitute occupancy for operation of Tenant's business and shall not trigger
the Commencement Date. Tenant agrees (i) any such early entry by Tenant shall be
at Tenant's sole risk, (ii) Tenant shall not interfere with Landlord or
Landlord's contractors completing work within the Premises or cause any labor
difficulties; Tenant, together with its employees, agents and independent
contractors will be subject to and will work under the direction of Landlord's
contractor, (iii) Tenant shall comply with and be bound by all provisions of
this Lease during the period of any such early entry except for the payment of
Base Rent, (iv) prior to entry upon the Premises by Tenant, Tenant agrees to pay
for and provide to Landlord certificates evidencing the existence and amounts of
liability insurance carried by Tenant, which coverage must comply with the
provisions of this Lease relating to insurance, (v) Tenant and its agents and
contractors agents to comply with all applicable laws, regulations, permits and
other approvals required to perform its work during the early entry on the
Premises, and (VI) EXCEPT IN CASES OF LANDLORD'S GROSS NEGLIGENCE OR WILLFUL
ACTS, TENANT AGREES TO INDEMNIFY, PROTECT, DEFEND AND SAVE LANDLORD AND THE
PREMISES HARMLESS FROM AND AGAINST ANY AND ALL LIENS, LIABILITIES, LOSSES,
DAMAGES, COSTS, EXPENSES, DEMANDS, ACTIONS, CAUSES OF ACTION AND CLAIMS
(INCLUDING, WITHOUT LIMITATION, ATTORNEYS' FEES AND LEGAL COSTS) ARISING OUT OF
THE EARLY ENTRY, USE, CONSTRUCTION, OR OCCUPANCY OF THE PREMISES BY TENANT OR
ITS AGENTS, EMPLOYEES OR CONTRACTORS, INCLUDING, WITHOUT LIMITATION, THAT WHICH
IS CAUSED BY LANDLORD'S OR ITS AGENTS OR CONTRACTOR'S NEGLIGENCE.
3. RENT.
----
3.1 Rent. Prior to the Commencement Date, Landlord will cause its architect
----
to measure and certify in writing to Landlord the Rentable Square Feet (as
defined in the Basic Lease Information) of the Building and the Premises,
following which time the Base Rent and other figures based upon the Rentable
Square Feet contained in the Building and the Premises shall be determined in
accordance with the rental rates set out in the Basic Lease Information. Except
in the case of manifest error, the certification from Landlord's architect of
the Rentable Square Footage of the Building and the Premises shall be binding
upon Landlord and Tenant. Tenant shall pay to Landlord, at Landlord's Address
for Payment of Rent designated in the Basic Lease Information, or at such other
address as Landlord may from time to time designate in writing to Tenant for the
payment of Rent, the Base Rent, without notice, demand, offset or deduction, in
advance, on the first day of each calendar month. Landlord shall have no
obligation to notify Tenant of any increase in Rent and Tenant's obligation to
pay all Rent (and any increases) when due shall not be modified or altered by
such lack of notice from Landlord. Acceptance of a payment of Rent which is less
than the amount then due shall not be a waiver of Landlord's rights to the
balance of such Rent, regardless of Landlord's endorsement of or deposit of any
check so stating. It is intended that this Lease
-2-
<PAGE>
be a "triple net lease," and that the Rent to be paid hereunder by Tenant will
be received by Landlord without any deduction or offset whatsoever by Tenant,
foreseeable or unforeseeable. Except as expressly provided to the contrary in
this Lease, Landlord shall not be required to make any expenditure, incur any
obligation, or incur any liability of any kind whatsoever in connection with
this Lease or the ownership, construction, maintenance, operation or repair of
the Premises or the Project. If the Term commences (or ends) on a date other
than the first (or last) day of a month, Base Rent shall be prorated on a per
diem basis with respect to the portion of the first month and/or last month
within the Term. All sums other than Base Rent which Tenant is obligated to pay
under this Lease shall be deemed to be additional rent due hereunder, whether or
not such are designated "additional rent" and shall be due and payable to
Landlord commencing on the Possession Date. The term "Rent" means the Base Rent
and all additional rent payable hereunder.
3.2 Late Charge and Interest. The late payment of any Rent will cause
------------------------
Landlord to incur additional costs, including administration and collection
costs and processing and accounting expenses and increased debt service
("Delinquency Costs"). If Landlord has not received any installment of Rent
within ten (10) days after such amount is due, Tenant shall pay a late charge of
ten percent (10%) of the delinquent amount, which is agreed to represent a
reasonable estimate of the Delinquency Costs incurred by Landlord.
Alternatively, all such delinquent amounts shall bear interest from the date
such amount was due until paid in full at a rate per annum ("Applicable Interest
Rate") equal to the lesser of (a) the maximum interest rate permitted by law or
(b) five percent (5%) above the rate publicly announced by Bank of America, N.A.
(or if Bank of America, N.A. ceases to exist, the largest bank then
headquartered in the State of California) ("Bank") as its "Reference Rate". If
the use of the announced Reference Rate is discontinued by the Bank, then the
term Reference Rate shall mean the announced rate charged by the Bank which is,
from time to time, substituted for the Reference Rate. Landlord and Tenant
recognize that the damage which Landlord shall suffer as a result of Tenant's
failure to pay such amounts is difficult to ascertain and said late charge is
the best estimate of the damage which Landlord shall suffer in the event of late
payment. If a late charge becomes payable for any three (3) installments of Rent
within any twelve (12) month period, then the Rent shall automatically become
due and payable quarterly in advance.
3.3 Security Deposit. Upon the execution of this Lease, Tenant shall pay to
----------------
Landlord the Security Deposit. The Security Deposit shall secure the full and
faithful performance of each provision of this Lease to be performed by Tenant.
Landlord shall not be required to pay interest on the Security Deposit or to
keep the Security Deposit separate from Landlord's own funds. If Tenant fails to
perform fully and timely all or any of Tenant's covenants and obligations
hereunder, Landlord may, but without obligation, apply all or any portion of the
Security Deposit toward fulfillment of Tenant's unperformed covenants and/or
obligations. If Landlord does so apply any portion of the Security Deposit,
Tenant shall immediately pay Landlord sufficient cash to restore the Security
Deposit to the amount of the then current Base Rent per month. Upon any increase
in Base Rent, Landlord may require the Security Deposit to be increased by the
amount of the increase in Base Rent per month. After Tenant vacates the
Premises, upon the expiration or sooner termination of this Lease, if Tenant is
not then in default, Landlord shall return to Tenant any unapplied balance of
the Security Deposit. Should the Permitted Use be amended to accommodate a
change in the business of Tenant or to accommodate a subtenant or assignee,
Landlord shall have the right to increase the Security Deposit to the extent
necessary, in Landlord's reasonable judgment, to account for any increased risk
to the Premises or increased wear and tear that the Premises may suffer as a
result thereof.
4. UTILITIES. Tenant shall pay all charges for heat, water, gas, electricity,
---------
telephone and any other utilities used on or provided to the Premises. Except
as provided below, Landlord shall not be liable to Tenant for interruption in or
curtailment of any utility service, nor shall any such interruption or
curtailment constitute constructive eviction or grounds for rental abatement.
Tenant shall pay a reasonable proration of utilities, as determined by Landlord.
In the event that the Premises or a portion thereof are rendered untenantable by
reason of the interruption or termination of any necessary utility service for
five (5) consecutive days, Base Rent hereunder shall be abated with respect to
that portion of the Premises so rendered untenantable from the date on which
such interruption or termination occurred until the date on which such necessary
utility service is restored to the Premises. In the event such service outage
of a necessary, utility continues for forty-five (45) consecutive days, Tenant
shall have the right, at Tenant's sole election, to terminate this Lease by
providing written notice of such election to Landlord.
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<PAGE>
5. TAXES.
-----
5.1 Real Property Taxes. Tenant shall pay to Landlord Tenant's Share of the
-------------------
Real Property Taxes in each calendar year; provided however, Landlord may, at
its election, require that Tenant pay any increase in the assessed value of the
Project based upon the value of the Tenant Improvements (as defined in the Work
Letter) relative to the value of the other improvements on or to the other
buildings in the Project, as reasonably determined by Landlord. Upon Tenant's
request, Landlord shall endeavor to provide Tenant with a breakdown of
Landlord's determination of Tenant's increased share of Real Property Taxes
resulting from the Tenant Improvements.
5.2 Definition of Real Property Taxes. "Real Property Taxes" shall be the
---------------------------------
sum of the following: all real property taxes, possessory-interest taxes,
business or license taxes or fees, service payments in lieu of such taxes or
fees, annual or periodic license or use fees, excises, transit and traffic
charges, housing fund assessments, open space charges, childcare fees, school
sewer and parking fees or any other assessments, levies, fees, exactions or
charges, general and special, ordinary and extraordinary, unforeseen as well as
foreseen (including fees "in-lieu" of any such tax or assessment) which are
assessed, levied, charged, conferred or imposed by any public authority upon the
Project (or any real property comprising any portion thereof) or its operations,
together with all taxes, assessments or other fees imposed by any public
authority upon or measured by any Rent or other charges payable hereunder,
including any gross receipts tax or excise tax levied by any governmental
authority with respect to receipt of rental income, or upon, with respect to or
by reason of the development, possession, leasing, operation, management,
maintenance, alteration, repair, use or occupancy by Tenant of the Premises or
any portion thereof, or documentary transfer taxes upon this transaction or any
document to which Tenant is a party creating or transferring an interest in the
Premises, together with any tax imposed in substitution, partially or totally,
of any tax previously included within the aforesaid definition or any additional
tax the nature of which was previously included within the aforesaid definition,
together with any and all costs and expenses (including, without limitation,
attorneys, administrative and expert witness fees and costs) of challenging any
of the foregoing or seeking the reduction in or abatement, redemption or return
of any of the foregoing, but only to the extent of any such reduction,
abatement, redemption or return. All references to Real Property Taxes during a
particular year shall be deemed to refer to taxes accrued during such year,
including supplemental tax bills regardless of when they are actually assessed
and without regard to when such taxes are payable. The obligation of Tenant to
pay for supplemental taxes shall survive the expiration or early termination of
this Lease. Nothing contained in this Lease shall require Tenant to pay any
franchise, corporate, estate or inheritance tax of Landlord, or any income,
profits or revenue tax or charge upon the net income of Landlord.
5.3 Personal Property Taxes. Prior to delinquency, Tenant shall pay all
-----------------------
taxes and assessments levied upon trade fixtures, alterations, additions,
improvements, inventories and other personal property located and/or installed
on the Premises by Tenant; and Tenant shall provide Landlord copies of receipts
for payment of all such taxes and assessments. To the extent any such taxes are
not separately assessed or billed to Tenant, Tenant shall pay the amount thereof
as invoiced by Landlord.
5.4 Waiver of Appeal. Tenant waives all rights to protest or appeal the
----------------
appraised value of the Premises, as well as the Project and Building, and all
rights to receive notices of reappraisement as set forth in Sections 41.413 and
42.015 of the Texas Tax Code.
6. OPERATING EXPENSES.
6.1 Operating Expenses. Tenant shall pay to Landlord Tenant's Share of the
------------------
Operating Expenses in each calendar year.
6.2 Definition of Operating Expenses. "Operating Expenses" shall include
--------------------------------
all reasonable and necessary expenses incurred by Landlord in the ownership,
operation, maintenance, repair and management of the Project, the Common Area
and/or the Building, including, but not limited to, (a) non-structural repairs
to and maintenance of the roof (and roof membrane), skylights and exterior walls
of the Building (including painting); (b) repair, maintenance, utility costs and
landscaping of the Common Area, including but not limited to, any and all costs
of maintenance, repair and replacement of all parking areas (including bumpers,
sweeping, striping and
-4-
<PAGE>
slurry coating), loading and unloading areas, trash areas, common driveways,
sidewalks, outdoor lighting, signs, directories, walkways, parkways,
landscaping, irrigation systems, fences and gates and other costs which are
allocable to the real property of which the Premises are a part; (c) insurance
deductibles and the commercially reasonable costs relating to the insurance
maintained by Landlord with respect to the Project (including, without
limitation, the Building), including, without limitation, Landlord's cost of any
self insurance deductible or retention; (d) maintenance contracts for heating,
ventilation and air-conditioning (HVAC) systems and elevators, if any; (e)
maintenance, monitoring and operation of the fire/life safety and sprinkler
system; (f) trash collection and security services; (g) Real Property Taxes; (h)
capital improvements made to or capital assets acquired for the Project after
the Commencement Date that actually reduce Operating Expenses or are reasonably
necessary for the health and safety of the occupants of the Project or are
required under any governmental law or regulation, which capital costs, or an
allocable portion thereof, shall be amortized over the period determined by
Landlord, together with interest on the unamortized balance at the Applicable
Interest Rate; (i) commercially reasonable reserves set aside for maintenance
and repair, and any other costs incurred by Landlord related to the Project.
Landlord agrees that the total annual costs of the items described in
subsections (a), (b), (d), (e), (f), (i) and 0) immediately above shall not
increase by more than ten percent (10/o) per year. Operating Expenses shall also
include an administrative fee to Landlord for accounting and project management
services relating to the Project in an amount equal to ten percent (10%) of the
sum of Operating Expenses (other than taxes, insurance and the administrative
fee). Operating Expenses shall also include all costs and fees incurred by
Landlord in connection with the management of this Lease and the Premises
including the cost of those services which are customarily performed by a
property management services company which amount shall be two percent (2%) of
the Rent. In no event will Landlord or its property manager be required to keep
separate accounting records for the components of the Operating Expenses or to
create any ledgers or schedules not already in existence. Operating Expenses
shall not include (i) replacement of or structural repairs to the roof or the
exterior walls; (ii) repairs to the extent covered by insurance proceeds, or
paid by Tenant or other third parties; (iii) alterations solely attributable to
tenants of the Project other than Tenant, (iv) lease commissions and other costs
of leasing space within the Project, (v) debt service or ground rents; or (vi)
collection costs or litigation expenses incurred with respect to other tenants.
Notwithstanding the foregoing, all costs Landlord incurs that are solely
attributable to the Premises shall be borne by Tenant, such that Tenant shall
reimburse Landlord for one hundred percent (100%) of same as additional rent.
7. ESTIMATED EXPENSES.
------------------
7.1 Payment. "Estimated Expenses" for any particular year shall mean
-------
Landlord's estimate of Operating Expenses and Real Property Taxes for a calendar
year. Tenant shall pay Tenant's Share of the Estimated Expenses with
installments of Base Rent in monthly installments of one-twelfth (1/12th)
thereof on the first day of each calendar month during such year. If at any
time Landlord determines that Operating Expenses and Real Property Taxes are
projected to vary from the then Estimated Expenses, Landlord may, by notice to
Tenant, revise such Estimated Expenses, and Tenant's monthly installments for
the remainder of such year shall be adjusted so that by the end of such calendar
year Tenant has paid to Landlord Tenant's Share of the revised Estimated
Expenses for such year.
7.2 Adjustment. "Operating Expenses and Real Property Taxes Adjustment" (or
----------
"Adjustment") shall mean the difference between Tenant's Share of Estimated
Expenses and Tenant's Share of Operating Expenses and Real Property Taxes for
any calendar year After the end of each calendar year, Landlord shall deliver to
Tenant a statement of Tenant's Share of Operating Expenses and Real Property
Taxes for such calendar year, accompanied by a computation of the Adjustment. If
Tenant's payments are less than Tenant's Share, then Tenant shall pay the
difference within twenty (20) days after receipt of such statement. Tenant's
obligation to pay such amount shall survive the termination of this Lease. If
Tenant's payments exceed Tenant's Share, then (provided that Tenant is not in
default), Landlord shall credit such excess amount to future installments of
Tenant's Share for the next calendar year. If Tenant is in default, Landlord
may, but shall not be required to, credit such amount to Rent arrearages.
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<PAGE>
8. INSURANCE.
---------
8.1 Landlord. Landlord shall maintain insurance through individual or
--------
blanket policies insuring the Building against fire and extended coverage
(including, if Landlord elects "all risk" coverage, earthquake/volcanic action,
flood and/or surface water insurance) for the full replacement cost of the
Building, with deductibles and the form and endorsements of such coverage as
selected by Landlord, together with rental abatement insurance against loss of
Rent in an amount equal to the amount of Rent for a period of at least twelve
(12) months commencing on the date of loss. Landlord may also carry such other
insurance as Landlord may deem prudent or advisable, including, without
limitation, liability insurance in such amounts and on such terms as Landlord
shall determine. Tenant shall pay to Landlord, as a portion of the Operating
Expenses, the costs of the insurance coverages described herein, including,
without limitation, Landlord's cost of any deductible or self-insured retention;
provided, however, Tenant's liability for the cost of any deductible or self-
insured retention solely relating to property insurance (and not any other
insurance required under this Lease) shall not exceed Twelve Thousand Five
Hundred Dollars ($12,500) per occurrence during the initial Term of this Lease.
8.2 Tenant. Tenant shall, at Tenant's expense, obtain and keep in force at
------
all times the following insurance:
8.2.1 Commercial General Liability Insurance (Occurrence Form). A
-------------------------------------------------------
policy of commercial general liability insurance (occurrence form) having a
combined single limit of not less than Two Million Dollars ($2,000,000) per
occurrence and Five Million Dollars ($5,000,000) aggregate providing coverage
for, among other things, blanket contractual liability, premises,
products/completed operations, with an "Additional Insured-Managers or Lessors
of Premises Endorsement" and contain the 'Amendment of the Pollution Exclusion
endorsement' for damage caused by heat, smoke or fumes from a hostile fire,
personal and advertising injury coverage, with deletion of (a) the exclusion for
operations within fifty (50) feet of a railroad track (railroad protective
liability), if applicable, and (b) the exclusion for explosion, collapse or
underground hazard, if applicable, and, if necessary, Tenant shall provide for
restoration of the aggregate limit and provided that the policy shall not
contain any intra-insured exclusions as between insured persons or
organizations, but shall include coverage for liability assumed under this lease
as an "insured contract" for the performance of Tenant's indemnity obligations
under this Lease;
8.2.2 Automobile Liability Insurance. Business automobile liability
------------------------------
insurance having a combined single limit of not less than One Million Dollars
($1,000,000) per occurrence and insuring Tenant against liability for claims
arising out of ownership, maintenance, or use of any owned, hired or non-owned
automobiles;
8.2.3 Workers' Compensation and Employee Liability Insurance.
------------------------------------------------------
Workers' compensation insurance having limits not less than those required by
state statute and federal statute, if applicable, and covering all persons
employed by Tenant in the conduct of its operations on the Premises (including
the all states endorsement and, if applicable, the volunteers endorsement),
together with employer's liability insurance coverage in the amount of at least
One Million Dollars ($ 1,000,000);
8.2.4 Property Insurance: "All risk" property insurance including
------------------
boiler and machinery comprehensive form, if applicable, covering damage to or
loss of any of Tenant's personal property, fixtures, and equipment, including
electronic data processing equipment (collectively "Tenant's Property") (and
coverage for the full replacement cost thereof including business interruption
of Tenant), together with, if the property of Tenant's invitees is to be kept in
the Premises, warehouse's legal liability or bailee customers insurance for the
full replacement cost of the property belonging to invitees and located in the
Premises, and
8.2.5 Business Interruption. Tenant shall obtain and maintain loss of
---------------------
income and extra expense insurance in amounts as will reimburse Tenant for
direct or indirect loss of earnings attributable to all perils commonly insured
against by prudent lessees in the business of Tenant or attributable to
prevention of access to the Premises as a result of such perils.
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<PAGE>
8.3 General.
-------
8.3.1 Insurance Companies. Insurance required to be maintained by
-------------------
Tenant shall be written by companies licensed to do business in the state in
which the Premises are located and having a "General Policyholders Rating of at
least "A -VIII" (or such higher rating as may be required by a lender having a
lien on the Premises) as set forth in the most current issue of "Best Insurance
Guide."
8.3.2 Certificates of Insurance. Tenant shall deliver to Landlord
-------------------------
certificates of insurance for all insurance required to be maintained by Tenant
in the form of Exhibit D, attached hereto (or in a form acceptable to Landlord
---------
in its sole discretion), no later than seven (7) days prior to the date of
possession of the Premises. Tenant shall, at least ten (10) days prior to
expiration of the policy, furnish landlord with certificates of renewal or
"binders" thereof. Each certificate shall expressly provide that such policies
shall not be cancelable or otherwise subject to modification except after twenty
(20) days prior written notice to the parties named as additional insureds in
this Lease (except in the case of cancellation for nonpayment of premium in
which case cancellation shall not take effect until at least ten (10) days'
notice has been given to Landlord). If Tenant fails to maintain any insurance
required in this Lease, Tenant shall be liable for all losses and cost resulting
from said failure.
8.3.3 Additional Insureds. Landlord, Landlord's lender, if any, and
-------------------
any property management company of Landlord for the Premises shall be named as
additional insureds on a form approved by Landlord under all of the policies
required by Section 8.2.1. The policies required under Section 8.2.1 shall
provide for severability of interest
8.3.4 Primary Coverage. All insurance to be maintained by Tenant
----------------
shall except for workers, compensation and employer's liability insurance, be
primary, without right of contribution from insurance of Landlord. Any umbrella
liability policy or excess liability policy (which shall be in "following form")
shall provide that if the underlying aggregate is exhausted, the excess coverage
will drop down as primary insurance. The limits of insurance maintained by
Tenant shall not limit Tenant's liability under this Lease.
8.3.5 Waiver of Subrogation. Landlord and Tenant each waive any right
---------------------
to recover against the other for claims for damages to Tenant's Property, the
Building or the Project, as the case may be, whether or not covered by
insurance, even if caused by the negligence of the other party. This provision
---------------------------------------------------
is intended to waive fully, and for the benefit of Landlord and Tenant any
rights and/or claims which might give rise to a right of subrogation in favor of
any insurance carrier. The coverage obtained by Tenant and Landlord pursuant to
this Lease shall include, without limitation, a waiver of subrogation
endorsement attached to the applicable certificate(s) of insurance.
8.3.6 Notification of Incidents. Tenant shall notify Landlord within
-------------------------
a reasonable time after the occurrence of any accidents or incidents in the
Premises, the Building, Common Areas or the Project which could give rise to a
claim under any of the insurance policies required under this Section 8.
8.4 INDEMNITY. TENANT SHALL INDEMNIFY, PROTECT, DEFEND (BY COUNSEL
---------
REASONABLY ACCEPTABLE TO LANDLORD) AND HOLD HARMLESS LANDLORD AND ITS PARTNERS,
DIRECTORS, OFFICERS, EMPLOYEES, SHAREHOLDERS, LENDERS, AGENTS, CONTRACTORS AND
EACH OF THEIR SUCCESSORS AND ASSIGNS FROM AND AGAINST ANY AND ALL CLAIMS,
JUDGMENTS, CAUSES OF ACTION, DAMAGES, PENALTIES, COSTS, LIABILITIES, AND
EXPENSES, INCLUDING ALL COSTS, ATTORNEYS' FEES, EXPENSES AND LIABILITIES
INCURRED IN THE DEFENSE OF ANY SUCH CLAIM OR ANY ACTION OR PROCEEDING BROUGHT
THEREON, ARISING AT ANY TIME DURING OR AFTER THE TERM AS A RESULT (DIRECTLY OR
INDIRECTLY) OF OR IN CONNECTION WITH (I) ANY DEFAULT IN THE PERFORMANCE OF ANY
OBLIGATION ON TENANT'S PART TO BE PERFORMED UNDER THE TERMS OF THIS LEASE, OR
(II) TENANT'S USE OF THE PREMISES, THE CONDUCT OF TENANTS BUSINESS OR ANY
ACTIVITY, WORK OR THINGS DONE, PERMITTED OR SUFFERED BY TENANT IN OR ABOUT THE
PREMISES, THE BUILDING, THE COMMON AREA OR OTHER
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<PAGE>
PORTIONS OF THE PROJECT, EXCEPT FOR CLAIMS CAUSED SOLELY BY LANDLORD'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT, BUT SPECIFICALLY INCLUDING LANDLORD'S
NEGLIGENCE (OTHER THAN GROSS NEGLIGENCE). THE OBLIGATIONS OF TENANT UNDER THIS
SECTION 8.4 SHALL SURVIVE THE TERMINATION OF THIS LEASE WITH RESPECT TO ANY
CLAIMS OR LIABILITY ARISING PRIOR TO SUCH TERMINATION.
8.5 EXEMPTION OF LANDLORD FROM LIABILITY. TENANT, AS A MATERIAL PART OF
------------------------------------
THE CONSIDERATION TO LANDLORD, HEREBY ASSUMES ALL RISK OF DAMAGE TO PROPERTY
INCLUDING, BUT NOT LIMITED TO, TENANT'S FIXTURES, EQUIPMENT, FURNITURE AND
ALTERATIONS OR INJURY TO PERSONS IN, UPON OR ABOUT TEE PREMISES, THE BUILDING,
THE COMMON AREA OR OTHER PORTIONS OF THE PROJECT ARISING FROM ANY CAUSE, AND
TENANT HEREBY WAIVES ALL CLAIMS IN RESPECT THEREOF AGAINST LANDLORD, EXCEPT TO
THE EXTENT SUCH CLAIMS ARE CAUSED BY LANDLORD'S GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. TENANT HEREBY AGREES THAT LANDLORD SHALL NOT BE LIABLE FOR INJURY TO
TENANT'S BUSINESS OR ANY LOSS OF INCOME THEREFROM OR FOR DAMAGE TO THE, PROPERTY
OF TENANT, OR INJURY TO OR DEATH OF TENANT, TENANT'S EMPLOYEES, INVITEES,
CUSTOMERS, AGENTS OR CONTRACTORS OR ANY OTHER PERSON IN OR ABOUT THE PREMISES,
THE BUILDING, THE COMMON AREA OR THE PROJECT, WHETHER SUCH DAMAGE OR INJURY IS
CAUSED BY FIRE, STEAM, ELECTRICITY, GAS, WATER OR RAIN, OR FROM THE BREAKAGE,
LEAKAGE OR OTHER DEFECTS OF SPRINKLERS, WIRES, APPLIANCES, PLUMBING, AIR
CONDITIONING OR LIGHTING SPRINKLERS, OR FROM ANY OTHER CAUSE, WHETHER SAID
DAMAGE OR INJURY RESULTS FROM CONDITIONS ARISING UPON THE PREMISES, UPON OTHER
PORTIONS OF THE BUILDING OR FROM OTHER SOURCES OR PLACES, AND REGARDLESS OF
WHETHER THE CAUSE OF SUCH DAMAGE OR INJURY OR THE MEANS OF REPAIRING THE SAME IS
INACCESSIBLE TO TENANT, EXCEPT TO THE EXTENT CAUSED BY LANDLORD'S GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT, BUT SPECIFICALLY INCLUDING LANDLORD'S
NEGLIGENCE (OTHER THAN GROSS NEGLIGENCE). LANDLORD SHALL NOT BE LIABLE FOR ANY
DAMAGES ARISING FROM ANY ACT OR NEGLECT OF ANY OTHER TENANT, IF ANY, OF THE
BUILDING OR THE PROJECT OR LANDLORD'S FAILURE TO ENFORCE THE TERMS OF ANY
AGREEMENTS WITH PARTIES OTHER THAN TENANT. IT IS EXPRESSLY UNDERSTOOD AND AGREED
THAT TENANTS WAIVERS UNDER THIS SECTION SHALL APPLY TO ALL COSTS, LIABILITIES,
DAMAGES, DEATHS AND INJURIES CAUSED BY LANDLORD'S NEGLIGENCE (OTHER THAN ITS
GROSS NEGLIGENCE).
9. REPAIRS AND MAINTENANCE.
-----------------------
9.1 Tenant. Tenant, at Tenant's sole cost and expense, shall keep and
------
maintain the Premises (interior and exterior), including loading docks, doors
and ramps, floors, and subfloors and floor coverings, walls and wall coverings,
doors windows, glass, plate glass, ceilings, skylights, lighting systems,
interior plumbing, electrical and mechanical systems and wiring, appliances and
devices using or containing refrigerants, fixtures and equipment in good repair
and in a clean and safe condition, and repair and/or replace any and all of the
foregoing in a clean and safe condition, in good order, condition and repair.
Without limiting the foregoing, Tenant shall, at Tenant's sole expense, (a)
immediately replace all broken glass in the Premises with glass equal to or in
excess of the specification and quality of the original glass; and (b) repair
any area damaged by Tenant, Tenant's agents, employees, invitees and visitors,
including any damage caused by any roof penetration, whether or not such roof
penetration was approved by Landlord. In the event Tenant fails, in the
reasonable judgment of Landlord, to maintain the Premises in accordance with the
obligations under the Lease, which failure continues at the end of ten (10) days
following Tenant's receipt of written notice from Landlord stating with
particularity the nature of the failure, Landlord shall have the right to enter
the Premises and perform such maintenance, repairs or refurbishing at Tenant's
sole cost and expense (including a sum for overhead to Landlord). Tenant shall
maintain written records of maintenance and repairs, as required by any
applicable law, ordinance or regulation, and shall use certified technician to
perform such maintenance and repairs, as so required. Tenant shall deliver full
and
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<PAGE>
complete copies of all service or maintenance contracts entered into by Tenant
for the Premises to Landlord within sixty (60) days after the Commencement Date.
9.2 Landlord. Landlord shall, subject to the following limitations, repair
--------
damage to the roof, foundation and exterior portions of exterior walls
(excluding wall coverings, painting, glass and doors) of the Building; provided,
if such damage is caused by an act or omission of Tenant, Tenant's employees,
agents, invitees, subtenants, or contractors, then such repairs shall be at
Tenant's sole expense. Landlord shall not be required to make any repair
resulting from (i) any alteration or modification to the Building or to
mechanical equipment within the Building performed by, for or because of Tenant
or to special equipment or systems installed by, for or because of Tenant, (ii)
the installation, use or operation of Tenant's property, fixtures and equipment,
(iii) the moving of Tenant's property in or out of the Building or in and about
the Premises, (iv) Tenant's use or occupancy of the Premises in violation of
Section 11 of this Lease or in the manner not contemplated by the parties at the
time of the execution of this Lease, (v) the acts or omissions of Tenant and
Tenant's employees, agents, invitees, subtenants, licensees or contractors, (vi)
fire and other casualty, except as provided by Section 13 of this Lease or (vii)
condemnation, except as provided in Section 14 of this Lease. Landlord shall
have no obligation to make repairs under this Section 9.2 until a reasonable
time after receipt of written notice from Tenant of the need for such repairs.
There shall be no abatement of Rent during the performance of such work.
Landlord shall not be liable to Tenant for injury or damage that may result from
interruption of Tenant's use of the Premises during any repairs by Landlord,
provided that Landlord shall use reasonable efforts to avoid or minimize any
interference with Tenant's normal business operations. Tenant waives any right
to repair the Premises, the Building and/or the Common Area at the expense of
Landlord under any applicable governmental laws, ordinances, statutes, orders or
regulations now or hereafter in effect which might otherwise apply.
10. ALTERATIONS.
-----------
10.1 Trade Fixtures; Alterations. Tenant may install necessary trade
---------------------------
fixtures, equipment and furniture in the Premises, provided that such items are
installed and are removable without structural or material damage to the
Premises, the Building, the Common Area or the Project. Tenant shall not
construct, nor allow to be constructed, any alterations or physical additions
in, about or to the Premises without obtaining the prior written consent of
Landlord, which consent shall be conditioned upon Tenant's compliance with
Landlord's reasonable requirements regarding construction of improvements and
alterations. Tenant shall submit plans and specifications to Landlord with
Tenant's request for approval and shall reimburse landlord for all reasonable
costs which Landlord may incur in connection with granting approval to Tenant
for any such alterations and additions, including any costs or expenses which
Landlord may incur in electing to have outside architects and engineers review
said matters. If Landlord does not respond to a written request from Tenant
within ten (10) business days, then Landlord shall be deemed to disapprove such
request. In the event Tenant makes any alterations to the Premises that trigger
or give rise to a requirement that the Building or the Premises come into
compliance with any governmental laws, ordinances statutes, orders and/or
regulations (such as ADA requirements), Tenant shall be fully responsible for
complying, at its sole cost and expense, with same. Tenant shall file a notice
of completion after completion of such work and provide Landlord with a copy
thereof. Tenant shall provide Landlord with a set of "as-built" drawings for any
such work.
10.2 Damage; Removal. Tenant shall repair all damage to the Premises and/or
---------------
the Building caused by the installation or removal of Tenant's fixtures,
equipment, furniture and alterations. Upon the termination of this Lease, Tenant
shall remove any or all trade fixtures, alterations, additions, improvements and
partitions made or installed by Tenant and restore the Premises to its condition
existing prior to the construction of any such items, provided, however,
Landlord has the absolute right to require Tenant to have all or any portion of
such items designated by Landlord to remain on the Premises, in which event they
shall be and become the property of Landlord upon the termination of this Lease.
All such removals and restoration shall be accomplished in a good and
workmanlike manner and so as not to cause any damage to the Premises, the
Building, the Common Area or the Project whatsoever. Notwithstanding the
foregoing, Tenant shall be required to remove only those improvements and
fixtures which Landlord has, in Landlord's written consent to such installation,
specified are to be removed upon the expiration or termination of this Lease.
Further, provided that Tenant is not then in default
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<PAGE>
hereunder, Tenant shall have the right to remove all conveyers, compactors,
alarms, metal detectors, security cameras and equipment, racks, removable trade
fixtures and phone equipment from the Premises.
10.3 Liens. Tenant shall promptly pay and discharge all claims for labor
-----
performed, supplies furnished and services rendered at the request of Tenant and
shall keep the Premises free of all mechanics', and materialmen's liens in
connection therewith. Tenant shall provide at least ten (10) days prior written
notice to Landlord before any labor is performed, supplies furnished or services
rendered on or at the Premises and Landlord shall have the right to post on the
Premises notices of non-responsibility. If any lien is filed, Tenant shall cause
such lien to be released and removed within ten (10) days after the date of
filing and if Tenant fails to do so, Landlord may take such action as may be
necessary to remove such lien and Tenant shall pay Landlord such amounts
expended by Landlord together with interest thereon at the Applicable Interest
Rate from the date of expenditure.
10.4 Standard of Work. All work to be performed by or for Tenant pursuant
----------------
hereto shall be performed diligently and in a first class, workmanlike manner,
and in compliance with all applicable laws, ordinances, regulations and rules of
any public authority having jurisdiction over the Premises and/or Tenant and
Landlord's insurance carriers. Landlord shall have the right, but not the
obligation, to inspect periodically the work on the Premises and Landlord may
require changes in the method or quality of the work.
11. USE. The Premises shall be used only for the Permitted Uses set forth in
---
the Basic Lease Information and for no other uses without Landlord's prior
written approval, which approval Landlord shall not unreasonably withhold
provided that the proposed use does not create additional concerns, obligations,
liabilities or risks for Landlord. Tenant's use of the Premises shall be in
compliance with and subject to all applicable governmental laws, ordinances,
statutes, orders and regulations and any CC&Rs (including payments thereunder,
if any, which are charged as Operating Expenses) or any supplement thereto
rewarded in any official or public records with respect to the Project or any
portion thereof. A copy of the CC&Rs currently affecting the Project is
attached hereto as Exhibit K. In no event shall the Premises be used for any of
---------
the Prohibited Uses set forth on Exhibit E attached hereto. Tenant, at Tenant's
---------
sole cost and expense, shall comply with the rules and regulations attached
hereto as Exhibit F, together with such additional rules and regulations as
---------
Landlord may from time to time prescribe. Tenant shall not commit waste,
overload the floors or structure of the Building, subject the Premises, the
Building, the Common Area or the Project to any use which would damage the same
or increase the risk of loss or violate any insurance coverage, permit any
unreasonable odors, smoke, dust, gas, substances, noise or vibrations to emanate
from the Premises, take any action which would constitute a nuisance or would
disturb, obstruct or endanger any other tenants, take any action which would
abrogate any warranties, or use or allow the Premises to be used for any
unlawful purpose. Tenant shall have the right in common with other tenants of
Landlord to use on an unreserved basis the parking facilities of the Project.
Tenant agrees not to overburden the parking facilities and agrees to cooperate
with Landlord and other tenants in the use of parking facilities. Tenant
further agrees that Landlord shall not be responsible for enforcing any parking
rights in the Project or non-compliance by any other tenant or occupant of the
Project with, or Landlord's failure to enforce, any of the rules or regulations
or CC&Rs or any other terms or provisions of such tenant's or occupant's lease.
Tenant shall promptly comply with the reasonable requirements of any board of
fire insurance underwriters or other similar body now or hereafter constituted.
Tenant shall not do any act which shall in any way encumber the title of
Landlord in and to the Premises, the Building or the Project.
12. ENVIRONMENTAL MATTERS.
---------------------
12.1 Hazardous Materials. Tenant shall not cause nor permit, nor allow any
-------------------
of Tenant's employees, agents, customers, visitors, invitees, licensees,
contractors, assignees or subtenants (collectively, 'Tenant's Parties") to cause
or permit, any Hazardous Materials to be brought upon, stored, manufactured,
generated, blended, handled, recycled, treated, disposed or used on, under or
about the Premises, the Building, the Common Area or the Project, except for
routine office and janitorial supplies in usual and customary quantities stored,
used and disposed of in accordance with all applicable Environmental Laws. As
used herein, "Hazardous Materials" any chemical substance, material, controlled
substance, object, condition, waste, living organism or combination thereof
which is or may be hazardous to human health or safety or to the environment due
to its radioactivity,
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ignitability, corrosively, reactivity, explosivity, toxicity, carcinogenicity,
mutagenicity, phytotoxicity, infectiousness or other harmful or potentially
harmful properties or effects, including, without limitation, petroleum and
petroleum products, asbestos, radon, polychlorinated biphenyls (PCBs),
refrigerants (including those substances defined in the Environmental Protection
Agency's "Refrigerant Recycling Rule," as amended from time to time) and all of
those chemicals, substances, materials, controlled substances, objects,
conditions, wastes, living organisms or combinations thereof which are now or
become in the future listed, defined or regulated in any manner by any
Environmental Law based upon, directly or indirectly, such properties or
effects. As used herein, "Environmental Laws" means any and all federal, state
or local environmental, health and/or safety-related laws, regulations,
standards, decisions of courts, ordinances, rules, codes, orders, decrees,
directives, guidelines, permits or permit conditions, currently existing and as
amended, enacted, issued or adopted in the future which are or become applicable
to Tenant, the Premises, the Building, the Common Area or the Project, Tenant
and Tenant's Parties shall comply with all Environmental Laws and promptly
notify Landlord of the violation of any Environmental Law or presence of any
Hazardous Materials, other than office and janitorial supplies as permitted
above, on the Premises. Landlord shall have the right, upon reasonable notice to
Tenant, to enter upon and inspect the Premises and to conduct tests, monitoring
and investigations provided that the foregoing do not materially interfere with
Tenant's normal business operations. If such tests indicate the presence of any
environmental condition which occurred during the Term of this Lease, Tenant
shall reimburse Landlord for the cost of conducting such tests if, and only if,
such condition was caused by Tenant, its contractors, employees, agents or
invitees. The phrase "environmental condition" shall mean any adverse condition
relating to any Hazardous Materials or the environment, including surface water,
groundwater, drinking water supply, land, surface or subsurface strata or the
ambient air and includes air, land and water pollutants, noise, vibration, light
and odors. In the event of any such environmental condition, Tenant shall
promptly take any and all steps necessary to rectify the same to Landlord's
reasonable satisfaction or shall at Landlord's election, reimburse Landlord,
upon demand, for the cost to Landlord of performing rectifying work. The
reimbursement shall be paid to Landlord in advance of Landlord's performing such
work, based upon Landlord's reasonable estimate of the cost thereof and upon
completion of such work by Landlord, Tenant shall pay to Landlord any shortfall
within thirty (30) days after Landlord bills Tenant therefor or Landlord shall
within thirty (30) days refund to Tenant any excess deposit, as the case may be.
Landlord hereby represents to Tenant that, to its current, actual knowledge, no
Hazardous Materials or environmental condition presently exists on the Premises,
Building, Common Area or Project in violation of Environmental Laws. For the
purposes of this Lease, current, actual knowledge of Landlord shall mean the
actual present knowledge of Steve Bryan as of the Effective Date of this Lease,
without investigation or inquiry of any kind.
12.2 INDEMNIFICATION. TENANT SHALL INDEMNIFY, PROTECT, DEFEND (BY COUNSEL
---------------
ACCEPTABLE TO LANDLORD) AND HOLD HARMLESS LANDLORD AND ITS PARTNERS, DIRECTORS,
OFFICERS, EMPLOYEES, SHAREHOLDERS, LENDERS, AGENTS, CONTRACTORS AND EACH OF
THEIR RESPECTIVE SUCCESSORS AND ASSIGNS (INDIVIDUALLY AND COLLECTIVELY,
"INDEMNITIES") FROM AND AGAINST ANY AND ALL CLAIMS, JUDGMENTS, CAUSES OF ACTION,
DAMAGES, PENALTIES, FINES, TAXES, COSTS, LIABILITIES, LOSSES AND EXPENSES
ARISING AT ANY TIME DURING OR AFTER THE TERM AS A RESULT (DIRECTLY OR
INDIRECTLY) OF OR IN CONNECTION WITH (A) TENANT AND/OR TENANT'S PARTIES' BREACH
OF ANY PROHIBITION OR PROVISION OF THE PRECEDING SECTION, OR (B) THE PRESENCE OF
HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PREMISES, OR OTHER PROPERTY AS A
RESULT (DIRECTLY OR INDIRECTLY) OF TENANT-S AND/OR TENANT'S PARTIES' ACTIVITIES,
OR FAILURE TO ACT, IN CONNECTION WITH THE PREMISES. THIS INDEMNITY SHALL INCLUDE
THE COST OF ANY REQUIRED OR NECESSARY REPAIR, CLEANUP OR DETOXIFICATION, AND THE
PREPARATION AND IMPLEMENTATION OF ANY CLOSURE, MONITORING OR OTHER REQUIRED
PLANS, WHETHER SUCH ACTION IS REQUIRED OR NECESSARY PRIOR TO OR FOLLOWING THE
TERMINATION OF THIS LEASE. NEITHER THE WRITTEN CONSENT BY LANDLORD TO THE
PRESENCE OF HAZARDOUS MATERIALS ON, UNDER OR ABOUT THE PREMISES, NOR THE STRICT
COMPLIANCE BY TENANT WITH ALL ENVIRONMENTAL LAWS, SHALL EXCUSE TENANT FROM
TENANT'S OBLIGATION OF INDEMNIFICATION PURSUANT HERETO. TENANT'S OBLIGATIONS
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PURSUANT TO THE FOREGOING INDEMNITY SHALL SURVIVE THE TERMINATION OF THIS LEASE.
13. DAMAGE AND DESTRUCTION.
----------------------
13.1 Casualty. If the Premises or Building should be damaged or destroyed
--------
by fire or other casualty, Tenant shall give immediate written notice to
Landlord. Within thirty (30) days after receipt from Tenant of such written
notice, Landlord shall notify Tenant whether the necessary repairs can
reasonably be made: (a) within ninety (90) days after the issuance of permits
for the necessary repair or reconstruction of the portion of the Building or
Premises which was damaged or destroyed; (b) in more than ninety (90) days after
the issuance of permits for the necessary repair or reconstruction of the
portion of the Building or Premises which was damaged or destroyed but in less
than one hundred thirty-five (135) days after the date on which the casualty
causing the damage or destruction occurred; or (c) in more than one hundred
thirty-five (135) days after the date on which the casualty causing the damage
or destruction occurred.
13.1.1 Less than 90 Days. If the Premises or Building should be
-----------------
damaged only to such extent that rebuilding or repairs can reasonably be
completed within ninety (90) days after the issuance of permits for the
necessary repair or reconstruction of the portion of the Building or Premises
which was damaged or destroyed, this Lease shall not terminate and, provided
that insurance proceeds are available to fully repair the damage, Landlord shall
repair the Premises, except that Landlord shall not be required to rebuild,
repair or replace Tenant's Property which may have been placed in, on or about
the Premises by or for the benefit of Tenant. If Tenant is required to vacate
all or a portion of the Premises during Landlord's repair thereof the Base Rent
payable hereunder shall be abated proportionately on the basis of the size of
the area of the Premises that is damaged (e.g., the number of square feet of
-----
floor area of the Premises that is damaged compared to the total square footage
of the floor area of the Premises) from the date Tenant vacates all or a portion
of the Premises that was damaged only to the extent rental abatement insurance
proceeds are received by Landlord and only during the period the Premises are
unfit for occupancy.
13.1.2 Greater than 90 Days. If the Premises or Building should be
--------------------
damaged only to such extent that rebuilding or repairs can reasonably be
completed in more than ninety (90) days after the issuance of permits for the
necessary repair or reconstruction of the portion of the Building or Premises
which was damaged or destroyed but in less than one hundred thirty-five (135)
days after the date on which the casualty causing the damage or destruction
occurred, then Landlord shall have the option of: (a) terminating the lease
effective upon the occurrence of such damage, in which event the Rent shall be
abated from the date Tenant vacates the Premises; or (b) electing to repair the
Premises, provided insurance proceeds are available to fully repair the damage
(except that Landlord shall not be required to rebuild, repair or replace
Tenant's Property which may have been placed in, on or about the Premises by or
for the benefit of Tenant). If during the final Lease Year of the initial Term
of this Lease the Premises or Building should be damaged to such extent that
rebuilding or repairs cannot reasonably be completed on or before ninety (90)
days after the date on which the casualty causing the damage or destruction
occurred, then either Landlord or Tenant may terminate this Lease by giving
written notice within ten (10) days after notice from Landlord specifying such
time period of repair, and this Lease shall terminate and the Rent shall be
abated from the date Tenant vacates the Premises. In the event that neither
party elects to terminate this Lease, pursuant to the immediately preceding
sentence, Landlord shall promptly commence and diligently prosecute to
completion the repairs to the Building or Premises, provided insurance proceeds
are available to repair the damage (except that Landlord shall not be required
to rebuild, repair or replace Tenant's Property which may have been placed in,
on or about the Premises by or for the benefit of Tenant). If Tenant is required
to vacate all or a portion of the Premises during Landlord's repair thereof, the
Base Rent payable hereunder shall be abated proportionately on the basis of the
size of the area of the Premises that is damaged (e.g., the number of square
-----
feet of floor area of the Premises that is damaged compared to the total square
footage of the floor area of the Premises) from the date Tenant vacates all or a
portion of the Premises that was damaged only to the extent rental abatement
insurance proceeds are received by Landlord and only during the period the
Premises are unfit for occupancy. In the event that Landlord should fail to
substantially complete such repairs within one hundred thirty-five (135) days
after the date on which the casualty causing the damage or destruction occurred,
(such period to be extended for delays caused by Tenant or because of any items
of Force Majeure, as hereinafter defined) and Tenant has not re-occupied
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the Premises, Tenant shall have the right, as Tenant's exclusive remedy, within
ten (10) days after the expiration of such one hundred thirty-five (135) day
period, to terminate this Lease by delivering written notice to Landlord as
Tenant's exclusive remedy, whereupon all rights hereunder shall cease and
terminate thirty (30) days after Landlord's receipt of such notice.
13.1.3 Greater than 135 Days. If the Premises or Building should be
---------------------
so damaged that rebuilding or repairs cannot be completed within one hundred
thirty-five (135) days after the date on which the casualty causing the damage
or destruction occurred, either Landlord or Tenant may terminate this Lease by
giving written notice within ten (10) days after notice from Landlord specifying
such time period of repair, and this Lease shall terminate and the Rent shall be
abated from the date Tenant vacates the Premises In the event that neither party
elects to terminate this Lease, Landlord shall promptly commence and diligently
prosecute to completion the repairs to the Building or Premises, provided
insurance proceeds are available to repair the damage (except that Landlord
shall not be required to rebuild, repair or replace Tenant's Property which may
have been placed in, on or about the Premises by or for the benefit of Tenant).
If Tenant is required to vacate all or a portion of the Premises during
Landlord's repair thereof, the Base Rent payable hereunder shall be abated
proportionately on the basis of the size of the area of the Premises that is
damaged (e.g., the number of square feet of floor area of the Premises that is
-----
damaged compared to the total square footage of the floor area of the Premises),
from the date Tenant vacates all or a portion of the Premises that was damaged
only to the extent rental abatement insurance proceeds are received by Landlord
and only during the period that the Premises are unfit for occupancy.
13.2 Tenant's Fault. If the Premises or any portion of the Building is
--------------
damaged resulting from the negligence or breach of this Lease by Tenant or any
of Tenant's Parties, Rent shall not be reduced during the repair of such damage
and Tenant shall be liable to Landlord for the cost of the repair caused thereby
to the extent such cost is not covered by insurance proceeds from policies of
insurance required to be maintained pursuant to the provisions of this Lease.
13.3 Uninsured Casualty. Tenant shall be responsible for and shall pay to
------------------
Landlord any deductible amount payable under the property insurance for the
Building; provided, however, Tenant's liability for the cost of any deductible
or self-insured retention solely relating to property insurance (and not any
other insurance required under this Lease) shall not exceed Twelve Thousand Five
Hundred Dollars ($12,500) per occurrence during the initial Term of this Lease.
In the event that the Premises or any portion of the Building is damaged to the
extent Tenant is unable to use the Premises and such damage is not covered by
insurance proceeds received by Landlord or in the event that the holder of any
indebtedness secured by the Premises requires that the insurance proceeds be
applied to such indebtedness, then Landlord shall have the right at Landlord's
option either (i) to repair such damage as soon as reasonably possible at
Landlord's expense, or (ii) to give written notice to Tenant within thirty (30)
days after the date of the occurrence of such damage of Landlord's intention to
terminate this Lease as of the date of the occurrence of such damage. In the
event Landlord elects to terminate this Lease, Tenant shall have the right
within ten (10) days after receipt of such notice to give written notice to
Landlord of Tenant's intention to pay the cost of repair of such damage, in
which event; following the securitization of Tenant's funding commitment in a
form acceptable to Landlord, this Tease shall continue in full force and effect
Landlord shall make such repairs as soon as reasonably possible and Tenant shall
reimburse Landlord for such repairs within fifteen (15) days after receipt of an
invoice from Landlord. If Tenant does not give such notice within the ten (10)
day period, this Lease shall terminate automatically as of the date of the
occurrence of the damage.
13.4 Waiver. With respect to any damage or destruction which Landlord is
------
obligated to repair or may elect to repair, Tenant waives all rights to
terminate this Lease pursuant to rights otherwise presently or hereafter
accorded by law except as specifically set forth in this Lease.
13.5 Force Majeure. "Force Majeure," as used in this Section 13 only and
-------------
shall not apply elsewhere unless otherwise specified, means delays resulting
from causes beyond the reasonable control of Landlord or Tenant, including.
without limitation. any delay caused by any action, inaction, order, ruling,
moratorium, regulation, statute, condition or other decision of any private
party or governmental agency having jurisdiction over any portion of the
Project, over the construction anticipated to occur thereon or over any uses
thereof or by delays in inspections or in issuing approvals by private parties
or permits by governmental agencies, or by fire, flood,
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<PAGE>
inclement weather, strikes, lockouts or other labor or industrial disturbance
(whether or not on the part of agents or employees of Landlord engaged in the
construction of the Premises), civil disturbance, order of any government, court
or regulatory body claiming jurisdiction or otherwise, act of public enemy, war,
riot, sabotage, blockage, embargo, failure or inability to secure materials,
supplies or labor through ordinary sources by reason of shortages or priority,
discovery of hazardous or toxic materials, earthquake, or other natural
disaster, delays caused by any dispute resolution process, or any cause
whatsoever beyond the reasonable control (excluding financial inability) of the
party whose performance is required, or any of its contractors or other
representatives, whether or not similar to any of the causes hereinabove stated.
Force Majeure shall not, however, excuse nonpayment of Rent.
14. EMINENT DOMAIN.
--------------
14.1 Total Condemnation. If all of the Premises is condemned by eminent
------------------
domain, inversely condemned or sold under threat of condemnation for any public
or quasi-public use or purpose ("Condemned"), this Lease shall terminate as of
the earlier of the date the condemning authority takes title to or possession of
the Premises, and Rent shall be adjusted to the date of termination.
14.2 Partial Condemnation. If any portion of the Premises or the Building
--------------------
is Condemned and such partial condemnation materially impairs Tenant's ability
to use the Premises for Tenant's business as reasonably and mutually determined
by Landlord and Tenant, Landlord shall have the option of either (i) relocating
Tenant to comparable space within the Project or (ii) terminating this Lease as
of the earlier of the date title vests in the condemning authority or as of the
date an order of immediate possession is issued and Rent shall be adjusted to
the date of termination. If such partial condemnation does not materially impair
Tenant's ability to use the Premises for the business of Tenant, Landlord shall
promptly restore the Premises to the extent of any condemnation proceeds
recovered by Landlord, excluding the portion thereof lost in such condemnation,
and this Lease shall continue in full force and effect except that after the
date of such title vesting Rent shall be adjusted as reasonably determined by
Landlord.
14.3 Award. If the Premises are wholly or partially Condemned, Landlord
-----
shall be entitled to the entire award paid for such condemnation, and Tenant
waives any claim to any part of the award from Landlord or the condemning
authority, provided however, Tenant shall have the right to recover from the
condemning authority; such compensation as may be separately awarded to Tenant
in connection with costs in removing Tenant's merchandise, furniture, fixtures,
leasehold improvements and equipment to a new location. No condemnation of any
kind shall be construed to constitute an actual or constructive eviction of
Tenant or a breach of any express or implied covenant of quiet enjoyment.
14.4 Temporary Condemnation. In the event of a temporary condemnation not
----------------------
extending beyond the Term, this Lease shall remain in effect, Tenant shall
continue to pay Rent and Tenant shall receive any award made for such
condemnation except damages to any of Landlord's property. If a temporary
condemnation is for a period which extends beyond the Term, this Lease shall
terminate as of the date of initial occupancy by the condemning authority and
any such award shall be distributed in accordance with the preceding Paragraph.
If a temporary condemnation remains in effect at the expiration or earlier
termination of this Lease, Tenant shall pay Landlord the reasonable cost of
performing any obligations required of Tenant with respect to the surrender of
the Premises.
15. DEFAULT.
-------
15.1 Events of Default. The occurrence of any of the following events
-----------------
shall, at Landlord's option, constitute an "Event of Default":
15.1.1 Failure to pay Rent on the date when due and the failure
continuing for a period of ten (10) days after Tenant's receipt of written
notice from Landlord that such payment is due;
15.1.2 Failure to perform Tenant's covenants and obligations
hereunder (except default in the Payment of Rent) where such failure continues
for a period of thirty (30) days after written notice from Landlord;
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<PAGE>
provided, however, if the nature of the default is such that more than thirty
(30) days are reasonably required for its cure, Tenant shall not be deemed to be
in default if Tenant commences the cure within the thirty (30) day period and
diligently and continuously prosecutes such cure to completion;
15.1.3 The making of a general assignment by Tenant for the benefit
of creditors; the filing of a voluntary petition by Tenant or the filing of an
involuntary petition by any of Tenant's creditors seeking the rehabilitation,
liquidation or reorganization of Tenant under any law relating to bankruptcy,
insolvency or other relief of debtors and, in the case of an involuntary action,
the failure to remove or discharge the same within sixty (60) days of such
filing, the appointment of a receiver or other custodian to take possession of
substantially all of Tenant's assets or this leasehold; Tenant's insolvency or
inability to pay Tenant's debts or failure generally to pay Tenant's debts when
due; any court entering a decree or order directing the winding up or
liquidation of Tenant or of substantially all of Tenant's assets; Tenant taking
any action toward the dissolution or winding up of Tenant's affairs; the
cessation or suspension of Tenant's use of the Premises; or the attachment
execution or other judicial seizure of substantially all of Tenant's assets or
this leasehold;
15.1.4 The making of any material misrepresentation or omission by
Tenant or any successor in interest of Tenant in any materials delivered by or
on behalf of Tenant to Landlord or Landlord's lender pursuant to this Lease; or
15.1.5 The occurrence of an Event of Default set forth in Section
15.1.3 or 15.1.4 with respect to any guarantor of this Lease, if applicable.
15.1.6 The occurrence of an Event of Default as otherwise designated
as an Event of Default in the Lease.
15.2 Remedies.
--------
(a) Upon any Event of Default, Landlord may, in addition to all other
rights and remedies afforded Landlord hereunder or by Law, take any of the
following actions:
(1) Terminate this Lease by giving Tenant written notice thereof
in which event Tenant shall pay to Landlord the sum of (A) all rent accrued
hereunder through the date of termination and, (B) all other amounts which may
be recovered by Landlord under Texas law, and (C) an amount equal to (i) the
total rent that Tenant would have been required to pay for the remainder of the
Term discounted to present value at a per annum rate equal to the rate of
interest set forth for 26-week U.S. governmental bills sold at a discount from
face value in units of $10,000 to $l,000,000 as published on the date this Lean
is terminated by The Wall Street Journal, Southwest Edition, in its listing of
"Money Rates" under the heading "Treasury Bills" (or, if no such rate is
published, the "Discount Rate" as published on such date under the "Money Rates"
listing), minus (ii) the then present fair rental value of the Premises for such
period, similarly discounted; or
(2) Terminate Tenant's right to possess the Premises without
terminating this Lease by giving written notice thereof to Tenant, in which
event Tenant shall pay to Landlord (A) all rent and other amounts accrued
hereunder to the date of termination of possession, (B) all amounts due from
time to time under Paragraph 15.2(b), and (C) all rent and other sums required
hereunder to be paid by Tenant during the remainder of the Term, diminished by
any net sums thereafter received by Landlord through reletting the Premises
during such period. Landlord shall use reasonable efforts to relet the Premises
on such term and conditions as Landlord in its sole discretion, may determine
(including a term different than the Term, rental concessions and alterations
to, and improvement of the Premises); however, Landlord shall not be obligated
to relet the Premises before leasing other portions of the Building or the
Project. Landlord shall not be liable for, nor shall Tenant's obligations
hereunder be diminished because of, Landlord's failure to relet the Premises or
to collect rent due for a reletting. Tenant shall not be entitled to the excess
of any consideration obtained by reletting over the rent due hereunder. Reentry
by Landlord in the Premises shall not affect Tenant's obligations hereunder for
the unexpired
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<PAGE>
Term; rather, Landlord may, from time to time, bring action against Tenant to
collect amounts due by Tenant without the necessity of Landlord's waiting until
the expiration of the Term. Unless Landlord delivers written notice to Tenant
expressly stating that it has elected to terminate this Lease, all actions taken
by Landlord to exclude or dispossess Tenant of the Premises shall be deemed to
be taken under this Paragraph 15.2(a)(2). If Landlord elects to proceed under
this Paragraph 15.2(a)(2), it may at any time elect to terminate this Lease
under Paragraph 15.2(a)(I).
Additionally, without notice, Landlord may alter locks or other security devices
at the Premises to deprive Tenant of access thereto, and Landlord shall not be
required to provide a new key or right of access to Tenant. Landlord
acknowledges that a substantial portion of the personal property to be located
on the Premises by Tenant will be owned by third parties, including without
limitation, Sears Roebuck & Co. and its affiliated entities. Landlord agrees to
permit such third parties to remove their respective personal property from the
Premises at reasonable times and subject to reasonable conditions to be imposed
by Landlord.
(b) Tenant shall pay to Landlord all costs incurred by Landlord
(including court costs and reasonable attorneys' fees and expenses) in (1)
obtaining possession of the Premises, (2) removing and storing Tenant's or any
other occupant's property, (3) repairing, restoring, altering remodeling, or
otherwise patting the Premises into condition acceptable to a new tenant, (4) if
Tenant is dispossessed of the Premises and this Lease is not terminated,
reletting all or any part of the Premises (including brokerage commissions, cost
of tenant finish work, and other costs incidental to such reletting), (5)
performing Tenant's obligations which Tenant failed to perform, and (6)
enforcing, or advising Landlord of its rights, remedies, and recourses.
Landlord's acceptance of rent following an Event of Default shall not waive
Landlord's rights regarding such Event of Default. Landlord's receipt of rent
with knowledge of any default by Tenant hereunder shall not be a waiver of such
default, and no waiver by Landlord of any provision of this Lease shall be
deemed to have been made unless set forth in writing and signed by Landlord. No
waiver by Landlord of any violation or breach of any of the terms contained
herein shall waive Landlord's rights regarding any future violation of such term
or violation of any other term. If Landlord repossesses the Premises pursuant to
the authority herein granted, then Landlord shall have the right to (A) keep in
place and use or (B) remove and store, at Tenant's expense, all of the
furniture, fixtures, equipment and other property in the Premises, including
that which is owned by or leased to Tenant at all times before any foreclosure
thereon by Landlord or repossession thereof by any lessor thereof or third party
having a lien thereon. Landlord may relinquish possession of all or any portion
of such furniture, fixtures, equipment and other property to any person (a
"Claimant") who presents to Landlord a copy of any instrument represented by
Claimant to have been executed by Tenant (or any predecessor of Tenant) granting
Claimant the right under various circumstances to take possession of such
furniture, fixtures, equipment or other property, without the necessity on the
part of Landlord to inquire into the authenticity or legality of the instrument.
Landlord may, at its option and without prejudice to or waiver of any rights it
may have, (i) escort Tenant to the Premises to retrieve any personal belongings
of Tenant and/or its employees not covered by the Landlord's statutory lien or
the security interest described in Paragraph 18. 10 or (ii) obtain a list from
Tenant of the personal property of Tenant and/or its employees that is not
covered by the Landlord's statutory lien or the security interest described in
Paragraph 18.10, and make such property available to Tenant and/or Tenant's
employees; however, Tenant first shall pay in cash all costs and estimated
expenses to be incurred in connection with the removal of such property and
making it available. The rights of Landlord herein stated are in addition to any
and all other rights that Landlord has or may hereafter have at law or in
equity, and Tenant agrees that the rights herein granted Landlord are
commercially reasonable.
16. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, sublet or
-------------------------
otherwise transfer, whether voluntarily or involuntarily or by operation of law,
the Premises or any part thereof without Landlord's prior written approval which
shall not be unreasonably withheld; provided, however, Tenant agrees it shall be
reasonable for Landlord to disapprove of a requested sublease or assignment, if
the sublessee or assignee does not have a tangible net worth (as determined in
accordance with generally accepted accounting principles consistently applied)
equal to or greater than that of Tenant as of the date of the lease as shown in
the financial information provided to Landlord. The merger of Tenant with any
other entity or the transfer of any controlling or managing ownership or
beneficial interest in Tenant, or the assignment of a substantial portion of the
assets of Tenant, whether or not located at the Premises, shall constitute an
assignment hereunder (without any notice). If Tenant desires to assign this
Lease or sublet any or all of the Premises, Tenant shall give Landlord written
notice thereof
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<PAGE>
with copies of all related documents and agreements associated with the
assignment or sublease, including without limitation, the financial statements
of any proposed assignee or subtenant, forty-five (45) days prior to the
anticipated effective date of the assignment or sublease. Tenant shall pay to
Landlord the sum of Two Hundred Fifty Dollars ($250.00) for reasonable
attorneys' fees and administrative expenses incurred in the review of such
documentation for each proposed transfer. Landlord shall have a period of
fifteen (15) days following receipt of such notice and all related documents and
agreements to notify Tenant in writing of Landlord's approval or disapproval of
the proposed assignment or sublease. If Landlord fails to notify Tenant in
writing of such election, Landlord shall be deemed to have disapproved such
assignment or subletting. This Lease may not be assigned by operation of law.
Any purported assignment or subletting contrary to the provisions hereof shall
be void and shall constitute an Event of Default hereunder. If Tenant receives
rent or other consideration for any such transfer in excess of the Rent, or in
case of the sublease of a portion of the Premises, in excess of such Rent that
is fairly allocable to such portion, after appropriate adjustments to assume
that all other payments required hereunder are appropriately taken into account,
Tenant shall pay Landlord fifty percent (50%) of the difference between each
such payment of rent or other consideration and the Rent required hereunder.
Landlord may, without waiving any rights or remedies, collect rent from the
assignee, subtenant or occupant and apply the net amount collected to the Rent
herein reserved and apportion any excess rent so collected in accordance with
the terms of the preceding sentence. Such acceptance of Rent shall in no event
be deemed to imply that Landlord is approving a subtenant or assignee which
Landlord has not approved in writing pursuant to the requirements of this
Section 16. Tenant shall continue to be liable as a principal and not as a
guarantor or surety to the same extent as though no assignment or subletting had
been made. Landlord's consent to any assignment or subletting shall not waive
the requirement that Landlord must consent to all subsequent assignments and
sublettings. Landlord may consent to subsequent assignments or subletting of
this lease or amendments or modifications to the Lease by assignees of Tenant
without notifying Tenant or any successor of Tenant and without obtaining their
consent. No permitted transfer shall be effective until there has been delivered
to Landlord a counterpart of the transfer instrument in which the transferee
agrees to be and remain jointly and severally liable with Tenant for the payment
of Rent pertaining to the Premises and for the performance of all the terms and
provisions of this Lease relating thereto arising on or after the date of the
transfer.
17. ESTOPPEL, ATTORNMENT AND SUBORDINATION.
--------------------------------------
17.1 Estoppel. Within ten (10) days after written request by Landlord,
--------
Tenant shall deliver an estoppel certificate duly executed (and acknowledged if
required by any lender), in the form attached hereto as Exhibit G, or in such
---------
other form as may be acceptable to the lender, which form may include some or
all of the provisions contained in Exhibit G, to any proposed mortgagee,
---------
purchaser or Landlord. Tenant's failure to deliver said statement in such time
period shall be an Event of Default hereunder and shall be conclusive upon
Tenant that (a) this Lease is in full force and effect without modification
except as may be represented by Landlord; (b) there are no uncured defaults in
Landlord's performance and Tenant has no right of offset, counterclaim or
deduction against Rent hereunder, and (c) no more than one month's Base Rent has
been paid in advance. If any financier should require that this Lease be amended
(other than in the description of the Premises, the Term, the Permitted Use, the
Rent or as will substantially, materially and adversely affect the rights of
Tenant), Landlord shall give written notice thereof to Tenant, which notice
shall be accompanied by a Lease supplement embodying such amendments. Tenant
shall within ten (10) days after the receipt of Landlord's notice, execute and
deliver to Landlord the tendered Lease supplement.
17.2 Subordination. This Lease shall be subject and subordinate to all
-------------
ground leases and the lien of all mortgages and deeds of trust which now or
hereafter affect the Premises or the Project or Landlord's interest therein and
all amendments thereto, all without the necessity of Tenant's executing further
instruments to effect such subordination. If required, Tenant shall execute and
deliver to Landlord within ten (10) days after Landlord's request whatever
documentation that may reasonably be required to further effect the provisions
of this paragraph including a Subordination, Nondisturbance and Attornment
Agreement in the form attached hereto as Exhibit H or in such other form as may
---------
be acceptable to the lender, which form may include some or all of the
provisions contained in Exhibit H. Notwithstanding the subordination provided
---------
herein, any Landlord's lender or ground lessor may subordinate its lien or lease
to this Lease at such person's election.
-17-
<PAGE>
17.3 Attornment. In the event of a foreclosure proceeding, the exercise
-----------
of the power of sale under any mortgage or deed of trust or the termination of a
ground lease, Tenant shall, if requested, attorn to the purchaser thereupon and
recognize such purchaser as Landlord under this Lease; provided, however,
Tenant's obligation to attorn to such purchaser shall be conditioned upon
Tenant's receipt of a non-disturbance agreement.
18. MISCELLANEOUS.
--------------
18.1 General.
--------
18.1.1 Entire Agreement. This Lease sets forth all the
-----------------
agreements between Landlord and Tenant concerning the Premises; and there are no
agreements either oral or written other than as set forth herein.
18.1.2 Time of Essence. Time is of the essence of this Lease.
----------------
18.1.3 Attorneys' Fees. In any action or proceeding which
----------------
either party brings against the other to enforce its rights hereunder, the
unsuccessful party shall pay all costs incurred by the prevailing party,
including reasonable attorneys' fees, which amounts shall be a part of the
judgment in said action or proceedings.
18.1.4 Severability. If an provision of this Lease or the
-------------
application of any such provision shall be held by a court of competent
jurisdiction to be invalid, void or unenforceable to any extent, the remaining
provisions of this Lease and the application thereof shall remain in full force
and effect and shall not be affected, impaired or invalidated.
18.1.5 Law. This Lease shall be construed and enforced in
----
accordance with the laws of the state in which the Premises are located.
18.1.6 No Option. Submission of this Lease to Tenant for
----------
examination or negotiation does not constitute an option to lease, offer to
lease or a reservation of, or option for, the Premises; and this document shall
become effective and binding only upon the execution and delivery hereof by
Landlord and Tenant.
18.1.7 Successors and Assigns. This Lease shall be binding
-----------------------
upon and inure to the benefit of the successors and assigns of Landlord and,
subject to compliance with the terms of Section 16, Tenant.
18.1.8 Third Party Beneficiaries. Nothing herein is intended to
--------------------------
create any third party benefit.
18.1.9 Memorandum of Lease. Tenant shall not record this Lease
--------------------
or a short form memorandum hereof without Landlord's prior written consent which
Landlord can withhold in its sole discretion.
18.1.10 Agency, Partnership or Joint Venture. Nothing contained
-------------------------------------
herein nor any acts of the parties hereto shall be deemed or construed by the
parties hereto, nor by any third party, as creating the relationship of
principal and agent or of partnership or joint venture by the parties hereto or
any relationship other than the relationship of landlord and tenant.
18.1.11 Merger. The voluntary or other surrender of this Lease
-------
by Tenant or a mutual cancellation thereof or a termination by Landlord shall
not work a merger and shall, at the option of Landlord, terminate all or any
existing subtenancies or may, at the option of Landlord, operate as an
assignment to Landlord of any or all of such subtenancies.
18.1.12 Headings. Section headings have been inserted solely as
---------
a matter of convenience and are not intended to define or limit the scope of any
of the provisions contained therein.
18.1.13 Auctions. Tenant shall not conduct, nor permit to be
---------
conducted, any auction upon the Premises without Landlord's prior written
consent. Landlord shall not be obligated to exercise any standard of
reasonableness in determining whether to permit an auction.
-18-
<PAGE>
18.1.14 Consents. Except as otherwise provided elsewhere in
---------
this Lease, Landlord's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Tenant for any
Landlord consent, including but not limited to consents to an assignment, a
subletting or the presence or use of a Hazardous Substance, shall be paid by
Tenant upon receipt of an invoice and supporting documentation therefor.
Landlord's consent to any act, assignment or subletting shall not constitute an
acknowledgment that no Event of Default or breach by Tenant of this Lease
exists, nor shall such consent be deemed a waiver of any then existing Event of
Default or breach, except as may be otherwise specifically stated in writing by
Landlord at the time of such consent. Except as otherwise set forth herein, the
failure to specify herein any particular condition to Landlord's consent shall
not preclude the imposition by Landlord at the time of consent of such further
or other conditions as are then reasonable with reference to the particular
matter for which consent is being given.
18.1.15 Guarantor.
---------
18.1.15.1 Execution. Guarantor shall execute the
----------
Guaranty of Lease attached hereto as Exhibit J.
---------
18.1.15.2 Default. It shall constitute an Event of
--------
Default of the Tenant if Guarantor fails or refuses, upon request to provide:
(a) evidence of the execution and continued enforceability of the guaranty,
including the authority of the party signing on Guarantor's behalf to obligate
Guarantor, and in the case of a corporate Guarantor, a certified copy of a
resolution of its board of directors authorizing the making of such guaranty,
(b) current financial statements, (c) an estoppel certificate, or (d) written
confirmation that the guaranty is still in effect as a valid binding obligation.
18.1.16 Security Measures. Tenant hereby acknowledges that
------------------
Landlord shall have no obligation to provide a guard service or other security
measures whatsoever. Tenant assumes all responsibility for the protection of the
Premises, Tenant, its agents and invitees and their property from the acts of
third parties.
18.2 Signs. All signs and graphics of every kind visible in or from
------
public view or corridors, the Common Areas or the exterior of the Premises shall
be subject to Landlord's prior written approval and shall be subject to any
applicable governmental laws, ordinances, and regulations and in compliance with
Landlord's signage program. Tenant shall remove all such signs and graphics
prior to the termination of this Lease. Such installations and removals shall be
made in such manner as to avoid injury or defacement of the Premises; and Tenant
shall repair any injury or defacement, including without limitation,
discoloration caused by such installation or removal.
18.3 Waiver. No waiver of any default or breach hereunder shall be
-------
implied from any omission to take action on account thereof, notwithstanding any
custom and practice or course of dealing. No waiver by either party of any
provision under this Lease shall be effective unless in writing and signed by
such party. No waiver shall affect any default other than the default specified
in the waiver and then such waiver shall be operative only for the time and to
the extent therein stated. Waivers of any covenant shall not be construed as a
waiver of any subsequent breach of the same.
18.4 Financial Statements. Tenant shall provide to any lender,
---------------------
purchaser or Landlord, within ten (10) days after request, a current accurate,
certified financial statement (or if a current statement is not yet available,
the Tenant and Tenant's business for each of the three (3) years prior to the
current financial statement year prepared under generally accepted accounting
principles consistently applied. Tenant shall also provide within said 10-day
period such other certified financial information or tax returns as may be
reasonably required by Landlord, purchaser or any lender of either.
18.5 LIMITATION OF LIABILITY. THE OBLIGATIONS OF LANDLORD UNDER THIS
------------------------
LEASE ARE NOT PERSONAL OBLIGATIONS OF THE INDIVIDUAL PARTNERS, DIRECTORS,
OFFICERS, SHAREHOLDERS, AGENTS OR EMPLOYEES OF LANDLORD; AND TENANT SHALL
-19-
<PAGE>
LOOK SOLELY TO THE BUILDING FOR SATISFACTION OF ANY LIABILITY OF LANDLORD AND
SHALL NOT LOOK TO OTHER ASSETS OF THE LANDLORD NOR SEEK RECOURSE AGAINST THE
ASSETS OF THE INDIVIDUAL PARTNERS, DIRECTORS, OFFICERS, SHAREHOLDERS, AGENTS OR
EMPLOYEES OF LANDLORD. WHENEVER LANDLORD TRANSFERS ITS INTEREST, LANDLORD SHALL
BE AUTOMATICALLY RELEASED FROM FURTHER PERFORMANCE UNDER THIS LEASE AND FROM ALL
FURTHER LIABILITIES AND EXPENSES HEREUNDER AND THE TRANSFEREE OF LANDLORD'S
INTEREST SHALL ASSUME ALL LIABILITIES AND OBLIGATIONS OF LANDLORD HEREUNDER FROM
THE DATE OF SUCH TRANSFER. TENANT HEREBY WAIVES ITS STATUTORY LIEN UNDER SECTION
91.004 OF THE TEXAS PROPERTY CODE.
18.6 Notices. All notices to be given hereunder shall be in writing
--------
and mailed postage prepaid by certified or registered mail, return receipt
requested, or delivered by personal or courier delivery, or sent by facsimile
(immediately followed by one of the preceding methods), to Landlord's Address
and Tenant's Address, or to such other place as Landlord or Tenant may designate
in a written notice given to the other party. Notices shall be deemed served
upon the earlier of receipt or three (3) days after the date of mailing.
18.7 Brokerage Commission. Landlord shall pay a brokerage commission
---------------------
to Landlord's Broker and Tenant's Broker specified in the Basic Lease
Information in accordance with separate agreements between Landlord and each
such broker. Landlord shall have no further or separate obligation for payment
of any commissions or fees to any other broker or finder. Tenant warrants to
Landlord that Tenant's sole contract with Landlord or with the Premises in
connection with this transaction has been directly with Landlord, Landlord's
Broker and Tenant's Broker specified in the Basic Lease Information, and that no
other broker or finder can properly claim a right to a commission or a finder's
fee based upon contacts between the claimant and Tenant. Subject to the
foregoing, Tenant agrees to indemnify and hold Landlord harmless from any claims
or liability, including reasonable attorneys' fees, in connection with a claim
by any person for a real estate broker's commission, finder's fee or other
compensation based upon any statement, representation or agreement of Tenant,
and Landlord agrees to indemnify and hold Tenant harmless from any such claims
or liability, including reasonable attorneys' fees, based upon any statement,
representation or agreement of Landlord.
18.8 Authorization. Each individual executing this Lease on behalf of
--------------
Tenant represents and warrants that he or she is duly authorized to execute and
deliver this Lease on behalf of Tenant and that such execution is binding upon
Tenant.
18.9 Holding Over; Surrender.
------------------------
18.9.1 Holding Over. If Tenant holds over the Premises or any
-------------
part thereof after expiration of the Term, such holding over shall, at
Landlord's option, constitute a month-to-month tenancy, at a rent equal to one
hundred twenty percent (120%) of the Base Rent in effect immediately prior to
such holding over and shall otherwise be on all the other terms and conditions
of this Lease. This paragraph shall not be construed as Landlord's permission
for Tenant to hold over. Acceptance of Rent by Landlord following expiration or
termination shall not constitute a renewal of this Lease or extension of the
Term except as specifically set forth above. If Tenant fails to surrender the
Premises upon expiration or earlier termination of this Lease, Tenant shall
indemnify and hold Landlord harmless from and against all loss or liability
resulting from or arising out of Tenant's failure to surrender the Premises,
including, but not limited to, any amounts required to be paid to any tenant or
prospective tenant who was to have occupied the Premises after the expiration or
earlier termination of this Lease and any related attorneys' fees and brokerage
commissions.
18.9.2 Surrender. Upon the termination of this Lease or
----------
Tenant's right to possession of the Premises, Tenant will surrender the Premises
broom clean, together with all keys, in good condition and repair, reasonable
wear and tear excepted. Tenant shall patch and fill all holes within the
Premises and all penetrations of the roof shall be resealed in a watertight
condition. In no event may Tenant remove from the Premises any mechanical or
electrical systems or any wiring or any other aspect of any systems within the
Premises. Notwithstanding the foregoing to the contrary, provided that Tenant is
not then in default hereunder, Tenant shall
-20-
<PAGE>
have the right to remove all conveyers, compactors, alarms, metal detectors,
security cameras and equipment, racks, removable trade fixtures, and phone
equipment from the Premises. Conditions existing because of Tenant's failure to
perform maintenance, repairs or replacements shall not be deemed "reasonable
wear and tear."
18.10 [Intentionally Deleted.]
18.11 Joint and Several. If Tenant consists of more than one person,
------------------
the obligation of all such persons shall be joint and several.
18.12 Covenants and Conditions. Each provision to be performed by
-------------------------
Tenant hereunder shall be deemed to be both a covenant and a condition.
18.13 Addenda. The Addenda attached hereto, if any, and identified
--------
with this Lease are incorporated herein by this reference as if fully set forth
herein.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date set
forth above.
"Landlord" "Tenant"
CATELLUS DEVELOPMENT CORPORATION, ASD SYSTEMS,
a Delaware corporation a Texas corporation
By: ASD SYSTEMS GP, INC.,
ITS GENERAL PARTNER
By: /s/ Ted A By: /s/ Norm Charney
--------------------------- ---------------------------
Name: [Signature Illegible]^^ Name: NORM CHARNEY
------------------------- -------------------------
Its: V.P. Its: PRESIDENT
-------------------------- --------------------------
Date: 11-4-97 Date: Nov 3, 1997
------------------------- -------------------------
-21-
<PAGE>
ADDENDUM TO LEASE
-----------------
THIS ADDENDUM TO LEASE ("Addendum") is attached to and constitutes an integral
--------
part of that certain Built to Suit Industrial Lease ("Lease") between CATELLUS
-----
DEVELOPMENT CORPORATION, as Landlord, and ASD SYSTEMS, a Texas limited
partnership, as Tenant. The terms of this Addendum shall be incorporated in the
Lease for all purposes. In the event of a conflict between the provisions of
the Lease and the provisions of this Addendum, this Addendum shall control.
The following new Sections are hereby added to the Lease which state in their
entirety as follows:
19. FREE RENT PERIOD. Tenant's obligation to pay Base Rent shall be
-----------------
conditionally abated during months one and two of the Term ("Free Rent Period").
Such abatement shall apply to Base Rent only and shall not apply to any other
sums payable under this Lease. The abatement of Base Rent described above is
expressly conditioned on Tenant's performance of its obligations under the Lease
throughout the Term; and the amount of the abated Base Rent is based in part on
the amount of Base Rent due under the Lease for the full Term. If Tenant
defaults under the Lease and such default results in a termination of the Lease
prior to the expiration of the Term, then Tenant shall pay Landlord on the date
of such termination, in addition to all other amounts and damages to which
Landlord is entitled, the amount of Base Rent which would otherwise have been
due and payable during the Free Rent Period. Tenant shall deliver payment for
the third month of the Term to Landlord upon Landlord's execution of this Lease.
Notwithstanding the foregoing, the amount payable by Tenant applicable to the
Free Rent Period shall be reduced, on a pro rata basis, for each month during
the Term for which Tenant has paid Base Rent. For example, if the subject
default results in a termination as of the end of the twenty-fourth (24th) month
of the Term, then Tenant would only be responsible for paying sixty percent
(60%) of the amount of the Base Rent applicable to the Free Rent Period which
would otherwise have been due and payable.
20. OPTION TO EXTEND.
-----------------
20.1 Terms of Options. Provided (i) Tenant is not in material default
-----------------
or in default of any monetary obligation, after receipt of notice and expiration
of applicable cure periods, under the terms of this Lease at the time each
renewal option is exercised or at the commencement of the applicable Extension
Term (as hereinafter defined), (ii) Tenant is occupying at least ninety percent
(90%) of the Premises, including any expansion space, and (iii) Landlord has not
given more than three (3) notices of Tenant's default during the Term of this
Lease, Tenant shall have two (2) options to renew this Lease for an additional
period for five (5) years each (individually, the "First Extension Term" and
"Second Extension Term"; and collectively, the "Extension Terms"). The Extension
Terms shall be on all the terms and conditions of this Lease, except that
Landlord shall have no additional obligation for free rent, leasehold
improvements or for any other tenant inducements for the Extension Terms and,
effective as of the first day of each Extension Term, the Base Rent is effect
immediately before each such extension period shall be increase (but not
-------
decreased) to an amount equal to the Fair Market Rental rate (as hereinafter
- ---------
defined) for each such Extension Term. There shall be no additional extension
terms beyond the Extension Terms set forth herein. Tenant must exercise its
options to extend this Lease by giving Landlord written notice of its election
to do so no later than one hundred eighty (180) days nor earlier than three
hundred sixty (360) days prior to the end of the initial Term, or the First
Extension Term, as applicable. Any notice not given in a timely manner shall be
void, and Tenant shall be deemed to have waived its extension rights. The
Extension Option set forth herein are personal to Tenant and shall not be
included in any assignment of this Lease.
20.2 Determination of Base Rent during Each Extension Term.
------------------------------------------------------
20.2.1 Agreement on Base Rent. Landlord and Tenant shall have
-----------------------
thirty (30) days after Landlord receives the exercise notice in which to agree
on the determination of the fair market rental rate for the Base Rent for the
first thirty (30) months of the applicable Extension Term. Notwithstanding
anything in this Section 20 to the contrary, in no event shall the Base Rent for
the applicable extension Term be less than the Base Rent in effect immediately
prior to the applicable Extension Term.
ADDENDUM
--------
Page 1
<PAGE>
20.2.2 Appraisal. If Landlord and Tenant are unable to agree upon
----------
the fair market rental rate for Base Rent for the applicable Extension Term
within such thirty (30) day period, then within fifteen (15) days after the
expiration of the thirty (30) day period, each party, by giving notice to the
other party, shall appoint a real estate appraiser who is a current member of
the American Institute of Real Estate Appraisers, with at least five (5) years
of experience appraising building space comparable to the Premises in the city
and county where the Premises is located to determine the fair market rent.
"Fair Market Rent" shall mean the monthly amount per rentable square foot in the
Premises that a willing, non-equity new tenant would pay and a willing landlord
would accept at arm's length for space in a comparable building or buildings,
with comparable tenant improvements, in a comparable location, giving
appropriate consideration to then-current monthly rental rates per rentable
square foot, the presence or absence of rent escalation clauses such as
operating expense and tax pass-throughs, length of lease term, size and location
of premises being leased and other generally applicable terms and conditions of
tenancy for a similar building or buildings but shall not exceed one hundred
twenty-five percent (125%) of the Base Rent then payable hereunder. If the two
(2) appraisers are unable to agree on the Fair Market Rent for the applicable
Extension Term within twenty (20) days, they shall select a third appraiser
meeting the qualifications stated in this Section within five (5) days after the
last day the two (2) appraisers are given to set the Fair Market Rent for the
applicable Extension Term. The third appraiser, however selected, shall be a
person who has not previously acted in any capacity for either party. Within
twenty (20) days after the selection of the third appraiser, a majority of the
appraisers shall set the Fair Market Rent for the applicable Extension Term. If
a majority of the appraisers is unable to set the Fair Market Rent within the
twenty (20) day period, the two (2) closest appraisals shall be added together
and their total divided by (2). The resulting quotient shall be the Fair Market
Rent for the applicable Extension Term. Each party shall be responsible for the
costs, charges and fees of the appraiser appointed by that party plus one-half
of the cost of the third appraiser. Notwithstanding anything to the contrary in
the foregoing, the Fair Market Rent shall never be less than the Base Rent in
effect immediately prior to the applicable Extension Term.
20.3 Amendment of Lease. Immediately after the Base Rent is determined
-------------------
pursuant to this Section 20, Landlord and Tenant shall execute an amendment to
this Lease stating the new Base Rent in effect for the applicable Extension
Term.
ADDENDUM
--------
Page 2
<PAGE>
[DIAGRAM OF PROPERTY APPEARS HERE]
EXHIBIT A
<PAGE>
PROPERTY DESCRIPTION
BEING all of Lot 1, Block 1 of Gateway East Business Park No. 3, an addition to
the City of Garland as recorded in Volume 96162, Page 0293, Map Records, Dallas
County, Texas and being part of the A.G. Collins Survey, Abstract No. 329,
Dallas County, Texas, also being part of that certain tract of land conveyed to
Santa Fe Land Improvement Company, subsequently renamed Catellus Development
Corporation, by deed recorded in Volume 69098, Page 0075, Deed Records, Dallas
County, Texas, and being more particularly described as follows:
BEGINNING at a capped iron rod found for corner at the southeast corner of Block
1, Lot 1, GATEWAY EAST BUSINESS PARK - PHASE I, according to the plat thereof
recorded in Volume 90213, Page 1768, Deed Records, Dallas County, Texas, and
lying in the north line of Grader Street (60' R.O.W.);
THENCE N0012'48"E departing the said north line of Grader Street and along the
east line of said Block 1, Lot 1, a distance of 673.74 feet to a capped iron rod
found for corner at the northeast corner of said Block 1, Lot 1;
THENCE S89 51'37"E a distance of 705.28 feet to a 5/8" iron rod found for
corner;
THENCE S0012'48"W passing the northwest corner of that certain 1.977 acre tract
of land conveyed to the City of Garland by Special Warranty Deed recorded in
Volume 93046, Page 1412, Deed Records, Dallas County, Texas, continuing along
the west line of said 1.977 acre tract, a distance of 673.74 feet to a 5/8" iron
rod set for corner at the southwest corner of said 1.977 acre tract in the
aforementioned north line of Grader Street:
THENCE N89'51'37"W along the said north line of Grader Street, a distance of
705.28 feet to the POINT OF BEGINNING and containing 475,174 square feet or
10.9085 acres of land, more or less.
EXHIBIT A-1
<PAGE>
EXHIBIT B
---------
WORK LETTER
-----------
THIS WORK LETTER ("Work Letter") is entered into as of this 31 day of October,
1997, by and between CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation
("Landlord"), and ASD SYSTEMS, a Texas limited partnership ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Landlord and Tenant have entered into that certain Multi-Tenant Industrial
Triple Net Lease (the "Lease") dated as of the date hereof, covering certain
premises (the "Premises") more particularly described in the Lease. This Work
Letter is attached to the Lease as Exhibit B. The Lease is hereby incorporated
into this Work Letter by this reference. Capitalized terms not defined in this
Work Letter shall have the meanings given to such terms in the Lease.
B. In consideration of the mutual covenants contained in the Lease and this
Work Letter, Landlord and Tenant hereby agree as follows:
A G R E E M E N T :
- - - - - - - - -
1. Definitions. As used in this Work Letter, the term "Shell" shall
------------
mean the tilt up warehouse industrial building containing approximately 226,411
square feet of floor area (the "Building") of which the Premises is a part,
excluding the Tenant Improvements (as hereinafter defined). As used in this Work
Letter and in the Lease, the term "Tenant Improvements" shall mean those
improvements set forth on the "Final Tenant Plans" (defined in Section 5(b) of
this Work Letter). The construction and installation of the Tenant Improvements
is sometimes referred to herein as the "Work".
2. Completion of Tenant Improvements. Subject to the terms of the
----------------------------------
Lease and this Work Letter and any "Tenant Delay" or "Force Majeure Delay" as
provided herein, Landlord shall use its commercially reasonable and diligent
efforts to cause the "Contractor" defined in Section 7 of this Work Letter) to
complete the construction and installation of the Tenant Improvements in
accordance with the terms of this Work Letter.
3. Designation of Representatives. With respect to the planning,
-------------------------------
design and construction of the Tenant Improvements, Landlord hereby designates
Steve Bryan as "Landlord's Representative" and Tenant hereby designates Norman
Charney as "Tenant's Representative". Tenant hereby confirms that Tenant's
Representative has full authority to act on behalf of and to bind Tenant with
respect to all matters pertaining to the planning, design and construction of
the Tenant Improvements. Landlord hereby confirms that Landlord's Representative
has limited authority to act on behalf of Landlord with respect to matters
pertaining to the planning, design and construction of the Tenant Improvements.
Either party may change its designated representative upon five (5) days prior
written notice to the other party.
4. Architect. RGA Architects ("Architect") shall as the architect
----------
with respect to the design of the Tenant Improvements. Landlord shall enter into
a contract with Architect for such services (the "Architect Contract"). The
parties acknowledge and agree that the Architect Contract entered into with
Architect will obligate Architect to issue to both Landlord and Tenant an
architect's certificate ("Architect's Certificate") upon Substantial Completion
(as hereinafter defined) of the Tenant Improvements certifying the Substantial
Completion of the Tenant Improvements in accordance with the Final Tenant Plans
(as hereinafter defined). Completion of the Tenant Improvements in accordance
with the Final tenant Plans (as hereinafter defined). Landlord reserves the
right to retain a development consultant to assist Landlord in performing its
obligations
EXHIBIT B
---------
Page 1
<PAGE>
under this Work Letter and under the Lease. All costs associated with any such
developer shall be included within the cost of the work.
5. Improvement Plans.
------------------
(a) Preliminary Plans. Attached hereto are the following
------------------
preliminary plans and base building specifications for the Shell and the Tenant
Improvements (collectively, the "Preliminary Plans"), which have been reviewed
and approved by Landlord and Tenant: (i) Schedule 1 is the space plans for the
----------
Tenant Improvements prepared by Architect and dated October ___, 1997; and (ii)
Schedule 2 is the "Base Building Specifications" for the Shell and the Tenant
- ----------
Improvements.
(b) Final Tenant Plans. Within two (2) business days following
-------------------
the Effective Date of the Lease, Landlord shall deliver to Tenant the final
plans and specifications for the Tenant Improvements ("Final Tenant Plans")
which shall be consistent with the Preliminary Plans. Included in the Final
Tenant Plans will be the civil, architectural and structural plans for the
Tenant Improvements. Tenant shall have two (2) business days following its
receipt of the Final Tenant Plans within which to approve or disapprove in
writing the Final Tenant Plans. If Tenant fails to give Landlord written notice
approving or disapproving the Final Tenant Plans within such two (2) business
day period, Tenant shall be deemed to have approved the Final Tenant Plans. In
the event Tenant disapproves the Final Tenant Plans within such two (2) business
day period, Landlord and Tenant shall mutually agree on revisions to the Final
Tenant Plans within five (5) business days from Landlord's receipt of Tenant's
notice disapproving the Final Tenant Plans. Tenant's failure to cooperate with
Landlord, provide necessary information to Landlord or to resolve any
outstanding issues within such five (5) business day period shall be a "Tenant
Delay" (as defined in Section 12 below). When the Final Tenant Plans have been
approved or deemed approved by Tenant and Landlord, Architect shall submit the
Final Tenant Plans to the appropriate governmental agency for plan checking and
the issuance of a building permit for the Tenant Improvements. Architect shall
make any and all changes to the Final Tenant Plans required by any applicable
governmental entity to obtain a building permit for the Tenant Improvements.
c. No Representations. Notwithstanding anything to the contrary
-------------------
contained in the Lease or herein, Landlord's participation in the preparation of
the Preliminary Plans, the Final Tenant Plans and the construction of the Tenant
Improvements shall not constitute any representation or warranty, express or
implied, that the Tenant Improvements, if built in accordance with the
Preliminary Plans and/or the Final Tenant Plans, will be suitable for Tenant's
intended purpose. Tenant acknowledges and agrees that the Tenant Improvements
are intended for use by Tenant and the specifications and design requirements
for such Tenant Improvements are not within the special knowledge or experience
of Landlord. Landlord's sole obligation shall be to arrange the construction of
the Tenant Improvements in accordance with the requirements of the Final Tenant
Plans; and any additional costs or expense required for the modification thereof
to more adequately meet Tenant's use, whether during or after Landlord's
construction thereof, shall be borne entirely by Tenant except as otherwise
provided in this Work Letter. Notwithstading the foregoing, Landlord agrees to
assign to Tenant the benefit of all construction warranties pertaining to the
Tenant Improvements to the extent that they do not relate to structural or other
portions of the Tenant Improvements that Landlord is required to maintain and
repair under the Lease.
6. Change Orders. After the parties approve the Final Tenant Plans
--------------
and a building permit for the Tenant Improvements is issued, any further changes
to the Final Tenant Plans and/or the Preliminary Plans shall require the prior
written approve of Tenant and Landlord (not to be unreasonably withheld or
delayed), provided that Landlord shall not need the consent or approval of
Tenant for changes to the Base Building Specifications that do not affect the
Tenant Improvements and/or the Premises or materially alter the character of the
Building. If Tenant desires any changes in the Final Tenant Plans or the
Preliminary Plans relative to the Tenant Improvements which is reasonable and
practical (which shall be conclusively determined by Architect), such changes
may only be requested by the delivery to Landlord by Tenant of a proposed
written "Change Order" specifically setting forth the requested change. Landlord
shall have five (5) business days from the receipt of the proposed Change Order
to provide Tenant with Architect's disapproval of the proposed change stating
the reason(s) for such disapproval, or if Architect approves the proposed
change, the following items: (i) a summary of any increase in the cost caused by
such change (the "Change Order Cost"), (ii) a statement of the
EXHIBIT B
---------
Page 2
<PAGE>
number of days of any delay caused by such proposed change (the "Change Order
Delay"), and (iii) a statement of the cost of the Change Order Delay (the
"Change Order Delay Expense"), which Change Order Delay Expense shall be the
product of the number of days of delay multiplied by the estimated daily Base
Rent rate. Tenant shall then have three (3) business days to approve the Change
Order Cost, the Change Order Delay and the Change Order Delay Expense. If Tenant
approves these items, Landlord shall promptly execute the Change Order and cause
the appropriate changes to the Final Tenant Plans to be made. If Tenant fails to
respond to Landlord within said three (3) business day period, the Change Order
Cost, the Change Order Delay and the Change Order Delay Expense shall be deemed
disapproved by Tenant and Landlord shall have no further obligation to perform
any Work set forth in the proposed Change Order. The Change Order Cost shall
include all costs associated with the Change Order, including, without
limitation, architectural fees, engineering fees and construction costs, as
conclusively determined by Architect and the Contractor (defined in Section 7),
respectively, together with a seven percent (7%) fee of these costs as
reimbursement for the expense of administration and coordination of such Change
Order by Landlord's Representative. The Change Order Delay shall include all
delays caused by the Change Order, including, without limitation, all design and
construction delays, as conclusively determined by Architect and the Contractor
(defined in Section 7), respectively. Tenant shall pay to Landlord in advance
all Change Order Costs associated with Tenant requested changes to Preliminary
Plans or the Final Tenant Plans.
7. Selection of Contractor. Landlord shall select a qualified
------------------------
contractor to act as general contractor for the Tenant Improvements. The
selected contractor shall be referred to herein as the "Contractor."
8. Construction Contract. Landlord shall enter into a construction
----------------------
contract with the Contractor on a form reasonably acceptable to Landlord
("Construction Contract") for the construction and installation of the Tenant
Improvements in accordance with the Final Tenant Plans.
9. Payment for Cost of the Tenant Improvements. Landlord shall pay
--------------------------------------------
for all costs of designing and constructing the Tenant Improvements, except as
provided in Section 6 above.
10. Financing of Construction of Tenant Improvements. Landlord may
-------------------------------------------------
elect to finance the construction of the Tenant Improvements with the proceeds
of a loan ("Project Loan") from a third party lender ("Lender") at the then
prevailing market rate and market terms for similar projects. The documents
securing or given in connection with the Project Loan, if any, are herein
collectively called "Loan Documents." Any Project Loan may be secured by the
lien of a deed of trust encumbering the Land and Tenant Improvements. Tenant
agrees to execute and/or provide all documents reasonably required by any Lender
in connection with any Project Loan, including, without limitation, estoppel
certificates, subordination agreements (subject to a commercially reasonable
non-disturbance agreement), consents to the assignment of this Agreement,
written confirmation of the satisfaction of closing conditions, and evidence of
the due execution, validity and enforceability of this Agreement.
11. Substantial Completion; Target Completion Date. The parties
-----------------------------------------------
estimate that Substantial Completion (as defined in Section 2.1 of the Lease)
will be achieved on or before January 1, 1998 (the "Target Completion Date").
Landlord agrees to use its commercially reasonable efforts to cause the Tenant
Improvements to be substantially completed on or before the Target Completion
Date. If there is any delay in the Substantial Completion of the Tenant
Improvements beyond the Target Completion Date and such delay results from a
Tenant Delay, then the Commencement Date shall be accelerated by the number of
days of delay caused by the Tenant Delay(s).
12. Tenant Delays; Force Majeure Delays. As used herein "Tenant
-------------------------------------
Delays" means any delay in the completion of the Tenant Improvements resulting
from any or all of the following: (1) Tenant's failure to timely perform any of
its obligations pursuant to this Work Letter, including Tenant's Architect's
failure to process timely the building permit for the Tenant Improvements and
any failure to complete, on or before the due date therefor, any action item
which is Tenant's responsibility pursuant to this Work Letter, including
Tenant's failure to grant approvals within the time frames described herein; (2)
Tenant's requested modifications to the Preliminary Plans or any Tenant-
initiated Change Orders; (3) Tenant's request for materials, finishes, or
installations which are not readily available, (4) any delay in any way
whatsoever arising from Tenant's right to conduct "Inspections" under Section 13
below, (5) Change Order Delays, or (6) any other act or failure to act by
EXHIBIT B
---------
Page 3
<PAGE>
Tenant, Tenant's Representative, Tenant's Architect, Tenant's employees, agents,
independent contractors, consultants and/or any other person performing or
required to perform services on behalf of Tenant, including interference with
Landlord, or its contractors, during Tenant's early entry under Section 2.3 of
the Lease. "Force Majeure Delays" as used herein means delays resulting from
causes beyond the reasonable control of Landlord or the Contractor, including,
without limitation, any delay caused by any action, inaction, order, ruling,
moratorium, regulation, statute, condition or other decision of any private
party or governmental agency having jurisdiction over any portion of the
projects, over the construction of the Tenant Improvements or over any uses
thereof, or by delays in inspections or in issuing approvals by private parties
or permits by governmental agencies, or by fire, flood, inclement weather,
strikes, lockouts or other labor or industrial disturbance (whether or not on
the part of agents or employees of either party hereto engaged in the
construction of the Tenant Improvements), civil disturbance, order of any
government, court or regulatory body claiming jurisdiction or otherwise, act of
public enemy, war, riot, sabotage, blockage, embargo, failure or inability to
secure materials, supplies or labor through ordinary sources by reason of
shortages or priority, discovery of hazardous or toxic materials, earthquake, or
other natural disaster, delays caused by any dispute resolution process, or any
cause whatsoever beyond the reasonable control (excluding financial inability)
of the party whose performance is required, or any of its contractors or other
representatives, whether or not similar to any of the causes hereinabove stated.
13. Tenant's Inspection Rights. Landlord shall schedule and attend
---------------------------
monthly progress meetings, walk-throughs and any other meetings with the
Landlord's Architect, the Contractor and Tenant to discuss the progress of the
construction of the Tenant Improvements ("Meetings'"). Landlord shall give
Tenant at least twenty-four (24) hours prior notice (written or telephonic) of
all such Meetings. Tenant shall designate in writing the person or persons
appointed by Tenant to attend the Meetings and such designated party shall be
entitled to be present at and to participate in the discussions during all
Meetings; but Landlord may conduct the Meetings even if Tenant's appointees are
not present. In addition to the foregoing and to Tenant's early entry rights as
provided in Section 2.3 of the Lease, Tenant or its agents shall have the right
at any and all reasonable times to conduct inspections, tests, surveys and
reports of work in progress "Inspections" for the purpose of reviewing whether
the Tenant Improvements are being constructed in accordance with the Final
Tenant Plans, as amended by any approved Change Orders or other agreed upon
changes. Tenant agrees to protect, hold harmless and indemnify Landlord from all
claims, demands, costs and liabilities (including reasonable attorneys' fees)
arising from Tenant's or Tenant's agents entry onto the Land for the purpose of
conducting Inspections.
14. Walk-Through and Punch List. Upon Substantial Completion of the
----------------------------
Tenant Improvements, Tenant, Landlord, the Tenant's Architect and the Landlord's
Architect shall jointly conduct a walk-through of the Tenant Improvements and
shall jointly prepare a punch list ("Punch List") of items needing additional
work ("Punch List Items"); provided, however, the Punch List shall be limited to
items which are required by the Construction Contract the Final Tenant Plans,
Change Order and any other changes agreed to by the parties.
15. Miscellaneous Construction Covenants.
-------------------------------------
(a) Coordination with Lease. Nothing herein contained shall be
------------------------
construed as (i) constituting Tenant as Landlord's agent for any purpose
whatsoever, or (ii) a waiver by Landlord or Tenant of any of the terms or
provisions of the Lease. Any default by either party with respect to any portion
of this Work Letter, shall be deemed a breach of the Lease for which Landlord
and Tenant shall have all the rights and remedies as in the case of a breach of
the Lease by the other party.
(b) Cooperation. Landlord and Tenant agree to cooperate with
------------
one another and to cause their respective employees, agents and contractors to
cooperate with one another to coordinate any work being performed by Landlord
and/or Tenant under this Work Letter, and their respective employees, agents and
contractors so as to avoid unnecessary interference and delays with the
completion of the Work.
16. No Representations. Landlord does not warrant that the Building
-------------------
or any component thereof will be free of latent defects or that it will not
require maintenance and/or repair within any particular period of time, except
as expressly provided herein. Tenant acknowledges and agrees that it shall rely
solely on the
EXHIBIT B
---------
Page 4
<PAGE>
warranty or guaranty, if any, from Landlord's Contractor, Tenant's Architect or
other material and/or service providers relative to the proper design and
construction of the Tenant Improvements or any component thereof.
IN WITNESS WHEREOF, this Work Letter is executed as of the date first
written above.
"Landlord" "Tenant
CATELLUS DEVELOPMENT CORPORATION, ASD SYSTEMS,
a Delaware corporation a Texas limited partnership
BY: ASD SYSTEMS GP, INC
ITS GENERAL PARTNER
By: BY:
---------------------------------- -----------------------------
Print Name: Print Name:
-------------------------- ---------------------
Print Title: Print Title:
------------------------- -------------------
EXHIBIT B
---------
Page 5
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
10/29/97
REQUIRED SQUARE FOOTAGE
- -----------------------
. Approximately 112,881 Square feet (SF) at 30 feet clear height is being
proposed under the terms of this proposal.
CLEAR HEIGHT
- ------------
. The actual minimum clear height from the first bay in under the lowest
portion of the steel structure is 30 feet-0 inches and varies up to 34
feet-0 inches clear at North-South demising wall. Any obstructions including
lighting, sprinkler lines, etc. shall be installed above the 30 feet minimum
clear height unless otherwise noted.
OFFICE SPACE REQUIREMENTS (Including General Offices, Rest Rooms, Breakroom,
- -------------------------
etc.)
. CDC will provide approximately 12,628 SF of one-level air-conditioned
office, of warehouse break and rest room areas.
. Office requirements are more specifically defined on the following pages
describing the Tenant's "Outline of Office Requirements" and the attached
floor plan sheets A2.1 and A2.2, dated 10/23/97, as prepared by RGA
Architects.
. Provide separate men's and women's lavatories to accommodate total
population. One warehouse break room is provided and currently designed to be
530 SF per the floor plan as shown on Sheet A2.2.
. Since rest room sizes were provided by Tenant, Landlord has not determined
that Tenant's employee population will be adequately accommodated. Landlord
believes that based on office layout and potential occupancy that there are
sufficient fixtures to meet code requirements.
LOADING DOCK REQUIREMENTS
- -------------------------
. CDC will provide twelve (12) dock door positions (tailgate docks) at 48
inches height complete with edge of dock angle protection and dock bumpers.
Six (6) of the dock positions will be constructed to include a Serco Model
No. S-600 seal with 20 ounces vinyl covering with alignment strip at bottom
of door seal pad (location to be determined by Tenant).
. No Drive-in Doors are provided.
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
(continued)
. No Interior Docks are included.
. No Special Height Doors are included.
AUTO & TRUCK PARKING
- --------------------
. Cars: There is existing parking for 100-125 cars.
HVAC
- ----
. Warehouse area to be heated with gas-fired unit heaters to maintain 55
degrees Fahrenheit inside the warehouse when outside temperature is 20
degrees Fahrenheit.
. The existing outside ventilation/smoke exhaust system shall provide a
minimum of four (4) air changes per hour. Controls to turn system on and
off inside Tenant's lease area will be provided.
. Office area to be heated by a gas-fired burner unit/electrically driven
rooftop mounted DX air conditioning package units. System shall be designed
to maintain 76 degrees Fahrenheit inside, during the summer, when the
outside temperature is 102 degrees Fahrenheit and maintain 72 degrees
Farenheit inside, during the winter, when the outside temperature is 20
degrees Farenheit.
FIRE SUPPRESSION/SPRINKLER
- --------------------------
. A 100% coverage ESFR sprinkler system, designed to accommodate Class I
through Class IV commodity use group shall be provided, to accommodate all
of the Tenant's operations, including racked storage areas (except for
in-rack sprinklering required) per the Tenant's rack plan module and
elevations and in accordance with the City of Garland Fire Marshall's
requirements and applicable local codes.
. CDC and Tenant acknowledge that the product shall be stored palletized or
in bulk containers, and shall be nonencapsulated.
WAREHOUSE FLOOR REQUIREMENTS
- ----------------------------
. CDC's warehouse floor is 6 inches thick, 4,000 psi compressive strength,
steel reinforced (#3's @ 18 inches O.C.E.W.) concrete slab.
. CDC has assumed from the overall clear height minimum of 30 feet - 0
inches that the pallets stacked without racking systems shall be stored to
a maximum of five (5) pallets in height or about 20 feet-0 inches A.F.F.
2
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
(continued)
. CDC and Tenant acknowledge that the maximum pallet weight will be 3000 lbs.
or less per unit.
. The building's floor slab finish tolerance was constructed to an overall
finish tolerance specification of F\\F\\35/F\\L\\24 (flatness/levelness).
The actual measured floor tolerances were an average of F\\F\\60/F\\L\\40.
. Fifty percent (50%) of the floor slab shall be caulked with semi-rigid
epoxy joint filler (MM-80 or equal) and power scrubbed clean and then shall
be coated with one (1) coat of Lapidolith acrylic based floor sealer. Slab
joints under rack areas will not be caulked.
. Battery charging area of the floor to be coated with a 17 mil epoxy paint
system that is acid resistant. The floor color shall be "safety yellow."
STRUCTURAL BAY & COLUMN SPACING
- -------------------------------
. Note actual column spacing. The building's column spacing is nominally 40
feet X 50 feet spacing in the standard bays of building. The north bay is
33 feet - 6 inches X 50 feet.
ELECTRIC SERVICE/POWER REQUIREMENTS
- -----------------------------------
. A 600 amp electrical service in the telephone/electrical room to include a
75 KVA transformer and 200 amp low voltage panel will be provided.
. A 480 volt, 100 amp warehouse lighting panel will be located in the
warehouse. Panel breakers will be used to turn on 400 watt metal halide
Cooper Industries or equal High-Bay lights that will be provided.
. A 480 volt, 60 amp disconnect, 45 KVA transformer and 100 amp low voltage
panel for warehouse offices and break area will be provided.
. Ten (10) 120 volt, 20 amp utility circuits in warehouse will be provided.
Location to be determined by Tenant.
. Two (2) trash compactor circuits, as noted on Schedule 1.
. Two (2) conveyor circuits as noted on Schedule 1.
. Service entrance switch gear to be located in telephone/electrical room
with meter can and disconnect located in main electrical room.
3
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
(continued)
WAREHOUSE & OFFICE AREA LIGHTING
- --------------------------------
. In general warehouse areas, CDC has included 400 watt, metal halide lighting
at 15 foot-candles at 36 inches above finished floor (A.F.F.).
. All lighting in warehouse area shall be either recessed within the roof
joists and/or above 30 feet-0 inches A.F.F.
. In exterior parking and truck loading areas, a 1 foot-candle average light
level is provided at night. Existing lighting at exterior loading areas
immediately adjacent to the building currently provided is approximately 7
foot-candles.
. In office areas: CDC shall provide 70 to 75 foot-candles using 277 or 208
volt fluorescent lighting. Fixtures will be standard commercial 4 lamp
fixtures with prismatic lenses.
OTHER REQUIREMENTS
- ------------------
. Battery charging stations for two (2) fork lift battery charging units
including a 3/4 inch cold water hose bibb and eyewash, as required by code.
Epoxy floor coating (please see warehouse flooring specification).
. A 1 hour fire separation/demising wall(s) separating the lease premises from
the balance of the building in conformance with local code. Walls will be
fire taped only.
. All interior warehouse walls will not be painted.
. Warehouse floor to be sealed with one coat of Lapidolith acrylic based
concrete sealer (please see warehouse flooring specification).
. The concrete truck apron extends throughout entire truck court.
. Air conditioning in office areas will be rooftop mounted with 6 zones/units
for comfort.
. ESFR sprinkler system is designed to accommodate racked storage for Class I
to Class IV commodities that will not impact the standard commercial S-1
occupancy.
. Warehouse outside air and exhaust shall follow the HVAC specifications as
described above in the HVAC specifications.
4
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
(continued)
. Building will be delivered in broom clean condition with all systems and
components in new and proper working condition including HVAC systems (one
year warranty minimum on all parts and labor and a 5 year parts and labor
warranty on the compressor unit), sprinkler system, lights, dock equipment,
etc.
. Protective 6 inches concrete-filled steel pipe bollards shall be provided
at fire sprinkler risers and dock doors on the interior side of the
warehouse.
. Separate metering for the electric and gas utilities will be provided for
the proposed tenant's portion of the facility.
. All exterior paved areas are less than 6 months old.
ARCHITECTURAL, ENGINEERING & SPACE PLANNING DESIGN COSTS
- --------------------------------------------------------
. Includes all necessary normal design services required to construct the
proposed facility exclusive of special foundations or systems or
installation of tenant's equipment added to building shell.
EXCLUSIONS
- ----------
. Battery charging systems installation.
. Design nor installation of aisle striping inside building) for warehouse
portion of the lease.
. Structural System foundation analysis or re-design or installation of
equipment for any air conditioning of the warehouse portion of the lease.
. Racking or other material handling systems design or installation is
specifically excluded for any portion of the lease area. Please note that
some structural analysis will be required to assess point loads of fully
loaded racks once Tenant's rack design is completed. Any additional costs,
if any, incurred as a result of redesign of the racks or modification to
the floor slab system once storage weights and exact configurations for
placement of product are known, will be at Tenant's expense.
. In rack sprinklers are specifically excluded from this proposal.
. Any modifications to the existing ESFR sprinkler system to accommodate
Tenant's Factory Mutual insurance design related coverage of the Tenant's
racking or other equipment or operations are specifically excluded from
this proposal.
5
<PAGE>
SCHEDULE 2
----------
ASD SUPPLY, INCORPORATED
------------------------
BASE BUILDING SPECIFICATIONS
(continued)
. Floor drains are specifically excluded from this proposal.
OCCUPANCY
- ---------
. Beneficial occupancy for racking in warehouse areas by December 1, 1997.
. Tenant's move-in and rent commencement is January 1, 1998.
6
<PAGE>
EXHIBIT C
---------
COMMENCEMENT DATE MEMORANDUM
----------------------------
With respect to that certain lease ("Lease") dated ____________, 1997,
between ASD SYSTEMS, a __________________ ("Tenant"), and Catellus Development
Corporation, a Delaware corporation ("Landlord"), whereby Landlord leased to
Tenant and Tenant leased from Landlord approximately ________ rentable square
feet of the building located at __________________________ ("Premises"), Tenant
hereby acknowledges and certifies to Landlord as follows:
(1) Landlord delivered possession of the Premises to Tenant in a
Substantially completed condition on _____________________ ("Possession Date");
(2) The Lease commenced on ________________________ ("Commencement
Date");
(3) The Premises contain __________ square feet of space; and
(4) Tenant has accepted and is currently in possession of the
Premises and the Premises are acceptable for Tenant's use.
IN WITNESS WHEREOF, this Commencement Date Memorandum is executed this ____
day of ________________.
"Tenant"
ASD SYSTEMS,
a Texas limited partnership
By:____________________________________
Its:________________________________
By:____________________________________
Its:________________________________
EXHIBIT C
---------
Page 1
<PAGE>
EXHIBIT D
---------
FORM OF INSURANCE CERTIFICATE
-----------------------------
EXHIBIT D
---------
Page 1
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
ACORD. CERTIFICATE OF INSURANCE DATE (MM/DD/YY)
- ---------------------------------------------------------------------------------------------------------------------------------
PRODUCER THIS CERTIFICATE IS ISSUED AS A MATTER OF INFORMATION
ONLY AND CONFERS NO RIGHTS UPON THE CERTIFICATE
HOLDER. THIS CERTIFICATE DOES NOT AMEND, EXTEND OR
ALTER THE COVERAGE AFFORDED BY THE POLICIES BELOW.
--------------------------------------------------------
COMPANIES AFFORDING COVERAGE
--------------------------------------------------------
COMPANY
A
- ---------------------------------------------------------------------------------------------------------------------------------
INSURED COMPANY
B
--------------------------------------------------------
COMPANY
C
--------------------------------------------------------
COMPANY
D
- ---------------------------------------------------------------------------------------------------------------------------------
COVERAGES
THIS IS TO CERTIFY THAT THE POLICIES OF INSURANCE LISTED BELOW HAVE BEEN ISSUED TO THE INSURED NAMED ABOVE FOR THE POLICY
PERIOD INDICATED, NOTWITHSTANDING ANY REQUIREMENT, TERM OR CONDITION OF ANY CONTRACT OR OTHER DOCUMENT WITH RESPECT TO
WHICH THIS CERTIFICATE MAY BE ISSUED OR MAY PERTAIN, THE INSURANCE AFFORDED BY THE POLICIES DESCRIBED HEREIN IS SUBJECT TO
ALL THE TERMS, EXCLUSIONS AND CONDITIONS OF SUCH POLICIES, LIMITS SHOWN MAY HAVE BEEN REDUCED BY PAID CLAIMS.
- ---------------------------------------------------------------------------------------------------------------------------------
CO POLICY EFFECTIVE POLICY EXPIRATION
LTR TYPE OF INSURANCE POLICY NUMBER DATE(MM/DD/YY) DATE(MM/DD/YY) LIMITS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GENERAL LIABILITY GENERAL AGGREGATE $
[_] COMMERCIAL GENERAL LIABILITY -----------------------------------
PRODUCTS-COMP/OP AGG $
[_][__] CLAIMS MADE [_] OCCUR -----------------------------------
[_] OWNER'S & CONT PROT PERSONAL & ADV INJURY $
[_]----------------------------- -----------------------------------
[_] EACH OCCURRENCE $
-----------------------------------
FIRE DAMAGE(Any one fire) $
-----------------------------------
MED EXP(Any one person) $
- ----------------------------------------------------------------------------------------------------------------------------------
AUTOMOBILE LIABILITY
[_] ANY AUTO COMBINED SINGLE UNIT $
[_] ALL OWNED AUTOS -----------------------------------
[_] SCHEDULED AUTOS BODILY INJURY
[_] HIRED AUTOS (Per person) $
[_] NON-OWNED AUTOS -----------------------------------
[_]----------------------------- BODILY INJURY
(Per accident) $
-----------------------------------
PROPERTY DAMAGE $
- ----------------------------------------------------------------------------------------------------------------------------------
GARAGE LIABILITY AUTO ONLY- EA ACCIDENT $
[_] ANY AUTO -----------------------------------
[_]----------------------------- OTHER THAN AUTO ONLY: $
-----------------------------------
EACH ACCIDENT $
-----------------------------------
AGGREGATE $
- ---------------------------------------------------------------------------------------------------------------------------------
EXCESS LIABILITY EACH OCCURRENCE $
[_] UMBRELLA FORM -----------------------------------
[_] OTHER THAN UMBRELLA FORM AGGREGATE $
-----------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
WORKERS COMPENSATION AND [_] STATUTORY LIMITS $
EMPLOYERS' LIABILITY -----------------------------------
EACH ACCIDENT $
THE PROPRIETOR/ [_] INCL -----------------------------------
PARTNERS/EXECUTIVE [_] EXCL DISEASE - POLICY LIMIT $
OFFICERS ARE: -----------------------------------
DISEASE - EACH EMPLOYEE $
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER
- ---------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OPERATIONS/LOCATIONS/VEHICLES/SPECIAL ITEMS
- ---------------------------------------------------------------------------------------------------------------------------------
CERTIFICATE HOLDER CANCELLATION
SHOULD ANY OF THE ABOVE DESCRIBED POLICIES BE CANCELLED BEFORE
EXPIRATION DATE THEREOF, THE ISSUING COMPANY WILL MAIL _______
DAYS WRITTEN NOTICE TO THE CERTIFICATE HOLDER NAMED TO THE
LEFT.
------------------------------------------------------------------
AUTHORIZED REPRESENTATIVE
EXHIBIT "D"
ACORD 25-S (3/93) ----------- (R) ACORD CORPORATION
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
POLICY NUMBER: COMMERCIAL GENERAL LIABILITY
THIS ENDORSEMENT CHANGES THE POLICY. PLEASE READ IT CAREFULLY.
ADDITIONAL INSURED-OWNERS, LESSEES OR
CONTRACTORS (Form B)
This endorsement modifies insurance provided under the following:
COMMERCIAL GENERAL LIABILITY COVERAGE PART SCHEDULE
Name of Person or Organization:
(If no entry appears above, information required to complete this endorsement
will be shown in the Declarations as applicable to this endorsement.)
WHO IS AN INSURED (Section II) is amended to include as an insured the person or
organization shown in the Schedule, but only with respect to liability arising
out of your ongoing operations performed for that insured.
<PAGE>
EXHIBIT E
---------
PROHIBITED USES
---------------
The following types of operations and activities are expressly prohibited on the
Premises:
1. automobile/truck maintenance, repair or fueling;
2. battery manufacturing or reclamation;
3. ceramics and jewelry manufacturing or finishing;
4. chemical (organic or inorganic) storage, use or manufacturing;
5. drum recycling;
6. dry cleaning;
7. electronic components manufacturing;
8. electroplating and metal finishing;
9. explosives manufacturing use or storage;
10. hazardous waste treatment, storage, or disposal;
11. leather production, tanning or finishing;
12. machinery and tool manufacturing;
13. medical equipment manufacturing and hospitals;
14. metal shredding, recycling or reclamation;
15. metal smelting and refining.
16. mining;
17. paint, pigment and coating operations;
18. petroleum refining;
19. plastic and synthetic materials; manufacturing
20. solvent reclamation;
21. tire and rubber manufacturing;
22. above- and/or underground storage tanks; and
23. residential use or occupancy.
EXHIBIT E
---------
Page 1
<PAGE>
EXHIBIT F
---------
RULES AND REGULATIONS
---------------------
1. No automobile, recreational vehicle or any other type of vehicle or
equipment shall remain upon the Common Area longer than 24 hours and no
vehicle or equipment of any kind shall be dismantled or repaired or
serviced on the Common Area. All vehicle parking shall be restricted to
areas designated and marked for vehicle parking. The foregoing restrictions
shall not be deemed to prevent temporary parking for loading or unloading
of vehicles in designated areas.
2. Signs will conform to sign standards and criteria established from time to
time by Landlord. No other signs, placards, pictures, advertisements, names
or notices shall be inscribed, displayed or printed or affixed on or to any
part of the outside or inside of the building without the written consent
of Landlord and Landlord shall have the right to remove any such non-
conforming signs, placards, pictures, advertisements, names or notices
without notice to and at the expense of Tenant.
3. No antenna, aerial discs, dishes or other such device shall be erected on
the roof or exterior walls of the Premises, or on the grounds, without the
written consent of the Landlord in each instance. Any device so installed
without such written consent shall be subject to removal without notice at
any time.
4. No loud speakers, televisions, phonographs, radios or other devices shall
be used in a manner so as to be heard or seen outside of the Premises
without the prior written consent of the Landlord.
5. The outside areas immediately adjoining the Premises shall be kept clean
and free from dirt and rubbish by the Tenant to the satisfaction of
Landlord and Tenant shall not place or permit any obstruction or materials
in such areas or permit any work to be performed outside the Premises.
6. No open storage shall be permitted in the Project.
7. All garbage and refuse shall be placed in containers placed at the location
designated for refuse collection, in the manner specified by Landlord.
8. No vending machine or machines of any description shall be installed,
maintained or operated upon the Common Area.
9. Tenant shall not disturb, solicit, or canvass any occupant of the building
and shall cooperate to prevent same.
10. No noxious or offensive trade or activity shall be carried on upon any
units or any part of the Common Area nor shall anything be done thereon
which would in any way interfere with the quiet enjoyment of each of the
other tenants of the Project or which would increase the rate of insurance
or overburden utility facilities from time to time existing in the Project.
11. Landlord reserves the right to make such amendments to these rules and
regulations from time to time as are nondiscriminatory and not inconsistent
with the Lease.
EXHIBIT F
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EXHIBIT G
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TENANT ESTOPPEL CERTIFICATE
---------------------------
To: Bank of America National Trust and Savings Association ("Bank")
Real Estate Industries Division No. ____________________________
________________________________________________________________
________________________________________________________________
Attn.:__________________________________________________________
Re: Lease Dated:__________________________________________
Current Landlord:_______________________________________________
Current Tenant:_________________________________________________
Square Feet Approximately:______________________________________
Floor(s):_______________________________________________________
Located at:_____________________________________________________
("Tenant") hereby certifies that as of ___________________, 199__:
1. Tenant is the present owner and holder of the tenant's interest under
the lease described above, as it may be amended to date (the "Lease") with
____________________ Landlord (who is called "Borrower" for the purposes of this
Certificate). (USE THE NEXT SENTENCE IF THE LANDLORD OR TENANT NAMED IN THE
------------------------------------------------------------
LEASE IS A PREDECESSOR TO THE CURRENT LANDLORD OR TENANT.) [The original
- --------------------------------------------------------
landlord under the Lease was _________________, and the original tenant under
the Lease was _____________________.] The Lease covers the premises commonly
known as _____________________ (the "Premises") in the building (the "Building")
at the address set forth above.
(CHOOSE ONE OF THE FOLLOWING SECTION 2(a)s BELOW)
-----------------------------------------------
[2. (a) A true, correct and complete copy of the Lease (including all
modifications, amendments, supplements, side letters, addenda and riders of and
to it) is attached to this Certificate as Exhibit A.]
[2 (a) The attached Exhibit A accurately identifies the Lease and all
---------
modifications, amendments, supplements, side letters, addenda and riders of and
to it.]
(b) (IF APPLICABLE) [The Lease provides that in addition to the
-------------
Premises, Tenant has the right to use or rent ________ assigned/unassigned
parking spaces near the Building or in the garage portion of the building during
the term of the Lease.]
(c) The term of the Lease commenced on ________________, 199__ and
will expire on ___________, 199__ including any presently exercised option or
renewal term. (CHOOSE ONE OF THE FOLLOWING TWO SENTENCES) [Tenant has no option
-----------------------------------------
or right to renew, extend or cancel the Lease, or to lease additional space in
the Premises or Budding, or to use any parking (IF APPLICABLE) [other than that
-------------
specified in Section 2(b) above]. [Except as specified in Paragraph(s) ____ of
the Lease (copy attached), Tenant has no option or right to renew, extend or
cancel the Lease, or to lease additional space in the Premises or Building, or
to use any parking (IF APPLICABLE) [other than that specified in Section 2(b)
above].]
(CHOOSE ONE OF THE FOLLOWING SECTION 2(d)s)
-----------------------------------------
[(d) Tenant has no option or preferential right to purchase all or any
part of the Premises (or the land of which the Premises are a part). Tenant has
no right or interest with respect to the Premises or the Building other than as
Tenant under the Lease.]
EXHIBIT G
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[(d) Except as specified in Paragraph(s) the Lease (copy attached),
Tenant has no option or preferential right to Purchase all or any part of the
Premises (or the land of which the Premises are a part). Except for the
foregoing, Tenant has no right or interest with respect to the Premises or the
Building other than as Tenant under the Lease.]
(e) The annual minimum rent currently Payable under the Lease is
$______________ and such rent has been paid through _________, 199__. (IF
--
APPLICABLE) [The annual percentage rent currently payable under the Lease is at
- ----------
the rate of _________ such rent has been paid through ________________, 199___.]
(f) (IF APPLICABLE) [Additional rent is payable under the Lease for
-------------
(i)operating, maintenance or repair expenses, (ii) property taxes, (iii)
consumer price index cost of living adjustments, or (iv) percentage of gross
sales adjustments (i.e. adjustments made based on underpayments of percentage
rent). Such additional rent has been paid in accordance with Borrower's rendered
bills through 199___. The base year amounts for additional rental items are as
follows: (1) operating, maintenance or repair expenses $__________, (2) property
taxes $____________ and (3) consumer price index _______________ (please
indicate base for CPI level)].
(g) Tenant has made no agreement with Borrower or any agent,
representative or employee of Borrower concerning free rent, partial rent rebate
of rental payments or any other similar rent concession (IF APPLICABLE) [except
-------------
as expressly set forth in Paragraph(s) _____ of the Lease (copy attached)].
(h) Borrower currently holds a security deposit in the amount of
$________ which is to be applied by Borrower or returned to Tenant in accordance
with Paragraph(s) ____ of the Lease. Tenant acknowledges and agrees that Bank
shall have no responsibility or liability for any security deposit, except to
the extent that any security deposit shall have been actually received by Bank.
3. (a) The Lease constitutes the entire agreement between Tenant and
Borrower with respect to the Premises, has not been modified changed, altered or
amended and is in full force and effect in the form (CHOOSE ONE) [attached
----------
as/described in] Exhibit A. There are no other agreements, written or oral which
---------
affect Tenant's occupancy of the Premises.
(b) All insurance required of Tenant under the law has been provided
by Tenant and all premiums have been paid.
(c) To the best knowledge of Tenant, no party is in default under the
Lease. To the best knowledge of Tenant, no event has occurred which, with the
giving of notice or passage of time, or both, would constitute such a default.
(d) The interest of Tenant in the Lease has not been assigned or
encumbered. Tenant is not entitled to any credit against any rent or other
charge or rent concession under the Lease except as set forth in the Lease. No
rental payments have been made more than one month in advance.
4. All contributions required to be paid by Borrower to date for
improvements to the Premises have been paid in full and all of Borrower's
obligations with respect to tenant improvements have been fully performed.
Tenant has accepted the Premises, subject to no conditions other than those set
forth in the Lease.
5. Neither Tenant nor any guarantor of Tenant's obligations under the
Lease is the subject of any bankruptcy or other voluntary or involuntary
proceeding, in or out of court for the adjustment of debtor-creditor
relationships.
6. (a) As used here, "Hazardous Substance" means any substance, material
or waste (including petroleum and petroleum products) which is designated,
classified or regulated as being "toxic" or "hazardous" or a
EXHIBIT G
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<PAGE>
"pollutant" or which is similarly designated, classified or regulated, under
any federal state or local law, regulation or ordinance.
(b) Tenant represents and warrants that it has not used, generated,
released, discharged, stored or disposed of any Hazardous Substances on, under,
in or about the Building or the land on which the Building is located (IF
--
APPLICABLE) [, other than Hazardous Substances used in the ordinary and
- ----------
commercially reasonable course of Tenant's business in compliance with all
applicable laws). (IF APPLICABLE) [Except for such commercially reasonable use
-------------
by Tenant,] Tenant has no actual knowledge that any Hazardous Substance is
present, or has been used, generated, released, discharged, stored or disposed
of by any party, on, under, in or about such Building or land.
7. Tenant hereby acknowledges that Borrower (CHOOSE ONE) [intends to
----------
encumber/has encumbered] the property containing the Premises with a Deed of
Trust in favor of Bank. Tenant acknowledges the right of Borrower, Bank and any
and all of Borrower's present and future lenders to rely upon the statements and
representations of Tenant contained in this Certificate and further acknowledges
that any loan secured by any such Deed of Trust or further deeds of trust will
be made and entered into m material reliance on this Certificate.
8. Tenant hereby agrees to furnish Bank with such other and further
estoppel as Bank may reasonably request.
____________________________
By:_________________________
Name:_______________________
Title:______________________
EXHIBIT G
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<PAGE>
EXHIBIT H
---------
RECORDING REQUESTED BY
AND WHEN RECORDED MAIL TO:
___________________________________
___________________________________
___________________________________
Attention:_________________________
================================================================================
(Space Above For Recorders Use)
SUBORDINATION, NONDISTURBANCE
AND ATTORNMENT AGREEMENT
------------------------
This SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT
("Agreement"), dated as of _______________________, 19___, executed by _________
("Tenant"), and CATELLUS DEVELOPMENT CORPORATION, a Delaware corporation
("Landlord"), in favor of ______________________, a national banking
association, as Agent ("Lender"), is entered into with reference to the
following facts:
A. Tenant is presently leasing certain premises (the "Premises")
comprising a portion of the real property (the "Property") described in Exhibit
-------
A. attached hereto and incorporated herein by this reference, pursuant to a
- -
lease (as modified from time to time, the "Lease") dated _____________________,
19___, between Tenant and Landlord.
B. Lender, has made or agreed to make a loan or loans to Landlord
(the "Loan") and, in connection therewith, Landlord has executed a deed of trust
(as modified from time to time, the "Deed of Trust") and an assignment of leases
(the "Assignment of Leases"), assigning to Lender Landlord's interests in the
Property, including Landlord's interests as landlord under the Lease.
IN CONSIDERATION OF THE FOREGOING, and for other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Tenant and Landlord hereby agree as follows.
A G R E E M E N T:
- - - - - - - - -
1. Certifications by Tenant, Tenant hereby certifies to Lender as
follows:
1.1 The Lease is in full force and effect, Tenant is presently
occupying the Premises pursuant thereto, and Tenant has not transferred its
interests in the Lease or agreed to do so.
1.2 A true and complete copy of the Lease, together with all
amendments, supplements and other modifications thereto (oral or written), has
been delivered to Lender by Tenant prior to the execution of this Agreement,
________________ is attached hereto as Exhibit B.
---------
1.3 No rent or other amount has been prepaid under the Lease, except
as follows (if none, state "None"):
EXHIBIT H
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<PAGE>
_______________________________________________________________________________
_______________________________________________________________________________
1.4 No deposit of any nature has been made in connection with the
Lease (other than deposits the nature and amount of which are expressly
described in the Lease), except as follows (if none, state "None"):
_______________________________________________________________________________
_______________________________________________________________________________
1.5 Tenant is currently paying base rent under the Lease in the
amount of $________ per month. Tenant's estimated share of common area charges,
insurance, real estate taxes and administrative and overhead charges is
currently being paid at the rate of $_________ per month. Tenant has paid a
total of $___________ of percentage rent for the 12-month period ending
_________________, 19__.
1.6 The Lease is the only agreement between Landlord and Tenant with
respect to the Premises, and Tenant claims no rights with respect to the
Premises or the Property other than those set forth in the Lease, except as
follows (if none, state "None").
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
1.7 To the best of Tenant's knowledge, there are no existing defenses
or offsets against amounts due or to become due to Landlord under the Lease, and
there are no existing uncured defaults by Landlord under the Lease, nor has any
event occurred which, with the passage of time or the giving of notice or both,
would constitute such a default, except as follows (if none, state "None"):
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
1.8 Landlord has performed all of its obligations to Tenant with
respect to the construction of improvements; Landlord has offered no free rent
period, building allowance or similar concession(s) to induce Tenant to enter
into the "Lease" except as set forth in the Lease; and Landlord has no other
obligations to Tenant in connection with the Lease, matured or not yet matured,
except as set forth in the Lease.
1.9 To the best of Tenant's knowledge, no circumstance presently
exists, and no event has occurred, that would prevent the Lease from becoming
effective or would entitle Tenant to terminate the Lease.
2. Consent to Assignment. Tenant understands that Landlord has assigned
---------------------
or will assign the Lease to Lender in connection with the Loan, and Tenant
hereby consents to such assignment. Tenant is not aware of any prior assignment
of the Lease by Landlord, except as follows (if none, state "None"):
_______________________________________________________________________________
_______________________________________________________________________________
3. No Modification of Lease; Lender Consents. Tenant shall not, without
-----------------------------------------
Lender's prior written consent, (a) amend, supplement, terminate (except to the
extent permitted under Section 4, below) or otherwise modify the Lease; or (b)
accept (and/or act in reliance on) the release, relinquishment or waiver by
Landlord of any right with respect to the Lease. Any such termination
modification, acceptance or other action taken without such prior consent shall,
at Lender's option, be void. Without limiting the generality of the foregoing,
(i) any
EXHIBIT H
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<PAGE>
assignment or subletting by Tenant (or by any assignee or subtenant) which
requires Landlord's consent shall also require Lender's consent, which consent
shall not be unreasonably withheld and shall at Lender's option, be void if such
consent is not obtained, and (ii) any alteration to the Premises which requires
Landlord's consent shall also require Lender's consent, which consent shall not
be unreasonably withheld. Tenant shall not pay any rent or other amount due to
Landlord under the Lease more than 10 days in advance of the due date.
4. Lender Cure Rights. Tenant shall not exercise any termination
------------------
remedy upon a default by Landlord with respect to the Lease unless Tenant has
first given Lender written notice of such default (at the address shown below or
any other address hereafter supplied to Tenant by Lender) and such default is
not cured within 30 days thereafter; provided that, if such default is
nonmonetary, is curable by Lender, and (a) is of such a nature that it cannot
reasonably be cured within 30 days or (b) the cure thereof by Lender requires
Lender to have possession of the Property, then in either such event Tenant
shall not exercise any termination remedy so long as Lender is diligently taking
all steps required for Lender to mm the default (including pursuit of possession
of the Property, to the extent required).
ADDRESS FOR NOTICES TO LENDER.
BANK OF AMERICA N.T.&S.A.
Agency Management Services #5596
1455 Market Street, 13th Floor
San Francisco, California 94103
Attention: Donald Moses, Vice President
with a copy to:
Bank of America N.T.&S.A.
SF National Accounts #9105
50 California Street, 11th Floor
San Francisco, California 94111
Attention: Janice Sears, Vice President
5. Payments to Lender. Tenant shall make all payments under the Lease to
------------------
Lender upon receiving a direction to pay from Lender, and shall comply with any
such direction to pay without determining whether any default exists with
respect to the Loan.
6. Agreements by Landlord. Landlord hereby agrees as follows:
----------------------
6.1 Tenant shall have no liability to Landlord for any amount
otherwise owing to Landlord under the Lease in the event that (a) Tenant
receives a written demand from Lender to pay such amount to Lender and (b)
Tenant thereafter pays such amount to Lender.
6.2 Tenant shall be entitled to assume that any such demand by Lender
is valid and shall be under no obligation, and shall have no right, to inquire
as to its validity, nor shall any claim by Landlord that such demand is invalid
affect Tenant's right and obligation to pay all amounts demanded to Lender and
thereupon be discharged of Tenant's obligation to pay such amounts to Landlord.
7. Subordination. All of Tenant's rights and interests with respect to
-------------
the Premises and the Property under the Lease and all related documents
(including, without limitation, any options to purchase and rights of first
offer and first refusal) are and shall remain subject and subordinate to
Lender's rights and interests in the Property under the Deed of Trust, the
Assignment of Leases and all related loan and security documents, and to all
amendments, supplements and other modifications now or hereafter executed with
respect thereto, including without limitation modifications that substantially
increase the obligations to Lender to which Tenant's interests are subordinated.
Without limiting the generality of the foregoing, the provisions of the
above-described loan and
EXHIBIT H
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<PAGE>
security documents shall prevail over any inconsistent provisions of the Lease
relating to the disposition of insurance and condemnation awards.
8. Nondisturbance and Attornment. In the event of any judicial or
-----------------------------
nonjudicial foreclosure of the Deed of Trust or transfer by deed in lieu
thereof, the Lease shall not terminate, nor shall Tenant's rights thereunder be
disturbed, except in accordance with the terms of the Lease or any amendment or
other applicable agreement executed by Tenant with respect thereto; provided,
however, that the transferee of Landlord's interests pursuant to such
foreclosure or other transfer shall not be (a) liable for any act or omission of
any prior landlord under the Lease (including, without limitation, the breach of
any representation or warranty made by any prior landlord unless such breach is
caused by such transferee), (b) obligated to cure any default of any prior
landlord under the Lease (other than nonmonetary default that remain uncured at
the time of foreclosure) 1 (c) subject to any offsets or defenses which Tenant
is entitled to assert against any prior landlord under the Lease, (d) bound by
any payment of any amount owing under the Lease to any prior landlord which was
made more than 10 days prior to the date due, (e) bound by any amendment or
other modification to the lease which was made subsequent to the date of this
Agreement without the prior written consent of Lender (which shall not be
unreasonably withheld) and which could adversely affect the Landlord's
interests, or (f) liable for the return to Tenant of any security or other
deposit paid by Tenant to any prior landlord under the Lease except to the
extent that such transferee actually receives such deposit. Tenant shall attorn
to and accept any such transferee as the landlord under the Lease for the
unexpired balance of the Lease term, and shall execute any document reasonably
requested by such transferee to evidence such attornment.
9. Further Assurances. Each party hereto shall execute, acknowledge and
------------------
deliver to each other party all documents, and shall take all actions,
reasonably required by such other party from time to time to confirm or effect
the matters set forth herein, or otherwise to carry out the purposes of this
Agreement.
10. Reference and Arbitration.
-------------------------
10.1 Mandatory Arbitration. Any controversy or claim between or
---------------------
among the parties that arises from or relates to this Agreement (including any
controversy or claim based on or arising from an alleged tort) shall at the
request of any party be determined by arbitration. The arbitration shall be
conducted in accordance with the United States Arbitration Act (Title 9, U S.
Code), notwithstanding any choice of law provision in this Agreement, and under
the Commercial Rules of the AAA. The arbitrator(s) shall give effect to statutes
of limitation in determining any claim. Any controversy concerning whether an
issue is abitrable shall be determined by the arbitrator(s). Judgment upon the
arbitration award may be entered in any court having jurisdiction. The
institution and maintenance of an action for judicial relief or pursuant of a
provisional or ancillary remedy shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration if any other party contests such action for judicial relief.
10.2 Real Property Collateral. Notwithstanding the provisions of
------------------------
Section 10. 1, no controversy or claim shall be submitted to arbitration without
the consent of all parties if, at the time of the proposed submission, such
controversy or claim arises from or relates to an obligation that is secured by
real property collateral.
10.3 Provisional Remedies, Self-Help and Foreclosure. No provision of
-----------------------------------------------
this Section 10 shall limit the right of any party to this Agreement to exercise
self-help remedies such as setoff, foreclosure against or sale of any real or
personal property collateral or security, or to obtain provisional or ancillary
remedies (including provisional remedies such as claim and delivery and
ancillary remedies such as the issuance of temporary restraining orders and
preliminary injunctions pending submission of any action or cause of action to
judicial reference or arbitration as otherwise required hereunder) from a court
of competent jurisdiction before, after, or during the pendency of any
arbitration or other proceeding. The exercise of a remedy does not waive the
right of any party to resort to arbitration or reference.
11. Attorneys' Fees. In the event that any litigation, reference or
---------------
arbitration shall be commenced concerning this Agreement, the party prevailing
in such proceeding shall be entitled to recover, in addition to such
EXHIBIT H
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<PAGE>
other relief as may be granted, its reasonable costs and expenses, including,
without limitation, reasonable attorneys, fees and costs (including the
allocated costs for in-house counsel), whether or not taxable, as awarded by a
court of competent jurisdiction, referee or arbitrator.
12. Reliance by Lender. Tenant understands that Lender will rely upon this
------------------
Agreement in making the Loan and/or in entering into certain agreements and/or
granting certain consents in connection therewith. Notice of acceptance of this
Agreement by Lender is waived.
13. Miscellaneous. This Agreement shall bind, and shall inure to the
-------------
benefit of, the successors and assigns of the parties. This document may be
executed in counterparts with the same force and effect as if the parties had
executed one instrument, and each such counterpart shall constitute an original
hereof. This Agreement shall be governed by the laws of the State of Texas.
IN WITNESS WHEREOF, Tenant and Landlord have caused this Agreement to be
duly executed as of the date first written above.
"Tenant"
______________________________________
a ____________________________________
By:___________________________________
Name:______________________________
Its:_______________________________
Date:_________________________________
"Landlord"
Landlord consents to, and agrees CATELLUS DEVELOPMENT CORPORATION,
to be bound by, the provisions a Delaware corporation
of Sections 4 through 13,
inclusive, of the foregoing
Agreement.
By:___________________________________
Name:_______________________________
Its:________________________________
Date:_________________________________
EXHIBIT H
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<PAGE>
EXHIBIT A
---------
DESCRIPTION OF PROPERTY
-----------------------
EXHIBIT H
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<PAGE>
EXHIBIT I
---------
WAIVER OF RIGHTS UNDER
THE DECEPTIVE TRADE PRACTICES - CONSUMER PROTECTION ACT
-------------------------------------------------------
Landlord and Tenant waive their rights under the Deceptive Trade Practices-
Consumer Protection Act, Section 17.41 et seq,. Business & Commerce Code, a law
--------
that gives consumers special rights and protections. Each, after consultation
with an attorney of its selection, voluntarily consents to this waiver.
Landlord: CATELLUS DEVELOPMENT CORPORATION,
a Delaware corporation
By:______________________________
Name:_________________________
Its:__________________________
Tenant: ASD SYSTEMS,
a Texas limited partnership
By:______________________________
Name:_________________________
Its:__________________________
Tenant Counsel: ARTER & HADDEN
By:______________________________
Name:_________________________
Its:__________________________
EXHIBIT I
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<PAGE>
EXHIBIT J
GUARANTY OF LEASE
-----------------
THIS GUARANTY OF LEASE ("Guaranty) is made as of this __ of October,
1997, by NORMAN CHARNEY ("Guarantor") in favor of CATELLUS DEVELOPMENT
CORPORATION, a Delaware corporation ("Landlord") in connection with that certain
Multi-Tenant Industrial Triple Lease (the "Lease") of substantially even date
herewith pursuant to which Landlord is to lease to ASD SYSTEMS, a Texas limited
partnership ("Tenant") those certain premises generally referred to as a portion
of that certain industrial warehouse building located in the City of Garland,
State of Texas, which premises consist of approximately 112,881 rentable square
feet of such building, as more particularly described in the Lease (the
"Premises").
A. As a condition to Landlord's entering into the Lease, Landlord
requires Guarantor to guarantee the full performance of the obligations of
Tenant accruing under the Lease.
B. Guarantor has agreed to provide this Guaranty to induce Landlord
to enter into the Lease with Tenant.
NOW, THEREFORE, in consideration of the execution of the Lease by
Landlord, and other good and valuation consideration, the receipt of which is
hereby acknowledged, Guarantor hereby agrees that:
1. Guarantor unconditionally, absolutely and to the same extent as
if Guarantor had signed the Lease as tenant, assumes all liabilities,
obligations and duties of Tenant accruing under the Lease, and guarantees to
Landlord and Landlord's successors and assigns the full prompt and complete
performance of each and all of the terms, covenants, conditions and provisions
of the Lease to be kept and performed by Tenant or Tenant's successors or
assigns, including the payment of all rental and other charges to accrue
thereunder and all damages that may arise as a consequence of the nonperformance
thereof, provided that Guarantor's obligations to Landlord under this Guaranty
shall not exceed the Guaranty Amount (as defined below) plus any obligations of
Guarantor arising under Section 6 below. Initially, the Guaranty Amount shall be
the sum of Five Hundred Thousand Dollars ($500,000). On the first anniversary of
the Commencement Date (as defined in the Lease) and on each anniversary of the
Commencement Date thereafter, the Guaranty Amount shall be reduced by the sum of
One Hundred Thousand Dollars ($100,000) provided that on each respective
anniversary of the Commencement Date there exists no Event of Default (as
defined in the Lease) which is continuing. In the event there is an Event of
Default on any anniversary of the Commencement Date (regardless of whether or
not Landlord has provided Tenant with notice of such default), the Guaranty
Amount shall not be reduced and shall remain the amount in effect for the prior
Lease Year (as defined in the Lease).
All amounts received by Landlord from any party (other than Guarantor)
in payment of any amounts due under the Lease shall be applied first, to amounts
due under the Lease which are not guaranteed pursuant to the terms hereof and
then to amounts due under the Lease which are guaranteed pursuant to the terms
hereof. In addition, if Landlord receives anything of value other than cash in
payment of any amounts due under the Lease, then such value shall be applied in
the order of priority set forth in the sentence immediately above.
2. The liability of Guarantor under this Guaranty shall be
unconditional and primary, and in relation to any right of action which shall
accrue to Landlord under the Lease, Landlord may, at its option, proceed from
time to time solely against Guarantor or jointly against Guarantor and any other
person or entity without regard to Tenant's ability to perform and without first
commencing any action, exhausting any remedy, obtaining any judgment or
proceeding in any way against Tenant or any other person or entity; and suit may
be brought and maintained against Guarantor by Landlord to enforce any
liability, duty or obligation guaranteed hereby without joinder of Tenant or any
other person or entity.
EXHIBIT J
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<PAGE>
3. This Guaranty shall continue during the entire term of the Lease
and any renewals or extensions thereof and thereafter until Tenant ad Tenant's
successors or assigns have fully discharged all of their obligations there
under, and this Guaranty shall not be diminished by any payment of rent or
performance of the terms, covenants or conditions of Tenant by Guarantor until
all of Tenant's obligations under the Lease have been fully discharged.
4. Until all the covenants and conditions in the Lease to be
performed and observed by Tenant or Tenant's successors or assigns are fully
performed and observed, Guarantor: (a) shall have no right of subrogation or any
other right to enforce any remedy against Tenant or Tenant's successors or
assigns by reason of any payment or performance thereunder by Guarantor, and (b)
subordinates any liability or indebtedness of Tenant or Tenant's successors or
assigns now or hereafter held by Guarantor to all obligations of Tenant or
Tenant's successors or assigns to Landlord under the Lease.
5. Guarantor agrees that Guarantor's obligations under the terms of
this Guaranty shall not be released, diminished, impaired, reduced or affected
by any limitation of liability or recourse under the Lease or by the occurrence
of any one or more of the following events: (a) the taking or accepting of any
other security or guaranty in connection with the Lease; (b) any release,
surrender, exchange, subordination, or loss of any security at any time existing
or purported or believed to exist in connection with the Lease; (c) the death.
insolvency, bankruptcy, disability, dissolution, termination, receivership,
reorganization or lack of corporate, partnership or other power of Tenant,
Guarantor, or any party at any time liable for payment or performance pursuant
to the Lease, whether now existing or hereafter occurring; (d) any assignment or
subletting by Tenant or Tenant's successors or assigns whether or not permitted
pursuant to the terms of the Lease or otherwise approved by Landlord; (e)
amendment of the Lease or any renewal, extension, modification or rearrangement
of the terms of payment or performance pursuant to the Lease either with or
without notice to or consent of Guarantor, or any adjustment, indulgence,
forbearance, or compromise that may be granted or given by Landlord to Tenant,
Guarantor or any other party at any time liable for payment or performance
pursuant to the Lease; (f) any neglect delay, omission, failure, or refusal of
Landlord to take or prosecute any action for the collection or enforcement of
the Lease or to foreclose or take or prosecute any action to foreclose upon any
security therefor or to take or prosecute any action in connection with the
Lease; (g) any failure of Landlord to notify Guarantor of any renewal extension,
rearrangement , modification, assignment of the Lease or subletting of the
Premises or any part thereof, or of the release of or change in any security or
of any other action taken or refrained from being taken by Landlord against
Tenant or of any new agreement between Landlord and Tenant, it being understood
that Landlord shall not be required to give Guarantor any notice of any kind
under any circumstances with respect to or in connection with the Lease; (h) the
unenforceability of all or any part of the law against Tenant, it being agreed
that Guarantor shall remain liable hereon regardless of whether Tenant or any
other person be found not liable on the Lease, or any part thereof, for any
reason; or (i) any payment by Tenant to Landlord being held to constitute a
preference under the bankruptcy laws or for any other reason Landlord being
required to refund such payment or pay the amount thereof to someone else.
6. In the event suit or action is brought upon or in connection with
the enforcement of this Guaranty, Guarantor shall pay reasonable attorneys' fees
and all other expenses and court costs incurred by Landlord in connection
therewith.
7. This Guaranty shall be binding upon the heirs, legal
representatives, successors and assigns of Guarantor and shall inure to the
benefit of the heirs, legal representatives, successors and assigns of Landlord.
8. Guarantor represents that Guarantor is the owner of a direct
interest in Tenant and that Guarantor will receive a direct or indirect benefit
from the Lease.
9. Guarantor hereby waives all rights, if any, to which it may
otherwise be entitled as a surety pursuant to the provisions of Chapter 34 of
the Texas Business and Commerce Code.
EXHIBIT J
---------
Page 2
<PAGE>
10. The laws of the State of Texas shall govern the validity,
enforcement and interpretation of this Guaranty. The obligations of the parties
are performable and venue for any legal action arising out of this Guaranty
shall lie in Dallas County, Texas.
IN WITNESS WHEREOF, Guarantor has executed this Guaranty as of the 31
day of October, 1997.
"Guarantor" /S/ Norman Charney
------------------------------------
NORMAN CHARNEY
EXHIBIT J
---------
Page 3
<PAGE>
DECLARATION OF COVENANTS, CONDITIONS AND
RESTRICTIONS
Declarant desires that the Property be held, sold, transferred, conveyed
and occupied subject to the covenants, conditions and restrictions contained in
this Declaration which are created for the purpose of enhancing and protecting
the value, quality, desirability and attractiveness of the Property and of any
other property owned by Declarant surrounding, or in the vicinity of, the
Property, including without limitation, the property described on Exhibit "B",
attached hereto and incorporated herein by reference for all purposes
(collectively, the "Project").
ARTICLE I
DEFINITIONS
-----------
The following words when used herein shall have the following meanings:
(a) "Acceptable Variety" - any indigenous variety of tree acceptable
to Approving Agent, but expressly excluding Ash, Mimosa, Mulberry, Poplar,
Sycamore or similar fast-growing, short-lived trees.
(b) "Applicable Law" - all governmental laws, statutes, ordinances,
codes, rules and regulations applicable to the development, use, or
occupancy of the Propertyand/or the Project, including any improvements
thereon.
(c) "Approving Agent" - Catellus Development Corporation, a Delaware
corporation, its successors, assigns or designees.
(d) "Declarant" - Catellus Development Corporation, a Delaware
corporation, and its successors and assigns.
(e) "Declaration" - this Declaration of Covenants, Conditions &
Restrictions, as amended from time to time pursuant to the terms contained
herein.
(f) "Design Development Plan" - plans and specifications which
include: (i) a site plan showing the location, dimensions and orientation
to the Property boundary lines and Property setback lines of all proposed
Improvements, means of ingress and egress and driveway and traffic
patterns; (ii) elevation designs of and description of the height and size
of each building and structure; (iii) a general description of the exterior
materials to be used for all Improvements; (iv) the number, type and
location of parking spaces; (v) a general description of the type, number,
size and location of all exterior signs; and (vi) a schedule showing all
proposed uses by gross floor area and compliance with the parking
requirements contained herein.
EXHIBIT K
<PAGE>
(g) "Exterior Plan" - drawings and details of all exterior surfaces
showing elevations and the color, quality, type and location of exterior
construction materials.
(h) "Governmental Authority" - any federal, state, county, municipal
or other governmental authority having jurisdiction over any aspect of the
development, use or occupancy of the Property or Improvements.
(i) "Improvement" or Improvements" - all structures or other
improvements to the Property of any kind whatsoever, whether above or below
grade, including, but not limited to, buildings, utility installations,
storage, loading and parking facilities, fences, walls, poles, walkways,
driveways, landscaping, ponds, lakes, signs, site lighting, site grading,
drainage systems and earth movement, and any exterior additions, changes,
or alterations thereto.
(j) "Landscaping Maintenance" - the repair, maintenance and
replacement of all Landscaping Work necessary from time to time to maintain
all Landscaping Work in good condition.
(k) "Landscaping Plan" - a plan for landscaping the Property prepared
by a licensed professional landscape architect approved in writing by
Approving Agent.
(1) "Landscaping Work" - the installation of all plantings and
improvements contained in a Landscaping Plan.
(m) "Lighting Plan" - plans and specifications showing the type,
style, size, candle power and location of all exterior lighting fixtures.
(n) "Net Square Feet" - the square feet contained within the
boundaries of the Property less all square feet contained within dedicated
rights-of-way for public streets and alleys.
(o) "Occupant" or "Occupants" - any party or parties legally entitled
to occupy and use any portion of the Property or an Improvement.
(p) "Owner" or "Owners" - the record owner or owners of the fee
simple title to the Property, but not a mortgagee unless and until such
mortgagee has acquired title to the fee to the Property pursuant to
foreclosure, deed in lieu of foreclosure, or other enforcement proceedings.
(q) "Plans" - the Landscaping Plan, the Design Development Plan, the
Exterior Plan, the Lighting Plan, the Signage Plan, and all other plans,
specifications and information requested by Approving Agent to enable
EXHIBIT K
2
<PAGE>
Approving Agent to determine the location, height, size, scale, design,
character, style and appearance of any proposed Improvement or
Improvements.
(r) "Property" - the real property described on Exhibit A.
(s) "Property Line" or "Property Lines" - boundary or boundaries of
the Property created by a certified survey or plat approved by Declarant.
(t) "Signage Plan" - plans and specifications showing the type,
style, size, color, graphics, construction materials, manner of
illumination and location of all exterior signs and signage.
ARTICLE II
GENERAL PROVISIONS
------------------
2.01 Establishment of Covenants, Conditions and Restrictions. Declarant
-------------------------------------------------------
does hereby declare that the Property shall be held, sold, transferred, conveyed
and occupied subject to the covenants, conditions and restrictions contained
herein, which shall be binding on all Owners and Occupants and any other parties
having or acquiring any right, title or interest in or to any portion of the
Property and which shall inure to the benefit of Declarant.
2.02 Purpose of Covenants. Conditions and Restrictions. The purpose of the
-------------------------------------------------
covenants, conditions and restrictions contained herein is to: (i) protect
Declarant against the improper development and use of the Property; (ii) prevent
the erection on the Property of Improvements which are constructed of inferior
or unsuitable materials;(iii) insure compatibility of design of Improvements
within the Project; (iv) secure and maintain sufficient setbacks and space
between buildings to create an aesthetically pleasing environment; (v) provide
for proper landscaping and for the maintenance thereof; and (vi) in general,
encourage construction of attractive, high-quality, permanent Improvements that
will promote the general welfare of all Owners and Occupants and enhance the
value of the Property and Project.
2.03 Permitted Uses. The Property may be used only for the following
--------------
(provided such use complies with Applicable Law): offices; office-showrooms;
office-warehouses; assembling; processing; light manufacturing; wholesaling;
research and development; servicing and distribution; distribution centers;
shopping centers; warehouse distribution center and wholesale over-the-counter
and shipped sales businesses and other commercial uses compatible with the
foregoing uses, including without limitation, hotels, restaurants, gasoline
service stations, and shops for the retail sale of merchandise. Uses which are
neither specifically prohibited, nor specifically authorized, by this
Declaration may be permitted if a proposed use plan describing such proposed use
in detail is submitted to, and approved in writing by, Approving Agent.
EXHIBIT K
3
<PAGE>
2.04 Prohibited Uses. Notwithstanding any provision to the contrary
---------------
contained herein, no portion of the Property shall be used for any purpose which
is offensive by reason of odor, fumes, dust, smoke, noise or pollution, or which
shall increase the danger to any portion of the Project or any other surrounding
properties of fire or explosion damage, or for any purpose which ma be or become
an annoyance or nuisance, or in any violation of any Applicable Law.
Specifically, but not in limitation of the preceding, the following uses shall
not be permitted on any portion of the Property: (i) dumping disposal,
incineration or reduction of garbage, sewage, offal, dead animals or refuse, or
the construction or operation of sewage treatment plants; (ii) junk yards or
recycling facilities; (iii) commercial excavation of building or construction
materials (but not including excavation in connection with the construction of
Improvements); (iv) refining of petroleum or of petroleum products; (v)
distillation of bones; (vi) smelting of iron, tin, zinc or other ores; (vii) fat
rendering; (viii) stockyard or slaughter of animals; (ix) cemeteries; (x) labor
camps or migrant worker camps; or (xi) jails or honor farms.
ARTICLE III
REGULATION OF IMPROVEMENTS
--------------------------
3.01 General. No Improvement shall be constructed, erected, placed,
-------
altered, maintained or permitted on the Property unless it complies with the
provisions of this Declaration and is approved by Approving Agent in the manner
provided in this Declaration.
3.02 Building Standards. All elevations of any Improvements shall be
------------------
comprised of high quality brick, stone, masonry or exposed aggregate tilt slab
construction. No other materials, including corrugated aluminum, asbestos, iron,
steel or other metal may be used on the exterior of any Improvements.
3.03 Roof Top Equipment. All fans, vents, cooling towers, skylights and any
------------------
equipment located on the roof of any Improvement shall be effectively screened
from public view.
3.04 Underground Utilities. Except for special street lighting or other
---------------------
aerial facilities which may be required by any Governmental Authority, or which
may be installed by Declarant pursuant to Declarant's development plan, no
aerial utility facilities of any type (except meters, risers, service pedestals,
transformers and other surface installations necessary to maintain or operate
appropriate underground facilities) shall be erected or installed on the
Property by a utility company, any Owner (except Declarant), any Occupant or any
other party. All utility service facilities (including, but not limited to,
water, sewer, gas, electricity and telephone) shall be buried underground unless
installed by Declarant or at Declarant's direction or unless otherwise approved
in writing by Approving Agent or unless otherwise required by any Governmental
Authority or by the applicable utility company. To the extent reasonably
practicable, all utility meters, equipment, air conditioning compressors, air
conditioning and heating units, and similar
EXHIBIT K
4
<PAGE>
items shall be visually screened and located in areas not visible from other
portions of the Project or Improvements. Notwithstanding anything to the
contrary hereinabove, aerial facilities connecting electrical service to the
back of buildings from overhead electrical service lines located along the back
Property Line of the Property shall be permitted.
3.05 Setback Lines. All Improvements shall comply with Applicable Law and
-------------
with the following building setback lines:
(a) Front Setbacks:
--------------
All Improvements shall be set back at least twenty-five feet (25")
from the back of the street curbline along Jupiter Road and Regency
Crest Drive.
(b) Side Setbacks:
-------------
All Improvements shall be set back at least ten feet (10") from side
Property Lines. If a side Property Line fronts an existing or then
proposed public street, the applicable front setbacks described in
subsection (a) of this Section 3.05 shall take precedence. Side
setbacks should be arranged to minimize unusable land and areas
difficult to maintain and should be sufficiently large to provide
room for convenient fire and police access.
(c) Rear Setbacks:
-------------
No specific minimum setback from rear Property Lines is required,
but the placement of Improvements shall comply with Applicable Law,
including but not limited to, laws pertaining to access for fire and
police vehicles.
(d) Exclusions from Setback Restrictions:
------------------------------------
Notwithstanding the foregoing, if not prohibited by Applicable Law,
the following Improvements may be located in setback areas: (i)
underground improvements; (ii) steps, sidewalks, driveways and
curbs; (iii) plants, fences, hedges and landscaping provided that
none of such plants, fences, hedges or landscaping exceed a height
of four feet (4") above level grade, except Acceptable Variety trees
of not less than five-inch caliper; and (iv) parking facilities
which comply with the requirements contained in Section 3.07.
3.06 Building Density. No building shall cover more than 50 percent of the
----------------
area contained within the Property on which such building is situated.
3.07 Parking. The Owner of the Property shall provide the number of parking
-------
spaces required by any Governmental Authority and Applicable Law in connection
with the Improvements situated on the Property, but the parking spaces provided
shall not be less than the following: (i) one space for each 1,000 square feet
of gross floor area contained within Improvements utilized for warehouse or
distribution uses; (ii) one space for each 500 square feet of gross floor area
contained within Improvements utilized for production or manufacturing uses,
(iii) one space for each 300 square feet of gross floor
EXHIBIT K
5
<PAGE>
area contained within Improvements utilized for office uses; and (iv) the number
of spaces per gross floor area established from time to time by Approving Agent
for uses, other than those enumerated in foregoing clauses (i), (ii) and (iii).
No parking shall be permitted in any street, alley or other right-of-way or in
any utility easement. All parking facilities shall be constructed of concrete
and shall include curbs and gutters. Unless prohibited by Applicable Law,
parking facilities may be situated in the front of Improvements and within
building setback areas; provided that: (i) no parking shall be allowed within
ten feet of the right-of-way line of any street, and (ii) any parking facility
located within applicable building setback areas described in this Declaration
shall be screened from view from streets by at least a two foot high undulating
landscaped earthen berm which shall be included in the Landscaping Plan for the
Property. Parking of trucks, truck trailers and fleet vehicles shall be limited
to the rear portion of the Property and shall be screened if required by
Approving. Agent.
3.08 Landscaping. Areas of the Property not otherwise improved shall be
-----------
landscaped in accordance with a Landscaping Plan. The Landscaping Plan shall
include and provide for: (i) drawings and specifications with respect to lawns,
shrubs, decorative plantings and trees and the size and location thereof, (ii)
an underground sprinkling irrigation system; (iii) screening of all storage,
loading and unloading areas; (iv) landscaping or other appropriate screening
dividing incompatible land uses; (v) lighting of buildings and motor vehicular
parking areas and all other areas where lighting is to be used; and (vi) all
other matters required for inclusion in the Landscaping Plan by Approving Agent.
A Landscaping Plan generally shall provide for: (i) landscaping of a minimum of
five percent of the area in front of all buildings; (ii) landscaping of the
entire area between parking areas and/or buildings and the back of the street
curbline on street frontage, which shall include at least one Acceptable Variety
tree of not less than five inch caliper for each 50 feet of street frontage
placed at irregular intervals along such street frontage and with the remainder
of such area being covered with suitable lawn grasses, ground covers, ornamental
plantings or other landscaping treatment approved by Approving Agent; (iii)
undulating landscaped earthen berms of at least three feet in height screening
all loading and dock areas from view from streets or other rights-of-way; (iv)
undulating landscaped earthen berms of at least two feet in height screening any
parking facility located within applicable building set back areas from view
from streets; and (v) the preservation of existing trees to the extent
reasonably practicable. All Landscaping Work shall be completed within 30 days
after the date of substantial completion of the first building located on the
Property. The Owner of the Property shall be responsible for the performance of
such Owner's Landscaping Maintenance.
3.09 Signs.
-----
(a) All signs shall be of a size and design to preserve the quality and
atmosphere of the Property and all signs may not: (i) be installed to
project above the roof line of a building or be located in front of a
building setback line; (ii) be of unusual size or design when compared to
the Improvements situated on the Property; (iii) be located in or painted
on any window; and (iv) contain or utilize any flashing, blinking,
intermittent or
EXHIBIT K
6
<PAGE>
moving light or source of illumination; provided, however, that any such sign or
signs may be illuminated with floodlights if prior written approval for such
illumination is obtained from Approving Agent. All signs, either temporary or
permanent, whether free standing or affixed to any structure, must be approved
in writing by Approving Agent prior to installation.
(b) Approving Agent may approve a building standard sign program in
writing. If Approving Agent approves a building standard sign program in
writing, signs installed in strict conformance with the requirements of such
approved program will not be required to have separate approval, but any sign
which deviates from such approved program may not be installed until approved in
writing by Approving Agent.
(c) Temporary Signs shall be permitted during construction and when the
Property is offered for sale or lease provided that the written approval of
Approving Agent is first obtained.
3.10 Accessory Building, Open Storage and Screening of Objects.
---------------------------------------------------------
(a) No accessory building shall be constructed on the Property.
(b) No article, good, material, incinerator, storage tank or equipment may
be stored on the Property in the open or exposed to public view or view from
adjacent buildings. If it shall become necessary to store or keep articles,
goods, materials or equipment on the Property in the open, then such storage may
be permitted with the prior written approval of Approving, Agent, provided that
the area used shall be enclosed with a screening fence and/or landscaping
treatment of a design and materials approved in writing by Approving Agent.
Notwithstanding the setback provisions set forth herein, any screening fence
shall be of a height at least equal to that of the articles, goods, materials,
or equipment to be stored and must fully shield such articles, goods, materials.
or equipment from both public view and view from adjacent buildings. Any open
storage must be located on the rear one-third of the Property. In no event shall
any article, good, material, incinerator, storage tank or equipment be stored on
the Property within 50 feet of any street.
(c) All water towers, trash bins, HVAC units, processing equipment, stand
fans, skylights, cooling towers, communication towers, vents, security fences
and any other structures or equipment located on the Property shall be
architecturally compatible with other Improvements and/or effectively shielded
from view from any public or private dedicated street by an architecturally
sound method. The construction or installation of said structure or equipment,
as well as any necessary screening, must be approved in writing by Approving
Agent before said structure or equipment is constructed or installed on the
Property.
EXHIBIT K
7
<PAGE>
3.11 Loading Docks/Loading Doors. Unless approved in writing by Approving
---------------------------
Agent, loading docks and/or loading doors shall not face either side of any
existing or then proposed public street(s). Where such docks or doors are
permitted by Approving Agent, they shall be screened from view from streets or
other rights-of-way by an undulating landscaped earthen berm at least three feet
in height which shall be included in the Landscaping Plan for the Property.
3.12 Excavations and Storage or Burning of Rubbish. No excavations shall
---------------------------------------------
be made and no sand, gravel or soil shall be removed from the Property except in
connection with Plans approved by Approving Agent as provided herein. No storage
or burning of rubbish or trash shall be permitted at any time.
ARTICLE IV
MANNER OF CONTROL OF IMPROVEMENTS
---------------------------------
4.01 Control of Improvements. No Improvement shall be constructed,
-----------------------
erected, placed, altered, maintained or permitted without the prior written
approval of Approving Agent.
4.02 Submissions to Approving Agent. To secure the approval of Approving
------------------------------
Agent, an Owner shall deliver to Approving Agent in form and substance
satisfactory to Approving Agent the Plans. The Plans shall conform to the
provisions of this Declaration and Applicable Law.
4.03 Approval of Plans. Approving Agent shall review and either approve or
-----------------
disapprove all or parts of the Plans submitted to Approving Agent within a
reasonable time after such Plans are submitted to Approving, Agent. If submitted
Plans are not approved by Approving Agent, the Owner of the Property may revise
the disapproved Plans to incorporate changes required by Approving Agent and
deliver complete sets of properly revised Plans to Approving Agent for approval.
No Improvement shall be constructed, erected, placed, altered, maintained or
permitted until the Plans therefor have been finally approved in writing by
Approving Agent
4.04 Changes in Approved Plans. An Owner shall secure the written approval
-------------------------
of Approving Agent to any material change or revision in approved Plans.
4.05 Variances. Upon submission of a written request for variances,
---------
Approving Agent may, from time to time, in Approving Agent's sole discretion,
permit an Owner to construct, erect, install, maintain, use and operate
Improvements which are in variance with the covenants, conditions and
restrictions or architectural standards which are contained in this Declaration.
Written requests for variances shall set forth in narrative detail the
particular standard from which a variance is sought. Approving Agent shall have
the right to require additional information, including supporting data and/or
plans and specifications in form and substance satisfactory to Approving Agent,
as a condition
EXHIBIT K
8
<PAGE>
to Approving Agent's consideration of any request for a variance. Approving,
Agent shall not be liable to any Owner for any claims, causes of action or
damages arising out of the, granting or denial of any requested variance. Each
request for a variance shall be reviewed separately and apart from other such
requests and the grant of a variance to any Owner shall not constitute a waiver
of Approving Agent's right to strictly enforce the covenants, conditions and
restrictions and architectural standards contained herein against any subsequent
Owner.
4.06 Deemed Variances. Notwithstanding anything to the contrary contained
----------------
in this Declaration, all Improvements which are constructed without material
deviation from Plans approved in writing by Approving Agent shall be deemed in
compliance with the building and location requirements contained in this
Declaration, and to the extent that any such Improvements deviate from or fail
to comply with the building and location requirements contained in this
Declaration, Approving Agent shall be deemed to have granted a variance with
respect to such requirements in connection with such Improvements.
4.07 Appointment and Designation. Approving Agent may from time to time
---------------------------
delegate any of Approving Agent's rights or responsibilities hereunder to one or
more duly licensed architects or other parties who shall have full authority to
act on behalf of Approving Agent in all matters delegated.
4.08 No Liability for Defects or Omissions. Approving Agent has no
-------------------------------------
liability or obligation whatsoever in connection with any Plans and no
responsibility for the adequacy thereof or for the construction of any
Improvements contemplated by any Plans. Approving Agent has no duty to inspect
any Improvements, and if Approving Agent should inspect any Improvements,
Approving Agent shall have no liability or obligation to any party arising out
of such inspection. Approving Agent expressly shall have no liability or
responsibility for defects in or omissions from any Plans or for defects in or
omissions from the construction of any Improvements.
ARTICLE V
COVENANTS FOR ASSESSMENTS
-------------------------
5.01 Creation of the Lien and Personal Obligation of Assessments.
-----------------------------------------------------------
Declarant hereby covenants and agrees, and Owner by acceptance of the Deed shall
be deemed to covenant and agree, to pay to the Declarant (or to a mortgage
company or other collection agency designated by the Declarant), based on
Owner's ownership interest in the Project, Owner's pro rata share of: (1) annual
maintenance assessments or charges to keep the common areas of the Project in a
well maintained, safe, clean and attractive condition at all times, including
without limitation, general landscaping care on a regular basis, such as lawn
mowing, watering, fertilizing, weeding, planting, replanting, replacing of
landscaping when required, pruning, keeping exterior lighting and mechanical
facilities in working order, gardening, and general cleaning and removal of
paper, debris, litter, trash,
EXHIBIT K
9
<PAGE>
waste and refuse from the Project; (2) special assessments for capital
improvements to the Project, if any; (3) individual special assessments levied
against the Property to reimburse the Declarant for extra costs for maintenance
and repairs to the Project and improvements thereon, caused by the willful or
negligent acts of the Owner and not caused by ordinary wear and tear, such
assessments to be established and collected from time to time if necessary. The
annual maintenance assessments, special assessments for capital improvements,
and individual special assessments, together with such interest thereon and
costs of collection thereof as hereinafter provide, shall be a charge to the
Owner, and shall be a continuing lien upon the Property. Each such assessment
together with such interest thereon and cost of collection thereof, including
reasonable attorneys' fees, as hereinafter provided, shall also be the
continuing personal obligation of the person who was the Owner of the Property
at the time when the assessment fell due.
5.02 Purpose of Assessments. The assessments levied by the Declaration
----------------------
shall be used for the purpose of promoting the health, safety and welfare of the
Project, and in particular for the improvement and maintenance of the Project or
for other services and facilities devoted to this purpose and directly related
to the use and enjoyment of the Project; and for paying the cost of labor,
equipment (including the expense of leasing any equipment) and materials
required for, and management and supervision of, the Project.
5.03 Due Dates. The annual maintenance assessments provided for herein
---------
shall be payable in advance, on the first day of such period, either monthly,
quarterly or annually, as the Declarant may determine.
5.04 Effect of Non-Payment of Assessments: The Personal Obligation of the
--------------------------------------------------------------------
Owner, the Lien; Remedies of Declarant.
- --------------------------------------
(a) If any assessment or any part thereof is not paid on the date(s) when
due, then the unpaid amount of such assessment, together with interest thereon
and cost of collection thereof, as hereinafter provided, shall become delinquent
and shall thereupon become a continuing lien in favor of the Declarant, such
lien to be impressed on the Property which shall bind the Property in the hands
of the then Owner of the Property, and the Owner's heirs, executors, devisees,
personal representatives, successors and assigns. The Declarant shall have the
right to reject partial payments of any assessments and demand the full payment
thereof. The obligation of the then existing Owner of the Property to pay such
assessments, however, shall remain such Owner's personal obligation and shall
not be extinguished by transfer of title. The lien for unpaid assessments shall
be unaffected by any sale or assignment of the Property and shall continue in
full force and effect.
(b) If any assessment or part thereof is not paid within fifteen (15)
days after the delinquency date, the unpaid amount of such assessment shall bear
interest from the date of delinquency at the highest lawful rate of interest,
and the Declarant may, in addition to all other remedies Declarant may have at
law or in equity, at its election, bring an action against the Owner of the
Property personally obligated to pay the same, and/or against the
EXHIBIT K
10
<PAGE>
record title Owner of the Property, in order to enforce payment and/or to
foreclose the lien against the Property, and there shall be added to the amount
of such assessment the costs of preparing and filing the complaint in such
action and in the event a judgment is obtained, such judgment shall include
interest on the assessment as above provided and a reasonable attorney's fee to
be fixed by the court, together with the costs of the action.
ARTICLE VI
MISCELLANEOUS PROVISIONS
------------------------
6.01 Owner's Maintenance. Each Owner shall at all times be obligated
-------------------
("Owner's Maintenance Obligation") to maintain, repair, replace and renew or
cause to be maintained, repaired, replaced or renewed all Improvements on the
Property (and the area between the Property Lines of the Property and any
adjacent street if such area is not otherwise maintained), so as to keep the
same clean, sightly and safe and in first-class condition consistent with its
original intended appearance. Owner's Maintenance Obligation shall include, but
not be limited to: the maintenance of all visible exterior surfaces of all
buildings and other Improvements; the prompt removal of all paper, debris,
refuse and dead and diseased trees and plantings from all areas of the Property
and all snow and ice from paved areas; the repair, replacement, cleaning and
relamping of all signs and lighting fixtures; the mowing, watering, fertilizing,
weeding, replanting and replacing of all landscaping approved in the applicable
Landscaping Plan and, during construction of Improvements on the Property,
consistent cleaning of dirt, construction debris and other construction related
refuse from streets, storm drains and inlets. If any Improvement is damaged or
destroyed, the Owner of such Improvement diligently shall proceed to restore
such Improvement to the condition existing prior to such damage or destruction
or, in the alternative, raze and remove such Improvement and landscape the
Property pursuant to a Landscaping Plan approved by Approving Agent as provided
herein. Until commencement of construction of Improvements thereon, the Owner of
the Property shall keep the Property free and clear of trash and debris and
regularly mowed.
6.02 Enforcement. The covenants, conditions, restrictions, easements, uses
-----------
and privileges contained in this Declaration shall run with the land and be
binding upon and inure to the benefit of Declarant and Approving Agent and their
respective heirs, devisees, personal representatives, successors and assigns.
The enforcement of the provisions of this Declaration shall be vested solely in
Approving Agent. A breach of this Declaration by an Owner relating to the use or
maintenance of the Property, or any part thereof, is hereby declared to be and
constitute a nuisance and every public or private remedy allowed by law or
equity for the abatement of a public or private nuisance shall be available to
Approving Agent to remedy such breach. In any legal or equitable proceeding for
the enforcement of this Declaration or to restrain a breach hereof, the party or
parties against whom judgment is entered shall pay the attorney's fees and costs
of the party or parties for whom judgment is entered in such amount as may be
fixed by the court in such proceeding. All remedies provided under this
Declaration, including those at law or in equity, shall be cumulative and not
exclusive. The failure of Approving
EXHIBIT K
11
<PAGE>
Agent to enforce this Declaration upon a breach hereof or to enforce a
particular provision contained in this Declaration shall not be deemed a waiver
of Approving, Agent's right to do so for a subsequent breach or of the right to
enforce any other provision of this Declaration. Approving Agent shall not be
liable for failure to enforce this Declaration.
6.03 Responsibility of Owner. Each Owner shall be responsible for any
-----------------------
breach of this Declaration which is a result of such Owner's own acts or
omissions or the acts or omissions of an Occupant of the Property.
6.04 Address of Approving Agent. All Plans submissions, notices and other
--------------------------
communications to Approving Agent shall be mailed or delivered to Catellus
Development Corporation, 4545 Fuller Drive, Suite 100, Dallas, Texas 75038.
Approving Agent may from time to time designate a different address for Plans
submissions, notices and other communications by either delivering written
notice of such new address to the Owner of the Property at such Owner's address
as reflected by the records of Approving agent or by recording a notice of such
change of address in the Real Property Records of Dallas, County, Texas.
6.05 Conflict with Applicable Law. If any covenant, condition or term of
----------------------------
this Declaration is less restrictive than a requirement imposed by Applicable
Law, the requirement imposed by Applicable Law shall control. If any covenant,
condition or term of this Declaration is more restrictive than a requirement
imposed by Applicable Law, then the requirement imposed by this Declaration
shall control unless prohibited by Applicable Law.
6.06 Severability. If any of the covenants, conditions or terms of this
------------
Declaration shall be found void or unenforceable for whatever reason by any
court of law or of equity, then every other covenant, condition or term herein
set forth shall remain valid and binding.
6.07 EXCULPATION, WAIVER AND RELEASE. NOTWITHSTANDING ANY COVENANT,
-------------------------------
CONDITION OR TERM CONTAINED IN THIS DECLARATION TO THE CONTRARY AND
NOTWITHSTANDING ANY PROVISION OF APPLICABLE LAW TO THE CONTRARY, NEITHER
DECLARANT NOR APPROVING AGENT SHALL HAVE ANY LIABILITY TO ANY OWNER ARISING OR
RESULTING FROM ANY ACT OR OMISSION OF DECLARANT OR APPROVING AGENT TAKEN OR
OMITTED PURSUANT TO THIS DECLARATION. EACH OWNER BY ACCEPTING A CONVEYANCE TO
ANY PORTION OF THE PROPERTY CONCLUSIVELY SHALL BE DEEMED TO HAVE UNCONDITIONALLY
AND IRREVOCABLY WAIVED AND RELEASED ALL CLAIMS AGAINST DECLARANT AND APPROVING
AGENT ARISING OR RESULTING FROM ACTS OR OMISSIONS OF DECLARANT OR APPROVING
AGENT TAKEN OR OMITTED PURSUANT TO THIS DECLARATION.
EXHIBIT K
12
<PAGE>
6.08 Termination by Declarant. At any time, at Declarant's sole option,
------------------------
Declarant may elect to terminate this Declaration by executing and recording in
the Real Property Records of Dallas County, Texas, an instrument terminating
this Declaration. Such termination shall be effective upon recordation thereof
in the Real Property Records of Dallas County, Texas, and after such
termination, neither Declarant nor any Owner shall have any duties or
obligations under this Declaration, and Declarant shall no longer have any
duties or obligations as Approving Agent under this Declaration.
6.09 Amendment. This Declaration may be amended from time to time by a
---------
written instrument executed by Declarant and the Owner(s) of the Property. No
such amendment shall be effective until it is recorded in the Real Property
Records of Dallas County, Texas.
6.10 Term. Unless terminated pursuant to the provisions of Section 6.08,
----
this Declaration shall remain in effect for 20 years after the date of the Deed
to which this Declaration is attached.
7.01 Agricultural use and/or -Qualified Open-Space Land Designations. The
---------------------------------------------------------------
execution and recordation of this Declaration is not intended and shall not be
construed: (i) as evidence of an immediate intention to change the use of any
portion of the Property which currently is designated for agricultural use or as
qualified open-space land under the applicable provisions of the Texas
Constitution, the Texas Tax Code or any other applicable law; (ii) to void or
otherwise affect any pending application for designation of any portion of the
Property for agricultural use or as qualified open-space land under the
provisions of the Texas Constitution, the Texas Tax Code or any other applicable
law; or (iii) to make or render ineligible any portion of the Property for
designation for agricultural use or ads qualified open-space land under the
provisions of the Texas Constitution, the Texas Tax Code or any other applicable
law. Declarant has executed and recorded this Declaration in anticipation that
the use of portions of the Property may be changed in the future from
agricultural use or qualified open-space land uses to one or more of the uses
contemplated hereinabove, but until such time as the use of a Parcel actually is
changed, Declarant does not intend, and hereby declares that Declarant does not
intend, to void or affect any existing designation, any pending application for
designation or any future eligibility for designation of any portion of the
Property for agricultural use or qualified open-space land under the applicable
provisions of the Texas Constitution, the Texas Tax Code or any other applicable
law.
EXHIBIT K
13
<PAGE>
EXHIBIT 10.7
TRAMMELL CROW COMPANY
COMMERCIAL LEASE AGREEMENT
AMB PROPERTY II, L.P., A DELAWARE LIMITED PARTNERSHIP
Landlord
AND
ASD SYSTEMS
Tenant
<PAGE>
GLOSSARY
--------
The following terms in the Lease are defined in the paragraphs opposite the
terms.
TERM DEFINED IN PARAGRAPH
---- --------------------
Additional Rent 4.1
Applicable Requirements 6.3
Assign 12.1
Base Rent 1.4
Basic Provisions 1.1
Building 1.2
Building Operating Expenses 4.2(b)
Code 12.1
Commencement Date 1.3
Commencement Date Certified 3.3
Common Areas 2.2
Common Area Operating Expenses 4.2(b)
Condemnation 14
Default 13.1
Expiration Date 1.3
HVAC 4.2(a)
Hazardous Substance 6.2
Indemnity 8.5
Industrial Center 1.2
Landlord 1.1
Landlord Entities 6.2(c)
<PAGE>
Lease 1.1
Lenders 6.4
Mortgage 16.18
Operating Expenses 4.2
Party/Parties 1.1
Permitted Use 1.8
Premises 1.2
Prevailing Party 16.13
Real Property Taxes 10.2
Rent 4.1
Reportable Use 6.2
Requesting Party 15
Responding Party 15
Rules and Regulation 2.4
Security Deposit 1.7,5
Taxes 10.2
Tenant 1.1
Tenant Acts 9.2
Tenant's Share 1.5
Term 1.3
Use 6.1
<PAGE>
AMB PROPERTY CORPORATION
INDUSTRIAL MULTI-TENANT LEASE
1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease") dated ______________19__, is made by and
-------
between AMB Property II, L.P., a Delaware limited partnership, ("Landlord") and
ASD Systems ("Tenant") (collectively the "Parties," or individually a "Party").
1.2 Premises: A portion (approximately 27,690 square feet) outlined on
--------
Exhibit A attached hereto ("Premises"), of the building ("Building") located at
11052 Grader Street in the City of Dallas, State of Texas. The Building is
located in the industrial center commonly known as Grader 3 (the "Industrial
Center"). Tenant shall have non-exclusive rights to the Common Areas (as defined
in Paragraph 2.3 below), but shall not have any rights to the roof, exterior
walls or utility raceways of the Building or to any other buildings in the
Industrial Center. The Premises, the Building, the Common Areas, the land upon
which they are located and all other buildings and improvements thereon are
herein collectively referred to as the "Industrial Center.
1.3 Term: One (1) year and zero (0) months ("Term") commencing May 1, 1999
----
("Commencement Date") and ending April 30, 2000 ("Expiration Date").
1.4 Base Rent: $11,537.50 per month ("Base Rent"). $11,537.50 payable on
---------
execution of this Lease for period May 1, 1999.
1.5 Tenant's Share of Operating Expenses ("Tenant's Share"):
------------------------------------
(a) Industrial Park 11.08%
(b) Building 42.70%
1.6 Tenant's Estimated Monthly Rent Payment: Following is the estimated
---------------------------------------
monthly Rent payment to Landlord pursuant to the provisions of this Lease. This
estimate is made at the inception of the Lease and is subject to adjustment
pursuant to the provisions of this Lease:
(a) Base Rent (Paragraph 4. 1) $ 11,537.50
(b) Operating Expenses (Paragraph 4.2;
excluding Real Property Taxes,
Landlord Insurance and HVAC) $ 1,338.35
(d) Landlord Insurance (Paragraph 8.3) $ 92.30
(e) Real Property Taxes (Paragraph 10) $ 2,192.13
(f) HVAC maintenance (Paragraph 4.2) $ 0.00
Estimated Monthly
Payment $ 15,160.28
=========
1.7 Security Deposit: $15,160.28 ("Security Deposit").
----------------
1.8 Permitted Use:("Permitted Use") Office/Warehouse
-------------
<PAGE>
1.9 Guarantor: None
---------
1.10 Addenda and Exhibits: Attached hereto are the following Addenda and
--------------------
Exhibits, all of which constitute a part of this Lease:
(a) Addenda: Option to Extend
(b) Exhibits: Exhibit A: Diagram of Premises
Exhibit B: Commencement Date Certificate.
1.11 Address for Rent Payments: All amounts payable by Tenant to Landlord
-------------------------
shall until further notice from Landlord be paid to AMB Property II, L.P. at the
following address:
Trammell Crow Dallas/Fort Worth
2200 Ross Avenue
3700 Chase Tower
Dallas, Texas 75201
2. Premises, Parking and Common Areas.
2.1 Letting. Landlord hereby leases to Tenant and Tenant hereby leases
-------
from LANDLORD the Premises upon all of the terms, covenants and conditions set
forth in this Lease. Any statement of square footage set forth in this Lease or
that may have been used in calculating Base Rent and/or Operating Expenses is an
approximation which Landlord and Tenant agree is reasonable and the Base Rent
and Tenant's Share based thereon is not subject to revision whether or not the
actual square footage is more or less.
2.2 Common Area.- - Definition. "Common Areas" are all areas and
--------------------------
facilities outside the Premises and within the exterior boundary line of the
Industrial Center and interior utility raceways within the Premises that are
provided and designated by the Landlord from time to time for the general non-
exclusive use of Landlord, Tenant and other tenants of the Industrial Center and
their respective employees, suppliers, shippers, tenants, contractors and
invitees.
2.3 Common Areas - Tenant's Rights. Landlord hereby grants to Tenant, for
------------------------------
the benefit of Tenant and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the nonexclusive right to
use, in common with others entitled to such use, the Common Areas as they exist
from time to time, subject to any rights, powers, and privileges reserved by
Landlord under the terms hereof or under the terms of any rules and regulations
or covenants, conditions and restrictions governing the use of the Industrial
Center.
2.4 Common Areas - Rules and Regulations. Landlord shall have the
------------------------------------
exclusive control and management of the Common Areas and shall have the right,
from time to time, to establish, modify, amend and enforce reasonable Rules and
Regulations with respect thereto in accordance with Paragraph 16.19.
2.5 Common Area Changes. Landlord shall have the right, in Landlord's
-------------------
sole discretion, from time to time:
<PAGE>
(a) To make changes to the Common Areas, including, without
limitation, changes in the locations, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the
Industrial Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof, and
(f) To do and perform such other acts and make such other changes
in, to or with respect to the Common Areas and Industrial Center as Landlord
may, in the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term:. The Commencement Date, Expiration Date and Term of this Lease
----
are as specified in Paragraph 1.3.
3.2 Delay in Possession. If for any reason Landlord cannot deliver
-------------------
possession of the Premises to Tenant by the Commencement Date, Landlord shall
not be subject to any liability therefor, nor shall such failure affect the
validity of this Lease or the obligations of Tenant hereunder. In such case,
Tenant shall not, except as otherwise provided herein, be obligated to pay Rent
or perform any other obligation of Tenant under the terms of this Lease until
Landlord delivers possession of the Premises to Tenant. The term of the Lease
shall commence on the earlier of (i) the date Tenant takes possession of the
Premises to Tenant or (ii) 10 days following notice to Tenant that Landlord is
prepared to tender possession of the Premises to Tenant. If possession of the
Premises is not delivered to Tenant within 60 days after the Commencement Date
and such delay is not due to Tenant's acts, failure to act or omissions Tenant
may by notice in writing to Landlord within 10 days after the end of said 60 day
period cancel this Lease and the parties shall be discharged from all
obligations hereunder. If such written notice of Tenant is not received by
Landlord within said 10 day period, Tenant's right to cancel this Lease shall
terminate.
3.3 Commencement Date Certificate: At the request of Landlord, Tenant
-----------------------------
shall execute and deliver to Landlord a completed certificate ("Commencement
Date Certificate") in the form attached hereto as Exhibit B.
---------
<PAGE>
4. Rent.
4.1 Base Rent. Tenant shall pay to Landlord Base Rent and other
---------
monetary obligations of Tenant to Landlord under the terms of this Lease (such
other monetary obligations are herein referred to as "Additional Rent") in
lawful money of the United States, without offset or deduction, in advance on or
before the first day of each month. Base Rent and Additional Rent for any period
during the term hereof which is for less than one full month shall be prorated
based upon the actual number of days of the month involved. Payment of Base Rent
and Additional Rent shall be made to Landlord at its address stated herein or to
such other persons or at such other addresses as Landlord may from time to time
designate in writing to Tenant. Base Rent and Additional Rent are collectively
referred to as "Rent". All monetary obligations of Tenant to Landlord under the
terms of this Lease are deemed to be rent.
4.2 Operating Expenses. Tenant shall pay to Landlord on the first
------------------
day of each month during the term hereof, in addition to the Base Rent, Tenant's
Share of all Operating Expenses in accordance with the following provisions:
(a) "Operating Expenses" are all costs incurred by Landlord
relating to the ownership and operation of the Industrial Center, Building and
Premises including, but not limited to, the following:
(i) The operation, repair, maintenance and replacement
in neat, clean, good order and condition of the Common Areas, including parking
areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways,
parkways, driveways, landscaped areas, striping, bumpers, irrigation systems.
drainage systems, lighting facilities, fences and gates, exterior signs and
tenant directories.
(ii) Water, gas, electricity, telephone and other
utilities servicing the Common Areas.
(iii) Trash disposal, janitorial services, snow removal,
property management and security services.
(iv) Reserves set aside for maintenance, repair and (??)
----
of the Common Areas and Building.
(v) Real Property Taxes.
(vi) Premiums for the insurance policies maintained by
Landlord under Paragraph 8 hereof.
(vii) Environmental monitoring and insurance programs.
(viii) Monthly amortization of reasonable capital
improvements to the Common Areas and the Building. The monthly amortization of
any given capital improvement shall be the sum of the (i) quotient obtained by
dividing the cost of the capital improvement by
<PAGE>
Landlord's estimate of the number of months of useful life of such improvement
plus (ii) an amount equal to the cost of the capital improvement times 1/12 of
the lesser of 12% or the maximum annual interest rate permitted by law.
(ix) Maintenance of the Building including, but not
limited to, painting, caulking and repair and replacement of Building
components, including, but not limited to, roof, elevators and fire detection
and sprinkler systems.
(x) Heating, ventilating and air conditioning systems
("HVAC").
(xi) If Tenant fails to maintain the Premises, any
expense incurred by Landlord for such maintenance.
(b) Tenant's Share of Operating Expenses that are not
specifically attributed to the Premises or Building ("Common Area Operating
Expenses") shall be that percentage shown in Paragraph 1.5(a). Tenant's Share of
Operating Expenses that are attributable to the Building ("Building Operating
Expenses") shall be that percentage shown in Paragraph 1.5(b). Landlord in its
reasonable discretion shall determine which Operating Expenses are Common Area
Operating Expenses, Building Operating Expenses or expenses to be entirely home
by Tenant.
(c) The inclusion of the improvements, facilities and
services set forth in Subparagraph 4.2(a) shall not be deemed to impose any
obligation upon Landlord to either have said improvements or facilities or to
provide those services.
(d) Tenant shall pay monthly in advance on the same day
as the Base Rent is due Tenant's Share of estimated Operating Expenses and HVAC
maintenance costs in the amount set forth in Paragraph 1.6. Landlord shall
deliver to Tenant within 90 days after the expiration of each calendar year a
reasonably detailed statement showing Tenant's Share of the actual Operating
Expenses incurred during the preceding year. If Tenant's estimated payments
under this Paragraph 4(d) during the preceding year exceed Tenant's Share as
indicated on said statement, Tenant shall be credited the amount of such
overpayment against Tenant's Share of Operating Expenses next becoming due. If
Tenant's estimated payments under this Paragraph 4.2(d) during said preceding
year were less than Tenant's Share as indicated on said statement, Tenant shall
pay to Landlord the amount of the deficiency within 10 days after delivery by
Landlord to tenant of said statement. At any time Landlord may adjust the amount
of the estimated Tenant's Share of Operating Expenses and HVAC maintenance costs
to reflect Landlord's estimate of such expenses for the year.
5. Security Deposit. Tenant shall deposit with Landlord upon Tenant's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Tenant's faithful performance of Tenants obligations under this Lease. If Tenant
fails to pay Base Rent or Additional Rent or otherwise defaults under this Lease
(as defined in Paragraph 13.1), Landlord may use the Security Deposit for the
payment of any amount due Landlord or to reimburse or compensate Landlord for
any liability, cost, expense, loss or damage (including attorney's fees) which
Landlord may suffer or incur by reason thereof. Tenant shall on demand pay
Landlord the amount so used or applied so as to restore the Security Deposit to
the amount set forth in
<PAGE>
Paragraph 1.7. Landlord shall not be required to keep all or any pan of the
Security Deposit separate from its general accounts. Landlord shall, at the
expiration or earlier termination of the term hereof and after Tenant has
vacated the Premises, return to Tenant that portion of the Security Deposit not
used or applied by Landlord. No part of the Security Deposit shall be considered
to be held in trust, to bear interest, or to be prepayment for any monies to be
paid by Tenant under this Lease.
6. Use.
6.1 Permitted Use: Tenant shall use and occupy the Premises only for the
-------------
Permitted Use set forth in Paragraph 1.8. Tenant shall not commit any nuisance,
permit the emission of any objectionable noise or odor, suffer any waste, make
any use of the Premises which is contrary to any law or ordinance or which will
invalidate or increase the premiums for any of Landlord's insurance. Tenant
shall not service, maintain or repair vehicles on the Premises, Building or
Common Areas. Tenant shall not store foods, pallets, drums or any other
materials outside the Premises.
6.2 Hazardous Substances:
--------------------
(a) Reportable Uses Require Consent. The term "Hazardous Substance"
-------------------------------
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Landlord to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Tenant
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Landlord and compliance in a timely manner (at
Tenant's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "Reportable Use" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice registration or business plan is
required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Requirements require that a notice be given to persons entering or
occupying the Premises or neighboring properties. Notwithstanding the foregoing,
Tenant may, without Landlord's prior consent, but upon notice to Landlord and in
compliance with all Applicable Requirements, use any ordinary and customary
materials reasonably required to be used by Tenant in the normal course of the
Permitted Use, so long as such use is not a Reportable Use and does not expose
the Premises, or neighboring properties to any meaningful risk of contamination
or damage or expose Landlord to any liability therefor. In addition, Landlord
may (but without any obligation to do so) condition its consent to any
Reportable Use of any Hazardous Substance by Tenant upon Tenant's giving
Landlord such additional assurances as Landlord, in its reasonable discretion,
deems necessary to protect itself,
<PAGE>
the public, the Premises and the environment against damage, contamination or
injury and/or liability therefor, including but not limited to the installation
(and at Landlord's option, removal on or before Lease expiration or earlier
termination) of reasonably necessary protective modifications to the Premises
(such as concrete encasements) and/or the deposit of an additional Security
Deposit.
(b) Duty to Inform Landlord. If Tenant knows, or has reasonable
-----------------------
cause to believe, that a Hazardous Substance is located in, under or about the
Premises or the Building, Tenant shall immediately give Landlord written notice
thereof, together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous
Substance. Tenant shall not cause or permit any Hazardous Substance to be
spilled or released in, on, under or about the Premises (including, without
limitation, through the plumbing or sanitary sewer system).
(c) Indemnification: Tenant shall indemnify, protect, defend and
---------------
hold Landlord, Landlord's affiliates, Lenders, and the officers, directors,
shareholders, partners, employees, managers, independent contractors, attorneys
and agents of the foregoing ("Landlord Entities") and the Premises, harmless
from and against any and all damages, liabilities, judgments, costs, claims,
liens, expenses, penalties, loss of permits and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises by
or for Tenant or by any of Tenant's employees, agents, contractors or invitees.
Tenant's obligations under this Paragraph 6.2(c) shall include. but not be
limited to, the effects of any contamination or injury to person, property or
the environment created or suffered by Tenant, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved.
Tenant's obligations under this Paragraph 6.2(c) shall survive the expiration or
earlier termination of this Lease.
6.3 Tenant's Compliance with Requirements. Tenant shall, at Tenant's sole
-------------------------------------
cost and expense, fully diligently and in a timely manner, comply with all
"Applicable Requirements," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, casements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Landlord's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill or release of
any Hazardous Substance), now in effect or which may hereafter come into effect.
Tenant shall, within 5 days after receipt of Landlord's written request, provide
Landlord with copies of all documents and information evidencing Tenant's
compliance with any Applicable Requirements and shall immediately upon receipt,
notify Landlord in writing (with copies of any documents involved) of any
threatened or actual claim, notice, citation, warning, complaint or report
pertaining to or involving failure by Tenant or the Premises to comply with any
Applicable Requirements.
<PAGE>
6.4 Inspection: Compliance with Law. In addition to Landlord's
-------------------------------
environmental monitoring and insurance program, the cost of which is included in
Operating Expenses, Landlord and the holders of any mortgages, deeds of trust or
ground leases on the Premises ("Lenders") shall have the right to enter the
Premises at any time in the case of an emergency, and otherwise at reasonable
times, for the purpose of inspecting the condition of the Premises and for
verifying compliance by Tenant with this Lease and all Applicable Requirements.
Landlord shall be entitled to employ experts and/or consultants in connection
therewith to advise Landlord with respect to Tenant's installation, operation,
use, monitoring. maintenance, or removal of any Hazardous Substance on or from
the Premises. The cost and expenses of any such inspections shall be paid by the
party requesting same unless a violation of Applicable Requirements exists or is
imminent or the inspection is requested or ordered by a governmental authority.
In such case, Tenant shall upon request reimburse Landlord or Landlord's Lender,
as the case may be, for the costs and expenses of such inspections.
7. Maintenance, Repairs, Trade Fixtures and Alterations.
7.1 Tenant's Obligations. Subject to the provisions of Paragraph 7.2
--------------------
(Landlord's Obligations), Paragraph 9 (Damage or Destruction) and Paragraph 14
(Condemnation), Tenant shall, at Tenant's sole cost and expense and at all
times, keep the Premises and every part thereof in good order, condition and
repair (whether or not such portion of the Premises requiring repair, or the
means of repairing the same, are reasonable or readily accessible to Tenant and
whether or not the need for such repairs occurs as a result of Tenant's use, any
prior use, the elements or the age of such portion of such Premises) including,
without limiting the generality of the foregoing, all equipment or facilities
specifically serving the Premises, such as plumbing, heating, air conditioning,
ventilating, electrical, lighting facilities, boilers, fired or unfired pressure
vessels, fire hose connectors if within the Premises, fixtures, interior walls,
interior surfaces of exterior walls, ceilings, floors, windows, doors, plate
glass, and skylights, but excluding any items which are the responsibility of
Landlord pursuant to Paragraph 7.2 below. Tenant's obligations shall include
restorations, replacements or renewals when necessary (o keep the Premises and
all improvements thereon or a part thereof in good order, condition and state of
repair.
7.2 Landlord's Obligations. Subject to the provisions of Paragraph 6
----------------------
(Use), Paragraph 7.1 (Tenant's Obligations), Paragraph 9 (Damage or Destruction)
and Paragraph 14 (Condemnation), Landlord at its expense and not subject to
reimbursement pursuant to Paragraph 4.2, shall keep in good order, condition and
repair the foundations and exterior walls of the Building and utility systems
outside the Building. Landlord, subject to reimbursement pursuant to Paragraph
4.2, shall keep in good order, condition and repair the air conditioning systems
servicing the Premises, Building roof and Common Areas.
7.3 Alterations. Tenant shall not make nor cause to be made any
-----------
alterations, installations in, on, under or about the Premises.
7.4 Surrender/Restoration. Tenant shall Surrender the Premises by the end
---------------------
of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair
ordinary wear and tear excepted. Without limiting
<PAGE>
the generality of the above, Tenant shall remove all personal property, trade
fixtures and floor bolts, patch all floors and cause all lights to be in good
operating condition.
8. Insurance; Indemnity
8.1 Payment of Premiums. The cost of the premiums for the insurance
-------------------
policies maintained by Landlord under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date of Expiration
Date.
8.2 Tenant's Insurance.
------------------
(i) At its sole cost and expense, Tenant shall maintain in full
force and effect during the Term of the lease the following insurance coverages
insuring against claims which may arise from or in connection with the Tenant's
operation and use of the leased premises.
(a) Commercial General Liability with minimum limits of
$1,000,000 per occurrence; $3,000,000 general aggregate for bodily injury,
personal injury and property damage. If required by Landlord, liquor liability
coverage will be included.
(b) Workers' Compensation insurance with statutory limits and
Employers Liability with a $1,000,000 per accident limit for bodily injury or
disease.
(c) Automobile Liability covering all owned, non-owned and
hired vehicles with a $1,000,000 per accident limit for bodily injury and
property damage.
(d) Property insurance against all risks of loss to any tenant
improvements or betterments and business personal property on a full replacement
cost basis with no coinsurance penalty provision; and Business Interruption
Insurance with a limit of liability representing loss of at least approximately
six months of income.
(ii) Tenant shall deliver to AMB certificates of all insurance
reflecting evidence of required coverages prior to initial occupancy; and
annually thereafter.
(iii) If, in the opinion of Landlord's insurance advisor, the amount
of scope of such coverage is deemed inadequate at any time during the Term,
Tenant shall increase such coverage to such reasonable amounts or scope as
Landlord's advisor deems adequate.
(iv) All insurance required under Paragraph 8.2 (i) shall be primary
and non-contributory, (ii) shall provide for severability of interests, (iii)
shall be issued by insurers, licensed to do business in the state in which the
Premises are located and which are rated A:VII or better by Best's Key Rating
Guide, (iv) shall be endorsed to include Landlord and such other persons or
entities as Landlord may from time to time designate, as additional insureds
(Commercial General Liability only), and (v) shall be endorsed to provide at
least 30-days prior notification of cancellation or material change in coverage
to said additional insureds.
<PAGE>
8.3 Landlord's Insurance. Landlord may, but shall not be obligated to,
--------------------
maintain all risk, including earthquake and flood. insurance covering the
buildings within the Industrial Center, Commercial General Liability and such
other insurance in such amounts and covering such other liability or hazards as
deemed appropriate by Landlord. The amount and scope of coverage of Landlord's
insurance shall be determined by Landlord from time to time in its sole
discretion and shall be subject to such deductible amounts as Landlord may
elect. Landlord shall have the right to reduce or terminate any insurance or
coverage. Premiums for any such insurance shall be a Common Area Operating
Expense.
8.4 Waiver of Subrogation - To the extent permitted by law and without
---------------------
affecting the coverage provided by insurance required to be maintained
hereunder, Landlord and Tenant each waive any right to recover against the other
on account of any and all claims Landlord or Tenant may have against the other
with respect to property insurance actually carried, or required to be carried
hereunder, to the extent of the proceeds realized from such insurance coverage.
8.5 Indemnity. Tenant shall protect, indemnify and hold the Landlord
---------
Entities harmless from and against any and all loss, claims, liability or costs
(including court costs and attorney's fees) incurred by reason of:
(i) any damage to any property (including but not limited to
property of any Landlord Entity) or death or injury to any person occurring in
or about the Premises, the Building or the Industrial Center to the extent that
such injury or damage shall be caused by or arise from any actual or alleged
act, neglect, fault or omission by or of Tenant, its agents, servants,
employees, invitees, or visitors;
(ii) the conduct or management of any work or anything whatsoever
done by the Tenant on or about the Premises or from transactions of the Tenant
concerning the Premises;
(iii) Tenant's failure to comply with any and all governmental laws,
ordinances and regulations applicable to the condition or use of the Premises or
its occupancy; or
(iv) any breach or default of the part of Tenant in the performance
of any covenant or agreement on the part of the Tenant to be performed pursuant
to this Lease.
The provisions of this Paragraph 8.5 shall survive the termination of this Lease
with respect to any claims or liability accruing prior to such termination.
8.6 Exemption of Landlord from Liability. Except to the extent caused by
------------------------------------
the gross negligence or willful misconduct of Landlord, Landlord Entities shall
not be liable for and Tenant waives any claims against Landlord Entities for
injury or damage to the person or the property of Tenant, Tenant's employees,
contractors, invitees, customers or any other person in or about the Premises,
Building or Industrial Center from any cause whatsoever, including, but not
limited to, damage or injury which is caused by or results from (i) fire, steam,
electricity, gas, water or rain, or from the breakage, leakage, obstruction or
other defects of pipes, fire sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or (ii) from the condition of the
<PAGE>
Premises, other portions of the Building or Industrial Center. Landlord shall
not be liable for any damages arising from any act or neglect of any other
tenant of Landlord nor from the failure by Landlord to enforce the provisions of
any other lease in the Industrial Center. Notwithstanding Landlord's negligence
or breach of this Lease, Landlord shall under no circumstances be liable for
injury to Tenant's business, for any loss of income or profit therefrom or any
indirect, consequential or punitive damages.
9. Damage or Destruction.
9.1 Termination Rights. Tenant shall give Landlord immediate written
------------------
notice of any damage to the Premises. Subject to the provisions of Paragraph
9.2, if the Premises or the Building shall be damaged to such an extent that
there is substantial interference for a period exceeding 90 consecutive days
with the conduct by Tenant of its business at the Premises, Tenant, at any time
prior to commencement of repair of the Premises and following 10 days written
notice to Landlord, may terminate this Lease effective 30 days after delivery of
such notice to Landlord. Such termination shall not excuse the performance by
Tenant of those covenants which under the terms hereof survive termination. Rent
shall be abated in proportion to the degree of interference during the period
that there is such substantial interference with the conduct of Tenant's
business at the Premises. Abatement of rent and Tenant's right of termination
pursuant to this provision shall be Tenant's sole remedy for failure of Landlord
to keep in good order, condition and repair the foundations and exterior walls
of the Building, Building roof, utility systems outside the Building, the Common
Areas and HVAC.
9.2 Damage Caused by Tenant. Tenant's termination rights under Paragraph
-----------------------
9.1 shall not apply if the damage to the Premises or Building is the result of
any act or omission of Tenant or of any of Tenant's agents, employees,
customers, invitees or contractors ("Tenant Acts"). Any damage resulting from a
Tenant Act shall be promptly repaired by Tenant. Landlord at its own may at
Tenant's expense repair any damage caused by Tenant Acts. Tenant shall continue
to pay all rent arid other sums due hereunder and shall be liable to Landlord
for all damages that Landlord may sustain resulting from a Tenant Act.
10. Real Property Taxes.
10.1 Payment of Real Property Taxes. Landlord shall pay the Real Property
------------------------------
Taxes due and payable during the term of this Lease and, except as otherwise
provided in Paragraph 10.3. any such amounts shall be included in the
calculation of Operating Expenses in accordance with the provisions of Paragraph
4.2.
10.2 Real Property Tax Definition. As used herein, the term "Real Property
----------------------------
Taxes" is any form of tax or assessment, general, special, ordinary or
extraordinary, imposed or levied upon (a) the Industrial Center, (b) any
interest of Landlord in the Industrial Center, (c) Landlord's right to rent or
other income from the Industrial Center, and/or (d) Landlord's business of
leasing the Premises. Real Property Taxes include (i) any license fee,
commercial rental tax, excise tax, improvement bond or bonds, levy or tax; (ii)
any tax or charge which replaces or is in addition to any of such above-
described "Real Property Taxes" and (iii) any fees, expenses or costs (including
attorney's fees, expert fees and the like) incurred by Landlord in protesting or
<PAGE>
contesting any assessments levied or any tax rate. The term "Real Property
Taxes" shall also include any increase resulting from a change in the ownership
of the Industrial Center or Building, the execution of this Lease or any
modification, amendment or transfer thereof. Real Property Taxes for tax years
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date of Expiration
Date.
10.3 Additional Improvements. Operating Expenses shall not include Real
-----------------------
Property Taxes attributable to improvements placed upon the Industrial Center by
other tenants or by Landlord for the exclusive enjoyment of such other tenants.
Notwithstanding Paragraph 10.1 hereof, Tenant shall, however, pay to Landlord at
the time Operating Expenses are payable under Paragraph 4.2, the entirety of any
increase in Real Property Taxes if assessed by reason of improvements placed
upon the Premises by Tenant or at Tenant's request.
10.4 Joint Assets. If the Building is not separately assessed, Real
------------
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed.
10.5 Tenant's Property Taxes. Tenant shall pay prior to delinquency all
-----------------------
taxes assessed against and levied upon Tenant's improvements, fixtures,
furnishings, equipment and all personal property of Tenant contained in the
Premises or stored within the Industrial Center.
11. Utilities. Tenant shall pay directly for all utilities and services
---------
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon.
12. Assignment and Subletting.
12.1 Landlord's Consent Required.
---------------------------
(a) Tenant shall not assign, transfer, mortgage or otherwise
transfer or encumber (collectively, "assign") or sublet all or any Part of
Tenant's interest in this Lease or in the Premises without Landlord's prior
written consent which consent shall not be unreasonably withheld. Relevant
criteria in determining reasonability of consent include, but are not limited
to, credit history of a proposed assignee or sublessee, references from prior
landlords, any change or intensification of use of the Premises or the Common
Areas and any limitations imposed by the Internal Revenue Code and the
Regulations promulgated thereunder relating to Real Estate Investment Trusts.
Assignment or sublet shall not release Tenant from its obligations hereunder.
Tenant shall not (i) sublet or assign or enter into other arrangements such that
the amounts to be paid by the sublessee or assignee thereunder would be based,
in whole or in part, on the income or profits derived by the business activities
of the sublessee or assignee; (ii) sublet the Premises or assign this Lease to
any person in which Landlord owns an interest, directly or indirectly (by
applying constructive ownership rules set forth in Section 856(d)(5) of the
Internal Revenue Code (the "Code"); or (iii) sublet the Premises or assign this
Lease in any other manner which could cause any portion of the amounts received
by Landlord pursuant to this Lease or any sublease to fail to qualify as "rents
from real property" within the meaning of Section 856(d) of the Code, or which
could cause any other income received by Landlord to fail to qualify as
<PAGE>
income described in Section 856(c)(2) of the Code. The requirements of this
Section 12.1 shall apply to any further subleasing by any subtenant.
(b) A change in the control of Tenant shall constitute an
assignment requiring Landlord's consent. The transfer, on a cumulative basis, of
25% or more of the voting or management control of Tenant shall constitute a
change in control for this purpose.
12.2 Rent Adjustment: If, as of the effective date of any permitted
----------------
assignment or subletting the then remaining term of this Lease is less than
three (3) years, Landlord may, as a condition to its consent: (i) require that
the amount and adjustment schedule of the rent payable under this Lease be
adjusted to what is then the market value and/or adjustment schedule for
property similar to the Premises as then constituted, as determined by Landlord;
or (ii) terminate the Lease as of the date of assignment or subletting subject
to the performance by Tenant of those covenants which under the terms hereof
survive termination.
13. Default; Remedies.
13.1 Default. The occurrence of any one of the following events shall
-------
constitute an event of default on the part of Tenant ("Default"):
(a) The abandonment of the Premises by Tenant;
(b) Failure to pay any installment of Base Rent, Additional Rent or
any other monies due and payable hereunder, said failure continuing for a period
of 3 days after the same is due
(c) A general assignment by Tenant or any guarantor for the benefit
of creditors;
(d) The filing of a voluntary petition in bankruptcy by Tenant or
any guarantor. the filing of a voluntary petition for an arrangement, the filing
of a petition, voluntary or involuntary, for reorganization, or the filing of an
involuntary petition by Tenant's creditors or guarantors;
(e) Receivership, attachment, of other judicial seizure of the
Premises or all or substantially all of Tenant's assets on the Premises;
(f) Failure of Tenant to maintain insurance as required by
Paragraph 8.2;
(g) Any breach by Tenant of its covenants under Paragraph 6.2;
(h) Failure in the performance of any of Tenant's covenants,
agreements or obligations hereunder (except those failures specified as events
of Default in other Paragraphs of this Paragraph 13.1 which shall be governed by
such other Paragraphs), which failure continues for 10 days after written notice
thereof from Landlord to Tenant provided that, if Tenant has exercised
reasonable diligence to cure such failure and such failure cannot be cured
within such
<PAGE>
10 day period despite reasonable diligence, Tenant shall not be in default under
this subparagraph unless Tenant fails thereafter diligently and continuously to
prosecute the cure to completion;
(i) Any transfer of a substantial portion of the assets of Tenant,
or any incurrence of a material obligation by Tenant, unless such transfer or
obligation is undertaken or incurred in the ordinary course of Tenants business
or in good faith for equivalent consideration, or with Landlord's consent; and
(j) The default of any guarantors of Tenant's obligations hereunder
under any guaranty of this Lease, or the attempted repudiation or revocation of
any such guaranty.
13.2 Remedies. In the event of any Default by Tenant, Landlord shall have
--------
the remedies set forth in the Addendum attached hereto entitled "Landlord's
Remedies in Event of Tenant Default".
13.3 Late Charges: Tenant hereby acknowledges that late payment by Tenant
------------
to Landlord of rent and other sums due hereunder will cause Landlord to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
Processing and accounting charges. Accordingly, if any installment of rent or
other sum due from Tenant shall not be received by Landlord or Landlord's
designee within 10 days after such amount shall be due, then, without any
requirement for notice to Tenant, Tenant shall pay to Landlord a late charge
equal to 5% of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Landlord will
incur by reason of late payment by Tenant. Acceptance of such late charge by
Landlord shall in no event constitute a waiver of Tenant's Default with respect
to such overdue amount, nor prevent Landlord from exercising any of the other
rights and remedies granted hereunder.
14. Condemnation. If the Premises or any portion thereof are taken under the
------------
power of eminent domain or sold under the threat of exercise of said power (all
of which are herein called "condemnation"), this Lease shall terminate as to the
part so taken as of the date the condemning authority takes title or possession,
whichever first occurs. If more than 10% of the floor area of the Premises, or
more than 25% of the portion of the Common Areas designated for Tenant's
parking, is taken by condemnation, Tenant may, at Tenant's option, to be
exercised in writing within 10 days after Landlord shall have given Tenant
written notice of such taking (or in the absence of such notice, within 10 days
after the condemning authority shall have taken possession) terminate this Lease
as of the date the condemning authority takes such possession. If Tenant does
not terminate this Lease in accordance with the foregoing, this Lease shall
remain in full force and effect as to the portion of the Premises remaining,
except that the Base Rent shall be reduced in the same proportion as the
rentable floor area of the Premises taken bears to the total rentable floor area
of the Premises. No reduction of Base Rent shall occur if the condemnation does
not apply to any portion of the Premises. Any award for the taking of all or any
part of the Premises under the power of eminent domain or any payment made under
threat of the exercise of such power shall be the property of Landlord,
provided, however, that Tenant shall be entitled to any compensation, separately
awarded to Tenant for Tenant's relocation
<PAGE>
expenses and/or loss of Tenants trade fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Landlord shall to the extent of
its net severance damages in the condemnation matter, repair any damage to the
Premises caused by such condemnation authority. Tenant shall be responsible for
the payment of any amount in excess of such net severance damages required to
complete such repair.
15. Estoppel Certificate and Financial Statements.
15.1 Estoppel Certificate. Each party (herein referred to as "Responding
--------------------
Party") shall within 10 days after written notice from the other Party (the
"Requesting Party") execute, acknowledge and deliver to the Requesting Party, to
the extent it can truthfully do so, an estoppel certificate in the form attached
hereto, plus such additional information, confirmation and/or statements as be
reasonably requested by the Requesting Party.
15.2 Financial Statement. If Landlord desires to finance, refinance, or
-------------------
sell the Building, Industrial Center or any pan thereof, Tenant and all
Guarantors shall deliver to any potential lender or purchaser designated by
Landlord such financial statements of Tenant and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Tenant's financial statements for the past 3 years. All such financial
statements shall be received by Landlord and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
16. Additional Covenants and Provisions.
16.1 Severability: The invalidity of any provision of this Lease, as
------------
determined by a court of competent jurisdiction, shall not affect the validity
of any other provision hereof.
16.2 Interest on Past-Due Obligations: Any monetary payment due Landlord
--------------------------------
hereunder not received by Landlord within 10 days following the date on which it
was due shall bear interest from the date due at 12% per annum, but not
exceeding the maximum rate allowed by law in addition to the late charge
provided for in Paragraph 13.3.
16.3 Time of Essence. Time is of the essence with respect to the
---------------
performance of all obligations to be performed or observed by the Parties under
this Lease.
16.4 Landlord Liability. Tenant, its successors and assigns, shall not
------------------
assert nor seek to enforce any claim for breach of this Lease against any of
Landlord's assets other than Landlord's interest in the Industrial Center.
Tenant agrees to look solely to such interest for the satisfaction of any
liability or claim against Landlord under this Lease. In no event whatsoever
shall Landlord (which term shall include, without limitation, any general or
limited partner, trustees, beneficiaries, officers, directors, or stockholders
of Landlord) ever be personally liable for any such liability.
16.5 No Prior or Other Agreements. This Lease contains all agreements
----------------------------
between the Parties with respect to any matter mentioned herein, and supersedes
all oral, written prior or contemporaneous agreements or understandings.
<PAGE>
16.6 Notice Requirements. All notices required or permitted by this Lease
-------------------
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in the Paragraph 16.6. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may by written notice to the other
specify a different address for notice purposes, except that upon Tenant's
taking possessing of the Premises, the Premises shall constitute Tenant's
address for the purpose of mailing or delivering notices to Tenant. A copy of
all notices required or permitted to be given to Landlord hereunder shall be
concurrently transmitted to such party or parties at such addresses as Landlord
may from time to time hereafter designate by written notice to Tenant.
16.7 Date of Notice. Any notice sent by registered or certified mail,
--------------
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given 48 hours after the same is
addressed as required herein and mailed with postage prepaid. Notices delivered
by United States Express Mail or overnight courier that guarantees next day
delivery shall be deemed given 24 hours after delivery of the same to the United
States Postal Service or courier. If any notice is transmitted by facsimile
transmission or similar means, the same shall be deemed served or delivered upon
telephone or facsimile confirmation of receipt of the transmission thereof,
provided a copy is also delivered via hand or overnight delivery or certified
mail. If notice is received on a Saturday or a Sunday or a legal holiday, it
shall be deemed received on the next business day.
16.8 Waivers. No waiver by Landlord of a Default by Tenant shall be deemed
-------
a waiver of any other term, covenant or condition hereof, or of any subsequent
Default by Tenant of the same or any other term, covenant or condition hereof.
16.9 Holdover. Tenant has no right to retain possession of the Premises or
--------
any part thereof beyond the expiration or earlier termination of this Lease. If
Tenant holds over with the consent of Landlord: (I) the Base Rent payable shall
be increased to 175% of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination; (ii) Tenant's right to
possession shall terminate on 30 days notice from Landlord and (iii) all other
terms and conditions of this Lease shall continue to apply. Nothing contained
herein shall be construed as a consent by Landlord to any holding over by
Tenant. Tenant shall indemnify, defend and hold Landlord harmless from and
against any and all claims, demands, actions, losses, damages, obligations,
costs and expenses, including, without limitation, attorneys' fees incurred or
suffered by Landlord by reason of Tenant's failure to surrender the Premises on
the expiration or earlier termination of this Lease in accordance with the
provisions of this Lease.
16.10 Cumulative Remedies. No remedy or election hereunder shall be deemed
-------------------
exclusive but shall, wherever possible, be cumulative with all other remedies in
law or in equity.
<PAGE>
16.11 Binding Effect: Choice of Law. This Lease shall be binding upon the
-----------------------------
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
16.12 Landlord. The covenants and obligations contained in this Lease on
--------
the part of Landlord are binding on Landlord, its successors and assigns, only
during and in respect of their respective period of ownership of such interest
in the Industrial Center. In the event of any transfer or transfers of such
title to the Industrial Center, Landlord (and in case of any subsequent
transfers or conveyances, the then grantor) shall be concurrently freed and
relieved from and after the date of such transfer or conveyance, without any
further instrument or agreement, of all liability with respect to the
performance of any covenants or obligations on the part of Landlord contained in
this Lease thereafter to be performed.
16.13 Attorneys Fees and Other Costs. If any Party brings an action or
------------------------------
proceeding to enforce the terms hereof or declare rights hereunder, the
Prevailing Party (as hereafter defined) in any such proceeding shall be entitled
to reasonable attorneys' fees. The term "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought. Landlord shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting breach. Tenant shall reimburse
Landlord on demand for all reasonable legal. engineering and other professional
services expenses incurred by Landlord in connection with all requests by Tenant
for consent or approval hereunder.
16.14 Landlord's Access, Showing Premises, Repairs. Landlord and
--------------------------------------------
Landlord's agents shall have the right to enter the Premises at any time, in the
case of an emergency, and otherwise at reasonable times upon reasonable notice
for the purpose of showing the same to prospective purchasers, lenders, or
tenants, and making such alterations, repairs, improvements or additions to the
Premises or to the Building, as Landlord may reasonably deem necessary. Landlord
may at any time place on or about the Premises or Building any ordinary "For
Sale" signs and Landlord may at any time during the last 120 days of the term
hereof place on or about the Premises any ordinary "For Lease" signs. All such
activities of Landlord shall be without abatement of rent or liability to
Tenant.
16.15 Signs. Tenant shall not place any signs at or upon the exterior of
-----
the Premises or the Building, except that Tenant may, with Landlord's prior
written consent, install (but not on the roof such signs as are reasonably
required to advertise Tenant's own business so long as such signs are in a
location designated by Landlord and comply with sign ordinances and the signage
criteria established for the Industrial Center by Landlord.
16.16 Termination; Merger. Unless specifically stated otherwise in writing
-------------------
by Landlord, the voluntary or other surrender of this Lease by Tenant, the
mutual termination or cancellation hereof, or a termination hereof by Landlord
for Default by Tenant, shall automatically terminate any sublease or lesser
estate in the Premises; provided, however, Landlord shall, in the event of any
such surrender, termination or cancellation, have the option to
<PAGE>
continue any one or all of any existing subtenancies. Landlord's failure within
10 days following any such event to make a written election to the contrary by
written notice to the holder of any such lesser interest, shall constitute
Landlord's election to have such event constitute the termination of such
interest.
16.17 Quiet Possession. Upon payment by Tenant of the Base Rent and
----------------
Additional Rent for the Premises and the performance of all of the covenants,
conditions and provisions on Tenant's part to be observed and performed under
this Lease, Tenant shall have quiet possession of the Premises for the entire
term hereof subject to all of the provisions of this Lease.
16.18 Subordination; Attornment; Non-Disturbance.
------------------------------------------
(a) Subordination. This Lease shall be subject and subordinate to
any ground lease, mortgage, deed of trust, or other hypothecation or mortgage
(collectively, "Mortgage") now or hereafter placed by Landlord upon the real
property of which the Premises are a part, to any and all advances made on the
security thereof and to all renewals, modifications, consolidations,
replacements and extensions thereof. Tenant agrees that any person holding any
Mortgage shall have no duty, liability or obligation to perform any of the
obligations of Landlord under this Lease. In the event of Landlord's default
with respect to any such obligation, Tenant will give any Lender, whose name and
address have previously in writing been furnished Tenant, notice of a default by
Landlord. Tenant may not exercise any remedies for default by Landlord unless
and until Landlord and the Lender shall have received written notice of such
default and a reasonable time (not less than 90 days) shall thereafter have
elapsed without the default having been cured. If any Lender shall elect to have
this Lease superior to the lien of its Mortgage and shall give written notice
thereof to Tenant, this Lease shall be deemed prior to such Mortgage. The
provisions of a Mortgage relating to the disposition of condemnation and
insurance proceeds shall prevail over any contrary provisions contained in this
Lease.
(b) Attornment. Subject to the non-disturbance provisions of
subparagraph C of this Paragraph 16.18, Tenant agrees to attornment to a Lender
or any other party who acquires ownership of the Premises by reason of a
foreclosure of a Mortgage. In the event of such foreclosure, such new owner
shall not: (i) be liable for any act or omission of any prior landlord or with
respect to events occurring prior to acquisition of ownership, (ii) be subject
to any offsets of defenses which Tenant might he against any prior Landlord, or
(iii) be liable for security deposits or be bound by prepayment or more than one
month's rent.
(c) Non-Disturbance. With respect to Mortgage entered into by
Landlord after the execution of this Lease, Tenant's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Mortgage holder that Tenant's possession and this Lease will not be disturbed so
long as Tenant is m in default and attorns to the record owner of the Premises.
(d) Self-Executing. The agreements contained in this Paragraph
16.18 shall be effective without the execution of any further documents;
provided, however, that upon written request from Landlord or a Lender in
connection with a sale, financing or refinancing of Premises, Tenant and
Landlord shall execute such further writings as may be reasonably required
<PAGE>
to separately document any such subordination or non-subordination, attornment
and/or non-disturbance agreement as is provided for herein. Landlord is hereby
irrevocably vested with full power to subordinate this Lease to a Mortgage.
16.19 Rules and Regulations. Tenant agrees that it will abide by, and to
---------------------
cause its employees, suppliers, shippers, customers, tenants, contractors and
invitees to abode by all reasonable rules and regulations ("Rules and
Regulations") which Landlord may make from time to time for the management,
safety, care, and cleanliness of the Common Areas, the parking and unloading of
vehicles and the preservation of good order, as well as for the convenience of
other occupants or tenants of the Building and the Industrial Center and their
invitees. Landlord shall not be responsible to Tenant for the noncompliance with
said Rules and Regulations by other tenants of the Industrial Center.
16.20 Security Measures. Tenant acknowledges that the rental payable to
-----------------
Landlord hereunder does not include the cost of guard service or other security
measures. Landlord has no obligations to provide same. Tenant assumes all
responsibility for the protection of the Premises, Tenant, its agents and
invitees and their property from the acts of third parties.
16.21 Reservations. Landlord reserves the right to grant such easements
------------
that Landlord deems necessary and to cause the recordation of parcel maps, so
long as such easements and maps do not reasonably interfere with the use of the
Premises by Tenant. Tenant agrees to sign any documents reasonably requested by
Landlord to effectuate any such easements or maps.
16.22 Conflict. Any conflict between the printed provisions of this Lease
--------
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
16.23 Offer. Preparation of this Lease by either Landlord or Tenant or
-----
Landlord's agent or Tenant's agent and submission of same to Tenant or Landlord
shall not be deemed an offer to lease. This Lease is not intended to be binding
until executed and delivered by all Parties hereto.
16.24 Amendments. This Lease may be modified only in writing, signed by
----------
the parties in interest at the time of the modification.
16.25 Multiple Parties. Except as otherwise expressly provided herein, if
----------------
more than one person or entity is named herein as Tenant, the obligations of
such persons shall be the joint and several responsibility of all persons or
entities named herein as such Tenant.
16.26 Authority. Each person signing on behalf of Landlord or Tenant
---------
warrants and represents that he or she is authorized to execute and deliver this
Lease and to make it a binding obligation of Landlord or Tenant.
<PAGE>
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Landlord: Tenant:
AMB Property II, L.P. ASD Systems
a Delaware limited partnership
By: AMB Property Holding Corporation,
a Maryland corporation.
its general partner
By:________________________________ By:_______________________________
Its:_______________________________ Title:____________________________
Telephone: (415) 394-9000 Telephone: (214) 348-7200
---------------------- --------------------
Facsimile: (415) 394-9001 Facsimile: (214) 348-2924
---------------------- --------------------
Executed at: San Francisco, CA Executed at:
---------------------- --------------------
on: 4/13/99 on: 4/5/99
---------------------- --------------------
<PAGE>
ADDENDA
AMB PROPERTY, L.P.,
A DELAWARE LIMITED PARTNERSHIP
INDUSTRIAL MULTI-TENANT LEASE
Option to Extend
This Option to Extend is a part of the Lease dated ________ by and between
AMB PROPERTY II, L.P. ("Landlord") and ASD Systems ("Tenant") for the premises
commonly known as Grader 3.
1. Option to Extend. Landlord hereby grants to Tenant the option to extend the
term of this Lease for the following periods ("Option Periods") commencing when
the prior term expires:
May 1, 2000 through April 30, 2001 "Period One"
May 1. 2001 through April 30, 2002 "Period Two"
2. Exercise Dates: For purposes of Paragraph 5 of this Addendum,
b. the Last Exercise Date is four (4) months prior to the date that the
Option Period would commence.
3. Monthly Base Rent. The monthly Base Rent for each month of an Option Period
shall be the amount calculated in accordance with the alternative selected below
("Rent Adjustment Alternative") but in no event shall (the monthly Base Rent for
an Option Period be less than the highest monthly Base Rent payable during the
term immediately preceding the Option Period.
[X] Fixed rent adjustment ("Fixed Rent Adjustment")
$11,537.50 shall be the monthly Base Rent for Period One.
$11,537.50 shall be the monthly Base Rent for Period Two.
[ ] Cost of living adjustment ("CPI Adjustment")
Monthly Base Rent shall be calculated using the following CPI indea.
("Index")
[ ] Urban Wage Earners and Clerical Workers
[ ] All Urban Consumers
[ ] ______________________________________________________
The Comparison Month is:
[ ] the first month of the term of this Lease; or
[ ] ______________________________________________________
4. Other Amendments to Lease operative during each Option Period:
5. Conditions to Exercise of Option. Tenant's right to extend is conditioned
upon and subject to each of the following:
<PAGE>
A. In order to exercise an option to extend, Tenant must give written
notice of such election to Landlord and Landlord must receive the same by the
Last Exercise Date. If proper notification of the exercise of an option is not
given and/or received, such option shall automatically expire. Options (if there
are more than one) may only be exercised consecutively. Failure to exercise an
option terminates that option and all subsequent options. Tenant acknowledges
that because of the importance to Landlord of knowing no later than the Last
Exercise Date whether or not Tenant will exercise the option, the failure of
Tenant to notify Landlord by the Last Exercise Date will conclusively be
presumed an election by Tenant not to exercise the option.
B. Tenant shall have no right to exercise an option (i) if Tenant is in
Default or (ii) in the event that Landlord has given to Tenant 3 or more notices
of separate Defaults during the 12 month period immediately preceding the
exercise of the option, whether or not the Defaults are cured. The period of
time within which an option may be exercised shall not be extended or enlarged
by reason of Tenant's inability to exercise an option because of the provisions
of this paragraph.
C. All of the terms and conditions of this Lease except where specifically
modified by this Addendum shall apply.
D. The options are personal to the Tenant, cannot be assigned or exercised
by anyone other than the Tenant and only while the Tenant is in full possession
of the Premises and without the intention of thereafter assigning or subletting.
<PAGE>
Landlord: Tenant:
AMB Property II, L.P. ASD Systems
a Delaware limited partnership
By: AMB Property Holding Corporation, By:
-------------------------------------
a Maryland corporation,
its general partner Its:
------------------------------------
on:
------------------------------------
By: By:
---------------------------------- -------------------------------------
Its: Its:
--------------------------------- ------------------------------------
Telephone: (415) 394-9000 Executed at:
--------------------------- ----------------------------
Facsimile: (415) 394-9001 on:
--------------------------- -------------------------------------
Executed at: San Francisco, CA Executed at:
------------------------- ----------------------------
on: 4/13/98 on:
---------------------------------- -------------------------------------
Telephone:
------------------------------
Facsimile:
------------------------------
<PAGE>
EXHIBIT A
---------
DIAGRAM OF PREMISES
<PAGE>
EXHIBIT B
---------
COMMENCEMENT DATE MEMORANDUM
----------------------------
LANDLORD: AMB PROPERTY II, L.P.
TENANT: ASD SYSTEMS
LEASE DATE:
PREMISES: 11052 Grader Street Dallas, Texas 75238
Tenant hereby accepts the Premises as being in the condition required under the
Lease.
The Commencement Date of the Lease is May 1, 1999.
The Expiration Date of the Lease is April 30, 2000.
Landlord: Tenant:
AMB Property II, L.P. ASD Systems
a Delaware limited partnership
By: AMB Property Holding Corporation,
a Maryland corporation,
its general partner
By: By:
----------------------------------- -----------------------------------
John T. Meyer
Its: Vice President Title: President
---------------------------------- --------------------------------
Telephone: (415) 394-9000 Telephone: (214) 348-7200
---------------------------- ----------------------------
Facsimile: (415) 394-9001 Facsimile: (214) 343-2924
---------------------------- ----------------------------
Executed at: San Francisco, CA Executed at:
-------------------------- --------------------------
on: 4/13/99 on: 4/5/99
----------------------------------- -----------------------------------
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 14th day of December, 1998 (the "Effective Date"), by and between NORMAN
CHARNEY, an individual ("Executive"), and ASD SYSTEMS, INC., a Texas corporation
("Employer").
RECITALS:
WHEREAS, Employer desires to employ Executive upon the terms set forth in
this Agreement; and
WHEREAS, Executive desires to be employed by Employer upon the terms set
forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, Employer and Executive agree as follows:
AGREEMENTS:
1. EMPLOYMENT.
Subject to the terms and conditions stated in this Agreement, Employer
hereby employs Executive and Executive hereby accepts such employment.
2. DUTIES OF EXECUTIVE.
(a) During the Term of Employment (hereinafter defined), Executive shall
be employed as the President and Chief Executive Officer of the Company and
shall perform customary functions and duties with respect to such positions.
Executive shall devote all of his working time and attention to the management,
consulting, product design, marketing, customer development or other duties
related to the business of Employer that the Board of Directors of Employer may
from time to time specify.
(b) Employee shall perform his obligation within the Dallas, Texas
metropolitan area. Executive acknowledges and agrees that the performance of his
duties may entail travel and other promotional activities on behalf of Employer.
(c) Executive acknowledges and agrees that the conduct of the business of
Employer shall, at all times, be within the exclusive control of the Board of
Directors of Employer.
3. COMPENSATION.
As compensation for Executive's services rendered hereunder, Employer shall
pay Executive a minimum aggregate annual base salary equal to $250,000 per annum
commencing on the Effective Date. On each anniversary date following the
Effective Date and during the Term of Employment, the annual base salary paid to
Executive hereunder will be increased by $10,000. Such salary shall be paid in
accordance with customary payroll practices of Employer from time to time in
effect but no less frequently than in equal monthly payments. Executive shall
also be entitled to such bonus determined at the discretion of the Board of
Directors. During the Term of Employment, Executive will be entitled to all
benefits, if any, ordinarily accorded to, and will participate in all employee
plans ordinarily participated in by full-time employees of Employer, to the
extent Executive is eligible under the terms of such plans, including, without
limitation, all health, medical, dental, retirement, life and disability
insurance plans established by Employer, in accordance with the terms of such
plans. During the Term of Employment, Executive shall be entitled to
participate in any pension and retirement plans, stock option or ownership plans
and other fringe benefit plans as are or may be made available from time to time
to executive or other salaried employees of Employer to the extent that
Executive is eligible under the terms of such plans. In addition, Executive
shall be entitled to such vacation time each year during the Term of Employment
(all of which vacation must be utilized in the respective calendar year
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 1
<PAGE>
in which it accrues) which senior executives of Employer are afforded pursuant
to Employer's standard policies and practices and other benefits afforded to
Executive prior to the date hereof.
4. EXPENSES.
Employee is authorized, in carrying out all of his responsibilities and
duties hereunder, to incur reasonable expenses while promoting the business of
Employer in accordance with the policies of Employer from time to time in
effect. Employer will either pay such expenses directly or promptly reimburse
Employee for such reasonable out-of-pocket expenses incurred at the request or
on behalf of Employer upon receipt by Employer of appropriate documentation
thereof.
5. TERM OF EMPLOYMENT.
Unless sooner terminated in accordance with this Agreement, the Term of
Employment (herein so called) shall become effective as of the Effective Date
and shall continue through any and all times through and including December 31,
2001, provided, however, that the Term of Employment shall automatically be
-------- -------
renewed for successive one-year terms unless either Employer or Employee gives
the other party hereto written notice of its or his intention to terminate this
Agreement at least thirty (30) days prior to the date the Term of Employment
would otherwise expire.
6. TERMINATION BY EMPLOYER.
(a) With Notice. The Term of Employment may be terminated by Employer at
any time, by written notice to Executive for cause. Cause shall mean (i) gross
negligence or willful misconduct or malfeasance by Executive in the performance
of his services by or on behalf of the Employer that has a material adverse
effect on the financial condition or business of the Employer or which is to the
material detriment of Employer; (ii) the failure by Executive to perform his
duties as reasonably assigned to him from time to time; (iii) any violation by
Executive of the covenants set forth in paragraphs 7 or 8; or (iv) Executive
becomes mentally or physically incapacitated to such extent that Executive is
unable to substantially perform his duties under this Agreement for a period of
more than one hundred eighty (180) consecutive days.
(b) Automatic. This Agreement shall automatically terminate upon the death
of Executive.
(c) Effect. Upon termination of the Term of Employment, whether by
Executive or Employer, all continuing rights and obligations hereunder shall
cease except for (i) the rights and obligations arising under Paragraph 3 of
this Agreement to the extent the agreements governing any such benefits and
plans so require, (ii) the rights and obligations under Paragraph 4 of this
Agreement with respect to expenses incurred prior to the date of termination,
(iii) the rights and obligations under this Subparagraph 6(c), and (iv) the
rights and obligations under Paragraphs 7, 8 and 9 hereof. The covenants set
forth in Paragraphs 7, 8 and 9 shall be construed as agreements ancillary to but
independent of any other provision of this Agreement. The existence of any claim
or cause of action against Employer, whether predicated on this Agreement or
otherwise, shall not constitute a defense to the enforcement of said covenants.
Executive expressly authorizes Employer to deduct from any compensation payable
to Executive on the expiration or termination of this Agreement, the value of
any monetary advances or loans received by Executive from Employer, the value of
any personal expenses of Executive borne by Employer which are outstanding, and
the value of any property or materials belonging to Employer which are not
returned to Employer upon expiration or termination.
7. CONFIDENTIALITY COVENANTS.
During the Term of Employment (except with respect to disclosures occurring
during the normal course of Executive performing his services in accordance
herewith) and continuing in perpetuity, Executive shall:
(a) preserve as confidential all knowledge and information pertaining to
the business, affairs, directors, officers, shareholders, employees, and other
personnel of Employer, all affiliates of Employer and any predecessors of
Employer (including, without limitation, Athletic Supply of Dallas, Inc. and
Athletic Supply of Dallas,
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 2
<PAGE>
L.L.C.) obtained by Executive from any source whatsoever and which is not a
matter of public knowledge, unless disclosure is otherwise required by
applicable law, and
(b) not, except on behalf of Employer during the Term of Employment, use
Employer's records, documents, contracts, writings, data or other information,
whether or not in written or other recorded form, unless they are a matter of
public knowledge.
Without limiting the generality of the foregoing, the prohibitions
contained above shall be operative, whether inside or outside the United States,
with respect to any information or knowledge that Employer or any affiliate of
Employer now or hereafter may deem to be confidential, including, without
limitation, the following information with respect to Employer: (i) directors,
officers, shareholders, employees, and other personnel; (ii) operations or
planning, including customer lists, lists of suppliers, and information
pertaining to potential customers or suppliers; (iii) bids or progress under, or
negotiations pursuant to, government or other contracts, or with respect to
facilities and equipment, including contents of any manual, practice or
procedure, or operating revenue, expense, private or public debt or equity
financing or banking, accounting, or financial matters; (iv) advertising or
promotional plans or programs; (v) matters contained in applications to or
matters or proceedings pending under the jurisdiction of any regulatory agency
or court, including those that are only threatened; (vi) any system, procedure,
or administrative operation; (vii) plans for the extension of the present
business or commencement of a new business; (viii) any copyrights, trade
secrets, know-how, proprietary information, patents, inventions, marks,
software, licenses or technology, and any registrations or applications for
registration relating to the foregoing, owned or utilized by Employer, or any
affiliate of Employer, or work in progress with respect to such items and (ix)
plans with respect to business combinations or reorganizations.
8. INDUCEMENT OF CLIENTS.
During the Term of Employment and continuing during the Restricted Period
(as defined below), Executive hereby agrees that he shall not, directly or
indirectly, solicit or interfere, for the benefit of any Competing Business or
in any manner materially detrimental to Employer, with the Clients (as defined
below), employees and business relationships of Employer. The term "Restricted
Period" shall mean, in the event of the termination of the Term of Employment
for any reason, any and all times through and including the date which is one
(1) year following the termination of this Agreement. The term "Competing
Business" shall mean any business enterprise which is engaged in the Business of
Employer (as defined below) in any area of the world in which Employer or any of
its affiliates are then conducting business. The term "Clients" shall mean any
individual, proprietorship, partnership, corporation, association, or other
entity that is solicited or served by Employer or its affiliates during the Term
of Employment. The term "Business of Employer" shall mean the type of business
engaged in or proposed to be engaged in by Employer at the time of Executive's
termination, including, without limitation, the software and systems development
and operations related to the telemarketing or fulfillment business for the
direct mail or catalog business. Without in any manner limiting the scope of the
foregoing provisions, if the Executive engages in any of the following acts he
shall be considered to have violated this covenant:
(a) induces or attempts to induce any Client or prospective Client to
withdraw, curtail, divert, or cancel its business or any agreements with
Employer or its affiliates;
(b) induces or attempts to induce any employee of Employer or its
affiliates to terminate his or her employment therewith;
(c) induces or attempts to induce any independent contractor providing
services on behalf of Employer or its affiliates to terminate his or her
business relationship therewith;
(d) develops any materials utilizing the confidential information of
Employer or its affiliates, except for the benefit of Employer or its
affiliates; or
(e) disrupts in any manner whatsoever any of Employer's or its
affiliate's existing business relationships.
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 3
<PAGE>
9. INTELLECTUAL PROPERTY RIGHTS.
(a) Executive agrees that he will make prompt and full disclosure to
Employer, will hold in trust for the sole right and benefit of Employer, and
will promptly assign to Employer, all of Executive's right, title and interest
in and to any trademarks, service marks, trade names, patents and copyrights,
all applications therefor and registrations thereof in the United States and all
foreign countries, all trade secrets, know-how, works of authorship, inventions,
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and similar or related information, which Executive solely or jointly
conceives, develops, or reduces to practice, causes to be conceived, developed
or reduced to practice, or with respect to which Executive or any entity with
which Executive is affiliated obtains any ownership interest in, during the Term
of Employment (the "Executive Property"). To the extent any of the
intellectual property rights of the type noted in this subparagraph 9(a) have
not been acquired by Employer, Executive shall promptly assign all of his right,
title and interest in such property to Employer.
(b) Executive acknowledges that all works of authorship which are made
by him (solely or jointly with others) within the scope of his employment and
during the Term of Employment shall be deemed "works made for hire", as that
term is defined in the United States Copyright Act (17 U.S.C. 101 et. seq.),
such that Employer shall be considered the author of such works and owner of all
copyrights therein. Executive warrants and represents that all works of
authorship which he made (solely or jointly with others) within the scope of his
employment and during all times he was employed by the predecessors-in-interest
to Employer were likewise deemed to be "works made for hire," such that the
respective predecessors-in-interest to Employer were considered the authors of
such works and owners of all copyrights therein. In the event that any such
works made during the Term of Employment with Employer, or made during
Executive's employment with the predecessors-in-interest to Employer, are for
any reason not held to be works made for hire, Executive hereby irrevocably
assigns to Employer all of Executive's right, title and interest in and to such
works and all copyrights therein, whether now existing or hereafter created.
(c) Executive agrees to assist and cooperate with Employer as may be
necessary or desirable from time to time in furtherance of the purposes of this
paragraph 9, including, without limitation, the execution, verification and
delivery of documents and the doing or taking of such lawful actions as Employer
may reasonably request in the United States and all foreign countries. Without
limiting the generality of the foregoing, Executive agrees without further
compensation to execute and deliver such documents and take such actions
(including appearing as a witness) as may be useful to enable Employer to apply
for, register, obtain, assign, perfect, evidence, sustain, record and enforce
any of the Executive Property and/or other rights assigned or to be assigned to
Employer pursuant to this Agreement, in the United States and all foreign
countries, and in connection with the assignments (and recording thereof) of
such Executive Property and/or other rights to Employer or its designee. The
obligations of Executive pursuant to this paragraph 9(c) shall continue beyond
the Term of Employment, but following the Term of Employment with Employer,
Employer shall compensate Executive at a reasonable rate after Executive's
termination for the time actually spent by Executive in this connection at
Employer's request.
(d) Executive hereby assigns to Employer any and all claims, of any
nature whatsoever, which Executive may now or hereafter have for infringement,
including past infringement, of any rights assigned or to be assigned to
Employer pursuant to this Agreement.
10. REMEDIES.
Without limiting any other rights of Employer, in the event of breach
or threatened breach by Executive of any provision in Paragraphs 7, 8 or 9
hereof, Employer shall be entitled to (i) relief by temporary restraining order,
temporary injunction, permanent injunction or otherwise, as issued by a court of
law or equity, (ii) recovery of all attorneys' fees and costs incurred by
Employer in obtaining such relief, and (iii) any other legal and equitable
relief to which it may be entitled, including any and all monetary damages which
any Employer may incur as a result of said breach or threatened breach or
violation. Employer may pursue any remedy available to it, including declaratory
relief, concurrently or consecutively in any order as to any breach, violation,
or threatened breach or violation, and the pursuit of one such remedy at any
time will not be deemed an election of remedies or waiver of the right to pursue
any other remedy. Employer has the right to pursue partial enforcement and/or to
seek declaratory relief regarding the enforceable scope of this Agreement
without penalty and without waiving Employer's right to pursue any other
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 4
<PAGE>
available remedy subsequent to or concurrently with declaratory relief. The
provisions of this Paragraph 10 shall not in any manner limit the rights and
remedies available to Employer for any breach of the terms of this Agreement.
11. NO BREACH.
Executive represents and warrants that the execution and delivery of this
Agreement and his performance and consummation of the transactions contemplated
under those documents, do not, and will not, conflict, breach, or constitute a
default under any other agreement, instrument, covenant or restriction that
Executive is a party to or is otherwise bound.
12. NOTICES.
Any notice or request herein required or permitted to be given to either
party hereunder shall be given in writing and shall be personally delivered or
sent to such party by prepaid mail at the address of such party set forth below
or at such other address as such party may designate by written communication to
the other parties to this Agreement:
If to Executive: Norman Charney
6014 Yorkville Ct.
Dallas, Texas 75248
If to Employer: ASD Systems, Inc.
3737 Grader Street, Suite 110
Garland, Texas 75041
Attention: President
Telefax: (214) 343-2924
Each notice given in accordance with this paragraph shall be deemed to have been
given, if personally delivered, on the date personally delivered or, if mailed,
on the fifth day following the day on which it is deposited in the United States
mail, certified or registered mail, return receipt requested, with postage
prepaid.
13. HEADINGS.
The headings of the paragraphs of this Agreement have been inserted for
convenience of reference only and shall in no way restrict or modify any of the
terms or provisions hereof.
14. SEVERABILITY.
If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term hereof,
such provision shall be fully severable and this Agreement shall be construed
and enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Agreement; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
15. ENTIRE AGREEMENT; SURVIVAL.
This Agreement embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, if any, relating to the subject matter
hereof. The covenants, agreements, representations and warranties contained in
or made pursuant to this Agreement shall survive Executive's termination of
employment and the termination of this Agreement.
16. BINDING EFFECT.
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 5
<PAGE>
This Agreement shall be binding upon and inure to the benefit of each of
the parties hereto and their respective successors, heirs, assigns, and legal
representatives, but Executive may not assign this Agreement nor any rights or
obligations hereunder without the prior consent in writing of Employer. This
Agreement may be assigned by Employer to any party who acquires substantially
all of the assets of Employer or who merges or consolidates with Employer;
provided that such party agrees to assume and be liable for all of the
obligations of Employer hereunder.
17. ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs, and necessary disbursements in addition to any other
relief to which he or it may be entitled.
18. WAIVERS.
One or more waivers of any covenant, term, or provision of this Agreement
by either party hereto shall not be construed as a waiver of the breach of any
other covenant, term, or provision or of any subsequent breach of the same or
any other covenant, term, or provision. The consent or approval of either party
hereto with respect to the act of the other party hereto shall not be deemed to
waive or render unnecessary consent to or approval of any subsequent similar
act. No custom or practice of the parties shall constitute a waiver of either
party's rights to insist upon strict compliance with the terms hereof.
19. GOVERNING LAW.
This Agreement shall be governed in all respects, including validity,
interpretation and effect by the laws of the State of Texas.
[Signature page follows]
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 6
<PAGE>
EXECUTED to be effective as of the date first above written.
EMPLOYER:
ASD SYSTEMS, INC.
By: /s/ NORMAN CHARNEY
------------------------------------------
Norman Charney, President
EXECUTIVE:
/s/ NORMAN CHARNEY
---------------------------------------------
NORMAN CHARNEY
- ----------------------------------------------------------------------------
EMPLOYMENT AGREEMENT -Page 7
<PAGE>
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of
the 14th day of October, 1997 (the "Effective Date"), by and between PAUL
JENNINGS, an individual ("Executive"), and ASD SYSTEMS, LTD., a Texas limited
partnership ("Employer").
RECITALS:
WHEREAS, Executive was previously employed by a predecessor-in-interest to
the business of Employer;
WHEREAS, Employer desires to employ Executive upon the terms set forth in
this Agreement; and
WHEREAS, Executive desires to be employed by Employer upon the terms set
forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and covenants herein
contained, Employer and Executive agree as follows:
AGREEMENTS:
1. EMPLOYMENT.
Subject to the terms and conditions stated in this Agreement, Employer
hereby employs Executive and Executive hereby accepts such employment.
2. DUTIES OF EXECUTIVE.
(a) During the Term of Employment (hereinafter defined), Executive
shall devote all of his working time and attention to the performance of the
systems development, systems maintenance, management, consulting, product
design, marketing, customer development or other duties related to the business
of Employer that the President of Employer may from time to time specify.
(b) Executive acknowledges and agrees that the performance of his
duties may entail significant travel and other promotional activities on behalf
of Employer.
(c) Executive acknowledges and agrees that the conduct of the
business of Employer shall, at all times, be within the exclusive control of the
Board of Directors of Employer (or its general partner, as the case may be).
3. COMPENSATION.
As compensation for Executive's services rendered hereunder, Employer shall
pay Executive a minimum aggregate annual base salary equal to $150,000 per annum
commencing on the Effective Date. On each anniversary date following the
Effective Date and during the Term of Employment, the annual base salary paid to
Executive hereunder will be increased by $12,500. Such salary shall be paid in
accordance with customary payroll practices of Employer from time to time in
effect but no less frequently than in equal monthly payments. During the Term of
Employment, Executive will be entitled to all benefits, if any, ordinarily
accorded to, and will participate in all employee plans ordinarily participated
in by full-time employees of Employer, to the extent Executive is eligible under
the terms of such plans, including, without limitation, all health, medical,
dental, retirement, life and disability insurance plans established by Employer,
in accordance with the terms of such plans. During the Term of Employment,
Executive shall be entitled to participate in any pension and retirement plans,
stock option or ownership plans and other
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 1
<PAGE>
fringe benefit plans as are or may be made available from time to time to
executive or other salaried employees of Employer to the extent that Executive
is eligible under the terms of such plans. In addition, Executive shall be
entitled to such vacation time each year during the Term of Employment (all of
which vacation must be utilized in the respective calendar year in which it
accrues) which senior executives of Executive's status are afforded pursuant to
Employer's standard policies and practices.
4. EXPENSES.
Employee is authorized, in carrying out all of his responsibilities and
duties hereunder, to incur reasonable expenses while promoting the business of
Employer in accordance with the policies of Employer from time to time in
effect. Employer will either pay such expenses directly or promptly reimburse
Employee for such reasonable out-of-pocket expenses incurred at the request or
on behalf of Employer upon receipt by Employer of appropriate documentation
thereof.
5. TERM OF EMPLOYMENT.
Unless sooner terminated in accordance with this Agreement, the Term of
Employment (herein so called) shall become effective as of the Effective Date
and shall continue through any and all times through and including the date
which is five (5) years after the Effective Date of this Agreement, provided,
--------
however, that the Term of Employment shall automatically be renewed for
- -------
successive one-year terms unless either Employer or Employee gives the other
party hereto written notice of its or his intention to terminate this Agreement
at least thirty (30) days prior to the date the Term of Employment would
otherwise expire.
6. TERMINATION BY EMPLOYER.
(a) With Notice. The Term of Employment may be terminated by Employer
at any time, by written notice to Executive for cause. Cause shall mean (i)
gross negligence or willful misconduct or malfeasance by Executive in the
performance of his services by or on behalf of the Employer that has a material
adverse effect on the financial condition or business of the Employer or which
is to the material detriment of Employer; (ii) the failure by Executive to
perform his duties as reasonably assigned to him from time to time; (iii) any
violation by Executive of the covenants set forth in paragraphs 7, 8 or 9; or
(iv) Executive becomes mentally or physically incapacitated to such extent that
Executive is unable to substantially perform his duties under this Agreement for
a period of more than one hundred eighty (180) consecutive days.
(b) Automatic. This Agreement shall automatically terminate upon the
death of Executive.
(c) Effect. Upon termination of the Term of Employment, whether by
Executive or Employer, all continuing rights and obligations hereunder shall
cease except for (i) the rights and obligations arising under Paragraph 3 of
this Agreement to the extent the agreements governing any such benefits and
plans so require, (ii) the rights and obligations under Paragraph 4 of this
Agreement with respect to expenses incurred prior to the date of termination,
(iii) the rights and obligations under this Subparagraph 6(c), and (iv) the
rights and obligations under Paragraphs 7, 8, 9 and 10 hereof. The covenants set
forth in Paragraphs 7, 8, 9 and 10 shall be construed as agreements ancillary to
but independent of any other provision of this Agreement. The existence of any
claim or cause of action against Employer, whether predicated on this Agreement
or otherwise, shall not constitute a defense to the enforcement of said
covenants. Executive expressly authorizes Employer to deduct from any
compensation payable to Executive on the expiration or termination of this
Agreement, the value of any monetary advances or loans received by Executive
from Employer, the value of any personal expenses of Executive borne by Employer
which are outstanding, and the value of any property or materials belonging to
Employer which are not returned to Employer upon expiration or termination.
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 2
<PAGE>
7. CONFIDENTIALITY COVENANTS.
During the Term of Employment (except with respect to disclosures occurring
during the normal course of Executive performing his services in accordance
herewith) and continuing in perpetuity, Executive shall:
(a) preserve as confidential all knowledge and information pertaining
to the business, affairs, directors, officers, shareholders, employees, and
other personnel of Employer, all affiliates of Employer (including, without
limitation, Employer's affiliates) and any predecessors of Employer (including,
without limitation, Athletic Supply of Dallas, Inc. and Athletic Supply of
Dallas, L.L.C.) obtained by Executive from any source whatsoever and which is
not a matter of public knowledge, unless disclosure is otherwise required by
applicable law, and
(b) not, except on behalf of Employer during the Term of Employment,
use Employer's records, documents, contracts, writings, data or other
information, whether or not same is in written or other recorded form, unless
they are a matter of public knowledge.
Without limiting the generality of the foregoing, the prohibitions
contained above shall be operative, whether inside or outside the United States,
with respect to any information or knowledge that Employer or any affiliate of
Employer now or hereafter may deem to be confidential, including, without
limitation, the following information with respect to Employer: (i) directors,
officers, shareholders, employees, and other personnel; (ii) operations or
planning, including customer lists, lists of suppliers, and information
pertaining to potential customers or suppliers; (iii) bids or progress under, or
negotiations pursuant to, government or other contracts, or with respect to
facilities and equipment, including contents of any manual, practice or
procedure, or operating revenue, expense, private or public debt or equity
financing or banking, accounting, or financial matters; (iv) advertising or
promotional plans or programs; (v) matters contained in applications to or
matters or proceedings pending under the jurisdiction of any regulatory agency
or court, including those that are only threatened; (vi) any system, procedure,
or administrative operation; (vii) plans for the extension of the present
business or commencement of a new business; (viii) any copyrights, trade
secrets, know-how, proprietary information, patents, inventions, marks,
software, licenses or technology, and any registrations or applications for
registration relating to the foregoing, owned or utilized by Employer, or any
affiliate of Employer, or work in progress with respect to such items and (ix)
plans with respect to business combinations or reorganizations.
8. NONCOMPETITION COVENANT.
During the Term of Employment and continuing during the Restricted Period,
Executive hereby agrees that he shall not Engage in a Competing Business. For
the purposes of this Agreement, the term "Restricted Period" shall mean, in the
event of the termination of the Term of Employment for any reason, any and all
times through and including the date which is three (3) years following the
termination of this Agreement. The term "Engage" shall mean the Executive,
directly or indirectly, being a principal, owner, officer, director, employee,
shareholder (other than a holder of fewer than 5% of the outstanding shares of a
publicly-traded company), consultant, partner, joint venturer, agent, or equity
owner or having any other capacity whatsoever in any business enterprise
(regardless of whether it is a corporation, partnership, sole proprietorship or
business association). The term "Competing Business" shall mean any business
enterprise which is engaged in the Business of Employer in any area of the world
in which Employer or any of its affiliates are then conducting or planning to
conduct business. The term "Business of Employer" shall mean the type of
business engaged in or proposed to be engaged in by Employer at the time of
Executive's termination, including, without limitation, the software and systems
development and operations related to the telemarketing or fulfillment business
for the direct mail or catalog business.
9. INDUCEMENT OF CLIENTS.
During the Term of Employment and continuing during the Restricted Period,
Executive hereby agrees that he shall not, directly or indirectly, solicit or
interfere, for the benefit of any Competing Business or in any manner materially
detrimental to Employer, with the Clients, employees and business relationships
of Employer. For purposes of the foregoing sentence, the term "Clients" shall
mean any individual, proprietorship, partnership, corporation, association, or
other entity that is solicited or served by Employer or its affiliates during
the Term of Employment and
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 3
<PAGE>
within three (3) years prior to the commencement thereof. Without in any manner
limiting the scope of the foregoing provisions, if the Executive engages in any
of the following acts he shall be considered to have violated this covenant:
(a) induces or attempts to induce any Client or prospective Client to
withdraw, curtail, divert, or cancel its business or any agreements with
Employer or its affiliates;
(b) induces or attempts to induce any employee of Employer or its
affiliates to terminate his or her employment therewith;
(c) induces or attempts to induce any independent contractor
providing services on behalf of Employer or its affiliates to terminate his or
her business relationship therewith;
(d) develops any materials utilizing the confidential information of
Employer or its affiliates, except for the benefit of Employer or its
affiliates; or
(e) disrupts in any manner whatsoever any of Employer's or its
affiliate's existing business relationships.
10. INTELLECTUAL PROPERTY RIGHTS.
(a) Executive agrees that he will make prompt and full disclosure to
Employer, will hold in trust for the sole right and benefit of Employer, and
will promptly assign to Employer, all of Executive's right, title and interest
in and to any trademarks, service marks, trade names, patents and copyrights,
all applications therefor and registrations thereof in the United States and all
foreign countries, all trade secrets, know-how, works of authorship, inventions,
innovations, improvements, developments, methods, designs, analyses, drawings,
reports and similar or related information, which Executive solely or jointly
conceives, develops, or reduces to practice, causes to be conceived, developed
or reduced to practice, or with respect to which Executive or any entity with
which Executive is affiliated obtains any ownership interest in, during the Term
of Employment. Executive further acknowledges that Employer is acquiring
substantially all of the intellectual property rights (including all software
developed by Executive to date) of Executive's former employer, Athletic Supply
of Dallas, Inc. and Athletic Supply of Dallas, L.L.C. To the extent any of the
intellectual property rights of the type noted in this subparagraph 10(a) have
not been acquired by Employer, Executive shall promptly assign all of his right,
title and interest in such property to Employer.
(b) Executive acknowledges that all works of authorship which are
made by him (solely or jointly with others) within the scope of his employment
and during the Term of Employment shall be deemed "works made for hire", as that
term is defined in the United States Copyright Act (17 U.S.C. 101 et. seq.),
such that Employer shall be considered the author of such works and owner of all
copyrights therein. Executive warrants and represents that all works of
authorship which he made (solely or jointly with others) within the scope of his
employment and during all times he was employed by the predecessors-in-interest
to Employer were likewise deemed to be "works made for hire," such that the
respective predecessors-in-interest to Employer were considered the authors of
such works and owners of all copyrights therein. In the event that any such
works made during the Term of Employment with Employer, or made during
Executive's employment with the predecessors-in-interest to Employer, are for
any reason not held to be works made for hire, Executive hereby irrevocably
assigns to Employer all of Executive's right, title and interest in and to such
works and all copyrights therein, whether now existing or hereafter created.
(c) Executive agrees to assist and cooperate with Employer as may be
necessary or desirable from time to time in furtherance of the purposes of this
paragraph 10, including, without limitation, the execution, verification and
delivery of documents and the doing or taking of such lawful actions as Employer
may reasonably request in the United States and all foreign countries. Without
limiting the generality of the foregoing, Executive agrees without further
compensation to execute and deliver such documents and take such actions
(including appearing as a witness) as may be useful to enable Employer to apply
for, register, obtain, assign, perfect, evidence, sustain, record and enforce
any of the Executive Property and/or other rights assigned or to be assigned to
Employer pursuant to this Agreement, in the United States and all foreign
countries, and in connection with the assignments (and recording
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 4
<PAGE>
thereof) of such Executive Property and/or other rights to Employer or its
designee. The obligations of Executive pursuant to this paragraph 10(c) shall
continue beyond the Term of Employment, but following the Term of Employment
with Employer, Employer shall compensate Executive at a reasonable rate after
Executive's termination for the time actually spent by Executive in this
connection at Employer's request.
(d) In the event Employer is unable for any reason, after reasonable
effort, to secure Executive's assistance and cooperation or Executive's
signature on any document necessary or desirable in connection with the matters
set forth in this paragraph 10, Executive hereby irrevocably designates and
appoints Employer and its duly authorized officers and agents as Executive's
agent and attorney-in-fact, to act for and in Executive's behalf to execute,
verify and file such documents and to do all other lawfully permitted acts to
further the purposes of this paragraph 10, with the same legal force and effect
as if executed or performed by Executive.
(e) Executive hereby assigns to Employer any and all claims, of any
nature whatsoever, which Executive may now or hereafter have for infringement,
including past infringement, of any rights assigned or to be assigned to
Employer pursuant to this Agreement.
11. REMEDIES.
Without limiting any other rights of Employer, in the event of breach or
threatened breach by Executive of any provision in Paragraphs 7, 8, 9 or 10
hereof, Employer shall be entitled to (i) relief by temporary restraining order,
temporary injunction, permanent injunction or otherwise, as issued by a court of
law or equity, (ii) recovery of all attorneys' fees and costs incurred by
Employer in obtaining such relief, and (iii) any other legal and equitable
relief to which it may be entitled, including any and all monetary damages which
any Employer may incur as a result of said breach or threatened breach or
violation. Employer may pursue any remedy available to it, including declaratory
relief, concurrently or consecutively in any order as to any breach, violation,
or threatened breach or violation, and the pursuit of one such remedy at any
time will not be deemed an election of remedies or waiver of the right to pursue
any other remedy. Employer has the right to pursue partial enforcement and/or to
seek declaratory relief regarding the enforceable scope of this Agreement
without penalty and without waiving Employer's right to pursue any other
available remedy subsequent to or concurrently with declaratory relief. The
provisions of this Paragraph 11 shall not in any manner limit the rights and
remedies available to Employer for any breach of the terms of this Agreement.
12. NO BREACH.
Executive represents and warrants that the execution and delivery of this
Agreement and his performance and consummation of the transactions contemplated
under those documents, do not, and will not, conflict, breach, or constitute a
default under any other agreement, instrument, covenant or restriction that
Executive is a party to or otherwise bound by.
13. NOTICES.
Any notice or request herein required or permitted to be given to either
party hereunder shall be given in writing and shall be personally delivered or
sent to such party by prepaid mail at the address of such party set forth below
or at such other address as such party may designate by written communication to
the other parties to this Agreement:
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 5
<PAGE>
If to Executive: Paul Jennings
13145 Halwin Ct.
Dallas, Texas 75243
with copies to: Jenkins, Watkins & Mask, P.C.
12750 Merit Drive, 8th Floor
Dallas, Texas 75251
Attn: Alan Mask, Esq.
If to Employer: ASD Systems, Ltd.
10850 Sanden Drive
Dallas, Texas 75238
Attention: Mr. Norman Charney
Telefax: (214) 343-2924
With copy to:
Arter & Hadden
1717 Main Street, Suite 4100
Dallas, Texas 75201-4605
Attention: Mark S. Solomon, Esq.
Telefax: (214) 741-7139
Each notice given in accordance with this paragraph shall be deemed to have been
given, if personally delivered, on the date personally delivered or, if mailed,
on the fifth day following the day on which it is deposited in the United States
mail, certified or registered mail, return receipt requested, with postage
prepaid.
14. HEADINGS.
The headings of the paragraphs of this Agreement have been inserted for
convenience of reference only and shall in no way restrict or modify any of the
terms or provisions hereof.
15. SEVERABILITY.
If any provision of this Agreement is held to be illegal, invalid, or
unenforceable under present or future laws effective during the term hereof,
such provision shall be fully severable and this Agreement shall be construed
and enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part of this Agreement; and the remaining provisions of this
Agreement shall remain in full force and effect and shall not be affected by the
illegal, invalid, or unenforceable provision or by its severance from this
Agreement. Furthermore, in lieu of each such illegal, invalid, or unenforceable
provision, there shall be added automatically as a part of this Agreement a
provision as similar in terms to such illegal, invalid, or unenforceable
provision as may be possible and be legal, valid, and enforceable.
16. ENTIRE AGREEMENT; SURVIVAL.
This Agreement embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings, if any, relating to the subject matter
hereof. The covenants, agreements, representations and warranties contained in
or made pursuant to this Agreement shall survive Executive's termination of
employment and the termination of this Agreement.
17. BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of each of
the parties hereto and their respective successors, heirs, assigns, and legal
representatives, but Executive may not assign this Agreement nor any rights or
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 6
<PAGE>
obligations hereunder without the prior consent in writing of Employer. This
Agreement may be assigned by Employer to any party who acquires substantially
all of the assets of Employer or who merges or consolidates with Employer;
provided that such party agrees to assume and be liable for all of the
obligations of Employer hereunder.
18. ATTORNEYS' FEES.
If any action at law or in equity is necessary to enforce or interpret the
terms of this Agreement, the prevailing party shall be entitled to reasonable
attorneys' fees, costs, and necessary disbursements in addition to any other
relief to which he or it may be entitled.
19. WAIVERS.
One or more waivers of any covenant, term, or provision of this Agreement
by either party hereto shall not be construed as a waiver of the breach of any
other covenant, term, or provision or of any subsequent breach of the same or
any other covenant, term, or provision. The consent or approval of either party
hereto with respect to the act of the other party hereto shall not be deemed to
waive or render unnecessary consent to or approval of any subsequent similar
act. No custom or practice of the parties shall constitute a waiver of either
party's rights to insist upon strict compliance with the terms hereof.
20. GOVERNING LAW.
This Agreement shall be governed in all respects, including validity,
interpretation and effect by the laws of the State of Texas.
[Signature page follows]
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EMPLOYMENT AGREEMENT - Page 7
<PAGE>
EXECUTED to be effective as of the date first above written.
EMPLOYER:
ASD SYSTEMS, LTD.
By: ASD Systems GP, Inc.,
its General Partner
By: /s/ NORMAN CHARNEY
--------------------------
Norman Charney, President
EXECUTIVE:
/s/ PAUL JENNINGS
------------------------------
PAUL JENNINGS
- --------------------------------------------------------------------------------
EMPLOYMENT AGREEMENT - Page 8
<PAGE>
EXHIBIT 10.10
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this 29th day of
January, 1999, by and between ASD Systems, Inc., a Texas corporation (the
"Company"), and ______________ ("Indemnitee"), a director of the Company.
WHEREAS, the Company and Indemnitee recognize the substantial increase in
corporate litigation subjecting officers and directors to expensive litigation
risks; and
WHEREAS, Indemnitee does not regard the current protection available as
adequate given the present circumstances, and Indemnitee and/or other officers
and directors of the Company may not be willing to serve as officers and/or
directors without adequate protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and/or directors
of the Company and to indemnify its officers and/or directors so as to provide
them with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Generally. The Company shall indemnify Indemnitee if Indemnitee is or
---------
is threatened to be made a named defendant or respondent in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, arbitrative or investigative, any appeal in such an action, suit
or proceeding, or any inquiry or investigation that could lead to such an
action, suit or proceeding, because Indemnitee is or was a director, officer,
employee or agent of the Company, is or was serving at the request of the
Company as a director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic
corporation, employee benefit plan, other enterprise or other entity, or any
action or inaction by Indemnitee while acting in any capacity described in
clauses (i) and (ii) of this Section 1 (a), if, and only if, it is determined
--------------
that Indenmitee met the standard of conduct required in Section 1 (b) hereof,
-------------
such determination to be made in accordance with Section 1 (c) hereof.
-------------
(b) Standard of Conduct. The Company shall indemnify Indemnitee pursuant
-------------------
to Section 1 (a) hereof if, and only if, it is determined in accordance with
-------------
Section l(c) hereof that Indemnitee acted in good faith; reasonably believed (A)
- ------------
in the case of conduct in Indemnitee's official capacity as a director of the
Company, that Indenmitee's conduct was in the best interests of the Company and
(B) in all other cases, that Indemnitee's conduct was at least not opposed to
the best interests of the Company; and in the case of any criminal proceeding,
had no reasonable cause to believe Indemnitee's conduct was unlawful. The
termination of a proceeding by judgment, order, settlement, or conviction, or on
a plea of nolo contendere or its equivalent is not of itself determinative that
Indemnitee did not meet the requirements set forth in this Section 1 (b).
-------------
<PAGE>
(c) Indemnification Procedure. Within thirty (30) days following receipt
-------------------------
of a request for indemnification to be provided pursuant to Section 1 (a)
-------------
hereof, a determination shall be made whether Indemnitee has met the standard of
conduct required for indemnification, as set forth in Section 1 (b) hereof.
-------------
Such determination shall be made by the Board of Directors by a majority vote of
a quorum consisting of directors who at the time of the vote are not named
defendants or respondents in the proceeding, and if such a quorum cannot be
obtained, by a majority vote of a committee of the Board of Directors,
designated to act in the matter by a majority vote of all directors, such
committee consisting solely of two (2) or more directors who at the time of the
vote are not named defendants or respondents in the proceeding, by special legal
counsel selected by the Board of Directors or a committee of the Board of
Directors by vote as set forth in clause (i) or (ii) of this Section l(c), or,
------------
if such quorum cannot be obtained and such a committee cannot be established, by
the Board of Directors by a majority vote of all directors or by the Company's
shareholders in a vote that excludes the shares held by persons/entities
who/which are named defendants or respondents in the proceeding. Promptly upon
determination that Indemnitee has met the standard of conduct required for
indemnification, payment will be made to Indenmitee. Indemnitee may contest a
determination that Indemnitee has not met the relevant standard of conduct for
indemnification by petitioning a court of appropriate jurisdiction to make an
independent determination respecting the right of indemnification, in accordance
with the terms of Section 3 hereof.
---------
(d) Limitation on Indemnification. Except to the extent permitted by
-----------------------------
Section 1 (e) hereof, Indemnitee may not be indemnified under Section 1 (a)
- -------------
hereof in respect of a proceeding in which Indemnitee is found liable on the
basis that personal benefit was improperly received by Indemnitee, whether or
not the benefit resulted from an action taken in Indemnitee's official capacity,
or in which Indemnitee is found liable to the Company. Indemnitee shall be
deemed to have been found liable in respect of any claim, issue or matter only
after Indemnitee shall have been so adjudged by a court of competent
jurisdiction after exhaustion of all appeals therefrom.
(e) Scope of Indemnification. The Company shall indemnify Indemnitee under
------------------------
Section l(a) hereof against judgments, penalties (including excise and similar
- ------------
taxes), fines, settlements, and reasonable expenses actually incurred by
Indemnitee in connection with the proceeding (including court costs and
attorneys' fees); but if Indemnitee is found liable to the Company or is found
liable on the basis that personal benefit was improperly received by Indemnitee,
the indemnification will be limited to reasonable expenses actually incurred by
Indemnitee in connection with the proceeding and shall not be made in respect of
any proceeding in which Indemnitee shall have been found liable for willful or
intentional misconduct in the performance of Indemnitee's duty to the Company.
2. Expenses.
--------
(a) Mandatory Indemnification of Expenses. The Company shall indemnify
-------------------------------------
Indemnitee against reasonable expenses incurred by Indemnitee in connection with
a proceeding in which Indemnitee is a named defendant or respondent because
Indemnitee is or was a director, or was serving in such other capacity described
in clauses (i) and (ii) of Section l(a) hereof, if Indemnitee has been wholly
------------
successful, on the merits or otherwise (including a settlement), in the defense
of the proceeding.
2.
<PAGE>
(b) Reasonable Expense Determination. Authorization of indemnification and
--------------------------------
determination as to reasonableness of expenses must be made in the same manner
as the determination that indemnification is permissible under Section l(c)
------------
hereof, except that if the determination that indemnification is permissible is
made by special legal counsel under clause (iii) of Section l(c) hereof,
----
authorization of indemnification and determination as to reasonableness of
expenses must be made in the manner specified by clause (iii) of Section 1 (c)
-------------
hereof for the selection of special legal counsel.
(c) Advancement of Expenses. Expenses actually and reasonably incurred by
-----------------------
Indemnitee who was, is, or is threatened to be made a named defendant or
respondent in a proceeding shall be paid or reimbursed by the Company within
twenty (20) days following delivery of a written request therefor (together with
evidence of the expenses actually and reasonably incurred) by the Indemnitee to
the Company, in advance of the final disposition of the proceeding and without
the authorization or determination specified in Section 2(b) hereof, after the
------------
Company receives a written affirmation by Indemnitee of Indemnitee's good faith
belief that Indemnitee has met the standard of conduct necessary for
indemnification under Section 1 (b) hereof and a written undertaking by or on
-------------
behalf of Indemnitee to repay the amount paid or reimbursed if it is ultimately
determined that Indemnitee has not met that standard or if it is ultimately
determined that indemnification of Indemnitee against expenses incurred by
Indemnitee in connection with that proceeding is prohibited by Section 1 (e)
-------------
hereof.
3. Enforcement of Rights. The right to indemnification or advances as
---------------------
provided by this Agreement shall be enforceable by Indemnitee in any court of
competent jurisdiction. The burden of proving that indemnification or advances
are appropriate shall be on Indemnitee. Neither the failure of the Company
(including its Board of Directors, a committee of its Board of Directors,
independent legal counsel or shareholders) to have made a determination prior to
the commencement of such action that indemnification or advances are proper
under the circumstances because Indemnitee has met the applicable standard of
conduct, nor an actual determination by the Company (including its Board of
Directors, a committee of its Board of Directors, independent legal counsel or
shareholders) that Indemnitee has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that Indemnitee has not
met the applicable standard of conduct. The Company agrees to indemnify
Indemnitee against and hold Indemnitee harmless from any judgments, fines,
losses, claims, costs (including, without limitation, costs of settlement
actually and reasonably incurred by Indemnitee) and expenses (including, without
limitation, attorney's fees and court costs) sustained or incurred by Indemnitee
in connection with a successful action, suit or proceeding to establish
Indemnitee's rights to indemnification or advances pursuant to this Agreement.
4. Additional Rights; Non-Exclusivity.
----------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by
law with respect to Indemnitee's actions and omissions in the capacities
described in clauses (i) and (ii) of Section 1 (a) hereof, notwithstanding that
-------------
such indemnification is not specifically authorized by the other provisions of
this Agreement, the Company's Articles of Incorporation, the Company's Bylaws or
by statute. In the event of any change, after the date of this Agreement, in
any applicable law,
3.
<PAGE>
statute, or rule which expands the right of a Texas corporation to indemnify a
member of its Board of Directors or its officers, such change will be, ipso
----
facto, within the purview of Indemnitee's rights, and Company's obligations,
- -----
under this Agreement. In the event of any change in any applicable law, statute,
or rule which narrows the right of a Texas corporation to indemnify a member of
its Board of Directors or its officers, such changes, to the extent not
otherwise required by such law, statute or rule to be applied to this Agreement
shall have no effect on this Agreement or the parties rights and obligations
hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
--------------
not be deemed exclusive of any rights to which an Indemnitee may be entitled
under the Company's Articles of Incorporation, the Company's Bylaws, any
agreement, any vote of shareholders or disinterested Directors, the Texas
Business Corporation Act, or otherwise, with respect to Indemnitee's actions and
omissions in the capacities described in clauses (i) and (ii) of Section 1 (a)
-------------
hereof. The indemnification provided under this Agreement shall continue as to
Indemnitee even though Indemnitee may have ceased to be a director or officer of
the Company or to act in the capacities described in clauses (i) and (ii) of
Section 1 (a) hereof.
- -------------
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Officer and Director Liability Insurance. The Company shall, from time
----------------------------------------
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage.
7. Severabiliy. Nothing in this Agreement is intended to require or
-----------
shall be construed as requiring the Company to do or fall to do any act in
violation of applicable law. The provisions of this Agreement shall be
severable as provided in this Section 7. If this Agreement or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Company shall nevertheless indemnify Indemnitee to the fullest extent
permitted by any applicable portion of this Agreement that shall not have been
invalidated, and the balance of this Agreement not so invalidated shall be
enforceable in accordance with its terms. Furthermore, to the extent any
provision of this Agreement is deemed unenforceable, it is the intent of the
parties hereto that this Agreement be deemed amended to cause, to the maximum
extent permissible, such unenforceable provision to be enforceable.
8. Choice of Law. This Agreement is made and entered into pursuant to
-------------
Section 2.02-1 (G) of the Texas Business Corporation Act and this Agreement
shall be governed by and its provisions construed in accordance with the laws of
the State of Texas.
4.
<PAGE>
9. Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to
ASD Systems, Inc.
3737 Grader Street, Suite 110
Garland, Texas 75041
Notice shall be deemed received three (3) days after the date postmarked if sent
by certified or registered mail, properly addressed. In addition, Indenmitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power.
10. Counterparts. This Agreement may be executed in counterparts, each of
------------
which shall constitute an original.
11. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
12. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of lndemnitee's material defenses to such
action were made in bad faith or were frivolous.
13. Miscellaneous. For purposes of this Agreement, references to "the
-------------
Company" shall include, in addition to the Company, any domestic or foreign
predecessor entity of the Company in a merger, conversion, consolidation or
other transaction in which some or all of the liabilities of the predecessor are
transferred to the Company by operation of law and in any other transaction in
which the Company assumes the liabilities of the predecessor but does not
specifically exclude liabilities that are the subject matter of this Agreement.
In addition, references contained in this Agreement to "official capacity" shall
mean when used with respect to a director, the office of director in the
Company, when used with respect to a person other than a director, the elective
or appointive office in the Company held by Indemnitee or the employment or
agency relationship undertaken by Indemnitee on behalf of the Company, but in
both of the preceding clauses (i) and (ii) does not include service for any
other foreign or domestic corporation or any employee benefit plan, other
enterprise or other entity.
5.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ASD SYSTEMS, INC.
By: ____________________________
Norman Charney, President
AGREED TO AND ACCEPTED:
INDEMNITEE:
By:__________________________
Indemnitee
6.
<PAGE>
EXHIBIT 10.11
STOCK OPTION AGREEMENT
OF
ASD SYSTEMS, INC.
STOCK OPTION AGREEMENT (this "Agreement") entered into this 10th day of
February, 1999, between ASD SYSTEMS, INC., a Texas corporation (the
"Corporation"), and PAUL M. JENNINGS, (the "Optionee," which term as used herein
shall be deemed to include any successor to the Optionee by will or by the laws
of descent and distribution, unless the context shall otherwise require).
The Corporation, acting through its Board of Directors, approved the
issuance to the Optionee, effective as of the date set forth above, of a
nonqualified stock option to purchase up to an aggregate of 957,500 shares of
the Series B common stock, par value $.0001, of the Corporation (the "Common
Stock"), at an exercise price of $1.00 per share (the "Option Price"), which
represents not less than 100% of the fair market value of a share of Common
Stock as determined by the Board of Directors, upon the terms and conditions
hereinafter set forth. Optionee acknowledges that the Series B Common Stock is
nonvoting.
NOW, THEREFORE, in consideration of the mutual premises and undertakings
hereinafter set forth, the parties hereto agree as follows:
1. Option; Option Price. On behalf of the Corporation, the Board hereby
--------------------
grants as of the date of this Agreement to the Optionee the option (the
"Option") to purchase, subject to the terms and conditions of this Agreement
957,500 shares of the Series B Common Stock of the Corporation at an exercise
price per share equal to the Option Price.
2. Term. The term (the "Option Term") of the Option shall commence on the
----
date of this Agreement and shall terminate on , 2004 unless such Option
shall theretofore have been terminated in accordance with the terms hereof.
3. Vesting; Change of Control; Restrictions on Exercise.
----------------------------------------------------
(a) Subject to the provisions of Sections 5 and 8 hereof, the Option
granted hereunder shall become fully vested and immediately exercisable on the
date hereof.
(b) Subject to the provisions of Sections 5 and 8 hereof, the shares as to
which the Option is exercisable may be purchased at any time prior to the
expiration or termination of the Option.
4. Termination of Option.
---------------------
(a) The unexercised portion of the Option (whether or not vested) shall
automatically and without notice terminate and become null and void at the time
of the earliest to occur of:
(i) one hundred eighty (180) days after the date that the Optionee
ceases to be a Director by reason of death; or
<PAGE>
(ii) the expiration date of the term of the Option.
5. Procedure for Exercise.
----------------------
(a) Subject to the requirements of Section 8, the Option may be exercised,
from time to time, in whole or in part (but for the purchase of a whole number
of shares only), by delivery of a written notice (the "Notice") from the
Optionee to the Secretary of the Corporation, which Notice shall:
(i) state that the Optionee elects to exercise the Option;
(ii) state the number of shares with respect to which the Option is
being exercised (the "Optioned Shares");
(iii) state the date upon which the Optionee desires to consummate
the purchase of the Optioned Shares (which date must be prior to the
termination of such Option and no later than thirty (30) days after the
date of receipt of such Notice);
(iv) include any representations of the Optionee required under
Section 8(c); and
(v) if the Option shall be exercised pursuant to Section 10 by any
person other than the Optionee, include evidence to the satisfaction of the
Board of the right of such person to exercise the Option.
(b) Payment of the Option Price for the Optioned Shares shall be made in
U.S. dollars by personal check, bank draft or money order payable to the order
of the Corporation or by wire transfer.
(c) The Corporation shall issue a stock certificate in the name of the
Optionee (or such other person exercising the Option in accordance with the
provisions of Section 10) for the Optioned Shares as soon as practicable after
receipt of the Notice and payment of the aggregate Option Price for such shares.
6. No Rights as a Stockholder. The Optionee Shall Have No Rights As A
--------------------------
stockholder of the Corporation with respect to any Optioned Shares until the
date the Optionee or his nominee (which, for purposes of this Agreement, shall
include any third party agent selected by the Board to hold such Option Shares
on behalf of the Optionee), guardian or legal representative is the holder of
record of such Optioned Shares.
7. Adjustments.
-----------
(a) If at any time while the Option is outstanding, there shall be any
increase or decrease in the number of issued and outstanding shares of Common
Stock through the declaration of a stock dividend, stock split, combination of
shares or through any recapitalization resulting in a stock split-up, spin-off,
combination or exchange of shares of Common Stock, then and in each such event
appropriate adjustment shall be made in the number of shares and the exercise
price per share covered by the Option, so that the same proportion of the
Corporation's issued and
2
<PAGE>
outstanding shares of Common Stock shall remain subject to purchase at the same
aggregate exercise price.
(b) Except as otherwise expressly provided herein, the issuance by the
Corporation of shares of its capital stock of any class, or securities
convertible into shares of capital stock of any class, either in connection with
a direct sale or upon the exercise of rights or warrants to subscribe therefor,
or upon conversion of shares or obligations of the Corporation convertible into
such shares or other securities, shall not affect, and no adjustment by reason
thereof shall be made with respect to, the number of or exercise price of shares
of Common Stock covered by the Option.
(c) Without limiting the generality of the foregoing, the existence of the
Option shall not affect in any manner the right or power of the Corporation to
make, authorize or consummate (i) any or all adjustments, recapitalizations,
reorganizations or other changes in the Corporation's capital structure or its
business; (ii) any merger or consolidation of the Corporation; (iii) any issue
by the Corporation of debt securities, or preferred or preference stock that
would rank above the shares of Common Stock covered by the Option; (iv) the
dissolution or liquidation of the Corporation; (v) any sale, transfer or
assignment of all or any part of the assets or business of the Corporation; or
(vi) any other corporate act or proceeding, whether of a similar character or
otherwise.
8. Additional Provisions Related to Exercise.
-----------------------------------------
(a) The Option shall be exercisable only in accordance with this Agreement,
including the provisions regarding the period when the Option may be exercised
and the number of shares of Common Stock that may be acquired upon exercise.
(b) The Option may not be exercised as to less than one hundred (100)
shares of Common Stock at any one time unless less than one hundred (100) shares
of Common Stock remain to be purchased upon the exercise of the Option.
(c) To exercise the Option, the Optionee shall follow the provisions of
Section 5 hereof. Upon the exercise of the Option at a time when there is not
in effect a registration statement under the Securities Act of 1933, as amended
(the "Securities Act") relating to the shares of Common Stock issuable upon
exercise of the Option, the Board in its discretion may, as a condition to the
exercise of the Option, require the Optionee (i) to represent in writing that
the shares of Common Stock received upon exercise of the Option are being
acquired for investment and not with a view to distribution and (ii) to make
such other representations and warranties as are deemed appropriate by counsel
to the Corporation or any underwriters or prospective underwriters (including
lock-up options). No Option may be exercised and no shares of Common Stock
shall be issued and delivered upon the exercise of the Option unless and until
the Corporation and/or the Optionee shall have complied with all applicable
federal or state registration, listing and/or qualification requirements and all
other requirements of law or of any regulatory agencies having jurisdiction.
(d) Stock certificates representing shares of Common Stock acquired upon
the exercise of the Option that have not been registered under the Securities
Act shall, if required by the Board, bear the following legend:
3
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT").
THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED."
(e) The exercise of each Option and the issuance of shares in connection
with the exercise of an Option shall, in all cases, be subject to the
satisfaction of withholding tax or other withholding liabilities.
9. Restriction on Transfer. The Option may not be assigned or transferred
-----------------------
except by will or by the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined in the Code, and may be exercised
during the lifetime of the Optionee only by the Optionee or the Optionee's
guardian or legal representative or assignee pursuant to a qualified domestic
relations order. If the Optionee dies, the Option shall thereafter be
exercisable, during the period specified in Section 4(a)(ii), by his executors
or administrators or by a person who acquired the right to exercise such option
by bequest or inheritance to the full extent to which the Option was exercisable
by the Optionee at the time of his death. The Option shall not be subject to
execution, attachment or similar process. Any attempted assignment or transfer
of the Option contrary to the provisions hereof, and the levy of any execution,
attachment or similar process upon the Option, shall be null and void and
without effect.
10. Notices. All notices or other communications which are required or
-------
permitted hereunder shall be in writing and sufficient if (i) personally
delivered, (ii) sent by nationally-recognized overnight courier or (iii) sent by
registered or certified mail, postage prepaid, return receipt requested,
addressed as follows:
if to the Optionee, to the address set forth on the signature page
hereto; and
if to the Corporation, to:
ASD Systems, Inc.
3737 Grader Street
Garland, Texas 75041
Attention: Norman Charney
or to such other address as the party to whom notice is to be given may have
furnished to each other party in writing in accordance herewith. Any such
communication shall be deemed to have been given (i) when delivered, if
personally delivered, (ii) on the first Business Day (as hereinafter defined)
after dispatch, if sent by nationally-recognized overnight courier and (iii) on
the third Business Day following the date on which the piece of mail containing
such communication is posted, if sent by mail. As used herein, "Business Day"
means a day that is not a Saturday, Sunday or a day on which banking
institutions in the city to which the notice or communication is to be sent are
not required to be open.
4
<PAGE>
11. No Waiver. No waiver of any breach or condition of this Agreement
---------
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of like or different nature.
12. Optionee Undertaking. The Optionee hereby agrees to take whatever
--------------------
additional actions and execute whatever additional documents the Corporation or
its counsel may in their reasonable judgment deem necessary or advisable in
order to carry out or effect one or more of the obligations or restrictions
imposed on the Optionee pursuant to the express provisions of this Agreement.
13. Modification of Rights. The rights of the Optionee are subject to
----------------------
modification and termination in certain events as provided in this Agreement.
14. Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the laws of the State of Texas applicable to contracts made and
to be wholly performed therein.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
16. Entire Agreement. This Agreement constitute the entire agreement
----------------
between the parties with respect to the subject matter hereof, and supersede all
previously written or oral negotiations, commitments, representations and
agreements with respect thereto.
ASD SYSTEMS, INC.
By: /s/ Norman Charney
_________________________________________
Name: Norman Charney
Title: President
OPTIONEE:
/s/ Paul M. Jennings
____________________________________________
Paul M. Jennings
5
<PAGE>
NOTICE OF EXERCISE
under
NONQUALIFIED STOCK OPTION AGREEMENT
-----------------------------------
To: ASD Systems, Inc. (the "Company")
From: ____________________
Date: ____________________
Pursuant to the Nonqualified Stock Option Agreement (the "Agreement")
between the Company and myself effective ___________, 1999, I hereby exercise my
Option as follows:
<TABLE>
------------------------------------------------------------------------------------------------------
<S> <C>
Number of shares of Common Stock I wish to purchase under the Option
------------------------------------------------------------------------------------------------------
Exercise Price per share $
------------------------------------------------------------------------------------------------------
Total Exercise Price $
------------------------------------------------------------------------------------------------------
"Vested Portion" of Option (see definition in Section 5 of the Agreement)
------------------------------------------------------------------------------------------------------
Number of shares I have previously purchased by exercising the Option
------------------------------------------------------------------------------------------------------
Expiration Date of the Option
------------------------------------------------------------------------------------------------------
</TABLE>
I hereby represent, warrant, and covenant to the Company that:
a. I am acquiring the Common Stock for my own account, for investment,
and not for distribution or resale, and I will make no transfer of such Common
Stock except in compliance with applicable federal and state securities laws and
in accordance with the provisions of the Agreement.
b. I can bear the economic risk of the investment in the Common Stock
resulting from this exercise of the Option, including a total loss of my
investment.
c. I am experienced in business and financial matters and am capable of
(i) evaluating the merits and risks of an investment in the Common Stock; (ii)
making an informed investment decision regarding exercise of the Option; and
(iii) protecting my interests in connection therewith.
I acknowledge that I must pay the exercise price in full and make
appropriate arrangements for the payment of all federal, state and local tax
withholdings due with respect to the Option exercised herein, before the stock
certificate evidencing the shares of Common Stock resulting from this exercise
of the Option will be issued to me.
<PAGE>
Attached in full payment of the exercise price for the Option exercised
herein is ( ) a check made payable to the Company in the amount of
$____________.
-------------------------------------------
Paul Jennings
7
<PAGE>
EXHIBIT 10.12
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT (this "Agreement") is
made and entered into as of August 23, 1999, by and among ASD SYSTEMS, INC., a
Texas corporation (the "Company"), Norman Charney ("Charney"), Paul M. Jennings
("Jennings") , and each of the persons and entities identified on Schedules A-1,
A-2 and A-3 attached hereto (Charney, Jennings and such persons and entities
listed on Schedules A-1, A-2 and A-3 being hereinafter referred to collectively
as "Shareholders" and individually as a "Shareholder") and each of the persons
and entities listed on Schedule B attached hereto (each, a "Preferred Investor")
W I T N E S S E T H:
WHEREAS, the Company, in connection with the transactions contemplated by
that certain Securities Purchase Agreement between the Company and the Preferred
Investor of dated August 22, 1999 (the "Securities Purchase Agreement"), has
amended and restated its Articles of Incorporation (the "Amended and Restated
Articles") to provide that it is authorized to issue 50,000,000 shares of Common
Stock, $.0001 par value per share (the "Common Stock") and 7,500,000 shares of
Preferred Stock, $.0001 par value (the "Preferred Stock"), of which 1,111,111
shares are designated Series A Preferred Stock (the "Series A Preferred Stock")
1,111,111 shares are designated Series B Preferred Stock ("Series B Preferred
Stock") and 3,200,000 shares are designated Series C Preferred Stock (the
"Series C Preferred Stock"); and
WHEREAS, upon filing of the Amended and Restated Articles, each share of
the Company's Series A Common Stock, $.0001 par value (the "Series A Common
Stock"), will be reclassified into one share of common stock; and
WHEREAS, each Shareholder listed on Schedules A-1, A-2 and A-3 is the
record and beneficial owner of the number of issued and outstanding shares of
Common Stock set forth opposite such Shareholder's name on such Schedule; and
WHEREAS, Charney (together with his family and including trusts for the
benefit of his children) and Jennings together control 100% of the equity
interests in ASD Partners, Ltd., a Texas limited partnership ("ASD Partners"),
which owns 6,000,000 of the shares of Common Stock; and
WHEREAS, the holders of the Common Stock, Charney, Jennings and the Company
previously executed a Shareholders Agreement dated January 29, 1999 (the
"Original Shareholders Agreement"); and
WHEREAS, in connection with the Securities Purchase Agreement, the Company,
the Preferred Investor and all of the Shareholders desire to amend and restate
the Original Shareholders Agreement in its entirety as set forth herein;
1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
set forth herein, the receipt and sufficiency of which are hereby acknowledged,
the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Defined Terms. As used in this Agreement, the following terms
have the following meanings:
"Affiliate" means, with respect to any Shareholder, any Person that
directly or indirectly, through one or more intermediaries, controls, or is
controlled by, or is under common control with, such Shareholder.
"Available Shares" has the meaning set forth in Section 2.2.
"Board" means the Board of Directors of the Company.
"Business Day" means a day other than a Saturday, Sunday or other day on
which commercial banks in New York or Texas are authorized or required by law to
close.
"Buyer" has the meaning set forth in Section 2.3.
"Commission" means the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Common Stock" has the meaning set forth in the recitals hereto.
"Control" of a Person means the power, directly or indirectly, to vote more
than fifty percent (50%) of the securities having voting power for the election
of directors of such Person or to direct or cause the direction of the
management and policies of such Person, whether by voting power, contract or
otherwise; provided, however, that neither the power of the Staubach Affiliated
Shareholders, the Preferred Investors nor the Private Shareholders to elect
members of the Board pursuant to Article III nor the powers of such Board
member(s) pursuant to Article III shall be deemed to constitute the power to
direct or cause the direction of the management and policies of the Company.
"Controlling Person" means a Person possessing Control with respect to the
Person specified.
"Demand Registration" means the registration of a Registrable Security
pursuant to the terms and provisions of Section 4.1.
2
<PAGE>
"Equity Security" means any capital stock of the Company, including Common
Stock or any security convertible into or exchangeable for Common Stock or
carrying any warrant or right to subscribe to or purchase Common Stock or any
such warrant or right.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Family Member" means any parent, spouse, lineal descendent or adopted
child of a Shareholder.
"First Offer Notice" has the meaning set forth in Section 2.2.
"Management Shareholder" means Charney, Jennings, each Affiliate of Charney
and Jennings, and any Permitted Transferee of any of the foregoing (in each
case, holding Stock in the Company).
"Non-Management Shareholder" means any Shareholder or Preferred Investor
who is not a Management Shareholder.
"Offered Shares" has the meaning set forth in Section 2.3.
"Offering Shareholder" has the meaning set forth in Section 2.3.
"Participating Shares" has the meaning set forth in Section 2.3.
"Permitted Transferee" means (A) with respect to any Shareholder or
Preferred Investor, any of the following: (i) any wholly owned subsidiary or
Affiliate of such Person; (ii) any partnership of which such Person or any
family member or Affiliate of such shareholder is a general partner and,
together with such Person's family members, holds in excess of fifty percent
(50%) of the economic interest of the partnership; (iii) any family member of
such Person; (iv) any trust of which there is, during the term hereof, no
beneficiary other than such Person or any one or more persons or entities who
would be a "Permitted Transferee" hereunder; (v) any corporation of which the
Person owns or controls 100% of the capital stock; or (vi) an executor or
administrator of a Person's estate upon his or her death; (B) with respect to
any Staubach Affiliated Shareholder, in addition to the Persons listed in (A)
above, any other Staubach Affiliated Shareholder or the Staubach Company or its
affiliated entities or any director, officer or employee thereof; and (C) with
respect to ASD Partners, any partner of ASD Partners.
"Person" means an individual, a corporation, a partnership, a joint
venture, an association, a joint stock company, a trust, an unincorporated
association or other entity of whatever nature.
"Piggy-Back Registration" means the registration of a Registrable Security
pursuant to the terms and provisions of Section 4.2 hereunder.
3
<PAGE>
"Plan" means any purchase, savings, option, bonus, appreciation, profit
sharing, thrift, incentive, pension or similar plan of the Company that provides
for the issuance of any Equity Security.
"Preferred Investors" means any person or entity listed on Schedule B
hereto and any Permitted Transferee of any of the foregoing (in each case,
holding Stock in the Company).
"Private Shareholder" means any person or entity listed on Schedule
A-2 hereto and any Permitted Transferee of any of the foregoing (in each case,
holding Stock in the Company).
"Pro Rata Portion" means (A) with respect to a right to purchase Stock
given only to the Staubach Affiliated Shareholders, that portion determined by
multiplying the number of shares of Stock subject to Transfer times a fraction,
the numerator of which equals the number of shares of Stock held by the Staubach
Affiliated Shareholder to whom such right to purchase is given, and the
denominator of which equals the aggregate number of shares of Stock owned by all
of the Staubach Affiliated Shareholders having a right to purchase such shares
of Stock, (B) with respect to a right to purchase Stock given only to the
Management Shareholders, that portion determined by multiplying the number of
shares of Stock subject to Transfer times a fraction, the numerator of which
equals the number of shares of Stock held by the Management Shareholder to whom
such right to purchase is given, and the denominator of which equals the
aggregate number of shares of Stock owned by all of the Management Shareholders
having a right to purchase such shares of Stock, (C) with respect to a right to
purchase Stock given only to the Private Shareholders, that portion determined
by multiplying the number of shares of Stock subject to Transfer times a
fraction, the numerator of which equals the number of shares of Stock held by
Private Shareholders to whom such right to purchase is given, and the
denominator of which equals the aggregate number of shares of Stock owned by all
of the Private Shareholders having a right to purchase such shares of Stock, (D)
with respect to a right to purchase Stock given only to the Preferred Investors,
that portion determined by multiplying the number of shares of Stock subject to
Transfer times a fraction, the numerator of which equals the number of shares of
Stock (which for purposes hereof shall include all shares of Common Stock into
which Series A Preferred Stock then held by the Preferred Investors is then
convertible at the then applicable conversion price and an additional number of
shares of Common Stock into which the Series B Preferred Stock would be
convertible if it had the right to convert into Common Stock at the same
conversion price as the Series A Preferred (the "Series B Amount")) held by
Preferred Investors to whom such right to purchase is given, and the denominator
of which equals the aggregate number of shares of Stock (determined as
aforesaid) owned by all of the Preferred Investors having a right to purchase
such shares of Stock, and (E) with respect to a right to purchase Stock given to
the Shareholders and the Preferred Investors, that portion determined by
multiplying the number of shares of Stock subject to Transfer (which shall
include the number of shares of Common Stock into which shares of Series A
Preferred Stock subject to Transfer are convertible into at the applicable
conversion price and the Series B Amount) times a fraction, the numerator of
which equals the number of shares of Stock (including the number of shares of
Common Stock into which any Series A Preferred Stock is convertible and the
Series B Amount) held by the Shareholder or Preferred Investor to whom such
right to purchase is given and the denominator of which equals the aggregate
number of shares of Stock (which for
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purposes hereof shall include all shares of Common Stock into which Series A
Preferred Stock then held by the Preferred Investors is then convertible at the
then applicable conversion price and the Series B Amount) owned by all of the
Shareholders and Preferred Investors having a right to purchase such shares of
Stock.
"Public Offering" means an offering of Equity Securities pursuant to an
effective registration statement (other than a registration statement on Form S-
8 or S-4 or any successor or similar forms) under the Securities Act.
"Registrable Amount" has the meaning set forth in Section 4.1(a).
"Registrable Securities" means (i) the shares of Common Stock currently
owned by the Rights Holders as set forth on Schedules A-1 and A-2, (ii) any
shares of Common Stock issued to the Preferred Investors upon conversion of the
Series A Preferred Stock, (iii) any shares of Common Stock issued to the
Preferred Investors upon exercise of Warrants, and (iv) and any and all Common
Stock of the Company issued or issuable with respect to such shares by way of a
dividend, reclassification, stock split, or other distribution or in connection
with a combination of shares, recapitalization, merger, consolidation or other
reorganization or otherwise. Any Registrable Security will cease to be a
Registrable Security when (i) a Registration Statement covering such Registrable
Security has been declared effective by the Commission and the Registrable
Security has been Transferred pursuant to such effective registration statement,
(ii) the Registrable Security is sold under circumstances in which all of the
applicable conditions of Rule 144 (or any similar provisions then in force)
promulgated under the Securities Act are met, (iii) the Registrable Security has
been otherwise Transferred, the Company has delivered a new certificate or other
evidence of ownership for it not bearing a legend restricting further Transfer,
and it may be resold without subsequent registration under the Securities Act or
(iv) the Registrable Security is eligible for sale pursuant to Rule 144(k) (or
any successor provision) under the Securities Act.
"Registration Expenses" means those expenses associated with any
Registration Statement filed under Article IV hereof, as described in Section
4.3.
"Registration Statement" means a registration statement pursuant to the
Securities Act and the rules and regulations promulgated thereunder.
"Remaining Available Shares" has the meaning set forth in Section 2.2.
"Rights Holders" means the Staubach Affiliated Shareholders, the Preferred
Investors and the Private Shareholders, in each case holding Registrable
Securities.
"Sale Price" means the price per share for Available Shares or Offered
Shares, as applicable, proposed to be Transferred pursuant to Section 2.2 or
Section 2.3, as applicable.
"Second Offer Notice" has the meaning set forth in Section 2.2.
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"Section 2.3 Notice" has the meaning set forth in Section 2.3.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Demand Holders" has the meaning set forth in Section 4.1(c).
"Selling Holders" has the meaning set forth in Section 4.2(a).
"Selling Shareholder" has the meaning set forth in Section 2.2.
"Series A Preferred Stock" has the meaning set forth in the recitals
hereto.
"Series B Preferred Stock" has the meaning set forth in the recitals
hereto.
"Series C Preferred Stock" has the meaning set forth in the recitals
hereto.
"Shareholder Group" means the Staubach Affiliated Shareholders, the
Preferred Investors, the Management Shareholders or the Private Shareholders, as
applicable, acting as a group for any purpose provided in this Agreement.
"Staubach Affiliated Shareholders" means any person or entity listed on
Schedule A-1 and any Permitted Transferee of any of the foregoing (in each case,
holding Stock in the Company).
"Stock" means shares of Common Stock or Preferred Stock, or any securities
having voting rights for the election of the Board of Directors of the Company,
or any securities convertible into or exercisable for any shares of the
foregoing, or any agreement or commitment to issue any of the foregoing, in each
case, now or hereafter owned by any party.
"Terms" means all material terms and conditions (other than the Sale Price)
of a proposed transfer of Available Shares or Offered Shares, as applicable,
pursuant to Section 2.2 or Section 2.3, as applicable.
"Third-Party Offer" means a bona fide offer received by a Shareholder from
a third party to purchase (i) any shares of Stock or Preferred Stock owned
directly or indirectly by such Shareholder, (ii) any equity interest in any
entity which owns shares of Stock or Preferred Stock and is Controlled by such
Shareholder or (iii) any equity interest in ASD Partners.
"Transfer" (including the term "Transferred") means any sale, transfer,
assignment, pledge, hypothecation, gift, encumbrance or other disposition of
shares of Stock or any right to or interest in any such shares.
"Transferee" means any person to whom shares of Stock are Transferred.
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"Underwritten Public Offering" means any Public Offering in which Equity
Securities are sold or to be sold pursuant to a firm commitment underwriting by
an investment banking concern of recognized national or regional standing.
Section 1.2 Other Definitional Provisions. All definitions contained in
this Agreement are equally applicable to the singular and plural forms of the
terms defined. The words "hereof," "herein," and "hereunder" and words of
similar import referring to this Agreement refer to this Agreement as a whole
and not to any particular provision of this Agreement. Unless otherwise
specified, all Article and Section references pertain to this Agreement.
ARTICLE II
RESTRICTIONS ON TRANSFER OF STOCK
Section 2.1 General Restrictions on All Transfers. In addition to the
restrictions on Transfer set forth in Sections 2.2 and 2.3 hereof, during the
term of this Agreement, none of the shares of Stock now owned or hereafter
acquired by any Shareholder or Preferred Investor may be Transferred unless:
(a) either (i) such shares are registered under the Securities
Act and registered or qualified under any other applicable securities
statute, or (ii) the Company has received an opinion of counsel, in form
and substance reasonably satisfactory to the Company, that such shares may
be Transferred in compliance with the Securities Act and any other
applicable securities statute without such registration or qualification;
and
(b) until such time as an initial public offering has closed, the
Transferee executes and delivers a document reasonably acceptable to the
Company pursuant to which such Transferee agrees that the shares of Stock
being Transferred and the Transferee's ownership thereof will be subject to
all of the applicable terms and conditions of this Agreement and that such
Transferee will comply with the provisions hereof.
Any purported Transfer in violation of any provision of this Agreement
shall be void and ineffectual. The Company shall not be required to recognize
or register any Transfer on the stock record books of the Company until it is
reasonably satisfied that such Transfer is being made in compliance with the
terms and conditions set forth in this Agreement.
Section 2.2 First Offer Right. If any Shareholder receives a Third-Party
Offer and desires to accept the Third-Party Offer, then such Shareholder (the
"Selling Shareholder") shall first offer the shares subject to the Third-Party
Offer (the "Available Shares") to the other Shareholders, the Preferred
Investors and the Company as described below by giving written notice (the
"First Offer Notice") to the Company, the Preferred Investors and the other
Shareholders of the proposed Transferee, the number of Available Shares, the
Sale Price for the Available Shares and the Terms, all in accordance with the
Third-Party Offer. For purposes of a
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Third-Party Offer for any equity securities of any entity that owns Stock, the
number of Available Shares shall be the number of shares of Common Stock
indirectly owned by virtue of the ownership of such equity interest. The
Company, the Preferred Investors and the other Shareholders shall then have the
following rights and options with respect to the Available Shares:
(a) Order of Offers. The Selling Shareholder shall first offer the
Available Shares to the other members of the Shareholder Group of which the
Selling Shareholder is a member. The members of the applicable Shareholder
Group (other than the Selling Shareholder) shall then have twenty (20) days
(after which the right and option to purchase the Available Shares will
expire unless extended to the next succeeding Business Day as provided
below) from the date on which the First Offer Notice is given to purchase,
in the aggregate, all or a portion of the Available Shares for a cash
purchase price per share equal to the Sale Price and upon terms and
conditions no less favorable to the Selling Shareholder than the Terms. If
the other members of the applicable Shareholder Group decide to exercise
such right, they shall do so by notifying the Selling Shareholder in
writing within such twenty (20) day period of such Shareholders' acceptance
of the offer set forth in the First Offer Notice and the number of
Available Shares the other members of the Shareholder Group, in the
aggregate, desire to purchase. The purchase of such Available Shares shall
take place on the thirtieth (30th) day after the giving of the First Offer
Notice (or such earlier date as such Shareholders shall designate in
writing to the Offering Shareholder) or, if such day is not a Business Day,
then on the next succeeding Business Day. If the other members of the
Shareholder Group to whom an offer is made as set forth this in paragraph
(a) do not agree to purchase all of the Available Shares, then the Selling
Shareholder shall give written notice (the "Second Offer Notice") to the
Company, the Preferred Investors and the Shareholders to whom the shares
were not previously offered, setting forth the name of the proposed
Transferee, the number of remaining Available Shares (the "Remaining
Available Shares"), the Sale Price and the Terms. The Company shall have
fifteen (15) days (after which the right and option to purchase the
Available Shares will expire unless extended to the next succeeding
Business Day as provided below) from the date on which the Second Offer
Notice is given to purchase all or a portion of the Remaining Available
Shares for a cash purchase price per share equal to the Sale Price and upon
terms and conditions no less favorable to the Selling Shareholder than the
Terms. If the Company decides to exercise such right, it shall do so by
notifying the Selling Shareholder in writing within such fifteen (15) day
period of the Company's acceptance of the offer set forth in the Second
Offer Notice and the number of Remaining Available Shares the Company
desires to purchase. If the Company accepts such offer, the purchase of
the Remaining Available Shares shall take place on the fifteenth (15th) day
after the giving of the Second Offer Notice (or such earlier date as the
Company shall designate in writing to the Selling Shareholder) or, if such
day is not a Business Day, then on the next succeeding Business Day. If
the Company does not agree to purchase all of the Remaining Available
Shares, then the Selling Shareholder shall make an offer, for a period of
ten (10) days following the expiration of the Company's fifteen-day option
period, of the shares not purchased to the Preferred Investor. The
Preferred Investor shall
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then have ten (10) days (after which the right and option to purchase the
Available Shares will expire unless extended to the next succeeding
Business Day as provided below) to purchase all or a portion of the
Remaining Available Shares for a cash purchase price per share equal to the
Sale Price and upon terms and conditions no less favorable to the Selling
Shareholder than the Terms. If the Preferred Shareholder decides to
exercise such right, it shall do so by notifying the Selling Shareholder in
writing within such ten (10) day period of the Preferred Investor's
acceptance of the offer and the number of Remaining Available Shares the
Preferred Investor desires to purchase. If the Preferred Investor accepts
such offer, the purchase of the Remaining Available Shares shall take place
on the tenth day after the Preferred Investor's acceptance of the offer (or
such earlier date that the Preferred Investor shall designate in writing to
the Selling Shareholder) or, if such day is not a Business Day then, on the
next succeeding Business Day. If the Preferred Investor does not agree to
purchase all the Remaining Available Shares, then the Selling Shareholder
shall make an offer, for a period of ten (10) days following the expiration
of the Preferred Investor's ten (10) day option of the shares not
purchased, to other Shareholder Group(s) to whom the shares were not
previously offered. Each member of such Shareholder Group shall then have
ten (10) days (after which the right and option to purchase any Remaining
Shares will expire unless extended to the next succeeding Business Day)
from the date on which the offer is given to purchase all or a portion of
such Shareholder Group's aggregate Pro Rata Portion of any Remaining
Available Shares or for a cash purchase price per share equal to the Sale
Price and upon terms and conditions no less favorable to the Selling
Shareholder than the Terms.
(b) Sale to Third Party. If the Shareholders and the Company do
not agree to purchase all of the Available Shares and any Remaining
Available Shares under Section 2.2(a) above, the Selling Shareholder shall
then have the right, at his, her or its election, for a period of ninety
(90) days after the expiration of the option periods provided under Section
2.2(a) or (b), as applicable, to sell all of the Available Shares either
pursuant to the Third-Party Offer or, if the Third-Party Offer is no longer
effective, to any third party at a purchase price per share equal to the
Sale Price and on terms and conditions no less favorable to the Selling
Shareholder than the Terms. The Selling Shareholder shall proceed with
reasonable diligence to consummate the sale of the Available Shares
pursuant to this subsection, subject, however, to the provisions of Section
2.3.
Each party hereto agrees that upon the reasonable request of any other
party it will cooperate and will cause its Affiliates to cooperate with the
other parties hereto to effect the provisions of this Section. Without limiting
the generality of the foregoing, the Company, subject to reasonable restrictions
to protect confidential information of the Company and the confidential nature
of all negotiations related to the transactions contemplated by this Section,
will provide reasonable access, during normal business hours, to all books and
records reasonably requested by any party or proposed Transferee and will permit
any party or proposed Transferee to interview the officers and directors of the
Company and all others who possess material information concerning the Company.
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Notwithstanding the foregoing provisions of this Section, no compliance
with such provisions shall be required (i) with respect to any Transfer by any
Shareholder to any Permitted Transferee (though any Transfer to a Permitted
Transferee shall comply with Section 2.1), or (ii) with respect to any Transfer
by any Shareholder as part of any Underwritten Public Offering.
Section 2.3 Participation Rights on Transfer. If any Management
Shareholder proposes to Transfer all or any of its shares of Common Stock
(including a Transfer by Charney, Jennings or any Permitted Transferee of either
of them of any equity securities of ASD Partners) to a third party, such
Management Shareholder (the "Offering Shareholder") shall give notice of such
proposed Transfer (the "Section 2.3 Notice") to the Non-Management Shareholders.
The Section 2.3 Notice must set forth the name of the proposed Transferee (the
"Buyer"), the number of shares of Common Stock to be Transferred (the "Offered
Shares"), the Sale Price, and the Terms of the proposed Transfer. For purposes
of a proposed Transfer by a Management Shareholder of any equity securities of
any entity that owns Common Stock, the number of Offered Shares shall be the
number of shares of Common Stock indirectly owned by virtue of the ownership of
such equity interest. Each Non-Management Shareholder shall have fifteen (15)
days (after which the right and option to participate in the proposed Transfer
will expire unless extended to the next succeeding Business Day as provided
below) from the date on which the Section 2.3 Notice is given to Transfer to the
Buyer (and the number of shares that may be sold by the Offering Shareholder to
the Buyer shall be reduced accordingly) up to that number of shares
("Participating Shares") of Common Stock equal to the product of (a) the total
number of Offered Shares, multiplied by (b) a fraction, the numerator of which
is equal to the number of shares of Common Stock (including the number of shares
of Common Stock then obtainable by the Preferred Investors upon conversion of
the Series A Preferred Stock at the then applicable conversion price and the
Series B Amount) owned by such Non-Management Shareholder, and the denominator
of which is equal to the sum of (x) the aggregate number of shares of Common
Stock (including the number of shares of Common Stock then obtainable by the
Preferred Investors upon conversion of the Series A Preferred Stock at the then
applicable conversion price and the Series B Amount) issued and outstanding and
(y) the number of shares of Common Stock owned by the Offering Shareholder. All
sales of Participating Shares pursuant to this Section shall be at the Sale
Price and on terms and conditions no less favorable to the Offering Shareholder
than the Terms set forth in the Section 2.3 Notice. Except as otherwise
provided in this Section, any attempt to Transfer to a Transferee other than the
Buyer or to Transfer on terms other than those set forth in the Section 2.3
Notice shall not be made without the Offering Shareholder's further compliance
with the notice and option provisions of this Section.
For purposes of this Section, the Staubach Affiliated Shareholders shall be
deemed to be a single Non-Management Shareholder.
Notwithstanding the foregoing provisions of this Section, no compliance
with the notice and option provisions of this Section shall be required (i) with
respect to any Transfer by any Management Shareholder in compliance with Section
2.2, (ii) with respect to any Transfer to a Permitted Transferee (provided that
any Transfer to a Permitted Transferee shall comply with Section 2.1) or (iii)
with respect to any Transfer by any Management Shareholder as part of an
Underwritten Public Offering.
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ARTICLE III
BOARD OF DIRECTORS
Section 3.1 Board Composition and Election. The Shareholders and
Preferred Investors hereby acknowledge and agree that the composition of the
Board shall be subject to the following terms and conditions:
(a) Upon the execution hereof, the Board shall consist of six (6)
members, and the size of the Board may be increased in connection with the
nomination of parties contemplated in this Section 3.1; provided that any
increase in the size of the Board above seven (7) members shall be made by
a resolution adopted by at least seventy-five percent (75%) of the members
of the Board. At each annual meeting of the shareholders of the Company or
any special meeting called for the purpose of electing directors of the
Company, the voting committee of the Staubach Affiliated Shareholders and
the Private Shareholders each shall separately have the right to nominate
one (1) member of the Board, and the Preferred Investors and Norm Charney
shall each have the right to separately nominate two (2) members of the
Board (for purposes of this Article III the Staubach Affiliated
Shareholders (as a group), the Private Shareholders (as a group), the
Preferred Investors (as a group) and Norman Charney are each referred to as
a "Nominating Party") and each of the Shareholders and Preferred Investors
shall vote all of the shares of Common Stock then owned by them, directly
or indirectly, in favor of the election of such nominated persons and
otherwise use their respective best efforts as shareholders or directors of
the Company to cause and maintain the election to the Board of such
persons; provided however, that (i) in the event that the Staubach
Affiliated Shareholders and/or the Private Shareholders shall at any time
own in the aggregate less than 500,000 shares of Common Stock (subject to
adjustment for stock splits, combinations and reclassifications and
dividends paid in Stock), the Staubach Affiliated Shareholders and/or the
Private Shareholders, as applicable, shall cease to have the right to
nominate a member of the Board until such time as the members of the
affected Shareholder Group again own in the aggregate at least 500,000
shares of Common Stock (subject to adjustment for stock splits,
combinations and reclassifications and dividends paid in Stock) and (ii) in
the event the Preferred Investors shall at any time own less than 1,000,000
shares of Common Stock (including the number of shares of Common Stock then
obtainable upon conversion of the Series A Preferred Stock at the
applicable conversion price and upon conversion, subject to adjustment for
subsequent stock splits, combinations and reclassification and dividends),
the Preferred Investors shall cease to have the right to nominate two (2)
members of the board until such time as the Preferred Investors again own
in the aggregate at least 1,000,000 shares of Common Stock (determined as
aforesaid). The Company shall pay the reasonable and accountable out-of-
pocket expenses incurred by the directors nominated herein which are
associated with the attendance of such directors at any Board meeting.
Each person elected as a director pursuant to this Section shall hold
office until the next annual meeting of
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shareholders and until his successor is duly elected and qualified in
accordance with this Section or until his death, resignation or removal.
(b) Norm Charney, the Private Shareholders, the Staubach
Affiliated Shareholders and the Preferred Investors hereby respectively
agree that, to the extent the conditions set forth in Section 3.1(a) above
are met, Paul Jennings and Norm Charney shall be the representatives of
Norm Charney, Jonathan Bloch shall be the representative of the Private
Shareholders, Kevin Yancy shall be the representative of the Staubach
Affiliated Shareholders, and Alan Salzman and Paul Sherer shall be the
representatives of the Preferred Investors, respectively, to initially
represent such parties on the Board.
(c) No Shareholder shall vote its shares of Common Stock in
favor of the removal of the director nominated by a Nominating Party unless
so requested by the applicable Nominating Party. If, however, a Nominating
Party shall request the removal of the director nominated by such
Nominating Party, each Shareholder shall vote all of the shares of Common
Stock owned by it at the time in favor of the removal of such director.
(d) If any vacancy occurs in the Board because of the death,
disability, resignation, retirement, or removal of a director nominated and
elected in accordance with paragraph (a) of this Section, the applicable
Nominating Party shall nominate a successor, and each Shareholder shall
vote all of the shares of Common Stock then owned by it in favor of the
election of such successor member to the Board. Any such vacancy that
occurs shall be filled as promptly as possible upon the request of the
applicable Nominating Party.
Section 3.2 Board Approval of Certain Matters. The Company shall not,
without the affirmative consent or approval of at least two-thirds (2/3) of the
members of the Board:
(i) sell, abandon, transfer, lease or otherwise dispose of all or
substantially all of the properties or assets of the Company (other than to
a corporation in which the shareholders of the Company own (or will own)
fifty percent (50%) or more of the voting power upon completion of the
transaction);
(ii) merge or consolidate with or into, or permit any subsidiary
to merge or consolidate with or into, any other corporation, corporations
or other entity or entities (other than a corporation or other entity in
which the shareholders of the Company own (or will own) fifty percent (50%)
or more the voting power on completion of the transaction);
(iii) voluntarily dissolve, liquidate, or wind-up or carry out any
partial liquidation or distribution or transaction in the nature of a
partial liquidation or distribution;
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(iv) incur or permit to exist any indebtedness for borrowed
money in excess of $500,000, other than debt existing on the date of this
Agreement;
(v) incur or agree to incur any single capital expenditure or
group of related capital expenditures in excess of $100,000;
(vi) declare or pay any dividend on or make any distribution with
respect to any Common Stock or Preferred Stock;
(vii) make any payment on account of the purchase of any Common
Stock or Series B Preferred Stock other than Common Stock or Series B
Preferred Stock purchased from a director or employee of the Company who
owns less than two percent (2%) of the outstanding shares of Common Stock
and Series B Preferred Stock at the time of purchase (other than any such
payment made in compliance with the terms of this Agreement or for
repurchases pursuant to the Long Term Incentive Plan);
(viii) authorize or issue any additional series or class or shares
of Common Stock or any other Equity Securities other than: (1) the issuance
of options pursuant to the Company's Long-Term Incentive Plan as presently
in effect or the issuance of shares upon exercise thereof, (2) the issuance
of shares pursuant to the Stock Option Agreement to Mr. Paul Jennings
exercisable for 957,500 shares of Series B Common Stock (to be reclassified
Series B Preferred Stock), (3) pursuant to the exercise of Warrants to
purchase 1,000,000 shares of Series B Common Stock (to be reclassified
Series B Preferred Stock), (4) shares of Common Stock issuable upon
conversion of the Series A Preferred Stock, Series B Preferred Stock or
Series C Preferred Stock or (5) shares of Common Stock upon exercise of the
Warrants issued to Preferred Investors pursuant to the Securities Purchase
Agreement, as any of the same may be amended by approval of the Board of
Directors (including the representatives of the Preferred Investors) and
subject to, in each case, adjustment for stock splits, combinations and
reclassifications and dividends paid in stock;
(ix) originate, renew, extend or amend the terms of any
employment agreement with any executive officer of the Company; or
(x) create an Executive Committee or other committee of the
Board which will have the authority to act on behalf of the Board.
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ARTICLE IV
REGISTRATION RIGHTS
Section 4.1 Demand Registration.
(a) Request for Registration.
(i) At any time after one year following the closing date of an
initial Public Offering, a Rights Holder (other than the Preferred
Investors) who owns, or group of Investing Shareholders who own, in the
aggregate, twenty-five percent (25%) or more of the total number of
Registrable Securities owned by all of the Rights Holders (other than the
Preferred Investors ) (a "Registrable Amount"), may make a written request
(a "Demand Notice") for registration under the Securities Act (a "Demand
Registration") of at least the Registrable Amount, subject to the
conditions of this Article IV.
(ii) At any time after one year following the closing date of an
initial Public Offering, a Preferred Investor who owns, or a group of
Preferred Investors who own, in the aggregate, fifty percent (50%) or more
of the total number of Registrable Securities owned by all of the Preferred
Investors (a "Preferred Registrable Amount"), may make a Demand Notice for
a Demand Registration of at least the Preferred Registrable Amount, subject
to the conditions of this Article IV.
(iii) Each Demand Notice will specify the number of shares of
Registrable Securities proposed to be sold and will also specify the
intended method of disposition thereof. Within ten (10) days after receipt
of such Demand Notice, the Company will give written notice of the
Company's receipt of such Demand Notice to all Rights Holders at least
twenty (20), but not more than sixty (60), days before the anticipated
filing date of such Registration Statement, and such Rights Holders will be
given the opportunity to participate in such Demand Registration and shall
be deemed a Demanding Holder (as hereinafter defined) for purposes of this
Agreement. Subject to Section 4.1(d) hereof, the Company will include in
such Demand Registration all Registrable Securities with respect to which
the Company has received written requests for inclusion therein within
fifteen (15) days after the delivery to the applicable Rights Holders of
the Company's notice. Each such Rights Holder's request also will specify
the number of Registrable Securities to be registered and, subject to
Section 4.1(f) hereof, the intended method of disposition thereof. In
addition, Demand Registrations shall be on such appropriate registration
form of the Commission as the Company shall determine.
(b) Limitation on Demand Registration.
(i) Notwithstanding any provision of this Agreement to the
contrary, the Company shall not be obligated to effect more than one (1)
Demand Registration under Section 4.1(a)(i) of this Agreement and more than
two (2) Demand Registrations under Section 4.1(a)(ii) of this Agreement.
Notwithstanding any provision of this Agreement to
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the contrary, the Company shall not be obligated to honor any Demand Notice
requesting a Demand Registration, or otherwise cause a Demand Registration
to become effective hereunder if the Demand Notice is delivered to the
Company during the period commencing ninety (90) days prior to the
Company's good faith estimate of the effective date of a registration
statement pursuant to which the Company is offering shares of any class of
equity securities of the Company in an Underwritten Public Offering and
ending one-hundred twenty (120) days after the closing date of any such
offering.
(ii) The Company may postpone or suspend for up to 90 days the filing
or the effectiveness of Registration Statements for Demand Registrations if
the Board determines reasonably and in good faith, that such registration
(or the effect thereof) is likely to have a material adverse effect on any
proposal or plan by the Company; provided, however, that the Company may
not utilize this right to postpone or suspend more than twice in any
twelve-month period.
(c) Effective Registration and Expenses. Upon receipt of a written
request for a Demand Registration, the Company will (i) take appropriate action,
on a reasonable, timely basis and in any event within sixty (60) days of such
request, to prepare and file a Registration Statement covering the shares
requested to be included in such Demand Registration subject to Section 4.1(e)
and (ii) use its reasonable best efforts to cause each Demand Registration to
become effective under the Securities Act. A registration will not count as a
Demand Registration (i) unless a Registration Statement with respect thereto has
become effective (unless the Rights Holders whose Registrable Securities are
included in such Demand Registration ("Selling Demand Holders") withdraw their
shares of Registrable Securities requested to be included in the Demand
Registration so that less than a Registrable Amount of shares remains subject to
such Demand Registration, in which case such demand shall count as a Demand
Registration unless the Selling Demand Holders agree to pay all Registration
Expenses), (ii) if after it has become effective, such registration is
interfered with by any stop order, injunction or other order or requirement of
the Commission or other governmental agency or court for any reason not
attributable to the Selling Demand Holders and has not thereafter become
effective, or (iii) if the conditions to closing specified in the underwriting
agreement, if any, entered into in connection with such registration are not
satisfied or waived, other than by reason of a failure on the part of the
Selling Demand Holders. Except as set forth above, the Company will pay all
Registration Expenses in connection with any Demand Registration as set forth in
Section 4.3, whether or not it becomes effective.
(d) No Third-Party Piggy-Back on Demand Registrations. Neither the
Company nor any of its respective securityholders (other than the holders of
Registrable Securities exercising rights granted pursuant to Section 4.2 hereof)
may include securities of the Company in any Demand Registration without the
prior written consent of the Demanding Holder or, if more than one Demanding
Holder, the Majority Demanding Holder (as hereinafter defined), and the Company
shall not enter into any agreement providing any such right to any of its
securityholders.
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(e) Cutback on Demand Registration. In the event the offering of shares
pursuant to a Demand Registration shall be in the form of an Underwritten Public
Offering pursuant to subsection (f) below, if the underwriter or the managing
underwriter of a group of underwriters, as applicable, of such offering advises
the Company and the Selling Demand Holders that market or other conditions
require a limitation on the number of Registrable Securities to be included in
the Registration Statement, then the Company may limit the number of shares of
Registrable Securities to be included in the Demand Registration. Upon such
advice by the underwriter or managing underwriter, the Company shall give notice
to all of the Selling Demand Holders of the number of shares of Registrable
Securities of the Selling Demand Holders that will be entitled to be included in
the Registration Statement, and the number of shares of Registrable Securities
of the Selling Demand Holders that may be so included shall be allocated among
all of the Selling Demand Holders (other than employees and directors of the
Company) in proportion, as nearly as practicable, to the respective numbers of
shares of Registrable Securities that such Selling Demand Holders had requested
to be included in the Registration Statement. To the extent that there remain
additional Registrable Securities which may be sold, such Registrable Securities
will then be allocated among Selling Demand Holders who are directors and
employees of the Company in the proportions set forth above. Any Selling Demand
Holder which disapproves of the terms of any such underwriting may elect to
withdraw therefrom by written notice to the Company and the underwriter or
managing underwriter. Any shares of Registrable Securities so withdrawn from
such underwriting shall be withdrawn from the Registration Statement.
(f) Manner of Offering: Selection of underwriters. If the Non-Management
Shareholder(s) requesting a Demand Registration ("Demanding Holder(s)") so
requests (or if more than one Demanding Holder, if the Demanding Holders owning
a majority of the Registrable Securities requested to be included in the Demand
Regulation by the Demanding Holders so requests (the "Majority Demanding
Holders")), the offering of Registrable Securities pursuant to a demand
Registration shall be in the form of an Underwritten Public Offering, and all
Demanding Holders electing to participate in such Demand Registration shall be
bound by such determination. If a Demand Registration is in the form of an
Underwritten Public Offering, the Majority Demanding Holders shall select the
managing underwriter or underwriters to be used in connection with the offering;
provided, however, that such underwriter or underwriters must be reasonably
satisfactory to the Company.
Section 4.2 Piggy-Back Registration.
(a) Request for Registration. If at any time after the closing date of an
initial Public Offering, any Equity Securities are proposed to be sold or
disposed, either for the account of the Company or for the account of a security
holder or holders, in a Public Offering (other than in connection with any
exchange offer, a registration relating solely to the sale of Securities to
participants in a Company stock plan, or an offering of securities solely to the
Company's existing security holders), the Company shall (a) promptly give to
each Rights Holder with rights remaining under this Section 4.2 notice of such
proposed offering, including a description of the securities to be offered, a
statement of the anticipated number and dollar amount of securities to be
offered, identifying any proposed underwriter or representative of the
underwriters, and
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describing the proposed method of distribution (including, without limitation, a
list of the jurisdictions in which the Company intends to attempt to register or
qualify such securities under applicable state securities law) and the
anticipated timing of the offering, and (b) include in the appropriate
Registration Statement covering such Equity Securities, and in any underwriting
relating thereto, all of the shares of Registrable Securities specified in a
written request made by any Rights Holder with rights remaining under this
Section 4.2 (a "Piggy-Back Registration") within thirty (30) days after receipt
of the notice of the proposed offering, except as set forth below in this
Section. If the registration pursuant to this Section involves an Underwritten
Public Offering, all of the Rights Holder proposing to distribute shares of
Registrable Securities through such Underwritten Public Offering (the "Selling
Holders") and the Company shall enter into an underwriting agreement in
customary form with the underwriter or representative of the underwriters named
in the Company's notice given pursuant to this Section.
(b) Limitation on Piggy-Back Registrations. Notwithstanding any provision
of this Agreement to the contrary, the Company shall not be obligated to effect
more than two (2) Piggy-Back Registrations under this Agreement for the Rights
Holders; provided however, the Preferred Investors shall not be limited in the
number of Piggy Back Registrations the Company may be obligated to effect. The
Company may postpone or suspend for up to 90 days the filing or the
effectiveness of a Registration Statement involving a Piggy-Back Registration if
the Board determines, reasonably and in good faith, that such registration (or
the effect thereof) is likely to have a material adverse effect on any proposal
or plan by the Company.
(c) Cutback on Piggy-Back Registration. Notwithstanding any other
provision of this Section, if the underwriter or the managing underwriter of a
group of underwriters, as applicable, advises the Company and the Selling
Holders that market or other conditions require a limitation of the number of
Registrable Securities to be included in the Registration Statement, then the
Company may limit the number of Registrable Securities of the Selling Holders to
be included in the Registration Statement and underwriting. Upon such advice by
the underwriter or managing underwriter, the Company shall give notice to all of
the Selling Holders of the number of Registrable Securities of the Selling
Holders that will be entitled to be included in the Registration Statement, and
the number of shares of Registrable Securities of the Selling Holders that may
be so included shall be allocated among all of the Selling Holders (other than
employees and directors of the Company) in proportion, as nearly as practicable,
to the respective numbers of shares of Registrable Securities that such Selling
Holders had requested to be included in the Registration Statement. To the
extent that there remain additional Registrable Securities which may be sold,
such Registrable Securities will then be allocated among the Selling Holders who
are directors and employees of the Company in the proportions set forth above.
Any Selling Holder which disapproves of the terms of any such underwriting may
elect to withdraw therefrom by written notice to the Company and the underwriter
or managing underwriter. Any shares of Registrable Securities so withdrawn from
such underwriting shall be withdrawn from the Registration Statement.
Section 4.3 Registration Expenses. All costs and expenses incurred in
connection with any registration, qualification, or compliance effected pursuant
to this Article IV, including (without limitation) all registration, filing, and
qualification fees, printing expenses, fees and
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disbursements of counsel (including one special counsel to the Selling Demand
Holders or Selling Holders, as the case may be) and independent accountants
(including, without limitation, the expenses of any special audit or "cold
comfort" letters required by or incident to such registration, qualification or
compliance) and other experts of the Company, as the case may be, shall be borne
by the Company to the extent permitted by applicable law; provided, however,
that the Company shall not be required to pay any underwriting discounts or
commissions relating to shares of Common Stock owned by the Selling Demand
Holders or Selling Holders, as the case may be.
Section 4.4 Obligations of the Company. Whenever required under this
Article IV to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) prepare and file with the SEC a Registration Statement with
respect to such Registrable Securities and use its reasonable best efforts to
cause such Registration Statement to become effective, and, upon the request of
the Rights Holders of a majority of the Registrable Securities registered
thereunder, keep such Registration Statement effective for a period of up to 120
days or until the distribution contemplated in the Registration Statement has
been completed, whichever first occurs; provided, however, that such 120-day
period shall be extended for a period of time equal to the period the Rights
Holder refrains from selling any securities included in such registration at the
request of an underwriter of Common Stock (or other securities) of the Company
or by the Company;
(b) prepare and file with the SEC such amendments and supplements
to such Registration Statement and the prospectus used in connection with such
Registration Statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
Registration Statement;
(c) furnish to the Rights Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as they may reasonably request
in order to facilitate the disposition of Registrable Securities owned by them;
(d) use its reasonable best efforts to register and qualify the
securities covered by such Registration Statement under such other securities or
Blue Sky laws of such jurisdictions as shall be reasonably requested by the
Rights Holders; provided that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions in
which it is not, at the time, so qualified;
(e) in the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering;
(f) notify each Rights Holder of Registrable Securities covered by
such Registration Statement at any time when a prospectus relating thereto is
required to be delivered
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under the Act of the happening of any event as a result of which the prospectus
included in such Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances then existing;
(g) cause all such Registrable Securities registered pursuant
hereunder to be listed on each securities exchange on which similar securities
issued by the Company are then listed; and
(h) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereunder and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
provided; however, it shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Article IV with respect to the
Registrable Securities of any selling Rights Holder that such Rights Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Rights Holder's
Registrable Securities.
Section 4.5 Form S-3 Registration. Subject to the requirements of
Section 4.1(b)(ii), in case the Company shall receive a written request or
requests from either (i) Preferred Investors holding a majority of the
Registrable Securities then held by the Preferred Investors or (ii) the Staubach
Affiliated Shareholders and the Private Shareholders (collectively, the
"Investing Shareholders") holding a majority of the Registrable Securities then
held by the Investing Shareholders, that the Company effect a registration on
Form S-3 with respect to all or part of the Registrable Securities owned by such
Preferred Investors or the Investing Shareholders, as the case may be; provided
that the Company then (and throughout the period of the proposed registration)
qualifies for registration on Form S-3, the Company will:
(i) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Rights Holders; and
(j) as soon as practicable, effect such registration and all such
qualifications and compliances as may be so requested and as would permit or
facilitate the sale and distribution of all or such portion of such Rights
Holder's or Rights Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
other Rights Holder or Rights Holders joining in such request as are specified
in a written request given within 15 days after receipt of such written notice
from the Company.
The Company shall file a registration statement covering the
Registrable Securities and other securities so requested to be registered as
soon as practicable after receipt of the request or requests of the Rights
Holders; provided that in no event may (i) the Preferred Investor make more than
two (2) requests for registration under this Section 4.5 or (ii) the Investing
Shareholders make more than one (1) request for registration under this Section
4.5.
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Registrations effected pursuant to this Section 4.5 shall not be counted as
demands for registration or registrations effected pursuant to Section 4.1.
Section 4.6 Limitations on Subsequent Registration Rights. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of the Preferred Investors holding a majority of the Registrable
Securities then held by the Preferred Investors, enter into any agreement with
any holder or prospective holder of any securities of the Company which would
allow such holder or prospective holder (a) to include such securities in any
registration filed under this Article IV hereof, unless under the terms of such
agreement, such holder or prospective holder may include such securities in any
such registration only to the extent that the inclusion of his securities will
not reduce the amount of the Registrable Securities of the Preferred Investors
which is included or (b) to make a demand registration which could result in
such registration statement being declared effective prior to date that is one
year subsequent to the closing of an initial Public Offering.
Section 4.7 Termination of Registration Rights. The rights of the Rights
Holders under Sections 4.1 through 4.4 shall terminate on the first to occur of
(a) the seventh (7th) anniversary date of the closing of an initial Public
Offering and (b) with respect to each Rights Holder, on the date such Rights
Holder may sell all of his, her or its Registrable Securities in any three month
period pursuant to Rule 144 promulgated under the Securities Act, as such rule
may be amended from time to time, or any similar rule or regulation hereafter
promulgated by the Commission.
Section 4.8 Transfer of Registration Rights. Notwithstanding anything in
this Agreement to the contrary, upon the Transfer of Registrable Securities by
an Rights Holder to a Permitted Transferee, the rights of such Non-Management
Shareholder under this Article IV shall inure to the benefit of such Permitted
Transferee provided that the Company is given prompt notice of such Transfer and
to the extent exercising rights under this Article IV, such Permitted Transferee
shall be bound by the provisions of this Article IV.
Section 4.9 Rule 144. The Company covenants that it will file the reports
required to be filed by it under the Securities Act and the Exchange Act and the
rules and regulations promulgated thereunder (or, if the Company is not required
to file such reports, it will, following consummation of a Public Offering, make
publicly available other information as long as necessary under Rule 144
promulgated under the Securities Act) from the date of the Company's initial
Public Offering, and it will take such further action after such date as any
Rights Holder may reasonably request, all to the extent required from time to
time to enable such Rights Holder to sell Stock pursuant to Rule 144 under the
Securities Act, as such rule may be amended from time to time, or any similar
rule or regulation hereafter promulgated by the Securities and Exchange
Commission.
Section 4.10 Indemnification. The following indemnification provisions
shall apply to the matters described in this Article:
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(a) With respect to each registration, qualification or compliance
effected pursuant to this Article, the Company shall indemnify and hold
harmless each Rights Holder and its Controlling Persons from and against,
and will reimburse such Rights Holder and each such Controlling Person with
respect to, any and all losses, claims, damages, liabilities and expenses
(including, without limitation, the costs and expenses of investigating,
preparing for and defending any legal proceeding, including reasonable
attorneys' fees) to which such Rights Holder or any such Controlling Person
may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages, liabilities and expenses arise out of or are based
upon (i) any untrue statement (or alleged untrue statement) of a material
fact contained in any prospectus, preliminary prospectus, or Registration
Statement, or any amendment or supplement thereto, or (ii) any omission (or
alleged omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
promulgated thereunder and relating to action or inaction required of the
Company in connection with any such registration, qualification, or
compliance; provided, however, that the Company shall not be liable in any
case to the extent that any such loss, claim, damage, or liability (or
action in respect thereto) arises out of or is based upon any untrue
statement or omission made in any prospectus, preliminary prospectus, or
Registration Statement, or any amendment or supplement thereto, in reliance
upon and in conformity with written information furnished to the Company by
such Rights Holder or Controlling Person of such Shareholder specifically
for inclusion in such prospectus, preliminary prospectus, or Registration
Statement, or any amendment or supplement thereto.
(b) With respect to each registration, qualification, or compliance
effected pursuant to this Article for the benefit of a Rights Holder, such
Rights Holder shall indemnify the Company and each of its Controlling
Persons from and against, and will reimburse the Company and each such
Controlling Person with respect to, any and all losses, claims, damages,
liabilities and expenses (including, without limitation, the costs and
expenses of investigating, preparing for and defending any legal
proceeding, including reasonable attorneys' fees) to which the Company or
any such Controlling Person may become subject under the Securities Act or
otherwise, insofar as such losses, claims, damages, liabilities and
expenses arise out of or are based upon (i) any untrue statement (or
alleged untrue statement) of a material fact contained in any prospectus,
preliminary prospectus, or Registration Statement, or any amendment or
supplement thereto, or (ii) any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make
the statements therein not misleading to the extent that any such loss,
claim, damage, or liability (or action in respect thereto) arises out of or
is based upon any untrue statement or omission made in any prospectus,
preliminary prospectus, or Registration Statement, or any amendment or
supplement thereto, in reliance upon and in conformity with written
information furnished to the Company by such Rights Holder specifically for
inclusion in such prospectus, preliminary prospectus, or Registration
Statement, or amendment or supplement thereto; provided, however, that a
Rights Holder shall not be liable for any amount in excess of
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the net proceeds of any such registration, qualification or compliance
which are received by such Rights Holder.
(c) Promptly after receipt by an indemnified party hereunder of
written notice of the commencement of any action or proceeding involving a
claim referred to in Sections 4.7(a) or (b), such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party,
give written notice to the indemnifying party of the commencement of such
action; provided, that the failure of any indemnified party to give notice
as provided in this subsection shall not relieve the indemnifying party of
its obligations under Sections 4.7(a) or (b) unless the indemnifying party
is actually prejudiced by such failure to give such notice. In case any
such action is brought against an indemnified party, the indemnifying party
will be entitled to participate in and to assume the defense thereof,
jointly with any other indemnifying party similarly notified to the extent
that it may wish, with counsel reasonably satisfactory to such indemnified
party; provided, however, if any indemnified party shall have reasonably
concluded that there may be legal defenses available to it which are
different from or additional to those available to the indemnifying party,
or if there is a conflict of interest that would prevent counsel for the
indemnifying party from also representing the indemnified party, the
indemnified party shall have the right to select separate counsel to
participate in the defense of such action on behalf of such indemnified
party. After notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof, the indemnifying party
will not be liable to such indemnified party pursuant to the provisions of
Sections 4.7(a) or (b) for any legal or other expense subsequently incurred
by such indemnified party in connection with the defense thereof, other
than reasonable costs of investigation, unless (i) the indemnified party
shall have employed counsel in connection with the proviso of the
immediately preceding sentence, (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party within a reasonable
time after the notice of the commencement of the action, or (iii) the
indemnifying party has authorized the employment of counsel for the
indemnified party at the expense of the indemnifying party. No
indemnifying party shall consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the
giving by the claimant or plaintiff to such indemnified party of a release
from all liability in respect of such claim or litigation.
(d) If the indemnification provided for in this Section from the
indemnifying party is unavailable to an indemnified party in respect of any
losses, claims, damages, liabilities or expenses referred to in this
Section, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party and indemnified parties in connection with
the actions, statements or omissions which resulted in such losses, claims,
damages, liabilities or expenses, as well as any other relevant equitable
considerations. The relative fault of such indemnifying party and
indemnified parties shall be determined by reference to, among other
things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact,
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such statement or omission relates to information supplied by the
indemnifying party or indemnified parties, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. For purposes of this Section,
the term "damages" includes any legal or other expenses reasonably incurred
by the indemnified party in connection with investigating or defending
against or appearing as a third party witness in any action or claim that
is the subject of the contribution provisions of this Section. No Person
guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
Person who is not guilty of such fraudulent misrepresentation.
ARTICLE V
PREEMPTIVE RIGHTS AND ANTI-DILUTION PROTECTION
Section 5.1 Preemptive Rights. Subject to the provisions of Section 5.2,
each Non-Management Shareholder shall have the right of first refusal to
purchase all (or any part) of its pro rata portion of any additional shares of
Common Stock or other Equity Securities ("New Securities"), that the Company
may, from time to time, propose to sell and issue other than: (i) options issued
by the Company pursuant to its Long-Term Incentive Plan approved by the Board
(or shares issued upon the exercise thereof) or shares issued pursuant to that
certain Stock Option Agreement dated February 10, 1999 between Paul Jennings and
the Company, (ii) shares issued upon the exercise of outstanding warrants to
acquire 1,000,000 shares of Series B Common Stock, (iii) shares of Common Stock
issued by the Company as a dividend, distribution or stock split pro rata among
all Shareholders (or similar action resulting in a pro rata distribution of
shares of Common Stock among all Shareholders), (iv) shares of Common Stock
issued by the Company as consideration for the acquisition of substantially all
the assets or at least fifty percent (50%) of the voting power of the equity
securities, of another corporation or other entity, (v) shares or Securities
issued to the Preferred Investors (including any securities acquired upon
exercise or conversion of securities issued to the Preferred Investors), and
(vi) shares issued in an initial Public Offering (the shares described in the
preceding clauses (i) through (vi) and any shares issued or issuable with
respect to such shares by way of a dividend, reclassification, stock split, or
other distribution or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or otherwise are
hereinafter referred to as the "Excluded Shares"). The pro rata portion of New
Securities which each party is entitled to purchase pursuant to this Article V
(subject to the provisions of Section 5.2) shall equal the ratio of (a) the
number of shares of Stock held by such party at the time the New Securities are
offered to (b) the number of shares of Common Stock held by all the Non-
Management Shareholders. For purposes of this Article V, the Staubach
Affiliated Shareholders shall be deemed to be a single party.
Section 5.2 Acceptance of Purchase Rights. If the Company proposes to
undertake an issuance of New Securities, it shall give each party having a right
of first refusal under this Article V written notice (the "Notice") of its
intention, describing the type of New Securities, the price, the amount of New
Securities to be issued, and the general terms and conditions upon
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which the Company proposes to issue the same. Each party having a right of first
refusal under this Article V shall have fourteen (14) days from the giving of
such Notice to agree to purchase New Securities for the price and upon the terms
and conditions specified in the First Notice by giving written notice (the
"Acceptance Notice") to the Company and stating therein whether such party
desires to purchase the quantity (up to such party's pro rata portion) of the
New Securities such party is electing to purchase. The purchase of New
Securities by each party so electing shall take place no later than the twenty-
fourth (24th) day after the giving of the Notice.
Section 5.3 Sale of New Securities by the Company. If the parties having
a right of first refusal under this Article V fail to exercise such right within
fourteen (14) days from the giving of the Notice, the Company shall have ninety
(90) days thereafter to sell the New Securities in respect of which such
parties' rights were not exercised, at a price and upon terms and conditions no
more favorable to the purchasers thereof than specified in the Company's notice
pursuant to Section 5.2 above. If the Company has not sold the New Securities
within such ninety (90) days, the Company shall not thereafter issue or sell any
New Securities without first offering such securities to the parties having a
right of first refusal under this Article V in accordance with the provisions of
this Article V.
Section 5.4 Anti-Dilution Protection. If the Company proposes to issue any
shares of Common Stock (other than Excluded Shares as defined in Section 5.1) at
a New Price (as hereinafter defined) which is less than the Base Price (as
hereinafter defined), and the Staubach Affiliated Shareholders and the Private
Shareholders, acting as separate Shareholder Groups, shall elect not to exercise
their rights of first refusal pursuant to Section 5.2, then either the Staubach
Affiliated Shareholders, the Private Shareholders, the Preferred Investors (with
respect to shares of Common stock actually owned by them) or all of them, acting
as a group (in each case an Electing Shareholder Group") may elect at any time
within fifteen (15) days after notice of such new issuance, to have the Company
issue to the members of such Electing Shareholder Group, immediately upon the
issuance or sale of such Common Stock, without any further consideration due or
payable therefor by any member of an Electing Shareholder Group, such number of
shares of Common Stock determined by multiplying the number of shares of Common
Stock owned by such member of the Electing Shareholder Group by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of additional
Common Stock to be issued at the New Price, and the denominator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock that the aggregate adequate
consideration to be received by the Company for such issuance would purchase at
the Base Price. For purposes of this Section 5.4, the "New Price" shall equal
the consideration per share received by the Company for the proposed issuance of
Common Stock, and the "Base Price" shall mean $1.00 per share (as adjusted for
stock splits, combinations and reclassifications and dividends paid in stock).
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ARTICLE VI
LEGENDS AND FILING
Section 6.1 Legend on Certificates. The certificates representing the
shares of Stock owned by the Shareholders, whether now outstanding or hereafter
to be issued during the term of this Agreement, shall have conspicuously
endorsed upon them a legend in substantially the following form:
"The shares of stock represented by this certificate are subject to the
terms of an effective Shareholders' Agreement, a copy of which is on file
at the principal office of the Company. The shares represented hereby may
be voted and sold, transferred, assigned, pledged, encumbered, or otherwise
alienated only in accordance with the terms of the Shareholders' Agreement.
A copy of the Shareholders' Agreement shall be furnished without charge to
the holder of this certificate upon the receipt by the Company of a written
request therefor from the holder."
The Shareholders acknowledge that they understand that none of the shares
of Stock owned by them have been registered under the Securities Act or
registered or qualified under any state securities laws; that the provisions of
Rule 144 promulgated under the Securities Act currently are not available for
the public resale of the shares of Stock; that the shares of Stock therefore are
not and will not be Transferable in the absence of a Registration Statement with
respect to such shares or an applicable exemption from registration; and that
there may be typed or otherwise printed on the certificates representing the
shares of Stock a legend in substantially the following form:
"The shares of stock represented by this certificate have not been
registered under the Securities Act of 1933 or any other applicable state
securities laws and may not be offered for sale, sold, assigned,
transferred, pledged or otherwise disposed of unless either (i) such shares
are registered under the Securities Act of 1933 and registered or qualified
under any other applicable securities statute, or (ii) such shares may be
offered, sold, assigned, transferred, pledged, or otherwise disposed of
pursuant to an exemption from the registration requirements of the
Securities Act of 1933 and any other applicable securities statute. The
Company may, in its discretion, require delivery of an opinion of counsel,
in form and substance reasonably satisfactory to the Company, to the effect
such exemptions are available for the offer, sale, transfer, pledge or
other disposition of the Shares represented hereby."
Section 6.2 Filing of this Agreement. The parties hereto acknowledge and
agree that a copy of this Agreement shall be placed on file by the Company at
its principal place of business and shall be subject to the same right of
examination by any Shareholder, in person or by agent, attorney, or accountant,
as are the books and records of the Company.
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ARTICLE VII
TERM AND ENFORCEMENT
Section 7.1 Term of Entire Agreement. This entire Agreement shall expire
or terminate upon (a) the distribution to the Shareholders of all proceeds (if
any) distributable to them as the result of the cessation of business,
bankruptcy, submission to receivership, or dissolution of the Company, (b) the
decision to so terminate evidenced by a document signed by Shareholders owning
at least seventy-five percent (75%) of the shares of Common Stock (including for
purposes of such calculation the shares issuable upon conversion of Series A
Preferred Stock and the Series B Amount) outstanding and subject to this
Agreement at the time of such decision, (c) the distribution to the Shareholders
of all proceeds (if any) distributable to them as the result of the sale of all
or substantially all of the assets of the Company, or (d) except with respect to
Articles I, IV and VIII, (except to the extent provided for therein), the
consummation of an initial Public Offering. No such termination shall, however,
negate, limit, impair, or otherwise affect any right, remedy, obligation, or
liability of any party hereto under this Agreement which matured or became
applicable before such termination.
Section 7.2 Specific Enforcement. Each Shareholder acknowledges and
agrees that a violation by him, her or it of any of the provisions of this
Agreement will cause irreparable damage to the Company and the other
Shareholders and that the Company and the other Shareholders will have no
adequate remedy at law for such violation. Accordingly, each party hereto
agrees that the Company and the non-violating Shareholders shall be entitled as
a matter of right to an injunction from any court of competent jurisdiction,
restraining any further violation of such provision or affirmatively compelling
such offender to carry out its obligations hereunder. Such right to injunctive
relief shall be cumulative and in addition to whatever remedies the Company or
non-violating Shareholders may have at law.
Section 7.3 Severability and Reformation. The parties hereto intend all
provisions of this Agreement to be enforced to the fullest extent permitted by
law. If, however, any provision of this Agreement is held to be illegal,
invalid, or unenforceable under any present or future law, such provision shall
be fully severable, and this Agreement shall be construed and enforced as if
such illegal, invalid, or unenforceable provision were never a part hereof, and
the remaining provisions shall remain in full force and effect and shall not be
affected by the illegal, invalid, or unenforceable provision or by its
severance. Further, the illegal, invalid, or unenforceable provision shall be
limited so that it will remain in effect to the fullest extent permitted by law.
Section 7.4 Attorneys' Fees. If any action at law or in equity is brought
by any party hereto to enforce the terms and conditions of this Agreement, the
party in whose favor a final judgment is entered shall be entitled, in addition
to any other relief which may be awarded, to recover from the other party or
parties, its reasonable attorneys' fees, together with such prevailing party's
other reasonable and necessary expenses incurred in connection with such
litigation.
26
<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section 8.1 Information Rights.
(a) The Company shall deliver to each Non-Management
Shareholder:
(i) audited annual balance sheets, statements of income and
statements of cash flow of the Company within ninety (90) days following
the end of each fiscal year of the Company;
(ii) quarterly unaudited balance sheets, statements of
income and statements of cash flow of the Company within forty-five (45)
days of the close of each fiscal quarter of the Company;
(iii) unaudited monthly financial statements within thirty (30)
days of the close of each month; and
(iv) a copy of the Company's annual budget and operating plan,
including forecasted balance sheets, statements of income and statements of
cash flow (accompanied by the related assumptions and detail backup) on or
before December 31 of each year.
Each Non-Management Shareholder shall also have the right, upon reasonable
notice at its own expense, to inspect the books and records of the Company at
the Company's offices during normal business hours. The Non-Management
Shareholders acknowledge that the information provided may be confidential or
proprietary and agree to treat such information accordingly and to conduct any
such review in a manner so as to not unreasonably interfere with the business
activities of the Company.
(b) The rights set forth in Section 8.1(a) above terminate upon
an initial Public Offering; provided that for a period of three years following
an initial Public Offering the Company would, upon the request of any Non-
Management Shareholder, transmit copies of the Company's Annual Reports on Form
10-K, Quarterly Reports on Form 10-Q, Report on Form 8-K and annual report to
shareholders promptly after such documents are filed with the Securities and
Exchange Commission.
Section 8.2 Notices. Any and all notices, consents, waivers, requests,
and other communications required or permitted to be given to the parties hereto
shall be in writing and transmitted by same-day or overnight courier for
personal delivery, by registered or certified mail, postage prepaid, return
receipt requested, or by facsimile, to the parties at the following addresses:
27
<PAGE>
If to the Company: ASD Systems, Inc.
3737 Grader St., Suite 110
Garland, Texas 75041
Facsimile No.: (214) 343-2924
Attn: Norman Charney
If to any of the
Shareholders: At their respective addresses then set forth in the
stock records of the Company.
If to the Preferred
Investor: VantagePoint Venture Partners
1001 Bayhill Drive, Suite 100
San Bruno, California 94066
Facsimile No.: 650.866.3100
Attn: Alan Salzman
Any of the above addresses may be changed only by giving notice of such change
of address to each of the other parties hereto. Any communication transmitted
in either manner described above in this Section shall be deemed sufficiently
given or otherwise effective upon delivery to the addressee (with the courier's
delivery receipt, the return receipt or the facsimile answer back being
conclusive evidence of such delivery) or at such time as delivery is refused by
the addressee.
Section 8.3 Governing Law. THIS AGREEMENT WILL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.
Section 8.4 Inurement. Subject to the restrictions on Transfer contained
herein, the provisions of this Agreement shall inure to the benefit of, and
shall be binding upon, the assigns, successors in interest, and legal
representatives of each of the parties hereto.
Section 8.5 Amendment and Waiver. This Agreement may be amended only by
the written consent of Shareholders owning at least seventy-five percent (75%)
of the shares of Common Stock outstanding and subject to this Agreement at the
time of such amendment. No provision of this Agreement may be waived except by
a document executed by each party against which the waiver is sought to be
enforced.
Section 8.6 Entire Agreement. This Agreement contains the entire contract
and understanding among the parties hereto and supersedes all prior oral or
written agreements among the parties hereto, or between any of them, with
respect to the subject matter hereof. There are no representations, agreements,
or understandings, oral or written, between or among the parties hereto relating
to the subject matter of this Agreement which are not expressed or referred to
herein.
28
<PAGE>
Section 8.7 Status of Spouses. Unless (a) shares of Stock are separately
issued by the Company to a spouse of a Shareholder in such spouse's own name,
(b) the Company acknowledges the proper Transfer of shares of Stock to such
spouse, or (c) the provisions of this Agreement otherwise expressly provide,
references to a "Shareholder" or to "Shareholders" (or any variation thereof)
shall not include the spouse of any of the Shareholders. If any married
Shareholder is required to sell his or her shares of Stock to the Company or the
other Shareholders pursuant to the terms of this Agreement, such Shareholder
hereby agrees to use his or her best efforts to cause any and all rights to and
interest in such shares of Stock that such spouse may then have (or claim to
have) to be sold, in like manner and upon the same terms and conditions, to the
Company or the other Shareholders.
Section 8.8 Descriptive Headings. The descriptive headings in this
Agreement have been used for convenience only and shall not be deemed to limit
or otherwise affect the construction of any of the provisions hereof.
Section 8.9 Gender. Whenever in this Agreement the context so requires,
the male gender shall include the female and neuter; the female gender shall
include the male gender and neuter; and the neuter shall include the male and
female.
Section 8.10 Further Acts. Each of the parties hereto shall perform all
such further acts and execute all such additional documents as may be necessary
or reasonably appropriate to effect the intent and purposes of this Agreement.
Section 8.11 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed an original and all
of which shall constitute the same instrument. This Agreement shall be
considered fully executed when all parties have executed an identical
counterpart, notwithstanding that all signatures may not appear on the same
counterpart.
Section 8.12 Amendment and Restatement. This Agreement amends and
restates in its entirety the Original Shareholders Agreement. Any issuances of
securities on or prior to the date hereof are consented to in all respects and
any preemptive rights or antidilution protections with respect thereto are
deemed waived.
29
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
THE COMPANY:
ASD SYSTEMS, INC.
By: /s/ Norman Charney
--------------------------------------------
Name: Norman Charney
Title: President
SHAREHOLDERS:
ASD PARTNERS, LTD., a Texas limited partnership
By: ASD GP, Inc., its general partner
By: /s/ Norman Charney
--------------------------------------------
Name: Norman Charney
Title: President
VANTAGEPOINT VENTURE PARTNERS III (Q), L.P.
By: VANTAGE POINT ASSOCIATES III, LLC
-------------------------------------------------
Name: /s/ Alan Salzman
--------------------------------------------
Title: Alan Salzman, Managing Member
-------------------------------------------
/s/ James C. Leslie
----------------------------------------------------
/s/ Kevin Yancy
----------------------------------------------------
James C. Leslie and Kevin Yancy as Attorneys-in-Fact
for each of the Staubach Affiliated Shareholders
listed in Schedule A-1 attached hereto
----------------------------------------------------
Jonathan Bloch, as Attorney-in-Fact for each of the
Private Shareholders listed in Schedule A-2 attached
hereto
/s/ Norman Charney
- ------------------------
Norman Charney
/s/ Paul M. Jennings
- ------------------------
Paul M. Jennings
<PAGE>
(Signature pages continued)
VANTAGE POINT COMMUNICATIONS
PARTNERS, L.P.
By: VANTAGEPOINT COMMUNICATIONS
ASSOCIATES, LLC
Name: /s/ Alan Salzman
-------------------------------------------
Title: Alan Salzman, Managing Member
<PAGE>
ASD SYSTEMS, INC.
SHAREHOLDERS' AGREEMENT
SCHEDULE A-1
Name of Shareholder Number of Shares of Common Stock Owned
------------------- --------------------------------------
BRANT BRYAN 50,000
MATTHEW COIT 180,000
SCOTT COLLIER 50,000
CHARLIE CORSON 75,000
KEITH CRAWFORD 25,000
RONNIE DEYO 25,000
BRUCE DODGE 25,000
BARRY DORFMAN 25,000
GREG ENGLAND 75,000
CRYSTAL PARTNERS V 40,000
JOHN GATES 100,000
LEE HANSEN 25,000
SCOTT HARRINGTON 25,000
JOE HOLLISTER 25,000
DAVID HOUCK 25,000
STEVE JARVIE 25,000
KELLEY KACKLEY 25,000
HUGH KELLY 25,000
KIMBLER FAMILY PARTNERS, LTD. 100,000
BRETT LANDES 25,000
JIM LESLIE 100,000
CHRIS MAGUIRE 50,000
KRISTIN MARKHAM 50,000
TOM MCCARTHY 30,000
LANCE MCILHENNY 25,000
JOE OWEN 50,000
TOMMY PARRETT 30,000
JOHN PAUL 25,000
JOHN PEARSON 25,000
FRANK RICCA 75,000
SCOTT RIDDLES 25,000
SCHEDULE A-1 - Page 1
<PAGE>
ROGER STAUBACH 100,000
DAVID STRINGFIELD 75,000
ANDY TEDFORD 25,000
PAUL TINGLEY 25,000
LARRY TOON 100,000
BILL WALTON 25,000
PAUL WHITMAN 220,000
KEVIN YANCY 75,000
ROBERT GAUNTT 25,000
HANZLIK FAMILY LIMITED 100,000
PARTNERSHIP
WILLIE LANGSTON 25,000
KEVIN LILLY 25,000
JAMES MANSOUR 100,000
SCHEDULE A-1 - Page 2
<PAGE>
ASD SYSTEMS, INC.
SHAREHOLDERS' AGREEMENT
SCHEDULE A-2
Name of Shareholder Number of Shares of Common Stock Owned
------------------- --------------------------------------
CLB PARTNERS, LTD. 500,000
HEIDI DEMAYO 75,000
MATTHEW DIAMOND 25000
GERALD HORN 75,000
LANCE HORN 75,000
STANLEY WOODWARD 50,000
RON CIBULKA 25,000
RPM TECHINVESTOR 100,000
YELLOW SNOW ENTERPRISES, LLC 100,000
DONALD PITT SEPARATE PROPERTY TRUST 75,000
FIRST SECURITY COMPANY, II, L.P. 250,000
WILLOW CAPITAL PARTNERS, L.P. 250,000
FIRST SECURITY INTERNATIONAL FUND
LIMITED 250,000
FIRST SECURITY ASSOCIATES, L.P. 250,000
JOHN D. HARKEY, JR. 25,000
SCHEDULE A-2 - Page 1
<PAGE>
ASD SYSTEMS, INC.
SHAREHOLDERS' AGREEMENT
SCHEDULE A-3
Name of Shareholder Number of Shares Owned
------------------- ----------------------
ASD PARTNERS, LTD. 6,000,000 Shares of Common Stock
SCHEDULE A-3 - Page 1
<PAGE>
SCHEDULE B
Name of Shareholder Number of Shares Owned
------------------- ----------------------
VANTAGEPOINT VENTURE PARTNERS III, 740,741 Shares of Series A
(Q), L.P., A DELAWARE LIMITED Preferred Stock
PARTNERSHIP 740,741 Shares of Series B
Preferred Stock
VANTAGEPOINT COMMUNICATIONS 370,370 Shares of Series A
PARTNERS, L.P. Preferred Stock
370,370 Shares of Series B
Preferred Stock
SCHEDULE B - Page 1
<PAGE>
EXHIBIT 10.13
ASD Systems, Inc.
Securities
Purchase Agreement
August 22, 1999
.
<PAGE>
TABLE OF CONTENTS
Page
----
1. Purchase and Sale of Securities........................................ 1
1.1 Sale and Issuance of Securities................................. 1
1.2 Closing......................................................... 1
2. Representations and Warranties of the Company.......................... 1
2.1 Organization, Good Standing and Qualification................... 1
2.2 Capitalization and Voting Rights................................ 2
2.3 Subsidiaries.................................................... 3
2.4 Authorization................................................... 3
2.5 Valid Issuance of Preferred and Common Stock.................... 3
2.6 Governmental Consents........................................... 4
2.7 Offering........................................................ 4
2.8 Litigation...................................................... 4
2.9 Confidentiality Agreements...................................... 4
2.10 Intellectual Property........................................... 5
2.11 Compliance with Other Instruments............................... 6
2.12 Material Contracts and Obligations.............................. 6
2.13 Related-Party Transactions...................................... 7
2.14 Financial Statements............................................ 7
2.15 Changes......................................................... 7
2.16 Tax Returns..................................................... 8
2.17 Permits......................................................... 9
2.18 Environmental and Safety Laws................................... 9
2.19 Disclosure...................................................... 9
2.20 Registration Rights............................................. 9
2.21 Corporate Documents; Minute Books............................... 9
2.22 Title to Property and Assets.................................... 9
2.23 Insurance........................................................ 10
2.24 Employee Benefit Plans.......................................... 10
2.25 Labor Agreements and Actions.................................... 10
2.26 Real Property Holding Company................................... 10
2.27 Year 2000 Compliance............................................ 10
3. Representations and Warranties of the Investors........................ 11
3.1 Authorization................................................... 11
3.2 Purchase Entirely for Own Account............................... 11
3.3 Disclosure of Information....................................... 11
3.4 Investment Experience........................................... 11
3.5 Accredited Investor............................................. 11
3.6 Restricted Securities........................................... 12
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3.7 Further Limitations on Disposition.............................. 12
3.8 Legends......................................................... 12
3.9 "Market Stand-Off" Agreement.................................... 13
4. Conditions of Investor's Obligations at Closing........................ 13
4.1 Representations and Warranties.................................. 13
4.2 Performance..................................................... 13
4.3 Compliance Certificate.......................................... 13
4.4 Qualifications.................................................. 13
4.5 Proceedings and Documents....................................... 13
4.6 Board of Directors.............................................. 14
4.7 Opinion of Company Counsel...................................... 14
4.8 Amended and Restated Shareholders' Agreement.................... 14
4.9 Investor Warrants............................................... 14
5. Conditions of the Company's Obligations at Closing..................... 14
5.1 Representations and Warranties.................................. 14
5.2 Payment of Purchase Price....................................... 14
5.3 Qualifications.................................................. 14
5.4 Amended and Restated Shareholders' Agreement.................... 14
6. Miscellaneous.......................................................... 14
6.1 Survival........................................................ 14
6.2 Successors and Assigns.......................................... 15
6.3 Governing Law................................................... 15
6.4 Titles and Subtitles............................................ 15
6.5 Notices......................................................... 15
6.6 Finder's Fee.................................................... 15
6.7 Expenses........................................................ 15
6.8 Amendments and Waivers.......................................... 15
6.9 Effect of Amendment or Waiver................................... 16
6.10 Severability.................................................... 16
6.11 Aggregation of Stock............................................ 16
6.12 Entire Agreement................................................ 16
6.13 Counterparts.................................................... 16
ii
<PAGE>
SCHEDULE A Investors
SCHEDULE B Disclosure Schedule
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B Form of Warrant
EXHIBIT C Amended and Restated Shareholders' Agreement
EXHIBIT D Opinion of Counsel for the Company
iii
<PAGE>
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is dated as of
the 22nd day of August, 1999 by and among ASD Systems, Inc., a Texas corporation
(the "Company"), and the investors listed on Schedule A hereto (each, an
"Investor" and collectively, the "Investors").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Securities.
1.1 Sale and Issuance of Securities.
(a) The Company shall adopt and file with the Secretary of State
of Texas on or before the Closing (as defined below) the Amended and Restated
Articles of Incorporation in the form attached hereto as Exhibit A (the
"Restated Articles").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally, to purchase at the Closing and the Company agrees to
sell and issue to each Investor at the Closing, (i) that number of shares of the
Company's Series A Preferred Stock, par value $0.0001 per share (the "Series A
Preferred Stock") set forth opposite each Investor's name on Schedule A hereto
(ii) the number of shares of the Company's Series B Preferred Stock, par value
$.0001 per share (the "Series B Preferred Stock") set forth opposite each
Investor's name on Schedule A hereto and (iii) a warrant to purchase shares of
the Company's Common Stock, in substantially the form attached hereto as Exhibit
B (the "Investor Warrants" and together with Series A Preferred Stock and Series
B Preferred Stock, the "Securities"), for the purchase price set forth thereon.
1.2 Closing. The closing of the purchase and sale of the
Securities hereunder (the "Closing") shall take place at the offices of Arter &
Hadden LLP, 1717 Main Street, Suite 4100, Dallas, Texas 75201, at 10:00 A.M., on
August 23, 1999 or at such other time and place as the Company and Investors
acquiring in the aggregate more than half the shares of Series A Preferred Stock
and Series B Preferred Stock sold pursuant hereto mutually agree upon orally or
in writing. The date on which the Closing occurs is referred to herein as the
"Closing Date." At the Closing the Company shall deliver to each Investor (i)
certificates representing the Series A Preferred Stock and Series B Preferred
Stock that such Investor is purchasing and (ii) a warrant or warrants
representing the Investor Warrants that such Investor is purchasing, against
payment of the purchase price therefor by wire transfer.
2. Representations and Warranties of the Company. The Company
hereby represents and warrants as of the date hereof to each Investor that,
except as set forth on a Disclosure Schedule (the "Disclosure Schedule")
furnished each Investor and special counsel for the Investors prior to execution
hereof and attached hereto as Schedule B, as follows:
2.1 Organization, Good Standing and Qualification. The Company is
a corporation duly organized, validly existing and in good standing under the
laws of the State of
1
<PAGE>
Texas and has all corporate power and authority to carry on its business as now
conducted and as proposed to be conducted. The Company is duly qualified to
transact business and is in good standing as a foreign corporation in each
jurisdiction in which the failure to be so qualified and in good standing,
individually or in the aggregate, could reasonably be expected to have a
material adverse effect on the business, operations, assets, properties,
liabilities, condition (financial or otherwise), results of operations, or
prospects of the Company, taken as a whole (a "Material Adverse Effect").
2.2 Capitalization and Voting Rights. The authorized capital of
the Company will consist immediately prior to the Closing of:
(a) Preferred Stock. 7,500,000 shares of Preferred Stock, par
value $0.0001 per share (the "Preferred Stock"), 1,111,111 shares of which have
been designated Series A Preferred Stock and up to all of which may be sold
pursuant to this Agreement, 1,111,111 shares of which have been designated
Series B Preferred Stock and up to all of which may be sold pursuant to this
Agreement, and 3,200,000 shares of which have been designated Series C Preferred
Stock (the "Series C Preferred Stock") of which no shares of Series C Preferred
Stock are outstanding and of which 1,457,500 shares have been reserved for
issuance upon exercise of outstanding options and 1,000,000 shares of which have
been reserved for issuance upon exercise of outstanding warrants. The rights,
privileges and preferences of the Series A Preferred Stock, the Series B
Preferred Stock and the Series C Preferred Stock will be as stated in the
Restated Articles.
(b) Common Stock. 50,000,000 shares of common stock, par value
$0.0001 per share (the "Common Stock"), of which 10,500,000 shares of Common
Stock are issued and outstanding.
(c) The outstanding shares of Common Stock are owned by the
stockholders and in the numbers specified on the Disclosure Schedule hereto.
(d) The outstanding shares of Common Stock and Series C Preferred
Stock are all duly and validly authorized and issued, fully paid and
nonassessable, and were issued in compliance with all applicable state and
federal laws concerning the issuance of securities.
(e) Except as set forth above in this Section 2.2 and except for
(i) the conversion privileges of the Series A Preferred Stock to be issued under
this Agreement, (ii) the redemption feature of the Series B Preferred Stock to
be issued under this Agreement, (iii) the Investor Warrants, (iv) the rights
provided in Article V of the Amended and Restated Shareholders' Agreement (as
defined below), (v) currently outstanding options included in the options
described above to purchase 500,000 shares of Series C Preferred Stock granted
to employees pursuant to the Company's 1999 Long Term Incentive Plan (the
"Option Plan"), (vi) the right provided to Paul Jennings, Vice President of the
Company to purchase 957,500 shares of Series C Preferred Stock at a purchase
price of $1.00 per share exercisable at any time on or before February 10, 2004
pursuant to that certain Stock Option Agreement dated February 10, 1999, (vii)
warrants exercisable for 1,000,000 shares of Series C Preferred Stock and (viii)
the conversion privileges for the Series C Preferred Stock (consisting of the
right for
2
<PAGE>
each share of Series C Preferred Stock to convert into one share of Common
Stock), no common stock, preferred stock, equity interest, stock appreciation
right, phantom stock, profit participation right, option, warrant or other
agreement for the purchase or acquisition by the Company for any shares of its
capital stock, conversion or preemptive right or other equity or equity
derivative security of any kind of the Company is (or at the Closing will be)
authorized, issued or outstanding or is committed to nor has the Company entered
into any other agreements for the purchase or acquisition from the Company of
any shares of its capital stock. In addition to the aforementioned options, the
Company has reserved an additional 700,000 shares of its Series C Preferred
Stock (or Common Stock, as appropriate) for purchase upon exercise of options to
be granted in the future under the Option Plan. Other than the Shareholders'
Agreement, dated as of January 29, 1999, by and among the Company, Norman
Charney, Paul Jennings and certain other shareholders of the Company listed on
Schedule A thereto (the "Shareholders' Agreement") which at or prior to the
Closing will be amended and restated as set forth in Amended and Restated
Shareholders' Agreement in the form attached hereto as Exhibit C (the "Amended
and Restated Shareholders' Agreement"), the Company is not a party or subject to
any agreement or understanding, and, to the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the voting or giving of written consents with respect to any security
or by a director of the Company.
2.3 Subsidiaries. The Company does not presently own or control,
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution and delivery of this Agreement, and the Amended and
Restated Shareholders' Agreement, and the Investor Warrants (together, the
"Ancillary Agreements"), the performance of all obligations of the Company
hereunder and thereunder, and the authorization (or reservation for issuance),
sale and issuance of the Securities being sold hereunder and the Common Stock
issuable upon conversion of the Series A Preferred Stock and upon exercise of
the Investor Warrants has been taken or will be taken prior to the Closing. This
Agreement and the Ancillary Agreements constitute valid and legally binding
obligations of the Company, enforceable in accordance with their respective
terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Amended and Restated Shareholders' Agreement may be limited by applicable
federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series A
Preferred Stock and the Series B Preferred Stock that is being purchased by the
Investors hereunder, when issued, sold and delivered in accordance with the
terms of this Agreement for the consideration expressed herein, will be duly and
validly issued, fully paid and nonassessable and will be free of restrictions on
transfer, other than restrictions on transfer under this Agreement, the Amended
and Restated Shareholders' Agreement and under applicable state and federal
securities laws.
3
<PAGE>
The Common Stock issuable upon conversion of the Series A Preferred Stock
purchased under this Agreement and upon exercise of the Investor Warrants
purchased under this Agreement has been duly and validly reserved for issuance
and, upon issuance in accordance with the terms of the Restated Articles or the
Investor Warrants, as applicable, will be duly and validly issued, fully paid
and nonassessable and will be free of restrictions on transfer, other than
restrictions on transfer under this Agreement and the Amended and Restated
Shareholders' Agreement and under applicable state and federal securities laws.
The sale of the Securities, and the subsequent conversion or exercise of the
Securities into Common Stock, are not and will not be subject to any preemptive
rights.
2.6 Governmental Consents. No consent, approval, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except for filings required pursuant to
applicable federal and state securities laws and blue sky laws, which filings
will be effected within the required statutory period.
2.7 Offering. Subject in part to the truth and accuracy of each
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Securities as contemplated by this Agreement are exempt
from the registration requirements of the Securities Act of 1933, as amended
(the "Act"), the qualification or registration requirements of the Texas
Securities Act and the qualification or registration requirements of other
applicable blue sky laws. Neither the Company nor any authorized agent acting on
its behalf will take any action hereafter that would cause the loss of such
exemptions.
2.8 Litigation. There is no action, suit, proceeding or
investigation pending, or to the Company's knowledge currently threatened,
against the Company that questions the validity of or the right of the Company
to enter into this Agreement or the Ancillary Agreements, or to consummate the
transactions contemplated hereby or thereby, or that might result, either
individually or in the aggregate, in any Material Adverse Effect or any change
in the current equity ownership of the Company. The foregoing includes, without
limitation, actions, suits, proceedings or investigations pending or threatened
(or any basis therefore known to the Company) involving the prior employment of
any of the Company's employees, their use in connection with the Company's
business of any information or techniques allegedly proprietary to any of their
former employers, or their obligations under any agreements with prior
employers. The Company is not a party or subject to the provisions of any order,
writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Confidentiality Agreements. Each officer, director, management
level employee, and each employee or consultant involved in developing or
maintaining the Company's Intellectual Property (as defined below) has executed
a confidentiality agreement. The Company, after reasonable investigation, is not
aware that any of such employees, officers, directors or management level
employees, or other employees or consultants are in violation
4
<PAGE>
thereof, and the Company will use its best efforts to prevent any such
violation. The Company has taken commercially reasonable precautions to protect
its Intellectual Property from unauthorized disclosure.
2.10 Intellectual Property
(a) Section 2.10 of the Disclosure Schedule contains a complete
and accurate list of all (i) patented or registered Intellectual Property Rights
(as defined below) owned or used by the Company, (ii) pending patent
applications and applications for registrations of other Intellectual Property
Rights filed by the Company, (iii) material unregistered trade names and
corporate names owned or used by the Company and (iv) material unregistered
trademarks, service marks, copyrights, and computer software owned or used by
the Company. Section 2.10 of the Disclosure Schedule also contains a complete
and accurate list of all licenses and other rights granted by the Company to any
third party with respect to any Intellectual Property Rights and all licenses
and other rights granted by any third party to the Company with respect to any
Intellectual Property Rights (other than off the shelf software), in each case
identifying the subject Intellectual Property Rights. The Company owns all
right, title and interest to, or has the right to use pursuant to a valid
license, all Intellectual Property Rights material to the operation of the
businesses of the Company as presently conducted and as presently proposed to be
conducted, free and clear of all liens or encumbrances. Except to the extent
set forth in the Disclosure Schedule, the loss or expiration of any Intellectual
Property Right or related group of Intellectual Property Rights owned or used by
the Company has not had and is not reasonably likely to have a Material Adverse
Effect, and no such loss or expiration is threatened, pending or reasonably
foreseeable. The Company has taken all actions reasonably necessary to maintain
and protect the Intellectual Property Rights which they own. The Company is not
aware of any facts indicating that the owners of any Intellectual Property
Rights licensed to the Company have failed to take all actions reasonably
necessary to maintain and protect the Intellectual Property Rights which are
subject to such licenses.
(b) Except to the extent set forth in the Disclosure Schedule, (i)
the Company has not received any notices of any infringement or misappropriation
by, or conflict with, any third party with respect to such Intellectual Property
Rights (including, without limitation, any demand or request that the Company
license any rights from a third party) nor is there valid grounds for any such
infringement, misappropriation or conflict, (iii) the conduct of the Company's
business has not infringed, misappropriated or conflicted with and does not
infringe, misappropriate or conflict with any Intellectual Property Rights of
others and (iv) to the best of the Company's knowledge after due inquiry, the
Intellectual Property Rights owned by or licensed to the Company have not been
infringed, misappropriated or conflicted by others. The transactions
contemplated by this Agreement will not conflict with or cause the loss of the
Company's right, title or interest in and to the Intellectual Property Rights
listed or required to be listed on Section 2.10 of the Disclosure Schedule.
(c) The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would
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interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the business of the Company as proposed
to be conducted. Neither the execution nor delivery of this Agreement or the
Ancillary Agreements, nor the carrying on of the Company's current business by
the employees of the Company, nor the conduct of the Company's business as
proposed, will, to the Company's knowledge, conflict with or result in a breach
of the terms, conditions or provisions of, or constitute a default under, any
contract, covenant or instrument under which any of such employees is now
obligated to a former employer. The Company does not believe it is or will be
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to their employment by the Company.
(d) As used herein, "Intellectual Property Rights" means all (i)
patents, patent applications, patent disclosures and inventions, (ii)
trademarks, service marks, trade dress, trade names, logos and corporate names
and registrations and applications for registration thereof together with all of
the goodwill associated therewith, (iii) copyrights (registered or unregistered)
and copyrightable works and registrations and applications for registrations
thereof, (iv) computer software, data, data bases and documentation thereof, (v)
trade secrets and other confidential information (including, without limitation,
ideas, formulas, compositions, inventions (whether patentable or unpatentable
and whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data, copyrightable works,
financial and marketing plans and customer and supplier lists and information),
(vi) other intellectual property rights and (vii) copies and tangible
embodiments thereof (in whatever form or medium).
2.11 Compliance with Other Instruments. The Company is not in
violation of any provision of its Articles of Incorporation or Bylaws nor any
instrument, judgment, order, writ, decree or contract, statute, rule or
regulation to which the Company is subject. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in any such violation, or be in conflict
with or constitute, with or without the passage of time and giving of notice,
either a default under any such provision or an event that results in the
creation of any lien, charge or encumbrance upon any assets (including
Intellectual Property Rights) of the Company or the suspension, revocation,
impairment, forfeiture or nonrenewal of any material permit, license,
authorization or approval applicable to the Company, its business or operations
or any of its assets or properties.
2.12 Material Contracts and Obligations. The Disclosure Schedule
sets forth a list of (i) each agreement which requires future expenditures by or
obligations (contingent or otherwise) of the Company in excess of $25,000 or
which might result in payments to the Company in excess of $25,000, (ii) all
employment and consulting agreements (including any agreement entitling any
employee to continued employment or any severance), employee benefit, bonus,
pension, profit-sharing, stock option, stock purchase and similar plans and
arrangements, and distributor and sales representative agreements, (iii) each
agreement with any shareholder, officer or director of the Company, or any
"affiliate" or "associate" of such persons (as such terms are defined in the
rules and regulations promulgated under the Act), including without limitation
any agreement or other arrangement providing for the furnishing of services by,
rental
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of real or personal property from, or otherwise requiring payments to, any such
person or entity, (iv) any agreement relating to the Company's trade secrets or
the Intellectual Property Rights, (v) any agreements restricting or affecting
the development or distribution of the Company's products or services, (vi)
indemnification by the Company with respect to infringements or proprietary
rights, and (vii) any loans or indebtedness for borrowed money, including
guarantees thereof. The Company has delivered or made available to the Investors
copies of such of the foregoing agreements as the Investors have requested. To
the Company's knowledge, all of such agreements and contracts are valid, binding
and in full force and effect, except where the failure to so comply would not
have a Material Adverse Effect.
2.13 Related-Party Transactions. No employee, officer or director
of the Company or member of his or her immediate family is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them. To the best of the Company's knowledge, none
of such persons has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company. No member of the immediate family of any officer or director of the
Company is directly or indirectly interested in any material contract with the
Company.
2.14 Financial Statements. The Company has delivered to each
Investor its balance sheet dated June 30, 1999 and the related statements of
income, changes in shareholders' equity and cash flows of the Company for the
six-month period then ended (the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods indicated and
with each other. The Financial Statements fairly present the financial condition
and operating results of the Company as of the dates and for the periods
indicated therein, except for the Financial Statements do not contain notes and
other normal yearend audit adjustments. Except as set forth in the Financial
Statements, the Company has no material liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
subsequent to June 30, 1999 and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in the Financial Statements,
which, in both cases, individually or in the aggregate, are not material to the
financial condition or operating results of the Company. Except as disclosed in
the Financial Statements, the Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation. The Company maintains and
will continue to maintain a standard system of accounting established and
administered in accordance with generally accepted accounting principles.
2.15 Changes. Since December 31, 1998 there has not been:
(a) change in the assets, liabilities, financial condition or
operating results of the Company, except changes in the ordinary course of
business that have not been, in the aggregate, materially adverse;
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(b) damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the assets, properties, financial
condition, operating results, prospects or business of the Company (as such
business is presently conducted and as it is proposed to be conducted);
(c) waiver by the Company of a valuable right or of a material
debt owed to it;
(d) satisfaction or discharge of any lien, claim or encumbrance or
payment of any obligation by the Company, except in the ordinary course of
business and that is not material to the assets, properties, financial
condition, operating results or business of the Company (as such business is
presently conducted and as it is proposed to be conducted);
(e) material change or amendment to a material contract or
arrangement by which the Company or any of its assets or properties is bound or
subject;
(f) material change in any compensation arrangement or agreement
with any employee or consultant;
(g) sale, assignment or transfer of any Intellectual Property
Rights or other intangible assets;
(h) restriction, resignation or termination of employment of any
key employee, key consultant or officer of the Company;
(i) loans or guarantees made by the Company to or for the benefit
of its employees, consultants, officers or directors, or any members of their
immediate families, other than travel advances and other advances made in the
ordinary course of its business;
(j) the Company's knowledge, any other event or condition of any
character that might have a Material Adverse Effect; or
(k) agreement or commitment by the Company to do any of the things
described in this Section 2.15.
2.16 Tax Returns. The Company has timely filed all tax returns,
information returns and reports (federal, state and local) required to be filed
by it. The Company has not been advised that any of its returns have been or are
being audited. The Company has not elected pursuant to the Internal Revenue Code
of 1986, as amended (the "Code"), to be treated as a Subchapter S corporation or
made any election pursuant to Section 1362(a) or Section 341(f) of the Code.
Since its incorporation, the Company has not incurred any taxes, assessments or
governmental charges other than in the ordinary course of business and the
Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and
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Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories.
2.17 Permits. The Company has all franchises, permits, licenses and
any similar authority necessary for the conduct of its business, the lack of
which could materially and adversely affect the business, properties or
financial condition of the Company. The Company is not in default in any
material respect under any of such franchises, permits, licenses or other
similar authority.
2.18 Environmental and Safety Laws. To its knowledge, the Company
is not in violation of any applicable statute, law or regulation relating to the
environment or occupational health and safety, and to its knowledge, no material
expenditures are or will be required in order to comply with any such existing
statute, law or regulation.
2.19 Disclosure. The Company has fully provided each Investor with
all the information that such Investor has requested for deciding whether to
purchase the Series A Preferred Stock and all information that the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement (including all the exhibits and schedules hereto) nor any
other statements or certificates made or delivered in connection herewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading in light
of the circumstances under which they were made.
2.20 Registration Rights. Except as provided in the Shareholders'
Agreement (which shall be amended by the Amended and Restated Shareholders'
Agreement), the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.21 Corporate Documents; Minute Books. Except for amendments
necessary to satisfy representations and warranties or conditions contained
herein (the forms of which amendments have been provided to and approved by the
Investors), the Articles of Incorporation and Bylaws of the Company are in the
form previously provided to special counsel for the Investors. The minute books
of the Company provided to the Investors contain a complete summary of all
meetings of directors and stockholders since the time of incorporation and
reflect all transactions referred to in such minutes accurately in all material
respects.
2.22 Title to Property and Assets. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except for (i) statutory liens for the payment of current taxes that are not yet
delinquent and (ii) liens, encumbrances and security interests that arise in the
ordinary course of business and minor defects in title, none of which,
individually or in the aggregate, materially impair the Company's ownership or
use of such property or assets. With respect to the property and assets it
leases, the Company is in material compliance with such leases and, to its
knowledge, holds a valid leasehold interest free of any liens, claims or
encumbrances, subject to clauses (i) and (ii).
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2.23 Insurance. The Company has fire and casualty insurance
policies with such coverages in amounts (subject to reasonable deductibles)
customary for companies similarly situated.
2.24 Employee Benefit Plans. The Company does not have any Employee
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.25 Labor Agreements and Actions. The Company is not bound by or
subject to (and none of its assets or properties is bound by or subject to) any
written or oral, express or implied, contract, commitment or arrangement with
any labor union, and no labor union has requested or, to the Company's
knowledge, has sought to represent any of the employees, representatives or
agents of the Company. There is no strike or other labor dispute involving the
Company pending, or to the Company's knowledge, threatened, that could have a
Material Adverse Effect, nor is the Company aware of any labor organization
activity involving its employees. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each officer
and employee of the Company, other than Messrs. Charney and Jennings, is
terminable at the will of the Company. To its knowledge, the Company has
complied in all material respects with all applicable state and federal equal
employment opportunity and other laws related to employment.
2.26 Real Property Holding Company. The Company is not currently,
and has not been during the prior five years, a real property holding company
within the meaning of Section 897 of the Code.
2.27 Year 2000 Compliance. All of the Company's products and
services and all computer software and hardware (including microcode, firmware,
system and application programs, files, databases, computer services and
microcontrollers) are Year 2000 Compliant (as defined below), except to the
extent that they may be used or interfaced with other software, data or
operating systems that are not Year 2000 Compliant. To its knowledge and after
due investigation, all of the Company's internal computer systems are Year 2000
Compliant. To its knowledge and after due investigation, the Company is not
relying on the products or services of any third party whose systems are not
Year 2000 Compliant. Except as set forth in the Disclosure Schedule, the Company
has not made any other representations or warranties that any product or service
sold, licensed, rendered or otherwise provided by the Company is Year 2000
Compliant. For purposes of this Agreement, "Year 2000 Compliant" shall mean that
such products and data and information systems and any such data, information or
other files or software it uses, individually and in combination, completely and
accurately record, store, process, calculate and present data involving dates
before, on or after January 1, 2000; specifically: (i) no value for a current
date will cause any interruption in operation; (ii) date-based functionality
will behave consistently when dealing with dates before, on or after January 1,
2000; (iii) no abnormal endings or incorrect results will be produced when
working with dates before, on or after January 1, 2000; (iv) in all interfaces
and data storage, the century will be
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specified explicitly and will be unambiguously derived; and (v) year 2000 will
be recognized as a leap year.
3. Representations and Warranties of the Investors. Each Investor
hereby represents, warrants and covenants that:
3.1 Authorization. Such Investor has full power and authority to
enter into this Agreement and the Ancillary Agreements, and each such agreement
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Amended and Restated Shareholders' Agreement may be limited by applicable
federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Securities to be received by such Investor and the Common
Stock issuable upon conversion or exercise thereof will be acquired for
investment for such Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that such
Investor has no present intention of selling, granting any participation in or
otherwise distributing the same. By executing this Agreement, such Investor
further represents that such Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities other than the redemption feature of the Series B Preferred Stock.
3.3 Disclosure of Information. Such Investor believes it has
received all the information it considers necessary or appropriate for deciding
whether to purchase the Securities. Such Investor further represents that it has
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Securities and the
business, properties, prospects and financial condition of the Company. The
foregoing, however, does not limit or modify the representations and warranties
of the Company in Section 2 of this Agreement or the right of the Investors to
rely thereon.
3.4 Investment Experience. Such Investor is an investor in
securities and acknowledges that it is able to fend for itself, can bear the
economic risk of its investment, and has such knowledge and experience in
financial or business matters that it is capable of evaluating the merits and
risks of the investment in the Securities. If other than an individual, such
Investor also represents it has not been organized for the purpose of acquiring
the Securities.
3.5 Accredited Investor. Such Investor is an "accredited investor"
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
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3.6 Restricted Securities. Such Investor understands that the
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such Securities may be resold without registration under
the Act only in certain limited circumstances. In this connection, such Investor
represents that it is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way
limiting the representations set forth above, such Investor further agrees not
to make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 3 and the Amended and Restated Shareholders' Agreement, and:
(a) There is then in effect a registration statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such registration statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
requested by the Company, such Investor shall have furnished the Company with an
opinion of counsel, reasonably satisfactory to the Company that such disposition
will not require registration of such shares under the Act and will provide
certificates without restrictive legends within three days of receipt of a
reasonably satisfactory opinion. It is agreed that the Company will not require
opinions of counsel for transactions made pursuant to Rule 144 except in unusual
circumstances.
(c) Notwithstanding the provisions of subsections (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.8 Legends. It is understood that the certificates evidencing the
Securities may bear one or all of the following legends:
(a) "These securities have not been registered under the
Securities Act of 1933, as amended. They may not be sold, offered for sale,
pledged or hypothecated in the absence of a registration statement in effect
with respect to the securities under such Act or an opinion of counsel
satisfactory to the Company that such registration is not required or unless
sold pursuant to Rule 144 of such Act."
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(b) Any legend required by applicable law or the Amended and
Restated Shareholders' Agreement.
3.9 "Market Stand-Off" Agreement. Each Investor hereby agrees
that, during the period of duration specified by the Company and an underwriter
of Common Stock or other securities of the Company, following the effective date
of the first registration statement of the Company filed under Securities Act of
1933 which covers Common Stock (or other securities) to be sold on behalf of the
Company to the public in an underwritten offering, it shall not, to the extent
requested by the Company and such underwriter, directly or indirectly sell,
offer to sell, contract to sell (including, without limitation, any short sale),
grant any option to purchase or otherwise transfer or dispose of (other than to
donees who agree to be similarly bound) any securities of the Company held by it
at any time during such period and will execute a "lock-up" agreement in the
form provided by underwriters in such offering consistent with the foregoing;
provided, however, that all officers and directors of the Company and all other
persons holding at least 5% of the outstanding securities of the Company enter
into similar agreements and such market stand-off time period shall not exceed
180 days from such effective date.
4. Conditions of Investor's Obligations at Closing. The
obligations of each Investor under subsection 1.1(b) of this Agreement are
subject to the fulfillment on or before the Closing of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent thereto:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in Section 2 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the date of such Closing.
4.2 Performance. The Company shall have performed and complied
with all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 Compliance Certificate. The President of the Company shall
deliver to each Investor at the Closing a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled.
4.4 Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
4.5 Proceedings and Documents. All corporate and other proceedings
in connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request.
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4.6 Board of Directors. The Company shall have taken all necessary
corporate action such that immediately following the Closing, six (6) persons
will comprise the Company's Board of Directors, consisting of: two (2)
representatives elected by the Investors, two (2) representatives elected by
Norm Charney, one (1) representative elected by the voting committee of the
"Staubach Affiliated Shareholders" (as that term is defined in the Shareholders'
Agreement), one (1) representative chosen by CKM Capital.
4.7 Opinion of Company Counsel. Each Investor shall have received
from Arter & Hadden LLP, counsel for the Company, an opinion, dated as of the
Closing, in the form attached hereto as Exhibit D.
4.8 Amended and Restated Shareholders' Agreement. The Company, the
Investors and the shareholders of the Company shall have entered into the
Amended and Restated Shareholders' Agreement, which shall be in full force and
effect.
4.9 Investor Warrants. The Company shall have executed and
delivered to the Investors the Investor Warrants.
5. Conditions of the Company's Obligations at Closing. The
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions by
that Investor:
5.1 Representations and Warranties. The representations and
warranties of the Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties had
been made on and as of the Closing.
5.2 Payment of Purchase Price. The Investor shall have delivered
the purchase price specified in Section 1.2.
5.3 Qualifications. All authorizations, approvals or permits, if
any, of any governmental authority or regulatory body of the United States or of
any state that are required prior to the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
5.4 Amended and Restated Shareholders' Agreement. The Company, the
Investors and the shareholders of the Company shall have entered into the
Amended and Restated Shareholders' Agreement.
6. Miscellaneous.
6.1 Survival. The warranties, representations and covenants of the
Company and Investors contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Closing and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investors or the Company.
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6.2 Successors and Assigns. Except as otherwise provided herein,
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties. Nothing in
this Agreement, express or implied, is intended to confer upon any party, other
than the parties hereto or their respective successors and assigns, any rights,
remedies, obligations or liabilities under or by reason of this Agreement,
except as expressly provided in this Agreement.
6.3 Governing Law. The construction, validity and interpretation
of this Agreement will be governed by the internal laws of the State of Texas
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of Texas or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Texas.
6.4 Titles and Subtitles. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.5 Notices. All notices required or permitted hereunder shall be
in writing and shall be deemed effectively given: (i) upon personal delivery to
the party to be notified, (ii) when sent by confirmed telex or facsimile if sent
during normal business hours of the recipient, if not, then on the next business
day; (iii) five days after having been sent by registered or certified mail,
return receipt requested, postage prepaid; or (iv) one day after deposit with a
nationally recognized overnight courier, specifying next day delivery, with
written verification of receipt. All communications shall be sent to the address
as set forth on the signature pages or Schedule A hereof or at such other
address as such party may designate by ten days advance written notice to the
other parties hereto.
6.6 Finder's Fee. Other than a fee payable by the Company to CKM
Capital LLC, each party represents that it neither is nor will be obligated for
any finders' fee or commission in connection with this transaction. Each
Investor agrees to indemnify and to hold harmless the Company from any liability
for any commission or compensation in the nature of a finders' fee (and the
costs and expenses of defending against such liability or asserted liability)
for which such Investor or any of its officers, partners, employees or
representatives is responsible. The Company agrees to indemnify and hold
harmless each Investor from any liability for any commission or compensation in
the nature of a finders' fee (and the costs and expenses of defending against
such liability or asserted liability) for which the Company or any of its
officers, employees or representatives is responsible.
6.7 Expenses. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the reasonable
fees and expenses of Brobeck, Phleger & Harrison LLP, special counsel for the
Investors, of an amount not to exceed $50,000.
6.8 Amendments and Waivers. Any term of this Agreement may be
amended and the observance of any term of this Agreement may be waived (either
generally or in a
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particular instance and either retroactively or prospectively), only with the
written consent of the Company and the holders of a majority of the Common Stock
that is issued or issuable upon conversion or exercise of the Securities sold
pursuant to this Agreement. Any amendment or waiver effected in accordance with
this paragraph shall be binding upon each holder of any securities purchased
under this Agreement at the time outstanding (including securities into which
such securities are convertible), each future holder of all such securities and
the Company.
6.9 Effect of Amendment or Waiver. Each Investor acknowledges
that, by the operation of Section 6.8 hereof, the holders of a majority of the
Common Stock that is issued or issuable upon conversion or exercise of the
Securities sold pursuant to this Agreement will have the power to diminish or
eliminate all rights of such Investor under this Agreement.
6.10 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Aggregation of Stock. All shares of the Securities or Common
Stock issued upon conversion or exercise thereof held or acquired by affiliated
entities or persons shall be aggregated together for the purpose of determining
the availability of any rights under this Agreement.
6.12 Entire Agreement. This Agreement and the documents referred to
herein constitute the entire agreement among the parties and no party shall be
liable or bound to any other party in any manner by any warranties,
representations or covenants except as specifically set forth herein or therein.
6.13 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[Signature pages follow.]
16
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
ASD SYSTEMS, INC.
By: /s/ Norman Charney
--------------------------------------------
Name: Norman Charney
Title: President
Address: 3737 Grader Street, Suite 110
Garland, Texas 75041
Fax: (214) 343-2924
INVESTORS:
VANTAGEPOINT VENTURE PARTNERS III (Q), L.P.
By: VantagePoint Associates III, LLC, as
General Partner
By: /s/ Alan E. Salzman
---------------------------------------
Alan E. Salzman
Managing Member
Address: 1001 Bayhill Drive, Suite 100
San Bruno, California 94066
Fax: (650) 869-6078
<PAGE>
VANTAGEPOINT COMMUNICATIONS PARTNERS, L.P.
By: VantagePoint Communcations Associates,
LLC, as General Partner
By: /s/ Alan E. Salzman
---------------------------------------
Alan E. Salzman
Managing Member
Address: 1001 Bayhill Drive, Suite 100
San Bruno, California 94066
Fax: (650) 869-6078
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
<PAGE>
SCHEDULE A
Schedule of Investors
---------------------
<TABLE>
<CAPTION>
Series A Series B Purchase Price
Preferred Stock Preferred --------------
--------------- Stock
---------
<S> <C> <C> <C>
VantagePoint Venture Partners III (Q), L.P. 740,741 740,741 $ 8,000,002.80
VantagePoint Communications Partners, L.P. 370,370 370,370 $ 3,999,996.00
--------- --------- --------------
Total 1,111,111 1,111,111 $11,999,998.80
</TABLE>
<PAGE>
EXHIBIT 10.14
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW. NO TRANSFER OF THIS WARRANT OR
OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE
UNLESS SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES
LAW OR PURSUANT TO AN EXEMPTION THEREFROM.
Warrant No. ______ August 23, 1999
-----------------------
COMMON STOCK PURCHASE WARRANT
__________________ a __________________________ (the "Company"),
hereby grants to ________________________, a _____________________________
("Purchaser"), or Purchaser's registered assigns or transferees (Purchaser and
each such assign or transferee being referred to herein as a "Holder" and
collectively as the "Holders") the right to purchase, at any time and from time
to time on and after the date hereof and until the third anniversary of the date
of the closing of the initial public offering of securities of the Company (an
"Initial Public Offering") or Acquisition (as defined in the Company's Articles
of Incorporation (the "Articles")) (the "Expiration Date"), the Exercise Amount
(as defined below) of fully paid and nonassessable shares of Common Stock (the
"Common Stock") of the Company, on the terms and subject to the conditions and
adjustments set forth below.
1. Exercise of Warrant.
1.1 Exercise Amount. To the extent not previously exercised, this
Common Stock Purchase Warrant (this "Warrant") shall be exercisable for such
number of shares of Common Stock (the "Exercise Amount") as is equal to the
product of (a) 1.30 multiplied by (b) the number of shares of Common Stock
issuable upon conversion of the shares of Series A Convertible Preferred Stock
held by such Holder computed using the Conversion Price (as such term is defined
in the Articles) in effect on the date of exercise of this Warrant (the
"Exercise Date"), provided that if the Initial Public Offering or Acquisition
has occurred, from and after the closing thereof, the Exercise Amount shall be
computed using for (b) in the equation above the Conversion Price in effect upon
the closing of the Initial Public Offering or Acquisition (including such
adjustment to the Conversion Price as a result of the Initial Public Offering or
Acquisition as provided in the Articles) subject to adjustment as hereinafter
provided.
1.2 Exercise Price. Subject to adjustment as hereinafter
provided, the rights represented by this Warrant are exercisable on and after
the date hereof until the Expiration Date at a price (the "Exercise Price") per
share of Common Stock issuable hereunder (hereinafter "Warrant Shares") equal to
the product that is obtained by multiplying (a) 1.10 by (b) the Conversion Price
in effect on the Exercise Date, provided that if the Initial Public Offering or
Acquisition has occurred, from and after the closing thereof, the Exercise Price
shall be
1
<PAGE>
computed using for (b) in the equation above the Conversion Price in effect upon
the closing of the Initial Public Offering or Acquisition (including such
adjustment to the Conversion Price as a result of the Initial Public Offering or
Acquisition as provided in the Articles). The Exercise Price shall be payable,
at the Holder's discretion, in cash, by certified or official bank check, by
cancellation by the Holder of indebtedness, by net exercise as provided in
Section 1.4 below or by a combination of the foregoing.
1.3 Method of Exercise. Upon surrender of this Warrant with a
duly executed Notice of Exercise in the form of Annex A attached hereto,
together with payment of the Exercise Price for the Warrant Shares purchased
(except to the extent of net exercise pursuant to Section 1.4 herein), at the
Company's principal executive offices as set forth on the signature page hereto
or at such other address as the Company shall have advised the Holder in writing
(the "Designated Office"), the Holder shall be entitled to receive a certificate
or certificates for the Warrant Shares so purchased. The Company agrees that
the Warrant Shares shall be deemed to have been issued to the Holder as of the
close of business on the date on which this Warrant shall have been surrendered
together with the Notice of Exercise and payment for such Warrant Shares.
1.4 Net Exercise Election. In lieu of exercising this Warrant by
payment in cash, check or cancellation of indebtedness, Holder may from time to
time convert this Warrant, in whole or in part, into a number of Warrant Shares
determined by dividing (a) the aggregate fair market value of the Warrant Shares
or other securities otherwise issuable upon exercise of this Warrant minus the
aggregate Exercise Price of such Warrant Shares by (b) the fair market value of
one Warrant Share. The fair market value of the Warrant Shares shall be
determined pursuant to Section 1.5.
1.5 Valuation. If the Warrant Shares are traded regularly in a
public market, the fair market value of one Warrant Share shall be the closing
selling price per share as reported or quoted on the system or exchange on which
the Common Stock is listed on the date of exercise. If the Common Stock is not
regularly traded in a public market, the Board of Directors of the Company shall
determine fair market value in its reasonable good faith judgment. In the event
the Company is acquired by means of any transaction or series of related
transactions (including, without limitation, any reorganization, merger or
consolidation) or all or substantially all of the assets of the Company are
sold, the fair market value of one Warrant Share shall be equal to the quotient
obtained by dividing the aggregate merger consideration or price paid plus
liabilities assumed, if any, and less liabilities not assumed, if any, in such
acquisition or sale by the number shares of Common Stock of the Company
outstanding on the date of the closing of such acquisition or sale, calculated
on a fully diluted basis. The foregoing notwithstanding, if Holder advises the
Board of Directors of the Company in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the valuation of such
investment banking firm is greater than that determined by the Board of
Directors of the Company, then all fees and expenses of such investment banking
firm shall be paid by the Company. In all other circumstances, such fees and
expenses shall be paid by Holder.
2
<PAGE>
2. Transfer; Issuance of Stock Certificates; Restrictive Legends;
Holder's Representations.
2.1 Transfer. This Warrant may not be transferred or assigned in
whole or in part without compliance with all applicable federal and state
securities laws by the transferor and the transferee (including the delivery of
investment representation letters and legal opinions reasonably satisfactory to
the Company, if such are requested by the Company). Subject to compliance with
the restrictions on transfer set forth in this Section 2, each transfer of this
Warrant and all rights hereunder, in whole or in part, shall be registered on
the books of the Company to be maintained for such purpose, upon surrender of
this Warrant at the Designated Office, together with a written assignment of
this Warrant in the form of Annex B attached hereto duly executed by the Holder
or its agent or attorney. Upon such surrender and delivery, the Company shall
execute and deliver a new Warrant or Warrants in the name of the assignee or
assignees and in the denominations specified in such instrument of assignment,
and shall issue to the assignor a new Warrant evidencing the portion of this
Warrant not so assigned, if any. A Warrant, if properly assigned in compliance
with the provisions hereof, may be exercised by the new Holder for the purchase
of Warrant Shares without having a new Warrant issued. Prior to due presentment
for registration of transfer thereof, the Company may deem and treat the
registered Holder of this Warrant as the absolute owner hereof (notwithstanding
any notations of ownership or writing thereon made by anyone other than a duly
authorized officer of the Company) for all purposes and shall not be affected by
any notice to the contrary. All Warrants issued upon any assignment of Warrants
shall be the valid obligations of the Company, evidencing the same rights, and
entitled to the same benefits as the Warrants surrendered upon such registration
of transfer or exchange.
2.2 Stock Certificates. Certificates for the Warrant Shares shall
be delivered to the Holder within three days after the rights represented by
this Warrant shall have been exercised pursuant to Section 1, and a new Warrant
representing the Warrant Shares, if any, with respect to which this Warrant
shall not then have been exercised shall also be issued to the Holder within
such time. The issuance of certificates for Warrant Shares upon the exercise of
this Warrant shall be made without charge to the Holder hereof including,
without limitation, any documentary, stamp or similar tax that may be payable in
respect thereof, provided, however, that the Company shall not be required to
pay any income tax to which the Holder hereof may be subject in connection with
the issuance of this Warrant or the Warrant Shares; and provided further, that
if Warrant Shares are to be delivered in a name other than the name of the
Holder hereof representing any Warrant being exercised, then no such delivery
shall be made unless the person requiring the same has paid to the Company the
amount of transfer taxes incident thereto, if any.
2.3 Restrictive Legends. (a) Except as otherwise provided in this
Section 2, each certificate for Warrant Shares initially issued upon the
exercise of this Warrant, and each certificate for Warrant Shares issued to any
subsequent transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED, SOLD OR
3
<PAGE>
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL SUCH SECURITIES
ARE REGISTERED UNDER SUCH ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR
PURSUANT TO AN EXEMPTION THEREFROM.
(b) Except as otherwise provided in this Section 2, each Warrant
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
NEITHER THIS WARRANT NOR ANY OF THE SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY STATE SECURITIES LAW, NO TRANSFER OF THIS WARRANT OR
OF THE SECURITIES ISSUABLE UPON EXERCISE HEREOF SHALL BE VALID OR EFFECTIVE
UNLESS SUCH TRANSFER IS MADE PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES
LAW, OR PURSUANT TO AN EXEMPTION THEREFROM.
Notwithstanding the foregoing, the legend requirements of this Section 2.3 shall
terminate as to any particular Warrant or Warrant Share when the Company shall
have received from the Holder thereof an opinion of counsel in form and
substance reasonably acceptable to the Company that such legend is not required
in order to ensure compliance with the Securities Act and the Company shall
provide certificates representing such securities without restrictive legend
within three (3) days of receipt of such opinion. Whenever the restrictions
imposed by this Section 2.3 shall terminate, the Holder hereof or of Warrant
Shares, as the case may be, shall be entitled to receive from the Company
without cost to such Holder a new Warrant or certificate for Warrant Shares of
like tenor, as the case may be, without such restrictive legend.
2.4 Representations and Warranties of the Holder. By accepting
this Warrant, the Holder hereby represents and warrants to the Company that:
(1) Purchase Entirely for Own Account. This Warrant is
issued to the Holder in reliance upon the Holder's representations to the
Company as set forth herein. This Warrant and the Common Stock issuable upon
exercise hereof (collectively, the "Securities") are being or will be acquired
for investment for the Holder's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that the
Holder has no present intention of selling, granting any participation in, or
otherwise distributing the same. By accepting this Warrant, the Holder further
represents that the Holder does not presently have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities. The Holder represents that it has full power and authority to enter
into this Agreement.
(2) Disclosure of Information. The Holder has had an
opportunity to discuss the Company's business, management, financial affairs and
the terms and conditions of the offering of the Securities with the Company's
management. The Holder understands that such discussions, as well as the written
information issued by the Company, were intended to describe the aspects of the
Company's business which it believes to be material.
4
<PAGE>
(3) Restricted Securities. The Holder understands that the
Securities have not been, and will not be, registered under the Securities Act,
by reason of a specific exemption from the registration provisions of the
Securities Act which depends upon, among other things, the bona fide nature of
the investment intent and the accuracy of the Holder's representations as
expressed herein. The Holder understands and acknowledges that the Securities
are "restricted securities" under applicable U.S. federal and state securities
laws and that, pursuant to these laws, the Holder must hold the Securities
indefinitely unless subsequently registered under the Securities Act and
qualified by state authorities, or an exemption from such registration and
qualification requirements is available. The Holder acknowledges that the
Company has no obligation to register or qualify the Securities for resale,
except as set in forth in the Amended and Restated Shareholders' Agreement dated
August 23, 1999, between the Company and certain holders of the Company's
capital stock. The Holder further acknowledges that if an exemption from
registration or qualification is available, it may be conditioned on various
requirements including, but not limited to, the time and manner of sale, the
holding period for the Securities, and on requirements relating to the Company
which are outside of the Holder's control, and which the Company is under no
obligation and may not be able to satisfy.
(4) Accredited Investor. The Holder is an accredited
investor as defined in Rule 501(a) of Regulation D promulgated under the
Securities Act.
3. Adjustment of Number of Shares; Exercise Price; Nature of Securities
Issuable Upon Exercise of Warrants.
3.1 Exercise Price; Adjustment of Number of Shares. The Exercise
Price set forth in Section 1 hereof and the number of shares purchasable
hereunder shall be subject to adjustment from time to time as hereinafter
provided.
3.2 Merger, Sale of Assets, etc. If at any time while this
Warrant, or any portion thereof, is outstanding and unexpired there shall be a
reorganization (other than a combination, reclassification, exchange, or
subdivision of shares as provided in Sections 3.3 and 3.4), merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving entity, or a merger in which the Company is the
surviving entity but the shares of the Company's capital stock outstanding
immediately prior to the merger are converted by virtue of the merger into other
property, whether in the form of securities, cash or otherwise, or a sale or
transfer of the Company's properties and assets as, or substantially as, an
entirety to any other person, then, as a part of such reorganization, merger,
consolidation, sale or transfer, lawful provision shall be made so that the
Holder of this Warrant shall thereafter be entitled to receive upon exercise of
this Warrant, during the period specified herein and upon payment of the
Exercise Price then in effect, the number of shares of stock or other securities
or cash or property of the successor corporation resulting from such
reorganization, merger, consolidation, sale or transfer that a Holder of the
shares deliverable upon exercise of this Warrant would have been entitled to
receive in such reorganization, consolidation, merger, sale or transfer if this
Warrant had been exercised immediately before such reorganization,
consolidation, merger, sale or transfer, all subject to further adjustment as
provided in this Section 3. The foregoing provisions of this Section 3.2 shall
similarly apply to successive reorganizations, consolidations, mergers, sales
and transfers and to the stock and securities of any other corporation that are
at the time receivable upon the exercise of this Warrant. If the per-
5
<PAGE>
share consideration payable to the Holder hereof for shares in connection with
any such transaction is in a form other than cash or securities, then the value
of such consideration shall be determined in good faith by the Company's Board
of Directors and in the event the Holder disagrees with such valuation, a
reputable investment banking firm shall be appointed in accordance Section 1.5.
In all events, appropriate adjustment shall be made in the application of the
provisions of this Warrant with respect to the rights and interests of the
Holder hereof after the transaction, to the end that the provisions of this
Warrant shall be applicable after that event, as near as reasonably may be, in
relation to any shares or other property deliverable after that event upon
exercise of this Warrant.
3.3 Reclassification, etc. If the Company, at any time while this
Warrant, or any portion thereof, remains outstanding and unexpired, shall, by
the reclassification or exchange of securities or otherwise, change any of the
securities as to which purchase rights under this Warrant exist into the same or
a different number of securities of any other class or classes, this Warrant
shall thereafter represent the right to acquire such number and kind of
securities as would have been issuable as the result of such change with respect
to the securities that were subject to the purchase rights under this Warrant
immediately prior to such reclassification, exchange or other change and the
Exercise Price therefor shall be appropriately adjusted, all subject to further
adjustment as provided in this Section 3.
3.4 Stock Splits, Stock Dividends and Reverse Stock Splits. In
case at any time the Company shall split or subdivide the outstanding shares of
Common Stock into a greater number of shares, or shall declare and pay any stock
dividend with respect to its outstanding stock that has the effect of increasing
the number of outstanding shares of Common Stock, the Exercise Price in effect
immediately prior to such subdivision or stock dividend shall be proportionately
reduced (but not below the par value of the Common Stock) and the number of
Warrant Shares purchasable pursuant to this Warrant immediately prior to such
subdivision or stock dividend shall be proportionately increased, and
conversely, in case at any time the Company shall combine its outstanding shares
of Common Stock into a smaller number of shares, the Exercise Price in effect
immediately prior to such combination shall be proportionately increased and the
number of Warrant Shares purchasable upon the exercise of this Warrant
immediately prior to such combination shall be proportionately reduced.
4. Registration; Exchange and Replacement of Warrant; Reservation of
Shares.
The Company shall keep at the Designated Office a register in which
the Company shall provide for the registration, transfer and exchange of this
Warrant. The Company shall not at any time, except upon the dissolution,
liquidation or winding-up of the Company, close such register so as to result in
preventing or delaying the exercise or transfer of this Warrant.
The Company may deem and treat the person in whose name this Warrant
is registered as the Holder and owner hereof for all purposes and shall not be
affected by any notice to the contrary, until presentation of this Warrant for
registration or transfer as provided in this Section 4.
6
<PAGE>
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant and (in case of
loss, theft or destruction) of indemnity satisfactory to it, and (in the case of
mutilation) upon surrender and cancellation of this Warrant, the Company will
(in the absence of notice to the Company that the Warrant has been acquired by a
bona fide purchaser) make and deliver a new Warrant of like tenor, in lieu of
this Warrant without requiring the posting of any bond or the giving of any
security.
The Company shall at all times reserve and keep available out of its
authorized shares of Common Stock, solely for the purpose of issuance upon the
exercise of this Warrant, such number of shares of Common Stock as shall be
issuable upon the exercise hereof. The Company covenants and agrees that, upon
exercise of this Warrant and payment of the Exercise Price therefor, all Warrant
Shares issuable upon such exercise shall be duly and validly issued, fully paid
and non-assessable.
5. Fractional Warrants and Fractional Shares.
If the number of Warrant Shares purchasable upon the exercise of this
Warrant is adjusted pursuant to Section 3 hereof, the Company shall nevertheless
not be required to issue fractions of shares, upon exercise of this Warrant or
otherwise, or to distribute certificates that evidence fractional shares. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the fair market value of such fractional share.
6. Warrant Holders Not Deemed Stockholders.
No Holder of this Warrant shall, as such, be entitled to vote or to
receive dividends or be deemed the Holder of Warrant Shares that may at any time
be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall
anything contained herein be construed to confer upon the Holder of this
Warrant, as such, any of the rights of a stockholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issue or reclassification
of stock, change of par value or change of stock to no par value, consolidation,
merger or conveyance or otherwise), or to receive notice of meetings, or to
receive dividends or subscription rights, until such Holder shall have exercised
this Warrant and been issued Warrant Shares in accordance with the provisions
hereof.
7. Notices of Record Date, etc.
In the event of:
(i) any taking by the Company of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, or any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right; or
(ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
conveyance of all
7
<PAGE>
or substantially all the assets of the Company to or consolidation or merger of
the Company with or into any other corporation, or any other event described in
Sections 3.2, 3.3 or 3.4 hereof; or
(iii) any voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(iv) any issuance or sale of securities by the Company;
then and in each such event the Company will mail or cause to be mailed to the
Holder a notice specifying (i) the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and stating the amount
and character of such dividend, distribution or right; (ii) the date on which
any such reorganization, reclassification, conveyance, consolidation, merger,
dissolution, liquidation, or winding up is to take place, and the time, if any
is to be fixed, as of which the holders of record of Common Stock (or other
securities) shall be entitled to exchange their shares of Common Stock (or other
securities) for securities or other property deliverable upon such
reorganization, reclassification, recapitalization, conveyance, consolidation,
merger, dissolution, liquidation, or winding up; and (iii) the amount and
character of any stock or other securities, or rights or options with respect
thereto, proposed to be issued or granted, the date of such proposed issue or
grant, the terms thereof and the persons or class of persons to whom such
proposed issue or grant is to be offered or made. Such notice shall be mailed
at least 15 days prior to the date therein specified.
8. Address for Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered
personally, or mailed by registered or certified mail, return receipt requested,
or telecopied or telexed and confirmed in writing and delivered personally or
mailed by registered or certified mail, return receipt requested (a) if to the
Holder of this Warrant, to the address of such Holder as shown on the books of
the Company, or (b) if to the Company, to 3737 Grader Street, Suite 110,
Garland, Texas 75041, Facsimile: (214) 343-2924; or at such other address as the
Holder or the Company may hereafter have advised the other.
9. Successors.
All the covenants, agreements, representations and warranties
contained in this Warrant shall bind the parties hereto and their respective
heirs, executors, administrators, distributees, successors, assigns and
transferees.
10. Law Governing.
This Warrant shall be construed and enforced in accordance with, and
governed by, the laws of the State of Texas (not including the choice of law
rules thereof) regardless of the jurisdiction of creation or domicile of the
Company or its successors or of the Holder at any time hereof.
8
<PAGE>
11. Entire Agreement; Amendments and Waivers.
This Warrant sets forth the entire understanding of the parties with
respect to the transactions contemplated hereby. The failure of any party to
seek redress for the violation or to insist upon the strict performance of any
term of this Warrant shall not constitute a waiver of such term and such party
shall be entitled to enforce such term without regard to such forbearance. This
Warrant may be amended, and any breach of or compliance with any covenant,
agreement, warranty or representation may be waived, only if the Company has
obtained the written consent or written waiver of the Holder, and then such
consent or waiver shall be effective only in the specific instance and for the
specific purpose for which given.
12. Severability; Headings.
If any term of this Warrant as applied to any person or to any
circumstance is prohibited, void, invalid or unenforceable in any jurisdiction,
such term shall, as to such jurisdiction, be ineffective to the extent of such
prohibition or invalidity without in any way affecting any other term of this
Warrant or affecting the validity or enforceability of this Warrant or of such
provision in any other jurisdiction. The section headings in this Warrant have
been inserted for purposes of convenience only and shall have no substantive
effect.
[The balance of this page intentionally left blank]
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed as of the date first written above.
------------------------------------
Name of entity)
By:
---------------------------------
Print Name:
-------------------------
Title:
------------------------------
Accepted and agreed:
- -------------------------------------------
By:
---------------------------------------
Print Name:
-------------------------------
Title:
------------------------------------
10
<PAGE>
ANNEX A
NOTICE OF EXERCISE
(To be executed upon partial or full
exercise of the within Warrant)
1. The undersigned hereby elects to purchase _______ shares of
Common Stock of _______________________ pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price of such shares in
full.
1. The undersigned hereby elects to convert the attached Warrant
into Warrant Shares in the manner specified in Section 1.4 of the Warrant. This
conversion is exercised with respect to _____________________ of the Warrant
Shares covered by the Warrant.
[Strike the paragraph numbered 1 above that does not apply.]
2. Please issue a certificate or certificates representing said
shares in the name of the undersigned or in such other name as is specified
below and deliver such certificate(s) to the address specified below.
3. The undersigned represents it is acquiring the shares solely for
investment for its own account and not as a nominee for any other party and not
with a view toward the resale or distribution thereof, and the undersigned will
not offer, sell or otherwise dispose of any such shares except in compliance
with applicable federal and state securities laws.
------------------------------------
(Signature)
------------------------------------
(Address)
------------------------------------
(Date)
<PAGE>
ANNEX B
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned registered owner of this Warrant
hereby sells, assigns and transfers unto the Assignee named below all of the
rights of the undersigned under this Warrant, with respect to the number of
shares of Common Stock set forth below:
- --------------------------------------------------------------------------------
No. of Shares of
Name and Address of Assignee Common Stock
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and does hereby irrevocably constitute and appoint _______________________
attorney-in-fact to register such transfer on the books of
__________________________ maintained for the purpose, with full power of
substitution in the premises.
The undersigned also represents that, by acceptance of the assignment
hereof, the Assignee acknowledges that this Warrant and the shares of stock to
be issued upon exercise hereof or conversion thereof are being acquired for
investment, and that the Assignee will not offer, sell, or otherwise dispose of
this Warrant or any shares of stock to be issued upon exercise hereof or
conversion thereof except under circumstances which will not result in a
violation of the Securities Act of 1933, as amended, or any state securities
laws. Further, the Assignee has acknowledged that upon exercise of this
Warrant, the Assignee shall, if requested by the Company, confirm in writing, in
a form satisfactory to the Company, that the shares of stock so purchased are
being acquired for investment and not with a view toward distribution or resale.
Dated: Print Name:
---------------------------------
Signature:
----------------------------------
Witness:
------------------------------------
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of this Warrant in every particular, without
alteration or enlargement or any change whatsoever.
<PAGE>
EXHIBIT 10.15
NEITHER THIS WARRANT NOR THE SHARES OF SERIES B COMMON STOCK ISSUABLE HEREUNDER
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY
APPLICABLE BLUE SKY OR STATE SECURITIES LAW. SUCH SECURITIES MAY NOT BE OFFERED
FOR SALE OR SOLD WITHOUT: (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS OR (2) AN OPINION OF COUNSEL
(SATISFACTORY TO THE COMPANY) THAT SUCH REGISTRATION IS NOT REQUIRED.
THIS WARRANT MAY NOT BE SOLD, ASSIGNED, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT
IN STRICT CONFORMITY WITH THE PROVISIONS HEREOF.
______________________
(a ________________)
WARRANT CERTIFICATE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
<S> <C>
Warrant No. 1 To Purchase _____________
Shares of Series B Common Stock
Issuance Date: ________________
Registered Owner: ___________________
Exercise Price: $_______ per share of Series B Common Stock
Expiration Date: ______ __.m., Dallas, Texas time on ___________; Void Thereafter
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
1. Basic Terms. This Warrant Certificate ("Warrant") certifies that, for
good and valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the registered owner named above (the "Registered Owner") shall be
entitled, subject to the terms and conditions of this Warrant, to purchase,
subject to Section 8 below, on or before the expiration date specified above
(the "Expiration Date"), the number of shares of Series B Common Stock (the
"Shares") of ___________________, a __________________ (the "Company"),
specified above, at the exercise price specified above ("Exercise Price"), on
delivery and surrender of this Warrant together with the Exercise Form attached
hereto completed and duly executed and simultaneous payment of the Exercise
Price for the Shares purchased.
2. Method of Exercise; Fractional Shares. The purchase rights represented
by this Warrant, as adjusted from time to time pursuant to the terms hereof, are
exercisable at the election of the Registered Owner in whole or in part at any
time, or from time to time, on any business day on or prior to the Expiration
Date, by surrendering this Warrant at the principal office of the Company,
together with the attached Exercise Form duly completed and executed, together
with payment for all Shares purchased under this Warrant. The address of the
principal office of the Company is 3737 Grader Street, Suite 110, Garland, Texas
75041, or such other address as the Company may designate in writing to the
Registered Owner at the address of such owner appearing on the books of the
Company. At the option of the Registered Owner, payment shall be made in cash,
by certified or bank cashier's check payable to the order of the Company. The
purchase rights represented by this Warrant may be exercised for less than the
full number of Shares covered by this Warrant. Upon a partial exercise, this
Warrant shall be surrendered, and the Company shall issue to the Registered
Owner a new Warrant of the same class and tenor representing the right to
purchase the number of Shares not purchased upon such partial exercise and any
previous exercises of the purchase rights represented hereby. The purchase
rights represented hereby may not be exercised with respect to less than a full
Share.
3. Replacement of Warrant. On receipt of evidence reasonably satisfactory
to the Company of the loss, theft, destruction or mutilation of this Warrant
and, in the case of loss, theft or destruction, on delivery of an
ASD SYSTEMS, INC.
WARRANT CERTIFICATE NO. 1 - Page 1
<PAGE>
indemnity agreement reasonably satisfactory in form and substance to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor and amount.
4. Rights of Registered Owner. Subject to Sections 6 and 8 of this
Warrant, the Registered Owner shall not be entitled to vote or receive
distributions or be deemed the holder of Shares or any other securities of the
Company that may at any time be issuable on the exercise hereof for any purpose,
nor shall anything contained herein be construed to confer upon the Registered
Owner, as such, any of the rights of a shareholder of the Company or any right
to vote for the election of the Board of Directors or upon any matter submitted
to shareholders at any meeting thereof, or to give or withhold consent to any
action (whether upon an recapitalization, issuance of interests,
reclassification of interests, consolidation, merger, conveyance, or otherwise)
or to receive notice of meetings, or to receive distributions or subscription
rights or otherwise until the Warrant shall have been exercised as provided
herein. Upon the surrender of this Warrant and payment of the Exercise Price as
provided above, the person or entity entitled to receive the Shares issuable
upon such exercise shall be treated for all purposes as the holder of such
Shares of record as of the close of business on the date of the surrender of
this Warrant for the exercise as provided above. Upon the exercise of all or
part of the purchase rights represented by this Warrant, the Registered Owner
shall have all of the rights of a holder of the Series B Common Stock of the
Company.
5. Transfer of Warrant.
(a) Warrant Register. The Company will maintain a register (the
"Warrant Register") containing the names and addresses of the Registered
Owner or Registered Owners. Any Registered Owner of this Warrant or any
portion thereof may change his or her address as shown on the Warrant
Register by written notice to the Company requesting such change. Any
notice or written communication required or permitted to be given to the
Registered Owner may be delivered or given by mail to such Registered Owner
as shown on the Warrant Register and at the address shown on the Warrant
Register. Until this Warrant is transferred on the Warrant Register of the
Company, the Company may treat the Registered Owner as shown on the Warrant
Register as the absolute owner of this Warrant for all purposes,
notwithstanding any notice to the contrary.
(b) Warrant Agent. The Company may, by written notice to the
Registered Owner, appoint an agent for the purpose of maintaining the
Warrant Register referred to in Section 5(a) above, issuing the Shares or
other securities then issuable upon the exercise of this Warrant,
exchanging this Warrant, replacing this Warrant, or any or all of the
foregoing. Thereafter, any such registration, issuance, exchange or
replacement, as the case may be, shall be made at the office of such agent.
(c) Transferability of Warrant. This Warrant may not be transferred
or assigned in whole or in part without compliance with all applicable
federal and state securities laws by the transferor and the transferee
(including the delivery of investment representation letters and legal
opinions reasonably satisfactory to the Company, if such are requested by
the Company). Subject to the provisions of this Warrant with respect to
compliance with the Securities Act of 1933, as amended (the "Act"), title
to this Warrant may be transferred with or separate from the Shares of the
Registered Owner by endorsement (by the Registered Owner executing the
Assignment Form annexed hereto) and delivery in the same manner as a
negotiable instrument transferable by endorsement and delivery.
(d) Exchange of Warrant upon a Transfer. On surrender of this Warrant
for exchange, properly endorsed on the Assignment Form and subject to the
provisions of this Warrant with respect to compliance with the Act and with
the limitations on assignments and transfers contained in this Section 5,
the Company at its expense shall issue to or on the order of the Registered
Owner a new warrant or warrants of like tenor, in the name of the
Registered Owner or as the Registered Owner (on payment by the Registered
Owner of any applicable transfer taxes) may direct, for the securities
issuable upon exercise hereof.
(e) Compliance with Securities Laws.
- -----------------------
WARRANT CERTIFICATE - Page 2
<PAGE>
(i) The Registered Owner of this Warrant, by acceptance
hereof, acknowledges that this Warrant and the Shares to
be issued upon exercise hereof are being acquired solely
for the Registered Owner's own account and not a nominee
for any other party, and for investment, and that the
Registered Owner will not offer, sell or otherwise
dispose of this Warrant or any Shares except under
circumstances that will not result in a violation of the
Act or any state securities laws. Upon exercise of this
Warrant, the Registered Owner shall, if requested by the
Company, confirm in writing, in a form satisfactory to
the Company that the Shares are being acquired solely for
the Registered Owner's own account and not a as nominee
for any other party, for investment, and not with a view
toward distribution or resale.
(ii) This Warrant and all Shares issued upon exercise hereof
shall be stamped or imprinted with a legend in
substantially the following form (in addition to any
legend required by state securities laws):
THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UPON THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS. SUCH SECURITIES AND ANY SECURITIES
ISSUED HEREUNDER OR THEREUNDER MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR ANY
EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE LAWS.
6. Notices.
(a) Whenever the Exercise Price or number of Shares purchasable
hereunder shall be adjusted pursuant to Section 8 hereof, the Company shall
issue a certificate signed by its Chief Financial Officer setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated, and the
Exercise Price and number of Shares purchasable hereunder after giving
effect to such adjustment, and shall cause a copy of such certificate to be
mailed (by first class mail, postage prepaid) to the Registered Owner of
this Warrant.
(b) In case:
(i) the Company shall take a record of its shareholders (or
other securities at the time receivable upon the exercise
of this Warrant) for the purpose of entitling them to
receive any dividend or other distribution, or any right
to subscribe for or purchase any securities, or to
receive any other right, or
(ii) of any capital reorganization of the Company, any
reclassification of the securities of the Company, any
consolidation or merger of the Company with or into
another corporation, or any conveyance of all or
substantially all of the assets of the Company to another
corporation, or
(iii) of any voluntary dissolution, liquidation or winding-up
of the Company,
then, and in each such case, the Company will mail or cause to be mailed to
the Registered Owner or Registered Owners a notice specifying, as the case
may be, (A) the date on which a record is to be taken for the purpose of
such dividend, distribution or right, and stating the amount and character
of such dividend, distribution or right, or (B) the date on which such
reorganization, reclassification, consolidation, merger, conveyance,
dissolution, liquidation or winding-up is to take place, and the time, if
any is to be fixed, as of which the holders of record of Shares (or such
securities at the time receivable upon the exercise of this Warrant) shall
be entitled to exchange their Shares (or such other securities) for
securities or other property
- -----------------------
WARRANT CERTIFICATE - Page 3
<PAGE>
deliverable upon such reorganization, reclassification, consolidation,
merger, conveyance, dissolution, liquidation or winding-up. Such notice
shall be mailed at least 15 days prior to the date therein specified.
7. Amendments.
(a) Any term of this Warrant may be amended with the written consent
of the Company and the Registered Owner of this Warrant.
(b) No waivers of, or exceptions to, any term, condition or provision
of this Warrant, in any one or more instances, shall be deemed to be, or
construed as, a further or continuing waiver of any such term, condition or
provision.
8. Adjustments. The Exercise Price and the amount of interests or
securities purchasable hereunder are subject to adjustment from time to time as
follows:
(a) Merger, Sale of Assets, etc. If at any time while this Warrant,
or any portion thereof, is outstanding and unexpired there shall be:
(i) a reorganization (other than a combination,
reclassification, exchange or subdivision of securities
otherwise provided for herein),
(ii) a merger or consolidation of the Company with or into
another corporation in which the Company is not the
surviving entity, or a reverse triangular merger in which
the Company is the surviving entity but the securities of
the Company's outstanding immediately prior to the merger
are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, or
(iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person,
then, as a part of such reorganization, merger, consolidation, sale or
transfer, lawful provision shall be made so that the Registered Owner of
this Warrant shall thereafter be entitled to receive upon exercise of this
Warrant, during the period specified herein and upon payment of the
Exercise Price then in effect, the number of Shares or other securities or
property of the successor corporation resulting from such reorganization,
consolidation, merger, sale or transfer if this Warrant had been exercised
immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 8.
The foregoing provisions of this Section 8(a) shall similarly apply to
successive reorganizations, consolidations, mergers, sales and transfers
and to the interests or securities of any other corporation that are at the
time receivable upon the exercise of this Warrant. If the per-unit
consideration payable to the holder hereof for securities in connection
with any such transaction is in a form other than cash or marketable
securities then the value of such consideration shall be determined in good
faith by the Company's Board of Directors. In all events, appropriate
adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this
Warrant with respect to the rights and interests of the Registered Owner
after the transaction, to the end that the provisions of this Warrant shall
be applicable after that event, as near as reasonably may be, in relation
to any Shares, securities or other property deliverable after that event
upon exercise of this Warrant.
(b) Reclassification, etc. If the Company, at any time while this
Warrant, or any portion hereof, remains outstanding and unexpired by
reclassification of securities or otherwise, shall change any of the
securities as to which purchase rights under this Warrant exist into the
same or a different number of securities of any other class or classes,
this Warrant shall thereafter represent the right to acquire such number
and kind of securities as would have been issuable as the result of such
change with respect to the securities that were subject to the purchase
rights under this Warrant immediately prior to such reclassification or
other change and the Exercise Price therefor shall be appropriately
adjusted, all subject to further adjustment as provided in this Section 8.
- -----------------------
WARRANT CERTIFICATE - Page 4
<PAGE>
(c) Split, Subdivision or Combination of Interests. If the Company at
any time while this Warrant, or any portion hereof, remains outstanding and
unexpired shall split, subdivide or combine the securities as to which
purchase rights under this Warrant exist, into a different number of
securities of the same class, the Exercise Price for such securities shall
be proportionately decreased in the case of a split or subdivision or
proportionately increased in the case of a combination.
(d) Adjustments for Distributions of Interests or Other Securities or
Property. If, while this Warrant, or any portion hereof, remains
outstanding and unexpired, the holders of the securities as to which
purchase rights under this Warrant exist at the time shall have received,
or, on or after the record date fixed for the determination of eligible
shareholders, shall have become entitled to receive, without payment
therefor, other or additional interests or other securities or property
(other than cash) of the Company by way of distribution, then and in each
case, this Warrant shall represent the right to acquire, in addition to the
number of units of the security receivable upon exercise of this Warrant,
and without payment of any additional consideration therefor, the amount of
such other or additional interests or other securities or property (other
than cash) of the Company that such holder would hold on the date of such
exercise had it been the holder of record of the security receivable upon
exercise of this Warrant on the date hereof and had thereafter, during the
period from the date hereof to and including the date of such exercise,
retained such securities and/or all other additional securities available
by it as aforesaid during such period, giving effect to all adjustments
called for during such period by the provisions of this Section 8.
(e) No Impairment. The Company will not, by any voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to
be observed or performed hereunder by the Company, but will at all times in
good faith assist in the carrying out of all provisions of this Section 8
and in the taking of all such action as may be necessary or appropriate in
order to protect the rights of the Registered Owner of this Warrant against
impairment.
(f) Company Option to Require Exercise. Notwithstanding any provision
of this Agreement, in the event of any transaction referenced in Sections
8(a), 8(b), 8(c) or 8(d), the Company shall have the option, but not the
obligation, to require the Registered Owner to exercise this Warrant prior
to the consummation of any such transaction. In the event the Company so
elects and the Registered Owner fails to so exercise, this Warrant shall
expire and be of no further force or effect.
9. Payment of Taxes. The Company shall pay all taxes and other
governmental charges, other than applicable income taxes, that may be imposed
with respect to the issuance or delivery of Shares or other securities or
property issuable upon the exercise of purchase rights represented by this
Warrant.
10. Captions. The captions used in this Warrant are for convenience of
reference only and shall not affect the meaning or construction of any provision
of this Warrant.
11. Governing Law. This Warrant shall be governed by and construed in
accordance with the substantive laws of the State of Texas (without giving
effect to conflict of law provisions) and applicable federal laws.
12. Miscellaneous. This Warrant and all conditions and provisions of this
Warrant shall inure to the benefit of, and be binding upon, the Company and its
successors and assigns and the Registered Owner and such owner's heirs,
executors, administrators, successors and permitted assigns.
- -----------------------
WARRANT CERTIFICATE - Page 5
<PAGE>
WITNESS the seal of the Company and the signature of its authorized
officer.
----------------------
A
--------------------
By:
----------------------------------
, President
---------------------
REGISTERED OWNER
--------------------------------------
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
- -----------------------
WARRANT CERTIFICATE - Page 6
<PAGE>
EXERCISE FORM
(To be executed by the Registered Owner to purchase
Shares pursuant to the Warrant Certificate)
- -------------------
- -------------------
- -------------------
The undersigned represents and warrants that he/she/it is the
registered owner and holder of the attached Warrant Certificate No. ____________
dated ______________. The undersigned (1) irrevocably elects to exercise
purchase rights represented by such Warrant Certificate for, and to purchase,
Shares of _______________ (the "Company") pursuant to the Warrant Certificate
and encloses payment of $_________ therefor (in cash or by certified or bank
cashier's check); (2) requests that a certificate for the Shares be issued in
the name of the undersigned and delivered to the following address:_____________
____________________________________________________________; and (3) requests
that, if such number of Shares is less than the total number of Shares
purchasable under this Warrant Certificate, the Company issue to the undersigned
a new Warrant Certificate of the same class and tenor for the remaining balance
of Shares purchasable under the attached Warrant Certificate and deliver same to
the address set forth herein above.
Date:
----------------------- ---------------------------------------
(Please sign exactly as name appears on
Warrant Certificate)
Taxpayer ID No.
------------------------
In the presence of: Signature guaranteed by:
- ----------------------- ---------------------------------------
ASD SYSTEMS, INC.
EXERCISE FORM - Solo Page
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned Registered Owner of this Warrant hereby
sells, assigns and transfers unto the Assignee named below all of the rights of
the undersigned under the within Warrant, with respect to the number of Shares
set forth below:
Name of Assignee Address No. of Shares
and does hereby irrevocably constitute and appoint _________________________,
Attorney, to make such transfer on the books of _________________, maintained
for the purpose, with full power of substitution in the premises.
The undersigned also represents that, by assignment hereof, the Assignee
acknowledges that this Warrant and the securities to be issued upon exercise
hereof are being acquired for investment and that the Assignee will not offer,
sell or otherwise dispose of this Warrant or any securities to be issued upon
exercise hereof except under circumstances that will not result in a violation
of the Securities Act of 1933, as amended, or any state securities laws.
Further, the Assignee has acknowledged that upon exercise of this Warrant, the
Assignee shall, if requested by the Company, confirm in writing, in a form
satisfactory to the Company, that the securities so purchased are being acquired
for investment and not with a view toward distribution or resale.
Dated:
------------------------
---------------------------------------
Signature of Registered Owner
ASD SYSTEMS, INC.
EXERCISE FORM - Solo Page
<PAGE>
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 report dated August 5, 1999 (except for Note 11, as to which the
date is August 23, 1999) with respect to the financial statements of ASD
Systems, Inc. for the year ended December 31, 1998, the financial statements of
ASD Partners, Ltd. for the period October 14, 1997 to December 31, 1997, and to
the use of our reports dated August 5, 1999 with respect to the financial
statements of the Fulfillment Division of Athletic Supply of Dallas, LLC for
the period December 21, 1996 to October 13, 1997 and the financial statements
of the Fulfillment Division of Athletic Supply of Dallas, Inc. for the period
January 1, 1996 to December 20, 1996, in the Registration Statement (Form S-1
No. 33- ) and related Prospectus of ASD Systems, Inc. for the registration
of shares of common stock.
/s/ Ernst & Young, LLP
Dallas, Texas
August 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TWELVE
MONTHS ENDED DEC. 31, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 280 201,691
<SECURITIES> 0 0
<RECEIVABLES> 1,384,226 1,402,749
<ALLOWANCES> (50,000) (50,000)
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,334,506 1,554,440
<PP&E> 3,072,607 4,494,398
<DEPRECIATION> (1,204,510) (1,565,777)
<TOTAL-ASSETS> 3,265,953 4,538,911
<CURRENT-LIABILITIES> 3,885,272 2,536,697
<BONDS> 1,044,220 1,793,665
0 0
0 0
<COMMON> 600 1,050
<OTHER-SE> (1,664,139) 207,499
<TOTAL-LIABILITY-AND-EQUITY> 3,265,953 4,538,911
<SALES> 8,020,021 4,679,351
<TOTAL-REVENUES> 8,020,021 4,679,351
<CGS> 5,051,297 3,315,668
<TOTAL-COSTS> 5,051,297 3,315,668
<OTHER-EXPENSES> 5,291,774 3,587,216
<LOSS-PROVISION> 50,000 0
<INTEREST-EXPENSE> 232,907 68,802
<INCOME-PRETAX> (2,605,957) (2,292,335)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,605,957) (2,292,335)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,605,957) (2,292,335)
<EPS-BASIC> (0.43) (0.24)
<EPS-DILUTED> (0.43) (0.24)
</TABLE>
