<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 3, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
SELECT COMFORT CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MINNESOTA 2515 41-1597886
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification
organization) No.)
</TABLE>
6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
DANIEL J. MCATHIE
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, CHIEF ADMINISTRATIVE OFFICER
AND SECRETARY
SELECT COMFORT CORPORATION
6105 TRENTON LANE NORTH, SUITE 100
MINNEAPOLIS, MINNESOTA 55442
(612) 551-7000
(Name and address, including zip code, and telephone number, including
area code, of agent for service)
--------------------------
COPIES TO:
Mark A. Kimball Peter Lillevand
Thomas R. Marek Scott Elliott
Amy E. Culbert Greg Liberman
Oppenheimer Wolff & Donnelly LLP Orrick, Herrington & Sutcliffe LLP
3400 Plaza VII, 45 South Seventh Old Federal Reserve Bank Building
Street 400 Sansome Street
Minneapolis, Minnesota 55402 San Francisco, California 94111
(612) 607-7000 (415) 392-1122
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
--------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $0.01 per share......................... $110,000,000(2) $32,450
</TABLE>
(1) Includes shares of Common Stock which may be purchased by the underwriters
pursuant to an over-allotment option.
(1) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457(o).
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 3, 1998
PROSPECTUS
SHARES
SELECT COMFORT CORPORATION
[LOGO]
COMMON STOCK
Of the shares of Common Stock offered hereby, shares are being
sold by the Company and shares are being sold by the Selling Shareholders.
The Company will not receive any of the proceeds from the sale of shares by the
Selling Shareholders. See "Principal and Selling Shareholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering price
will be between $ and $ per share. See "Underwriting" for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has applied to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol AIRB.
--------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share.................. $ $ $ $
Total(3)................... $ $ $ $
</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting offering expenses payable by the Company estimated at
$ .
(3) The Company and certain Selling Shareholders have granted to the
Underwriters a 30-day option to purchase up to additional shares of Common
Stock solely to cover over-allotments, if any. If all such shares are
purchased, the total Price to Public, Underwriting Discount, Proceeds to
Company and Proceeds to Selling Shareholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998, at the office of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
PIPER JAFFRAY INC.
, 1998
<PAGE>
[INSIDE COVER PAGE OF PROSPECTUS INCLUDES A PICTURE OF A TYPICAL SELECT COMFORT
RETAIL STORE, SEVERAL PICTURES OF THE COMPANY'S AIR BEDS AND A MAP OF THE UNITED
STATES ILLUSTRATING
SELECT COMFORT'S RETAIL STORE LOCATIONS]
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
--------------
SELECT COMFORT-REGISTERED TRADEMARK-, SLEEP NUMBER-REGISTERED TRADEMARK-,
COMFORT CLUB-REGISTERED TRADEMARK-, 90 NIGHT TRIAL, BETTER NIGHT'S SLEEP
GUARANTEE, THE AIR BED COMPANY and the Company's stylized logo are trademarks of
the Company. This Prospectus also includes trademarks of companies other than
the Company.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND THE PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS."
THE COMPANY
Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
The Company offers its air beds exclusively under the Select Comfort brand
through 230 Select Comfort retail stores and leased departments, direct
marketing operations and road show events. Net sales have grown from $14.0
million in 1993 to $184.4 million in 1997, and comparable stores sales have
increased 26.1%, 36.8% and 27.6% for 1996, 1997 and the six months ended July 4,
1998, respectively.
According to the International Sleep Products Association, 35.3 million
mattress and foundation units were sold in the U.S. in 1997, generating
approximately $3.6 billion in wholesale sales, which the Company believes
represented approximately $6.7 billion in retail sales. This market is dominated
by four large manufacturers primarily focused on traditional innerspring
mattresses. The National Sleep Foundation estimates that approximately 50% of
U.S. consumers have suffered from sleep deprivation or poor quality sleep from a
variety of causes. The Company believes there is increasing demand for products
designed to provide a better night's sleep and promote overall wellness and the
traditional innerspring mattress industry has not been responsive to these
consumer preferences.
Select Comfort has commissioned a number of independent clinical studies
which indicate that the Company's air beds provide consumers with substantial
benefits over traditional innerspring mattresses. These studies have confirmed
that Select Comfort's air beds provide greater comfort and support by more
naturally contouring to the body, thereby providing better spinal alignment,
reduced pressure points, greater relief of lower back pain, greater overall
comfort and better quality sleep compared to traditional mattress products. The
Company has been granted or has applications pending for 25 U.S. patents and
maintains an active research and development department.
Unlike traditional mattress manufacturers, Select Comfort sells its products
directly to consumers through three complementary, service-oriented distribution
channels. Each of these channels is operated by knowledgeable Company employees
trained in the latest innovations in sleep technology and the benefits and
features of the Select Comfort product line. The Company's retail operations
included 230 stores in 42 states, including four leased departments (three in
Bed Bath & Beyond stores), at July 31, 1998. The Company plans to open
approximately 24 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. The Company's direct marketing operations include over 90 sales
professionals who service consumer inquiries and make outbound calls. Road show
events are held in selected markets where the Company has high inquiry levels
but does not have a retail presence, as well as at home shows and consumer
product shows, state fairs and similar events. The Company advertises through
targeted print, radio and television media which generate consumer inquiries
that are pursued through each of the Company's three distribution channels.
The Company's goal is to leverage its leadership position and build the
Select Comfort brand to be synonymous with a better night's sleep. In order to
achieve this goal, the Company's business and growth strategy is to (i) provide
a superior product, (ii) educate consumers and provide superior customer
service, (iii) increase product awareness and brand recognition, (iv) leverage
complementary distribution channels, (v) capitalize on vertically integrated
operations, and (vi) pursue additional growth opportunities.
The Company was incorporated in Minnesota in February 1987. The Company's
principal executive office is located at 6105 Trenton Lane North, Suite 100,
Minneapolis, MN 55442. The Company's telephone number is (612) 551-7000.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. shares
Common Stock offered by the Selling
Shareholders.................................. shares
Common Stock to be outstanding after the
offering...................................... shares(1)
Use of proceeds................................. To repay a portion of long-term
indebtedness; to fund expansion of its
retail store base and construction of a
third manufacturing and distribution
facility; and for general corporate
purposes, including working capital and
possible acquisitions
Proposed Nasdaq National Market symbol.......... AIRB
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED(2) SIX MONTHS ENDED
------------------------------------------------------- ----------------------
DEC. 31, DEC. 30, DEC. 28, JAN. 3, JUNE 28, JULY 4,
1994 1995 1996 1998 1997 1998
--------- --------- --------- --------- ----------- ---------
DEC. 31,
1993
-----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales.................................. $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 82,077 $ 118,800
Gross margin............................... 8,221 19,420 39,796 63,507 117,801 53,082 77,254
Operating income (loss).................... (2,753) (3,297) (4,589) (3,764) 2,078 1,257 4,703
Net income (loss).......................... $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (609) $ 1,247
Net income (loss) per share:
Basic.................................... $ (1.44) $ (1.76) $ (2.11) $ (1.74) $ (1.06) $ (0.31) $ 0.20
Diluted.................................. $ (1.27) $ (1.55) $ (1.87) $ (1.58) $ (0.99) $ (0.29) $ 0.04
Weighted average common shares:
Basic.................................... 1,907 1,911 2,166 2,630 3,529 3,368 3,974
Diluted.................................. 2,176 2,179 2,434 2,898 3,798 3,636 22,747(3)
Pro forma net income (loss)(4)............. $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ 404 $ 461 $ 2,787
Pro forma net income (loss) per share,
diluted(4)............................... $ (0.24) $ (0.20) $ (0.24) $ (0.18) $ 0.02 $ 0.02 $ 0.12
Pro forma weighted average common shares,
diluted(5)............................... 11,487 16,554 19,030 21,013 23,232 22,753 24,024
SELECTED OPERATING DATA:
Stores open at period-end(6)............... 19 35 68 143 200 172 224
Average square footage of stores open
during period(7)......................... 668 642 703 768 866 866 891
Sales per square foot(7)................... $ 401 $ 442 $ 611 $ 622 $ 666 $ 302 $ 358
Average store age (in months at period
end)..................................... 5 12 15 15 22 18 25
Comparable store sales increase(8)......... -- 57.6% 59.8% 26.1% 36.8% 24.6% 27.6%
</TABLE>
<TABLE>
<CAPTION>
JULY 4, 1998
-------------------------
ACTUAL AS ADJUSTED(9)
--------- --------------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............................................................. $ 8,732 $
Working capital....................................................................... 2,643
Total assets.......................................................................... 58,799
Long-term debt, less current maturities............................................... 20,712
Total shareholders' equity (deficit).................................................. (19,030)
</TABLE>
4
<PAGE>
- --------------------------
(1) Based on the number of shares outstanding as of July 31, 1998. Excludes (i)
an aggregate of 5,001,035 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding as of July 31, 1998 at a weighted
average exercise price of $4.77 per share and (ii) an aggregate of
shares of Common Stock issuable upon exercise of employee stock options
expected to be granted in connection with this offering at an exercise price
per share equal to the initial public offering price. See "Capitalization,"
"Management--Stock Option and Incentive Plans" and "Description of Capital
Stock--Options and Warrants."
(2) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.
(3) See Note 11 of Notes to Consolidated Financial Statements.
(4) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon consummation of this offering. See "Pro Forma Consolidated
Financial Statements" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
(5) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering and the dilutive
effect of outstanding options and warrants.
(6) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, June 28, 1997 and January 3, 1998
and four at July 4, 1998).
(7) For stores open during the entire period indicated.
(8) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 85 and 164 for 1994, 1995, 1996, 1997 and the six-month
periods ended June 28, 1997 and July 4, 1998, respectively.
(9) As adjusted to give effect upon the consummation of this offering to the (i)
reclassification of a put warrant from long-term debt to shareholders'
equity, (ii) conversion of all outstanding shares of preferred stock into
Common Stock, and (iii) application of the estimated net proceeds from the
issuance of shares of Common Stock at an assumed initial public
offering price of $ per share, including repayment of $15.0 million of
the Company's outstanding indebtedness. See "Use of Proceeds" and
"Capitalization."
--------------------------
THE COMPANY'S FISCAL YEAR ENDS ON THE SATURDAY CLOSEST TO DECEMBER 31, AND
UNLESS THE CONTEXT OTHERWISE REQUIRES, ALL REFERENCES TO YEARS IN THIS
PROSPECTUS REFER TO THE COMPANY'S FISCAL YEARS. ALL REFERENCES TO THE COMPANY
HEREIN INCLUDE THE COMPANY'S WHOLLY OWNED SUBSIDIARIES, SELECT COMFORT DIRECT
CORPORATION, SELECT COMFORT RETAIL CORPORATION, DIRECT CALL CENTERS, INC. AND
SELECT COMFORT SC CORPORATION. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS (I) GIVES EFFECT TO THE CONVERSION OF ALL OUTSTANDING SHARES OF
PREFERRED STOCK INTO COMMON STOCK UPON THE CONSUMMATION OF THIS OFFERING, (II)
HAS BEEN ADJUSTED TO REFLECT A THREE-FOR-TWO STOCK SPLIT OF THE COMPANY'S COMMON
STOCK EFFECTIVE UPON THE CONSUMMATION OF THIS OFFERING, AND (III) ASSUMES THAT
THE UNDERWRITERS' OVER-ALLOTMENT OPTION WILL NOT BE EXERCISED.
5
<PAGE>
RISK FACTORS
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS
AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH BELOW AND ELSEWHERE IN
THIS PROSPECTUS. SEE "CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS."
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING ANY SHARES OF THE COMMON
STOCK OFFERED HEREBY.
HISTORY OF OPERATING LOSSES; UNCERTAIN PROFITABILITY. Although the Company
achieved profitability with net income of $1.2 million for the first six months
of 1998, the Company has incurred substantial operating losses since its
inception and had an accumulated deficit of $21.1 million as of July 4, 1998.
There can be no assurance that the Company will achieve or sustain profitability
on a quarterly or annual basis in future periods. The Company's future operating
results will depend upon a number of factors, including (i) the level of
consumer acceptance of the Company's products, (ii) the ability of the Company
to create product and brand name awareness, (iii) the effectiveness and
efficiency of the Company's advertising, (iv) the number and timing of new
retail store openings, (v) the performance of the Company's existing and new
retail stores, (vi) the ability of the Company to manage its planned rapid store
expansion, (vii) the ability of the Company to successfully identify and respond
to emerging trends in the mattress industry, (viii) the level of competition in
the mattress industry, and (ix) general economic conditions and consumer
confidence. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
LIMITED HISTORY OF RETAIL OPERATIONS; AGGRESSIVE GROWTH STRATEGY. The
Company's net sales have grown significantly in the past several years primarily
as a result of the opening of new retail stores and increases in comparable
store sales from year to year. Until recently, the Company generated most of its
net sales from its direct marketing operations. The Company opened its first
three retail stores in 1992 and operated 19 stores at the end of 1993, 35 stores
at the end of 1994, 68 stores at the end of 1995, 143 stores at the end of 1996,
200 stores at the end of 1997 and 230 stores, including four leased departments
(three in Bed Bath & Beyond stores) as of July 31, 1998. Virtually all of the
Company's retail stores are in mall locations. The Company plans to open
approximately 24 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999. The Company intends to open new retail stores in both existing
and, to a lesser extent, new geographic markets. The opening of additional
stores in an existing market could result in lower net sales from existing
Company stores in that market. Because the Company will be expanding into new
geographic markets, it may face competitive challenges that are different from
those encountered to date. In addition to adding further mall locations, the
Company's retail expansion plans include alternative locations such as strip
shopping centers. Such alternative locations may involve different risks than
mall locations.
The success of the Company's planned expansion will be dependent upon many
factors, including the ability of the Company to (i) successfully open
additional retail stores in existing geographic markets, (ii) successfully enter
new geographic markets and store environments in which the Company has no
previous retail experience, (iii) negotiate acceptable lease terms for
additional sites, (iv) effectively hire, train, manage and retain qualified
management and other personnel, (v) effectively manage the interaction among the
Company's multiple distribution channels, (vi) generate additional direct
marketing inquiries, (vii) effectively develop strategic alliances with respect
to product development, marketing and distribution, and (viii) effectively refer
selected direct marketing inquiries to the retail and road show distribution
channels. There can be no assurance that the Company will be able to grow at
historical rates or achieve its planned expansion, that new retail stores will
be effectively integrated into the Company's existing operations, that such
stores will be profitable or that the Company will be able to establish and
maintain profitable strategic alliances. See "Business--Business and Growth
Strategy."
6
<PAGE>
ABILITY TO MANAGE GROWTH. The Company's aggressive growth strategy has
placed, and will continue to place, a significant strain on the Company's
management, production, information systems and other resources. To manage
growth effectively, the Company must maintain a high level of manufacturing
quality and efficiency, continue to enhance its operational, financial and
management systems, including its database management, tracking of inquiries,
inventory control and distribution systems, and expand, train and manage its
employee base. There can be no assurance that the Company will be able to
effectively manage this expansion in any one or more of these areas, and any
failure to do so could have a material adverse effect on the Company's business,
financial condition and operating results.
All orders are filled by shipments made directly to the customer from one of
the Company's two manufacturing and distribution centers located in Minneapolis
and in Columbia, South Carolina. The Company believes that its existing
manufacturing and distribution facilities will be adequate to support its
planned expansion through the next 12 months. Any significant interruption in
the operation of either of such facilities would have a material adverse effect
on the business, financial condition and operating results of the Company. The
Company plans to add a third manufacturing and distribution center in Salt Lake
City, which is expected to be in operation during the first half of 1999, at a
cost of approximately $4.5 million. There can be no assurance that the new
facility will be completed on time, that the cost to build it will not exceed
the Company's estimates or that manufacturing costs for this new facility will
not be greater than manufacturing costs at the Company's current facilities in
Minnesota and South Carolina. In addition, delays or interruptions in the normal
supply of products could occur as the Company attempts to integrate a third
manufacturing and distribution center. Any such increases in costs or delays
could have a material adverse effect on the Company's business, financial
condition and operating results. The Company does not have experience in
manufacturing its products in the volumes that it projects will be necessary to
support the anticipated increase in sales and may encounter difficulties in
scaling up production, including problems involving quality control and
assurance, component supply and shortages of qualified personnel. Any failure on
the part of the Company in manufacturing its products in volumes sufficient to
meet demand could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Manufacturing and
Distribution."
EFFECTIVENESS AND EFFICIENCY OF ADVERTISING EXPENDITURES. The Company's
advertising expenditures increased from $5.4 million in 1994 to $28.3 million in
1997, and are expected to continue to increase for the foreseeable future. The
Company's future growth and profitability will be dependent in part on the
effectiveness and efficiency of the Company's advertising expenditures,
including the ability of the Company to (i) create greater awareness of the
Company's products and brand name, (ii) determine the appropriate creative
message and media mix for future advertising expenditures, (iii) effectively
manage advertising costs (including creative and media) in order to maintain
acceptable costs per inquiry, costs per order and operating margins, and (iv)
convert inquiries into actual orders. Historically, the Company's advertising
expenditures have generated revenue benefits beyond the actual duration of the
advertisements. There can be no assurance that the Company will experience
similar benefits from advertising expenditures in the future. In addition, no
assurance can be given that the Company's planned increases in advertising
expenditures will result in increased sales, will generate sufficient levels of
product and brand name awareness or that the Company will be able to manage such
advertising expenditures on a cost effective basis. See "Business--Marketing and
Advertising."
FLUCTUATIONS IN COMPARABLE STORE SALES RESULTS. The Company's comparable
store sales results have fluctuated significantly in the past and such
fluctuations are likely to continue. The Company's comparable store sales
increases were 26.1%, 36.8% and 27.6% for 1996, 1997 and the six months ended
July 4, 1998, respectively. The Company's comparable store sales results
fluctuate significantly from quarter to quarter and ranged from 8.2% to 62.0% on
a quarterly basis for 1996 and 1997. There can be no assurance that the
Company's comparable store sales results will not fluctuate significantly in the
future. A variety of factors affect the Company's comparable store sales
results, including (i) the level of consumer awareness of Select Comfort's
products and brand name, (ii) the rate of consumer acceptance of the Company's
7
<PAGE>
products, (iii) the higher levels of sales in the first year of operations as
each successive class of new stores is opened, (iv) the strong comparable store
sales performance in recent periods, (v) the maturation of its store base, (vi)
the timing and relative success of promotional events, advertising expenditures,
new product introductions and product line extensions, and (vii) general
economic conditions and consumer confidence. In addition, the Company's higher
per unit prices and lower number of transactions relative to other mall-based
retailers may cause greater volatility in the Company's comparable store sales
results. Additionally, due to the integrated nature of the Company's
distribution channels, the relative level of the Company's net sales may
fluctuate between retail and direct marketing, which may contribute to
fluctuations in comparable store sales results. Changes in comparable store
sales results could cause the price of the Common Stock to fluctuate
substantially.
QUARTERLY FLUCTUATIONS AND SEASONALITY. The Company's quarterly operating
results may fluctuate significantly as a result of a variety of factors,
including increases or decreases in comparable store sales, the timing, amount
and effectiveness of advertising expenditures, any increases in return rates,
the timing of new store openings and related expenses, competitive factors, net
sales contributed by new stores, any disruptions in third party delivery
services and general economic conditions and consumer confidence. The Company's
business is also subject to some seasonal influences, with heavier
concentrations of sales during the fourth quarter holiday season due to higher
mall traffic. During the third quarter of 1997, the United Parcel Service
("UPS") work stoppage resulted in delayed delivery of the Company's products,
requiring the Company to use alternative carriers. Additionally during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997. See "--Reliance Upon Carriers."
A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations of any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.
The Company expects to incur certain charges in the period in which this
offering is consummated in connection with an outstanding put warrant and with
the repayment of certain indebtedness with a portion of the net proceeds of this
offering. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Overview."
RETURN POLICY AND PRODUCT WARRANTY. Part of the Company's marketing and
advertising strategy focuses on providing a 90 Night Trial in which customers
may return the air bed and obtain a refund of the purchase price. As the Company
expands its sales, there can be no assurance that its return rates will remain
within acceptable levels. An increase in return rates could have a material
adverse effect on the Company's business, financial condition and operating
results. The Company also provides its customers with a limited 20-year warranty
on its air beds. Although the Company has performed extensive testing to enable
it to project warranty claims over the 20-year warranty period, the Company has
only been selling air beds in significant quantities since 1992. There can be no
assurance that the Company's warranty reserves will be adequate to cover future
warranty claims, and such failure could have a material adverse effect on the
Company's business, financial condition and operating results.
8
<PAGE>
PRODUCT DEVELOPMENT AND ENHANCEMENTS. The Company's growth and future
success will depend upon its ability to enhance its existing products and to
develop and market new products on a timely basis that respond to customer needs
and achieve market acceptance. The Company is pursuing opportunities to enter
into strategic alliances with manufacturers of adjustable frame beds and sofa
sleepers. There can be no assurance that the Company will be successful in
developing or marketing enhanced or new products, or that any such products will
be accepted by the market. There can also be no assurance that the Company will
be able to establish and maintain profitable strategic alliances. Further, there
can be no assurance that the resulting level of sales of any of the Company's
enhanced or new products will justify the costs associated with their
development and marketing. See "Business--Business and Growth Strategy" and
"--Research and Product Development."
MARKET ACCEPTANCE. The U.S. mattress market is dominated by four large
manufacturers of innerspring mattresses. The Company's air bed technology
represents a significant departure from traditional innerspring mattresses. The
market for air beds is continuing to evolve and the success of the Company's
products will be dependent upon both the continued growth of this market and
upon market acceptance of the Company's air beds. The failure of the Company's
air beds to achieve market acceptance for any reason would have a material
adverse effect on the Company's business, financial condition and operating
results.
DEPENDENCE ON CONSUMER SPENDING. The success of the Company's operations
depends to a significant extent upon a number of factors relating to
discretionary consumer spending. These factors include economic conditions such
as employment levels, business conditions, interest rates, availability of
credit, inflation and taxation. Downturns in such economic conditions or in
consumer confidence could have a negative effect on discretionary spending.
Because a high percentage of the Company's net sales are made on credit, any
downturn in general economic conditions or increases in interest rates may
materially adversely affect the Company's business, financial condition and
operating results. The Company is also dependent upon the continued popularity
of malls as shopping destinations and the ability of mall anchor tenants and
other attractions to generate customer traffic for the Company's retail stores.
A decrease in mall traffic could adversely affect the Company's growth, net
sales, comparable store results and profitability.
RELIANCE UPON VENDORS; FOREIGN SOURCES OF SUPPLY. All of the air chambers
for the Company's air beds are purchased from one Eastern European supplier
under a supply contract expiring in August 1999, pursuant to which the Company
is obligated to purchase certain minimum quantities. The Company has recently
completed the development of an air chamber designed with new materials that
will be manufactured by a U.S. based company at a foreign manufacturing
facility. Full production of this new air chamber is expected to commence in the
third quarter of 1999. The Eastern European supplier is expected to provide a
second source of supply of this new air chamber during the second half of 1999.
The Company is continuously searching for alternative designs and materials for
all of its components, as well as alternative sources of supply. The inability
of the Company's sources of supply to meet, for any reason, the Company's
requirement for air chambers could have a material adverse effect on the
Company's business, financial condition and operating results. In addition,
since the Company's air chambers and other supplies are manufactured outside the
United States, the Company's operations could be materially adversely affected
by the risks associated with foreign sourcing of materials, including (i)
political instability resulting in disruption of trade, (ii) existing or
potential duties, tariffs or quotas that may limit the quantity of certain types
of goods that may be imported into the United States or increase the cost of
such goods, and (iii) any significant fluctuation in the value of the dollar
against foreign currencies.
With the exception of its air chambers, the Company has no long-term
purchase contracts or other contractual assurances of continued supply, pricing
or access to components. The inability or failure of one or more key vendors to
supply components, the loss of one or more key vendors or a material change in
the Company's purchase terms could have a material adverse effect on the
Company's business, financial
9
<PAGE>
condition and operating results. See "Business--Suppliers" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RELIANCE UPON CARRIERS. Historically, the Company has relied almost
exclusively on UPS for delivery of the Company's products to customers. For a
significant portion of the third quarter of 1997, UPS was unable to deliver the
Company's products within acceptable time periods, causing delays in deliveries
to customers and requiring the Company to use alternative carriers. This
contributed to substantially greater freight charges and canceled orders, which
had a material adverse effect on the Company's operating results in the second
half of 1997. Due to the extensive national distribution system and cost
effectiveness of UPS, the Company has continued to rely primarily on UPS for
deliveries to customers. No assurance can be given that UPS will not experience
difficulties in meeting the Company's requirements in the future. The Company
continues to evaluate alternative carriers on a national and regional basis, as
well as providers of in-home assembly services. There can be no assurance that
alternative carriers will be able to meet the Company's requirements on a timely
or cost-effective basis. Any significant delay in deliveries to customers or
increase in freight charges may have a material adverse effect on the Company's
business, financial condition and operating results.
COMPETITION. The mattress industry is highly competitive. Participants in
the mattress industry compete primarily on price, quality, brand name
recognition, product availability and product performance, including the
perceived levels of comfort and support provided by a mattress. The Company's
air beds compete with a number of different types of mattress alternatives,
including innerspring mattresses, waterbeds, futons and other air-supported
mattresses that are sold through a variety of channels, including furniture
stores, bedding specialty stores, department stores, mass merchants, wholesale
clubs, telemarketing programs, television infomercials and catalogs. The Company
believes that its success depends in part on increasing consumer awareness and
acceptance of the Company's existing products and continuing to introduce
products that have qualities and benefits which differentiate the Company's
products from those offered by other manufacturers. There can be no assurance
that such products will receive consumer acceptance or that the Company will
continue to be able to successfully introduce such products.
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. These manufacturers
were estimated by FURNITURE/TODAY to account for approximately 62% of wholesale
dollar sales in 1997. The balance of the mattress market is served by over 700
manufacturers, primarily operating on a regional basis. The traditional mattress
distribution channels and the estimated market shares in 1997, according to the
International Sleep Products Association ("ISPA"), were furniture stores (42%),
specialty bedding stores (24%), department stores (11%), national chains (8%),
wholesale clubs (6%) and others, including telephone and electronic shopping
channels (9%). Between 1993 and 1997, specialty bedding stores increased their
share of the market from 19% to 24%. Many of these competitors, and in
particular the four largest manufacturers named above, have greater financial,
marketing and manufacturing resources and better brand name recognition than the
Company, and sell their products through broader and more established
distribution channels. The Company believes that a number of companies,
including two of the four largest manufacturers, have begun to offer air beds.
There can be no assurance that these or any other mattress manufacturers will
not aggressively pursue the air bed market. Any such competition by the
established manufacturers or new entrants into the market could have a material
adverse effect on the Company's business, financial condition and operating
results. In addition, should any of the Company's competitors reduce prices on
premium mattress products, the Company may be required to implement price
reductions in order to remain competitive, which could have a material adverse
effect on its business, financial condition and operating results. There are no
provisions in the Company's retail store leases that limit or restrict competing
businesses from operating in the malls in which the Company's stores are
located. The lack of such restrictions and the lack of significant barriers to
entry may result in new competition. See "Business--Competition."
10
<PAGE>
REGULATORY MATTERS. The Company's products and its marketing and
advertising practices are subject to regulation by various federal, state and
local regulatory authorities, including the Federal Trade Commission and the
U.S. Food and Drug Administration. The mattress industry also engages in
advertising self-regulation through certain voluntary forums, including the
National Advertising Division (the "NAD") of the Better Business Bureau. The
Company's advertising campaigns have in the past been the subject of proceedings
before the NAD. As a result of such proceedings, the Company has made minor
modifications to its advertising literature. There can be no assurance that the
Company's marketing and advertising practices will not be the subject of further
proceedings before regulatory authorities or the NAD, or the subject of claims
by other parties. The Company is also subject to various other federal, state
and local regulatory requirements, including federal, state and local
environmental regulation and regulations issued by the U.S. Occupational Safety
and Health Administration. There can be no assurance that the Company will not
experience any material adverse effects on its business, financial condition or
operating results as a result of such regulatory requirements.
YEAR 2000 COMPLIANCE. The Company and third parties with which the Company
does business rely on numerous computer programs in their day to day operations.
The Company has completed a review of its internal information systems and
believes such systems are either Year 2000 compliant or will be Year 2000
compliant by the end of second quarter of 1999 without any significant
interruption to the Company's operations. While the Company believes its
planning efforts are adequate to address its Year 2000 concerns and that the
costs and efforts of its Year 2000 initiatives are not expected to be material
to the Company's business, financial condition or operating results, there can
be no assurance that the Company will be able to effectively address its Year
2000 issues in a timely and cost-efficient manner and without interruption to
its business. The Company has initiated discussions with its significant
suppliers regarding their plans to remediate Year 2000 issues where their
systems interface with the Company's systems or otherwise impact its operations.
There can be no assurance that Year 2000 difficulties encountered by its
suppliers and other third parties with whom it does business will not have a
material adverse impact on the Company's business, financial condition or
operating results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Impact of Year 2000."
DEPENDENCE ON KEY PERSONNEL. The success of the Company's business will
continue to be dependent upon the efforts of its key operating officers and
employees, including H. Robert Hawthorne, President, Chief Executive Officer and
a director, and Daniel J. McAthie, Executive Vice President, Chief Financial
Officer and Chief Administrative Officer. The loss of either of these executive
officers, or other key personnel, could have a material adverse effect on the
Company's business, financial condition and operating results. In addition, the
Company's success in the future will be dependent upon its ability to attract,
retain and motivate qualified personnel, including retail store managers.
INTELLECTUAL PROPERTY PROTECTION. The Company currently holds a number of
U.S. and Canadian patents, and has various U.S. and international patent
applications pending, with respect to certain aspects of the design, technology
and function of its products. Notwithstanding these patents and patent
applications, no assurance can be given that such rights will provide
substantial protection or that others will not be able to develop products that
are similar to or competitive with the Company's air beds. The Company also
relies on a combination of copyright, trademark, trade secret, unfair
competition and other intellectual property laws, nondisclosure agreements and
other protective measures to protect its rights. Such protections, however, may
not preclude competitors from developing products similar to the Company's
products or otherwise competing with the Company. In addition, the laws of
certain foreign countries may not protect the Company's intellectual property
rights and confidential information to the same extent as the laws of the United
States. Although the Company is unaware of any basis for an intellectual
property infringement or invalidity claim against it, there can be no assurance
that third parties, including competitors, will not assert such claims against
the Company or that, if asserted, such claims will not be upheld. Intellectual
property litigation, which could result in substantial cost to and diversion of
effort by the Company, may be necessary to enforce patents issued to the
Company, to protect trade secrets or
11
<PAGE>
proprietary technology owned by the Company or to defend the Company against
claimed infringement of the rights of others and to determine the scope and
validity of the proprietary rights of others. There can be no assurance that the
Company would prevail in any such litigation or that, if it is unsuccessful, the
Company would be able to obtain any necessary licenses on reasonable terms or at
all. See "Business-- Intellectual Property."
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. The Company's directors,
executive officers and their affiliates will, in the aggregate, beneficially own
approximately % of the Company's outstanding Common Stock after this
offering. Although the Company does not know of the existence of any agreements
among such shareholders with respect to the voting of their shares, if they were
to act in concert, they would be able to elect all of the Company's directors,
increase the Company's authorized capital stock, dissolve, merge or sell the
assets of the Company, effect other fundamental corporate transactions requiring
shareholder approval, including delaying, deterring or preventing a change in
control of the Company, and generally direct the affairs of the Company. See
"Principal and Selling Shareholders."
LACK OF PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public market for the Common Stock, and there
can be no assurance that an active trading market will develop or be sustained.
The initial public offering price for the shares of Common Stock to be sold in
this offering will be determined by agreement among the Company, the Selling
Shareholders and the representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after completion
of this offering. For a discussion of the factors to be considered in
determining the initial public offering price, see "Underwriting."
The stock market has from time to time experienced significant price and
volume fluctuations that are unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
market price of the Company's Common Stock. In addition, the market price of the
Common Stock is likely to be highly volatile. Factors such as fluctuations in
the Company's operating results, including sales volume growth and comparable
store sales, a downturn in the retail industry, changes in stock market
analysts' recommendations regarding the Company, other retail companies or the
retail industry in general and general market and economic conditions may have a
significant effect on the market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. The sale of substantial amounts of the
Company's Common Stock in the public market following this offering could
adversely affect the market price of the Common Stock and could impair the
Company's ability to raise capital in the future through the sale of its equity
securities. Upon completion of the offering, the Company will have
shares of Common Stock outstanding. Of these shares, the shares of
Common Stock offered hereby will be freely tradable. Of the remaining shares,
shares are subject to lock-up agreements expiring 180 days after the
date of this Prospectus. Upon expiration of these agreements, shares of
Common Stock will be eligible for immediate resale in the public market subject
to the limitations of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Of such shares, approximately will be eligible for
resale in the public market pursuant to Rule 144(k) without regard to the volume
and manner of sale limitations in Rule 144. Of the shares not subject to
lock-up agreements, shares will be eligible for immediate resale in the
public market pursuant to Rule 144(k) and the remainder will be eligible for
resale in the public market subject to the limitations of Rule 144. The Company
intends to file a registration statement on Form S-8 within 30 days after the
completion of this offering to register the shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options. As of July 31, 1998,
options to purchase approximately shares not subject to lock-up
agreements were vested and would be eligible for sale pursuant to such
registration statement. In addition, certain existing shareholders and
warrantholders have the right to register shares of Common Stock for sale in the
public market. See "Shares Eligible for Future Sale" and "Description of Capital
Stock--Registration Rights."
12
<PAGE>
ANTI-TAKEOVER CONSIDERATIONS. The Company's Articles of Incorporation (the
"Articles") provide for a classified Board of Directors (the "Board") serving
staggered terms of three years. The Articles also require the approval of
two-thirds of the outstanding voting power of the Company entitled to vote in
the event of any sale or merger of the Company. Under the Articles, the Board
has the authority, without shareholder approval, to issue up to 5,000,000 shares
of undesignated preferred stock (the "Undesignated Preferred Stock") and to fix
the rights and preferences thereof. This authority, together with the super-
majority shareholder voting requirements and the staggered Board, may have the
effect of making it more difficult for a third party to acquire, or discourage a
third party from attempting to acquire, control of the Company, even if
shareholders purchasing shares in this offering may consider such a change in
control to be in their best interests. In addition, Minnesota law contains
certain provisions that may have the effect of delaying, deterring or preventing
a hostile takeover of the Company. See "Description of Capital Stock--
Provisions with Potential Anti-Takeover Effect."
DILUTION. The initial public offering price per share is substantially
higher than the net tangible book value per share of Common Stock. New investors
purchasing Common Stock in this offering will incur immediate and substantial
dilution of $ in net tangible book value per share of Common Stock
purchased. See "Dilution."
13
<PAGE>
CAUTIONARY LANGUAGE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not purely historical
are forward-looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects," "will," "may," "anticipates,"
"believes," "intends," and "seeks" are forward-looking statements. These
forward-looking statements, including statements regarding the Company's efforts
to increase store level profitability and plans to open new retail stores and
develop new products, are based on information available to the Company on the
date hereof, and the Company assumes no obligation to update any such
forward-looking statement. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Among the factors that could cause actual results to differ materially are the
factors set forth under the heading "Risk Factors." In particular, the success
of the Company will be dependent upon many factors, including (i) the level of
consumer acceptance of the Company's products, (ii) the ability of the Company
to create product and brand name awareness, (iii) the effectiveness and
efficiency of the Company's advertising, (iv) the number and timing of new
retail store openings, (v) the performance of the Company's existing and new
retail stores, (vi) the ability of the Company to manage its planned rapid store
expansion, (vii) the ability of the Company to successfully identify and respond
to emerging trends in the mattress industry, (viii) the level of competition in
the mattress industry, and (ix) general economic conditions and consumer
confidence. There can be no assurance that the Company will be able to achieve
its planned expansion, that new stores will be effectively integrated into the
Company's existing operations, that new or existing stores will be profitable or
that the Company will be able to establish and maintain profitable strategic
alliances.
14
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $ per share are estimated to be $
million ($ million if the Underwriters' over-allotment option is exercised in
full) after deducting the underwriting discount and estimated offering expenses
payable by the Company. The Company intends to use such net proceeds as follows:
(i) approximately $15.0 million to repay long-term debt; (ii) approximately $6.5
million to fund expansion of its retail store base; (iii) approximately $4.5
million to fund construction of its third manufacturing and distribution
facility scheduled for completion during the first half of 1999; and (iv) the
remainder for general corporate purposes, including working capital and for
possible acquisitions of complementary products, technologies or businesses. The
Company has no current plans to undertake any acquisitions of a material nature.
The Company's $15.0 million of long-term debt intended to be repaid with a
portion of the net proceeds of this offering bears interest at 11% per annum and
is due March 31, 2003. The proceeds of such indebtedness were used to fund
expansion of the Company's retail store base and for general corporate purposes.
The actual amount expended for each of the purposes described above may vary
significantly depending upon many factors. Pending application of the net
proceeds described above, the Company intends to invest the net proceeds in
short-term, interest-bearing, investment-grade securities. The Company will not
receive any proceeds from the sale of Common Stock by the Selling Shareholders.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Principal and Selling
Shareholders."
DIVIDEND POLICY
To date, the Company has neither declared nor paid cash dividends on shares
of its Common Stock. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business and, therefore, does not
anticipate paying any cash dividends in the foreseeable future. The payment of
any future dividends will be at the discretion of the Company's Board of
Directors and will depend upon, among other things, the Company's future
earnings, capital requirements and financial condition and general business
conditions. The Company's current debt agreement contains various financial
covenants, including covenants relating to net worth, which may have the effect
of restricting the Company's ability to pay dividends. This agreement will
terminate upon repayment of the $15.0 million outstanding thereunder from a
portion of the net proceeds of this offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of July
4, 1998 on an (i) actual basis and (ii) as adjusted basis after giving effect to
the conversion of all outstanding shares of preferred stock into shares of
Common Stock upon the consummation of this offering, the reclassification of
certain warrants from long-term debt to common shareholders' equity upon the
consummation of this offering, and the receipt and the application of the
estimated net proceeds from the sale of the shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $ per
share. The table should be read in conjunction with the Consolidated Financial
Statements of the Company and the Pro Forma Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JULY 4, 1998
--------------------------
ACTUAL AS ADJUSTED(1)
---------- --------------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt.................................................. $ 1,053 $
---------- -------
---------- -------
Long-term debt, less current maturities............................................... $ 20,712 $
Convertible preferred stock........................................................... 27,612
---------- -------
Common shareholders' equity:
Undesignated preferred stock, 5,000,000 shares authorized, no shares issued and
outstanding actual, as adjusted................................................... --
Common stock, $0.01 par value, 95,000,000 shares authorized, 4,339,182 shares issued
and outstanding, actual; shares issued and outstanding, as adjusted(2).... 43
Additional paid-in capital.......................................................... 2,959
Accumulated deficit................................................................. (21,060)
Notes receivable--investors......................................................... (972)
---------- -------
Total common shareholders' equity (deficit)....................................... (19,030)
---------- -------
Total capitalization............................................................ $ 29,294 $
---------- -------
---------- -------
</TABLE>
- ------------------------
(1) See Pro Forma Consolidated Financial Statements.
(2) Excludes (i) an aggregate of 5,001,035 shares of Common Stock issuable upon
exercise of stock options and warrants outstanding as of July 31, 1998 at a
weighted average exercise price of $4.77 per share and (ii) an aggregate of
shares of Common Stock issuable upon exercise of employee stock
options expected to be granted in connection with this offering at an
exercise price per share equal to the initial public offering price. See
"Management--Stock Option and Incentive Plans" and "Description of Capital
Stock--Options and Warrants."
16
<PAGE>
DILUTION
As of July 4, 1998, the Company had a net tangible book value of
approximately $12.7 million or $0.56 per share of Common Stock, giving effect to
the conversion of all outstanding shares of preferred stock into Common Stock
and the reclassification of certain warrants from long-term debt to common
shareholders' equity upon the consummation of this offering. Net tangible book
value per share represents the amount of the Company's common shareholders'
equity, less intangible assets, divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the shares of Common
Stock offered by the Company hereby at an assumed initial public offering price
of $ per share and the application of the estimated net proceeds
therefrom, the net tangible book value of the Company as of July 4, 1998 would
have been approximately $ million, or approximately $ per share. This
represents an immediate increase in net tangible book value of $ per share to
existing shareholders and an immediate dilution in net tangible book value of
$ per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $
Net tangible book value per share before the offering....... $ 0.56
Increase per share attributable to new investors............
---------
Net tangible book value per share after the offering..........
---------
Dilution per share to new investors........................... $
---------
---------
</TABLE>
The following table summarizes, as of July 4, 1998, the differences between
the existing shareholders and the new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration paid
and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1).... 22,721,970 % $ 30,614,000 % $ 1.35
New investors(1)............
------------ ----- ------------- -----
Total..................... 100.0% $ 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
As of July 31, 1998, options and warrants to purchase 5,001,035 shares of
Common Stock were outstanding, with a weighted average exercise price of $4.77
per share. To the extent these options and warrants are exercised, there will be
further dilution to new investors. See "Management--Stock Option and Incentive
Plans" and "Description of Capital Stock--Options and Warrants."
- ------------------------
(1) Sales by the Selling Shareholders in this offering will reduce the number of
shares held by the existing shareholders to or approximately %
( shares or approximately % if the underwriter's over-allotment
option is exercised in full) and will increase the number of shares held by
new investors to or approximately % ( or approximately
% if the over-allotment option is exercised in full) of the total
number of shares of Common Stock outstanding after this offering. See
"Principal and Selling Shareholders."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The Consolidated Statements of Operations Data presented below for the years
ended December 30, 1995, December 28, 1996 and January 3, 1998 and the
Consolidated Balance Sheets Data as of December 28, 1996 and January 3, 1998,
are derived from the Company's consolidated financial statements included
elsewhere in this Prospectus, which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, and should be read in conjunction with
those consolidated financial statements and notes thereto. The Consolidated
Statements of Operations Data presented below for the year ended December 31,
1994 and the Consolidated Balance Sheets Data as of December 31, 1994 and
December 30, 1995 are derived from audited consolidated financial statements of
the Company not included herein. The Consolidated Statement of Operations Data
presented below for the year ended December 31, 1993 and the Consolidated
Balance Sheet Data as of December 31, 1993 are derived from the unaudited
consolidated financial statements of the Company which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information set
forth therein. The Consolidated Statements of Operations Data presented below
for the six months ended June 28, 1997 and July 4, 1998, the Consolidated
Balance Sheet Data presented below as of July 4, 1998 and the Pro Forma
Consolidated Statements of Operations Data for all periods shown, are derived
from the Company's unaudited consolidated financial statements included
elsewhere in this Prospectus which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial information set forth therein. The
consolidated results of operations for the six months ended July 4, 1998 are not
necessarily indicative of the results to be expected for the entire year ending
January 2, 1999 or for any future period. The information presented below under
the caption "Selected Operating Data" is unaudited.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED(1) ENDED
----------------------------------------------------------- -----------
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, JUNE 28,
1993 1994 1995 1996 1998 1997
----------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 14,041 $ 30,472 $ 68,629 $ 102,028 $ 184,430 $ 82,077
Cost of sales................................. 5,820 11,052 28,833 38,521 66,629 28,995
----------- ----------- ----------- --------- --------- -----------
Gross margin................................ 8,221 19,420 39,796 63,507 117,801 53,082
Operating expenses:
Sales and marketing......................... 7,391 16,331 34,164 54,814 99,218 43,736
General and administrative.................. 3,583 6,386 10,221 12,457 16,505 8,089
----------- ----------- ----------- --------- --------- -----------
Total operating expenses.................. 10,974 22,717 44,385 67,271 115,723 51,825
----------- ----------- ----------- --------- --------- -----------
Operating income (loss)....................... (2,753) (3,297) (4,589) (3,764) 2,078 1,257
Other income (expense), net................... 1 (74) 29 79 (4,783) (1,854)
----------- ----------- ----------- --------- --------- -----------
Income (loss) before income taxes............. (2,752) (3,371) (4,560) (3,685) (2,705) (597)
Income tax expense............................ -- -- -- -- 141 12
----------- ----------- ----------- --------- --------- -----------
Net income (loss)............................. $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ (2,846) $ (609)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Net income (loss) per share
Basic....................................... $ (1.44) $ (1.76) $ (2.11) $ (1.74) $ (1.06) $ (0.31)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Diluted..................................... $ (1.27) $ (1.55) $ (1.87) $ (1.58) $ (0.99) $ (0.29)
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Weighted average common shares
Basic....................................... 1,907 1,911 2,166 2,630 3,529 3,368
Diluted..................................... 2,176 2,179 2,434 2,898 3,798 3,636
Pro forma net income (loss)(3)................ $ (2,752) $ (3,371) $ (4,560) $ (3,685) $ 404 $ 461
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Pro forma net income (loss) per share,
diluted(3).................................. $ (0.24) $ (0.20) $ (0.24) $ (0.18) $ 0.02 $ 0.02
----------- ----------- ----------- --------- --------- -----------
----------- ----------- ----------- --------- --------- -----------
Pro forma weighted average common shares,
diluted(4).................................. 11,487 16,554 19,030 21,013 23,232 22,753
<CAPTION>
JULY 4,
1998
---------
<S> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales..................................... $ 118,800
Cost of sales................................. 41,546
---------
Gross margin................................ 77,254
Operating expenses:
Sales and marketing......................... 63,955
General and administrative.................. 8,596
---------
Total operating expenses.................. 72,551
---------
Operating income (loss)....................... 4,703
Other income (expense), net................... (2,355)
---------
Income (loss) before income taxes............. 2,348
Income tax expense............................ 1,101
---------
Net income (loss)............................. $ 1,247
---------
---------
Net income (loss) per share
Basic....................................... $ 0.20
---------
---------
Diluted..................................... $ 0.04
---------
---------
Weighted average common shares
Basic....................................... 3,974
Diluted..................................... 22,747(2)
Pro forma net income (loss)(3)................ $ 2,787
---------
---------
Pro forma net income (loss) per share,
diluted(3).................................. $ 0.12
---------
---------
Pro forma weighted average common shares,
diluted(4).................................. 24,024
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED(1) ENDED
----------------------------------------------------------- -----------
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, JUNE 28,
1993 1994 1995 1996 1998 1997
----------- ----------- ----------- --------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Stores open at period-end(5).................. 19 35 68 143 200 172
Average square footage of stores open during
period(6)................................... 668 642 703 768 866 866
Sales per square foot(6)...................... $ 401 $ 442 $ 611 $ 622 $ 666 $ 302
Average store age (in months at period end)... 5 12 15 15 22 18
Comparable store sales increase(7)............ -- 57.6% 59.8% 26.1% 36.8% 24.6%
<CAPTION>
JULY 4,
1998
---------
<S> <C>
SELECTED OPERATING DATA:
Stores open at period-end(5).................. 224
Average square footage of stores open during
period(6)................................... 891
Sales per square foot(6)...................... $ 358
Average store age (in months at period end)... 25
Comparable store sales increase(7)............ 27.6%
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 30, DEC. 28, JAN. 3, JULY 4,
1993 1994 1995 1996 1998 1998
----------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.......................... $ 635 $ 3,770 $ 6,862 $ 2,422 $ 12,670 $ 8,732
Working capital.................................... 260 2,614 2,734 (7,809) 757 2,643
Total assets....................................... 5,873 14,243 23,838 29,794 57,241 58,799
Long-term debt, less current maturities............ 109 77 40 1,162 19,511 20,712
Total common shareholders' equity (deficit)........ (7,313) (10,592) (14,779) (18,216) (21,038) (19,030)
</TABLE>
- ------------------------------
(1) Except for the year ended January 3, 1998, which included 53 weeks, all
years presented included 52 weeks.
(2) See Note 11 of Notes to Consolidated Financial Statements.
(3) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will
terminate upon the consummation of this offering. See Pro Forma Consolidated
Financial Statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
(4) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering and the dilutive
effect of outstanding options and warrants.
(5) Includes Select Comfort stores operated in leased departments within larger
retail stores (one at December 28, 1996, June 28, 1997 and January 3, 1998
and four at July 4, 1998).
(6) For stores open during the entire period indicated.
(7) Stores enter the comparable store calculation in their 13th full month of
operation. The number of comparable stores used to calculate such data were
13, 32, 65, 138, 85 and 164 for 1994, 1995, 1996, 1997 and the six months
ended June 28, 1997 and July 4, 1998, respectively.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL
STATEMENTS AND THE PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND
THE NOTES THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. EXCEPT FOR THE
HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHENEVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN "RISK FACTORS," AS
WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. SEE "CAUTIONARY LANGUAGE REGARDING
FORWARD-LOOKING STATEMENTS."
OVERVIEW
Select Comfort was founded in 1987 and has become the leading vertically
integrated manufacturer, specialty retailer and direct marketer of innovative
air beds and sleep-related products. The Company's initial focus was on its
direct marketing operations which have grown in depth and sophistication and now
provide critical support for the Company's retail and road show distribution
channels. Since the Company's first retail stores were opened in 1992, an
increasing percentage of the Company's net sales has occurred at the Company's
retail stores, and retail store sales now account for a majority of the
Company's net sales. In 1994, the Company established its road show distribution
channel, which focuses primarily on markets where the Company does not have
retail stores.
The Company's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage the direct marketing infrastructure and improve the process
of converting inquiries into sales. The Company has also enhanced its marketing
programs at its retail stores to focus more on increasing customer traffic,
including a number of in-store activities and promotions. The Company believes
that its direct marketing operations will also continue to play a significant
role in building consumer awareness and product sales.
The Company's retail operations included 143 stores as of December 28, 1996,
200 stores as of January 3, 1998 and 230 stores, including four leased
departments within larger retail stores (three in Bed Bath & Beyond stores), at
July 31, 1998. The Company plans to open approximately 24 additional retail
stores and 10 additional leased departments in Bed Bath & Beyond stores in the
remainder of 1998 and approximately 50 additional retail stores in 1999. In
addition, the Company expects to expand its leased department concept in 1999.
The Company expects that approximately 41% of the 1998 retail store openings,
including leased departments, will be in new markets. To date, the Company has
closed four stores.
Historically, the Company has experienced strong comparable store sales
growth, reporting increases of 26.1%, 36.8% and 27.6% in 1996, 1997 and the
first six months of 1998, respectively. The Company believes this performance is
due to increased awareness of the Select Comfort brand and its product benefits
(the Company's advertising expenditures increased from $10.5 million in 1995 to
$28.3 million in 1997), the relatively young age of the Company's store base and
various initiatives implemented in recent periods related to the Company's
increased emphasis on the retail distribution channel. These initiatives include
(i) a change in focus of advertising toward brand awareness, (ii) the evolution
of the Company's retail store operations, including improvements in store
design, and (iii) the closer integration of the
20
<PAGE>
Company's direct marketing and retail distribution channels. Comparable store
sales results in the future will be influenced by a variety of factors. See
"Risk Factors--Fluctuations in Comparable Store Sales Results."
The Company expenses advertising costs as incurred as a component of sales
and marketing expenses, although the Company believes that advertising
expenditures provide significant benefits beyond the period in which they are
expensed. The Company also expenses pre-opening costs associated with new retail
stores as incurred.
The Company believes its historical operating losses have been primarily the
result of an aggressive retail store opening strategy, a relatively immature
store base, significant marketing, advertising and research and development
expenditures, and the development of a substantial corporate infrastructure to
support future growth. Future increases in net sales and the achievement of
long-term profitability will depend upon greater consumer awareness and
acceptance of the Company's products, the opening and successful performance of
new retail stores, and continued improvement in the performance of its current
stores as they mature. There can be no assurance that the Company will be able
to achieve or sustain profitability in the future, on a quarterly or annual
basis. See "Risk Factors--History of Operating Losses; Uncertain Profitability."
In connection with its March 1997 $15.0 million debt financing, the Company
issued a warrant that contained a put feature. This put feature requires the
Company to record the warrant as long-term debt at its fair value. Furthermore,
any change in the fair value of this warrant is required to be reflected as
interest expense, which resulted in non-cash interest expense of $3.3 million,
$1.1 million and $1.5 million during 1997 and the six months ended June 28, 1997
and July 4, 1998, respectively. The put feature of this warrant will be
eliminated upon the closing of this offering with the result that the warrant
will be reclassified from long-term debt to common shareholders' equity, and
there will be no further interest expense associated with the warrant. Until
such time, the Company will be required to recognize any increases in the fair
value of this warrant as a non-cash interest expense and the amount of such
non-cash interest expense will be substantial in the periods up to and including
the period in which this offering is consummated. See "Pro Forma Consolidated
Financial Statements."
A portion of the net proceeds from this offering is intended to be used to
repay the Company's March 1997 $15.0 million debt financing. As a result of this
repayment, the Company will be required to write off certain deferred assets
associated with such indebtedness in the period in which such repayment occurs.
This charge is estimated to be approximately $1.5 million at the time of such
repayment and will be recorded as an extraordinary charge.
At January 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $7.5 million. During 1997 and the
first six months of 1998, the Company utilized a substantial portion of its net
operating loss carryforwards. Future earnings will result in the elimination of
the Company's net operating loss carryforwards, increasing the Company's
effective tax rate.
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
results of operations expressed as percentages of net sales. Percentage amounts
may not total due to rounding.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
-------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
----------------------------------- ------------------------
DEC. 30, DEC. 28, JAN. 3, JUNE 28, JULY 4,
1995 1996 1998 1997 1998
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................. 42.0 37.8 36.1 35.3 35.0
----------- ----------- --------- ----------- -----------
Gross margin................................................ 58.0 62.2 63.9 64.7 65.0
Operating expenses:
Sales and marketing......................................... 49.8 53.7 53.8 53.3 53.8
General and administrative.................................. 14.9 12.2 8.9 9.9 7.2
----------- ----------- --------- ----------- -----------
Total operating expenses...................................... 64.7 65.9 62.7 63.1 61.1
----------- ----------- --------- ----------- -----------
Operating income (loss)....................................... (6.7) (3.7) 1.1 1.5 4.0
Other income (expense), net................................... 0.0 0.1 (2.6) (2.3) (2.0)
----------- ----------- --------- ----------- -----------
Income (loss) before income taxes............................. (6.6) (3.6) (1.5) (0.7) 2.0
Income tax expense............................................ 0.0 0.0 0.1 0.0 0.9
----------- ----------- --------- ----------- -----------
Net income (loss)............................................. (6.6)% (3.6)% (1.5)% (0.7)% 1.0%
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
</TABLE>
COMPARISON OF SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
NET SALES. Net sales increased 44.7% from $82.1 million for the first six
months of 1997 to $118.8 million for the first six months of 1998. The increase
was primarily due to (i) the opening of 53 new retail stores from June 28, 1997
through July 4, 1998, (ii) a 31.0% increase in direct marketing sales, and (iii)
an increase of 27.6% in comparable store sales over the comparable period of the
prior year, resulting primarily from the continuing maturation of stores.
GROSS MARGIN. Gross margin increased from 64.7% for the first six months of
1997 to 65.0% for the first six months of 1998 primarily due to improved
purchasing through volume discounts and better relationships with key suppliers
and improved leverage of fixed manufacturing costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 46.2% from
$43.7 million in the first six months of 1997 to $64.0 million in the first six
months of 1998, and increased slightly as a percentage of net sales from 53.3%
in the first six months of 1997 to 53.8% in the first six months of 1998. The
increase in the dollar amount of sales and marketing expenses was primarily due
to the opening of 53 new retail stores from June 28, 1997 through July 4, 1998,
increased advertising expenditures to support the Company's growth, and higher
commissions, percentage rents and freight expense related to the higher net
sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
6.3% from $8.1 million in the first six months of 1997 to $8.6 million in the
first six months of 1998, but decreased as a percentage of net sales from 9.9%
in the first six months of 1997 to 7.2% for the first six months of 1998. The
increase in the dollar amount of general and administrative expenses was
primarily due to increased spending to provide infrastructure to support overall
net sales growth. The decrease in general and administrative expenses as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.
22
<PAGE>
OTHER INCOME (EXPENSE), NET. Other expense increased from $1.9 million in
the first six months of 1997 to $2.4 million in the first six months of 1998
primarily due to an increase in interest expense associated with the Company's
March 1997 $15.0 million debt issuance, offset in part by the interest income
associated with the proceeds thereof. Other expense in the first six months of
1998 included $1.5 million of non-cash interest expense relating to the change
in the fair value of an outstanding put warrant compared with $1.1 million in
the first six months of 1997. See "--Overview."
COMPARISON OF YEARS ENDED DECEMBER 28, 1996 AND JANUARY 3, 1998
NET SALES. Net sales increased 80.8% from $102.0 million in 1996 to $184.4
million in 1997. The increase was primarily due to (i) the opening of 58 new
retail stores in 1997, (ii) a 59.2% increase in direct marketing sales, and
(iii) an increase of 36.8% in comparable store sales over the prior year,
resulting primarily from the continuing maturation of stores. For a significant
portion of the third quarter of 1997, due to a UPS work stoppage, UPS was unable
to deliver the Company's products within acceptable time periods, causing delays
in deliveries to customers and requiring the Company to use alternative
carriers. Also, during this period, the Company converted its manufacturing and
financial operations to a new integrated information system. These factors
resulted in higher than normal customer returns and canceled orders and
substantially increased freight charges, which had a material adverse effect on
the Company's operating results in the second half of 1997. See "Risk
Factors--Reliance Upon Carriers."
GROSS MARGIN. Gross margin increased from 62.2% in 1996 to 63.9% in 1997
primarily due to improved purchasing through volume discounts and better
relationships with key suppliers and improved leverage of fixed manufacturing
costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 81.0% from
$54.8 million in 1996 to $99.2 million in 1997, and increased slightly as a
percentage of net sales from 53.7% in 1996 to 53.8% in 1997. The increase in the
dollar amount of sales and marketing expenses was primarily due to the opening
of 58 new retail stores in 1997, higher commissions, percentage rents and
freight expenses related to the higher level of net sales, increased advertising
expenditures to support the Company's growth, and an increase in freight charges
due to the UPS strike.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
32.5% from $12.5 million in 1996 to $16.5 million in 1997, but decreased as a
percentage of net sales from 12.2% in 1996 to 8.9% in 1997. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease in
general and administrative expenses as a percentage of net sales was primarily
due to improved leverage of fixed costs over the increase in net sales.
OTHER INCOME (EXPENSE), NET. Other income (expense) decreased from $0.1
million of other income in 1996 to $4.8 million of other expense in 1997
primarily due to (i) the inclusion of $3.3 million of non-cash interest expense
relating to the change in the fair value of an outstanding put warrant (see
"--Overview") and (ii) interest expense associated with the Company's March 1997
$15.0 million debt issuance, offset in part by the interest income associated
with the proceeds thereof.
COMPARISON OF YEARS ENDED DECEMBER 30, 1995 AND DECEMBER 28, 1996
NET SALES. Net sales increased 48.7% from $68.6 million in 1995 to $102.0
million in 1997. The increase was primarily due to (i) the opening of 77 new
retail stores in 1996, (ii) a 16.1% increase in direct marketing sales, and
(iii) an increase of 26.1% in comparable store sales over the prior year,
resulting primarily from the continuing maturation of stores.
GROSS MARGIN. Gross margin increased from 58.0% in 1995 to 62.2% in 1996.
The increase in gross margin was primarily due to improved purchasing through
volume discounts and better relationships with key suppliers, the elimination of
supplier problems that adversely affected the second half of 1995 (during
23
<PAGE>
which certain of the Company's former suppliers were unable to supply newly
designed components in a timely manner) and improved leverage of fixed
manufacturing costs over higher unit volumes.
SALES AND MARKETING. Sales and marketing expenses increased 60.4% from
$34.2 million in 1995 to $54.8 million in 1996, and increased as a percentage of
net sales from 49.8% in 1995 to 53.7% in 1996. The increase in the percentage of
net sales was primarily due to the opening of 77 new retail stores in 1996,
higher commissions, percentage rents and freight charges related to the higher
level of net sales and advertising expenditures to support the Company's growth.
The increase as a percentage of net sales was primarily due to advertising
expenditures increasing at a rate greater than the increase in net sales, and
retail store net sales (which have higher sales and marketing costs as a
percentage of net sales) increasing at a rate greater than overall net sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
21.9% from $10.2 million in 1995 to $12.5 million in 1996, but decreased as a
percentage of net sales from 14.9% in 1995 to 12.2% in 1996. The increase in the
dollar amount of general and administrative expenses was primarily due to
increased infrastructure to support overall net sales growth. The decrease as a
percentage of net sales was primarily due to improved leverage of fixed costs
over the increase in net sales.
24
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth selected unaudited quarterly results of
operations for the Company's ten fiscal quarters ended July 4, 1998. The
unaudited quarterly information includes all normal recurring adjustments which
management considers necessary for a fair presentation of the information shown.
The results of operation for any quarter will not necessarily be indicative of
the results that may be achieved for a full year or any future quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
MAR. 30, JUNE 29, SEPT. 28, DEC. 28, MAR. 29, JUNE 28, SEPT. 27,
1996 1996 1996 1996 1997 1997 1997
----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ $ 22,263 $ 24,775 $ 24,302 $ 30,688 $ 36,004 $ 46,074 $ 44,392
Cost of sales.................... 8,757 9,516 9,460 10,788 12,839 16,157 15,890
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin................... 13,506 15,259 14,842 19,900 23,165 29,917 28,502
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing............ 12,442 12,592 13,278 16,502 21,370 22,366 25,740
General and administrative..... 3,094 3,090 2,968 3,305 3,618 4,471 3,504
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..... 15,536 15,682 16,246 19,807 24,988 26,837 29,244
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss).......... (2,030) (423) (1,404) 93 (1,823) 3,080 (742)
Other income (expense), net...... 68 (14) 44 (19) (70) (1,784) (1,169)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... (1,962) (437) (1,360) 74 (1,893) 1,296 (1,911)
Income tax expense............... -- -- -- -- 12 -- 4
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................ $ (1,962) $ (437) $ (1,360) $ 74 $ (1,905) $ 1,296 $ (1,915)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per share
Basic.......................... $ (0.89) $ (0.26) $ (0.58) $ (0.05) $ (0.68) $ 0.30 $ (0.59)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Diluted........................ $ (0.80) $ (0.23) $ (0.53) $ (0.05) $ (0.63) $ 0.05 $ (0.55)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Weighted average common shares
Basic.......................... 2,451 2,565 2,743 2,761 3,122 3,615 3,655
Diluted........................ 2,720 2,833 3,012 3,029 3,390 21,768 3,923
Pro forma net income (loss)(1)... $ (1,962) $ (437) $ (1,360) $ 74 $ (1,905) $ 2,366 $ (1,085)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss) per
share, diluted(1).............. $ (0.09) $ (0.02) $ (0.06) $ 0.00 $ (0.09) $ 0.10 $ (0.05)
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma weighted average common
shares, diluted(1)............. 20,834 20,948 21,126 21,144 21,505 23,030 22,038
<CAPTION>
PERCENTAGE OF NET SALES
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 39.3 38.4 38.9 35.2 35.7 35.1 35.8
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross margin................... 60.7 61.6 61.1 64.8 64.3 64.9 64.2
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing............ 55.9 50.8 54.6 53.8 59.4 48.5 58.0
General and administrative..... 13.9 12.5 12.2 10.8 10.0 9.7 7.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses..... 69.8 63.3 66.9 64.5 69.4 58.2 65.9
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating income (loss).......... (9.1) (1.7) (5.8) 0.3 (5.1) 6.7 (1.7)
Other income (expense), net...... 0.3 (0.1) 0.2 (0.1) (0.2) (3.9) (2.6)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income
taxes.......................... (8.8) (1.8) (5.6) 0.2 (5.3) 2.8 (4.3)
Income tax expense............... -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)................ (8.8)% (1.8 )% (5.6 )% 0.2% (5.3 )% 2.8% (4.3)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income (loss)(1)... (8.8 )% (1.8 )% (5.6 )% 0.2% (5.3 )% 5.1% (2.4)%
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
JAN. 3, APR. 4, JULY 4,
1998 1998 1998
--------- --------- ---------
<S> <C> <C> <C>
Net sales........................ $ 57,960 $ 58,671 $ 60,129
Cost of sales.................... 21,743 21,080 20,466
--------- --------- ---------
Gross margin................... 36,217 37,591 39,663
--------- --------- ---------
Operating expenses:
Sales and marketing............ 29,742 32,260 31,695
General and administrative..... 4,912 4,294 4,302
--------- --------- ---------
Total operating expenses..... 34,654 36,554 35,997
--------- --------- ---------
Operating income (loss).......... 1,563 1,037 3,666
Other income (expense), net...... (1,760) (1,305) (1,050)
--------- --------- ---------
Income (loss) before income
taxes.......................... (197) (268) 2,616
Income tax expense............... 125 193 908
--------- --------- ---------
Net income (loss)................ $ (322) $ (461) $ 1,708
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share
Basic.......................... $ (0.15) $ (0.18) $ 0.35
--------- --------- ---------
--------- --------- ---------
Diluted........................ ($ 0.14) $ (0.17) $ 0.06
--------- --------- ---------
--------- --------- ---------
Weighted average common shares
Basic.......................... 3,712 3,718 4,231
Diluted........................ 3,981 3,986 22,902
Pro forma net income (loss)(1)... $ 1,028 $ 495 $ 2,292
--------- --------- ---------
--------- --------- ---------
Pro forma net income (loss) per
share, diluted(1).............. $ 0.04 $ 0.02 $ 0.09
--------- --------- ---------
--------- --------- ---------
Pro forma weighted average common
shares, diluted(1)............. 23,857 23,869 24,179
<S> <C> <C> <C>
Net sales........................ 100.0% 100.0% 100.0%
Cost of sales.................... 37.5 35.9 34.0
--------- --------- ---------
Gross margin................... 62.5 64.1 66.0
--------- --------- ---------
Operating expenses:
Sales and marketing............ 51.3 55.0 52.7
General and administrative..... 8.5 7.3 7.2
--------- --------- ---------
Total operating expenses..... 59.8 62.3 59.9
--------- --------- ---------
Operating income (loss).......... 2.7 1.8 6.1
Other income (expense), net...... (3.0) (2.2) (1.7)
--------- --------- ---------
Income (loss) before income
taxes.......................... (0.3) (0.5) 4.4
Income tax expense............... 0.2 0.3 1.5
--------- --------- ---------
Net income (loss)................ (0.6)% (0.8)% 2.8%
--------- --------- ---------
--------- --------- ---------
Pro forma net income (loss)(1)... 1.8% 0.8% 3.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------------
(1) See Pro Forma Consolidated Financial Statements.
25
<PAGE>
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including increases or decreases in comparable
store sales, the timing, amount and effectiveness of advertising expenditures,
any changes in return rates, the timing of new store openings and related
expenses, competitive factors, net sales contributed by new stores, any
disruptions in third party delivery services and general economic conditions and
consumer confidence. The Company's business is also subject to some seasonal
influences, with heavier concentrations of sales during the fourth quarter
holiday season due to higher mall traffic. During the third quarter of 1997, the
UPS work stoppage resulted in delayed delivery of the Company's products,
requiring that the Company use alternative carriers. Additionally, during that
period, the Company converted its manufacturing and financial operations to a
new integrated information system, which further contributed to delays in
fulfilling customer orders. These factors resulted in higher than normal
customer returns, canceled orders and substantially increased freight charges,
which had a material adverse effect on the Company's operating results in the
second half of 1997.
A substantial portion of the Company's operating expenses is related to
sales and marketing expenses, including costs associated with opening new stores
and advertising and marketing expenditures. The level of such spending cannot be
adjusted quickly and is based, in significant part, on the Company's
expectations of future customer inquiries and net sales. Furthermore, the
Company has often realized a substantial portion of its net sales in the last
month of a quarter, with such net sales frequently concentrated in the last
weeks or days of a quarter, due in part to its promotional schedule. If there is
a shortfall in expected net sales or in the conversion rate of customer
inquiries, the Company may be unable to adjust its spending in a timely manner
and the Company's business, financial condition and operating results may be
materially adversely affected. The Company's results of operations for any
quarter are not necessarily indicative of the results that may be achieved for a
full year or any future quarter.
The Company expects to incur certain charges in the period in which this
offering is consummated in connection with an outstanding put warrant and with
the repayment of certain indebtedness with a portion of the net proceeds of this
offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity has been the sale of equity
securities and a $15.0 million senior subordinated debt financing transaction
completed in March 1997. Primary uses of cash have been for the development and
manufacturing of the Company's air bed product line, sales and marketing
expenses, costs associated with the opening of new retail stores and
manufacturing facilities and other required infrastructure and general corporate
purposes, including working capital. The Company had working capital of
approximately $2.6 million at July 4, 1998.
Net cash used in operating activities for 1995 was approximately $404,000
and consisted primarily of a net loss adjusted for non-cash expenses and
increases in inventories and accounts receivable, partially offset by increases
in accounts payable and accruals. Net cash provided by operating activities in
1996 was approximately $3.1 million and consisted primarily of increases in
accounts payable and accruals, partially offset by a net loss adjusted for
non-cash expenses and increases in inventories, accounts receivable and prepaid
expenses. Net cash provided by operating activities in 1997 was approximately
$7.3 million and consisted primarily of increases in accounts payable, accruals
and net loss adjusted for non-cash expenses, partially offset by increases in
accounts receivable, inventories and prepaid expenses. Net cash provided by
operating activities in the first six months of 1997 was approximately $5.2
million and consisted primarily of increases in accounts payable, accruals and
net loss adjusted for non-cash expenses, partially offset by increases in
accounts receivable, inventories and prepaid expenses. Net cash used in
operating activities in the first six months of 1998 was approximately $772,000
and consisted primarily of increases in accounts receivable and inventories and
a decrease in accounts payable, partially offset by net income adjusted for
non-cash expenses.
26
<PAGE>
Net cash used in investing activities was approximately $5.6 million, $10.1
million, $10.7 million, $6.0 million and $4.0 million in the years 1995, 1996,
1997 and the first six months of 1997 and the first six months of 1998,
respectively. Investing activities consisted of purchases of property and
equipment for new retail stores in all periods as well as for a new
manufacturing and distribution facility and the conversion to a new information
system in 1997.
Net cash provided by financing activities for 1995 was approximately $9.1
million and consisted primarily of proceeds from a preferred stock issuance. Net
cash provided by financing activities for 1996, 1997 and the first six months of
1997 was approximately $2.6 million, $13.6 million and $14.2 million,
respectively, and consisted primarily of proceeds from debt issuances, partially
offset by debt repayments. Net cash provided by financing activities for the
first six months of 1998 was approximately $827,000 and consisted primarily of
proceeds from a Common Stock issuance, partially offset by debt repayments.
At July 31, 1998, the Company had 230 retail stores (including four leased
departments) and plans to open approximately 24 additional retail stores and 10
additional leased departments in Bed Bath & Beyond stores in the remainder of
1998 and approximately 50 retail stores in 1999. In addition, the Company
expects to expand its leased department concept within larger retail stores in
1999. Management expects that new stores will be leased on terms generally
comparable to those of existing store leases. In addition, the Company plans to
open a third manufacturing and distribution facility in Salt Lake City during
the first half of 1999. The Company anticipates that capital expenditures in
1998 and 1999 will be approximately $8.2 million and $15.0 million,
respectively, based on currently planned store openings, the planned new
manufacturing and distribution facility and the central office facilities and
systems necessary to support such additional stores.
The Company believes the proceeds from this offering and cash generated from
operations will be sufficient to satisfy its anticipated working capital and
capital expenditure requirements through at least the end of 1999.
IMPACT OF YEAR 2000
STATE OF READINESS. Beginning in early 1996, the Company included certain
Year 2000 initiatives and remediation plans in its broader information systems
strategic plan. At that time, the Company also retained an independent
consultant to assess the adequacy of the Company's Year 2000 initiatives and
remediation plans. Since that time, all of the Company's essential information
technology ("IT") systems have been inventoried and remediation plans for any
Year 2000 issues have been implemented. The Company's remediation plans included
the development of Year 2000 compliant applications for the Company's order
entry, customer service and point of sale systems in Fall 1996. In the third
quarter of 1997, the Company purchased and implemented an enterprise information
system used in manufacturing operations, material planning, inventory
management, order processing, financial management and human resources
applications, which system will be upgraded to be Year 2000 compliant in the
first half of 1999. The Company purchased Year 2000 compliant upgrades to the
Company's payroll application in 1997 and the Company's telephone system in
1998. The Company has purchased Year 2000 compliant upgrades for its software
applications for customer inquiries and for processing and tracking warranty
claims and returns. The Company anticipates these upgrades will be completed in
the first half of 1999. With the implementation of these applications and
upgrades, the Company expects that all of its core applications and IT systems
will be Year 2000 compliant by the end of the second quarter of 1999.
In August 1998, the Company formed a Year 2000 project team ("Year 2000
Project Team") to identify and address Year 2000 compliance matters, including
the Company's significant non-IT systems which are comprised of the embedded
technology used in the Company's buildings, plant, equipment and other
infrastructure. The Year 2000 Project Team is currently in the process of
inventorying all material Year 2000 issues in the Company's non-IT systems. The
Company expects that remedial action for all of its non-IT systems will be
completed by the end of the second quarter of 1999.
27
<PAGE>
During the first quarter of 1998, the Company initiated discussions with its
significant suppliers regarding their plans to remediate Year 2000 issues. The
Company sent each of its significant suppliers a questionnaire inquiring as to
the magnitude of their Year 2000 issues and the status of their readiness. The
Company has received assurances from a majority of its suppliers that such third
parties will become Year 2000 compliant in a timely manner. The Company has not
received responses from all of the third parties with whom it does business. In
addition to the questionnaires, the Company has established a supplier
certification program under which the Company's suppliers must meet rigorous
standards relating to quality, service, the ability to deliver materials on a
timely basis and Year 2000 compliance. To date, eight of the Company's key
suppliers were certified and other authorized suppliers are in the process of
seeking certification.
In addition to suppliers, the Company also relies upon governmental
agencies, utility companies, telecommunication service companies and other
service providers outside of the Company's control. There can be no assurance
that such governmental agencies or other third parties will not suffer a Year
2000 business disruption that could have a material adverse effect on the
Company's business, financial condition and operating results.
COSTS TO ADDRESS THE YEAR 2000 ISSUE. The Company estimates that the
expenses it has incurred to date to address Year 2000 issues have not been
material. The Company estimates that it will incur approximately $250,000 to
complete its remediation plans required for its IT systems, which includes
systems software costs and consulting fees. The Company does not have an
estimate on Year 2000 remediation costs that may be required for its non-IT
systems, but the Company believes that such costs will not have a material
adverse effect on the Company's business, financial condition and operating
results.
RISKS PRESENTED BY THE YEAR 2000 ISSUE. As the process of inventorying
non-IT systems proceeds, the Company may identify systems that present a Year
2000 risk. In addition, if any third parties who provide goods or services
essential to the Company's business activities fail to appropriately address
their Year 2000 issues, such failure could have a material adverse effect on the
Company's business, financial condition and operating results. For example, a
Year 2000 related disruption on the part of the financial institutions which
process the Company's credit card sales would have a material adverse effect on
the Company's business, financial condition and operating results.
CONTINGENCY PLANS. The Company's Year 2000 Project Team's initiatives
include the development of contingency plans in the event the Company has not
completed all of its remediation plans in a timely manner. In addition, the Year
2000 Project Team is in the process of developing contingency plans in the event
that any third parties who provide goods or services essential to the Company's
business fail to appropriately address their Year 2000 issues. The Year 2000
Project Team expects to conclude the development of these contingency plans by
the end of the second quarter of 1999.
28
<PAGE>
BUSINESS
OVERVIEW
Select Comfort, "The Air Bed Company," is the leading vertically integrated
manufacturer, specialty retailer and direct marketer of premium quality, premium
priced, innovative air beds and sleep-related products. Select Comfort believes
it is revolutionizing the mattress industry by offering a differentiated product
through a variety of service-oriented distribution channels. Select Comfort's
products have been clinically proven to address broad-based consumer sleep
problems through the Company's proprietary air bed technology and the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort's proprietary technology
allows its air beds to provide greater comfort and support by more naturally
contouring to the body, thereby providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. The
Company's air beds are marketed exclusively under the Select Comfort brand. The
Company seeks to build awareness of its air beds and brand as being synonymous
with a better night's sleep.
Unlike traditional mattress manufacturers, the Company sells its products
directly to consumers through three complementary, service-oriented distribution
channels, including Company-operated retail stores and leased departments within
larger retail stores, direct marketing operations and road show events. Each of
these channels is operated by knowledgeable Company employees trained in the
latest innovations in sleep technology and the benefits and features of the
Select Comfort product line. The Company's retail operations included 230 stores
in 42 states, including four leased departments (three in Bed Bath & Beyond
stores), at July 31, 1998. The Company plans to open approximately 24 additional
retail stores and 10 additional leased departments in Bed Bath & Beyond stores
in the remainder of 1998 and approximately 50 retail stores in 1999. In
addition, the Company expects to expand its leased department concept in 1999.
The Company's direct marketing operations include over 90 sales professionals
responsible for servicing customer inquiries and making outbound calls. Road
show events are held in selected markets where the Company has high inquiry
levels but does not have a retail presence, as well as at home shows and
consumer product shows, state fairs and similar events. The Company advertises
through targeted print, radio and television media which generate customer
inquiries that are converted into sales through each of the Company's three
distribution channels. The Company's net sales have grown from $14.0 million in
1993 to $184.4 million in 1997, and its comparable store sales have increased
26.1%, 36.8% and 27.6% for 1996, 1997 and the six months ended July 4, 1998,
respectively.
INDUSTRY BACKGROUND
The U.S. mattress market is large and dominated by four large manufacturers
primarily focused on traditional innerspring mattresses. According to the
International Sleep Products Association ("ISPA"), 35.3 million mattress and
foundation units were sold in the U.S. in 1997, generating approximately $3.6
billion in wholesale sales, which the Company believes represented approximately
$6.7 billion in retail sales. ISPA estimates that innerspring mattresses
accounted for approximately 90% of total U.S. mattress sales in 1997 and,
according to FURNITURE/TODAY, the four largest manufacturers (Sealy, Serta,
Simmons and Spring Air) accounted for nearly 62% of wholesale dollar sales. The
balance of the mattress market is served by over 700 manufacturers, primarily
operating on a regional basis. The traditional mattress distribution channels
and the estimated market shares in 1997, according to FURNITURE/TODAY, were
furniture stores (42%), specialty bedding stores (24%), department stores (11%),
national chains (8%), wholesale clubs (6%) and others, including telephone and
electronic shopping channels (9%). Between 1993 and 1997, specialty bedding
stores increased their share of the market from 19% to 24%.
The Company believes there is increasing demand for products designed to
provide better quality sleep and promote overall wellness and that the
traditional mattress industry has not been responsive to these consumer
preferences. The National Sleep Foundation estimates that approximately 50% of
U.S.
29
<PAGE>
consumers have suffered from sleep deprivation or poor quality sleep from a
variety of causes, including physical causes such as spinal misalignment,
pressure points or lower back pain. In addition, independent researchers have
reported that approximately 80% of all adults will experience lower back pain at
some point in their lives, with most of these cases associated with spinal
misalignment and aging. The Company believes that the sleep surface is an
important factor in sleep quality, and clinical research verifies that an
improved sleep surface can contribute to better quality sleep and greater relief
of lower back pain.
The Company believes that the market for mattresses and related accessories
has been changing as consumers are purchasing larger, higher quality and more
expensive mattresses, as well as more innovative and higher quality accessories.
Factors influencing this trend are the increasing awareness among consumers of
the importance of sleep as a component of health and the aging and increasing
affluence of the baby boom generation. The Company believes that consumers are
increasingly health conscious and motivated to purchase higher quality products
for the home.
THE SELECT COMFORT SOLUTION
Select Comfort believes it is revolutionizing the mattress industry by
offering a clinically proven, differentiated product through a variety of
service-oriented distribution channels. The Company's products address
broad-based consumer sleep problems, resulting in a better night's sleep. The
Company's proprietary technology allows its air beds to more naturally contour
to the body, thereby generally providing better spinal alignment, reduced
pressure points, greater relief of lower back pain, greater overall comfort and
better quality sleep in comparison with traditional mattress products. A
firmness control system allows customers to independently customize the firmness
on each side of the Select Comfort air bed to their optimal level of comfort and
support. Unlike traditional mattress manufacturers, the Company sells its
products directly to consumers through three complementary distribution
channels. These channels allow the Company to interact directly with consumers
to enhance customer satisfaction and build brand loyalty. These channels also
provide consumers with greater accessibility and convenience in purchasing
Select Comfort products.
Select Comfort has commissioned a number of independent clinical studies
which indicate that Select Comfort air beds provide consumers with substantial
benefits over traditional innerspring mattresses. A recent commissioned study
conducted at the Stanford University Sleep Research Center indicated that
participants using Select Comfort air beds fell asleep faster, experienced fewer
brainwave sleep disturbances and spent less time in the lighter sleep stages and
a greater percentage of overall sleep in deeper stages of sleep, including rapid
eye movement (REM) sleep, in comparison to alternative mattress products.
Another commissioned study conducted at the University of Memphis confirmed that
spinal misalignments were generally lower on Select Comfort air beds in
comparison with both a leading innerspring mattress and a leading waterbed. The
Company has also performed extensive testing which confirms that Select Comfort
air beds reduce pressure points in comparison with innerspring mattresses and
waterbeds. Three additional commissioned studies on the relationship between
lower back pain, sleep quality and the sleep surface have found, on average,
that 95% of lower back pain sufferers reported reduced pain, 88% experienced
improved sleep quality and 80% experienced increased physical functioning when
sleeping on a Select Comfort air bed in comparison with an innerspring mattress.
These findings support the Company's market research and customer testimonials
which indicate that sleeping on a Select Comfort air bed results in a
significant reduction in medical visits and fewer days of work lost due to back
pain.
The Company has been granted 19 U.S. patents, has applications pending for
six U.S. patents and maintains an active research and development department.
Select Comfort plans to continue its research of sleep technology, testing of
the consumer benefits from sleeping on its air beds and development of new
products and product improvements designed to provide a better night's sleep.
30
<PAGE>
BUSINESS AND GROWTH STRATEGY
The Company is the leading vertically integrated manufacturer, specialty
retailer and direct marketer of innovative air beds and sleep-related products.
Select Comfort intends to leverage its position by increasing awareness of air
bed technology and further establishing the Select Comfort brand to be
synonymous with a better night's sleep, premium quality products and superior
customer service. Key elements of the Company's business strategy are set forth
below.
PROVIDE A SUPERIOR PRODUCT. Select Comfort's products differ from
traditional mattresses by addressing broad-based consumer sleep problems through
the greater comfort and support of sleeping on air and through the ability to
customize the firmness on each side of the mattress at the touch of a button.
Extensive testing has confirmed that Select Comfort air beds generally provide
better spinal alignment, reduced pressure points, greater relief of lower back
pain, greater overall comfort and better quality sleep in comparison with
traditional mattress products. The Company is committed to the continuing
development of new products to enhance the sleep experience and has recently
introduced the Imperial Series at the top of the product line, quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls.
EDUCATE CONSUMERS AND PROVIDE SUPERIOR CUSTOMER SERVICE. Traditionally, the
mattress industry has relied heavily on promotional pricing and has not been
characterized by high levels of customer service. Since consumer education and
customer service are critical to convey the features and benefits of Select
Comfort's innovative air beds and to achieve high levels of customer acceptance
and satisfaction, the Company seeks to provide a more friendly and informative
sales environment. In order to ensure superior customer satisfaction, retail,
direct marketing and road show sales professionals receive extensive training in
sleep technology and the Company's proprietary technology and products,
including features and benefits, assembly and service procedures and policies.
The Company also maintains a customer service department of over 50 employees
who receive similar training. As part of its continuous efforts to maximize
convenience for consumers, the Company offers a 90 Night Trial, and has recently
begun testing in-home assembly services in selected markets.
INCREASE PRODUCT AWARENESS AND BRAND RECOGNITION. The Company believes that
the single most important factor in increasing sales is increasing consumer
awareness of the features and benefits of Select Comfort air beds. The Company's
highest brand awareness and market share is in Minneapolis, where it has its
largest advertising budget and largest number of retail stores. The Company
plans to increase product awareness and brand recognition nationwide through
continued investment in advertising and expansion of its retail store base.
LEVERAGE COMPLEMENTARY DISTRIBUTION CHANNELS. The Company distributes
directly to customers through Company-operated retail stores, direct marketing
operations and road show events. The Company's control over its three
complementary distribution channels provides significant competitive advantages,
including the ability to (i) leverage the Select Comfort brand name to generate
inquiries and convert inquiries to sales, (ii) interact directly with consumers
to enhance customer satisfaction and build brand loyalty, (iii) train sales
professionals regarding the Company's products and to provide superior customer
service, (iv) utilize data from its direct marketing operations to support
retail and road show site selection, new store openings and road show events,
and (v) leverage advertising and marketing programs across multiple markets and
distribution channels. In addition, the Company's complementary distribution
channels provide customers with greater accessibility and convenience in the
purchase of its products.
CAPITALIZE ON VERTICALLY INTEGRATED OPERATIONS. The Company maintains
control over all phases of its business, including the design, manufacturing,
marketing, distribution and service of its air beds. This allows the Company to
maintain rigorous product quality standards, establish coordinated and
integrated sales and marketing efforts, carefully manage the presentation and
pricing of its products and focus on
31
<PAGE>
customer satisfaction and service. As a result of its direct relationships with
consumers, the Company is better positioned to understand and respond to
consumer needs and market trends.
PURSUE ADDITIONAL GROWTH OPPORTUNITIES. The Company has begun testing the
offering of in-home assembly services in selected markets through regional and
national providers in order to increase overall sales and enhance customer
satisfaction by providing greater convenience to the customer. The Company also
plans to introduce product enhancements and new products such as sofabeds,
adjustable frames, space saver foundations with storage compartments and sound
vibration mattresses providing relaxation and therapeutic effects. The Company
is also exploring opportunities to market the Company's products through health
care providers, including chiropractors and health maintenance organizations.
PRODUCTS
Select Comfort provides a line of high quality air beds, foundations and
sleep accessories. The current line of products represents over 10 years of
research and development by the Company designed to revolutionize the way people
sleep.
AIR BEDS
Select Comfort air beds have been engineered to more naturally contour to
the body, thereby generally providing better spinal alignment, reduced pressure
points, greater relief of lower back pain, greater overall comfort and better
quality sleep in comparison with traditional mattress products. Every Select
Comfort air bed has a patented air chamber as its functioning core and comes
with a firmness control system ("FCS") that allows the customer to easily and
instantly customize the firmness of the mattress at the touch of a button. All
of the Company's air beds, except twin size mattresses, are available with
independent air chambers for each side of the mattress, allowing customized
firmness for each sleep partner. The Company's Imperial and Ultra Series of air
beds feature a wireless remote control with a digital display of the user's
"Sleep Number," which reflects the level of firmness and allows the customer to
more easily adjust and readjust the firmness level to the customer's ideal Sleep
Number based on personal preference.
Select Comfort air beds feature either a traditional cover or a pillowtop
style cover that provides extra cushioning. The covers are constructed with
sanitized and hypoallergenic Damask ticking made from blends of
polyester/polypropylene or cotton/rayon, or from 100% rayon. Select Comfort air
beds are manufactured in a broad array of sizes and styles, including all
standard bed sizes and a waterbed replacement size that fits into a customer's
existing waterbed frame. The Company restaged its product line in the spring of
1998 to include new cover designs as well as the addition of a new zoned foam in
its pillowtop models. This restaging also included a newly redesigned, "whisper
quiet" FCS for the Imperial and Ultra Series and all new marketing materials.
The Company's air beds can be assembled by customers in a simple process
requiring no tools and can be moved more easily than a traditional mattress and
box spring. Furthermore, because air is the primary support material of the
mattress, Select Comfort air beds do not lose their shape or support over time
like a traditional mattress and box spring. Each air bed is accompanied with
instructional product brochures and easy to follow assembly instructions, is
certified by Underwriter's Laboratories and is backed by a 20-year limited
warranty and Select Comfort's 90 Night Trial and Better Night's Sleep Guarantee.
The following paragraphs describe the Select Comfort product line.
CLASSIC SERIES. The Classic Series is the Company's entry level product
that is competitively priced with a broad array of mattress alternatives. The
Classic Series targets consumers seeking better support and comfort at the most
affordable price. The FCS for the Classic Series is equipped with two
individual, wired hand controls to instantly customize firmness. The Classic
Series mattress is 7 1/2 inches thick and features a traditional cover.
32
<PAGE>
ELITE SERIES. In comparison with the Classic Series, the Elite Series
features a quieter and more technologically advanced FCS with two individual,
ergonomically designed, wired hand controls for instant firmness adjustment. The
Elite Series mattress is 9 1/2 inches thick in the pillowtop model and features
more padding for greater comfort and foam sidewalls for greater stability. The
Elite Series is also available with a traditional cover.
ULTRA SERIES. The Ultra Series is the Company's most popular air bed,
featuring a new "whisper quiet" FCS with a single wireless, ergonomically
designed, hand control with a lighted digital display of each user's Sleep
Number for precisely customized firmness. This lighted digital display feature
allows the user to more easily adjust and readjust the firmness level to the
user's ideal Sleep Number based on personal preference. The Ultra Series
mattress is 11 1/2 inches thick in the pillowtop model that features a Belgian
Damask cover. The Ultra Series is also available with a traditional cover.
IMPERIAL SERIES. The Imperial Series is the Company's new premium air bed,
incorporating the Company's most advanced technology. The Imperial Series
mattress is 13 1/2 inches thick and has a unique multi-layer foam system for the
utmost in comfort and support. Available in pillowtop style only, the cover
features an ornate Belgian Damask ticking with a 1930s vintage antique pattern
and is filled with a blend of highly resilient fibrefill and cashmere. Like the
Ultra Series, the Imperial comes with the new "whisper quiet" FCS with a single
wireless, ergonomically designed, hand control with a lighted digital display of
each user's Sleep Number.
The current retail prices for the Company's air beds (excluding foundations)
are as follows:
<TABLE>
<CAPTION>
FULL/
TWIN DOUBLE QUEEN KING
--------- ----------- --------- ---------
<S> <C> <C> <C> <C>
Classic
Traditional....................................... $ 299 $ 459 $ 549 $ 749
Elite
Pillowtop......................................... $ 599 $ 849 $ 949 $ 1,199
Traditional....................................... $ 449 $ 699 $ 799 $ 1,049
Ultra
Pillowtop......................................... $ 899 $ 1,149 $ 1,249 $ 1,499
Traditional....................................... $ 749 $ 999 $ 1,099 $ 1,349
Imperial
Pillowtop......................................... $ 1,799 N/A $ 2,249 $ 2,599
</TABLE>
FOUNDATIONS
Select Comfort also offers matching foundations that enhance the performance
of its mattresses. A substantial majority of the Company's customers purchase
sets, which include a mattress and foundation. The Company's foundations provide
solid, uniform support beneath the mattress to ensure that the air bed provides
the intended support. Unlike traditional box springs, Select Comfort foundations
do not lose their shape or support over time and are stronger, lighter and more
easily moved. The foundations for the Imperial, Ultra and Elite Series also
feature a padded top for enhanced comfort. Retail prices for foundations
currently range from $199 to $399.
ACCESSORY PRODUCTS
Select Comfort also offers a line of accessory products, including high
quality mattress pads with zoned heating and specialty pillows, all of which are
hypoallergenic and designed to provide comfort and better quality sleep. The
Company's specialty pillows include a neck pillow designed to provide neck
support and comfort, a silent sleeper contoured pillow designed to reduce
snoring, a memory foam pillow that molds to the shape of the head and neck, a
natural down pillow for superior comfort and a side
33
<PAGE>
sleeper pillow. All of these specialty products are manufactured by third
parties and marketed under the Select Comfort brand name. The Company also sells
a line of bed frames manufactured by a third party.
SALES GENERATION
Select Comfort's vertically integrated operations and control over its three
separate but complementary distribution channels enable it to develop and
maintain direct customer relationships, as well as leverage its advertising
dollars. The Company's sales generation is driven by targeted print, radio and
television media which generate customer inquiries that historically were
pursued primarily through the Company's direct marketing operations. As the
Company's retail store base has expanded, the Company believes it has been able
to further leverage its direct marketing infrastructure and improve the process
of converting customer inquiries into sales. The Company is continually
assessing opportunities to further coordinate and leverage its three
distribution channels to direct potential customers to the channel which best
suits their needs and to increase conversion ratios.
RETAIL STORES
Since the Company's first retail stores were opened in 1992, an increasing
percentage of the Company's net sales has occurred at the Company's retail
stores, and retail store sales now account for a majority of the Company's net
sales. At July 31, 1998, the Company had 230 stores in 42 states, including four
leased departments (three in Bed Bath & Beyond stores), and plans to open
approximately 24 additional retail stores and 10 additional leased departments
in Bed Bath & Beyond stores in the remainder of 1998 and approximately 50 retail
stores in 1999. In addition, the Company expects to expand its leased department
concept in 1999.
[MAP OF THE UNITED STATES ILLUSTRATING THE COMPANY'S RETAIL STORE LOCATIONS]
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STORE ENVIRONMENT. Select Comfort seeks to offer a unique and innovative
store environment that attracts consumers, showcases the Company's products and
encourages trial of its air beds. The Company's retail store design is intended
to convey a sense of innovation, sophistication and quality that reinforces the
Company's brand image and reputation as sleep experts. The Company's current
store design consists of graphically intriguing "dream walls" against a backdrop
of clouds designed to invite consumers to try the Company's innovative products.
The Company's retail stores are principally showrooms, averaging approximately
900 square feet, with several display models from the Company's line of air beds
and a full display of the Company's branded accessories. The retail stores
typically maintain an inventory of accessory products, but little or no
inventory of air beds. The Company's leased departments, at approximately 240
square feet, are significantly smaller than its retail stores.
The Company's sales professionals play an important role in creating an
inviting and informative retail environment. These professionals receive
extensive training regarding the features and benefits of the Company's
proprietary technology and products as well as on the overall importance of
sleep quality. This enables them to more effectively introduce consumers to the
Company's innovative air beds, emphasize the features and benefits that
distinguish Select Comfort air beds from traditional mattresses, determine the
consumers' needs, encourage consumers to experience the comfort and support of
the air beds and answer questions regarding the Company's products.
SITE SELECTION. The Company intends to continue to open retail stores in
both existing markets and new markets. In selecting new store sites, Select
Comfort generally seeks high-traffic mall locations of approximately 800 to
1,200 square feet within regional malls in major metropolitan areas. The Company
conducts extensive analyses of potential store sites and bases its selection on
a number of factors, including the location within the mall, demographics of the
trade area, the specifications of the mall (including size, age, sales per
square foot and the location of the nearest competitive mall), the perceived
strength of the mall's anchor stores, the performance of other specialty retail
tenants in the mall and the number of direct marketing inquiries received from
the area surrounding the mall. Clustering of retail stores within a metropolitan
retail market is also a key consideration in order to leverage the Company's
advertising. The Company is also evaluating alternative locations for its retail
stores, such as strip shopping centers. The Company expects that the retail
stores in which its additional leased departments will be opened will be in a
variety of locations, including malls and strip shopping centers.
NEW STORE ECONOMICS. The Company's 142 stores that were open for all of
1997 generated average net sales of approximately $576,000 and average net sales
per square foot of approximately $666 during 1997. The Company's newer stores
typically generate lower sales volumes than its more mature stores, although the
average first year sales of each new class of stores by year of opening has
increased each year since 1992. The Company's average cost for leasehold
improvements, furniture and fixtures for stores opened in 1997 was approximately
$101,000 per store. The Company's retail stores have an average payback period
of approximately two years. Pre-opening costs are expensed as incurred and
average under $10,000 per store. Working capital requirements are not
significant since the Company typically maintains relatively little inventory at
the retail stores.
MARKETING AND ADVERTISING. The Company has supported new store openings
with local print and radio advertisements and mailings to direct response
inquiries in the market. The Company also uses local radio personalities and
newspaper advertising in certain of the markets where it has multiple retail
stores. Local radio personalities have been particularly effective in driving
inquiries with personal endorsements that build product credibility. The Company
also uses local radio and print advertisements and promotional offers during
high mall traffic periods, such as three-day holiday weekends, and in-store
events including live remote broadcasts and promotional contests. The Company
also relies on its unique store design and word-of-mouth referrals to attract
potential customers. To encourage word-of-mouth referrals and build brand
loyalty, new customers are enrolled in the "Comfort Club," which entitles
members to certain benefits.
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MANAGEMENT AND EMPLOYEES. The Company's stores are currently organized into
four regional areas and 30 geographic districts, with approximately eight stores
in each district. Each regional sales manager oversees approximately eight
geographic districts. The regional sales managers average over 10 years of
multi-unit retail experience. Each district has a district sales manager who is
responsible for the sales and operations and who reports to a regional sales
manager. The district sales managers frequently visit stores to review
merchandise presentation, sales force product knowledge, financial performance
and compliance with operating standards. The district sales managers average
over six years of experience as an area or district manager in specialty
retailing. The typical staff of a Select Comfort store consists of one store
manager and two full-time sales professionals. In order to maintain high
operating standards, the Company recruits store managers who typically have one
to four years of experience as a store manager in specialty retailing. The sales
professionals devote substantially all of their efforts to sales and customer
service, which includes helping customers and generating and responding to
inquiries. In addition, to promote consumer education, ensure customer
satisfaction and generate referrals, the sales professionals place follow-up
calls to customers who have made recent purchases. Since minimal inventory is
maintained at the retail stores, store managers and sales professionals have
relatively few inventory management, store merchandising and related
administrative duties.
TRAINING AND COMPENSATION. All store personnel receive comprehensive
on-site training on the Company's technology and sleep expertise, the features
and benefits of the Company's air beds, sales and customer service techniques
and operating policies and guidelines. Initial training programs are reinforced
through detailed product and operating manuals and periodic performance
appraisals. All store sales professionals receive base compensation and are
entitled to commissions based on individual and store-wide performance. Regional
and district sales managers are eligible to receive, in addition to their base
compensation, incentive compensation for the achievement of performance
objectives by the stores within their respective regions and districts.
DIRECT MARKETING OPERATIONS
Many consumers' initial exposure to the Select Comfort air bed is through
the Company's direct marketing operations. Typically, an interested consumer
will respond to one of the Company's advertisements by calling the Company's
toll-free number. On this call, one of the direct marketing sales professionals
captures information from the consumer, begins the consumer education process,
takes orders, or, if appropriate, directs the consumer to the Company's other
distribution channels. The telemarketing operations are conducted by
knowledgeable and well-trained sales professionals, including a group of over 50
sales professionals who field incoming direct marketing inquiries, and over 30
sales professionals who make outbound calls to consumers who have previously
contacted the Company. The direct marketing operations also include a database
marketing department that is responsible for mailings of product and promotional
information to direct response inquiries.
INQUIRY GENERATION. In the direct marketing channel, the Company's
advertising message is communicated through targeted print, radio, infomercials
and television advertisements, as well as through product brochures, videos and
other product and promotional materials mailed in response to consumer inquiries
at various intervals. As the Company's advertising budget has expanded over the
last few years, the direct marketing channel has relied more heavily on
nationally syndicated radio personalities, such as Paul Harvey and Rush
Limbaugh, and more recently on television commercials and infomercials. The
Company's direct marketing operations continually monitor the effectiveness and
efficiency of the Company's advertising through tracking the cost per inquiry
("CPI") and cost per order ("CPO") of its advertising, using focus groups to
evaluate the effectiveness of its advertising messages and using sophisticated
media buying techniques.
INQUIRY CONVERSION AND INTEGRATION WITH OTHER DISTRIBUTION CHANNELS. From
each inquiry, the Company's sales professionals strive to capture a variety of
information, including name, address, telephone
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number, the current mattress product used, sleep habits and health issues that
may be adversely affected by poor quality sleep. The Company maintains a
database of information on approximately 3.5 million inquiries, including
customers who have purchased an air bed from the Company, from which the direct
marketing channel is able to take orders, or, if appropriate, direct the
consumer to the Company's other distribution channels. The database also
provides valuable marketing information. The Company's telemarketing sales
professionals begin the consumer education process during the initial call from
the consumer. Subsequent to the initial inquiry, the Company's database
marketing department contacts the consumer on a scheduled format through
mailings of printed product and educational information, a video on the features
and benefits of Select Comfort air beds, outbound telephone calls and periodic
promotional offerings.
The direct marketing operations also support the Company's retail and road
show operations through referrals, as well as mailings to direct marketing
inquiries in selected markets in advance of retail store openings and road
shows. As the Company's base of retail stores has expanded, the direct marketing
sales professionals have increasingly been able to refer direct marketing
inquiries to a convenient retail store location, improving the process of
converting inquiries into sales and providing the consumer with a choice of
service venues. The Company intends to continue to pursue opportunities to
leverage its direct marketing infrastructure and expertise to enhance its retail
and road show distribution channels.
TRAINING AND COMPENSATION. The Company's direct marketing sales
professionals receive ongoing training and must pass various tests to move
through the four sales professional levels, each with a separate pay scale.
Direct marketing sales professionals are paid base compensation plus
commissions.
ROAD SHOW EVENTS
The Company's third distribution channel is road show events in selected
markets where the Company typically does not have a retail presence, as well as
at home shows and consumer product shows, state fairs and similar events. Select
Comfort sales professionals, supported by local print and radio advertising and
advance mailings to direct marketing inquiries, travel to various cities to
demonstrate the Company's products in temporary showrooms or in booths at trade
shows and educate consumers about the benefits of Select Comfort's air beds. The
Company uses inquiries generated from the direct marketing channel to determine
road show sites and typically will have approximately 10 road show events,
ranging from three days to two weeks in duration, in process at any given time.
The Company has found this distribution channel to be very effective in
converting direct response customers who want to see the product before
purchasing, but do not live close to a retail store location. The road show
events also provide the Company with valuable information for use in feasibility
analyses for retail store sites. The road show sales professionals receive both
base and incentive compensation.
MARKETING AND ADVERTISING
The primary objective of the Company's marketing and advertising strategy is
to create awareness of the features and benefits of Select Comfort air beds and
to build recognition of the Select Comfort brand as the leader in innovative air
beds, sleep expertise, superior quality and excellent customer service. The
Company's corporate marketing department is responsible for implementing a
coordinated, integrated and consistent marketing and advertising strategy across
the Company's three complementary distribution channels. The Company continues
to spend the majority of its advertising budget on direct marketing, which also
drives traffic to the expanding base of retail stores. As the base of retail
stores continues to grow, the Company plans to dedicate more of its advertising
budget to the retail stores.
In 1997, the Company spent approximately $28.3 million on advertising
expenses. The majority of the Company's advertising budget is devoted to print
and long and short-form television advertising, with the balance primarily
devoted to radio advertising with well-known national personalities, such as
Paul Harvey and Rush Limbaugh, as well as local radio personalities in selected
retail markets. The Company also intends to continue to pursue various
alternative channels, such as catalogs, the Internet and targeted
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marketing programs. Management believes that additional demand for the Company's
products will be created by increased consumer awareness of the benefits of
Select Comfort air beds.
CONSUMER EDUCATION AND CUSTOMER SERVICE
Select Comfort is committed to achieving its goal of world class customer
satisfaction and service. The Company intends to achieve this goal through a
variety of means designed to (i) educate consumers on the benefits of Select
Comfort products, (ii) deliver superior quality products, (iii) maximize the
Company's direct relationship with consumers, (iv) maximize convenience for the
consumer, and (v) respond quickly to consumer needs and inquiries. The Company
believes that educating consumers about the features and benefits of Select
Comfort air beds is critical to the success of its marketing and sales efforts,
and devotes considerable time and resources to training programs for its retail,
direct marketing and road show sales professionals. The retail stores also have
displays that provide customers with the latest information on sleep technology
and the features and benefits of Select Comfort air beds.
The Company's controlled distribution channels optimize the Company's direct
contact with its customers and allow the Company to respond quickly to customer
service inquiries and enhance customer satisfaction. The Company's multiple
distribution channels also enhance the convenience for the consumer to purchase
products through a variety of venues. In addition, the Company is currently
testing the offering of in-home assembly services in selected markets through
national and regional providers in order to provide greater convenience and
enhance customer satisfaction.
Select Comfort maintains an in-house customer service department of over 50
customer service representatives who receive extensive training in sleep
technology and all aspects of the Company's products and operations. The Company
has recently implemented an interactive voice response system to improve
customer service. The Company's customer service representatives field customer
calls and also interact with each of the Company's retail stores to address
customer questions and concerns raised with retail sales professionals. The
customer service department makes outbound calls to new customers during the 90
Night Trial phase to answer questions and provide solutions to possible problems
in order to enhance customer education, build customer satisfaction and reduce
returns.
RESEARCH AND PRODUCT DEVELOPMENT
The Company has been granted 19 U.S. patents, has applications pending for
six U.S. patents and maintains an active research and development department.
The Company's research and development department continuously seeks to enhance
the Company's knowledge of sleep dynamics and sleep technology, improve current
product performance and benefits and develop new products. The research and
development department also conducts clinical studies and product tests to
measure the benefits of the Company's air beds, enhance the Company's sleep
technology learning, develop product improvements and establish quality and
performance standards. The Company has performed extensive pressure point
testing in which Select Comfort air beds were tested against nationally
recognized innerspring mattress brands and found to be superior in reducing
pressure points. A commissioned study conducted at the University of Memphis
confirmed that spinal misalignments were generally lower on Select Comfort air
beds in comparison with both a leading innerspring mattress and a leading
waterbed. A recent commissioned study conducted at the Stanford University Sleep
Research Center indicated that participants using Select Comfort air beds
experienced a significant improvement in the quality of their sleep in
comparison to alternative mattress products. Three additional commissioned
studies on the relationship between lower back pain, sleep quality and the sleep
surface have found, on average, that 95% of lower back pain sufferers reported
reduced pain, 88% experienced improved sleep quality and 80% experienced
increased physical functioning when sleeping on a Select Comfort air bed in
comparison with an innerspring mattress. Through customer surveys, Select
Comfort seeks consumer feedback on a regular basis to help enhance existing
products and develop new products.
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Since the introduction of the Company's first air bed, the Company has
continued to improve and expand its product line, including quieter firmness
control systems, remote control gauges with digital settings, finer fabrics and
covers, new generations of foams and foundation systems and enhanced border
walls. The Company is currently exploring and expects to develop, either
independently or with a strategic partner, additional product enhancements or
extensions, including adjustable frames, space saver foundations with storage
compartments and sound vibration mattresses providing relaxation and therapeutic
effects.
In August 1998, the Company entered into a license agreement with
Hillenbrand Industries, Inc. ("Hillenbrand"), a leading provider of high-end
beds used primarily in the medical market, and Hillenbrand's wholly owned
subsidiary, Sleep Options, Inc. ("Sleep Options"), pursuant to which the Company
has obtained a limited exclusive license to Sleep Options' technology relating
to various air and foam mattress structures, articulating bed frames and hand
control devices for mattresses, and related product knowledge. The license
allows the Company to leverage Hillenbrand's knowledge of sleep surface
technology to manufacture and sell these products in the consumer market. For
this license, the Company has agreed to pay a royalty based on a percentage of
net sales, with certain minimum royalties. The license agreement has an initial
term of three years.
MANUFACTURING AND DISTRIBUTION
The Company's manufacturing operations are located in Minneapolis and in
Columbia, South Carolina and consist of quilting and sewing of the Company's
fabric covers for its air beds, assembly of firmness control systems and final
assembly and packaging of air beds and foundations from contract manufactured
components. The Company currently conducts its manufacturing operations on two
shifts (three shifts for sewing) and believes it has sufficient capacity to meet
anticipated increases in demand through the next 12 months. The Company plans to
open a third manufacturing and distribution facility in Salt Lake City in the
first half of 1999, primarily to serve West Coast and Southwest destinations.
The Company manufactures air beds to meet orders rather than to stock
inventory, which has enabled the Company to reduce inventory costs. Management
stresses total quality manufacturing techniques, including employee training and
team concepts designed to instill quality awareness and a performance and
customer service orientation. Select Comfort utilizes multiple employee teams to
accomplish its manufacturing objectives, rather than a continuous assembly line
approach, and seeks to enhance employee involvement, enthusiasm and concern for
quality through regular communication and meetings with employees regarding
performance objectives.
Orders are currently shipped from one of the Company's two distribution
centers, primarily via UPS, typically within 48 hours following order receipt,
and are usually received by the customer within five to eight business days
after shipment. The Company is continually evaluating alternative carriers on a
national and regional basis, as well as recent tests in selected markets
involving providers of in-home assembly services. See "Risk Factors--Reliance on
Vendors; Foreign Sources of Supply" and "--Reliance Upon Carriers."
SUPPLIERS
The Company currently obtains all of the materials and components used to
produce its air beds from outside sources. Components for the firmness control
systems are obtained from a variety of primarily domestic sources. Quilting and
ticking materials are obtained from a supplier in Belgium and components for
foundation systems are obtained primarily from two domestic sources. The
Company's proprietary air chambers are produced to Company specifications by one
Eastern European supplier under a supply contract expiring in August 1999,
pursuant to which the Company is obligated to purchase certain minimum
quantities. The Company has recently completed the development of an air chamber
designed with new materials that will be manufactured by a U.S. based company at
a foreign manufacturing facility.
Full production of this new air chamber is expected to commence in the third
quarter of 1999. The Eastern
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European supplier is expected to provide a second source of supply of this new
air chamber during the second half of 1999. The Company is continuously
searching for alternative designs and materials for all of its components and
materials, as well as alternative sources of supply. See "Risk Factors--Reliance
Upon Vendors; Foreign Sources of Supply."
The Company has a supplier certification program under which suppliers are
required to meet rigorous standards relating to quality, service and ability to
deliver materials on a basis compatible with the Company's demand manufacturing
system and Year 2000 compliance. To date, eight of the Company's key suppliers
have received certification and other authorized suppliers are in the process of
seeking certification.
INFORMATION SYSTEMS
Since 1996, the Company has invested approximately $1.7 million in the
design, development and implementation of its integrated enterprise information
system. This system supports manufacturing operations, material planning,
inventory management, order processing, returns and warranty tracking, financial
management, human resources and distribution and tracking systems applications.
In addition, the Company's order capture and database marketing systems allow
each channel to gather inquiries and direct them to a central database, as well
as to share and develop those leads on a coordinated and efficient basis. The
Company also employs a point of sale system used at its retail operations. This
system provides for the reporting of retail orders to the manufacturing
department to speed order processing and allows retail stores to access and
interact with the Company's direct marketing database to obtain information
regarding inquiries and to report inquiries to the Company's central database.
The Company is in the process of internally developing and upgrading core
applications for customer inquiries and for processing and tracking warranty
claims and returns, which is scheduled for implementation in the first half of
1999. With the implementation of these applications, and the upgrade of the
Company's integrated enterprise systems also scheduled for the first half of
1999, all of the Company's core business applications are expected to be Year
2000 compliant. See "Risk Factors--Year 2000 Compliance" and "Management's
Discussion and Analysis of Financial Condition Results of Operations--Impact of
Year 2000."
INTELLECTUAL PROPERTY
Certain elements of the design and function of the Select Comfort air beds
are the subject of United States and foreign patents and patent applications
owned by Select Comfort. As of July 31, 1998, the Company had 19 U.S. issued
patents and six U.S. patent applications pending. The Company also held eight
Canadian patents and had five Canadian patent applications pending as of July
31, 1998. In August 1998, the Company obtained a limited exclusive license to
Sleep Options' technology relating to various air and foam mattress structures,
articulating bed frames and hand control devices for mattresses, together with
related know-how. Notwithstanding these patents and patent applications, no
assurance can be given that such rights will provide substantial protection or
that others will not be able to develop products that are similar to or
competitive with the Select Comfort air beds. The Company is not aware of any
claims that any element of the Company's air beds infringes or otherwise
violates any intellectual property rights of any third parties.
The name "Select Comfort" and the Company's logo are trademarks of the
Company registered with the United States Patent and Trademark Office. The
trademark "Select Comfort" is also registered, or the subject of pending
applications, in approximately 20 foreign countries. The Company has a number of
other registered marks, including the trademarks "Comfort Club" and "Sleep
Number," the service mark "Comfort Club," and a number of unregistered marks,
including the trademarks "90 Night Trial," "Better Night's Sleep Guarantee" and
"The Air Bed Company." The Company has a number of pending applications for
trademark registrations in the United States and selected foreign countries.
Each federally registered mark is renewable indefinitely if the mark is still in
use at the time of renewal. The Company is
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not aware of any material claims of infringement or other challenges to the
Company's right to use its marks. See "Risk Factors--Intellectual Property
Protection."
COMPETITION
The mattress industry is highly competitive. Participants in the mattress
industry compete primarily on price, quality, brand name recognition, product
availability and product performance, including the perceived levels of comfort
and support provided by a mattress. The Company's air beds compete with a number
of different types of mattress alternatives, including innerspring mattresses,
waterbeds, futons and other air-supported mattresses that are sold through a
variety of channels, including furniture stores, bedding specialty stores,
department stores, mass merchants, wholesale clubs, telemarketing programs,
television infomercials and catalogs. The Company believes that its success
depends in part on increasing consumer acceptance of existing products and the
continuing introduction of products that have qualities and benefits which
differentiate the Company's products from those offered by other manufacturers.
There can be no assurance that such products will receive consumer acceptance or
that the Company will continue to be able to successfully introduce such
products. See "Risk Factors--Competition."
The traditional mattress industry is characterized by a high degree of
concentration among the four largest manufacturers of innerspring mattresses
with nationally recognized brand names, including Sealy, which also owns the
Stearns & Foster brand name, Serta, Simmons and Spring Air. These manufacturers
were estimated by FURNITURE/TODAY to account for approximately 62% of wholesale
dollar sales in 1997. The balance of the mattress market is served by over 700
manufacturers, primarily operating on a regional basis. Many of these
competitors, and in particular the four largest manufacturers named above, have
greater financial, marketing and manufacturing resources and better brand name
recognition than the Company, and sell their products through broader and more
established distribution channels. The Company believes that a number of
companies, including two of the four largest manufacturers, have begun to offer
air beds. There can be no assurance that these or any other mattress
manufacturer will not aggressively pursue the air bed market. Any such
competition by the established manufacturers or new entrants into the market
could have a material adverse effect on the Company's business, financial
condition and operating results. In addition, should any of the Company's
competitors reduce prices on premium mattress products, the Company may be
required to implement price reductions in order to remain competitive, which
could have a material adverse effect on its business, financial condition and
operating results.
There are no provisions in the Company's retail store leases that limit or
restrict competing businesses from operating in the malls in which the Company's
stores are located. The lack of such restrictions and the lack of significant
barriers to entry may result in new competition. Such competition could have a
material adverse effect on the Company's business, financial condition and
operating results.
EMPLOYEES
At July 31, 1998, the Company employed 1,432 persons, including 717 retail
store employees, 124 direct marketing employees, 54 customer service employees,
23 road show sales professionals, 367 manufacturing and distribution employees
and 147 management and administrative employees. Approximately 86 of the
Company's employees were employed on a part-time basis at July 31, 1998. Except
for managerial employees and professional support staff, all of the Company's
employees are paid on an hourly basis plus commissions for sales associates.
None of the Company's employees is represented by a labor union or covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
PROPERTIES
The Company currently leases all of its existing retail store locations and
expects that its policy of leasing, rather than owning, will continue as it
expands. The Company's store leases generally provide for
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an initial lease term of 10 years with a mutual termination option if the
Company does not achieve certain minimum annual sales thresholds. Generally, the
store leases require the Company to pay minimum rent plus percentage rent based
on net sales in excess of certain thresholds, as well as certain operating
expenses.
The Company leases 125,000 square feet of space in Minneapolis for one of
the Company's manufacturing and distribution centers, one of the Company's
direct marketing call centers, a customer service center, a research and
development center and corporate offices, which lease expires in 2004. The
Company also leases 105,000 square feet of space in Columbia, South Carolina,
for its other manufacturing and distribution center and a direct marketing call
center, which lease expires in 2003. The Company plans to open a manufacturing
and distribution center in Salt Lake City in the first half of 1999.
CONSUMER CREDIT ARRANGEMENTS
In May 1997, the Company entered into an arrangement with Monogram Credit
Card Bank of Georgia (the "Bank"), an affiliate of General Electric Capital
Corporation, a creditor and warrantholder of the Company, pursuant to which the
Bank offers to the Company's qualified customers an unsecured revolving credit
arrangement to finance purchases from the Company. The Bank sets the rate,
annual fees, late fees and all other terms and conditions relating to the
customers' accounts, including collection policies and procedures, and is the
owner of the receivables. The effective interest rate is comparable to rates
generally available under similar consumer revolving credit arrangements. The
Bank's current commitment extends to a maximum of $75 million of receivables
outstanding. The Company expects to increase the amount of this commitment
before the end of 1998.
In connection with all purchases financed under these arrangements, the Bank
pays the Company an amount equal to the total amount of purchases net of
promotional related discounts and less amounts retained for returned products
and limited recourse on bad debts. The Company's liability for bad debts is
limited to a specified percentage of the receivables generated.
In the six months ended July 4, 1998, approximately 52.6% of the Company's
net sales were financed by the Bank through these arrangements. The average
receivable outstanding generated under these arrangements at June 30, 1998 was
approximately $1,114, with an aggregate amount outstanding at that date of
approximately $57.7 million. As part of its allowance for doubtful accounts, the
Company maintains a reserve for recourse that may result under its arrangement
with the Bank. The amount of this reserve at July 4, 1998 was approximately $2.2
million, representing approximately 3.9% of the related receivables as of that
date. For financial statement purposes, the financing arrangement with the Bank
has been accounted for as a sale of receivables. See "Risk Factors--Dependence
on Consumer Spending."
GOVERNMENTAL REGULATION
The Company's products and its marketing and advertising practices are
subject to regulation by various federal, state and local regulatory
authorities, including the Federal Trade Commission and the U.S. Food and Drug
Administration. The mattress industry also engages in advertising
self-regulation through certain voluntary forums, including the National
Advertising Division of the Better Business Bureau. The Company is also subject
to various other federal, state and local regulatory requirements, including
federal, state and local environmental regulation and regulations issued by the
U.S. Occupational Safety and Health Administration. See "Risk
Factors--Regulatory Matters."
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings incident to the
ordinary course of its business. The Company believes that the outcome of all
pending legal proceedings in the aggregate will not have a material adverse
effect on its business, financial condition or operating results.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
July 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
H. Robert Hawthorne................... 53 President, Chief Executive Officer and Director
Daniel J. McAthie..................... 47 Executive Vice President, Chief Financial Officer, Chief
Administrative Officer and Secretary
Charles E. Dorsey..................... 48 Senior Vice President of Direct Marketing and President of Select
Comfort Direct Corporation
Ronald E. Mayle....................... 40 Senior Vice President of Retail and President of Select Comfort
Retail Corporation
Gregory T. Kliner..................... 60 Senior Vice President of Operations
Ervin R. Shames(1)(2)................. 58 Chairman of the Board
Thomas J. Albani(3)................... 56 Director
Patrick A. Hopf(1)(2)................. 49 Director
Christopher P. Kirchen(1)(3).......... 55 Director
David T. Kollat(3).................... 60 Director
Kenneth A. Macke(2)................... 59 Director
Jean-Michel Valette(3)................ 38 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Compensation Committee
(3) Member of the Audit Committee
H. ROBERT HAWTHORNE has served as the President, Chief Executive Officer and
a Director of the Company since April 1997. From February 1992 to December 1997,
he served as President of The Pillsbury Brands Group, a subsidiary of The
Pillsbury Company, which is a subsidiary of Diageo PLC. From June 1990 to
January 1992, he was President and Chief Executive Officer of Alpo Petfoods,
then a subsidiary of Grand Metropolitan PLC. Prior to joining Alpo Petfoods, Mr.
Hawthorne was President and Chief Executive Officer of Pillsbury Canada, a
subsidiary of Diageo PLC.
DANIEL J. MCATHIE has served as Executive Vice President, Chief Financial
Officer, Chief Administrative Officer and Secretary since October 1995. From May
1990 to April 1995, Mr. McAthie held the positions of Senior Vice President,
Chief Financial Officer, Vice President and Treasurer of Fingerhut Companies,
Inc., a mail order catalog company.
CHARLES E. DORSEY has served as Senior Vice President of Direct Marketing
since January 1992 and President of Select Comfort Direct Corporation since
March 1996. From March 1988 to December 1991, Mr. Dorsey served as Chief
Operating Officer for DM Shelter, Inc., a custom packaged home company.
RONALD E. MAYLE has served as Senior Vice President of Retail of the Company
and President of Select Comfort Retail Corporation since December 1997. From
October 1996 to December 1997, Mr. Mayle served as Managing Member of Management
& Capital, a retail consulting firm. From April 1992 to May 1995, Mr. Mayle was
Vice President of Operations of Petstuff, Inc., a subsidiary of PetsMart Inc.
43
<PAGE>
GREGORY T. KLINER has served as Senior Vice President of Operations since
August 1995. From October 1986 to August 1995, Mr. Kliner served as Director of
Operations of the Irrigation Division for The Toro Company.
ERVIN R. SHAMES has served as a Director of the Company and Chairman of the
Board of Directors since April 1996. From December 1993 to January 1995, Mr.
Shames served as the Chief Executive Officer of Borden, Inc. and was President
and Chief Operating Officer of Borden, Inc. from July 1993 until December 1993.
From June 1992 to July 1993, Mr. Shames served as Chairman and Chief Executive
Officer of The Stride Rite Corporation, a footwear manufacturer, and was
President and Chief Executive Officer of The Stride Rite Corporation from June
1990 to June 1992. Mr. Shames is also a director of the First Brands
Corporation.
THOMAS J. ALBANI has served as a Director of the Company since February
1994. Mr. Albani served as President and Chief Executive Officer of Electrolux
Corporation, a manufacturer of premium floor care machines, from July 1991 to
May 1998. From September 1984 to April 1989, Mr. Albani was employed by
Allegheny International Inc., a home appliance manufacturing company, in a
number of positions, most recently as Executive Vice President and Chief
Operating Officer.
PATRICK A. HOPF has served as a Director of the Company since December 1991.
From August 1993 to April 1996, Mr. Hopf served as the Chairman of the Board of
Directors of the Company. Mr. Hopf has been President of St. Paul Venture
Capital, Inc., a venture capital firm, and Vice President of St. Paul Fire and
Marine Insurance Company since August 1988, and Managing General Partner of St.
Paul Venture Capital IV, LLC since its formation in January 1997. Both St. Paul
Fire and Marine Insurance Company and St. Paul Venture Capital IV, LLC are
investors in the Company. Mr. Hopf also serves as a director of a number of
privately held companies.
CHRISTOPHER P. KIRCHEN has served as a Director of the Company since
December 1991. Mr. Kirchen is currently Managing General Partner of Brand Equity
Ventures, a venture capital partnership that he co-founded in March 1997. Mr.
Kirchen is also a General Partner of Consumer Venture Partners, an investor in
the Company, a position he has held since 1986. Mr. Kirchen also serves as a
director of a number of privately held companies.
DAVID T. KOLLAT has served as a Director of the Company since February 1994.
Mr. Kollat has served as President and Chairman of 22 Inc., a research and
consulting company for retailers and consumer goods manufacturers, since 1987.
From 1976 until 1987, Mr. Kollat served in various capacities for The Limited,
including Executive Vice President of Marketing and President of Victoria's
Secret Catalogue. Mr. Kollat also serves as a director of numerous companies,
including The Limited, Inc., Wolverine World Wide, Inc., Consolidated Stores,
Inc. and Cooker Restaurant Corporation.
KENNETH A. MACKE has served as a Director as a of the Company since
September 1994. Mr. Macke is General Partner of Macke Limited Partnership, a
venture capital firm and investor in the Company. He previously served as
Chairman and Chief Executive Officer of Dayton Hudson Corporation from 1984 to
1994, prior to which he was employed by Dayton Hudson in a variety of positions
beginning in 1961. Mr. Macke also serves as a director of Unisys Corporation,
General Mills, Inc. and Fingerhut Companies, Inc.
JEAN-MICHEL VALETTE has served as a Director of the Company since 1994. Mr.
Valette has served as President and Chief Executive Officer of Franciscan
Estates, Inc., a winery in Northern California, since August 1998. Mr. Valette
was a Managing Director of Hambrecht & Quist LLC from January 1987 to August
1998. Mr. Valette is also a member of the general partner of H&Q Select Comfort
Investors, L.P., an investor in the Company and a related party to Hambrecht &
Quist LLC. Hambrecht & Quist LLC is one of the Underwriters of this offering.
From 1981 to 1983, Mr. Valette was a consultant with The Boston Consulting
Group. Mr. Valette also serves as a director of a number of privately held
companies.
44
<PAGE>
BOARD OF DIRECTORS
Effective upon completion of this offering, the Board of Directors will
consist of three classes of directors, each class serving for a staggered
three-year term. The Class A directors, whose initial terms will expire at the
1999 annual shareholders meeting, will be Messrs. Kirchen, Macke and Valette.
The Class B directors, whose initial terms will expire at the 2000 annual
shareholders meeting, will be Messrs. Hopf and Shames. The Class C directors,
whose initial terms will expire at the 2001 annual shareholders meeting, will be
Messrs. Hawthorne, Kollat and Albani.
COMMITTEES
The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee has the authority to take all
actions that the Board as a whole is able to take, except as limited by
applicable law. The Audit Committee provides assistance to the Board in
satisfying its fiduciary responsibilities relating to accounting, auditing,
operating and reporting practices of the Company, and reviews the annual
financial statements of the Company, the selection and work of the Company's
independent auditors and the adequacy of internal controls for compliance with
corporate policies and directives. The Compensation Committee reviews general
programs of compensation and benefits for all employees of the Company and makes
recommendations to the Board concerning such matters as compensation to be paid
to the Company's officers and directors.
DIRECTOR COMPENSATION
Effective upon completion of this offering, all non-employee directors of
the Company (other than Ervin R. Shames, who is entitled to the compensation
described below) will receive $3,500 for each meeting of the Board of Directors
attended and $500 for each meeting of the Executive Committee, Audit Committee
or Compensation Committee attended. In addition, all non-employee directors
(other than Mr. Shames) will be granted, on an annual basis, an option to
purchase 3,000 shares of Common Stock exercisable at the fair market value of
the Common Stock on the date of grant for a period of up to 10 years, subject to
their continuous service on the Board of Directors. Directors who are officers
or employees of the Company do not receive additional compensation for their
services as directors. All directors are reimbursed for travel expenses for
attending meetings of the Board and any Board committees.
In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. Pursuant to the Consulting Agreement, Mr.
Shames received $120,000 in 1997 for consulting services rendered. See
"--Employment and Consulting Agreements."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Hopf, Albani and Macke served as members of the Compensation
Committee of the Board of Directors during 1997. Mr. Hopf is the President of
St. Paul Venture Capital, Inc. and Vice President of St. Paul Fire and Marine
Insurance Company, and Mr. Macke is the General Partner of Macke Limited
Partnership, each of which is an investor in the Company. For a description of
certain transactions involving these entities, see "Certain Relationships and
Related Transactions" and "Principal and Selling Shareholders." Mr. Hopf served
as Chairman of the Board of the Company from August 1993 to April 1996. No other
relationships existed during 1997 with respect to Messrs. Hopf, Albani or Macke
that would be required to be disclosed under the rules of the Securities Act.
Messrs. Hopf, Macke and Shames currently serve as members of the Compensation
Committee of the Board of Directors.
45
<PAGE>
EXECUTIVE COMPENSATION
The following table describes the compensation earned in 1997 by (i) the
Chief Executive Officer of the Company; and (ii) each of the four other most
highly compensated executive officers of the Company whose salary and bonus
exceeded $100,000 in 1997 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-------------
ANNUAL COMPENSATION SECURITIES
----------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OPTIONS (#) COMPENSATION ($)
- ------------------------------------------------- --------- ---------- ----------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
H. Robert Hawthorne(1) .......................... 1997 $ 225,000 $ 27,000 600,000 --
President and Chief Executive Officer
Mark L. de Naray(2) ............................. 1997 90,898 -- -- $ 148,515(3)
Former President and Chief Executive Officer
Daniel J. McAthie ............................... 1997 198,655 23,838 82,500 --
Executive Vice President, Chief Financial
Officer, Chief Administrative Officer and
Secretary
Charles E. Dorsey ............................... 1997 155,540 81,381 52,500 --
Senior Vice President of Retail and President
of Select Comfort Direct Corporation
John D. Watson(4) ............................... 1997 149,423 17,931 52,500 --
Former Senior Vice President of Corporate
Marketing
Gregory T. Kliner ............................... 1997 147,095 17,652 52,500 --
Senior Vice President of Operations
</TABLE>
- ------------------------
(1) Mr. Hawthorne became President and Chief Executive Officer of the Company
effective April 28, 1997.
(2) Mr. de Naray was President and Chief Executive Officer of the Company
through April 27, 1997.
(3) Represents severance payments in an aggregate amount of $147,115 and term
life insurance premiums in the aggregate amount of $1,400 paid by the
Company for the benefit of Mr. de Naray. See "--Separation Agreements."
(4) Mr. Watson resigned from the Company effective September 1, 1998. See
"--Separation Agreements."
46
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes stock option grants during 1997 to each of
the Company's Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME GRANTED (#) FISCAL YEAR PER SHARE DATE 5% ($) 10% ($)
- ----------------------------------- ----------- --------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne................ 450,000(3) 31.3% $ 3.50 3/27/07 $ 990,509 $ 2,510,144
150,000(4) 10.4 3.50 3/27/07 330,170 836,715
Mark L. de Naray................... -- -- -- -- -- --
Daniel J. McAthie.................. 30,000(3) 2.1 3.50 3/27/07 66,034 167,343
52,500(4) 3.6 3.50 3/27/07 115,559 292,850
Charles E. Dorsey.................. 52,500(4) 3.6 3.50 3/27/07 115,559 292,850
John D. Watson..................... 52,500(4) 3.6 3.50 3/27/07 115,559 292,850
Gregory T. Kliner.................. 52,500(4) 3.6 3.50 3/27/07 115,559 292,850
</TABLE>
- ------------------------
(1) All of the options granted to the Named Executive Officers were granted
under the Company's 1997 Stock Incentive Plan. See "--Stock Option and
Incentive Plans" for a discussion of the material terms of option grants
under such plan.
(2) In accordance with the rules of the Commission, the amounts shown on this
table represent hypothetical gains that could be achieved for the respective
options if exercised at the end of the option term. These gains are based on
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect the Company's estimates or projections of future Common Stock
prices. The gains shown are net of the option price, but do not include
deductions for taxes or other expenses associated with the exercise. Actual
gains, if any, on stock option exercises will depend upon the future
performance of the Common Stock, the executive's continued employment with
the Company or its subsidiaries and the date on which the options are
exercised. The amounts represented in this table might not necessarily be
achieved.
(3) These options become exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as the executive remains
employed by the Company or one of its subsidiaries at that date. To the
extent not already exercisable, these options become immediately exercisable
in full upon certain changes in control of the Company and remain
exercisable for the remainder of their term. See "--Stock Option and
Incentive Plans."
(4) These options become exercisable in full upon the earlier of the following
to occur: (a) the date on which the average of the high and low sales prices
of the Company's Common Stock, as reported by the Nasdaq National Market
System, exceeds $14.67 per share for at least 30 consecutive trading days;
or (b) March 28, 2002, so long as the executive remains employed by the
Company or one of its subsidiaries at that date. To the extent not already
exercisable, these options become immediately exercisable in full upon
certain changes in control of the Company that result in consideration
received or to be received by the shareholders of the Company as a result of
such transaction exceeding $14.67 per share of Common Stock on a fully
diluted basis.
47
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table summarizes the number and value of options exercised
during 1997 and the value of options held by the Named Executive Officers at
January 3, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT JANUARY 3, 1998 AT JANUARY 3, 1998(1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
H. Robert Hawthorne............ -- -- 112,500 487,500 $ 356,250 $ 1,543,750
Mark L. de Naray............... 270,000(2) $ 891,000 -- -- -- --
71,925(2) 237,353
126,510(2) 409,049
900(2) 2,910
259,665(2) 830,928
42,000(2) 119,000
24,000(2) 7,200
12,000(2) 0
Daniel J. McAthie.............. -- -- 120,399 127,101 408,887 413,113
Charles E. Dorsey.............. 3,000 19,400 150,735 61,365 931,592 204,738
John D. Watson................. -- -- 53,328 119,172 168,872 377,378
Gregory T. Kliner.............. -- -- 88,320 84,180 302,423 273,077
</TABLE>
- ------------------------
(1) Value based on the difference between the fair market value of one share of
Common Stock at January 3, 1998 ($6.67), as determined by the Board of
Directors, and the exercise price of the options ranging from $0.20 to $3.50
per share. Options are in-the-money if the market price of the shares
exceeds the option exercise price.
(2) Mr. de Naray exercised these options on February 20, 1997 and paid for the
shares by executing a full recourse promissory note in the amount of
$396,550. See "--Separation Agreements."
EMPLOYMENT AND CONSULTING AGREEMENTS
On April 3, 1997, the Company entered into a Letter Agreement with H. Robert
Hawthorne pursuant to which Mr. Hawthorne serves as President and Chief
Executive Officer as well as a director of the Company. Mr. Hawthorne's base
salary is $350,000 per year, and he is entitled to receive an incentive bonus if
certain performance criteria are met. Under the terms of the Letter Agreement,
Mr. Hawthorne was granted two ten-year options to purchase an aggregate of
600,000 shares of Common Stock at an exercise price of $3.50 per share. Of these
options: (i) an option to purchase 450,000 shares of Common Stock becomes
exercisable in as nearly equal as possible monthly installments over a 36-month
period, so long as Mr. Hawthorne remains employed by the Company or one of its
subsidiaries at such date and (ii) the other option is a "performance-based"
option and becomes exercisable as to 150,000 shares of Common Stock upon the
earlier of the following to occur: (a) the date on which the average of the high
and low sales prices of the Company's Common Stock, as reported by the Nasdaq
National Market System, exceeds $14.67 per share for at least 30 consecutive
trading days; or (b) March 28, 2002, so long as Mr. Hawthorne remains employed
by the Company or one of its subsidiaries at such date. Mr. Hawthorne is
entitled to a minimum severance payment of 24 months base salary in the event he
is terminated without cause.
On October 20, 1995, the Company entered into a Letter Agreement with Daniel
J. McAthie pursuant to which Mr. McAthie serves as Executive Vice President,
Chief Financial Officer Chief Administrative Officer of the Company. Mr. McAthie
receives a base salary and is entitled to receive an incentive bonus if
48
<PAGE>
certain performance criteria are met. Under the terms of the Letter Agreement,
Mr. McAthie was granted a ten-year option to purchase 127,500 shares of Common
Stock at an exercise price of $3.20 per share. This option becomes exercisable
in as nearly equal as possible monthly installments over a 36-month period, so
long as Mr. McAthie remains employed by the Company or one of its subsidiaries
at such date. Mr. McAthie is also entitled to a minimum severance payment equal
to his nine month's then current base salary in the event of termination without
cause.
On July 11, 1995, the Company entered into a Letter Agreement with Gregory
T. Kliner pursuant to which Mr. Kliner serves as Senior Vice President of
Operations of the Company. Mr. Kliner receives a base salary and is entitled to
receive an incentive bonus if certain performance criteria are met. Under the
terms of the Letter Agreement, Mr. Kliner was granted a ten-year option to
purchase 97,500 shares of Common Stock at an exercise price of $3.20 per share.
This option becomes exercisable in as nearly equal as possible monthly
installments over a 36-month period, so long as Mr. Kliner remains employed by
the Company or one of its subsidiaries at such date.
The Company and Mr. Shames entered into a Consulting Agreement and a related
Stock Option Agreement, each dated April 1, 1996, under which Mr. Shames serves
as a consultant to assist the Company in various executive and management
duties. The Consulting Agreement has a term of three years. Under the Consulting
Agreement, Mr. Shames is entitled to a monthly retainer of $10,000 and
reimbursement of certain expenses. In addition to the monthly retainer, Mr.
Shames was granted, effective April 1, 1996, a ten-year, non-qualified option to
purchase 225,000 shares of Common Stock at an exercise price of $3.50 per share,
75,000 shares of which became immediately exercisable and the remaining 150,000
shares of which become exercisable in as nearly equal as possible monthly
installments over the three-year term of the Consulting Agreement, so long as
Mr. Shames remains engaged as a consultant, officer or director of the Company.
Pursuant to the Consulting Agreement, Mr. Shames was also granted a ten-year,
non-qualified option effective April 1, 1997 to purchase 75,000 shares of Common
Stock at an exercise price of $4.33 per share which becomes exercisable in as
nearly equal as possible monthly installments over a 24-month period, and a
ten-year, non-qualified option, effective April 1, 1998 to purchase 37,500
shares of Common Stock at an exercise price of $7.33 per share which becomes
exercisable in as nearly equal as possible monthly installments over a 12-month
period. The Company also agreed to grant Mr. Shames, effective April 1, 1999,
subject to the Board of Directors' discretion, a non-qualified option to
purchase 37,500 shares of Common Stock at an exercise price equal to the fair
market value of the Common Stock on such date which option will become
immediately exercisable in full on such date. The Consulting Agreement provides
that Mr. Shames will not compete with the Company for a period of two years
after the termination of the Consulting Agreement.
SEPARATION AGREEMENTS
On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company. Under the Separation Agreement, the Company agreed to
provide Mr. de Naray with certain payments and benefits, including (i) payment
of Mr. de Naray's base salary through July 31, 1998, (ii) payment of a $50,000
cash bonus, (iii) continuation of health, dental and life insurance coverage
until July 31, 1998, and (iv) reimbursement of certain other expenses in an
amount not to exceed $10,000. The Company loaned Mr. de Naray approximately
$346,550, in addition to the $50,000 Mr. de Naray previously owed the Company,
in order to provide Mr. de Naray funds to exercise his options. The original
principal amount of the full recourse note was $396,550 and it bears interest at
the rate of 9 1/4% per annum. The entire principal balance and all accrued
interest on the note is due in full on the earlier of (i) six months following
the completion of this offering or (ii) April 30, 1999. The loan is secured by
Mr. de Naray's pledge of 225,000 shares of Common Stock. The outstanding
principal balance and accrued interest on the note was approximately $417,700 as
of January 3, 1998 and $439,665 as of July 31, 1998. Pursuant to the Separation
Agreement, the Company loaned an additional $425,000 to Mr. de Naray on April
13, 1998, which loan is evidenced by a note and a pledge agreement containing
the same terms and conditions as described above,
49
<PAGE>
including the pledge of an additional 225,000 shares of Common Stock. The
outstanding principal balance and accrued interest on this note was
approximately $436,848 as of July 31, 1998. Under the Separation Agreement, the
Company agreed to use its good faith efforts to enable Mr. de Naray to sell up
to 75,000 shares of Common Stock in this offering. Under the Separation
Agreement, Mr. de Naray agreed not to disclose any confidential information of
the Company until July 31, 2003, and until July 31, 1999, not to compete with
the Company, interfere with the Company's relationships with any of its current
or potential vendors, suppliers, distributors or customers and not to solicit
any employees of the Company so long as they remain employees of the Company.
On July 13, 1998, the Company entered into a Separation Agreement with John
D. Watson, the former Senior Vice President of Corporate Marketing of the
Company. Under the Separation Agreement, the Company agreed to provide Mr.
Watson with certain payments and benefits, including (i) payment of Mr. Watson's
base salary through August 1, 1999, (ii) payment of a cash bonus at the end of
1998 equal to 8/12 of Mr. Watson's bonus had he remained an employee during the
remainder of 1998, (iii) continuation of health, dental and life insurance
coverage until July 31, 1999, and (iv) reimbursement of certain other expenses
in an amount not to exceed $5,000. Under the Separation Agreement, Mr. Watson
agreed not to disclose any confidential information of the Company and, until
February 29, 2000, not to compete with the Company, interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers and not to solicit any current employees of the
Company.
STOCK OPTION AND INCENTIVE PLANS
The Company grants options pursuant to its 1990 Omnibus Stock Option Plan
(the "1990 Plan") and its 1997 Stock Incentive Plan (the "1997 Plan"). Each of
the 1990 Plan and the 1997 Plan provides for the grant to eligible participants
of options to purchase shares of Common Stock that qualify as "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended ("Incentive Options"), as well as options that do not qualify as
Incentive Options ("Non-Statutory Options"). In addition, the 1997 Plan provides
for awards to eligible recipients of stock appreciation rights, restricted stock
awards, performance units and stock bonuses. Eligible participants under these
plans include employees, officers, directors, consultants and independent
contractors of the Company and its subsidiaries. Each of these plans is
administered by the Compensation Committee of the Board of Directors, which
determines the persons who are to receive awards, as well as the type, terms and
number of shares subject to each award. The 1990 Plan will terminate on May 29,
2000, and the 1997 Plan will terminate on March 28, 2007, in each case unless
earlier terminated by the Board of Directors.
The Company has reserved an aggregate of 4.2 million shares of Common Stock
for awards under the 1990 Plan. As of July 31, 1998, options to purchase an
aggregate of 1,220,052 shares of Common Stock were outstanding under the 1990
Plan, of which 909,726 were fully vested, and a total of 545,391 shares of
Common Stock remained available for grant under the 1990 Plan. The Company has
reserved an aggregate of 2.25 million shares of Common Stock for awards under
the 1997 Plan. As of July 31, 1998, options to purchase an aggregate of
1,396,063 shares of Common Stock were outstanding under the 1997 Plan, of which
260,548 were fully vested, and a total of 699,976 shares of Common Stock
remained available for grant under the 1997 Plan. As of July 31, 1998, the
outstanding options under the plans were held by an aggregate of 144 individuals
and were exercisable at prices ranging from $0.20 to $11.00 per share of Common
Stock. Prior to the consummation of this offering, the Company plans to grant
options to purchase an aggregate of approximately shares of Common Stock under
the 1997 Plan at an exercise price equal to the initial public offering price of
the shares of Common Stock offered hereby. Options granted under the plans
generally become exercisable in as nearly equal as possible monthly installments
over a 36-month period. Shares subject to options granted under the plans that
lapse or are terminated may again be subject to grants under the plans.
Incentive Options granted under the plans may not have an exercise price
less than the fair market value of the Common Stock on the date of the grant
(or, if granted to a person holding more than 10% of
50
<PAGE>
the Company's voting stock, at less than 110% of fair market value).
Non-Statutory Options granted under the plans may not have an exercise price
less than 85% of fair market value on the date of grant. Aside from the maximum
number of shares of Common Stock reserved under the plans, there is no minimum
or maximum number of shares that may be subject to options. However, the
aggregate fair market value of the stock subject to Incentive Options granted to
any optionee that are exercisable for the first time by an optionee during any
calendar year may not exceed $100,000. Options generally expire when the
optionee's employment or other service is terminated with the Company and its
subsidiaries. Options generally may not be transferred, other than by will or
the laws of descent and distribution, and during the lifetime of an optionee,
may be exercised only by the optionee. The term of each option, which is fixed
by the Board at the time of grant, may not exceed ten years from the date the
option is granted (except that an Incentive Option granted to a person holding
more than 10% of the Company's voting stock may be exercisable only for five
years).
Each of the 1990 Plan and the 1997 Plan contains provisions under which
options would become fully exercisable following certain changes in control of
the Company, such as (i) the sale, lease, exchange or other transfer of all or
substantially all of the assets of the Company to a corporation that is not
controlled by the Company, (ii) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, (iii)
certain merger or business combination transactions, (iv) more than 50% of the
Company's outstanding voting shares are acquired by any person or group of
persons who did not own any shares of Common Stock on the effective date of the
respective plan, or (v) certain changes in the composition of the Board of
Directors of the Company. In addition, under the 1997 Plan, in the event of a
change in control of the Company, all stock appreciation rights will become
fully exercisable, all restricted stock awards will become immediately and fully
vested and all performance units and stock bonuses will vest and/or continue to
vest according to the terms of the agreements evidencing such awards. In
addition, under the 1997 Plan, in the event of such a change in control, the
Compensation Committee, in its sole discretion, may provide that some or all
participants holding outstanding options will receive for each share of Common
Stock subject to such options cash in an amount equal to the excess of the fair
market value of such shares immediately prior to the effective date of a change
in control over the exercise price per share of such options. The acceleration
of the exercisability of options under the Plans may be limited, however, if the
acceleration would be subject to an excise tax imposed upon "excess parachute
payments."
Payment of an option exercise price may be made in cash, or at the
Compensation Committee's discretion, in whole or in part by tender of a broker
exercise notice, a promissory note or previously acquired shares of Common Stock
of the Company having an aggregate fair market value on the date of exercise
equal to the payment required.
PROFIT SHARING AND 401(K) SAVINGS PLAN
On January 1, 1994, the Company adopted a Profit Sharing and 401(k) Plan
(the "401(k) Plan"). Employees who are employed on a full time basis and are 21
years old or over are eligible to participate in the 401(k) Plan on the first
day of the first calendar month following their employment commencement date.
Employees who are employed on a less than full time basis and are 21 years old
or over are eligible to participate in the 401(k) Plan on the first day of the
first calendar month once such employees have completed at least 1,000 hours of
service during the 12 months following their employment commencement date or
have completed 1,000 hours of service during the preceding plan year. Employees
may make salary reduction contributions to the 401(k) Plan up to the maximum
amount permitted by law. The Company may make discretionary matching
contributions equal to a percentage of the amount of the salary reduction the
employee elected. This percentage is determined annually by the Company. During
the first six months of 1998, the Company contributed $78,000 to the 401(k)
Plan. The Company did not make any contributions during 1995, 1996 and 1997.
Generally, employer matching contributions are vested at the rate of 20% per
year of service commencing after the employee has completed two years of
service. Employee salary reduction contributions under the 401(k) Plan are
always 100% vested.
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CERTAIN TRANSACTIONS
DIRECTOR RELATIONSHIPS
Patrick A. Hopf, a director of the Company, is the President of St. Paul
Venture Capital, Inc. and the Vice President of St. Paul Fire and Marine
Insurance Co., both of which are shareholders of the Company. Mr. Hopf was
elected to the Board of Directors of the Company in connection with the purchase
agreement under which the Series A Preferred Stock was purchased.
Christopher P. Kirchen, a director of the Company, is a general partner of
Consumer Venture Associates, L.P., which is the general partner of Consumer
Venture Partners I, L.P., a shareholder of the Company. Mr. Kirchen is also the
general partner of Consumer Venture Associates II, L.P., which is the general
partner of Consumer Venture Partners II, L.P., a shareholder of the Company. Mr.
Kirchen was elected to the Board of Directors of the Company in connection with
the purchase agreement under which the Series B Preferred Stock was purchased.
Jean-Michel Valette, a director of the Company, was a Managing Director of
Hambrecht & Quist LLC from January 1987 to August 1998. Mr. Valette is also a
member of the general partner of H&Q Select Comfort Investors, L.P., an investor
in the Company and a related party to Hambrecht & Quist LLC. Mr. Valette was
elected to the Board of Directors of the Company in connection with the purchase
agreement under which the Series D Preferred Stock was purchased. Hambrecht &
Quist LLC is one of the Underwriters of this offering.
CERTAIN SALES OF SECURITIES
Since January 1, 1995, the Company has sold shares of Series E Preferred
Stock, promissory notes convertible into shares of Common Stock and warrants to
purchase shares of Common Stock to various investors, including certain
directors, executive officers, greater-than 5% shareholders and entities
affiliated with directors. Such securities were sold to such affiliated
purchasers on the same terms as they were sold to non-affiliated purchasers.
SERIES E FINANCING
On December 28, 1995, the Company sold an aggregate of 857,143 shares of
Series E Preferred Stock pursuant to the Company's Series E Convertible
Preferred Stock Purchase Agreement dated December 28, 1995 (the "Series E
Purchase Agreement"), at a price of $10.50 per share for an aggregate purchase
price of approximately $9.0 million. The Series E Purchase Agreement was amended
in April 1996 to provide for the issuance to such purchasers of Series E
Preferred Stock warrants to purchase an aggregate of 257,142 shares of Common
Stock exercisable through December 28, 2005 at an exercise price of $3.50 per
share. The following entities and individuals purchased shares of Series E
Preferred Stock and were issued warrants in the following amounts: Apex
Investment Fund, L.P. (19,380 shares of Series E Preferred Stock convertible
into 23,071 shares of Common Stock and a warrant to purchase 5,814 shares);
related parties to Hambrecht & Quist LLC (45,000 shares of Series E Preferred
Stock convertible into 53,570 shares of Common Stock and a warrant to purchase
13,500 shares); Macke Limited Partnership (11,900 shares of Series E Preferred
Stock convertible into 14,166 shares of Common Stock and a warrant to purchase
3,570 shares); Marquette Venture Partners II, L.P. (257,150 shares of Series E
Preferred Stock convertible into 306,130 shares of Common Stock and a warrant to
purchase 77,145 shares); Norwest Equity Partners V (257,150 shares of Series E
Preferred Stock convertible into 306,130 shares of Common Stock and a warrant to
purchase 10,505 shares); St. Paul Fire and Marine Insurance Co. (100,000 shares
of Series E Preferred Stock convertible into 119,047 shares of Common Stock and
a warrant to purchase 30,000 shares); John Sculley (15,000 shares of Series E
Preferred Stock convertible into 17,857 shares of Common Stock and a warrant to
purchase 4,500 shares); Patrick A. Hopf (950 shares of Series E Preferred Stock
convertible into 1,130 shares of Common Stock and a warrant to purchase 285
shares); Mark L. de Naray (500 shares of Series E Preferred Stock convertible
into 595 shares of Common Stock and a warrant to
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purchase 150 shares); and Daniel J. McAthie (20,000 shares of Series E Preferred
Stock convertible into 23,809 shares of Common Stock and a warrant to purchase
6,000 shares).
1996 BRIDGE FINANCING
In November 1996, the Company borrowed an aggregate of approximately
$1,252,000 from certain existing shareholders and issued promissory notes
evidencing such loans. Interest on these notes accrued at an annual rate of 8%.
The Company granted each of these shareholders ten-year warrants to purchase a
number of shares of Common Stock equal to 25% of the principal amount of such
shareholder's note divided by $3.50 (an aggregate of 88,978 shares), at an
exercise price of $3.50 per share. The promissory notes were due on the earlier
of (i) the closing of an equity financing of $10.0 million or more, or (b)
November 1, 1997. The Company paid off the promissory notes in full in March
1997 and granted each of these shareholders additional ten-year warrants to
purchase a number of shares equal to 5% of the principal amount of such
shareholder's note divided by $3.50 (an aggregate of 18,305 shares), exercisable
through October 31, 2006 at an exercise price of $3.50 per share. The following
entities purchased notes and warrants in the following amounts: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 10,838 shares); Macke Limited
Partnership ($6,000 and warrants to purchase 514 shares); Norwest Equity
Partners V ($122,550 and warrants to purchase 10,504 shares); and St. Paul Fire
and Marine Insurance Co. ($835,150 and warrants to purchase 71,584 shares).
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
All holders of Common Stock issuable upon conversion of the preferred stock
or upon exercise of certain warrants have certain demand and incidental
registration rights covering such shares of Common Stock pursuant to the Amended
and Restated Registration Rights Agreement dated December 28, 1995, as amended,
among the Company and the other parties thereto. See "Description of
Securities-- Registration Rights--Amended and Restated Registration Rights
Agreement."
VOTING AGREEMENT AND STOCK RESTRICTION AGREEMENT
The Company and the purchasers of the preferred stock entered into a Voting
Agreement in connection with the purchase agreements under which the preferred
stock was purchased, pursuant to which Saint Paul Fire and Marine Insurance Co.,
Cherry Tree Ventures IV, Consumer Venture Partners, Apex Investment Fund, L.P.
and KCB BV, L.P. each were granted the right to designate one director to the
Board of Directors so long as each held at least 20% of the number of shares
originally purchased by such investor pursuant to the Series A Purchase
Agreement (in the case of Saint Paul Fire and Marine Insurance Co., Cherry Tree
Ventures IV and Consumer Venture Partners), Series B Purchase Agreement (in the
case of Apex Investment Fund, L.P.) or Series C Purchase Agreement (in the case
of KCB BV, L.P.). In connection with the Series D Purchase Agreement and the
Series E Purchase Agreement, related parties to Hambrecht & Quist LLC and
Marquette Venture Partners II, L.P., respectively, were granted a one-time right
to designate one director to the Board of Directors. All of the holders of the
preferred stock agreed to vote their shares of preferred stock and any other
shares of capital stock of the Company owned by such holder in favor of the
election of the persons designated by the respective shareholders. In addition,
in connection with the Series A Financing, the Company, the holders of the
Series A Preferred Stock and Robert A. Walker and JoAnn Walker (collectively,
the "Promoters") entered into a Stock Restriction Agreement. The Stock
Restriction Agreement was amended to include all subsequent purchasers of
preferred stock. Under this agreement, the Company, the holders of the preferred
stock and J.P. Poole had certain rights of first refusal to purchase and to
participate in any sales of shares of the Company's capital stock by the
Promoters. In addition, until the holders of the preferred stock recovered (by
sale or other disposition) their aggregate investment amount paid for all shares
of preferred stock purchased from the Company, the Promoters were prohibited
from selling more than 20% of their
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collective holdings of capital stock of the Company. The Stock Restriction
Agreement terminated on December 31, 1997, and the Voting Agreement will
terminate upon the consummation of this offering.
SEPARATION AGREEMENTS
On February 20, 1997, the Company entered into a Separation Agreement with
Mark L. de Naray, the former President and Chief Executive Officer and a former
director of the Company. On July 13, 1998, the Company entered into a Separation
Agreement with John D. Watson, the former Senior Vice President of Corporate
Marketing of the Company. For a discussion of these agreements, see
"Management-- Separation Agreements."
CONSULTING AGREEMENTS
In April 1996, the Company entered into a Consulting Agreement with Ervin R.
Shames, Chairman of the Board, pursuant to which Mr. Shames renders certain
consulting services to the Company. See "Management--Director Compensation" and
"--Employment and Consulting Agreements."
In July 1997, the Company entered into a Letter Agreement with Richard
Clayton, a former director of the Company, pursuant to which Mr. Clayton
rendered certain consulting services to the Company
through the end of March 1998 in connection with the establishment by the
Company of several leased departments within larger retail stores. Under the
Letter Agreement, Mr. Clayton received a consulting fee equal to $197,000 paid
in eight monthly installments and was granted an option to purchase 21,000
shares of Common Stock at an exercise price of $5.00 per share.
For a discussion of the employment agreements entered into by the Company
and certain Named Executive Officers, see "Management--Employment and Consulting
Agreements."
GE FINANCING AND RESTRUCTURING OF GE WARRANTS
On March 27, 1997, the Company entered into a Purchase Agreement (the "GE
Purchase Agreement") with General Electric Capital Corporation ("GECC"),
pursuant to which the Company issued to GECC a senior subordinated promissory
note in the principal amount of $15.0 million (the "GE Note"). Interest on the
GE Note accrues at a rate equal to 11% per year and is payable quarterly in
arrears. The outstanding principal on the GE Note is due on or before March 31,
2003. Under the terms of the GE Purchase Agreement, the Company is required to
comply with certain affirmative and financial covenants so long as the GE Note
remains outstanding, including without limitation, the delivery of certain
financial and business information and maintaining a minimum ratio of EBITDA to
fixed charges, a minimum ratio of total indebtedness to EBITDA and a minimum
consolidated net worth. In addition, the Company is required to comply with
certain negative covenants so long as the GE Note remains outstanding, including
without limitation, refraining from consummating certain acquisitions,
investments, and sales of Company assets, issuing additional shares of preferred
stock, incurring additional indebtedness and permitting liens on any of its
assets. The Company intends to repay the GE Note in full with a portion of the
net proceeds of this offering. See "Use of Proceeds."
In addition to the GE Note, the Company issued to GECC a Series A Warrant
(the "Series A Warrant") to purchase 1,650,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $7.00 and a Series B
Warrant (the "Series B Warrant") providing contingent rights to purchase up to
1,500,000 shares of Common Stock at an exercise price of $.007 after May 1,
1999, subject to adjustment and cancellation upon the occurrence of certain
events. Pursuant to an amendment to the GE Purchase Agreement effective as of
March 31, 1998, the Company and GECC restructured these warrants by combining
them into one Series A Warrant to purchase 1,964,374 shares of Common Stock at
an exercise price of $5.88. GECC has certain demand and incidental registration
rights covering the shares
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<PAGE>
of Common Stock issuable upon exercise of the new Series A Warrant. See
"Description of Securities-- Registration Rights--General Electric Warrant."
------------------------
All future transactions, including any loans from the Company to its
officers, directors, principal shareholders or affiliates, will be on terms no
less favorable to the Company than could be obtained from unaffiliated third
parties.
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<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information known to the Company with respect
to beneficial ownership of the Common Stock as of July 31, 1998 and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, for (i) each
Selling Shareholder, (ii) each person who is known by the Company to own
beneficially more than 5% of the Common Stock, (iii) each of the Named Executive
Officers, (iv) each of the Company's directors, and (v) all directors and
executive officers as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES BENEFICIALLY OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING(1)
------------------------- NUMBER OF SHARES -------------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- ------------------------------------------------ ------------ ----------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C>
St. Paul Venture Capital, Inc.(2)............... 7,699,719 33.6% %
Consumer Venture Partners(3).................... 3,355,669 14.7
Apex Investment Fund, L.P. and The Productivity
Fund II, L.P.(4).............................. 1,994,014 8.7
General Electric Capital Corporation(5)......... 1,964,374 7.9
Norwest Venture Capital(6)...................... 1,592,423 7.0
Cherry Tree Ventures IV Limited
Partnership(7)................................ 1,243,035 5.5
H. Robert Hawthorne(8).......................... 244,041 1.1
Mark L. de Naray(9)............................. 843,000 3.7
Daniel J. McAthie(10)........................... 208,354 *
Charles E. Dorsey(11)........................... 163,737 *
John D. Watson(12).............................. 84,366 *
Gregory T. Kliner(13)........................... 116,680 *
Ervin R. Shames(14)............................. 264,591 1.1
Thomas J. Albani................................ 56,392 *
Patrick A. Hopf(15)............................. 7,713,696 33.7
Christopher P. Kirchen(16)...................... 3,355,669 14.7
David T. Kollat(17)............................. 56,392 *
Kenneth A. Macke(18)............................ 134,000 *
Jean-Michel Valette(19)......................... 310,483 1.4
All directors and executive officers as a group
(12 persons)(20).............................. 12,701,013 53.9%
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as otherwise indicated, the persons named in the table, based on
information provided by such persons, have sole voting and sole investment
power with respect to all shares of Common Stock shown as beneficially owned
by them. Shares of Common Stock subject to options or warrants currently
exercisable or exercisable within 60 days of July 31, 1998 are deemed
outstanding for computing the percentage of the person or group holding such
options or warrants but are not deemed outstanding for computing the
percentage of any other person.
(2) Includes 7,135,510 shares held by St. Paul Fire and Marine Insurance Company
and 462,625 shares held by St. Paul Venture Capital IV, L.L.C. Includes
89,653 shares issuable upon exercise of outstanding warrants held by St.
Paul Fire and Marine Insurance Company and 11,931 shares issuable upon
exercise of outstanding warrants held by St. Paul Venture Capital IV, L.L.C.
St. Paul Venture Capital, Inc. is an affiliate of St. Paul Fire and Marine
Insurance Company and the manager of St. Paul Venture Capital IV, L.L.C.
Patrick A. Hopf, a director of the Company, is the Vice President of St.
Paul Fire and Marine Insurance Company and the managing director of St. Paul
Venture Capital IV, L.L.C. Does not include shares held of record by Mr.
Hopf. See note (14) below. The address of
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<PAGE>
St. Paul Venture Capital, Inc. is 8500 Normandale Lake Boulevard, Suite
1940, Bloomington, Minnesota 55437.
(3) Includes 411,468 shares held by Consumer Venture Partners I, L.P. and
2,944,201 shares held by Consumer Venture Partners II, L.P. Christopher P.
Kirchen, a director of the Company, is the general partner of Consumer
Venture Associates L.P., which is the general partner of Consumer Venture
Partners I, L.P. Mr. Kirchen is also the general partner of Consumer Venture
Associates II, L.P., which is the general partner of Consumer Venture
Partners II, L.P. Does not include any shares held of record by Mr. Kirchen.
See note (15) below. The address of Consumer Venture Partners is Three
Pickwick Plaza, Greenwich, Connecticut 06830.
(4) Includes 1,377,913 shares held of record by Apex Investment Fund, L.P.
("Apex") and 592,047 shares held of record by The Productivity Fund II, L.P.
("TPF"). Also includes 16,652 and 7,402 shares issuable upon exercise of
outstanding warrants held by Apex and TPF, respectively. First Analysis
Corporation is a general partner of each of the general partners of Apex and
TPF and may be deemed to be the beneficial owner of shares held by Apex and
TPF. First Analysis Corporation disclaims beneficial ownership of such
shares, except to the extent of its pecuniary interest therein. James A.
Johnson, George M. Middlemas and Paul J. Renze, by virtue of their
affiliation with Apex, may be deemed to be the beneficial owner of shares
held by Apex; however, they disclaim beneficial ownership of such shares,
except to the extent of their individual pecuniary interest therein. Bret R.
Maxwell, by virtue of his affiliation with TPF, may be deemed to be the
beneficial owner of shares held by TPF; however, he disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest
therein. The address of Apex and TPF is 233 South Wacker Drive, Suite 9500,
Chicago, Illinois 60606.
(5) Includes 1,950,000 shares issuable upon exercise of outstanding warrants.
The address of General Electric Capital Corporation is 260 Long Ridge Road,
Stamford, Connecticut 06927.
(6) Includes 1,045,579 shares held by Norwest Equity Partners IV and 459,195
shares held by Norwest Equity Partners V. Also includes 87,649 shares
issuable upon exercise of outstanding warrants held by Norwest Equity
Partners V. Itasca Partners is the general partner of Norwest Equity
Partners IV and may be deemed to be the beneficial owner of shares held by
Norwest Equity Partners IV. Itasca Partners V is the general partner of
Norwest Equity Partners V and may be deemed to be the beneficial owner of
shares held by Norwest Equity Partners V. Daniel J. Haggerty, by virtue of
his affiliation with Norwest Equity Partners IV and Norwest Equity Partners
V, may be deemed to be the beneficial owner of shares held by Norwest Equity
Partners IV and Norwest Equity Partners V; however he disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest
therein. Robert F. Zicarelli, by virtue of his affiliation with Norwest
Equity Partners IV, may be deemed to be the beneficial owner of shares held
by Norwest Equity Partners IV; however he disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest therein. John E.
Lindahl and George J. Still, Jr., by virtue of their affiliation with
Norwest Equity Partners V, each may be deemed to be the beneficial owner of
shares held by Norwest Equity Partners V; however they disclaim beneficial
ownership of such shares, except to the extent of their pecuniary interest
therein. The address of Norwest Venture Capital and the other named
individuals is 2800 Piper Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402.
(7) The address of Cherry Tree Ventures IV Limited Partnership is 1400 Northland
Plaza, 3800 West 80th Street, Minneapolis, Minnesota 55431.
(8) Includes 76,041 shares issuable upon exercise of outstanding options. Also
includes 18,000 shares held by Mr. Hawthorne's children, as to which Mr.
Hawthorne disclaims any beneficial interest.
(9) Includes 55,500 shares held by Mr. de Naray's spouse and children, as to
which Mr. de Naray disclaims any beneficial ownership.
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<PAGE>
(10) Includes 79,350 shares issuable upon exercise of outstanding options and
6,000 shares issuable upon exercise of outstanding warrants. Also includes
43,645 shares held by Mr. McAthie's spouse, as to which Mr. McAthie shares
voting and investment power.
(11) Includes 5,103 shares issuable upon exercise of outstanding options. Also
includes 148,734 shares jointly held by Mr. Dorsey and his spouse and an
aggregate of 7,500 held by Mr. Dorsey's children, as to which Mr. Dorsey
disclaims any beneficial interest.
(12) Includes 7,083 shares issuable upon exercise of outstanding options.
(13) Includes 116,680 shares issuable upon exercise of outstanding options.
(14) Includes 86,091 shares issuable upon exercise of outstanding options held
by Mr. Shames and 150,000 shares issuable upon exercise of outstanding
options held by Louise G. Shames, Trustee of the Ervin R. Shames Estate
Reduction Family Trust U/A dated October 30, 1997.
(15) Includes 285 shares issuable upon exercise of outstanding warrants. Also
includes an aggregate of 1,692 shares held by Mr. Hopf's spouse and
children, as to which Mr. Hopf disclaims any beneficial ownership. Also
include shares beneficially owned by St. Paul Fire and Marine Insurance
Company and St. Paul Venture Capital IV, L.L.C., as to which shares Mr. Hopf
disclaims any beneficial ownership except to the extent of his pecuniary
interests therein. Mr. Hopf has the same business address as St. Paul
Venture Capital. See note (2) above.
(16) Includes shares beneficially owned by Consumer Venture Partners I, L.P. and
Consumer Venture Partners II, L.P., as to which shares Mr. Kirchen disclaims
any beneficial ownership except to the extent of his pecuniary interests
therein. Mr. Kirchen has the same business address as Consumer Venture
Partners. See note (3) above.
(17) Includes 56,250 shares issuable upon exercise of outstanding options.
(18) Includes 18,750 shares issuable upon exercise of outstanding options. Also
includes 111,166 shares held by Macke Limited Partnership and 4,084 shares
issuable upon exercise of outstanding warrants held by Macke Limited
Partnership, of which Mr. Macke is the general partner, and as to which
shares Mr. Macke disclaims any beneficial ownership except to the extent of
his pecuniary interests therein.
(19) Includes 300,594 shares held by H&Q Select Comfort Investors, L.P., a
related party to Hambrecht & Quist LLC. Also includes 8,910 shares issuable
upon exercise of outstanding warrants held by H&Q Select Comfort Investors,
L.P. Mr. Valette by virtue of his affiliation with H&Q Select Comfort
Investors, L.P. may be deemed to be the beneficial owner of such shares;
however, he disclaims beneficial ownership of such shares, except to the
extent of his pecuniary interest therein.
(20) Includes an aggregate of 786,106 shares issuable upon exercise of
outstanding options and warrants held by officers, directors and their
affiliates. Also includes all shares beneficially owned by St. Paul Venture
Capital, Inc. and Consumer Venture Partners. See notes (2) and (3) above.
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DESCRIPTION OF CAPITAL STOCK
Assuming the conversion of all outstanding shares of preferred stock into
Common Stock and the filing of the Articles upon completion of this offering,
the authorized capital stock of the Company will consist of 95,000,000 shares of
Common Stock and 5,000,000 shares of Undesignated Preferred Stock. The following
summary of the terms and provisions of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Articles and applicable law.
COMMON STOCK
As of July 31, 1998, there were 22,799,365 shares of Common Stock issued and
outstanding, held of record by 171 shareholders. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of shareholders, and are not entitled to cumulate votes. Subject to
preferences that may be applicable to any outstanding shares of Undesignated
Preferred Stock, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. Upon liquidation, dissolution or winding up of the Company,
the holders of Common Stock are entitled to share ratably in all assets that are
legally available for distribution after payment of all debts and other
liabilities and subject to the prior rights of any holders of the outstanding
shares of Undesignated Preferred Stock. The holders of Common Stock have no
preemptive, subscription, redemption, sinking fund or conversion rights. All
outstanding shares of Common Stock are fully paid and nonassessable, and the
shares of Common Stock to be issued upon completion of this offering will be
fully paid and nonassessable.
UNDESIGNATED PREFERRED STOCK
As of the date of this Prospectus, no shares of Undesignated Preferred Stock
were issued and outstanding. Under Minnesota law, no action by the Company's
shareholders is necessary, and only action by the Board of Directors is
required, to authorize the issuance of any of the shares of Undesignated
Preferred Stock. Subject to certain limitations, the Board of Directors is
empowered to establish, and to designate the name of each class or series of the
shares of Undesignated Preferred Stock and to set the terms of such shares
(including terms with respect to redemption, sinking fund, dividend,
liquidation, preemptive conversion and voting rights and preferences). The Board
of Directors can issue shares of such class or series to, among other
individuals, the holders of another class or series of Undesignated Preferred
Stock or to the holders of the Common Stock. Accordingly, the Board of
Directors, without shareholder approval, could issue Undesignated Preferred
Stock with dividend, voting and conversion rights which could adversely affect
the rights of the holders of Common Stock. The Undesignated Preferred Stock may
have the effect of discouraging an attempt, through acquisition of a substantial
number of shares of the Common Stock, to acquire control of the Company with a
view to effecting a merger, sale or exchange of assets or a similar transaction.
The Company has no present plans to issue Undesignated Preferred Stock.
OPTIONS AND WARRANTS
As of July 31, 1998, the Company had outstanding options to purchase an
aggregate of 2,616,115 shares of Common Stock at a weighted average exercise
price of $4.09 per share and warrants to purchase an aggregate of 2,384,920
shares of Common Stock at a weighted average exercise price of $5.52 per share.
All outstanding options and warrants provide for antidilution adjustments in the
event of certain mergers, consolidations, reorganizations, recapitalizations,
stock dividends, stock splits or other changes in the corporate structure of the
Company. Certain of the outstanding warrants provide for antidilution
adjustments if the Company sells any shares of capital stock or securities
exercisable for or convertible into shares of capital stock for less than $3.50
per share. Holders of the outstanding warrants have certain demand and
incidental registration rights with respect to the shares issuable upon exercise
of the warrants. See "--Registration Rights."
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<PAGE>
REGISTRATION RIGHTS
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
The holders of 18,382,813 shares of Common Stock and warrants to purchase an
aggregate of 2,328,799 shares of Common Stock (the "Registrable Securities") or
their transferees are entitled to certain rights with respect to the
registration of such shares under the Securities Act pursuant to the terms of
the Amended and Restated Registration Rights Agreement, dated as of December 28,
1995, as amended (the "Registration Rights Agreement"), among the Company and
the holders of Registrable Securities. If at any time the holders of specified
amounts of Registrable Securities request that the Company file a registration
statement covering the Registrable Securities, the Company will use its best
efforts to cause such securities to be registered. The Company is not required
to file more than two registration statements, other than on Form S-2 or Form
S-3, pursuant to such demand rights, or more than one registration statement,
other than on Form S-2 or Form S-3, in any twelve-month period. The holders of
specified amounts of Registrable Securities also have the right to require the
Company to file a registration statement on Form S-2 or Form S-3 an unlimited
number of times, provided that the Company is not required to register any
Registrable Securities which are freely transferable under the provisions of
Rule 144(k) under the Securities Act. In addition, the holders of Registrable
Securities are entitled to have Registrable Securities included in a
registration statement filed on behalf of the Company provided that the Company
is not required to include any Registrable Securities which are freely
transferable under the provisions of Rule 144(k) under the Securities Act. In
any underwritten public offering, the foregoing registration rights are limited
to the extent that the managing underwriter has the right (i) to limit the
number of Registrable Securities to be included in the registration statement,
(ii) to prohibit the sale of any securities of the Company other than those
registered and included in the underwritten offering for a period of 180 days,
and (iii) to require holders of Registrable Securities not to sell, make any
short sale of, loan, grant any option for the purchase of, or otherwise dispose
of any securities of the Company (other than the securities included in the
registration) without the prior written consent of such underwriters for a
period up to 180 days from the effective date of such registration. The Company
will bear the expenses of registration of any of the Registrable Securities,
except for any underwritten discounts and commissions which will be borne by the
participating shareholders in proportion to the number of shares sold and except
for any expenses incurred in connection with a registration statement on Form
S-2 or Form S-3 filed at the request of holders of Registrable Securities the
minimum offering of which is less than $1.0 million. The registration rights
granted under the Registration Rights Agreement terminate as to any Registrable
Securities when such Registrable Securities have been effectively registered and
sold by the holder thereof or when such Registrable Securities have been sold
pursuant to Rule 144 under the Securities Act. The foregoing registration rights
have been waived with respect to this offering.
GENERAL ELECTRIC WARRANT
General Electric Capital Corporation ("GECC") possesses certain rights to
register of up to 1,964,374 shares of Common Stock (the "GE Registrable
Securities") issuable upon exercise of a warrant granted in connection with the
Company's March 1997 debt financing. Commencing six months following the
consummation of this offering (assuming this offering constitutes a Qualified
IPO, as defined below), holders of an aggregate of 30% or more of the GE
Registrable Securities or holders of GE Registrable Securities having a minimum
anticipated aggregate offering price of at least $5.0 million, may request that
the Company register the GE Registrable Securities under the Securities Act,
subject to the limitations below. A "Qualified IPO" means a sale of the
Company's Common Stock pursuant to an initial public offering registered under
the Securities Act which yields net proceeds to the Company (after underwriting
discounts and commissions) of at least $20.0 million and which results in a
post-offering valuation of the Company's total equity of at least $200.0 million
based on the per share offering price and the number of issued and outstanding
shares of the Company's Common Stock. The Company is not required to file more
than two registration statements pursuant to such demand rights unless the
Company is eligible to file a
60
<PAGE>
registration statement on Form S-3 in which event such holders are entitled to
an unlimited number of such registrations. In addition, the holders of GE
Registrable Securities are entitled to have GE Registrable Securities included
in a registration statement filed on behalf of the Company (other than a
registration statement on Form S-4 and Form S-8); provided, that the Company is
not required to include any GE Registrable Securities which are transferable
without registration under the Securities Act. The Company is not required to
register GE Registrable Securities pursuant to a holder's demand right, if the
Company has had a registration statement under which such holder had a right to
have its GE Registrable Securities included pursuant to its demand and
incidental rights declared effective within one year prior to the date of the
request pursuant to its demand rights; provided, however, that if any holder
elected to have GE Registrable Securities included under such registration
statement but some or all of such securities were excluded pursuant to
underwriter's advice, then such one-year period is reduced to six months. The
Company will bear the expenses of registration of any of the GE Registrable
Securities, except for any fees, discounts or commissions to any underwriter or
any fees or disbursements of counsel for any underwriter and all expenses
incurred in connection with any amendment or supplement to the registration
statement or prospectus filed more than 180 days after the effective date of
such registration statement because any holder of GE Registrable Securities has
not sold such GE Registrable Securities requested to be registered. Such
registration rights terminate when such GE Registrable Securities have been
effectively registered under the Securities Act and sold or when the Company has
received an opinion of counsel that such shares may be transferred without
registration under the Securities Act.
PROVISIONS WITH POTENTIAL ANTI-TAKEOVER EFFECT
The Company is subject to the provisions of Sections 302A.671 and 302A.673
of the Minnesota Business Corporation Act. These anti-takeover provisions may
eventually operate to deny shareholders the receipt of a premium on their Common
Stock and may also have a depressive effect on the market price of the Company's
Common Stock. In general, Section 302A.671 provides that the shares of a
corporation acquired in a "control share acquisition" have no voting rights
unless voting rights are approved by the shareholders in a prescribed manner. A
"control share acquisition" is defined as an acquisition of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. Section 302A.673 prohibits a public
corporation from engaging in a "business combination" with an "interested
shareholder" for a period of four years after the date of the transaction in
which the person became an interested shareholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions. An "interested
shareholder" is a person who is the beneficial owner, of 10% or more of the
corporation's voting stock. Reference is made to the detailed terms of Sections
302A.671 and 302A.673 of the Minnesota Business Corporation Act.
The Company's Articles provide for a classified Board of Directors serving
staggered terms of three years. In addition, shareholders are not entitled to
cumulative voting in the election of directors and may not remove a director
without cause. The Articles also require the approval of two-thirds of the
outstanding voting power of the Company entitled to vote in the event of any
sale or merger of the Company. The authorization of Undesignated Preferred Stock
makes it possible for the Board of Directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of the Company. The foregoing provisions of the
Company's Articles and the Minnesota Business Corporation Act may have the
effect of deterring hostile takeovers or delaying changes in control of
management of the Company.
LIMITATION ON LIABILITY OF DIRECTORS AND INDEMNIFICATION
The Company's Articles limit the liability of its directors to the fullest
extent permitted by the Minnesota Business Corporation Act. Specifically,
directors of the Company will not be personally liable
61
<PAGE>
for monetary damages for breach of fiduciary duty as directors, except liability
for (i) any breach of the duty of loyalty to the Company or its shareholders,
(ii) acts or omissions not in good faith or that involve intentional misconduct
or a knowing violation of law, (iii) dividends or other distributions of
corporate assets that are in contravention of certain statutory or contractual
restrictions, (iv) violations of certain Minnesota securities laws, or (v) any
transaction from which the director derives an improper personal benefit.
Liability under federal securities law is not limited by the Restated Articles.
The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.
The Minnesota Business Corporation Act requires that the Company indemnify
any director, officer or employee made or threatened to be made a party to a
proceeding, by reason of the former or present official capacity of the person,
against judgments, penalties, fines, settlements and reasonable expenses
incurred in connection with the proceeding if certain statutory standards are
met. "Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including a derivative
action in the name of the Company. Reference is made to the detailed terms of
the Minnesota indemnification statute, Section 302A.521 of the Minnesota
Business Corporation Act, for a complete statement of such indemnification
rights. The Company's Articles also require the Company to provide
indemnification to the fullest extent of the Minnesota indemnification statute.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company is aware 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.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this offering, the Company will have shares
of Common Stock outstanding, assuming no exercise of options or warrants after
July 31, 1998. Of these shares, the shares sold in this offering will be
freely tradable without restriction under the Securities Act, unless purchased
by an "affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining shares of Common Stock held by existing
shareholders are "restricted securities" as defined in Rule 144 and may be sold
in the public market only if registered, or pursuant to an exemption from
registration such as Rule 144, 144(k) or 701 under the Securities Act. Holders
of an aggregate of shares of Common Stock, have entered into lock-up
agreements under which they have agreed that they will not, without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of,
any shares of Common Stock, options or warrants to acquire shares of Common
Stock or securities exchangeable for or convertible into shares of Common Stock
owned by them during the 180-day period following the date of this Prospectus.
Hambrecht & Quist LLC may, in its sole discretion at any time without notice,
release any portion of the shares subject to the lock-up agreements during the
180-day period. Upon expiration of these agreements, shares of Common
Stock will be eligible for immediate resale in the public market subject to the
limitations of Rule 144. Of such shares, approximately will be eligible
for resale in the public market pursuant to Rule 144(k) without regard to the
volume and manner of sale limitations in Rule 144. Of the shares not
subject to lock-up agreements, shares will be eligible for immediate
resale in the public market pursuant to Rule 144(k) and the remainder will be
eligible for resale in the public market subject to the limitations of Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year, within any three-month period commencing 90 days
after the date of this Prospectus, may sell a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately shares immediately after this offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are generally subject
to certain manner of sale provisions and notice requirements and to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company 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, is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the Securities
Act, persons who purchase shares upon exercise of options granted prior to the
effective date of this offering are entitled to sell such shares 90 days after
the effective date of this offering in reliance on Rule 144, without having to
comply with the holding period requirements of Rule 144 and, in the case of
non-affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144.
As of July 31, 1998, options to purchase 2,616,115 shares of Common Stock
were outstanding under the Company's option plans. The Company expects to grant
options to purchase an aggregate of shares of Common Stock in connection
with this offering. Options covering an aggregate of shares are subject
to the lock-up agreements described above. Approximately 30 days after the
completion of this offering, the Company intends to file Registration Statements
on Form S-8 covering shares issuable under the Company's 1990 Omnibus Stock
Option Plan and 1997 Stock Incentive Plan (including shares subject to then
outstanding options), thus permitting the resale of such shares in the public
market without restrictions under the Securities Act after expiration of the
applicable lock-up agreements. In addition, as of July 31, 1998, warrants to
purchase 2,384,919 shares of Common Stock were outstanding.
A total of of the shares outstanding immediately following the
completion of this offering and the holders of warrants to purchase
shares of Common Stock will be entitled to registration
63
<PAGE>
rights with respect to such shares. The number of shares sold in the public
market could increase if such rights are exercisable.
Because there has been no public market for shares of the Company's Common
Stock, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, through their Representatives, Hambrecht & Quist LLC,
BancBoston Robertson Stephens Inc. and Piper Jaffray Inc. have severally agreed
to purchase from the Company and the Selling Shareholders the following
respective number of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
- ---------------------------------------------------------------------------------- -----------
<S> <C>
Hambrecht & Quist LLC.............................................................
BancBoston Robertson Stephens Inc.................................................
Piper Jaffray Inc.................................................................
-----------
Total.........................................................................
-----------
-----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriters' obligation is such that they are
committed to purchase all shares of Common Stock offered hereby if any of such
shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow a
concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives of the Underwriters. The
Representatives have informed the Company that the Underwriters do not intend to
confirm discretionary sales in excess of 5% of the Common Stock offered hereby.
The Company and certain of the Selling Shareholders have granted to the
Underwriters an option, exercisable no later than 30 days after the date of this
Prospectus, to purchase up to additional shares of Common Stock at the
initial public offering price, less the underwriting discount, set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise this
option, each of the Underwriters will have a firm commitment to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. The Company and such Selling
Shareholders will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares are offered by the several Underwriters subject
to prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
The Selling Shareholders and certain other shareholders of the Company,
including the executive officers and directors, who will own in the aggregate
shares of Common Stock after the offering,
65
<PAGE>
have agreed that they will not, without the prior written consent of Hambrecht &
Quist LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities exchangeable
for or convertible into shares of Common Stock owned by them during the 180-day
period following the date of this Prospectus. The Company has agreed that it
will not, without the prior written consent of Hambrecht & Quist LLC, offer,
sell or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the 180-day period following the date of this
Prospectus, except that the Company may issue shares upon the exercise of
options and warrants granted prior to the date hereof, and may grant additional
options under its stock option plans, subject to the 180-day period described
above.
Prior to the offering, there has been no public market for the Common Stock.
The initial public offering price for the Common Stock will be determined by
negotiation among the Company, the Selling Shareholders and the Representatives.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company's business operations, the Company's management and other factors
deemed relevant. The estimated initial public offering price range set forth on
the cover of this preliminary prospectus is subject to change as a result of
market conditions and other factors.
Certain persons participating in the offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market, including by entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. A stabilizing bid means the placing of
any bid or effecting of any purchase, for the purpose of pegging, fixing or
maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. A penalty bid means an arrangement that permits the Underwriters
to reclaim a selling concession from a syndicate member in connection with the
offering when shares of Common Stock sold by the syndicate member are purchased
in syndicate covering transactions. Such transactions may be effected on the
Nasdaq National Market, in the over-the-counter market, or otherwise. Such
stabilizing, if commenced, may be discounted at any time.
H&Q Select Comfort Investors, L.P. and H&Q London Ventures, related parties
to Hambrecht & Quist LLC, one of the Representatives, own in the aggregate
602,167 shares of the Company's Common Stock and warrants to purchase an
aggregate of 17,820 shares of the Company's Company's Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota. Mark A.
Kimball, a partner in the law firm of Oppenheimer Wolff & Donnelly LLP,
beneficially owns 1,500 shares of Common Stock. Orrick, Herrington & Sutcliffe
LLP, San Francisco, California will pass upon certain legal matters for the
Underwriters.
EXPERTS
The consolidated financial statements of Select Comfort Corporation as of
December 28, 1996 and January 3, 1998, and for each of the years in the
three-year period ended January 3, 1998 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
66
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified in
all respects by such reference. A copy of the Registration Statement and the
exhibits and schedules thereto may be inspected without charge at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington D.C. 20549, and at the Commission's regional offices at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of all or any part of the
Registration Statement may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements, and other information that has been
or will be filed by the Company.
The Company intends to furnish holders of the Common Stock with annual
reports containing audited financial statements certified by independent
auditors, and quarterly reports for each of the first three quarters of each
year containing unaudited financial information.
67
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Pro Forma Consolidated Financial Statements................................................................ F-2
Pro Forma Consolidated Statement of Operations for the year ended January 3, 1998 (unaudited)............ F-2
Pro Forma Consolidated Statements of Operations for the six months ended June 28, 1997 and July 4, 1998
(unaudited)............................................................................................ F-3
Pro Forma Consolidated Balance Sheet as of July 4, 1998 (unaudited)...................................... F-4
Consolidated Financial Statements.......................................................................... F-5
Report of Independent Auditors........................................................................... F-5
Consolidated Balance Sheets as of December 28, 1996 and January 3, 1998 and July 4, 1998 (unaudited)..... F-6
Consolidated Statements of Operations for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the six months ended June 28, 1997 and July 4, 1998 (unaudited).................... F-7
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 30, 1995, December
28, 1996 and January 3, 1998 and the six months ended July 4, 1998 (unaudited)......................... F-8
Consolidated Statements of Cash Flows for the years ended December 30, 1995, December 28, 1996 and
January 3, 1998 and the six months ended June 28, 1997 and July 4, 1998 (unaudited).................... F-9
Notes to Consolidated Financial Statements............................................................... F-10
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The pro forma consolidated statements of operations data set forth below for
the year ended January 3, 1998 and for the six months ended June 28, 1997 and
July 4, 1998 give effect to the offering as if it had occurred at the beginning
of each period presented. The pro forma adjustments are based upon currently
available information and certain assumptions that management of the Company
believes are reasonable under the circumstances.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JANUARY 3, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 3, 1998
-----------------------------------
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------
<S> <C> <C> <C>
Net sales.................................................................. $ 184,430 $ -- $ 184,430
Cost of sales.............................................................. 66,629 -- 66,629
---------- ----------- ----------
Gross margin........................................................... 117,801 -- 117,801
---------- ----------- ----------
Operating expenses:
Sales and marketing...................................................... 99,218 -- 99,218
General and administrative............................................... 16,505 -- 16,505
---------- ----------- ----------
Total operating expenses............................................... 115,723 -- 115,723
---------- ----------- ----------
Operating income........................................................... 2,078 -- 2,078
---------- ----------- ----------
Other income (expense):
Interest income.......................................................... 682 -- 682
Interest expense......................................................... (5,234) 3,250(1) (1,984)
Other, net............................................................... (231) -- (231)
---------- ----------- ----------
Other income (expense), net............................................ (4,783) 3,250 (1,533)
---------- ----------- ----------
Income (loss) before income taxes.......................................... (2,705) 3,250 545
Income tax expense......................................................... 141 -- 141
---------- ----------- ----------
Net income (loss).......................................................... $ (2,846) $ 3,250 $ 404
---------- ----------- ----------
---------- ----------- ----------
Net income (loss) per common share, diluted................................ $ (0.99) $ 0.02
---------- ----------
---------- ----------
Weighted average common shares, diluted.................................... 3,798 19,434(2) 23,232
</TABLE>
- ------------------------
(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of the offering.
(2) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering and the dilutive
effect of outstanding options and warrants.
F-2
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 28, 1997 JULY 4, 1998
------------------------------------- -----------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................... $ 82,077 $ -- $ 82,077 $ 118,800 $ -- $ 118,800
Cost of sales....................... 28,995 -- 28,995 41,546 -- 41,546
----------- ----------- ----------- ---------- ----------- ----------
Gross margin...................... 53,082 -- 53,082 77,254 -- 77,254
----------- ----------- ----------- ---------- ----------- ----------
Operating expenses:
Sales and marketing............... 43,736 -- 43,736 63,955 -- 63,955
General and administrative........ 8,089 -- 8,089 8,596 -- 8,596
----------- ----------- ----------- ---------- ----------- ----------
Total operating expenses........ 51,825 -- 51,825 72,551 -- 72,551
----------- ----------- ----------- ---------- ----------- ----------
Operating income.................... 1,257 -- 1,257 4,703 -- 4,703
----------- ----------- ----------- ---------- ----------- ----------
Other income (expense):
Interest income................... 246 -- 246 381 -- 381
Interest expense.................. (1,816) 1,070(1) (746) (2,736) 1,540(1) (1,196)
Other, net........................ (284) -- (284) -- -- --
----------- ----------- ----------- ---------- ----------- ----------
Other income (expense), net..... (1,854) 1,070 (784) (2,355) 1,540 (815)
----------- ----------- ----------- ---------- ----------- ----------
Income (loss) before income taxes... (597) 1,070 473 2,348 1,540 3,888
Income tax expense.................. 12 -- 12 1,101 -- 1,101
----------- ----------- ----------- ---------- ----------- ----------
Net income (loss)................... $ (609) $ 1,070 $ 461 $ 1,247 $ 1,540 $ 2,787
----------- ----------- ----------- ---------- ----------- ----------
----------- ----------- ----------- ---------- ----------- ----------
Net income (loss) per common share,
diluted........................... $ (0.29) $ 0.02 $ 0.04 $ 0.12
----------- ----------- ----------- ---------- ----------- ----------
----------- ----------- ----------- ---------- ----------- ----------
Weighted average common shares,
diluted........................... 3,636 19,117(2) 22,753 22,747 1,277(2) 24,024
</TABLE>
- ------------------------
(1) Includes a pro forma adjustment for the elimination of non-cash interest
expense associated with a put warrant, the put feature of which will be
terminated upon the consummation of the offering.
(2) Gives effect to the conversion of all outstanding shares of preferred stock
into Common Stock upon the consummation of this offering and the dilutive
effect of outstanding options and warrants.
F-3
<PAGE>
The pro forma consolidated balance sheet data set forth below at July 4,
1998 gives effect to the offering as if it had occurred on July 4, 1998. The pro
forma adjustments are based upon currently available information and certain
assumptions that management of the Company believes are reasonable under current
circumstances.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
JULY 4, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 8,732
Accounts receivable, net................................................... 8,352
Inventories................................................................ 9,846
Prepaid expenses........................................................... 3,690
----------- ----------- -----------
Total current assets................................................... 30,620
----------- ----------- -----------
Property and equipment, net.................................................. 26,871
Other assets................................................................. 1,308
----------- ----------- -----------
Total assets........................................................... $ 58,799
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt....................................... $ 1,053
Accounts payable........................................................... 10,696
Accruals:
Sales returns............................................................ 5,327
Warranty costs........................................................... 3,739
Compensation, taxes and benefits......................................... 2,872
Other.................................................................... 4,290
----------- ----------- -----------
Total current liabilities.............................................. 27,977
Long-term debt, less current maturities...................................... 20,712
Other liabilities............................................................ 1,528
----------- ----------- -----------
Total liabilities...................................................... 50,217
----------- ----------- -----------
Series A-E mandatorily redeemable preferred stock, $1.00--$1.25 par value;
12,091,962 and shares issued and outstanding, respectively......... 12,692
Additional paid-in capital................................................... 14,920
----------- ----------- -----------
27,612
----------- ----------- -----------
Common shareholders' equity (deficit):
Undesignated preferred stock; no shares issued and outstanding............. --
Common stock, $.01 par value; 4,339,182 and issued and outstanding,
respectively............................................................. 43
Additional paid-in capital................................................. 2,959
Warrants................................................................... --
Accumulated deficit........................................................ (21,060)
Notes receivable--investors................................................ (972)
----------- ----------- -----------
Total common shareholders' equity (deficit)............................ (19,030)
----------- ----------- -----------
Total liabilities and shareholders' equity............................. $ 58,799
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
- ------------------------------
(1) As adjusted to give effect to the reclassification of a put warrant from
debt to common shareholders' equity upon the consummation of the offering.
(2) Reflects automatic conversion of preferred stock to common stock upon the
consummation of the offering.
(3) Reflects the net proceeds from the issuance of shares at an assumed
initial public offering price of $ per share.
(4) Reflects repayment of the Company's March 1997 $15.0 million indebtedness,
and the expensing of certain deferred costs associated therewith, and
related tax effects.
F-4
<PAGE>
When the transaction referred to in Note 16 of the Notes to the Consolidated
Financial Statements has been consummated, we will be in the position to render
the following report:
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Select Comfort Corporation:
We have audited the accompanying consolidated balance sheets of Select
Comfort Corporation and subsidiaries (the Company) as of December 28, 1996 and
January 3, 1998, and the related consolidated statements of operations,
shareholders' equity (deficit), and cash flows for each of the years in the
three-year period ended January 3, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Select
Comfort Corporation and subsidiaries as of December 28, 1996 and January 3,
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended January 3, 1998 in conformity with
generally accepted accounting principles.
Minneapolis, Minnesota
February 13, 1998,
except as to Notes 7, 8 and 9,
which are as of August 26, 1998
and Note 16, which is as of
November , 1998
F-5
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 28, 1996, JANUARY 3, 1998 AND JULY 4, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1997
---------- ---------- JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 2,422 $ 12,670 $ 8,732
Accounts receivable, net of allowance for doubtful accounts of $200,
$1,901, and $2,504, respectively (note 2)................................ 1,202 6,001 8,352
Inventories (note 3)....................................................... 5,582 7,749 9,846
Prepaid expenses........................................................... 1,689 4,256 3,690
---------- ---------- -----------
Total current assets................................................... 10,895 30,676 30,620
Property and equipment, net (note 4)......................................... 18,316 25,183 26,871
Other assets................................................................. 583 1,382 1,308
---------- ---------- -----------
Total assets........................................................... $ 29,794 $ 57,241 $ 58,799
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to investors (note 6)........................................ $ 1,252 $ -- $ --
Current maturities of long-term debt (note 7).............................. 563 999 1,053
Accounts payable........................................................... 9,173 12,470 10,696
Accruals:
Sales returns............................................................ 2,795 5,324 5,327
Warranty costs........................................................... 2,036 3,257 3,739
Compensation, taxes and benefits......................................... 1,723 3,149 2,872
Other.................................................................... 1,162 4,720 4,290
---------- ---------- -----------
Total current liabilities.............................................. 18,704 29,919 27,977
Long-term debt, less current maturities (note 7)............................. 1,162 19,511 20,712
Other liabilities............................................................ 532 1,237 1,528
---------- ---------- -----------
Total liabilities...................................................... 20,398 50,667 50,217
---------- ---------- -----------
Series A-E mandatorily redeemable preferred stock, $1.00-$1.25 par value;
12,123,390 shares authorized, 12,091,962 shares issued and outstanding
(note 8)................................................................... 12,692 12,692 12,692
Additional paid-in capital................................................... 14,920 14,920 14,920
---------- ---------- -----------
27,612 27,612 27,612
---------- ---------- -----------
Common shareholders' equity (deficit) (note 9):
Undesignated preferred stock; 5,000,000 shares authorized, no shares issued
and outstanding.......................................................... -- -- --
Common stock, $.01 par value; 95,000,000 shares authorized, 2,770,719 and
3,716,490 and 4,339,182 shares issued and outstanding, respectively...... 28 37 43
Additional paid-in capital................................................. 1,217 1,650 2,959
Accumulated deficit........................................................ (19,461) (22,307) (21,060)
Notes receivable--investors (note 14)...................................... -- (418) (972)
---------- ---------- -----------
Total common shareholders' equity (deficit)............................ (18,216) (21,038) (19,030)
---------- ---------- -----------
Commitments (notes 5, 7 and 15)
Total liabilities and shareholders' equity............................. $ 29,794 $ 57,241 $ 58,799
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996
AND JANUARY 3, 1998 AND SIX MONTHS
ENDED JUNE 28, 1997 AND JULY 4, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
JUNE 28, JULY 4,
1995 1996 1997 1997 1998
--------- ---------- ---------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................................. $ 68,629 $ 102,028 $ 184,430 $ 82,077 $ 118,800
Cost of sales.......................................... 28,833 38,521 66,629 28,995 41,546
--------- ---------- ---------- --------- ----------
Gross margin......................................... 39,796 63,507 117,801 53,082 77,254
--------- ---------- ---------- --------- ----------
Operating expenses:
Sales and marketing.................................. 34,164 54,814 99,218 43,736 63,955
General and administrative........................... 10,221 12,457 16,505 8,089 8,596
--------- ---------- ---------- --------- ----------
Total operating expenses......................... 44,385 67,271 115,723 51,825 72,551
--------- ---------- ---------- --------- ----------
Operating income (loss)................................ (4,589) (3,764) 2,078 1,257 4,703
--------- ---------- ---------- --------- ----------
Other income (expense):
Interest income...................................... 136 244 682 246 381
Interest expense (note 7)............................ (34) (88) (5,234) (1,816) (2,736)
Other, net........................................... (73) (77) (231) (284) --
--------- ---------- ---------- --------- ----------
Other income (expense), net...................... 29 79 (4,783) (1,854) (2,355)
--------- ---------- ---------- --------- ----------
Income (loss) before income taxes...................... (4,560) (3,685) (2,705) (597) 2,348
Income tax expense (note 10)........................... -- -- 141 12 1,101
--------- ---------- ---------- --------- ----------
Net income (loss)...................................... $ (4,560) $ (3,685) $ (2,846) $ (609) $ 1,247
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Net income (loss) per common share (note 11)
Basic................................................ $ (2.11) $ (1.74) $ (1.06) $ (0.31) $ 0.20
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
Diluted.............................................. $ (1.87) $ (1.58) $ (0.99) $ (0.29) $ 0.04
--------- ---------- ---------- --------- ----------
--------- ---------- ---------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND SIX MONTHS ENDED JULY 4, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON SHAREHOLDERS' EQUITY
(DEFICIT)
MANDATORILY REDEEMABLE -----------------------------------
PREFERRED STOCK ADDITIONAL COMMON STOCK ADDITIONAL
---------------------- PAID-IN ---------------------- PAID-IN
SHARES AMOUNT CAPITAL TOTAL SHARES AMOUNT CAPITAL
--------- ----------- ----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994............ 11,234,819 $ 11,835 $ 6,834 $ 18,669 2,022,869 $ 20 $ 604
Exercise of common stock options...... -- -- -- -- 279,229 3 120
Conversion of subordinated
debenture........................... -- -- -- -- 78,114 1 249
Issuance of Series E preferred
stock............................... 857,143 857 8,099 8,956 -- -- --
Net loss.............................. -- -- -- -- -- -- --
--------- ----------- ----------- --------- --------- ----------- -----------
Balance at December 30, 1995............ 12,091,962 12,692 14,933 27,625 2,380,212 24 973
Exercise of common stock options...... -- -- -- -- 390,507 4 244
Issuance of Series E preferred
stock............................... -- -- (13) (13) -- -- --
Net loss.............................. -- -- -- -- -- -- --
--------- ----------- ----------- --------- --------- ----------- -----------
Balance at December 28, 1996............ 12,091,962 12,692 14,920 27,612 2,770,719 28 1,217
Exercise of common stock options...... -- -- -- -- 945,771 9 433
Issuance of investor notes............ -- -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- -- --
--------- ----------- ----------- --------- --------- ----------- -----------
Balance at January 3, 1998.............. 12,091,962 12,692 14,920 27,612 3,716,490 37 1,650
Exercise of common stock options
(unaudited)......................... -- -- -- -- 622,692 6 1,309
Issuance of investor notes
(unaudited)......................... -- -- -- -- -- -- --
Net income (unaudited)................ -- -- -- -- -- -- --
--------- ----------- ----------- --------- --------- ----------- -----------
Balance at July 4, 1998 (unaudited)..... 12,091,962 $ 12,692 $ 14,920 $ 27,612 4,339,182 $ 43 $ 2,959
--------- ----------- ----------- --------- --------- ----------- -----------
--------- ----------- ----------- --------- --------- ----------- -----------
<CAPTION>
NOTES
ACCUMULATED RECEIVABLE -
DEFICIT INVESTORS TOTAL
------------ ------------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994............ $ (11,216) $ -- $ (10,592)
Exercise of common stock options...... -- -- 123
Conversion of subordinated
debenture........................... -- -- 250
Issuance of Series E preferred
stock............................... -- -- --
Net loss.............................. (4,560) -- (4,560)
------------ ----- ---------
Balance at December 30, 1995............ (15,776) -- (14,779)
Exercise of common stock options...... -- -- 248
Issuance of Series E preferred
stock............................... -- -- --
Net loss.............................. (3,685) -- (3,685)
------------ ----- ---------
Balance at December 28, 1996............ (19,461) -- (18,216)
Exercise of common stock options...... -- -- 442
Issuance of investor notes............ -- (418) (418)
Net loss.............................. (2,846) -- (2,846)
------------ ----- ---------
Balance at January 3, 1998.............. (22,307) (418) (21,038)
Exercise of common stock options
(unaudited)......................... -- -- 1,315
Issuance of investor notes
(unaudited)......................... -- (554) (554)
Net income (unaudited)................ 1,247 -- 1,247
------------ ----- ---------
Balance at July 4, 1998 (unaudited)..... $ (21,060) $ (972) $ (19,030)
------------ ----- ---------
------------ ----- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
SELECT COMFORT CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 28, 1996,
AND JANUARY 3, 1998
AND SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
-----------
JUNE 28,
1997
-----------
1995 1996 1997 (UNAUDITED)
--------- --------- ---------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ (4,560) $ (3,685) $ (2,846) $ (609)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 1,090 2,094 4,030 1,414
Loss on disposal of property and equipment..................................... 11 66 264 --
Interest expense from put warrant valuation.................................... -- -- 3,250 1,070
Change in operating assets and liabilities:
Accounts receivable, net..................................................... (488) (421) (4,799) (1,310)
Inventories.................................................................. (1,177) (500) (2,167) (935)
Prepaid expenses............................................................. (171) (781) (2,567) (804)
Accounts payable............................................................. 1,961 4,039 3,297 1,151
Accrued sales returns........................................................ 1,102 888 2,529 1,055
Accrued warranty costs....................................................... 782 646 1,221 997
Accrued compensation, taxes and benefits..................................... 813 393 1,426 341
Other accrued liabilities.................................................... 332 158 3,558 2,665
Other assets................................................................. (154) (91) (565) (405)
Other liabilities............................................................ 55 270 705 577
--------- --------- --------- -----------
Net cash provided by (used in) operating activities........................ (404) 3,076 7,336 5,207
--------- --------- --------- -----------
Cash flows from investing activities:
Purchases of property and equipment............................................ (5,614) (10,122) (10,727) (5,962)
--------- --------- --------- -----------
Net cash used in investing activities...................................... (5,614) (10,122) (10,727) (5,962)
--------- --------- --------- -----------
Cash flows from financing activities:
Proceeds from issuance of debt................................................... 31 2,850 16,184 16,184
Principal payments on debt....................................................... -- (523) (2,203) (1,826)
Debt issuance costs.............................................................. -- -- (781) (677)
Proceeds from issuance of common stock........................................... 123 292 439 476
Proceeds from issuance of redeemable preferred stock 8,956 (13) -- --
--------- --------- --------- -----------
Net cash provided by financing activities.................................. 9,110 2,606 13,639 14,157
--------- --------- --------- -----------
Increase (decrease) in cash and cash equivalents........................... 3,092 (4,440) 10,248 13,402
Cash and cash equivalents, at beginning of period.................................. 3,770 6,862 2,422 2,422
--------- --------- --------- -----------
Cash and cash equivalents, at end of period........................................ $ 6,862 $ 2,422 $ 12,670 $ 15,824
--------- --------- --------- -----------
--------- --------- --------- -----------
<CAPTION>
JULY 4,
1998
---------
<S> <C>
Cash flows from operating activities:
Net income (loss)................................................................ $ 1,247
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization.................................................. 2,571
Loss on disposal of property and equipment..................................... --
Interest expense from put warrant valuation.................................... 1,540
Change in operating assets and liabilities:
Accounts receivable, net..................................................... (2,351)
Inventories.................................................................. (2,097)
Prepaid expenses............................................................. 566
Accounts payable............................................................. (1,774)
Accrued sales returns........................................................ 3
Accrued warranty costs....................................................... 482
Accrued compensation, taxes and benefits..................................... (277)
Other accrued liabilities.................................................... (430)
Other assets................................................................. (543)
Other liabilities............................................................ 291
---------
Net cash provided by (used in) operating activities........................ (772)
---------
Cash flows from investing activities:
Purchases of property and equipment............................................ (3,993)
---------
Net cash used in investing activities...................................... (3,993)
---------
Cash flows from financing activities:
Proceeds from issuance of debt................................................... --
Principal payments on debt....................................................... (488)
Debt issuance costs.............................................................. --
Proceeds from issuance of common stock........................................... 1,315
Proceeds from issuance of redeemable preferred stock --
---------
Net cash provided by financing activities.................................. 827
---------
Increase (decrease) in cash and cash equivalents........................... (3,938)
Cash and cash equivalents, at beginning of period.................................. 12,670
---------
Cash and cash equivalents, at end of period........................................ $ 8,732
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Select Comfort Corporation and its wholly owned subsidiaries (the Company)
develop, manufacture, and market air beds and sleep-related products. The
Company's fiscal year ends on the Saturday closest to December 31. Fiscal years
1995 and 1996 each had 52 weeks. Fiscal 1997 had 53 weeks. Certain prior year
amounts have been reclassified to conform to the current year presentation.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The financial information presented for the six months ended June 28, 1997
and July 4, 1998 is unaudited. In the opinion of management, this unaudited
financial information contains all adjustments (which consist only of normal,
recurring adjustments) necessary for a fair presentation. Operating results for
the six months ended July 4, 1998 are not necessarily indicative of results that
may be expected for the full year.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with initial
maturities of three months or less.
INVENTORIES
Inventories includes material, labor, and overhead and is stated at the
lower of cost or market. Cost is determined by the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment, carried at cost, are depreciated using the
straight-line method over the estimated useful lives of the assets, which range
from three to seven years. Leasehold improvements are amortized over the shorter
of the life of the lease or ten years.
OTHER ASSETS
Other assets include security deposits, patents, trademarks, and debt
issuance costs. Patents and trademarks are amortized using the straight-line
method over a 17-year period and 15-year period, respectively. Debt issuance
costs are amortized using the straight-line method over the term of the debt.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the
F-10
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
ACCRUED WARRANTY COSTS
The Company has a 20-year warranty on air beds, the last 15 years of which
are on a prorated basis. Estimated warranty costs are provided at the time of
sale of the warranted products. Estimates are based upon historical warranty
claims incurred by the Company. Given the limited history available, actual
results could differ from these estimates.
ACCRUED SALES RETURNS
Estimated sales returns are provided at the time of sale based upon
historical sales returns.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents and accounts receivable
approximate fair value because of the short-term maturity of those instruments.
The fair value of long-term debt approximates carrying value based on the
Company's estimate of rates that would be available to it for debt of the same
remaining maturities. Warrants are recorded at fair value based on a third party
valuation. The Company believes it is not practical to estimate a fair market
value different from the redeemable preferred stock's carrying value, as this
security has numerous unique features (See Note 8).
STOCK COMPENSATION
The Company records compensation expense for option grants under its stock
option plan if the fair value of the underlying stock exceeded the exercise
price on the date of the option grant. Pro forma disclosure of the net income
impact of applying an alternative method of recognizing stock compensation
expense over the vesting period based on the fair value of all stock-based
awards on the date of grant is presented in Note 9.
RESEARCH AND DEVELOPMENT COSTS
Costs incurred in connection with research and development are charged to
expense as incurred.
F-11
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(1) BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRE-OPENING COSTS
Costs associated with the opening of new stores are expensed as incurred.
DIRECT RESPONSE ADVERTISING COSTS
The Company incurs direct response advertising costs associated with print
and broadcast advertisements. Such costs are charged to expense as incurred.
Advertising expense was $10,545,000, $16,224,000 and $28,281,000 in 1995, 1996
and 1997, respectively, and $12,891,000 and $16,771,000 for the six months ended
June 28, 1997 and July 4, 1998, respectively.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the future
tax consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
EARNINGS PER SHARE
Basic earnings per share excludes dilution and is computed by dividing the
income available to common shareholders by the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes common
stock equivalents consisting of stock options and warrants determined by the
treasury stock method, and dilutive convertible securities.
(2) ACCOUNTS RECEIVABLE
In June 1997, the Company began utilizing a third party bank to offer its
qualified customers an unsecured revolving credit arrangement to finance
purchases from the Company. The bank sets the rates, fees and all other terms
and conditions of the customer accounts, including collection policies and
procedures, and is the owner of the accounts. In connection with all purchases
financed under these arrangements, the bank pays the Company an amount equal to
the total amount of such purchases, net of promotional related discounts and
less amounts retained for recourse related to returned products and limited
recourse related to bad debts. The bank's recourse for bad debts is limited to a
specified percent of receivables generated. The bank had retained $3,882,000 and
$8,714,000 as of January 3, 1998 and July 4, 1998, respectively, under terms of
the agreement. The Company has included such amounts in its accounts receivable
net of estimated allowance for doubtful accounts.
F-12
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(3) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------- ----------- JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials......................................... $ 3,829 $ 5,891 $ 6,561
Work in progress...................................... 760 39 65
Finished goods........................................ 993 1,819 3,220
------ ----------- -----------
$ 5,582 $ 7,749 $ 9,846
------ ----------- -----------
------ ----------- -----------
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------- JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Leasehold improvements..................................... $ 12,151 $ 18,164 $ 20,513
Office furniture and equipment............................. 2,233 2,698 2,936
Production machinery and computer equipment................ 5,050 7,062 8,319
Other...................................................... 826 1,256 1,410
Property and equipment under capital lease................. 1,870 2,971 2,967
Less accumulated depreciation and amortization............. (3,814) (6,968) (9,274)
------------ ----------- -----------
$ 18,316 $ 25,183 $ 26,871
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(5) LEASES
The Company rents office and manufacturing space under two operating leases
which, in addition to the minimum lease payments, require payment of a
proportionate share of the real estate taxes and building operating expenses.
The Company also rents retail space under operating leases which, in addition to
the minimum lease payments, require payment of percentage rents based upon sales
levels. Rent expense aggregated $2,550,000, $5,112,000 and $9,357,000 for 1995,
1996 and 1997, respectively, and $4,049,000 and $6,022,000 for the six months
ended June 28, 1997 and July 4, 1998, respectively, including percentage rents
of $152,000, $237,000 and $892,000 for 1995, 1996 and 1997, respectively, and
$339,000 and $843,000 for the six months ended June 28, 1997 and July 4, 1998,
respectively.
The Company also leases equipment under noncancelable operating leases.
Costs incurred under these operating leases aggregated $384,000, $402,000 and
$683,000 for 1995, 1996 and 1997, respectively, and $298,000 and $389,000 for
the six months ended June 28, 1997 and July 4, 1998, respectively.
F-13
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(5) LEASES (CONTINUED)
The aggregate minimum rental commitments under operating leases are as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998............................................................................... $ 9,266
1999............................................................................... 9,265
2000............................................................................... 9,374
2001............................................................................... 9,399
2002............................................................................... 9,116
Thereafter......................................................................... 27,612
---------
$ 74,032
---------
---------
</TABLE>
(6) NOTES PAYABLE TO INVESTORS
In November 1996, the Company borrowed $1,252,000 and issued short-term
notes payable to several related parties at 8% interest per annum. In connection
with these notes, the Company granted warrants to purchase 88,978 shares of the
Company's common stock at a purchase price of $3.50 per share. In accordance
with the note agreements, an additional 18,305 common stock warrants were issued
during 1997 at an exercise price of $3.50 per share. The notes were repaid in
full in March 1997.
(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
In March 1997, the Company completed a financing under which it issued a
senior subordinated promissory note in the principal amount of $15,000,000, a
warrant to purchase 1,650,000 shares of the Company's common stock at $7.00 per
share and a warrant to purchase 1,500,000 shares of common stock at $0.007 per
share. These warrants were subsequently adjusted and combined, resulting in a
single warrant to purchase 1,964,374 shares of common stock at $5.88 per share,
exercisable at any time prior to March 31, 2005. (see Note 9). At January 3,
1998, the Company was not in compliance with certain financial covenants
provided in the agreement for which it has received a waiver. At July 4, 1998,
the Company was in compliance with all financial covenants.
The warrant holder may require repurchase of the warrant if an IPO has not
been completed prior to March 27, 2002. The repurchase amount would be equal to
the excess of the estimated fair market value of the Company's common stock, as
determined by the warrant agreement, over the exercise price of the warrant. The
Company also has an option to repurchase the warrant if the warrant has not been
exercised prior to March 27, 2004. As required by Emerging Issues Task Force
Issue 96-13 (EITF 96-13), the warrant is recorded at fair value and recorded as
long-term debt. At January 3, 1998 and July 4, 1998, the fair value of the
warrant was $5,670,000 and $7,210,000, respectively. The fair value recorded in
the financial statements is not necessarily indicative of the amount which would
be payable in the event the Company were required to repurchase the warrant.
In addition, EITF 96-13 requires that any change in fair value of the
warrant be reflected as interest expense. Accordingly, the financial statements
reflect interest expense of $3,250,000 for 1997 and $1,070,000 and $1,540,000
for the six months ended June 28, 1997 and July 4, 1998, respectively. In
addition, in connection with the March 1997 $15.0 million debt issuance, the
Company recorded original issue discount equal to $2,420,000, which is being
amortized over the term of the note.
F-14
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(7) NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS (CONTINUED)
Long-term obligations under notes and capital leases are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------- ----------- JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Senior subordinated note payable to financing company
due March 2003 with interest payable quarterly at
11% per annum. Face amount of $15,000,000 net of
$2,118,000 and $1,916,000, respectively, of debt
discount with an effective interest rate of 13.7%... $ -- $ 12,882 $ 13,084
Warrant subject to put provision...................... -- 5,670 7,210
Notes payable under capital lease agreements, payable
in monthly installments through March 2000, with
interest at 9.75%--12.5% per annum. Financing
available under these agreements aggregates
$3,000,000, of which $2,971,000 had been utilized at
January 3, 1998. In connection with these notes, the
Company granted the vendor warrants to acquire
31,428 shares of the Company's Series E convertible
preferred stock (note 8)............................ 1,725 1,958 1,471
------ ----------- -----------
1,725 20,510 21,765
Less current maturities............................... 563 999 1,053
------ ----------- -----------
$ 1,162 $ 19,511 $ 20,712
------ ----------- -----------
------ ----------- -----------
</TABLE>
Aggregate annual maturities of long-term debt for the five years subsequent
to January 3, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1998................................................................................. $ 999
1999................................................................................. 929
2000................................................................................. 30
2001................................................................................. --
2002................................................................................. 5,670
</TABLE>
(8) REDEEMABLE PREFERRED STOCK
The Company's Articles of Incorporation authorize 4,458,852 shares
designated as Series A redeemable preferred stock (Series A), $1.00 par value;
2,400,000 shares designated as Series B redeemable preferred stock (Series B),
$1.25 par value; 2,292,635 shares designated as Series C redeemable preferred
stock (Series C), $1.00 par value; 2,083,332 shares designated as Series D
redeemable preferred stock
F-15
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(8) REDEEMABLE PREFERRED STOCK (CONTINUED)
(Series D), $1.00 par value; and 888,571 shares designated as Series E
redeemable preferred stock (Series E), $1.00 par value.
The holders of the Series A, B, C, D, and E redeemable preferred stock are
entitled to receive dividends out of funds legally available for dividends if
and when declared by the board of directors. No dividends can be paid to common
shareholders unless the dividend is allocated among the holders of Series A, B,
C, D, and E shares and the holders of common shares based on the amount of the
investment in the Company represented by each such class. In addition, the
holders of Series E preferred stock are entitled to a cumulative dividend of
$1.05 per share before dividends may be paid on any other class of capital
stock. At January 3, 1998, cumulative dividends in arrears equaled $1,800,000.
In the event of voluntary or involuntary liquidation, dissolution, or winding up
of the Company or in the event of a sale of the Company's assets or a merger
with another corporation, the holders of the Company's shares of preferred stock
are entitled to receive the following amounts in the following order of
priority: (1) Series E, $21.00 per share through December 31, 1997 and $10.50
per share plus cumulative dividends thereafter, (2) Series D, $2.88 per share,
Series C, $2.27 per share, Series B, $1.25 per share, and Series A, $1.00 per
share, respectively, before any distribution is made with respect to the common
stock. The Series A, B, C, D, and E shareholders have special voting rights as
defined by the Articles of Incorporation. However, in the event of an
underwritten public offering of the Company's common stock meeting certain
requirements, the special voting rights will terminate.
The Series A, B, C, D, and E are convertible into an aggregate of 18,382,916
shares of common stock at any time or can be automatically converted into common
stock upon the issuance of common stock in an underwritten public offering where
the gross proceeds received by the Company equal or exceed $20,000,000 and the
public offering price equals or exceeds $9.50 per share and, solely with respect
to Series E, $13.30 per share after 1997. The conversion price is approximately
$0.67, $0.83, $1.51, $1.92 and $5.88 per share, respectively, but is subject to
adjustments as defined in the Articles of Incorporation. The Series A, B, C, D,
and E must be redeemed by the Company, 1/3 each on or before December 31, 1998,
1999, and 2000 at $1.00, $1.25, $2.27, $2.88, and $10.50 per share,
respectively. The holders of the Series A, B, C, D, and E have the option to
defer this redemption offer for successive one-year periods. The deferral does
not affect the Company's obligation to redeem in successive years. If the
holders of the Series A, B, C, D, and E elect to defer the redemption, the
Company has the right, but not the obligation, to redeem the Series A, B, C, D,
and E on December 31, 2000.
Redeemable preferred stock consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ ----------- JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Redeemable preferred stock (Series A), $1.00 par
value; 4,458,852 shares authorized, issued, and
outstanding......................................... $ 4,459 $ 4,459 $ 4,459
Redeemable preferred stock (Series B), $1.25 par
value; 2,400,000 shares authorized, issued, and
outstanding......................................... 3,000 3,000 3,000
</TABLE>
F-16
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(8) REDEEMABLE PREFERRED STOCK (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1996 1998
------------ -----------
JULY 4,
1998
-----------
(UNAUDITED)
<S> <C> <C> <C>
Redeemable preferred stock (Series C), $1.00 par
value; 2,292,635 shares authorized, issued, and
outstanding......................................... 2,293 2,293 2,293
Redeemable preferred stock (Series D), $1.00 par
value; 2,083,332 shares authorized, issued, and
outstanding......................................... 2,083 2,083 2,083
Redeemable preferred stock (Series E), $1.00 par
value; 888,571 shares authorized and 857,143 shares
issued and outstanding.............................. 857 857 857
------------ ----------- -----------
Total redeemable preferred stock.................... $ 12,692 $ 12,692 $ 12,692
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(9) SHAREHOLDERS' EQUITY
STOCK OPTIONS
The Board of Directors has reserved 6,450,000 shares of common stock for
options that may be granted to key employees, directors, or others under the
Company's stock option plans.
A summary of the status of the Company's stock option plans for the three
years ended January 3, 1998 is as follows:
<TABLE>
<CAPTION>
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at December 31, 1994............................................................ 2,033,663 $ 0.36
Granted................................................................................... 818,250 2.53
Exercised................................................................................. 279,229 0.43
Canceled.................................................................................. 119,909 0.44
Outstanding at December 30, 1995 (including 1,420,790 shares exercisable)................... 2,452,775 1.06
Granted................................................................................... 665,775 3.50
Exercised................................................................................. 390,507 0.73
Canceled.................................................................................. 209,283 1.53
Outstanding at December 28, 1996 (including 1,658,202 shares exercisable)................... 2,518,760 1.72
Granted................................................................................... 1,610,625 4.13
Exercised................................................................................. 945,771 0.47
Canceled.................................................................................. 40,200 2.86
---------- -----
Outstanding at January 3, 1998 (including 1,396,979 shares exercisable)..................... 3,143,414 $ 3.32
---------- -----
---------- -----
</TABLE>
F-17
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(9) SHAREHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about options outstanding at
January 3, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------------- OPTIONS EXERCISABLE
AVERAGE -----------------------
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICE SHARES LIFE (YEARS) PRICE SHARES PRICE
- ------------- ---------- --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.20 - 0.30 199,095 3.68 $ 0.25 199,095 $ 0.25
0.50 - 0.67 273,126 6.69 0.61 225,884 0.61
3.20 - 4.33 2,365,193 8.71 3.48 954,984 3.41
5.00 - 6.67 306,000 9.84 6.49 17,016 6.36
- ------------- ---------- --- ----- ---------- -----
$ 0.20 - 6.67 3,143,414 8.33 $ 3.32 1,396,979 $ 2.54
- ------------- ---------- --- ----- ---------- -----
- ------------- ---------- --- ----- ---------- -----
</TABLE>
No compensation cost has been recognized in the financial statements for
stock options grants. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under an alternative
accounting method, the Company's net income (loss) would have been adjusted as
indicated below (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Net income (loss): As reported............................... $ (4,560) $ (3,685) $ (2,846)
Pro forma................................... $ (4,892) $ (4,253) $ (3,563)
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Sholes option-pricing model with the following assumptions: expected
dividend yield--0%; expected stock price volatility--40%; risk-free interest
rate--6.4%; expected life of options--4.5 years, 3.0 years and 4.2 years for
1995, 1996 and 1997, respectively. The per share weighted-average fair value of
stock options granted during 1995, 1996 and 1997 was $1.20, $1.35 and $1.28,
respectively. The pro forma net income (loss) reflects only options granted in
1995, 1996 and 1997. Therefore, the full impact of calculating compensation cost
for stock options under this alternative accounting method is not reflected in
the pro forma net income (loss) amounts presented above because compensation
cost is reflected over the options' vesting period, typically three years, and
compensation cost for options granted prior to January 1, 1995 is not
considered.
WARRANTS
In connection with the financing completed in March 1997 (see Note 7), the
Company issued a warrant to purchase 1,650,000 shares of Common Stock at $7.00
per share (Series A Warrant) and a warrant to purchase 1,500,000 shares of
Common Stock at $0.007 per share (Series B Warrant). The Series B Warrant
provided that the number of shares exercisable could be reduced based on future
earnings levels or in the event the Company completed an initial public
offering. Effective March 31, 1998, the warrants were adjusted and combined,
resulting in a single warrant to purchase 1,964,374 shares of Common Stock at
$5.88 per share, exercisable at any time prior to March 31, 2005.
F-18
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(9) SHAREHOLDERS' EQUITY (CONTINUED)
In April 1996, the Company amended the Series E Stock Purchase Agreement
dated December 28, 1995 to provide for the issuance of warrants to the holders
of Series E Preferred Stock to purchase an aggregate of 257,142 shares of Common
Stock at an exercise price of $3.50 per share.
In connection with a capital lease transaction with a vendor in 1997, the
Company granted the vendor warrants to acquire 31,428 shares of the Company's
Series E convertible preferred stock at a purchase price of $10.50 per share.
The warrants are exercisable for the shorter of (1) ten years from the grant
date, or (2) five years from the effective date of an initial public offering.
In connection with short-term debt issued to related parties in 1996, the
Company granted warrants to purchase 107,287 shares of the Company's common
stock at a purchase price of $3.50 per share. The warrants are exercisable for
ten years from the grant date.
(10) INCOME TAXES
Effective tax rates differ from statutory federal income tax rates as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Statutory federal income tax rate................................ (34.0)% (34.0)% (34.0)%
Nondeductible interest expense, put warrants..................... -- -- 40.8
Change in valuation allowance.................................... 36.0 33.0 (2.7)
Effect of change in tax rate on deferred tax asset............... 0.0 8.6 0.0
State income taxes, net of federal benefit....................... (2.0) (4.0) 0.4
General business credits......................................... 0.0 (2.6) 0.0
Other............................................................ 0.0 (1.0) 0.7
--------- --------- ---------
0.0% 0.0% 5.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>
The tax effects of temporary differences that give rise to significant
deferred tax assets at December 28, 1996 and January 3, 1998 are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Current:
Inventory, warranty, and returns reserves............................ $ 1,853 $ 3,361
Allowance for doubtful accounts...................................... 76 722
Advertising costs.................................................... 300 --
Other................................................................ 176 214
Long term:
Net operating loss carryforwards..................................... 4,967 2,842
Other................................................................ 183 344
--------- ---------
Total gross deferred tax assets.................................... 7,555 7,483
Valuation allowance...................................................... (7,555) (7,483)
--------- ---------
Total net deferred tax assets...................................... $ -- $ --
--------- ---------
--------- ---------
</TABLE>
F-19
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(10) INCOME TAXES (CONTINUED)
At January 3, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $7,500,000. These carryforwards,
subject to Internal Revenue Code (IRC) Section 382 limitations, may be available
to offset future taxable income and will expire between the years 2002 and 2011.
Approximately $1,800,000 are subject to the IRC Section 382 limitations based
upon a prior ownership change. The utilization of the loss carryforwards may be
further restricted in the event of future ownership changes.
(11) NET INCOME (LOSS) PER COMMON SHARE
The following computations reconcile net income (loss) with net income
(loss) per common share-- basic and net income (loss) per common share--diluted
(dollars in thousands, except per share amounts).
<TABLE>
<CAPTION>
1995
----------------------------------
INCOME PER SHARE
(LOSS) SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net income (loss).............................................................. $ (4,560)
Less cumulative preferred dividends............................................ --
---------
BASIC EPS
Income available to common shareholders........................................ (4,560) 2,165,612 $ (2.11)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 268,253
--------- ----------
DILUTED EPS
Income available to common shareholders and assumed conversions................ $ (4,560) 2,433,865 $ (1.87)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------
INCOME PER SHARE
(LOSS) SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net income (loss).............................................................. $ (3,685)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Income available to common shareholders........................................ (4,585) 2,630,226 $ (1.74)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 268,253
--------- ----------
DILUTED EPS
Income available to common shareholders and assumed conversions................ $ (4,585) 2,898,479 $ (1.58)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
F-20
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(11) NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
<TABLE>
<CAPTION>
1997
----------------------------------
INCOME PER SHARE
(LOSS) SHARES AMOUNT
--------- ---------- -----------
<S> <C> <C> <C>
Net income (loss).............................................................. $ (2,846)
Less cumulative preferred dividends............................................ (900)
---------
BASIC EPS
Income available to common shareholders........................................ (3,746) 3,529,421 $ (1.06)
-----------
-----------
EFFECT OF DILUTIVE SECURITIES
Dilutive effect retroactively applied to share issuances....................... -- 268,253
--------- ----------
DILUTED EPS
Income available to common shareholders and assumed conversions................ $ (3,746) 3,797,674 $ (0.99)
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JULY 4, 1998 (UNAUDITED)
------------------------------------
INCOME PER SHARE
(LOSS) SHARES AMOUNT
--------- ------------ -----------
<S> <C> <C> <C>
Net income (loss).............................................................. $ 1,247
Less cumulative preferred dividends............................................ (450)
---------
BASIC EPS
Income available to common shareholders........................................ 797 3,974,120 $ 0.20
-----
-----
EFFECT OF DILUTIVE SECURITIES
Options........................................................................ -- 1,446,920
Warrants....................................................................... -- 205,127
Convertible preferred stock.................................................... -- 16,852,229
Dilutive effect retroactively applied to share issuances....................... -- 268,253
------------ -----
DILUTED EPS
Income available to common shareholders and assumed
conversions................................................................ $ 797 22,746,649 $ 0.04
--------- ------------ -----
--------- ------------ -----
</TABLE>
F-21
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(11) NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
The following is a summary of those securities outstanding during the
respective periods which have been excluded from the calculations because the
effect on net income (loss) per common share would not have been dilutive:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JULY
1995 1996 1997 4, 1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Options............................... 2,452,775 2,518,760 3,143,414 33,375
Common stock warrants................. -- 231,035 3,514,431 1,950,000
Preferred stock warrants.............. -- 31,428 31,428 31,428
Convertible preferred stock........... 12,091,962 12,091,962 12,091,962 857,143
</TABLE>
Convertible preferred stock and preferred stock warrants were convertible
into 18,382,916; 18,420,334, 18,420,334 and 1,020,390 common shares during 1995,
1996, 1997 and the six months ended July 4, 1998, respectively.
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Total cash paid for interest during 1995, 1996 and 1997 was $34,000, $44,000
and $1,512,000, respectively, and $252,000 and $912,000, respectively, for the
six months ended June 28, 1997 and July 4, 1998. There were no cash payments for
income taxes during 1995 or 1996. Income tax payments during 1997 totaled
$16,000 and during the six month periods ended June 28, 1997 and July 4, 1998
totaled $3,000 and $406,000, respectively.
During 1995, $250,000 of notes payable were converted to common stock.
(13) EMPLOYEE BENEFIT PLANS
Effective January 1, 1994, the Company adopted a profit sharing and 401(k)
plan for eligible employees. The plan allows employees to defer up to 15% of
their compensation on a pretax basis. Each year, the Company may make a
discretionary contribution equal to a percentage of the employee's contribution.
The Company did not make a contribution for 1995 and 1996. During 1997, the
Company expensed $78,000 relating to its contribution to the 401(k) plan.
(14) RELATED PARTY TRANSACTIONS
At December 28, 1996, the Company had a $50,000 note receivable due from a
director of the Company. The note plus interest at 6% per annum was due on
August 31, 1997. On February 20, 1997, the director signed a promissory note for
$387,000, which replaced the $50,000 note receivable. The note, with interest at
9.25% per annum, is due and payable to the Company on the earlier of (1) six
months following the completion of an initial public offering of the Company's
securities, or (2) April 30, 1999. The full recourse note is secured by a pledge
of 225,000 shares of the Company's common stock. At January 3, 1998 the note
receivable, including interest, totaled $418,000. In April 1998, the director
borrowed an additional $425,000 from the Company under the same terms as the
February 1997 note. At July 4, 1998, the balance of these notes was $871,000.
F-22
<PAGE>
SELECT COMFORT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION PERTAINING TO THE SIX MONTHS ENDED JUNE 28, 1997 AND JULY 4, 1998
IS UNAUDITED)
(14) RELATED PARTY TRANSACTIONS (CONTINUED)
At December 28, 1996 the Company had a $20,000 note receivable due from an
employee of the Company. This non-interest-bearing note was repaid in 1997.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims, legal actions, sales tax disputes,
and other complaints arising in the ordinary course of business. In the opinion
of management, any losses that may occur are adequately covered by insurance or
are provided for in the financial statements and the ultimate outcome of these
matters will not have a material effect on the financial position or results of
operations of the Company.
The Company purchases its air chambers from a supplier under a long-term
supply contract running through 1999. The Company is committed to purchasing
certain minimum quantities under this contract.
(16) SUBSEQUENT EVENT
Effective , 1998, the Company's Board of Directors approved a
proposal to amend the Company's Articles of Incorporation, as amended, to
increase the authorized common shares from 25,000,000 to 95,000,000. In
addition, the Board of Directors approved a three-for-two split of the Company's
common stock upon the effective date of the Company's initial public offering.
The accompanying financial statements have been adjusted to reflect the effect
of the split on all share and per share amounts.
F-23
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY, ANY SELLING SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL OR TO ANY PERSON TO WHOM IT IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 20
Business.................................................................. 29
Management................................................................ 43
Certain Transactions...................................................... 52
Principal and Selling Shareholders........................................ 56
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 63
Underwriting.............................................................. 65
Legal Matters............................................................. 66
Experts................................................................... 66
Additional Information.................................................... 67
Index to Consolidated Financial Statements................................ F-1
</TABLE>
--------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
SHARES
SELECT COMFORT CORPORATION
COMMON STOCK
-------------
PROSPECTUS
-------------
HAMBRECHT & QUIST
BANCBOSTON ROBERTSON STEPHENS
PIPER JAFFRAY INC.
, 1998
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All of the amounts shown are
estimates, except the SEC registration fee, the NASD filing fees and the Nasdaq
listing fee.
<TABLE>
<S> <C>
SEC registration fee............................................... $ 32,450
NASD filing fee.................................................... 11,500
Nasdaq listing fee................................................. 95,000
Fees and expenses of counsel for the Company....................... *
Fees and expenses of accountants for the Company................... *
Blue sky fees and expenses......................................... 5,000
Printing expenses.................................................. *
Transfer agent fees................................................ *
Miscellaneous...................................................... *
---------
Total.......................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Minnesota Statutes, Section 302A.521 provides that a Minnesota business
corporation shall indemnify any director, officer, employee or agent of the
corporation made or threatened to be made a party to a proceeding, by reason of
the former or present official capacity (as defined) of the person, against
judgments, penalties, fines, settlements and reasonable expenses incurred by the
person in connection with the proceeding if certain statutory standards are met.
"Proceeding" means a threatened, pending or completed civil, criminal,
administrative, arbitration or investigative proceeding, including one by or in
the right of the corporation. Section 302A.521 contains detailed terms regarding
such right of indemnification and reference is made thereto for a complete
statement of such indemnification rights. The Company's Articles of
Incorporation also require the Company to provide indemnification to the fullest
extent of the Minnesota indemnification statute.
The Company also maintains a directors and officers insurance policy
pursuant to which directors and officers of the Company are insured against
liability for certain actions in their capacity as directors and officers.
Reference is also made to Section 7(a) of the Underwriting Agreement
contained in Exhibit 1.1 hereto, indemnifying officers and directors of the
Company against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since August 1, 1995, the Company has issued and sold the following
securities without registration under the Securities Act:
1. On December 28, 1995, the Company sold an aggregate of 857,143
shares of Series E Preferred Stock at a price of $10.50 per share and issued
warrants to purchase an aggregate of 257,142 shares of Common Stock
exercisable through December 28, 2005 at an exercise price of $3.50 pursuant
to the Company's Series E Convertible Preferred Stock Purchase Agreement
dated December 28, 1995, as amended, for an aggregate purchase price of
approximately $9.0 million to 25
II-1
<PAGE>
accredited investors and three non-accredited investors, including shares
and warrants sold to the following entities and individuals in the following
amounts: Apex Investment Fund, L.P. (19,380 shares of Series E Preferred
Stock convertible into 23,071 shares of Common Stock and a warrant to
purchase 5,814 shares); Macke Limited Partnership (11,900 shares of Series E
Preferred Stock convertible into 14,166 shares of Common Stock and a warrant
to purchase 3,570 shares); St. Paul Fire and Marine Insurance Company
(100,000 shares of Series E Preferred Stock convertible into 119,047 shares
of Common Stock and a warrant to purchase 30,000 shares); John Sculley
(15,000 shares of Series E Preferred Stock convertible into 17,857 shares of
Common Stock and a warrant to purchase 4,500 shares); Patrick A. Hopf (950
shares of Series E Preferred Stock convertible into 1,130 shares of Common
Stock and a warrant to purchase 285 shares); Mark L. de Naray (500 shares of
Series E Preferred Stock convertible into 595 shares of Common Stock and a
warrant to purchase 150 shares); and Daniel J. McAthie (20,000 shares of
Series E Preferred Stock convertible into 23,809 shares of Common Stock and
a warrant to purchase 6,000 shares).
2. From August 1, 1995 through December 31, 1995, the Company issued an
aggregate of 179,673 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 179,673 shares issued, 90,000 were issued at $0.67 per share; 7,173
were issued at $.30 per share; 37,500 were issued at $.27 per share; and
45,000 were issued at $.20 per share.
3. On August 27, 1996, the Company issued a warrant to Comdisco, Inc.
to purchase 7,619 shares of the Company's Series E Preferred Stock
exercisable for five years from the effective date of this offering at an
exercise price of $10.50 per share in connection with a Master Lease
Agreement dated as of August 27, 1996 and an Equipment Schedule No. VL-1
dated as of August 27, 1996. Upon consummation of this offering, the warrant
will automatically be amended to provide for the purchase of 13,605 shares
of Common Stock at an exercise price of $5.88 per share.
4. In November 1996, the Company borrowed an aggregate of $1,251,700
from certain existing shareholders and issued promissory notes evidencing
such loans. Interest on these notes accrued at an annual rate of 8%. In
connection with such loans, the Company granted each of these shareholders
warrants to purchase a number of shares of Common Stock equal to 25% of the
principal amount of such shareholder's note divided by $3.50 (an aggregate
of 88,978 shares of Common Stock), exercisable until October 31, 2006 at
$3.50 per share. The promissory notes were due on the earlier of the
following: (i) the closing date of an equity financing of $10.0 million or
more, or (b) November 1, 1997. The Company paid off the promissory notes in
full in March 1997 and at such time granted each of these shareholders
additional warrants to purchase a number of shares equal to 5% of the
principal amount of such shareholder's note divided by $3.50 (an aggregate
of 18,305 shares of Common Stock), exercisable through October 31, 2006 at
$3.50 per share. All of the purchasers of the notes and warrants were
accredited investors, including the following entities: Apex Investment
Fund, L.P. ($126,450 and warrants to purchase 10,838 shares); Macke Limited
Partnership ($6,000 and warrants to purchase 514 shares); Norwest Venture
Capital ($122,550 and warrants to purchase 10,504 shares); and St. Paul Fire
and Marine Insurance Co. ($835,150 and warrants to purchase 71,584 shares).
5. On November 11, 1996, Company issued a warrant to Comdisco, Inc. to
purchase 23,809 shares of the Company's Series E Preferred Stock exercisable
for five years from the effective date of this offering at an exercise price
of $10.50 per share in connection with a Master Lease Agreement dated as of
August 27, 1996 and Equipment Schedule Nos. VL-2 and VL-3 dated as of
November 11, 1996. Upon consummation of this offering, the warrant will
automatically be amended to provide for the purchase of 42,515 shares of
Common Stock at an exercise price of $5.88 per share.
6. From January 1, 1996 through December 31, 1996, the Company issued
an aggregate of 404,950 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 404,950 shares issued, 29,351 were issued at $3.50 per
II-2
<PAGE>
share; 14,569 were issued at $3.20; 92,721 were issued at $1.73 per share;
106,828 were issued at $0.61; 16,549 were issued at $.57 per share; 9,135
were issued at $.50 per share; 106,837 were issued at $.30 per share; 10,500
were issued at $.27 per share and 107,400 were issued at $.20 per share.
7. On March 27, 1997, the Company entered into a Purchase Agreement
dated March 27, 1997 (the "GE Purchase Agreement") with General Electric
Capital Corporation ("GECC"), pursuant to which the Company issued to GE a
senior subordinated promissory note in the principal amount of $15.0 million
(the "GE Note"). Interest on the GE Note accrues at a rate equal to 11% per
year and is payable quarterly in arrears. The outstanding principal on the
GE Note is due on or before March 31, 2003. In connection with the GE
Purchase Agreement, the Company issued to GE a Series A Warrant (the "Series
A Warrant") to purchase an aggregate of 1,650,000 shares of Common Stock
exercisable through March 31, 2005 at an exercise price of $7.00 and a
Series B Warrant (the "Series B Warrant") containing certain contingent
rights to purchase an aggregate of up to 1,500,000 shares of Common Stock at
an exercise price of $.007. Pursuant to an amendment to the GE Purchase
Agreement effective as of March 31, 1998, the Company and GECC restructured
these warrants by combining them into one Series A Warrant to purchase
1,964,374 shares of Common Stock at an exercise price of $5.88.
8. From January 1, 1997 through December 31, 1997, the Company issued
an aggregate of 945,141 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 945,141 shares issued, 13,953 were issued at $3.50 per share; 39,063
were issued at $3.20 per share; 58,230 were issued at $0.67 per share;
12,882 were issued at $.57 per share; 75,240 were issued at $.50 per share;
268,188 were issued at $.30 per share; 132,660 were issued at $.27 per
share; and 344,925 were issued at $.20 per share.
9. From January 1, 1998 through August 31, 1998, the Company issued an
aggregate of 698,827 shares of Common Stock to employees and directors of
the Company pursuant to the exercise of stock options by such individuals.
Of the 698,827 shares issued, 112 were issued at $11.00 per share; 261 were
issued at $7.33 per share; 150 were issued at $6.67 per share; 249 were
issued at $5.00 per share; 279,838 were issued at $3.50 per share; 127,024
were issued at $3.20 per share; 48,295 were issued at $.67 per share; 87,351
were issued at $.57 per share; 52,773 were issued at $.30 per share; 37,500
were issued at $.27 per share; and 39,600 were issued at $.20 per share.
No underwriting commissions or discounts were paid with respect to the sales
of the unregistered securities described above. In addition, all of the above
sales were made in reliance on Rule 701, Regulation D and Section 4(2) under the
Securities Act. With regard to the reliance by the Company upon the exemptions
set forth in the previous sentence, certain inquiries were made by the Company
to establish that such sales qualified for such exemptions from the registration
requirements. In particular, the Company confirmed that (i) all offers of sales
and sales were made by personal contact from officers or directors of the
Company or other persons closely associated with the Company; (ii) each investor
made representations that he or she was sophisticated in relation to this
investment (and the Company has no reason to believe such representations were
incorrect); (iii) each purchaser gave assurance of investment intent and the
certificates for the shares bear a legend accordingly; and (iv) offers and sales
within any offering were made to a limited number of persons.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
1.1* Underwriting Agreement
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
3.1* Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)
3.2* Restated Bylaws of the Company (to be effective upon effectiveness of
Registration Statement)
4.1* Specimen Common Stock Certificate
4.2 Form of Warrant issued in connection with the sale of Convertible
Preferred Stock, Series E
4.3 Form of Warrant issued in connection with the November 1996 Bridge
Financing
4.4 Amended and Restated Registration Rights Agreement dated December 28, 1995
4.5 First Amendment to Series E Stock Purchase Agreement and Amended and
Restated Registration Rights Agreement dated April 25, 1996
4.6 Second Amendment to Amended and Restated Registration Rights Agreement
dated as of November 1, 1996
4.7 Second (sic) Amendment to Amended and Restated Registration Rights
Agreement dated March 24, 1997
4.8 Series A Warrant effective as of March 31, 1998 issued to General Electric
Capital Corporation
5.1* Opinion of Oppenheimer Wolff & Donnelly LLP
10.1 Net Lease Agreement dated December 3, 1993 between the Company and Opus
Corporation
10.2 Amendment of Lease dated August 10, 1994 between the Company and Opus
Corporation
10.3 Second Amendment to Lease dated May 10, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership (successor to Opus
Corporation)
10.4 Letter Agreement dated as of October 5, 1995 between the Company and
Rushmore Plaza Partners Limited Partnership
10.5 Third Amendment of Lease, Assignment and Assumption of Lease and Consent
dated as of January 1, 1996 among the Company, Rushmore Plaza Partners
Limited Partnership and Select Comfort Direct Corporation
10.6 Sublease dated as of March 27, 1997 between Select Comfort SC Corporation
and Bellsouth Telecommunications, Inc.
10.7 Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and
the Company and Equipment Schedules VL-1 dated August 27, 1996 and VL-2
and VL-3 dated November 11, 1996
10.8 Supply Agreement dated August 23, 1994 between the Company and Supplier(1)
10.9 Equipment Purchase and Software License Agreement dated February 6, 1996
between the Company and Supplier(1)
10.10 Purchase Agreement dated as of March 27, 1997 between the Company and
General Electric Capital Corporation
10.11 Senior Subordinated Note dated as of March 27, 1997 in the principal
amount of $15,000,000 by the Company in favor of General Electric
Capital Corporation
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------------
<C> <S>
10.12 Consumer Credit Card Program Agreement dated as of May 22, 1997 among the
Company, Select Comfort Retail Corporation, Select Comfort Direct
Corporation, Select Comfort SC Corporation and Monogram Credit Card Bank
of Georgia(1)
10.13 Major Merchant Agreement dated December 19, 1997 among First National Bank
of Omaha and the Company, Select Comfort So. Carolina Corporation,
Select Comfort Retail Corporation and Select Comfort Direct Corporation
10.14 1990 Omnibus Stock Option Plan, as amended
10.15 1997 Stock Incentive Plan
10.16 Form of Incentive Stock Option Agreement under the 1997 Stock Incentive
Plan
10.17 Form of Performance Based Stock Option Agreement under the 1997 Stock
Incentive Plan
10.18 Employment Letter Agreement dated April 3, 1997 between the Company and H.
Robert Hawthorne
10.19 Employment Letter Agreement dated October 20, 1995 between the Company and
Daniel J. McAthie
10.20 Employment Letter Agreement dated July 11, 1995 between the Company and
Gregory T. Kliner
10.21 Consulting Agreement and Stock Option Agreement dated April 1, 1996
between the Company and Ervin R. Shames
10.22 Separation Agreement dated February 20, 1997 between the Company and Mark
L. de Naray
10.23 Promissory Note dated February 20, 1997 in favor of the Company from Mark
L. de Naray
10.24 Pledge Agreement dated February 20, 1997 between the Company and Mark L.
de Naray
10.25 Promissory Note dated April 13, 1998 in favor of the Company from Mark L.
de Naray
10.26 Pledge Agreement dated April 13, 1998 between the Company and Mark L. de
Naray
10.27 Separation Agreement dated as of July 13, 1998 between the Company and
John D. Watson
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent and Report on Financial Statement Schedule
of KPMG Peat Marwick LLP
23.2* Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included on pages II-9 hereto)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed separately with the Commission pursuant to Rule 406 under the
Securities Act.
II-5
<PAGE>
(b) Financial Statement Schedules.
SELECT COMFORT CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
CHARGED TO BALANCE AT
BALANCE AT COSTS AND DEDUCTIONS END OF
DESCRIPTION BEGINNING EXPENSES FROM RESERVES PERIOD
- --------------------------------------------------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts--1997.............. $ 200 $ 2,101 $ 400 $ 1,901
--1996................. $ 261 $ 63 $ 124 $ 200
--1995................. $ 35 $ 237 $ 11 $ 261
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Minnesota Business Corporation Act, the Restated
Articles of Incorporation or Bylaws of the Registrant, the Underwriting
Agreement, 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, 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.
The undersigned Registrant hereby undertakes that:
(1) It will 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.
(2) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement on Form S-1 to be signed on its
behalf by the undersigned, thereunto duly authorized, in Minneapolis, Minnesota
on this 1st day of September, 1998.
<TABLE>
<S> <C> <C>
SELECT COMFORT CORPORATION
By: /s/ H. ROBERT HAWTHORNE
-----------------------------------------
H. Robert Hawthorne
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
By: /s/ DANIEL J. MCATHIE
-----------------------------------------
Daniel J. McAthie
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER, CHIEF ADMINISTRATIVE OFFICER AND
SECRETARY (PRINCIPAL FINANCIAL AND
ACCOUNTING OFFICER)
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, H. Robert Hawthorne and
Daniel J. McAthie, and each one of them acting singly, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, 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 any additional Registration Statements filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with all exhibits thereto, and other 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 connection therewith,
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 their or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated, on September 1, 1998.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ H. ROBERT HAWTHORNE
- ------------------------------ President, Chief Executive
H. Robert Hawthorne Officer and Director
/s/ ERVIN R. SHAMES
- ------------------------------ Chairman of the Board
Ervin R. Shames
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
/s/ THOMAS J. ALBANI
- ------------------------------ Director
Thomas J. Albani
/s/ PATRICK A. HOPF
- ------------------------------ Director
Patrick A. Hopf
/s/ CHRISTOPHER P. KIRCHEN
- ------------------------------ Director
Christopher P. Kirchen
- ------------------------------ Director
David T. Kollat
/s/ KENNETH A. MACKE
- ------------------------------ Director
Kenneth A. Macke
/s/ JEAN-MICHEL VALETTE
- ------------------------------ Director
Jean-Michel Valette
</TABLE>
II-8
<PAGE>
SELECT COMFORT CORPORATION
EXHIBIT INDEX TO REGISTRATION STATEMENT ON FORM S-1
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
1.1* Underwriting Agreement
3.1* Restated Articles of Incorporation of the Company (to be effective upon
effectiveness of Registration Statement)
3.2* Restated Bylaws of the Company (to be effective upon effectiveness of Registration
Statement)
4.1* Specimen Common Stock Certificate
4.2 Form of Warrant issued in connection with the sale of Convertible Preferred Stock,
Series E
4.3 Form of Warrant issued in connection with the November 1996 Bridge Financing
4.4 Amended and Restated Registration Rights Agreement dated December 28, 1995
4.5 First Amendment to Series E Stock Purchase Agreement and Amended and Restated
Registration Rights Agreement dated April 25, 1996
4.6 Second Amendment to Amended and Restated Registration Rights Agreement dated as of
November 1, 1996
4.7 Second (sic) Amendment to Amended and Restated Registration Rights Agreement dated
March 24, 1997
4.8 Series A Warrant effective as of March 31, 1998 issued to General Electric Capital
Corporation
5.1* Opinion of Oppenheimer Wolff & Donnelly LLP
10.1 Net Lease Agreement dated December 3, 1993 between the Company and Opus Corporation
10.2 Amendment of Lease dated August 10, 1994 between the Company and Opus Corporation
10.3 Second Amendment to Lease dated May 10, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership (successor to Opus Corporation)
10.4 Letter Agreement dated as of October 5, 1995 between the Company and Rushmore Plaza
Partners Limited Partnership
10.5 Third Amendment of Lease, Assignment and Assumption of Lease and Consent dated as of
January 1, 1996 among the Company, Rushmore Plaza Partners Limited Partnership and
Select Comfort Direct Corporation
10.6 Sublease dated as of March 27, 1997 between Select Comfort SC Corporation and
Bellsouth Telecommunications, Inc.
10.7 Master Lease Agreement dated August 27, 1996 between Comdisco, Inc. and the Company
and Equipment Schedules VL-1 dated August 27, 1996 and VL-2 and VL-3 dated
November 11, 1996
10.8 Supply Agreement dated August 23, 1994 between the Company and Supplier(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
10.9 Equipment Purchase and Software License Agreement dated February 6, 1996 between the
Company and Supplier(1)
10.10 Purchase Agreement dated as of March 27, 1997 between the Company and General
Electric Capital Corporation
10.11 Senior Subordinated Note dated as of March 27, 1997 in the principal amount of
$15,000,000 by the Company in favor of General Electric Capital Corporation
10.12 Consumer Credit Card Program Agreement dated as of May 22, 1997 among the Company,
Select Comfort Retail Corporation, Select Comfort Direct Corporation, Select
Comfort SC Corporation and Monogram Credit Card Bank of Georgia; as amended in
First Amendment to Consumer Credit Card Program Agreement dated November 18,
1987(1)
10.13 Major Merchant Agreement dated December 19, 1997 among First National Bank of Omaha
and the Company, Select Comfort So. Carolina Corporation, Select Comfort Retail
Corporation and Select Comfort Direct Corporation
10.14 1990 Omnibus Stock Option Plan, as amended
10.15 1997 Stock Incentive Plan
10.16 Form of Incentive Stock Option Agreement under the 1997 Stock Incentive Plan
10.17 Form of Performance Based Stock Option Agreement under the 1997 Stock Incentive Plan
10.18 Employment Letter Agreement dated April 3, 1997 between the Company and H. Robert
Hawthorne
10.19 Employment Letter Agreement dated October 20, 1995 between the Company and Daniel J.
McAthie
10.20 Employment Letter Agreement dated July 11, 1995 between the Company and Gregory T.
Kliner
10.21 Consulting Agreement and Stock Option Agreement dated April 1, 1996 between the
Company and Ervin R. Shames
10.22 Separation Agreement dated February 20, 1997 between the Company and Mark L. de
Naray
10.23 Promissory Note dated February 20, 1997 in favor of the Company from Mark L. de
Naray
10.24 Pledge Agreement dated February 20, 1997 between the Company and Mark L. de Naray
10.25 Promissory Note dated April 13, 1998 in favor of the Company from Mark L. de Naray
10.26 Pledge Agreement dated April 13, 1998 between the Company and Mark L. de Naray
10.27 Separation Agreement dated as of July 13, 1998 between the Company and John D.
Watson
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent and Report on Financial Statement Schedule of KPMG
Peat Marwick LLP
23.2 Consent of Oppenheimer Wolff & Donnelly LLP (included in Exhibit 5.1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION METHOD OF FILING
- ----------- ------------------------------------------------------------------------------------ -----------------
<C> <S> <C>
24.1 Power of Attorney (included on pages II-9 hereto)
27.1 Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
(1) Confidential treatment has been requested with respect to designated
portions contained within this exhibit. Such portions have been omitted and
filed with the Commission pursuant to Rule 406 under the Securities Act.
<PAGE>
Exhibit 4.2
WARRANT
to Purchase ______ Shares of
Common Stock of
SELECT COMFORT CORPORATION
THIS CERTIFIES that ______________________________________________ or any
permitted successor or assign (the "Holder") is entitled to purchase from Select
Comfort Corporation (the "Company"), at any time during the period commencing on
the date of this warrant (together with any warrant or warrants issued in
substitution or exchange therefor, the "Warrant") and ending at 5:00
p.m., Minneapolis, Minnesota time, on December 28, 2005, _________ fully paid
and nonassessable shares of the common stock of the Company, $.01 par value (the
"Common Stock"), or such greater or lesser number of shares as may be determined
by application of the anti-dilution provisions of this Warrant (such shares or
other securities purchasable upon exercise of this Warrant being herein called
the "Shares"), at the purchase price of $5.25 per share. The foregoing purchase
price, as it may be adjusted pursuant to the anti-dilution provisions of this
Warrant, is referred to herein as the "Purchase Price."
This Warrant is subject to the following provisions, terms and conditions:
1. EXERCISE; OPTIONAL CONVERSION; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised, in whole or
in part (but not as to a fractional share of Common Stock), by surrendering
this Warrant, with the Purchase Form attached hereto (or a reasonable facsimile)
duly executed, at the principal office of the Company, and by paying the
Purchase Price in full for the Shares to be purchased upon such exercise in cash
or by certified or official bank check payable to the order of the Company.
(b) In addition to the purchase rights set forth above and without
limiting the rights of the holder of this Warrant, the holder of this Warrant
shall have the right (the "Conversion Right") to convert this Warrant or any
portion thereof into shares of Common Stock as provided in this Section 1 at any
time or from time to time after the date hereof and prior to its expiration.
Upon exercise of the Conversion Right with respect to a particular number of
shares subject to this Warrant (the "Converted Warrant Shares"), the Company
shall deliver to the holder of this Warrant, without payment by the holder of
any exercise price of cash or other consideration, that number of shares of
Common Stock equal to the quotient obtained by dividing the Net Value (as
hereinafter defined) of the Converted Warrant Shares by the fair market value
(as defined in paragraph (d) below) of a single share of Common Stock,
determined in each case as of the close of business on the Conversion Date (as
hereinafter defined). The "Net Value" of the Converted Warrant Shares shall be
determined by subtracting the aggregate Purchase Price of the Converted Warrant
Shares from the aggregate fair market value of the Converted Warrant Shares.
Notwithstanding anything in this Section 1 to the contrary, the Conversion Right
cannot be exercised with respect to a number of Converted Warrant Shares having
a Net Value below $100. No fractional shares shall be issuable upon exercise
of the Conversion Right, and if the number of shares to be issued in accordance
with the foregoing formula is other than a whole number, the
<PAGE>
Company shall pay to the holder of this Warrant an amount in cash equal to
the fair market value of the resulting fractional share.
(c) The Conversion Right may be exercised by the holder of this Warrant by
the surrender of this Warrant at the principal office of the Company together
with a written statement specifying that the holder thereby intends to exercise
the Conversion Right and indicating the number of shares subject to this Warrant
which are being exercised pursuant to this Conversion Right. Such conversion
shall be effective upon receipt by the Company of this Warrant together with the
aforesaid written statement, or on such later date as is specified therein (the
"Conversion Date"), but not later than the expiration date of this Warrant.
Certificates for the shares of Common Stock issuable upon exercise of the
Conversion Right, together with a check in payment of any fractional share and,
in the case of a partial exercise, a new warrant evidencing the shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and shall be
delivered to the holder of this Warrant within 10 days following the Conversion
Date.
(d) For purposes of this Section 1, the "fair market value" of a share of
Common Stock as of a particular date shall mean, if the Common Stock is traded
on a securities exchange or on the NASDAQ National Market System, the closing
price of the Common Stock on such exchange or on the NASDAQ National Market
System, or, if the Common Stock is otherwise traded in the over-the-counter
market, the closing bid price, in each case averaged over a period of 20
consecutive business days prior to the date as of which "market price" is to be
determined. If at any time the Common Stock is not traded on an exchange or the
NASDAQ National Market System, or otherwise traded in the over-the-counter
market, the "fair market value" shall be deemed to be the higher of (i) the book
value thereof as determined by any firm of independent public accountants of
recognized standing selected by the Board of Directors of the Company as of the
last day of any month ending within 60 days preceding the date as of which the
determination is to be made, or (ii) the fair value thereof determined in good
faith by the Board of Directors of the Company as of a date which is within 15
days of the date as of which the determination is to be made.
(e) This Warrant is issued only as a registered Warrant and until it is
transferred on the records of the Company, the Company may treat the person in
whose name it is registered as the absolute owner of this Warrant for all
purposes, notwithstanding any notice to the contrary.
2. ISSUANCE OF SHARES.
The Company agrees that the Shares purchased upon exercise or optional
conversion of this Warrant shall be and are deemed to be issued as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made or optional conversion exercised for such Shares. Certificates for
the Shares purchased shall be delivered to the Holder within 10 days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of Shares, if
any, with respect to which this Warrant has not been exercised shall also be
delivered to the Holder within such time. Notwithstanding the foregoing,
however, the Company shall not be required to deliver any certificates for the
Shares, except in accordance with the provisions and subject to the limitations
of Section 6 below.
2
<PAGE>
3. COVENANTS OF COMPANY.
The Company covenants and agrees that all Shares that may be issued upon
the exercise of this Warrant have been duly authorized and reserved for issuance
upon the exercise of this Warrant, and the Shares, when so issued, delivered and
paid for upon such exercise in accordance with the terms of this Warrant, will
be validly issued, fully paid and nonassessable, and free from all taxes, liens
and charges with respect to the issuance thereof. The Company further covenants
and agrees that until expiration of this Warrant, the Company will at all times
have authorized, and reserved for the purpose of issuance or transfer upon
exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
4. ANTI-DILUTION ADJUSTMENTS.
The foregoing provisions are, however, subject to the following:
(a) The Purchase Price shall be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the Purchase Price, the Holder of
this Warrant shall thereafter be entitled to purchase, at the Purchase Price
resulting from such adjustment, the number of Shares obtained by multiplying
the Purchase Price in effect immediately prior to such adjustment by the number
of Shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Purchase Price resulting from such
adjustment.
(b) In case the Company shall at any time subdivide the outstanding shares
of its Common Stock into a greater number of shares or declare a dividend
payable in Common Stock, securities convertible into Common Stock or rights or
options to purchase Common Stock or securities convertible into Common Stock,
the Purchase Price in effect immediately prior to such subdivision or dividend
shall be proportionately reduced, and conversely, in case the outstanding shares
of its Common Stock shall be combined into a smaller number of shares, the
Purchase Price in effect immediately prior to such combination shall be
proportionately increased. In case prior to the exercise of this Warrant the
Company shall declare a dividend or distribution upon the Common Stock payable
other than in cash out of earnings or surplus or other than in Common Stock,
then from the date of such declaration, the holder of this Warrant upon the
exercise hereof will be entitled to receive the number of shares of Common Stock
for which this Warrant is exercisable, and, in addition and without payment
therefor, the property which the holder of this Warrant would have received as a
dividend if continuously since the record date for any such dividend or
distribution such holder (a) had been the record holder of the number of shares
of Common Stock received upon exercise and (B) had retained all dividends or
distributions in stock or securities payable with respect to such Common Stock
or with respect to any stock or securities paid as dividends or distributions
and originating directly or indirectly from such Common Stock.
(c) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of the
Company's Common Stock shall be entitled to receive stock, securities or assets
with respect to or in exchange for such Common Stock, then, as a condition of
such
3
<PAGE>
reorganization, reclassification, consolidation, merger or sale, the Holder
of this Warrant shall have the right to purchase and receive on the basis and on
the terms and conditions specified in this Warrant and in lieu of the shares of
the Common Stock of the Company immediately theretofore purchasable and
receivable upon the exercise of the rights represented hereby or upon the
consummation of any such transaction, such shares of stock, securities or assets
as would have been issued or delivered to the Holder of this Warrant if the
Holder had exercised this Warrant and received upon exercise of this Warrant the
Common Stock prior to or upon the consummation of such reorganization,
reclassification, consolidation, merger or sale, and in any such case
appropriate provision shall be made with respect to the rights and interests of
the Holder of this Warrant to the end that the provisions hereof (including
without limitation provisions for adjustments of the Purchase Price and of the
number of shares purchasable upon exercise of this Warrant) shall thereafter be
applicable, as nearly as may be, in relation to any shares of stock, securities
or assets thereafter deliverable upon the exercise hereof. The Company
shall not effect any such consolidation, merger or sale unless prior to the
consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger or the corporation purchasing such
assets shall assume by written instrument executed and mailed to the Holder at
the last address of the Holder appearing on the books of the Company the
obligation to deliver to such Holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, the Holder may be entitled to
purchase.
(d) Except for the grant of options, and the issuance of shares pursuant
to the exercise of such options, granted to employees and consultants of the
Company and to directors of the Company, as approved from time to time by the
Board of Directors of the Company or a committee thereof, if and whenever the
Company shall issue or sell any shares of Common Stock for a consideration per
share less than the Purchase Price then in effect (other than dividends payable
in Common Stock, securities convertible into Common Stock or rights or options
to purchase Common Stock or securities convertible into Common Stock) or shall
issue any convertible securities, options, warrants or other rights for the
purchase of such shares at a consideration per share that is less than the
Purchase Price then in effect, then, upon such issuance or sale of such shares,
convertible securities, options, warrants, or other purchase rights, the
Purchase Price in effect immediately prior to such issuance or sale shall be
reduced to (y) if such issuance or sale occurs on or before December 31, 1997,
the price at which such shares of Common Stock were sold or at which shares of
Common Stock are issuable upon the exercise of such convertible securities,
options, warrants or other purchase rights or (z) if such issuance or sale
occurs after December 31, 1997, the price (calculated to the nearest cent)
determined by dividing (A) an amount equal to the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such issuance or sale
multiplied by the then existing Purchase Price and (2) the consideration, if
any, received by the Company upon such issuance or sale, by (B) an amount equal
to the sum of (1) the number of shares of Common Stock outstanding immediately
prior to such issuance or sale and (2) the number of shares of Common Stock thus
issued or sold and the number of shares of Common Stock issuable upon the
exercise of such convertible securities, options, warrants or other purchase
rights. Solely for purposes of (A) and (B) above, the term "Common Stock
outstanding" shall include those shares of Common Stock issuable upon conversion
of outstanding shares of Preferred Stock of the Company. If any options or
purchase rights that are taken into account in any such adjustment of the
Purchase Price subsequently expire without exercise, the Purchase Price shall be
recomputed at the time of expiration by deleting such options or purchase
rights.
4
<PAGE>
(e) If the Company takes any other action, or if any other event occurs,
which does not come within the scope of the provisions of Sections 4(b), 4(c) or
4(d), but which should, in the Company's opinion, result in an adjustment in the
Purchase Price and/or the number of Shares subject to the Warrant in order to
fairly protect the rights of the Holder of this Warrant, then the Company shall
make an appropriate adjustment in the Purchase Price or the number of Shares to
be received upon exercise of this Warrant.
(f) No adjustment of the Purchase Price shall be made if the amount of
such adjustment is less than $.01 per share, but in such case any adjustment
that would otherwise be required then to be made shall be carried forward and
shall be made at the time of and together with the next subsequent adjustment
which, together with any other adjustment or adjustments so carried forward,
shall amount to not less than $.01 per share.
(g) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but the Company shall pay a cash adjustment in respect
of any fraction of a share of Common Stock which would otherwise be issuable in
an amount equal to the same fraction of the fair market value (as defined in
Section 1(d) above) per share of Common Stock.
(h) Upon any adjustment of the Purchase Price, the Company shall give
written notice thereof, by first-class mail, postage prepaid, addressed to the
registered Holder of this Warrant at the address of such Holder as shown on the
books of the Company, which notice shall state the Purchase Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares purchasable at such price upon the exercise of this Warrant,
setting forth in reasonable detail the method of calculation and the facts upon
which such calculation is based.
(i) In case any time:
(1) the Company shall declare any cash dividend on its Common Stock
at a rate in excess of the rate of the last cash dividend theretofore paid;
(2) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash dividends) to the
holders of its Common Stock;
(3) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or other rights;
(4) there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another corporation;
or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (aa) the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights, or (bb)
5
<PAGE>
such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up shall take place, as the case may be.
Such notice shall also specify the date as of which the holders of Common
Stock of record shall participate in such dividend, distribution or
subscription rights, or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be. Such written notice shall be given at least
20 days prior to the action in question and not less than 20 days prior to
the record date or the date on which the Company's transfer books are closed
in respect thereto.
5. NO RIGHTS OF SHAREHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a shareholder of the Company.
6. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, represents and warrants that it is
acquiring this Warrant for its own account for investment purposes only and not
with a view to its resale or distribution, and it has no present intention to
resell or otherwise dispose of all or any part of this Warrant. Other than
pursuant to registration under federal and state securities laws or an
exemption from such registration, the availability of which shall be reasonably
determined by the Company, the Company will not accept the exercise of this
Warrant or issue certificates for Shares, and neither this Warrant nor any
Shares may be sold, pledged, assigned or otherwise disposed of (whether
voluntarily or involuntarily). The Company may condition such issuance or sale,
pledge, assignment or other disposition on the receipt from the party to whom
this Warrant is to be so transferred or to whom Shares are to be issued or so
transferred of any representations and agreements requested by the Company in
order to permit such issuance or transfer to be made pursuant to exemptions from
registration under federal and applicable state securities laws. Each
certificate representing the Warrant (or any part thereof) and any Shares shall
be stamped with the appropriate legends setting forth these restrictions on
transferability. The Holder, by acceptance hereof, agrees to give written
notice to the Company before exercising or transferring this Warrant or
transferring any Shares of the Holder's intention to do so, describing briefly
the manner of any proposed exercise or transfer and providing the Company with
an opinion of counsel, acceptable to the Company, that such transfer complies
with federal and applicable state securities laws or exemptions thereunder.
Within thirty (30) days of receiving such written notice, the Company shall
notify the Holder as to whether such exercise or transfer may be effected.
7. COMMON STOCK DEFINITION. As used herein, the term "Common Stock"
shall mean and include the Company's presently authorized Common Stock and shall
also include any capital stock of any class of the Company hereafter authorized
which shall not be limited to a fixed sum or percentage in respect of the rights
of the holders thereof to participate in dividends or in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or winding up
of the Company; provided that the shares purchasable pursuant to this Warrant
shall include shares designated as Common Stock of the Company on the date of
original issue of this Warrant or, in the case of any reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
paragraph 4(c) above.
6
<PAGE>
8. REGISTRATION RIGHTS. The holder of this Warrant and of the Common
Stock issuable or issued upon the exercise hereof shall be entitled to the
registration rights set forth in the Amended and Restated Registration Rights
Agreement dated as of December 28, 1995, as amended.
9. SUCCESSORS AND ASSIGNS.
All the covenants and provisions of this Warrant by or for the benefit of
the Company or the Holder shall bind and inure to the benefit of their
respective successors and assigns.
10. MODIFICATION OF WARRANT.
Neither this Warrant nor any term hereof may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer this 24th day of May, 1996, effective as of the 28th
day of December, 1995.
SELECT COMFORT CORPORATION
By ________________________________
Its _______________________________
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
7
<PAGE>
TO: SELECT COMFORT CORPORATION
* * * *
PURCHASE FORM--To be Executed by the Registered Holder in Order to Exercise
Warrants
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to purchase thereunder, _____
shares of Common Stock provided for therein, and request that certificates for
such shares be issued in the name of:
Please insert social security or other
identifying number of registered _____________________________
holder of certificate (Name)
_______________________________ _____________________________
(Address)
_____________________________
(Name)
_____________________________
(Address)
Date: _________________________ Signature(s):
_____________________________
_____________________________
and if such number of shares shall not be all of the shares purchasable
hereunder, that a new Warrant for the balance of the shares purchasable under
such Warrant be registered in the name of the undersigned Holder or his or her
Assignee as below indicated and delivered to the address stated below.
Name of Holder or Assignee:
_____________________________
(please print)
Address:
_____________________________
_____________________________
8
<PAGE>
ASSIGNMENT FORM--To be Executed by the Registered Holder in Order to Transfer
Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
______________________ of the Warrants represented by the attached Warrant unto:
Please insert social security or Please print or typewrite name
other identifying number of and address including zip code
assignee of assignee
_____________________________
_____________________________
_____________________________
and does hereby irrevocably constitute and appoint _______________ Attorney to
transfer the Warrant on the records of the Company with full power of
substitution in the premises.
Date: _________________________ Signature(s):
_____________________________
_____________________________
* * * *
NOTICE--The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.
9
<PAGE>
Exhibit 4.3
WARRANT
to Purchase ___________ Shares of
Common Stock of
SELECT COMFORT CORPORATION
THIS CERTIFIES that ___________________ or any permitted successor or
assign (the "Holder") is entitled to purchase from Select Comfort Corporation
(the "Company"), at any time during the period commencing on the date of this
warrant (together with any warrant or warrants issued in substitution or
exchange therefor, the "Warrant") and ending at 5:00 p.m., Minneapolis,
Minnesota time, on October 31, 2006, ______________________ fully paid and
nonassessable shares of the common stock of the Company, par value $0.01 per
share (the "Common Stock"), or such greater or lesser number of shares as may be
determined by application of the anti-dilution provisions of this Warrant (such
shares or other securities purchasable upon exercise of this Warrant being
herein called the "Shares"), at the purchase price of $5.25 per share. The
foregoing purchase price, as it may be adjusted pursuant to the anti-dilution
provisions of this Warrant, is referred to herein as the "Purchase Price."
This Warrant is further subject to the following provisions, terms and
conditions:
1. EXERCISE; OPTIONAL CONVERSION; TRANSFERABILITY.
(a) The rights represented by this Warrant may be exercised, in whole or
in part (but not as to a fractional Share of Common Stock), by surrendering
this Warrant, with the Purchase Form attached hereto (or a reasonable
facsimile) duly executed, at the principal office of the Company, and by
paying the Purchase Price in full for the Shares to be purchased upon such
exercise in cash or by certified or official bank check payable to the
order of the Company.
(b) In addition to the purchase rights set forth above and without
limiting the rights of the holder of this Warrant, the holder of this
Warrant shall have the right (the "Conversion Right") to convert this
Warrant or any portion thereof into shares of Common Stock as provided in
this Section 1 at any time or from time to time after the date hereof and
prior to its expiration. Upon exercise of the Conversion Right with respect
to a particular number of Shares subject to this Warrant (the "Converted
Warrant Shares"), the Company shall deliver to the holder of this Warrant,
without payment by the holder of any exercise price of cash or other
consideration, that number of shares of Common Stock equal to the quotient
obtained by dividing the Net Value (as hereinafter defined) of the
Converted Warrant Shares by the fair market value (as defined in paragraph
(d) below) of a single share of Common Stock, determined in each case as of
the close of business on the Conversion Date (as hereinafter defined). The
"Net Value" of the Converted Warrant Shares shall be determined by
subtracting the aggregate Purchase Price of the Converted Warrant Shares
from the aggregate fair market value of
<PAGE>
the Converted Warrant Shares. Notwithstanding anything in this Section
1 to the contrary, the Conversion Right cannot be exercised with respect
to a number of Converted Warrant Shares having a Net Value below $100.
No fractional Shares shall be issuable upon exercise of the Conversion
Right, and if the number of Shares to be issued in accordance with the
foregoing formula is other than a whole number, the Company shall pay
to the holder of this Warrant an amount in cash equal to the fair
market value of the resulting fractional Share.
(c) The Conversion Right may be exercised by the holder of this Warrant by
the surrender of this Warrant at the principal office of the Company
together with a written statement specifying that the holder thereby
intends to exercise the Conversion Right and indicating the number of
Shares subject to this Warrant which are being exercised pursuant to this
Conversion Right. Such conversion shall be effective upon receipt by the
Company of this Warrant together with the aforesaid written statement, or
on such later date as is specified therein (the "Conversion Date"), but not
later than the expiration date of this Warrant. Certificates for the
shares of Common Stock issuable upon exercise of the Conversion Right,
together with a check in payment of any fractional Share and, in the case
of a partial exercise, a new warrant evidencing the Shares remaining
subject to this Warrant, shall be issued as of the Conversion Date and
shall be delivered to the holder of this Warrant within 10 days following
the Conversion Date.
(d) For purposes of this Section 1, the "fair market value" of a share of
Common Stock as of a particular date shall mean, if the Common Stock is
traded on a securities exchange or on the NASDAQ National Market System,
the closing price of the Common Stock on such exchange or on the NASDAQ
National Market System, or, if the Common Stock is otherwise traded in the
over-the-counter market, the closing bid price, in each case averaged over
a period of 20 consecutive business days prior to the date as of which
"market price" is to be determined. If at any time the Common Stock is not
traded on an exchange or the NASDAQ National Market System, or otherwise
traded in the over-the-counter market, the "fair market value" shall be
deemed to be the higher of (i) the book value thereof as determined by any
firm of independent public accountants of recognized standing selected by
the Board of Directors of the Company as of the last day of any month
ending within 60 days preceding the date as of which the determination is
to be made, or (ii) the fair value thereof determined in good faith by the
Board of Directors of the Company as of a date which is within 15 days of
the date as of which the determination is to be made.
(e) This Warrant is issued only as a registered Warrant and until it is
transferred on the records of the Company, the Company may treat the person
in whose name it is registered as the absolute owner of this Warrant for
all purposes, notwithstanding any notice to the contrary.
2
<PAGE>
2. ISSUANCE OF SHARES.
The Company agrees that the Shares purchased upon exercise or optional
conversion of this Warrant shall be and are deemed to be issued as of the close
of business on the date on which this Warrant shall have been surrendered and
payment made or optional conversion exercised for such Shares. Certificates for
the Shares purchased shall be delivered to the Holder within 10 days after the
rights represented by this Warrant shall have been so exercised, and, unless
this Warrant has expired, a new Warrant representing the number of Shares, if
any, with respect to which this Warrant has not been exercised shall also be
delivered to the Holder within such time. Notwithstanding the foregoing,
however, the Company shall not be required to deliver any certificates for the
Shares, except in accordance with the provisions and subject to the limitations
of Section 6 below.
3. COVENANTS OF COMPANY.
The Company covenants and agrees that all Shares that may be issued upon
the exercise of this Warrant have been duly authorized and reserved for issuance
upon the exercise of this Warrant, and the Shares, when so issued, delivered and
paid for upon such exercise in accordance with the terms of this Warrant, will
be validly issued, fully paid and nonassessable, and free from all taxes, liens
and charges with respect to the issuance thereof. The Company further covenants
and agrees that until expiration of this Warrant, the Company will at all times
have authorized, and reserved for the purpose of issuance or transfer upon
exercise of this Warrant, a sufficient number of shares of Common Stock to
provide for the exercise of this Warrant.
4. ANTI-DILUTION ADJUSTMENTS.
The foregoing provisions are, however, subject to the following:
(a) The Purchase Price shall be subject to adjustment from time to time as
hereinafter provided. Upon each adjustment of the Purchase Price, the
Holder of this Warrant shall thereafter be entitled to purchase, at the
Purchase Price resulting from such adjustment, the number of Shares
obtained by multiplying the Purchase Price in effect immediately prior to
such adjustment by the number of Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing the product thereof by
the Purchase Price resulting from such adjustment.
(b) In case the Company shall at any time subdivide the outstanding shares
of its Common Stock into a greater number of shares or declare a dividend
payable in Common Stock, securities convertible into Common Stock or rights
or options to purchase Common Stock or securities convertible into Common
Stock, the Purchase Price in effect immediately prior to such subdivision
or dividend shall be proportionately reduced, and conversely, in case the
outstanding shares of its Common Stock shall be combined into a smaller
number of shares, the Purchase Price in effect immediately prior to such
combination shall be proportionately increased. In case prior to the
exercise of this Warrant the Company shall declare a dividend or
distribution upon the Common Stock payable other than in cash out of
earnings or surplus or other than in Common Stock, then from the date of
such declaration, the holder of this Warrant upon the exercise hereof will
3
<PAGE>
be entitled to receive the number of shares of Common Stock for which this
Warrant is exercisable, and, in addition and without payment therefor, the
property which the holder of this Warrant would have received as a dividend
if continuously since the record date for any such dividend or distribution
such holder (a) had been the record holder of the number of shares of
Common Stock received upon exercise and (B) had retained all dividends or
distributions in stock or securities payable with respect to such Common
Stock or with respect to any stock or securities paid as dividends or
distributions and originating directly or indirectly from such Common
Stock.
(c) If any capital reorganization or reclassification of the capital stock
of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to
another corporation shall be effected in such a way that holders of the
Company's Common Stock shall be entitled to receive stock, securities or
assets with respect to or in exchange for such Common Stock, then, as a
condition of such reorganization, reclassification, consolidation, merger
or sale, the Holder of this Warrant shall have the right to purchase and
receive on the basis and on the terms and conditions specified in this
Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby or upon the consummation of any such transaction,
such shares of stock, securities or assets as would have been issued or
delivered to the Holder of this Warrant if the Holder had exercised this
Warrant and received upon exercise of this Warrant the Common Stock prior
to or upon the consummation of such reorganization, reclassification,
consolidation, merger or sale, and in any such case appropriate provision
shall be made with respect to the rights and interests of the Holder of
this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustments of the Purchase Price and of the
number of Shares purchasable upon exercise of this Warrant) shall
thereafter be applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise
hereof. The Company shall not effect any such consolidation, merger or
sale unless prior to the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument
executed and mailed to the Holder at the last address of the Holder
appearing on the books of the Company the obligation to deliver to such
Holder such shares of stock, securities or assets as, in accordance with
the foregoing provisions, the Holder may be entitled to purchase.
(d) Except for the grant of options to employees or consultants of the
Company or to directors of the Company, as approved from time to time by
the Board of Directors of the Company or a committee thereof, and the
issuance of shares pursuant to the exercise of such options, and the
issuance of shares pursuant to the exercise of currently outstanding
options or warrants that were approved by the Board of Directors or a
committee thereof, if and whenever the Company shall issue or sell any
shares of Common Stock for a consideration per share less than the Purchase
Price then in effect (other than dividends payable in Common Stock,
securities convertible into Common Stock or rights or options to purchase
Common Stock or securities convertible into Common Stock) or shall issue
any convertible securities, options, warrants or other rights for the
purchase of such shares at a consideration per share that is less than the
Purchase Price then in effect, then,
4
<PAGE>
upon such issuance or sale of such shares, convertible securities,
options, warrants, or other purchase rights, the Purchase Price in
effect immediately prior to such issuance or sale shall be reduced
to (y) if such issuance or sale occurs on or before December 31,
1997, the price at which such shares of Common Stock were sold or
at which shares of Common Stock are issuable upon the exercise of
such convertible securities, options, warrants or other purchase
rights or (z) if such issuance or sale occurs after December 31,
1997, the price (calculated to the nearest cent) determined by
dividing (A) an amount equal to the sum of (1) the number of shares
of Common Stock outstanding immediately prior to such issuance or
sale multiplied by the then existing Purchase Price and (2) the
consideration, if any, received by the Company upon such issuance
or sale, by (B) an amount equal to the sum of (1) the number of
shares of Common Stock outstanding immediately prior to such
issuance or sale and (2) the number of shares of Common Stock thus
issued or sold and the number of shares of Common Stock issuable
upon the exercise of such convertible securities, options, warrants
or other purchase rights. Solely for purposes of clauses (A) and
(B) above, the term "Common Stock outstanding" shall include those
shares of Common Stock issuable upon conversion of outstanding
shares of Preferred Stock of the Company. If any options or
purchase rights that are taken into account in any such adjustment
of the Purchase Price subsequently expire without exercise, the
Purchase Price shall be recomputed at the time of expiration by
deleting such options or purchase rights.
(e) If the Company takes any other action, or if any other event occurs,
which does not come within the scope of the provisions of Sections 4(b),
4(c) or 4(d), but which should, in the Company's opinion, result in an
adjustment in the Purchase Price and/or the number of Shares subject to the
Warrant in order to fairly protect the rights of the Holder of this
Warrant, then the Company shall make an appropriate adjustment in the
Purchase Price or the number of Shares to be received upon exercise of this
Warrant.
(f) No adjustment of the Purchase Price shall be made if the amount of
such adjustment is less than $.01 per Share, but in such case any
adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any other adjustment or
adjustments so carried forward, shall amount to not less than $.01 per
share.
(g) No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but the Company shall pay a cash adjustment in
respect of any fraction of a share of Common Stock which would otherwise be
issuable in an amount equal to the same fraction of the fair market value
(as defined in Section 1(d) above) per share of Common Stock.
(h) Upon any adjustment of the Purchase Price, the Company shall give
written notice thereof, by first-class mail, postage prepaid, addressed to
the registered Holder of this Warrant at the address of such Holder as
shown on the books of the Company, which notice shall state the Purchase
Price resulting from such adjustment and the increase or decrease, if any,
in the number of Shares purchasable at such price upon the exercise of
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<PAGE>
this Warrant, setting forth in reasonable detail the method of calculation
and the facts upon which such calculation is based.
(i) In case any time:
(1) the Company shall declare any cash dividend on its Common Stock
at a rate in excess of the rate of the last cash dividend theretofore
paid;
(2) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock;
(3) the Company shall offer for subscription pro rata to the holders
of its Common Stock any additional shares of stock of any class or
other rights;
(4) there shall be any capital reorganization, or reclassification of
the capital stock of the Company, or consolidation or merger of the
Company with, or sale of all or substantially all of its assets to,
another corporation; or
(5) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in any one or more of said cases, the Company shall give written notice,
by first-class mail, postage prepaid, addressed to the registered holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (aa) the books of the Company shall close or a record shall be
taken for such dividend, distribution or subscription rights, or (bb) such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up shall take place, as the case may be. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be. Such
written notice shall be given at least 20 days prior to the action in question
and not less than 20 days prior to the record date or the date on which the
Company's transfer books are closed in respect thereto.
5. NO RIGHTS OF SHAREHOLDERS.
This Warrant shall not entitle the Holder to any voting rights or other
rights as a shareholder of the Company.
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<PAGE>
6. RESTRICTIONS ON TRANSFER.
The Holder, by acceptance hereof, represents and warrants that it is
acquiring this Warrant for its own account for investment purposes only and not
with a view to its resale or distribution, and it has no present intention to
resell or otherwise dispose of all or any part of this Warrant. Other than
pursuant to registration under federal and state securities laws or an exemption
from such registration, the availability of which shall be reasonably determined
by the Company, the Company will not accept the exercise of this Warrant or
issue certificates for Shares, and neither this Warrant nor any Shares may be
sold, pledged, assigned or otherwise disposed of (whether voluntarily or
involuntarily). The Company may condition such issuance or sale, pledge,
assignment or other disposition on the receipt from the party to whom this
Warrant is to be so transferred or to whom Shares are to be issued or so
transferred of any representations and agreements requested by the Company in
order to permit such issuance or transfer to be made pursuant to exemptions from
registration under federal and applicable state securities laws. Each
certificate representing the Warrant (or any part thereof) and any Shares shall
be stamped with the appropriate legends setting forth these restrictions on
transferability. The Holder, by acceptance hereof, agrees to give written
notice to the Company before exercising or transferring this Warrant or
transferring any Shares of the Holder's intention to do so, describing briefly
the manner of any proposed exercise or transfer and providing the Company with
an opinion of counsel, acceptable to the Company, that such transfer complies
with federal and applicable state securities laws or exemptions thereunder.
Within thirty (30) days of receiving such written notice, the Company shall
notify the Holder as to whether such exercise or transfer may be effected.
7. COMMON STOCK DEFINITION.
As used herein, the term "Common Stock" shall mean and include the
Company's presently authorized Common Stock and shall also include any capital
stock of any class of the Company hereafter authorized which shall not be
limited to a fixed sum or percentage in respect of the rights of the holders
thereof to participate in dividends or in the distribution of assets upon the
voluntary or involuntary liquidation, dissolution or winding up of the Company;
provided that the shares purchasable pursuant to this Warrant shall include
shares designated as Common Stock of the Company on the date of original issue
of this Warrant or, in the case of any reclassification of the outstanding
shares thereof, the stock, securities or assets provided for in paragraph 4(c)
above.
8. REGISTRATION RIGHTS.
The holder of this Warrant and of the Common Stock issuable or issued upon
the exercise hereof shall be entitled to the registration rights set forth in
the Amended and Restated Registration Rights Agreement dated as of December 28,
1995, as amended.
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9. SUCCESSORS AND ASSIGNS.
All the covenants and provisions of this Warrant by or for the benefit of
the Company or the Holder shall bind and inure to the benefit of their
respective successors and assigns.
10. MODIFICATION OF WARRANT.
Neither this Warrant nor any term hereof may be changed, waived, discharged
or terminated orally, but only by an instrument in writing signed by the party
against which enforcement of the change, waiver, discharge or termination is
sought.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by
its duly authorized officer this 27th day of March, 1997.
SELECT COMFORT CORPORATION
By
-------------------------------
Its
-------------------------------
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES HAVE BEEN
ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED, ASSIGNED
OR OTHERWISE DISPOSED OF, AND NO TRANSFER OF THE SECURITIES WILL BE MADE BY THE
COMPANY OR ITS TRANSFER AGENT, IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION
OF COUNSEL ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
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TO: SELECT COMFORT CORPORATION
* * * *
PURCHASE FORM -- To be Executed by the Registered Holder in Order to Exercise
Warrants
The undersigned hereby irrevocably elects to exercise the right of purchase
represented by the attached Warrant for, and to purchase thereunder, __shares of
Common Stock provided for therein, and request that certificates for such shares
be issued in the name of:
Please insert social security or other
identifying number of registered holder
of certificate:
------------------------ -------------------------------
(SS# or Tax ID) (Name)
-------------------------------
(Address)
- -------------------------- -------------------------------
(SS# or Tax ID) (Name)
-------------------------------
(Address)
Date: Signature(s):
-----------------------
--------------------------------
--------------------------------
and if such number of shares shall not be all of the shares purchasable
hereunder, that a new Warrant for the balance of the shares purchasable under
such Warrant be registered in the name of the undersigned Holder or his or her
Assignee as below indicated and delivered to the address stated below.
Name of Holder or Assignee:
-------------------------------
(please print)
Address:
-------------------------------
-------------------------------
-------------------------------
<PAGE>
ASSIGNMENT FORM -- To be Executed by the Registered Holder in Order to Transfer
Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers
____________________ of the Warrants represented by the attached Warrant unto:
Please insert social security Please print or typewrite name
or other identifying number and address including zip code
of assignee: of assignee:
----------------------
-------------------------------------
-------------------------------------
-------------------------------------
Please insert social security Please print or typewrite name
or other identifying number and address including zip code
of assignee: of assignee:
----------------------
-------------------------------------
-------------------------------------
-------------------------------------
and does hereby irrevocably constitute and appoint ______________ Attorney to
transfer the Warrant on the records of the Company with full power of
substitution in the premises.
Date: Signature(s):
----------------------------
-------------------------------------
-------------------------------------
NOTICE -- The Signature(s) to the Purchase Form or the Assignment Form must
correspond to the name as written upon the face of the Warrant in every
particular without alteration or enlargement or any change whatsoever.
<PAGE>
WARRANT RECEIPT
FOR
SELECT COMFORT CORPORATION
The undersigned hereby acknowledges that the foregoing Warrant to Purchase
Shares of Common Stock of Select Comfort Corporation, dated March 27, 1997,
registered to ___________________________ for _________ shares has been
delivered to and received by the undersigned.
By:
--------------------------------
Date:
------------------------------
<PAGE>
Exhibit 4.4
SELECT COMFORT CORPORATION
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Amended and Restated Registration Rights Agreement dated as of this
28th day of December, 1995 (this "AGREEMENT"), is by and among Select Comfort
Corporation, a Minnesota corporation (the "COMPANY"), and each of the Holders,
as hereinafter defined.
PRELIMINARY STATEMENT
This Agreement supersedes the Amended and Restated Registration Rights
Agreement dated September 8, 1994.
Certain of the Holders have agreed to purchase shares of the Series E
Preferred described below on the conditions, among others, that: the Company
grant the registration rights set forth in this Agreement; and the holders of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred agree to consolidate their registration rights in this Agreement along
with those granted to the holders of Series E Preferred.
To induce those certain Holders to purchase Series E Preferred and in
consideration of the mutual representations and agreements set forth in this
Agreement, the Company and the Holders agree as follows.
AGREEMENT
SECTION 1. DEFINITIONS.
1.1 As used in this Agreement, the following terms shall have the
following meanings:
"AFFILIATE" means any entity controlling, controlled by or under common
control with a designated Person. For the purposes of this definition,
"control" shall have the meaning specified as of the date of this Agreement for
that word in Rule 405 promulgated by the Commission under the Securities Act.
"BOARD" means the Board of Directors of the Company.
"COMMISSION" means the Securities and Exchange Commission, and any
successor thereto.
"COMMON" means the Company's Common Stock, $.01 par value per share.
"CONVERSION STOCK" means shares of Common issued upon conversion of the
Series A Preferred, Series B Preferred, Series C Preferred, Series D Preferred
and Series E Preferred.
<PAGE>
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"HOLDERS" means (a) holders as of the date of this Agreement of Preferred
or Conversion Stock, each of whom is listed on Exhibit A to this Agreement, and
(b) any subsequent legal or beneficial owner of Preferred or Conversion Stock
who has become a party to this Agreement in accordance with Section 14 of this
Agreement.
"PERSON" means an individual, partnership, corporation, business trust,
limited liability company, joint stock company, trust, unincorporated
association, joint venture, or other entity of whatever nature.
"PREFERRED" means the Series A Preferred, the Series B Preferred, the
Series C Preferred, the Series D Preferred and the Series E Preferred.
"REGISTRABLE COMMON" means (a) any shares of Common then outstanding which
were issued upon conversion of Preferred; and (b) any shares of Common then
issuable upon conversion of then-outstanding Preferred; and (c) any shares of
Common then outstanding which were issued as, or were issued directly or
indirectly upon the conversion of other Securities issued as, a dividend or
other distribution with respect to, or in replacement of, Preferred or other
Registrable Common; and (d) any shares of Common then issuable directly or
indirectly upon the conversion or exercise of other Securities issued as a
dividend or other distribution with respect to, or in replacement of, Preferred
or other Registrable Common; provided, however, that outstanding shares of
Common shall no longer be Registrable Common when they shall have been (y)
effectively registered under the Securities Act and sold by the holder thereof
in accordance with such registration, or (z) sold pursuant to Rule 144.
"RULE 144" means Rule 144 promulgated by the Commission under the
Securities Act, as such rule may be amended from time to time, or any successor
Rule thereto.
"SECURITIES" means any debt or equity securities of the Company, whether
now or hereafter authorized and any instrument convertible into, or exercisable
or exchangeable for, Securities or a Security.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SERIES A PREFERRED" means (a) the 4,458,852 outstanding shares of the
Company's Series A Convertible Preferred Stock, $1.00 par value, and any shares
of Series A Convertible Preferred Stock issued in payment of a dividend upon any
share of Series A Convertible Preferred Stock and (b) any other Securities
issued as a dividend or other distribution with respect to, or in replacement
of, any Series A Preferred except shares of Registrable Common.
"SERIES A PURCHASE AGREEMENT" means the Stock Purchase Agreement dated
September 11, 1991, as amended, among the Company and certain of the Holders.
"SERIES B PREFERRED" means (a) the 2,400,000 outstanding shares of the
Company's Series B Convertible Preferred Stock, $1.25 par value, and any shares
of Series B Convertible
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Preferred Stock issued in payment of a dividend upon any share of Series B
Convertible Preferred Stock and (b) any other Securities issued as a dividend
or other distribution with respect to, or in replacement of, any Series B
Preferred except shares of Registrable Common.
"SERIES B PURCHASE AGREEMENT" means the Series B Convertible Preferred
Stock Purchase Agreement dated April 23, 1993, among the Company and certain of
the Holders.
"SERIES C PREFERRED" means (a) the 2,292,635 outstanding shares of the
Company's Series C Convertible Preferred Stock, $1.00 par value, and any shares
of Series C Convertible Preferred Stock issued in payment of a dividend upon any
share of Series C Convertible Preferred Stock, and (b) any other Securities
issued as a dividend or other distribution with respect to, or in replacement
of, any Series C Preferred except shares of Registrable Common.
"SERIES C PURCHASE AGREEMENT" means the Series C Convertible Preferred
Stock Purchase Agreement dated October 18, 1993, among the Company and certain
of the Holders.
"SERIES D PREFERRED" means (a) the 2,083,332 outstanding shares of the
Company's Series D Convertible Preferred Stock, $1.00 par value, and any shares
of Series D Convertible Preferred Stock issued in payment of a dividend upon any
share of the Series D Convertible Preferred Stock, and (b) any other Securities
issued as a dividend or other distribution with respect to, or in replacement
of, any Series D Preferred except shares of Registrable Common.
"SERIES D PURCHASE AGREEMENT" means the Stock Purchase Agreement dated
September 8, 1994, among the Company and certain of the Holders.
"SERIES E PREFERRED" means (a) the 857,143 outstanding shares of the
Company's Series E Convertible Preferred Stock, $1.00 par value, and any shares
of Series E Convertible Preferred Stock issued in payment of a dividend upon any
share of the Series E Convertible Preferred Stock, and (b) any other Securities
issued as a dividend or other distribution with respect to, or in replacement
of, any Series E Preferred except shares of Registrable Common.
"SERIES E PURCHASE AGREEMENT" means the Stock Purchase Agreement dated
December 28, 1995, among the Company and certain of the Holders.
"SHORT FORM" means Form S-2 or Form S-3 under the Securities Act, and any
other form promulgated after the date of this Agreement applicable in
circumstances substantially comparable to either of those forms, regardless of
its designation.
1.2 For purposes of references in this Agreement to Securities "equivalent
to" an amount of Registrable Common issued and issuable, a Holder of Preferred
will be deemed to be the Holder of Registrable Common issuable upon conversion
of such Preferred but not then issued (disregarding any legal restriction then
applicable to the conversion of such Preferred), and the Registrable Common
issuable but not then issued with respect to outstanding Preferred will be
included in the total number of Registrable Common.
SECTION 2. PRIOR AGREEMENTS.
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<PAGE>
2.1 The Amended and Restated Registration Rights Agreement dated September
8, 1994 is hereby amended and restated in its entirety by this Agreement and
shall have no further force or effect.
2.2 Article 12 of the Series A Purchase Agreement is hereby deleted and
replaced in its entirety by the provisions of this Agreement. Such Article 12 of
the Series A Purchase Agreement is of no further force or effect.
SECTION 3. REGISTRATIONS ON LONG FORMS.
3.1 By a written notice to the Company given any time after January 1,
1997, the Holder or Holders of Preferred or Conversion Stock equivalent to: (a)
more than 66-2/3% of the Common issued and issuable upon conversion of the
Series A Preferred; (b) more than 66-2/3% of the Common issued and issuable upon
conversion of the Series B Preferred; (c) more than 66-2/3% of the Common issued
and issuable upon conversion of the Series C Preferred; (d) more than 66-2/3% of
the Common issued and issuable upon conversion of the Series D Preferred; and
(e) more than 66-2/3% of the Common issued and issuable upon conversion of the
Series E Preferred, may from time to time request that the Company register any
Registrable Common specified in the notice, under the Securities Act and under
other relevant securities laws, for disposition in accordance with methods
stated in the notice.
3.2 When the Company receives a registration notice under Section 3.1, it
shall promptly deliver a copy of the registration notice to each Holder who is
not a party to the registration notice, each of whom may then specify, by prompt
notice to the Company, a number of shares of Registrable Common held by or
issuable to it which it wishes to include in any registration pursuant to the
registration notice under Section 3.1.
3.3 When the Company receives a registration notice under Section 3.1, it
shall use its best efforts to effect the registration under the Securities Act
of Registrable Common specified in the registration notice under Section 3.1 and
subsequent notices under Section 3.2, all to the extent requisite to permit
disposition by such Holders in accordance with the intended methods of
disposition described in the registration notice.
SECTION 4. REGISTRATIONS ON SHORT FORMS.
4.1 If at any time the Company is a registrant entitled to use a Short
Form to register Registrable Common, Holders of Preferred and Conversion Stock
equivalent to more than 50% of the Common issued and issuable upon conversion of
the Series A Preferred, the Series B Preferred, the Series C Preferred, the
Series D Preferred and the Series E Preferred, collectively, may, by a written
notice to the Company, request that the Company register Registrable Common
specified in the notice on a Short Form.
4.2 When it receives a notice under this Section 4, the Company shall use
its best efforts to effect the expeditious registration under the Securities Act
on the Short Form specified
4
<PAGE>
in the notice, of Registrable Common specified in the notice which is not
then freely transferable under the provisions of subsection (k) of Rule 144.
SECTION 5. INCIDENTAL REGISTRATION. Each time the Company proposes to
register any of its Securities under the Securities Act (other than pursuant to
Section 3 of this Agreement), it will give at least 60 days advance written
notice of its intention to do so to each Holder. Each Holder may then specify,
by prompt notice to the Company, a number of shares of Registrable Common held
by it which it wishes to include in the Company's proposed registration. Subject
to the market cutback limitations of Section 10, the Company will use its best
efforts to effect the registration under the Securities Act of Registrable
Common specified by Holders under this Section 5 which is not then freely
transferable under the provisions of subsection (k) of Rule 144; PROVIDED,
however, that the Company shall have the right to discontinue its efforts to
register any Securities pursuant to this Section 5, if it reasonably believes
such action is in the best interest of the Company.
SECTION 6. LIMITATIONS ON REGISTRATION RIGHTS. Notwithstanding any
contrary provision of this Agreement:
(a) the Company shall not be required to effect more than two
registrations pursuant to Section 3 (provided, however, that a demand for
registration shall not count as a registration under this clause (a) if
either (y) the registration statement filed with respect to such
registration is not declared effective by the Commission for reasons other
than the Holders not proceeding with such registration, or (z) each Holder
requesting registration of Registrable Common under Sections 3.1 and 3.2
does not register and sell at least 90% of the Registrable Common it has
requested be registered in such registration for reasons other than its
voluntary decision not to do so); and
(b) the Company shall not be required to effect more than one
registration pursuant to Section 3 in any twelve-month period; and
(c) the Company shall not be required to pay the expenses for a
registration pursuant to Section 4 if the minimum offering for such
registration is less than $1,000,000; and
(d) Section 5 shall not apply to a registration effected solely to
implement an employee benefit plan or to any other form or type of
registration which does not permit inclusion of Registrable Common pursuant
to Commission rule or practice; and
(e) the rights to registration granted under this Agreement shall
terminate as to any particular Common when such Registrable Common shall
have been (i) effectively registered under the Securities Act and sold by
the Holder thereof in accordance with such registration, or (ii) sold
pursuant to Rule 144.
SECTION 7. REGISTRATION PROCEDURES
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7.1 Whenever the Company is required by the provisions of this Agreement
to use its best efforts to effect the registration of any Registrable Common
under the Securities Act, the Company will, as expeditiously as possible:
(a) in the case of a registration required under Section 3, engage
the underwriters designated by the Holders of a majority of the Registrable
Common giving notice under Section 3;
(b) before filing each registration statement or prospectus or
amendment or supplement thereto with the Commission, furnish counsel for
the sellers with copies of all such documents proposed to be filed;
(c) prepare and file with the Commission a registration statement
with respect to such Registrable Common and use its best efforts to cause
such registration statement to become and remain effective for the period
provided in Section 7.2;
(d) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all Registrable Common
covered by such registration statement in accordance with the intended
methods of disposition set forth in such registration statement;
(e) prepare and promptly file with the Commission, and notify each
seller of such Registrable Common immediately after the filing of, such
amendment or supplement to such registration statement or prospectus as may
be necessary to correct any statements or omissions if, during such periods
as a prospectus relating to such Securities is required to be delivered
under the Securities Act, any event shall have occurred as the result of
which any such prospectus or any other prospectus as then in effect would
include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in the light of the
circumstances in which they were made, not misleading, and notify each
seller immediately after its discovery of such event;
(f) furnish to the underwriters and each seller of such Registrable
Common such numbers of copies of such registration statement, each
amendment and supplement thereto, the prospectus included in such
registration statement (including each preliminary prospectus) and such
other documents as such underwriters or seller may reasonably request in
order to facilitate the disposition of the Registrable Common subject to
such registration statement in accordance with such registration statement;
(g) use its best efforts to register or qualify any Registrable
Common covered by such registration statement under the securities or blue
sky laws of such jurisdiction within the United States of America as the
seller or the underwriters reasonably request, and to take any other acts
which a seller or the underwriters may reasonably request under such
securities or blue sky laws to enable the consummation of the disposition
in such
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<PAGE>
jurisdictions of such Registrable Common (provided, however, that
the Company shall not be required under this Agreement (i) to qualify
generally to do business as a foreign corporation in any jurisdiction in
which it would not otherwise be required to qualify, or (ii) to subject
itself to taxation in any such jurisdiction, or (iii) to consent to general
service of process in any such jurisdiction);
(h) provide a transfer agent and registrar for all Registrable Common
sold under the registration not later than the effective date of the
registration statement;
(i) use its best efforts to cause all Registrable Common sold under
the registration to be listed on each securities exchange or to be
qualified and eligible for trading in any automated quotation system, if
any, on which similar Securities issued by the Company are then listed or
traded or, if no such listing or qualification has then occurred, to cause
such Securities to be so listed or qualified on an exchange or in a trading
system that is reasonably acceptable to the Holders of a majority of the
Registrable Common being sold;
(j) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the
underwriters, if any, or the Holders of more than 50% of the Registrable
Common being sold reasonably request in order to expedite or facilitate the
disposition of such Registrable Common (including, without limitation,
effecting a stock split or a combination of shares);
(k) advise each seller of Registrable Common, immediately after it
shall receive notice or obtain knowledge thereof, of the issuance of any
stop order by the Commission suspending the effectiveness of such
registration statement or the initiation or threatening of any proceeding
for such purpose and promptly use reasonable efforts to prevent the
issuance of any stop order or to obtain its withdrawal if such stop order
should be issued; and
(1) make available for inspection by the sellers of Registrable
Common, any underwriter participating in any deposition pursuant to such
registration statement, and any attorney, accountant or other agent
retained by any such seller or underwriter, all financial and other
records, pertinent corporate documents and properties of the Company, and
cause the Company's officers, directors, employees and independent
accountants to supply all information reasonably requested by any such
seller or underwriter in connection with such registration statement, all
subject to such limitations as the Company reasonably deems appropriate in
order to protect the Company's confidential or proprietary information.
7.2 Notwithstanding any contrary provision of this Section 7, the Company
shall not be required to maintain the effectiveness of any registration
statement for a period in excess of 180 days or until the sellers have sold or
otherwise disposed of their Registrable Common registered under such
registration statement, whichever is earlier.
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7.3 It shall be a condition precedent to the inclusion of the Registrable
Common of any Holder in a registration effected pursuant to this Agreement that
such Holder shall (a) furnish to the Company such information regarding such
Holder, the Registrable Common of such Holder to be registered and the intended
method of disposition of such Registrable Common, and (b) execute such
indemnities, underwriting agreements and other documents, as the Company or the
managing underwriter shall reasonably request in order to satisfy the
requirements applicable to such registration.
SECTION 8. EXPENSES. The Company shall pay all expenses incurred in
effecting all registrations of Registrable Common provided for in Section 3, 4
and 5 of this Agreement, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for the
Company, reasonable fees and disbursements of one counsel for the sellers
selected by the Holders of more than 50% of the Registrable Common subject to
such registration, underwriting expenses other than discounts and commissions,
and expenses of any audits incident to or required by any such registration and
expenses of complying with the securities or blue sky laws of any jurisdictions
pursuant to Section 7.1 (g) of this Agreement.
SECTION 9. INDEMNIFICATION.
9.1 In the event of any registration of any of its Registrable Common
under the Securities Act pursuant to this Agreement, the Company agrees, to the
extent permitted by law, to indemnify and hold harmless each seller of
Registrable Common, and each Affiliate of such seller, against any losses,
claims, damages or liabilities, joint or several, arising out of or based upon:
(a) any alleged untrue statement of any material fact contained, on
the effective date thereof, in any registration statement under which such
Securities were registered under the Securities Act, any preliminary
prospectus or final prospectus contained therein, or any summary prospectus
contained therein, or any amendment or supplement thereto, or
(b) any alleged omission to state in any such document a material
fact required to be stated therein or necessary to make the statements
therein not misleading,
except insofar as any such loss, claim, damage or liability is:
(x) caused by the inclusion of any information furnished in writing
to the Company by such seller expressly for use in connection with such
registration, or
(y) caused by such seller's failure to deliver a copy of the
registration statement or prospectus or any amendment or supplement thereto
as required by the Securities Act or the rules or regulations thereunder,
or
(z) caused by the use of a prospectus or preliminary prospectus or
any amendment or supplement thereto after receipt of notice from the
Company that it should no longer be used.
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In connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls (within
the meaning of the Securities Act) such underwriters to the same extent as
provided above with respect to the sellers of Registrable Common. The Company
shall reimburse each Person indemnified pursuant to this Section 9.1 in
connection with investigating or defending any loss, claim, damage, liability or
action indemnified against. The reimbursements required by this Section 9.1
shall be made by periodic payments during the course of the investigation or
defense, as and when bills are received or expenses incurred. The indemnities
provided pursuant to this Section 9.1 shall remain in force and effect
regardless of any investigation made by or on behalf of the indemnified party
and shall survive transfer of Registrable Common by a seller.
9.2 In the event of any registration of any Registrable Common under the
Securities Act pursuant to this Agreement, each Holder agrees to furnish to the
Company in writing such information and affidavits as the Company reasonably
requests for use in connection with any registration statement or prospectus in
connection with the registration or any amendment or supplement thereto.
9.3 To the extent permitted by law, and subject to the limitation set
forth in the last sentence of this Section 9.3, each Holder which is a seller of
Registrable Common in a registration pursuant to this Agreement agrees,
severally and not jointly, to indemnify and hold harmless the Company, its
directors and officers, each other seller of Securities in such registration,
each Affiliate of each such other seller, and each Affiliate of the Company,
against:
(a) any losses, claims, damages or liabilities, joint or several,
arising out of or based upon:
(i) any alleged untrue statement of any material fact contained,
on the effective date thereof, in any registration statement under
which such Securities were registered under the Securities Act, any
preliminary prospectus or final prospectus contained therein, or any
summary prospectus contained therein, or any amendment or supplement
thereto, or
(ii) any alleged omission to state in any such document a
material fact required to be stated therein or necessary to make the
statements therein not misleading,
but only insofar as any such loss, claim, damage or liability is caused by
the inclusion of any information furnished in writing to the Company by the
indemnifying seller expressly for use in connection with such registration,
and excluding any such loss, claim, damage or liability which is caused by
or contained in such statements, or caused by such omissions, based upon
the authority of an expert as defined in the Securities Act (but only if
the indemnifying seller had no grounds to believe, and did not believe,
that the statements made on the authority of an expert were untrue or that
there was an omission to state a material fact); and
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(b) any losses, claims, damages or liabilities, joint or several,
arising out of or based upon any failure by such seller to deliver a copy
of the registration statement or prospectus or any amendment or supplement
thereto as required by the Securities Act or the rules or regulations
thereunder. In connection with an underwritten offering, each seller will
indemnify such underwriters, their officers and directors and each Person
who controls (within the meaning of the Securities Act) such underwriters
to the same extent as provided above with respect to the Company and other
sellers. Each seller shall reimburse each Person indemnified pursuant to
this Section 9.3 in connection with investigating or defending any loss,
claim, damage, liability or action indemnified against. The reimbursements
required by this Section 9.3 shall be made by periodic payments during the
course of the investigation or defense, as and when bills are received or
expenses incurred. The indemnities provided pursuant to this Section 9.3
shall remain in force and effect regardless of any investigation made by or
on behalf of the indemnified party and shall survive transfer of
Registrable Common by an indemnifying seller, and transfer of other
Securities by any other indemnified seller. Notwithstanding any contrary
provision of this Agreement, however, the liability under this Section 9 of
each Holder which is a seller of Registrable Common shall be limited in the
aggregate, with respect to the claims of all indemnified Persons taken as a
whole, not to exceed the amount of proceeds to the indemnifying seller from
the sale of the Registrable Common sold by the indemnifying seller.
9.4 Indemnification similar to that specified in Sections 9.1 and 9.3
(with such modifications as shall be appropriate) shall be given by the Company
and each Holder of any Registrable Common covered by any registration or other
qualification of Securities under any federal or state securities law or
regulation other than the Securities Act with respect to any such registration
or other qualification effected pursuant to this Agreement.
9.5 In the event the Company or any Holder receives a complaint, claim or
other notice of any loss, claim, damage, liability or action, giving rise to
claim for indemnification under this Section 9, the Person claiming
indemnification shall promptly notify the Person against whom indemnification is
sought of such complaint, notice, claim or action, and such indemnifying Person
shall have the right to investigate and defend any such loss, claim, damage,
liability or action. After notice from the indemnifying Person to such
indemnified Person of its election to so assume the defense of such loss, claim,
damage, liability or action, the Person claiming indemnification shall have the
right to employ separate counsel in any such action and to participate in the
defense thereof but the fees and expenses of such counsel shall not be at the
expense of the Person against whom indemnification is sought (unless the Person
claiming indemnification reasonably believes that the ability of the counsel
defending such action to defend such Person's interests therein is affected
adversely and materially by a conflict of interest) and the indemnifying Person
shall not be obligated to indemnify any Person for any settlement of any claim
or action effected without the indemnifying Person's consent, which consent will
not be unreasonably withheld.
SECTION 10. MARKETING RESTRICTIONS.
10.1 If:
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(a) a registration is to be made pursuant to a registration notice
under Section 3 or Section 4 of this Agreement, and
(b) the offering proposed to be made by the Holder or Holders for
whom such registration is to be made is to be an underwritten public
offering, and
(c) the managing underwriters of such public offering furnish a
written opinion that the total amount of Securities to be included in such
offering would exceed the maximum number of shares of Common (as specified
in such opinion) which can be marketed at a price reasonably related to the
current market value of such Common and without otherwise materially and
adversely affecting such offering,
then the rights of the Holders, of the holders of other Securities having the
right to include Common in such registration and of the Company to participate
in such offering shall be in the following order of priority:
First: the Holders of Preferred and Conversion Stock shall be entitled
to participate in such offering to the extent of such maximum number of
shares of Common, or of the aggregate number of shares of Registrable
Common that all such Holders shall have requested be registered, whichever
is less, pro rata among themselves in accordance with the number of shares
of Registrable Common which each such Holder shall have requested be
registered; and then
Second: if such maximum number of shares of Common exceeds the
aggregate number of shares of Registrable Common that all such Holders
shall have requested be registered, the Company and all holders of other
Securities having the right to include such Securities in such registration
shall be entitled to participate pro rata in accordance with the number of
shares proposed to be registered by them; and no Securities (issued or
unissued) other than those registered and included in the underwritten
offering shall be offered for sale or other disposition in a transaction
which would require registration under the Securities Act until the
expiration of 180 days after the effective date of the registration
statement filed in connection with such registration or such earlier time
consented to by the managing underwriter.
10.2 If:
(a) any Holder of Preferred or Registrable Common requests
registration of Registrable Common under Section 5 of this Agreement, and
(b) the offering proposed to be made is to be an underwritten public
offering, and
(c) the managing underwriters of such public offering furnish a
written opinion that the total amount of Securities to be included in such
offering would exceed the maximum amount of Securities (as specified in
such opinion) which can be marketed
11
<PAGE>
at a price reasonably related to the then current market value of such
Securities and without materially and adversely affecting such offering,
then the rights of the Holders, of the holders of other Securities having the
right to include such Securities in such registration and of the Company to
participate in such offering shall be in the following order of priority:
First: the Person or Persons (including the Company in the case of a
primary offering) requesting such registration shall be entitled to
participate in accordance with the relative priorities, if any, that shall
exist among them; and then
Second: the holders of Preferred and Conversion Stock shall be
entitled to participate in such offering, pro rata among themselves in
accordance with the number of shares of Registrable Common which each such
holder shall have requested be registered; and then
Third: all other holders (including the Company, if such registration
shall have been required by a Person other than the Company) of Securities
having the right to include such Securities in such registration shall be
entitled to participate pro rata in accordance with the number of shares
proposed to be registered by them;
and no Securities (issued or unissued) other than those registered and included
in the underwritten offering shall be offered for sale or other disposition in a
transaction which would require registration under the Securities Act until the
expiration of 180 days after the effective date of the registration statement
filed in connection with such registration or such earlier time consented to by
the managing underwriter.
10.3 In connection with any offering involving an underwriting of
Registrable Common pursuant to Section 5 of this Agreement, the Company shall
not be required to include any of the Registrable Common of a Holder in such
offering unless such Holder agrees to the terms of the underwriting (regarding
pricing, underwriting discounts and commissions) agreed to between the Company
and the underwriter or underwriters selected by the Company.
SECTION 11. SALE OF PREFERRED TO UNDERWRITER. Notwithstanding anything
in this Agreement to the contrary, in lieu of converting any Preferred to
Conversion Stock prior to or simultaneously with the filing or the effectiveness
of any registration statement filed pursuant to this Agreement, the Holder of
such Preferred may sell such Preferred to the underwriter of the offering being
registered upon the undertaking of such underwriter to convert such Preferred
into Conversion Stock before making any distribution pursuant to such
registration statement and agreeing to include such Conversion Stock among the
Securities being offered pursuant to such registration statement. The Company
agrees to cause such Conversion Stock to be issued within such time as will
permit the underwriter to make and complete the distribution contemplated by the
underwriting and to register the Preferred in any registration statement so that
the Holder may make the sale described in the first sentence of this Section 11.
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<PAGE>
SECTION 12. LOCKUP AGREEMENT. Each Holder agrees in connection with any
registration of any of the Company's Securities that, upon the request of the
underwriters managing any underwritten offering of the Company's Securities, he
or it will not sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Securities of the Company (other than
the Securities included in the registration) without the prior written consent
of such underwriters for such period of time (not to exceed 180 days) from the
effective date of such registration as the Company or the underwriters may
specify.
SECTION 13. COMPLIANCE WITH RULE 144. In the event that the Company (a)
registers a class of Securities under Section 12 of the Exchange Act, (b) issues
an offering circular meeting the requirements of Regulation A under the
Securities Act or (c) commences to file reports under Section 13 or 15(d) of the
Exchange Act, then at the request of any Holder who proposes to sell Securities
in compliance with Rule 144, the Company shall, to the extent necessary to
enable such Holder to comply with such Rule, (y) forthwith furnish to such
Holder a written statement of compliance with the filing requirements of the
Commission as set forth in Rule 144 and (z) make available to the public and
such Holders such information as will enable the Holders to make sales pursuant
to Rule 144.
SECTION 14. ASSIGNABILITY OF REGISTRATION RIGHTS. The rights set forth
in this Agreement shall accrue to each subsequent Holder of Preferred or
Registrable Common who shall have executed a written consent agreeing to be
bound by the terms and conditions of this Agreement as a party to this
Agreement.
SECTION 15. CHANGES, WAIVERS, ETC. Neither this Agreement nor any
provision hereof may be amended, changed, waived, discharged or terminated
orally, but only by a statement, in writing, executed by the Company and 75% in
interest of the Holders.
IN WITNESS WHEREOF, the parties hereto have caused this Amended and
Restated Registration Rights Agreement to be executed on the day first above
written.
SELECT COMFORT CORPORATION,
a Minnesota corporation
By: /s/
------------------------------------
Its: CEO
------------------------------
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ST. PAUL FIRE AND MARINE INSURANCE CO.,
a Minnesota corporation
By: /s/
---------------------------------------
Its: ---------------------------------
CHERRY TREE VENTURES IV,
a Minnesota Limited Partnership
By: /s/
---------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS I, L.P., a
Delaware Limited Partnership
By: Consumer Venture Associates, L.P.,
Its General Partner
By: /s/
---------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS II, L.P., a
Delaware Limited Partnership
By: Consumer Venture Associates II, L.P.,
Its General Partner
By: /s/
---------------------------------------
Its General Partner
14
<PAGE>
Exhibit 4.5
SELECT COMFORT CORPORATION
AMENDMENT NUMBER 1 TO
SERIES E
STOCK PURCHASE AGREEMENT
AND
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Amendment Number 1 to the Series E Stock Purchase Agreement and the
Amended and Restated Registration Rights Agreement is made this 25th day of
April, 1996, to be effective as of the 28th day of December, 1995, among Select
Comfort Corporation, a Minnesota corporation (the "COMPANY"), and each of the
Investors, as defined in the Series E Purchase Agreement, as defined below.
WHEREAS, the Company and the Investors entered into that certain Series E
Stock Purchase Agreement dated as of December 28, 1995 (the "SERIES E PURCHASE
AGREEMENT") providing for the issuance by the Company of an aggregate of 857,143
shares of its Series E Convertible Preferred Stock for a purchase price of
$10.50 per share, and that certain Amended and Restated Registration Rights
Agreement dated as of December 28, 1995 (the "REGISTRATION RIGHTS AGREEMENT");
and
WHEREAS, the Company and the Investors desire to amend, effective as of
December 28, 1995, the Series E Purchase Agreement, pursuant to the terms and
conditions of Section 15.1 thereof, and the Registration Rights Agreement, all
as more fully set forth herein; and
WHEREAS, terms used herein with an initial capital letter, unless otherwise
expressly defined herein, shall have the meaning given to such terms in the
Series E Purchase Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Investors agree
as follows:
1. AMENDMENT OF SERIES E PURCHASE AGREEMENT. Pursuant to the provisions
of Section 15.1 of the Series E Purchase Agreement, and subject to the
conditions to closing of the transactions contemplated hereby as set forth
below, the Series E Purchase Agreement is hereby modified and amended as
follows:
1.1 GRANT OF WARRANTS. Section 3 of the Series E Purchase Agreement shall
be modified and amended to read in its entirety as follows:
"3. SALE AND PURCHASE OF SHARES OF SERIES E PREFERRED AND COMMON
STOCK PURCHASE WARRANTS. Subject to the terms and conditions hereof, the
Company agrees to sell to each Series E Purchaser, and each Series E
Purchaser severally agrees to purchase from the Company in accordance with
this Agreement, the number of shares of Series E Preferred set forth
opposite such purchaser's name on Schedule 1 attached to the Series E
Purchase Agreement, together with one (1) common stock purchase warrant
(each such warrant to be in the form of EXHIBIT 1.1 attached to this
Amendment Number 1 and entitling the holder thereof to purchase one (1)
share of Common Stock from the Company at an exercise price of $5.25 per
share of Common Stock (all such warrants are
1
<PAGE>
referred to herein collectively as the "WARRANTS" and all such shares
of Common Stock purchasable upon exercise of the Warrants are referred
to herein collectively as the "WARRANT STOCK")) for each five (5)
shares of Series E Preferred purchased by such purchaser, rounded to
the nearest whole number of Warrants, for an aggregate purchase price of
Ten Dollars and 50 Cents ($10.50) per share of Series E Preferred. The
parties hereto agree that of the purchase price for the shares of Series
E Preferred, $.01 per share of Warrant Stock covered by the Warrants
shall be allocated to the purchase of the Warrants."
1.2 AMENDMENT OF ARTICLES. A new Section 3.1 shall be added to the Series
E Purchase Agreement, which new Section 3.1 shall read in its entirety as
follows:
"3.1 FURTHER AMENDMENT OF ARTICLES OF INCORPORATION. The Restated
Articles, as amended by the Articles Amendment adopted pursuant to the
Series E Purchase Agreement (the "RESTATED ARTICLES"), shall be further
amended to contain the provisions set forth in the amendment of the
Restated Articles in the form of EXHIBIT 1.2 attached to this Amendment
Number 1 (the "AMENDMENT"). The Company hereby undertakes to use its
reasonable best efforts to obtain the approval of the shareholders of the
Company of the Amendment as soon as practicable."
2. CLOSING. The closing of the transactions necessary to effect the
provisions of this Amendment Number 1 (the "SECOND CLOSING") shall take place as
soon as practicable following the satisfaction of the conditions to closing set
forth in Section 4 below (the date on which such closing takes place shall be
referred to herein as the "SECOND CLOSING DATE") at the offices of Oppenheimer
Wolff & Donnelly, Plaza VII, Suite 3400, 45 South Seventh Street, Minneapolis,
Minnesota 55402, or such other place or different day as may be mutually
acceptable to the Series E Purchasers and the Company. At the Second Closing,
the Company shall issue and deliver to each of the Series E Purchasers (i) a
common stock purchase warrant in the form of Exhibit 1.1 representing the right
to purchase one (1) share of Common Stock at an exercise price of $5.25 per
share of Common Stock for each five (5) shares of Series E Preferred purchased
by such Series E Purchaser, and (ii) evidence of approval of the adoption and
effectiveness of the Amendment in such form as may be reasonably requested by
the Series E Purchasers.
3. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. To induce the
Investors to enter into this Amendment Number 1, the Company hereby represents
and warrants to the Investors that:
3.1 AUTHORITY. The Company has the requisite corporate power and
authority to issue the Warrants and the Warrant Stock and to otherwise
perform its obligations under this Amendment Number 1 and the Warrants.
This Amendment Number 1 has been duly authorized by all necessary corporate
action on behalf of the Company, has been duly executed and delivered by an
authorized officer of the Company, and is a valid and binding agreement on
the part of the Company that is enforceable against the Company in
accordance with its terms, except as the enforceability thereof may be
limited by bankruptcy, insolvency, moratorium, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and
to judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies. All
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<PAGE>
corporate actions necessary to the authorization, creation, issuance and
delivery of the Warrants, and the approval and effectiveness of the
Amendment, will be taken by the Company and its shareholders on or prior
to the Second Closing Date. Each of the Warrants when issued pursuant
to the terms of this Amendment Number 1 will be a valid and binding
agreement of the Company enforceable against the Company in accordance
with its terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, moratorium, reorganization or other similar
laws affecting the enforcement of creditors' rights generally and to
judicial limitations on the enforcement of the remedy of specific
performance and other equitable remedies.
3.2 FINANCIAL STATEMENTS. The audited financial statements of the
Company as of December 31, 1995, which are attached hereto as EXHIBIT 3.2,
are in accordance with the books and records of the Company, present fairly
the financial position of the Company as of the dates thereof and the
results of operations for the periods covered thereby and, except as
disclosed in the footnotes to such financial statements, have been prepared
in accordance with generally accepted accounting principles applied on a
basis consistent with prior accounting periods. The balance sheet as of
December 31, 1995 (i) discloses all of the debts, liabilities and
obligations of any nature (whether absolute, accrued or contingent and
whether due or to become due) of the Company which, individually or in the
aggregate, are material and which in accordance with generally accepted
accounting principles would be required to be disclosed in such balance
sheet, and the omission of which would, in the aggregate, have a material
adverse impact on the Company, and (ii) includes appropriate reserves
required in accordance with generally accepted accounting principles for
all taxes and other liabilities accrued but not yet payable as of such
date. Since the date of such financial statements, the Company has
conducted its business only in the ordinary course of business consistent
with past practices.
3.3 VALID ISSUANCE OF WARRANTS AND WARRANT STOCK. The Warrants, when
issued pursuant to the terms of this Amendment Number 1, will be duly
authorized, validly issued and outstanding, fully paid and nonassessable,
free and clear of all pledges, liens, encumbrances, and restrictions,
except as set forth in Section 6 below. The shares of Warrant Stock have
been reserved for issuance and, when issued upon exercise of the Warrants,
will be duly authorized, validly issued and outstanding, fully paid and
nonassessable, free and clear of all pledges, liens, encumbrances and
restrictions, except as set forth in Section 6 below. The Warrants to be
delivered by the Company hereunder and the certificates representing the
Warrant Stock to be delivered upon the exercise of the Warrants will be
genuine, and the Company has no knowledge of any fact that which would
impair the validity thereof.
3.4 SECURITIES LAWS. Based in part upon the representations of the
Series E Purchasers in the Series E Purchase Agreement, no consent,
authorization, approval, permit or order of or filing with any governmental
or regulatory authority is required under current laws and regulations in
connection with the execution and delivery of this Amendment Number 1 or
the offer, issuance, sale or delivery of the Warrants or the offer of the
Warrant Stock, other than the filing of an amendment to the Company's Form
D filed pursuant to Regulation D under the Securities Act in connection
with the Series E Purchase Agreement, and the qualification thereof, if
required, under applicable state
3
<PAGE>
securities laws, which qualification has been or will be effected as a
condition of the Second Closing. Under the circumstances contemplated
by this Agreement, the offer, issuance, sale and delivery of the
Warrants and the offer of the Warrant Stock will not, under current
laws and regulations, require compliance with the prospectus delivery
or registration requirements of the Securities Act.
3.5 DISCLOSURE. The Company has not knowingly withheld from the
Series E Purchasers any material facts relating to the assets, business,
operations, financial condition or prospects of the Company. No
representation or warranty in this Amendment Number 1 or in any written
certificate, schedule, statement or other document prepared by or on behalf
of the Company and furnished or to be furnished by the Company to a Series
E Purchaser pursuant hereto or in connection with the transactions
contemplated herein contains or will contain any untrue statement of a
material fact or omits or will omit to state any material fact required to
be stated herein or therein or necessary to make the statements herein or
therein not misleading.
3.6 CHANGES, DIVIDENDS, ETC. Except for the transactions
contemplated by this Amendment Number 1, since December 31, 1995 the
Company has not: (a) incurred any debts, obligations or liabilities,
absolute, accrued or contingent and whether due or to become due, except
liabilities incurred in the ordinary course of business, which
(individually or in the aggregate) will not materially and adversely affect
the business, properties or prospects of the Company; (b) paid any
obligation or liability other than, or discharged or satisfied any liens or
encumbrances other than those securing, current liabilities, in each case
in the ordinary course of business; (c) declared or made any payment or
distribution to its stockholders as such, or purchased or redeemed any of
its shares of capital stock or other securities (other than in connection
with the exercise of stock options in accordance with the terms thereof),
or obligated itself to do so; (d) mortgaged, pledged or subjected to lien,
charge, security interest or other encumbrance any of its assets, tangible
or intangible, except in the ordinary course of business; (e) sold,
transferred or leased any of its assets except in the ordinary course of
business; (f) canceled or compromised any debt or claim, or waived or
released any right of material value except in the ordinary course of
business; (g) suffered any physical damage, destruction or loss (whether or
not covered by insurance) materially and adversely affecting the
properties, business or prospects of the Company; (h) entered into any
transaction other than in the ordinary course of business (except that the
Company has executed a letter of intent to conduct a joint test marketing
plan in Japan and the Company is negotiating the terms of a consulting
agreement with Ervin R. Shames); (i) encountered any labor difficulties or
labor union organizing activities; (j) issued or sold any shares of capital
stock or other securities or granted any options, warrants or other
purchase rights with respect thereto other than contemplated by this
Amendment Number 1, except for the grant of an aggregate of 206,000 options
to purchase shares of Common Stock at a price of $5.25 per share; (k) made
any acquisition or disposition of any material assets or become involved in
any other material transaction, other than for fair value in the ordinary
course of business; (l) increased the compensation payable, or to become
payable, to any of its directors or employees, or made any bonus payment or
similar arrangement with any directors or employees or increased the scope
or nature of any fringe benefits provided for its employees or directors,
except in the ordinary course of business; or (m) agreed to do any of the
foregoing other than pursuant hereto.
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<PAGE>
3.7 CAPITALIZATION. The Company will be authorized by its Restated
Articles, upon approval of the Amendment and the filing thereof with the
Secretary of State, to issue 25,000,000 shares of Common Stock, $0.01 par
value, 4,458,852 shares of Series A Preferred, $1.00 par value, 2,400,000
shares of Series B Preferred, $1.25 par value, 2,292,635 shares of Series C
Preferred, $1.00 par value, 2,083,332 shares of Series D Preferred, $1.00
par value, and 857,143 shares of Series E Preferred, $1.00 par value.
Immediately prior to the Second Closing Date there were 1,677,076 shares of
Common Stock, 4,458,852 shares of Series A Preferred, 2,400,000 shares of
Series B Preferred, 2,292,635 shares of Series C Preferred, 2,083,332
shares of Series D Preferred and 857,143 shares of Series E Preferred
issued and outstanding. All shares outstanding immediately prior to the
Second Closing Date have been duly authorized and validly issued and are
fully paid and nonassessable. The Company holds no shares in its treasury.
Except for such shares of Common Stock and shares of Series A Preferred,
Series B Preferred, Series C Preferred, Series D Preferred and Series E
Preferred, the Company has no other authorized series or class of capital
stock and, except for the Warrants and outstanding options to purchase an
aggregate of 1,723,046 shares of Common Stock, has no outstanding options,
warrants or other rights to acquire securities of the Company. Except as
set forth in the Amended and Restated Registration Rights Agreement and the
Restated Articles, as amended by the Amendment, the Company is not subject
to any obligation to register or redeem any outstanding Securities of the
Company.
3.8 REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. Except as
modified by the representations and warranties set forth above in this
Section 3, the Company hereby reaffirms that the representations and
warranties of the Company set forth in the Series E Purchase Agreement were
true and correct in all material respects as of the date of the Series E
Purchase Agreement.
4. CONDITIONS TO CLOSING. The obligation of the Company and the Series E
Purchasers to consummate the transactions contemplated by this Amendment Number
1 is subject to the fulfillment prior to or on the Closing Date of the
applicable conditions set forth in this Section 4. In the event that any such
condition is not satisfied to the satisfaction of the Company and the Series E
Purchasers, then neither the Company nor any Series E Purchaser shall be
obligated to proceed with the consummation of the Second Closing.
4.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Company under this Amendment Number 1 shall be true in
all material respects as of the Second Closing Date with the same effect as
though made on and as of the Second Closing Date.
4.2 AMENDMENT OF ARTICLES OF INCORPORATION. As of the Second Closing
Date, the shareholders of the Company shall have approved the Amendment in
accordance with the Restated Articles and applicable law and the Amendment
shall have become effective as an amendment of the Restated Articles.
4.3 COMPLIANCE WITH AMENDMENT NUMBER 1. The Company shall have
performed and complied with all agreements or conditions required by this
Amendment
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<PAGE>
Number 1 to be performed and complied with by it prior to or as of the
Second Closing Date.
4.4 CERTIFICATE OF OFFICERS. The Company shall have delivered to the
Series E Purchasers a certificate, dated as of the Second Closing Date,
executed by the President and the Chief Financial Officer of the Company,
certifying to the satisfaction of the conditions specified in Sections 4.1,
4.2 and 4.3 above.
4.5 OPINION OF THE COMPANY'S COUNSEL. The Company shall have
delivered to each Series E Purchaser an opinion, satisfactory to each of
the Series E Purchasers, of Oppenheimer Wolff & Donnelly, counsel for the
Company, dated as of the Second Closing Date, to the effect that:
(a) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Minnesota,
and has the corporate power and authority to own and hold the
properties owned and leased by it and to carry on the business in
which it is engaged. The Company has the corporate power and
authority to enter into this Amendment Number 1 and to issue and sell
the Warrants and the Warrant Stock, and to carry out the provisions of
this Amendment Number 1;
(b) This Amendment Number 1 and the Warrants have been duly
authorized, executed and delivered by the Company, are the legal,
valid and binding agreements of the Company and are enforceable
against the Company in accordance with their respective terms, subject
to applicable bankruptcy, insolvency, moratorium, reorganization, and
other similar laws affecting the enforcement of creditors' rights
generally and to judicial limitations on the enforcement of the remedy
of specific performance and other equitable remedies;
(c) The Warrants have been duly authorized, validly issued and
delivered by the Company and are fully paid, non-assessable and free
and clear of any liens, charges, claims and encumbrances except any
created under this Amendment Number 1 or by or through the Series E
Purchasers. The Warrants are in valid and sufficient form and the
holders of the Warrants are entitled to the rights set forth in the
Warrants;
(d) The amendment of the Restated Articles to include the
provisions set forth in the Amendment has been adopted by all
necessary corporate action, the Amendment has been duly filed with the
Secretary of State of the State of Minnesota, no other or additional
filing or recording is necessary in order to amend the Restated
Articles to include the provisions set forth in the Amendment, and the
holders of the shares of Series E Preferred are entitled to the
rights, preferences and provisions of the Restated Articles, as
amended by the Amendment;
(e) All corporate proceedings required by law or by the
provisions of this Amendment Number 1 to be taken by the Board of
Directors and shareholders of the Company on or prior to the Second
Closing Date in connection with the
6
<PAGE>
execution and delivery of this Amendment Number 1 and the adoption of
the Amendment, and the issuance and delivery of the Warrants and the
Warrant Stock have been duly and validly taken;
(f) The Company is authorized by its Restated Articles, as
amended by the Amendment, to issue 25,000,000 shares of Common Stock,
$0.01 par value, 4,458,852 shares of Series A Preferred, $1.00 par
value, 2,400,000 shares of Series B Preferred, $1.25 par value,
2,292,635 shares of Series C Preferred, $1.00 par value, 2,083,332
shares of Series D Preferred, $1.00 par value, and 857,143 shares of
Series E Preferred, $1.00 par value. Immediately prior to the Second
Closing Date there were (to the best of such counsel's knowledge)
1,677,076 shares of Common Stock, 4,458,852 shares of Series A
Preferred, 2,400,000 shares of Series B Preferred, 2,292,635 shares of
Series C Preferred, 2,083,332 shares of Series D Preferred and 857,143
shares of Series E Preferred issued and outstanding. All shares
outstanding immediately prior to the Second Closing Date have been
duly authorized and validly issued and are fully paid and
nonassessable. To the best of such counsel's knowledge, the Company
holds no shares in its treasury. Except for such shares of Common
Stock and shares of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred and Series E Preferred, the Company has
no other authorized series or class of capital stock and, to the best
of such counsel's knowledge, except for the Warrants and outstanding
options to purchase an aggregate of 1,723,046 shares of Common Stock,
has no outstanding options, warrants or other rights to acquire
securities of the Company. To the best of such counsel's knowledge,
except as set forth in the Amended and Restated Registration Rights
Agreement and the Restated Articles, as amended by the Amendment, the
Company is not subject to any obligation to register or redeem any
outstanding Securities of the Company;
(g) The requisite number of shares of Warrant Stock, based upon
the terms of the Warrants in effect as of the Second Closing Date,
have been validly authorized and reserved for issuance upon exercise
of the Warrants, and when issued upon such exercise in accordance with
the terms and conditions of the Warrants and those of this Amendment
Number 1 the Warrant Stock will be duly authorized and issued and will
be fully paid and nonassessable. To the best of such counsel's
knowledge, no security-holder of the Company is entitled to preemptive
or similar rights to purchase the Warrants or the Warrant Stock
contemplated to be issued pursuant to this Amendment Number 1;
(h) Assuming the accuracy of the representations made by the
Series E Purchasers in Article 7 of the Series E Purchase Agreement,
the Company has obtained the approval or consent of all governmental
agencies or bodies required for the legal and valid execution and
delivery of this Amendment Number 1 and the legal and valid offer,
issuance and sale of the Warrants and the offer of the Warrant Stock
to the Series E Purchasers through exercise by them of the Warrants
and for the performance of the obligations of the Company under all
provisions of this Amendment
7
<PAGE>
Number 1. Assuming the accuracy of the representations made by the
Series E Purchasers in Article 7 of the Series E Purchase
Agreement, the execution, delivery and performance of this
Amendment Number 1, and the offer, issuance and sale of the
Warrants and the Warrant Stock and the consummation of the
transactions contemplated by this Amendment Number 1 will not
result in any breach or violation of the terms or provisions of, or
constitute a default under, the Restated Articles, as amended by
the Amendment, or the Restated Bylaws of the Company or any
statute, rule or regulation affecting the Company or its business.
To the best of such counsel's knowledge, the execution, delivery
and performance of this Amendment Number 1 by the Company, the
offer, issuance and sale of the Warrants and the Warrant Stock and
the consummation of the transactions contemplated by this Amendment
Number 1 will not result in any violation of any agreement or other
instrument of which such counsel is aware to which the Company is a
party or by which it is bound or to which any of its properties,
assets or business is subject or any judgment, decree or order;
(i) Assuming the accuracy of the representations made by the
Series E Purchasers in Article 7 of the Series E Purchase Agreement,
the offer, sale, issuance and delivery of the Warrants and the offer
of the Warrant Stock to the Series E Purchasers through exercise by
them of the Warrants under the circumstances contemplated by this
Amendment Number 1 are exempt from the registration and prospectus
delivery requirements of the Securities Act and all applicable state
securities laws; and
(j) Except for DeMarco, et. al., vs. Select Comfort Corporation,
such counsel has no knowledge of any litigation, proceeding or
governmental investigation pending or threatened against the Company
or its properties or business.
4.6 SUPPORTING DOCUMENTS. Legal counsel for the Series E Purchasers
shall have received the following:
(a) A copy of the resolutions of the Board of Directors of the
Company authorizing and approving the execution, delivery and
performance of this Amendment Number 1, and a copy of resolutions of
the Board of Directors and stockholders of the Company authorizing and
approving the Amendment, all such resolutions to be certified by the
Secretary of the Company;
(b) A Certificate of Incumbency executed by the Secretary of the
Company certifying the names, titles and signatures of the officers
authorized to execute this Amendment Number 1 and further certifying
that the Amendment has been duly filed and has become a part of the
Restated Articles, and that the Restated Bylaws have not been further
amended or modified except as contemplated hereby; and
(c) Such additional supporting documentation and other
information with respect to the transactions contemplated hereby as
legal counsel for the Series E Purchasers may reasonably request.
8
<PAGE>
4.7 QUALIFICATION UNDER STATE SECURITIES LAWS. All registrations,
qualifications, permits and approvals required under applicable state
securities laws for the lawful execution and delivery of this Amendment
Number 1 and the offer, sale, issuance and delivery of the Warrants to the
Series E Purchasers at the Second Closing and the offer of the Warrant
Stock shall have been obtained.
4.8 BOARD OF DIRECTORS. The Company shall have taken such actions as
shall be appropriate to elect to and maintain on its Board of Directors the
persons contemplated by Section 5 hereof.
5. DIRECTOR REPRESENTATION; SHAREHOLDER VOTING AGREEMENT.
5.1 REPLACEMENT OF SECTION 10 OF THE SERIES E PURCHASE AGREEMENT,
SECTION 10 OF THE SERIES D PURCHASE AGREEMENT, SECTION 10 OF THE SERIES C
PURCHASE AGREEMENT, SECTION 10 OF THE SERIES B PURCHASE AGREEMENT AND
SECTION 8.7 OF THE SERIES A PURCHASE AGREEMENT. This Section 5 replaces
Section 10 of each of the Series E Purchase Agreement, the Series D
Purchase Agreement, the Series C Purchase Agreement and the Series B
Purchase Agreement and Section 8.7 of the Series A Purchase Agreement in
their entirety and such Section 10 of each of the Series E Purchase
Agreement, the Series D Purchase Agreement, the Series C Purchase Agreement
and the Series B Purchase Agreement and Section 8.7 of the Series A
Purchase Agreement shall be of no further force or effect whatsoever.
5.2 COMPOSITION OF BOARD. Effective upon the closing of the
transactions contemplated by this Amendment Number 1, the Company's Board
of Directors shall consist of twelve (12) members. One (1) of the members
of the Board of Directors shall be the Chief Executive Officer of the
Corporation as appointed by the Board of Directors from time to time. The
holders of Series A Preferred shall have the right to elect three (3)
directors; (i) one of whom shall be designated by Saint Paul; (ii) one of
whom shall be designated by Cherry Tree; and (iii) one of whom shall be
designated by CVP. The holders of Series B Preferred shall have the right
to elect one (1) director, who shall be designated by Apex. The holders of
Series C Preferred shall have the right to elect one (1) director, who
shall be designated by KCB BV. The holders of Series D Preferred shall
have the right to elect one (1) director, who shall be elected by a
majority vote of the outstanding shares of Series D Preferred. The holders
of Series E Preferred shall have the right to elect one (1) director, who
shall be elected by a majority vote of the outstanding shares of Series E
Preferred. The remaining four (4) directors shall be elected by a majority
vote of all outstanding shares of the Company's capital stock voting
together as a single class on an as-if-converted basis. Each of the Series
E Purchasers hereby consents to the election of James Simons as the
director to be elected by the holders of Series E Preferred, his term to
continue until his successor is duly elected and qualified in accordance
with the Restated Articles, as amended, the Restated Bylaws, as amended,
and applicable law. Each of the Investors hereby further consents to the
amendment of the Restated Bylaws to increase the size of the Board of
Directors to up to twelve (12) members.
5.3 AGREEMENT TO VOTE SHARES. The Investors hereby agree to vote
their shares of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred,
9
<PAGE>
Series E Preferred, Conversion Stock, Warrant Stock, Common Stock or
any other capital stock of the Company now owned or hereafter acquired
by them in favor of the election of the persons designated by the
respective shareholders as provided in Section 5.2 above.
5.4 LOSS OF RIGHT TO DESIGNATE DIRECTOR. At such time as any of
Saint Paul, Cherry Tree, CVP, Apex or KCB BV shall hold less than twenty
percent (20%) of the Securities originally purchased by such Investor
pursuant to the Series A Purchase Agreement (in the case of Saint Paul,
Cherry Tree and CVP), Series B Purchase Agreement (in the case of Apex) or
Series C Purchase Agreement (in the case of KCB BV), such Investor shall
lose its right to designate a nominee for director. The director then
serving as such Investor's designee shall be removed and such directorship
shall be filled by the vote of the holders of 75% of the Series A Preferred
(in the case of Saint Paul, Cherry Tree or CVP) or of the Series B
Preferred (in the case of Apex) or of the Series C Preferred (in the case
of KCB BV).
5.5 VOTING AGREEMENT. This Section 5 constitutes a Shareholder
Voting Agreement pursuant to Section 302A.455 of the Minnesota Business
Corporation Act.
5.6 TERMINATION OF VOTING AGREEMENT. The obligations of the parties
under this Section 5, notwithstanding any provisions hereof apparently to
the contrary, shall terminate and shall be of no further force or effect at
the earlier of (a) the date that the Company makes a Qualified Public
Offering, or (b) the date that there are no longer any shares of Preferred
Stock issued and outstanding.
6. RESTRICTIONS ON TRANSFER OF SECURITIES.
6.1 RESTRICTIONS. The Warrants and the Warrant Stock are only
transferable pursuant to (a) a public offering registered under the
Securities Act, (b) Rule 144 of the Commission (or any similar rule then in
effect) if such rule is available, and (c) subject to the conditions
specified elsewhere in this Section 6, any other legally available means of
transfer.
6.2 LEGEND. Each Warrant and each certificate representing shares of
Warrant Stock shall be endorsed with a legend substantially similar to the
following:
The securities represented by this certificate have been issued
without registration under the Securities Act of 1933 or under any
state securities laws, and may not be sold, transferred or pledged in
the absence of an effective registration statement under applicable
federal and state securities laws or an opinion of counsel
satisfactory to the company that the transfer is exempt from
registration under applicable federal and state securities laws.
6.3 REMOVAL OF LEGEND. Any legend endorsed on a certificate pursuant
to Section 6.2 hereof shall be removed, and the Company shall issue a
certificate without such legend to the holder of such security, if such
security is being disposed of pursuant to a registration under the
Securities Act or pursuant to Rule 144 or any similar rule then in effect
or if such holder provides the Company with an opinion of counsel
satisfactory to the Company to the effect that a transfer of such security
may be made without
10
<PAGE>
registration. In addition, if the holder of such security delivers to the
Company an opinion of such counsel to the effect that no subsequent
transfer of such security will require registration under the Securities
Act, the Company will promptly upon such contemplated transfer deliver
new certificates evidencing such security that do not bear the legend
set forth in Section 6.2.
The aforesaid legend shall also be removed with respect to Securities held
for at least three years (including, with respect to the Warrant Stock
issued upon the cashless conversion of a Warrant, the period during which
the related Warrant had been held) by a person who has not been an
affiliate of the Company (as defined in Rule 144 under the Securities Act)
during the three months preceding the request for removal of such legend.
The foregoing legend removal requirement is based on Rule 144(k) under the
Securities Act as currently in force, and assumes that such Rule (or a
successor thereto) in substantially its current form shall be in effect at
the time of any such request for legend removal.
7. MISCELLANEOUS.
7.1 AMENDMENT OF REGISTRATION RIGHTS AGREEMENT. The Registration
Rights Agreement is hereby modified and amended as follows:
(a) The term "HOLDERS" as used therein shall be deemed to
include the holders as of the date of this Amendment Number 1 of
Warrants or Warrant Stock, and any subsequent legal or beneficial
owner of Warrants or Warrant Stock who has become a party to the
Amended and Restated Registration Rights Agreement in accordance with
Section 14 thereof.
(b) The term "REGISTRABLE COMMON" as used therein shall be
deemed to include (i) any shares of Common Stock then outstanding
which were issued upon exercise or conversion of any Warrant issued
hereunder; (ii) any shares of Common Stock then issuable upon
conversion of then-outstanding Warrants, (iii) any shares of Common
Stock then outstanding which were issued as, or were issued directly
or indirectly upon the conversion of other Securities (as defined in
the Registration Rights Agreement) issued as, a dividend or other
distribution with respect to, or in replacement of, the Warrants or
other Registrable Common (as defined in the Registration Rights
Agreement), and (iv) any shares of Common Stock then issuable directly
or indirectly upon the conversion or exercise of other Securities
issued as a dividend or other distribution with respect to, or in
replacement of, the Warrants or other Registrable Common.
7.2 WAIVER OF PREEMPTIVE RIGHTS. Each of the Investors hereby waives
any and all preemptive rights that the Investors or any holders of
Preferred Stock of the Company may have pursuant to the Restated Articles
or otherwise in connection with the offer, issuance and sale by the Company
of any shares of its Series E Preferred, the Conversion Stock, the Warrants
and the Warrant Stock pursuant to the Series E Purchase Agreement and this
Amendment Number 1.
11
<PAGE>
7.3 CHANGES, WAIVERS, ETC. Neither this Amendment Number 1 nor any
provision hereof may be changed, waived, discharged or terminated orally,
but only by a statement in writing signed by the party against which
enforcement of the change, waiver, discharge or termination is sought,
except to the extent provided in Section 15.1 of the Series E Purchase
Agreement.
7.4 PARTIES IN INTEREST. All the terms and provisions of this
Amendment Number 1 shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and, in particular, shall inure to the benefit
of and be enforceable by the holder or holders from time to time of any of
the Series E Preferred, the Conversion Stock, the Warrants or the Warrant
Stock.
7.5 CHOICE OF LAW. The laws of Minnesota shall govern the validity
of this Amendment Number 1, the construction of its terms and the
interpretation of the rights and duties of the parties hereunder.
7.6 FORCE OF AMENDMENT. Except as specifically amended hereby, the
Series E Purchase Agreement and the Registration Rights Agreement shall
remain in full force and effect.
7.7 COUNTERPARTS. This Amendment Number 1 may be executed
concurrently 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.
7.8 SEVERABILITY. Should any one or more of the provisions of this
Amendment Number 1 or of any agreement entered into pursuant to this
Amendment Number 1 be determined to be illegal or unenforceable, all other
provisions of this Amendment Number 1 and of each other agreement entered
into pursuant to this Amendment Number 1, shall be given effect separately
from the provision or provisions determined to be illegal or unenforceable
and shall not be affected thereby.
12
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amendment Number 1 to be
executed by its duly authorized representative and each of the Investors has
caused this Amendment Number 1 to be executed by signing in counterpart the
acceptance form attached to this Amendment Number 1.
SELECT COMFORT CORPORATION,
a Minnesota corporation
By: /s/
-------------------------------------
Its: CEO
-------------------------------------
ST. PAUL FIRE AND MARINE
INSURANCE CO., a Minnesota corporation
By: /s/
-------------------------------------
Its:
-------------------------------------
CHERRY TREE VENTURES IV,
a Minnesota Limited Partnership
By: /s/
-------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS I, L.P.,
a Delaware Limited Partnership
By: Consumer Venture Associates, L.P.,
Its General Partner
By: /s/
-------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS II, L.P.,
a Delaware Limited Partnership
By: Consumer Venture Associates II, L.P.,
Its General Partner
By: /s/
-------------------------------------
13
<PAGE>
Its General Partner
APEX INVESTMENT FUND, L.P.,
a Delaware Limited Partnership
By: Apex Management Partnership,
Its General Partner
By: Stellar Investment Co.,
Its Managing General Partner
By: /s/
-------------------------------------
James A. Johnson, President
THE PRODUCTIVITY FUND II, L.P.,
a Delaware Limited Partnership
By: First Analysis Management Company II,
Its General Partner
By: First Analysis Corporation,
Its General Partner
By: /s/
-------------------------------------
Its:
-------------------------------------
KCB BV, L.P.,
a California Limited Partnership
By: KCB BV, INC.,
Its General Partner
By: /s/
-------------------------------------
Harvey G. Knell, President
NORWEST EQUITY PARTNERS IV,
a Minnesota Limited Partnership
By: Itasca Partners
Its General Partner
By: /s/
-------------------------------------
Its: Partner
-------------------------------------
14
<PAGE>
NORWEST EQUITY PARTNERS V,
a Minnesota Limited Partnership
By: Itasca Partners V
Its General Partner
By: /s/
-------------------------------------
Its: Partner
-------------------------------------
GROSSMAN INVESTMENTS,
a General Partnership
By: /s/
-------------------------------------
Its General Partner
H & Q SELECT COMFORT INVESTORS L.P.,
a limited partnership
By: H & Q Select Comfort Investors L.L.C.
Its General Partner
By: /s/
-------------------------------------
Its:
-------------------------------------
H & Q LONDON VENTURES
By: /s/
-------------------------------------
Its:
-------------------------------------
MARQUETTE VENTURE PARTNERS II, L.P.,
a limited partnership
By: /s/
-------------------------------------
Its: Authorized Signatory
MVP II AFFILIATES FUND, L.P.,
a limited partnership
By: /s/
-------------------------------------
Its: Authorized Signatory
15
<PAGE>
MACKE LIMITED PARTNERSHIP
By: /s/
-------------------------------------
Its:
PAINE WEBBER INCORPORATED, CUSTODIAN OF
FRED W. REESE DECEDENT IRA
By:/s/
-------------------------------------
Its:
-------------------------------------
BAYVIEW INVESTORS, LTD.
By:/s/
-------------------------------------
Its:
-------------------------------------
ALEX. BROWN & SONS
EMPLOYEES VENTURE FUND LP
By:/s/
-------------------------------------
Its:
-------------------------------------
MONTGOMERY ASSOCIATES, 1992 L.P.
By:/s/
-------------------------------------
Its:
-------------------------------------
/s/ Patrick A. Hopf
----------------------------------------
Patrick A. Hopf
/s/ Theodore H. Ashford
----------------------------------------
Theodore H. Ashford
/s/ John Sculley
----------------------------------------
John Sculley
/s/ Mark L. de Naray
----------------------------------------
Mark L. de Naray
/s/ Daniel J. McAthie
----------------------------------------
Daniel J. McAthie
16
<PAGE>
/s/ Karl L. Matthies
----------------------------------------
Karl L. Matthies
/s/ Deborah N. Matthies
----------------------------------------
Deborah N. Matthies
/s/ Thomas R. Hitchner
----------------------------------------
Thomas R. Hitchner
/s/ Donald P. Clark
----------------------------------------
Donald P. Clark
/s/ Catherine Clark Griffin
----------------------------------------
Catherine Clark Griffin
/s/ Deborah Clark Lencioni
----------------------------------------
Deborah Clark Lencioni
/s/ Carol Anne Clark Pontrelli
----------------------------------------
Carol Anne Clark Pontrelli
/s/ Carl Hulick
----------------------------------------
Carl Hulick
/s/ Everett V. Cox
----------------------------------------
Everett V. Cox
/s/ Michael B. Gorman
----------------------------------------
Michael B. Gorman
/s/ Terral Jordan
----------------------------------------
Terral Jordan
/s/ Erwin A. Kelen
----------------------------------------
Erwin A. Kelen
/s/ John A. Rollwagen
----------------------------------------
John A. Rollwagen
/s/ Dewey K. Shay
----------------------------------------
Dewey K. Shay
/s/ Doug Hickman
----------------------------------------
Doug Hickman
/s/ Brian D. Jacobs
----------------------------------------
Brian D. Jacobs
17
<PAGE>
/s/ Barbro E. Shronts
----------------------------------------
Barbro E. Shronts
/s/ Sharon Pearson
----------------------------------------
Sharon Pearson
18
<PAGE>
Exhibit 4.6
SELECT COMFORT CORPORATION
AMENDMENT NUMBER 2 TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
AND WAIVER OF PREEMPTIVE RIGHTS
This Amendment Number 2 to the Amended and Restated Registration Rights
Agreement is made as of the 1st day of November, 1996, among Select Comfort
Corporation, a Minnesota corporation (the "Company"), and each of the Holders,
as defined in the Registration Rights Agreement, as defined below.
WHEREAS, the Company and the Holders entered into that certain Amended and
Restated Registration Rights Agreement dated as of December 28, 1995, as amended
by that certain Amendment Number 1 made on April 25, 1996 (the "Registration
Rights Agreement"); and
WHEREAS, the Company and the Holders desire to amend, effective as of
November 1, 1996, the Registration Rights Agreement, all as more fully set forth
herein; and
WHEREAS, terms used herein with an initial capital letter, unless otherwise
expressly defined herein, shall have the meaning given to such terms in the
Registration Rights Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Holders agree as
follows:
1. AMENDMENT OF REGISTRATION RIGHTS AGREEMENT. The Registration
Rights Agreement is hereby modified and amended as follows:
(a) The term "Holders" as used therein shall be deemed to
include (i) the holders of the warrants to purchase shares of Common Stock of
the Company issued in connection with that certain bridge financing transaction
entered into between the Company and certain Holders on or about November 1,
1996 in the maximum aggregate principal amount of $1,500,000 (the "Bridge
Warrants"), (ii) the holders of the securities issuable upon exercise of the
Bridge Warrants (the "Bridge Warrant Stock"), and (iii) any subsequent legal or
beneficial owner of the Bridge Warrants or the Bridge Warrant Stock who has
become a party to the Registration Rights Agreement in accordance with Section
14 thereof.
(b) The term "Registrable Common" as used therein shall be
deemed to include (i) any shares of Common Stock then outstanding which were
issued upon exercise or conversion of any of the Bridge Warrants; (ii) any
shares of Common Stock then issuable upon conversion of any then outstanding
Bridge Warrants, (iii) any shares of Common Stock then outstanding which were
issued as, or were issued directly or indirectly upon the conversion of other
Securities (as defined in the Registration Rights Agreement) issued as, a
dividend or other distribution with respect to, or in replacement of, or upon
exercise of, the Bridge Warrants or other Registrable Common (as defined in the
Registration Rights Agreement), and (iv) any
<PAGE>
shares of Common Stock then issuable directly or indirectly upon the
conversion or exercise of other Securities issued as a dividend or other
distribution with respect to, or in replacement of, or upon exercise of, the
Bridge Warrants or other Registrable Common.
2. WAIVER OF PREEMPTIVE RIGHTS. Each of the Holders hereby waives
any and all preemptive rights that the Holders or any holders of Preferred Stock
of the Company may have pursuant to the Restated Articles or otherwise in
connection with the offer, issuance and sale by the Company of any of the Bridge
Warrants and the Bridge Warrant Stock.
3. CHANGES, WAIVERS, ETC. Neither this Amendment Number 2 nor any
provision hereof may be changed, waived, discharged or terminated orally, but
only by a statement in writing signed by the party against which enforcement of
the change, waiver, discharge or termination is sought, except to the extent
provided in the Registration Rights Agreement.
4. PARTIES IN INTEREST. All the terms and provisions of this
Amendment Number 2 shall be binding upon and inure to the benefit of and be
enforceable by the respective successors and assigns of the parties hereto,
whether so expressed or not, and, in particular, shall inure to the benefit of
and be enforceable by the holder or holders from time to time of any of the
Bridge Warrants or the Bridge Warrant Stock.
5. CHOICE OF LAW. The laws of Minnesota shall govern the validity
of this Amendment Number 2, the construction of its terms and the interpretation
of the rights and duties of the parties hereunder.
6. FORCE OF AMENDMENT. Except as specifically amended hereby, the
Registration Rights Agreement shall remain in full force and effect.
7. COUNTERPARTS. This Amendment Number 2 may be executed
concurrently 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.
8. SEVERABILITY. Should any one or more of the provisions of this
Amendment Number 2 be determined to be illegal or unenforceable, all other
provisions of this Amendment Number 2 shall be given effect separately from the
provision or provisions determined to be illegal or unenforceable and shall not
be affected thereby.
2
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amendment Number 2 to be
executed by its duly authorized representative and each of the Holders has
caused this Amendment Number 2 to be executed by signing in counterpart the
acceptance form attached to this Amendment Number 2.
SELECT COMFORT CORPORATION,
a Minnesota corporation
By: /S/
--------------------------------------
Its:
--------------------------------------
ST. PAUL FIRE AND MARINE
INSURANCE CO., a Minnesota corporation
By: /S/
--------------------------------------
Its:
--------------------------------------
CHERRY TREE VENTURES IV,
a Minnesota Limited Partnership
By: /S/
--------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS I,
L.P., a Delaware Limited Partnership
By: Consumer Venture Associates, L.P.,
Its General Partner
By: /S/
--------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS II,
L.P., a Delaware Limited Partnership
By: Consumer Venture Associates II, L.P.,
Its General Partner
By: /S/
--------------------------------------
Its General Partner
APEX INVESTMENT FUND, L.P.,
3
<PAGE>
a Delaware Limited Partnership
By: Apex Management Partnership,
Its General Partner
By: Stellar Investment Co.,
Its Managing General Partner
By: /S/
--------------------------------------
James A. Johnson, President
THE PRODUCTIVITY FUND II, L.P.,
a Delaware Limited Partnership
By: First Analysis Management Company
II,
Its General Partner
By: First Analysis Corporation,
Its General Partner
By: /S/
--------------------------------------
Its:
--------------------------------------
KCB BV, L.P.,
a California Limited Partnership
By: KCB BV, INC.,
Its General Partner
By:
--------------------------------------
Harvey G. Knell, President
NORWEST EQUITY PARTNERS IV,
a Minnesota Limited Partnership
By: Itasca Partners
Its General Partner
By: /S/
--------------------------------------
Its:
--------------------------------------
NORWEST EQUITY PARTNERS V,
a Minnesota Limited Partnership
4
<PAGE>
By: Itasca Partners V
Its General Partner
By: /S/
--------------------------------------
Its:
--------------------------------------
GROSSMAN INVESTMENTS,
a General Partnership
By: /S/
--------------------------------------
Its General Partner
H & Q SELECT COMFORT INVESTORS
L.P., a limited partnership
By: H & Q Select Comfort Investors L.L.C.
Its General Partner
By: /S/
--------------------------------------
Its:
--------------------------------------
H & Q LONDON VENTURES
By: /S/
--------------------------------------
Its:
--------------------------------------
MARQUETTE VENTURE PARTNERS II,
L.P., a limited partnership
By: /S/
--------------------------------------
Its:
--------------------------------------
MVP II AFFILIATES FUND, L.P.,
a limited partnership
By: /S/
--------------------------------------
Its:
--------------------------------------
MACKE LIMITED PARTNERSHIP
By: /S/
--------------------------------------
5
<PAGE>
Its:
--------------------------------------
PAINE WEBBER INCORPORATED,
CUSTODIAN OF FRED W. REESE
DECEDENT IRA
By:
--------------------------------------
Its:
--------------------------------------
BAYVIEW HOLDERS, LTD.
By:
--------------------------------------
Its:
--------------------------------------
ALEX. BROWN & SONS EMPLOYEES
VENTURE FUND LP
By:
--------------------------------------
Its:
--------------------------------------
MONTGOMERY ASSOCIATES, 1992 L.P.
By:
--------------------------------------
Its:
--------------------------------------
/S/
-----------------------------------------
Patrick A. Hopf
/S/
-----------------------------------------
Theodore H. Ashford
/S/
-----------------------------------------
John Sculley
-----------------------------------------
Lynn Elliott
6
<PAGE>
/S/
-----------------------------------------
Daniel J. McAthie
-----------------------------------------
Karl L. Matthies
-----------------------------------------
Deborah N. Matthies
-----------------------------------------
Thomas R. Hitchner
/S/
-----------------------------------------
Donald P. Clark
/S/
-----------------------------------------
Catherine Clark Griffin
/S/
-----------------------------------------
Deborah Clark Lencioni
/S/
-----------------------------------------
Carol Anne Clark Pontrelli
/S/
-----------------------------------------
Carl Hulick
/S/
-----------------------------------------
Everett V. Cox
/S/
-----------------------------------------
Michael B. Gorman
7
<PAGE>
/S/
-----------------------------------------
Terral Jordan
/S/
-----------------------------------------
Erwin A. Kelen
/S/
-----------------------------------------
John A. Rollwagen
/S/
-----------------------------------------
Dewey K. Shay
/S/
-----------------------------------------
Doug Hickman
/S/
-----------------------------------------
Brian D. Jacobs
/S/
-----------------------------------------
Barbro E. Shronts
-----------------------------------------
Sharon Pearson
8
<PAGE>
Exhibit 4.7
SELECT COMFORT CORPORATION
AMENDMENT NUMBER 2 TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This Amendment Number 2 to the Amended and Restated Registration Rights
Agreement is made this 24th day of March, 1997 among Select Comfort Corporation,
a Minnesota corporation (the "COMPANY"), and each of the Holders, as such term
is defined in that certain Amended and Restated Registration Rights Agreement
dated December 28, 1995, as amended by that certain Amendment Number 1 to
Amended and Restated Registration Rights Agreement, made as of April 25, 1996
(the "REGISTRATION RIGHTS AGREEMENT").
WHEREAS, the Company intends to obtain $15 million in senior subordinated
debt financing from General Electric Capital Corporation ("GECC"), which
financing provides for the issuance by the Company to GECC of warrants to
purchase an aggregate of up to 2,100,000 shares of common stock of the Company
(the "GE WARRANTS"); and
WHEREAS, the GE Warrants provide the Holders thereof with certain
registration rights, and the Company, GECC and the Holders desire to coordinate
the relative priorities of the registration rights of the Holders and of the
holders of the GE Warrants, all as more fully set forth herein; and
WHEREAS, terms used herein with an initial capital letter, unless otherwise
expressly defined herein, shall have the meaning given to such terms in the
Registration Rights Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Company and the Holders agree as
follows:
1. AMENDMENT OF SECTION 10 OF THE REGISTRATION RIGHTS AGREEMENT.
Section 10 of the Registration Rights Agreement is hereby modified and amended
to add a new Section 10.4 thereto, which new Section 10.4 shall read in its
entirety as follows:
Section 10.4 Notwithstanding anything contained herein to the
contrary, in the event that the holder or holders of the GE Warrants
exercise the incidental registration rights set forth in Section 9.4
of the GE Warrants, as originally issued, and if the managing
underwriter of the proposed offering advises the Company in writing
that in its opinion the distribution of the shares underlying the GE
Warrants requested to be included in the registration concurrently
with the securities being registered by the Company or the security
holders demanding such registration would materially and adversely
affect the distribution of such securities by the Company or such
demanding security holders, then the rights of the holder or holders
of the GE Warrants to include the shares underlying the GE Warrants in
such registration shall be on a PARI PASSU basis with the Holders,
such that to the extent that any shares held by selling security
holders are to be excluded from any such registration, such shares
will be excluded on a pro rata basis among the Holders and the holder
or holders of the GE Warrants.
<PAGE>
2. FORCE OF AMENDMENT. Except as specifically amended hereby, the
Registration Rights Agreement shall remain in full force and effect.
3. COUNTERPARTS. This Amendment Number 2 may be executed
concurrently 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.
IN WITNESS WHEREOF, the Company has caused this Amendment Number 2 to be
executed by its duly authorized representative and each of the Holders has
caused this Amendment Number 2 to be duly executed and delivered.
SELECT COMFORT CORPORATION,
a Minnesota corporation
By: /s/
-------------------------------------
Its: EVP - CFO & CAO
ST. PAUL FIRE AND MARINE
INSURANCE CO., a Minnesota corporation
By: /s/
-------------------------------------
Its: Vice President
CHERRY TREE VENTURES IV,
a Minnesota Limited Partnership
By: /s/
-------------------------------------
Its General Partner
CONSUMER VENTURE PARTNERS I,
L.P., a Delaware Limited Partnership
By: Consumer Venture Associates, L.P.,
Its General Partner
By: /s/
-------------------------------------
Its General Partner
2
<PAGE>
CONSUMER VENTURE PARTNERS II,
L.P., a Delaware Limited Partnership
By: Consumer Venture Associates II, L.P.,
Its General Partner
By: /s/
-------------------------------------
Its General Partner
APEX INVESTMENT FUND, L.P.,
a Delaware Limited Partnership
By: Apex Management Partnership,
Its General Partner
By: Stellar Investment Co.,
Its Managing General Partner
By: /s/
-------------------------------------
James A. Johnson, President
THE PRODUCTIVITY FUND II, L.P.,
a Delaware Limited Partnership
By: First Analysis Management Company
II,
Its General Partner
By: First Analysis Corporation,
Its General Partner
By: /s/
-------------------------------------
Its:
-------------------------------------
KCB BV, L.P.,
a California Limited Partnership
By: KCB BV, INC.,
Its General Partner
By: /s/
-------------------------------------
Harvey G. Knell, President
3
<PAGE>
NORWEST EQUITY PARTNERS IV,
a Minnesota Limited Partnership
By: Itasca Partners
Its General Partner
By:
-------------------------------------
Its:
-------------------------------------
NORWEST EQUITY PARTNERS V,
a Minnesota Limited Partnership
By: Itasca Partners V
Its General Partner
By:
-------------------------------------
Its:
-------------------------------------
GROSSMAN INVESTMENTS,
a General Partnership
By: /s/
-------------------------------------
Its General Partner
H & Q SELECT COMFORT INVESTORS
L.P., a limited partnership
By: H & Q Select Comfort Investors L.L.C.
Its General Partner
By: /s/
-------------------------------------
Its:
-------------------------------------
H & Q LONDON VENTURES
By: /s/
-------------------------------------
Its:
-------------------------------------
4
<PAGE>
MARQUETTE VENTURE PARTNERS II,
L.P., a limited partnership
By: /s/
-------------------------------------
Its:
-------------------------------------
MVP II AFFILIATES FUND, L.P.,
a limited partnership
By: /s/
-------------------------------------
Its:
-------------------------------------
MACKE LIMITED PARTNERSHIP
By: /s/
-------------------------------------
Its:
-------------------------------------
PAINE WEBBER INCORPORATED,
CUSTODIAN OF FRED W. REESE
DECEDENT IRA
By: /s/
-------------------------------------
Its:
-------------------------------------
BAYVIEW HOLDERS, LTD.
By:
-------------------------------------
Its:
-------------------------------------
ALEX. BROWN & SONS EMPLOYEES
VENTURE FUND LP
By:
-------------------------------------
Its:
-------------------------------------
MONTGOMERY ASSOCIATES, 1992 L.P.
By: /s/
-------------------------------------
Its:
-------------------------------------
/s/
-------------------------------------
5
<PAGE>
Patrick A. Hopf
/s/
----------------------------------------
Theodore H. Ashford
/s/
----------------------------------------
John Sculley
----------------------------------------
Lynn Elliott
/s/
----------------------------------------
Daniel J. McAthie
/s/
----------------------------------------
Karl L. Matthies
/s/
----------------------------------------
Deborah N. Matthies
/s/
----------------------------------------
Thomas R. Hitchner
/s/
----------------------------------------
Donald P. Clark
/s/
----------------------------------------
Catherine Clark Griffin
/s/
----------------------------------------
Deborah Clark Lencioni
/s/
----------------------------------------
Carol Anne Clark Pontrelli
/s/
----------------------------------------
Carl Hulick
/s/
----------------------------------------
Everett V. Cox
/s/
----------------------------------------
Michael B. Gorman
/s/
----------------------------------------
Terral Jordan
6
<PAGE>
/s/
----------------------------------------
Erwin A. Kelen
/s/
----------------------------------------
John A. Rollwagen
/s/
----------------------------------------
Dewey K. Shay
/s/
----------------------------------------
Doug Hickman
/s/
----------------------------------------
Brian D. Jacobs
/s/
----------------------------------------
Barbro E. Shronts
----------------------------------------
Sharon Pearson
7
<PAGE>
SERIES A WARRANT
TO PURCHASE COMMON STOCK OF
SELECT COMFORT CORPORATION
Warrant No. A-2
No. of Shares of Common Stock: 1,309,583
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. EXERCISE OF WARRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.1. MANNER OF EXERCISE.. . . . . . . . . . . . . . . . . . . . . . . . 4
2.2. PAYMENT OF TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3. FRACTIONAL SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.4. CONTINUED VALIDITY.. . . . . . . . . . . . . . . . . . . . . . . . 6
3. TRANSFER, DIVISION AND COMBINATION. . . . . . . . . . . . . . . . . . . . 6
3.1. TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2. DIVISION AND COMBINATION . . . . . . . . . . . . . . . . . . . . . 6
3.3. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.4. MAINTENANCE OF BOOKS . . . . . . . . . . . . . . . . . . . . . . . 7
4. ADJUSTMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.1. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS:. . . . . . . . . . 7
4.2. CERTAIN OTHER DISTRIBUTIONS AND ADJUSTMENTS. . . . . . . . . . . . 7
4.3. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. . . . . . . . . . . 8
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS . . . . . . . . . . . . . . . 8
4.5. ISSUANCE OF CONVERTIBLE SECURITIES . . . . . . . . . . . . . . . . 9
4.6. SUPERSEDING ADJUSTMENT . . . . . . . . . . . . . . . . . . . . . . 9
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. . . 10
4.8. REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS... . . . . . . . . . . . . . . . . . . . . . 12
4.9. OTHER ACTION AFFECTING COMMON STOCK. . . . . . . . . . . . . . . . 12
5. NOTICES TO WARRANT HOLDERS. . . . . . . . . . . . . . . . . . . . . . . . 12
5.1. NOTICE OF ADJUSTMENTS. . . . . . . . . . . . . . . . . . . . . . . 12
5.2. NOTICE OF CORPORATE ACTION. . . . . . . . . . . . . . . . . . . . 13
6. NO IMPAIRMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY . . . . . . . . . . . . . . . . 14
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS. . . . . . . . . . . . 14
9. RESTRICTIONS ON TRANSFERABILITY . . . . . . . . . . . . . . . . . . . . . 14
9.1. RESTRICTIVE LEGEND . . . . . . . . . . . . . . . . . . . . . . . . 15
9.2. NOTICE OF PROPOSED TRANSFERS; REQUESTS FOR REGISTRATION. . . . . . 15
9.3. REQUIRED REGISTRATION. . . . . . . . . . . . . . . . . . . . . . . 15
9.4. INCIDENTAL REGISTRATION. . . . . . . . . . . . . . . . . . . . . . 16
9.5. REGISTRATION PROCEDURES. . . . . . . . . . . . . . . . . . . . . . 16
9.6. EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.7. INDEMNIFICATION AND CONTRIBUTION.. . . . . . . . . . . . . . . . . 18
9.8. TERMINATION OF RESTRICTIONS. . . . . . . . . . . . . . . . . . . . 19
9.9. LISTING ON SECURITIES EXCHANGE.. . . . . . . . . . . . . . . . . . 20
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
9.10. CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. . . . . . . . . . . . 20
9.11. SELECTION OF MANAGING UNDERWRITERS. . . . . . . . . . . . . . . . 20
10. SUPPLYING INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . 20
11. LOSS OR MUTILATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
12. OFFICE OF COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13. FINANCIAL AND BUSINESS INFORMATION . . . . . . . . . . . . . . . . . . . 21
13.1. QUARTERLY INFORMATION . . . . . . . . . . . . . . . . . . . . . . 21
13.2. ANNUAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 21
13.3. FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14. REPURCHASE BY COMPANY OF WARRANT . . . . . . . . . . . . . . . . . . . . 22
14.1. OBLIGATION TO REPURCHASE WARRANT. . . . . . . . . . . . . . . . . 22
14.2. OPTION TO REPURCHASE WARRANT. . . . . . . . . . . . . . . . . . . 22
14.3. DETERMINATION AND PAYMENT OF REPURCHASE PRICE.. . . . . . . . . . 22
15. APPRAISAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
16. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . . . . . . . . 23
17. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
17.1. NONWAIVER AND EXPENSES. . . . . . . . . . . . . . . . . . . . . . 23
17.2. NOTICE GENERALLY: . . . . . . . . . . . . . . . . . . . . . . . . 23
17.3. REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.4. SUCCESSORS AND ASSIGNS. . . . . . . . . . . . . . . . . . . . . . 24
17.5. AMENDMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.6. SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
17.7. HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
17.8. GOVERNING LAW.. . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
</TABLE>
EXHIBITS
Exhibit A - Subscription Form
Exhibit B - Assignment Form
ii
<PAGE>
THIS WARRANT AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED IN
VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS
OF THIS WARRANT.
No. of Shares of Common Stock: 1,309,583 Warrant No. A-2
SERIES A WARRANT
To Purchase Common Stock of
SELECT COMFORT CORPORATION
THIS IS TO CERTIFY THAT GENERAL ELECTRIC CAPITAL CORPORATION, or
registered assigns, is entitled, at any time during the Exercise Period (as
hereinafter defined), to purchase from SELECT COMFORT CORPORATION, a Minnesota
corporation ("Company"), 1,309,583 shares of Common Stock (as hereinafter
defined and subject to adjustment as provided herein), in whole or in part,
including fractional parts, at a purchase price of $8.82 per share (subject to
adjustment as provided herein) all on the terms and conditions and pursuant to
the provisions hereinafter set forth.
1. DEFINITIONS
Terms used in this Warrant which are defined in the Purchase Agreement
(as defined below) are used herein as defined therein unless otherwise provided,
and the following terms have the respective meanings set forth below:
"Additional Shares of Common Stock" shall mean all shares of Common Stock
issued by Company after the Closing Date, other than Warrant Stock.
"Appraised Value" shall mean, in respect of any share of Common Stock on
any date herein specified, the fair saleable value of such share of Common Stock
(determined without giving effect to the discount for (i) a minority interest or
(ii) any lack of liquidity of the Common Stock or to the fact that Company may
have no class of equity registered under the Exchange Act) as of the last day of
the most recent fiscal month to end within 60 days prior to such date specified
for purposes of Section 14.1 hereof and as of the most recent determination
thereof for all other purposes hereof, based on the equity value of Company, as
determined by an investment banking or valuation firm selected in accordance
with the terms of Section 15, divided by the number of Fully Diluted Outstanding
shares of Common Stock as determined in accordance with GAAP (assuming the
payment of the exercise prices for such shares).
"Business Day" shall mean any day that is not a Saturday or Sunday or a
day on which banks are required or permitted to be closed in the State of New
York.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency then administering the Securities Act and other federal
securities laws.
1
<PAGE>
"Common Stock" shall mean (except where the context otherwise indicates)
the Common Stock, $0.01 par value, of Company as constituted on the Closing
Date, and any capital stock into which such Common Stock may thereafter be
changed, and shall also include (i) capital stock of Company of any other class
(regardless of how denominated) issued to the holders of shares of Common Stock
upon any reclassification thereof which is also not preferred as to dividends or
assets over any other class of stock of Company and which is not subject to
redemption and (ii) shares of common stock of any successor or acquiring
corporation (as defined in Section 4.8) received by or distributed to the
holders of Common Stock of Company in the circumstances contemplated by Section
4.8.
"Convertible Securities" shall mean evidences of indebtedness, shares of
stock or other securities which are convertible into or exchangeable, with or
without payment of additional consideration in cash or property, for Additional
Shares of Common Stock, either immediately or upon the occurrence of a specified
date or a specified event.
"Current Market Price" shall mean, in respect of any share of Common
Stock on any date herein specified, either (a) the EBITDA Value per share of
Common Stock as at such date, or (b) if there shall then be a public market for
the Common Stock, the average of the daily market prices for 20 consecutive
Business Days commencing 30 days before such date. The daily market price for
each such Business Day shall be (i) the last sale price on such day on the
principal stock exchange or NASDAQ National Market System ("NASDAQ-NMS") on
which such Common Stock is then listed or admitted to trading, (ii) if no sale
takes place on such day on any such exchange or NASDAQ-NMS, the average of the
last reported closing bid and asked prices on such day as officially quoted on
any such exchange or NASDAQ-NMS, (iii) if the Common Stock is not then listed or
admitted to trading on any stock exchange or NASDAQ-NMS, the average of the last
reported closing bid and asked prices on such day in the over-the-counter
market, as furnished by the National Association of Securities Dealers Automatic
Quotation System or the National Quotation Bureau, Inc., (iv) if neither such
corporation at the time is engaged in the business of reporting such prices, as
furnished by any similar firm then engaged in such business, or (v) if there is
no such firm, as furnished by any member of the NASD selected mutually by the
Majority Holders and Company or, if they cannot agree upon such selection, as
selected by two such members of the NASD, one of which shall be selected by the
Majority Holders and one of which shall be selected by Company.
"Current Warrant Price" shall mean, in respect of a share of Common Stock
at any date herein specified, the price at which a share of Common Stock may be
purchased pursuant to this Warrant on such date.
"Deferral Notice" shall have the meaning set forth in Section 14.1(a).
"EBITDA Value" shall mean, in respect of any share of Common Stock on any
date herein specified, the quotient of (x) the EBITDA of Company and its
Subsidiaries for the most recent four calendar quarters for which financial
statements are available, multiplied by seven (7), minus Indebtedness, and plus
cash and Cash Equivalents, and then divided by (y) the number of Fully Diluted
Outstanding Shares of Common Stock as determined in accordance with GAAP, as
certified by Company's chief financial officer.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar federal statute, and the rules and regulations of the
Commission thereunder, all as the same shall be in effect from time to time.
2
<PAGE>
"Exercise Period" shall mean the period during which this Warrant is
exercisable pursuant to Section 2.1.
"Expiration Date" shall mean March 31, 2005.
"Fully Diluted Outstanding" shall mean, when used with reference to
Common Stock, at any date as of which the number of shares thereof is to be
determined, all shares of Common Stock Outstanding at such date and all shares
of Common Stock issuable in respect of this Warrant outstanding on such date,
and other options or warrants to purchase, or securities convertible into,
shares of Common Stock outstanding on such date which would be deemed
outstanding in accordance with GAAP for purposes of determining book value or
net income per share on a fully diluted basis.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as from time to time in effect.
"GE Capital" shall mean General Electric Capital Corporation, a New York
corporation.
"Holder" shall mean the Person in whose name the Warrant set forth herein
is registered on the books of Company maintained for such purpose.
"IPO" shall mean, for purposes of Sections 4.5, 14.1 and 14.2 hereof, a
sale of Company's Common Stock pursuant to an initial public offering registered
under the Securities Act and underwritten on a firm commitment basis by a
nationally recognized investment banking firm.
"Majority Holders" shall mean the holders of Warrants exercisable for in
excess of 50% of the aggregate number of shares of Common Stock then purchasable
upon exercise of all Warrants, whether or not then exercisable.
"NASD" shall mean the National Association of Securities Dealers, Inc.,
or any successor corporation thereto.
"Note" shall have the meaning set forth in Section 2.1.
"Other Property" shall have the meaning set forth in Section 4.8.
"Outstanding" shall mean, when used with reference to Common Stock, at
any date as of which the number of shares thereof is to be determined, all
issued shares of Common Stock, except shares then owned or held by or for the
account of Company or any subsidiary thereof, and shall include all shares
issuable in respect of outstanding scrip or any certificates representing
fractional interests in shares of Common Stock.
"Permitted Issuances" shall mean the issuance of (i) shares of Common
Stock upon conversion of Company's presently outstanding preferred stock,
warrants and options, and (ii) additional options to Company's employees,
non-employee directors, consultants and independent contractors and the shares
of Common Stock issued upon exercise thereof, provided that not more than a
total of 100,000 options may be issued in each Fiscal Year beginning with Fiscal
Year 1998. Any options that may be, but are not, granted in a Fiscal Year may
be granted in any subsequent Fiscal Year, in addition to the options which may
be granted in such subsequent Fiscal Year.
3
<PAGE>
"Person" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, incorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Purchase Agreement" shall mean the Purchase Agreement dated as of March
27, 1997 by and between Company and GE Capital, or any successor agreement
between such parties.
"Repurchase Price" shall mean, in respect of any share of Common Stock or
Warrant Stock on any date herein specified, the higher of the Appraised Value or
EBITDA Value per share of Common Stock as of such date.
"Restricted Common Stock" shall mean shares of Common Stock which are, or
which upon their issuance on the exercise of this Warrant would be, evidenced by
a certificate bearing the restrictive legend set forth in Section 9.1(a).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute, and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Series A Warrants" shall mean this Series A Warrant.
"Transfer" shall mean any disposition of any Warrant or Warrant Stock or
of any interest in either thereof, which would constitute a sale thereof within
the meaning of the Securities Act.
"Transfer Notice" shall have the meaning set forth in Section 9.2.
"Warrants" shall mean this Series A Warrant and for purposes of Section 9
hereof all warrants issued upon transfer, division or combination of, or in
substitution for, any thereof. All Series A Warrants shall at all times be
identical as to terms and conditions and date, except as to the number of shares
of Common Stock for which they may be exercised.
"Warrant Price" shall mean an amount equal to (i) the number of shares of
Common Stock being purchased upon exercise of this Warrant pursuant to Section
2.1, multiplied by (ii) the Current Warrant Price as of the date of such
exercise.
"Warrant Stock" shall mean the shares of Common Stock purchased by the
holders of the Series A Warrants upon the exercise thereof.
2. EXERCISE OF WARRANT
2.1. MANNER OF EXERCISE. From and after the Closing Date and until
5:00 P.M., New York time, on the Expiration Date (the "Exercise Period"), Holder
may exercise this Warrant, on any Business Day, for all or any part of the
number of shares of Common Stock purchasable hereunder.
In order to exercise this Warrant, in whole or in part, Holder shall
deliver to Company at its principal office at 6105 Trenton Lane North,
Minneapolis, Minnesota 55442 or at the office or agency designated by Company
pursuant to Section 12, (i) a written notice of Holder's election to exercise
this Warrant, which notice shall specify the number of shares of Common Stock to
be purchased, (ii) payment of the Warrant Price and (iii) this Warrant. Such
notice shall be substantially in the form of
4
<PAGE>
the subscription form appearing at the end of this Warrant as Exhibit A, duly
executed by Holder or its agent or attorney. Upon receipt thereof, Company
shall, as promptly as practicable, and in any event within ten (10) Business
Days thereafter, execute or cause to be executed and deliver or cause to be
delivered to Holder a certificate or certificates representing the aggregate
number of full shares of Common Stock issuable upon such exercise, together
with cash in lieu of any fraction of a share, as hereinafter provided. The
stock certificate or certificates so delivered shall be, to the extent
possible, in such denomination or denominations as such Holder shall request
in the notice and shall be registered in the name of Holder or, subject to
Section 9, such other name as shall be designated in the notice. This
Warrant shall be deemed to have been exercised and such certificate or
certificates shall be deemed to have been issued, and Holder or any other
Person so designated to be named therein shall be deemed to have become a
holder of record of such shares for all purposes, as of the date the notice,
together with the cash or check or other payment as provided below and this
Warrant, is received by Company as described above and all taxes required to
be paid by Holder, if any, pursuant to Section 2.2 prior to the issuance of
such shares have been paid. If this Warrant shall have been exercised in
part, Company shall, at the time of delivery of the certificate or
certificates representing Warrant Stock, deliver to Holder a new Warrant
evidencing the rights of Holder to purchase the unpurchased shares of Common
Stock called for by this Warrant, which new Warrant shall in all other
respects be identical with this Warrant, or, at the request of Holder,
appropriate notation may be made on this Warrant and the same returned to
Holder. Notwithstanding any provision herein to the contrary, Company shall
not be required to register shares in the name of any Person who acquired
this Warrant (or part hereof) or any Warrant Stock otherwise than in
accordance with this Warrant.
Payment of the Warrant Price shall be made at the option of the Holder by
(i) certified or official bank check, and/or (ii) by the surrender of the Note
issued by Company pursuant to the Purchase Agreement, and/or (iii) by the
Holder's surrender to Company of that number of shares of Warrant Stock (or the
right to receive such number of shares) or shares of Common Stock having an
aggregate Current Market Price equal to or greater than the Current Warrant
Price for all shares then being purchased (including those being surrendered),
or (v) any combination thereof, duly endorsed by or accompanied by appropriate
instruments of transfer duly executed by Holder or by Holder's attorney duly
authorized in writing. For the purposes of making payment of the Warrant Price,
the Note shall have a value equal to 100% of the principal amount thereof plus
accrued and unpaid interest thereon to the date of surrender in respect of
payment of the Warrant Price.
If a Holder surrenders the Note having an aggregate value which exceeds
the aggregate Warrant Price, such surrendered value equal to the integral
multiple of $500 which is next higher than such aggregate Warrant Price shall be
applied to the payment of the Warrant Price, and Company shall pay the Holder an
amount in cash equal to the excess (if any) of such integral multiple over the
Warrant Price. With respect to the Note, a new Note shall be issued in the
principal amount equal to that portion of such surrendered principal amount not
applied to the Warrant Price and not paid in cash to the Holder.
2.2. PAYMENT OF TAXES. All shares of Common Stock issuable upon the
exercise of this Warrant pursuant to the terms hereof shall be validly issued,
fully paid and nonassessable and without any preemptive rights. Company shall
pay all expenses in connection with, and all taxes and other governmental
charges that may be imposed with respect to, the issue or delivery thereof,
unless such tax or charge is imposed by law upon Holder, in which case such
taxes or charges shall be paid by Holder. Company shall not be required,
however, to pay any tax or other charge imposed in connection with any transfer
involved in the issue of any certificate for shares of Common Stock issuable
upon exercise of this Warrant in any name other than that of Holder, and in such
case Company shall not be required to
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issue or deliver any stock certificate until such tax or other charge has
been paid or it has been established to the satisfaction of Company that no
such tax or other charge is due.
2.3. FRACTIONAL SHARES. Company shall not be required to issue a
fractional share of Common Stock upon exercise of any Warrant. As to any
fraction of a share which the Holder of one or more Warrants, the rights under
which are exercised in the same transaction, would otherwise be entitled to
purchase upon such exercise, except as otherwise provided in Section 2.1,
Company shall pay a cash adjustment in respect of such final fraction in an
amount equal to the same fraction of the Current Market Price per share of
Common Stock on the date of exercise.
2.4. CONTINUED VALIDITY. A holder of shares of Common Stock issued
upon the exercise of this Warrant, in whole or in part (other than a holder who
acquires such shares after the same have been publicly sold pursuant to a
Registration Statement under the Securities Act or sold pursuant to Rule 144
thereunder), shall continue to be entitled with respect to such shares to all
rights to which it would have been entitled as Holder under Sections 9, 10 and
17 of this Warrant. Company will, at the time of each exercise of this Warrant,
in whole or in part, upon the request of the holder of the shares of Common
Stock issued upon such exercise hereof, acknowledge in writing, in form
reasonably satisfactory to such holder, its continuing obligation to afford to
such holder all such rights; PROVIDED, HOWEVER, that if such holder shall fail
to make any such request, such failure shall not affect the continuing
obligation of Company to afford to such holder all such rights.
3. TRANSFER, DIVISION AND COMBINATION
3.1. TRANSFER. Subject to compliance with Sections 9 and 14 hereof and
Section 3.5 of the Purchase Agreement, transfer of this Warrant and all rights
hereunder, in whole or in part, shall be registered on the books of Company to
be maintained for such purpose, upon surrender of this Warrant at the principal
office of Company referred to in Section 2.1 or the office or agency designated
by Company pursuant to Section 12, together with a written assignment of this
Warrant substantially in the form of Exhibit B hereto duly executed by Holder or
its agent or attorney and if such transfer is not to be made pursuant to Section
14, funds sufficient to pay any transfer taxes payable upon the making of such
transfer. Upon such surrender and, if required, such payment, Company shall,
subject to Section 9, execute and deliver a new Warrant or Warrants in the name
of the assignee or assignees and in the denomination specified in such
instrument of assignment, and shall issue to the assignor a new Warrant
evidencing the portion of this Warrant not so assigned, and this Warrant shall
promptly be cancelled. A Warrant, if properly assigned in compliance with
Section 9, may be exercised by a new Holder for the purchase of shares of Common
Stock without having a new Warrant issued.
3.2. DIVISION AND COMBINATION. Subject to Section 9, this Warrant may
be divided or combined with other Warrants upon presentation hereof at the
aforesaid office or agency of Company, together with a written notice specifying
the names and denominations in which new Warrants are to be issued, signed by
Holder or its agent or attorney. Subject to compliance with Section 3.1 and
with Section 9, as to any transfer which may be involved in such division or
combination, Company shall execute and deliver a new Warrant or Warrants in
exchange for the Warrant or Warrants to be divided or combined in accordance
with such notice.
3.3. EXPENSES. Company shall prepare, issue and deliver at its own
expense (other than transfer taxes) the new Warrant or Warrants under this
Section 3.
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3.4. MAINTENANCE OF BOOKS. Company agrees to maintain, at its
aforesaid office or agency, books for the registration and the registration of
transfer of the Warrants.
4. ADJUSTMENTS
The number of shares of Common Stock for which this Warrant is
exercisable, or the price at which such shares may be purchased upon exercise of
this Warrant, shall be subject to adjustment from time to time as set forth in
this Section 4. Company shall give each Holder notice of any event described
below which requires an adjustment pursuant to this Section 4 at the time of
such event.
4.1. STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. If at any time
Company shall:
(a) take a record of the holders of its Common Stock for the
purpose of entitling them to receive a dividend payable in, or other
distribution of, Additional Shares of Common Stock,
(b) subdivide its outstanding shares of Common Stock into a
larger number of shares of Common Stock, or
(c) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock,
then (i) the number of shares of Common Stock for which this Warrant is
exercisable immediately after the occurrence of any such event shall be adjusted
to equal the number of shares of Common Stock which a record holder of the same
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the occurrence of such event would own or be entitled to
receive after the happening of such event, and (ii) the Current Warrant Price
shall be adjusted to equal (A) the Current Warrant Price multiplied by the
number of shares of Common Stock for which this Warrant is exercisable
immediately prior to the adjustment divided by (B) the number of shares for
which this Warrant is exercisable immediately after such adjustment.
4.2. CERTAIN OTHER DISTRIBUTIONS AND ADJUSTMENTS.
(a) If at any time Company shall take a record of the holders
of its Common Stock for the purpose of entitling them to receive any
dividend or other distribution of:
(i) cash,
(ii) any evidences of its indebtedness, any shares of its
stock or any other securities or property of any nature whatsoever
(other than cash, Convertible Securities or Additional Shares of
Common Stock), or
(iii) any warrants or other rights to subscribe for or
purchase any evidences of its indebtedness, any shares of its
stock or any other securities or property of any nature whatsoever
(other than cash, Convertible Securities or Additional Shares of
Common Stock),
then Holder shall be entitled to receive such dividend or distribution as if
Holder had exercised this Warrant.
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(b) A reclassification of the Common Stock (other than a change
in par value, or from par value to no par value or from no par value to
par value) into shares of Common Stock and shares of any other class of
stock shall be deemed a distribution by Company to the holders of its
Common Stock of such shares of such other class of stock within the
meaning of paragraph (a) above and, if the outstanding shares of Common
Stock shall be changed into a larger or smaller number of shares of
Common Stock as a part of such reclassification, such change shall be
deemed a subdivision or combination, as the case may be, of the
outstanding shares of Common Stock within the meaning of Section 4.1.
4.3. ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK.
(a) If at any time Company shall (except as hereinafter
provided) issue or sell any Additional Shares of Common Stock, other than
Permitted Issuances, in exchange for consideration in an amount per
Additional Share of Common Stock less than the Current Warrant Price at
the time the Additional Shares of Common Stock are issued, then (i) the
Current Warrant Price as to the number of shares for which this Warrant
is exercisable prior to such adjustment shall be reduced to a price
determined by dividing (A) an amount equal to the sum of (x) the number
of shares of Common Stock Outstanding immediately prior to such issue or
sale multiplied by the then existing Current Warrant Price, plus (y) the
consideration, if any, received by Company upon such issue or sale, by
(B) the total number of shares of Common Stock Outstanding immediately
after such issue or sale; and (ii) the number of shares of Common Stock
for which this Warrant is exercisable shall be adjusted to equal the
product obtained by multiplying the Current Warrant Price in effect
immediately prior to such issue or sale by the number of shares of Common
Stock for which this Warrant is exercisable immediately prior to such
issue or sale and dividing the product thereof by the Current Warrant
Price resulting from the adjustment made pursuant to clause (i) above.
(b) The provision of paragraph (a) of Section 4.3 shall not
apply to any issuance of Additional Shares of Common Stock for which an
adjustment is provided under Section 4.1 or 4.2. No adjustment of the
number of shares of Common Stock for which this Warrant shall be
exercisable shall be made under paragraph (a) of Section 4.3 upon the
issuance of any Additional Shares of Common Stock which are issued
pursuant to the exercise of any warrants or other subscription or
purchase rights or pursuant to the exercise of any conversion or exchange
rights in any Convertible Securities, if any such adjustment shall
previously have been made upon the issuance of such warrants or other
rights or upon the issuance of such Convertible Securities (or upon the
issuance of any warrant or other rights therefor) pursuant to Section 4.4
or Section 4.5.
4.4. ISSUANCE OF WARRANTS OR OTHER RIGHTS. If at any time Company
shall take a record of the holders of its Common Stock for the purpose of
entitling them to receive a distribution of, or shall in any manner (whether
directly or by assumption in a merger in which Company is the surviving
corporation) issue or sell, any warrants or other rights to subscribe for or
purchase any Additional Shares of Common Stock or any Convertible Securities
(other than Permitted Issuances), whether or not the rights to exchange or
convert thereunder are immediately exercisable, and the price per share for
which Common Stock is issuable upon the exercise of such warrants or other
rights or upon conversion or exchange of such Convertible Securities shall be
less than the Current Warrant Price in effect immediately prior to the time of
such issue or sale, then the number of shares for which this Warrant is
exercisable and the Current Warrant Price shall be adjusted as provided in
Section 4.3 on the basis that the maximum number of Additional Shares of Common
Stock issuable pursuant to all such warrants or other rights or necessary to
effect the conversion or exchange of all such Convertible Securities shall be
deemed to have
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been issued and outstanding and Company shall be deemed to have received all
of the consideration payable therefor, if any, as of the date of the issuance
of such warrants or other rights. No further adjustments of the Current
Warrant Price shall be made upon the actual issue of such Common Stock or of
such Convertible Securities upon exercise of such warrants or other rights or
upon the actual issue of such Common Stock upon such conversion or exchange
of such Convertible Securities.
4.5. ISSUANCE OF CONVERTIBLE SECURITIES. If at any time Company shall
take a record of the holders of its Common Stock for the purpose of entitling
them to receive a distribution of, or shall in any manner (whether directly or
by assumption in a merger in which Company is the surviving corporation) issue
or sell, any Convertible Securities (other than Permitted Issuances), whether or
not the rights to exchange or convert thereunder are immediately exercisable,
and the price per share for which Common Stock is issuable upon such conversion
or exchange shall be less than the Current Warrant Price in effect immediately
prior to the time of such issue or sale, then the number of Shares for which
this Warrant is exercisable and the Current Warrant Price shall be adjusted as
provided in Section 4.3 on the basis that the maximum number of Additional
Shares of Common Stock necessary to effect the conversion or exchange of all
such Convertible Securities shall be deemed to have been issued and outstanding
and Company shall have received all of the consideration payable therefor, if
any, as of the date of issuance of such Convertible Securities. No adjustment
of the number of Shares for which this Warrant is exercisable and the Current
Warrant Price shall be made under this Section 4.5 upon the issuance of any
Convertible Securities which are issued pursuant to the exercise of any warrants
or other subscription or purchase rights therefor, if any such adjustment shall
previously have been made upon the issuance of such warrants or other rights
pursuant to Section 4.4. No further adjustments of the number of Shares for
which this Warrant is exercisable and the Current Warrant Price shall be made
upon the actual issue of such Common Stock upon conversion or exchange of such
Convertible Securities and, if any issue or sale of such Convertible Securities
is made upon exercise of any warrant or other right to subscribe for or to
purchase any such Convertible Securities for which adjustments of the number of
Shares for which this Warrant is exercisable and the Current Warrant Price have
been or are to be made pursuant to other provisions of this Section 4, no
further adjustments of the number of Shares for which this Warrant is
exercisable and the Current Warrant Price shall be made by reason of such issue
or sale. The provisions of Sections 4.3, 4.4 and 4.5 hereof shall no longer be
applicable eighteen (18) months following the completion by the Company of an
IPO.
4.6. SUPERSEDING ADJUSTMENT. If, at any time after any adjustment of
the number of shares of Common Stock for which this Warrant is exercisable and
the Current Warrant Price shall have been made pursuant to Section 4.4 or
Section 4.5 as the result of any issuance of warrants, rights or Convertible
Securities,
(a) such warrants or rights, or the right of conversion or
exchange in such other Convertible Securities, shall expire, and all or a
portion of such warrants or rights, or the right of conversion or
exchange with respect to all or a portion of such other Convertible
Securities, as the case may be, shall not have been exercised, or
(b) the consideration per share for which shares of Common
Stock are issuable pursuant to such warrants or rights, or the terms of
such other Convertible Securities, shall be increased solely by virtue of
provisions therein contained for an automatic increase in such
consideration per share upon the occurrence of a specified date or event,
then for each outstanding Warrant such previous adjustment shall be rescinded
and annulled and the Additional Shares of Common Stock which were deemed to have
been issued by virtue of the
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computation made in connection with the adjustment so rescinded and annulled
shall no longer be deemed to have been issued by virtue of such computation.
Thereupon, a recomputation shall be made of the effect of such rights or
options or other Convertible Securities on the basis of
(c) treating the number of Additional Shares of Common Stock or
other property, if any, theretofore actually issued or issuable pursuant
to the previous exercise of any such warrants or rights or any such right
of conversion or exchange, as having been issued on the date or dates of
any such exercise and for the consideration actually received and
receivable therefor, and
(d) treating any such warrants or rights or any such other
Convertible Securities which then remain outstanding as having been
granted or issued immediately after the time of such increase of the
consideration per share for which shares of Common Stock or other
property are issuable under such warrants or rights or other Convertible
Securities; whereupon a new adjustment of the number of shares of Common
Stock for which this Warrant is exercisable and the Current Warrant Price
shall be made, which new adjustment shall supersede the previous
adjustment so rescinded and annulled.
4.7. OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION.
The following provisions shall be applicable to the making of adjustments of the
number of shares of Common Stock for which this Warrant is exercisable and the
Current Warrant Price provided for in this Section 4:
(a) COMPUTATION OF CONSIDERATION. To the extent that any
Additional Shares of Common Stock or any Convertible Securities or any
warrants or other rights to subscribe for or purchase any Additional
Shares of Common Stock or any Convertible Securities shall be issued for
cash consideration, the consideration received by Company therefor shall
be the amount of the cash received by Company therefor, or, if such
Additional Shares of Common Stock or Convertible Securities are offered
by Company for subscription, the subscription price, or, if such
Additional Shares of Common Stock or Convertible Securities are sold to
underwriters or dealers for public offering without a subscription
offering, the initial public offering price (in any such case subtracting
any amounts paid or receivable for accrued interest or accrued dividends
and without taking into account any compensation, discounts or expenses
paid or incurred by Company for and in the underwriting of, or otherwise
in connection with, the issuance thereof). To the extent that such
issuance shall be for a consideration other than cash, then, except as
herein otherwise expressly provided, the amount of such consideration
shall be deemed to be the fair value of such consideration at the time of
such issuance as determined in good faith by the Board of Directors of
Company. In case any Additional Shares of Common Stock or any
Convertible Securities or any warrants or other rights to subscribe for
or purchase such Additional Shares of Common Stock or Convertible
Securities shall be issued in connection with any merger in which Company
issues any securities, the amount of consideration therefor shall be
deemed to be the fair value, as determined in good faith by the Board of
Directors of Company, of such portion of the assets and business of the
nonsurviving corporation as such Board in good faith shall determine to
be attributable to such Additional Shares of Common Stock, Convertible
Securities, warrants or other rights, as the case may be. The
consideration for any Additional Shares of Common Stock issuable pursuant
to any warrants or other rights to subscribe for or purchase the same
shall be the consideration received by Company for issuing such warrants
or other rights plus the additional consideration payable to Company upon
exercise of such warrants or other rights. The consideration for any
Additional Shares of Common Stock issuable pursuant to the terms of any
Convertible Securities shall be the
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consideration received by Company for issuing warrants or other rights to
subscribe for or purchase such Convertible Securities, plus the
consideration paid or payable to Company in respect of the subscription
for or purchase of such Convertible Securities, plus the additional
consideration, if any, payable to Company upon the exercise of the right
of conversion or exchange in such Convertible Securities. In case of the
issuance at any time of any Additional Shares of Common Stock or
Convertible Securities in payment or satisfaction of any dividends upon
any class of stock other than Common Stock, Company shall be deemed to
have received for such Additional Shares of Common Stock or Convertible
Securities a consideration equal to the amount of such dividend so paid
or satisfied.
(b) WHEN ADJUSTMENTS TO BE MADE. The adjustments required by
this Section 4 shall be made whenever and as often as any specified event
requiring an adjustment shall occur, except that any adjustment of the
number of shares of Common Stock for which this Warrant is exercisable
that would otherwise be required may be postponed (except in the case of
a subdivision or combination of shares of Common Stock, as provided for
in Section 4.1) up to, but not beyond the date of exercise if such
adjustment either by itself or with other adjustments not previously made
adds or subtracts less than 1% of the shares of Common Stock for which
this Warrant is exercisable immediately prior to the making of such
adjustment. Any adjustment representing a change of less than such
minimum amount (except as aforesaid) which is postponed shall be carried
forward and made as soon as such adjustment, together with other
adjustments required by this Section 4 and not previously made, would
result in a minimum adjustment or on the date of exercise. For the
purpose of any adjustment, any specified event shall be deemed to have
occurred at the close of business on the date of its occurrence.
(c) FRACTIONAL INTERESTS. In computing adjustments under this
Section 4, fractional interests in Common Stock shall be taken into
account to the nearest 1/10th of a share.
(d) WHEN ADJUSTMENT NOT REQUIRED. If Company shall take a
record of the holders of its Common Stock for the purpose of entitling
them to receive a dividend or distribution or subscription or purchase
rights and shall, thereafter and before the distribution to stockholders
thereof, legally abandon its plan to pay or deliver such dividend,
distribution, subscription or purchase rights, then thereafter no
adjustment shall be required by reason of the taking of such record and
any such adjustment previously made in respect thereof shall be rescinded
and annulled.
(e) ESCROW OF WARRANT STOCK. If after any property becomes
distributable pursuant to this Section 4 by reason of the taking of any
record of the holders of Common Stock, but prior to the occurrence of the
event for which such record is taken, and Holder exercises this Warrant,
any Additional Shares of Common Stock issuable upon exercise by reason of
such adjustment shall be deemed the last shares of Common Stock for which
this Warrant is exercised (notwithstanding any other provision to the
contrary herein) and such shares or other property shall be held in
escrow for Holder by Company to be issued to Holder upon and to the
extent that the event actually takes place, upon payment of the then
Current Warrant Price. Notwithstanding any other provision to the
contrary herein, if the event for which such record was taken fails to
occur or is rescinded, then such escrowed shares shall be cancelled by
Company and escrowed property returned to Company.
(f) CHALLENGE TO GOOD FAITH DETERMINATION. Whenever the Board
of Directors of Company shall be required to make a determination in
good faith of the fair value of any item
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under this Section 4, such determination may be challenged in good faith
by the Majority Holders, and any dispute shall be resolved by an
investment banking or valuation firm of recognized national standing
selected by Company and acceptable to the Majority Holders.
4.8. REORGANIZATION, RECLASSIFICATION, MERGER, CONSOLIDATION OR
DISPOSITION OF ASSETS. In case Company shall reorganize its capital, reclassify
its capital stock, consolidate or merge with or into another corporation (where
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of Company), or sell, transfer or
otherwise dispose of all or substantially all its property, assets or business
to another corporation and, pursuant to the terms of such reorganization,
reclassification, merger, consolidation or disposition of assets, shares of
common stock of the successor or acquiring corporation, or any cash, shares of
stock or other securities or property of any nature whatsoever (including
warrants or other subscription or purchase rights) in addition to or in lieu of
common stock of the successor or acquiring corporation ("Other Property"), are
to be received by or distributed to the holders of Common Stock of Company, then
each Holder shall have the right thereafter to receive, upon exercise of such
Warrant, the number of shares of common stock of the successor or acquiring
corporation or of Company, if it is the surviving corporation, and Other
Property receivable upon or as a result of such reorganization,
reclassification, merger, consolidation or disposition of assets by a holder of
the number of shares of Common Stock for which this Warrant is exercisable
immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than Company) shall expressly assume the due
and punctual observance and performance of each and every covenant and condition
of this Warrant to be performed and observed by Company and all the obligations
and liabilities hereunder, subject to such modifications as may be deemed
appropriate (as determined by resolution of the Board of Directors of Company)
in order to provide for adjustments of shares of Common Stock for which this
Warrant is exercisable which shall be as nearly equivalent as practicable to the
adjustments provided for in this Section 4. For purposes of this Section 4.8,
"common stock of the successor or acquiring corporation" shall include stock of
such corporation of any class which is not preferred as to dividends or assets
over any other class of stock of such corporation and which is not subject to
redemption and shall also include any evidences of indebtedness, shares of stock
or other securities which are convertible into or exchangeable for any such
stock, either immediately or upon the arrival of a specified date or the
happening of a specified event and any warrants or other rights to subscribe for
or purchase any such stock. The foregoing provisions of this Section 4.8 shall
similarly apply to successive reorganizations, reclassifications, mergers,
consolidations or disposition of assets.
4.9. OTHER ACTION AFFECTING COMMON STOCK. In case at any time or from
time to time Company shall take any action in respect of its Common Stock, other
than any action described in this Section 4, then, unless such action will not
have a materially adverse effect upon the rights of the Holders, the number of
shares of Common Stock or other stock for which this Warrant is exercisable
and/or the purchase price thereof shall be adjusted in such manner as may be
equitable in the circumstances.
5. NOTICES TO WARRANT HOLDERS
5.1. NOTICE OF ADJUSTMENTS. Whenever the number of shares of Common
Stock for which this Warrant is exercisable, or whenever the price at which a
share of such Common Stock may be purchased upon exercise of the Warrants, shall
be adjusted pursuant to Section 4, Company shall forthwith prepare a certificate
to be executed by the chief financial officer of Company setting forth, in
reasonable detail, the event requiring the adjustment and the method by which
such adjustment was calculated (including a description of the basis on which
the Board of Directors of Company determined
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the fair value of any evidences of indebtedness, shares of stock, other
securities or property or warrants or other subscription or purchase rights
referred to in Section 4.7(a)), specifying the number of shares of Common
Stock for which this Warrant is exercisable and (if such adjustment was made
pursuant to Section 4.8 or 4.9) describing the number and kind of any other
shares of stock or Other Property for which this Warrant is exercisable, and
any change in the purchase price or prices thereof, after giving effect to
such adjustment or change. Company shall promptly cause a signed copy of
such certificate to be delivered to each Holder in accordance with Section
17.2. Company shall keep at its office or agency designated pursuant to
Section 12 copies of all such certificates and cause the same to be available
for inspection at said office during normal business hours by any Holder or
any prospective purchaser of a Warrant designated by a Holder thereof.
5.2. NOTICE OF CORPORATE ACTION. If at any time
(a) Company shall take a record of the holders of its Common
Stock for the purpose of entitling them to receive a dividend or other
distribution, or any right to subscribe for or purchase any evidences of
its indebtedness, any shares of stock of any class or any other
securities or property, or to receive any other right, or
(b) there shall be any capital reorganization of Company, any
reclassification or recapitalization of the capital stock of Company or
any consolidation or merger of Company with, or any sale, transfer or
other disposition of all or substantially all the property, assets or
business of Company to, another corporation, or
(c) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of Company;
then, in any one or more of such cases, Company shall give to Holder (i) at
least 30 days' prior written notice of the date on which a record date shall be
selected for such dividend, distribution or right or for determining rights to
vote in respect of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, and (ii) in the case of any such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up, at least 30 days' prior written notice of the date when the same shall take
place. Such notice in accordance with the foregoing clause also shall specify
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, the date on which the holders of Common Stock
shall be entitled to any such dividend, distribution or right, and the amount
and character thereof, and (ii) the date on which any such reorganization,
reclassification, merger, consolidation, sale, transfer, disposition,
dissolution, liquidation or winding up is to take place and the time, if any
such time is to be fixed, as of which the holders of Common Stock shall be
entitled to exchange their shares of Common Stock for securities or other
property deliverable upon such reorganization, reclassification, merger,
consolidation, sale, transfer, disposition, dissolution, liquidation or winding
up. Each such written notice shall be sufficiently given if addressed to Holder
at the last address of Holder appearing on the books of Company and delivered in
accordance with Section 17.2.
6. NO IMPAIRMENT
Company shall not by any action, including, without limitation, amending
its articles of incorporation or through any reorganization, 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 of this Warrant, but will at all times in good faith assist in the
carrying out of all such
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terms and in the taking of all such actions as may be necessary or
appropriate to protect the rights of Holder against impairment. Without
limiting the generality of the foregoing, Company will take all such action
as may be necessary or appropriate in order that Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, including taking such action as is necessary for
the Current Warrant Price to be not less than the par value of the shares of
Common Stock issuable upon exercise of this Warrant, and (b) use its best
efforts to obtain all such authorizations, exemptions or consents from any
public regulatory body having jurisdiction thereof as may be necessary to
enable Company to perform its obligations under this Warrant.
Upon the request of Holder, Company will at any times during the period
this Warrant is outstanding acknowledge in writing, in form satisfactory to
Holder, the continuing validity of this Warrant and the obligations of Company
hereunder.
7. RESERVATION AND AUTHORIZATION OF COMMON STOCK; REGISTRATION WITH OR
APPROVAL OF ANY GOVERNMENTAL AUTHORITY
From and after the Closing Date, Company shall at all times reserve and
keep available for issue upon the exercise of Warrants such number of its
authorized but unissued shares of Common Stock as will be sufficient to permit
the exercise in full of all outstanding Warrants. All shares of Common Stock
which shall be so issuable, when issued upon exercise of any Warrant and payment
therefor in accordance with the terms of such Warrant, shall be duly and validly
issued and fully paid and nonassessable, and not subject to preemptive rights.
Before taking any action which would result in an adjustment in the
number of shares of Common Stock for which this Warrant is exercisable or in the
Current Warrant Price, Company shall obtain all such authorizations or
exemptions thereof, or consents thereto, as may be necessary from any public
regulatory body or bodies having jurisdiction thereof.
If any shares of Common Stock required to be reserved for issuance upon
exercise of Warrants require registration or qualification with any governmental
authority or other governmental approval or filing under any federal or state
law (otherwise than as provided in Section 9) before such shares may be so
issued, Company will in good faith and as expeditiously as possible and at its
expense endeavor to cause such shares to be duly registered or such approval to
be obtained or filing made.
8. TAKING OF RECORD; STOCK AND WARRANT TRANSFER BOOKS
In the case of all dividends or other distributions by Company to the
holders of its Common Stock with respect to which any provision of Section 4
refers to the taking of a record of such holders, Company will in each such case
take such a record and will take such record as of the close of business on a
Business Day. Company will not at any time, except upon dissolution,
liquidation or winding up of Company, close its stock transfer books or Warrant
transfer books so as to result in preventing or delaying the exercise or
transfer of any Warrant.
9. RESTRICTIONS ON TRANSFERABILITY
As provided in Section 1 hereof, for all purposes of this Section 9, the
term Warrants includes the Series A Warrants, and the term Warrant Stock
includes the Common Stock issuable upon exercise of the Series A Warrants.
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The Warrants and the Warrant Stock shall not be transferred, hypothecated
or assigned before satisfaction of the conditions specified in this Section 9,
which conditions are intended to ensure compliance with the provisions of the
Securities Act with respect to the Transfer of any Warrant or any Warrant Stock.
Holder, by acceptance of this Warrant, agrees to be bound by the provisions of
this Section 9.
9.1. RESTRICTIVE LEGEND
(a) Except as otherwise provided in this Section 9, each
certificate for Warrant Stock initially issued upon the exercise of this
Warrant, and each certificate for Warrant Stock issued to any subsequent
transferee of any such certificate, shall be stamped or otherwise
imprinted with a legend in substantially the following form:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, as
amended, and may not be transferred in violation of
such Act or the rules and regulations thereunder."
(b) Except as otherwise provided in this Section 9, each
Warrant shall be stamped or otherwise imprinted with a legend in
substantially the following form:
"This Warrant and the securities represented hereby
have not been registered under the Securities Act of
1933, as amended, and may not be transferred in
violation of such Act, the rules and regulations
thereunder or the provisions of this Warrant."
9.2. NOTICE OF PROPOSED TRANSFERS; REQUESTS FOR REGISTRATION. Prior
to or promptly following any Transfer of any Warrants or any shares of
Restricted Common Stock, the holder of such Warrants or Restricted Common
Stock shall give written notice (a "Transfer Notice") to Company of such
Transfer. Each certificate, if any, evidencing such shares of Restricted
Common Stock issued upon such Transfer shall bear the restrictive legend set
forth in Section 9.1(a), and each Warrant issued upon such Transfer shall
bear the restrictive legend set forth in Section 9.1(b), unless in the
opinion of counsel to such holder which is reasonably acceptable to Company
such legend is not required in order to ensure compliance with the Securities
Act.
The holders of Warrants and Warrant Stock shall have the right to request
registration of such Warrant Stock pursuant to Sections 9.3 and 9.4.
9.3. REQUIRED REGISTRATION. After receipt of a written request from
the holders of Warrants and/or Warrant Stock representing at least either (x) an
aggregate of 30% of the total of (i) all shares of Warrant Stock then subject to
purchase upon exercise of all Warrants and (ii) all shares of Warrant Stock then
outstanding and which are Restricted Common Stock, or (y) such shares of Warrant
Stock having a minimum anticipated aggregate offering price of at least
$5,000,000, requesting that Company effect the registration of Warrant Stock
issuable upon the exercise of such holder's Warrants or of any of such holder's
Warrant Stock under the Securities Act and specifying the intended method or
methods of disposition thereof, Company shall promptly notify all holders of
Warrants and Warrant Stock in writing of the receipt of such request and each
such holder, in lieu of exercising its rights under Section 9.4, may elect (by
written notice sent to Company within ten Business Days from the date of such
holder's receipt of the aforementioned Company's notice) to have its shares of
Warrant Stock included in such
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registration thereof pursuant to this Section 9.3. Thereupon Company shall,
as expeditiously as is possible, use its best efforts to effect the
registration under the Securities Act of all shares of Warrant Stock which
Company has been so requested to register by such holders for sale, all to
the extent required to permit the disposition (in accordance with the
intended method or methods thereof, as aforesaid) of the Warrant Stock so
registered; PROVIDED, HOWEVER, that Company shall not be required to effect
more than an aggregate of two registrations of any Warrant Stock pursuant to
this Section 9.3, unless Company shall be eligible to file a registration
statement on Form S-3 (or other comparable short form) under the Securities
Act, in which event such holders shall be entitled to an unlimited number of
such registrations pursuant to this Section 9.3. The provisions of this
Section 9.3 shall only apply commencing six months following the consummation
of a Qualified IPO.
9.4. INCIDENTAL REGISTRATION. If Company at any time commencing one
year after the Closing Date proposes to file on its behalf and/or on behalf of
any of its security holders (the "demanding security holders") a Registration
Statement under the Securities Act on any form (other than a Registration
Statement on Form S-4 or S-8 or any successor form for securities to be offered
in a transaction of the type referred to in Rule 145 under the Securities Act or
to employees of Company pursuant to any employee benefit plan, respectively) for
the general registration of securities to be sold for cash with respect to its
Common Stock or any other class of equity security (as defined in Section
3(a)(11) of the Exchange Act) of Company, it will give written notice to all
holders of Warrants or Warrant Stock at least 30 days before the initial filing
with the Commission of such Registration Statement, which notice shall set forth
the intended method of disposition of the securities proposed to be registered
by Company. The notice shall offer to include in such filing the aggregate
number of shares of Warrant Stock, and the number of shares of Common Stock for
which this Warrant is exercisable, as such holders may request.
Each holder of any such Warrants or any such Warrant Stock desiring to
have Warrant Stock registered under this Section 9.4 shall advise Company in
writing within 15 days after the date of receipt of such offer from Company,
setting forth the amount of such Warrant Stock for which registration is
requested. Company shall thereupon include in such filing the number of shares
of Warrant Stock for which registration is so requested, subject to the next
sentence, and shall use its best efforts to effect registration under the
Securities Act of such shares. If the managing underwriter of a proposed public
offering shall advise Company in writing that, in its opinion, the distribution
of the Warrant Stock requested to be included in the registration concurrently
with the securities being registered by Company or such demanding security
holder would materially and adversely affect the distribution of such securities
by Company or such demanding security holder, then all selling security holders
(including any demanding security holder who initially requested such
registration) shall reduce the amount of securities each intended to distribute
through such offering on a pro rata basis. Except as otherwise provided in
Section 9.6, all expenses of such registration shall be borne by Company.
9.5. REGISTRATION PROCEDURES. If Company is required by the provisions
of this Section 9 to use its best efforts to effect the registration of any of
its securities under the Securities Act, Company will, as expeditiously as
possible:
(a) prepare and file with the Commission a Registration
Statement with respect to such securities and use its best efforts to
cause such Registration Statement to become and remain effective for a
period of time required for the disposition of such securities by the
holders thereof, but not to exceed 180 days;
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(b) prepare and file with the Commission such amendments and
supplements to such Registration Statement and the prospectus used in
connection therewith as may be necessary to keep such Registration
Statement effective and to comply with the provisions of the Securities
Act with respect to the sale or other disposition of all securities
covered by such Registration Statement until the earlier of such time as
all of such securities have been disposed of in a public offering or the
expiration of 180 days;
(c) furnish to such selling security holders such number of
copies of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as such selling security
holders may reasonably request;
(d) use its best efforts to register or qualify the securities
covered by such Registration Statement under such other securities or
blue sky laws of such jurisdictions within the United States and Puerto
Rico as each holder of such securities shall request (PROVIDED, HOWEVER,
that Company shall not be obligated to qualify as a foreign corporation
to do business under the laws of any jurisdiction in which it is not then
qualified or to file any general consent to service or process), and do
such other reasonable acts and things as may be required of it to enable
such holder to consummate the disposition in such jurisdiction of the
securities covered by such Registration Statement;
(e) furnish, at the request of any holder requesting
registration of Warrant Stock pursuant to Section 9.3, on the date that
such shares of Warrant Stock are delivered to the underwriters for sale
pursuant to such registration or, if such Warrant Stock is not being sold
through underwriters, on the date that the Registration Statement with
respect to such shares of Warrant Stock becomes effective, (1) an
opinion, dated such date, of the independent counsel representing Company
for the purposes of such registration, addressed to the underwriters, if
any, and if such Warrant Stock is not being sold through underwriters,
then to the holders making such request, in customary form and covering
matters of the type customarily covered in such legal opinions; and (2) a
comfort letter dated such date, from the independent certified public
accountants of Company, addressed to the underwriters, if any, and if
such Warrant Stock is not being sold through underwriters, then to the
holder making such request and, if such accountants refuse to deliver
such letter to such holder, then to Company in a customary form and
covering matters of the type customarily covered by such comfort letters
as the underwriters or such holders shall reasonably request;
(f) enter into customary agreements (including an underwriting
agreement in customary form) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of
such securities; and
(g) otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to
its security holders, as soon as reasonably practicable, but not later
than 18 months after the effective date of the Registration Statement,
an earnings statement covering a period of at least 12 months beginning
after the effective date of such Registration Statement, which earnings
statements shall satisfy the provisions of Section 11(a) of the
Securities Act.
It shall be a condition precedent to the obligation of Company to take
any action pursuant to this Section 9 in respect of the securities which are to
be registered at the request of any holder of Warrants
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or Warrant Stock that such holder shall furnish to Company such information
regarding the securities held by such holder and the intended method of
disposition thereof as Company shall reasonably request and as shall be
required in connection with the action taken by Company.
9.6. EXPENSES. All expenses incurred in complying with Section 9,
including, without limitation, all registration and filing fees (including all
expenses incident to filing with the NASD), printing expenses, fees and
disbursements of counsel for Company, the reasonable fees and expenses of one
counsel for the selling security holders (selected by those holding a majority
of the shares being registered), expenses of any special audits incident to or
required by any such registration and expenses of complying with the securities
or blue sky laws of any jurisdictions pursuant to Section 9.5(d), shall be paid
by Company, except that
(a) all such expenses in connection with any amendment or
supplement to the Registration Statement or prospectus filed more than
180 days after the effective date of such Registration Statement because
any holder of Warrant Stock has not effected the disposition of the
securities requested to be registered shall be paid by such holder; and
(b) Company shall not be liable for any fees, discounts or
commissions to any underwriter or any fees or disbursements of counsel
for any underwriter in respect of the securities sold by such holder of
Warrant Stock.
9.7. INDEMNIFICATION AND CONTRIBUTION.
(a) In the event of any registration of any of the Warrant
Stock under the Securities Act pursuant to this Section 9, Company shall
indemnify and hold harmless the holder of such Warrant Stock, such
holder's directors and officers, and each other Person (including each
underwriter) who participated in the offering of such Warrant Stock and
each other Person, if any, who controls such holder or such participating
Person within the meaning of the Securities Act, against any losses,
claims, damages or liabilities, joint or several, to which such holder or
any such director or officer or participating Person or controlling
Person may become subject under the Securities Act or any other statute
or at common law, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon (i) any
alleged untrue statement of any material fact contained, on the effective
date thereof, in any Registration Statement under which such securities
were registered under the Securities Act, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement
thereto, or (ii) any alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse such holder or such director, officer
or participating Person or controlling Person for any legal or any other
expenses reasonably incurred by such holder or such director, officer or
participating Person or controlling Person in connection with
investigating or defending any such loss, claim, damage, liability or
action; PROVIDED, HOWEVER, that Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any alleged untrue statement or alleged omission
made in such Registration Statement, preliminary prospectus, prospectus
or amendment or supplement in reliance upon and in conformity with
written information furnished to Company by such holder specifically for
use therein or (in the case of any registration pursuant to Section 9.3)
so furnished for such purposes by any underwriter. Such indemnity shall
remain in full force and effect regardless of any investigation made by
or on behalf of such holder or such director, officer or participating
Person or controlling Person, and shall survive the transfer of such
securities by such holder.
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(b) Each holder of any Warrant Stock, by acceptance thereof,
agrees to indemnify and hold harmless Company, its directors and officers
and each other Person, if any, who controls Company within the meaning of
the Securities Act against any losses, claims, damages or liabilities,
joint or several, to which Company or any such director or officer or any
such Person may become subject under the Securities Act or any other
statute or at common law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon information in writing provided to Company by such holder of such
Warrant Stock specifically for use in the following documents and
contained, on the effective date thereof, in any Registration Statement
under which securities were registered under the Securities Act at the
request of such holder, any preliminary prospectus or final prospectus
contained therein, or any amendment or supplement thereto, but in an
amount not to exceed the net proceeds received by such holder in the
offering.
(c) If the indemnification provided for in this Section 9 from
the indemnifying party is unavailable to an indemnified party hereunder
in respect of any losses, claims, damages, liabilities or expenses
referred to therein, 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 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 any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information
supplied by, such indemnifying party or indemnified parties, and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such action. The amount paid or
payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include any
legal or other fees or expenses reasonably incurred by such party in
connection with any investigation or proceeding. The liability of any
holder of Warrant Stock hereunder shall not exceed the net proceeds
received by it in the offering.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 9.7(c) were determined by pro rata
allocation or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding paragraph.
No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
9.8. TERMINATION OF RESTRICTIONS. Notwithstanding the foregoing
provisions of Section 9, the restrictions imposed by this Section upon the
transferability of the Warrants, the Warrant Stock and the Restricted Common
Stock (or Common Stock issuable upon the exercise of the Warrants) and the
legend requirements of Section 9.1 shall terminate as to any particular Warrant
or share of Warrant Stock or Restricted Common Stock (or Common Stock issuable
upon the exercise of the Warrants) (i) when and so long as such security shall
have been effectively registered under the Securities Act and disposed of
pursuant thereto or (ii) when Company shall have received an opinion of counsel
reasonably satisfactory to it that such shares may be transferred without
registration thereof under the Securities Act. Whenever the restrictions
imposed by Section 9 shall terminate as to this Warrant, as hereinabove
provided, the Holder hereof shall be entitled to receive from Company, at the
expense of Company, a new Warrant
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without the restrictive legend set forth in Section 9.1(b). Whenever the
restrictions imposed by this Section shall terminate as to any share of
Restricted Common Stock, as hereinabove provided, the holder thereof shall be
entitled to receive from Company, at Company's expense, a new certificate
representing such Common Stock not bearing the restrictive legend set forth
in Section 9.1(a).
9.9. LISTING ON SECURITIES EXCHANGE. If Company shall list any shares
of Common Stock on any securities exchange, it will, at its expense, list
thereon, maintain and, when necessary, increase such listing of, all shares of
Common Stock issued or, to the extent permissible under the applicable
securities exchange rules, issuable upon the exercise of this Warrant so long as
any shares of Common Stock shall be so listed during any such Exercise Period.
9.10. CERTAIN LIMITATIONS ON REGISTRATION RIGHTS. Notwithstanding the
other provisions of Section 9:
(i) Company shall not be obligated to register the
Warrant Stock of any holder if, in the opinion of counsel to
Company reasonably satisfactory to the holder and its counsel (or,
if the holder has engaged an investment banking firm, to such
investment banking firm and its counsel), the sale or other
disposition of such holder's Warrant Stock, in the manner proposed
by such holder (or by such investment banking firm), may be
effected without registering such Warrant Stock under the
Securities Act; and
(ii) Company shall not be obligated to register the
Warrant Stock of any holder pursuant to Section 9.3, if Company
has had a registration statement, under which such holder had a
right to have its Warrant Stock included pursuant to Sections 9.3
or 9.4, declared effective within one year prior to the date of
the request pursuant to Section 9.3; PROVIDED, HOWEVER, that if
any holder elected to have shares of its Warrant Stock included
under such registration statement but some or all of such shares
were excluded pursuant to the penultimate sentence of Section 9.4,
then such one-year period shall be reduced to six months.
9.11. SELECTION OF MANAGING UNDERWRITERS. The managing underwriter or
underwriters for any offering of Warrant Stock to be registered pursuant to
Section 9.3 shall be selected by the holders of a majority of the shares being
so registered (other than any shares being registered pursuant to Section 9.4)
and shall be reasonably acceptable to Company.
10. SUPPLYING INFORMATION
Company shall cooperate with each Holder of a Warrant and each holder
of Restricted Common Stock in supplying such information as may be reasonably
necessary for such holder to complete and file any information reporting
forms presently or hereafter required by the Commission as a condition to the
availability of an exemption from the Securities Act for the sale of any
Warrant or Restricted Common Stock.
11. LOSS OR MUTILATION
Upon receipt by Company from any Holder of evidence reasonably
satisfactory to it of the ownership of and the loss, theft, destruction or
mutilation of this Warrant and indemnity reasonably satisfactory to it (it being
understood that the written agreement of GE Capital shall be sufficient
indemnity), and in case of mutilation upon surrender and cancellation hereof,
Company will execute and
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deliver in lieu hereof a new Warrant of like tenor to such Holder; PROVIDED,
in the case of mutilation, no indemnity shall be required if this Warrant in
identifiable form is surrendered to Company for cancellation.
12. OFFICE OF COMPANY
As long as any of the Warrants remain outstanding, Company shall maintain
an office or agency (which may be the principal executive offices of Company)
where the Warrants may be presented for exercise, registration of transfer,
division or combination as provided in this Warrant.
13. FINANCIAL AND BUSINESS INFORMATION
13.1. QUARTERLY INFORMATION. Company will deliver to each Holder, as
soon as practicable after the end of each of the first three quarters of
Company, and in any event within 45 days thereafter, one copy of an unaudited
consolidated balance sheet of Company and its subsidiaries as at the close of
such quarter, and the related unaudited consolidated statements of income and
cash flows of Company for such quarter and, in the case of the second and third
quarters, for the portion of the fiscal year ending with such quarter, setting
forth in each case in comparative form the figures for the corresponding periods
in the previous fiscal year. Such financial statements shall be prepared by
Company in accordance with GAAP (without period-end adjustments or footnotes)
and accompanied by the certification of Company's chief executive officer or
chief financial officer that such financial statements are complete and correct
and present fairly the consolidated financial position, results of operations
and cash flows of Company and its subsidiaries as at the end of such quarter and
for such year-to-date period, as the case may be.
13.2. ANNUAL INFORMATION. Company will deliver to each Holder as soon
as practicable after the end of each fiscal year of Company, and in any event
within 90 days thereafter, one copy of:
(i) an audited consolidated balance sheet of Company and
its subsidiaries as at the end of such year, and
(ii) audited consolidated statements of income and cash
flows of Company and its subsidiaries for such year;
setting forth in each case in comparative form the figures for the corresponding
periods in the previous fiscal year, all prepared in accordance with GAAP, and
which audited financial statements shall be accompanied by (i) an opinion
thereon of the independent certified public accountants regularly retained by
Company, or any other firm of independent certified public accountants of
recognized national standing selected by Company and (ii) a report of such
independent certified public accountants confirming any adjustment made pursuant
to Section 4 during such year.
13.3. FILINGS. Company will file on or before the required date all
regular or periodic reports (pursuant to the Exchange Act) with the Commission
and will deliver to Holder promptly upon their becoming available one copy of
each report, notice or proxy statement sent by Company to its stockholders
generally, and of each regular or periodic report (pursuant to the Exchange Act)
and any Registration Statement, prospectus or written communication (other than
transmittal letters) (pursuant to the Securities Act), filed by Company with
(i) the Commission or (ii) any securities exchange on which shares of Common
Stock are listed.
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14. REPURCHASE BY COMPANY OF WARRANT
14.1. OBLIGATION TO REPURCHASE WARRANT.
(a) At any time after the fifth anniversary of the Closing Date
but prior to the consummation of an IPO, upon written notice from any
Holder, Company shall repurchase, on the date and in the manner set forth
in Section 14.3 below, from such Holder all or the portion of this
Warrant or the Warrant Stock designated in such notice for an amount
determined by multiplying (i) the number of shares of Common Stock
subject to this Warrant or portion thereof and Warrant Stock being
repurchased by (ii) the Repurchase Price as of the date of such notice,
less the Current Warrant Price per share of Common Stock as of the date
of such notice with respect to the shares subject to the Warrant which
has not yet been paid; provided, however, that Company shall have the
right, upon delivery of a written notice (the "Deferral Notice") to the
Holder within 15 days following its receipt of the repurchase notice, to
satisfy its obligations under this Section 14.1 to repurchase this
Warrant or a portion thereof or the Warrant Stock by effecting, at
Company's expense, within 120 days after the date of the Deferral Notice,
an underwritten public offering on a firm commitment basis of the shares
of Common Stock subject to the Warrant or the Warrant Stock requested to
be repurchased, or a debt or other financing, the net proceeds (after
underwriting discounts and commissions) of which shall not be less than
the amount required for such repurchase, in which event such repurchase
of the Warrant and the Warrant Stock shall be deferred until such public
offering or such other financing shall be consummated, but not beyond
such 120 day period. Nothing herein shall preclude the exercise by
Holder of any portion of this Warrant exercisable at any time prior to
such repurchase. In addition to the foregoing, Company shall have the
obligation to repurchase the Warrants as provided in Section 2.4 of the
Purchase Agreement. This Section 14.1 terminates upon completion of an
IPO.
14.2. OPTION TO REPURCHASE WARRANT. From time to time on or after
the seventh anniversary of the Closing Date but prior to the consummation of
an IPO, Company shall have the right, upon written notice to any Holder, to
repurchase from such Holder, from any source of funds legally available
therefor, on the date and in the manner set forth in Section 14.4 below, all
or any part of the Warrant or the Warrant Stock then held by such Holder for
an amount determined as provided in Section 14.1 above; provided, however,
that nothing herein shall preclude the exercise by Holder of any portion of
this Warrant exercisable at any time prior to such repurchase. This Section
14.2 terminates upon completion of an IPO.
14.3. DETERMINATION AND PAYMENT OF REPURCHASE PRICE.
(a) The Repurchase Price for any repurchase pursuant to this
Section 14 shall be determined within 90 days after the date of the
repurchase notice received or given by Company pursuant to Section 14.1
or 14.2, and shall be payable in cash within 20 days following the date
of such determination of the Repurchase Price. On the date of any
repurchase of Warrants or Warrant Stock pursuant to this Section 14, each
Holder shall assign to Company such Holder's Warrant or portion thereof
or Warrant Stock being repurchased, as the case may be, without any
representation or warranty, by the surrender of such Holder's Warrant or
Warrant Stock at the principal office of Company referred to in Section
2.1 against payment therefor by, at the option of such Holder, (i) wire
transfer to an account in a bank located in the United States designated
by such Holder for such purpose or (ii) a certified or official bank
check drawn on a member of the New York Clearing House payable to the
order of such Holder. If less than all of any
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Holder's Warrant is being repurchased, Company shall, pursuant to
Section 3, cancel such Warrant and issue in the name of, and deliver to,
such Holder a new Warrant for the portion not being repurchased.
(b) Any repurchase by Company of all or any portion of the
Warrant or Warrant Stock pursuant to Section 14.1 which is delayed by the
failure of Company to determine the Repurchase Price within the time
periods required in Section 14.3(a) shall be consummated within 10 days
after the determination of the Repurchase Price. In the event of such
delay the Repurchase Price shall be paid with cash interest thereon from
the date it would have been paid if there were no such delay at the rate
of 11% per annum.
(c) In the event that the determination of the Repurchase Price
requires an opinion from an investment banking or valuation firm, all
costs and fees associated therewith shall be paid by Company.
15. APPRAISAL
The determination of the Appraised Value per share of Common Stock shall
be made by an investment banking or valuation firm of nationally recognized
standing selected by Company and acceptable to the Majority Holders. If the
investment banking or valuation firm selected by Company is not acceptable to
the Majority Holders and Company and the Majority Holders cannot agree on a
mutually acceptable investment banking or valuation firm, then the Majority
Holders and Company shall each choose one such investment banking or valuation
firm and the respective chosen firms shall agree on another investment banking
or valuation firm which shall make the determination. Company shall retain, at
its sole cost, such investment banking or valuation firm as may be necessary for
the determination of Appraised Value required by the terms of this Warrant.
16. LIMITATION OF LIABILITY
No provision hereof, in the absence of affirmative action by Holder to
purchase shares of Common Stock, and no enumeration herein of the rights or
privileges of Holder hereof, shall give rise to any liability of such Holder for
the purchase price of any Common Stock or as a stockholder of Company, whether
such liability is asserted by Company or by creditors of Company.
17. MISCELLANEOUS
17.1. NONWAIVER AND EXPENSES. No course of dealing or any delay or
failure to exercise any right hereunder on the part of Holder shall operate as a
waiver of such right or otherwise prejudice Holder's rights, powers or remedies.
If Company fails to make, when due, any payments provided for hereunder, or
fails to comply with any other provision of this Warrant, Company shall pay to
Holder such amounts as shall be sufficient to cover any costs and expenses
including, but not limited to, reasonable attorneys' fees, including those of
appellate proceedings, incurred by Holder in collecting any amounts due pursuant
hereto or in otherwise enforcing any of its rights, powers or remedies
hereunder.
17.2. NOTICE GENERALLY. Any notice, demand, request, consent, approval,
declaration, delivery or other communication hereunder to be made pursuant to
the provisions of this Warrant shall be sufficiently given or made if in writing
and either delivered in person with receipt acknowledged or sent by registered
or certified mail, return receipt requested, postage prepaid, or by telecopy and
confirmed by telecopy answerback, addressed as follows:
23
<PAGE>
(a) If to any Holder or holder of Warrant Stock, at its last
known address appearing on the books of Company maintained for such
purpose.
(b) If to Company at
Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442
Attention: Chief Financial Officer
Telecopy Number: (612) 551-7888
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration, delivery or other communication hereunder shall
be deemed to have been duly given or served on the date on which personally
delivered, with receipt acknowledged, telecopied and confirmed by telecopy
answerback, or three (3) Business Days after the same shall have been deposited
in the United States mail. Failure or delay in delivering copies of any notice,
demand, request, approval, declaration, delivery or other communication to the
person designated above to receive a copy shall in no way adversely affect the
effectiveness of such notice, demand, request, approval, declaration, delivery
or other communication.
17.3. REMEDIES. Each holder of Warrant and Warrant Stock, in addition
to being entitled to exercise all rights granted by law, including recovery of
damages, will be entitled to specific performance of its rights under Section 9
of this Warrant. Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of Section 9 of this Warrant and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
17.4. SUCCESSORS AND ASSIGNS. Subject to the provisions of Sections 3.1
and 9, this Warrant and the rights evidenced hereby shall inure to the benefit
of and be binding upon the successors of Company and the successors and assigns
of Holder. The provisions of this Warrant are intended to be for the benefit of
all Holders from time to time of this Warrant and, with respect to Section 9
hereof, holders of Warrant Stock, and shall be enforceable by any such Holder or
holder of Warrant Stock. Notwithstanding the foregoing, the rights provided by
Section 9.3 hereof may only be transferred along with the transfer of at least
50% of the Series A Warrants and/or Warrant Stock, taken as a whole.
17.5. AMENDMENT. This Warrant and all other Warrants may be modified or
amended or the provisions hereof waived with the written consent of Company and
the Majority Holders, which, for purposes of Section 9 hereof, shall refer to
holders of Series A Warrants, PROVIDED that no such Warrant may be modified or
amended to reduce the number of shares of Common Stock for which such Warrant is
exercisable or to increase the price at which such shares may be purchased upon
exercise of such Warrant (before giving effect to any adjustment as provided
therein) without the prior written consent of the Holder thereof.
17.6. SEVERABILITY. Wherever possible, each provision of this Warrant
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Warrant 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 Warrant.
24
<PAGE>
17.7. HEADINGS. The headings used in this Warrant are for the
convenience of reference only and shall not, for any purpose, be deemed a part
of this Warrant.
17.8. GOVERNING LAW. This Warrant shall be governed by the laws of the
State of New York, without regard to the provisions thereof relating to conflict
of laws.
IN WITNESS WHEREOF, Company has caused this Warrant to be duly executed
and attested by its Secretary or an Assistant Secretary.
Dated: August __, 1998, and
Effective as of March 31, 1998
SELECT COMFORT CORPORATION
By:________________________________
Name:
Title:
Attest:
By:________________________________
Name:
Title:
25
<PAGE>
EXHIBIT A
SUBSCRIPTION FORM
[To be executed only upon exercise of Warrant]
The undersigned registered owner of this Warrant irrevocably exercises
this Warrant for the purchase of ______ Shares of Common Stock of SELECT COMFORT
CORPORATION and herewith makes payment therefor, all at the price and on the
terms and conditions specified in this Warrant and requests that certificates
for the shares of Common Stock hereby purchased (and any securities or other
property issuable upon such exercise) be issued in the name of and delivered to
_____________ whose address is _________________ and, if such shares of Common
Stock shall not include all of the shares of Common Stock issuable as provided
in this Warrant, that a new Warrant of like tenor and date for the balance of
the shares of Common Stock issuable hereunder be delivered to the undersigned.
--------------------------------
(Name of Registered Owner)
--------------------------------
(Signature of Registered Owner)
--------------------------------
(Street Address)
--------------------------------
(City) (State) (Zip Code)
NOTICE: The signature on this subscription must correspond with the name
as written upon the face of the within Warrant in every
particular, without alteration or enlargement or any change
whatsoever.
<PAGE>
EXHIBIT 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:
NAME AND ADDRESS OF ASSIGNEE NO. OF SHARES OF COMMON STOCK
- ---------------------------- -----------------------------
and does hereby irrevocably constitute and appoint _______ ________________
attorney-in-fact to register such transfer on the books of SELECT COMFORT
CORPORATION maintained for the purpose, with full power of substitution in the
premises.
Dated:________________________ Print Name:____________________________
Signature:_____________________________
Witness:_______________________________
NOTICE: The signature on this assignment must correspond with the name as
written upon the face of the within Warrant in every particular,
without alteration or enlargement or any change whatsoever.
<PAGE>
Exhibit 10.1
NET LEASE AGREEMENT
Opus Corporation - Landlord
Select Comfort Corporation - Tenant
Dated: December 3, 1993
<PAGE>
TABLE OF CONTENTS
ARTICLE I
TERM OF LEASE
Page
Section 1.1 Term of Lease . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Options to Renew. . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
CONSTRUCTION OF IMPROVEMENTS
Section 2.1 Landlord's Improvements . . . . . . . . . . . . . . . . . . . 1
Section 2.2 Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . 2
Section 2.3 Possession of Demised Premises. . . . . . . . . . . . . . . . 2
Section 2.4 Construction Guaranty . . . . . . . . . . . . . . . . . . . . 2
Section 2.5 Tenant's Acceptance of Demised Premises . . . . . . . . . . . 3
Section 2.6 Repair and Maintenance. . . . . . . . . . . . . . . . . . . . 3
ARTICLE III
BASIC RENT
Section 3.1 Basic Rent. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.2 Basic Rent Adjustment . . . . . . . . . . . . . . . . . . . . 3
Section 3.3 Additional Rent . . . . . . . . . . . . . . . . . . . . . . . 3
Section 3.4 Delinquent Payments . . . . . . . . . . . . . . . . . . . . . 3
Section 3.5 Independent Obligations . . . . . . . . . . . . . . . . . . . 4
Section 3.6 Security Deposit. . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV
USE OF DEMISED PREMISES
Section 4.1 Permitted Use . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 4.2 Preservation of Demised Premises. . . . . . . . . . . . . . . 4
Section 4.3 Acceptance of Demised Premises. . . . . . . . . . . . . . . . 4
ARTICLE V
PAYMENT OF TAXES, ASSESSMENTS, ETC.
Section 5.1 Payment of Impositions. . . . . . . . . . . . . . . . . . . .4
Section 5.2 Tenant's Right to Contest Impositions . . . . . . . . . . . .5
Section 5.3 Levies and Other Taxes. . . . . . . . . . . . . . . . . . . .5
Section 5.4 Evidence of Payment . . . . . . . . . . . . . . . . . . . . .5
Section 5.5 Escrow for Taxes and Assessments. . . . . . . . . . . . . . .6
Section 5.6 Landlord's Right to Contest Impositions . . . . . . . . . . .6
i
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ARTICLE VI
INSURANCE
Section 6.1 Tenant's Insurance Obligations. . . . . . . . . . . . . . . . 6
Section 6.2 Insurance Coverage. . . . . . . . . . . . . . . . . . . . . . 6
Section 6.3 Insurance Provisions. . . . . . . . . . . . . . . . . . . . . 6
Section 6.4 Waiver of Subrogation . . . . . . . . . . . . . . . . . . . . 7
Section 6.5 Tenant's Indemnification of Landlord. . . . . . . . . . . . . 7
Section 6.6 Unearned Premiums . . . . . . . . . . . . . . . . . . . . . . 7
Section 6.7 Blanket Insurance Coverage. . . . . . . . . . . . . . . . . . 7
ARTICLE VII
UTILITIES
Section 7.1 Payment of Utilities. . . . . . . . . . . . . . . . . . . . . 7
Section 7.2 Additional Charges. . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE VIII
REPAIRS
Section 8.1 Tenant's Repairs. . . . . . . . . . . . . . . . . . . . . . . 7
Section 8.2 Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 8.3 Tenant's Waiver of Claims Against Landlord. . . . . . . . . . 8
Section 8.4 Prohibitions Against Waste. . . . . . . . . . . . . . . . . . 8
Section 8.5 Landlord's Right to Effect Repairs. . . . . . . . . . . . . . 8
Section 8.6 Misuse or Neglect . . . . . . . . . . . . . . . . . . . . . . 8
ARTICLE IX
COMPLIANCE WITH LAWS AND ORDINANCES
Section 9.1 Compliance with Laws and Ordinances . . . . . . . . . . . . . 8
Section 9.2 Compliance with Permitted Encumbrances. . . . . . . . . . . . 8
Section 9.3 Tenant's Obligations. . . . . . . . . . . . . . . . . . . . . 8
Section 9.4 Tenant's Right to Contest Laws and Ordinances . . . . . . . . 8
Section 9.5 Compliance with Hazardous Materials Laws. . . . . . . . . . . 9
Section 9.6 Hazardous Materials Representation by Landlord. . . . . . . . 9
Section 9.7 Cost of Compliance with Hazardous Materials Laws. . . . . . . 9
Section 9.8 Discovery of Hazardous Materials. . . . . . . . . . . . . . . 9
Section 9.9 Indemnification . . . . . . . . . . . . . . . . . . . . . . . 9
Section 9.10 Environmental Audits. . . . . . . . . . . . . . . . . . . . .10
Section 9.11 Acts or Omissions Regarding Hazardous Materials . . . . . . .10
Section 9.12 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . .10
ii
<PAGE>
ARTICLE X
MECHANIC'S LIENS AND OTHER LIENS
Section 10.1 Freedom from Liens. . . . . . . . . . . . . . . . . . . . . .10
Section 10.2 Landlord's Indemnification. . . . . . . . . . . . . . . . . .10
Section 10.3 Removal of Liens. . . . . . . . . . . . . . . . . . . . . . .10
ARTICLE XI
INTENT OF PARTIES
Section 11.1 Net Lease . . . . . . . . . . . . . . . . . . . . . . . . . .11
Section 11.2 Entry by Landlord . . . . . . . . . . . . . . . . . . . . . .11
Section 11.3 Interest on Unpaid Amounts. . . . . . . . . . . . . . . . . .11
ARTICLE XII
DEFAULTS OF TENANT
Section 12.1 Event of Default. . . . . . . . . . . . . . . . . . . . . . .11
Section 12.2 Surrender of Demised Premises . . . . . . . . . . . . . . . .12
Section 12.3 Reletting by Landlord . . . . . . . . . . . . . . . . . . . .12
Section 12.4 Survival of Tenant's Obligations. . . . . . . . . . . . . . .12
Section 12.5 Damages . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 12.6 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . .12
Section 12.7 Landlord's Remedies . . . . . . . . . . . . . . . . . . . . .13
Section 12.8 Bankruptcy. . . . . . . . . . . . . . . . . . . . . . . . . .13
Section 12.9 Waiver by Tenant. . . . . . . . . . . . . . . . . . . . . . .13
ARTICLE XIII
Section 13.1 Destruction and Restoration . . . . . . . . . . . . . . . . .13
Section 13.2 Application of Insurance Proceeds . . . . . . . . . . . . . .13
Section 13.3 Continuance of Tenant's Obligations . . . . . . . . . . . . .14
Section 13.4 Completion of Restoration . . . . . . . . . . . . . . . . . .14
Section 13.5 Termination of Lease. . . . . . . . . . . . . . . . . . . . .14
ARTICLE XIV
CONDEMNATION
Section 14.1 Condemnation of Entire Demised Premises . . . . . . . . . . .14
Section 14.2 Partial Condemnation/Termination of Lease . . . . . . . . . .15
Section 14.3 Partial Condemnation/Continuation of Lease. . . . . . . . . .15
Section 14.4 Continuance of Obligations. . . . . . . . . . . . . . . . . .16
Section 14.5 Adjustment of Rent. . . . . . . . . . . . . . . . . . . . . .16
iii
<PAGE>
ARTICLE XV
ASSIGNMENT, SUBLETTING, ETC.
Section 15.1 Restriction on Transfer . . . . . . . . . . . . . . . . . . .16
Section 15.2 Restriction From Further Assignment . . . . . . . . . . . . .16
Section 15.3 Tenant's Failure to Comply. . . . . . . . . . . . . . . . . .17
Section 15.4 Sharing of Excess Rent. . . . . . . . . . . . . . . . . . . .17
ARTICLE XVI
SUBORDINATION, NONDISTURBANCE,
NOTICE TO MORTGAGEE AND ATTORNMENT
Section 16.1 Subordination by Tenant . . . . . . . . . . . . . . . . . . .17
Section 16.2 Landlord's Default. . . . . . . . . . . . . . . . . . . . . .17
Section 16.3 Attornment. . . . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE XVII
SIGNS
Section 17.1 Tenant's Signs. . . . . . . . . . . . . . . . . . . . . . . .17
ARTICLE XVIII
REPORTS BY TENANT
[Intentionally Omitted.]
ARTICLE XIX
CHANGES AND ALTERATIONS
Section 19.1 Tenant's Changes and Alterations. . . . . . . . . . . . . . .18
ARTICLE XX
MISCELLANEOUS PROVISIONS
Section 20.1 Entry by Landlord . . . . . . . . . . . . . . . . . . . . . .19
Section 20.2 Exhibition of Demised Premises. . . . . . . . . . . . . . . .19
Section 20.3 Indemnification by Tenant . . . . . . . . . . . . . . . . . .19
Section 20.4 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . .19
Section 20.5 Quiet Enjoyment . . . . . . . . . . . . . . . . . . . . . . .20
Section 20.6 Landlord's Continuing Obligations . . . . . . . . . . . . . .20
Section 20.7 Estoppel. . . . . . . . . . . . . . . . . . . . . . . . . . .20
Section 20.8 Memorandum of Lease . . . . . . . . . . . . . . . . . . . . .20
Section 20.9 Severability. . . . . . . . . . . . . . . . . . . . . . . . .21
Section 20.10 Successors and Assigns. . . . . . . . . . . . . . . . . . . .21
Section 20.11 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 20.12 Relationship of Parties . . . . . . . . . . . . . . . . . . .21
Section 20.13 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . .21
Section 20.14 No Merger . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 20.15 Possession and Use. . . . . . . . . . . . . . . . . . . . . .21
iv
<PAGE>
Section 20.16 No Surrender During Lease Term. . . . . . . . . . . . . . . .21
Section 20.17 Surrender of Demised Premises . . . . . . . . . . . . . . . .21
Section 20.18 Holding Over. . . . . . . . . . . . . . . . . . . . . . . . .21
Section 20.19 Landlord Approvals. . . . . . . . . . . . . . . . . . . . . .21
Section 20.20 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . .21
Section 20.21 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . .22
Section 20.22 Landlord's Limited Liability. . . . . . . . . . . . . . . . .22
Section 20.23 Broker. . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Section 20.24 Governing Law . . . . . . . . . . . . . . . . . . . . . . . .22
Section 20.25 Joint and Several Liability . . . . . . . . . . . . . . . . .22
Section 20.26 Time is of the Essence. . . . . . . . . . . . . . . . . . . .22
Section 20.27 Tenant Termination Right. . . . . . . . . . . . . . . . . . .22
Section 20.28 Moving Allowance. . . . . . . . . . . . . . . . . . . . . . .22
EXHIBITS
Exhibit "A" Legal Description and Permitted Encumbrances
Exhibit "B" Outline Plans and Specifications
Exhibit "C" Final Plans and Specifications
Exhibit "D" Business Plan
v
<PAGE>
NET LEASE AGREEMENT
THIS NET LEASE AGREEMENT ("Lease"), made this 3rd day of December, 1993, by
and between Opus Corporation, a Minnesota corporation ("Landlord") and Select
Comfort Corporation, a Minnesota corporation ("Tenant").
WITNESSETH:
Landlord, for and in consideration of the rents, covenants and agreements
hereinafter reserved, mentioned and contained on the part of Tenant, its
successors and assigns, to be paid, kept, observed and performed, has leased,
rented, let and demised, and by these presents does lease, rent, let and demise
unto Tenant, and Tenant does hereby take and hire, upon and subject to the
conditions and limitations hereinafter expressed, all that parcel of land
situated in the City of Plymouth, County of Hennepin and State of Minnesota,
described in Exhibit "A" attached hereto and made a part hereof, together with
any appurtenant easements described in said Exhibit "A" (the "Land"), together
with all improvements located on and to be constructed thereon, Landlord's
Improvements (as defined in Article II) and all other improvements, machinery,
equipment, fixtures and other property, real, personal or mixed (except Tenant's
trade fixtures) installed or located thereon, together with all additions,
alterations and replacements thereof are hereinafter referred to as the
"Improvements." The Land and the Improvements are hereinafter referred to as
the "Demised Premises." The Demised Premises are subject to the easements,
restrictions, reservations and other "permitted encumbrances" set forth in said
Exhibit "A." The structures located upon and being a part of the Demised
Premises which are constructed for human occupancy or for storage of goods,
merchandise, equipment, or other personal property are collectively called the
"Building."
ARTICLE I
TERM OF LEASE
Section 1.1 Term of Lease. The initial term of this Lease shall
commence on the Commencement Date, as defined in Section 2.3, and shall end on
the 1st day of June, 2004. The initial term of the Lease, as set forth above,
is sometimes hereinafter referred to as the "Initial Term." Any reference to
the term of this Lease or similar reference shall be a reference to the Initial
Term together with any renewal terms (if any) of this Lease or any extensions to
or modifications of the Initial Term. Tenant shall not be liable to Landlord
for the payment of Basic Rent (as hereinafter defined) or the payment of any
other obligation to be paid by Tenant until the Commencement Date as defined in
Section 2.3.
Section 1.2 Options to Renew. Tenant shall have the right, to be
exercised as hereinafter provided, to extend the term of this Lease Agreement
for two periods of five years each from and after the end of the Initial Term
(each a "Renewal Term") upon the following terms and conditions and subject to
the following limitations:
(a) No event of Default. At the time hereinafter set forth for the
exercise of the renewal option and at the time of commencement of the
Renewal Term in
1
<PAGE>
question, this Lease shall be in full force and effect and there shall be
no uncured Event of Default under this Lease, but Landlord shall have the
right, in its sole discretion to waive any such conditions regarding an
Event of Default.
(b) Terms. The Demised Premises shall be leased to Tenant on an "as is"
basis and each Renewal Term shall be upon the same terms, covenants and
conditions in this Lease except for Landlord's construction obligations and
except that the Basic Rent during each Renewal Term shall be as set forth
in clause (d).
(c) Exercise of Renewal Term(s). Tenant shall exercise its right to
extend the term of this Lease (i) for the first Renewal Term, if at all, by
notifying Landlord in writing of its election to exercise the right to
renew and extend the term of this Lease by no later than May 1, 2003, and
(ii) for the second Renewal Term, if at all, by notifying Landlord of its
election to renew and extend the term of this Lease by no later than May 1,
2008.
(d) Basic Rent. The annual Basic Rent payable during the first Renewal
Term shall be the greater of (i) the Basic Rent payable during the last
year of the Initial Term, and (ii) an amount equal to the Basic Rent
payable during the last year of the Initial Term multiplied by a fraction
the numerator of which is the CPI (as defined below) as of June 1, 2004,
and the denominator of which is the CPI as of June 1, 2002. The annual
Basic Rent payable during the second Renewal Term shall be the greater of
(y) the annual Basic Rent payable during the first Renewal Term, and (z) an
amount equal to the annual Basic Rent payable during the first Renewal Term
multiplied by a fraction the numerator of which is the CPI as of June 1,
2009, and the denominator of which is the CPI as of June 1, 2004. The CPI
is the Consumer Price Index, All Urban Consumers, U.S. City Average, All
Items, 1982-1984 = 100, issued by the Bureau of Labor Statistics of the
U.S. Department of Labor. If the reference years for the CPI is changed,
an appropriate adjustment shall be made so that the reference basis in each
denominator and numerator as set forth above is comparable. If publication
of the CPI is discontinued, the CPI shall be the most nearly comparable
index as selected by Landlord in good faith.
The options in this Section 1.2 are personal to Select Comfort Corporation, and
an option for a Renewal Term, whether or not exercised, shall be of no effect if
Select Comfort Corporation assigns this Lease.
ARTICLE II
CONSTRUCTION OF IMPROVEMENTS
Section 2.1 Landlord's Improvements. Upon obtaining the necessary
permits, Landlord agrees to furnish at Landlord's sole cost and expense all of
the material, labor, and equipment for the construction on the Land of the
improvements specified on the Outline Plans and Specifications which are
attached hereto and made a part hereof as Exhibit "B" ("Landlord's
Improvements"). Landlord's Improvements shall be constructed in a good and
workmanlike manner in accordance with the Outline Plans and Specifications and
Landlord agrees to complete
2
<PAGE>
the construction thereof in accordance with the applicable building code as
it is presently interpreted and enforced by the governmental bodies having
jurisdiction thereof and in accordance with the Americans With Disabilities
Act. Landlord agrees to cause final plans and specifications to be prepared
in accordance with the Outline Plans and Specifications and the aforesaid
building code and to submit the same to Tenant for its approval. Tenant
agrees that it will not withhold its approval except for just and reasonable
cause and will not act in an arbitrary or capricious manner with respect to
the approval of the final plans and specifications. The final plans and
specifications shall be approved by Landlord and Tenant by affixing thereon
the signature or initials of an authorized officer or employee of each of the
respective parties hereto and copies thereof shall be attached to each
party's copy of this Lease and made a part hereof as Exhibit "C." Such
Exhibit "C" shall be in lieu of and shall replace Exhibit "B" except as to
nonconstruction matters contained in Exhibit "B" such as allowances and
exclusions not expressly and specifically superseded by Exhibit "C." The
signature of an authorized officer or employee shall be deemed conclusive
evidence of the approval indicated by such signature. Landlord agrees to
appoint competent personnel to work with Tenant in the preparation of the
final plans and specifications for the Building and Tenant agrees to appoint
an officer or employee of Tenant to work with Landlord in the preparation of
the final plans and specifications for the Building. When Landlord requests
Tenant to specify details or layouts, Tenant shall specify same, subject to
the provisions of the Outline Plans and Specifications, so as not to delay
completion of the Landlord's Improvements. Tenant shall pay to Landlord all
increased costs of Landlord's Improvements attributable to delays caused by
Tenant. If any of the building permits and other approvals required to start
construction of Landlord's Improvements have not been obtained by January 15,
1994, then either Landlord or Tenant can terminate this Lease by notice to
the other given before such permits and approvals are obtained.
Section 2.2 Force Majeure. Landlord shall diligently proceed with the
construction of the Landlord's Improvements and complete the same and deliver
possession thereof to Tenant on or about June 1, 1994; provided, however, if
delay is caused or contributed to by act or neglect of Tenant, or those acting
for or under Tenant, labor disputes, casualties, acts of God or the public
enemy, governmental embargo restrictions, shortages of fuel, labor, or building
materials, action or non-action of public utilities, or of local, state or
federal governments affecting the work, or other causes beyond Landlord's
reasonable control, then the time of completion of said construction shall be
extended for the additional time caused by such delay. Such delays are each
hereinafter referred to as an "Excused Delay." If the Commencement Date has not
occurred by September 30, 1994, as extended by the number of days of Excused
Delays (if any) between the date hereof and the Commencement Date, then Tenant
may terminate this Lease by written notice given to Landlord at any time prior
to the Commencement Date.
Section 2.3 Possession of Demised Premises. Tenant shall, not later
than February 1, 1994, advise Landlord of required color selections. Tenant
shall be responsible for Landlord's increased cost of labor and materials if
any, and loss of rent, arising out of delay in the completion of the Demised
Premises caused by Tenant's failure to comply in a timely manner with the
foregoing schedule. Tenant shall not be liable to Landlord for the payment of
Basic Rent or the payment of any other obligation to be paid by Tenant under
this Lease nor shall Tenant have any right to possession or use of the Demised
Premises until the date upon which the Demised Premises are substantially
completed and ready for occupancy by Tenant
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("Commencement Date"). Except as provided for in Section 2.2, if the
Landlord's Improvements are not substantially completed but are partially
ready for occupancy, Tenant may, but need not, occupy the portion of same
that is ready for occupancy, and in the event of such occupancy Tenant shall
pay to Landlord the pro rata portion of the full Basic Rent and the pro rata
portion of the full amount of other obligations to be paid by Tenant
hereunder equitably based upon the value and area of the Building occupied by
Tenant. If Tenant occupies any portion of the Demised Premises prior to
substantial completion of the Landlord's Improvements the terms of this Lease
shall apply to such occupancy or use of the Demised Premises by Tenant.
Basic Rent and the payment of other obligations to be paid by Tenant shall
commence upon the Commencement Date; provided, however, in the event that
Landlord's Improvements are partially completed and partially ready for
occupancy, and are occupied by Tenant, or Tenant is required to occupy same,
a pro rata portion of the Basic Rent and the pro rata portion of all other
obligations to be paid by Tenant shall be payable commencing with such date
of partial occupancy, and shall be equitably adjusted from time to time based
upon the area and value of the portion of Landlord's Improvements
substantially completed and ready for Tenant's occupancy. The failure of
Tenant to take possession of or to occupy the Demised Premises or any portion
thereof which Tenant is required to occupy on or after the date Landlord's
Improvements or such applicable portion thereof are substantially complete
and ready for occupancy by Tenant shall not serve to relieve Tenant of said
obligations or delay payments by Tenant to Landlord. Tenant shall be allowed
not less than 30 days prior to the Commencement Date to install its
machinery, equipment, fixtures and other personal property on the Demised
Premises during the final stages of completion of construction provided that
Tenant does not thereby interfere with the completion of construction or
occasion any labor dispute as a result of such installations and provided
further that Tenant does hereby agree to assume all risk of loss or damage to
such machinery, equipment, fixtures and other personal property, and to
indemnify, defend and hold harmless Landlord from any loss or damage to such
machinery, equipment, fixtures and personal property, and all liability, loss
or damage arising from any injury to the property of Landlord, or its
contractors, subcontractors or materialmen, and any death or personal injury
to any person or persons to the extent arising out of such installations,
except for liability, loss or damage caused by Landlord's gross negligence or
willful misconduct. Delay in putting Tenant in possession of the Demised
Premises shall not serve to extend the Initial Term of this Lease or to make
Landlord liable for any damages arising therefrom.
Landlord shall be obligated to deliver possession of the Demised Premises
to Tenant in accordance with the provisions of Section 2.2 if Tenant has
executed and delivered this Lease in a form acceptable to Landlord on or before
December 3, 1993, and if Tenant has complied with the provisions of this Lease.
Section 2.4. Construction Guaranty. Landlord guarantees the Landlord's
Improvements against defective workmanship and/or materials for a period of five
years from the date of substantial completion of Landlord's Improvements and
Landlord agrees, at it sole cost and expense, to repair or replace any defective
item occasioned by poor workmanship and/or materials during said five-year
period, and performance of such five-year guaranty shall be Landlord's sole and
exclusive obligation with respect to defective workmanship and/or materials, and
Tenant's rights to enforce such five-year guaranty shall be Tenant's sole and
exclusive remedy with respect to such defective workmanship and/or materials in
limitation of any
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contract, warranty or other rights, whether express or implied, that Tenant
may otherwise have under applicable law. The Landlord's Improvements shall
be considered substantially completed at such time as the municipality having
jurisdiction thereof issues a certificate of occupancy permitting Tenant to
occupy the Landlord's Improvements or takes such other action as may be
customary to permit occupancy or use thereof; provided, however, the issuance
of a certificate of occupancy or such other action as may be customary to
permit occupancy or use thereof shall not be a condition to payment of rent
or commencement of the term if failure to secure such certificate or action
is caused by the act or neglect of Tenant or unless matters required for
issuance are not the responsibility of Landlord. From and after the
expiration of the five year guaranty of Landlord against defective
workmanship and materials, Landlord agrees to cooperate with Tenant in the
enforcement by Tenant, at Tenant's sole cost and expense, of any express
warranties or guaranties of workmanship or materials given by subcontractors
or materialmen that guarantee or warrant against defective workmanship or
materials for a period of time in excess of the five-year period described
above and to cooperate with Tenant in the enforcement by Tenant, at Tenant's
sole cost and expense, of any service contracts that provide service, repair
or maintenance to any item incorporated in the Building for a period of time
in excess of such five-year period.
Section 2.5 Tenant's Acceptance of Demised Premises. Within a period of
90 days after commencement of the Initial Term, Tenant shall notify Landlord, in
writing, of all portions of the Landlord's Improvements which are incomplete and
Landlord shall forthwith complete such items. Subject to Excused Delays,
Landlord shall complete such incomplete items within 60 days after receipt of
Tenant's notice.
Section 2.6 Repair and Maintenance. Save and except for the five year
guaranty against defective items occasioned by poor workmanship and/or materials
referred to in Section 2.4 above and the incomplete items referred to in Section
2.5 above, Tenant upon commencement of the term shall have and hold the Demised
Premises as the same shall then be without any liability or obligation on the
part of Landlord for making any alterations, improvements or repairs of any kind
in or about the Demised Premises for the term of this Lease, or any extension or
renewal thereof, and Tenant agrees to maintain the Demised Premises and all
parts thereof in a good and sufficient state of repair as required by the
provisions of this Lease.
ARTICLE III
BASIC RENT
Section 3.1 Basic Rent. In consideration of the leasing of the Demised
Premises and the construction of the Landlord's Improvements referred to in
Article II hereof, Tenant covenants to pay Landlord, without previous demand
therefor and without any right of setoff or deduction whatsoever, at the office
of Landlord at:
Opus Corporation
9900 Bren Road East, Suite 800
Minnetonka, Minnesota 55343
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or at such other place as Landlord may from time to time designate in writing,
an annual rental for the Initial Term of this Lease of Four Hundred Sixty
Thousand Seven Hundred Six and no/100 Dollars ($460,706.00) for the period
beginning on the Commencement Date and ending May 31, 1997, Four Hundred
Seventy-Seven Thousand Six Hundred Two and no/100 Dollars ($477,602.00) for the
period beginning June 1, 1997, and ending May 31, 2000, Five Hundred Forty-Three
Thousand One Hundred Ninety-Eight and no/100 Dollars ($543,198.00) for the
period beginning June 1, 2000, and ending May 31, 2002, and Five Hundred
Eighty-Four Thousand Nine Hundred Forty-One and no/100 Dollars ($584,941.00)
for the balance of the Initial Term, payable monthly, in advance, in equal
installments, commencing on the Commencement Date and continuing on the first
day of each month thereafter for the succeeding months during the balance of
the Initial Term. The rent provided for in this Section 3.1 is hereinafter
called the "Basic Rent."
Section 3.2 Basic Rent Adjustment. If the Initial Term of this Lease
does not commence on the first day of a calendar month or end on the last day of
a calendar month, the installment of Basic Rent for the partial calendar month
at the commencement or the termination of the term shall be prorated on the
basis of the number of days of the term within such calendar month.
Section 3.3 Additional Rent. The Basic Rent shall be absolutely net to
Landlord so that this Lease shall yield, net to Landlord, the Basic Rent
specified in Section 3.1 in each year of the term of this Lease and that all
impositions, insurance premiums, utility charges, maintenance, repair and
replacement expenses, all expenses relating to compliance with laws (except in
connection with the completion of Landlord's Improvements, which shall be at
Landlord sole cost and expense), and all other costs, fees, charges, expenses,
reimbursements and obligations of every kind and nature whatsoever relating to
the Demised Premises (excepting only Landlord's portion of the proration of real
estate taxes and special assessments for the first and last years of the term of
this Lease referred to in Section 5.1 and certain taxes of Landlord referred to
in the last sentence of Section 5.3 of this Lease) which may arise or become due
during the term or by reason of events occurring during the term of this Lease
shall be paid or discharged by Tenant. In the event Tenant fails to pay or
discharge any imposition, insurance premium, utility charge, maintenance repair
or replacement expense which it is obligated to pay or discharge, Landlord may,
but shall not be obligated to pay the same, and in that event Tenant shall
immediately reimburse Landlord therefor and pay the same as additional rent (all
such items being sometimes hereinafter collectively referred to as "Additional
Rent") and Tenant hereby agrees to indemnify, defend and save Landlord harmless
from and against such impositions, insurance premiums, utility charges,
maintenance, repair and replacement expenses, all expenses relating to
compliance with laws, and all other costs, fees, charges, expenses,
reimbursements and obligations above referred to.
Section 3.4 Delinquent Payments. All payments of Basic Rent and
Additional Rent shall be payable without previous demand therefor and without
any right of setoff or deduction whatsoever, and in case of nonpayment of any
item of Additional Rent by Tenant when the same is due, Landlord shall have, in
addition to all its other rights and remedies, all of the rights and remedies
available to Landlord under the provisions of this Lease or by law in the case
of nonpayment of Basic Rent. The performance and observance by Tenant of all
the terms,
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covenants, conditions and agreements to be performed or observed by
Tenant hereunder shall all be performed and observed by Tenant at Tenant's sole
cost and expense. Any installment of Basic Rent or Additional Rent or any other
charges payable by Tenant under the provisions hereof which shall not be paid
when due or within ten days after the due date shall bear interest at an annual
rate equal to two percentage points per annum in excess of the published "prime
rate" or "base rate" of interest charged by Norwest Bank Minneapolis, N.A. (or
similar institution if said Bank shall cease to exist or to publish such a prime
rate) from the date when the same is due hereunder until the same shall be paid,
but in no event in excess of the maximum lawful rate permitted to be charged by
Landlord against Tenant. Said rate of interest is sometimes hereinafter
referred to as the "Maximum Rate of Interest."
In addition, any installment of Basic Rent or Additional Rent or any other
charges payable by Tenant under the provisions hereof which shall not be paid
when due and which remain unpaid ten days thereafter shall be subject to a late
payment fee of four percent of the unpaid amount.
Section 3.5 Independent Obligations. Any term or provision of this
Lease to the contrary notwithstanding, the covenants and obligations of Tenant
to pay Basic Rent and Additional Rent hereunder shall be independent from any
obligations, warranties or representations, express or implied, if any, of
Landlord herein contained.
Section 3.6 Security Deposit. Contemporaneously with the execution
hereof, Tenant shall pay to Landlord the sum of Two Hundred Fifty-Seven
Thousand Eight Hundred Thirty-Three and No/100 Dollars ($257,833.00) as
increased or decreased as provided below (the "Security Deposit"). The
Security Deposit shall be held by Landlord as security for the performance by
Tenant of Tenant's covenants and obligations under this Lease, it being
expressly understood that such deposit shall not be considered an advance
payment of Basic Rent or Additional Rent or a measure of Landlord's damages
in case of default by Tenant. Attached hereto as Exhibit D is a business plan
of Tenant showing Tenant's net worth as of the date shown on Exhibit D and
Tenant's net income before taxes for the twelve month period ending on the
date shown on Exhibit D (the "Base Business Plan"). By no later than July
31, 1995, Tenant shall provide Landlord with a business plan of Tenant
prepared as to all data on the same basis as the basis used in preparing the
attached business plan and showing Tenant's net worth as of June 30, 1995,
and its net income before taxes for the twelve month period ending June 30,
1995 (the "Comparison Business Plan"). If, based upon the Comparison
Business Plan, Tenant's net worth as of June 30, 1995, is less than 90% of
the net worth shown on the Base Business Plan, or Tenant's net income before
taxes for the twelve month period ending June 30, 1995, is less than 90% of
the comparable number shown on the Base Business Plan, Tenant shall, by no
later than August 15, 1995, deposit an additional $73,667 security deposit
with Landlord. If, based upon the Comparison Business Plan, Tenant's net
worth as of June 30, 1995, is over 110% of its net worth as shown in the Base
Business Plan, and Tenant's net income before taxes for the twelve month
period ending June 30, 1995, is 110% or more of the comparable number shown
on the Base Business Plan, then, by no later than 15 days after receipt of
the Comparison Business Plan, Landlord shall refund to Tenant $36,833 of the
Security Deposit. Upon the occurrence of any event of default by Tenant,
Landlord may, from time to time, without prejudice to any other remedy, use
the Security Deposit to the extent necessary to make good any arrearages of
Basic
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Rent, Additional Rent and any other damage, in jury, 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.
Provided there exists no Event of Default hereunder, any remaining balance of
the Security Deposit shall be returned by Landlord to Tenant upon expiration
or earlier termination of this Lease. If Landlord transfers its interest in
the Demised Premises during the term of this Lease, Landlord may assign the
Security Deposit to the transferee and thereafter shall have no further
liability for the return of the Security Deposit. Landlord shall pay
interest on the Security Deposit at the rate of six percent per annum,
payable semi-annually on July 1 and January 1 of each year during the term,
except that, if there is an uncured Event of Default hereunder, interest
shall be added to the Security Deposit. If at the end of the fifth year of
the Initial Term of the Lease, Tenant has exceeded the net worth shown on the
Business Plan by an amount of 110% or more, Landlord shall reduce the
Security Deposit to $110,499.00.
ARTICLE IV
USE OF DEMISED PREMISES
Section 4.1 Permitted Use. The Demised Premises including all buildings
or other improvements hereafter erected upon the same shall be used for
office/warehouse, showroom and miscellaneous light manufacturing. Tenant shall
not use or occupy the same, or knowingly permit them to be used or occupied,
contrary to any statute, rule, order, ordinance, requirement or regulation
applicable thereto, or in any manner which would violate any certificate of
occupancy affecting the same, or which would make void or voidable any insurance
then in force with respect thereto or which would make it impossible to obtain
fire or other insurance thereon required to be furnished hereunder by Tenant, or
which would cause structural injury to the improvements or cause the value or
usefulness of the Demised Premises, or any portion thereof, substantially to
diminish (reasonable wear and tear excepted), or which would constitute a public
or private nuisance or waste or would violate any Hazardous Materials Laws (as
defined in Section 9.5), and Tenant agrees that it will promptly, upon discovery
of any such use, take all necessary steps to compel the discontinuance of such
use.
Section 4.2 Preservation of Demised Premises. Tenant shall not use,
suffer, or permit the Demised Premises, or any portion thereof, to be used by
Tenant, any third party or the public in such manner as might reasonably tend to
impair Landlord's title to the Demised Premises, or any portion thereof, or in
such manner as might reasonably make possible a claim or claims of adverse usage
or adverse possession by the public, as such, or third persons, or of implied
dedication of the Demised Premises, or any portion thereof. Nothing in this
Lease contained and no action or inaction by Landlord shall be deemed or
construed to mean that Landlord has granted to Tenant any right, power or
permission to do any act or make any agreement that may create, or give rise to
or be the foundation for any such right, title, interest, lien, charge or other
encumbrance upon the estate of Landlord in the Demised Premises. Landlord
acknowledges that it is familiar with Tenant's operations in its current
facility and that such operations will not violate this Section.
Section 4.3 Acceptance of Demised Premises. Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to the
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Demised Premises or the Building or with respect to the suitability or
fitness of either for the conduct of Tenant's business or for any other
purpose and Tenant accepts the Demised Premises in an "as is" condition,
subject to Landlord's obligations under Article 2. Tenant shall comply with
any recorded covenants, conditions, and restrictions affecting the Demised
Premises and the Building as of the commencement of the Lease or which are
recorded during the Lease Term. Landlord acknowledges that it is familiar
with Tenant's operations in its current facility and that such operations
will not violate this Section.
ARTICLE V
PAYMENT OF TAXES, ASSESSMENTS, ETC.
Section 5.1 Payment of Impositions. Tenant covenants and agrees to pay
during the term of this Lease, as Additional Rent, before any fine, penalty,
interest or cost may be added thereto for the nonpayment thereof, all real
estate taxes, special assessments, water rates and charges, sewer rates and
charges, including any sum or sums payable for present or future sewer or water
capacity, charges for public utilities, street lighting, excise levies,
licenses, permits, inspection fees, other governmental charges, and all other
charges or burdens of whatsoever kind and nature (including costs, fees, and
expenses of complying with any restrictive covenants or similar agreements to
which the Demised Premises are subject) incurred in the use, occupancy,
ownership, operation, leasing or possession of the Demised Premises, without
particularizing by any known name or by whatever name hereafter called, and
whether any of the foregoing be general or special, ordinary or extraordinary,
foreseen or unforeseen (all of which are sometimes herein referred to as
"Impositions"), which at any time during the term may have been or may be
assessed, levied, confirmed, imposed upon, or become a lien on the Demised
Premises, or any portion thereof, or any appurtenance thereto, rents or income
therefrom, and such easements or rights as may now or hereafter be appurtenant
or appertain to the use of the Demised Premises. Tenant shall pay all special
(or similar) assessments for public improvements or benefits which, during the
term of this Lease shall be laid, assessed, levied or imposed upon or become
payable or become a lien upon the Demised Premises, or any portion thereof;
provided, however, that if by law any special assessment is payable (without
default) or, at the option of Landlord, may be paid (without default) in
installments (whether or not interest shall accrue on the unpaid balance of such
special assessment), Tenant may pay the same, together with any interest accrued
on the unpaid balance of such special assessment in installments as the same
respectively become payable and before any fine, penalty, interest or cost may
be added thereto for the nonpayment of any such installment and the interest
thereon. Tenant shall pay all special assessments or installments thereof
(including interest accrued thereon), whether heretofore or hereafter laid,
assessed, levied or imposed upon the Demised Premises, or any portion thereof,
which are due and payable during the term of this Lease. Landlord shall pay all
installments of special assessments (including interest accrued on the unpaid
balance) which are payable prior to the commencement and after the termination
date of the term of this Lease. Tenant shall pay all real estate taxes, whether
heretofore or hereafter levied or assessed upon the Demised Premises, or any
portion thereof, which are due and payable during the term of this Lease.
Landlord shall pay all real estate taxes which are due and payable prior to the
commencement of the term of this Lease. Provisions herein to the contrary
notwithstanding, Landlord shall pay that portion of the real estate taxes and
installments of special assessments due and payable in respect to the Demised
Premises during the year the term commences and the year in which the term ends
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which the number of days in said year not within the term of this Lease bears to
365, and Tenant shall pay the balance of said real estate taxes and installments
of special assessments during said years.
Section 5.2 Tenant's Right to Contest Impositions. Tenant shall have
the right at its own expense to contest the amount or validity, in whole or in
part, of any Imposition by appropriate proceedings diligently conducted in good
faith, but only after payment of such Imposition, unless such payment, or a
payment thereof under protest, would operate as a bar to such contest or
interfere materially with the prosecution thereof, in which event,
notwithstanding the provisions of Section 5.1 hereof, Tenant may postpone or
defer payment of such Imposition if (a) neither the Demised Premises nor any
portion thereof would by reason of such postponement or deferment, be in danger
of being forfeited or lost, and (b) Tenant shall have deposited with Landlord
cash or a certificate of deposit payable to Landlord issued by a national bank
or federal savings and loan association in the amount of the Imposition so
contested and unpaid, together with all interest and penalties which may accrue
in Landlord's reasonable judgment in connection therewith, and all charges that
may or might be assessed against or become a charge on the Demised Premises, or
any portion thereof, during the pendency of such proceedings. If, during the
continuance of such proceedings, Landlord shall, from time to time, reasonably
deem the amount deposited, as aforesaid, insufficient, Tenant shall, upon demand
of Landlord, make additional deposits of such additional sums of money or such
additional certificates of deposit as Landlord may reasonably request. Upon
failure of Tenant to make such additional deposits, the amount theretofore
deposited may be applied by Landlord to the payment, removal and discharge of
such Imposition, and the interest, fines and penalties in connection therewith,
and any costs, fees (including attorney's fees) and other liability (including
costs incurred by Landlord) accruing in any such proceedings. Upon the
termination of any such proceedings, Tenant shall pay the amount of such
Imposition or part thereof, if any, as finally determined in such proceedings,
the payment of which may have been deferred during the prosecution of such
proceedings, together with any costs, fees, including attorney's fees, interest,
penalties, fines and other liability in connection therewith, and upon such
payment Landlord shall return all amounts or certificates deposited with it with
respect to the contest of such Imposition, as aforesaid, or, at the written
direction of Tenant, Landlord shall make such payment out of the funds on
deposit with Landlord and the balance, if any, shall be returned to Tenant.
Tenant shall be entitled to the refund of any Imposition, penalty, fine and
interest thereon received by Landlord which have been paid by Tenant or which
have been paid by Landlord but for which Landlord has been previously reimbursed
in full by Tenant. Landlord shall not be required to join in any proceedings
referred to in this Section 5.2 unless the provisions of any law, rule or
regulation at the time in effect shall require that such proceedings be brought
by or in the name of Landlord, in which event, Landlord shall join in such
proceedings or permit the same to be brought in Landlord's name upon compliance
with such conditions as Landlord may reasonably require. Landlord shall not
ultimately be subject to any liability for the payment of any fees, including
attorney's fees, costs and expenses in connection with such proceedings, Tenant
agrees to pay all such fees (including reasonable attorney's fees), costs and
expenses or, on demand, to make reimbursement to Landlord for such payment.
During the time when any such certificate of deposit is on deposit with
Landlord, and prior to the time when the same is returned to Tenant or applied
against the payment, removal or discharge
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of Impositions, as above provided, Tenant shall be entitled to receive all
interest paid thereon, if any. Cash deposits shall not bear interest.
Section 5.3 Levies and Other Taxes. If, at any time during the term of
this Lease, any method of taxation shall be such that there shall be levied,
assessed or imposed on Landlord, or on the Basic Rent or Additional Rent, or on
the Demised Premises or on the value of the Demised Premises, or any portion
thereof, a capital levy, sales or use tax, gross receipts tax or other tax on
the rents received therefrom, or a franchise tax, or an assessment, levy or
charge measured by or based in whole or in part upon such rents or value, Tenant
covenants to pay and discharge the same, it being the intention of the parties
hereto that the rent to be paid hereunder shall be paid to Landlord absolutely
net without deduction or charge of any nature whatsoever foreseeable or
unforeseeable, ordinary or extraordinary, or of any nature, kind or description,
except as in this Lease otherwise expressly provided. Nothing in this Lease
contained shall require Tenant to pay any municipal, state or federal net income
or excess profits taxes assessed against Landlord, or any municipal, state or
federal capital levy, estate, succession, inheritance or transfer taxes of
Landlord, or corporation franchise taxes imposed upon any corporate owner of the
fee of the Demised Premises.
Section 5.4 Evidence of Payment. Tenant covenants to furnish Landlord,
within 30 days after the date upon which any Imposition or other tax,
assessment, levy or charge is payable by Tenant, official receipts of the
appropriate taxing authority, or other appropriate proof satisfactory to
Landlord, evidencing the payment of the same. The certificate, advise or bill
of the appropriate official designated by law to make or issue the same or to
receive payment of any Imposition or other tax, assessment, levy or charge may
be relied upon by Landlord as sufficient evidence that such Imposition or other
tax, assessment, levy or charge is due and unpaid at the time of the making or
issuance of such certificate, advise or bill.
Section 5.5 Escrow for Taxes and Assessments. At Landlord's written
demand after any Event of Default and for as long as such Event of Default is
uncured, Tenant shall pay to Landlord the known or estimated yearly real estate
taxes and assessments payable with respect to the Demised Premises in monthly
payments equal to one-twelfth of the known or estimated yearly real estate taxes
and assessments next payable with respect to the Demised Premises. From time to
time Landlord may reestimate the amount of real estate taxes and assessments,
and in such event Landlord shall notify Tenant, in writing, of such reestimate
and fix future monthly installments for the remaining period prior to the next
tax and assessment due date in an amount sufficient to pay the reestimated
amount over the balance of such period after giving credit for payments made by
Tenant on the previous estimate. If the total monthly payments made by Tenant
pursuant to this Section 5.5 shall exceed the amount of payments necessary for
said taxes and assessments, such excess shall be credited on subsequent monthly
payments of the same nature; but if the total of such monthly payments so made
under this paragraph shall be insufficient to pay such taxes and assessments
when due, then if Tenant shall pay to Landlord such amount as may be necessary
to make up the deficiency. Payment by Tenant of real estate taxes and
assessments under this section shall be considered as performance of such
obligation under the provisions of Section 5.1 hereof.
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Section 5.6 Landlord's Right to Contest Impositions. In addition to the
right of Tenant under Section 5.2 to contest the amount of validity of
Impositions, Landlord shall also have the right, but not the obligation, to
contest the amount or validity, in whole or in part, of any Impositions not
contested by Tenant, by appropriate proceedings conducted in the name of
Landlord or in the name of Landlord and Tenant. If Landlord elects to contest
the amount or validity, in whole or in part, of any Impositions, such contests
by Landlord shall be at Landlord's expense, provided, however, that if Tenant
has approved such contest by Landlord, then the amounts payable by Tenant for
Impositions are reduced (or if a proposed increase in such amounts is avoided or
reduced) by reason of Landlord's contest of Impositions, Tenant shall reimburse
Landlord for costs incurred by Landlord in contesting Impositions, but such
reimbursements shall not be in excess of the amount saved by Tenant by reason of
Landlord's actions in contesting such Impositions.
ARTICLE VI
INSURANCE
Section 6.1 Tenant's Insurance Obligations. Tenant, at its sole cost
and expense, shall obtain and continuously maintain in full force and effect
during the term of this Lease, commencing with the date that rental (full or
partial) commences, policies of insurance covering the Improvements constructed,
installed or located on the Demised Premises naming the Landlord, as an
additional insured, against (a) loss or damage by fire; (b) loss or damage from
such other risks or hazards now or hereafter embraced by an "Extended Coverage
Endorsement," including, but not limited to, windstorm, hail, explosion,
vandalism, riot and civil commotion, damage from vehicles, smoke damage, water
damage and debris removal; and (c) loss or damage from such other risks or
hazards of a similar or dissimilar nature which are now or may hereafter be
customarily insured against with respect to improvements similar in
construction, design, general location, use and occupancy to the Improvements.
At all times, such insurance coverage shall be in an amount equal to 100% of the
then "full replacement cost" of the Improvements. "Full Replacement Cost" shall
be interpreted to mean the cost of replacing the improvements without deduction
for depreciation or wear and tear, and it shall include a reasonable sum for
architectural, engineering, legal, administrative and supervisory fees connected
with the restoration or replacement of the Improvements in the event of damage
thereto or destruction thereof. If a sprinkler system shall be located in the
Improvements, sprinkler leakage insurance shall be procured and continuously
maintained by Tenant at Tenant's sole cost and expense. For the period prior to
the date when full or partial rental commences hereunder Landlord, at its sole
cost and expense, shall maintain in full force and effect, on a completed value
basis, insurance coverage on the Building on Builder's Risk or other comparable
coverage.
Section 6.2 Insurance Coverage. During the term of this Lease, Tenant,
at its sole cost and expense, shall obtain and continuously maintain in full
force and effect the following insurance coverage:
(a) Comprehensive general liability insurance against any loss, liability
or damage on, about or relating to the Demised Premises, or any portion
thereof, with limits of not less than Two Million Dollars ($2,000,000.00)
combined single limit, per occurrences and aggregate, coverage on an
occurrence basis. Any such insurance
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obtained and maintained by Tenant shall name Landlord as an additional
insured therein and shall be obtained and maintained from and with a
reputable and financially sound insurance company authorized to issue
such insurance in the state in which the Demised Premises are located.
Such insurance shall specifically insure (by contractual liability and
consent) Tenant's obligations under Section 20.3 of this Lease.
(b) Boiler and pressure vessel (including, but not limited to, pressure
pipes, steam pipes and condensation return pipes) insurance, provided the
Building contains a boiler or other pressure vessel or pressure pipes.
Landlord shall be named as an additional insured in such policy or policies
of insurance.
(c) Such other insurance and in such amounts as may from time to time be
reasonably required by Landlord, against other insurable hazards which at
the time are commonly insured against in the case of premises and/or
buildings or improvements similar in construction, design, general
location, use and occupancy to those on or appurtenant to the Demised
Premises.
The insurance set forth in this Section 6.2 shall be maintained by Tenant
at not less than the limits set forth herein until reasonably required to be
changed from time to time by Landlord, in writing, whereupon Tenant covenants to
obtain and maintain thereafter such protection in the amount or amounts so
required by Landlord. Landlord may not require increases more frequently than
at five year intervals, with the first such increase not earlier than June 1,
1999.
Section 6.3 Insurance Provisions. All policies of insurance required by
Section 6.1 shall provide that the proceeds thereof shall be payable to Landlord
and if Landlord so request shall also be payable to any contract purchaser of
the Demised Premises and the holder of any mortgages now or hereafter becoming a
lien on the fee of the Demised Premises, or any portion thereof, as the interest
of such purchaser or holder appears pursuant to a standard named insured or
mortgagee clause. Tenant shall not, on Tenant's own initiative or pursuant to
request or requirement of any third party, take out separate insurance
concurrent in form or contributing in the event of loss with that required in
Section 6.1 hereof, unless Landlord is named therein as an additional insured
with loss payable as in said Section 6.1 provided. Tenant shall immediately
notify Landlord whenever any such separate insurance is taken out and shall
deliver to Landlord original certificates evidencing the same.
Each policy required under this Article VI shall have attached thereto (a)
an endorsement that such policy shall not be canceled or materially changed
without at least 30 days prior written notice to Landlord, and (b) an
endorsement to the effect that the insurance as to the interest of Landlord
shall not be invalidated by any act or neglect of Landlord or Tenant. All
policies of insurance shall be written in companies reasonably satisfactory to
Landlord and licensed in the state in which the Demised Premises are located.
Such certificates of insurance shall be in a form reasonably acceptable to
Landlord and Tenant, shall be delivered to Landlord upon commencement of the
term and prior to expiration of such policy, new certificates of insurance,
shall be delivered to Landlord not less than 20 days prior to the expiration of
the then current policy term.
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Section 6.4 Waiver of Subrogation. Tenant shall cause to be inserted
in the policy or policies of insurance required by this Article VI hereof a
so-called "Waiver of Subrogation Clause" as to Landlord. Tenant and Landlord
each hereby waives, releases and discharges the other party hereto, its
agents and employees from all claims whatsoever arising out of loss, claim,
expense or damage to or destruction covered or coverable by property or loss
of use or business interruption insurance of the kind required under this
Article VI notwithstanding that such loss, claim, expense or damage may have
been caused by such party, its agents or employees, and Tenant agrees to look
to the insurance coverage only in the event of such loss.
Section 6.5 Tenant's Indemnification of Landlord. Tenant shall maintain
insurance coverage upon Tenant's business and upon all personal property of
Tenant or the personal property of others kept, stored or maintained on the
Demised Premises against loss or damage by fire, windstorm or other casualties
or causes for such amount as Tenant may desire, and Tenant agrees that such
policies shall contain a waiver of subrogation clause as to Landlord.
Section 6.6 Unearned Premiums. Upon expiration of the term of this
Lease, the unearned premiums upon any insurance policies or certificates thereof
lodged with Landlord by Tenant shall, subject to the provisions of Article XIII
hereof, be payable to Tenant, provided that Tenant shall not then be in default
in keeping, observing or performing the terms and conditions of this Lease.
Section 6.7 Blanket Insurance Coverage. Nothing in this Article shall
prevent Tenant from taking out insurance of the kind and in the amount provided
for under the preceding paragraphs of this Article under a blanket insurance
policy or policies (certificates thereof reasonably satisfactory to Landlord
shall be delivered to Landlord) which may cover other properties owned or
operated by Tenant as well as the Demised Premises; provided, however, that any
such policy of blanket insurance of the kind provided for shall (a) specify
therein the amounts thereof exclusively allocated to the Demised Premises or
Tenant shall furnish Landlord and the holder of any fee mortgage with a written
statement from the insurers under such policies specifying the amounts of the
total insurance exclusively allocated to the Demised Premises, and (b) not
contain any clause which would result in the insured thereunder being required
to carry any insurance with respect to the property covered thereby in an amount
not less than any specific percentage of the Full Replacement Cost of such
property in order to prevent the insured therein named from becoming a
co-insurer of any loss with the insurer under such policy; and further provided,
however, that such policies of blanket insurance shall, as respects the Demised
Premises, contain the various provisions required of such an insurance policy by
the foregoing provisions of this Article VI.
ARTICLE VII
UTILITIES
Section 7.1 Payment of Utilities. During the term of this Lease, Tenant
will pay, when due, all charges of every nature, kind or description for
utilities furnished to the Demised Premises or chargeable against the Demised
Premises, including all charges for water, sewage, heat, gas, light, garbage,
electricity, telephone, steam, power, or other public or private utility
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services. Prior to the Commencement Date, Tenant shall pay for all utilities or
services at the Demised Premises used by it or its agents, employees or
contractors.
Section 7.2 Additional Charges. Except for initial SAC, WAC and
connection charges (including gas and electrical, but not telephone), in the
event that any charge or fee is required after the Commencement Date by the
state in which the Demised Premises are located, or by any agency, subdivision,
or instrumentality thereof, or by any utility company furnishing services or
utilities to the Demised Premises, as a condition precedent to furnishing or
continuing to furnish utilities or services to the Demised Premises, such charge
or fee shall be deemed to be a utility charge payable by Tenant. The provisions
of this Section 7.2 shall include, but not be limited to, any charge of fees for
present or future water or sewer capacity to serve the Demised Premises, any
charges for the underground installation of gas or other utilities or services,
and other charges relating to the extension of or change in the facilities
necessary to provide the Demised Premises with adequate utility services. In
the event that Landlord has paid any such charge or fee after the date hereof,
Tenant shall reimburse Landlord for such utility charge. Nothing contained in
this Section 7.2 shall be construed to relieve Landlord of the obligation to
finish Landlord's Improvements described in Exhibit "B."
ARTICLE VIII
REPAIRS
Section 8.1 Tenant's Repairs. Save and except for the five-year
guaranty against defective materials and workmanship or other guaranties
provided for in Section 2.4 hereof, and the completion of incomplete items
provided for in Section 2.5 hereof, Tenant, at its sole cost and expense,
throughout the term of this Lease, shall take good care of the Demised Premises
(including any improvements hereafter erected or installed on the Land), and
shall keep the same in good order, condition and repair, and irrespective of
such guaranty shall make and perform all routine maintenance thereof and all
necessary repairs thereto, interior and exterior, structural and nonstructural,
ordinary and extraordinary, foreseen and unforeseen, of every nature, kind and
description. When used in this Article VIII, "repairs" shall include all
necessary replacements, renewals, alterations, additions and betterments. All
repairs made by Tenant shall be at least equal in quality and cost to the
original work and shall be made by Tenant in accordance with all laws,
ordinances and regulations whether heretofore or hereafter enacted. The
necessity for or adequacy of maintenance and repairs shall be measured by the
standards which are appropriate for improvements of similar construction and
class, provided that Tenant shall in any event make all repairs necessary to
avoid any structural damage or other damage or injury to the Improvements.
Section 8.2 Maintenance. Tenant, at its sole cost and expense, shall
take good care of, repair and maintain all driveways, pathways, roadways,
sidewalks, curbs, spur tracks, parking areas, loading areas, landscaped areas,
entrances and passageways in good order and repair and shall promptly remove all
accumulated snow, ice and debris from any and all driveways, pathways, roadways,
sidewalks, curbs, parking areas, loading areas, entrances and passageways, and
keep all portions of the Demised Premises, including areas appurtenant thereto,
in a clean and orderly condition free of snow, ice, dirt, rubbish, debris and
unlawful obstructions. Further, Tenant shall keep the Demised Premises safe for
human occupancy and use.
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Section 8.3 Tenant's Waiver of Claims Against Landlord. Landlord shall
not be required to furnish any services or facilities or to make any repairs or
alterations in, about or to the Demised Premises or any improvements hereafter
erected thereon. Tenant hereby assumes the full and sole responsibility for the
condition, operation, repair, replacement, maintenance and management of the
Demised Premises and all improvements hereafter erected thereon, and Tenant
hereby waives any rights created by any law now or hereafter in force to make
repairs to the Demised Premises or improvements hereafter erected thereon at
Landlord's expense.
Section 8.4 Prohibition Against Waste. Tenant shall not do or suffer
any waste or damage, disfigurement or injury to the Demised Premises, or any
improvements hereafter erected thereon, or to the fixtures or equipment therein,
or permit or suffer any overloading of the floors or other use of the
Improvements that would place an undue stress on the same or any portion thereof
being that for which the same was designed.
Section 8.5 Landlord's Right to Effect Repairs. If Tenant should fail
to perform any of its obligations under this Article VIII, then Landlord may, if
it so elects, in addition to any other remedies provided herein, effect such
repairs and maintenance. Any sums expended by Landlord in effecting such
repairs and maintenance shall be due and payable, on demand, together with
interest thereon at the Maximum Rate of Interest from 10 days after the date of
invoice by Landlord for such expenditure by Landlord to the date of repayment by
Tenant.
Section 8.6 Misuse or Neglect. Tenant shall be responsible for all
repairs to the Building which are made necessary by any misuse or neglect by:
(i) Tenant or any of its officers, agents, employees, contractors, licensees, or
subtenants; or (ii) any visitors, patrons, guests, or invitees of Tenant or its
subtenant while in or upon the Demised Premises.
ARTICLE IX
COMPLIANCE WITH LAWS AND ORDINANCES
Section 9.1 Compliance with Laws and Ordinances. Tenant shall,
throughout the term of this Lease, and at Tenant's sole cost and expense,
promptly comply or cause compliance with or remove or cure any violation of any
and all present and future laws, ordinances, orders, rules, regulations and
requirements of all federal, state, municipal and other governmental bodies
having jurisdiction over the Demised Premises and the appropriate departments,
commissions, boards and officers thereof, and the orders, rules and regulations
of the Board of Fire Underwriters where the Demised Premises are situated, or
any other body now or hereafter constituted exercising lawful or valid authority
over the Demised Premises, or any portion thereof, or the sidewalks, curbs,
roadways, alleys, entrances or railroad track facilities adjacent or appurtenant
thereto, or exercising authority with respect to the use or manner of use of the
Demised Premises, or such adjacent or appurtenant facilities, and whether the
compliance, curing or removal of any such violation and the costs and expenses
necessitated thereby shall have been foreseen or unforeseen, ordinary or
extraordinary, and whether or not the same shall be presently within the
contemplation of Landlord or Tenant or shall involve any change of governmental
policy, or require structural or extraordinary repairs, alterations or additions
by Tenant and irrespective of the costs thereof.
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Section 9.2 Compliance with Permitted Encumbrances. Tenant, at its sole
cost and expense, shall comply with all agreements, contracts, easements,
restrictions, reservations or covenants, if any, set forth in Exhibit "A"
attached, or hereafter created by Tenant or consented to, in writing, by Tenant
or requested, in writing, by Tenant. Tenant shall also comply with, observe and
perform all provisions and requirements of all policies of insurance at any time
in force with respect to the Demised Premises and required to be obtained and
maintained under the terms of Article VI hereof and shall comply with all
development permits issued by governmental authorities issued in connection with
development of the Demised Premises.
Section 9.3 Tenant's Obligations. Notwithstanding that it may be usual
and customary for Landlord to assume responsibility and performance of any or
all of the obligations set forth in this Article IX, and notwithstanding any
order, rule or regulation directed to Landlord to perform, Tenant hereby assumes
such obligations because, by nature of this Lease, the rents and income derived
from this Lease by Landlord are net rentals not to be diminished by any expense
incident to the ownership, occupancy, use, leasing, or possession of the Demised
Premises or any portion thereof.
Section 9.4 Tenant's Right to Contest Laws and Ordinances. After prior
written notice to Landlord, Tenant, at its sole cost and expense and without
cost or expense to Landlord, shall have the right to contest the validity or
application of any law or ordinance referred to in this Article IX in the name
of Tenant or Landlord, or both, by appropriate legal proceedings diligently
conducted but only if compliance with the terms of any such law or ordinance
pending the prosecution of any such proceeding may legally be delayed without
the incurrence of any lien or charge, liability of any kind against the Demised
Premises, or any portion thereof, and without subjecting Landlord or Tenant to
any liability, civil or criminal, for failure so to comply therewith until the
final determination of such proceeding; provided, however, if any lien or charge
would be incurred by reason of any such delay, Tenant nevertheless, on the prior
written consent of Landlord, may contest as aforesaid and delay as aforesaid,
provided that such delay would not subject Tenant or Landlord to civil or
criminal liability and Tenant (a) prosecutes the contest with due diligence and
in good faith, and (b) agrees to indemnify, defend and hold harmless Landlord
and the Demised Premises from any charge, liability or expense whatsoever.
If necessary or proper to permit Tenant so to contest the validity or
application of any such law or ordinance, Landlord shall, at Tenant's sole cost
and expense, including reasonable attorney's fees incurred by Landlord, execute
and deliver any appropriate papers or other documents; provided, Landlord shall
not be required to execute any document or consent to any proceeding which would
result in the imposition of any cost, charge, expense or penalty on Landlord or
the Demised Premises.
Section 9.5 Compliance with Hazardous Materials Laws. Tenant shall at
all times and in all respects comply with all federal, state and local laws,
ordinances and regulations ("Hazardous Materials Laws") relating to the
industrial hygiene, environmental protection or the use, analysis, generation,
manufacture, storage, presence, disposal or transportation of any oil, petroleum
products, flammable explosives, asbestos, urea formaldehyde, polychlorinated
biphenyls, radioactive materials or waste, or other hazardous, toxic,
contaminated or polluting
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materials, substances or wastes, including without limitation any "hazardous
substances," "hazardous wastes," "hazardous materials" or "toxic substances"
under any such laws, ordinances or regulations (collectively, "Hazardous
Materials").
Tenant shall at its own expense procure, maintain in effect and comply with
all conditions of any and all permits, licenses and other governmental and
regulatory approvals required for Tenant's use of the Demised Premises,
including, without limitation, discharge of (appropriately treated) materials or
waste into or through any sanitary sewer system serving the Demised Premises.
Except as discharged into the sanitary sewer in strict accordance and conformity
with all applicable Hazardous Materials Laws, Tenant shall cause any and all
Hazardous Materials to be removed from the Demised Premises and transported
solely by duly licensed haulers to duly licensed facilities for final disposal
of such Hazardous Materials and wastes. Tenant shall in all respects, handle,
treat, deal with and manage any and all Hazardous Materials in, on, under or
about the Demised Premises in complete conformity with all applicable Hazardous
Materials Laws and prudent industry practices regarding the management of such
Hazardous Materials. All reporting obligations to the extent imposed upon
Tenant by Hazardous Materials Laws are solely the responsibility of Tenant.
Upon expiration or earlier termination of this Lease, Tenant shall cause all
Hazardous Materials (to the extent such Hazardous Materials are generated,
stored, released or disposed of during the term of this Lease by Tenant) to be
removed from the Demised Premises and transported for use, storage or disposal
in accordance and in compliance with all applicable Hazardous Materials Laws.
Tenant shall not take any remedial action in response to the presence of any
Hazardous Materials in, on, about or under the Demised Premises or in any
Improvements situated on the Land, nor enter into any settlement agreement,
consent, decree or other compromise in respect to any claims relating to any way
connected with the Demised Premises or the Landlord's Improvements on the Land
without first notifying Landlord of Tenant's intention to do so and affording
Landlord ample opportunity to appear, intervene or otherwise appropriately
assert and protect Landlord's interest with respect thereto. In addition, at
Landlord's request, at the expiration of the term of this Lease, Tenant shall
remove all tanks or fixtures which were placed on the Demised Premises during
the term of this Lease and which contain, have contained or are contaminated
with, Hazardous Materials.
Tenant shall immediately notify Landlord in writing of (a) any enforcement,
clean-up, removal or other governmental or regulatory action instituted,
completed or threatened pursuant to any Hazardous Materials Laws; (b) any claim
made or threatened by any person against Landlord, or the Demised Premises,
relating to damage, contribution, cost recovery, compensation, loss or injury
resulting from or claimed to result from any Hazardous Materials; and (c) any
reports made to any environmental agency arising out of or in connection with
any Hazardous Materials in, on or about the Demised Premises or with respect to
any Hazardous Materials removed from the Demised Premises, including, any
complaints, notices, warnings, reports or asserted violations in connection
therewith. Tenant shall also provide to Landlord, as promptly as possible, and
in any event within five business days after Tenant first receives or sends the
same, with copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Demised Premises or Tenant's use
thereof. Upon written request of Landlord (to enable Landlord to defend itself
from any claim or charge related to any Hazardous Materials Law), Tenant shall
promptly deliver to Landlord notices of hazardous waste manifests reflecting the
legal and proper disposal of all such Hazardous Materials removed or to
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be removed from the Demised Premises. All such manifests shall list the Tenant
or its agent as a responsible party and in no way shall attribute responsibility
for any such Hazardous Materials to Landlord.
Section 9.6 Hazardous Materials Representation by Landlord. To the best
of Landlord's knowledge, there are no Hazardous Materials or asbestos containing
materials whether friable or non-friable which exist or are located on or in the
Demised Premises, except as may be disclosed in that certain environmental site
assessment prepared by GME Consultants, Inc., dated April 10, 1989. Further,
Landlord represents to Tenant that, to the best of its knowledge, Landlord has
not caused the generation, storage or release of Hazardous Materials upon the
Demised Premises, except in accordance with Hazardous Materials Laws.
Section 9.7 Cost of Compliance with Hazardous Materials Laws.
Provisions of Sections 9.5 and 9.6 notwithstanding, Tenant shall be responsible
only for that part of the cost of compliance with Hazardous Materials Laws which
relates to a breach by Tenant of the covenants contained in this Lease to be
kept and performed by Tenant, including but not limited to the covenants
contained in Section 9.5. Landlord shall be responsible only for that part of
the cost of compliance with Hazardous Materials Laws which relates to a breach
by Landlord of the covenants contained in this Lease, including but not limited
to the covenants contained in Section 9.6.
Section 9.8 Discovery of Hazardous Materials. In the event (a)
Hazardous Materials are discovered upon the Demised Premises, (b) Landlord has
been given written notice of the discovery of such Hazardous Materials, and (c)
pursuant to the provisions of Section 9.7, neither Landlord nor Tenant is
obligated to pay the cost of compliance with Hazardous Materials Laws, then and
in that event Landlord may voluntarily but shall not be obligated to agree with
Tenant to take all action necessary to bring the Demised Premises into
compliance with Hazardous Materials Laws at Landlord's sole cost. In the event
Landlord fails to notify Tenant in writing within 30 days of the notice to
Landlord of the discovery of such Hazardous Materials that Landlord intends to
voluntarily take such action as is necessary to bring the Demised Premises into
compliance with Hazardous Materials Laws, then unless Landlord and Tenant agree
in writing to share the costs of compliance, Tenant may (i) bring the Demised
Premises into compliance with Hazardous Materials Laws at Tenant's sole cost or
(ii) provided such Hazardous Materials endanger persons or property in, on, or
about the Demised Premises or interfere with Tenant's use of the Demised
Premises, terminate the Lease on a date not less than 30 days following written
notice of such intent to terminate. If Landlord gives Tenant notice pursuant to
this Section 9.8 that it intends to take action, it shall promptly do so.
Section 9.9 Indemnification. Tenant shall indemnify, defend (with
counsel reasonably acceptable to Landlord), protect and hold Landlord and
each of Landlord's officers, directors, partners, employees, agents,
attorneys, successors and assigns free and harmless from and against any and
all claims, liabilities, damages, costs, penalties, forfeitures, losses or
expenses (including attorneys' fees) for death or injury to any person or
damage to any property whatsoever (including water tables and atmosphere)
(collectively, "Indemnified Matters") arising or resulting in whole or in
part, directly or indirectly, from the presence or discharge of Hazardous
Materials, in, on, under, upon or from the Demised Premises or the
Improvements located thereon or from
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the transportation or disposal of Hazardous Materials to or from the Demised
Premises to the extent caused by Tenant, whether knowingly or unknowingly,
the standard herein being one of strict liability. Landlord shall indemnify,
defend, protect and hold harmless Tenant and each of Tenant's officers,
directors, partners, employees, agents, attorneys, successors and assigns
from and against any Indemnified Matters arising or resulting in whole or in
part, directly or indirectly, from the presence or discharge of Hazardous
Materials in, on, under, upon or from the Demised Premises or the
Improvements located thereon or from the transportation or disposal of
Hazardous Materials to the Demised Premises to the extent caused by Landlord,
whether knowingly or unknowingly, the standard herein being one of strict
liability. Tenant's and Landlord's obligations hereunder shall include,
without limitation, and whether foreseeable or unforeseeable, all costs of
any required or necessary repairs, clean-up or detoxification or
decontamination of the Demised Premises or the Improvements, and the presence
and implementation of any closure, remedial action or other required plans in
connection therewith, and shall survive the expiration of or early
termination of the term of this Lease. For purposes of the indemnity
provided herein, any acts or omissions of Tenant, or its employees, agents,
customers, sub-lessees, assignees, contractors or sub-contractors of Tenant
(whether or not they are negligent, intentional, willful or unlawful) shall
be strictly attributable to Tenant.
Section 9.10 Environmental Audits. Upon request by Landlord during the
term of this Lease, prior to the exercise of any renewal term and/or prior to
vacating the Demised Premises, Tenant shall undertake and submit to Landlord an
environmental audit from an environmental company reasonably acceptable to
Landlord which audit shall evidence Tenant's compliance with this Article IX.
Landlord shall pay for the cost of any such audit unless it discloses a hazard
or problem.
Section 9.11 Acts of Omissions Regarding Hazardous Materials. For
purposes of the covenants and agreements contained in Section 9.5 through 9.10,
inclusive, any acts or omissions of Tenant, its employees, agents, customers,
sublessees, assignees, contractors or sub-contractors (except Landlord and its
sub-contractors providing the Landlord's Improvements) shall be strictly
attributable to Tenant; any acts or omissions of Landlord, its employees,
agents, customers, assignees, contractors or sub-contractors shall be strictly
attributable to Landlord.
Section 9.12 Survival. The respective rights and obligations of Landlord
and Tenant under this Article IX shall survive the expiration or earlier
termination of this Lease.
ARTICLE X
MECHANIC'S LIENS AND OTHER LIENS
Section 10.1 Freedom from Liens. Tenant shall not suffer or permit any
mechanic's lien or other lien to be filed against the Demised Premises, or any
portion thereof, by reason of work, labor, skill, services, equipment or
materials supplied or claimed to have been supplied to the Demised Premises at
the request of Tenant, or anyone holding the Demised Premises, or any portion
thereof, through or under Tenant. If any such mechanic's lien or other lien
shall at any time be filed against the Demised Premises, or any portion thereof,
Tenant shall cause the same to be discharged of record within 60 days after the
date of filing the same. If Tenant shall fail to discharge such mechanic's lien
or liens or other lien within such period, then, in addition to any
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other right or remedy of Landlord, after five days prior written notice to
Tenant, Landlord may, but shall not be obligated to, discharge the same by
paying to the claimant the amount claimed to be due or by procuring the
discharge of such lien as to the Demised Premises by deposit in the court
having jurisdiction of such lien, the foreclosure thereof or other
proceedings with respect thereto, of a cash sum sufficient to secure the
discharge of the same, or by the deposit of a bond or other security with
such court sufficient in form, content and amount to procure the discharge of
such lien, or in such other manner as is now or may in the future be provided
by present or future law for the discharge of such lien as a lien against the
Demised Premises. Any amount paid by Landlord, or the value of any deposit
so made by Landlord, together with all costs, fees and expenses in connection
therewith (including reasonable attorney's fees of Landlord), together with
interest thereon at the Maximum Rate of Interest set forth in Section 3.4
hereof, shall be repaid by Tenant to Landlord on demand by Landlord and if
unpaid may be treated as Additional Rent. Tenant shall indemnify and defend
Landlord against and save Landlord and the Demised Premises, and any portion
thereof, harmless from all losses, costs, damages, expenses, liabilities,
suits, penalties, claims, demands and obligations, including, without
limitation, reasonable attorney's fees resulting from the assertion, filing,
foreclosure or other legal proceedings with respect to any such mechanic's
lien or other lien.
All materialmen, contractors, artisans, mechanics, laborers and any other
person now or hereafter furnishing any labor, services, materials, supplies or
equipment to Tenant with respect to the Demised Premises, or any portion
thereof, are hereby charged with notice that they must look exclusively to
Tenant to obtain payment for the same. Notice is hereby given that Landlord
shall not be liable for any labor, services, materials, supplies, skill,
machinery, fixtures or equipment furnished or to be furnished to Tenant upon
credit, and that no mechanic's lien or other lien for any such labor, services,
materials, supplies, machinery, fixtures or equipment shall attach to or affect
the estate or interest of Landlord in and to the Demised Premises, or any
portion thereof.
Section 10.2 Landlord's Indemnification. The provisions of Section 10.1
above shall not apply to any mechanic's lien or other lien for labor, services,
materials, supplies, machinery, fixtures or equipment furnished to the Demised
Premises in the performance of Landlord's obligations to construct the
Landlord's Improvements required by the provisions of Article II hereof, and
Landlord does hereby agree to indemnify and defend Tenant against and save
Tenant and the Demised Premises, and any portion thereof, harmless from all
losses, costs, damages, expenses, liabilities and obligations, including,
without limitation, reasonable attorney's fees resulting from the assertion,
filing, foreclosure or other legal proceedings with respect to any such
mechanic's lien or other lien.
Section 10.3 Removal of Liens. Except as otherwise provided for in this
Article X, Tenant shall not create, permit or suffer, and shall promptly
discharge and satisfy of record, any other lien, encumbrance, charge, security
interest, or other right or interest which shall be or become a lien,
encumbrance, charge or security interest upon the Demised Premises, or any
portion thereof (excluding liens upon and security interests in Tenant's
equipment and personal property), or the income therefrom, or on the interest of
Landlord or Tenant in the Demised Premises, or any portion thereof, save and
except for those liens, encumbrances, charges, security interests, or other
rights or interests consented to, in writing, by Landlord, or those mortgages,
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assignments of rents, assignments of leases and other mortgage documentation
placed thereon by Landlord in financing or refinancing the Demised Premises.
ARTICLE XI
INTENT OF PARTIES
Section 11.1 Net Lease. Landlord and Tenant do each state and represent
that it is the intention of each of them that this Lease be interpreted and
construed as an absolute net lease and all Basic Rent and Additional Rent shall
be paid by Tenant to Landlord without abatement, deduction, diminution,
deferment, suspension, reduction or setoff, and the obligations of Tenant shall
not be affected by reason of damage to or destruction of the Demised Premises
from whatever cause (except as provided for in Section 13.5 hereof); nor shall
the obligations of Tenant be affected by reason of any condemnation, eminent
domain or like proceedings (except as provided in Article XIV hereof); nor shall
the obligations of Tenant be affected by reason of any other cause whether
similar or dissimilar to the foregoing or by any laws or customs to the
contrary. It is the further express intent of Landlord and Tenant that (a) the
obligations of Landlord and Tenant hereunder shall be separate and independent
covenants and agreements and that the Basic Rent and Additional Rent, and all
other charges and sums payable by Tenant hereunder, shall commence at the times
provided herein and shall continue to be payable in all events unless the
obligations to pay the same shall be terminated pursuant to an express provision
in this Lease; (b) all costs or expenses of whatsoever character or kind,
general or special, ordinary or extraordinary, foreseen or unforeseen, and of
every kind and nature whatsoever that may be necessary or required in and about
the Demised Premises, or any portion thereof, and Tenant's possession or
authorized use thereof during the term of this Lease, shall be paid by Tenant
and all provisions of this Lease are to be interpreted and construed in light of
the intention expressed in this Section 11.1; (c) the Basic Rent specified in
Section 3.1 shall be absolutely net to Landlord so that this Lease shall yield
net to Landlord the Basic Rent specified in Section 3.1 in each year during the
term of this Lease (unless extended or renewed at a different Basic Rent); (d)
all Impositions, insurance premiums, utility expense, repair and maintenance
expense, and all other costs, fees, interest, charges, expenses, reimbursements
and obligations of every kind and nature whatsoever relating to the Demised
Premises, or any portion thereof, which may arise or become due during the term
of this Lease, or any extension or renewal thereof, shall be paid or discharged
by Tenant as Additional Rent; and (e) Tenant hereby agrees to indemnify, defend
and save Landlord harmless from and against such costs, fees, charges, expenses,
reimbursements and obligations, any interest thereon.
Section 11.2 Entry by Landlord. If Tenant shall at any time fail to pay
any Imposition in accordance with the provisions of Article V, or to take out,
pay for, maintain and delivery any of the insurance policies or certificates of
insurance provided for in Article VI, or shall fail to make any other payment or
perform any other act on its part to be made or performed, then Landlord, after
10 days' prior written notice to Tenant as provided in Section 12.1 (or without
notice in case of emergency), and without waiving or releasing Tenant from any
obligation of Tenant contained in this Lease, may, but shall be under no
obligation to do so, (a) pay any Imposition payable by Tenant pursuant to the
provisions of Article V; (b) take out, pay for and maintain any of the insurance
policies provided for in this Lease; or (c) make any other payment or perform
any other act on Tenant's part to be paid or performed as in this Lease
provided, and
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Landlord may enter upon the Demised Premises for any such purpose and take
all such action therein or thereon as may be necessary therefor. Nothing
herein contained shall be deemed as a waiver or release of Tenant from any
obligation of Tenant in this Lease contained.
Section 11.3 Interest on Unpaid Amounts. If Tenant shall fail to perform
any act required of it, Landlord may perform the same, but shall not be required
to do so, in such manner and to such extent as Landlord may deem necessary or
desirable, and in exercising any such right to employ counsel and to pay
necessary and incidental costs and expenses, including reasonable attorney's
fees. All sums so paid by Landlord and all necessary and reasonable incidental
costs and expenses, including reasonable attorneys fees, in connection with the
performance of any such act by Landlord, together with interest thereon at the
Maximum Rate of interest provided for in Section 3.4 hereof from the date of
making such expenditure by Landlord, such interest shall begin accruing 10 days
from Tenant's receipt of Landlord's invoice, shall be deemed Additional Rent
hereunder and, except as is otherwise expressly provided herein, shall be
payable to Landlord within 10 days after Tenant's receipt of invoice from
Landlord or, at the option of Landlord, may be added to any monthly rental then
due or thereafter becoming due under this Lease, and Tenant covenants to pay any
such sum or sums, with interest as aforesaid, and Landlord shall have, in
addition to any other right or remedy of Landlord, the same rights and remedies
in the event of nonpayment thereof by Tenant as in the case of default by Tenant
in the payment of monthly Basic Rent. Landlord shall not be limited in the
proof of any damages which Landlord may claim against Tenant arising out of or
by reason of Tenant's failure to provide and keep in force insurance as
aforesaid, to the amount of the insurance premium or premiums not paid or not
incurred by Tenant, and which would have been payable upon such insurance, but
Landlord shall also be entitled to recover as damages for such breach the
uninsured amount of any loss (to the extent of any deficiency between the dollar
limits of insurance required by the provisions of this Lease and the dollar
limits of the insurance actually carried by Tenant), damages, costs and expenses
of suits, including reasonable attorney's fees, suffered or incurred by reason
of damage to or destruction of the Demised Premises, or any portion thereof or
other damage or loss which Tenant is required to insure against hereunder,
occurring during any period when Tenant shall have failed or neglected to
provide insurance as aforesaid.
ARTICLE XII
DEFAULTS OF TENANT
Section 12.1 Event of Default. If any one or more of the following
events (in this Article sometimes called "Events of Default") shall happen:
(a) If default shall be made by Tenant, by operation of law or otherwise,
under the provisions of Article XV hereof relating to assignment, sublease,
mortgage or other transfer of Tenant's interest in this Lease or in the
Demised Premises or in the income arising therefrom;
(b) If default shall be made in the due and punctual payment of any Basic
Rent or Additional Rent payable under this Lease or in the payment of any
obligation to be paid by Tenant, when and as the same shall become due and
payable, and such
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default shall continue for a period of ten business days after written
notice thereof given by Landlord to Tenant;
(c) If default shall be made by Tenant in keeping, observing or performing
any of the terms contained in this Lease, other than those referred to in
Subparagraphs (a) and (b) of this Section 12.1, which does not expose
Landlord to criminal liability, and such default shall continue for a
period of 45 days after written notice thereof given by Landlord to Tenant,
or in the case of such a default or contingency which cannot with due
diligence and in good faith be cured within 45 days, and Tenant fails to
proceed promptly and with due diligence and in good faith to cure the same
and thereafter to prosecute the curing of such default with due diligence
and in good faith, it being intended that in connection with a default
which does not expose Landlord to criminal liability, not susceptible of
being cured with due diligence and in good faith within 45 days, that the
time allowed Tenant within which to cure the same shall be extended for
such period as may be necessary for the curing thereof promptly with due
diligence and in good faith;
(d) If default shall be made by Tenant in keeping, observing or performing
any of the terms contained in this Lease, other than those referred to in
Subparagraphs (a), (b) and (c) of this Section 12.1, and which exposes
Landlord to criminal liability, and such default shall continue after
written notice thereof given by Landlord to Tenant, and Tenant fails to
proceed timely and promptly with all due diligence and in good faith to
cure the same and thereafter to prosecute the curing of such default with
all due diligence, it being intended that in connection with a default
which exposes Landlord to criminal liability that Tenant shall proceed
immediately to cure or correct such condition with continuity and with all
due diligence and in good faith;
then, and in any such event, Landlord, at any time thereafter during the
continuance of any such Event of Default, may give written notice to Tenant
specifying such Event of Default or Events of Default and stating that this
Lease and the terms hereby demised shall expire and terminate on the date
specified in such notice, and upon the date specified in such notice this Lease
and the terms hereby demised, and all rights of Tenant under this Lease,
including all rights of renewal whether exercised or not, shall expire and
terminate, or in the alternative or in addition to the foregoing remedy,
Landlord may assert and have the benefit of any other remedy allowed herein, at
law, or in equity.
Section 12.2 Surrender of Demised Premises. Upon any expiration or
termination of this Lease, Tenant shall quit and peaceably surrender the Demised
Premises, and all portions thereof, to Landlord, and Landlord, upon or at any
time after any such expiration or termination, may, without further notice,
enter upon and reenter the Demised Premises, and all portions thereof, and
possess and repossess itself thereof, by force, summary proceeding, ejectment or
otherwise, and may dispossess Tenant and remove Tenant and all other persons and
property from the Demised Premises, and all portions thereof, and may have, hold
and enjoy the Demised Premises and the right to receive all rental and other
income of and from the same.
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Section 12.3 Reletting by Landlord. At any time, or from time to time
after any such expiration or termination, Landlord may relet the Demised
Premises, or any portion thereof, in the name of Landlord or otherwise, for such
term or terms (which may be greater or less than the period which would
otherwise have constituted the balance of the term of this Lease) and on such
conditions (which may include concessions or free rent) as Landlord, in its
uncontrolled discretion, may determined and may collect and receive the rents
therefor. Landlord shall in no way be responsible or liable for any failure to
relet the Demised Premises, or any part thereof, or for any failure to collect
any rent due upon any such reletting.
Section 12.4 Survival of Tenant's Obligations. No such expiration or
termination of this Lease shall relieve Tenant of its liabilities and
obligations under this Lease (as if this Lease had not been so terminated or
expired), and such liabilities and obligations shall survive any such expiration
or termination. In the event of any such expiration or termination, whether or
not the Demised Premises, or any portion thereof, shall have been relet, Tenant
shall pay to Landlord a sum equal to the Basic Rent, and the Additional Rent and
any other charges required to be paid by Tenant, up to the time of such
expiration or termination of this Lease, and thereafter Tenant, until the end of
what would have been the term of this Lease in the absence of such expiration or
termination, shall be liable to Landlord for, and shall pay to Landlord, as and
for liquidated and agreed current damages for Tenant's default:
(a) The equivalent of the amount of the Basic Rent and Additional Rent
which would be payable under this Lease by Tenant if this Lease were still
in effect, less
(b) The net proceeds of any reletting effected pursuant to the provisions
of Section 12.3 hereof after deducting all of Landlord's reasonable
expenses in connection with such reletting, including, without limitation,
all repossession costs, brokerage commissions, legal expenses, reasonable
attorney's fees, alteration costs, and expenses of preparation of the
Demised Premises, or any portion thereof, for such reletting.
Tenant shall pay such current damages in the amount determined in
accordance with the terms of this Section 12.4, as set forth in a written
statement thereof from Landlord to Tenant (hereinafter called the "Deficiency"),
to Landlord in monthly installments on the days on which the Basic Rent would
have been payable under this Lease if this Lease were still in effect, and
Landlord shall be entitled to recover from Tenant each monthly installment of
the Deficiency as the same shall arise.
Section 12.5 Damages. At any time after an Event of Default and
termination of this Lease, whether or not Landlord shall have collected any
monthly Deficiency as set forth in Section 12.4, Landlord shall be entitled to
recover from Tenant, and Tenant shall pay to Landlord, on demand, as and for
final damages for Tenant's default (and in lieu of sums thereafter required to
be paid in Section 12.4 above), an amount equal to the difference between the
then present worth of the aggregate of the Basic Rent and Additional Rent and
any other charges to be paid by Tenant hereunder for the unexpired portion of
the term of this Lease (assuming this Lease had not been so terminated), and the
then present worth of the then aggregate fair and reasonable fair market rent of
the Demised Premises for the same period. In
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the computation of present worth, a discount at the rate of 6% per annum
shall be employed. If the Demised Premises, or any portion thereof, be relet
by Landlord for the unexpired term of this Lease, or any part thereof, before
presentation of proof of such damages to any court, commission or tribunal,
the amount of rent reserved upon such reletting shall, prima facie, be the
fair and reasonable fair market rent for the part or the whole of the Demised
Premises so relet during the term of the reletting.
Section 12.6 No Waiver. No failure by Landlord or by Tenant to insist
upon the performance of any of the terms of this Lease or to exercise any right
or remedy consequent upon a breach thereof, and no acceptance by Landlord of
full or partial rent from Tenant or any third party during the continuance of
any such breach, shall constitute a waiver of any such breach or of any of the
terms of this Lease. None of the terms of this Lease to be kept, observed or
performed by Landlord or by Tenant, and no breach thereof, shall be waived,
altered or modified except by a written instrument executed by Landlord and/or
by Tenant, as the case may be. No waiver of any breach shall affect or alter
this Lease, but each of the terms of this Lease shall continue in full force and
effect with respect to any other then existing or subsequent breach of this
Lease. No waiver of any default of Tenant herein shall be implied from any
omission by Landlord to take any action on account of such default, if such
default persists or is repeated and no express waiver shall affect any default
other than the default specified in the express waiver and that only for the
time and to the extent therein stated. One or more waivers by Landlord shall
not be construed as a waiver of a subsequent breach of the same covenant, term
or condition.
Section 12.7 Landlord's Remedies. In the event of any breach of any of
the terms contained in this Lease, Landlord shall be entitled to enjoin such
breach and shall have the right to invoke any right or remedy allowed at law or
in equity or by statute or otherwise as though entry, reentry, summary
proceedings and other remedies were not provided for in this Lease. Each remedy
or right of Landlord provided for in this Lease shall be cumulative and shall be
in addition to every other right or remedy provided for in this Lease, or now or
hereafter existing at law or in equity or by statute or otherwise, and the
exercise or the beginning of the exercise by Landlord of any one or more of such
rights or remedies shall not preclude the simultaneous or later exercise by
Landlord of any or all other rights or remedies.
Section 12.8 Bankruptcy. If, during the term of this Lease, (a) Tenant
shall make an assignment for the benefit of creditors, (b) a voluntary petition
be filed by Tenant under any law having for its purpose the adjudication of
Tenant a bankrupt, or Tenant be adjudged a bankrupt pursuant to an involuntary
petition in bankruptcy, (c) a receiver be appointed for the property of Tenant,
or (d) any department of the state or federal government, or any officer thereof
duly authorized, shall take possession of the business or property of Tenant,
the occurrence of any such contingency shall be deemed a breach of the Lease and
this Lease shall, ipso facto upon the happening of any of said contingencies, be
terminated and the same shall expire as fully and completely as if the day of
the happening of such contingency were the date herein specifically fixed for
the expiration of the term, and Tenant will then quit and surrender the Demised
Premises, but Tenant shall remain liable as hereinafter provided.
Notwithstanding other provisions of this Lease, or any present or future law,
Landlord shall be entitled to recover from Tenant or Tenant's estate (in lieu of
the equivalent of the amount of all rent and other charges
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unpaid at the date of such termination) as damages for loss of the bargain
and not as a penalty, an aggregate sum which at the time of such termination
represents the difference between the then present worth of the aggregate of
the Basic Rent and Additional Rent and any other charges payable by Tenant
hereunder that would have accrued for the balance of the term of this Lease
(assuming this Lease had not been so terminated), over the then present worth
of the aggregate fair market rent of the Demised Premises for the balance of
such period, unless any statute or rule of law covering the proceedings in
which such damages are to be proved shall limit the amount of such claim
capable of being so proved, in which case Landlord shall be entitled to prove
as and for damages by reason of such breach and termination of this Lease the
maximum amount which may be allowed by or under any such statute or rule of
law without prejudice to any rights of Landlord against any guarantor of
Tenant's obligations herein. In the computation of present worth, a discount
rate of 6% per annum shall be employed. Nothing contained herein shall limit
or prejudice Landlord's right to prove and obtain as damages arising out of
such breach and termination the maximum amount allowed by any such statute or
rule of law which may govern the proceedings in which such damages are to be
proved, whether or not such amount be greater, equal to, or less than the
amount of the excess of the present value of the rent and other charges
required herein over the present value of the fair market rents referred to
above. Specified remedies to which Landlord may resort under the terms of
this Section 12.8 are cumulative and are not intended to be exclusive of any
other remedies or means of redress to which Landlord may be lawfully entitled.
Section 12.9 Waiver by Tenant. Tenant hereby expressly waives, so far as
permitted by law, any and all right of redemption or reentry or repossession or
to revive the validity and existence of this Lease in the event that Tenant
shall be dispossessed by a judgment or by order of any court having jurisdiction
over the Demised Premises or the interpretation of this Lease or in case of
entry, reentry or repossession by Landlord or in case of any expiration or
termination of this Lease.
ARTICLE XIII
DESTRUCTION AND RESTORATION
Section 13.1 Destruction and Restoration. Tenant covenants and agrees
that in case of damage to or destruction of the Improvements after the
Commencement Date of the term of this Lease, by fire or otherwise, Tenant, at
its sole cost and expense, shall promptly restore, repair, replace and rebuild
the same as nearly as possible to the condition that the same were in
immediately prior to such damage or destruction with such changes or alterations
(made in conformity with Article XIX hereof) as may be reasonably acceptable to
Landlord or required by law. Tenant shall forthwith give Landlord written
notice of such damage or destruction upon the occurrence thereof and specify in
such notice, in reasonable detail, the extent thereof. Such restoration,
repairs, replacements, rebuilding, changes and alterations, including the cost
of temporary repairs for the protection of the Demised Premises, or any portion
thereof, pending completion thereof are sometimes hereinafter referred to as the
"Restoration". The Restoration shall be carried on and completed in accordance
with the provisions and conditions of Section 13.2 and Article XIX hereof. If
the net amount of the insurance proceeds (after deduction of all costs, expenses
and fees related to recovery of the insurance proceeds) recovered by Landlord
and held by Landlord and Tenant as co-trustees is reasonably deemed insufficient
by Landlord to
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complete the Restoration of such improvements to its then current condition
(exclusive of Tenant's personal property and trade fixtures which shall be
restored, repaired or rebuilt out of Tenant's separate funds), Tenant shall,
upon request of Landlord, deposit with Landlord and Tenant, as co-trustees a
cash deposit equal to the reasonable estimate of the amount necessary to
complete the Restoration of such improvements less the amount of such
insurance proceeds available.
Section 13.2 Application of Insurance Proceeds. All insurance moneys
recovered by Landlord and held by Landlord and Tenant as co-trustees on account
of such damage or destruction, less the costs, if any, to Landlord of such
recovery, shall be applied to the payment of the costs of the Restoration and
shall be paid out from time to time as the Restoration progresses upon the
written request of Tenant, accompanied by a certificate of the architect or a
qualified professional engineer in charge of the Restoration stating that as of
the date of such certificate (a) the sum requested in justly due to the
contractors, subcontractors, materialmen, laborers, engineers, architects, or
persons, firms or corporations furnishing or supplying work, labor, services or
materials for such Restoration, or is justly required to reimburse Tenant for
any expenditures made by Tenant in connection with such Restoration, and when
added to all sums previously paid out by Landlord does not exceed the value of
the Restoration performed to the date of such certificate by all of said
parties; (b) except for the amount, if any, stated in such certificates to be
due for work, labor, services or materials, there is no outstanding indebtedness
known to the person signing such certificate, after due inquiry, which is then
due for work, labor, services or materials in connection with such Restoration,
which, if unpaid, might become the basis of a mechanic's lien or similar lien
with respect to the Restoration or a lien upon the Demised Premises, or any
portion thereof; and (c) the costs, as estimated by the person signing such
certificate, of the completion of the Restoration required to be done subsequent
to the date of such certificate in order to complete the Restoration do not
exceed the sum of the remaining insurance moneys, plus the amount deposited by
Tenant, if any, remaining in the hands of Landlord after payment of the sum
requested in such certificate.
Tenant shall furnish Landlord at the time of any such payment with evidence
reasonably satisfactory to Landlord that there are no unpaid bills in respect to
any work, labor, services or materials performed, furnished or supplied in
connection with such Restoration. Landlord and Tenant as co-trustees shall not
be required to pay out any insurance moneys where Tenant fails to supply
satisfactory evidence of the payment of work, labor, services or materials
performed, furnished or supplied, as aforesaid. If the insurance moneys in the
hands of Landlord and Tenant as co-trustees, and such other sums, if any,
deposited with Landlord and Tenant as co-trustees pursuant to Section 13.1
hereof, shall be insufficient to pay the entire costs of the Restoration, Tenant
agrees to pay any deficiency promptly upon demand. Upon completion of the
Restoration and payment in full thereof by Tenant, Landlord shall, within a
reasonable period of time thereafter, turn over to Tenant all insurance moneys
or other moneys then remaining upon submission of proof reasonably satisfactory
to Landlord that the Restoration has been paid for in full and the damaged or
destroyed Building and other improvements repaired, restored or rebuilt as
nearly as possible to the condition they were in immediately prior to such
damage or destruction, or with such changes or alterations as may be made in
conformity with Section 13.1 and Article XIX hereof.
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Section 13.3 Continuance of Tenant's Obligations. Except as provided for
in Section 13.5, no destruction of or damage to the Demised Premises, or any
portion thereof, by fire, casualty or otherwise shall permit Tenant to surrender
this Lease or shall relieve Tenant from its liability to pay to Landlord the
Basic Rent and Additional Rent payable under this Lease or from any of its other
obligations under this Lease, and Tenant waives any rights now or hereafter
conferred upon Tenant by present or future law or otherwise to quit or surrender
this Lease or the Demised Premises, or any portion thereof, to Landlord or to
any suspension, diminution, abatement or reduction of rent on account of any
such damage or destruction.
Section 13.4 Completion of Restoration. The foregoing provisions of this
Article XIII apply only to damage or destruction of the Improvements by fire,
casualty or other cause occurring after the Commencement Date. Any such damage
or destruction occurring prior to such time shall be promptly restored,
repaired, replaced and rebuilt by Landlord and during such period of
construction Landlord shall obtain and maintain the builder's risk insurance
coverage referred to in Section 6.1 hereof. All moneys received by Landlord
under its builder's risk insurance coverage shall be applied by Landlord to
complete the Restoration of such damage or destruction and if such insurance
proceeds are insufficient Landlord shall provide all additional funds necessary
to complete the Restoration of the Improvements.
Section 13.5 Termination of Lease. If, within six months prior to the
expiration of the term of this Lease, the Improvements shall be destroyed or
damaged to such an extent that the Restoration thereof will cost an amount in
excess of Five Hundred Thousand Dollars ($500,000.00) over and above the net
proceeds of the insurance required to be maintained by Tenant (to be collected
by Landlord and Tenant as co-trustees), hereinafter referred to as the "Excess
Funds," and Tenant shall be unable or unwilling to expend out of its own funds
such Excess Funds for the purpose of Restoration of such damage or destruction
for occupancy by Tenant, Tenant shall, with reasonable promptness, notify
Landlord, in writing, of such fact, which notice shall be accompanied by a
detailed statement of the nature and extent of such damage or destruction and
detailed estimates of the total cost of Restoration. Within 30 days after the
giving of such notice, Landlord shall notify Tenant either that (a) it will
furnish, at its sole cost and expense, the Excess Funds which are necessarily
required in connection with the Restoration (to be disbursed in conformity with
the requirements of Section 13.2 and Article XIX hereof), or (b) it is unwilling
to expend the Excess Funds for such purpose. Failure to give such notice within
such 30-day period shall be deemed an election by Landlord not to make such
expenditure. In the event that Landlord elects not to expend the Excess Funds,
as aforesaid, then Tenant shall have the option, within 60 days after the
expiration of said 30-day period, to terminate this Lease and surrender the
Demised Premises to Landlord by a notice, in writing, addressed to Landlord,
specifying such election accompanied by Tenant's payment of the balance of the
Basic Rent and Additional Rent and other charges hereafter specified in this
Section 13.5. Upon the giving of such notice and the payment of such amounts,
the term of this Lease shall cease and come to an end on a day to be specified
in Tenant's notice, which date shall not be more than 30 days after the date of
delivery of such notice by Tenant to Landlord. Tenant shall accompany such
notice with its payment of all Basic Rent and Additional Rent and other charges
payable by Tenant hereunder, justly apportioned to the date of such termination,
together with the dollar amount of Landlord's reasonable estimate of the Excess
Funds. In such event Landlord shall be entitled to the proceeds of all
insurance required to be carried by Tenant
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hereunder and Tenant shall execute all documents reasonably requested by
Landlord to allow such proceeds to be paid to Landlord.
ARTICLE XIV
CONDEMNATION
Section 14.1 Condemnation of Entire Demised Premises. If, during the
term of this Lease, the entire Demised Premises shall be taken as the result of
the exercise of the power of eminent domain (hereinafter referred to as the
"Proceedings"), this Lease and all right, title and interest of Tenant hereunder
shall cease and come to an end on the date of vesting of title pursuant to such
Proceedings and Landlord shall be entitled to and shall receive the total award
made in such Proceedings, Tenant hereby assigning any interest in such award,
damages, consequential damages and compensation to Landlord and Tenant hereby
waiving any right Tenant has now or may have under present or future law to
receive any separate award of damages for its interest in the Demised Premises,
or any portion thereof, or its interest in this Lease.
In any taking of the Demised Premises, or any portion thereof, whether or
not this Lease is terminated as in this Article provided, Tenant shall not be
entitled to any portion of the award for the taking of the Demised Premises or
damage to the Improvements, except as otherwise provided for in Section 14.3
with respect to the restoration of the Improvements, or for the estate or
interest of Tenant therein, all such award, damages, consequential damages and
compensation being hereby assigned to Landlord, and Tenant hereby waives any
right it now has or may have under present or future law to receive any separate
award of damages for its interest in the Demised Premises, or any portion
thereof, or its interest in this Lease, except that Tenant shall have,
nevertheless, the limited right to prove in the Proceedings and to receive any
award which may be made for damages to or condemnation of Tenant's movable trade
fixtures and equipment, and for Tenant's relocation costs in connection
therewith.
Section 14.2 Partial Condemnation/Termination of Lease. If, during the
Initial Term of this Lease, or any extension or renewal thereof, less than the
entire Demised Premises, but more than 15% of the floor area of the Building, or
more than 25% of the land area of the Demised Premises, shall be taken in any
such Proceedings, this Lease shall, upon vesting of title in the Proceedings,
terminate as to the portion of the Demised Premises so taken, and Tenant may, at
its option, terminate this Lease as to the remainder of the Demised Premises.
Tenant shall not have the right to terminate this Lease pursuant to the
preceding sentence unless (a) the business of Tenant conducted in the portion
of the Demised Premises taken cannot reasonably be carried on with substantially
the same utility and efficiency in the remainder of the Demised Premises (or any
substitute space securable by Tenant pursuant to clause [b] hereof) and (b)
Tenant cannot construct or secure substantially similar space to the space so
taken, on the Demised Premises. Such termination as to the remainder of the
Demised Premises shall be effected by notice in writing given not more than 60
days after the date of vesting of title in such Proceedings, and shall specify a
date not more than 60 days after the giving of such notice as the date for such
termination. Upon the date specified in such notice, the term of this Lease,
and all right, title and interest of Tenant hereunder, shall cease and come to
an end. If this Lease is terminated as in this Section 14.2 provided, Landlord
shall be entitled to and shall receive the total award made in
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such Proceedings, Tenant hereby assigning any interest in such award,
damages, consequential damages and compensation to Landlord, and Tenant
hereby waiving any right Tenant has now or may have under present or future
law to receive any separate award of damages for its interest in the Demised
Premises, or any portion thereof, or its interest in this Lease except as
otherwise provided in Section 14.1. The right of Tenant to terminate this
Lease, as in this Section 14.2 provided, shall be exercisable only upon
condition that Tenant is not then in default in the performance of any of the
terms, covenants or conditions of this Lease on its part to be performed, and
such termination upon Tenant's part shall become effective only upon
compliance by Tenant with all such terms, covenants and conditions to the
date of such termination. In the event that Tenant elects not to terminate
this Lease as to the remainder of the Demised Premises, the rights and
obligations of Landlord and Tenant shall be governed by the provisions of
Section 14.3 hereof.
Section 14.3 Partial Condemnation/Continuation of Lease. If 15%, or
less, of the floor area of the Building, or 25%, or less, of the land area of
the Demised Premises, shall be taken in such Proceedings, or if more than 15% of
the floor area of the Building or more than 25% of the land area of the Demised
Premises is taken (but less than the entire Demised Premises), and this Lease is
not terminated as in Section 14.2 hereof provided, this Lease shall, upon
vesting of title in the Proceedings, terminate as to the parts so taken, and
Tenant shall have no claim or interest in the award, damages, consequential
damages and compensation, or any part thereof except as otherwise provided in
Section 14.1. Landlord shall be entitled to and shall receive the total award
made in such Proceedings, Tenant hereby assigning any interest in such award,
damages, consequential damages and compensation to Landlord, and Tenant hereby
waiving any right Tenant has now or may have under present or future law to
receive any separate award of damages for its interest in the Demised Premises,
or any portion thereof, or its interest in this Lease except as otherwise
provided in Section 14.1. The net amount of the award (after deduction of all
costs and expenses, including attorneys' fees), shall be held by Landlord and
Tenant as co-trustees and applied as hereinafter provided. Tenant, in such
case, covenants and agrees, at Tenant's sole cost and expense (subject to
reimbursement to the extent hereinafter provided), promptly to restore that
portion of the Improvements on the Demised Premises not so taken to a complete
architectural and mechanical unit for the use and occupancy of Tenant as in this
Lease provided. In the event that the net amount of the award (after deduction
of all costs and expenses, including attorney's fees) that may be received by
Landlord and held by Landlord and Tenant as co-trustees in any such Proceedings
for physical damage to the Improvements as a result of such taking is
insufficient to pay all costs of such restoration work, Tenant shall deposit
with Landlord and Tenant as co-trustees such additional sum as may be required
upon the written request of Landlord. The provisions and conditions in Article
XIX applicable to changes and alterations shall apply to Tenant's obligations to
restore that portion of the Improvements to a complete architectural and
mechanical unit. Landlord and Tenant as co-trustees agree in connection with
such restoration work to apply so much of the net amount of any award (after
deduction of all costs and expenses, including attorney's fees) that may be
received by Landlord and held by Landlord and Tenant as co-trustees in any such
Proceedings for physical damage to the Improvements as a result of such taking
to the costs of such restoration work thereof and the said net award for
physical damage to the Improvements as a result of such taking shall be paid out
from time to time to Tenant, or on behalf of Tenant, as such restoration work
progresses upon the written request of Tenant, which shall be accompanied by a
certificate of the architect or the
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registered professional engineer in charge of the restoration work stating
that (a) the sum requested is justly due to the contractors, subcontractors,
materialmen, laborers, engineers, architects or other persons, firms or
corporations furnishing or supplying work, labor, services or materials for
such restoration work or as is justly required to reimburse Tenant for
expenditures made by Tenant in connection with such restoration work, and
when added to all sums previously paid out by Landlord and Tenant as
co-trustees does not exceed the value of the restoration work performed to
the date of such certificate; and (b) the net amount of any such award for
physical damage to the Improvements as a result of such taking remaining in
the hands of Landlord, together with the sums, if any, deposited by Tenant
with Landlord and Tenant as co-trustees pursuant to the provisions hereof,
will be sufficient upon the completion of such restoration work to pay for
the same in full. If payment of the award for physical damage to the
Improvements as a result of such taking, as aforesaid, shall not be received
by Landlord in time to permit payments as the restoration work progresses
(except in the event of an appeal of the award by Landlord), Tenant shall,
nevertheless, perform and fully pay for such work without delay (except such
delays as are referred to in Article XIX hereof), and payment of the amount
to which Tenant may be entitled shall thereafter be made by Landlord out of
the net award for physical damage to the Improvements as a result of such
taking as and when payment of such award is received by Landlord. If
Landlord appeals an award and payment of the award is delayed pending appeal
Tenant shall, nevertheless, perform and fully pay for such work without delay
(except such delays as are referred to in Article XIX hereof), and payment of
the amount to which Tenant would have been entitled had Landlord not appealed
the award (in an amount not to exceed the net award prior to such appeal)
shall be made by Landlord to Tenant as restoration progresses pursuant to
this Section 14.3. In which event Landlord shall be entitled to retain an
amount equal to the sum disbursed to Tenant pursuant to the preceding
sentence out of the net award as and when payment of such award is received
by Landlord. Tenant shall also furnish Landlord and Tenant as co-trustees
with each certificate hereinabove referred to, together with evidence
reasonably satisfactory to Landlord that there are no unpaid bills in respect
to any work, labor, services or materials performed, furnished or supplied,
or claimed to have been performed, furnished or supplied, in connection with
such restoration work, and that no liens have been filed against the Demised
Premises, or any portion thereof. Landlord and Tenant as co-trustees shall
not be required to pay out any funds when there are unpaid bills for work,
labor, services or materials performed, furnished or supplied in connection
with such restoration work, or where a lien for work, labor, services or
materials performed, furnished or supplied has been placed against the
Demised Premises, or any portion thereof. Upon completion of the restoration
work and payment in full therefor by Tenant, and upon submission of proof
reasonably satisfactory to Landlord that the restoration work has been paid
for in full and that the Improvements have been restored or rebuilt to a
complete architectural and mechanical unit for the use and occupancy of
Tenant as provided in this Lease, Landlord and Tenant as co-trustees shall
pay over to Tenant any portion of the cash deposit furnished by Tenant then
remaining. From and after the date of delivery of possession to the
condemning authority pursuant to the Proceedings, a just and proportionate
part of the Basic rent, according to the extent and nature of such taking,
shall abate for the remainder of the term of this Lease.
Section 14.4 Continuance of Obligations. In the event of any termination
of this Lease, or any part thereof, as a result of any such Proceedings, Tenant
shall pay to Landlord all Basic Rent and all Additional Rent and other charges
payable hereunder with respect to that portion of
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the Demised Premises so taken in such Proceedings with respect to which this
Lease shall have terminated justly apportioned to the date of such
termination. From and after the date of vesting of title in such
Proceedings, Tenant shall continue to pay the Basic Rent and Additional Rent
and other charges payable hereunder, as in this Lease provided, to be paid by
Tenant, subject to an abatement of a just and proportionate part of the Basic
Rent according to the extent and nature of such taking as provided for in
Section 14.3 and 14.5 hereof in respect to the Demised Premises remaining
after such taking.
Section 14.5 Adjustment of Rent. In the event of a partial taking of the
Demised Premises under Section 14.3 hereof, or a partial taking of the Demised
Premises under Section 14.2 hereof, followed by Tenant's election not to
terminate this Lease, the fixed Basic Rent payable hereunder during the period
from and after the date of vesting of title in such Proceedings to the
termination of this Lease shall be reduced to a sum equal to the product of the
Basic Rent provided for herein multiplied by a fraction, the numerator of which
is the value of the Demised Premises after such taking and after the same has
been restored to a complete architectural unit, and the denominator of which is
the value of the Demised Premises prior to such taking. In no event, however,
shall such reduction in Basic Rent exceed 10% of the net award received by
Landlord as a result of such taking after deductions of all costs of the
Proceedings, including the costs of Restoration.
ARTICLE XV
ASSIGNMENT, SUBLETTING, ETC.
Section 15.1 Restriction on Transfer. Tenant shall not sublet the
Demised Premises, or any portion thereof, nor assign, mortgage, pledge, transfer
or otherwise encumber or dispose of this Lease, or any interest therein, or in
any manner assign, mortgage, pledge, transfer or otherwise encumber or dispose
of its interest or estate in the Demised Premises, or any portion thereof,
without obtaining Landlord's prior written consent in each and every instance,
which consent shall not be unreasonably withheld or delayed, provided the
following conditions are complied with:
(a) Any assignment of this Lease shall transfer to the assignee all of
Tenant's right, title and interest in this Lease and all of Tenant's estate
or interest in the Demised Premises.
(b) At the time of any assignment or subletting, and at the time when
Tenant requests Landlord's written consent thereto, this Lease must be in
full force and effect, without any breach or default thereunder on the part
of Tenant.
(c) Any such assignee shall assume, by written, recordable instrument, in
form and content satisfactory to Landlord, the due performance of all of
Tenant's obligations under this Lease, including any accrued obligations at
the time of the effective date of the assignment, and such assumption
agreement shall state that the same is made by the assignee for the express
benefit of Landlord as a third party beneficiary thereof. A copy of the
assignment and assumption agreement, both in form and content satisfactory
to Landlord, fully executed and
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acknowledged by assignee, together with a certified copy of a properly
executed corporate resolution (if the assignee be a corporation)
authorizing the execution and delivery of such assumption agreement,
shall be sent to Landlord ten days prior to the effective date of such
assignment.
(d) In the case of a subletting, a copy of any sublease fully executed and
acknowledged by Tenant and the sublessee shall be mailed to Landlord ten
days prior to the effective date of such subletting, which sublease shall
be in form and content acceptable to Landlord.
(e) Such assignment or subletting shall be subject to all the provisions,
terms, covenants and conditions of this Lease, and Tenant-assignor (and the
guarantor or guarantors of this Lease, if any) and the assignee or
assignees shall continue to be and remain liable under this Lease, as it
may be amended or extended, or both, from time to time without notice to
any assignor of Tenant's interest or to any guarantor.
(f) Each sublease permitted under this Section 15.1 shall contain
provisions to the effect that (i) such sublease is only for actual use and
occupancy by the sublessee; (ii) such sublease is subject and subordinate
to all of the terms, covenants and conditions of this Lease and to all of
the rights of Landlord thereunder; and (iii) in the event this Lease shall
terminate before the expiration of such sublease, the sublessee thereunder
will, at Landlord's option, attorn to Landlord and waive any rights the
sublessee may have to terminate the sublease or to surrender possession
thereunder, as a result of the termination of this Lease.
(g) Tenant agrees to pay on behalf of Landlord any and all costs of
Landlord, including reasonable attorney's fees paid or payable to outside
counsel, occasioned by such assignment or subletting other than to an
affiliate.
Section 15.2 Restriction From Further Assignment. Notwithstanding
anything contained in this Lease to the contrary and notwithstanding any consent
by Landlord to any sublease of the Demised Premises, or any portion thereof, or
to any assignment of this Lease or of Tenant's interest or estate in the Demised
Premises, no sublessee shall assign its sublease nor further sublease the
Demised Premises, or any portion thereof, and no assignee shall further assign
its interest in this Lease or its interest or estate in the Demised Premises, or
any portion thereof, nor sublease the Demised Premises, or any portion thereof,
without Landlord's prior written consent in each and every instance which
consent shall not be unreasonably withheld or unduly delayed. No such
assignment or subleasing shall relieve Tenant from any of Tenant's obligations
in this Lease contained. Notwithstanding anything herein to the contrary,
Tenant may assign this Lease or sublet the Demised Premises to an affiliate or
in connection with the merger or reorganization of Tenant or the sale of all or
substantially all of Tenant's assets. As used herein, the Affiliate shall mean
any entity which owns or controls or is owned or controlled by or its under
common ownership or control with the Tenants.
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Section 15.3 Tenant's Failure to Comply. Tenant's failure to comply with
all of the foregoing provisions and conditions of this Article XV shall (whether
or not Landlord's consent is required under this Article), at Landlord's option,
render any purported assignment or subletting null and void and of no force and
effect.
Section 15.4 Sharing of Excess Rent. If Landlord consents to Tenant
assigning its interest under this Lease or subletting all or any portion of the
Demised Premises, Tenant shall pay to Landlord (in addition to Rent and all
other amounts payable by Tenant under this Lease) 33% of the rents and other
considerations payable by such assignee or subtenant in excess of the Rent
otherwise payable by Tenant from time to time under this Lease. For the
purposes of this computation, the additional amount payable by Tenant shall be
determined by application of the rental rate per square foot for the Demised
Premises or any portion thereof sublet. Said additional amount shall be paid to
Landlord immediately upon receipt by Tenant of such Rent or other considerations
from the assignee or subtenant. This Section 15.4 shall not apply to subletting
or assignment to an affiliate.
ARTICLE XVI
SUBORDINATION, NONDISTURBANCE,
NOTICE TO MORTGAGEE AND ATTORNMENT
Section 16.1 Subordination by Tenant. This Lease and all rights of
Tenant therein, and all interest or estate of Tenant in the Demised Premises, or
any portion thereof, shall be subject and subordinate to the lien of any
mortgage, deed of trust, security instrument or other document of like nature
("Mortgage"), which at any time may be placed upon the Demised Premises, or any
portion thereof, by Landlord, and to any replacements, renewals, amendments,
modifications, extensions or refinancing thereof, and to each and every advance
made under any Mortgage provided the holder of such Mortgage agrees in writing
not to disturb Tenant in its quiet enjoyment of the Demised Premises in its
rights and under this Lease, so long as Tenant is not in default hereunder.
Tenant agrees at any time hereafter, and from time to time on demand of
Landlord, to execute and deliver to Landlord any instruments, releases or other
documents that may be reasonably required for the purpose of subjecting and
subordinating this Lease to the lien of any such Mortgage. It is agreed,
nevertheless, that such instruments, releases or other documents shall state in
writing that so long as Tenant is not in default in the payment of Basic Rent
and Additional Rent and the performance and observance of all covenants,
conditions, provisions, terms and agreements to be performed and observed by
Tenant under this Lease, that such subordination agreement or other instrument,
release or document shall not interfere with, hinder or molest Tenant's right to
quiet enjoyment under this Lease, nor the right of Tenant to continue to occupy
the Demised Premises, and all portions thereof, and to conduct its business
thereon in accordance with the covenants, conditions, provisions, terms and
agreements of this Lease. The lien of any such Mortgage shall not cover
Tenant's trade fixtures or other personal property located in or on the Demised
Premises.
Section 16.2 Landlord's Default. In the event of any act or omission of
Landlord constituting a default by Landlord, Tenant shall not exercise any
remedy until Tenant has given Landlord prior written notice of such act or
omission and until a 30-day period of time to allow Landlord or the mortgagee to
remedy such act or omission shall have elapsed following the
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giving of such notice; provided, however, if such act or omission cannot,
with due diligence and in good faith, be remedied within such 30-day period,
the Landlord and/or mortgagee shall be allowed such further period of time as
may be reasonably necessary provided that it shall have commenced remedying
the same with due diligence and in good faith within said 30-day period. In
the event Landlord's act or omission which constitutes a Landlord's default
hereunder results in an immediate threat of bodily harm to Tenant's
employees, agents or invitees, or damage to Tenant's property Tenant may
proceed to cure the default without prior notice to Landlord provided,
however, in that event Tenant shall give written notice to Landlord as soon
as possible after commencement of such cure. Nothing herein contained shall
be construed or interpreted as requiring any mortgagee to remedy such act or
omission.
Section 16.3 Attornment. If any mortgagee shall succeed to the rights
of Landlord under this Lease or to ownership of the Demised Premises, whether
through possession or foreclosure or the delivery of a deed to the Demised
Premises, then, upon the written request of such mortgagee so succeeding to
Landlord's rights hereunder, Tenant shall attorn to and recognize such mortgagee
as Tenant's landlord under this Lease, and shall promptly execute and deliver
any instrument that such mortgagee may reasonably request to evidence such
attornment (whether before or after making of the mortgage). In the event of
any other transfer of Landlord's interest hereunder, upon the written request of
the transferee and Landlord, Tenant shall attorn to and recognize such
transferee as Tenant's landlord under this Lease and shall promptly execute and
deliver any instrument that such transferee and Landlord may reasonably request
to evidence such attornment.
ARTICLE XVII
SIGNS
Section 17.1 Tenant's Signs. Subject to Landlord's reasonable approval,
Tenant may erect signs on the exterior or interior of the Building or on the
landscaped area adjacent thereto, provided that such sign or signs (a) do not
cause any structural damage or other damage to the Building; (b) do not violate
applicable governmental laws, ordinances, rules or regulations; and (c) do not
violate any existing restrictions affecting the Demised Premises.
ARTICLE XVIII
REPORTS BY TENANT
[Intentionally omitted.]
ARTICLE XIX
CHANGES AND ALTERATIONS
Section 19.1 Tenant's Changes and Alterations. Tenant shall have the
right at any time, and from time to time during the term of this Lease, to make
such changes and alterations, structural or otherwise, to the Building,
improvements and fixtures hereafter erected on the Demised Premises as Tenant
shall deem necessary or desirable in connection with the requirements of its
business, which such changes and alterations (other than changes or
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alterations of Tenant's movable trade fixtures and equipment) shall be made
in all cases subject to the following conditions, which Tenant covenants to
observe and perform:
(a) Permits. No charge or alteration shall be undertaken until Tenant
shall have procured and paid for, so far as the same may be required from
time to time, all municipal, state and federal permits and authorizations
of the various governmental bodies and departments having jurisdiction
thereof, and Landlord agrees to join in the application for such permits or
authorizations whenever such action is necessary, all at Tenant's sole cost
and expense, provided such applications do not cause Landlord to become
liable for any cost, fees or expenses.
(b) Compliance with Plans and Specifications. Before commencement of any
change, alteration, restoration or construction (hereinafter sometimes
referred to as "Work") involving in the aggregate an estimated cost of more
than Twenty-Five Thousand and no/100 Dollars ($25,000.00) or which in
Landlord's reasonable judgment would materially alter the mechanical,
structural, or electrical systems of the Improvements, Tenant shall (i)
furnish Landlord with detailed plans and specifications of the proposed
change or alteration; (ii) obtain Landlord's prior written consent, which
consent shall not be unreasonably withheld (but such consent may be
withheld if the change or alteration would, in the reasonable judgment of
Landlord, impair the value or usefulness of the Land or Improvements, or
any substantial part thereof to Landlord); (iii) obtain Landlord's prior
written approval of a licensed architect or licensed professional engineer
selected and paid for by Tenant, who shall supervise any such work
(hereinafter referred to as "Alterations Architect or Engineer") which
approval shall not be unreasonably withheld; (iv) obtain Landlord's prior
written approval of detailed plans and specifications prepared and approved
in writing by said Alterations Architect or Engineer, and of each amendment
and change thereto; and (v) if Landlord reasonably determines that it is
necessary, furnish to Landlord a surety company performance bond issued by
a surety company licensed to do business in the state in which the Demised
Premises are located and reasonably acceptable to Landlord in an amount
equal to the estimated cost of such work guaranteeing the completion
thereof within a reasonable time thereafter (1) free and clear of all
mechanic's liens or other liens, encumbrances, security interests and
charges, and (2) in accordance with the plans and specifications approved
by Landlord.
(c) Value Maintained. Any change or alteration shall, when completed, be
of such character as not to reduce the value or utility of the Demised
Premises or the Building to which such change or alteration is made below
its value or utility to Landlord immediately before such change or
alteration, nor shall such change or alteration reduce the area or cubic
content of the Building, nor change the character of the Demised Premises
or the Building as to use without Landlord's express written consent.
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(d) Compliance with Laws. All Work done in connection with any change or
alteration shall be done promptly and in a good and workmanlike manner and
in compliance with all building and zoning laws of the place in which the
Demised Premises are situated, and with all laws, ordinances, orders,
rules, regulations and requirements of all federal, state and municipal
governments and appropriate departments, commissions, boards and officers
thereof, and in accordance with the orders, rules and regulations of the
Board of Fire Underwriters where the Demised Premises are located, or any
other body exercising similar functions. The cost of any such change or
alteration shall be paid in cash so that the Demised Premises and all
portions thereof shall at all times be free of liens of labor and materials
supplied to the Demised Premises, or any portion thereof. The Work of any
change or alteration shall be prosecuted with reasonable dispatch, delays
due to strikes, lockouts, acts of God, inability to obtain labor or
materials, governmental restrictions or similar causes beyond the control
of Tenant excepted. Tenant shall obtain and maintain, at its sole cost and
expense, during the performance of the Work, workers' compensation
insurance covering all persons employed in connection with the Work and
with respect to which death or injury claims could be asserted against
Landlord or Tenant or against the Demised Premises or any interest therein,
together with comprehensive general liability insurance for the mutual
benefit of Landlord and Tenant with limits of not less than Two Million
Dollars ($2,000,000.00) combined single limit, and the fire insurance with
"extended coverage" endorsement required by Section 6.1 hereof shall be
supplemented with "builder's risk" insurance on a completed value form or
other comparable coverage on the Work. All such insurance shall be in a
company or companies authorized to do business in the state in which the
Demised Premises are located and reasonably satisfactory to Landlord, and
all such policies of insurance or certificates of insurance shall be
delivered to Landlord endorsed "Premium Paid" by the company or agency
issuing the same, or with other evidence of payment of the premium
satisfactory to Landlord.
(e) Property of Landlord. All affixed improvements and alterations (other
than Tenant's movable trade fixtures and equipment) made or installed by
Tenant shall immediately, upon completion or installation thereof, become
the property of Landlord without payment therefor by Landlord, and shall be
surrendered to Landlord on the expiration of the term of this Lease.
(f) Location of Improvements. No change, alteration, restoration or new
construction shall be in or connect the Improvements with any property,
building or other improvement located outside the boundaries of the parcel
of land described in Exhibit "A" attached, nor shall the same obstruct or
interfere with any existing easement.
(g) Removal of Improvements. As a condition to granting approval for any
changes or alterations, Landlord may require Tenant to agree that Landlord,
by written notice to Tenant, given at or prior to the time of granting such
approval, may require Tenant at the termination of this Lease to remove any
improvements,
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additions or installations installed by Tenant in the Demised Premises at
Tenant's sole cost and expense, and repair and restore any damage caused
by the installation and removal of such improvements, additions, or
installations; provided, however, the only improvements, additions or
installations which Tenant shall remove shall be those specified in such
notice. All improvements, additions or installations installed by Tenant
which did not require Landlord's prior approval shall be removed by Tenant
as provided for in this Section 19.1(g), unless Tenant has obtained a
written waiver of such condition from Landlord.
(h) Written Notification Required. Tenant shall notify Landlord in
writing 30 days prior to commencing any alterations, additions or
improvements to the Demised Premises which have been approved by Landlord
so that Landlord shall have the right to record and post notices of
non-responsibility on the Demised Premises.
ARTICLE XX
MISCELLANEOUS PROVISIONS
Section 20.1 Entry by Landlord. Tenant agrees to permit Landlord and
authorized representatives of Landlord to enter upon the Demised Premises at all
reasonable times during ordinary business hours for the purpose of inspecting
the same and making any necessary repairs to comply with any laws, ordinances,
rules, regulations or requirements of any public body, or the Board of Fire
Underwriters, or any similar body. Nothing herein contained shall imply any
duty upon the part of Landlord to do any such work which, under any provision of
this Lease, Tenant may be required to perform and the performance thereof by
Landlord shall not constitute a waiver of Tenant's default in failing to perform
the same. Landlord may, during the progress of any work, keep and store upon
the Demised Premises all necessary materials, tools and equipment. Landlord
shall not in any event be liable for inconvenience, annoyance, disturbance, loss
of business or other damage to Tenant by reason of making repairs or the
performance of any work in or about the Demised Premises, or on account of
bringing material, supplies and equipment into, upon or through the Demised
Premises during the course thereof, and the obligations of Tenant under this
Lease shall not be thereby affected in any manner whatsoever.
Section 20.2 Exhibition of Demised Premises. Landlord is hereby given
the right during usual business hours at any time during the term of this Lease
to enter upon the Demised Premises and to exhibit the same for the purpose of
mortgaging or selling the same. During the final year of the term, Landlord
shall be entitled to display on the Demised Premises, in such manner as to not
unreasonably interfere with Tenant's business, signs indicating that the Demised
Premises are for rent or sale and suitably identifying Landlord or its agent.
Tenant agrees that such signs may remain unmolested upon the Demised Premises
and that Landlord may exhibit said premises to prospective tenants during said
period.
Section 20.3 Indemnification by Tenant. To the fullest extent allowed by
law, Tenant shall at all times indemnify, defend and hold Landlord and
Landlord's shareholders, employees and managing agent harmless against and from
any and all claims, costs, liabilities, actions and damages (including, without
limitation, attorneys' fees and costs) by or on behalf of any person or persons,
firm or firms, corporation or corporations, arising from the conduct or
management,
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or from any work or things whatsoever done in or about the Demised Premises,
unless caused by Landlord or its agents or employees, and will further
indemnify, defend and hold Landlord harmless against and from any and all
claims arising during the term of this Lease from any condition of the
Improvements, or arising from any breach or default on the part of Tenant in
the performance of any covenant or agreement on the part of Tenant to be
performed, pursuant to the terms of this Lease, or arising from any act or
negligence of Tenant, its agents, servants, employees or licensees, or
arising from any accident, injury or damage whatsoever caused to any person,
firm or corporation occurring during the term of this Lease, in or about the
Demised Premises (unless caused by Landlord or its agents or employees), or
upon the sidewalk and the land adjacent thereto, and from and against all
costs, attorney's fees, expenses and liabilities incurred in or about any
such claim or action or proceeding brought thereon; and in case any action or
proceeding be brought against Landlord by reason of any such claim, Tenant,
upon notice from Landlord, covenants to defend such action or proceeding by
counsel reasonably satisfactory to Landlord. Tenant's obligations under this
Section 20.3 shall be insured by contractual liability endorsements in
Tenant's policies of insurance required under the provisions of Section 6.2
hereof.
Section 20.4 Notices. All notices, demands and requests which may be or
are required to be given, demanded or requested by either party to the other
shall be in writing. All notices, demands and requests shall be sent by United
States registered or certified mail, postage prepaid or by an independent
overnight courier service, addressed as follows:
To Landlord: Opus Corporation
P.O. Box 150
Minneapolis, Minnesota 55440-0150
Attention: John D. Griffith
With a copy to: James A. Dueholm
Faegre & Benson
90 South Seventh Street, Suite 2200
Minneapolis, Minnesota 55402-3901
To Tenant: Select Comfort Corporation
6105 Trenton Lane North
Plymouth, Minnesota 55442
Attention: Marcel Kole
With a copy to: Mark E. Kimball
Oppenheimer, Wolff & Donnelly
45 South Seventh Street, Suite 3400
Minneapolis, Minnesota 55402
or at such other place as Landlord may from time to time designate by written
notice to Tenant. Notices, demands and requests which shall be served upon
Landlord by Tenant, or upon Tenant by Landlord, in the manner aforesaid, shall
be deemed to be sufficiently served or given for all
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purposes hereunder at the time such notice, demand or request shall be mailed
or delivered to a courier.
Section 20.5 Quiet Enjoyment. Landlord covenants and agrees that Tenant,
upon paying the Basic Rent and Additional Rent, and upon observing and keeping
the covenants, agreements and conditions of this Lease on its part to be kept,
observed and performed, shall lawfully and quietly hold, occupy and enjoy the
Demised Premises (subject to the provisions of this Lease) during the term of
this Lease without hindrance or molestation by Landlord or by any person or
persons claiming under Landlord. Landlord represents that, as of the date of
this Lease, the Demised Premises are not subject to a mortgage.
Section 20.6 Landlord's Continuing Obligations. The term "Landlord," as
used in this Lease so far as covenants or obligations on the part of Landlord
are concerned, shall be limited to mean and include only the owner or owners at
the time in question of the fee of the Demised Premises, and in the event of any
transfer or transfers or conveyance the then grantor shall be automatically
freed and relieved from and after the date of such transfer or conveyance of all
liability as respects the performance of any covenants or obligations on the
part of Landlord contained in this Lease thereafter to be performed, provided
that any funds in the hands of such landlord or the then grantor at the time of
such transfer, in which Tenant has an interest, shall be turned over to the
grantee, and any amount then due and payable to Tenant by Landlord or the then
grantor under any provision of this Lease shall be paid to Tenant. The
covenants and obligations contained in this Lease on the part of Landlord shall,
subject to the aforesaid, be binding on Landlord's successors and assigns,
during and in respect of their respective successive periods of ownership.
Nothing herein contained shall be construed as relieving Landlord of its
obligations under Article II of this Lease, or releasing Landlord from any
obligation to complete the cure of any breach by Landlord during the period of
its ownership of the Demised Premises.
Section 20.7 Estoppel. Landlord and Tenant shall, each without charge at
any time and from time to time, within ten business days after written request
by the other party, certify by written instrument, duly executed, acknowledged
and delivered to any mortgagee, assignee of a mortgagee, proposed mortgagee, or
to any purchaser or proposed purchaser, or to any other person dealing with
Landlord, Tenant or the Demised Premises:
(a) That this Lease (and all guaranties, if any) is unmodified and in full
force and effect (or, if there have been modifications, that the same is in
full force and effect, as modified, and stating the modifications);
(b) The dates to which the Basic Rent or Additional Rent have been paid in
advance;
(c) Whether or not there are then existing any breaches or defaults by
such party or the other party known by such party under any of the
covenants, conditions, provisions, terms or agreements of this Lease, and
specifying such breach or default, if any, or any setoffs or defenses
against the enforcement of any covenant, condition, provision, term or
agreement of this Lease (or of any guaranties) upon the part of Landlord or
Tenant (or any guarantor), as the case may be, to be
41
<PAGE>
performed or complied with (and, if so, specifying the same and the steps
being taken to remedy the same); and
(d) Such other statements or certificates as Landlord or any mortgagee may
reasonably request.
It is the intention of the parties hereto that any statement delivered
pursuant to this Section 20.7 may be relied upon by any of such parties dealing
with Landlord, Tenant or the Demised Premises. If Tenant does not deliver such
statement to Landlord within such 10 day period, Landlord, and any prospective
purchaser or encumbrancer of the Demised Premises or the Building, may
conclusively presume and rely upon the following facts: (i) that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been canceled or terminated and is in
full force and effect, except as otherwise represented by Landlord; that the
current amounts of the Basic Rent and Security Deposit are as represented by
Landlord; that any changes made against the Security Deposit are uncontested and
valid; that there have been no subleases or assignments of the Lease; (iii) that
not more than one month's Basic Rent or other charges have been paid in advance;
and (iv) that Landlord is not in default under the Lease. In such event, Tenant
shall be estopped from denying the truth of such facts.
Section 20.8 Memorandum of Lease. Upon not less than ten business days
prior written request by either party, the parties hereto agree to execute and
deliver to each other a Memorandum Lease, in recordable form, setting forth the
following:
(a) The date of this Lease;
(b) The parties to this Lease;
(c) The term of this Lease;
(d) The legal description of the Demised Premises; and
(e) Such other matters reasonably requested by Landlord to be stated
therein.
Section 20.9 Severability. If any covenant, condition, provision, term
or agreement of this Lease shall, to any extent, be held invalid or
unenforceable, the remaining covenants conditions, provisions, terms and
agreements of this Lease shall not be affected thereby, but each covenant,
condition, provision, term or agreement of this Lease shall be valid and in
force to the fullest extent permitted by law. This Lease shall be construed and
be enforceable in accordance with the laws of the state in which the Demised
Premises are located.
Section 20.10 Successors and Assigns. The covenants and agreements herein
contained shall bind and inure to the benefit of Landlord, its successors and
assigns, and Tenant and its permitted successors and assigns.
42
<PAGE>
Section 20.11 Captions. The caption of each article of this Lease is for
convenience and reference only, and in no way defines, limits or describes the
scope or intent of such article or of this Lease.
Section 20.12 Relationship of Parties. This Lease does not create the
relationship of principal and agent, or of partnership, joint venture, or of any
association or relationship between Landlord and Tenant, the sole relationship
between Landlord and Tenant being that of landlord and tenant.
Section 20.13 Entire Agreement. All preliminary and contemporaneous
negotiations are merged into and incorporated in this Lease. This Lease
together with the Exhibits contains the entire agreement between the parties and
shall not be modified or amended in any manner except by an instrument in
writing executed by the parties hereto.
Section 20.14 No Merger. There shall be no merger of this Lease or the
leasehold estate created by this Lease with any other estate or interest in the
Demised Premises by reason of the fact that the same person, firm, corporation
or other entity may acquire, hold or own directly or indirectly, (a) this Lease
or the leasehold interest created by this Lease or any interest therein, and (b)
any such other estate or interest in the Demised Premises, or any portion
thereof. No such merger shall occur unless and until all persons, firms,
corporations or other entities having an interest (including a security
interest) in (1) this Lease or the leasehold estate created thereby, and (2) any
such other estate or interest in the Demised Premises, or any portion thereof,
shall join in a written instrument expressly effecting such merger and shall
duly record the same.
Section 20.15 Possession and Use. Tenant acknowledges that the Demised
Premises are the property of Landlord and that Tenant has only the right to
possession and use thereof upon the covenants, conditions, provisions, terms and
agreements set forth in this Lease.
Section 20.16 No Surrender During Lease Term. No surrender to Landlord of
this Lease or of the Demised Premises, or any portion thereof, or any interest
therein, prior to the expiration of the term of this Lease shall be valid or
effective unless agreed to and accepted in writing by Landlord and consented to
in writing by all contract vendors and mortgagees, and no act or omission by
Landlord or any representative or agent of Landlord, other than such a written
acceptance by Landlord consented to by all contract vendors and the mortgagees,
as aforesaid, shall constitute an acceptance of any such surrender.
Section 20.17 Surrender of Demised Premises. At the expiration of the
term of this Lease, Tenant shall surrender the Demised Premises in the same
condition as the same were in upon delivery of possession thereto at the
Commencement Date of the term of this Lease, reasonable wear and tear and
alterations completed in accordance with the terms hereof excepted, and shall
surrender all keys to the Demised Premises to Landlord at the place then fixed
for the payment of Basic Rent and shall inform Landlord of all combinations on
locks, safes and vaults, if any. Tenant shall at such time remove all of its
property therefrom and all alterations and improvements placed thereon by Tenant
if so requested by Landlord. Tenant shall repair any damage to the Demised
Premises caused by such removal, and any and all such property not so removed
shall, at Landlord's option, become the exclusive property of Landlord or be
disposed
43
<PAGE>
of by Landlord, at Tenant's cost and expense, without further notice to or
demand upon Tenant. If the Demised Premises be not surrendered as above set
forth, Tenant shall indemnify, defend and hold Landlord harmless against loss
or liability resulting from the delay by Tenant in so surrendering the
Demised Premises, including, without limitation any claim made by any
succeeding occupant founded on such delay. Tenant's obligations to observe
or perform this covenant shall survive the expiration or other termination of
this Lease.
All property of Tenant not removed within 30 days after the last day of the
term of this Lease shall be deemed abandoned. Tenant hereby appoints Landlord
its agent to remove all property of Tenant from the Demised Premises upon
termination of this Lease and to cause its transportation and storage for
Tenant's benefit, all at the sole cost and risk of Tenant and Landlord shall not
be liable for damage, theft, misappropriation or loss thereof and Landlord shall
not be liable in any manner in respect thereto. Tenant shall pay all costs and
expenses of such removal, transportation and storage. Tenant shall reimburse
Landlord upon demand for any expenses incurred by Landlord with respect to
removal or storage of abandoned property and with respect to restoring said
Demised Premises to good order, condition and repair.
Section 20.18 Holding Over. In the event Tenant remains in possession
of the Demised Premises after expiration of this Lease, and without the
execution of a new lease, it shall be deemed to be occupying the Demised
Premises as a tenant from month to month, if with Landlord's written consent,
or at sufferance, if without such consent, subject to all the provisions,
conditions and obligations of this Lease insofar as the same can be
applicable to a month-to-month tenancy, except that the Basic Rent shall be
escalated to 150% of the then current Basic Rent for the Demised Premises.
Section 20.19 Landlord Approvals. Any approval by Landlord or Landlord's
architects and/or engineers of any of Tenant's drawings, plans and
specifications which are prepared in connection with any construction of
improvements respecting the Demised Premises shall not in any way be construed
or operate to bind Landlord or to constitute a representation or warranty of
Landlord as to the adequacy or sufficiency of such drawings, plans and
specifications, or the improvements to which they relate, for any reason,
purpose or condition, but such approval shall merely be the consent of Landlord,
as may be required hereunder, in connection with Tenant's construction of
improvements relating to the Demised Premises in accordance with such drawings,
plans and specifications.
Section 20.20 Survival. All obligations (together with interest or money
obligations at the Maximum Rate of Interest) accruing prior to expiration of the
term of this Lease shall survive the expiration or other termination of this
Lease.
Section 20.21 Attorneys' Fees. In the event of any litigation or judicial
action in connection with this Lease or the enforcement thereof, the prevailing
party in any such litigation or judicial action shall be entitled to recover all
costs and expenses of any such judicial action or litigation (including, but not
limited to, reasonable attorneys' fees and paralegals' fees) from the other
party.
44
<PAGE>
Section 20.22 Landlord's Limited Liability. Tenant agrees to look solely
to Landlord's interest in the Demised Premises for recovery of any judgment from
Landlord, it being agreed that Landlord (and if Landlord is a partnership, its
partners, whether general or limited, and if Landlord is a corporation, its
directors, officers or shareholders) shall never be personally liable for any
personal judgment or deficiency decree or judgment against it.
Section 20.23 Broker. Tenant represents that it has dealt directly with
and only with CB Commercial and Towle Real Estate Company in connection with
this Lease and that no other broker has negotiated or participated in
negotiations of this Lease or is entitled to any commission in connection
therewith. Tenant shall indemnify and hold Landlord harmless from and against
any and all commissions, fees and expenses and all claims therefor by any
broker, salesman or other party in connection with or arising out of Tenant's
action in entering into this Lease, except for the commissions of CB Commercial
and Towle Real Estate Company, which commissions Landlord shall be obligated to
pay.
Section 20.24 Governing Law. This Lease shall be governed by the laws of
the State of Minnesota. All covenants, conditions and agreements of Tenant
arising hereunder shall be performable in the county wherein the Demised
Premises are located. Any suit arising from or relating to this Lease shall be
brought in the county wherein the Demised Premises are located, and the parties
hereto waive the right to be sued elsewhere.
Section 20.25 Joint and Several Liability. All parties signing this Lease
as Tenant shall be jointly and severally liable for all obligations of Tenant.
Section 20.26 Time is of the Essence. Time is of the essence with respect
to the performance of every provision of this Lease in which time of performance
is a factor.
Section 20.27 Tenant Termination Right. Tenant may terminate this Lease
as of May 31, 1997, by notice given to Landlord not later than May 31, 1996, if,
and only if, prior to the date of the notice of termination Tenant (i) has
entered into a lease with Landlord of not less than 170,000 square feet in a
building constructed by Landlord after the date of this Lease, and (ii) has paid
Landlord $198,409, which represents the unamortized cost of the mezzanine in
Landlord's Improvements. Neither Landlord nor Tenant shall have any obligation
to enter into a lease which would give rise to the right of termination under
this Section 20.27, but, if Tenant gives notice to Landlord that Tenant desires
to enter into such a lease, both Landlord and Tenant shall negotiate in good
faith.
Section 20.28 Moving Allowance. Promptly after Tenant has occupied the
Demised Premises, Landlord shall pay Tenant the lesser of $30,000 or Tenant's
documented costs of moving from its existing premises to the Demised Premises.
Section 20.29 Change Orders. If there are change orders which increase
the cost of Landlord's Improvements, Tenant may pay such increase, or (a) the
cost of such change orders up to an aggregate of $50,000, together with interest
thereon at the rate of seven percent per annum, shall be paid through additional
Basic Rent in equal monthly installments over the initial
45
<PAGE>
term of this Lease, and (b) Tenant shall pay such change order costs in
excess of $50,000 within 10 days after receipt of invoice from Landlord.
IN WITNESS WHEREOF, each of the parties hereto has caused this Lease to be
duly executed as of the day and year first above written.
LANDLORD:
OPUS CORPORATION
By: /S/
-------------------------------
Its: Vice President, General Manager
By:
-------------------------------
Its:
-------------------------------
TENANT:
SELECT COMFORT CORPORATION
By: /S/
-------------------------------
Its: COO/CFO
By:
-------------------------------
Its:
-------------------------------
46
<PAGE>
EXHIBIT "A"
Lot 1, Block 1, Bass Creek Business Park 2nd Addition
Subject to the lien of real estate taxes and installments of special assessments
due and payable in 1994 and thereafter, and to easements, restrictions and
covenants of record, if any, none of which, Landlord represents, would adversely
affect the improvement, operation or use of the Demised Premises as contemplated
hereby.
<PAGE>
Exhibit 10.2
AMENDMENT OF LEASE
THIS AMENDMENT OF LEASE, made this 10th day of August, 1994, between Opus
Corporation ("Landlord") and Select Comfort Corporation ("Tenant").
RECITALS
Landlord, as landlord, and Tenant, as tenant, are parties to a Net Lease
Agreement dated December 3, 1993 relating to real estate in Plymouth, Hennepin
County, Minnesota (the "Lease").
Landlord has provided $50,000 in change orders pursuant to Section 20.29 of
the Lease, resulting in an annual increase of $7,120 over the term of the Lease,
and has in addition provided an additional $65,779 of improvements, for which an
additional $36,887 in annual rent will be paid for the first two years of the
Lease term. The leased premises has been enlarged to provide land for
additional future parking, and the parties have agreed to a $2,500 annual rental
payment over the term of the Lease to reflect this additional land.
By this amendment, the parties desire to confirm the commencement date of
the term of the Lease and provide for the additional premises and the additional
rental referred to above.
NOW, THEREFOR, the parties hereto agree as follows:
1. The Commencement Date, as defined in the Lease, is June 6, 1994.
The last day of the Initial Term, as defined in the Lease, is June 1, 2004.
2. The legal description in Exhibit A to the Lease is changed to Lot
1, Block 1, Bass Creek Business Park 3rd Addition, which Landlord will complete
and record.
3. Lines 7 through 15 of Section 3.1 of the Lease are amended as
follows:
or at such other place as Landlord may from time to time
designate in writing, an annual rental for the Initial Term
of this Lease of $507,213 for the period beginning on the
Commencement Date and ending May 31, 1996, $470,326 for the
period beginning June 1, 1996 and ending May 31, 1997,
$487,222 for the period beginning June 1, 1997 and ending
May 31, 2000, $552,818 for the period beginning June 1, 2000
and ending May 31, 2002, and $594,561 for the balance of the
Initial Term, payable monthly, in advance, in equal
installments, commencing on the Commencement Date and
continuing on the first day of each month thereafter for the
succeeding months during the balance of the Initial Term.
The rent provided for in this Section 3.1 is hereafter
called the "Base Rent".
<PAGE>
4. Except as hereby specifically amended, the Lease and all of the
terms and provisions thereof remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be made as of the day and year first above stated.
OPUS CORPORATION
By: /s/
-----------------------------------
Its: Vice President, General Manager
-----------------------------------
SELECT COMFORT CORPORATION
By: /s/
-----------------------------------
Its: COO/CFO
-----------------------------------
<PAGE>
Exhibit 10.3
SECOND AMENDMENT OF LEASE
THIS SECOND AMENDMENT OF LEASE is made as of May 10, 1995, by and between
Rushmore Plaza Partners Limited Partnership, a South Dakota limited partnership
("Landlord") and Select Comfort Corporation, a Minnesota corporation ("Tenant").
RECITALS:
a. Opus Corporation, a Minnesota corporation ("Opus"), as Landlord's
predecessor in title, and Tenant made and entered into that certain Net Lease
Agreement dated December 3, 1993, with respect to the following described
property situated in the City of Plymouth, Hennepin County, Minnesota:
Lot 1, Block 1, Bass Creek Business Park 3rd Addition.
The above described land ("Land") has been improved with certain improvements
("Improvements"), which Land and Improvements are referred to as the "Demised
Premises".
b. By Amendment of Lease made and entered into August 10, 1994, by Opus
and Tenant, said parties amended the December 3, 1993 Net Lease Agreement. The
December 3, 1993 Net Lease Agreement, as amended by the August 10, 1994
Amendment of Lease, is hereinafter referred to as the "Lease".
c. Section 3.1 of the Lease provides for the payment of Basic Rent.
Basic Rent currently payable under the Lease is set forth on Schedule A hereto.
Section 20.27 of the Lease provides Tenant a right to terminate the Lease as of
May 31, 1997, provided Tenant complies with the conditions for early termination
as set forth in Section 20.27, which conditions include payment of a lease
termination payment (the "Termination Payment") representing the unamoritized
cost of the Improvements.
d. Tenant desires to have additional improvements (the "Additional
Improvements") made to the Demised Premises, as contemplated by, and as
described in, that certain Design/Build Construction Contract made May 10, 1995
(the "Construction Contract") by the between Landlord and Opus. Landlord is
willing to enter into the Construction Contract and to otherwise provide for the
construction of the Additional Improvements, provided Tenant agrees to reimburse
Landlord for the agreed upon $565,739.00 cost thereof and associated financing
and legal costs (collectively, the Additional Improvements Cost) through an
increase in the amount of the Basic Rent, and provided further that Tenant
agrees to an increase in the amount of the Termination Payment.
e. The parties desire to enter into this Second Amendment of Lease to
amend the Lease to reflect the foregoing, and to make certain other amendments
to the Lease.
NOW, THEREFORE, IT IS AGREED by and between Landlord and Tenant, for
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, as follows:
<PAGE>
1. CONSTRUCTION OF ADDITIONAL IMPROVEMENTS. Landlord agrees to cause the
construction of the Additional Improvements in accordance with the terms and
conditions of the Construction Contract and in accordance with the working
drawings and base building specifications as are listed on Exhibit A to the
Construction Contract; provided, however, Landlord shall not be required to
authorize Change Orders which would increase the Contract Sum above the agreed
upon amount of $565,739.00. Tenant agrees to cooperate with Opus and Landlord
in the construction of the Additional Improvements and to make every reasonable
effort to conduct its business in such a way as will cause as little
interference as possible with the construction of the Additional Improvements.
Further, Tenant agrees to supervise the construction of the Additional
Improvements and to otherwise take an active role in ensuring that the
construction of the Additional Improvements complies with the plans and
specifications therefor, which plans and specifications were prepared with the
participation of Tenant, and which plans and specifications have been approved
by Tenant.
2. BASIC RENT. Commencing with the first day of the month following the
date of substantial completion of the Additional Improvements, as such date is
determined by Landlord and Opus, Tenant agrees to pay increased installments of
monthly Basic Rent, which increased installments of monthly Basic Rent will be
that amount necessary to pay, on a level monthly basis, the Basic Rent now
provided for in the Lease, plus the amount necessary to amortize, over the
remaining period of the Initial Term, the Additional Improvements Cost with
interest calculated at an annual rate of 11% (Interest calculations shall be
based on the assumption of twelve 30-day months per year, at a monthly
compounded rate of .8735%.) Schedule B sets forth an example of the calculation
of the level monthly installments of Basic Rent that would be payable by Tenant
following substantial completion of the construction of the Additional
Improvements.
3. TERMINATION PAYMENTS. The Termination Payment shall be increased by
the amount necessary to reimburse Landlord for the unamortized portion of the
Additional Improvements Cost. Schedule B hereto also sets forth an example of
the calculation that would be made to determine the increased Termination
Payment due Landlord, should Tenant duly elect to exercise its right of early
termination following the construction of the Additional Improvements.
4. INITIAL TERM. The Initial Term of the Lease is from and including
June 6, 1994, through and including May 31, 2004.
5. SECURITY DEPOSIT. Section 3.6 of the Lease is hereby deleted, and the
following shall be inserted in place thereof:
Section 3.6 Security Deposit. Tenant has paid a security deposit in
the amount of $257,833.00 to be increased or decreased as provided
below (the "Security Deposit"). The Security Deposit shall be held by
Landlord as security for the performance by Tenant of Tenant's
covenants and obligations under this Lease. Such deposit shall not be
considered an advance payment of Base Rent or Additional Rent or a
measure of Landlord's damages in case of default of Tenant. If
Tenant's net worth as of June 30, 1995, is less than $2,842,000, or if
Tenant's
<PAGE>
net income before taxes for the twelve month period ending
June 30, 1995 is less than $456,000, Tenant shall, by no later than
August 15, 1995, deposit an additional $73,667 with Landlord. If
Tenant's net worth as of June 30, 1995, is over $3,474,000, and
Tenant's net income before taxes for the twelve month period ending
June 30, 1995, is $557,000 or more, then, by no later than August 15,
1995, Landlord shall refund to Tenant $26,833 of the Security Deposit.
Upon the occurrence of any Event of Default by Tenant, Landlord may,
from time to time, without prejudice to any other remedy, use the
Security Deposit to the extent necessary to make good any arrearages
of Base Rent, Additional 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. Provided there exists no Event of
Default hereunder, any remaining balance of the Security Deposit shall
be returned by Landlord to Tenant upon expiration or earlier
termination of this Lease. If Landlord transfers its interest in the
Demised Premises during the term of this Lease, Landlord may assign
the Security Deposit to the transferee and thereafter shall have no
further liability for the return of the Security Deposit. Landlord
shall pay interest on the Security Deposit at the rate of six percent
per annum, payable semi-annually on July 1 and January 1 of each year
during the term, except that, if there is an uncured Event of Default
hereunder, interest shall be added to the Security Deposit. If at the
end of the fifth year of the Initial Term of this Lease, Tenant's net
worth exceeds $3,474,000, Landlord shall reduce the Security Deposit
to $110,499.00
6. NOTICE. Section 20.4 of the Lease is amended to provide that notices
to the Landlord shall be sent to the following address:
Rushmore Plaza Partners Limited Partnership
3914 IDS Center
80 South Eighth Street
Minneapolis, MN 55402
<PAGE>
7. LEASE INTERPRETATION. Attached hereto are true and correct copies of
the December 3, 1993 Lease between Opus and Tenant, and of the August 10, 1994
Amendment of Lease made by Opus and Tenant. Capitalized terms used in this
Second Amendment of Lease, and not otherwise defined herein, shall have the
meanings set forth in the Lease. Except as amended by this Second Amendment of
Lease, the Lease is hereby ratified and confirmed, and the provisions thereof
shall remain in full force and effect.
Rushmore Plaza Partners Limited
Partnership, a South Dakota limited
partnership
By: Churchill Rushmore Plaza Civic
Center, Inc.
Its: General Partner
By: /s/
----------------------------------
Its: Vice President
----------------------------------
Select Comfort Corporation,
a Minnesota corporation
By: /s/
----------------------------------
Its: CFO
----------------------------------
<PAGE>
SCHEDULE A
TO THE SECOND AMENDMENT OF LEASE
BASIC RENT PAYMENT SCHEDULE BEFORE SECOND AMENDMENT
Payments Due During the 12 month period Monthly Basic Rent Annual Basic Rent
<TABLE>
<S> <C> <C> <C>
01-Jun-94 31-May-95 $ 42,267.75 $ 507,213.00
01-Jun-95 31-May-96 $ 42,267.75 $ 507,213.00
01-Jun-96 31-May-97 $ 39,193.83 $ 470,326.00
01-Jun-97 31-May-98 $ 40,601.83 $ 487,222.00
01-Jun-98 31-May-99 $ 40,601.83 $ 487,222.00
01-Jun-99 31-May-2000 $ 40,601.83 $ 487,222.00
01-Jun-2000 31-May-2001 $ 46,068.17 $ 552,818.00
01-Jun-2001 31-May-2002 $ 46,068.17 $ 552,818.00
01-Jun-2002 31-May-2003 $ 49,546.75 $ 594,561.00
01-Jun-2003 31-May-2004 $ 49,546.75 $ 594,561.00
</TABLE>
<PAGE>
SCHEDULE B
TO THE SECOND AMENDMENT OF LEASE
1. EXAMPLE OF BASIC RENT CALCULATION
Assumptions:
Substantial Completion Date: 15-Jul-95
Improvement Cost: $ 565,739.00
Legal & Financing Cost: $ 15,000.00
Other key parameters:
Annual Interest Rate 11.0000%
Monthly Interest Rate 0.8735%
Project Costs $ 580,739.00
Revised Lease Payment $ 51,374.01 per month
$ 616,488.07 annually
1st New Lease Payment Due 01-Aug-95
<TABLE>
<CAPTION>
Payments Due During Current Basic New Basic Rent Net Change in
the 12 month* period Rent Basic Rent
<S> <C> <C> <C> <C>
01-Aug-95 31-May-96 $ 422,677.50 $ 513,740.06 $ 91,062.56
01-Jun-96 31-May-97 $ 470,326.00 $ 616,488.07 $ 146,162.07
01-Jun-97 31-May-98 $ 487,222.00 $ 616,488.07 $ 129,266.07
01-Jun-98 31-May-99 $ 487,222.00 $ 616,488.07 $ 129,266.07
01-Jun-99 31-May-2000 $ 487,222.00 $ 616,488.07 $ 129,266.07
01-Jun-2000 31-May-2001 $ 552,818.00 $ 616,488.07 $ 63,670.07
01-Jun-2001 31-May-2002 $ 552,818.00 $ 616,488.07 $ 63,670.07
01-Jun-2002 31-May-2003 $ 594,561.00 $ 616,488.07 $ 21,927.07
01-Jun-2003 31-May-2004 $ 594,561.00 $ 616,488.07 $ 21,927.07
</TABLE>
* first year is a year 10 months
<PAGE>
SCHEDULE B (continued)
TO THE SECOND AMENDMENT OF LEASE
II. EXAMPLE OF TERMINATION PAYMENT CALCULATION
Unamortized Balance on
01-May-96 $ 533,295.25
Interest to 31-May-96 4,658.33
Current Payment 198,409.00
------------
Total Termination Payment $ 736,362.58
PARTIAL AMORTIZATION SCHEDULE
<TABLE>
<CAPTION>
Lease Current New Basic Incremental Unamortized
Month Basic Rent Rent Payment Basic Rent Improvements
Balance
<S> <C> <C> <C> <C> <C>
$ 580,739.00
01-Aug-95 15 (1) $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 571,632.74
01-Sep-95 16 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 567,519.70
01-Oct-95 17 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 563,370.73
01-Nov-95 18 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 559,185.52
01-Dec-95 19 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 554,963.74
01-Jan-96 20 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 550,705.10
01-Feb-96 21 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 546,409.25
01-Mar-96 22 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 542,075.88
01-Apr-96 23 $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 537,704.65
01-May-96 24 (2) $ 42,267.75 $ 51,374.01 $ 9,106.26 $ 533,295.25
</TABLE>
(1) Assumes payment in advance; i.e., no interest.
(2) Payoff balance to include interest to May 31, 1996 payment date
<PAGE>
AMENDMENT OF LEASE
THIS AMENDMENT OF LEASE, made this 10th day of August, 1994, between Opus
Corporation ("Landlord") and Select Comfort Corporation ("Tenant").
RECITALS
Landlord, as landlord, and Tenant, as tenant, are parties to a Net Lease
Agreement dated December 3, 1993 relating to real estate in Plymouth, Hennepin
County, Minnesota (the "Lease").
Landlord has provided $50,000 in change orders pursuant to Section 20.29 of
the Lease, resulting in an annual increase of $7,120 over the term of the Lease,
and has in addition provided an additional $65,779 of improvements, for which an
additional $36,887 in annual rent will be paid for the first two years of the
Lease term. The leased premises has been enlarged to provide land for
additional future parking, and the parties have agreed to a $2,500 annual rental
payment over the term of the Lease to reflect this additional land.
By this amendment, the parties desire to confirm the commencement date of
the term of the Lease and provide for the additional premises and the additional
rental referred to above.
NOW, THEREFOR, the parties hereto agree as follows:
1. The Commencement Date, as defined in the Lease, is June 6, 1994.
The last day of the Initial Term, as defined in the Lease, is June 1, 2004.
2. The legal description in Exhibit A to the Lease is changed to Lot
1, Block 1, Bass Creek Business Park 3rd Addition, which Landlord will complete
and record.
3. Lines 7 through 15 of Section 3.1 of the Lease are amended as
follows:
or at such other place as Landlord may from time to time
designate in writing, an annual rental for the Initial Term
of this Lease of $507,213 for the period beginning on the
Commencement Date and ending May 31, 1996, $470,326 for the
period beginning June 1, 1996 and ending May 31, 1997,
$487,222 for the period beginning June 1, 1997 and ending
May 31, 2000, $552,818 for the period beginning June 1, 2000
and ending May 31, 2002, and $594,561 for the balance of the
Initial Term, payable monthly, in advance, in equal
installments, commencing on the Commencement Date and
continuing on the first day of each month thereafter for the
succeeding months during the balance of the Initial Term.
The rent provided for in this Section 3.1 is hereafter
called the "Base Rent".
<PAGE>
4. Except as hereby specifically amended, the Lease and all of the
terms and provisions thereof remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused these presents to
be made as of the day and year first above stated.
OPUS CORPORATION
By: /s/
----------------------------------
Its: Vice President, General Manager
----------------------------------
SELECT COMFORT CORPORATION
By: /s/
----------------------------------
Its: COO/CFO
----------------------------------
<PAGE>
SCHEDULE B
TO THE SECOND AMENDMENT OF LEASE
1. EXAMPLE OF BASIC RENT CALCULATION
Assumptions:
Substantial Completion Date: 15-Sep-95
Improvement Cost: $ 565,739.00
Legal & Financing Cost: $ 15,000.00
Other key parameters:
Annual Interest Rate 11.0000%
Monthly Interest Rate 0.8735%
Project Costs $ 580,739.00
Revised Lease Payment $ 51,494.20 per month
$ 617,930.36 annually
1st New Lease Payment Due 01-Oct-95
<TABLE>
<CAPTION>
Payments Due During Current Basic New Basic Net Change in
the 12 month* period Rent Rent Basic Rent
<S> <C> <C> <C> <C>
01-Oct-95 31-May-96 $ 338,142.00 $ 411,953.57 $ 73,811.57
01-Jun-96 31-May-97 $ 470,326.00 $ 617,930.36 $ 147,604.36
01-Jun-97 31-May-98 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-98 31-May-99 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-99 31-May-2000 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-2000 31-May-2001 $ 552,818.00 $ 617,930.36 $ 65,112.36
01-Jun-2001 31-May-2002 $ 552,818.00 $ 617,930.36 $ 65,112.36
01-Jun-2002 31-May-2003 $ 594,561.00 $ 617,930.36 $ 23,369.36
01-Jun-2003 31-May-2004 $ 594,561.00 $ 617,930.36 $ 23,369.36
</TABLE>
* first year is a year of 8 months
<PAGE>
Exhibit 10-4
[LETTERHEAD]
October 5, 1995
Mr. Marcel J. Kole
Chief Financial Officer/Chief Operating Officer
Select Comfort Corporation
6105 Trenton Lane North, Suite 100
Plymouth, MN 55442-3240
Dear Marcel:
This will confirm the understanding that you and I reached on Tuesday
concerning the amortization of improvements costs. We have agreed that the
FINAL and total amount of costs to be included in the rent calculation is
$580,739, which sum includes $15,000 of legal and financing costs, and that
payments effective as of October 1st will be $51,494.20 for the balance of
the lease term.
Considering that you've already paid $51,275.89, we're agreed that the
November 1st payment will be $51,712.42 to cover the difference of $218.22 in
the October 1st payment.
I have enclosed a copy of a revised Schedule B that summarizes the
calculations. I would ask that you return to me a signed copy of this letter.
Marcel, I think the decision to fix the rent once and for all was a good
decision and I appreciate your cooperation and understanding.
Very truly yours,
RUSHMORE PLAZA PARTNERS LIMITED PARTNERSHIP
CHURCHILL RUSHMORE PLAZA CIVIC CENTER, INC., GENERAL PARTNER
/s/ James J. Phelps
- ----------------------------
James J. Phelps
Vice President
ACKNOWLEDGED THIS 9TH DAY OF OCTOBER, 1995
SELECT COMFORT CORPORATION
/s/ Marcel J. Kole
----------------------------
By: MARCEL J. KOLE
ITS CHIEF FINANCIAL OFFICER/CHIEF OPERATING OFFICER
<PAGE>
SCHEDULE B
TO THE SECOND AMENDMENT OF LEASE
I. EXAMPLE OF BASIC RENT CALCULATION
<TABLE>
<S> <C>
Assumptions:
Substantial Completion Date: 15-Sept-95
Improvement Cost $565,739.00
Legal & Financing Costs $15,000.00
Other key parameters:
Annual Interest Rate 11.0000%
Monthly Interest Rate 0.8735%
Project Costs $580,739.00
Revised Lease Payment $51,494.20 per month
$617,930.36 annually
1st New Lease Payment Due 01-Oct-95
</TABLE>
<TABLE>
<CAPTION>
Payments Due During
the 12 month* period Current Basic Rent New Basic Rent Net Change in Basic Rent
- ------------------------------------------ ------------------ -------------- ------------------------
<S> <C> <C> <C>
01-Oct-95 31-May-96 $ 338,142.00 $ 411,953.37 $ 73,811.57
01-Jun-96 31-May-97 $ 470,326.00 $ 617,930.36 $ 147,604.36
01-Jun-97 31-May-98 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-98 31-May-99 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-99 31-May-2000 $ 487,222.00 $ 617,930.36 $ 130,708.36
01-Jun-2000 31-May-2001 $ 552,818.00 $ 617,930.36 $ 65,112.36
01-Jun-2001 31-May-2002 $ 552,818.00 $ 617,930.36 $ 65,112.36
01-Jun-2002 31-May-2003 $ 594,561.00 $ 617,930.36 $ 23,369.36
01-Jun-2003 31-May-2004 $ 594,561.00 $ 617,930.36 $ 23,369.36
</TABLE>
* first year is a year of 8 months
<PAGE>
THIRD AMENDMENT OF LEASE,
ASSIGNMENT AND ASSUMPTION OF LEASE
AND CONSENT
THIS THIRD AMENDMENT OF LEASE, ASSIGNMENT AND ASSUMPTION OF LEASE AND
CONSENT ("Agreement") is made effective as of the 1st day of January, 1996
("Effective Date"), by and among Rushmore Plaza Partners Limited Partnership, a
South Dakota limited partnership ("Landlord"), Select Comfort Corporation, a
Minnesota corporation ("Assignor"), and Select Comfort Direct Corporation, a
Minnesota corporation ("Assignee").
RECITALS:
A. Opus Corporation, a Minnesota corporation ("Opus"), as Landlord's
predecessor in title, and Assignor, as tenant, made and entered into that
certain Net Lease Agreement dated December 3, 1993 (the "Original Lease"), with
respect to certain property and improvements located thereon in the City of
Plymouth, Hennepin County, Minnesota, more particularly described therein.
B. By that certain Amendment of Lease dated August 10, 1994, by and
between Opus and Assignor (the "First Amendment"), and that certain Second
Amendment of Lease dated May 10, 1995, by and between Landlord and Assignor (the
"Second Amendment"), the parties amended the Original Lease. By that certain
letter agreement dated October 5, 1995, (the "Letter Agreement"), the parties
confirmed certain terms and conditions of the Original Lease, as then amended.
The Original Lease, as amended by the First Amendment and the Second Amendment,
and as confirmed by the Letter Agreement, is hereinafter referred to as the
"Lease".
C. Assignor desires to assign its interest in the Lease to Assignee, and
Assignee desires to assume the obligations of Assignor under the Lease as more
particularly set forth below.
D. Landlord is willing to consent to such assignment and assumption
provided Assignor confirms its continuing obligations under the Lease, and any
extension thereof and any amendment thereto, by so acknowledging herein.
E. The parties desire to enter into this Agreement to amend the Lease to
reflect the foregoing and to make certain other amendments to the Lease as more
particularly set forth below.
NOW, THEREFORE, it is agreed by and among Landlord, Assignor and Assignee,
for valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, as follows:
1. ASSIGNMENT AND ASSUMPTION. Assignor hereby grants, conveys, transfers
and assigns to Assignee all of Assignor's rights, title and interest in, to and
under the Lease from and after the Effective Date. Assignee hereby accepts the
foregoing assignment and agrees to assume, pay, perform and discharge all of the
agreements and obligations of Assignor arising under the Lease, including any
and all obligations which have accrued prior to the Effective Date. From and
after the Effective Date, Assignee shall be deemed the Tenant under the Lease as
defined in the Lease. The foregoing assignment shall not operate to release
Assignor from liability for any obligations of Assignor under the Lease now or
hereafter arising, and Assignor shall remain liable for each and every one of
such obligations. Landlord hereby consents to the
<PAGE>
foregoing assignment of the Lease from Assignor to Assignee, and waives, for
the purposes of this Agreement and the foregoing assignment only, Assignor's
full compliance with the terms of Article XV of the Original Lease.
2. CONFIRMATION OF ASSIGNOR'S CONTINUING LIABILITY. In confirmation of
Assignor's continuing liability for each and every obligation of Tenant under
the Lease, as hereby further amended, Assignor hereby absolutely and
unconditionally guarantees to Landlord, its successors and assigns, the prompt
and full payment of all rent and all other payments to be made by Tenant under
the Lease, and the full performance and observance by Tenant of all of the other
terms, covenants, conditions and agreements therein provided to be performed and
observed by Tenant, for which the Assignor shall be jointly and severally liable
with Tenant. Assignor agrees that in the event of a default by Tenant under the
Lease beyond the applicable notice and cure period, if any, Landlord may proceed
against Assignor before, after and simultaneously with proceeding against
Tenant. Assignor's agreement hereunder shall not be terminated, affected or
impaired in any manner by reason of: (a) the assertion by Landlord against
Tenant of any of the rights or remedies reserved to Landlord pursuant to the
provisions of the Lease; (b) the commencement of summary or other proceedings
against Tenant; (c) the failure of Landlord to enforce any of its rights against
Tenant; or (d) the granting by Landlord of any extensions of time to Tenant.
Assignor's agreement hereunder shall be absolute and unconditional and shall be
in full force and effect with respect to any extension, renewal, amendment,
addition, assignment, sublease, transfer or other modification of the Lease,
whether or not Assignor shall have knowledge or have been notified of or agreed
or consented thereto. If Landlord at any time is compelled to take action, by
legal proceedings or otherwise, to enforce or compel compliance with the terms
hereof, Assignor shall, in addition to any other rights or remedies to which
Landlord may be entitled hereunder or as a matter of law or in equity, pay to
Landlord all costs, including reasonable attorneys' fees, incurred or expended
by Landlord in connection therewith. In the event the Lease is disaffirmed by a
Trustee in Bankruptcy for Tenant, Assignor agrees that it shall, at the election
of Landlord, either assume the Lease and perform all of the covenants, terms and
conditions of Tenant thereunder or enter into a new lease, which new lease shall
be in form and substance identical to the Lease, except that the renewal options
set forth in Section 1.2 of the Lease shall be available to Assignor. All
duties and obligations of Assignor hereunder shall be binding upon the
successors and assigns of Assignor. Assignor agrees that, to the extent that
the Tenant makes a payment or payments to the Landlord or the Landlord receives
any proceeds of collateral, which payment or payments or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or otherwise is required to be repaid to the Tenant, its estate, trustee,
receiver or any other party, including, without limitation, under any bankruptcy
law, state or federal law, common law or equitable cause, then to the extent of
such payment or repayment, the obligations of Tenant or part thereof which has
been paid, reduced or satisfied by such amount shall be reinstated and continued
in full force and effect as of the date such initial payment, reduction or
satisfaction occurred.
3. EXTENSION OPTION. The final grammatical paragraph of Section 1.2 of
the Lease is hereby deleted, and the following is hereby inserted in place
thereof:
The options in this Section 1.2 are personal to Select Comfort Direct
Corporation, and an option for a Renewal Term, whether or not
exercised, shall be of no effect if Select Comfort Direct Corporation
assigns this lease.
4. SECURITY DEPOSIT. Section 3.6 of the Lease (as amended by Section 5
of the Second Amendment) is hereby deleted, and the following is hereby inserted
in place thereof:
<PAGE>
Section 3.6 Security Deposit. Select Comfort Corporation has paid a
security deposit in the amount of $257,833.00 (the "Security
Deposit"). The Security Deposit shall be held by Landlord as security
for the performance by Tenant of Tenant's covenants and obligations
under this Lease. Such deposit shall not be considered an advance
payment of Base Rent or Additional Rent or a measure of Landlord's
damages in case of default by Tenant. If the shareholders' equity as
shown on Select Comfort Corporation's consolidated balance sheet as of
the end of any fiscal quarter of the company ending prior to May 31,
1999, exceeds $25,000,000.00, the amount of the Security Deposit shall
be reduced to $150,000.00. If the shareholders' equity as shown on
Select Comfort Corporation's consolidated balance sheet as of the end
of any fiscal quarter of the company ending after May 31, 1999,
exceeds $25,000,000.00, the amount of the Security Deposit shall be
reduced to $100,000.00. Landlord shall refund the appropriate amount
to Select Comfort Corporation promptly upon being furnished evidence
reasonably satisfactory to Landlord that the shareholders' equity as
shown on Select Comfort Corporation's consolidated balance sheet is in
excess of $25,000.000.00. Upon the occurrence of any Event of Default
by Tenant, Landlord may, from time to time, without prejudice to any
other remedy, use the Security Deposit to the extent necessary to make
good any arrearages of Base Rent, Additional 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 or to such
reduced amount as may then be applicable as provided above. Provided
there exists no Event of Default hereunder, any remaining balance of
the Security Deposit shall be returned by Landlord to Tenant upon
expiration or earlier termination of this Lease. If Landlord
transfers its interest in the Demised Premises during the term of this
Lease, Landlord shall assign the Security Deposit to the transferee
and thereafter shall have no further liability for the return of the
Security Deposit. Landlord shall pay interest on the Security Deposit
at the rate of six percent per annum, payable semi-annually on July 1
and January 1 of each year during the term, except that, if there is
an uncured Event of Default hereunder, interest shall be added to the
Security Deposit.
5. NOTICES. Section 20.4 of the Lease is amended to provide that notices
to the Tenant shall be sent to the following address:
Select Comfort Direct Corporation
6105 Trenton Lane North
Plymouth, MN 55442
ATTN: Daniel J. McAthie
<PAGE>
With a copy to:
Mark A. Kimball, Esq.
Oppenheimer Wolff & Donnelly
3400 Plaza VII
45 South Seventh Street
Minneapolis, MN 55402
6. MISCELLANEOUS.
a. The provisions of this Agreement shall be binding on, and shall inure
to the benefit of, the parties hereto and their respective successors and
permitted assigns.
b. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, but all of which when taken together shall
constitute one and the same instrument.
c. The effective date of this Agreement shall be the Effective Date as
defined above.
7. CONFIRMATION. Except as amended by this Agreement, the Lease is
hereby ratified and confirmed, and the provisions thereof shall remain in full
force and effect.
IN AGREEMENT, the parties hereto have executed this Agreement as of the
Effective Date.
LANDLORD: RUSHMORE PLAZA PARTNERS
LIMITED PARTNERSHIP,
a South Dakota limited partnership
By: CHURCHILL RUSHMORE PLAZA
CIVIC CENTER, INC.
Its: General Partner
By: /s/
----------------------------------
Its: Vice President
----------------------------------
ASSIGNOR: SELECT COMFORT CORPORATION,
a Minnesota corporation
By: /s/
----------------------------------
Its: Vice President, Tax and Insurance
----------------------------------
ASSIGNEE: SELECT COMFORT DIRECT
CORPORATION, a Minnesota corporation
By: /s/
----------------------------------
Its: Vice President
----------------------------------
<PAGE>
Exhibit 10.6
SUBLEASE
THIS SUBLEASE made and entered into to be effective as of the 27 day of
March, 1997, by and between BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia
corporation ("Tenant"), successor in interest to Southern Bell Telephone &
Telegraph Company and SELECT COMFORT SC CORPORATION, a Minnesota corporation
("Subtenant").
PRELIMINARY STATEMENT
Tenant, as successor in interest to Western Electric Company, Incorporated,
is a party to that certain Lease Agreement effective June 12, 1975, as amended
by that certain First Amendment to Lease dated March 27, 1991, and that certain
Second Amendment to Lease Agreement dated February 23, 1993, (as amended the
"Lease") whereby Tenant, leased certain property more fully described on
EXHIBIT "A" attached hereto, together with the building (the "Building") and
other improvements and property situate thereon (the "Demised Premises" or
"Premises"), from Frastacky (U.S.) Properties Limited Partnership (the
"Landlord"), successor in title to J. L Williams & Co., Inc. Tenant now desires
to sublease the Demised Premises to Subtenant subject however to the terms and
conditions provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and provisions
contained herein, Tenant hereby subleases and demises to Subtenant, the Demised
Premises subject to the following:
SECTION 1 - DEFINITIONS. For purposes of this Sublease, the capitalized
terms hereinafter set forth shall have the following meanings:
"Additional Rent" shall mean all sums due and owing to the Landlord under
the Lease which accrue after the Commencement Date except Base Annual Rent and
Subtenant Rent.
"Base Annual Rent" shall mean the Base Annual Rent of $300,000.00, due in
equal monthly installments of $25,000.00 as set forth in the Lease for the
remainder of the Term.
"Subtenant Rent" shall mean the sum of $3,750.00 commencing on June 1, 1997
(subject to the terms of Section 4 hereof) and continuing on the first day of
each and every month through the remainder of the Term.
"Commencement Date" shall have the meaning set forth in SECTION 2 herein.
"Expiration Date" shall have the meaning set forth in SECTION 2 herein.
"Rent" shall mean Base Annual Rent, Subtenant Rent and Additional Rent.
<PAGE>
"Term" shall have the meaning set forth in SECTION 2 herein.
"Hazardous Materials" shall mean any substance, chemical, compound,
product, solid, gas, liquid, waste, byproduct, pollutant, contaminant, or
material which is hazardous or toxic, and includes, without limitation, (a)
asbestos, polychlorinated biphenyls, and petroleum (including crude oil and any
fraction thereof) and (b) any such material classified or regulated as
"hazardous" or "toxic" pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended by the Superfund Amendments
and Re-authorization Act of 1986, 42 USC 9601 et seq., Solid Waste Disposal Act,
as amended by the Resource Conservation and Recovery Act of 1976 and Hazardous
and Solid Waste Amendments of 1984, 42 USC 6901 et seq., Federal Water Pollution
Control Act, as amended by the Clean Water Act of 1977, 33 USC 1251 et seq.,
Clean Air Act of 1966, as amended, 42 USC 7401 et seq., Toxic Substances Control
Act of 1976, 15 USC 2601 et seq., or Hazardous Materials Transportation Act, 49
USC App. 1801 et seq.
"Exclusive Possession" shall mean the time at which Tenant and all persons
or entities claiming by or under Tenant have removed all personal property and
fixtures from the Demised Premises that it intends to remove or is required to
remove hereunder and Tenant and all persons or entities claiming by or under
Tenant no longer require access or have the right of access to the Demised
Premises, except for Tenant's limited rights of access set forth elsewhere in
this Sublease.
All capitalized terms not otherwise defined herein shall have the
respective meaning set forth in the Lease.
SECTION 2 - COMMENCEMENT DATE AND POSSESSION. Subject to the provisions
of Section 8 below, the "Term" of this Sublease shall commence on the date
Tenant delivers Exclusive Possession of the Demised Premises to Subtenant in
the condition required herein (subject to Landlord's right of access under
the Lease) ("Commencement Date") and continue, unless earlier terminated as
provided herein, through February 27, 2003 ("Expiration Date").
Notwithstanding the Commencement Date of this Sublease, Tenant shall provide
Subtenant with non-exclusive access to and from the Building and parking from
and after the date hereof and Exclusive Possession of the Building from and
after the date hereof except for those areas of the Building shown on EXHIBIT
"B" attached hereto which are specifically designated for use by Tenant prior
to the Commencement Date. In the event that Tenant fails to provide
Subtenant access and possession as provided in the preceding sentence above,
or fails to deliver Exclusive Possession (subject to Landlord's rights of
access under the Lease) to the Demised Premises in the condition required
herein by May 15, 1997, Subtenant, at its option may, for a period of ten
(10) days after said failure of either of the above, terminate this Sublease
effective upon written notice to Tenant. Except for the terms of Sections 5
and 18 herein, Subtenant's obligations contained herein shall not commence
until the Commencement Date. Upon the request of either party, the parties
shall execute an instrument confirming the Commencement Date.
SECTION 3 - CONDITION OF DEMISED PREMISES. Except as otherwise provided
herein, the Demised Premises shall be delivered and Subtenant shall accept the
Demised Premises in "AS IS" condition.
2
<PAGE>
SECTION 4 - PAYMENT OF RENT. All Rent due and owing by Subtenant except
Subtenant Rent shall be payable directly to the Landlord as specified in the
Lease; provided, however, if Landlord will not accept said payments, Subtenant
shall notify Tenant of the same and Subtenant shall make such payments directly
to Tenant, which will make such payments to Landlord. The Subtenant Rent shall
be payable directly to Tenant. In connection with the payment of any Rent by
Tenant or Subtenant to the Landlord throughout the Term, a copy of the check or
other confirmation of the payment thereof shall be sent by the party making such
payment to the other party to this Sublease at the notice address set forth
herein.
Tenant hereby acknowledges and agrees that notwithstanding the Commencement
Date and Subtenant's early access, if any, Subtenant shall not be required to
pay Base Annual Rent nor Subtenant Rent or any Additional Rent, including taxes
and assessments, until June 1, 1997, and during such period Tenant shall be
responsible to Landlord for payment of the same. In the event the Commencement
Date has not occurred by April 21, 1997, the June 1, 1997 date set forth above
shall be advanced to July 1, 1997. In addition, should the Commencement Date
occur after May 15, 1997, the July 1, 1997 date set forth above shall be
advanced one (1) day for each day the Commencement Date is delayed past May 15,
1997 because Tenant has failed to deliver Exclusive Possession of the Demised
Premises to Subtenant as provided in Section 2 above in the condition required
herein.
Subtenant shall deliver herewith to Tenant the sum of $28,750.00 which
shall be retained by Tenant as a security deposit and, provided there is no
default by Subtenant hereunder, shall be applied by Tenant against the last
installment of Rent due by Subtenant hereunder.
It is the intention of the parties that the Rent payable hereunder shall be
net to Landlord/Tenant so that this Sublease shall yield to Landlord/Tenant the
net Rent specified herein during the term of this Sublease, and that all costs,
expenses and obligations of every kind and nature whatsoever relating to the
Demised Premises during the Term shall be paid by Subtenant, except as otherwise
herein noted or noted in the Lease.
Notwithstanding anything to the contrary contained herein, in the event of
a fire or casualty to or condemnation of, the Demised Premises, all Rent payable
hereunder shall abate as provided in Sections 9 and 10 of the Lease and
Subtenant shall have the right to terminate this Sublease (but not the Lease)
pursuant to the terms of Sections 9 and 10 of the Lease, subject to the terms of
Sections 9 and 10 of the Lease. No termination of this Sublease pursuant to
this Section will be effective unless Tenant is given notice of Subtenant's
termination of this Sublease at least five (5) days prior to the time Tenant is
required to give notice of termination of the Lease to Landlord pursuant to the
provisions of Sections 9 and 10 of the Lease.
SECTION 5 - ENVIRONMENTAL COMPLIANCE. Subtenant acknowledges the receipt
of the Limited Site Assessment by General Engineering Laboratories dated January
20, 1997 ("Environmental Report") and further acknowledges that Subtenant has
been given the opportunity to conduct its own environmental assessment. Tenant
hereby represents and warrants to Subtenant that, to the best of its knowledge,
except as set forth and disclosed in the Environmental Report, there are no
Hazardous Materials on, in or about the Demised Premises.
3
<PAGE>
It is the express intent of Subtenant and Tenant that Subtenant should
not be responsible for any contamination of the Demised Premises by Hazardous
Materials, including contamination from Hazardous Materials on, in or under
the soils or groundwater of the Demised Premises, arising or present on or
before Commencement Date which are not introduced by Subtenant during the
exercise of its early access rights hereunder and that thereafter Subtenant's
liability shall be limited to any contamination of Hazardous Materials on, in
or under the soils or groundwater of the Demised Premises after the
Commencement Date resulting from the introduction or use of Hazardous
Materials on the Demised Premises after the Commencement Date by any person
or entity other than Tenant or Landlord or their respective agents, employees
or contractors. Similarly, it is the express intent of Tenant and Subtenant
that Tenant shall not be liable for any contamination, including
contamination from Hazardous Materials on, in or under the soils or
groundwater of the Demised Premises, resulting from Subtenant's introduction
or use of Hazardous Materials on the Demised Premises. Tenant (and not
Subtenant) shall be responsible to Landlord for compliance with the terms of
the Lease regarding the existence of Hazardous Materials and any required
removal, monitoring or remediation under applicable laws as a result of
Hazardous Materials present on the Demised Premises prior to the Commencement
Date, except for any Hazardous Materials first introduced by Subtenant on the
Demised Premises during Subtenant's early access period as provided above.
The provisions of this Sublease to the contrary notwithstanding, Tenant
and Subtenant agree that Tenant shall not be responsible to Subtenant for the
removal of the asbestos containing adhesive which secures the floor tile or
asbestos containing materials in the roof unless (a) said removal is ordered
by a Governmental entity having the authority to order said removal or such
removal is required by Landlord under the terms of the Lease, and (b) said
removal is not required as a result of modifications to the Demised Premises
being undertaken by Subtenant.
Tenant covenants and agrees to indemnify, defend and hold Subtenant
harmless from any and all claims, judgments, damages, penalties, fines,
causes, liabilities or losses, (including reasonable attorneys' fees and all
other out-of-pocket expenses) resulting from or related to the introduction,
use, presence or existence of any Hazardous Materials on the Demised Premises
before the Commencement Date, except for any Hazardous Materials first
introduced by Subtenant on the Demised Premises during Subtenant's early
access period provided above.
Subtenant covenants and agrees to indemnify, defend and hold Tenant
harmless from any and all claims, judgments, damages, penalties, fines,
causes, liabilities or losses, (including reasonable attorneys' fees and all
other out-of-pocket expenses) resulting from or related to the introduction
or use of Hazardous Materials on the Demised Premises after the Commencement
Date or resulting from or related to the presence or existence of Hazardous
Materials on the Demised Premises first introduced on the Demised Premises
after the Commencement Date, except to the extent due to the acts or
omissions of Tenant or Landlord or their respective agents, contractors or
employees.
The above notwithstanding, no allegations by Subtenant alleging
non-compliance with this Section shall allow Subtenant to withhold any Rent
or otherwise release Subtenant of any obligation under this Sublease and
shall not be considered an event of default under this Sublease
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unless the existence of Hazardous Materials present prior to the Commencement
Date and/or Tenant's failure to perform its obligations under this Section 5
materially adversely affects Subtenant's ability to use the Demised Premises
or shall cause an event of default under the Lease as evidenced by a final
determination of default under the Lease. It is agreed that the
indemnification and other obligations of Tenant and Subtenant as set forth in
this Section shall survive the expiration, cancellation or termination of the
Lease and this Sublease.
SECTION 6 - ALTERATIONS AND IMPROVEMENTS. In addition to any consent
required by the Landlord under the Lease, all alterations, additions or
improvements made by Subtenant to the Demised Premises in excess of
$75,000.00 during any 120 day period shall require the prior written approval
of Tenant, with such approval not to unreasonably be withheld or delayed.
Tenant hereby approves Subtenant's alterations, additions, signage and
improvements referenced in EXHIBIT "C" attached hereto.
SECTION 7 - MAINTENANCE, REPAIR AND REPLACEMENT. Tenant's
responsibility for maintenance, repair, and replacement to the Demised
Premises shall be those of the Landlord under the Lease. In addition, Tenant
shall be responsible for the maintenance, repair and replacement of the roof
of the Building in accordance with the terms of the Lease, so that the roof
of the Building is kept in good repair and condition; provided, however,
Tenant shall not be responsible for any maintenance or repair of the roof of
the Building which is necessitated by the acts of Subtenant or its agents,
contractors and employees and Subtenant shall be responsible therefor.
Except as otherwise provided herein, Subtenant shall be responsible for
all maintenance, repairs and replacements of the Demised Premises in
accordance with the terms of the Lease, including those of a structural
nature.
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SECTION 8 - SURRENDER OF THE PREMISES. At the end of the Term,
Subtenant shall deliver the Demised Premises to Tenant in the same condition
as at the Commencement Date (ordinary wear and tear and casualty and
condemnation and alterations set forth below excepted). It is agreed and
understood by Subtenant and Tenant that in no event shall Subtenant be
required to remove any improvements, alterations, additions or fixtures in
the Demised Premises at the end of the Term, including, without limitation,
the alterations, additions and improvements referenced in Section 6 above,
unless such improvements, alterations and additions were made by Subtenant
and are required to be removed by Landlord at the end of the Term pursuant to
the Lease. All other provisions hereof notwithstanding, if by December 31,
2002, Landlord and Subtenant have not entered into an agreement whereby
Subtenant will lease the Demised Premises directly from Landlord following
the termination of the Lease between Tenant and Landlord, then this Sublease
will terminate on January 31, 2003 so as to allow Tenant time to remove its
fixtures, improvements, alterations and additions pursuant to the
requirements of the Lease. Subtenant must provide Tenant with written notice
of its lease with Landlord by January 10, 2003 to avoid the early termination
above.
Should Subtenant and Landlord enter into a direct lease as above, then
it shall become Subtenant's obligation to remove any of Tenant's equipment,
personal property, or fixtures remaining at the termination of the Lease as
required by the terms of the Lease. Tenant, on its own behalf and on behalf
of its affiliates, hereby agrees that it shall not compete with Subtenant in
the negotiation of any lease with Landlord for any occupancy of the Demised
Premises after February 28, 2003.
SECTION 9 - ASSIGNMENT AND SUBLETTING AND SUBORDINATION. Subtenant may
not assign, sublease or otherwise alienate or encumber this Sublease or any
portion of Subtenant's interest in the leasehold estate, without the consent
of Tenant, which consent shall not be unreasonably withheld or delayed.
Notwithstanding the foregoing, Subtenant may assign or sublease all or any
portion of the Demised Premises without Tenant's consent to an affiliate of
Subtenant or to an entity resulting from a merger or consolidation or sale of
all or substantially all of Subtenant's assets. Tenant shall not transfer
Tenant's interest in the Lease without the consent of Subtenant, which
consent may not be unreasonably withheld or delayed. No such assignment
shall serve to release Subtenant or Tenant from its obligations hereunder.
As used in this Section 9, "affiliate" shall mean any entity which is
controlled by Subtenant, or which controls Subtenant or is under common
control with Subtenant. Tenant hereby agrees that Tenant, except to the
extent that Tenant is required to do so under the Lease, will not enter into
any subordination agreement requested or required by Landlord's lender
without notice to Subtenant. Subtenant shall be afforded the opportunity to
participate in the drafting of said agreement, but may not prohibit the
execution of an agreement by Tenant which is required under the Lease.
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SECTION 10 - INSURANCE. Subtenant shall have the right to request Landlord
to cause all policies of insurance regarding the Demised Premises which name
Tenant as an insured to also name Subtenant as an additional insured, as its
interests may appear. During the Term, all policies of insurance required of
Tenant under the Lease shall become the responsibility of Subtenant which
shall name both Landlord and Tenant as additional insureds, thereunder.
Tenant hereby assigns to Subtenant its right, if any, under the Lease, to
request Landlord to cause all policies of insurance regarding the Demised
Premises which name Tenant to contain an endorsement related to the waiver of
subrogation set forth in Section 19 of the Lease.
SECTION 11 - BREACH OR DEFAULT. For purposes of this Sublease, an
"Event of Default" shall mean the following: (a) any failure of Subtenant to
pay any Rent under the terms of this Sublease to the Landlord (or if Landlord
will not accept such payments as described in Section 4 hereof, to Tenant) by
its due date and such failure continues for a period of five (5) days after
Subtenant receives written notice thereof; (b) any failure of Subtenant to
pay Rent or any other sum due to Tenant under the terms of this Sublease,
which is not also an event of default under the Lease, which default
continues for a period of more than fifteen (15) days after receipt of
written notice of default from Tenant; (c) the failure of Subtenant to
perform any obligation of Tenant under the Lease required to be performed by
Subtenant hereunder other than the payment of Rent and such failure continues
for a period of twenty (20) days after receipt of written notice of default;
provided however, that if such default cannot be cured within twenty (20)
days, such default shall nevertheless be deemed cured if within such twenty
(20) day period after receipt of written notice from Tenant, Subtenant
commences to cure such default and continues with all reasonable diligence
until the cure is completed; (d) the failure of Subtenant to perform any
obligation other than the payment of Rent under the terms of this Sublease
which is not also an event of default under the Lease and such failure
continues for a period of thirty (30) days after receipt of written notice of
default; provided however, that if such default cannot be cured within thirty
(30) days, such default shall nevertheless be deemed cured if within such
thirty (30) day period after receipt of written notice from Tenant, Subtenant
commences to cure such default and continues with all reasonable diligence
until the cure is completed, or; (e) the filing under the United States
Bankruptcy Act or any law of like import by or against Subtenant of a
petition, not removed within sixty (60) days, for adjudication as a bankrupt
or insolvent, or for reorganization or appointment or a receiver or trustee
of Subtenant's property by any governmental officer or agency pursuant to
statutory authority for the dissolution or liquidation of Subtenant.
Tenant agrees to forward to Subtenant any notice of default and any
other notice received by Tenant from Landlord via facsimile and registered
mail as provided in Section 17(i) below within two (2) business days of the
receipt thereof; provided, however, Tenant's failure to forward such notice
during the above two (2) business day period shall not permit Subtenant to
terminate this Sublease based on such default. With respect to a default
hereunder which is also a default under the Lease, Subtenant shall then have
until the end of the cure period provided for above or in the Lease,
whichever is shorter, in which to cure said default.
Upon notice of default under the Lease from Landlord to Tenant,
following the expiration of the notice and cure periods of Subtenant provided
herein and to the extent the default is an obligation under the Lease which
Subtenant is required to perform under this Sublease, Tenant shall have the
absolute right (but not the obligation) to proceed to cure the said default
and upon
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demand shall be reimbursed by Subtenant for all sums expended in connection
with such curative actions, together with interest at the rate of 6% per
annum until all sums due and owing to Tenant have been paid in full. In
addition to Tenant's rights to cure Subtenant's default(s), following the
expiration of the notice and cure periods provided above, Tenant shall be
entitled to pursue all remedies available at law or in equity for a breach of
the terms of this Sublease. Tenant shall not be liable to Subtenant for any
default of the Lease or Sublease which default results in whole or in part
from the actions or inactions of Subtenant. Subtenant shall not be liable to
Tenant for any default of the Lease or Sublease which default results in
whole or in part from the actions or inactions of Tenant.
The above notwithstanding, Tenant shall have the absolute right but not
the obligation to cure a default by Tenant if there are five (5) days or less
remaining in the cure period afforded Tenant by Landlord under the Lease for
a non-monetary default under the Lease and two (2) days or less remaining in
the cure period afforded Tenant by Landlord under the Lease for a failure to
pay rent under the Lease and Subtenant has not cured a failure to pay rent
under the Lease or commenced to cure a non-monetary default under the Lease
in accordance with the requirements of the Lease. In the event Tenant fails
to forward to Subtenant a notice of default under the Lease from Landlord
within the period as provided above, and such default is an obligation under
the Lease which Subtenant is required to perform under this Sublease,
Subtenant shall only be responsible for the reasonable costs of cure
performed by Tenant and shall not be required to pay the interest set forth
in this Section; provided, however, if Subtenant is not provided with notice
within the two (2) day period set forth above and such default is cured by
Tenant, Subtenant shall have the right to contest whether the default
referenced in the Landlord's notice of default was in fact a condition
creating a default under the Lease and/or whether Tenant's cure of such
default was at a reasonable cost. Failure to pay any such amounts to Tenant
while Subtenant is protesting such cure shall not constitute a default by
Subtenant hereunder.
In the event that Tenant fails to forward to Subtenant any notice of
default under the Lease received by Tenant from Landlord in the two (2) day
period provided above and Tenant fails to cure such default, Tenant hereby
agrees to defend Subtenant (with counsel reasonably acceptable to Subtenant)
in any action brought to evict or dispossess Subtenant from the Demised
Premises based on such default, agrees to be liable for all costs of such
defense, including all costs required in any appeal, and agrees to indemnify
and hold harmless Subtenant from any and all claims, judgments, damages,
penalties, fines, causes, liabilities, or losses resulting from or related to
Subtenant's eviction or dispossession from the Demised Premises based on such
default following a final non-appealable order of eviction or dispossession
from the Demised Premises.
SECTION 12 - COMPLIANCE WITH LEASE. Except for the terms set forth in
this Sublease which are contrary to the Lease and except as otherwise
modified herein, (a) all obligations, responsibilities, requirements and
indemnifications of and from Tenant to Landlord under the Lease shall be
deemed obligations, responsibilities, requirements and indemnifications of
and from Subtenant to Tenant under the Sublease; (b) all of the terms,
provisions, covenants and conditions of the Lease are made a part of this
Sublease and this Sublease is subject to all the terms, conditions, covenants
and conditions contained therein, and for the purposes of this Sublease, each
reference in the Lease to "Landlord" and "Tenant" shall be read as referring
to
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Tenant and Subtenant, respectively, wherever appropriate; (c) all obligations
of Landlord to Tenant under the Lease shall be considered the responsibility
of Tenant to Subtenant; (d) all reservations, exclusions, conditions and
limitations of liability, contained in the Lease in favor of Landlord shall
be, reservations, exclusions, conditions and limitations of liability in
favor of Tenant under the Sublease.
SECTION 13 - REPRESENTATIONS, WARRANTIES AND COVENANTS OF TENANT.
Tenant represents, warrants and covenants as follows: (a) the only documents
establishing the relationship between the Landlord and Tenant are the Lease
and amendments which are attached hereto as EXHIBIT "F"; (b) the Lease and
amendments attached hereto as EXHIBIT "F" are currently in full force and
effect and neither the Landlord nor Tenant is in default with respect to any
obligation set forth therein, and there are no existing events which would,
with the passage of time or giving of notice or both, become a default under
the Lease; (c) All rent and other charges due and payable as of the date
hereof by Tenant under the Lease have been paid in full; (d) Tenant has full
right and lawful authority to enter into this Sublease, and possesses a
leasehold interest in and to the Demised Premises under the Lease and the
Lease expires on February 28, 2003; (e) No consent of Landlord is required
under the Lease as a condition to the execution or effectiveness of this
Sublease and this Sublease complies with the requirements of the Lease; (f)
Tenant, except as set forth in the Environmental Report, has received no
notice of any violation of any governmental law, rule, regulation or
ordinance relating to the Demised Premises which remains uncured as of the
date hereof; (g) to the extent that the use complies with zoning regulations,
the Demised Premises can be used for administration, warehousing,
distribution, assembly, manufacturing, office, telemarketing, company store,
customer pickup, and customer service uses under the provisions of the Lease
and under the restrictions recorded upon the Demised Premises; (h) Tenant has
not assigned or transferred its interest in the Demised Premises or the Lease
to any other person or entity nor has it mortgaged, encumbered or otherwise
subjected its interest in the Demised Premises, its fixtures, personal
property or equipment contained therein or the Lease to the lien of any
security instrument, and will not do any of the foregoing during the Term.
Tenant covenants and agrees to indemnify Subtenant and hold it harmless from
and against any and all liabilities, claims, demands, costs, losses and
expense (including reasonable attorneys' fees) arising out of, by reason of
or resulting from any breach of any representations and warranties of Tenant
contained herein in any material respect. This indemnity shall survive the
expiration or earlier termination of this Sublease.
SECTION 14 - QUIET ENJOYMENT. On the payment by Subtenant of the Rent
provided herein and upon observance and performance of all the covenants,
terms and conditions on Subtenant's part to be observed and performed
hereunder and except as otherwise may be provided herein, Subtenant shall
peaceably and quietly hold and enjoy the Demised Premises for the Term hereby
demised subject nevertheless to the terms and conditions of the Sublease and
the Lease. Provided, however, that the provisions of this Section will not
create any liability on the part of the Tenant for the acts or omissions of
Subtenant.
SECTION 15 - LEASE MODIFICATION. Neither Subtenant nor Tenant shall amend,
modify, surrender or terminate the Lease without the express written consent of
Subtenant and Tenant, which consent may be withheld in Tenant's or Subtenant's
sole and absolute discretion.
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SECTION 16 - TENANT'S RIGHT OF ENTRY. Tenant or Tenant's representative
shall have the right at all reasonable times during business hours and upon
reasonable notice to Subtenant during the Term to enter upon the Demised
Premises for the purpose of determining whether the conditions and covenants
contained in this Sublease are being kept and performed. Provided further,
that Tenant shall have the right to enter onto the Demised Premises for the
purpose of complying with any environmental responsibilities on the Demised
Premises including without limitation the monitoring of any Hazardous
Materials. Subtenant agrees that it will not tamper with any of Tenant's
monitoring equipment which remains on the Demised Premises. In the conduct
of its activities under this Section 16, Tenant agrees not to unreasonably
interfere with Subtenant's use or occupancy of the Demised Premises or its
conduct of business thereon.
SECTION 17 - NOTICE. Any notice or demand under the terms of this
Sublease or under any statute which must or may be given or made by a party
hereto shall be in writing and shall be deemed given (i) upon receipt if
delivered by nationally recognized overnight courier or if delivered by
facsimile during normal business hours and followed with an additional copy
of the notice by registered mail addressed to the respective parties as
follows or (ii) three (3) business days after mailing such notice by
registered mail addressed to the respective parties as follows:
TO TENANT: BellSouth Telecommunications, Inc.
675 West Peachtree Street
Suite 20C75
Atlanta, GA 30375
Attn: Wilma Bugg, Property Administrator
Fax: 404/525-0048
Phone: 404/420-6581
COPY TO: BellSouth Telecommunications, Inc.
675 West Peachtree Street
Suite 20C75
Atlanta, GA 30375
Attn: Real Estate Manager
Fax: 404/525-0048
Phone: 404/420-6581
TO SUBTENANT: Select Comfort SC Corporation
6105 Trenton Lane North, Suite 400
Minneapolis, MN 55442
Attn: Daniel J. McAthie
Fax: 612/551-7826
Phone: 612/551-7000
COPY TO: Oppenheimer Wolff & Donnelly
45 South Seventh Street, Suite 3400
Minneapolis, MN 55402
Attn: Mark A. Kimball, Esq.
Fax: 612/344-9376
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Phone: 612/344-9300
Any party may change its notice address by notice to the other parties as
provided above.
SECTION 18 - INDEMNIFICATION AND WAIVER OF SUBROGATION. Subtenant shall
keep, save and hold harmless Tenant and its affiliates and their respective
officers, directors and employees, from any and all losses, costs, damages
and liabilities for anything and everything whatsoever (including, without
limitation, any events, circumstances, occurrences and conditions) relating
to or arising from or out of the occupancy or use (to include by occupancy or
use prior to the Commencement Date) of the Demised Premises by or under
Subtenant, Subtenant's agents, contractors, licensees, invitees or servants,
or from any loss or damage arising from any negligent or intentional act or
omission by Subtenant or any failure on Subtenant's part to comply with any
of the covenants, terms and conditions contained in this Sublease or the
Lease (to the extent applicable), except to the extent that such loss, cost,
damage or liability arises from the negligence or willful misconduct of the
Landlord or Tenant or their respective agents, contractors, licensees,
invitees or servants or from the failure of the Landlord or Tenant to perform
any of its obligations under the terms of this Sublease or the Lease. It is
agreed that the indemnification obligations of Subtenant as set forth in this
Section 18 shall survive the expiration, cancellation or termination of this
Sublease. This paragraph, however, shall not govern Subtenant's
responsibility for environmental matters which are exclusively governed by
the provisions of Section 5 hereof.
Except as set forth below in this paragraph and except to the extent
caused by the negligence or willful misconduct of Subtenant, or its agents,
contractors, licensees, invitees or servants, Tenant shall keep, save and
hold harmless Subtenant and its affiliates and their respective officers,
directors, and employees, from any and all losses, costs, damages and
liabilities for anything and everything whatsoever (including, without
limitation, any events, circumstances, occurrences and conditions) relating
to or arising from or out of the use, ownership or occupancy by Tenant or its
agents, contractors, licensees, invitees or servants of the Demised Premises
or from any loss or damage arising from any negligent or intentional act or
omission of Tenant, Tenant's agents, contractors, or others under Tenant's
control after delivery of the Demised Premises. It is agreed that the
indemnification obligations of Tenant as set forth in this Section 18 shall
survive the expiration, cancellation or termination of this Sublease. This
paragraph, however, shall not govern Tenant's responsibility for
environmental matters which are exclusively governed by the provisions of
Section 5 hereof.
Tenant and Subtenant each hereby waive any and all rights of recovery
against the other, or against the officers, employees, agents or
representatives of the other, for loss of or damage to its property or the
property of others under its control, if such loss or damage is covered by
any insurance policy in force (whether or not described in this Sublease) at
the time of such loss or damage. Upon obtaining the required policies of
insurance, Tenant and Subtenant shall give notice to the insurance carriers
of this mutual waiver of subrogation. If Tenant elects to self-insure, the
above waiver shall nonetheless apply to Tenant so long as Subtenant has
complied with Subtenant's insurance obligations required pursuant to the
terms of this Sublease.
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SECTION 19 - ESTOPPEL CERTIFICATES. Tenant and Subtenant shall, from
time to time, and upon reasonable written request to the other party, furnish
a written statement signed by Tenant or Subtenant and addressed to the person
designated in such request, on the status to the best of its knowledge of any
matter pertaining to this Sublease or the Lease, including that at the date
of such statement, (i) the provisions and conditions of this Sublease or the
Lease have been complied with; (ii) there are no defaults by Tenant or
Subtenant, and (iii) this Sublease or the Lease is still in force and effect.
If any or all of (i), (ii), (iii) are not stated in the affirmative in the
statement, the statement shall describe the facts and matters which Tenant or
Subtenant alleges prevent such affirmative statement.
SECTION 20 - FINDER'S OR BROKER'S FEES. Tenant shall be solely
responsible for payment of any finder's or broker's fee in connection with
this Sublease. The parties represent and warrant that they have dealt with no
broker in connection with this Sublease. Tenant and Subtenant each hereby
agree to indemnify and hold the other harmless from any loss, cost, damage or
expense (including reasonable attorneys' fees) arising from the breach by the
indemnifying party of the representation contained in this Section.
SECTION 21 - ATTORNEYS' FEES. In the event that either party hereto is
required to seek or bring suit to enforce any of the terms and conditions of
this Sublease, it is agreed that the Court may assess reasonable attorneys'
fees and costs to be paid by the non-prevailing party to the prevailing party.
SECTION 22 - NO WAIVER. No failure of either party hereto to exercise
any power or right given unto such party hereunder to insist upon strict
compliance by the other party with any obligation of the other party
hereunder, and no custom or practice of either party at variance with the
terms hereof shall constitute a waiver of the other party's right to demand
exact compliance with the terms hereof.
SECTION 23 - RIGHTS OF SUCCESSORS AND ASSIGNS. The covenants and
conditions contained in this Sublease shall bind and inure to the benefit of
Tenant and Subtenant and their respective permitted successors and assigns,
but neither Tenant nor Subtenant shall be bound or liable unless and until
this Sublease shall have been executed and delivered by both Tenant and
Subtenant.
SECTION 24 - DIVISIBILITY. If any term or provision of this Sublease or
the application thereof to any person or circumstance shall, to any extent,
be invalid or unenforceable, the remainder of this Sublease shall not be
affected thereby, and each term and provision of this Sublease shall be valid
and enforceable to the fullest extent permitted by law.
SECTION 25 - ENTIRE AGREEMENT. This instrument and the exhibits hereto
and any other instrument executed by Tenant and Subtenant of even date
herewith contain the entire and only agreement between the parties, and no
oral statement or representation or prior written matter not contained in
this instrument or in any other instrument executed by Tenant and Subtenant
of even date herewith shall have any force or effect. This Sublease shall
not be modified or amended in any way except by a writing executed by both
parties.
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SECTION 26 - MEMORANDUM OF SUBLEASE. The parties hereto agree that this
instrument shall not be recorded and in lieu thereof a short form sublease or
memorandum of sublease executed by the parties hereto and of even date may be
recorded by either party. The Memorandum of Sublease shall be in the form
attached hereto as EXHIBIT "G".
SECTION 27 - GOVERNING LAW. This Sublease shall be governed by the laws
of the State of South Carolina.
SECTION 28 - EXCLUSIONS FROM LEASE. The following items of the Lease
are excluded from this Sublease:
(a) Section 9 (Paragraph G only)
(b) Section 10 (Paragraphs D and E only)
(c) Section 28 (Paragraph A only) (Deleted by First Amendment)
(d) Section 31
(e) Section 33 (Deleted by First Amendment)
(f) Section 34
(g) Section 35
SECTION 29 - MODIFICATIONS OF LEASE PROVISIONS. The following sections
of the Lease are modified as follows:
(a) Tenant represents to Subtenant that it has received no
notification as to any item referenced in Paragraph 5.C of the
Lease.
(b) Tenant may not exercise any right of termination contained in
Paragraph 9.C or 9.D of the Lease unless Subtenant also
terminates the Sublease.
(c) The limits contained in Paragraph 11 shall be increased as
follows: Property Damage $1,000,000.00, Personal Injury or
Wrongful Death $1,000,000.00 per person, and $2,000,000.00 per
accident.
(d) Taxes and assessments for the year 1997 (Paragraph 16 of the
Lease) shall be pro-rated upon the receipt of the tax bill to the
following date: June 1, 1997; provided, however, if the
Commencement Date has not occurred on or before April 21, 1997,
the proration date shall be advanced to July 1, 1997, and if the
Commencement Date has thereafter not occurred on or before May
15, 1997, the proration date shall be advanced past July 1, 1997
one (1) day for each day after May 15, 1997 in which the
Commencement Date is delayed. Tenant, within fifteen (15) days
after written notice from Subtenant requesting payment and
enclosing evidence of the payment of the taxes and assessments
for the year 1997, shall pay its prorata amount of taxes and
assessments for the year 1997 to Subtenant.
(e) Paragraph 17 is amended so as to cause Subtenant to be
responsible for all utility connections to the Demised Premises;
provided, however, Tenant agrees to use
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best efforts to assist Subtenant in the enforcement of the
provisions of Paragraph 17 related to utility connections
against Landlord.
(f) Tenant may not exercise any right under Paragraphs 9.G., 10.D. or
E, 34 or 35 of the Lease without the prior consent of Subtenant
which consent may be withheld in its sole and absolute
discretion.
The above modifications and exclusions serve to amend the provisions of the
Lease as said provisions pertain to the relationship between Tenant and
Subtenant under the Sublease but do not otherwise modify the terms of the Lease
itself which shall remain in full force and effect.
SECTION 30 - CONTRACTOR RELATIONSHIPS. In accordance with Tenant's
policy with respect to contractor relationships, it is hereby stipulated by
the Subtenant that, to the best of Subtenant's knowledge and belief,
Subtenant has not employed, retained, induced or directed any person employed
by Tenant to solicit or secure this Sublease upon agreement, offer,
understanding or implication involving any form of remuneration whatsoever.
That Subtenant agrees that in the event of an allegation of substance
(the determination of which will be made solely by Tenant) that the paragraph
regarding Contractor Relationships has been violated, Subtenant will
cooperate in a reasonable manner with Tenant to establish whether the
allegation is true.
SECTION 31 - LICENSE. Notwithstanding the termination of the Term on
February 27, 2003, Tenant hereby grants Subtenant a license to occupy the
Demised Premises on February 28, 2003 free of any Rent or other charge
whatsoever, provided, however that Subtenant prior to December 31, 2002 must
have entered into a lease with Landlord for the Demised Premises for a term
commencing March 1, 2003.
SECTION 32 - SUBLEASE. Nothing contained in this Sublease shall be
deemed to confer any right or benefit on any person or entity who is not a
party to this Sublease. This Sublease is made for the sole benefit of Tenant
and Subtenant, and no other person or entity is granted any right of action
hereon or hereunder, it being the intent of the parties that no person or
entity shall be third party beneficiary of this Sublease, including, without
limitation, Landlord. It is also agreed by the parties that this agreement
shall be deemed a sublease rather than assignment. It being the intent of
this agreement that no payment of Rent directly to the Landlord shall create
any rights of Landlord against Subtenant or under this agreement.
SECTION 33 - WORK. Prior to the Commencement Date, Tenant hereby agrees
to complete the work more particularly set forth in EXHIBIT "H".
SECTION 34 - TENANT DEFAULT:
a. Subject to the other provisions hereof, the occurrence of any of the
following shall constitute a default of this Sublease by Tenant.
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(i) Any failure by Tenant to make any payment required to be made
by Tenant under the Lease when due, when such failure continues
for five (5) days after delivery of written notice of such
failure by Subtenant or Landlord to Tenant and such payment is
not also the responsibility of Subtenant, Subtenant not having
paid the same.
(ii) Any failure by Tenant to make any payment required to be made
by Tenant to Subtenant hereunder when due, when such failure
continues for fifteen (15) days after delivery of written
notice of such failure by Subtenant to Tenant.
(iii) Any failure by Tenant to perform or comply with any other
provisions of the Lease to be performed or complied with by
Tenant, if such failure continues for twenty (20) days after
delivery of written notice of such failure by Subtenant or
Landlord to Tenant, or if such failure cannot reasonably be
cured within said twenty (20) days and Tenant shall not have
commenced to cure such failure within such twenty (20) day
period and shall not thereafter with reasonable diligence and
good faith cure said default; provided, however, that the said
performance or compliance is not also a responsibility of
Subtenant under the Sublease which Subtenant has failed to
perform or comply with.
(iv) Any failure by Tenant to perform or comply with any other
provisions of this Sublease to be performed or complied with by
Tenant, if such failure continues for thirty (30) days after
delivery of written notice of such failure by Subtenant to
Tenant, or if such failure cannot reasonably be cured within
said thirty (30) days and Tenant shall not have commenced to
cure such failure within such thirty (30) day period and shall
not thereafter with reasonable diligence and good faith cure
said default.
(v) Any representation or warranty of Tenant being false or
misleading in any material respect when made which
substantially interferes with Subtenant's ability to use the
Demised Premises.
Notwithstanding the above, with respect to a default hereunder, which
is also a default under the Lease, Tenant shall have until the end of
the cure period provided for above or in the Lease, whichever is
shorter, in which to cure said default.
b. If Tenant's default materially and adversely affects Subtenant's
ability to utilize the Demised Premises under the Sublease and it
cannot be cured by Tenant within the cure periods provided herein,
Subtenant may terminate the Sublease. In addition, in the event of
default by Tenant, Subtenant may cure the same at the expense of
Tenant only: (i) in the case of an emergency or where such default
will result in irreparable harm to Subtenant, if not cured immediately
and (ii) in any other case if such default is not cured by Tenant
within the applicable cure periods provided herein. All reasonable
costs incurred in good faith by Subtenant in
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curing such default shall be reimbursable by Tenant within fifteen
(15) days of demand. Tenant hereby agrees to defend Subtenant
(with counsel reasonably acceptable to Subtenant) in any action
brought to evict or dispossess Subtenant from the Demised Premises
based on a default by Tenant hereunder, agrees to be liable for any
costs of such defense, including all costs required in any appeal,
and agrees to indemnify and hold harmless Subtenant from any and
all claims, judgments, damages, penalties, fines, causes,
liabilities, or losses resulting from or related to Subtenant's
eviction or dispossession from the Demised Premises based on such
default following a final non-appealable order of eviction or
dispossession from the Demised Premises.
SECTION 35 - TERMINATION: Tenant and Subtenant acknowledge that
Subtenant's structural improvements, additions and alterations to the Demises
Premises must be approved by the holder of the mortgage executed by Landlord
which encumbers the Demised Premises. Accordingly, Subtenant shall have the
right to terminate this Sublease by written notice to Tenant in the event such
mortgagee fails by its action or inactions to approve Subtenant's structural
alterations, improvements and additions on or before the thirty-fifth (35th) day
after such request for consent is received by such mortgagee. Subtenant must
exercise its right of termination within ten (10) days of the end of said
thirty-five (35) day period.
SECTION 36 - ROOF AMENDMENT. Tenant agrees to use best efforts to
negotiate an amendment to the Lease acceptable to Tenant, Landlord and Subtenant
wherein Landlord would assume responsibility for the maintenance, repair and
replacement of the roof of the building on the Demised Premises. In connection
with the execution of an amendment to the Lease which transfers the
responsibility for the maintenance, repair and replacement of the roof under the
Lease to Landlord, Tenant and Subtenant agree to enter into an amendment to the
Sublease reasonably acceptable to Subtenant and Tenant which will provide that
for the remainder of the term of the Sublease, Landlord shall be responsible for
the maintenance, repair or replacement of the roof. In no event shall any such
amendments increase the obligations of Subtenant under the Sublease or under the
Lease.
SECTION 37 - GUARANTEE. As a condition to the execution of this Sublease,
Tenant has required the execution and delivery of that certain Guarantee dated
of even date herewith from Select Comfort Corporation.
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IN WITNESS WHEREOF, the parties have caused these presents to be duly
executed as a sealed instrument as of the day and year first above written.
TENANT:
BELLSOUTH TELECOMMUNICATIONS, INC.,
a Georgia corporation
WITNESSES:
/s/ By: /s/
- ---------------------------- ------------------------------
/s/ Its: MANAGER - REAL ESTATE
- ---------------------------- ------------------------------
SUBTENANT:
SELECT COMFORT SC CORPORATION,
a Minnesota corporation
WITNESSES:
/s/ By: /s/
- ---------------------------- ------------------------------
/s/ Its: TREASURER, CFO AND SECRETARY
- ---------------------------- ------------------------------
17
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EXHIBIT "A"
LEGAL DESCRIPTION OF PREMISES
All that certain piece, parcel or tract of land, containing 31.95
acres, more or less, together with the improvements thereon, if any, situate,
lying and being on the Northeastern side of the Frontage Road along Interstate
Highway I-26, near the intersection of said highway with U.S. Highways No. 76
and No. 176, near Columbia, County of Richland, State of South Carolina, the
said tract being more particularly described as follows:
BEGINNING at an iron located on the Eastern right-of-way of said
highway at a point where the within described property adjoins property now or
formerly of Roof E. Lowman and running North 64DEG. 44' East along said property
now or formerly of Roof E. Lowman for a distance of 413.10 feet to an iron;
THEN turning and running North 67DEG. 59' East along property now
or formerly of Roof E. Lowman for a distance of 1598.79 feet to a concrete
monument;
THEN turning and running South 49DEG. 17' East along property now
or formerly of O.D. Lowman and R.E. Lowman for a distance of 500.00 feet to
an iron;
THEN turning and running South 55DEG. 28' West along property now
or formerly of Baco, Inc. for a distance of 2048.31 feet to an "X" mark in
the invert of a concrete box culvert located on the Eastern right-of-way of
said Frontage Road;
THEN turning and running North 38DEG. 24' West along said Eastern
right-of-way of said Frontage Road for a distance of 866.06 feet to a
concrete right-of-way marker;
THEN turning and running North 15DEG. 49' West along said
right-of-way for a distance of 33.94 feet to the point of commencement, be
all measurements a little more or less; all of which is more clearly shown
and delineated upon a plat of the same prepared by Belter and Associates,
Surveyors and Planners, dated December 19, 1974, and recorded in the Office
of the Register of Mesne Conveyance for Richland County in Plat Book X at
Page 3779; this being the same property heretofore conveyed to William S.
Nelson, as agent for an undisclosed principal, by Baco, Inc., by deed dated
April 22, 1975, and recorded in the Office of the Register of Mesne
Conveyance for Richland County, South Carolina, in Deed Book D-345 at Page
590.
<PAGE>
EXHIBIT "B"
[SEE ATTACHED]
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EXHIBIT "C"
SUBTENANT IMPROVEMENTS
Offices - Remove wallcovering, repaint walls, clean or paint ceiling system,
install telephone and data cables, refurbish carpeting and floor tile.
Paint - Clean concrete perimeter walls and underside of roof structure, paint
wall and structural columns to 12 ft. above floor.
Add overhead light fixtures in production area of plant.
Add air compressor and overhead piping distribution system for equipment in
plant.
Add 10-12 roof-top air conditioning units including roof curbs and structural
angle supports over plant area.
Add overhead electrical distribution system for equipment in plant.
Remove existing fire sprinkler piping in areas to contain high pile storage and
upgrade with Early Suppression - Fast Response (ESFR) fire sprinkler piping
system.
Install 4 additional dock doors for Shipping and Receiving in side and rear
perimeter walls adjacent to existing dock doors.
Upgrade break room in plant.
Install identification sign to front building wall.
Refurbish existing security and paging systems.
20
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EXHIBIT "D"
INTENTIONALLY DELETED
21
<PAGE>
EXHIBIT "E"
INTENTIONALLY DELETED
22
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EXHIBIT "F"
THE STATE OF SOUTH CAROLINA )
)
COUNTY OF RICHLAND )
LEASE AGREEMENT
This Agreement of lease made and entered into by and between J.L. WILLIAMS
& CO., INC., referred to herein as "Landlord", 1200 Mockingbird Towers East,
1341 W. Mockingbird Lane, Dallas, Texas, 75247, and WESTERN ELECTRIC COMPANY,
INCORPORATED, referred to herein as "Tenant", 222 Broadway, New York, New York,
10038.
WITNESSETH:
That for and in consideration of the rents to be paid and the conditions and
covenants to be performed and observed as hereinafter set forth, the Landlord
hereby leases to the Tenant and the Tenant hereby takes from the Landlord
certain property containing approximately 31.95 acres, located in Richland
County, South Carolina,
and more particularly described in Exhibit "A" attached hereto and made a
part hereof, together with improvements to be built on the demised premises.
This lease shall be for a primary term of Fifteen (15) years commencing on
the Commencement Date, as defined in Section 6 of Exhibit "B" annexed hereto,
such Commencement Date estimated to be November 15, 1975.(*)
In the event Landlord is to construct additional improvements on the demised
premises, such construction shall be performed in accordance with the Plans
and Specifications to which the parties will agree as provided in Exhibit "B"
attached hereto, and the primary term of this lease shall commence on the
date Landlord delivers written notice to the Tenant the premises are
substantially completed and ready for occupancy by Tenant as provided in
Exhibit "B".
Tenant agrees to pay to Landlord during the term aforesaid a monthly rental
of $20,648.25, payable on the first day of each and every month in advance
during the term of this lease. Rent for a fractional month at the beginning
or end of the lease term shall be prorated. All such rent shall be payable
to the order of the Landlord and delivered or mailed to the Landlord at such
address as the Landlord may designate in writing.
- ---------------
(*) In the event that Tenant takes occupancy of a portion of the premises
before the Commencement Date of the lease, Tenant agrees to pay to Landlord
partial rent for such use based upon the percentage of space
occupied.
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The lease shall be subject to the following terms, covenants and conditions:
USE OF PREMISES: The demised premises shall be used and occupied only for the
purpose of:
administration, warehousing, distribution, and any other lawful
business purpose not in violation of any legally enforceable recorded
restrictions upon the premises,
and not otherwise. Use of the Tenant does not permit the stacking of
merchandise or materials against the walls of the building so that pressure
or live load will be exerted against the walls, nor the hanging of equipment
from (or otherwise loading) the roof or structural members of the building,
without the express written consent of the Landlord. provided no such consent
is required if the service loads specified in the Plans and Specifications
outlined in Exhibit "B" hereto are not exceeded. Tenant shall at its own
risk and expense obtain any and all governmental licenses and permits
necessary for such use.
MAINTENANCE BY TENANT: During the term of this lease the Tenant shall, at
its own expense, maintain the building and other improvements on the demised
premises in good repair and condition (including all necessary replacements)
including, but not limited to, regular mowing of any grass, trimming, weed
removal, prompt repair of roof leaks and removal of snow from the roof of the
building and the demised premises, regular removal of debris, and maintenance
of the water and sewer systems servicing the building and demised premises.
Tenant shall take good care of all the property and its fixtures, including
all glass, and suffer no waste. Should Tenant neglect to reasonably keep and
maintain the herein demised premises, the Landlord shall have the right after
thirty (30) days' written notice to Tenant and Tenant's failure during said
thirty-day period to correct the condition (but not the obligation) to have
said work done, and any reasonable costs therefor shall be charged to the
Tenant as additional rental and paid by the Tenant with the payment of the
rental next due. At the termination of this lease agreement the Tenant shall
deliver the premises broom-clean in the same good order and condition as
existed at the beginning date of this lease, ordinary wear and natural
deterioration beyond the control of the Tenant excepted provided, however,
Tenant agrees to make such repairs and replacements as may be necessary so
that all air conditioning and heating equipment and all plumbing and
electrical systems shall be left by Tenant in operable condition at the
termination of this lease. "Broom clean" means reasonably free from all
debris, dirt, rubbish and personal property of Tenant inside and outside the
building and on the grounds comprising the demised premises. Tenant shall
not be obligated to repair any damage caused by fire, tornado or other
insured casualty. All claims of Landlord against Tenant with respect to the
condition of the demised premises upon termination of the lease shall be
deemed waived unless presented in writing to Tenant within 30 days after
expiration or other termination of the lease.
ASSIGNMENT BY LANDLORD: Landlord shall have the right to assign its rights
under this lease but Landlord shall have no such right of assignment until 3
months after the Commencement Date provided nothing herein shall prohibit
Landlord's assignment of this lease as security in connection with a first
mortgage loan from a financial institution or institutional lender. Such
assignment shall not affect the rights of the Tenant under this lease so long as
the
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Tenant is not in default in the performance of its covenants under this lease
and Tenant attorns to the Landlord's assignee.
ALTERATIONS, ADDITIONS AND IMPROVEMENTS:
A. Tenant may, at its own cost and expense, without Landlord's prior
consent, make structural or non-structural alterations, additions and
improvements to the demised premises. Except as otherwise provided in this
paragraph 5, title to all alterations, additions and improvements constructed on
the demised premises shall vest in Landlord and shall be deemed a part of the
premises.
B. No work shall be done by Tenant pursuant to subparagraph A above or
pursuant to paragraph 34 hereof unless (i) the structural integrity and market
value of the premises shall not be materially lessened by reason thereof, (ii)
such work shall be completed in a good and workmanlike manner in compliance with
all applicable laws, rules, regulations and ordinances, and the specifications
for such work shall equal or exceed the specifications for the original
construction of the improvements under this lease, taking into consideration any
changes in construction practices and technology which may exist at the time of
the alteration or expansion, (iii) Tenant shall have procured and paid for all
permits and licenses required in connection therewith, and (iv) during the
period when any alteration, addition or improvement is being made, Tenant shall
maintain or require its contractors to maintain the following insurance on the
premises:
(i) public liability insurance insuring Landlord and Tenant and the
contractor under any contract entered into by Tenant with respect to any such
addition, improvement, alteration, removal or rebuilding against any liability
to persons or property in any way occurring during the progress of any such
addition, improvement, alteration, removal or rebuilding or in any way arising
therefrom, whether injury shall be to employees or others, in the minimum
amounts of $500,000.00 for each claim with respect to any one death or bodily
injury, $1,000,000.00 with respect to any one occurrence, and $500,000.00 for
all claims for property damage with respect to any one occurrence;
(ii) completed value builder's risk insurance for the premises during the
period of construction, including building materials on the premises, covering
loss or damage from fire, lightning, extended coverage perils, sprinkler
leakage, vandalism and malicious mischief in an amount not less than the final
cost, as estimated by Tenant, of the job during the period when construction or
reconstruction is being done;
(iii) workmen's compensation insurance coverage of the contractor's full
statutory liability as an employer.
C. With respect to any improvements, alterations or additions (other than
items specified in subparagraph D hereof), if Landlord, within thirty (30) days
after receiving written notice by Tenant that the work has been completed,
informs Tenant in writing that it does not desire such improvements, alterations
or additions to remain a part of the demised premises, Tenant shall, at
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<PAGE>
its sole cost and expense, remove any alterations, additions, and
improvements at the expiration or other termination of this lease, repair all
damage caused by such removal and restore the premises to the condition they
were in prior to the installation of any such alteration, addition or
improvement, ordinary wear and tear excepted.
D. Tenant may, at its cost and expense, install, replace or remove any
fixtures, trade fixtures, machinery, and equipment. Any such fixtures, trade
fixtures, machinery, and equipment shall not become the property of Landlord
(other than replacement of trade fixtures, machinery and equipment which were
the property of, and were originally installed by, Landlord) and any such
fixtures, trade fixtures, machinery, and equipment shall, at Tenant's cost and
expense, be removed, at Tenant's option, upon expiration or termination of the
lease and Tenant shall effect such removal and restore the premises to their
original condition, in a good and workmanlike manner, reasonable wear and tear
excepted.
E. In the event improvements are to be removed by Tenant after the
expiration of the lease term, Tenant shall pay rent until such improvements are
removed. Tenant's time for removal shall be extended for any delay attributable
to any cause specified in Section 5 of Exhibit "B" - Force Majeure.
F. Tenant agrees to obtain the consent of Landlord's mortgagee to any
structural alterations or additions to the demised premises which are required
to be consented to by the mortgagee under the terms of the loan agreement and/or
mortgage or deed of trust between Landlord and said mortgagee. Landlord agrees
that any mortgage will provide that non-structural changes may be made without
Landlord's or mortgagee's consent, provided there is compliance with
subparagraph B above. If the mortgagee's consent is required for structural
changes, the mortgagee will agree not to unreasonably withhold such consent and
to act upon Tenant's request within thirty days after receipt thereof. Failure
to so act will constitute approval. Landlord agrees to furnish Tenant with
written notice of the provision of any mortgage which requires the consent of
the mortgagee in regard to alterations, additions and improvements.
6. MECHANIC'S LIENS: Tenant agrees to indemnify and hold harmless Landlord
of and from all liability arising out of the filing of any mechanic's lien
against the demised premises by reason of any act or omission of Tenant, and
Landlord at its option may, after ten (10) days' written notice to Tenant and
failure of Tenant within said period to remove said lien(s) by payment, bond or
otherwise, satisfy such liens and collect the amount expended from Tenant as
additional rent. If in fact any mechanic's liens which are in violation of the
provisions of this lease exist at the commencement of the term of this lease,
then Landlord agrees to indemnify and hold harmless Tenant from any and all
liabilities arising out of any and all such mechanic's liens.
7. COMPLIANCE WITH LAW: Landlord shall comply with all governmental laws,
ordinances and regulations applicable to the original construction of the
improvements for the uses designated by Tenant in the final specifications, and
Tenant shall comply with all governmental laws, ordinances and regulations
applicable to the use of the demised premises enacted after the commencement of
the lease or uses not included in said specifications. Each party shall
promptly comply with all governmental orders and directives for the correction,
prevention and abatement of nuisances in or upon or in connection with the
demised premises for
26
<PAGE>
which such party is responsible, all at such party's sole risk and expense.
In the event that during the term of the lease there are any additional
requirements of any governmental agency, law, ordinance or regulation
relating solely to the structural portions of the building that require
additional improvements to the building, Landlord and Tenant agree that the
cost of such structural improvements shall be pro rated between Landlord and
Tenant. The portion of such cost to be paid by Tenant shall be determined by
multiplying the cost of such improvements by a fraction, the numerator being
the balance of the lease term and the denominator being the estimated useful
life of such improvements. As and when options to extend the lease are
exercised by Tenant as provided herein, Tenant shall pay an additional
portion of the cost of such improvements which shall be determined by
multiplying the cost of such improvements by a fraction, the numerator being
the period of the option and the denominator being the estimated useful life
of the improvements. The estimated useful life of the improvements shall be
determined at the time the improvements are made. The cost of such
improvements and whether such improvements will be made by Landlord or Tenant
shall be determined in the same manner as herein provided for expansion of
the leased premises. If such additional requirements relate to Tenant's
particular use of the premises and not to the structural changes to the
building for general use, they shall be made and paid for by Tenant.
8. ASSIGNMENT AND SUBLETTING: Provided Tenant is not in default of any of
the terms, conditions or covenants contained in this lease, Tenant may, without
the consent of the Landlord, assign this lease or sublet the whole or any part
of the demised premises. Any such assignment or subletting shall be subject to
all the terms and conditions of this lease agreement, including the provisions
of paragraph 1 hereof relating to the use of the demised premises.
Notwithstanding any such assignment or subletting, the Tenant shall at all times
remain fully responsible and liable for the payment of the rent herein specified
and for compliance with all of its other obligations under the terms, provisions
and covenants of this lease. If an "event of default", as hereinafter defined,
should occur while the demised premises or any part thereof are then assigned or
sublet, the Landlord, in addition to any other remedies herein provided or
provided by law, may at its option collect directly from such assignee or
subtenant all rents becoming due to Tenant under such assignment or sublease and
apply such rent against any sums due to it by Tenant hereunder. No direct
collection by the Landlord from any such assignee or subtenant shall be
construed to constitute a novation or a release of Tenant from the further
performance of its obligations hereunder.
As a condition precedent to such subletting or assignment, the Tenant agrees to:
(a) give the Landlord immediate written notice of such assignment or subletting;
and (b) furnish the Landlord with an executed copy of such assignment or
sublease at the time such instrument is executed.
9. FIRE AND CASUALTY DAMAGE:
A. In case of fire or other casualty, Tenant shall give immediate notice to
Landlord. If the premises shall be partially damaged by fire, the elements or
other casualty, but not so as to render the premises partially or wholly
untenantable, Landlord shall restore the same and Tenant's obligation to pay
rent shall continue.
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<PAGE>
B. If the premises be so extensively and substantially damaged as to render
them untenantable in whole or in part (but such damage is not as extensive as
specified in subparagraph C hereof), then the rent shall cease or be diminished
partially in the case of a partial untenantability, until such time as the
premises shall be made tenantable by Landlord.
C. If the premises are rendered wholly or substantially destroyed so as to
require practically a rebuilding thereof, Landlord shall give written notice to
Tenant within thirty (30) days after the damage either (i) declaring this lease
null and void in which event this lease shall terminate and the rent shall be
abated from the date of destruction, provided Landlord shall only have such
option if the damage occurs on or after the fifth (5th) anniversary date of the
lease, or (ii) informing Tenant that it shall restore the demised premises and
furnishing a certificate from Landlord's architect as to whether (a) the
premises can be restored within one hundred eighty (180) days from the date of
the damage or whether (b) the premises cannot be restored within such time
period. If the Landlord notifies Tenant under clause (ii)(a) above, this lease
shall continue in effect, Landlord shall restore the premises and the rent shall
continue abated until such time as the premises are tenantable. If Landlord
gives the notification under clause (ii)(b) above, Tenant may, within fifteen
(15) days after such occurrence, elect to terminate this lease by giving written
notice to Landlord, in which case the lease shall terminate and the rent shall
be paid up to the time of the damage. If the Tenant does not make this election
within such fifteen (15) day period, this lease shall continue, Landlord shall
restore the premises and the rent shall continue abated until the premises are
tenantable.
D. If Landlord, having given the notification under clause C(ii)(a) above,
fails to remake the premises substantially tenantable within two hundred ten
(210) days from the date of the damage, Tenant may give Landlord written notice
canceling this lease twenty (20) days thereafter if said improvements are not
completed prior to the expiration of the twenty (20) days specified in such
notice. Such period shall be extended for a period equivalent to the time lost
attributable to any cause listed in Section 5 of Exhibit "B" - Force Majeure,
but no extension shall be granted unless Landlord gives Tenant written notice of
such event within three (3) business days after such event commences. In the
event the premises are not made substantially tenantable on or prior to two
hundred eighty-five (285) days from the date of the damage, without regard to
whether such situation results from Force Majeure or any other cause, Tenant may
give Landlord written notice canceling this lease twenty (20) days thereafter if
said improvements are not completed prior to the expiration of the twenty (20)
days specified in such notice. In lieu of terminating the lease as provided in
this paragraph 9D, Tenant may elect within twenty (20) days after Landlord fails
to remake the premises within the two hundred ten (210) days specified herein
(as such time may be extended because of the operation of Force Majeure) to
restore the premises itself at Landlord's cost and expense, for which Landlord
shall reimburse Tenant, or, if Landlord fails to do so, Tenant may resort to its
remedies under paragraph 37C of this lease. If Tenant does not elect either to
terminate this lease or to restore the premises itself within such twenty (20)
day period, this lease shall continue, Landlord shall complete its restoration
of the premises, and the rent shall continue abated until the premises are
tenantable.
E. In the event the damages as such as to make the premises partially
untenantable, Tenant shall pay only a pro rata portion of the total monthly rent
as shall be equitable in view of the
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portion of the premises remaining tenantable, until such time as the premises
shall be repaired and wholly tenantable.
F. Whenever Landlord must repair, restore or make the premises tenantable
under this section, such work shall be done as speedily as possible and the
premises shall be made tenantable and restored to at least as good a condition
as existed prior to the casualty in accordance with the applicable sections of
Exhibit "B".
G. If this lease is terminated under Clause C of this paragraph 9, then the
Tenant may, within twenty (20) days after the termination of the lease, give
written notice to Landlord that it elects to pay Landlord an amount equal to the
Landlord's Amount provided on Exhibit "C" (the "Landlord's Amount") for the pro
rated portion of the applicable lease year, provided that Tenant's obligation to
pay Landlord's Amount shall be released to the extent of any insurance proceeds
received subject to such Landlord's Amount created under paragraph 16 hereof, on
or after the fifth (5th) anniversary date of this lease, when Tenant may, within
twenty (20) days after the termination of the lease, give written notice to
Landlord that it elects to pay Landlord an amount equal to the Landlord's Amount
provided on Exhibit "C" for the pro rata portion of the applicable lease year.
Upon such election and the making of all required payments by Tenant to
Landlord, the said premises, or the untaken portion thereof, shall be conveyed
to Tenant. In addition, Landlord shall assign or pay over to Tenant all of the
Landlord's award or all of Landlord's right, title and interest in any
uncollected award for the taking attributable to said premises and the
improvements. If Tenant does not make the election specified herein, or if this
lease is terminated under paragraph 10A hereof prior to the fifth (5th)
anniversary date of this lease, all of Tenant's options to purchase the premises
shall automatically terminate, all of the damages shall belong to Landlord, and
paragraph 10C hereof will apply. Upon Landlord's request Tenant will furnish
written confirmation that it has not made the election specified in this
paragraph 10E, and retained by Landlord or its mortgagee. Upon the payment by
Tenant of all sums due and owing, this lease shall expire as fully as if it were
the date herein fixed for the expiration of the term. In such event the
unrestored premises, together with the balance of all insurance proceeds, net of
any such proceeds applied to reduce Landlord's Amount, as above provided, will
be conveyed to and become the property of Tenant without further payment by
Tenant, and thereafter neither party shall have any further obligation to the
other hereunder or under Tenant's options to purchase said property.
H. Landlord and Tenant agree that Landlord shall carry, throughout the term
of the lease, rent insurance which will provide for the payment of rent to
Landlord for the time that the premises are untenantable by reason of any loss
or damage occurring under the provisions of this paragraph relating to fire or
casualty damage and that the cost of such insurance shall be paid one-half (1/2)
by Landlord and one-half (1/2) by Tenant, Landlord to obtain such insurance and
to bill Tenant for one-half (1/2) of such cost, furnishing to Tenant at the time
of such billing written evidence of such cost from the insurance carrier or its
agent.
10. 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
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governmental law, ordinance or regulation or by right of eminent domain, or
should be sold to the condemning authority under threat of condemnation, this
lease shall terminate and the rent shall be abated during the unexpired
portion of this lease, effective as of the date when the physical taking of
said premises shall occur. Substantial part, as used herein, means that the
remainder cannot be reconstructed or restored to make the remainder
reasonably tenantable and suitable for the Tenant's business needs.
B. If less than a substantial part of the demised premises shall be taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain, or should be sold to the condemning
authority under the threat of condemnation, this lease shall not terminate but
Landlord shall, at its sole expense, restore and reconstruct the building and
other improvements situated on the demised premises, provided such restoration
and reconstruction shall make the same reasonably tenantable and suitable for
the uses for which the premises are leased as defined in paragraph 1 hereof.
The rent payable hereunder during the unexpired portion of this lease shall be
adjusted to such extent as is fair and reasonable under the circumstances.
C. All damages awarded for any such taking under the power of eminent
domain, whether for the whole or part of the demised premises, shall belong to
and be the property of the Landlord, whether such damages shall be awarded as
compensation for diminution in value of the leasehold, or for the fee of the
demised premises; provided, however, that Landlord shall not be entitled to any
award made to Tenant for loss of or damage to Tenant's trade fixtures and
removable personal property or for damages for cessation or interruption of
Tenant's business, to the extent such cessation or interruption damages are
awarded exclusive of and separate and apart from damages for diminution in value
of the leasehold.
D. Any damages awarded to Landlord for a taking under paragraph 10B hereof
shall automatically reduce by the same amount the option price to Tenant
specified in the Option Agreement of even date herewith between Landlord and
Tenant and shall also reduce by an equivalent amount the Landlord's Amount
specified in Exhibit "C" hereof.
11. HOLD HARMLESS: Landlord shall not be liable to the Tenant or Tenant's
employees, agents or invitees, or to any other person whomsoever, for any injury
to person or damage to property on or about the demised premises caused by the
negligence or misconduct of the Tenant, its agents or employees, or by reason of
said building becoming out of repair or by Tenant failing to perform any other
covenant required of the Tenant; and the Tenant agrees to indemnify Landlord and
hold it harmless from any loss, expense or claims (including reasonable
attorneys' fees) arising out of any such damage or injury, and to insure such
indemnity the Tenant agrees, at its own cost and expense, to keep the demised
premises insured under a public liability policy against claims for property
damage with limits of $100,000 for any one occurrence and personal bodily injury
(including wrongful death) with limits of $100,000 for any one person and
$300,000 for any one accident. Upon Landlord's request, the Tenant shall
furnish to Landlord written proof as to the required insurance.
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12. QUIET ENJOYMENT AND SUBORDINATION: Landlord covenants, represents and
warrants that it has full right and power to execute and perform this lease and
to grant the estate demised herein, and that Tenant, upon payment of the rents
herein reserved, and performance of the terms, conditions, covenants and
agreements 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 thereof; 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 now existing or 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 subordination shall be upon
the express condition that this lease shall be recognized by the mortgagee
and that all of the rights of the Tenant including Tenant's options to renew
the lease and to purchase the demised premises shall remain in full force and
effect during the full term of this lease on condition that the Tenant attorn
to the mortgagee, its successors and assigns, and perform all of the
covenants and conditions required by the terms of this lease. In the event
of foreclosure or any enforcement of any such mortgage, the rights of the
Tenant hereunder shall expressly survive and this lease shall in all respects
continue in full force and effect; provided, however, that the Tenant shall
fully perform all its obligations hereunder and attorn to the purchaser.
All of the Landlord's personal liability under this lease shall terminate
upon conveyance of the property, provided Landlord (J.L. Williams & Co.,
Inc.) has completed the construction of the improvements in accordance with
Exhibit "B" and the purchaser has sufficient financial net worth, in Tenant's
opinion, to discharge the obligations of the Landlord, and the purchaser
assumes Landlord's obligations hereunder. Such a sale will not relieve J.L.
Williams & Co., Inc. of its responsibility for any uncorrected details
existing at the time of the conveyance or the warranties of J.L. Williams &
Co., Inc. under the terms of the lease. provided that the obligations of the
Landlord under this lease are covenants running with the land and shall be
binding upon the purchaser of Landlord's interest in the demised premises.
13. WAIVER. No waiver by the parties hereto of any default or breach of
any term, covenant, condition, agreement, provision or stipulation herein
contained shall be treated as a waiver of any subsequent default or breach of
the same or any other term, condition, covenant, agreement, provision or
stipulation hereof.
14. SIGNS: Tenant shall have the right of erecting signs in good taste on
the exterior walls of the building only, subject to all applicable laws, deed
restrictions and regulations. No signs or other objects shall be erected which
are attached to the roof of the building, and no signs shall be attached to the
building at right angles suspended by guy wires, but shall be attached flush to
the building in a safe and secure manner, and not on the canopy. All such signs
erected shall advertise the Tenant's business only and no revenue-producing
advertising shall be erected on the demised premises without the specific
written permission of the Landlord. Tenant shall not paint any signs directly
on the walls of the building or otherwise deface, damage or overload the
building. Tenant shall remove all signs at the termination of this lease, at
Tenant's sole risk and expense, and shall in a workmanlike manner properly
repair any damage and close any holes
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caused by removal of the Tenant's signs. Anything in this paragraph 14 to the
contrary notwithstanding, Tenant shall have the right, without the consent of
Landlord, to erect signs on the exterior walls of the building or on the
grounds, similar to other Western Electric or Bell System signs, provided the
same are in accordance with applicable laws, deed restrictions and
regulations.
16. REAL ESTATE TAXES. Tenant agrees to pay before they become delinquent
all real estate taxes and special assessments lawfully levied or assessed
against the demised premises; provided, however, Tenant may, at its expense,
contest and dispute the taxes?, and in such case the disputed item need not
be paid until finally adjudged to be valid. In the event of such contest the
Tenant may make such contest in the name of the Landlord. Taxes for the
beginning and ending years of the lease term shall be prorated, in the event
Tenant fails to pay such taxes when due, then Landlord may, at its option,
pay the same and collect the amount expended from Tenant as additional rent.
In the event that during the term of this lease or any renewal or extension
thereof any taxes or other charges shall be levied or assessed against said
property in lieu of or as a substitute for all or a part of the ad valorem
taxes upon the leased premises and improvements situated thereon, then for
the purposes of this lease such levy and assessment shall be treated the same
as real estate taxes and shall be the responsibility of the party who would
be required to pay such charges and assessment had such charges and
assessment been a part of the ad valorem taxes on the leased premises. In
the event that substitute taxes or assessment are included in the income
taxes of the landlord, then the amount of such taxes to be paid by the Tenant
shall be limited to so much of such tax as the Landlord would be obligated to
pay in case it derived no income from any source other than the real estate
hereby demised.
17. UTILITIES SERVICES: Landlord shall provide the _________ utility
service connections into the demised premises as required in the plans and
specifications? and shall pay the initial connection charges for such
utilities. Tenant shall pay all other costs for utility services, including
all charges for gas, water and electricity used on the demised premises and
all electric light lamps or tubes.
18. INSURANCE:
A. Tenant shall not permit the demised premises to be used for any
operation deemed extra hazardous on account of fire or otherwise.
B. Any insurance which may be carried by Landlord or Tenant against loss
or damage to the building and other improvements situated on the demised
premises shall be carried for the benefit of the Landlord to the extent of
loss or damage to the building or improvements owned by the Landlord and for
the benefit of the Tenant to the extent of loss or damage to improvements
owned by the Tenant, and the proceeds of such insurance shall be under the
control of the party for whom such insurance is carried.
C. Tenant agrees that throughout the term of this lease it will, at Tenant's
cost, keep all buildings and improvements situated on the demised premises
insured against fire and extended coverage perils, including malicious mischief
and vandalism and against all losses incident to
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any sprinkler system installed in the premises to the extent of the full
insurable value of said buildings and improvements with Replacement Cost
Endorsement. Such insurance shall be with insurance companies acceptable to
the Landlord. Tenant agrees to furnish, on the date of the commencement of
the lease term, Landlord with a copy of the insurance policy for such
insurance or a certificate as to such insurance from the insurance company,
which shall name the Landlord and the Landlord's mortgagee (if requested by
Landlord, as their interests may appear) and shall furnish such additional
policies as may be necessary to keep such insurance in continuous force and
effect during the lease term. Tenant agrees that all proceeds of insurance
on the demised premises shall be paid directly to the Landlord and the
Landlord's mortgagee. Tenant acknowledges the right of the Landlord to
assign the insurance proceeds to the Landlord's mortgagee in connection with
any mortgage indebtedness on the premises provided that Landlord agrees that
any mortgage it obtains on the premises will require the mortgagee to make
available to Landlord the insurance proceeds for the purpose of
reconstructing or rebuilding the premises, subject to such reasonable time
requirements and other conditions which the mortgagee may reasonably require.
Should Tenant fail to furnish such insurance, then the Landlord may, at its
option, supply such insurance and recover the amount expended from the Tenant
as additional rent.
19. WAIVER OF SUBROGATION. Each party hereby waives any and every claim
which arises or may arise in its favor and against the other party hereto
during the term of this lease or any extension or renewal thereof for any and
all loss of, or damage to, any of its property located within or upon, or
constituting a part of, the premises leased to the Tenant hereunder, which
loss or damage is covered by valid and collectible fire and extended coverage
insurance policies, to the extent that such loss or damage is recoverable
under said insurance policies. Said 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 or damage to property of the parties
hereto. Inasmuch as the above 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 hereto hereby agrees immediately to
give to each insurance company which has issued to it policies of fire and
extended coverage insurance written notice of the terms of said mutual
waivers, and to have said insurance policies properly endorsed, if necessary,
to prevent the invalidation of said insurance coverages by reason of said
waivers.
20. HOLDING OVER: Should Tenant, or any of its successors in interest,
hold over the herein demised premises, or any part thereof, after the
expiration of the term of this lease, unless otherwise agreed in writing,
such holding-over shall constitute and be construed as tenancy from
month-to-month only at a monthly rental equal to the rent paid for the last
month of the term of this lease. Tenant shall pay rent until such
alterations and corrections as are required to be made by the Tenant are made
and until such additions and improvements as Tenant is entitled to remove
have been removed.
21. DEFAULT BY TENANT: The following events shall be deemed to be events
of default by Tenant under this lease:
A. Tenant shall fail to pay any installment of rent on the date the same is
due and such failure continues for a period of ten (10) days after Tenant
receives written notice thereof in
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which event Tenant shall pay as additional rental an amount equal to ten per
cent (10%) of the amount of rent in default. The penalty in this subparagraph
A shall not apply as long as Western Electric Company, Incorporated is in
possession of the premises.
B. Tenant shall fail to comply with any material term, provision or
covenant of this lease, other than the payment of rent, and shall not cure
such failure within thirty (30) days after written notice thereof to Tenant
or if such failure cannot reasonably be cured within the said thirty (30)
days and Tenant shall not have commenced to cure such failure within such
(30) day period and shall not thereafter with reasonable diligence and good
faith cure such failure.
C. Tenant shall become insolvent, or shall make a transfer in fraud of its
creditors, or shall make an assignment for the benefit of its creditors or
its interest is levied on by execution or other legal process.
D. Tenant shall file 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; or Tenant shall be adjudged bankrupt
or insolvent in proceedings filed against Tenant thereunder.
E. A receiver or trustee shall be appointed for all or substantially all
of the assets of Tenant.
Upon the occurrence of any of such events of default, the Landlord
shall have the option to pursue any one or more of the following remedies
without any notice or demand whatsoever:
(1) Terminate this lease, in which event Tenant shall immediately
surrender the premises to Landlord, and if Tenant fails so to do Landlord
may, without prejudice to any other remedy which it may have for possession
or arrearages in rent, enter upon or take possession of the leased premises
and expel or remove Tenant and any other person who may be occupying said
premises or any part thereof, by force if necessary, without being liable for
prosecution or any claim for damages therefor; and Tenant agrees to pay to
Landlord on demand the amount of all loss and damage which the Landlord may
suffer by reason of such termination, whether through inability to relet the
premises on satisfactory terms or otherwise.
(2) Enter upon and take possession of the leased premises and expel or
remove Tenant and any other person who may be occupying said premises or any
part thereof, by force if necessary, without being liable for prosecution or
any claim for damages therefor, and mature the rental payments for the
balance of the lease term, and relet the premises and receive the rent
thereof; and Tenant agrees to pay to Landlord on demand any deficiency that
may arise by reason of such reletting.
(3) Enter upon the leased premises, by force if necessary, without
being liable for prosecution or any claim for damages therefor, and do
whatever Tenant is obligated to do under the terms of this lease, and Tenant
agrees to reimburse Landlord on demand for any expenses which Landlord may
incur in thus effecting compliance with Tenant's obligations under this
lease, and Tenant further agrees that Landlord shall not be liable for any
damages resulting to the Tenant from such action, whether caused by the
negligence of Landlord or otherwise, provided Landlord acts reasonably.
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(4) Correct such default and recover the amounts expended from the
Tenant as additional rent.
(5) Enter upon and take custodial possession of the leased premises,
maintaining the same, and use reasonable efforts to relet the premises for
the balance of the lease term without thereby causing a termination or
anticipatory breach of the lease and Tenant agrees to pay the Landlord the
full amount of the rental, specified in the lease during the time that the
premises are vacant, and in addition thereto to pay the Landlord for any
deficiency by reason of reletting of the premises for less than the rental
specified in the lease agreement.
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 or any rent due to Landlord hereunder or any damages accruing to
Landlord by reason of the violation of any of the terms, provisions and
covenants herein contained. Failure by Landlord to enforce one or more of
the remedies herein provided upon an event of a default shall not be deemed
or construed to constitute a waiver of such default, or of any other
violation or breach of any of the terms, provisions and covenants herein
contained.
If, on account of any breach or default by Tenant of the terms,
covenants and conditions of this lease, Landlord employs an attorney to
enforce Landlord's rights or remedies hereunder, Tenant shall be liable for
any reasonable attorney's fees incurred by Landlord.
23. LANDLORD'S RIGHT OF ENTRY: As long as there is no unreasonable
interference with Tenant's business, Landlord and its authorized agents shall
have the right to enter the demised premises during normal working hours for
the following purposes: (a) inspecting the general condition and state of
repair of the premises; (b) making repairs required of Landlord; (c) showing
the premises to any prospective tenant or purchaser; (d) showing the premises
for lease if the Tenant shall not have renewed or extended this lease; or (e)
showing the building for any other legal or reasonable purpose. If Tenant
shall not have renewed or extended this lease prior to the final one hundred
twenty (120) day period of the lease term, the Landlord and its authorized
agents shall have the right to erect on or about the demised premises a
customary sign advertising the property for lease or for sale.
24. NOTICES AND LEGAL ADDRESSES: Each provision of this instrument or any
applicable governmental laws, regulations, ordinances and any other
requirements with reference to the mailing, sending or delivery of any notice
or with reference to the making of any payment by Tenant to Landlord shall be
considered complied with when and if the following steps are taken:
A. All rent and other payments required to be made by the Tenant to
the Landlord hereunder shall be payable to the Landlord at Landlord's
address set forth hereinbelow, or at such other address as Landlord may
specify from time to time by written notice delivered in accordance
herewith.
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B. Any notice or document required or permitted to be delivered
hereunder by Landlord or Tenant shall be deemed to be delivered when same
is deposited in the United States mail, postage prepaid, certified or
registered mail, return receipt requested, addressed to the parties
hereto at their respective addresses.
25. PRIOR AGREEMENTS, AMENDMENTS: This agreement supersedes all prior
agreements and understandings, whether oral or written, and all
contemporaneous oral agreements and understandings relating to the demised
premises. No agreement hereafter made shall be effective to change, modify,
discharge or effect an abandonment of this lease, in whole or in part, unless
such agreement is in writing and signed by or on behalf of the party against
whom enforcement of the change, modification, discharge or abandonment is
sought.
26. SUCCESSORS: All of the terms, covenants and conditions 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 of the
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.
27. CAPTIONS OR HEADINGS: The captions or headings of the paragraphs in
this agreement are inserted and included solely for convenience and shall
never be considered or given any effect in construing the provisions hereof
if any question of intent should arise.
28. SHORT FORM LEASE AND ESTOPPEL: Tenant and Landlord agree at any time,
on request of the other party, to execute a short form of this lease in form
permitting its recording which shall include appropriate references to the
options to extend the lease term and to purchase the demised premises.
Tenant agrees that from time to time, upon not less than ten (10) days'
prior written request by Landlord, it will deliver to Landlord a statement in
writing certifying that:
(a) The lease is unmodified and in full force and effect (or if there
have been modifications, that the lease as modified is in full force and
effect).
(b) The dates to which rent and other charges have been paid.
(c) Tenant has no knowledge of a default of Landlord under any
provision of the lease or if in default the nature thereof in detail.
(d) If requested by Landlord, it will not pay rent for more than one
month in advance and that such lease will not be amended without notice to
the Landlord's mortgagee and that same will not be terminated without the
same notice required by the lease to be furnished to the Landlord also
furnished to the Landlord's mortgagee.
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28a. The parties have executed a separate document granting Tenant certain
options to purchase the premises and the provisions of such document are an
integral part of this lease.
29. CONSENT: Landlord and Tenant agree that whenever consent or approval
is required of either of them under the terms of this lease, such consent or
approval will not be unreasonably withheld.
30. ATTORNEY'S FEES: In the event either party defaults in the performance
of any of the terms, covenants, agreements, or conditions contained in this
lease and the other party places the enforcement of this lease, or any
portion thereof, or the collection of any rent or charge due, or to become
due, or the recovery of the possession of the premises, in the hands of
attorneys, or files suit upon the same, the unsuccessful party agrees to pay
the reasonable attorneys' fees of the prevailing party.
31. BROKERAGE FEES: In connection with the negotiation and execution of
this lease agreement, J.L. Williams & Co., Inc. hereby represents (i) that no
brokers' commissions are payable as the result of this transaction, (ii) that
no brokerage commission or fee has been or will be paid to any individual,
firm, brokerage company or agency, and (iii) that no amount of money has been
or will be offered or paid, directly or indirectly, to any individual, firm,
agency, or company as a brokerage fee, commission, finder's fee, or otherwise
in regard to this transaction.
32. PARTIES: Wherever in this lease the name Western Electric Company,
Incorporated is used, it shall mean Western Electric Company, Incorporated,
any parent, affiliate, subsidiary, or any member of the Bell System.
33. RENEWAL OPTION:
A. If Western Electric Company, Incorporated is not in possession of
the leased premises at the time of giving notice and at the time of the
commencement of the term for which the option is exercised, and provided the
Tenant is not in default of any term, condition or covenant contained in this
lease and has not assigned or sublet the leased premises, the Tenant shall
have the option of renewing this lease for 5 additional terms of one (1) year
each on the same terms and conditions as provided herein, save and except
that $20,648.25 (the monthly rental during the primary term), which shall be
the base rental; provided, however, in no event shall the rental during a
renewal period be less than the rental during the primary term. The rental
for such month during the renewal lease term shall be determined by dividing
the base rental (the numerator) by the index number (denominator) for the
last day for which computation has been made in the column "All Items" in the
table "Consumer's Price Index - U.S. Average, All Items and Commodity
Groups," published monthly in the "Monthly Labor Review" of the Bureau of
Labor Statistics for the United States Department of Labor in the issue of
said "Monthly Labor Review" for the first month of the 15th year of the
primary lease term, and subsequently multiplying that amount (quotient) by
the index number for the last month of the last year of the primary lease
term. The product shall be the monthly rental during the renewal period. In
the event that the Bureau of Labor Statistics shall change the base period,
now 1967, the new index numbers shall be substituted for the old index
numbers in making the above
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computation. Said monthly payments of rental shall be paid in advance on the
same day of each month as rent was payable during the primary term of this
lease.
If the Tenant is granted more than one renewal, then the rental for the
second and subsequent renewal terms shall be determined for each of such
renewal terms by dividing the base rental (the numerator) by the index number
(denominator) for the last day for which computation has been made in the
column "All Items" in the table "Consumer's Price Index - U.S. Average, All
Items and Commodity Groups," published monthly in the "Monthly Labor Review"
of the Bureau of Labor Statistics for the United States Department of Labor
in the issue of said "Monthly Labor Review" for the first month of the 15th
year of the primary lease term, and subsequently multiplying that amount
(quotient) by the index number for the last month of the last year of the
previous renewal lease term.
In the Event of Discontinuation of Cost of Living Index: The above
mentioned cost of living index has been published continuously since 1913,
and the parties believe it improbable that same will be discontinued during
the term of this lease. It is agreed, however, that in the event the
Consumer's Price Index of the United States Bureau of Labor Statistics is
discontinued, the parties shall accept comparable statistics on the
purchasing power of the consumer's dollar as published at the time of said
discontinuance by a responsible financial periodical or recognized authority
to be then chosen by the parties. In the event the parties cannot agree upon
a financial periodical as the source of said comparable statistics after
attempting for ten (10) days to reach such an agreement, said periodical
shall be chosen by arbitration. Each of the parties shall choose one
arbitrator and said two arbitrators shall choose a third. The arbitrators
shall be approved reputable bankers in the community in which the premises
are located and shall be competent and impartial and of good moral and
business reputation. They shall be directed to deliver a report in writing,
signed by each of them, within twenty (20) days. The decision of any two of
said arbitrators shall be binding. The expenses of arbitration shall be
borne equally by the parties and the report of the arbitrators shall be
binding upon the Landlord and the Tenant.
Notice of the exercise of such option shall be given by Tenant to
Landlord in writing not later than 120 days prior to expiration of the
primary term hereof or any prior renewal term hereof.
B. Provided Western Electric Company, Incorporated is in possession of
the leased premises at the time of the commencement of the term for which the
options hereinafter provided are exercised and is not in default of any term,
condition or covenant contained in the lease, Western Electric Company,
Incorporated shall have the option of renewing this lease for five (5)
additional terms of one (1) year each on the same terms, conditions and
rental as provided for in the original term of this lease. Notice of the
exercise of such option shall be given by Tenant to Landlord as provided in A
above.
34. EXPANSION OPTIONS: Provided Western Electric Company, Incorporated is
the tenant in possession of the premises, then at any time during the term
hereof, prior to two (2) years before the expiration thereof, and during any
extension of the term by Tenant, Tenant shall have an unlimited number of
expansion options for improvements. For the purpose of this paragraph 34
"expansion" shall be deemed to occur only if Tenant desires to increase the
gross
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square feet of building space located on the premises by 15,000 square feet
or more. Any work not included within such definition shall be deemed an
alteration, addition or improvement pursuant to paragraph 5 hereof.
If Tenant seeks to expand the improvements as provided above, Tenant will
deliver to Landlord a written request for a bid for such expansion work and
upon receiving such written request by Tenant and after submission by Tenant
to Landlord of plans and specifications, Landlord will submit a lump-sum bid
to Tenant which will be good for a period of thirty (30) days.
In the event Tenant does not accept such lump-sum bid, Landlord shall obtain
bids from three (3) other contractors acceptable to Tenant and qualified to
perform the construction work for the expansion and Landlord shall submit a
revised bid. If one or more of those bids from other contractors, plus ten
percent (10%) of such bid to be added by Landlord, is lower than the revised
bid submitted by Landlord, Landlord shall have the option to contract with
such (lowest bid) contractor or to perform the expansion work at such lowest
bid plus ten percent (10%) thereof. If Landlord's revised bid is less than
the lowest bid of any of the other contractors, after adding ten percent
(10%) to the amount of such other contractor's bid, then Landlord shall
perform the expansion work at the amount of Landlord's revised bid. Landlord
may refuse to perform the expansion work at the lowest bid plus ten percent
(10%) thereof, and in such event Tenant shall have the right to have such
work performed by such lowest bidder without any compensation pursuant to
this paragraph 34 to Landlord. Tenant reserves the right to refuse to accept
any of such bids and in such event the expansion will not occur.
The cost of any expansion work performed by Landlord shall be paid on a
monthly basis by Tenant as the work is performed, less a retainage of ten
percent (10%) which shall be paid thirty (30) days after completion of the
work certified by Landlord's architect.
In the event that J.L. Williams & Co., Inc. is no longer Landlord, Tenant
shall have the right to perform expansion work with a contractor of its own
choosing, provided only that the landlord then in possession of the premises
shall be afforded an opportunity to bid, which bid or bids may be rejected by
Tenant in its sole discretion.
Any expansion work shall be in accordance with the standards set forth in
paragraph 5B relating to alterations, additions and improvements, and shall
be deemed an alteration, addition or improvement subject to the provisions of
said paragraph 5.
35. PURCHASE OF LAND: Landlord agrees to purchase from Tenant the property
described in Exhibit "A" and will pay Tenant therefor the sum of $575,000.00,
or such other amount as may be certified to by Tenant as being its total
cost, including commissions, attorneys' fees, closing costs and other
expenses in acquiring the property; provided, however, that to the extent
that such costs may vary from $575,000.00, such difference in land cost shall
be used in determining the rent as provided in Exhibit "B", Section 10(b).
Closing of said purchase of said property shall occur within seven (7) days
following the execution of the lease. Tenant agrees to assign to Landlord
the obligations relating to the installation of the water line which Tenant
acquired in connection with its purchase of said property. Landlord and
Tenant agree to cooperate in regard to the acquisition of the title to said
property so as to minimize the expense
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and avoid the unnecessary duplication of title insurance policies and
documentary or transfer stamps. Landlord agrees to accept conveyance of said
property subject to the conditions of title affecting the title set forth on
the attached binder as Exhibit "D" to this lease; otherwise free and clear of
all liens and encumbrances.
36. LIMITATION OF MORTGAGE AMOUNTS:
A. Landlord will limit the aggregate outstanding principal amount of
indebtedness form time to time outstanding and secured by one or more
mortgages covering the premises or any portion thereof in the following
amounts:
One hundred per cent (100%) of $2,679,000 at the end of the 60th month
Ninety-five per cent (95%) of $2,562,000 at the end of the 120th month
Ninety per cent (90%) of $2,374,000 at the end of the 180th month.
This lease shall not be subject and subordinate to, and Tenant shall not be
obligated to subordinate this lease to, any mortgages to the extent the same
secure indebtedness exceeding such amounts. For purposes of this paragraph,
the aggregate outstanding principal amount of indebtedness shall be computed
upon the assumption that all principal and interest payments to be made by
the mortgagor pursuant to its amortization schedule have been made,
regardless of whether or not the mortgagor has in fact made such payments.
B. Landlord agrees that the aggregate amount of all monthly payments under
any permanent mortgage or mortgages to which this lease shall be subordinate
shall not exceed the monthly rental payments provided for in this lease.
37. TENANT'S REMEDIES:
A. Landlord shall use its best efforts to obtain a provision in any
mortgage which may hereafter be placed on or against the premises that the
Mortgagee shall give the Tenant written notice of any default under said
mortgage and twenty (20) days within which to cure said default. If Landlord
is not able, in spite of its best efforts, to obtain agreement from its
Mortgagee to the above provision, Landlord agrees to furnish Tenant
appropriate evidence that it has made all payments and performed all
obligations required under the mortgage within ten (10) days after such
payments or obligations are required. "Best efforts", as used herein, does
not require the Landlord to pay additional interest or other additional
amounts.
B. In the event of a default by the Landlord in any of the payments due
under any mortgage to which this lease may be subordinated, the Tenant, upon
ten (10) days' written notice to the Landlord, sent by registered or
certified mail, shall, if such default is not cured, have the right to cure
the same by applying thereto on behalf of the Landlord such rental payments
as may thereafter come due, and when so applied, said rental payments shall
be considered as having been duly made to Landlord.
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C. Landlord agrees that upon its failure to perform its obligations
hereunder, Tenant may, after giving not less than twenty (20) days' written
notice to Landlord and any first mortgagee of which it has actual knowledge,
take any reasonable steps to cure such failure and deduct any amounts so
expended from the monthly rentals subsequently accruing.
EXECUTED this 12th day of June, 1975.
LANDLORD
J. L. Williams & Co., Inc.
Attest:
/s/ By /s/ J.L. Williams
- --------------------------- ----------------------------------
Assistant Secretary Title: Chairman-Executive Committee
1200 Mockingbird Towers East
1341 West Mockingbird Lane
Dallas, Texas 75247
TENANT
Western Electric Company, Incorporated
Attest:
/s/ By /s/
- --------------------------- ----------------------------------
Assistant Secretary Title: Executive Vice President
222 Broadway
New York, New York 10038
Attention: General Manager - Plant
Design and Construction
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THE STATE OF TEXAS )
)
COUNTY OF DALLAS )
BEFORE ME, the undersigned, a Notary Public in and for said County and
State, on this day personally appeared J. L. Williams, known to me to be the
person and officer whose name is subscribed to the foregoing instrument and
acknowledged to me that the same was the act of the said J. L. Williams & Co.,
Inc., a corporation, and that he executed the same as the act of such
corporation for the purposes and consideration therein expressed, and in the
capacity therein stated.
GIVEN UNDER MY HAND and seal of office this 2nd day of June, 1975.
/s/
----------------------------
Notary Public in and for
Dallas County, Texas
My commission expires
June 1, 1977.
THE STATE OF NEW YORK
COUNTY OF NEW YORK
BEFORE ME, the undersigned a Notary Public in and for said County and
State, on this day personally appeared R.F. Fick, known to me to be the
person and officer whose name is subscribed to the foregoing instrument and
acknowledged to me that the same was the act of the said Western Electric
Company, Incorporated, a corporation, and that he executed the same as the
act of such corporation for the purposes and consideration therein expressed,
and in the capacity therein stated.
GIVEN UNDER MY HAND and seal of office this 12th day of June, 1975.
/s/
----------------------------
Notary Public in and for
My commission expires
- ----------------------------
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EXHIBIT "A"
All that certain piece, parcel or tract of land, containing 31.95
acres, more or less, together with the improvements thereon, if any, situate,
lying and being on the Northeastern side of the Frontage Road along
Interstate Highway I-26, near the intersection of said highway with U.S.
Highways No. 76 and No. 176, near Columbia, County of Richland, State of
South Carolina, the said tract being more particularly described as follows:
BEGINNING at an iron located on the Eastern right-of-way of said
highway at a point where the within described property adjoins property now
or formerly of Roof E. Lowman and running North 64DEG. 44' East along said
property now or formerly of Roof E. Lowman for a distance of 413.10 feet to
an iron;
THEN turning and running North 67DEG. 59' East along property now or
formerly of Roof E. Lowman for a distance of 1598.79 feet to a concrete
monument;
THEN turning and running South 49DEG. 17' East along property now or
formerly of O. D. Lowman and R. E. Lowman for a distance of 500.00 feet to an
iron;
THEN turning and running South 55DEG. 28' West along property now or
formerly of Baco, Inc. for a distance of 2048.31 feet to an "X" mark in the
invert of a concrete box culvert located on the Eastern right-of-way of said
Frontage Road;
THEN turning and running North 38DEG. 24' West along said Eastern
right-of-way of said Frontage Road for a distance of 866.06 feet to a
concrete right-of-way marker;
THEN turning and running North 15DEG. 49' West along said right-of-way
for a distance of 33.94 feet to the point of commencement, be all
measurements a little more or less; all of which is more clearly shown and
delineated upon a plat of the same prepared by Belter and Associates,
Surveyors and Planners, dated December 19, 1974, and recorded in the Office
of the Register of Mesne Conveyance for Richland County in Plat Book X at
Page 3779; this being the same property heretofore conveyed to William S.
Nelson, as agent for an undisclosed principal, by Baco, Inc., by deed dated
April 22, 1975, and recorded in the Office of the Register of Mesne
Conveyance for Richland County, South Carolina, in Deed Book D-345 at Page
590.
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EXHIBIT "B"
CONSTRUCTION OF BUILDING AND OTHER IMPROVEMENTS
SECTION 1. PLANS AND SPECIFICATIONS. Landlord shall, at its sole cost
and expense, construct and complete all the improvements, in accordance with
final plans and specifications to be prepared from the preliminary plans and
specifications prepared by Tenant prior to the execution of this lease,
consisting of Floor Plan of Building, Drawing A-6925, referred to as
"Facility Plan," Topographical Map, Plat Plan, and Western Electric Design
Criteria for Columbia Distribution Center, Spec: CA-DC-2375, Issue February,
1975. Such items are hereinafter referred to as the "Preliminary Plans and
Specifications" and are annexed hereto as Exhibit "B-1."
SECTION 2. PREPARATION OF PLANS AND SPECIFICATIONS.
(a) Landlord's architect shall submit the proposed final plans and
specifications referred to in Section 1 hereof to Tenant within twenty (20)
days after the execution of this lease. Within ten (10) business days(1)
after actual receipt by Tenant's Representative (as hereinafter defined)
or his designee of the Plans and Specifications submitted by Landlord, Tenant
shall review same and advise Landlord of any aspect of the submitted plans
and specifications which do not comply with the Preliminary Plans and
Specifications described on Exhibit "B-1." If Tenant does not so advise
Landlord within such ten (10) day period, Tenant shall be deemed to have
approved such submitted plans and specifications, subject only to the
coordination of such part of the plans and specifications with portions
thereof yet to be completed. Promptly following delivery by Tenant to
Landlord of its comments on the submitted plans and specifications, the
parties shall agree on and initial the final plans and specification (which
final plans and specifications are hereinafter called "Plans and
Specifications").
(b) After the Plans and Specifications are approved, in the event of
any discrepancy between the shop drawings (which conform to the Plans and
Specifications) or the plans on the one hand and the specifications on the
other, or in the event that any provision in the specifications shall not be
reflected in such shop drawings or the plans, or vice versa, Tenant's
Representative shall decide whether the specifications on the one hand or the
plans or such shop drawings on the other shall govern. In the absence of a
decision by Tenant's Representative, the specifications shall govern and
control with respect to the obligations of Landlord hereunder.
(c) In the event the Plans and Specifications do not specifically
define the quality of equipment to be installed or material to be used,
Tenant's Representative shall approve such items before they are incorporated
in Landlord's work. If Landlord proposes to substitute equipment or
materials other than called for by the Plans and Specifications, Tenant's
Representative must approve same, and if an aggregate reduction of Landlord's
cost is achieved, Tenant shall at its option be entitled to a credit on its
rent (in accordance with Section 10(b)
- ----------------
(1) As used in this Exhibit "B," a "day" shall be deemed a calendar day and a
"business day" shall be a day in which the location where Tenant's Plant
Design and Construction Division is situated is open for a full day.
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hereof), or a credit against its Change Orders, for the difference between the
value of that specified and that substituted.
SECTION 3. CONSTRUCTION TIME. Promptly following agreement on the
Plans and Specifications, Landlord shall apply for and obtain all necessary
building permits and all other governmental permits, consents and
authorizations for the construction of the improvements. Landlord shall
complete the construction of the improvements in accordance with Section 6
hereof within one hundred ninety-five (195) days from the date of the lease,
provided such time shall be increased to the extent Landlord' construction is
delayed due to Tenant's not having approved the Plans and Specifications
submitted by Landlord, if Landlord gives Tenant written notice of such delay
within five business days after Tenant approves the Plans and Specifications.
SECTION 4. FAILURE TO COMPLETE IMPROVEMENTS. In the event the
construction is not completed on or prior to the one hundred ninety-five
(195) days specified in Section 3, Tenant may give Landlord and Landlord's
mortgagee written notice of its intention to cancel this lease thirty (30)
days thereafter if said improvements are not completed prior to the
expiration of the thirty (30) days specified in such notice. Such period
shall be extended for a period equivalent to the time lost attributable to
any cause listed in Section 5, "Force Majeure", but no extension shall be
granted unless Landlord gives Tenant written notice of such event within
three business days after such event commences. In the event construction is
not completed on or prior to two hundred eighty-five (285) days from the date
of the lease, without regard to whether such situation results from Force
Majeure or any other cause, Tenant may give Landlord and Landlord's mortgagee
written notice of its intention to cancel the lease ten (10) days thereafter
if said improvements are not completed prior to the expiration of the ten
(10) days specified in such notice. In the event Tenant shall have exercised
its option to terminate this lease by giving written notice as above
provided, and the Landlord does not complete the improvements in accordance
with such notice, this lease shall terminate with no further liability of one
party to the other.
SECTION 5. FORCE MAJEURE. In the event Landlord or Tenant shall be
delayed, hindered or prevented from the performance of any act required
hereunder by reason of acts of God, strikes, lockouts, labor disputes, labor
troubles, inability to procure materials, riots, insurrection, war, or other
reason of like nature not the fault of Landlord or Tenant, then the
performance of such acts shall be excused for the period of the delay and the
period for performance of any such act shall be extended for a period
equivalent to the period of such delay, provided the party so delayed takes
all reasonable steps to limit and eliminate such causes of delay, and neither
party hereto shall have a claim against the other based upon such delay.
SECTION 6. COMMENCEMENT DATE. The primary term hereof shall commence
upon the first day of the month (the "Commencement Date") after the entire
premises are ready for "total occupancy" by Tenant, provided that Landlord
has given Tenant fourteen (14) days' prior written notice of such date. The
premises shall be deemed to be ready for total occupancy upon the occurrence
of all of the following: (a) the delivery to Tenant of a completion
certificate issued by Landlord's Architect certifying that the improvements
have been completed in accordance with the Plans and Specifications, subject
to a reasonable punch list agreed to by Tenant; (b) all
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utilities shall have been connected and fully installed in the building,
including without limitation, telephone conduit, sanitary sewer, water, gas,
and electricity, and such services shall be operational and in good working
order and condition and adequate for Tenant's use; and (c) a final
certificate of occupancy, if required, is issued by Richland County. If the
entire premises are ready for "total occupancy" by Tenant and Landlord has
given Tenant at least fourteen (14) days' prior written notice of such date,
but such date falls other than on the first day of the month, then Tenant
agrees to occupy the entire premises and pay rental in accordance with the
partial occupancy provision on page 1 of this lease from such date until the
Commencement Date.
SECTION 7. SHOP DRAWINGS. Landlord shall submit to Tenant's
Representative a print of each shop drawing and similar material required for
use by the various trades or called for by the Plans and Specifications as
implemented, prior to performing the work required to be performed
thereunder. Landlord shall review and indicate its approval of shop drawings
and all such material prior to submission to Tenant and Tenant shall advise
Landlord of any errors or omissions it notes in the shop drawings within five
business days of their receipt by Tenant. Landlord shall, when requested in
writing by Tenant's Representative, furnish a sample of material for review.
SECTION 8. PROGRESS SCHEDULES AND MEETINGS. Prior to commencement of
construction, Landlord shall furnish to Tenant a proposed progress schedule
for construction. This schedule shall indicate the proposed dates for the
commencement and completion on the various stages of construction separately
for the office space and warehouse space and shall be updated and modified as
required during the course of construction to reflect the actual progress of
the work.
Weekly coordinating and progress meetings of responsible
representatives of the various trades engaged on the project shall be held at
the field office of the Landlord or his building contractor. The building
contractor's superintendent or comparable level of supervision shall conduct
such meetings. The Tenant's Representative or his designee will be given
notice of and an opportunity to be present at all such weekly progress
meetings. Minutes of such meetings shall be prepared by the Landlord and
distributed to Tenant.
SECTION 9. LANDLORD'S INSURANCE.
(a) Landlord and (in the case of clauses (i) through (iii)) its
contractors and subcontractors, during the performance of their work pursuant
to this Exhibit "B" shall carry, at their own cost and expense, with respect
to work performed by or for them:
(i) Workmen's Compensation Insurance as prescribed by the law of
the State of South Carolina and Employer's Liability Insurance with
limits of not less than $100,000 for each occurrence;
(ii) Comprehensive General Liability Insurance, including
Contractor's Protective Liability Insurance with limits of not less than
$500,000 for bodily injury, including death, to any one person, and
$1,000,000 on account of any one occurrence, and $500,000 for each
occurrence of property damage;
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(iii) Comprehensive Automobile Liability Insurance with limits of
not less than $500,000 for bodily injury, including death, to any one
person, and $1,000,000 on account of any one occurrence, and $500,000 for
each occurrence of property damage;
(iv) Builder's All Risk Insurance upon the entire work upon the
premises to the extent of the full insurable value thereof including
material and equipment on the site. This insurance shall include the
interests of Landlord, its contractors and subcontractors, and Tenant as
their interests may appear, and shall insure against the perils of fire,
extended coverage, vandalism and malicious mischief.
(b) Landlord and Tenant waive all rights against each other for damages
caused by fire or other perils to the extent covered by insurance. Landlord and
Tenant shall require similar waivers by their contractors and subcontractors.
(c) Certificates of insurance acceptable to Tenant shall be filed with
Tenant prior to commencement of work. These certificates shall contain a
provision that coverages afforded under the policies will not be cancelled or
materially changed until Western Electric Company, Incorporated has received
at least fifteen (15) days' prior written notice.
SECTION 10. CHANGES. (a) Tenant may, at any time after completion of
the Plans and Specifications, require additions or alterations to or
deductions or deviations (hereinafter referred to as a "Change") from the
scope of the work called for by the Plans and Specifications. Tenant shall
submit to Landlord information to enable Landlord to submit to Tenant the
cost of the Change on the basis of a "lump-sum" price, which price shall be
submitted to Tenant within twenty days after the request therefor. If Tenant
accepts the price submitted by Landlord, it shall issue a written Change
Order directing Landlord to perform such work at the "lump-sum" price, and
Landlord shall comply therewith. If Tenant does not agree with Landlord's
"lump-sum" price, Tenant shall, within ten days after receipt of Landlord's
"lump-sum" price, either (i) advise Landlord not to perform the requested
Change or (ii) direct Landlord by a written Change Order to perform such work
on a "cost-plus" basis, which cost (hereinafter called "Landlord's Cost")
shall be limited (with respect to Landlord and its contractors) to direct
labor for architectural, engineering and survey work and soil testing, all
direct labor and direct supervision and benefit costs therefor, materials,
all tools consumed in performing the work, rental for all equipment used in
performing the work, building and other permits and inspection fees, and
filing and recording costs and adjustment for interim financing costs
specified in Sec. 10(g). An amount equal to ten per cent of the total of the
above-referenced items of Landlord's Cost shall be added to such total for
overhead and profit. (Such total amount of Landlord's Cost plus the ten per
cent referred to above is hereinafter called "Cost-Plus Price".) If Tenant
does not issue a Change Order for Landlord to perform the Change at the
"lump-sum" price nor on a "cost-plus" basis, the Landlord may proceed with
the original contract work without change and Tenant shall be deemed to have
withdrawn such request. The price identified herein (whether "lump-sum"
price or "cost-plus" price) (hereinafter "Price") shall be the total
obligation of Tenant with respect to any Change Order whether the work is
performed by Landlord or by an independent contractor retained by Landlord.
Landlord shall maintain and make available to Tenant accurate and complete
records of all costs incurred in performing "cost-plus" work.
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(b) The difference in Price resulting from Tenant's written Change
Orders and the difference in land costs determined in accordance with
paragraph 35, unless Tenant elects to pay such Price as the work progresses,
shall be added to the Basic Rent computed on an annual basis as the amount of
such Price. To the extent that the Price not paid for by Tenant as work
progresses (less difference in land cost credit) exceeds $200,000, such Price
shall be paid for by Tenant as provided in paragraph (d) hereinbelow. In the
event a Change Order reduces Landlord's cost, the amount of such reduction
shall be determined and netted against the Price owed by Tenant pursuant to
the following provision. In the event the aggregate of all such reductions
of Landlord's cost (plus difference in land cost credit) exceeds the
aggregate of all increases of Landlord's cost, the difference (not to exceed
$200,000) shall reduce the Basic Rent hereunder by 9% of such difference per
annum pro rated monthly. In the event that all such increases exceed all
reductions, the difference (not to exceed $200,000) shall increase the Basic
rent hereunder by 9% of such difference per annum pro rated monthly.
Landlord shall have the right and option of refusing to agree to any changes
in the Plans and Specifications if such changes (plus difference in land cost
credit) could cause the aggregate reduction in Landlord's cost to exceed
$200,000.
(c) If Tenant determines it requires another 200,000 gallon water tank
and an additional 1,500 G.P.M./125P.S.I. electric fire pump(*), Landlord shall
furnish and install same at an additional cost to Tenant of $68,077, provided
Landlord shall only guarantee this price to Tenant if Tenant informs Landlord
in writing within sixty (60) days after the execution of this lease that it
requires such equipment. If Tenant requires this additional water tank, the
cost shall be treated in accordance with Section 10(b) hereof.
(d) Any portion of the Price not added to the Basic Rent shall be paid
for by Tenant on a monthly basis as the Change Order work is performed.
Landlord shall submit invoices to Tenant on or before the twenty-fifth (25th)
day of the month for all Change Order work performed during the prior month
and Tenant shall pay Landlord for such Change Order work on or before the
fifteenth (15th) day of the following month, less a retainage of ten per cent
(10%) which shall be paid thirty (30) days after each Change Order has been
completed in a good and workmanlike manner as certified by Landlord's
Architect.
(e) Tenant shall not be required to pay for any Change from the Plans
and Specifications unless such Change is made pursuant to Tenant's requests
in the form of a written Change Order.
(f) Notwithstanding anything to the contrary herein, but subject to
Section 10(b) hereof, Tenant shall have the right by written Change Order to
make changes to the Plans and Specifications to accommodate its needs. If
Tenant makes such changes prior to the performance by Landlord of any work
that must be modified by reason of such change, the only cost to Tenant shall
be Landlord's costs for engineering and drafting in connection therewith, if
any, plus a fee
- ------------------
(*) If the cost of an electric fire pump varies from the cost of the diesel
booster pump used by Landlord in submitting its quote for this extra,
then the cost of $68,077 shall be adjusted upward or downward
accordingly.
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of ten per cent (10%). Such engineering and drafting charges plus the
specified fee shall be paid to Landlord in a lump sum within thirty (30) days
after such work is performed and Landlord submits an invoice to Tenant
therefor. In the event the change by Tenant is requested after the
performance by Landlord of any work that must be modified by reason of the
change, the provisions of Sections 10(a) and (b) above shall control.
(g) In computing adjustments under this Section 10 (other than those
dealt with in Section 10(d)) and adjustments under paragraph 35 of the lease,
there shall be added to the following adjustments at the time specified eight
per cent (8%) per annum, representing an adjustment for interest financing
costs:
(i) Difference in Land Costs to be added at the time
title to the property is transferred to Landlord;
(ii) "Cost Plus" work done by Landlord under Section
10(a)(ii) which is to be included in the rent under Section 10(b).
The eight per cent (8%) per annum adjustment shall be computed as
Landlord pays the cost of such work.
(iii) Change Orders which reduce Landlord's costs under
Section 10(b). The eight per cent (8%) adjustment shall be computed
when Tenant issues its written Change Orders.
SECTION 11. EXTRA COST CLAIMS. In the event any instructions by
Tenant's Representative not involving a written Change Order involve extra
cost to Landlord, Landlord shall give Tenant written notice thereof within
twenty (20) days after receipt of such instructions, and in any event before
proceeding to execute the work pursuant to said instructions. Within ten
(10) days after receipt of such notice (which period may be extended another
ten (10) days upon Tenant's giving written notice to Landlord), Tenant shall
either cancel the instructions of Tenant's Representative or approve such
instructions by issuing a Change Order in writing. Failure of Tenant to
promptly advise Landlord in accordance with the foregoing shall be deemed
cancellation of such instructions. Tenant shall pay for such work as the same
progresses, but Tenant shall have no obligation to make payment to Landlord
in the absence of such notice.
SECTION 12. TENANT'S REPRESENTATIVE. For purposes of this lease,
Tenant's Representative shall be R. N. Pucci, or such other person or persons
as may be designated by Tenant from time to time in writing (herein called
"Tenant's Representative") provided, however, (i) Tenant shall not designate
more than one such Tenant's Representative at one time and (ii) if Tenant
fails for any reason to designate such Representative or successor, Landlord
or its contractor shall be relieved of all requirements of this lease with
respect to such Representative. Tenant's Representative and any other person
or persons designated by him in writing as an assistant or assistants (but
not more than five (5) such persons) shall at all reasonable times have
access to Landlord's work for the purpose of general representation of Tenant
and to determine if the work is being performed in accordance with the Plans
and Specifications, and shall have the right to take all necessary action on
behalf of Tenant. Landlord and its contractors shall provide safe and proper
facilities for such inspections and for Tenant's on-site representatives.
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SECTION 13. OTHER CONTRACTS. Tenant shall have the right to install
or award contracts to others for the installation of machinery, equipment,
fixtures and materials that Tenant will require in its use of the premises.
Landlord shall afford Tenant and its respective contractors reasonable
opportunity for the introduction and storage in a secure area of their
materials and equipment needed for execution of their work. Landlord shall
not be responsible for loss or damage of such material or equipment unless
covered by Landlord's insurance or caused by the negligence of Landlord or
its contractors or subcontractors. Landlord and Tenant shall properly connect
and coordinate their work with each other and their contractors. Nothing
herein shall give Tenant any right to interfere with, delay, or cause an
increase in the cost of the work of Landlord or its subcontractors.
SECTION 14. QUALITY OF WORK. All of Landlord's work shall be
performed in a good and workmanlike manner in accordance with the usual and
customary construction standards of buildings of similar nature and for a
similar purpose. All such work shall be performed by Landlord under the
supervision of Landlord's architect and in compliance with the Plans and
Specifications and all governmental rules, orders, ordinances, licenses and
building requirements applicable thereto. All materials shall be new and of
first class quality and be equal to or better than the materials specified in
the Plans and Specifications.
SECTION 15. LANDLORD'S SPECIAL INDEMNIFICATION. Landlord shall pay,
and shall protect, indemnify and hold Tenant harmless from and against any
and all liabilities, losses, damages, costs, expenses (including, without
limitation, reasonable attorneys' fees and expenses), causes of action,
suits, claims, demands or judgments of any nature arising, or alleged to
arise, during and from or in connection with Landlord's performance of
construction work pursuant to this Exhibit "B") which involves (i) any injury
to, or the death of, any person or any damage to property in or upon the
premises and caused in whole or in part by the acts or omissions of Landlord,
its agents, servants, employees, invitees, licensees, contractors or
subcontractors, or (ii) any violation, or alleged violation, of any
governmental law, rule, regulation, or ordinance, or of any agreement, deed
of trust or indenture to which Landlord is a party or by which it is bound,
now or hereafter in effect, affecting or applicable to the premises or any
portion thereof which threatens to or adversely affects Tenant's possession,
use, occupancy, maintenance, repair or rebuilding of the premises. In case
Tenant shall be made a party to any litigation commenced by or against
Landlord for any of the above reasons, then Landlord shall protect and hold
Tenant harmless and pay all costs, penalties, charges, damages, expenses and
reasonable attorneys' fees incurred or paid by Tenant.
SECTION 16. WARRANTY. Landlord covenants that all mechanical
appurtenances to and all equipment, machinery and facilities located by Landlord
within the premises, including, but not limited to, heating, water, air
conditioning, plumbing, ventilating, electrical and other equipment and services
and machinery installed by Landlord shall be properly installed and shall
conform to the Plans and Specifications, and that such installation shall be in
compliance with all applicable laws, regulations, ordinances, policies,
restrictive or protective covenants, and administrative orders in existence and
in force as of the Commencement Date. Landlord warrants that the premises and
the equipment and machinery installed by Landlord in the premises shall be free
from defects in workmanship and material for a period of (a) three (3) calendar
years from the
50
<PAGE>
Commencement Date because of latent defects (i) arising out of faulty
workmanship or materials or (ii) attributable to Landlord's failure to comply
with the Plans and Specifications, and (b) one (1) calendar year from the
Commencement Date in all other cases. Provided Landlord is given notice of
such defects within said warranty periods, or five (5) business days
thereafter, Landlord shall, at its sole cost and expense, promptly repair or
replace or remedy any defective or non-conforming material or workmanship and
perform any and all labor to correct any such defects and to make the work
conform to the Plans and Specifications. Where Landlord has performed labor
or provided materials or equipment, in accordance with its warranty
hereunder, the said warranty shall be extended for such items an additional
period of one (1) year from the date of correction of such defective or
faulty workmanship or materials. Landlord shall obtain the customary
warranties on all materials and equipment in the name of both Landlord and
Tenant and shall transfer all unexpired warranties to Tenant one (1) year
from the Commencement Date. Landlord shall obtain and turn over to Tenant in
an orderly manner at the Commencement Date all operating data, manuals,
instructions, diagrams, and parts list required to repair, service, maintain
and replace all equipment and fixtures installed by Landlord.
51
<PAGE>
LANDLORD'S EXHIBIT "C"
<TABLE>
<CAPTION>
LANDLORD'S
LEASE YEAR LANDLORD'S AMOUNT* MAXIMUM MORTGAGE
- ------------------------------ ------------------ -----------------
<S> <C> <C>
During the 60th full month $2,679,000 100%
During the 72nd full month 2,655,400 99%
During the 84th full month 2,632,200 98%
During the 96th full month 2,608,800 97%
During the 108th full month 2,585,400 96%
During the 120th full month 2,562,000 95%
During the 132nd full month 2,524,400 94%
During the 144th full month 2,486,800 93%
During the 156th full month 2,449,200 92%
During the 168th full month 2,411,600 91%
During the 180th full month 2,374,000 90%
</TABLE>
*The Landlord's Amount shall be computed by pro rating monthly the difference
between the Landlord's Amount given for the applicable lease years, EXAMPLE:
If the payment occurred during the 126th month of the lease, the Landlord's
Amount would be the payment for the 120th month ($2,562,000) minus 6/12 of
the difference between the 120th and the 132nd months, or 6/12 x $37,600
equals $18,800. This figure of $18,800, when subtracted from $2,562,000,
results in a Landlord's Amount of $2,543,200 for the 126th month.
Landlord shall use reasonable efforts to obtain a mortgage which does not
contain any pre-payment penalty in case the mortgage is paid off due to the
occurrence of a casualty or a taking by eminent domain, but Landlord shall
not be obligated to accept more onerous financing or other terms in order to
obtain such provision.
If, in spite of efforts of Landlord above, a pre-payment penalty is required
under such circumstances, the Tenant's liability for such pre-payment charges
shall be limited to the following percentages of the principal amount
outstanding:
During the 60th through the 119th months five per cent
During the 120th through the 179th months three per cent
During the 180th month zero per cent
52
<PAGE>
LAWYERS TITLE INSURANCE CORPORATION
A STOCK COMPANY
HOME OFFICE - RICHMOND, VIRGINIA
SCHEDULE B - SECTION 2
EXCEPTIONS
The policy or polices to be issued will contain exceptions to the following
unless the same are disposed of to the satisfaction of the Company:
2. Taxes for the year 1975 and subsequent years, a lien, but not yet due and
payable.
3. Easement for utility installation and maintenance granted South Carolina
Electric & Gas Company by instrument recorded in Deed Book D162, page 599.
4. Rights of upper and lower riparian owners in and to the use of the waters
of creek and the natural flow thereof, as shown on plat of survey by
Melvin J. Belter dated December 19, 1974.
NOTE: If policy is to be issued in support of a mortgage loan, attention is
directed to the fact that the Company can assume no liability under its policy,
the closing instructions, or Insured Closing Service for compliance with the
requirements of any consumer credit protection or truth in lending law in
connection with said mortgage loan.
Schedule B - Section 2 - Page 1
53
<PAGE>
EXHIBIT "D"
FIRST AMENDMENT TO LEASE
This AMENDMENT TO LEASE is made and entered into this 27th day of March, 1991 by
and between The Manufacturers Life Insurance Company ("Landlord") and BellSouth
Services Incorporated ("Tenant") as follows:
WHEREAS by Lease dated June 12, 1975, (the "Lease") J. L. Williams (then
Landlord) leased unto Western Electric Company (then Tenant) that certain
property containing 31.95 acres, and all improvements located thereon, known
municipally as 610 Western Lane, I-26, Columbia, South Carolina, and;
WHEREAS said Lease provided for a fifteen (15) year primary term which
commenced on May 1, 1976 and will expire on April 30, 1991 with five, 1-year
renewal options and;
WHEREAS J. L. Williams and Company did sell and convey all of its rights and
interests to said property to The Manufacturers Life Insurance Company by
deed and assignment of lease dated August 2, 1976 and;
WHEREAS Western Electric Company did assign all of its interests and rights
to said Lease to Southern Bell Telephone and Telegraph Company by that
certain Assignment of Lease Agreement dated as December 31, 1983 and;
WHEREAS Southern Bell Telephone and Telegraph Company did assign all of its
rights and interest to said Lease to BellSouth Services Incorporated by that
certain Assignment of Lease Agreement dated as of May 1, 1987.
NOW THEREFORE in consideration of the mutual covenants herein contained, and
other good and valuable consideration Lessor and Lessee hereby agree as
follows
1. The Commencement Date of the Lease is confirmed to be May 1, 1976;
2. That the line on page 1 of the Lease which reads "This lease shall be for
a primary term of Fifteen (15) years" is amended to read "This lease
shall be for a primary term of Twenty (20) years";
3. The line of page 1 of the lease which reads, "Tenant agrees to pay to
Landlord during the term aforesaid a monthly rental of $20,648.25 ..." is
amended to read "Tenant agrees to pay to Landlord during the first
fifteen years of the primary term aforesaid, a monthly rental of
$20,648.25 ...". Immediately following said sentence, a new sentence
shall be added as follows, "Beginning in the first month of the sixteenth
year of the Lease and through the remainder of the primary term, Tenant
agrees to pay to Landlord a monthly rental of $25,000.00 payable on the
first day of each and every month in advance.";
54
<PAGE>
4. Paragraph 28a is deleted in its entirety. Tenant acknowledges that it
did not exercise its rights under the Option to Purchase dated June 12,
1975, and such Option to Purchase is now null and void; and,
5. Paragraph 33 of the Lease is deleted in its entirety.
This First Amendment to Lease modifies the Lease only as above stated. All
other terms and conditions of the Lease shall remain the same and in full force
and effect.
WITNESSES FOR LESSOR: THE MANUFACTURER'S LIFE
INSURANCE COMPANY
/s/ /s/
- ---------------------------------- -------------------------------------
TITLE: John Williams Shed
Assistant Vice President
/s/ Real Estate Investment
- ----------------------------------
INVESTMENT OFFICER
WITNESSES FOR LESSEE: BELLSOUTH SERVICES
INCORPORATED
/s/ /s/
- ---------------------------------- -------------------------------------
Vice President - Procurement,
Property & Services Management
/s/
- ----------------------------------
55
<PAGE>
SECOND AMENDMENT TO LEASE AGREEMENT
This Second Amendment to Lease Agreement (this "AMENDMENT"), made and
entered into as of February 23rd, 1993, is by and between The Manufacturers Life
Insurance Company ("LANDLORD") and BellSouth Telecommunications, Inc.
("TENANT").
W I T N E S S E T H:
WHEREAS, Landlord's predecessor-in-title, J. L. Williams & Co., Inc.
("WILLIAMS"), entered into that certain Lease Agreement, dated June 12, 1975
(the "ORIGINAL LEASE"), with Western Electric Company, Incorporated ("WEC"),
as tenant, covering certain property and all improvements thereon located at
610 Western Lane, I-26, Columbia, Richland County, South Carolina (the
"PROPERTY");
WHEREAS Williams sold, transferred, bargained and conveyed all of its
rights, title and interests to the Property to Landlord pursuant to the terms
and conditions of that certain Deed and Assignment of Lease, dated August 2,
1976;
WHEREAS, WEC assigned, transferred and conveyed all of its rights,
title and interests in and to the Original Lease to Southern Bell Telephone
and Telegraph Company ("SOUTHERN"), pursuant to the terms and conditions of
that certain Assignment of Lease Agreement, dated as of December 31, 1983 and
Southern in turn assigned, transferred and conveyed all of its rights, title
and interests in and to the Original Lease to BellSouth Services Incorporated
("BELLSOUTH"), pursuant to the terms and conditions of that certain
Assignment of Lease Agreement, dated as of May 1, 1987;
WHEREAS, Landlord and BellSouth entered into that certain First
Amendment to Lease Agreement, dated March 27, 1991 (the "FIRST AMENDMENT",
together with the Original Lease hereinafter referred to as the "LEASE");
WHEREAS, effective December 31, 1991, BellSouth and another corporation
merged with and into Southern, at which time Southern changed its name to
BellSouth Telecommunications, Inc. (previously identified above as Tenant
under this Amendment); and
WHEREAS, Landlord and Tenant now desire to enter into this Amendment to
provide for an extension of the Lease and a partial abatement of the Base
Rental (as hereinafter defined) under the Lease, in accordance with the terms
and conditions provided herein;
NOW, THEREFORE, in consideration of the mutual benefits to be derived
herefrom, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby
agree as follows:
1. The third sentence of Page 1 of the Lease, as amended by the
First Amendment, which presently reads "this lease shall be
for a primary term of Twenty (20) years" is hereby further
amended by deleting such sentence and replacing it in its
entirety with the following:
56
<PAGE>
"This lease shall be for a primary term of Twenty-Six (26)
years and Ten (10) months, commencing on the Commencement
Date, as defined in Section 6 of Exhibit 'B' annexed hereto,
such Commencement Date confirmed to be May 1, 1976, which term
shall terminate on February 28, 2003."
2. Notwithstanding any provisions to the contrary set forth in
the Lease, Landlord hereby agrees that the monthly installment
of rental payment, in the amount of $25,000.00 (the "BASE
RENTAL") payable by Tenant under the Lease, shall be abated*
for each month of the period commencing April 1, 1993 through
December 31, 1993. Thereafter, Tenant agrees to resume
payment of such Base Rental, for the period beginning on
January 1, 1994 and for the balance of the term of the Lease,
upon the same terms and conditions set forth in the Lease.
Landlord and Tenant further agree that the provisions of this
Paragraph 2 shall not abate, modify, decrease, alter or affect
any other rental payments payable by Tenant under the terms
and conditions of the Lease.
3. Any and all capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Lease.
4. Landlord and Tenant hereby represent and warrant to each other
that the Lease contains the full agreement of the parties
hereto relating to the Property prior to the execution of this
Amendment.
5. Except as otherwise modified, amended, supplemented,
superseded or provided herein, all other provisions of the
Lease remain in full force and effect.
6. This Amendment may be executed in counterparts by the parties
hereto, each of which shall be binding upon the party
executing same and all of which shall be deemed to be one
instrument.
LANDLORD:
THE MANUFACTURERS LIFE
INSURANCE COMPANY
By: /s/
----------------------------------
Name: Bruce D. Avery
Title: Assistant Vice President
Real Estate Investment
TENANT:
BellSouth Telecommunications, Inc.
57
<PAGE>
By: /s/
----------------------------------
Name: H. I. Waddle
Title: Assistant Vice Preident
Property Management
58
<PAGE>
EXHIBIT "G"
MEMORANDUM OF SUBLEASE
THIS MEMORANDUM OF SUBLEASE, made and entered into this ____ day of
March, 1997, by and between BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia
corporation, whose mailing address is c/o Property Administrator, 20C75, 675
West Peachtree Street, Atlanta, Georgia 30375 ("Sublandlord"), and SELECT
COMFORT SC CORPORATION, a Minnesota corporation, whose mailing address is 6105
Trenton Lane, Plymouth, Minnesota 55442 ("Subtenant").
RECITALS
A. The premises ("Premises") situated on certain real property in
Richland County, South Carolina legally described on EXHIBIT "A" attached
hereto are subject to a certain Lease Agreement dated June 12, 1975, between
Frastacky (U.S.) Properties Limited Partnership, successor in interest to
J.L. Williams & Co., Inc., as landlord, and Sublandlord, successor in
interest to Western Electric Company, Inc., as tenant, as amended by that
certain First Amendment to Lease dated March 27, 1991, and that certain
Second Amendment to Lease Agreement dated February 23, 1993 (as amended, the
"Lease").
B. Sublandlord has subleased the entire Premises to Subtenant
pursuant to the terms of that certain Sublease dated of even date herewith by
and between Sublandlord and Subtenant ("Sublease").
C. Sublandlord and Subtenant now wish to memorialize of record the
existence of the Sublease and certain specifics of the same.
NOW, THEREFORE, in consideration of the Sublease and other good and
valuable consideration, the receipt and sufficiency of which is here
acknowledged, Sublandlord and Subtenant agree as follows:
1. Sublandlord and Subtenant have entered into that the Sublease to
sublease the entire Premises upon the terms and conditions more
particularly set forth in the Sublease.
2. The term of the Sublease shall commence on or before April 21, 1997
and expire on February 27, 2003, subject to the provisions of the
Sublease.
3. Reference is made to the Sublease for a full statement of the terms
and conditions of the Sublease, all of which are hereby incorporated
by reference.
4. Nothing in this Memorandum of Sublease shall be construed to amend,
modify, change, alter, amplify, interpret, or supersede any of the
terms and conditions of the Sublease, which shall in all events
control.
59
<PAGE>
IN WITNESS WHEREOF, Sublandlord and Subtenant have executed this
Memorandum of Sublease as of the day and year first above written.
SUBLANDLORD
WITNESSES BELLSOUTH TELECOMMUNICATIONS,
INC., a Georgia corporation
By:
- ---------------------------------- ---------------------------------
Its:
- ---------------------------------- ---------------------------------
SUBTENANT:
WITNESSES SELECT COMFORT CORPORATION,
a Minnesota corporation
By:
- ---------------------------------- ---------------------------------
Its:
- ---------------------------------- ---------------------------------
STATE OF )
) ss.
COUNTY OF )
Personally appeared before me the undersigned witness, and made oath that
(s)he saw the within named BELLSOUTH TELECOMMUNICATIONS, INC., a Georgia
corporation, by _______________________, its _____________, sign the within
instrument and as his/her act and deed deliver the same and that (s)he with the
other witnesses above named witnessed the execution thereof.
Sworn to before me this ____ day of
____________________, 1997.
_________________________________________
Notary Public for _______________________
My Commission Expires: __________________
STATE OF _________________)
) ss.
60
<PAGE>
COUNTY OF ________________)
Personally appeared before me the undersigned witness, and made oath that
(s)he saw the within named SELECT COMFORT SC CORPORATION, a Minnesota
corporation, by _______________________, its _____________, sign the within
instrument and as his/her act and deed deliver the same and that (s)he with the
other witnesses above named witnessed the execution thereof.
Sworn to before me this ____ day of
____________________, 1997.
_________________________________________
Notary Public for _______________________
My Commission Expires: __________________
THIS INSTRUMENT WAS DRAFTED BY:
Oppenheimer Wolff & Donnelly (JDL)
3400 Plaza VII
45 South Seventh Street
Minneapolis, MN 55402
61
<PAGE>
EXHIBIT "H"
TENANT IMPROVEMENTS
1. Door repair - 6 doors
2. Heaters - check out heaters and make functional
3. Cages - keeping 2 cages out in the plant, 1 - 10 x 10 office in plant
4. Outbound doors - replace panels, weather guards
5. Remove slates (for holding cable rolls) - parking lot, between doors and
rivets in cement
6. Ground level doors need replacement
7. All shop restrooms need repair as appropriate
8. Remove all racking with the exception of racking used in battery area
(forklift)
9. Scrub and seal floor - acid wash and etch floor
10. Clean all dock pits and sumps
11. Do P.M. on load levelers
12. Check leak by access hatch to roof and fix if necessary
13. Check operation of power entry gate and fix if necessary
14. Stairway support to mezzanine and outside railings
15. Bumper rails in and outside of building need repair or replacement
16. P.M. on air conditioner (office)
17. Make diesel pump for fire control system operational
18. Remove miscellaneous brackets, piping, etc. from interior walls
19. Remove last row of racking outside office area
20. Remove area cage on north side of warehouse
62
<PAGE>
Exhibit 10.7
MASTER LEASE AGREEMENT
MASTER LEASE AGREEMENT (the "Master Lease") dated August 27, 1996 by and between
COMDISCO, INC. ("Lessor") and SELECT COMFORT CORPORATION("Lessee").
IN CONSIDERATION of the mutual agreements described below, the parties agree as
follows (all capitalized terms are defined in Section 14.18):
1. PROPERTY LEASED.
Lessor leases to Lessee all of the Equipment described on each Summary Equipment
Schedule. In the event of a conflict, the terms of the applicable Schedule
prevail over this Master Lease.
2. TERM.
On the Commencement Date, Lessee will be deemed to accept the Equipment, will be
bound to its rental obligations for each item of Equipment and the term of a
Summary Equipment Schedule will begin and continue through the Initial Term and
thereafter until terminated by either party upon prior written notice received
during the Notice Period. No termination may be effective prior to the
expiration of the Initial Term.
3. RENT AND PAYMENT
Rent is due and payable in advance on the first day of each Rent Interval at the
address specified in Lessor's invoice. Interim Rent is due and payable when
invoiced. If any payment is not made when due, Lessee will pay a Late Charge on
the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay
Lessor the Advance specified on the Schedule. The Advance will be credited
towards the final Rent payment if Lessee is not then in default. No interest
will be paid on the Advance.
4. SELECTION; WARRANTY AND DISCLAIMER OF WARRANTIES.
4.1 SELECTION. Lessee acknowledges that it has selected the Equipment and
disclaims any reliance upon statements made by the Lessor, other than as set
forth in the Schedule.
4.2 WARRANTY AND DISCLAIMER OF WARRANTIES. Lessor warrants to Lessee that,
so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and
peaceful possession, and unrestricted use of the Equipment. To the extent
permitted by the manufacturer, Lessor assigns to Lessee during the term of the
Summary Equipment Schedule any manufacturer's warranties for the Equipment.
LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILTY OF THE EQUIPMENT OR ITS
FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability,
claim, loss, damage or expense of any kind (including strict liability in tort)
caused by the Equipment except for any loss or damage
<PAGE>
caused by the willful misconduct or negligent acts of Lessor. In no event is
Lessor responsible for special, incidental or consequential damages.
5. TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT.
5.1 TITLE. Lessee holds the Equipment subject and subordinate to the rights
of the Owner, Lessor, any Assignee and any Secured Party. Lessee authorizes
Lessor, as Lessee's agent, and at Lessor's expense, to prepare, execute and file
in Lessee's name precautionary Uniform Commercial Code financing statements
showing the interest of the Owner, Lessor, and any Assignee or Secured Party in
the Equipment and to insert serial numbers in Summary Equipment Schedules as
appropriate. Lessee will, at its expense, keep the Equipment free and clear
from any liens or encumbrances of any kind (except any caused by Lessor) and
will indemnify and hold the Owner, Lessor, any Assignee and Secured Party
harmless from and against any loss caused by Lessee's failure to do so, except
where such is caused by Lessor.
5.2 RELOCATION OR SUBLEASE. Upon prior written notice, Lessee may relocate
Equipment to any location within the continental United States provided (i) the
Equipment will not be used by an entity exempt from federal income tax, and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Lessee.
Lessee may sublease the Equipment upon the reasonable consent of the Lessor and
the Secured Party. Such consent to sublease will be granted if: (i) Lessee
meets the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its
rights in the sublease to Lessor and the Secured Party as additional collateral
and security, (iv) Lessee's obligation to maintain and insure the Equipment is
not altered, (v) all financing statements required to continue the Secured
Party's prior perfected security interest are filed, and (vi) Lessee executes
sublease documents acceptable to Lessor.
No relocation or sublease will relieve Lessee from any of its obligations under
this Master Lease and the relevant Schedule.
5.3 ASSIGNMENT BY LESSOR. The terms and conditions of each Schedule have
been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer
its interest or grant a security interest in each Schedule and/or the Equipment
to a Secured Party or Assignee. In that event, the term Lessor will mean the
Assignee and any Secured Party. However, any assignment. sale, or other
transfer by Lessor will not relieve Lessor of its obligations to Lessee and will
not materially change Lessee's duties or materially increase the burdens or
risks imposed on Lessee. The Lessee consents to and will acknowledge such
assignments in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's rights,
but will not be obligated to perform any of the obligations of Lessor. The
Secured Party will not disturb Lessee's quiet and peaceful possession and
unrestricted use of the Equipment so long as Lessee is not in default and the
Secured Party continues to receive all Rent payable under the Schedule; and
2
<PAGE>
(b) Lessee will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against Lessor. Lessee
reserves its right to have recourse directly against Lessor for any defense or
claim;
(c) Subject to and without impairment of Lessee's leasehold rights in the
Equipment, Lessee holds the Equipment for the Secured Party to the extent of the
Secured Party's rights in that Equipment.
6. NET LEASE; TAXES AND FEES.
6.1 NET LEASE. Each Summary Equipment Schedule constitutes a net lease.
Lessee's obligation to pay Rent and all other amounts due hereunder is absolute
and unconditional and is not subject to any abatement, reduction, set-off,
defense, counterclaim, interruption, deferment or recoupment for any reason
whatsoever.
6.2 TAXES AND FEES. Lessee will pay when due or reimburse Lessor for all
taxes, fees or any other charges (together with any related interest or
penalties not arising from the negligence of Lessor) accrued for or arising
during the term of each Summary Equipment Schedule against Lessor, Lessee or the
Equipment by any governmental authority (except only Federal, state, local and
franchise taxes on the capital or the net income of Lessor). Lessor will file
all personal property tax returns for the Equipment and pay all such property
taxes due. Lessee will reimburse Lessor for property taxes within thirty (30)
days of receipt of an invoice.
7. CARE, USE AND MAINTENANCE; INSPECTION BY LESSOR.
7.1 CARE, USE AND MAINTENANCE. Lessee will maintain the Equipment in good
operating order and appearance, protect the Equipment from deterioration, other
than normal wear and tear, and will not use the Equipment for any purpose other
than that for which it was designed. If commercially available and considered
common business practice for each item of Equipment, Lessee will maintain in
force a standard maintenance contract with the manufacturer of the Equipment, or
another party acceptable to Lessor, and will provide Lessor with a complete copy
of that contract. If Lessee has the Equipment maintained by a party other than
the manufacturer or self maintains, Lessee agrees to pay any costs necessary for
the manufacturer to bring the Equipment to then current release, revision and
engineering change levels, and to re-certify the Equipment as eligible for
manufacturer's maintenance at the expiration of the lease term, provided
recertification is available and is required by Lessor. The lease term will
continue upon the same terms and conditions until recertification has been
obtained.
7.2 INSPECTION BY LESSOR. Upon reasonable advance notice, Lessee, during
reasonable business hours and subject to Lessee's security requirements, will
make the Equipment and its related log and maintenance records available to
Lessor for inspection.
8. REPRESENTATIONS AND WARRANTIES OF LESSEE. Lessee hereby represents,
warrants and covenants that with respect to the Master Lease and each Schedule
executed hereunder:
3
<PAGE>
(a) The Lessee is a corporation duly organized and validly existing in good
standing under the laws of the jurisdiction of its incorporation, is duly
qualified to do business in each jurisdiction (including the jurisdiction where
the Equipment is, or is to be, located) where its ownership or lease of property
or the conduct of its business requires such qualification, except for where
such lack of qualification would not have a material adverse effect on the
Company's business; and has full corporate power and authority to hold property
under the Master Lease and each Schedule and to enter into and perform its
obligations under the Master Lease and each Schedule.
(b) The execution and delivery by the Lessee of the Master Lease and each
Schedule and its performance thereunder have been duly authorized by all
necessary corporate action on the part of the Lessee, and the Master Lease and
each Schedule are not inconsistent with the Lessee's Articles of Incorporation
or Bylaws, do not contravene any law or governmental rule, regulation or order
applicable to it, do not and will not contravene any provision of, or constitute
a default under, any indenture, mortgage, contract or other instrument to which
it is a party or by which it is bound, and the Master Lease and each Schedule
constitute legal, valid and binding agreements of the Lessee, enforceable in
accordance with their terms, subject to the effect of applicable bankruptcy and
other similar laws affecting the rights of creditors generally and rules of law
concerning equitable remedies.
(c) There are no actions, suits, proceedings or patent claims pending or, to
the knowledge of Lessee, threatened against or affecting the Lessee in any court
or before any governmental commission, board or authority which, if adversely
determined, will have a material adverse effect on the ability of the Lessee to
perform its obligations under the Master Lease and each Schedule.
(d) The Equipment is personal property and when subjected to use by the
Lessee will not be or become fixtures under applicable law.
(e) The Lessee has no material liabilities or obligations, absolute or
contingent (individually or in the aggregate), except the liabilities and
obligations of the Lessee as set forth in the Financial Statements and
liabilities and obligations which have occurred in the ordinary course of
business, and which have not been, in any case or in the aggregate, materially
adverse to Lessee's ongoing business.
(f) To the best of the Lessee's knowledge, the Lessee owns, possesses, has
access to, or can become licensed on reasonable terms under all patents, patent
applications, trademarks, trade names, inventions, franchises, licenses,
permits, computer software and copyrights necessary for the operations of its
business as now conducted, with no known, infringement of, or conflict with, the
rights of others.
(g) All material contracts, agreements and instruments to which the Lessee is
a party are in full force and effect in all material respects, and are valid,
binding and enforceable by the Lessee in accordance with their respective terms,
subject to the effect of applicable bankruptcy and other similar laws affecting
the rights of creditors generally, and rules of law concerning equitable
remedies.
4
<PAGE>
9. DELIVERY AND RETURN OF EQUIPMENT.
Lessee hereby assumes the full expense of transportation and in-transit
insurance to Lessee's premises and installation thereat of the Equipment. Upon
termination (by expiration or otherwise) of each Summary Equipment Schedule,
Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense
(including, without limitation, expenses of transportation and in-transit
insurance), return the Equipment to Lessor in the same operating order, repair,
condition and appearance as when received, less normal depreciation and wear and
tear. Lessee shall return the Equipment to Lessor at 6111 North River Road,
Rosemont, Illinois 60018 or at such other address within the continental United
States as directed by Lessor, provided, however, that Lessee's expense shall be
limited to the cost of returning the equipment to Lessor's address as set forth
herein. During the period subsequent to receipt of a notice under Section 2,
Lessor may demonstrate the Equipment's operation in place and Lessee will supply
any of its personnel as may reasonably be required to assist in the
demonstrations.
10. LABELING.
Upon request, Lessee will mark the Equipment indicating Lessor's interest with
labels provided by Lessor. Lessee will keep all Equipment free from any other
marking or labeling which might be interpreted as a claim of ownership.
11. INDEMNITY.
With regard to bodily injury and property damage liability only, Lessee will
indemnify and hold Lessor, any Assignee and any Secured Party harmless from and
against any and all claims, costs, expenses, damages and liabilities, including
reasonable attorneys' fees, arising out of the ownership (for strict liability
in tort only), selection, possession, leasing, operation, control, use,
maintenance, delivery, return or other disposition of the Equipment during the
term of this Master Lease or until Lessee's obligations under the Master Lease
terminate. However, Lessee is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Lessee agrees to carry bodily injury
and property damage liability insurance during the term of the Master Lease in
amounts and against risks customarily insured against by the Lessee on equipment
owned by it. Any amounts received by Lessor under that insurance will be
credited against Lessee's obligations under this Section.
12. RISK OF LOSS.
Effective upon delivery and until the Equipment is returned, Lessee relieves
Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment. Lessee will carry casualty insurance for each
item of Equipment in an amount not less than the Casualty Value. All policies
for such insurance will name the Lessor and any Secured Party as additional
insured and as loss payee, and will provide for at least thirty (30) days prior
written notice to the Lessor of cancellation or expiration, and will insure
Lessor's interests regardless of any breach or violation by Lessee of any
representation, warranty or condition contained in such policies and
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will be primary without right of contribution from any insurance effected by
Lessor. Upon the execution of any Schedule, the Lessee will furnish
appropriate evidence of such insurance acceptable to Lessor.
Lessee will promptly repair any damaged item of Equipment unless such Equipment
has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss,
Lessee will provide written notice of that loss to Lessor and Lessee will, at
Lessee's option, either (a) replace the item of Equipment with Like Equipment
and marketable title to the Like Equipment will automatically vest in Lessor or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing with respect to the item of Equipment, Lessee's obligation
to pay further Rent for the item of Equipment will cease.
13. DEFAULT, REMEDIES AND MITIGATION.
13.1 DEFAULT. The occurrence of any one or more of the following Events of
Default constitutes a default under a Summary Equipment Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee when due
if that failure continues for five (5) business days after written notice; or
(b) Lessee's failure to perform any other term or condition of the Schedule
or the material inaccuracy of any representation or warranty made by the Lessee
in the Schedule or in any document or certificate furnished to the Lessor
hereunder if that failure or inaccuracy continues for ten (10) business days
after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the failure by
Lessee to pay its debts when due, the insolvency of Lessee, the filing by Lessee
or the filing against Lessee of any petition under any bankruptcy or insolvency
law or for the appointment of a trustee or other officer with similar powers,
the adjudication of Lessee as insolvent, the liquidation of Lessee, or the
taking of any action for the purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule, Summary
Equipment Schedule or other agreement between Lessee and Lessor or its Assignee
or Secured Party.
13.2 REMEDIES. Upon the occurrence of any of the above Events of Default,
Lessor, at its option, may:
(a) enforce Lessee's performance of the provisions of the applicable Schedule
by appropriate court action in law or in equity;
(b) recover from Lessee any damages and or expenses, including Default Costs;
(c) with notice and demand, recover all sums due and accelerate and recover
the present value of the remaining payment stream of all Rent due under the
defaulted Schedule (discounted at the same rate of interest at which such
defaulted Schedule was discounted with a Secured Party plus any prepayment fees
charged to Lessor by the Secured Party or, if there is no Secured
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<PAGE>
Party, then discounted at 6%) together with all Rent and other amounts
currently due as liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's security
requirements, Lessor may enter on Lessee's premises to remove and repossess the
Equipment without being liable to Lessee for damages due to the repossession,
except those resulting from Lessor's, its assignees', agents' or
representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted by law,
are cumulative and may be exercised successively or concurrently.
13.3 MITIGATION. Upon return of the Equipment pursuant to the terms of
Section 13.2, Lessor will use its best efforts in accordance with its normal
business procedures (and without obligation to give any priority to such
Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH
IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY
STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY
ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or
otherwise dispose of all or any part of the Equipment at a public or private
sale for cash or credit with the privilege of purchasing the Equipment. The
proceeds from any sale, lease or other disposition of the Equipment are defined
as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair Market
Value of the Equipment at the expiration of the Initial Term less the Default
Costs; or
(b) if leased, the present value (discounted at 3 percent (3%) over the U.S.
Treasury Notes of comparable maturity to the term of the re-lease) of the
rentals for a term not to exceed the Initial Term, less the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums due
to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may
recover, the amount by which the proceeds are less than the liquidated damages
and other sums due to Lessor from Lessee.
14. ADDITIONAL PROVISIONS.
14.1 BOARD ATTENDANCE. One representative of Lessor will have the right to
attend Lessee's corporate Board of Directors meetings and Lessee will give
Lessor reasonable notice in advance of any special Board of Directors meeting,
which notice will provide an agenda of the subject matter to be discussed at
such board meeting. Lessee will provide Lessor with a certified copy of the
minutes of each Board of Directors meeting within thirty (30) days following the
date of such meeting held during the term of this Master Lease.
14.2 FINANCIAL STATEMENTS. As soon as practicable at the end of each month
(and in any event within thirty (30) days), Lessee will provide to Lessor the
same information which Lessee
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provides to its Board of Directors, but which will include not less than a
monthly income statement, balance sheet and statement of cash flows prepared
in accordance with generally accepted accounting principles, consistently
applied (the "Financial Statements"). As soon as practicable at the end of
each fiscal year, Lessee will provide to Lessor audited Financial Statements
setting forth in comparative form the corresponding figures for the fiscal
year (and in any event within ninety (90) days), and accompanied by an audit
report and opinion of the independent certified public accountants selected
by Lessee. Lessee will promptly furnish to Lessor any additional information
(including, but not limited to, tax returns, income statements, balance
sheets and names of principal creditors) as Lessor reasonably believes
necessary to evaluate Lessee's continuing ability to meet financial
obligations. After the effective date of the initial registration statement
covering a public offering of Lessee's securities, the term "Financial
Statements" will be deemed to refer to only those statements required by the
Securities and Exchange Commission.
14.3 OBLIGATION TO LEASE ADDITIONAL EQUIPMENT. Upon notice to Lessee, Lessor
will not be obligated to lease any Equipment which would have a Commencement
Date after said notice if: (i) Lessee is in default under this Master Lease or
any Schedule; (ii) Lessee is in default under any loan agreement, the result of
which would allow the lender or any secured party to demand immediate payment of
any material indebtedness; (iii) there is a material adverse change in Lessee's
credit standing; or (iv) Lessor determines (in reasonable good faith) that
Lessee will be unable to perform its obligations under this Master Lease or any
Schedule.
14.4 MERGER AND SALE PROVISIONS. Lessee will notify Lessor of any proposed
Merger at least sixty (60) days prior to the closing date. Lessor may, in its
discretion, either (i) consent to the assignment of the Master Lease and all
relevant Schedules to the successor entity, or (ii) terminate the Lease and all
relevant Schedules. If Lessor elects to consent to the assignment, Lessee and
its successor will sign the assignment documentation provided by Lessor. If
Lessor elects to terminate the Master Lease and all relevant Schedules, then
Lessee will pay Lessor all amounts then due and owing and a termination fee
equal to the present value (discounted at 6%) of the remaining Rent for the
balance of the Initial Term(s) of all Schedules, and will return the Equipment
in accordance with Section 9. Lessor hereby consents to any Merger in which the
acquiring entity has a Moody's Bond Rating of BA3 or better or a commercially
acceptable equivalent measure of creditworthiness as reasonably determined by
Lessor.
14.5 ENTIRE AGREEMENT. This Master Lease and associated Schedules and Summary
Equipment Schedules supersede all other oral or written agreements or
understandings between the parties concerning the Equipment including, for
example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY
ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT
IS SOUGHT TO BE ENFORCED.
14.6 NO WAIVER. No action taken by Lessor or Lessee will be deemed to
constitute a waiver of compliance with any representation, warranty or covenant
contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of
a breach of any provision of this Master Lease or a Schedule will not operate or
be construed as a waiver of any subsequent breach.
8
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14.7 BINDING NATURE. Each Schedule is binding upon, and inures to the benefit
of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS.
14.8 SURVIVAL OF OBLIGATIONS. All agreements, obligations including, but not
limited to those arising under Section 6.2, representations and warranties
contained in this Master Lease, any Schedule, Summary Equipment Schedule or in
any document delivered in connection with those agreements are for the benefit
of Lessor and any Assignee or Secured Party and survive the execution, delivery,
expiration or termination of this Master Lease.
14.9 NOTICES. Any notice, request or other communication to either party by
the other will be given in writing and deemed received upon the earlier of (1)
actual receipt or (2) three days after mailing if mailed postage prepaid by
regular or airmail to Lessor (to the attention of "the Comdisco Venture Group")
or Lessee, at the address set out in the Schedule, (3) one day after it is sent
by courier or (4) on the same day as sent via facsimile transmission, provided
that the original is sent by personal delivery or mail by the sending party.
14.10 APPLICABLE LAW. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE
BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED
AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
14.11 SEVERABILITY. If any one or more of the provisions of this Master Lease
or any Schedule is for any reason held invalid, illegal or unenforceable, the
remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enforceable provision that is closest to
the original intention of the parties.
14.12 COUNTERPARTS. This Master Lease and any Schedule may be executed in any
number of counterparts, each of which will be deemed an original, but all such
counterparts together constitute one and the same instrument. If Lessor grants
a security interest in all or any part of a Schedule, the Equipment or sums
payable thereunder, only that counterpart Schedule marked "Secured Party's
Original" can transfer Lessor's rights and all other counterparts will be marked
"Duplicate."
14.13 LICENSED PRODUCTS. Lessee will obtain no title to Licensed Products
which will at all times remain the property of the owner of the Licensed
Products. A license from the owner may be required and it is Lessee's
responsibility to obtain any required license before the use of the Licensed
Products. Lessee agrees to treat the Licensed Products as confidential
information of the owner, to observe all copyright restrictions, and not to
reproduce or sell the Licensed Products.
14.14. SECRETARY'S CERTIFICATE. Lessee will, upon execution of this Master
Lease, provide Lessor with a secretary's certificate of incumbency and
authority. Upon the execution of each
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Schedule with a purchase price in excess of $1,000,000, Lessee will provide
Lessor with an opinion from Lessee's counsel in a form acceptable to Lessor
regarding the representations and warranties in Section 8.
14.15 ELECTRONIC COMMUNICATIONS. Each of the parties may communicate with the
other by electronic means under mutually agreeable terms,
14.16 LANDLORD/MORTGAGEE WAIVER. Lessee agrees to provide Lessor with a
Landlord/ Mortgagee Waiver with respect to the Equipment. Such waiver shall be
in a form satisfactory to Lessor.
14.17 EQUIPMENT PROCUREMENT CHARGES/PROGRESS PAYMENTS. Lessee hereby agrees
that Lessor shall not, by virtue of its entering into this Master Lease, be
required to remit any payments to any manufacturer or other third party until
Lessee accepts the Equipment subject to this Master Lease.
14.18 DEFINITIONS.
ADVANCE - means the amount due to Lessor by Lessee upon Lessee's execution of
each Schedule.
ASSIGNEE - means an entity to whom Lessor has sold or assigned its rights as
owner and Lessor of Equipment.
CASUALTY LOSS - means the irreparable loss or destruction of Equipment.
CASUALTY VALUE - means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
COMMENCEMENT DATE - is defined in each Schedule.
DEFAULT COSTS - means reasonable attorney's fees and remarketing costs resulting
from a Lessee default or Lessor's enforcement of its remedies.
DELIVERY DATE - means date of delivery of Inventory Equipment to Lessee's
address.
EQUIPMENT - means the property described on a Summary Equipment Schedule and any
replacement for that property required or permitted by this Master Lease or a
Schedule.
EVENT OF DEFAULT - means the events described in Subsection 13.1.
FAIR MARKET VALUE - means the aggregate amount which would be obtainable in an
arm's-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
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INITIAL TERM - means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent Intervals indicated on a Schedule.
INTERIM RENT - means the pro rata portion of Rent due for the period from the
Commencement Date through but not including the first day of the first full Rent
Interval included in the Initial Term.
LATE CHARGE - means the lesser of five percent (5%) of the payment due or the
maximum amount permitted by the law of the state where the Equipment is located.
LICENSED PRODUCTS - means any software or other licensed products attached to
the Equipment.
LIKE EQUIPMENT - means replacement Equipment which is lien free and of the same
model, type, configuration and manufacture as Equipment.
MERGER. - means any consolidation or merger of the Lessee with or into any other
corporation or entity, any sale or conveyance of all or substantially all of the
assets or stock of the Lessee by or to any other person or entity in which
Lessee is not the surviving entity.
NOTICE PERIOD - means not less than ninety (90) days nor more than twelve (12)
months prior to the expiration of the lease term.
OWNER - means the owner of Equipment.
RENT - means the rent Lessee will pay for each item of Equipment expressed in a
Summary Equipment Schedule either as a specific amount or an amount equal to the
amount which Lessor pays for an item of Equipment multiplied by a lease rate
factor plus all other amounts due to Lessor under this Master Lease or a
Schedule.
RENT INTERVAL - means a full calendar month or quarter as indicated on a
Schedule.
SCHEDULE- means either an Equipment Schedule or Licensed Products Schedule which
incorporates all of the terms and conditions of this Master Lease.
SECURED PARTY - means an entity to whom Lessor has granted a security interest
for the purpose of securing a loan.
SUMMARY EQUIPMENT SCHEDULE - means a certificate provided by Lessor summarizing
all of the Equipment for which Lessor has received Lessee approved vendor
invoices, purchase documents and/or evidence of delivery during a calendar
quarter which will incorporate all of the terms and conditions of the related
Schedule and this Master Lease and will constitute a separate lease for the
equipment leased thereunder.
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IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as
of the day and year first above written,
SELECT COMFORT CORPORATION COMDISCO, INC.,
as Lessee as Lessor
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
12
<PAGE>
ADDENDUM TO THE
MASTER LEASE AGREEMENT DATED AS OF AUGUST 27, 1996
BETWEEN SELECT COMFORT CORPORATION AS LESSEE
AND COMDlSCO, INC. AS LESSOR
The undersigned hereby agree that the terms and conditions of the
above-referenced Master Lease are hereby modified and amended as follows:
1) Section 6. "TITLE; RELOCATION OR SUBLEASE; AND ASSIGNMENT"
In paragraph 6.3, in line 5 before the word "However" add "Lessor agrees
that it will not assign or transfer its interest hereunder or in any
Schedule or Equipment to any person or entity that completes with
Lessee's business."
2) Section 10. "LABELING"
Delete the first sentence of this section in its entirety.
3) Section 13. "DEFAULT"
In paragraph (d) add "and if Such Event of Default continues for ten (10)
days after written notice."
4) Section 14.1. "BOARD ATTENDANCE"
Delete this section in its entirety.
5) Section 14.2. "FINANCIAL STATEMENTS"
In line 2, delete the words "thirty (30)" and replace with "forty five
(45)" and delete the words "the same information which Lessee provides
to its Board of Directors, but will include not less than".
In line 4, delete the words "prepared in accordance with generally
accepted accounting principles, consistently applied."
In line 8, delete the words ninety (90)" and replace with "one hundred
twenty (120)".
6) Section 14.4. "MERGER AND SALE PROVISIONS"
In line 2, delete "sixty (60)" and replace with "thirty (30)"
7) Section 14.16. "LANDLORD/MORTGAGEE WAIVER"
Delete this section in its entirety.
<PAGE>
8) New Section 14.17. "LESSEE'S SUBSIDIARIES OR AFFILIATES"
"Lessor agrees that subsidiaries and/or affiliated companies of Lessee
may execute Equipment Schedule(s) in accordance with the provisions of
this Master Lease, provided that Lessee shall deliver to Lessor a parent
guaranty substantially in the form attached hereto as Exhibit B. In such
event, the applicable subsidiary or affiliate of Lessee executing any
Equipment Schedule(s)(s), for purposes of such Equipment Schedule(s),
shall be considered the "Lessee" as that term is used in this Master
Lease, and this Master Lease, insofar as it relates to any such Equipment
Schedule(s), shall be deemed to be a two (2) party agreement between
Lessor on the one hand and such subsidiary or affiliated company on the
other hand."
9) New Section 14.18. "OBSOLESCENCE"
"In the event that any item of Equipment becomes obsolete, Lessee may,
upon prior written notice to Lessor, replace that item of Equipment with
Like Equipment and marketable title to the Like Equipment will
automatically vest to Lessor."
SELECT COMFORT CORPORATION COMDlSCO, INC.
as LESSEE as LESSOR
By: By:
----------------------------- -----------------------------
Title Title:
-------------------------- --------------------------
Date: Date:
-------------------------- --------------------------
<PAGE>
EXHIBIT B
GUARANTY
In consideration for COMDISCO, INC. ("COMDISCO") entering into the Master
Lease Agreement dated August 27, 1996, and all of its related Equipment
Schedules issued pursuant thereto (the "Lease") with Select Comfort Retail
Corporation (as "LESSEE"), a wholly-owned subsidiary of the undersigned, the
undersigned hereby guarantees the prompt and complete performance by said LESSEE
of all the terms and conditions of said Lease to be performed by it, including
but not limited to, the prompt payment of all rentals and other sums payable
thereunder. The undersigned further agrees to indemnify and hold COMDlSCO, its
successors and assigns, harmless from and against any and all direct liability,
loss, damage or expense, including attorneys fees and court costs, which
COMDlSCO, its successors and assigns, may incur or sustain by reason of the
failure of said LESSEE to fully perform and comply with the terms and conditions
of said Lease. In no event will the undersigned be responsible for any indirect
or consequential damages of any kind.
This is a continuing, absolute and unconditional guaranty of performance
and payment and not of collection. The undersigned specifically waives any
right to subrogation, setoff or counterclaim, and any defense for changes in
applicable law or any other circumstances which might constitute a legal or
equitable defense or discharge of a guarantor or surety. The undersigned waives
any right to require a proceeding first against the Lessee, and waives notice of
acceptance hereof and of defaults hereunder. The undersigned exhaust any
security for the performance of the obligations of the Lessee, and agrees that
the liability of the undersigned shall not be affected or decreased by any
amendment, termination, extension, renewal, waiver or modification of said Lease
or the rejection or disaffirmance thereof in bankruptcy or like proceedings and
that certain obligations under the Lease may be accelerated upon any nonpayment
thereof by the Lessee. This Guaranty shall be specifically assignable to and
inure to the benefit of Lessor's Assignee and Secured Party as set forth in the
Lease and is irrevocable so long as there are any obligations of Lessee
remaining under the Lease.
This guaranty shall be governed by and construed in accordance with the
Laws of the State of Illinois.
Dated: August 27, 1996
---------------------------------------
(Guarantor)
By:
------------------------------------
Title:
---------------------------------
(Corporate Seal)
<PAGE>
EQUIPMENT SCHEDULE VL-1
DATED AS OF AUGUST 27, 1996
TO MASTER LEASE AGREEMENT
DATED AS OF AUGUST 27, 1996 (THE "MASTER LEASE")
LESSEE: SELECT COMFORT RETAIL CORPORATION LESSOR: COMDISCO, INC.
ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES:
- ------------------------ -----------------------
Mr. Dan McAthie
(612) 551-7000 6111 North River Road
(612) 551-7888 (FAX) Rosemont, Illinois 60018
Attn.: Venture Group
ADDRESS FOR NOTICES:
- -------------------
6105 Trenton Lane N.
Minneapolis, MN 55442-3240
Attn.:
CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly
- ------------------------ -------------
Same as above
Attn.:
Lessee Reference No.: __________________
(24 digits maximum)
LOCATION OF EQUIPMENT: INITIAL TERM: 36
- --------------------- ------------
Same as above (Number of Rent Intervals)
LEASE RATE FACTOR: 3.189%
-----------------
Attn.:
EQUIPMENT (as defined below): ADVANCE: $31,890
------- -------
Equipment specifically approved by Lessor, which shall be delivered to and
accepted by Lessee during the period August 27, 1996 through December 15, 1996
("Equipment Delivery Period"), for which Lessor receives vendor invoices
approved for payment, up to an aggregate purchase price of $1,000,000
("Commitment Amount"). Equipment will include standard store equipment and POS
system and exclude custom use equipment, leasehold improvements, installation
costs and delivery costs, rolling stock, special tooling, "stand-alone"
software, application software bundled into computer hardware, hand held items,
molds and fungible items.
<PAGE>
1. EQUIPMENT PURCHASE
This Schedule contemplates Lessor's acquisition of Equipment for lease to
Lessee, either by one of the first three categories listed below or by providing
Lessee with Equipment from the fourth category, in a value up to the Commitment
Amount referred to on the face of this Schedule. If the Equipment acquired is
of category (i), (ii) or (iii) below, the effectiveness of this Schedule as it
relates to those items of Equipment is contingent upon Lessee's acknowledgment
at the time Lessor acquires the Equipment that Lessee has either received or
approved the relevant purchase documentation between vendor and Lessor for that
Equipment.
(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which
is specifically approved by Lessor.
(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at
Lessee's site and to which Lessee has clear title and ownership may be
considered by Lessor for inclusion under this Lease (the "Sale-Leaseback
Transaction"). Any request for a Sale-Leaseback Transaction must be
submitted to Lessor in writing (along with accompanying evidence of
Lessee's Equipment ownership satisfactory to Lessor for all Equipment
submitted) no later than September 27, 1996*. Lessor will not perform a
Sale-Leaseback Transaction for any request or accompanying Equipment
ownership documents which arrive after the date marked above by an asterisk
(*). Further, any sale-leaseback Equipment will be placed on lease subject
to: (1) Lessor prior approval of the Equipment; and (2) for Equipment
which is located in the headquarters and factory of Lessee purchased within
one year from the date hereof and for Equipment which is located in
Lessee's retail stores and also purchased one year from the date hereof,
Lessor agrees to pay 100% of Lessee's original cost.
(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment which
is obtained from a third party by Lessee for its use subject to Lessor's
prior approval of the Equipment and at Lessor's appraised value for such
used Equipment.
(iv) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or
used Equipment from its inventory at rates provided by Lessor.
2. COMMENCEMENT DATE
The Commencement Date for each item of new on-order or used on-order
Equipment will be the date Lessee approves the vendor invoice. The Commencement
Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase
price, and the Commencement Date for inventory Equipment shall be the Delivery
Date. Lessor will summarize all approved invoices, purchase documentation and
evidence of delivery, as applicable, received in the same calendar quarter into
a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1,
and the Initial Term will begin the first day of the calendar quarter
thereafter. Each Summary Equipment Schedule will contain the Equipment
location, description, serial number(s) and cost and will incorporate the terms
and conditions of the Master Lease and this Schedule and will constitute a
separate lease.
<PAGE>
3. OPTION TO EXTEND
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term of a Summary
Equipment Schedule, Lessee will have the right to extend the Initial Term of
such Summary Equipment Schedule for a period of one (1) year. In such event,
the rent to be paid during said extended period shall be mutually agreed upon
and if the parties cannot mutually agree, then the Summary Equipment Schedule
shall continue in full force and effect pursuant to the existing terms and
conditions until terminated in accordance with its terms. The Summary Equipment
Schedule will continue in effect following said extended period until terminated
by either party upon not less than ninety (90) days prior written notice, which
notice shall be effective as of the date of receipt.
4. PURCHASE OPTION
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term or the extended
term of the applicable Summary Equipment Schedule, Lessee will have the option
at the expiration of the Initial Term of the Summary Equipment Schedule to
purchase all, but not less than all, of the Equipment listed therein for a
purchase price not to exceed 22% of Lessor's original cost and upon terms and
conditions to be mutually agreed upon by the parties following Lessee's written
notice, plus any tax applicable at time of purchase. Said purchase price shall
be paid to Lessor at least thirty (30) days before the expiration date of the
Initial Term or extended term. Title to the Equipment shall automatically pass
to Lessee upon payment in full of the purchase price but, in no event, earlier
than the expiration of the fixed Initial Term or extended term, if applicable.
If the parties are unable to agree on the purchase price or the terms and
conditions with respect to said purchase, then the Summary Equipment Schedule
with respect to this Equipment shall remain in full force and effect.
Notwithstanding the exercise by Lessee of this option and payment of the
purchase price, until all obligations under the applicable Summary Equipment
Schedule have been fulfilled, it is agreed and understood that Lessor shall
retain a purchase money security interest in the Equipment listed therein and
the Summary Equipment Schedule shall constitute a Security Agreement under the
Uniform Commercial Code of the state in which the Equipment is located.
5. SPECIAL TERMS
The terms and conditions of the Lease as they pertain to this Schedule are
hereby modified and amended as follows:
Master Lease: This Schedule is issued pursuant to the Lease identified on page
1 of this Schedule. All of the terms and conditions of the Lease are
incorporated in and made a part a this Schedule as if they were expressly set
forth in this Schedule. The parties hereby reaffirm all of the terms and
conditions of the Lease (including, without limitation, the representations and
warranties set forth in Section 8) except as modified herein by this Schedule.
This Schedule may not be amended or rescinded except by a writing signed by both
parties.
<PAGE>
SELECT COMFORT CORPORATION COMDISCO, INC.
as Lessee as Lessor
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
Date: Date:
-------------------------- --------------------------
<PAGE>
EXHIBIT 1
SUMMARY EQUIPMENT SCHEDULE
This Summary Equipment Schedule dated XXXX is executed pursuant to
Equipment Schedule No. X to the Master Lease Agreement dated XXXX between
Comdisco, Inc. ("Lessor") and XXX ("Lessee"). All of the terms, conditions,
representations and warranties of the Master Lease Agreement and Equipment
Schedule No. X are incorporated herein and made a part hereof, and this Summary
Equipment Schedule constitutes a Schedule for the Equipment on the attached
invoices.
1. FOR PERIOD BEGINNING: AND ENDING:
-------------------- ----------
2. INITIAL TERM STARTS ON: INITIAL TERM:
---------------------- ------------
(Number of Rent Intervals)
3. TOTAL SUMMARY EQUIPMENT COST:
----------------------------
4. LEASE RATE FACTOR:
-----------------
5. RENT:
----
6. ACCEPTANCE DOC TYPE:
-------------------
<PAGE>
GUARANTY
In consideration for COMDISCO, INC. ("COMDlSCO") entering into the Master
Lease Agreement dated August 27, 1996, and all of its related Equipment
Schedules issued pursuant thereto (the "Lease") with Select Comfort Retail
Corporation (as "LESSEE"), a wholly-owned subsidiary of the undersigned, the
undersigned hereby guarantees the prompt and complete performance by said LESSEE
of all the terms and conditions of said Lease to be performed by it, including
but not limited to, the prompt payment of all rentals and other sums payable
thereunder. The undersigned further agrees to indemnify and hold COMDISCO, its
successors and assigns, harmless from and against any and all direct liability,
loss, damage or expense, including attorneys fees and court costs, which
COMDlSCO, its successors and assigns, may incur or sustain by reason of the
failure of said LESSEE to fully perform and comply with the terms and conditions
of said Lease. In no event will the undersigned be responsible for any indirect
or consequential damages of any kind.
This is a continuing, absolute and unconditional guaranty of performance
and payment and not of collection. The undersigned specifically waives any
right to subrogation, setoff or counterclaim, and any defense for changes in
applicable law or any other circumstances which might constitute a legal or
equitable defense or discharge of a guarantor or surety. The undersigned waives
any right to require a proceeding first against the Lessee, and waives notice of
acceptance hereof and of defaults hereunder. The undersigned exhaust any
security for the performance of the obligations of the Lessee, and agrees that
the liability of the undersigned shall not be affected or decreased by any
amendment, termination, extension, renewal, waiver or modification of said Lease
or the rejection or disaffirmance thereof in bankruptcy or like proceedings and
that certain obligations under the Lease may be accelerated upon any nonpayment
thereof by the Lessee. This Guaranty shall be specifically assignable to and
inure to the benefit of Lessor's Assignee and Secured Party as set forth in the
Lease and is irrevocable so long as there are any obligations of Lessee
remaining under the Lease.
This guaranty shall be governed by and construed in accordance with the
Laws of the State of Illinois.
Dated: August 27, 1996
------------------------------------
(Guarantor)
By:
---------------------------------
Title:
------------------------------
(Corporate Seal)
[co]
<PAGE>
EQUIPMENT SCHEDULE VL-2
DATED AS OF NOVEMBER 11, 1996
TO MASTER LEASE AGREEMENT
DATED AS OF AUGUST 27, 1996 (THE "MASTER LEASE")
LESSEE: SELECT COMFORT RETAIL CORPORATION LESSOR: COMDISCO, INC.
ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES:
- ------------------------ -----------------------
Mr. Dan McAthie
(612)551-7000 6111 North River Road
(612)551-7888 (FAX) Rosemont, Illinois 60018
Attn.: Venture Group
ADDRESS FOR NOTICES:
- -------------------
6105 Trenton Lane N.
Minneapolis, MN 55442-3240
Attn.:
CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly
- ------------------------ -------------
Same as above
Attn.:
Lessee Reference No.: __________________
(24 digits maximum)
LOCATION OF EQUIPMENT: INITIAL TERM: 36
- --------------------- ------------
Same as above (Number of Rent Intervals)
LEASE RATE FACTOR: 3.310%
-----------------
Attn.:
EQUIPMENT (as defined below): ADVANCE: $33,100
------- -------
Equipment specifically approved by Lessor, which shall be delivered to and
accepted by Lessee during the period November 11, 1996 through December
[January] 15, 1996 [1997] (''Equipment Delivery Period''), for which Lessor
receives vendor invoices approved for payment, up to an aggregate purchase price
of $1,000,000 ("Commitment Amount"). Equipment will include standard store
equipment (ie. display cases, shelving, furniture, lighting, electronic
equipment and signage) and exclude custom use equipment, leasehold improvements,
installation costs and delivery costs, rolling stock, special tooling,
"stand-alone" software, application software bundled into computer hardware,
hand held items, molds and fungible items.
Lessee may transfer a portion, not to exceed $250,000, of the Commitment Amount
available hereunder to Equipment Schedule VL-3 between Lessor and Lessee.
<PAGE>
1. EQUIPMENT PURCHASE
This Schedule contemplates Lessor's acquisition of Equipment for lease to
Lessee, either by one of the first three categories listed below or by providing
Lessee with Equipment from the fourth category, in a value up to the Commitment
Amount referred to on the face of this Schedule. If the Equipment acquired is
of category (i), (ii) or (iii) below, the effectiveness of this Schedule as it
relates to those items of Equipment is contingent upon Lessee's acknowledgment
at the time Lessor acquires the Equipment that Lessee has either received or
approved the relevant purchase documentation between vendor and Lessor for that
Equipment.
(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is
specifically approved by Lessor.
(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at
Lessee's site and to which Lessee has clear title and ownership may be
considered by Lessor for inclusion under this Lease (the "Sale-Leaseback
Transaction"). Any request for a Sale-Leaseback Transaction must be
submitted to Lessor in writing (along with accompanying evidence of
Lessee's Equipment ownership satisfactory to Lessor for all Equipment
submitted) no later than December 11, l996*. Lessor will not perform a
Sale-Leaseback Transaction for any request or accompanying Equipment
ownership documents which arrive after the date marked above by an asterisk
(*). Further, any sale-leaseback Equipment will be placed on lease subject
to: (1) Lessor prior approval of the Equipment; and (2) for all Equipment
with an invoice date one year prior to the date hereof, Lessor will pay
Lessee the net book value of the Equipment and for Equipment older than one
year and less than two years old Lessor will pay 70% of Lessee original
Equipment cost.
(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment
which is obtained from a third party by Lessee for its use subject to
Lessor's prior approval of the Equipment and at Lessor's appraised value
for such used Equipment.
(iv) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or
used Equipment from its inventory at rates provided by Lessor.
2. COMMENCEMENT DATE
The Commencement Date for each item of new on-order or used on-order
Equipment will be the date Lessee approves the vendor invoice. The Commencement
Date for sale-leaseback Equipment shall be the date Lessor tenders the purchase
price, and the Commencement Date for inventory Equipment shall be the Delivery
Date. Lessor will summarize all approved invoices, purchase documentation and
evidence of delivery, as applicable, received in the same calendar quarter into
a Summary Equipment Schedule in the form attached to this Schedule as Exhibit 1,
and the Initial Term will begin the first day of the calendar quarter
thereafter. Each Summary Equipment Schedule will contain the Equipment
location, description, serial number(s) and cost and will incorporate the terms
and conditions of the Master Lease and this Schedule and will constitute a
separate lease.
<PAGE>
3. OPTION TO EXTEND
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term of a Summary
Equipment Schedule, Lessee will have the right to extend the Initial Term of
such Summary Equipment Schedule for a period of one (1) year. In such event,
the rent to be paid during said extended period shall be mutually agreed upon
and if the parties cannot mutually agree, then the Summary Equipment Schedule
shall continue in full force and effect pursuant to the existing terms and
conditions until terminated in accordance with its terms. The Summary Equipment
Schedule will continue in effect following said extended period until terminated
by either party upon not less than ninety (90) days prior written notice, which
notice shall be effective as of the date of receipt.
4. PURCHASE OPTION
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term or the extended
term of the applicable Summary Equipment Schedule, Lessee will have the option
at the expiration of the Initial Term of the Summary Equipment Schedule to
purchase all, but not less than all, of the Equipment listed therein for a
purchase price not to exceed 22% of Lessor's original cost and upon terms and
conditions to be mutually agreed upon by the parties following Lessee's written
notice, plus any taxes applicable at time of purchase. Said purchase price
shall be paid to Lessor at least thirty (30) days before the expiration date of
the Initial Term or extended term. Title to the Equipment shall automatically
pass to Lessee upon payment in full of the purchase price but, in no event,
earlier than the expiration of the fixed Initial Term or extended term, if
applicable. If the parties are unable to agree on the purchase price or the
terms and conditions with respect to said purchase, then the Summary Equipment
Schedule with respect to this Equipment shall remain in full force and effect.
Notwithstanding the exercise by Lessee of this option and payment of the
purchase price, until all obligations under the applicable Summary Equipment
Schedule have been fulfilled, it is agreed and understood that Lessor shall
retain a purchase money security interest in the Equipment listed therein and
the Summary Equipment Schedule shall constitute a Security Agreement under the
Uniform Commercial Code of the state in which the Equipment is located.
5. SPECIAL TERMS
The terms and conditions of the Lease as they pertain to this Schedule are
hereby modified and amended as follows:
Master Lease: This Schedule is issued pursuant to the Lease identified on page
1 of this Schedule. All of the terms and conditions of the Lease are
incorporated in and made a part of this Schedule as if they were expressly set
forth in this Schedule. The parties hereby reaffirm all of the terms and
conditions of the Lease (including, without limitation, the representations and
warranties set forth in Section 8) except as modified herein by this Schedule.
This Schedule may not be amended or rescinded except by a writing signed by both
parties.
<PAGE>
SELECT COMFORT CORPORATION COMDISCO, INC.
as Lessee as Lessor
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
Date: Date:
-------------------------- --------------------------
<PAGE>
EXHIBIT 1
SUMMARY EQUIPMENT SCHEDULE
--------------------------
This Summary Equipment Schedule dated XXXX is executed pursuant to
Equipment Schedule No. X to the Master Lease Agreement dated XXXX between
Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions,
representations and warranties of the Master Lease Agreement and Equipment
Schedule No. X are incorporated herein and made a part hereof, and this Summary
Equipment Schedule constitutes a Schedule for the Equipment on the attached
invoices.
1. FOR PERIOD BEGINNING: AND ENDING:
-------------------- ----------
2. INITIAL TERM STARTS ON: INITIAL TERM:
-------------------- ----------
(Number of Rent Intervals)
3. TOTAL SUMMARY EQUIPMENT COST:
----------------------------
4. LEASE RATE FACTOR:
-----------------
5. RENT:
----
6. ACCEPTANCE DOC TYPE:
-------------------
<PAGE>
EQUIPMENT SCHEDULE VL-3
DATED AS OF NOVEMBER 11, 1996
TO MASTER LEASE AGREEMENT
DATED AS OF AUGUST 27, 1996 (THE "MASTER LEASE")
LESSEE: SELECT COMFORT RETAIL CORPORATION LESSOR: COMDISCO, INC.
ADMIN. CONTACT/PHONE NO.: ADDRESS FOR ALL NOTICES:
- ------------------------ -----------------------
Mr. Dan McAthie
(612) 551-7000 6111 North River Road
(612) 551-7888 (FAX) Rosemont, Illinois 60018
Attn.: Venture Group
ADDRESS FOR NOTICES:
- -------------------
6105 Trenton Lane N.
Minneapolis, MN 55442-3240
Attn.:
CENTRAL BILLING LOCATION: RENT INTERVAL: Monthly
- ------------------------ -------------
Same as above
Attn.:
Lessee Reference No.: __________________
(24 digits maximum)
LOCATION OF EQUIPMENT: INITIAL TERM: 36
- --------------------- ------------
Same as above (Number of Rent Intervals)
LEASE RATE FACTOR: 3.211%
-----------------
Attn.:
EQUIPMENT (as defined below): ADVANCE: $32,110
------- -------
Equipment specifically approved by Lessor, which shall be delivered to and
accepted by Lessee during the period November 11, 1996 through December
[January] 15, 1996 [1997] ("Equipment Delivery Period"), for which Lessor
receives vendor invoices approved for payment, up to an aggregate purchase price
of $l,000,000 ("Commitment Amount"). Equipment located in corporate
factory/headquarters including standard manufacturing, production and sewing
equipment [and point of sale equipment residing in retail locations] (with a
ready third party re-sale market), and excluding custom use equipment, leasehold
improvements, installation costs and delivery costs, rolling stock, special
tooling, "stand-alone" software, application software bundled into computer
hardware, hand held items, molds and fungible items.
Lessee may transfer a portion, not to exceed $250,000, of the Commitment Amount
available hereunder to Equipment Schedule VL-2 between Lessor and Lessee.
<PAGE>
1. EQUIPMENT PURCHASE
This Schedule contemplates Lessor's acquisition of Equipment for lease to
Lessee, either by one of the first three categories listed below or by providing
Lessee with Equipment from the fourth category, in a value up to the Commitment
Amount referred to on the face of this Schedule. If the Equipment acquired is
of category (i), (ii) or (iii) below, the effectiveness of this Schedule as it
relates to those items of Equipment is contingent upon Lessee's acknowledgment
at the time Lessor acquires the Equipment that Lessee has either received or
approved the relevant purchase documentation between vendor and Lessor for that
Equipment.
(i) NEW ON-ORDER EQUIPMENT. Lessor will purchase new Equipment which is
specifically approved by Lessor.
(ii) SALE-LEASEBACK EQUIPMENT. Any in-place Equipment installed at
Lessee's site and to which Lessee has clear title and ownership may be
considered by Lessor for inclusion under this Lease (the "Sale-Leaseback
Transaction"). Any request for a Sale-Leaseback Transaction must be
submitted to Lessor in writing (along with accompanying evidence of
Lessee's Equipment ownership satisfactory to Lessor for all Equipment
submitted) no later than December 11, 1996*. Lessor will not perform a
Sale-Leaseback Transaction for any request or accompanying Equipment
ownership documents which arrive after the date marked above by an asterisk
(*). Further, any sale-leaseback Equipment will be placed on lease subject
to: (1) Lessor prior approval of the Equipment; and (2) for all Equipment
with an invoice date one year prior to the date hereof, Lessor will pay
Lessee the net book value of the Equipment and for Equipment older than one
year and less than two years old Lessor will pay 70% of Lessee's original
Equipment cost.
(iii) USED ON-ORDER EQUIPMENT. Lessor will purchase used Equipment
which is obtained from a third party by Lessee for its use subject to
Lessor's prior approval of the Equipment and at Lessor's appraised value
for such used Equipment.
(iv) INVENTORY EQUIPMENT. Upon Lessee's request, Lessor may supply new or
used Equipment from its inventory at rates provided by Lessor.
2. COMMENCEMENT DATE
The Commencement Date for each item of new on-order or used on-order
Equipment will be the date Lessee approves the vendor invoice. The
Commencement Date for sale-leaseback Equipment shall be the date Lessor tenders
the purchase price, and the Commencement Date for inventory Equipment shall be
the Delivery Date. Lessor will summarize all approved invoices, purchase
documentation and evidence of delivery, as applicable, received in the same
calendar quarter into a Summary Equipment Schedule in the form attached to this
Schedule as Exhibit 1, and the Initial Term will begin the first day of the
calendar quarter thereafter. Each Summary Equipment Schedule will contain the
Equipment location, description, serial number(s) and cost and will incorporate
the terms and conditions of the Master Lease and this Schedule and will
constitute a separate lease.
<PAGE>
3. OPTION TO EXTEND
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term of a Summary
Equipment Schedule, Lessee will have the right to extend the Initial Term of
such Summary Equipment Schedule for a period of one (1) year. In such event,
the rent to be paid during said extended period shall be mutually agreed upon
and if the parties cannot mutually agree, then the Summary Equipment Schedule
shall continue in full force and effect pursuant to the existing terms and
conditions until terminated in accordance with its terms. The Summary Equipment
Schedule will continue in effect following said extended period until terminated
by either party upon not less than ninety (90) days prior written notice, which
notice shall be effective as of the date of receipt.
4. PURCHASE OPTION
So long as no Event of Default has occurred and is continuing hereunder,
and upon written notice no earlier than twelve (12) months and no later than
ninety (90) days prior to the expiration of the Initial Term or the extended
term of the applicable Summary Equipment Schedule, Lessee will have the option
at the expiration of the Initial Term of the Summary Equipment Schedule to
purchase all, but not less than all, of the Equipment listed therein for a
purchase price not to exceed 22% of Lessor's original cost and upon terms and
conditions to be mutually agreed upon by the parties following Lessee's written
notice, plus any taxes applicable at time of purchase. Said purchase price
shall be paid to Lessor at least thirty (30) days before the expiration date of
the Initial Term or extended term. Title to the Equipment shall automatically
pass to Lessee upon payment in full of the purchase price but, in no event,
earlier than the expiration of the fixed Initial Term or extended term, if
applicable. If the parties are unable to agree on the purchase price or the
terms and conditions with respect to said purchase, then the Summary Equipment
Schedule with respect to this Equipment shall remain in full force and effect.
Notwithstanding the exercise by Lessee of this option and payment of the
purchase price, until all obligations under the applicable Summary Equipment
Schedule have been fulfilled, it is agreed and understood that Lessor shall
retain a purchase money security interest in the Equipment listed therein and
the Summary Equipment Schedule shall constitute a Security Agreement under the
Uniform Commercial Code of the state in which the Equipment is located.
5. SPECIAL TERMS
The terms and conditions of the Lease as they pertain to this Schedule are
hereby modified and amended as follows:
Master Lease: This Schedule is issued pursuant to the Lease identified on page
1 of this Schedule. All of the terms and conditions of the Lease are
incorporated in and made a part of this Schedule as if they were expressly set
forth in this Schedule. The parties hereby reaffirm all of the terms and
conditions of the Lease (including, without limitation, the representations and
warranties set forth in Section 8) except as modified herein by this Schedule.
This Schedule may not be amended or rescinded except by a writing signed by both
parties.
<PAGE>
SELECT COMFORT CORPORATION COMDISCO, INC.
as Lessee as Lessor
By: By:
----------------------------- -----------------------------
Title: Title:
-------------------------- --------------------------
Date: Date:
-------------------------- --------------------------
<PAGE>
EXHIBIT 1
SUMMARY EQUIPMENT SCHEDULE
This Summary Equipment Schedule dated XXXX is executed pursuant to
Equipment Schedule No. X to the Master Lease Agreement dated XXXX between
Comdisco, Inc. ("Lessor") and XXXX ("Lessee"). All of the terms, conditions,
representations and warranties of the Master Lease Agreement and Equipment
Schedule No. X are incorporated herein and made a part hereof, and this Summary
Equipment Schedule constitutes a Schedule for the Equipment on the attached
invoices.
1. FOR PERIOD BEGINNING: AND ENDING:
-------------------- ----------
2. INITIAL TERM STARTS ON: INITIAL TERM:
---------------------- ------------
(Number of Rent Intervals)
3. TOTAL SUMMARY EQUIPMENT COST:
----------------------------
4. LEASE RATE FACTOR:
-----------------
5. RENT:
----
6. ACCEPTANCE DOC TYPE:
-------------------
<PAGE>
EXHIBIT 10.8
SUPPLY AGREEMENT
BY AND BETWEEN
SELECT COMFORT CORPORATION
AND
XXXXX
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission]
August 23, 1994
<PAGE>
SUPPLY AGREEMENT
THIS SUPPLY AGREEMENT, made and entered into this 30th day of August 1994, by
and between SELECT COMFORT CORPORATION, a corporation organized and existing
under the laws of the State of Minnesota, having its principal place of
business and office at, 6105 Trenton Lane North, Minneapolis, Minnesota
55422, hereinafter referred to as "Select," and XXXXXXX, a.s., organized
under the laws of XXXXXX and having its principal place of
business at XXXXXXXXXX, hereinafter referred to as "Supplier."
[A portion of this recital has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this exhibit with this recital intact has been filed
separately with the Securities and Exchange Commission]
WITNESSETH:
WHEREAS, Select is a user of the goods hereinafter described and
desires to establish a formal relationship for the purchase from Supplier of
such goods; and
WHEREAS, Supplier is a manufacturer and supplier of such goods and is
willing to provide and sell them to Select, all upon the terms and conditions
hereinafter stated.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth, the parties hereby agree as follows:
ARTICLE
1.
DEFINITIONS
For purposes of this Agreement, the following terms, word and phrases, where
written with an initial capital letter shall have the following meanings:
1.1 "Products" shall mean air chambers for bedding purposes as manufactured
by Supplier according to Exhibit IV and enclosures numbers 1-11,
including improvements to such products as that term is defined below.
1.2 "North America" shall mean the United States of America, including its
territories and possessions, Canada and Mexico.
1.3 "Improvements" shall mean modifications and/or enhancements to the design
of patented products owned by Select, developed by either party during
the term of this Agreement.
ARTICLE
2.
SUPPLY AND PURCHASE
2.1 During the initial term of this Agreement, Select agrees to purchase from
Supplier, and Supplier agrees to supply to Select, at the prices
determined in accordance herewith, and subject to the terms and
conditions hereinafter set forth, the annual minimum volumes of Products
set forth in Exhibit I attached hereto.
<PAGE>
2.2 Supplier agrees that all air chamber "Products" as specified in
Enclosures 1-11, shall deliver exclusively to Select. Inquiries that
Supplier receives relative to air chambers as specified in Enclosures
1-11, shall be directed to Select.
ARTICLE
3.
ORDERS, DELIVERY AND MODIFICATION OF PRODUCTS
3.1 Purchase Orders. Select shall submit purchase orders for the Products 90
days prior to the requested delivery date. The delivery date will be the
date the order is expected to arrive at the German seaport. Supplier
shall confirm within one (1) week the purchase orders and delivery dates
in writing. All purchase orders shall be in accordance with the terms
and conditions of this Agreement and at the prices established herein.
3.2 Delivery of Products. Supplier shall deliver the Products within the
times (which is of the essence) specified on the individual purchase
orders, in the quantities specified on the individual purchase orders and
at the prices specified herein, all in accordance with Select's
instructions and specifications. Select reserves the right to adjust the
mix of the specifications on purchase orders up to 45 days prior to the
scheduled ship date.
3.3 Shipping Terms. The initial shipping term for Products delivered by
Supplier to Select pursuant to this Agreement shall be the shipping term
set forth in Exhibit II attached hereto. Such shipping term may be
changed by the parties upon mutual agreement in writing at any time
during the term of this Agreement. The shipping terms stipulated by the
Parties shall be interpreted in accordance with the terms of Incoterm '90
defined by the International Chamber of Commerce. In the event of a
change in the shipping term, the parties shall adjust the prices for
Products set forth in Exhibit II to reflect the changed shipping term.
Such changed shipping term and prices shall be substituted for the
shipping term and prices then set forth in Exhibit II, and a new Exhibit
II, as so modified, shall be attached to the Agreement.
3.4 Packing and shipping will be done according to the Master Specification
(Exhibit IV) and Select instructions which will be in conformity with the
other paragraphs of this Agreement.
ARTICLE
4.
QUALITY OF PRODUCTS
The quality of all Products delivered by Supplier shall be in accordance with
the Master Specifications (Exhibit IV) and meet any and all applicable laws
and regulations promulgated by any federal, state, local or municipal
governmental authority or agency, including, but not limited to, public
safety, health and environmental standards, to be clearly defined by Select
from time to time.
2
<PAGE>
ARTICLE
5.
COOPERATION
REVISED 9/25/95
The parties agree to cooperate in research and development efforts relating to
quality improvement and cost reduction of the Products. Such research and
development shall take the form and extent as mutually agreed to by the parties
from time to time.
ARTICLE
6.
PRICES AND PAYMENT
REVISED 9/25/95 6.2
6.1 Prices and Adjustments. The initial prices to be paid by Select for the
Products purchased hereunder shall be the prices set forth in Exhibit II
attached hereto. In addition to any changes to such prices pursuant to
Paragraph 3.3 hereof, such prices may be subject to annual adjustments as
agreed to by the parties hereto in writing. Such adjusted prices shall
be substituted for the prices then set forth in Exhibit II, and a new
Exhibit II, as so modified, shall be attached to this Agreement.
6.2 Payment Terms. Payment for delivered Products shall be made via a wire
transfer by Select in United States Dollars thirty (30) days from the
date of the Bill of Lading for Products ordered and delivered. From time
to time Select may wish to pay for delivered Products prior to sea
shipment at a discounted price as set forth in Exhibit II.
Select Comfort Corporation XXXXXXX
By:_________________________________ By:____________________________________
Title:______________________________ Title:_________________________________
Date:_______________________________ Date:__________________________________
[A portion of this Section has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this Section intact has been filed
separately with the Securities and Exchange Commission]
ARTICLE 4.
QUALITY OF PRODUCTS
The quality of all Products delivered by Supplier shall be in accordance with
the Master Specifications (Exhibit IV) and meet any and all applicable laws
and regulations promulgated by any federal, state, local or municipal
governmental authority or agency, including, but not limited to, public
safety, health and environmental standards, to be clearly defined by Select
from time to time.
3
<PAGE>
ARTICLE 5.
COOPERATION
The parties agree to cooperate in research and development efforts relating to
quality and costs of the Products and to improvement in the quality of the
Products. Such research and development shall take the form and extent as
mutually agreed to by the parties from time to time.
ARTICLE 6.
PRICES AND PAYMENT
6.1 Prices and Adjustments. The initial prices to be paid by Select for the
Products purchased hereunder shall be the prices set forth in Exhibit II
attached hereto. The prices will be in effect on a calendar basis running from
January 1 through December 31 of each year. In addition to any changes to such
prices pursuant to Paragraph 3.3 hereof, such prices may be subject to annual
adjustments as agreed to by the parties hereto in writing. Such adjusted prices
shall be substituted for the prices then set forth in Exhibit II, and a new
Exhibit II, as so modified, shall be attached to this Agreement.
6.2 Payment Terms. Payment for delivered Products shall be made by Select in
United States Dollars no later than thirty (30) days from the date of the Bill
of Lading for Products ordered and delivered. Select shall open an L/C minimum
15 days in advance before each shipment. From time to time Select may wish to
pay for delivered Products prior to sea shipment at a discounted price as set
forth in Exhibit II.
ARTICLE
7.
TAXES
Except as otherwise provided in this Agreement, Supplier shall be responsible
for and shall pay any and all (a) export duties, (b) gross receipt, income and
pre-sale taxes and (c) other governmental charges which relate to the
production, delivery and sale of the Products, as such are now or may hereafter
be imposed under or by any state, local or municipal governmental authority or
agency in XXXXXXX. Supplier shall not be responsible and shall not
pay any taxes or charges as outlined in above levied after delivery to Select.
ARTICLE
8.
ACCEPTANCE AND WARRANTY
8.1 Acceptance of Products. Select shall conduct any acceptance tests at the
time the Products are being prepared for shipment to Select's customers
at its principal place of business in Minneapolis, Minnesota, not later
than one (1) year from the date of receipt. Any Products not rejected by
Select by written notice to Supplier within such period shall be deemed
accepted. Any Products rejected by Select shall be reported in
accordance with the Claim Procedure (Exhibit III).
4
<PAGE>
8.2 Warranty.
8.2.1 Supplied warrants to Select for a period of twelve (12) months
from the date of delivery of the Products to Select in accordance
with Section 3.2 of this Agreement that all Products sold
hereunder shall (i) be free from any defects in design (if such
design was created by Supplier), material or workmanship and be of
good and merchantable quality, (ii) conform to Select's
specifications or any sample or prototype approved by Select and
(iii) comply and have been produced, processed and delivered in
conformity with Article 4 herein.
8.2.2 Supplier warrants that all Products to be delivered hereunder and
all property to be returned to Select shall be free and clear of
any and all liens and encumbrances whatsoever.
8.2.3 The foregoing warranties shall survive inspection of, delivery of
and payment for the Products and shall run in favor of Select and
its customers. If Supplier breaches any of the foregoing
warranties during the twelve-month period, or if Supplier fails to
perform or comply with any provision of this Agreement, Supplier
shall be liable to Select for any and all costs, expenses
(including reasonable attorneys' fees, court costs and litigation
expenses) and damages arising therefrom.
8.3 Quantity obligations.
8.3.1 Select undertakes to purchase annually minimum volumes as
indicated in Exhibit I of this Agreement.
8.3.2 Supplier undertakes to produce annually minimum volumes as
indicated in Exhibit 1 of this Agreement.
ARTICLE
9.
PROPRIETARY RIGHTS
9.1 Select retains all proprietary rights in and to all designs of air
chambers, as specified in Enclosures 1-11.
9.2 The Supplier undertakes to continuously develop an activity of research
concerning the quality improvements of the Products taking into
consideration the market requirements and the economical production.
The development costs are to be borne by the Supplier.
9.3 The Supplier undertakes to develop the product according to special
request of Select. Such improvements are made for consideration on basis
of mutual written agreements of
5
<PAGE>
the parties. The costs of these development activities are to be borne
as agreed upon in writing by both parties prior to the actual development
activities.
9.4 Supplier retains all proprietary rights in and to all designs,
engineering details and other data pertaining to its manufacturing
technology as specified in the Master Specification (Exhibit IV) and
Enclosures 1-11.
ARTICLE
10.
TRADEMARKS
Nothing contained in this Agreement will be deemed to grant either party any
right, title or interest in the trademarks, trade name, service marks,
proprietary words, or symbols which the other may have adopted or used at any
time in the course of its business.
ARTICLE
11.
CONFIDENTIALITY
Each party agrees that all information disclosed to it or any of its
affiliates by the other, whether verbally or in writing, shall be presumed to
be proprietary and confidential to such party, unless otherwise stated in
writing. Each party shall prevent the disclosure of any such proprietary
information to any third person or party by maintaining such proprietary
information in strictest confidence absent service of compulsory process.
Each party shall not during the term of this Agreement or thereafter, use any
such proprietary information for any purpose other than as specifically set
forth in this Agreement.
ARTICLE
12.
COMPETITIVE ACTIVITIES
During the term of this Agreement, Supplier will not (a) participate in the
management or operations of any enterprise engaged in any activities in
competition with the business of Select, or (b) cause or permit any enterprise
in which Supplier participates or invests to engage in any such activities.
ARTICLE
13.
TERM AND TERMINATION
13.1 Term of Agreement. This Agreement shall take effect as of the date
hereof and shall continue in full force and effect for a period of three
(3) years and thereafter shall be automatically renewed for successive
terms of one (1) year each, unless either party provides written notice
to the other party at least ninety (90) days prior to the expiration
6
<PAGE>
of the initial term or any renewal term of its desire not to renew this
Agreement upon the expiration of the relevant term.
13.2 Termination. This Agreement may be terminated only in accordance with
the following provisions:
13.2.1 This Agreement may be terminated at any time upon the
mutual written consent of the parties hereto;
13.2.2 Either party hereto may terminate this Agreement by giving
notice in writing to the other party in the event that the
other party is in material breach of this Agreement and
shall have failed to cure such breach within thirty (30)
days of receipt of written notice thereof from the first
party specifying the nature of the breach; or
13.2.3 Either party hereto may terminate this Agreement at any
time by giving notice in writing to the other party, if (1)
the other party shall at any time (i) file or have filed
against it a petition of any type as to its bankruptcy,
(ii) be adjudged bankrupt or insolvent, (iii) make an
assignment for the benefit of its creditors or (iv) go into
liquidation or receivership; (2) a trustee, receiver or
other equivalent officer is appointed for the other party
by any court or governmental authority or any third party
to administer or liquidate, who is not dismissed within
sixty (60) days of the date of appointment; or (3)
dissolution proceedings are commenced by or against the
other party, which are not dismissed within sixty (60) days
of commencement.
13.2.4 This Agreement may be terminated by Select or Supplier with
minimum 90 days written notice if either party discontinues
using the Products in its business.
13.3 Rights and Obligations on Termination. In the event of the termination
of this Agreement, the parties hereto shall have the following rights and
obligations:
13.3.1 The obligations of Supplier under the terms of Sections 4,
7, 8, 9, 10 and 11 hereof shall survive the termination of
this Agreement.
13.3.2 Within twenty (20) days after the termination of this
Agreement, each party shall return to the other any and all
proprietary and confidential information of such party then
in its possession or under its control.
13.3.3 Termination or expiration of this Agreement shall not
release either party from the obligation to make payment to
the other party of all amounts then and thereafter due and
payable under this Agreement within thirty (30) days of
termination.
7
<PAGE>
ARTICLE
14.
FORCE MAJEURE
14.1 Definition. Force Majeure shall mean any event or condition, not
existing as of the date of signature of this Agreement, not reasonably
foreseeable as of such date and not reasonably within the control of
either party, which prevents in whole or in material part the performance
by one of the parties of its obligations hereunder or which renders the
performance of such obligations so difficult or costly as to make such
performance commercially unreasonable. Without limiting the foregoing,
the following shall constitute events or conditions of Force Majeure:
acts of State or, governmental action, riots, disturbance, war,
strikes, lockouts, slowdowns, prolonged shortage of energy supplies,
epidemics, fire, flood, hurricane, typhoon, earthquake, lightning and
explosion.
14.2 Notice. Upon giving notice to the other party, a party affected by an
event of Force Majeure shall be released without any liability on its
part from the performance of its obligations under this Agreement, except
for the obligation to pay any amounts due and owing hereunder, but only
to the extent and only for the period that its performance of such
obligations is prevented by the event of Force Majeure. Such notice
shall include a description of the nature of the event of Force Majeure,
its cause and possible consequences. The party claiming Force Majeure
shall promptly notify the other party of the termination of such event.
14.3 Suspension of Performance. During the period that the performance by one
of the parties of its obligations under this Agreement has been suspended
by reason of an event of Force Majeure, the other party may likewise
suspend the performance of all or part of its obligations hereunder.
ARTICLE
15.
DISPUTES AND GOVERNING LAW
15.1 Disputes.
15.1.1 The parties hereto shall submit any disputes arising under
this Agreement to arbitration. Any disputes submitted to
arbitration shall be finally determined by arbitration
before a single arbitrator conducted in Minneapolis,
Minnesota under the Commercial Arbitration Rules of the
American Arbitration Association. The award in such
arbitration shall be final and enforceable in any court of
competent jurisdiction.
15.1.2 Select and Supplier shall each pay its own costs, expenses,
and reasonable attorneys' fees incurred in such arbitral
proceedings and shall share equally any fees for
arbitration, provided, however, that if the arbitrator
deems it more equitable to otherwise divide the costs,
expenses, attorneys' fees and arbitral fees between the
parties in dispute, the arbitrator shall designate in his
award which
8
<PAGE>
party is entitled to recover all or a portion of its costs
necessarily incurred in the arbitration procedures.
15.2 Governing Law. This Agreement shall be governed by, and interpreted and
construed in accordance with, the laws of the State of Minnesota.
ARTICLE
16.
GENERAL TERMS AND CONDITIONS
16.1 Relationship. This Agreement does not make either party hereto the
employee, agent or legal representative of the other party for any
purpose whatsoever. Neither party hereto is granted any right or
authority to assume or to create any obligation or responsibility,
express or implied, on behalf of or in the name of the other party. In
fulfilling its obligations pursuant to this Agreement, each party hereto
shall act as an independent contractor.
16.2 Assignment. Each party shall not assign or otherwise transfer any of its
rights or obligations under this Agreement without the prior written
consent of the other party. This Agreement and the rights and obligation
arising hereunder shall not be affected by any change in the corporate
structure of ownership of the parties.
16.3 Notices. All notices permitted or required to be given hereunder shall
be delivered personally or sent by telecopy or registered or certified
air mail, postage prepaid, return receipt requested, addressed to the
addresses of the parties hereto as set forth above or to such other
addresses as the parties may designate by like notice from time to time.
Notices so given shall be effective (a) upon the date of personal
delivery, (b) if sent by telecopy, concurrently with the transmission
thereof if the sender's machine produces a transmission report
without notice of a communication fault, (c) on the third (3rd)
business day following the date on which such notice is mailed by
registered or certified air mail.
16.4 Entire Agreement. This Agreement, including the Exhibits attached hereto
and by this reference made an integral part hereof, constitute the entire
agreement of the parties hereto with respect to the subject matter hereof
and thereof, and supersede all previous proposals, verbal or written,
expressed or implied, and all negotiations, conversations or discussions
heretofore between the parties hereto related to the subject matter of
this Agreement.
16.5 Amendment. This Agreement shall not be deemed or construed to be
modified, amended, rescinded, canceled or waived, in whole or in part,
except by written statement signed by both parties hereto.
16.6 Severability. In the event that any of the terms of this Agreement are
in conflict with any rule of law or statutory provision or otherwise
unenforceable under the laws or regulations of any government or
subdivision thereof, such terms shall be deemed
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<PAGE>
stricken from this Agreement, but such invalidity or
unenforceability shall not invalidate any of the other terms of this
Agreement, and this Agreement shall continue in force, unless the
invalidity or unenforceability of any such provisions hereof does
substantial violence to, or where the invalid or unenforceable
provisions comprise an integral part of, or are otherwise inseparable
from, the remainder of this Agreement.
16.7 Compliance with Applicable Laws. The parties to this Agreement shall at
all times conduct their activities hereunder in accordance with all
applicable federal, state and local laws, rules and governmental
regulations.
16.8 Waiver. No failure by either party hereto to take any action or assert
any right hereunder shall be deemed to be a waiver of such right in the
event of the continuation or repetition of the circumstances giving rise
to such right.
16.9 Counterparts. This Agreement may be executed in two (2) or more
counterparts in the English language, each of which shall be deemed an
original, but all of which shall constitute one (1) and the same
instrument.
16.10 Remedies Cumulative. Each of the rights and remedies of the parties set
forth in this Agreement shall be cumulative with all other such rights
and remedies, as well as with all rights and remedies of the parties
hereto otherwise available at law or in equity.
16.11 Indemnification. Each party shall indemnify the other and hold it
harmless from and against any and all costs including reasonable
attorneys' fees, court costs and litigation expenses, losses, expenses
and damages incurred by the other party in connection with any claim or
cause of action brought by any third person or party against it which, in
whole or in part is based upon or arises out of any breach of any of its
obligations hereunder.
16.12 Captions. The captions of Articles and Sections of this Agreement are
included for convenient reference only, shall not be construed as part of
this Agreement and shall not be used to define, limit, extend or
interpret the terms hereof.
16.13 Offset. In the event that any amount shall be due by either party
hereunder, the other party may, after providing written notice thereof
and a reasonable opportunity to cure, at its option, either (a) seek
reimbursement directly from the non-paying party or (b) set off any
amount that it owes to the non-paying party pursuant to this Agreement
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the day and year first written above.
SELECT COMFORT CORPORATION XXXXXXX
By /s/ By /s/
---------------------------------- -------------------------------------
Title President & CEO Title General Manager
------------------------------- ----------------------------------
[A portion of this signature page has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this signature page intact has been filed
separately with the Securities and Exchange Commission]
10
<PAGE>
EXHIBIT 10.9
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission.]
EQUIPMENT PURCHASE AND SOFTWARE LICENSE AGREEMENT
THIS AGREEMENT is made as of this 6th day of February, 1996 by and
between SELECT COMFORT CORPORATION, a Minnesota corporation (the "CUSTOMER"),
with an address of 6105 Trenton Lane North, Suite 100, Minneapolis, Minnesota
55442-3240, and XXXXX, organized under the laws of XXXXXX (the "SUPPLIER"),
with an address at XXXXXXXXXX.
WHEREAS, the Supplier is the manufacturer of certain air chambers that
are used by the Customer in the manufacture of Customer's air sleep systems; and
WHEREAS, the Customer has acquired certain equipment and has developed
certain software and testing procedures, which equipment, software and testing
procedures are useful in testing the air chambers sold by the Supplier to the
Customer, which testing may result in substantial savings to the Supplier; and
WHEREAS, the Supplier desires to purchase from the Customer the equipment
and to license from the Customer the software and testing procedures, all as
hereinafter described and subject to the terms and conditions of this Agreement;
and
WHEREAS, the Customer desires to obtain reasonable protection of its
proprietary and confidential information that has been developed by the Customer
at considerable expense;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto do hereby agree
as follows:
1. PURCHASE AND SALE OF EQUIPMENT. The Supplier hereby agrees to
purchase from the Customer, and the Customer hereby agrees to sell to the
Supplier, the equipment described on Exhibit I attached hereto and made a part
hereof, for an aggregate purchase price of $20,454.69 US Dollars, payable
immediately upon receipt of the equipment by the Supplier. Supplier hereby
acknowledges that the Customer is not the manufacturer of the equipment. The
Customer does hereby assign to the Supplier, subject to and effective only upon
receipt by the Customer of the purchase price for the equipment set forth above,
all of the Customer's rights under the original equipment manufacturer's
warranty relating to the equipment, a copy of which warranty will be included
with the equipment delivered to the Supplier. Select Comfort will provide
warranty support to XXXXX as outlined in the original equipment manufacturers
warranty. EXCEPT AS EXPRESSLY SET FORTH ABOVE, THE CUSTOMER DISCLAIMS ALL
WARRANTIES ON PRODUCTS FURNISHED HEREUNDER, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. THE EXPRESS PROVISIONS OF THIS SECTION ARE IN LIEU OF ALL
OBLIGATIONS OR LIABILITIES ON THE PART OF THE CUSTOMER FOR DAMAGES, INCLUDING
BUT NOT LIMITED TO, SPECIAL, INDIRECT, OR CONSEQUENTIAL DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE USE OR PERFORMANCE OF THE EQUIPMENT ACQUIRED BY THE
SUPPLIER HEREUNDER.
2. GRANT OF A LICENSE FOR LIMITED USE OF SOFTWARE AND TESTING
PROCEDURES.
(a) GRANT OF LICENSE. For and in consideration of the
agreements of the Supplier set forth in this Agreement, and subject to
the fulfillment by the Supplier of all of its obligations set
<PAGE>
forth in this Agreement, the Customer hereby grants to the Supplier a
non-exclusive, non-transferable, license to use the software and the
testing procedures described on Exhibit 2 attached hereto and made a
part hereof (the "LICENSED TECHNOLOGY") solely and exclusively to
enable the Supplier to test the air cell bladders to be sold by the
Supplier to the Customer, and for no other use or purpose of any kind.
The Supplier may not sell, lease, license or otherwise transfer any
of the Licensed Technology or any rights therein, nor otherwise use or
exploit the Licensed Technology for any use or purpose except as
expressly set forth above. Specifically, and not in limitation of the
foregoing, the Supplier acknowledges and agrees that it is not
authorized to use the Licensed Technology for the purpose of testing
any products of the supplier that may be held for sale to any party
other than the Customer.
(b) OWNERSHIP OF LICENSED TECHNOLOGY. The Supplier hereby
acknowledges and agrees that the Licensed Technology constitutes
proprietary and confidential trade secret information of the Customer,
and acknowledges and agrees that the Customer has enforceable trade
secret protection with respect to the Licensed Technology and enforceable
copyright protection in the documentation relating to the Licensed
Technology.
(c) CONFIDENTIALITY. The Supplier acknowledges and agrees that
the Licensed Technology, and all embodiments thereof in whatever form,
constitute "CONFIDENTIAL INFORMATION" as such term is used in this
Agreement. The Supplier agrees that it shall not use the Confidential
Information for any purpose other than solely and exclusively for the
purpose of testing air cell bladders to be sold to the Customer as
ordered and specified by the Customer in connection with the business
relationship between the Customer and the Supplier. The Supplier hereby
agrees that it will not at any time, whether during the term of this
Agreement or thereafter, use the Confidential Information for any use or
purpose not expressly authorized by this Agreement, and will not disclose
the Confidential Information to any person or entity not expressly
authorized by the Customer to receive such Confidential Information,
except that the Supplier may disclose the Confidential Information to any
of its employees who have a need to know such Confidential Information
solely for the purpose of enabling such employees to perform the tests of
the air cell bladders to be sold by the Supplier to the Customer, and
provided that the Supplier advises each such employee that the
Confidential Information is proprietary and confidential trade secret
information of the Customer and that such employees are obligated to
maintain the confidentiality of all such Confidential Information. Upon
the termination of the license granted hereunder for any reason, the
Supplier agrees to promptly return to the Customer all of the
Confidential Information, including all copies or other reproductions
thereof in whatever form in Supplier's possession or control.
(d) DERIVATIVES. The term "DERIVATIVES" as used in this
Agreement shall mean any software developed in part by the Supplier which
is a derivative or modification of any of the Licensed Technology. So
long as the license granted by the Customer to the Supplier pursuant to
this Agreement remains in effect, the Supplier shall notify the Customer
promptly of any Derivative of which it becomes aware, and the Supplier
shall provide any such Derivative, including all documentation and source
code relating thereto, to the Customer as soon as reasonably practicable
thereafter.
(e) RIGHTS OF INSPECTION AND AUDIT. The Supplier hereby agrees
that the Customer and its representatives shall have full access to the
premises, facilities, books, records and operations of the Supplier
during the term of the license granted hereunder for the purpose of
enabling the
2
<PAGE>
Customer to verify compliance by the Supplier with all of the terms and
conditions of this Agreement as it pertains to the operation of this
equipment and software.
(f) TERM. The license granted by the Customer to the Supplier
hereunder shall become effective upon the execution and delivery of this
Agreement by each of the parties hereto and shall continue for as long as
the Supplier continues to produce and sell to the Customer air chambers,
subject to earlier termination as hereinafter set forth.
Upon termination of this agreement, Supplier agrees to return to the
customer, all equipment and software described in Exhibit I attached
hereto. The supplier will depreciate the equipment and software based on
a five (5) year depreciation schedule (60 equal months). If termination
of this agreement occurs prior to the full depreciation of the equipment,
the customer will issue payment to the supplier based on the balance of
the depreciation value prior to the supplier returning the equipment and
software to the customer.
(g) TERMINATION. Notwithstanding the provisions of Section
2(f) above, this Agreement and the limited license to use the Licensed
Technology granted by the Customer to the Supplier pursuant to this
Section 2 may be terminated:
(1) By either party upon the failure of the other party
hereto to perform or fulfill, at the time and in the manner herein
provided, any material obligation or condition required to be
performed or fulfilled by such party hereunder. Any such failure,
upon its occurrence, shall constitute a breach, and termination
shall be effective immediately following not less than [thirty
(30)] days after written notice thereof from the non-breaching
party; or
(2) The assignment by the supplier of its business or
substantially all of its assets for the benefit of creditors, or
the appointment of a receiver, trustee in bankruptcy or
appointment of a similar officer to take charge of all or any
substantial part of such property, or if the supplier is
adjudicated as bankrupt, and such other condition or conditions
are not corrected to the satisfaction of the customer within [ten
(10)] days following written notice thereof.
Notwithstanding the foregoing, upon any termination of this
Agreement pursuant to this Section 2(g), the obligations of the
Supplier pursuant to Section 2(c) above shall continue in full and
effect following such termination.
(h) DISCLAIMER OF WARRANTIES. THE LIMITED LICENSE GRANTED
HEREUNDER IS GRANTED "AS IS" WITHOUT ANY WARRANTY OF ANY KIND. THE
CUSTOMER DISCLAIMS ANY WARRANTIES OF ANY KIND, EXPRESSED OR IMPLIED,
INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
3. MISCELLANEOUS TERMS AND CONDITIONS.
(a) ASSIGNMENT. Neither party shall have the right to assign
or otherwise transfer any of its rights or obligations under this
Agreement, except with the written consent of the other party. Any
prohibited assignment or attempted assignment shall be null and void.
3
<PAGE>
(b) ENTIRE AGREEMENT. This Agreement, including the Exhibits
attached hereto and incorporated herein by reference, constitutes the
entire Agreement of the parties with respect to the subject matter
hereof, and supersedes all previous proposals, oral or written, and all
negotiations, conversations or discussions heretofore had between the
parties related to this Agreement.
(c) AMENDMENT AND MODIFICATION. This Agreement shall not be
modified, amended, rescinded, canceled or waived, in whole or in part,
except by written amendment signed by each of the parties hereto.
(d) NOTICES. Any notice required or permitted to be given
hereunder shall be deemed sufficient if given by facsimile or by
reputable international courier, addressed as indicated below or to such
other address as the respective parties may designate by like notice from
time to time by notice so given shall be deemed to be effective upon
receipt by the addressee.
In the case of the Customer:
Select Comfort Corporation
6105 Trenton Lane North
Suite 100
Minneapolis, Minnesota 55442-3240
Fax Number: (612) 551-7826
Attention: Procurement Director
In the case of the Supplier:
XXXXX
XXXXX
XXXXXX
Fax Number: XXXXXX
Attention: Managing Director
[Portions of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this section intact has been filed
separately with the Securities and Exchange Commission]
(e) SEVERABILITY. In the event that any of the terms of this
Agreement are in conflict with any rule of law or statutory provision or
otherwise unenforceable under the laws or regulations of any
jurisdiction, such terms shall be deemed stricken from this Agreement,
but such invalidity or unenforceability shall not invalidate any of the
other terms of this Agreement, and this Agreement shall continue in
force, unless the invalidity or unenforceability of any such provisions
hereof does substantial violence to, or where the invalid or
unenforceable provisions comprise an integral part of, or other
inseparable from, the remainder of this Agreement.
(f) GOVERNING LAW. The English language version of this
Agreement, if it shall have been translated into any other language,
shall be the controlling version of this Agreement. This Agreement shall
be governed by and constituted in accordance with the laws of the State
of Minnesota. Each of the parties hereto hereby consents to the personal
jurisdiction of the state and federal courts located in Hennepin County,
State of Minnesota, and to the use of the English language, for the
adjudication of any claim or controversy arising under this Agreement.
4
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
SELECT COMFORT CORPORATION
By /s/
----------------------------------------------
Its Senior Vice President, Operations
--------------------------------------------
XXXXX
By /s/
----------------------------------------------
Its Managing Director
--------------------------------------------
[Portions of this signature page have been omitted pursuant to a request
for confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with this signature page intact has been filed
separately with the Securities and Exchange Commission]
5
<PAGE>
Exhibit 10.10
- -------------------------------------------------------------------------------
PURCHASE AGREEMENT
dated as of March 27, 1997
by and between
SELECT COMFORT CORPORATION
and
GENERAL ELECTRIC CAPITAL CORPORATION
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PURCHASE AGREEMENT
Section Page
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. PURCHASE OF NOTE AND WARRANTS . . . . . . . . . . . . . . . . . . . 11
2.1 Purchase of Note and Warrants. . . . . . . . . . . . . . . . 11
2.2 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Optional Prepayment. . . . . . . . . . . . . . . . . . . . . 11
2.4 Mandatory Redemption . . . . . . . . . . . . . . . . . . . . 12
2.5 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . 12
2.6 Interest on Note . . . . . . . . . . . . . . . . . . . . . . 12
2.7 Original Issue Discount. . . . . . . . . . . . . . . . . . . 13
2.8 Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.9 Receipt of Payments. . . . . . . . . . . . . . . . . . . . . 14
2.10 Application of Payments. . . . . . . . . . . . . . . . . . . 14
2.11 Sharing of Payments. . . . . . . . . . . . . . . . . . . . . 14
2.12 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.13 Access . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.14 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. PURCHASER'S REPRESENTATIONS, WARRANTIES AND
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
3.1 Investment Intention . . . . . . . . . . . . . . . . . . . . 17
3.2 Accredited Investor. . . . . . . . . . . . . . . . . . . . . 17
3.3 Corporate Existence. . . . . . . . . . . . . . . . . . . . . 17
3.4 Corporate Power; Authorization; Enforceable
Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 17
3.5 Restrictions on Transfer . . . . . . . . . . . . . . . . . . 17
3.6 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . 17
4. COMPANY'S REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . 18
4.1 Authorized and Outstanding Shares of
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . 18
4.2 Authorization and Issuance of Note and
Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.3 Securities Laws. . . . . . . . . . . . . . . . . . . . . . . 19
4.4 Corporate Existence; Compliance with Law . . . . . . . . . . 19
4.5 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . 19
4.6 Corporate Power; Authorization; Enforceable
Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 19
4.7 Financial Statements . . . . . . . . . . . . . . . . . . . . 20
i
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4.8 Ownership of Property. . . . . . . . . . . . . . . . . . . . 20
4.9 Material Contracts; Indebtedness . . . . . . . . . . . . . . 21
4.10 Environmental Protection . . . . . . . . . . . . . . . . . . 21
4.11 Labor Matters. . . . . . . . . . . . . . . . . . . . . . . . 22
4.12 Other Ventures . . . . . . . . . . . . . . . . . . . . . . . 23
4.13 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.14 No Litigation. . . . . . . . . . . . . . . . . . . . . . . . 24
4.15 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.16 Employment and Labor Agreements. . . . . . . . . . . . . . . 24
4.17 Patents, Trademarks, Copyrights and
Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.18 No Material Adverse Effect . . . . . . . . . . . . . . . . . 24
4.19 ERISA. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.20 Registration Under Exchange Act; Registration
Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.21 Ordinary Course of Business. . . . . . . . . . . . . . . . . 26
4.22 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . 26
4.23 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . 26
4.24 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . 26
5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.1 Affirmative and Financial Covenants. . . . . . . . . . . . 26
(a) Books and Records . . . . . . . . . . . . . . . . . . . 27
(b) Financial and Business Information. . . . . . . . . . . 27
(c) Communication with Accountants. . . . . . . . . . . . . 28
(d) Tax Compliance. . . . . . . . . . . . . . . . . . . . . 28
(e) Insurance . . . . . . . . . . . . . . . . . . . . . . . 28
(f) Employee Plans. . . . . . . . . . . . . . . . . . . . . 28
(g) Compliance with Laws. . . . . . . . . . . . . . . . . . 29
(h) Financial Covenants . . . . . . . . . . . . . . . . . . 29
(i) Maintenance of Existence and Conduct
of Business . . . . . . . . . . . . . . . . . . . . . . 30
5.2 Negative Covenants . . . . . . . . . . . . . . . . . . . . . 31
(a) Permitted Acquisitions and
Investments . . . . . . . . . . . . . . . . . . . . . . 31
(b) Sales of Assets; Liquidation. . . . . . . . . . . . . . 31
(c) Employee Loans. . . . . . . . . . . . . . . . . . . . . 31
(d) Preferred Stock . . . . . . . . . . . . . . . . . . . . 31
(e) Transactions with Affiliates. . . . . . . . . . . . . . 31
(f) Indebtedness. . . . . . . . . . . . . . . . . . . . . . 32
(g) Liens . . . . . . . . . . . . . . . . . . . . . . . . . 32
(h) Restricted Payments . . . . . . . . . . . . . . . . . . 32
(i) Mergers; Subsidiaries . . . . . . . . . . . . . . . . . 32
5.3 Additional Covenants . . . . . . . . . . . . . . . . . . . . 32
6. CONDITIONS PRECEDENT. . . . . . . . . . . . . . . . . . . . . . . . 33
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6.1 Conditions Precedent . . . . . . . . . . . . . . . . . . . . 33
6.2 Additional Conditions. . . . . . . . . . . . . . . . . . . . 34
7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES. . . . . . . . . . . . . . . 34
7.1 Events of Default. . . . . . . . . . . . . . . . . . . . . . 34
7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 36
7.3 Waivers by Company . . . . . . . . . . . . . . . . . . . . . 36
7.4 Right of Set-Off . . . . . . . . . . . . . . . . . . . . . . 37
8. SUBORDINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
8.1 Note Subordinated to Senior Debt . . . . . . . . . . . . . . 37
8.2 Priority and Payment Over of Proceeds in
Certain Events. . . . . . . . . . . . . . . . . . . . . . . 37
8.3 Rights of Holders of Senior Debt Not To Be
Impaired. . . . . . . . . . . . . . . . . . . . . . . . . . 39
8.4 Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . 39
8.5 Obligations of Company Unconditional. . . . . . . . . . . . 40
8.6 Notice to Holders. . . . . . . . . . . . . . . . . . . . . . 40
8.7 Right of Any Holder as Holder of Senior
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
8.8 Reinstatement. . . . . . . . . . . . . . . . . . . . . . . . 40
9. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
9.1 Complete Agreement; Modification of Agreement,
Sale of Interest . . . . . . . . . . . . . . . . . . . . . . 41
9.2 Fees and Expenses. . . . . . . . . . . . . . . . . . . . . . 42
9.3 No Waiver by Purchaser . . . . . . . . . . . . . . . . . . . 42
9.4 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.5 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . 43
9.6 Severability . . . . . . . . . . . . . . . . . . . . . . . . 43
9.7 Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.8 Conflict of Terms. . . . . . . . . . . . . . . . . . . . . . 43
9.9 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . 43
9.10 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 43
9.11 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 45
9.12 Section Titles . . . . . . . . . . . . . . . . . . . . . . . 45
9.13 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . 45
9.14 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . 45
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Schedules
Schedule 1(A) - Certain Shareholders
Schedule 1(B) - Certain Permitted Liens
Schedule 3.5 - Certain Competitors
Schedule 4.1 - Stockholders and Stock
Schedule 4.5 - Subsidiaries
Schedule 4.7 - Obligations and Dividends
Schedule 4.8 - Real Property
Schedule 4.9 - Material Contracts
Schedule 4.10 - Environmental Matters
Schedule 4.11 - Labor Matters
Schedule 4.12 - Other Ventures
Schedule 4.13 - Taxes
Schedule 4.14 - Litigation
Schedule 4.16 - Employment Contracts
Schedule 4.17 - Patents, Trademarks, Etc.
Schedule 4.18 - Material Adverse Effect
Schedule 4.19 - ERISA
Schedule 4.20 - Registration Rights
Schedule 4.22 - Insurance
Schedule 5.2(c) - Loans to Employees
Exhibits
Exhibit A Form of Note
Exhibit B Form of Series A Warrant
Exhibit C Form of Series B Warrant
Exhibit D Opinion of Company Counsel
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PURCHASE AGREEMENT
PURCHASE AGREEMENT, dated as of March 27, 1997, by and between Select
Comfort Corporation, a Minnesota corporation ("Company"), and General Electric
Capital Corporation, a New York corporation ("GE Capital" or "Purchaser").
W I T N E S S E T H :
WHEREAS, Company has agreed to issue and sell to Purchaser, and Purchaser
has agreed to purchase from Company, upon the terms and conditions hereinafter
provided, a senior subordinated promissory note in the principal amount of
$15,000,000 (the "Note"), a warrant to purchase an aggregate of 1,100,000 shares
of common stock of Company (the "Series A Warrant") and a warrant to purchase
1,000,000 shares of common stock of Company (the "Series B Warrant"; and
collectively with the Series A Warrant, the "Warrants");
NOW, THEREFORE, in consideration of the premises and the covenants
hereinafter contained, it is agreed as follows:
1. DEFINITIONS
"Affiliate" shall mean, with respect to any Person, (i) each Person that,
directly or indirectly, owns or controls, whether beneficially, or as a trustee,
guardian or other fiduciary, 5% or more of the Stock having ordinary voting
power in the election of directors of such Person, (ii) each Person that
controls, is controlled by or is under common control with such Person or any
Affiliate of such Person, (iii) each of such Person's officers, directors, joint
venturers and partners or (iv) each member of such Person's immediate family
(including spouse, parents, children, siblings and in-laws of a similar
relation). For the purpose of this definition, "control" of a Person shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of its management or policies, whether through the ownership of voting
securities, by contract or otherwise.
"Agreement" shall mean this Purchase Agreement including all amendments,
modifications and supplements hereto and any appendices, exhibits and schedules
hereto or thereto, and shall refer to the Agreement as the same may be in effect
at the time such reference becomes operative.
"Balance Sheet" shall have the meaning set forth in Section 4.7(a) hereof.
"Business Day" shall mean any day that is not a Saturday, a Sunday or a day
on which banks are required or permitted to be closed in the State of New York.
"Capital Lease" shall mean, with respect to any Person, any lease of any
property (whether real, personal or mixed) by such Person as lessee that, in
accordance with GAAP, either would be required to be classified and accounted
for as a capital lease on a balance sheet of such Person or otherwise be
disclosed as a capital lease in a note to such balance sheet, other than, in
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the case of Company or a Subsidiary of Company, any such lease under which
Company or such Subsidiary is the lessor.
"Capital Lease Obligation" shall mean, with respect to any Capital Lease,
the amount of the obligation of the lessee thereunder that, in accordance with
GAAP, would appear on a balance sheet of such lessee in respect of such Capital
Lease or otherwise be disclosed in a note to such balance sheet.
"Cash Equivalents" shall mean (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency thereof
maturing within one year from the date of acquisition thereof; (ii) commercial
paper maturing no more than one year from the date of creation thereof and at
the time of their acquisition having an "investment grade" rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.;
and (iii) certificates of deposit, maturing not more than one year from the date
of creation thereof, issued by commercial banks incorporated under the laws of
the United States of America, each having combined capital, surplus and
undivided profits of not less than $200,000,000 and having a rating of "A" or
better by a nationally recognized rating agency.
"Change of Control" shall mean any of the following: (a) any person or
group of persons (within the meaning of the Exchange Act) (other than GE Capital
and its Affiliates and those existing shareholders of Company set forth on
Schedule 1(A) hereto) shall have acquired beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the SEC under the Exchange Act) of 30% or
more of the issued and outstanding shares of Common Stock of Company; (b)
Company shall be a party to a merger or consolidation in which Company is not
the survivor or in which Company's stockholders immediately prior thereto own
less than a majority of the outstanding voting stock of the survivor; or (c)
Company shall have sold, leased or otherwise transferred all or substantially
all of its assets.
"Charges" shall mean all federal, state, county, city, municipal, local,
foreign or other governmental (including, without limitation, PBGC) taxes at the
time due and payable, levies, assessments, charges, liens, claims or
encumbrances upon or relating to (i) Company's or any of its Subsidiaries'
employees, payroll, income or gross receipts, (ii) Company's or any of its
Subsidiaries' ownership or use of any of its assets, or (iii) any other aspect
of Company's or any of the Subsidiaries' business.
"Closing" shall have the meaning set forth in Section 2.2 hereof.
"Closing Date" shall have the meaning set forth in Section 2.2 hereof.
"COBRA" shall have the meaning set forth in Section 4.19(j) hereof.
"Common Stock" shall mean the common stock, $0.01 par value per share, of
Company.
"Company" shall have the meaning set forth in the first paragraph of this
Agreement.
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"Consolidated Net Worth" shall mean, with respect to Company on a
consolidated basis, its total stockholders' equity determined in accordance with
GAAP, plus any amount associated with amortizing the original issue discount
specified in Section 2.7 from the date hereof through the date on which
Consolidated Net Worth is being measured, to the extent deducted in calculating
Company's consolidated net income.
"Default" shall mean any event which, with the passage of time or notice or
both, would, unless cured or waived, become an Event of Default.
"EBITDA" shall mean, with respect to Company for any period, the
consolidated operating income (before extraordinary or nonrecurring items,
interest income or expense, taxes, depreciation and amortization) of Company and
its Subsidiaries determined in accordance with GAAP.
"Environmental Laws" shall mean all federal, state and local laws,
statutes, ordinances and regulations, now or (other than with respect to Section
4.10) hereafter in effect, and in each case as amended or supplemented from time
to time, and any judicial or administrative interpretation thereof, including,
without limitation, any applicable judicial or administrative order, consent
decree or judgment, relative to the applicable Real Estate, relating to the
regulation and protection of human health, safety, the environment and natural
resources (including, without limitation, ambient air, surface water,
groundwater, wetlands, land surface or subsurface strata, wildlife, aquatic
species and vegetation). Environmental Laws include but are not limited to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601 ET SEQ.) ("CERCLA"); the Hazardous Material
Transportation Act, as amended (49 U.S.C. Section 1801 ET SEQ.); the Federal
Insecticide, Fungicide, and Rodenticide Act, as amended (7 U.S.C. Section 136 ET
SEQ.); the Resource Conservation and Recovery Act, as amended (42 U.S.C. Section
6901 ET SEQ.) ("RCRA"); the Toxic Substance Control Act, as amended (15 U.S.C.
Section 2601 ET SEQ.); the Clean Air Act, as amended (42 U.S.C. Section 740 ET
SEQ.); the Federal Water Pollution Control Act, as amended (33 U.S.C. Section
1251 ET SEQ.); the Occupational Safety and Health Act, as amended (29 U.S.C.
Section 651 ET SEQ.) ("OSHA"); and the Safe Drinking Water Act, as amended (42
U.S.C. Section 300f ET SEQ.), and any and all regulations promulgated
thereunder, and all analogous state and local counterparts or equivalents and
any transfer of ownership notification or approval statutes.
"Environmental Liabilities and Costs" shall mean all liabilities,
obligations, responsibilities, remedial actions, losses, damages, punitive
damages, consequential damages, treble damages, costs and expenses (including,
without limitation, all fees, disbursements and expenses of counsel, experts and
consultants and costs of investigation and feasibility studies), fines,
penalties, sanctions and interest incurred as a result of any claim, suit,
action or demand by any person or entity, whether based in contract, tort,
implied or express warranty, strict liability, criminal or civil statute or
common law (including, without limitation, any thereof arising under any
Environmental Law, permit, order or agreement with any Governmental Authority)
and which relate to any health or safety condition regulated under any
Environmental Law or in connection with any other environmental matter or Spill
or the presence of a Hazardous Substance or threatened Spill of any Hazardous
Substance.
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"ERISA" shall mean the Employee Retirement Income Security Act of 1974 (or
any successor legislation thereto), as amended from time to time and any
regulations promulgated thereunder.
"ERISA Affiliate" shall mean, with respect to Company, any trade or
business (whether or not incorporated) under common control with Company and
which, together with Company, are treated as a single employer within the
meaning of Section 414(b), (c), (m) or (o) of the IRC, excluding Purchasers and
each other person which would not be an ERISA Affiliate if Purchasers did not
own any issued and outstanding shares of Stock of Company.
"ERISA Event" shall mean, with respect to Borrower or any ERISA Affiliate,
(i) a Reportable Event with respect to a Title IV Plan or a Multiemployer Plan;
(ii) the withdrawal of Borrower, any of its Subsidiaries or any ERISA Affiliate
from a Title IV Plan subject to Section 4063 of ERISA during a plan year in
which it was a substantial employer, as defined in Section 4001 (a) (2) of
ERISA; (iii) the complete or partial withdrawal of Borrower, any of its
Subsidiaries or any ERISA Affiliate from any Mulletemployer Plan; (iv) the
filing of a notice of intent to terminate a Title IV Plan or the treatment of a
plan amendment as a termination under Section 4041 of ERISA; (v) the institution
of proceedings to terminate a Title IV Plan or Multiemployer Plan by the PBGC;
(vi) the failure to make required contributions to a Pension Plan; or (vii) any
other event or condition which might reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Title IV Plan or Multiemployer Plan or the
imposition of any liability under Title IV of ERISA, other than PBGC premiums
due but not delinquent under Section 4007 of ERISA.
"Event of Default" shall have the meaning set forth in Section 7.1 hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and all rules and regulations promulgated thereunder.
"Financials" shall mean the financial statements referred to in Section
4.7(a) hereof.
"Fiscal Year" shall mean the twelve month period ending on the Saturday
closest to December 31. Subsequent changes of the fiscal year of Company shall
not change the term "Fiscal Year," unless the Required Holders shall consent in
writing to such changes.
"Fixed Charges" shall mean, with respect to Company for any period, the
aggregate of all consolidated interest expenses paid or accrued, plus scheduled
payments of principal with respect to Indebtedness, plus scheduled payments of
dividends on and scheduled mandatory redemption payments (which have not been
waived) on Company's outstanding preferred stock, in all cases during such
period by Company and its Subsidiaries, less any amount associated with
amortizing the original issue discount specified in Section 2.7 to the extent
included in calculating Company's consolidated interest expense.
"GAAP" shall mean generally accepted accounting principles in the United
States of America as in effect from time to time, except that for purposes of
the financial covenants
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<PAGE>
contained in Section 5.17(h) hereof, GAAP shall be as in effect on the date
of the most recent Financials and shall be applied in a manner consistent
therewith.
"GE Capital" shall have the meaning set forth in the first paragraph of
this Agreement.
"Governmental Authority" shall mean any nation or government, any state or
other political subdivision thereof, and any agency, department or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guaranteed Indebtedness" shall mean, as to any Person, any obligation of
such Person (other than guaranties by Company or any of its Subsidiaries of
obligations of Company or any of its Subsidiaries) guaranteeing any
Indebtedness, lease, dividend, or other obligation ("primary obligations") of
any other Person (the "primary obligor") in any manner including, without
limitation, any obligation or arrangement of such Person (a) to purchase or
repurchase any such primary obligation, (b) to advance or supply funds (i) for
the purchase or payment of any such primary obligation or (ii) to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet condition of the primary
obligor, (c) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation, or (d) to
indemnify the owner of such primary obligation against loss in respect thereof.
"Hazardous Substance" shall have the meaning set forth in Section 4.10 (a)
hereof.
"Indebtedness" of any Person shall mean (i) all indebtedness of such Person
for borrowed money or for the deferred purchase price of property or services
(including, without limitation, reimbursement and all other obligations with
respect to surety bonds, letters of credit and bankers' acceptances, whether or
not matured, but not including obligations to trade creditors incurred in the
ordinary course of business), (ii) all obligations evidenced by notes, bonds,
debentures or similar instruments, (iii) all indebtedness created or arising
under any conditional sale or other title retention agreements with respect to
property acquired by such Person (even though the rights and remedies of the
seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), (iv) all Capital Lease Obligations, (v)
all Guaranteed Indebtedness, (vi) all Indebtedness referred to in clause (i),
(ii), (iii), (iv) or (v) above secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien upon or in property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not assumed
or become liable for the payment of such Indebtedness and (vii) all liabilities
under Title IV of ERISA.
"Interest Payment Date" shall have the meaning assigned to such term in
Section 2.6(a) hereof.
"IRC" shall mean the Internal Revenue Code of 1986, as amended, and any
successor thereto.
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"IRS" shall mean the Internal Revenue Service, or any successor thereto.
"Lien" shall mean any mortgage or deed of trust, pledge, hypothecation,
assignment, deposit arrangement, lien, charge, claim, security interest,
easement or encumbrance, or preference, priority or other security agreement or
preferential arrangement of any kind or nature whatsoever (including, without
limitation, any title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement perfecting a security interest
as to assets owned by the relevant Person under the Uniform Commercial Code or
comparable law of any jurisdiction).
"Loan Documents" shall mean this Agreement, the Note and all other
agreements, instruments, documents and certificates, including, without
limitation, pledges, powers of attorney, consents, assignments, contracts,
notices, and all other written matter whether heretofore, now or hereafter
executed by or on behalf of Company, and delivered to Purchaser, in its capacity
as a purchaser of the Note hereunder, in connection with this Agreement or the
transactions contemplated hereby, but not including the Warrants.
"Material Adverse Effect" shall mean a material adverse effect on (i) the
business, assets, operations, prospects or financial or other condition of
Company or of Company and its Subsidiaries taken as a whole or (ii) Company's
ability to pay the Obligations in accordance with the terms thereof.
"Material Contracts" means (i) all of Company's and its Subsidiaries'
contracts, agreements, leases (other than leases for real property) or other
instruments to which Company or any of its Subsidiaries is a party or by which
Company, its Subsidiaries or its properties are bound, which involve payments by
or to Company or its Subsidiaries of more than $100,000, (ii) all of Company's
and its Subsidiaries' loan agreements, bank lines of credit agreements,
indentures, mortgages, deeds of trust, pledge and security agreements, factoring
agreements, conditional sales contracts, letters of credit or other debt
instruments, (iii) all non-competition and similar agreements by which Company
is bound not to compete, (iv) all written contracts for the employment of any
officer or employee not terminable at will, (v) all agreements between Company
and any of its existing stockholders or their Affiliates, (vi) all consulting
agreements, (vii) any guarantees by Company or any of its Subsidiaries and
(viii) all other material contracts not made in the ordinary course of business.
"Maximum Lawful Rate" shall have the meaning set forth in Section 2.6(d)
hereof.
"Multiemployer Plan" shall mean a "multiemployer plan" as defined in
Section 4001 (a) (3) of ERISA, and to which Company, any of its Subsidiaries or
any ERISA Affiliate is making, is obligated to make, has made or been obligated
to make, contributions on behalf of participants who are or were employed by any
of them.
"Note" shall mean the $15,000,000 senior subordinated promissory note of
Company to be issued to Purchaser hereunder, substantially in the form of
Exhibit A hereto.
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"Obligations" shall mean all amounts owing by Company to Purchaser and any
of its assignees pursuant hereto or the Note, including, without limitation, all
principal, interest, fees, expenses, attorneys' fees and any other sum
chargeable to Company under any of the Loan Documents.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any successor
thereto.
"Pension Plan" shall mean any "employee pension plan", as defined in
Section 3(2) of ERISA, maintained by Company, any of its Subsidiaries or any of
its ERISA Affiliates to which Company, any of its Subsidiaries or any of its
ERISA Affiliates contributed or is obligated to contribute thereunder.
"Permitted Indebtedness" means, with respect to Company and its
Subsidiaries, (i) taxes or assessments or other governmental charges or levies,
either not yet due and payable or to the extent that nonpayment thereof is
permitted by the terms of this Agreement; (ii) obligations under workmen's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (iii) bids, tenders, contracts (other than contracts for
the payment of money) or leases to which Company or any of its Subsidiaries is a
party as lessee made in the ordinary course of business; (iv) public or
statutory obligations of Company or any of its Subsidiaries; (v) all deferred
taxes and (vi) all unfunded pension fund and other employee benefit plan
obligations and liabilities but only to the extent permitted to remain unfunded
under applicable law.
"Permitted Liens" shall mean the following: (i) Liens for taxes or
assessments or other governmental charges or levies, either not yet due and
payable or to the extent that nonpayment thereof is permitted by the terms of
this Agreement; (ii) pledges or deposits securing obligations under workmen's
compensation, unemployment insurance, social security or public liability laws
or similar legislation; (iii) pledges or deposits securing bids, tenders,
contracts (other than contracts for the payment of money) or leases to which
Company or any of its Subsidiaries is a party as lessee made in the ordinary
course of business; (iv) Liens arising solely by virtue of any statutory or
common law provision relating to bankers' liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; (v) workers, mechanics, suppliers, carriers,
warehousemen's or other similar liens arising in the ordinary course of business
and securing indebtedness, not yet due and payable; (vi) deposits securing or in
lieu of surety, appeal or customs bonds in proceedings to which Company or any
of its Subsidiaries is a party; (vii) Liens arising in the ordinary course of
business in connection with obligations that are not overdue or which are being
contested in good faith and by appropriate proceedings, including, but not
limited to, Liens under bid, performance and other surety bonds, supersedeas and
appeal bonds, landlord Liens arising under leases of real property, Liens on
advance or progress payments received from customers under contracts for the
sale, lease or license of goods, software or services and upon the products
being sold or licensed, in each case securing performance of the underlying
contract or the repayment of such advances in the event final acceptance of
performance under such contracts does not occur, and Liens upon funds collected
temporarily from others pending payment or remittance on their behalf; (viii)
zoning restrictions, easements, licenses, or other restrictions on the use of
real property or other minor irregularities in title (including leasehold title)
thereto, so long as the
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same do not materially impair the use, value, or marketability of such real
property, leases or leasehold estates; (ix) Liens existing on the date hereof
and described on Schedule 1(B) hereto; and (x) Liens granted to Purchaser or
any of Purchaser's Affiliates under any private label credit card
arrangements.
"Person" shall mean any individual, sole proprietorship, partnership,
limited liability company, joint venture, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, entity or
government (whether federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Plan" shall mean any "employee benefit plan", as defined in Section 3(3)
of ERISA, and any other employee benefit arrangements or payroll practices,
including, without limitation, severance pay, sick leave, vacation pay, salary
continuation for disability, consulting or other compensation agreements,
retirement, deferred compensation, bonus, stock purchase, hospitalization,
medical insurance, life insurance and scholarship programs maintained by Company
and any of its Subsidiaries to which Company or any of its Subsidiaries
contributed or is obligated to contribute thereunder.
"Purchaser" shall have the meaning set forth in the first paragraph of this
Agreement.
"Qualified IPO" means a sale of Company's Common Stock pursuant to an
initial public offering registered under the Securities Act which yields net
proceeds to Company (after underwriting discounts and commissions) of at least
$20,000,000 and which results in a post-offering valuation of Company's total
equity of at least $200,000,000 based on the per share offering price and the
number of issued and outstanding shares of Company's Common Stock.
"Reportable Event" shall mean any of the events described in Section
4043(b) (1), (2), (3), (5), (6), (8) or (9) of ERISA.
"Required Holders" shall mean Purchaser and any of its assignees who hold
at least a majority of the outstanding principal amount of the Note.
"Restricted Payment" shall mean (i) the declaration of any dividend or the
incurrence of any liability to make any other payment or distribution of cash or
other property or assets in respect of Company's Stock or (ii) any payment on
account of the purchase, redemption or other retirement of Company's Stock or
any other payment or distribution made in respect of any Stock of Company,
either directly or indirectly, which is not made in the form of Stock of
Company.
"Retiree Welfare Plan" shall refer to any Welfare Plan providing for
continuing coverage or benefits for any participant or any beneficiary of a
participant after such participant's termination of employment, other than
continuation coverage provided pursuant to COBRA or any comparable state law and
at the sole expense of the participant or the beneficiary of the participant.
8
<PAGE>
"SEC" shall mean the U.S. Securities and Exchange Commission, or any
successor thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended, and all
rules and regulations promulgated thereunder.
"Senior Debt" shall mean all principal of and premium, if any, and interest
on, and all other amounts owing in respect of Indebtedness (other than the Note)
of Company now or hereafter outstanding which is permitted hereunder to be
outstanding, other than Permitted Indebtedness.
"Series A Warrant" shall mean the warrant for 1,100,000 shares of Common
Stock to be issued by Company to Purchaser hereunder substantially in the form
of Exhibit B hereto.
"Series B Warrant" shall mean the warrant for 1,000,000 shares of Common
Stock to be issued by Company to Purchaser hereunder substantially in the form
of Exhibit C hereto.
"Solvent" shall mean, when used with respect to any Person, that:
(a) the present fair salable value of such Person's assets is in
excess of the total amount of such Person's liabilities;
(b) such Person is able to pay its debts as they become due; and
(c) such Person does not have unreasonably small capital to carry on
such Person's business as theretofore operated and all businesses in which
such Person is about to engage.
"Spill" shall have the meaning set forth in Section 4.10 (a) hereof.
"Stock" shall mean all shares, options, warrants, general or limited
partnership interests, limited liability company membership interest,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited liability company or equivalent entity whether
voting or nonvoting, including, without limitation, common stock, preferred
stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of
the General Rules and Regulations promulgated by the SEC under the Exchange
Act).
"Subordinated Debt" shall have the meaning set forth in Section 8.1 hereof.
"Subsidiary" shall mean, with respect to any Person, (a) any corporation of
which an aggregate of more than 50% of the outstanding Stock having ordinary
voting power to elect a majority of the board of directors of such corporation
(irrespective of whether, at the time, Stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time, directly or indirectly, owned
legally or beneficially by such Person and/or one or more Subsidiaries of such
Person, and (b) any partnership or other entity in which such Person and/or one
or more Subsidiaries of such Person
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<PAGE>
shall have an interest (whether in the form of voting or participation in
profits or capital contribution) of more than 50%.
"Taxes" shall have the meaning set forth in Section 2.14 (a) hereof.
"Transaction Documents" shall mean this Agreement, the Note and the
Warrants.
"Title IV Plan" shall mean a Pension Plan, other than a Multiemployer Plan,
which is covered by Title IV of ERISA.
"Unfunded Pension Liability" shall mean, at any time, the aggregate amount,
if any, of the sum of (i) the amount by which the present value of all accrued
benefits under each Title IV Plan exceeds the fair market value of all assets of
such Title IV Plan allocable to such benefits in accordance with Title IV of
ERISA, all determined as of the most recent valuation date for each such Title
IV Plan using the actuarial assumptions in effect under such Title IV Plan for
funding purposes, and (ii) for a period of five (5) years following a
transaction reasonably likely to be covered by Section 4069 of ERISA, the
liabilities (whether or not accrued) that could be avoided by Borrower, any of
its Subsidiaries or any ERISA Affiliate as a result of such transaction.
"Warrants" shall mean the collective reference to the Series A Warrant and
Series B Warrant.
"Welfare Plan" shall mean any welfare plan, as defined in Section 3(1) of
ERISA, which is maintained or contributed to by Company, any of its Subsidiaries
or any ERISA Affiliate.
"Withdrawal Liability" means, at any time, the aggregate amount of the
liabilities, if any, pursuant to Section 4201 of ERISA, and any increase in
contributions pursuant to Section 4243 of ERISA with respect to all
Multiemployer Plans.
Any accounting term used in this Agreement shall have, unless otherwise
specifically provided herein, the meaning customarily given such term in
accordance with GAAP, and all financial computations hereunder shall be
computed, unless otherwise specifically provided herein, in accordance with GAAP
consistently applied. That certain terms or computations are explicitly
modified by the phrase "in accordance with GAAP" shall in no way be construed to
limit the foregoing. The words "herein," "hereof" and "hereunder" and other
words of similar import refer to this Agreement as a whole, including the
Annexes, Exhibits and Schedules hereto, as the same may from time to time be
amended, modified or supplemented, and not to any particular section, subsection
or clause contained in this Agreement. Wherever from the context it appears
appropriate, each term stated in either the singular or plural shall include the
singular and the plural, and pronouns stated in the masculine, feminine or
neuter gender shall include the masculine, the feminine and the neuter.
2. PURCHASE OF NOTE AND WARRANTS
2.1 PURCHASE OF NOTE AND WARRANTS. Subject to the terms and conditions
set forth in this Agreement, Purchaser agrees to subscribe for and purchase from
Company, and Company agrees
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to issue and sell to Purchaser, the Note, the Series A Warrant and the Series
B Warrant for an aggregate purchase price of $15,000,000, $1,100 and $1,000,
respectively, containing the terms set forth herein and in Exhibits A, B and
C hereto, respectively. The principal amount of the Note shall be
$15,000,000, and the maturity date thereof shall be March 31, 2003.
2.2 CLOSING. The closing of the purchase and sale of the Note and
Warrants (the "Closing") shall take place within five Business Days after the
satisfaction or waiver of the conditions set forth in Article 6 hereof or such
date and time as shall be mutually agreed to by the parties hereto (the "Closing
Date") at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York,
New York, or such other place as shall be mutually agreed to by the parties
hereto.
On the Closing Date, Company will deliver to Purchaser the Note and
Warrants payable to and registered in the name of Purchaser, respectively,
against delivery by Purchaser of the purchase price therefor by wire transfer of
funds to the account of Company.
2.3 OPTIONAL PREPAYMENT. Company shall have the right at any time or from
time to time and without premium or penalty, except as provided below, on 30
days' prior written notice to Purchaser, to voluntarily prepay all or any
portion (in multiples of not less than $500,000 or the amount outstanding on the
Note) of the Note. Each prepayment shall be accompanied by the payment of
accrued and unpaid interest on the amount being prepaid, through the date of
prepayment and shall be further accompanied by a prepayment premium in an amount
equal to the percentage of the principal amount being prepaid set forth below
based upon the number of years after the Closing Date during which such
prepayment occurs:
<TABLE>
<CAPTION>
DURING YEARS PERCENTAGE
<S> <C>
1 11%
2 8%
3 6%
4 4%
5 2%
thereafter 0%
</TABLE>
Notwithstanding the foregoing, if the Note or any portion thereof is prepaid
within 60 days of a Qualified IPO, the prepayment premium shall be 11% of the
principal being repaid if occurring during the first year after the Closing Date
(less the aggregate amount of interest paid on the portion of the Note being
prepaid during such year, but not below zero) and 0% thereafter.
2.4 MANDATORY REDEMPTION. Upon the occurrence of a Change of Control,
Purchaser, by written notice to Company within thirty (30) days of the
occurrence thereof, may require Company to redeem (i) all or a portion of the
Note for a price which would then be applicable to a voluntary prepayment by
Company (without regard to the Qualified IPO provisions) pursuant to Section 2.3
hereof, and (ii) all or a portion of the Warrants or Common Stock issued upon
exercise thereof for a cash price equal to the highest price per share of Common
Stock paid in such Change of Control transaction (or allocable to a share of
Common Stock) multiplied by the
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<PAGE>
number of shares issuable upon exercise of the Warrants (less the applicable
exercise price) and number of such outstanding shares of Common Stock.
Upon the consummation of a Qualified IPO, Purchaser, by written notice to
Company within forty five (45) days of the occurrence thereof, may require
Company to redeem up to 50% of the Note for a price which would then be
applicable to a voluntary prepayment following a Qualified IPO pursuant to
Section 2.3 hereof.
At least 30 days prior to the redemption by Company of any shares of any
series of its outstanding preferred stock, Company shall provide Purchaser with
notice of any such redemption, setting forth (i) the number of shares of each
series of preferred stock to be redeemed, and (ii) the Highest Redemption Factor
(as hereinafter defined) relating to such redemption. Within such 30 day
period, Purchaser may require Company to redeem up to that portion of the Note
equal to the product of (x) $15,000,000, multiplied by (y) the Highest
Redemption Factor, for a price which would then be applicable to a voluntary
prepayment by Company (without regard to the Qualified IPO provisions) pursuant
to Section 2.3 hereof, which redemption shall occur prior to any such preferred
stock redemption. For purposes of this Section 2.4, the "Highest Redemption
Factor" shall be calculated as follows: Company shall calculate, with respect
to each series of its preferred stock being redeemed, a fraction, the numerator
of which shall equal the number of shares of such series of preferred stock
being redeemed, and the denominator of which shall equal the total number of
shares of such series of preferred stock outstanding on the Closing Date. The
highest of all fractions calculated pursuant to the immediately preceding
sentence shall be the "Highest Redemption Factor." In no event shall the
Highest Redemption Factor exceed 1/3 during any calendar year.
2.5 USE OF PROCEEDS. Company shall apply the proceeds of the purchase
price hereunder for working capital and general corporate purposes, and to repay
promissory notes of Company in an aggregate principal amount of $1,251,700
issued in November 1996 to certain holders of the Common Stock of Company.
2.6 INTEREST ON NOTE. (a) Company shall pay interest to Purchaser,
quarterly in arrears on the last day of each calendar quarter, commencing on
June 30, 1997 (each, an "Interest Payment Date"), at a rate equal to 11% per
annum, based on a year of 365 (or 366) days for the actual number of days
elapsed, and based on the amounts outstanding from time to time under the Note.
(b) If any payment on the Note becomes due and payable on a day
other than a Business Day, the maturity thereof shall be extended to the next
succeeding Business Day and, with respect to payments of principal, interest
thereon shall be payable at the then applicable rate during such extension.
(c) So long as any Event of Default shall be continuing, the
interest rate applicable to the Note shall be increased by 2% per annum above
the rate otherwise applicable.
(d) Notwithstanding anything to the contrary set forth in this
Section 2.6, if at any time until payment in full of the Note, the interest rate
payable thereon exceeds the highest rate of interest permissible under any law
which a court of competent jurisdiction shall, in a final
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<PAGE>
determination, deem applicable hereto (the "Maximum Lawful Rate"), then in
such event and so long as the Maximum Lawful Rate would be so exceeded, the
rate of interest payable on the Note shall be equal to the Maximum Lawful
Rate; PROVIDED, HOWEVER, that if at any time thereafter the interest rate
payable thereon is less than the Maximum Lawful Rate, Company shall continue
to pay interest thereunder at the Maximum Lawful Rate until such time as the
total interest received by Purchaser is equal to the total interest which it
would have received had the interest rate on the Note been (but for the
operation of this paragraph) the interest rate payable since the Closing
Date. Thereafter, the interest rate payable shall be the stated interest rate
unless and until such rate again exceeds the Maximum Lawful Rate, in which
event this paragraph shall again apply. In no event shall the total interest
received by Purchaser pursuant to the terms hereof exceed the amount which it
could lawfully have received had the interest due hereunder been calculated
for the full term hereof at the Maximum Lawful Rate. In the event the
Maximum Lawful Rate is calculated pursuant to this paragraph, such interest
shall be calculated at a daily rate equal to the Maximum Lawful Rate divided
by the number of days in the year in which such calculation is made. In the
event that a court of competent jurisdiction, notwithstanding the provisions
of this Section 2.6(d), shall make a final determination that Purchaser has
received interest hereunder or under any of the Loan Documents in excess of
the Maximum Lawful Rate, Purchaser shall, to the extent permitted by
applicable law, promptly apply such excess first to any interest due and not
yet paid under the Note, then to the outstanding principal of the Note, then
to other unpaid Obligations and thereafter shall refund any excess to Company
or as a court of competent jurisdiction may otherwise order.
2.7 ORIGINAL ISSUE DISCOUNT. Company and Purchaser hereby acknowledge and
agree that the Warrants are part of an investment unit within the meaning of
Section 1273 (c) (2) of the IRC, which includes the Note. Notwithstanding
anything to the contrary contained herein, Company and Purchaser hereby further
acknowledge and agree that for United States federal, state and local income tax
purposes the "issue price" of the Series A Warrant, the Series B Warrant and the
Note under Section 1273(b) of the IRC shall equal $1,741,100, $681,000 and
$12,580,000, respectively. Company and Purchaser agree to use the foregoing
issue prices for all income tax purposes with respect to this transaction.
2.8 FEE. On the Closing Date, Company shall pay to Purchaser a
non-refundable fee of $65,000.
2.9 RECEIPT OF PAYMENTS. Company shall make each payment under the Note
not later than 2:00 P.M. (New York City time) on the day when due in lawful
money of the United States of America in immediately available funds to
Purchaser's depository bank in the United States as designated by Purchaser from
time to time for deposit in Purchaser's depositary account. For purposes only
of computing interest under the Note, all payments shall be applied by Purchaser
to the Note on the day payment has been credited by Purchaser's depository bank
to Purchaser's account in immediately available funds.
2.10 APPLICATION OF PAYMENTS. Company irrevocably waives the right to
direct the application of any and all payments at any time or times hereafter
received by Purchaser from or on behalf of Company pursuant to the terms of this
Agreement, and Company irrevocably agrees that Purchaser shall have the
continuing exclusive right to apply any and all such payments
13
<PAGE>
against the then due and payable Obligations of Company and in repayment of
the Note as it may deem advisable. In the absence of a specific
determination by Purchaser with respect thereto, the same shall be applied in
the following order: (i) then due and payable fees and expenses; (ii) then
due and payable interest payments on the Note; and (iii) then due and payable
principal payments on the Note.
2.11 SHARING OF PAYMENTS. If any holder of the Note or a portion thereof
shall obtain any payment (whether voluntary, involuntary, through the exercise
of any right of set-off, or otherwise) on account of the Note held by it in
excess of its ratable share of payments on account of the Notes held by all
holders thereof, such holder shall forthwith purchase from each other holder
such participations in the Note held by it as shall be necessary to cause such
purchasing holder to share the excess payment ratably with each other holder;
PROVIDED, HOWEVER, that if all or any portion of such excess payment is
thereafter recovered from such purchasing holder, such purchase shall be
rescinded and such holder shall repay to the purchasing holder the purchase
price to the extent of such recovery together with an amount equal to such
holder's ratable share (according to the proportion of (i) the amount of such
holder's required repayment to (ii) the total amount so recovered from the
purchasing holder) of any interest or other amount paid or payable by the
purchasing holder in respect of the total amount so recovered. Company agrees
that any holder so purchasing a participation from another holder pursuant to
this Section 2.11 may, to the fullest extent permitted by law, exercise all its
rights of payment (including the right of set-off) with respect to such
participation as fully as if such holder were the direct creditor of Company in
the amount of such participation. Company further agrees to make all payments
on the Note to all holders thereof on a pro rata basis, based on the principal
amount of the Note held by each.
2.12 INDEMNITY. (a) Company shall indemnify and hold Purchaser and each
of its officers, directors and Affiliates harmless from and against any and all
suits, actions, proceedings, claims, damages, losses, liabilities and expenses
(including, without limitation, reasonable attorneys' fees and disbursements,
including those incurred upon any appeal) which may be instituted or asserted
against or incurred by Purchaser or such other indemnified person as the result
of Purchaser having entered into this Agreement or any of the other Loan
Documents or purchased the Note or Warrants hereunder or relating to or arising
out of any untrue representation, breach of warranty or failure to perform any
covenants or agreement by Company contained herein or in any Transaction
Document or arising out of any Environmental Law applicable to Company or its
Subsidiaries or otherwise relating to or arising out of the transactions
contemplated hereby; provided, however, that Company shall not be liable for
such indemnification to such indemnified Person to the extent that any such
suit, action, proceeding, claim, damage, loss, liability or expense results from
such indemnified Person's gross negligence or willful misconduct.
2.13 ACCESS. Purchaser and any of its officers, employees and/or agents
shall have the right, exercisable as frequently as it determines to be
appropriate, during normal business hours, to visit and inspect the properties
and facilities of Company and its Subsidiaries and to inspect, audit and make
extracts from all of Company's and its Subsidiaries' records, files, corporate
books and books of account and to discuss the affairs, finances and accounts of
Company and its Subsidiaries with the principal officers of Company, all at such
reasonable times, upon reasonable notice and as often as such Purchaser may
reasonably request. Company shall deliver
14
<PAGE>
any document or instrument reasonably necessary for Purchaser, as it may
request, to obtain records from any service bureau maintaining records for
Company or its Subsidiaries. Company shall instruct its and its
Subsidiaries' banking and other financial institutions to make available to
Purchaser such information and records as it may reasonably request.
2.14 TAXES. (a) Any and all payments by Company hereunder or under the
Note shall be made, in accordance with this Section 2.14, free and clear of and
without deduction for any and all present or future taxes, levies, imposts,
deductions, charges or withholdings, and all liabilities with respect thereto,
excluding taxes imposed on or measured by the net income of Purchaser, by the
jurisdiction under the laws of which it is organized or any political
subdivision thereof (all such non-excluded taxes, levies, imposts, deductions,
charges, withholdings and liabilities being hereinafter referred to as "Taxes").
If Company shall be required by law to deduct any Taxes from or in respect of
any sum payable hereunder or under the Note to Purchaser, (i) the sum payable
shall be increased as may be necessary so that after making all required
deductions (including deductions applicable to additional sums payable under
this Section 2.14) Purchaser receives an amount equal to the sum it would have
received had no such deductions been made, (ii) Company shall make such
deductions, and (iii) Company shall pay the full amount deducted to the relevant
taxing or other authority in accordance with applicable law.
(b) In addition, Company agrees to pay any present or future stamp
or documentary taxes or any other sales, transfer, exercise, mortgage recording
or property taxes, charges or similar levies that arise from any payment made
hereunder or under the Note or from the execution, sale, transfer, delivery or
registration of, or otherwise with respect to, this Agreement, the Note, the
Warrants or the other Transaction Documents (hereinafter referred to as "Other
Taxes").
(c) Company shall indemnify Purchaser for the full amount of Taxes
or Other Taxes (including without limitation, any Taxes or Other Taxes imposed
by any jurisdiction on amounts payable under this Section 2.14) paid by
Purchaser and any liability (including penalties, interest and expenses) arising
therefrom or with respect thereto, whether or not such Taxes or Other Taxes were
correctly or legally asserted. This indemnification shall be made within 30
days from the date Purchaser makes written demand therefor or.
(d) Within 30 days after the date of any payment of Taxes, Company
shall furnish to Purchaser the original or a certified copy of a receipt
evidencing payment thereof.
(e) Without prejudice to the survival of any other agreement of
Company hereunder, the agreements and obligations of Company contained in this
Section 2.14 shall survive the payment in full of the Note.
(f) Each Holder (as hereinafter defined) of a Note which is
organized outside the United States shall deliver to Company such certificates,
documents or other evidence, as required by the IRC or Treasury Regulations
issued pursuant thereto, including Internal Revenue Service Form 1001, Form
4224, Form W-8 or any other required certificate or statement of exemption,
properly completed and duly executed by such Holder establishing that payment
hereunder or under the Note is (i) not subject to withholding under the IRC
because such
15
<PAGE>
payment is effectively connected with the conduct by such Holder of a trade
or business in the United States or (ii) totally exempt from United States
tax under a provision of an applicable tax treaty. Unless Company has
received forms or other documents reasonably satisfactory to it indicating
that payment hereunder or under the Note is not subject to United States
withholding tax or is subject to such tax at a rate reduced by an applicable
tax treaty, Company shall withhold taxes from such payment at the applicable
statutory rate in the case of payments to or for any Holder organized under
the laws of a jurisdiction outside the United States.
(g) Notwithstanding anything to the contrary herein, Company shall
not be required to pay any additional amounts to any Holder in respect of United
States withholding tax pursuant to paragraph (a) above if the obligation to pay
such additional amounts would not have arisen but for a failure by such Holder
to comply with the provisions of paragraph (f) above other than by reason of (i)
a change in applicable law, regulation or official interpretation thereof or
(ii) an amendment, modification or revocation of any applicable tax treaty or a
change in official position regarding the application or interpretation thereof,
in each case after the Closing Date (and in the case of an assignee, after the
date of assignment).
(h) If, a Holder determines that as a result of an event described
in subparagraph (i) or (ii) of paragraph (g) after the Closing Date (or, in the
case of an assignee, after the date of assignment), such Holder (i) is unable to
provide to Company a form otherwise required to be delivered by it pursuant to
paragraph (f) above, or such Holder is required to withdraw or cancel any such
form previously submitted or (ii) makes any payment or becomes liable to make
any payment on account of any Taxes with respect to payments by Company
hereunder, Company shall continue to make payments to such Holder under the
terms of this of Agreement and the Note, which payments shall be made in
accordance with paragraph (a) above. In that event, Holder agrees to take such
steps as reasonably may be available to it under applicable tax laws and any
applicable tax treaty or convention to obtain an exemption from, or reduction
(to the lowest applicable rate) of, such Taxes, except to the extent that taking
such a step would be disadvantageous to the Holder, as it determines in its sole
discretion.
3. PURCHASER'S REPRESENTATIONS. WARRANTIES AND COVENANTS
Purchaser makes the following representations, warranties and covenants to
Company, each and all of which shall survive the execution and delivery of this
Agreement and the Closing hereunder:
3.1 INVESTMENT INTENTION. Purchaser is purchasing the Note and Warrants
for its own account, for investment purposes and not with a view to the
distribution thereof. Purchaser will not, directly or indirectly, offer,
transfer, sell, assign, pledge, hypothecate or otherwise dispose of the Note and
Warrants (or solicit any offers to buy, purchase, or otherwise acquire the Note
and Warrants), except in compliance with the Securities Act.
3.2 ACCREDITED INVESTOR. Purchaser is an "accredited investor" (as that
term is defined in Rule 501 of Regulation D under the Securities Act) and by
reason of its business and financial experience, it has such knowledge,
sophistication and experience in business and financial matters as to be capable
of evaluating the merits and risks of the prospective investment, is able
16
<PAGE>
to bear the economic risk of such investment and is able to afford a complete
loss of such investment.
3.3 CORPORATE EXISTENCE. Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of the State of New York.
3.4 CORPORATE POWER: Authorization; Enforceable Obligations. The
execution, delivery and performance by Purchaser of this Agreement and the other
Transaction Documents to be executed by it: (i) are within Purchaser's
corporate power; (ii) have been duly authorized by all necessary corporate
action; (iii) are not in contravention of any provision of Purchaser's
certificate of incorporation or by-laws; and (iv) will not violate any law or
regulation, or any order or decree of any court or governmental instrumentality
binding on Purchaser. This Agreement and the other Transaction Documents to
which Purchaser is a party have each been duly executed and delivered by
Purchaser and constitute the legal, valid and binding obligations of Purchaser,
enforceable against it in accordance with their respective terms, subject to
applicable bankruptcy, insolvency, fraudulent conveyance, reorganization,
moratorium and similar laws affecting creditors' rights and remedies generally,
and subject, as to enforceability, to general principles of equity, including
principles of commercial reasonableness, good faith and fair dealing (regardless
of whether enforcement is sought in a proceeding at law or in equity).
3.5 RESTRICTIONS ON TRANSFER. Purchaser agrees that it will not sell,
assign or otherwise transfer the Note, the Warrants or the Common Stock issuable
upon exercise thereof to a competitor of Company listed on Schedule 3.5 without
the prior written consent of Company, except that such consent shall not be
required if, at the time thereof, an Event of Default under Section 7.1(a)
hereof shall have occurred and been continuing for at least one year.
3.6 CONFIDENTIALITY. Purchaser agrees to keep information obtained by
it pursuant to the transactions contemplated by this Agreement confidential
for a period of two (2) years from the date it obtains such information and
agrees that during such time period it will only use such information in
connection with the transactions contemplated by this Agreement and not
disclose any of such information other than (i) to its employees,
representatives and agents who are or are expected to be involved in the
evaluation of such information in connection with the transactions
contemplated by this Agreement and who are advised of the confidential nature
of such information, (ii) to the extent such information presently is or
hereafter becomes available to it on a non-confidential basis from a source
other than Company, (iii) to the extent disclosure is required by law,
regulation or judicial order or requested or required by bank regulators or
auditors, or (iv) to assignees or participants or potential assignees or
participants who agree to be bound by the provisions of this sentence.
4. COMPANY'S REPRESENTATIONS AND WARRANTIES
Company makes the following representations and warranties to Purchaser,
each and all of which shall survive the execution and delivery of this Agreement
and the Closing hereunder:
4.1 AUTHORIZED AND OUTSTANDING SHARES OF CAPITAL STOCK. After giving
effect to the Closing, the authorized capital stock of Company consists of
25,000,000 shares of Common
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<PAGE>
Stock, of which 2,398,745 shares are issued and outstanding and 12,123,390
shares of convertible preferred stock of which the following number of shares
divided by series are issued and outstanding: 4,458,852 Series A, 2,400,000
Series B, 2,292,635 Series C, 2,083,332 Series D and 857,143 Series E. All
of such issued and outstanding shares are validly issued, fully paid and
non-assessable. Schedule 4.1 hereto contains a complete and correct list of
all stockholders of Company and the number of shares owned by each. Except
as set forth on Schedule 4.1, (i) there is no existing option, warrant, call,
commitment or other agreement to which Company is a party requiring, and
there are no convertible securities of Company outstanding which upon
conversion would require, the issuance of any additional shares of Stock of
Company or other securities convertible into shares of equity securities of
Company, other than the Warrants, and (ii) there are no agreements to which
Company is a party or, to the knowledge of Company, which any stockholder of
Company is a party, with respect to the voting or transfer of the Stock of
Company. Except as set forth on Schedule 4.1, there are no stockholders'
preemptive rights or rights of first refusal or other similar rights with
respect to the issuance of Stock by Company. True and correct copies of the
articles of incorporation and by-laws of Company have been delivered to
Purchaser.
4.2 AUTHORIZATION AND ISSUANCE OF NOTE AND WARRANTS. The issuance of
the Note and Warrants have been duly authorized by all necessary corporate
action on the part of Company and, upon delivery to Purchaser of the Note and
Warrants against payment in accordance with the terms hereof, the Note and
Warrants will have been validly issued, free and clear of all pledges, liens,
encumbrances and preemptive rights. The issuance of shares of Common Stock
upon exercise of the Warrants has been duly authorized by all necessary
corporate action on the part of Company and, when issued upon exercise of the
Warrants, such Common Stock will have been validly issued and fully paid and
non-assessable. Company has duly reserved 2,100,000 shares of Common Stock
for issuance pursuant to the terms of the Warrants.
4.3 SECURITIES LAWS. In reliance on the investment representations
contained in Sections 3.1 and 3.2 hereof, the offer, issuance, sale and delivery
of the Note and Warrants, as provided in this Agreement, are exempt from the
registration requirements of the Securities Act and all applicable state
securities laws, and are otherwise in compliance with such laws. Neither
Company nor any Person acting on its behalf has taken or will take any action
(including, without limitation, any offering of any securities of Company under
circumstances which would require the integration of such offering with the
offering of the Note and Warrants under the Securities Act and the rules and
regulations of the SEC thereunder) which might subject the offering, issuance or
sale of the Note and Warrants to the registration requirements of Section 5 of
the Securities Act.
4.4 CORPORATE EXISTENCE; COMPLIANCE WITH LAW. Company and each of its
Subsidiaries (i) is a corporation duly organized, validly existing and in good
standing under the laws of their respective jurisdictions of incorporation,
which in the case of Company is Minnesota; (ii) is duly qualified as a foreign
corporation and in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business requires such
qualification (except for jurisdictions in which such failure to so qualify or
to be in good standing would not have a Material Adverse Effect); (iii) has the
requisite corporate power and authority and the legal right to own, pledge,
mortgage or otherwise encumber and operate its
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properties, to lease the property it operates under lease, and to conduct its
business as now being conducted; (iv) has, or has applied for, all material
licenses, permits, consents or approvals from or by, and has made all
material filings with, and has given all material notices to, all
Governmental Authorities having jurisdiction, to the extent required for such
ownership, operation and conduct; (v) is in compliance with its articles of
incorporation and by-laws; and (vi) is in compliance with all applicable
provisions of law, except for such non-compliance which would not have a
Material Adverse Effect.
4.5 SUBSIDIARIES. There currently exist no Subsidiaries of Company
other than as set forth on Schedule 4.5 hereto, which sets forth such
Subsidiaries, together with their respective jurisdictions of organization, and
the authorized and outstanding capital Stock of each such Subsidiary, by class
and number and percentage of each class owned by Company or a Subsidiary of
Company or any other Person. There are no options, warrants, rights to purchase
or similar rights covering capital Stock for any such Subsidiary.
4.6 CORPORATE POWER; AUTHORIZATION; ENFORCEABLE OBLIGATIONS. The
execution, delivery and performance by Company of this Agreement, the other
Transaction Documents to which it is a party and all instruments and
documents to be delivered by Company, the issuance and sale of the Note and
Warrant and the consummation of the other transactions contemplated by any of
the foregoing: (i) are within Company's corporate power and authority; (ii)
have been duly authorized by all necessary or proper corporate action; (iii)
are not in contravention of any provision of Company's articles of
incorporation or by-laws; (iv) will not violate any law or regulation, or any
order or decree of any court or governmental instrumentality; (v) will not
conflict with or result in the breach or termination of, constitute a default
under or accelerate any performance required by, any indenture, mortgage,
deed of trust, lease, agreement or other instrument to which Company or any
of its Subsidiaries is a party or by which Company, any of its Subsidiaries
or any of their property is bound; (vi) will not result in the creation or
imposition of any Lien upon any of the property of Company or any of its
Subsidiaries; and (vii) do not require the consent or approval of, or any
filing with, any Governmental Authority or any other Person (except for those
filings required by the registration rights provisions of the Warrants and
filings and approvals which may be required in certain circumstances in
connection with an exercise of the Warrants under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976 and the rules and regulations promulgated
thereunder). At or prior to the Closing Date, each of this Agreement and the
other Transaction Documents shall have been duly executed and delivered by
Company and each shall then constitute a legal, valid and binding obligation
of Company, enforceable against it in accordance with its terms, subject to
applicable bankruptcy, insolvency, fraudulent transfer or conveyance,
reorganization, moratorium and similar laws affecting creditors' rights and
remedies generally, and subject, as to enforceability, to general principles
of equity, including principles of commercial reasonableness, good faith and
fair dealing (regardless of whether enforcement is sought in a proceeding at
law or in equity).
4.7 FINANCIAL STATEMENTS. (a) The audited consolidated balance sheet
of Company as at December 30, 1995, and the related consolidated statements of
income and cash flows for the year then ended, with the opinion thereon of KPMG
Peat Marwick LLP, and the unaudited consolidated balance sheet of Company and
its Subsidiaries as at December 28, 1996 (the "Balance Sheet") and the related
unaudited consolidated statements of income and cash flows for
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the twelve months then ended, copies of which have previously been delivered
to Purchaser, have been prepared in conformity with GAAP consistently applied
throughout the periods involved and present fairly in all material respects
the consolidated financial position of Company and its Subsidiaries as at the
dates thereof, and the results of their operations and cash flows for the
periods then ended.
(b) Except as set forth on Schedule 4.7, neither Company nor any of
its Subsidiaries has any material obligations, contingent or otherwise,
including, without limitation, Indebtedness, liabilities for Charges, long-term
leases or unusual forward or long-term commitments which are not reflected in
the Balance Sheet, other than those incurred since December 28, 1996, in the
ordinary course of business.
(c) Except as set forth on Schedule 4.7, no dividends or other
distributions have been declared, paid or made upon any shares of capital Stock
of Company, nor have any shares of capital Stock of Company been redeemed,
retired, purchased or otherwise acquired for value by Company since December 28,
1996.
4.8 OWNERSHIP OF PROPERTY. (a) Except as set forth on Schedule 4.8,
neither Company nor any of its Subsidiaries owns any real estate. Each of
Company and its Subsidiaries has good and marketable and insurable fee simple
title to its real property, free and clear of all Liens. Each of Company and
its Subsidiaries has valid leasehold interests in the leases described in
Schedule 4.8 hereto, and, except as set forth on Schedule 4.8, good and
marketable title to, or valid leasehold interests in, all of its other
properties and assets free and clear of all Liens, except Permitted Liens.
(b) All real property leased by Company and its Subsidiaries is set
forth on Schedule 4.8. Each of such leases is valid and enforceable in
accordance with its terms (subject to applicable bankruptcy, insolvency,
fraudulent transfer or conveyance, reorganization, moratorium and similar laws
affecting creditors' rights and remedies generally, and subject, as to
enforceability, to general principles of equity, including principles of
commercial reasonableness, good faith and fair-dealing (regardless of whether
enforcement is sought in a proceeding at law or in equity)) and is in full force
and effect. Company has delivered or made available to Purchaser true and
complete copies of each of such leases set forth on Schedule 4.8(b) and all
documents affecting the rights or obligations of Company or any of its
Subsidiaries, including, without limitation, any non-disturbance and recognition
agreements, subordination agreements, attornment agreements and agreements
regarding the term or rental of any of the leases. Except as set forth on
Schedule 4.8, none of Company, any of its Subsidiaries nor, to its knowledge,
any other party to any such lease is in material default of its obligations
thereunder or has delivered or received any notice of default under any such
lease, nor has any event occurred which, with the giving of notice, the passage
of time or both, would constitute a default under any such lease, which could be
reasonably likely to result in a Material Adverse Effect.
(c) Except as disclosed on Schedule 4.8, neither Company nor any of
its Subsidiaries is obligated under or a party to, any option, right of first
refusal or any other
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contractual right to purchase, acquire, sell, assign or dispose of any real
property owned or leased by Company or such Subsidiary.
4.9 MATERIAL CONTRACTS; INDEBTEDNESS. Schedule 4.9 contains a true,
correct and complete list and description of all Material Contracts, true and
complete copies of which have been delivered to Purchaser. Each Material
Contract is a valid and binding agreement of Company or its Subsidiaries (as the
case may be) enforceable against Company or such Subsidiary in accordance with
its terms (subject to applicable bankruptcy, insolvency, fraudulent transfer or
conveyance, reorganization, moratorium and similar laws affecting creditors'
rights and remedies generally, and subject, as to enforceability, to general
principles of equity, including principles of commercial reasonableness, good
faith and fair dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity)), and neither Company nor any of its
Subsidiaries has any knowledge that any Material Contract is not a valid and
binding agreement against the other parties thereto. Company and each of its
Subsidiaries has fulfilled all material obligations required pursuant to the
Material Contract to have been performed by Company or such Subsidiary on its
part. Except as set forth in Schedule 4.9, neither Company nor any of its
Subsidiaries is in default or breach, nor to Company's or such Subsidiary's
knowledge is any third party in default or breach, under or with respect to any
Material Contract which could be reasonably likely to result in a Material
Adverse Effect. Except as set forth on Schedule 4.9, neither Company nor any of
its Subsidiaries has any Indebtedness except Permitted Indebtedness.
4.10 ENVIRONMENTAL PROTECTION. (a) Except as set forth on Schedule
4.10, to the best of Company's knowledge, all real property owned, leased or
otherwise operated by Company and its Subsidiaries (each, a "Facility") is free
of contamination from any substance, waste or material (i) currently identified
to be toxic or hazardous pursuant to, or which may result in liability under,
any Environmental Law or (ii) within the definition of a substance which is
toxic or hazardous under any Environmental Law, including, without limitation,
any asbestos, pcb, radioactive substance, methane, volatile hydrocarbons,
industrial solvents, oil or petroleum or chemical liquids or solids, liquid or
gaseous products, or any other material or substance which has in the past or
could at any time in the future cause or constitute a health, safety, or
environmental hazard to any Person or property or result in any Environmental
Liabilities and Costs ("Hazardous Substance") of more than $100,000 or which, in
either case, could have a Material Adverse Effect. Except as set forth on
Schedule 4.10, to the best of Company's knowledge, neither Company nor any of
its Subsidiaries has caused or suffered to occur any release, spill, migration,
leakage, discharge, spillage, uncontrolled loss, seepage, or filtration of
Hazard Substances at or from the Facility (a "Spill") which could result in
Environmental Liabilities and Costs in excess of $100,000.
(b) To the best of Company's knowledge, Company and each Subsidiary
has generated, treated, stored and disposed of any Hazardous Substances in full
compliance with applicable Environmental Laws, except for such non-compliances
which would not have a Material Adverse Effect.
(c) To the best of Company's knowledge, Company and each Subsidiary
has obtained, or has applied for, and is in full compliance with and in good
standing under all permits
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required under Environmental Laws (except for such failures which would not
have a Material Adverse Effect), and neither Company nor any of its
Subsidiaries has any knowledge of any proceedings to substantially modify or
to revoke any such permit.
(d) Except as set forth on Schedule 4.10, to the best of Company's
knowledge, there are no investigations, proceedings or litigation pending or, to
Company's or its Subsidiaries' knowledge, threatened affecting or against
Company, any of its Subsidiaries or the Facilities relating to Environmental
Laws or Hazardous Substances.
(e) Since January 1, 1995, except for communications in connection
with the matters listed on Schedule 4.10, neither Company nor any of its
Subsidiaries has received any communication or notice (including, without
limitation, requests for information) indicating the potential of Environmental
Liabilities and Costs against Company or its Subsidiaries.
4.11 LABOR MATTERS. (a) There are no strikes or other labor disputes
against Company or any of its Subsidiaries pending or, to Company's or its
Subsidiaries' knowledge, threatened. Hours worked by and payment made to
employees of Company and its Subsidiaries have not been in violation of the Fair
Labor Standards Act or any other applicable law dealing with such matters. All
payments due from Company and each of its Subsidiaries on account of employee
health and welfare insurance have been paid or accrued as a liability on the
books of Company or such Subsidiary. There is no organizing activity involving
Company or any of its Subsidiaries pending or, to Company's or its Subsidiaries'
knowledge, threatened by any labor union or group of employees. There are no
representation proceedings pending or, to Company's or its Subsidiaries'
knowledge, threatened with the National Labor Relations Board, and no labor
organization or group of employees of Company or its Subsidiaries has made a
pending demand for recognition. Except as set forth on Schedule 4.11, there are
no complaints or charges against Company or any of its Subsidiaries pending or,
to Company's or its Subsidiaries' knowledge, threatened to be filed with any
federal, state, local or foreign court, governmental agency or arbitrator based
on, arising out of, in connection with, or otherwise relating to the employment
or termination of employment by Company or any of its Subsidiaries of any
individual.
(b) Neither Company nor any of its Subsidiaries is, or during the
five years preceding the date hereof was, a party to any labor or collective
bargaining agreement and there are no labor or collective bargaining agreements
which pertain to employees of Company or its Subsidiaries.
4.12 OTHER VENTURES. Except as set forth on Schedule 4.12, neither
Company nor any of its Subsidiaries is engaged in any joint venture or
partnership with any other Person.
4.13 TAXES. Except as set forth on Schedule 4.13, all federal and all
material state, local and foreign tax returns, reports and statements required
to be filed (after any permitted extensions) by Company and its Subsidiaries
have been filed with the appropriate Governmental Authority and all material
Charges and other impositions due and payable have been paid prior to the date
on which any fine, penalty, interest or late charge may be added thereto for
nonpayment thereof, or any such fine, penalty, interest, late charge or loss has
been paid. There are no Liens with respect to Charges upon any of the assets of
Company or its Subsidiaries, other than with
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respect to Charges not yet due and payable. Proper and accurate amounts have
been withheld by Company and its Subsidiaries from its employees for all
periods in compliance in all material respects with the tax, social security
and unemployment withholding provisions of applicable federal, state, local
and foreign law and such withholdings have been timely paid to the respective
governmental agencies. Except as set forth on Schedule 4.13, neither Company
nor any of its Subsidiaries has executed or filed with the IRS or any other
Governmental Authority any agreement or other document extending, or having
the effect of extending, the period for assessment or collection of any
Charges. No audit or other proceedings by any Governmental Authority is
pending or threatened with respect to any Charges due from, or with respect
to, Company or any of its Subsidiaries. Except as set forth on Schedule 4.13,
no assessment of tax has been proposed against Company, any of its
Subsidiaries, or any of their respective assets. Neither Company nor any of
its Subsidiaries has filed a consent pursuant to IRC Section 341(f) or agreed
to have IRC Section 341(f) (2) apply to any dispositions of subsection (f)
assets (as such term is defined in IRC Section 34l(f)(4)). None of the
property owned by Company or any of its Subsidiaries is property which such
company is required to treat as being owned by any other Person pursuant to
the provisions of Section 168(f) (8) of the Internal Revenue Code of 1954, as
amended, and in effect immediately prior to the enactment of the Tax Reform
Act of 1986 or is "tax-exempt use property" within the meaning of IRC Section
168 (h). Neither Company nor any of its Subsidiaries has agreed or has been
requested to make any adjustment under IRC Section 481 (a) by reason of a
change in accounting method or otherwise. Neither Company nor any of its
Subsidiaries has any obligation under any written tax sharing agreement.
4.14 NO LITIGATION. Except as disclosed on Schedule 4.14, no action,
claim or proceeding is now pending or, to the knowledge of Company or its
Subsidiaries, threatened against Company or any of its Subsidiaries, at law, in
equity or otherwise, before any court, board, commission, agency or
instrumentality of any federal, state, or local government or of any agency or
subdivision thereof, or before any arbitrator or panel of arbitrators which, if
adversely determined, could reasonably be expected to have a Material Adverse
Effect.
4.15 BROKERS. Other than Duff & Phelps Securities Co., no broker or
finder acting on behalf of Company or any of its Subsidiaries brought about the
consummation of the transactions contemplated pursuant to this Agreement and
neither Company nor any of its Subsidiaries has any obligation to any Person in
respect of any finder's or brokerage fees (or any similar obligation) in
connection with the transactions contemplated by this Agreement.
4.16 EMPLOYMENT AND LABOR AGREEMENTS. Except as set forth on Schedule
4.16, there are no employment, consulting or management agreements covering
management of Company or any of its Subsidiaries.
4.17 PATENTS, TRADEMARKS, COPYRIGHTS AND LICENSES. Company and each of
its Subsidiaries owns all licenses, patents, patent applications, copyrights,
service marks, trademarks and registrations and applications for registration
thereof, and trade names necessary to continue to conduct its business as
heretofore conducted by it and now being conducted by it, each of which is
listed, together with Patent and Trademark Office or Copyright Office
application or registration numbers, where applicable, on Schedule 4.17 hereto.
To the best of Company's knowledge, Company and each of its Subsidiaries
conducts its businesses without infringement
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or claim of infringement of any license, patent, copyright, service mark,
trademark, trade name, trade secret or other intellectual property right of
others, except as set forth on Schedule 4.17 hereto. To the best of
Company's knowledge, there is no infringement by others of any license,
patent, copyright, service mark, trademark, trade name, trade secret or other
intellectual property right of Company or any of its Subsidiaries, except as
set forth on Schedule 4.17 hereto.
4.18 NO MATERIAL ADVERSE EFFECT. Except as set forth on Schedule 4.18,
no event has occurred since December 28, 1996 which has had or could be
reasonably expected to have a Material Adverse Effect.
4.19 ERISA. (a) Schedule 4.19 sets forth all Plans currently
maintained by Company and any of its Subsidiaries or for which Company and any
of its Subsidiaries could be liable and Pension Plans currently maintained by
Company, any of its Subsidiaries or any ERISA Affiliate or for which Company,
any of its Subsidiaries or any ERISA Affiliate could be liable.
(b) No Pension Plan is subject to Title IV of ERISA, Section 302 of
ERISA or Section 412 of the Code.
(c) The Pension Plans intended to satisfy Section 401 (a) of the
Code have received a favorable determination letter from the IRS with respect to
such plan as adopted or most recently restated and the trusts maintained
pursuant thereto are exempt from federal income taxation under Section 501 of
the Code, and nothing has occurred with respect to the operation of the Pension
Plans which would reasonably be expected to result in the loss of such
qualification or exemption or the imposition of any material liability, penalty,
or tax under ERISA or the Code in connection with the failure by such plan to
satisfy such requirements.
(d) All contributions required by law or pursuant to the terms of
the Plans to any funds or trusts established thereunder or in connection
therewith have been made by the due date thereof (including any valid
extension).
(e) There is no material violation of ERISA with respect to the
filing of applicable reports, documents, and notices regarding the Plans with
the Secretary of Labor and the Secretary of the Treasury or the furnishing of
such documents to the participants or beneficiaries of the Plans which would
reasonably be expected to result in a material liability or penalty.
(f) True, correct and complete copies of the following documents,
if applicable, with respect to each of the Plans, have been made available or
delivered to Purchaser by Company: (A) any plans and related trust documents,
and amendments thereto, (B) the most recent Forms 5500, (C) the last IRS
determination letter, and (D) summary plan descriptions.
(g) There are no pending actions, claims or lawsuits which have
been asserted or instituted against the Plans, the assets of any of the trusts
under such plans or the plan sponsor or the plan administrator, or against any
fiduciary of the Plans with respect to the operation of such plans (other than
routine benefit claims), nor does Company or any of its Subsidiaries have
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knowledge of facts which would reasonably be expected to form the basis for any
such claim or lawsuit.
(h) The Plans have been maintained in accordance with their terms
and with all provisions of ERISA (including rules and regulations thereunder)
and other applicable Federal and state law so as not to result in any material
liability to Company or any of its Subsidiaries. Neither Company nor any of its
Subsidiaries or "party in interest" or "disqualified person" with respect to the
Plans has engaged in a "prohibited transaction" within the meaning of Section
4975 of the Code or Section 406 of ERISA which would reasonably be expected to
result in a material liability.
(i) Except of set forth on Schedule 4.19, none of Company, any of
its Subsidiaries or any ERISA Affiliate maintains retired life and retired
health insurance plans which are Welfare Plans and which provide for continuing
benefits or coverage for any participant or any beneficiary of a participant
except as may be required under Section 4980B of the Code and Part 6 of Subtitle
B of Title I of ERISA ("COBRA") or any comparable state law and at the expense
of the participant or the participant's beneficiary. None of Company, any of
its Subsidiaries and any ERISA Affiliate which maintain a Welfare Plan would
reasonably be expected to have any material liability for failure to comply with
the notice and continuation requirements of COBRA and the regulations
thereunder.
(j) None of Company, any of its Subsidiaries or any ERISA Affiliate
has contributed or been obligated to contribute to a Multiemployer Plan as of
the Closing.
(k) None of Company, any of its Subsidiaries or any ERISA Affiliate
has withdrawn in a complete or partial withdrawal from any Multiemployer Plan
prior to the Closing Date, nor has any of them incurred any liability due to the
termination or reorganization of a Multiemployer Plan.
4.20 REGISTRATION UNDER EXCHANGE ACT; REGISTRATION RIGHTS. Neither
Company nor any of its Subsidiaries has registered any class of its securities
pursuant to Section 12 of the Exchange Act, no such registration is required by
the Exchange Act, and it is not required to file any reports thereunder. Except
as set forth in Schedule 4.20 hereto and as provided in the registration rights
provisions of the Warrants, neither Company nor any of its Subsidiaries is under
any obligation to register under the Securities Act any of its presently
outstanding securities or any securities which may hereafter be issued.
4.21 ORDINARY COURSE OF BUSINESS. Except as set forth on Schedule 4.7 or
in response to the events described therein, since December 28, 1996, Company
and each of its Subsidiaries has conducted its operations only in the ordinary
course of business consistent with past practice.
4.22 INSURANCE. Schedule 4.22 hereto contains a complete and correct
list of all policies of insurance of any kind or nature covering Company and its
Subsidiaries, including, without limitation, policies of life, fire, theft,
employee fidelity and other casualty and liability insurance, indicating the
type of coverage, name of insured, the insurer, the premium, the expiration date
of each policy and the amount of coverage, and such policies are in full force
and
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effect. Complete and correct copies of each such policy have been furnished
or made available to Purchaser. Such policies are in amounts customary for the
industry in which Company or such Subsidiary operates.
4.23 MINUTE BOOKS. The minute books of Company, as previously made
available to Purchaser, accurately reflect all formal corporate action of the
stockholders and Board of Directors of Company.
4.24 FULL DISCLOSURE. No information contained in this Agreement, any
other Transaction Document, the Financial Statements or any written statement
furnished by or on behalf of Company pursuant to the terms of this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements contained herein or therein, in light of
the circumstances under which made, not misleading.
5. COVENANTS
5.1 AFFIRMATIVE AND FINANCIAL COVENANTS. Company covenants and agrees
that, from and after the date hereof (except as otherwise provided herein, or
unless the Required Holders have given their prior written consent) so long as
the Note is outstanding:
(a) BOOKS AND RECORDS. Company shall, and shall cause its
Subsidiaries to, keep adequate records and books of account with respect to
their business activities, in which proper entries, reflecting all of their
financial transactions, are made in accordance with GAAP.
(b) FINANCIAL AND BUSINESS INFORMATION.
(i) MONTHLY INFORMATION. Company will deliver to Purchaser
as soon as practicable after the end of each month, but in any event
within 30 days thereafter: (A) an unaudited consolidated balance
sheet of Company and its Subsidiaries at the end of such month; (B)
unaudited consolidated statements of income and cash flows of
Company and its Subsidiaries for such month and for the portion of
such year ending with such month; (C) sales and selling margin by
store by class year for such month and for the portion of the Fiscal
Year ending with such month; and (D) copies of all reports and
summaries as are customarily delivered to the Board of Directors of
Company.
(ii) OUARTERLY INFORMATION. Company will deliver to
Purchaser as soon as practicable after the end of each of the first
three quarterly fiscal periods in each Fiscal Year of Company, but
in any event within 45 days thereafter, (A) an unaudited
consolidated balance sheet of Company and its Subsidiaries as at the
end of such quarter, and (B) unaudited consolidated statements of
income and cash flows of Company and its Subsidiaries for such
quarter and (in the case of the second and third quarters) for the
portion of the Fiscal Year ending with such quarter. Such
statements shall be (1) prepared in accordance with GAAP
consistently applied (except that such statements shall not reflect
any period-end
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adjustments and shall not include footnotes), (2) in reasonable
detail and (3) certified by the principal financial or accounting
officer of Company.
(iii) ANNUAL INFORMATION. Company will deliver to Purchaser
as soon as practicable after the end of each Fiscal Year of Company,
but in any event within 90 days thereafter, (A) an audited
consolidated balance sheet of Company and its Subsidiaries as at the
end of such year, and (B) audited consolidated statements of income,
retained earnings and cash flows of Company and its Subsidiaries for
such year; setting forth in each case in comparative form the
figures for the previous year. Such statements shall be (1)
prepared in accordance with GAAP consistently applied, (2) in
reasonable detail and (3) certified by KPMG Peat Marwick LLP or such
other firm of independent certified public accountants of recognized
national standing selected by the Board of Directors of Company. In
addition, Company will deliver to Purchaser as soon as available a
completed annual budget for the next Fiscal Year, prepared with the
same level of detail as the financial projections delivered to
Purchaser during Purchaser's due diligence review of Company in
connection with the consummation of the transactions contemplated
hereby.
(iv) FILINGS. Company will deliver to Purchaser, promptly
upon their becoming available, one copy of each report, notice or
proxy statement sent by Company to its stockholders generally, and
of each regular or periodic report (pursuant to the Exchange Act)
and any registration statement, prospectus or other writing (other
than transmittal letters) (including, without limitation, by
electronic means) pursuant to the Securities Act filed by Company
with (i) the SEC or (ii) any securities exchange on which shares of
Common Stock of Company are listed.
(v) OTHER INFORMATION. If requested by Purchaser, Company
will deliver to Purchaser such other information respecting
Company's or any of its Subsidiaries' business, financial condition
or prospects as is readily available. Prior to a Qualified IPO,
Company shall deliver to Purchaser copies of all information
delivered to Company's directors and preferred stockholders
simultaneously with the delivery of such information to them.
(c) COMMUNICATION WITH ACCOUNTANTS. Purchaser may request that
Company consent to Purchaser communicating directly with Company's independent
certified public accountants and tax advisors, which consent shall not be
unreasonably withheld. Such consent would authorize those accountants to
disclose to Purchaser any and all financial statements and other supporting
financial documents and schedules including copies of any management letter with
respect to the business, financial condition and other affairs of Company and
any of its Subsidiaries.
(d) TAX COMPLIANCE. Company shall pay all transfer, excise or
similar taxes (not including income or franchise taxes) in connection with the
issuance, sale, delivery or transfer by Company to Purchaser of the Note and
Warrants and the Common Stock issuable
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<PAGE>
upon exercise of the Warrants, and shall indemnify and save Purchaser
harmless without limitation as to time against any and all liabilities with
respect to such taxes. Company shall not be responsible for any taxes in
connection with the transfer of the Note and Warrants or such Common Stock by
the holder thereof. The obligations of Company under this Section 5.6 shall
survive the payment or prepayment of the Note, the repurchase of the Warrants
and the termination of this Agreement.
(e) INSURANCE. Company shall and shall cause each Subsidiary of
Company to maintain insurance covering, without limitation, fire, theft,
burglary, public liability, property damage, product liability, workers'
compensation, directors' and officers' insurance, and any other insurance
covering risks and in amounts customary for the industry. Company shall, and
shall cause each of its Subsidiaries to, pay all insurance premiums payable by
them.
(f) EMPLOYEE PLANS. (i) With respect to other than a
Multiemployer Plan, for each Pension Plan hereafter adopted or maintained by
Company, any of its Subsidiaries or any ERISA Affiliate, Company shall (A)
(except for a Pension Plan which is unfunded and is maintained by Company or a
Subsidiary primarily for the purpose of providing deferred compensation for a
select group of management or highly compensated employees) seek, or cause its
Subsidiaries or ERISA Affiliates to seek, and receive determination letters from
the IRS to the effect that such Pension Plan is qualified within the meaning of
Section 401 (a) of the IRC; and (B) from and after the adoption of any such
Pension Plan, cause such plan to be administered so as to avoid any material
liability to Company, any of its Subsidiaries or any ERISA Affiliates in
connection with any failure to comply with the requirements of ERISA and Section
401 (a) of the IRC.
(ii) With respect to each Welfare Plan hereafter adopted or
maintained by Company, any of its Subsidiaries or any ERISA Affiliate, Company
shall comply, or cause its Subsidiaries or ERISA Affiliates to comply, in good
faith and in all material respects with the notice and continuation coverage
requirements of COBRA and the regulations thereunder so as not to result in any
material liability to Company, any of its Subsidiaries or any ERISA Affiliates.
(iii) Company shall not, directly or indirectly, and shall
not permit its Subsidiaries or any ERISA Affiliate to directly or indirectly by
reason of an amendment or amendments to, or the adoption of, one or more Pension
Plans subject to Title IV of ERISA, permit an Unfunded Pension Liability to
exceed $250,000, or to give rise to the requirement that security must be
provided to any such plan under Section 401 (a) (29) of the IRC. Neither
Company nor any of its Subsidiaries shall establish or become obligated to any
new Retiree Welfare Plan, which would result in the present value of future
liabilities under any such plans to exceed $100,000. Neither Company nor any of
its Subsidiaries or ERISA Affiliates shall establish or become obligated to any
new unfunded Pension Plan, which would result in the present value of future
liabilities under any such plans to exceed $150,000.
(iv) Company, any of its Subsidiaries and any ERISA
Affiliate shall not contribute or become obligated to contribute to any
Multiemployer Plan.
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<PAGE>
(g) COMPLIANCE WITH LAWS. Company shall, and shall cause each of
its Subsidiaries to, comply with all laws, including Environmental Laws,
applicable to it where the failure to so comply could reasonably be expected to
have a Material Adverse Effect.
(h) FINANCIAL COVENANTS. Company and its Subsidiaries shall, on a
consolidated basis:
(i) maintain, at the end of each fiscal quarter, a ratio of
EBITDA to Fixed Charges for the latest 12 months of not less than the amounts
set forth below:
<TABLE>
<CAPTION>
OUARTER ENDING MINIMUM RATIO
<S> <C>
March 1997 (5.50) : 1.00
June 1997 (1.50) : 1.00
September 1997 1.25 : 1.00
December 1997 1.75 : 1.00
March 1998 and 2.00 : 1.00
each quarter thereafter
</TABLE>
(ii) maintain, at the end of each fiscal quarter, commencing
with the quarter ending March 31, 1998, a ratio of total Indebtedness as of such
quarter-end to EBITDA for the latest 12 months of not greater than 3 to 1.
(iii) maintain, at the end of each fiscal quarter,
Consolidated Net Worth of at least the amount set forth opposite such quarter
below plus, in each case, an amount equal to 85% of any increase from the date
hereof in Consolidated Net Worth resulting from the issuance by Company of any
securities or capital contributions:
<TABLE>
<CAPTION>
CONSOLIDATED
OUARTER ENDING NET WORTH
<S> <C>
March 1997 $ 5,100,000
June 1997 5,200,000
September 1997 7,200,000
December 1997 11,800,000
March 1998 $11,500,000
June 1998 12,800,000
September 1998 14,600,000
December 1998 17,100,000
Each quarter thereafter $20,000,000
</TABLE>
(i) MAINTENANCE OF EXISTENCE AND CONDUCT OF BUSINESS. Company
shall, and shall cause each of its Subsidiaries to: (i) except as permitted by
Section 5.2(i) hereof, do or cause to be done all things necessary to preserve
and keep in full force and effect its corporate existence, and its rights and
franchises; (ii) at all times maintain, preserve and protect all of its patents,
trademarks and trade names, and preserve all the remainder of its material
assets, in use
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<PAGE>
or useful in the conduct of its business and keep the same in
good repair, working order and condition (taking into consideration ordinary
wear and tear) and from time to time make, or cause to be made, all needful and
proper repairs, renewals and replacements, betterments and improvements thereto
except, in each case, to the extent Company determines that to do so is not
necessary or advisable for the ongoing operations of Company or its Subsidiaries
consistent with industry practices; and (iii) continue to conduct business
solely in its existing lines of business and businesses related thereto.
5.2 NEGATIVE COVENANTS. Company covenants and agrees that from and
after the date hereof (except as otherwise provided herein, or unless the
Required Holders have given their prior written consent) so long as the Note is
outstanding:
(a) PERMITTED ACQUISITIONS AND INVESTMENTS. Company shall not, and
shall not permit any of its Subsidiaries to, directly or indirectly in any
transaction or related series of transactions, acquire or invest in, whether for
cash, debt, stock, or other property or assets or by guaranty of any obligation,
any assets or business of any Person other than (i) acquisitions of assets in
the ordinary course of business of Company, (ii) Cash Equivalents, (iii)
acquisitions or investments (including investments in wholly-owned Subsidiaries
of Company) for consideration other than Stock issued by Company, the value of
the consideration for which, when added to the value of consideration for such
other acquisitions or investments made during the then preceding 12 months, does
not exceed 15% of the Consolidated Net Worth of Company, as of the then most
recent fiscal quarter immediately preceding, or (iv) any other acquisition or
investment made in consideration of Stock issued by Company.
(b) SALES OF ASSETS; LIQUIDATION. Company shall not, and shall not
permit any Subsidiary of Company to, (i) sell, transfer, convey or otherwise
dispose of any assets or properties or (ii) liquidate, dissolve or wind up
Company, except for transfers to Company, whether voluntary or involuntary;
PROVIDED, HOWEVER, that the foregoing shall not prohibit (i) the sale of
inventory in the ordinary course of business, (ii) the sale of surplus or
obsolete equipment and fixtures, (iii) transfers resulting from any casualty or
condemnation of assets or properties, (iv) transfers of assets to wholly-owned
Subsidiaries of Company to the extent permitted by paragraph (a) above, or (v)
any transfers, sales or dispositions, the book value of which when added to the
book value of all other such transfers, sales and dispositions over the then
preceding 12 months does not exceed 15% of the Consolidated Net Worth of Company
as of the then most recent fiscal quarter immediately preceding.
(c) EMPLOYEE LOANS. Other than as set forth on Schedule 5.2(c),
Company shall not, and shall not permit any Subsidiary of Company to, make or
accrue any loans or other advances of money to any employee of Company or such
Subsidiary, other than in the ordinary course of business consistent with past
practice in an aggregate amount outstanding not to exceed at any one time (i)
$100,000 with respect to any employee, and (ii) $375,000 with respect to all
employees.
(d) PREFERRED STOCK. (i) Company shall not issue or agree to issue
any additional shares of preferred stock with an aggregate redemption price,
liquidation preference or purchase price of more than $20,000,000.
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<PAGE>
(e) TRANSACTIONS WITH AFFILIATES. Company shall not, and shall not
permit any Subsidiary of Company to, enter into or be a party to any transaction
with any Affiliate of Company or such Subsidiary, except (i) transactions
expressly permitted hereby, (ii) transactions in the ordinary course of and
pursuant to the reasonable requirements of Company's or such Subsidiary's
business and upon fair and reasonable terms that are not less favorable to
Company or such Subsidiary than would be obtained in a comparable arm's-length
transaction with a Person not an Affiliate of Company or such Subsidiary, and
(iii) payment of compensation to employees and directors' fees.
(f) INDEBTEDNESS. Company shall not, and shall not permit any
Subsidiary of Company to, incur or suffer to exist any Indebtedness except: (i)
Indebtedness existing on the date hereof and listed on Schedule 5.2(f); (ii)
Permitted Indebtedness; (iii) Indebtedness to be incurred after the date hereof,
as set forth on Schedule 5.2(f); (iv) to the extent deemed Indebtedness,
obligations under any private label credit card arrangement entered into between
Company and Purchaser or any Affiliate of Purchaser; and (v) Indebtedness
(including the Note) in an aggregate amount outstanding at any one time not to
exceed $30,000,000, provided that Company would then be in compliance with the
covenant in Section 5.1(h) (ii) (without regard to the March 31, 1998 date
thereof) after giving effect to the incurrence of such Indebtedness.
(g) LIENS. Company shall not, and shall not permit any Subsidiary
of Company to, incur or suffer to exist any Liens on any of its assets, except
(i) Permitted Liens, and (ii) Liens securing Senior Debt permitted hereunder.
(h) RESTRICTED PAYMENTS. Company shall not make any Restricted
Payments nor shall Company permit any Subsidiary to make such payments with
respect to Company's Stock, other than (i) repurchases of the Warrants pursuant
to the provisions thereof, and (ii) mandatory redemption of Company's
outstanding preferred stock, provided that (x) no Default or Event of Default
exists or would result therefrom, and (y) the mandatory redemption provisions
provided for in Section 2.4 are complied with.
(i) MERGERS; SUBSIDIARIES. Company shall not, nor shall it
permit any of its Subsidiaries to, directly or indirectly, by operation of
law or otherwise, merge with, consolidate with, or otherwise combine with any
Person, nor shall Company create any Subsidiary, other than (i) the creation
of wholly-owned Subsidiaries or (ii) mergers of wholly-owned Subsidiaries of
Company into Company or any of its other wholly-owned Subsidiaries.
5.3 ADDITIONAL COVENANTS. Company covenants and agrees that, from and
after the Closing Date so long as the Note or at least 50% of the shares of
Common Stock issuable upon exercise of the Warrants (after giving effect to
any reduction in the number of shares subject to the Series B Warrant) and/or
Warrants exercisable for such amount of shares remain outstanding:
(a) Purchaser may designate one individual (an "Observer") to
attend all meetings of the Board of Directors of Company (and any formal
meetings of the audit or compensation committees thereof) in a non-voting
observer capacity. The Observer shall be entitled to receive all reports,
presentations and materials as if such Observer were a member of
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<PAGE>
the Board of Directors. Company shall reimburse the Observer for all
reasonable expenses incurred in connection with meetings of the Board of
Directors and committees thereof, including reasonable travel expenses. This
subparagraph (a) shall cease to apply following a Qualified IPO.
(b) Company shall keep Purchaser advised of the progress and status
of any negotiations resulting from an offer by a third party which could result
in a Change of Control. Company shall give Purchaser notice of any such offers
or negotiations.
6. CONDITIONS PRECEDENT
6.1 CONDITIONS PRECEDENT. The obligation of Purchaser to purchase the
Note and Warrants pursuant to Section 2.1 hereof, is subject to the condition
that Purchaser shall have received, on the Closing Date, the following, each
dated the Closing Date unless otherwise indicated, in form and substance
satisfactory to Purchaser:
(a) The Note and Warrants duly executed by Company and payable to
and registered, respectively, in the name of Purchaser.
(b) Favorable opinion of Oppenheimer Wolff & Donnelly, counsel to
Company, substantially in the form attached hereto as Exhibit D, it being
understood that to the extent that such opinion of counsel to Company shall rely
upon any other opinion of counsel, each such other opinion shall be in form and
substance reasonably satisfactory to Purchaser and shall provide that Purchaser
may rely thereon.
(c) Resolutions of the board of directors of Company, certified by
the Secretary or Assistant Secretary of Company, as of the Closing Date, to be
duly adopted and in full force and effect on such date, authorizing (i) the
consummation of each of the transactions contemplated by this Agreement and (ii)
specific officers to execute and deliver this Agreement and each other
Transaction Document to which it is a party.
(d) Governmental certificates, dated the most recent practicable
date prior to the Closing Date, with telegram updates where available, showing
that Company is duly organized and in good standing in the State of Minnesota
and is qualified as a foreign corporation and in good standing in all other
jurisdictions in which it is qualified to transact business.
(e) A copy of the articles of incorporation and all amendments
thereto of Company (including, without limitation, an amendment of the
anti-dilution protection applicable to the shares of preferred stock of
Company, which amendment shall be in form and substance satisfactory to GE
Capital, in its sole discretion), certified as of a recent date by the
Secretary of State of the State of Minnesota, and copies of Company's
by-laws, certified by the Secretary or Assistant Secretary of Company as true
and correct as of the Closing Date.
(f) Certificates of the Secretary or an Assistant Secretary of
Company, dated the Closing Date, as to the incumbency and signatures of the
officers of Company executing this Agreement, the Note, the Warrants and any
other certificate or other document to be delivered
32
<PAGE>
pursuant hereto or thereto, together with evidence of the incumbency of such
Secretary or Assistant Secretary.
(g) Certificate of the President or Chief Financial Officer of
Company, dated the Closing Date, stating that all of the representations and
warranties of Company contained herein or in the other Transaction Documents are
true and correct on and as of the Closing Date as if made on such date and that
no breach of any covenant contained in Article 5 and no Default or Event of
Default has occurred or would result from the Closing hereunder.
(h) Certificate of the Chief Financial Officer of Company, dated
the Closing Date, stating that neither the issuance nor the exercise of the
Warrants will result in a reduction (or other adjustment having a similar
effect) in the conversion price of any series of the outstanding shares of
preferred stock of Company other than the outstanding shares of Series E
preferred stock of Company, the conversion price of which will be reduced to the
weighted average exercise price of the Warrants after cancellation of any Series
B Warrants, whether or not any of the Warrants are exercised.
6.2 ADDITIONAL CONDITIONS. The obligation of Purchaser to purchase the
Note and Warrant pursuant to Section 2.1 hereof is subject to the additional
conditions precedent that:
(a) There shall not have occurred any Material Adverse Effect since
December 28, 1996.
(b) All of the representations and warranties of Company contained
herein or in the other Transaction Documents shall be true and correct on and as
of the Closing Date as if made on such date and no breach of any covenant
contained in Article 5 or Default or Event of Default shall have occurred or
would result from the Closing hereunder.
(c) The Closing shall have occurred no later than March 31, 1997.
7. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the
following events (regardless of the reason therefor) shall constitute an "Event
of Default" hereunder and under the Note:
(a) Company shall fail to make any payment of principal of, or
interest on or any other amount owing in respect of, the Note, or any of the
other Obligations when due and payable or declared due and payable, provided
that (i) once in any Fiscal Year, with respect to interest only such failure
shall remain unremedied for a period of five (5) days, and (ii) with respect to
payments other than principal, prepayment premium or interest, such failure
shall remain unremedied for a period of ten (10) days.
(b) Company shall fail or neglect to perform, keep or observe any
of the provisions of Sections 4.4, 4.10, 4.13, 4.19, 4.22, 5.1(h) or 5.2 hereof.
33
<PAGE>
(c) Company shall fail or neglect to perform, keep or observe any
other provision of this Agreement or of any of the other Loan Documents, and the
same shall remain unremedied for a period of thirty (30) days after Company
shall receive written notice of any such failure from Purchaser.
(d) A default shall occur under any other agreement, document or
instrument to which Company or any Subsidiary is a party or by which Company or
any of its Subsidiaries or any of their property is bound, and such default (i)
involves the failure to make any payment (whether of principal, interest or
otherwise) due (whether by scheduled maturity, required prepayment,
acceleration, demand or otherwise) in respect of any Indebtedness of Company or
any of its Subsidiaries in an aggregate amount exceeding $2,000,000, or (ii)
causes (or permits any holder of such Indebtedness or a trustee to cause) such
Indebtedness or a portion thereof in an aggregate amount exceeding $2,000,000,
to become due prior to its stated maturity or prior to its regularly scheduled
dates of payment.
(e) Any representation or warranty herein or in any Loan Document
or in any written statement pursuant thereto or hereto, report, financial
statement or certificate made or delivered to Purchaser by Company pursuant
hereto or thereto shall be untrue or incorrect in any material respect, as of
the date when made.
(f) Any of the assets of Company or any of its Subsidiaries in
excess of $250,000 in value shall be attached, seized, levied upon or subjected
to a writ or distress warrant, or come within the possession of any receiver,
trustee, custodian or assignee for the benefit of creditors of Company or any of
its Subsidiaries and shall remain unstayed or undismissed for sixty (60)
consecutive days; or Company or any of its Subsidiaries shall have concealed,
removed or permitted to be concealed or removed, any part of its property, with
intent to hinder, delay or defraud its creditors or any of them or made or
suffered a transfer of any of its property or the incurring of an obligation
which may be fraudulent under any bankruptcy, fraudulent conveyance or other
similar law.
(g) A case or proceeding shall have been commenced against Company
or any of its Subsidiaries in a court having competent jurisdiction seeking a
decree or order in respect of Company or any of its Subsidiaries (i) under title
11 of the United States Code, as now constituted or hereafter amended, or any
other applicable federal, state or foreign bankruptcy or other similar law, (ii)
appointing a custodian, receiver, liquidator, assignee, trustee or sequestrator
(or similar official) of Company or any of its Subsidiaries or of any
substantial part of its or their properties, or (iii) ordering the winding-up or
liquidation of the affairs of Company or any of its Subsidiaries and such case
or proceeding shall remain undismissed or unstayed for sixty (60) consecutive
days or such court shall enter a decree or order granting the relief sought in
such case or proceeding.
(h) Company or any of its Subsidiaries shall (i) file a petition
seeking relief under title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable federal, state or foreign bankruptcy
or other similar law, (ii) consent to the institution of proceedings thereunder
or to the filing of any such petition or to the appointment of or taking
possession by a custodian, receiver, liquidator, assignee, trustee or
sequestrator (or similar
34
<PAGE>
official) of Company or any of its Subsidiaries or of any substantial part of
its properties, (iii) fail generally to pay its debts as such debts become
due, or (iv) take any corporate action in furtherance of any such action.
(i) Final judgment or judgments (after the expiration of all times
to appeal therefrom) for the payment of money in excess of $1,000,000 in the
aggregate shall be rendered against Company or any of its Subsidiaries and the
same shall not be (i) covered by insurance with reasonable deductibles, or (ii)
vacated, stayed, bonded, paid or discharged for a period of thirty (30) days.
(j) (i) With respect to any Plan, a prohibited transaction within
the meaning of Section 4975 of the IRC or Section 406 of ERISA occurs which in
the reasonable determination of the Agent could result in direct or indirect
liability to Company or any of its Subsidiaries, (ii) with respect to any Title
IV Plan, the filing of a notice to voluntarily terminate any such plan in a
distress termination, (iii) with respect to any Multiemployer Plan, Company, any
of its Subsidiaries or any ERISA Affiliate shall incur any Withdrawal Liability,
(iv) with respect to any Pension Plan subject to Section 412 of the Code or
Section 302 of ERISA, Company, any of its Subsidiaries or any ERISA Affiliate
shall incur an accumulated funding deficiency or request a funding waiver from
the IRS, or (v) with respect to any Title IV Plan or Multiemployer Plan which
has an ERISA Event not described in clauses (ii) - (iv) hereof, in the
reasonable determination of the Agent there is a reasonable likelihood for
termination of any such plan by the PBGC; PROVIDED, HOWEVER, that the events
listed in clauses (i) - (v) hereof shall constitute Events of Default only if
the liability, deficiency or waiver request of Company, any of its Subsidiaries
or any ERISA Affiliate, whether or not assessed, exceeds $1,000,000 in any case
set forth in (i) - (v) above, or exceeds $1,000,000 in the aggregate for all
such cases.
7.2 REMEDIES. If any Event of Default specified in Section 7.1 shall
have occurred and be continuing, Purchaser may, without notice, declare all
Obligations to be forthwith due and payable, whereupon all such Obligations
shall become and be due and payable, without presentment, demand, protest or
further notice of any kind, all of which are expressly waived by Borrower;
PROVIDED, HOWEVER, that upon the occurrence of an Event of Default specified in
Section 7.1(f), (g) or (h) hereof, such Obligations shall become due and payable
without declaration, notice or demand by Purchaser.
Purchaser may (but shall not be obligated to) take such action, or refrain
from taking such action, with respect to such Default or Event of Default as it
shall deem advisable in its best interests, including any action (or the failure
to act) pursuant to the Loan Documents.
7.3 WAIVERS BY COMPANY. Except as otherwise provided for in this
Agreement and applicable law, Company waives (i) presentment, demand and protest
and notice of presentment, dishonor and notice of intent to accelerate, (ii) all
rights to notice and a hearing prior to Purchaser's taking possession or control
of, or to Purchaser's replevy, attachment or levy upon, the Collateral or any
bond or security which might be required by any court prior to allowing
Purchaser to exercise any of its remedies, and (iii) the benefit of all
valuation, appraisal and exemption laws. Company acknowledges that it has been
advised by counsel of its choice with
35
<PAGE>
respect to this Agreement, the other Loan Documents and the transactions
evidenced by this Agreement and the other Loan Documents.
7.4 RIGHT OF SET-OFF. Upon the occurrence and during the continuance of
any Event of Default, Purchaser is hereby authorized at any time and from time
to time, to the fullest extent permitted by law, to set off and apply any and
all deposits (general or special, time or demand, provisional or final) at any
time held and other indebtedness at any time owing by Purchaser to or for the
credit or the account of Company against any and all of the obligations of
Company now or hereafter existing under this Agreement and the Note held by
Purchaser irrespective of whether or not Purchaser shall have made any demand
under this Agreement or the Note and although such obligations may be unmatured.
Purchaser agrees promptly to notify Company after any such set-off and
application made by Purchaser; PROVIDED, HOWEVER, that the failure to give such
notice shall not affect the validity of such set-off and application. The
rights of Purchaser under this Section are in addition to other rights and
remedies (including, without limitation, other rights of set-off) which
Purchaser may have. This Section 7.4 shall not apply to any retail receivables
financing or private label credit card arrangements entered into between Company
and Purchaser or any of its Affiliates, and Purchaser waives any common law
rights of setoff with respect thereto.
8. SUBORDINATION
8.1 NOTE SUBORDINATED TO SENIOR DEBT. Company covenants and agrees, and
Purchaser and any other holder of the Note (Purchaser and such holders being
hereinafter referred to collectively as "Holder") by its acceptance thereof
likewise covenants and agrees, that all payments of the principal of and
interest on the Note and all other Obligations of Company pursuant to this
Agreement (collectively the "Subordinated Debt") shall be subordinated in
accordance with the provisions of this Section 8 to the prior payment in full of
all Senior Debt of Company. For purposes of this Section 8, the term "Senior
Debt" shall mean the Senior Debt of Company and shall include principal of and
premium, if any, and interest (including interest accruing at the rate provided
for in the documents evidencing such Senior Debt after the commencement of any
proceedings of the type referred to in Section 8.2(a) hereof, whether or not an
allowed claim in such proceeding) on all loans and other extensions of credit
under, and all expenses, fees, reimbursements, indemnities and other amounts
owing pursuant to, the Senior Debt, to the extent permitted to be incurred
pursuant hereto.
8.2 PRIORITY AND PAYMENT OVER OF PROCEEDS IN CERTAIN EVENTS.
(a) SUBORDINATION ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF
COMPANY. Upon payment or distribution of assets or securities of Company of any
kind or character, whether in cash, property or securities, upon any dissolution
or winding up or total or partial liquidation or reorganization of Company,
whether voluntary or involuntary, or in bankruptcy, insolvency, receivership or
other proceedings or upon an assignment for the benefit of creditors or any
other marshalling of the assets and liabilities of Company, all Senior Debt
shall first be paid in full in cash, or payment provided for in cash or cash
equivalents in a manner satisfactory to the holders of Senior Debt, before any
direct or indirect payments or distributions, including, without limitation, by
exercise of set-off, of any cash, property or securities on account of
36
<PAGE>
principal of (or premium, if any) or interest on the Note and to that end the
holders of Senior Debt shall be entitled to receive (pro rata on the basis of
the respective amounts of Senior Debt held by them) directly, for application
to the payment thereof (to the extent necessary to pay all Senior Debt in
full after giving effect to any substantially concurrent payment or
distribution to or provision for payment to the holders of such Senior Debt),
any payment or distribution of any kind or character, whether in cash,
property or securities, in respect of the Subordinated Debt. The holders of
Senior Indebtedness are hereby authorized to file an appropriate claim for
and on behalf of the Holders if they or any of them do not file, and there is
not otherwise filed on behalf of the Holders, a proper claim or proof of
claim in the form required in any such proceeding prior to 30 days before the
expiration of the time to file such claim or claims.
(b) SUBORDINATION ON DEFAULT IN SENIOR DEBT. No direct or indirect
payment by or on behalf of Company of principal of (premium, if any), or
interest on, the Subordinated Debt, whether pursuant to the terms of the Note,
upon acceleration or otherwise, shall be made if at the time of such payment
there exists (i) a default in the payment of all or any portion of principal of
(premium, if any), interest on, fees or other amounts owing in connection with
any Senior Debt, or (ii) any other default under any document or instrument
governing or evidencing any Senior Debt, and Purchaser has received written
notice of such default from a holder or representative of the holders of Senior
Debt, and, in either case, such default shall not have been cured or waived in
writing, PROVIDED HOWEVER, that if within the period specified in the next
sentence with respect to a default referred to in clause (ii) above, the holders
of Senior Debt have not declared the Senior Debt to be immediately due and
payable (or have declared such Senior Debt to be immediately due and payable and
within such period have rescinded such acceleration), then and in that event,
payment of principal of, and interest on, the Note shall be resumed. With
respect to any default under clause (ii) above, the period referred to in the
preceding sentence shall commence upon receipt by Purchaser of a written notice
or notices (which shall specify all defaults existing under the Senior Debt on
the date of such notice and of which the holder thereof of representative giving
such note had actual knowledge at such time) of the commencement of such period
from such holder or representative, and shall end at the completion of the 90th
day after the beginning of such period. Only one such 90 day period may
commence within any 360 consecutive days. Upon termination of any such period,
Borrower shall resume payments on account of the principal of (premium, if any),
and interest on, the Note, and on account of all other Subordinated Debt,
subject to the provisions of Sections 8.1 and 8.2 hereof.
(c) RIGHTS AND OBLIGATIONS OF HOLDERS.
(i) In the event that, notwithstanding the foregoing provision
prohibiting such payment or distribution, the Holders shall have received any
payment on account of the Subordinated Debt at a time when such payment is
prohibited by such provision before the Senior Debt is paid in full, then and in
such event, such payment or distribution shall be received and held in trust by
the Holders apart from their other assets and paid over or delivered to the
holders of the Senior Debt remaining unpaid to the extent necessary to pay in
full in cash the principal of (premium, if any), and interest on, such Senior
Debt in accordance with its terms and after giving effect to any concurrent
payment or distribution to the holders of such Senior Debt.
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(ii) Nothing contained in this Section 8 will limit the right of the
Holders of Subordinated Debt to take any action to accelerate the maturity of
the Subordinated Debt pursuant to Section 7.2 hereof, PROVIDED, HOWEVER, that
all Senior Debt then due or thereafter declared to be due shall first be paid in
full before the Holders are entitled to receive any payment from Company of
principal of, or interest on, the Note.
(iii) Upon any payment or distribution of assets or securities
referred to in this Section 8, the Holders shall be entitled to rely upon any
order or decree of a court of competent jurisdiction in which such
dissolution, winding up, liquidation or reorganization proceedings are
pending, and upon a certificate of the receiver, trustee in bankruptcy,
liquidating trustee, agent or other person making any such payment or
distribution, delivered to the Holders for the purpose of ascertaining the
persons entitled to participate in such distribution, the holders of Senior
Debt and other Indebtedness of Company, the amount thereof or payable
thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Section 8.
8.3 RIGHTS OF HOLDERS OF SENIOR DEBT NOT TO BE IMPAIRED. No right of
any present or future holder of any Senior Debt to enforce subordination as
herein provided shall at any time in any way be prejudiced or impaired by any
act or failure to act by any such holder, or by any noncompliance by Company
with the terms and provisions and covenants herein regardless of any knowledge
thereof such holder may have or otherwise be charged with.
The provisions of this Section 8 are intended to be for the benefit of, and
shall be enforceable directly by, the holders of the Senior Debt. Company and
each Holder of a Note, by its acceptance thereof, acknowledges that the holders
of the Senior Debt are relying upon the provisions of this Section 8 in
extending such Senior Debt.
8.4 SUBROGATION. Upon the payment in full of all Senior Debt, the
Holders shall be subrogated to the extent of the payments or distributions made
to the holders of, or otherwise applied to payment of, the Senior Debt pursuant
to the provisions of this Section 8 and to the rights of the holders of Senior
Debt to receive payments or distributions of assets of Company made on the
Senior Debt until the Note shall be paid in full; and for the purposes of such
subrogation, no payments or distributions to holders of Senior Debt of any cash,
property or securities to which Holders of the Note would be entitled except for
the provisions of this Section 8, and no payment over pursuant to the provisions
of this Section 8 to holders of Senior Debt by the Holders, shall, as between
Company, its creditors other than holders of Senior Debt and the Holders, be
deemed to be payment by Company to or on account of Senior Debt, it being
understood that the provisions of this Section 8 are solely for the purpose of
defining the relative rights of the holders of Senior Debt, on the one hand, and
the Holders, on the other hand.
If any payment or distribution to which the Holders would otherwise have
been entitled but for the provisions of this Section 8 shall have been applied,
pursuant to the provisions of this Section 8, to the payment of Senior Debt,
then and in such case, the Holders shall be entitled to receive from the holders
of Senior Debt at the time outstanding any payments or distributions received by
such holders of Senior Debt in excess of the amount sufficient to pay all Senior
Debt in full.
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8.5 OBLIGATIONS OF COMPANY UNCONDITIONAL. Nothing contained in this
Section 8 or elsewhere in this Agreement or in the Note is intended to or shall
impair, as between Company and the Holders, the obligations of Company, which
are absolute and unconditional, to pay to the Holders the principal of (premium,
if any), and interest on, the Note as and when the same shall become due and
payable in accordance with their terms, or is intended to or shall affect the
relative rights of the Holders and creditors of Company other than the holders
of the Senior Debt, nor shall anything herein or therein prevent any Holder from
exercising all remedies otherwise permitted by applicable law upon the
occurrence of a Default or Event of Default under this Agreement, subject to the
rights, if any, under this Section 8 of the holders of Senior Debt in respect of
cash, property or securities of Company received upon the exercise of any such
remedy.
The failure to make a payment on account of principal of, or interest on,
the Note by reason of any provision of this Section 8 shall not be construed as
preventing the occurrence of a Default or an Event of Default hereunder.
8.6 NOTICE TO HOLDERS. Company shall give prompt written notice to each
Holder of any fact known to Company which would prohibit the making of any
payment on or in respect of the Note, but failure to give such notice shall not
affect the subordination of the Subordinated Debt to the Senior Debt provided in
this Section 8. Notwithstanding the provisions of this Section 8 or any other
provision of this Agreement or the Note, no Holder shall be charged with
knowledge of the existence of any facts which would prohibit the making of any
payment to or in respect of the Note, unless and until the Holders shall have
received written notice thereof from Company or a representative of or holder of
Senior Debt, and, prior to the receipt of any such written notice, subject to
the provisions of this Section 8, the Holders shall be entitled in all respects
to assume no such facts exist. Nothing contained in this Section 8.6 shall
limit the right of the holders of Senior Debt to recover payments as
contemplated by Sections 8.1 and 8.2.
8.7 RIGHT OF ANY HOLDER AS HOLDER OF SENIOR DEBT. Any Holder in its
individual capacity shall be entitled to all the rights set forth in this
Section 8 with respect to any Senior Debt which may at any time be held by it,
to the same extent as any other holder of Senior Debt, and nothing in this
Agreement shall deprive such Holder of any of its rights as such holder.
8.8 REINSTATEMENT. The provisions of this Section 8 shall continue to
be effective or be reinstated, and the Senior Debt shall not be deemed to be
paid in full, as the case may be, if at any time any payment of any of the
Senior Debt is rescinded or must otherwise be returned by the holder thereof
upon the insolvency, bankruptcy or reorganization of the Company or otherwise,
all as though such payment had not been made.
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9. MISCELLANEOUS
9.1 COMPLETE AGREEMENT; MODIFICATION OF AGREEMENT; SALE OF INTEREST.
(a) The Transaction Documents constitute the complete agreement between the
parties with respect to the subject matter hereof and may not be modified,
altered or amended except as provided therein, or in the case of the Loan
Documents by an agreement in writing signed by Company and Purchaser in
accordance with Section 9.1(d) hereof. Company may not sell, assign or transfer
any of the Loan Documents or any portion thereof, including, without limitation,
Company's rights, title, interests, remedies, powers and duties hereunder or
thereunder. Company hereby consents to Purchaser's sale of participations,
assignment, transfer or other disposition, at any time or times, of any of the
Loan Documents or of any portion thereof or interest therein, including, without
limitation, Purchaser's rights, title, interests, remedies, powers or duties
thereunder, whether evidenced by a writing or not.
(b) In the event Purchaser assigns or otherwise transfers all or
any part of the Note, Company shall, upon the request of Purchaser issue new
Notes to effectuate such assignment or transfer.
(c) Except as provided in Section 3.5, Purchaser may sell, assign,
transfer or negotiate to one or more other lenders, commercial banks, insurance
companies, other financial institutions or any other Person acceptable to
Purchaser all or a portion of its rights and obligations under the Note held by
Purchaser and this Agreement; PROVIDED, HOWEVER, that acceptance of such
assignment by any assignee shall constitute the agreement of such assignee to be
bound by the terms of this Agreement applicable to Purchaser. From and after
the effective date of such an assignment, (x) the assignees thereunder shall, in
addition to the rights and obligations hereunder held by it immediately prior to
such effective date, have the rights and obligations hereunder that have been
assigned to it pursuant to such assignment and (y) the assignor thereunder
shall, to the extent that rights and obligations hereunder have been assigned by
it pursuant to such assignment, relinquish its rights and be released from its
obligations under this Agreement (and, in the case of an assignment and
acceptance covering all or the remaining portion of an assignor's rights and
obligations under this Agreement, such assignor shall cease to be a party
hereto).
(d) No amendment or waiver of any provision of this Agreement or
the Note or any other Loan Document, nor consent to any departure by Company
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Required Holders, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given; PROVIDED, HOWEVER, that no amendment, waiver or consent shall, unless in
writing and signed by each holder of a Note affected thereby do any of the
following: (i) subject such holder to any additional obligations, (ii) reduce
the principal of, or interest on, the Note or other amounts payable hereunder or
release or discharge Company from its obligations to make such payments, (iii)
postpone any date fixed for any payment of principal of, or interest on, the
Note or other amounts payable hereunder, (iv) change the aggregate unpaid
principal amount of the Note, or the number of holders thereof, which shall be
required for such holders or any of them to take any action hereunder, or (v)
amend this Section 9.1(d).
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9.2 FEES AND EXPENSES. Company shall pay all reasonable out-of-pocket
expenses of Purchaser in connection with the preparation of the Transaction
Documents and the transactions contemplated thereby, including all reasonable
legal expenses. If, at any time or times, regardless of the existence of an
Event of Default (except with respect to paragraphs (ii), (iii) and (iv) below,
which shall be subject to an Event of Default (or in the case of paragraph (ii)
a Default) having occurred and be continuing), Purchaser shall employ counsel or
other advisors for advice or other representation or shall incur reasonable
legal or other costs and expenses in connection with:
(i) any amendment, modification or waiver, or consent with respect
to, any of the Loan Documents;
(ii) a Default or an Event of Default;
(iii) any litigation, contest, dispute, suit, proceeding or action
(whether instituted by Purchaser, Company, any Subsidiary of Company or any
other Person) in any way relating to any of the Loan Documents or any other
agreements to be executed or delivered in connection herewith; or
(iv) any attempt to enforce any rights of Purchaser against
Company, any Subsidiary of Company or any other Person, that may be
obligated to Purchaser by virtue of any of the Loan Documents;
then, and in any such event, the reasonable attorneys' and other parties' fees
arising from such services, including those of any appellate proceedings, and
all reasonable expenses, costs, charges and other fees incurred by such counsel
and others in any way or respect arising in connection with or relating to any
of the events or actions described in this Section shall be payable, on demand,
by Company to Purchaser and shall be additional Obligations under this Agreement
and the other Loan Documents. Without limiting the generality of the foregoing,
such expenses, costs, charges and fees may include: reasonable paralegal fees,
costs and expenses; accountants' and investment bankers' fees, costs and
expenses; court costs and expenses; photocopying and duplicating expenses; court
reporter fees, costs and expenses; long distance telephone charges; air express
charges; telegram charges; secretarial overtime charges; and expenses for
travel, lodging and food paid or incurred in connection with the performance of
such legal services.
9.3 NO WAIVER BY PURCHASER. Purchaser's failure, at any time or times,
to require strict performance by Company of any provision of this Agreement and
any of the other Loan Documents shall not waive, affect or diminish any right of
Purchaser thereafter to demand strict compliance and performance therewith. Any
suspension or waiver by Purchaser of an Event of Default by Company under the
Loan Documents shall not suspend, waive or affect any other Event of Default by
Company under this Agreement and any of the other Loan Documents whether the
same is prior or subsequent thereto and whether of the same or of a different
type. None of the undertakings, agreements, warranties, covenants and
representations of Company contained in this Agreement or any of the other Loan
Documents and no Event of Default by Company under this Agreement and no
defaults by Company under any of the other Loan
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Documents shall be deemed to have been suspended or waived by Purchaser,
unless such suspension or waiver is by an instrument in writing signed by an
officer of Purchaser and the Required Holders and directed to Company
specifying such suspension or waiver.
9.4 REMEDIES. Purchaser's rights and remedies under this Agreement
shall be cumulative and nonexclusive of any other rights and remedies which
Purchaser may have under any other agreement, including without limitation, the
Loan Documents, the other Transaction Documents, by operation of law or
otherwise.
9.5 WAIVER OF JURY TRIAL. The parties hereto waive all right to trial
by jury in any action or proceeding to enforce or defend any rights under the
Transaction Documents.
9.6 SEVERABILITY. Wherever 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.
9.7 PARTIES. This Agreement and the other Transaction Documents shall
be binding upon, and inure to the benefit of, the successors of Company and
Purchaser and the assigns, transferees and endorsees of Purchaser.
9.8 CONFLICT OF TERMS. Except as otherwise provided in this Agreement
or any of the other Loan Documents by specific reference to the applicable
provisions of this Agreement, if any provision contained in this Agreement is in
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
9.9 GOVERNING LAW. Except as otherwise expressly provided in any of the
Transaction Documents, in all respects, including all matters of construction,
validity and performance, this Agreement and the Obligations arising hereunder
shall be governed by, and construed and enforced in accordance with, the laws of
the State of New York applicable to contracts made and performed in such state,
without regard to the principles thereof regarding conflict of laws, and any
applicable laws of the United States of America. Purchaser and Company agree to
submit to personal jurisdiction and to waive any objection as to venue in the
County of New York, State of New York. Service of process on Purchaser or
Company in any action arising out of or relating to any of the Transaction
Documents shall be effective if mailed to such party at the address listed in
Section 9.10 hereof. Nothing herein shall preclude Purchaser or Company from
bringing suit or taking other legal action in any other jurisdiction.
9.10 NOTICES. Except as otherwise provided herein, whenever it is
provided herein that any notice, demand, request, consent, approval, declaration
or other communication shall or may be given to or served upon any of the
parties by another, or whenever any of the parties desires to give or serve upon
another any communication with respect to this Agreement, each such notice,
demand, request, consent, approval, declaration or other communication shall be
in writing and either shall be delivered in person with receipt acknowledged or
by registered or certified mail,
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return receipt requested, postage prepaid, or telecopied and confirmed by
telecopy answerback addressed as follows:
(a) If to Company at:
Select Comfort Corporation
6105 Trenton Lane N.
Suite 100
Plymouth, Minnesota 55442
Attn: Chief Financial Officer
Telecopy Number: (612) 551-7888
With a Copy to:
Oppenheimer Wolff & Donnelly
45 South 7th Street
Suite 3400
Minneapolis, Minnesota 55402
Attn: Mark A. Kimball, Esq.
Telecopy Number: (612) 344-9376
(b) If to Purchaser:
General Electric Capital Corporation
260 Long Ridge Road
Stamford, Connecticut 06927
Attn: Equity Capital Group-Select
Telecopy Number: (203) 357-4565
with copies to:
General Electric Capital Corporation
260 Long Ridge Road
Stamford, Connecticut 06927
Attention: Equity Capital Group Legal
Counsel
Telecopy Number: (203) 357-3047
and
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Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
Attn: Ted S. Waksman, Esq.
Telecopy Number: (212) 310-8007
or at such other address as may be substituted by notice given as herein
provided. The giving of any notice required hereunder may be waived in writing
by the party entitled to receive such notice. Every notice, demand, request,
consent, approval, declaration or other communication hereunder shall be deemed
to have been duly given or served on the date on which personally delivered,
with receipt acknowledged, telecopied and confirmed by telecopy answerback or
three (3) Business Days after the same shall have been deposited in the United
States mail. Failure or delay in delivering copies of any notice, demand,
request, consent, approval, declaration or other communication to the persons
designated above to receive copies shall in no way adversely affect the
effectiveness of such notice, demand, request, consent, approval, declaration or
other communication.
9.11 SURVIVAL. The representations and warranties of Company in this
Agreement shall survive the execution, delivery and acceptance hereof by the
parties hereto and the closing of the transactions described herein or related
hereto.
9.12 SECTION TITLES. The Section titles and Table of Contents contained
in this Agreement are and shall be without substantive meaning or content of any
kind whatsoever and are not a part of the agreement between the parties hereto.
9.13 COUNTERPARTS. This Agreement may be executed in any number of
separate counterparts, each of which shall, collectively and separately,
constitute one agreement.
9.14 PUBLICITY. Company shall not issue any press release or make any
public disclosure regarding the transactions contemplated hereby unless such
press release or public disclosure is approved by Purchaser in advance.
Notwithstanding the foregoing, Company may, in documents required to be filed by
it with the SEC or other regulatory bodies, make such statements with respect to
the transactions contemplated hereby as it may be advised by counsel is legally
necessary or advisable, subject to advance consultation with Purchaser.
IN WITNESS WHEREOF, Company and Purchaser have duly executed this Agreement
as of the day and year first above written.
SELECT COMFORT CORPORATION
By: /s/
---------------------------------------
Name:
Title: CFO and CAO
44
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GENERAL ELECTRIC CAPITAL CORPORATION
By: /s/
---------------------------------------
Name: George Hashbarger, Jr.
Title:
45
<PAGE>
Exhibit 10.11
SENIOR SUBORDINATED NOTE
$15,000,000 New York, New York
March 27, 1998
FOR VALUE RECEIVED, the undersigned, SELECT COMFORT CORPORATION, a
Minnesota corporation ("Company"), hereby unconditionally PROMISES TO PAY to the
order of GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation
("Purchaser"), at the office of Purchaser, at 260 Long Ridge Road, Stamford,
Connecticut 06927, or at such other place as the holder of this Senior
Subordinated Note (the "Note") may designate from time to time in writing, in
lawful money of the United States of America and in immediately available funds,
the principal amount of FIFTEEN MILLION DOLLARS ($15,000,000), together with
interest on the unpaid principal amount of this Note outstanding from time to
time from the date hereof, at the rate provided in the Purchase Agreement (as
hereinafter defined).
This Note is issued pursuant to that certain Purchase Agreement dated as of
March 27, 1997 between Company and Purchaser (the "Purchase Agreement"), and is
entitled to the benefit and security of the Loan Documents provided for therein,
to which reference is hereby made for a statement of all the terms and
conditions under which the loan evidenced hereby is made. All capitalized
terms, unless otherwise defined herein, shall have the meanings ascribed to them
in the Purchase Agreement.
The principal amount of the indebtedness evidenced hereby shall be payable
in the amounts and on the dates specified in the Purchase Agreement and, if not
sooner paid in full, on March 21, 2003. Interest there on shall be paid until
such principal amount is paid in full at such interest rates and at such times
as are specified in the Purchase Agreement.
If any payment on this Note becomes due and payable on a day other than a
Business Day, the maturity thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the then applicable rate during such extension.
Upon and after the occurrence of an Event of Default, this Note may, as
provided in the Purchase Agreement, and without demand, notice or legal process
of any kind, be declared, and immediately shall become, due and payable.
Demand, presentment, protest and notice of nonpayment and protest are
hereby waived by Company.
This Note has been executed, delivered and accepted at New York, New York
and shall be interpreted, governed by and construed in accordance with, the laws
of the State of New York.
SELECT COMFORT CORPORATION
By: /s/ Daniel J. McAthie
---------------------------
Daniel J. McAthie
Executive Vice President
<PAGE>
CONSUMER CREDIT CARD PROGRAM AGREEMENT
BY AND AMONG
SELECT COMFORT CORPORATION
SELECT COMPORT RETAIL CORPORATION
SELECT COMFORT DIRECT CORPORATION
SELECT COMFORT SC CORPORATION
AND
MONOGRAM CREDIT CARD BANK OF GEORGIA
DATED AS OF
MAY 22, 1997
[Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this Exhibit with the portions intact has been filed
separately with the Securities and Exchange Commission]
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS 1
Section 1.01 Certain Defined Terms 1
Section 1.02 Miscellaneous 10
ARTICLE II ESTABLISHMENT OF PROGRAM 11
Section 2.01 Commencement of Program; Retailers to honor
Credit Cards 11
Section 2.02 Bank to Extend Credit 11
Section 2.03 Promotion of Program 13
ARTICLE III ADMINISTRATION OF PROGRAM 14
Section 3.01 Preparation of Documents 14
Section 3.02 Account Administration; Credit Criteria 15
Section 3.03 Ownership of Accounts 15
Section 3.04 Insurance Solicitation of Accounts 15
Section 3.05 Value-Added Solicitation of Accounts 16
Section 3.06 Use of Cardholder List 17
Section 3.07 In-Store Payments; Payments at Bank
Locations 18
Section 3.08 Inserts; Statement Messages 18
ARTICLE IV OPERATING PROCEDURES 19
Section 4.01 General 19
Section 4.02 New Cardholder Account Establishment
Procedures 19
Section 4.03 Purchase Authorization Procedures 20
ARTICLE V SETTLEMENTS, SERVICE FEES AND ADJUSTMENTS 20
Section 5.01 Settlement Procedures 20
Section 5.02 Other Adjustments 21
2
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Section 5.03 Payment Terms and Rights of Set Off and
Recoupment 22
ARTICLE VI CREDIT TERMS; RESERVES; LOSSES ON ACCOUNTS; SECURITY 22
Section 6.01 Credit Terms 22
Section 6.02 Promotion Reserve 23
Section 6.03 Liquidation Reserve 24
Section 6.04 Return Reserve 26
Section 6.05 Losses on Accounts 28
Section 6.06 Grant of Security Interest;
Precautionary Filing 29
Section 6.07 Returns of Merchandise 30
Section 6.08 Limited Guarantee 30
ARTICLE VII CHARGEBACK 31
Section 7.01 Bank's Right to Chargeback 31
Section 7.02 Limitation of Chargeback 31
Section 7.03 Exercise of Chargeback 32
ARTICLE VIII WARRANTIES AND COVENANTS OF RETAILER 32
Section 8.01 Presentment Warranties 32
Section 8.02 Account Covenants 33
Section 8.03 General Representations and Warranties 34
Section 8.04 Additional Affirmative Covenants of Retailer 36
Section 8.05 Additional Negative Covenants of Retailer 37
ARTICLE IX WARRANTIES OF BANK 38
Section 9.01 Representations and Warranties of Bank 38
ARTICLE X EVENTS OF DEFAULT; RIGHTS AND REMEDIES 39
Section 10.01 Events of Default 39
Section 10.02 Remedies 41
ARTICLE XI TERM/TERMINATION 42
Section 11.01 Commitment Period 42
Section 11.02 Termination 42
Section 11.03 Purchase of Accounts by Retailers Upon
Termination 43
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Section 11.04 Termination for Force Majeure 45
Section 11.05 Liquidation of Accounts 46
ARTICLE XII INDEMNIFICATION 47
Section 12.01 Indemnification by Retailer 47
Section 12.02 Indemnification by Bank 48
Section 12.03 Payment of Indemnified Amounts 49
Section 12.04 Notice 49
ARTICLE XIII OTHER AGREEMENTS 50
Section 13.01 Retailer Acquisitions; New Retailer
Subsidiaries 50
Section 13.02 Retailer Primary Divestitures 51
Section 13.03 Retailer Secondary Divestitures 52
Section 13.04 Other Programs 54
ARTICLE XIV MISCELLANEOUS 54
Section 14.01 Assignability 54
Section 14.02 Amendment 54
Section 14.03 Non-Waiver 54
Section 14.04 Severability 55
Section 14.05 Governing Law 55
Section 14.06 Captions 55
Section 14.07 Use of Retailer Names and Marks 55
Section 14.08 Securitization/Participation 55
Section 14.09 Further Assurances 56
Section 14.10 Entire Agreement 56
Section 14.11 Notices 56
Section 14.12 Power of Attorney 56
Section 14.13 Confidential Information 57
Section 14.14 No Partnership 57
Section 14.15 Third Parties 57
Section 14.16 Interpretation 58
Section 14.17 Meetings of Parties 58
Section 14.18 Joint and Several Obligations 58
Section 14.19 Multiple Counterparts 58
EXHIBITS
- --------
Exhibit A - Operating Procedures
SCHEDULES
- ---------
4
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Schedule 1 - Initial Approved Credit-Based Promotions
Schedule 2 - Legal Name/Principal Place of Business for Retailers
Schedule 3 - Retailers' Names
Schedule 4 - Notice Addresses
5
<PAGE>
CONSUMER CREDIT CARD PROGRAM AGREEMENT
This CONSUMER CREDIT CARD PROGRAM AGREEMENT (hereinafter the "Agreement")
is made as of the 22nd day of May, 1997 by and among Monogram Credit Card Bank
of Georgia, a Georgia banking corporation with its principal place of business
at 7840 Roswell Road, Building 100, Suite 210, Atlanta, Georgia 30350 (together
with its successors, assigns and transferees, the "Bank") and Select Comfort
Corporation, Select Comfort Retail Corporation, Select Comfort Direct
Corporation, and Select Comfort SC Corporation, each a Minnesota corporation and
each having its principal place of business at 6105 Trenton Lane North,
Minneapolis, Minnesota 55442 (jointly and severally, the "Retailers").
W I T N E S S E T H
WHEREAS, Bank has established programs to extend customized revolving
credit to qualified customers for the purchase of goods and services from
various merchants for personal, family or household purposes;
WHEREAS, Retailers are engaged, among other activities, in the retail sale
of consumer goods and services and desire to create a customized revolving
credit card program, as more particularly set forth herein;
WHEREAS, Retailers have requested that Bank extend credit to qualified
customers of Retailers for the purchase of certain goods and services; and
WHEREAS, subject to the terms and conditions of this Agreement, Bank has
agreed to provide Retailers with such a program for credit extension;
NOW, THEREFORE, in consideration of the terms, conditions and mutual
covenants contained herein, and for good and valuable consideration the receipt
and sufficiency of which are hereby acknowledged, Bank and Retailers agree as
follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 CERTAIN DEFINED TERMS. As used in this Agreement, the
following terms shall have the following meanings:
"ACCOUNT" means and includes the following: (i) any open-end revolving
Credit Card Agreement, whether now existing or hereafter created between a
Cardholder and Bank under the Program, pursuant to which such Cardholder may
finance Purchases on credit pursuant to the terms of such Credit Card Agreement,
together with any modifications or amendments which now or hereafter may be made
to such Credit Card Agreement; (ii) any and all Account Documentation; (iii) all
of the accounts, accounts receivable, Indebtedness, other receivables, contract
rights, choses in action, general intangibles, chattel paper, instruments,
documents and
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notes, Program Documents and contract rights related to, comprising, securing
or evidencing the obligation, or the receivables arising from or under any
Credit Card Agreement or any other Account Documentation and all proceeds of
all of the foregoing, (iv) any and all rights as to any goods or other
property which is represented thereby or is security or collateral therefor;
(v) all guarantees, claims, security interests, or other security held by or
granted to Bank to secure payment by any person with respect thereto; (vi)
proceeds relating to Insurance Programs and Value-Added Programs; and (vii)
any and all other rights, remedies, benefits, interests and titles, both
legal and equitable, to which Bank may now or at anytime hereafter be
entitled in respect of the foregoing.
"ACCOUNT DOCUMENTATION" means with respect to an Account, any and all
documentation relating to such Account, including without limitation, Program
Documents, Credit Cards, Credit Card Applications, Credit Card Agreements,
Charge Transaction Data, Charge Slips, Credit Slips, checks and stubs, credit
bureau reports, adverse action information, change of terms notices,
correspondence, memoranda, documents, instruments, certificates, agreements,
invoices, and any other written information relating to such Account, in each
case including any and all amendments or modifications thereto, and in each
case, however stored or kept, PROVIDED, HOWEVER, that "Account Documentation"
shall not include materials used for advertising or solicitations including,
without limitation, advertising or solicitations of credit-based promotions.
"ACTIVE ACCOUNT" means, for any Billing Period, any Account other than an
Defaulted Account, which at any time during such Billing Period had a debit or
credit balance.
"AFFILIATE" means, with respect to any person, each person that controls,
is controlled by or is under common control with such person. For the purpose
of this definition, "control" of a person shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of its management or
policies, whether through the ownership of voting securities, by contract or
otherwise.
"ANNUAL LOSS RATE" shall have the meaning given to such term in Section
6.05 hereof.
"ANNUAL LOSS SHARE" shall have the meaning given to such term in Section
6.05 hereof.
"APPROVED CREDIT-BASED PROMOTIONS" means until the first anniversary of the
Program Commencement Date, the promotional credit and billing terms and such
other credit-based promotions as are described on the attached Schedule 1 and at
all times after the Program Commencement Date, such other promotional credit and
billing terms and such other credit-based promotions as may be agreed to from
time to time in writing by Bank and Retailers.
"AVERAGE NET RECEIVABLES" means, for any Billing Period, the sum of the
aggregate Indebtedness for all Accounts (other than Defaulted Accounts) for each
day during such period divided by the number of days in such period.
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"BANK" means Monogram Credit Card Bank of Georgia and its permitted
successors, transferees and assigns.
"BANK TERMINATION EVENT" means any of the following events: (i) Bank shall
fail to pay any amount when due hereunder and the same shall remain unpaid for a
period of fifteen (15) days after the Retailers, acting collectively, shall have
made written demand therefor PROVIDED, HOWEVER, that the failure to make a
payment due hereunder shall not constitute a "Bank Termination Event" if the
amount which Bank has failed to pay is less than XXXXXXXXX Dollars ($XXXXX) and
Bank, acting in good faith, has delivered a written notice to Retailers
contesting its obligation to make such payment; (ii) Bank shall materially fail
or neglect to perform, keep, or observe any other term, provision, condition, or
covenant contained in this Agreement that is required to be performed, kept, or
observed by it, and such failure or neglect shall continue for a period of
thirty (30) days after Retailers, acting collectively, shall have given written
notice thereof; (iii) any representation, warranty or statement, made, delivered
or deemed made by Bank hereunder shall prove not to have been true and correct
in all material respects as of the date when made, delivered or deemed made and
such failure to be true and correct has a material adverse effect on Bank's
ability to perform its obligations hereunder; (iv) Bank shall assign its rights
and obligations hereunder to General Electric Capital Corporation and Retailers,
acting collectively, shall notify Bank of their election to characterize such
assignment as a "Bank Termination Event" under this Agreement within thirty (30)
days of the date on which any Retailer is first notified of such assignment; or
(v) Bank (A) shall no longer be Solvent; (B) shall generally not pay its debts
as such debts become due or shall admit in writing its inability to pay its
debts generally; (C) shall make a general assignment for the benefit of its
creditors; (D) shall institute or have instituted against it any proceeding
seeking to adjudicate it a bankrupt or insolvent or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency, or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, custodian or other similar official
for it or for any substantial part of its property, and, in the case of any
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of thirty (30)
days, or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or (E) shall take any corporate
action to authorize any of the actions set forth above in this subclause (iv).
[A portion of this section has been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
"BILLING PERIOD" means the elapsed time between the dates on which Bank
elects to send billing statements in respect of Accounts, which time is usually
between twenty-eight (28) and thirty-two (32) days in length.
"BUSINESS DAY" means any day, except Saturday, Sunday, or a day on which
banks are required or permitted to be closed in Georgia.
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"CARDHOLDER" means any natural person who has entered into a Credit Card
Agreement with Bank or who is or may become obligated under or with respect to
an Account.
"CARDHOLDER LIST" has the meaning given to it in Section 3.06 hereof.
"CHANGE OF CONTROL" has the meaning given to it in Section 10.01(f) hereof.
"CHARGE SLIP" means a sales receipt, register receipt tape or other invoice
or documentation, in each case evidencing a Purchase that gives rise to an
Account.
"CHARGE TRANSACTION DATA" means Account/Cardholder identification and
transaction information with regard to each Purchase by a Cardholder on credit
and each return of a Purchase for credit to the Account/Cardholder, which data
will be transmitted by Retailers to Bank in accordance with the applicable
Operating Procedures.
"COMMERCIAL PAPER RATE" has the meaning given to it in Section 6.03(c)
hereof.
"COMMITMENT PERIOD" means the period commencing on the Program Commencement
Date and ending on the termination or expiration date established pursuant to
Section 11.01 or 11.02 hereof.
"CREDIT CARD" or "CARD" means the plastic card issued and owned by Bank
under the Program exclusively for use with the Program which evidences a
Cardholder's right to make Purchases under the Program.
"CREDIT CARD AGREEMENT" means the open-end revolving credit agreement
between Bank and each Cardholder pursuant to which such Cardholder may make
Purchases on credit provided by Bank, together with any modifications or
amendments which may be made to such agreement.
"CREDIT CARD APPLICATION" means Bank's credit application form which must
be completed by applicants who wish to become Cardholders and must be submitted
to Bank for its review and approval.
"CREDIT REVIEW POINT" means, except as adjusted pursuant to Section 2.02,
Seventy-five Million Dollars ($75,000,000), or such other higher amount as Bank,
in its sole discretion, shall from time to time specify to Retailers in writing.
"CREDIT SLIP" means a sales credit receipt evidencing a return or exchange
of Goods or an adjustment for Services rendered or not rendered by a Retailer to
a Cardholder for credit on an Account.
"DAILY RETENTION AMOUNT" shall have the meaning given to such term in
Section 5.01 hereof.
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"DEFAULT" means any event the occurrence of which, with the passage of time
or the giving of notice or both, would constitute an Event of Default.
"DEFAULTED ACCOUNT" means an Account which has been written off in
accordance with Bank's write-off policies.
"EVENT OF DEFAULT" shall have the meaning given to such term in Section
10.01 hereof.
"FINAL LIQUIDATION DATE" shall mean the first date after the termination or
expiration of the Commitment Period on which Bank no longer owns any Active
Accounts.
"FULLY-FUNDED DATE" means the first Settlement Date on which the net amount
credited to the Return Reserve is equal to or greater than the product of (i)
the then applicable Return Percentage and (ii) an amount equal to the total
amount of all Purchases on Accounts made by Cardholders and identified in Charge
Transaction Data received during the immediately preceding three (3) Billing
Periods.
"GOODS" and/or "SERVICES", separately or cumulatively, means (i) all
merchandise and services, respectively, which may be purchased by a Cardholder
from a Retailer; (ii) all Value-Added Programs to the extent that the purchase
thereof gives rise to an Account; and (iii) all Insurance Programs to the extent
that the purchase thereof gives rise to an Account. Notwithstanding the
foregoing to the contrary, neither "Goods" nor "Services" shall include extended
warranties offered for sale by or through any Retailer.
"INDEBTEDNESS" means any and all amounts owing from time to time with
respect to an Account whether or not billed, including, without limitation, any
unpaid balance, finance charges (inclusive of finance charges subject to
possible reversals due to unexpired credit-based promotions), late charges, NSF
fees, charges for Value-Added and Insurance Programs, and any other charges with
respect to an Account.
"IN-STORE PAYMENTS" means any payment on an Account made by a Cardholder
(or by any person acting on behalf of a Cardholder) at a Retailer Location.
"INSURANCE PROGRAM" means any program which may be offered through Bank
pursuant to Section 3.04 under which Bank, any insurance company, or any other
third party makes available insurance coverage to Cardholders.
"LIQUIDATION RESERVE" means the record created on the books of the Bank in
accordance with Section 6.03 hereof.
"LIQUIDATION RESERVE FACTOR" means a factor which shall be established and
modified by Bank in its sole discretion from time to time PROVIDED, HOWEVER,
that in no event may such factor exceed XXXX and PROVIDED FURTHER, that Bank may
not make changes to the Liquidation Reserve Factor unless and until Retailers
shall have requested in writing that Bank, in the
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exercise of its sole discretion, make adjustments to the credit standards
applicable to requests for extension of credit to Cardholders. The
"Liquidation Reserve Factor" shall be based, from time to time upon Bank's
then-applicable credit standards for requests for extension of credit to
Cardholders (the "Applicable Credit Standards"). The "Liquidation Reserve
Factor" shall be set as Bank's good faith estimate of the amount by which the
Annual Loss Rate would exceed XXX had the Bank approved requests for
extensions of credit to Cardholders at all times since the Program
Commencement Date in accordance with the Applicable Credit Standards.
Initially, the Liquidation Reserve Factor shall be XXXX. [Portions of
this section have been omitted pursuant to a request for confidential
treatment under Rule 406 under the Securities Act of 1933, as amended. A
copy of this section with the portions intact has been filed separately with
the Securities and Exchange Commission]
"LOSSES" shall have the meaning given to such term in Section 12.01 hereof.
"MARKETING FUND" shall have the meaning given to such term in Section
2.03(c).
"MONTHLY LOSS RATE" shall have the meaning given to such term in Section
6.05.
"MONTHLY PROMOTIONAL PAYMENT" means an amount equal to the sum of (i) an
amount equal to the accrued but unpaid finance charges in respect of each
Account subject to an "After-the-Fact Free" (as such phrase is defined in
Schedule 1 hereto) Approved Credit-based Promotion where the Cardholder (A) has
paid the total cash price thereof prior to the expiration of the applicable
promotional period and during the immediately preceding Billing Period; or (B)
has returned Goods to a Retailer for credit prior to the expiration of the
promotional period and during the immediately preceding Billing Period; and (ii)
an amount equal to ninety-two percent (92%) of the applicable APR which would
have accrued in respect of each Account subject to an "Interest Free" or "Equal
Pay" (as such phrases are defined in Schedule 1 hereto) Approved Credit-based
Promotion during the immediately preceding Billing Period had such Account not
been subject to such Approved Credit-based Promotion.
"NET RECOVERIES" shall have the meaning given to such term in Section 6.05.
"NEW RETAILER" means any person engaged in the operation of retail stores
or the making of direct sales in the United States, together with any other
person directly or indirectly controlled by such person and any franchisees of
such person using such person's name, logo, trademarks and service marks or
similar proprietary designations.
"OPERATING PROCEDURES" means the instructions and procedures to be followed
by Retailers in connection with the Program, a copy of which is set forth as
Exhibit A hereto, as such instructions and procedures may be amended from time
to time.
"PRIMARY DIVESTITURE DATE" shall have the meaning given to such term in
Section 13.02 (a).
"POSTAGE BASE RATE" means Thirty-two Cents ($.32).
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"PROGRAM COMMENCEMENT DATE" means May 27, 1997.
"PROGRAM" means the credit card program established by Bank pursuant to
this Agreement and made available to qualified customers of Retailers to make
Purchases. The term "Program" includes the extension of credit by Bank to
Cardholders, billings, collections, accounting between the parties, and all
aspects of the customized revolving credit plan contemplated herein.
"PROGRAM DOCUMENTS" has the meaning given to it in Section 3.01 hereof.
"PROMOTION RESERVE" means the record created on the books of the Bank in
accordance with Section 6.02 hereof.
"PROMOTION RESERVE HOLDBACKS" means (i) with respect to the Approved
Credit-based Promotions identified on Schedule 1 hereto, (A) for the period
commencing on the Program Commencement Date and ending on the first anniversary
thereof, the promotion reserve holdbacks identified on Schedule 1 and (B) for
the period after the first anniversary of the Program Commencement Date, program
reserve holdbacks established by Bank in its sole discretion as Bank's good
faith estimate of the amounts needed to be held back from remittances otherwise
to be made by Bank under Section 5.01(b) in order that the amounts in the
Promotion Reserve will be sufficient to pay the applicable Monthly Promotion
Payment on each Settlement Date and (ii) with respect to all other Approved
Credit-based Promotions, the promotion reserve holdbacks agreed to by all
parties hereto at the time such promotions are approved.
"PROMOTIONAL RESERVE REQUIRED BALANCE" shall mean, as of any date of
determination, an amount to be established by Bank in its sole discretion as a
good faith estimate of the sum of the Monthly Promotion Payments to be due on
each Settlement Date after such date of determination.
"PURCHASE(S)" means the purchase by a Cardholder of any of the Goods and/or
Services which may be purchased from a Retailer at a Retailer Location.
"RETAILER LOCATION(S)" means retail stores within the United States that
are owned or operated by a Retailer. The definition of "Retailer Location(s)"
shall also include the locations within the United States from which mail order
sales and catalog sales of Goods and/or Services are made by a Retailer and from
which telemarketing and other marketing of Goods and/or Services may be
conducted by a Retailer.
"RETAILER NAMES" has the meaning given to it in Section 14.07 hereof.
"RETAILER PRIMARY DIVESTITURE" means the sale or other transfer for value
by any Retailer, directly or indirectly, in one transaction or in a series of
related transactions, of (i) all or substantially all of the assets, or fifty
percent (50%) or more of the outstanding voting securities,
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<PAGE>
of any other Retailer or (ii) Retailer Locations which during the 12-month
period immediately prior to determination accounted for twenty-five percent
(25%) or more of such Retailer's net sales proceeds from sales of Goods and
Services.
"RETAILER SECONDARY DIVESTITURE" means the sale or other transfer for
value by any Retailer, directly or indirectly, in one transaction or in a
series of related transactions, of one or more Retailer Locations, which sale
or other transfer for value is not a Retailer Primary Divestiture.
"RETAILERS' ANNUAL SHARE" has the meaning given to it in Section 6.05
hereof.
"RETAILERS' MONTHLY SHARE" has the meaning given to it in Section 6.05
hereof.
"RETENTION FACTOR" has the meaning given to it in Section 5.01 hereof.
"RETURN PERCENTAGE" means the percentage of Goods sold on Account which are
returned for credit to Retailers as determined from time to time by Bank. The
"Return Percentage" shall be initially set at XXXXX percent (XX%) and shall be
recalculated on the third Settlement Date after the Program Commencement Date
and on every third Settlement Date thereafter. Each such recalculation shall
determine the percentage of Goods sold on Account which were returned for credit
to Retailer during the three (3) immediately preceding Billing Periods as of
such Settlement Date. [A portion of this section hase been omitted pursuant to
a request for confidential treatment under Rule 406 under the Securities Act of
1933, as amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
"RETURN RESERVE" means the record created on the books of the Bank in
accordance with Section 6.04 hereof.
"SECOND SOURCE PROGRAM" has the meaning given to it in Section 8.05(b)
hereof.
"SERVICE FEE PERCENTAGE" has the meaning given to it in Section 5.02
hereof.
"SETTLEMENT DATE" means a date selected by Bank after each Billing Period
which date shall be no more than fifteen (15) days after the last day of such
Billing Period.
"SOLVENT" means, as to any person, (a) that the present fair salable value
of such person's assets is in excess of the total amount of its liabilities, (b)
that such person is presently generally able to pay its debts as they become
due, and (c) that such person does not have unreasonably small capital to carry
on such person's business as theretofore operated and or the business in which
such person is about to engage. The phrase "present fair salable value" of a
person's assets is intended to mean that value which could be obtained if the
assets were sold within a reasonable time in arm's-length transactions in an
existing and not theoretical market.
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<PAGE>
"TERMINATION NOTICE DATE" means the first date on which any party hereto
shall deliver a notice of non-extension under Section 11.01 or a notice of
termination under Section 11.02 to any other party hereto.
"UCC" means the Uniform Commercial Code of Georgia as in effect from time
to time.
"UNPAID RETURNED GOODS" means any Goods that are returned to any Retailer
if such return results in an obligation of the Retailer to make any payment to
Bank under this Agreement (including, without limitation, any obligation to
repurchase any Account created by the sale of such Goods) or gives Bank any
right to reduce the amount of any payments which would otherwise have been made
under Section 5.01 hereof; PROVIDED, HOWEVER, that such Goods shall cease to be
"Unpaid Returned Goods" when Bank has received from the Retailers full payment
of such obligation or has reduced a payment made under Section 5.01 in respect
thereof.
"VALUE-ADDED PROGRAM" means any products or services which may be offered
by or through Bank to Cardholders pursuant to Section 3.05 that enhance the
features of the Program or any Account including, without limiting the
foregoing, credit card protection plans, legal services and auto clubs;
PROVIDED, HOWEVER, that "Value-Added Programs" shall not include credit
insurance or any other Insurance Program.
SECTION 1.02 MISCELLANEOUS. As used herein, (i) all references to the
plural number shall include the singular number (and vice versa); (ii) all
references to the masculine gender shall include the feminine gender (and vice
versa) and (iii) all references to "herein," "hereof," "hereunder,"
"hereinbelow," "hereinabove" or like words shall refer to this Agreement as a
whole and not to any particular section, subsection or clause contained in this
Agreement. References herein to any document including, without limitation,
this Agreement shall be deemed a reference to such document as it now exists,
and as from time to time hereafter the same may be amended. References herein
to a "person" or "persons" shall be deemed to be references to an individual,
corporation, limited liability company, partnership, trust, unincorporated
association, joint venture, joint-stock company, or any other form of entity.
All other undefined terms contained herein shall, unless the context indicates
otherwise, have the meanings provided for by the UCC to the extent the same are
used or defined therein.
ARTICLE II
ESTABLISHMENT OF PROGRAM
SECTION 2.01 COMMENCEMENT OF PROGRAM; RETAILERS TO HONOR CREDIT CARDS.
(a) Pursuant to the terms and conditions of this Agreement,
Retailers and Bank hereby establish the Program for the purpose of making
open-end credit available during the Commitment Period (up to such credit
limits as Bank may from time to time establish and modify) to qualified
customers of Retailers for Purchases from Retailer Locations.
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(b) During the Commitment Period, with respect to each applicant
under the Program who qualifies for credit under the standards unilaterally
established by Bank, Bank will open an Account, issue to such qualified
applicant a Credit Card, activate such applicant's Credit Card in accordance
with the Operating Procedures and grant credit to such applicant for any
Purchases. The terms and conditions upon which a Cardholder may use the
Credit Card and upon which Bank may extend credit to a Cardholder shall be
governed by the Credit Card Agreement between the Cardholder and Bank.
(c) Bank will pay to Retailers a bonus ("Incentive Bonus") in the
amount of XXXXXXXXXX Dollars ($XXXXX) on the Program Commencement Date as an
incentive to enter into this Agreement. [A portion of this section has been
omitted pursuant to a request for confidential treatment under Rule 406 under
the Securities Act of 1933, as amended. A copy of this section with the
portion intact has been filed separately with the Securities and Exchange
Commission]
(d) Retailers will participate in the Program and honor any valid
Credit Card issued by Bank for Purchase(s) at each Retailer Location. Only
the cash selling price, including related sales and use taxes and shipping
costs, of Goods and/or Services sold or rendered by Retailers shall be
charged to Accounts. Sales of extended warranties offered by or through any
Retailer shall not be charged to Accounts. Retailers shall permit customers
with Accounts to charge Goods and/or Services to their Accounts, subject to,
and in accordance with, the Operating Procedures.
SECTION 2.02 BANK TO EXTEND CREDIT.
(a) Subject to (i) the terms of this Agreement, (ii) the credit
limits applicable to each Account and (iii) the terms and conditions in the
Credit Card Agreements, Bank shall extend credit to Cardholders in amounts
set forth as the total for any Purchase(s) for personal, family or household
purposes reflected in Charge Transaction Data received and accepted by Bank
during the Commitment Period.
(b) Under no circumstances shall Bank be required to advance funds
in respect of Charge Transaction Data submitted to it by any Retailer, if,
after giving effect to such advance, the then-outstanding aggregate
Indebtedness with respect to all Accounts would exceed the Credit Review
Point. If on any date the aggregate Indebtedness with respect to all
Accounts equals or exceeds eighty percent (80%) of the Credit Review Point
then in effect, Bank shall promptly so advise Retailers and within one
hundred and twenty (120) days of such date, Bank shall give Retailers written
notice of its election of one of the following options:
(i) Bank may, in its sole discretion, increase the Credit
Review Point to an amount Bank deems acceptable, but in any event to an
amount higher than one hundred twenty-five percent (125%) of the
aggregate Indebtedness with respect to all Accounts as of the date of
the election of this option. If Bank elects this option, then Bank's
written notice to Retailers shall include the amount of the increased
Credit Review Point.
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(ii) Bank may elect not to increase the Credit Review Point to
the amount required by Section 2.02(b) (i); in such event, Retailers,
acting collectively, shall be entitled to terminate this Agreement in
accordance with the provisions of Section 11.02.
After the Bank first notifies Retailers that the aggregate Indebtedness with
respect to all Accounts equals or exceeds eighty percent (80%) of the Credit
Review Point then in effect, Bank shall provide Retailers with a monthly
statement comparing the aggregate Indebtedness with respect to all Accounts
to the Credit Review Point, PROVIDED, HOWEVER, that Bank shall have no
further obligation to provide such monthly notice if it elects to increase
the Credit Review Point to an amount required by Section 2.02(b) (i).
(c) Retailers expressly acknowledge Bank's right to establish a
Credit Review Point as described in this Section 2.02 and, in this regard,
hereby release Bank from, and indemnify Bank against, any and all Losses
incurred as a result of Bank's refusal to advance credit to Cardholders in
accordance with this Section 2.02, and from and against any and all Losses
incurred as a result of Bank's refusal to increase the Credit Review Point.
SECTION 2.03 PROMOTION OF PROGRAM.
(a) During the term of this Agreement, Retailers agree to actively
promote the Program including, without limitation, providing proper training
to their respective employees in the use and marketing of the Program to
their customers. Without limiting the foregoing, prior to the expiration or
termination of the Commitment Period, Retailers agree to expend at least
XXXXXXXXXX Dollars ($XXXXXXX) for (i) point-of-sale promotional materials and
store signage; and (ii) other marketing promotions which have been approved
by Bank. Retailers shall provide Bank -with invoices and other documents
establishing the amount of all such expenditures. [A portion of this section
has been omitted pursuant to a request for confidential treatment under
Rule 406 under the Securities Act of 1933, as amended. A copy of this section
with the portion intact has been filed separately with the Securities and
Exchange Commission]
(b) Retailers shall include Program information and/or actual
Credit Card Aplications and Credit Card Agreements in their general and
specialized advertising brochures when deemed appropriate by the management
of the Retailers. Retailers shall make Credit Card Applications and Credit
Card Agreements to be used in connection with the Program prominently and
conspicuously available at all Retailer Locations in such manner as is
mutually agreed by Retailers and Bank PROVIDED, HOWEVER, that such Credit
Card Applications and Credit Card Agreements need not be made available at
any location from which Retailers make only mail order and catalog sales. No
Account Documentation shall be publicly distributed or disseminated without
the prior written consent of Retailers and Bank; PROVIDED, HOWEVER, that Bank
reserves the right to make or require Retailers to make any change in the
Account Documentation as may in Bank's reasonable judgment be required by or
appropriate to comply with, any applicable law, rule or regulation. In the
event any Retailer proceeds with promoting or offering any billing or credit
terms, insurance or other products for use with any Credit Card without prior
written approval by Bank, Retailers shall indemnify Bank for any and all
Losses arising from such materials or program. Retailers may not, without
Bank's prior written consent,
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use Bank's name or logo type (or the name or logo type of any Affiliate of
the Bank) in any advertisement, press release or promotional materials except
as may otherwise be required by applicable law. The Bank's approval of any
billing and credit terms for any credit-based promotion is not intended to be
and will not be construed to be an approval of any materials used in
advertising or soliciting participation in such promotions.
(c) Beginning on the first Settlement Date after the end of the
thirteenth (13th) Billing Period and continuing on each Settlement Date
thereafter until the Termination Notice Date, and PROVIDED there exists no
Default or Event of Default on any such date, Bank shall credit an amount
equal to one-twelfth (1/12) of the product of the Average Net Receivables for
the immediately preceding Billing Period and XXXXXXX percent (XXXX%), to a
record maintained on the books of the Bank. Such record is referred to
herein as the "Marketing Fund." Except for the right to require Bank to make
payments from such account from time to time in accordance with Section
2.03(d) hereof, Retailers have no right, title or interest in or to the
Marketing Fund or in and to any amounts which have been credited thereto. [A
portion of this section has been omitted pursuant to a request for confidential
treatment under Rule 406 under the Securities Act of 1933, as amended. A copy
of this section with the portion intact has been filed separately with the
Securities and Exchange Commission]
(d) After the later of (i) the first anniversary of the Program
Commencement Date and (ii) the date on which Retailers shall have fully
expended the XXXXXXXX Dollars ($XXXXX) in point-of-sale promotional
materials, store signage and other approved marketing promotions as required
pursuant to Section 2.03(a) and continuing until the expiration or
termination of the Commitment Period, the cost and expenses of marketing
promotions proposed by any party hereto and approved by all other parties
hereto (which approvals shall not be unreasonably withheld) shall be paid on
a matching basis, whereby Retailers, acting collectively, shall direct Bank
to pay XXXXX (XXX) of the costs of any such promotions from the Marketing
Fund and Retailers shall pay directly XXXXX (XXX) of such costs. During such
period of time, Retailers shall have the right to use the Marketing Fund on a
matching basis for such mutually agreed upon marketing promotions until it is
fully expended. Any amounts remaining credited to the Marketing Fund at the
expiration or termination of the Commitment Period may be retained by Bank
for its own account without obligation to account therefor to Retailers.
[Portion of this section have been omitted pursuant to a request for
confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
ARTICLE III
ADMINISTRATION OF PROGRAM
SECTION 3.01 PREPARATION OF DOCUMENTS.
(a) Bank shall provide Retailers with the form and content of
Credit Card Applications, Credit Card Agreements, Credit Cards, credit card
mailers and such other documents as are required by law or by the Operating
Procedures (hereinafter collectively, the "Program Documents"). Bank shall
establish the nature and quantities of any such documents.
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All Account Documentation (including, without limitation, the Program
Documents) and all other documents, advertisements or promotional materials
used by Retailers in connection with the Program shall clearly disclose that
Bank is extending credit directly to Cardholders.
(b) Bank shall be responsible for the direct costs of preparing
and distributing billing statements, Credit Cards (including costs of
embossing) and carriers, and of establishing and maintaining a host-to-host
computer link between Bank and Select Comfort Corporation.
(c) Retailers shall be solely responsible for all other costs and
expenses of preparing and distributing Account Documentation, including,
without limitation, the costs of preparing Credit Card Applications, and
shall be solely responsible for all costs and expenses of credit advertising,
in-store point-of-purchase promotional materials, credit marketing, and other
expenses related to the promotion of the Program.
SECTION 3.02 ACCOUNT ADMINISTRATION; CREDIT CRITERIA.
(a) Bank, in its sole discretion, (i) shall determine the
creditworthiness of individual applicants under the Program, the range of
credit limits to be made available to individual Cardholders, whether to
suspend or terminate credit privileges of any Cardholder, and the credit
criteria to be used in evaluating applicants in connection with the Program;
(ii) shall establish the terms and conditions of the Credit Card Agreements
and the terms and conditions under which credit will be extended to
Cardholders; and (iii) may modify such terms and conditions from time to time.
(b) Except to the extent resulting from a failure of the Bank or
the Program Documents to comply with all applicable laws where such failure
would give rise to an indemnity obligation of the Bank under Section
12.02(d), the rejection for credit of any applicant under the Program, or any
number of applicants, shall not give rise to any claim, liability, demand,
offset, defense, counterclaim or other right or action by any Retailer
against Bank or its Affiliates, and each Retailer hereby waives and releases
any such claim that it may have against Bank or its Affiliates.
SECTION 3.03 OWNERSHIP OF ACCOUNTS. Bank shall be the sole and
exclusive owner of all Accounts and Account Documentation, including without
limitation, all Program Documents, Cardholder data, Charge Transaction Data,
Charge Slips, Credit Slips, and receipts or evidences of payments or
purchases by Cardholders. Bank shall be entitled to receive all payments made
by Cardholders on Accounts and each Retailer acknowledges and agrees that it
has no right, title or interest in any of the foregoing and no right to any
payments made by Cardholders on Accounts or any proceeds in respect of the
Accounts. All collection procedures shall be under the sole control and
discretion of Bank and may be modified from time to time by Bank in its sole
discretion.
SECTION 3.04 INSURANCE SOLICITATION OF ACCOUNTS. Bank, or its agents,
may solicit Cardholders for Insurance Programs. Bank shall be entitled to
retain for its account all proceeds of Insurance Programs and Retailers shall
have no rights with respect thereto. Notwithstanding
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the foregoing, provided no Default or Event of Default shall have occurred
and be continuing, Bank shall pay to Retailers as an administrative fee, on
each Settlement Date occurring prior to the expiration or termination of the
Commitment Period, an amount equal to XXXXX percent (XXX%) of the Bank's Net
Insurance Income received during the immediately preceding Billing Period.
If as of any Settlement Date, any amounts would have been payable to
Retailers under this Section 3.04 but for the existence of a Default (but not
an Event of Default) on such date, Bank agrees to pay to Retailers the amount
which would otherwise have been paid on such Settlement Date if Retailers
cure such Default prior to the occurrence of an Event of Default. Any such
deferred payment shall be made on the Settlement Date next succeeding the
date on which such Default is cured. Unless otherwise requested in writing
by all Retailers, no solicitation regarding any Insurance Program shall state
or imply that such Insurance Program is offered or endorsed by any Retailer.
As used herein, "Net Insurance Income" shall mean the credit insurance
charges billed each month less (i) credit insurance charges reversals; (ii)
all claims and claims expenses, including all claims adjustment expenses;
(iii) all premium and other applicable taxes, including but not limited to
applicable federal, state and municipal taxes, licensing fees, special ceding
assessment fees, and the proportional amounts of guaranty fund applicable to
the credit insurance charges; and (iv) administrative fees, if any. For the
purposes of item (ii) in the preceding sentence, "claims" shall include, but
not be limited to, any amounts Bank becomes obligated to pay to any third
party arising out of or related to claims made under credit insurance,
including, but not limited, damages, court awards or judgments of any kind or
nature assessed against the Bank. On each Settlement Date prior to the
expiration or termination of the Commitment Period, Bank will provide
Retailers with an accounting of the Net Insurance Income to be paid to
Retailers hereunder. Upon reasonable notice and request, and not more
frequently than once a year, Retailers shall be entitled to audit the books
and records of Bank pertaining to such Net Insurance Income. [A portion of
this section has been omitted pursuant to a request for confidential treatment
under Rule 406 under the Securities Act of 1933, as amended. A copy of this
section with the portion intact has been filed separately with the Securities
and Exchange Commission]
SECTION 3.05 VALUE-ADDED SOLICITATION OF ACCOUNTS. Bank, or its agents,
may solicit Cardholders for Value-Added Programs. Bank shall be entitled to
retain for its account all proceeds of Value-Added Programs and Retailers
shall have no rights with respect thereto. Notwithstanding the foregoing,
provided no Default or Event of Default shall have occurred and be
continuing, Bank shall pay to Retailers, on each Settlement Date occurring
prior to the expiration or termination of the Commitment Period, an amount
equal to XXXXX percent (XXX%) of the Bank's Net Value-Added Income received
during the immediately preceding Billing Period. If as of any Settlement
Date, any amounts would have been payable to Retailers under this Section
3.05 but for existence of a Default (but not an Event of Default) on such
date, Bank agrees to pay to Retailers the amount which would otherwise have
been paid on such Settlement Date if Retailers cure such Default prior to the
occurrence of an Event of Default. Any such deferred payment shall be made
on the Settlement Date next succeeding the date on which such Default is
cured. Unless otherwise requested in writing by all Retailers, no
solicitation regarding any Value-Added Program shall state or imply that such
Value-Added Program is offered or endorsed by any Retailer. As used herein,
"Net Value-Added Income"
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shall mean the amount of commissions paid to Bank from third-party vendors
offering the Value-Added Programs less the sum of (a) commissions charged
back to Bank by such third-party vendors due to customer returns,
cancellations, or other causes; (b) all charges billed to Bank in respect of
such Value-Added Programs; and (c) administrative fees, if any. On each
Settlement Date prior to the expiration or termination of the Commitment
Period, Bank will provide Retailers with an accounting of the Net Value-Added
Income to be paid to Retailers hereunder. Upon reasonable notice and
request, and not more frequently than once a year, Retailers shall be
entitled to audit the books and records of Bank pertaining to such Net
Value-Added Income. [A portion of this section has been omitted pursuant to a
request for confidential treatment under Rule 406 under the Securities Act of
1933, as amended. A copy of this section with the portion intact has been
filed separately with the Securities and Exchange Commission]
SECTION 3.06 USE OF CARDHOLDER LIST. Retailer acknowledges and agrees
that Bank is the sole owner of all lists of applicants for Credit Cards and
Cardholders (including the names and addresses thereof) and all credit
information (including credit information for approved and declined
applicants) (hereafter collectively the "Cardholder List"). Notwithstanding
the foregoing to the contrary, however, Bank expressly agrees that it will
not sell, rent or use such Cardholder List except in connection with its
administration and operation of the Program as provided in this Agreement;
PROVIDED, HOWEVER, that upon the termination or expiration of the Commitment
Period however caused, Bank shall be entitled to use the Cardholder List in
connection with the liquidation or sale of the portfolio as provided in
Section 11.05. Bank agrees that to the extent permitted by applicable law,
during the term of this Agreement, each Retailer may utilize the Cardholder
List at no charge for promotion of this Program and its Goods and Services
(including, without limitation, use in determining customers eligible for the
Second Source Program); PROVIDED, HOWEVER, that until the Final Liquidation
Date in no event shall any Retailer or its Affiliates be entitled to use such
Cardholder List (i) to solicit Cardholders with respect to any other debit,
credit or charge programs that are in competition with Bank or its
Affiliates; or (ii) to solicit Cardholders to charge Goods and Services which
constitute financial products that compete with financial products offered by
Bank or its Affiliates (except for extended warranties or service contracts
in respect of any Retailer's Goods or Services); or (iii) to send
solicitations with respect to Goods and Services that (x) cannot be charged
to Accounts and (y) which Goods and Services constitute financial products
that are in competition with the financial products offered by Bank or its
Affiliates, and which solicitations identify the solicitee as an Account
holder. Nothing in this Section 3.06 shall preclude Retailers' use of any
list of Retailer's customers maintained by any Retailer PROVIDED, that no
information on such list was obtained through the operation of the Program.
SECTION 3.07 IN-STORE PAYMENTS; PAYMENTS AT BANK LOCATIONS. No Retailer
shall accept any In-Store Payment. Retailers shall make available to
Cardholders at all Retailer Locations the address to be used for making
payments on Accounts directly to Bank. If notwithstanding the foregoing, any
Retailer inadvertently receives any In-Store Payment, Retailers agree that
they shall receive and hold such payment in trust for the Cardholder making
the In-Store Payment and shall promptly (but not later than one (1) Business
Day after receipt thereof) deliver same to Bank in the form received together
with such endorsements or other
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documents of assignment as may be necessary to permit the Bank to receive the
benefit thereof to the same extent as if payment had been made directly to
the Bank.
SECTION 3.08 INSERTS; STATEMENT MESSAGES.
(a) Retailers, acting collectively, may elect to provide to Bank
(at the address so stated by Bank and using Bank's insert requirements as
outlined in the Operating Procedures) up to eight (8) inserts per Active
Account billing statement (if such a billing statement is generated by Bank)
per month. Retailers are responsible for the proper delivery, size and weight
requirements of inserts and for the supply of insert stock, all as specified
in the Operating Procedures. In the event the inserts cause the postage
payable to exceed the postage otherwise payable by Bank, then Retailers shall
reimburse Bank for such excess postage cost. Should it be necessary for Bank
to change such requirements, then it shall give Retailers written notice at
least ninety (90) days prior to such change. Retailers will be solely
responsible for the costs of producing such inserts. The insertion service
by Bank will be at no cost to Retailers (up to a maximum of eight (8)
inserts, per billing statement per month) as long as all insert requirements
set forth in the Operating Procedures have been met by Retailers.
Notwithstanding the foregoing, any insert required by law or regulation shall
take precedence over any or all inserts provided by Retailers. Bank's
insertion service will not be available after the termination or expiration
of the Commitment Period.
(b) Subject to any statement message utilization requirements that
Bank deems advisable or appropriate, during the Commitment Period Bank shall
make available to Retailers, acting collectively, a space for a message to be
provided by Retailers on each billing statement for an Active Account sent to
a Cardholder during such month. If more than one space is available for a
message on each such billing statement, then during the Commitment Period
Bank agrees to grant Retailers the option of utilizing such additional space
for additional messages. Any such messages shall be included at no charge to
Retailers. Bank agrees to use reasonable efforts to advise Retailers if
billing statement messages will not be available to Retailers during any
Billing Period.
ARTICLE IV
OPERATING PROCEDURES
SECTION 4.01 GENERAL. Retailers shall follow all applicable Operating
Procedures relative to the Program including, but not limited to, procedures
for distributing Credit Card Applications, seeking authorizations for
Accounts, handling credit transactions with Cardholders and transmitting
Charge Transaction Data. The Operating Procedures may be amended from time
to time by Bank in its sole discretion. For example, the parties recognize
and agree that from time to time modifications and improvements will be made
in hardware, software, and data communications facilities that may, in Bank's
sole discretion, require changes in the Operating Procedures. Bank shall
provide Retailers with reasonable prior notice of material modifications to
the Operating Procedures. Upon receipt of any such notice, Retailers, acting
collectively, may request that the proposed modifications be reconsidered and
Bank agrees to confer in good faith
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with Retailers to determine if such proposed changes can be made in a manner
which would impose less costs or administrative inconvenience upon Retailers.
SECTION 4.02 NEW CARDHOLDER ACCOUNT ESTABLISHMENT PROCEDURES.
(a) During the Commitment Period, all Credit Card Applications
will be reviewed by Bank for approval and credit line assignment.
(b) During the Commitment Period, Bank will forward Credit Cards
to approved Cardholders and will activate such Credit Cards.
(c) Retailers will not knowingly submit any Credit Card
Applications for corporate accounts. Retailers will not knowingly include in
any Charge Transaction Data any Charge Slips for Accounts arising from
purchases for other than personal, family or household purposes. Nothing in
this Section 4.02(c) shall be deemed to limit any presentment warranty deemed
made pursuant to Section 8.01 hereof.
SECTION 4.03 PURCHASE AUTHORIZATION PROCEDURES. Retailers agree that
all purchase authorizations shall be obtained in accordance with the
Operating Procedures.
ARTICLE V
SETTLEMENTS, SERVICE FEES AND ADJUSTMENTS
SECTION 5.01 SETTLEMENT PROCEDURES.
(a) All Charge Transaction Data will be electronically transmitted
to Bank using an electronic communication system established between
Retailers and Bank to facilitate the operation of the Program. Retailers, or
an agent of the Retailers, will retain a copy of each Charge Slip for at
least twenty-five (25) months after such Charge Slip is created.
(b) Upon receipt, verification and processing of any Charge
Transaction Data by Bank during the Commitment Period, Bank will remit to the
Retailers in respect of such Charge Transaction Data, an amount equal to the
total amount (including any applicable sales and use tax and shipping
charges) of the Purchases on Accounts identified in such Charge Transaction
Data less the sum of (i) the total amount reflected on any Credit Slips
included in such Charge Transaction Data; (ii) the Daily Retention Amount;
(iii) any Promotion Reserve Holdbacks applicable to Purchases included in
such Charge Transaction Data; (iv) an amount equal to the product of (A) the
Liquidation Reserve Factor and (B) the total amount (including any applicable
sales and use tax and shipping charges) of the Purchases on Accounts
identified in such Charge Transaction Data and (v) at Bank's election, any
other amounts due and owing by any Retailer to Bank, including, without
limitation, amounts owing under Sections 5.02, 5.03 and 7.01 hereof. As used
herein "Daily Retention Amount" shall mean (i) from the Program Commencement
Date until the Fully-funded Date, an amount equal to the product of (A) the
applicable Retention Factor and (B) the total amount of the Purchases on
Accounts identified in the applicable Charge Transaction Data; and (ii) at
all times after the Fully-funded Date, zero ($0). As used herein,
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"Retention Factor" shall mean XXX% unless Bank, acting reasonably and in good
faith, determines that a higher Retention Factor is necessary to ensure that
the Fully-funded Date occurs before the thirteenth (13th) Settlement Date
after the Program Commencement Date. Bank will transfer funds via wire
transfer to an account maintained in the name of all Retailers and designated
in a writing delivered to Bank by Retailers. If Charge Transaction Data is
received by Bank's processing center before 6:00 a.m. (Atlanta, Georgia
time) on a Business Day, Bank will initiate such wire transfer on the same
Business Day. In the event that the Charge Transaction Data is received
after 6:00 a.m. (Atlanta, Georgia time), then Bank will initiate such
transfer on the following Business Day. [A portion of this section has been
omitted pursuant to a request for confidential treatment under Rule 406 under
the Securities Act of 1933, as amended. A copy of this section with the
portion intact has been filed separately with the Securities and Exchange
Commission]
(c) Retailers acknowledge that the Bank may in its sole discretion
microfilm (or copy using any other reasonable method) all Account
Documentation and destroy all original Account Documentation in the ordinary
course of business. To the extent required, each Retailer consents to the
making of such copies and the destruction of the corresponding original
documents.
(d) In connection with the settlement procedures outlined above,
the parties agree that all settlements made hereunder shall be net of any and
all other adjustments contemplated by this Agreement, including but not
limited to credits and chargebacks. Bank shall have the right to set off any
amounts due to it pursuant to this Agreement against any amounts to be
transmitted to any Retailer hereunder.
SECTION 5.02 OTHER ADJUSTMENTS.
(a) On each Settlement Date prior to the expiration or termination
of the Commitment Period, Bank shall pay to Retailers an amount equal to the
product of (i) the Service Fee Percentage and (ii) the Average Net
Receivables for the immediately preceding Billing Period, all divided by
twelve (12) PROVIDED, HOWEVER, that until the Fully-funded Date, the amount
payable to Retailers hereunder shall be deposited to the Return Reserve in
lieu of being disbursed to Retailers and PROVIDED, FURTHER, that after the
Fully-funded Date, all or a portion of the amount payable to Retailers
hereunder shall be deposited to the Return Reserve in lieu of being disbursed
to Retailers to the extent necessary to cause the net amount credited to the
Return Reserve to equal the product of (i) the then applicable Return
Percentage and (ii) the total amount of all Purchases on Accounts made by
Cardholders and identified in Charge Transaction Data received during the
immediately preceding three (3) Billing Periods. As used herein, "Service
Fee Percentage" shall mean XXXXX percent (XXX%) until the first Settlement
Date after the end of the thirteenth (13th) Billing Period and XXXXX percent
(XXX%) at all times thereafter. [Portions of this section have been omitted
pursuant to a request for confidential treatment under Rule 406 under the
Securities Act of 1933, as amended. A copy of this section with the portion
intact has been filed separately with the Securities and Exchange Commission]
(b) If the United States first class postal rate is increased at
any time above the Postage Base Rate, Retailers shall pay to Bank on each
Settlement Date immediately following a
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Billing Period during which such postal rate exceeded the Postage Base Rate,
an amount equal to the product of (i) the amount by which the United States
first class postal rate then in effect exceeds the Postage Base Rate, and
(ii) the number of Active Accounts during such Billing Period.
(c) On each Settlement Date, Retailers shall pay to Bank an amount
equal to the Monthly Promotional Payment. To the extent available to Bank,
payments of amounts due under this Section 5.02(c) shall be made by debiting
the Promotion Reserve pursuant to Section to Section 6.02 hereof.
(d) Any costs or expenditures by the parties to this Agreement
other than as expressly set forth herein shall be at the sole expense of the
party incurring such costs or other expenditures and shall not entitle that
party to seek reimbursement of such costs or other expenditures from the
other parties to this Agreement. Accordingly, subject to the reimbursement
provisions of this Agreement, if any, each of the parties shall be liable for
the payment of all sums due third parties retained by such party in
performing its obligations hereunder.
SECTION 5.03 PAYMENT TERMS AND RIGHTS OF SET OFF AND RECOUPMENT. Unless
specifically provided for in another Section of this Agreement, any amount(s)
payable by a Retailer to Bank under this Agreement shall be paid within ten
(10) Business Days of any Retailer's receipt of an invoice rendered by Bank.
Any such payments shall be made by wire transfer to Bank to an account
designated in writing by Bank from time to time. Notwithstanding the
foregoing, Bank may at any time deduct, net against, set-off, or appropriate
and apply, any amounts owing to Bank from any Retailer hereunder or any money
or other property of any Retailer held by Bank from any amounts otherwise
payable by Bank hereunder. Bank may exercise such rights of deduction,
netting, and set-off without regard to whether an invoice for the amounts
owing from the Retailers has been sent, and, if such an invoice has been
sent, without regard to whether the ten (10) Business Day period referred to
in the first sentence of this Section shall have expired.
ARTICLE VI
CREDIT TERMS; RESERVES; LOSSES ON ACCOUNTS; SECURITY
SECTION 6.01 CREDIT TERMS. Bank shall have the sole right to establish
the rate, annual fees, late fees and all other terms and conditions relating
to the Accounts, and to amend or modify such rate, fees and/or other terms
and conditions from time to time.
SECTION 6.02 PROMOTION RESERVE.
(a) Bank shall create, on its books, a record known as the
"Promotion Reserve." Amounts credited to the Promotion Reserve shall be
applied solely in accordance with the provisions of this Section 6.02. No
interest or other earnings on amounts credited to the Promotion Reserve shall
accrue or be paid for the benefit of Retailers.
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(b) As provided in Section 5.01, in connection with each Account
which is subject to an Approved Credit-based Promotion, Bank shall deduct
from amounts otherwise payable to Retailers in respect thereof, the Promotion
Reserve Holdbacks. Each Promotional Reserve Holdback shall be credited to
the Promotion Reserve.
(c) On each Settlement Date, Bank shall debit the Promotional
Reserve for the lesser of (i) the Monthly Promotional Payment; or (ii) the
entire amount remaining credited to the Promotional Reserve as of such
Settlement Date (where the amount credited to such Reserve is determined
prior to giving effect to any debits or credits to be made in respect of such
Reserve on such Settlement Date pursuant to Sections 6.02(d) or (e) hereof).
(d) Bank shall also have the right, in its sole discretion, from
time to time and on any day, to debit the Promotion Reserve for amounts past
due and payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall
not debit the Promotion Reserve for any such past due amount, if on such day,
Bank was obligated to remit an amount to Retailers under Section 5.01(b) in
excess of such past due amount, it being the intent of the parties hereto
that to the extent reasonably possible, Bank will exercise its right to
reduce its payment obligations under Section 5.01(b) (v) in lieu of
exercising its rights to debit the Promotion Reserve under this Section
6.02(d). No debit of the Promotion Reserve or application of such funds to
outstanding obligations shall be deemed to cure any Default or Event of
Default hereunder. If Bank debits any amounts from the Promotion Reserve
under this Section 6.02(d), then on or before the next Settlement Date, Bank
shall provide notice thereof to Retailers. If Bank debits any amounts from
the Promotion Reserve under this Section 6.02(d), Retailers shall pay to Bank
an amount equal to the amount debited hereunder and upon receipt of such
funds, Bank will credit the Promotion Reserve with the amount thereof.
(e) On the twelfth (12th) Settlement Date and on each third (3rd)
Settlement Date thereafter, Bank shall calculate the required Promotional
Reserve Required Balance and notify Retailers of the amount thereof. If
after taking into account all amounts to be credited or debited to the
Promotion Reserve on such Settlement Date pursuant to Sections 6.02(c) and
(d) hereof, the amount remaining credited to the Promotion Reserve exceeds
the Promotional Reserve Required Balance, Bank shall debit the Promotion
Reserve by the amount of such excess and, unless a Default or Event of
Default shall have occurred and be continuing, shall pay an amount equal to
such excess to Retailers. If after taking into account all amounts to be
credited or debited to the Promotion Reserve on such Settlement Date pursuant
to Sections 6.02(c) and (d) hereof, the amount remaining credited to the
Promotion Reserve is less than the Promotional Reserve Required Balance,
Retailers shall immediately pay to Bank an amount equal to such shortfall and
upon receipt of such payment Bank shall credit the Promotion Reserve by the
amount thereof.
(f) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall pay to Retailers an amount equal to the amount remaining credited to
the Promotion Reserve on the date of such purchase. If Retailers do not
purchase or arrange for the
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purchase of all the Accounts (other than Defaulted Accounts) and related
Indebtedness in accordance with Section 11.03 hereof, and if as of the Final
Liquidation Date, Retailers shall have paid all other amounts owing
hereunder, Bank shall pay to Retailers an amount equal to the amount
remaining credited to the Promotion Reserve on the Final Liquidation Date.
SECTION 6.03 LIQUIDATION RESERVE.
(a) Bank shall create, on its books, a record known as the
"Liquidation Reserve." Amounts credited to the Liquidation Reserve shall be
applied solely in accordance with the provisions of this Section 6.03.
Except as set forth in Section 6.03(c) below, no interest or other earnings
on amounts credited to the Liquidation Reserve shall accrue or be paid for
the benefit of Retailers.
(b) As provided in Section 5.01, in connection with each Purchase,
Bank shall deduct from amounts otherwise payable to Retailers in respect
thereof, an amount equal to the product of (i) the Liquidation Reserve Factor
and (ii) the total amount (including any applicable sales and use tax and
shipping charges) of the Purchase. Such amounts shall be credited to the
Liquidation Reserve.
(c) On each Settlement Date, Bank shall also credit to the
Liquidation Reserve an amount equal to the product of (i) the Average
Liquidation Reserve Balance and (ii) the Commercial Paper Rate all divided by
twelve (12). As used herein, "Average Liquidation Return Reserve Balance"
means, for any Billing Period, one-half (1/2) of the sum of the net amount
credited to the Liquidation Reserve as of the first day of such Billing
Period and the net amount credited to the Liquidation Reserve as of the last
day of such Billing Period. As used herein, "Commercial Paper Rate" means,
in respect of any Billing Period, a per annum rate equal to the rate of
so-called ninety (90) day high grade unsecured notes sold through dealers by
major corporations in multiples of one thousand dollars ($1,000) as published
by THE WALL STREET JOURNAL in its "Money Rates" section under the heading
"Commercial Paper" as of the last Business Day of such Billing Period (or if
such publication is discontinued, such other publications of similar type
designated by Bank).
(d) Bank shall have the right, in its sole discretion, from time
to time and on any day, to debit the Liquidation Reserve for amounts past due
and payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall not
debit the Liquidation Reserve for any such past due amount, if on such day,
Bank was obligated to remit an amount to Retailers under Section 5.01(b) in
excess of such past due amount, it being the intent of the parties hereto
that to the extent reasonably possible, Bank will exercise its right to
reduce its payment obligations under Section 5.01(b) (v) in lieu of
exercising its rights to debit the Liquidation Reserve under this Section
6.03(d). No debiting of funds from the Liquidation Reserve or application of
such funds to outstanding obligations shall be deemed to cure any Default or
Event of Default hereunder. If Bank debits any amounts from the Liquidation
Reserve under this Section 6.03(d), then on or before the next Settlement
Date, Bank shall provide notice thereof to Retailers. If Bank debits any
amounts from the Liquidation Reserve under this Section 6.03(d), Retailers
shall pay to
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Bank an amount equal to the amount withdrawn hereunder and upon receipt of
such funds, Bank will credit the Liquidation Reserve with the amount thereof.
(e) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall simultaneously pay to Retailers an amount equal to the amount then
remaining credited to the Liquidation Reserve on the date of such purchase.
If Retailers do not purchase or arrange for the purchase of all the Accounts
(other than Defaulted Accounts) and related Indebtedness in accordance with
Section 11.03 hereof, and if as of the Final Liquidation Date, Retailers
shall have paid all other amounts owing hereunder, Bank shall pay to
Retailers an amount equal to the amount remaining credited to the Liquidation
Reserve on the Final Liquidation Date.
(f) On each Settlement Date, Bank shall calculate an amount equal
to the product of (i) the then applicable Liquidation Reserve Factor and (ii)
the Average Net Receivables for the immediately preceding Billing Period. If
the amount then credited to the Liquidation Reserve (including interest
credited to the Liquidation Reserve as of such Settlement Date) exceeds this
calculated amount, Bank shall debit the Liquidation Reserve for the amount of
such excess and if no Default or Event of Default shall have occurred and be
continuing, shall deliver an amount equal to such excess to Retailers.
SECTION 6.04 RETURN RESERVE.
(a) Bank shall create, on its books, a record known as the "Return
Reserve." Amounts credited to the Return Reserve shall be applied solely in
accordance with the provisions of this Section 6.04. Except as set forth in
Section 6.04(c) below, no interest or other earnings on amounts credited to
the Return Reserve shall accrue or be paid for the benefit of Retailers.
(b) On the Program Commencement Date, Retailers shall pay to Bank
an amount equal to XXXXXXXXXXXXX Dollars ($XXXXX) and upon receipt of such
payment, Bank shall credit the Return Reserve by the amount thereof. [A portion
of this section has been omitted pursuant to a request for confidential
treatment under Rule 406 under the Securities Act of 1933, as amended. A copy
of this section with the portion intact has been filed separately with the
Securities and Exchange Commission]
(c) As provided in Sections 5.01 and 5.02(a), from time to time,
Bank shall credit to the Return Reserve certain amounts otherwise payable to
Retailers thereunder.
(d) On each Settlement Date, Bank shall also credit to the Return
Reserve an amount equal to the product of (i) the Average Return Reserve
Balance and (ii) the Commercial Paper Rate all divided by twelve (12). As
used herein, "Average Return Reserve Balance" means, for any Billing Period,
one-half (1/2) of the sum of the net amount credited to the Return Reserve as
of the first day of such Billing Period and the net amount credited to the
Return Reserve as of the last day of such Billing Period.
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(e) Bank shall have the right, in its sole discretion, from time
to time and on any day, to debit the Return Reserve for amounts past due and
payable to Bank from any Retailer PROVIDED, HOWEVER, that Bank shall not
debit the Return Reserve for any such past due amount, if on such day, Bank
was obligated to remit an amount to Retailers under Section 5.01(b) in excess
of such past due amount, it being the intent of the parties hereto that to
the extent reasonably possible, Bank will exercise its right to reduce its
payment obligations under Section 5.01(b) (v) in lieu of exercising its
rights to debit the Return Reserve under this Section 6.04(e). No debiting
of amounts from the Return Reserve or application of such funds to
outstanding obligations shall be deemed to cure any Default or Event of
Default hereunder. If Bank debits any amounts from the Return Reserve under
this Section 6.04(e), then on or before the next Settlement Date, Bank shall
provide notice thereof to Retailers. If Bank debits any amounts from the
Return Reserve under this Section 6.04(e), Retailers shall pay to Bank an
amount equal to the amount debited hereunder and upon receipt of such funds,
Bank will credit the Return Reserve with the amount thereof.
(e) If Retailers purchase or arrange for the purchase of all of
the Accounts (other than Defaulted Accounts) and related Indebtedness from
Bank in accordance with Section 11.03 hereof, and if as of the date of such
purchase, Retailers shall have paid all other amounts owing hereunder, Bank
shall pay to Retailers an amount equal to the amount remaining credited to
the Return Reserve on the date of such purchase. If Retailers do not
purchase or arrange for the purchase of all the Accounts (other than
Defaulted Accounts) and related Indebtedness in accordance with Section 11.03
hereof, and if as of the Final Liquidation Date, Retailers shall have paid
all other amounts owing hereunder, Bank shall pay to Retailers an amount
equal to the amount remaining credited to the Return Reserve on the Final
Liquidation Date.
(f) On each Settlement Date, Bank shall calculate an amount equal
to the product of (i) the then applicable Return Percentage and (ii) an
amount equal to the total amount of all Purchases on Accounts made by
Cardholders and identified in Charge Transaction Data received during the
immediately preceding three (3) Billing Periods. If the amount then credited
to the Return Reserve (including interest credited to the Return Reserve and
amounts credited to the Return Reserve in accordance with Section 5.02 (a)
hereof as of such Settlement Date) exceeds such calculated amount, Bank shall
debit the amount of such excess from the Return Reserve and if no Default or
Event of Default shall have occurred and be continuing, deliver an amount
equal to such excess to Retailers. If this calculated amount exceeds the
amount then credited to the Return Reserve (including interest credited to
the Return Reserve and amounts credited to the Return Reserve in accordance
with Section 5.02 (a) hereof as of such Settlement Date), Retailers shall
deliver an amount equal to such excess to Bank, and Bank shall credit the
Return Reserve with such amount. Notwithstanding the foregoing to the
contrary, however, Retailers shall have no obligation to pay any amounts to
Bank under this Section 6.04(f) (except as otherwise provided in Sections
5.01 and 5.02(a)) if the amount owing by Retailers to Bank in accordance with
this Section 6.04(f) is determined on a Settlement Date prior to the
Fully-funded Date and prior to the thirteenth (13th) Settlement Date.
SECTION 6.05 LOSSES ON ACCOUNTS.
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(a) Except for (i) any chargebacks allowed pursuant to Section
7.01; (ii) any losses incurred after the Accounts are purchased by Retailers
in accordance with Section 11.03 hereof; and (iii) the sharing of losses
provided for in subsections (b) and (c) of this Section 6.05, all losses on
Accounts shall be borne solely by Bank.
(b) On each Settlement Date, if the Monthly Loss Rate for the
immediately preceding Billing Period is greater than XXXXXX, Retailers shall
pay to Bank an amount equal to the product of Retailers' Monthly Share and an
amount equal to the Average Net Receivables for such Billing Period. As used
herein, "Retailers' Monthly Share" shall mean the lesser of (i) the Monthly
Loss Rate for the immediately preceding Billing Period less XXXXXX and (ii)
XXXXX. As used herein, "Monthly Loss Rate" means for any Billing Period, an
amount equal to the amount of the Indebtedness for Accounts first becoming
Defaulted Accounts during such period less the amount of Net Recoveries
received during such period all divided by the Average Net Receivables for
such period. As used herein "Net Recoveries" means for any period, the net
amount (including deduction for outside attorneys' fees or other collection
costs) of cash recoveries received by Bank during such period in respect of
Defaulted Accounts (regardless of when such Accounts first became Defaulted
Accounts). [Portions of this section have been omitted pursuant to a request
for confidential treatment under Rule 406 under the Securities Act of 1933,
as amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
(c) On each anniversary of the Program Commencement Date,
Retailers shall pay to Bank an amount equal to the amount by which the Annual
Loss Share exceeds the sum of all amounts paid by Retailers under Section
6.05(b) during the immediately preceding year. On each anniversary of the
Program Commencement Date, if no Default or Event of Default shall have
occurred and be continuing, Bank shall pay to Retailers an amount equal to
the amount by which the sum of all amounts paid by Retailers under Section
6.05(b) during the immediately preceding year exceeds the Annual Loss Share.
As used herein, "Annual Loss Share" shall mean zero ($0) unless the Annual
Loss Rate is greater than XXXXX in which event, "Annual Loss Share" shall
mean the product of Retailers' Annual Share and an amount equal to the sum of
the Average Net Receivables calculated for each of the twelve (12)
immediately preceding Billing Periods all divided by twelve (12) (the "Annual
Average Net Receivables"). As used herein, "Retailers' Annual Share" shall
mean the lesser of (i) the Annual Loss Rate less XXXXX and (ii) XXXXX. As
used herein, "Annual Loss Rate" means an amount equal to the amount of the
Indebtedness for Accounts first becoming Defaulted Accounts during the twelve
(12) immediately preceding Billing Periods less the Net Recoveries received
during such period, all divided by the Annual Average Net Receivables for
such period. [Portions of this section have been omitted pursuant to a request
for confidential treatment under Rule 406 under the Securities Act of 1933, as
amended. A copy of this section with the portion intact has been filed
separately with the Securities and Exchange Commission]
SECTION 6.06 GRANT OF SECURITY INTEREST; PRECAUTIONARY FILING. The parties
hereto agree that the transactions contemplated herein shall constitute a
program for the extension of consumer credit and service to customers of the
Retailers. Both (i) against the possibility that it
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is determined that Article 9 of the UCC applies or may apply to the
transactions contemplated hereby, and (ii) to secure payment of and
performance by Retailers of any and all indebtedness, liabilities or
obligations, now existing on hereafter arising pursuant to this Agreement,
including indebtedness, liabilities and obligations that may be deemed to
exist in the event of the applicability of Article 9 of the UCC to, and any
recharacterization of, any transactions contemplated hereby, each Retailer
hereby grants to Bank a first priority continuing security interest in and to
all of such Retailer's right, title and interest, if any, now owned or
existing or hereafter acquired or arising in, to and under the following
property (in each case, existing at any time, past, present or future)
(collectively, the "Bank Property"): (A) all Accounts, Account Documentation
and Indebtedness; (B) all deposits, credit balances and reserves on Bank's
books (including without limitation, the Marketing Fund, the Promotion
Reserve, the Liquidation Reserve and the Return Reserve) relative to any
Accounts; (C) all Unpaid Returned Goods; and (D) all proceeds of the
foregoing. The Retailers, jointly and severally, represent and warrant that
no Retailer has, on or before the date of this Agreement, granted any
Potentially Competing Security Interests or signed any Potentially Competing
Financing Statements other than any security interests or financing
statements that have lapsed or been terminated. Each Retailer agrees that it
will not, on or after the date of this Agreement, grant any Potentially
Competing Security Interest or sign any Potentially Competing Financing
Statement unless the secured party thereunder first signs an intercreditor
agreement with Bank subordinating such secured party's interest in any Unpaid
Returned Goods and disclaiming such secured party's interest in the other
Bank Property. Such intercreditor agreement shall be in form and substance
acceptable to Bank. As used herein, "Potentially Competing Security
Interest" means any security interest in favor of any person that attaches to
any of the Bank Property or, in the case of any Bank Property other than
Unpaid Returned Goods, that would attach to such property if, contrary to the
intent of the parties hereto, the Retailers were determined to have any
rights therein. As used herein, "Potentially Competing Financing Statement"
mean any financing statement in favor of any person that covers any of the
Bank Property or, in the case of any Bank Property other than Unpaid Returned
Goods, that would cover any such property if, contrary to the intent of the
parties hereto, the Retailers were determined to have any rights therein.
Retailers agree to cooperate fully with Bank as Bank may reasonably request
in order to give effect to the security interests granted by this Section
6.06, including, without limitation, the filing of UCC-l or comparable
statements in order to perfect such security interests. Each Retailer agrees
to provide Bank with not less than thirty (30) days prior written notice of
any change in location of its executive offices or principal place of
business or any change of its corporate name and, notwithstanding the
foregoing, no such change shall be effected before such Retailer shall have
supplied Bank with signed copies of all filings and actions as Bank may
reasonably determine to be necessary or appropriate to preserve and maintain
at all times the perfection and priority of the security interests granted or
purported to be granted to Bank hereunder.
SECTION 6.07 RETURNS OF MERCHANDISE. Each Retailer may settle or adjust
any dispute or claim, grant any discount, credit, or allowance, or accept any
return of Goods purchased under a Credit Card Agreement in the ordinary
course of business. The Retailers shall notify Bank of all credits issued to
Cardholders by any Retailer with respect to such Goods. Each such
notification shall indicate the Account to which it relates and the amount of
credit issued to the Cardholder. Except as otherwise provided in the
Operating Procedures, such notification shall be given to
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Bank within one (1) Business Day of the date on which such credit is given
and, if consistent with this timing requirement, may be included in the next
transmission of Charge Transaction Data. The amount of all such credits may,
at Bank's option, be deducted from the daily settlement amounts paid under
Section 5.1 hereof. Bank may also elect to invoice Retailers for such
credits. When any Retailer receives Unpaid Returned Goods, it holds such
Goods on behalf of the Bank and subject to Bank's interest therein.
SECTION 6.08 LIMITED GUARANTEE.
(a) Each Retailer hereby unconditionally and irrevocably
guarantees, as primary obligor and not as surety only, and promises to pay to
Bank when due, any amounts due and payable to Bank by any other Retailer
pursuant to this Agreement. This guarantee is a guarantee of payment when
due and not of collection.
(b) Each Retailer waives any subrogation or similar type right or
claim it may have for any payment made pursuant to Section 6.08(a) and waives
(i) presentment, demand, protest, notice of protest, notice of dishonor and
notice of nonpayment with respect to claims guaranteed by such guarantor
pursuant to Section 6.08(a) and (ii) the right to require Bank to proceed
against the party whose obligations are being guaranteed by such Retailer or
to pursue any other remedy against such party.
ARTICLE VII
CHARGEBACK
SECTION 7.01 BANK'S RIGHT TO CHARGEBACK. Bank shall have the right, at
its option, to chargeback to any Retailer the Indebtedness of any Account if
with respect to such Account or the underlying transaction:
(a) Any presentment warranty made by a Retailer pursuant to
Section 8.01 proves to have been false or inaccurate in any respect, as
determined by Bank;
(b) The Cardholder asserts any claim or defense against Bank as a
result of any act or omission of any Retailer allegedly in violation of any
applicable law, statute, ordinance, rule or regulation provided any such
claim or defense constitutes a bona fide claim or defense presented by the
Cardholder in good faith in the reasonable opinion of Bank, after inquiry to
Retailers;
(c) The Cardholder disputes the amount or existence of such
Account or refuses to pay alleging dissatisfaction with Goods and/or Services
received (other than dissatisfaction with Insurance or Value-Added Programs),
a breach of any warranty, representation or covenant made by any Retailer in
connection with the transaction, or an offset or counterclaim against Bank
based on an act or omission of any Retailer, provided any such disputes
constitute bona fide claims presented by Cardholders in good faith in the
reasonable opinion of Bank, after inquiry to Retailers; and
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(d) In the case of Accounts arising from sales other than
telemarketing sales, if Cardholder disputes an Account (other than a dispute
relating to Insurance and Value-Added Programs) and Retailers cannot supply
Bank with a copy of the Charge Slip and documents evidencing delivery within
fifteen (15) days of Bank's written request and, in the case of Accounts
arising from telemarketing sales, if Cardholder disputes an Account (other
than a dispute relating to Insurance and Value-Added Programs) and Retailers
cannot supply Bank with a copy of the written documentation made by Retailer
at the time of such sale and evidencing such sale and documents evidencing
delivery within fifteen (15) days of Bank's written request.
SECTION 7.02 LIMITATION OF CHARGEBACK. In its reasonable discretion,
Bank may compromise and settle any claim made by any Cardholder in respect of
his Account or any Indebtedness. No such compromise or settlement will
impair Bank's rights to charge back under Section 7.01 hereof PROVIDED that
the amount Bank will be entitled to charge back to Retailers following any
such compromise or settlement is limited to the amount of the Indebtedness on
the Account being charged back after taking into account all amounts actually
received by Bank from Cardholder in compromise or settlement thereof.
SECTION 7.03 EXERCISE OF CHARGEBACK. If Bank exercises its right of
chargeback in accordance with this Agreement, Bank may set-off amounts
charged back against any sums due any Retailer under this Agreement or Bank
may demand payment from any Retailer for all or any portion of the amount to
be charged back. Any Account which is charged back to Retailers shall cease
to be an "Account" for all purposes of this Agreement after Bank receives
full payment from Retailers in respect thereof. If all or any portion of the
face amount of any Charge Slip is charged back to Retailers hereunder, Bank
shall simultaneously be deemed to have assigned to Retailers all right to
payments for such Charge Slip or portion thereof. Any such assignment shall
be without recourse, except that Bank shall be deemed to have represented and
warranted that such right of payment is being assigned free and clear of any
lien, encumbrance or claim of title arising by, through or under Bank.
ARTICLE VIII
WARRANTIES AND COVENANTS OF RETAILER
SECTION 8.01 PRESENTMENT WARRANTIES. Each Retailer represents and
warrants to Bank with respect to each Account and each related Charge Slip
and Charge Transaction Data (and the following shall be deemed restated,
renewed and reaffirmed each time Bank receives Charge Transaction Data from
any Retailer relative to an Account):
(a) That except in the case of Insurance Programs and Value-Added
Programs, each Charge Slip represents a bona fide sale by a Retailer of the
Goods and/or Services described in such Charge Slip, that each Charge Slip
has not been included in any Charge Transaction Date previously transmitted
to Bank, and that Retailer has delivered all the Goods and fully performed
all the Services listed on such Charge Slip;
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(b) That except in the case of telemarketing sales, each Credit
Card Application and each Charge Slip have been signed and the signatures are
similar to the signature of the Cardholder on the Credit Card or on another
item of valid identification examined by Retailer;
(c) That each Charge Slip has not been materially altered;
(d) That the transaction did not involve a cash advance or Goods
or Services not listed on the Charge Slip and other than Insurance Programs
and Value-Added Programs, only Goods and Services sold by a Retailer are the
subject of the transaction;
(e) That the transaction giving rise to the Charge Transaction
Data was conducted by Retailer in accordance with the Operating Procedures;
(f) That the Account number of the Cardholder has been accurately
printed on each Charge Slip;
(g) That no Retailer has received, directly or indirectly, and
that each Retailer will refuse to accept, any reimbursement, payment or
trade-in for the charges listed on such Charge Slip (other than from Bank)
and that no Retailer has or will, either directly or indirectly, take or
grant or purport to take or grant any right or security interest in such
Charge Slip or any related Credit Slip (other than to the Bank);
(h) That the transactions giving rise to the Charge Transaction
Data were conducted by Retailers in compliance with all material laws and
regulations applicable to the sales of Goods and/or Services by Retailers
(except to the extent that such non-compliance was the result of Retailers
use of Program Documents in the forms provided by Bank and in accordance with
all Operating Procedures or the result of Bank's failure to comply with all
material laws and regulations) and that the Charge Transaction Data is not
invalid, illegible, inaccurate or incomplete;
(i) That the balance in each such Account (except to the extent
that such balance relates to Insurance and Value-Added Programs) is valid and
enforceable against the Cardholder and that there is no fact, nor any claim
or defense of a Cardholder (except to the extent that such claim or defense
is based solely on the form of the Program Documents provided by Bank or is
based solely on the failure of Bank to comply with its obligations under this
Agreement or applicable law) that would impair the validity, enforceability,
or collectibility of the obligation of the Cardholder evidenced by each
Charge Slip;
(j) That the Goods and/or Services (other than Insurance Programs
and Value-Added Programs) were sold by Retailer in the ordinary course of
business and that each such sale was made to a Cardholder for personal,
family or household purposes; and
(k) That Retailers have no knowledge (i) of the filing of any
petition under any bankruptcy or insolvency laws by or against the
Cardholder, (ii) of the death or incompetence of the Cardholder, and (iii) of
the Cardholder's lack of a valid United States address.
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SECTION 8.02 ACCOUNT COVENANTS. Until the Final Liquidation Date,
Retailers covenant to do the following with respect to each transaction
involving an Account or the Program:
(a) Retailers shall respond to, and cooperate with, Bank promptly
in connection with the resolution of disputes with Cardholders;
(b) Retailers shall maintain a policy for the exchange and return
of Goods and adjustments for Services rendered or not rendered that is in
accordance with all applicable laws and include credit for such return or
adjustment in the Charge Transaction Data in accordance with the terms of
this Agreement and the Operating Procedures in the event the return/exchange
has been authorized in accordance with Retailers' policies;
(c) Retailers shall not seek or obtain any special agreement or
condition from, nor discriminate in any way against, Cardholders with respect
to the terms of any transaction;
(d) Retailers shall comply with all Retailers' warranties, if any,
with respect to Goods and/or Services sold under an Account; and
(e) Retailers shall do nothing to prevent an Account from being
valid and enforceable against the Cardholder obligated for the payment and
performance of such Account.
SECTION 8.03 GENERAL REPRESENTATIONS AND WARRANTIES. To induce Bank to
originate Accounts, each Retailer jointly and severally makes the following
representations and warranties to Bank, each of which shall survive the
execution and delivery of this Agreement, and each of which shall be deemed
to be restated and remade on each date on which Bank originates any Account
or extends any credit hereunder:
(a) Each Retailer (i) is duly organized, validly existing, and in
good standing under the laws of the State of Minnesota, (ii) is duly
qualified and in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business require such
qualification and where the failure to so qualify could have a material
adverse effect on the business, operations, prospects, property, or financial
or other condition of such Retailer; (iii) has the requisite power and
authority and the legal right to own and operate its properties, to lease the
properties it operates under lease, and to conduct its business as now
conducted and as it is contemplated to be conducted hereafter; (iv) has all
necessary licenses, permits, consents, or approvals from or by, and has made
all necessary notices to, all governmental authorities having jurisdiction,
to the extent required for such current ownership and operations or for such
further operations as are proposed to be conducted except where the failure
to obtain such licenses, permits, consents, or approvals or the failure to
give such notices would not have a material adverse effect on the business,
operations, prospects, property, or financial or other condition of such
Retailer; and (v) is in compliance with its organizational documents.
(b) The execution, delivery, and performance of this Agreement and
all instruments and documents to be delivered by each Retailer hereunder: (i)
are within its corporate power; (ii)
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have been duly authorized by all necessary and proper corporate action; (iii)
do not and will not contravene any provisions of its organizational
documents; (iv) do not and will not violate any law or regulation or any
order or decree of any court or governmental instrumentality; (v) do not and
will not conflict with or result in the breach of, or constitute a default
under any indenture, mortgage, deed of trust, lease, agreement, or other
instrument to which it is a party or by which it or any of its assets or
property are bound; and (vi) do not require any filing or registration with
or the consent or approval of any governmental body, agency, authority, or
any other person which has not been made or obtained. This Agreement has
been duly executed and delivered by each Retailer and constitutes a legal,
valid, and binding obligation of such Retailer, enforceable against such
Retailer in accordance with its terms.
(c) Each Retailer is Solvent.
(d) No Retailer is in default with respect to any material
contract, agreement, lease or other instrument to which it is a party nor has
any Retailer received any notice of default under any material contract,
agreement, lease or other instrument.
(e) No contract, agreement, lease, or other instrument to which
any Retailer is a party or by which any Retailer is bound, and no provision
of any applicable law or governmental regulation, materially and adversely
affects or may reasonably be expected to materially and adversely affect the
business, operations, prospects, property, or financial or other condition of
any Retailer.
(f) All information furnished by the Retailers to Bank for
purposes of or in connection with this Agreement or any information hereafter
furnished by any Retailer to Bank, is and will be true and correct in all
material respects and no such information omits to state a material fact
necessary to make the information so furnished not misleading. There is no
fact known to any Retailer which the Retailer has not disclosed to Bank which
could materially and adversely affect the financial condition, business,
operations, property, or prospects of any Retailer.
(g) No Event of Default or Default has occurred and is continuing.
(h) The chief executive office and principal place of business of
each Retailer is accurately set forth on Schedule 2 hereto. The correct
legal name of each Retailer is set forth on Schedule 2 hereto. Such name,
together with the other Retailer Names, are the only names under which such
Retailer currently conducts or has heretofore conducted business.
(i) There are no actions, suits or proceedings existing or pending
before any court, arbitrator or governmental administrative body or agency,
or, to the knowledge of any Retailer, threatened against any Retailer which
could affect the validity or enforceability of any Account, could affect the
validity or enforceability of this Agreement or which could have a material
adverse effect on the ability of any Retailer to perform its obligations
hereunder.
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(j) No Retailer has licensed the use of all or any portion of any
Retailer Location for the sale of goods or services by any person other than
a Retailer and no Retailer sells any goods or services which it has received
on consignment from any person.
SECTION 8.04 ADDITIONAL AFFIRMATIVE COVENANTS OF RETAILER. Until the
Final Liquidation Date, unless Bank shall otherwise consent in writing,
Retailers will:
(a) For each Retailer which is subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (i) as soon as reasonably available and in any event within
ninety (90) days after the close of its fiscal year, submit to Bank an
audited annual report of such Retailer's annual earnings, including its
audited consolidated balance sheets, income statements and statement of cash
flows and changes in financial position and (ii) promptly after the filing
thereof, submit to Bank copies of all proxy statements, and all reports on
Forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission
by such Retailer;
(b) For each Retailer which is not subject to the reporting
requirements of Section 13 or Section 15(d) of the Securities Exchange Act of
1934, as amended (i) as soon as reasonably available and in any event within
ninety (90) days after the close of its fiscal year, submit to Bank an
audited annual report of such Retailer's annual earnings, including its
audited consolidated balance sheets, income statements and statement of cash
flows and changes in financial position and (ii) as soon as reasonably
available and in any event within forty-five (45) days after the close of
each of its fiscal quarters, submit to Bank an unaudited quarterly report of
such Retailer's earnings, including its consolidated balance sheets, income
statements and statement of cash flows and changes in financial position,
accompanied by the certification on behalf of such Retailer by such
Retailer's chief financial officer that such financial statements were
prepared in accordance with generally accepted accounting principles applied
on a consistent basis and present fairly the consolidated financial position
and the results of operations of such Retailer as of the end of such fiscal
quarter;
(c) Comply in all material respects with all laws applicable to
Retailers, their respective businesses, and their respective properties
including, without limitation, all laws relating to (i) descriptions of Goods
and/or Services, pricing, charges, and related wording and content of the
Program Documents where such wording or content is furnished by a Retailer,
(ii) Retailers' sales material or practices, including, but not limited to,
the sales order forms, sales invoices, promotional and advertising materials
and similar forms and/or (iii) actions or omissions (at the point-of-sale or
otherwise) of a Retailer or it's employees, agents or representatives;
provided that the foregoing shall not apply to any Retailer's use of a
Program Documents where such document is in the form prepared and provided by
Bank without additions, deletions or modifications and where such form is
used in accordance with the requirements of the Operating Procedures.
(d) Promptly upon receipt, deliver to Bank copies of any
communications relating to an Account received from a Cardholder or from any
governmental or regulatory authority.
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(e) Permit Bank, during normal business hours and upon reasonable
notice, to visit the offices of each Retailer from time to time, and shall
permit Bank from time to time to discuss the Program with Retailers and their
respective officers, directors and employees and to examine the books and
records of Retailers relating to the Program or to have the same examined by
Bank's attorneys and/or accountants. In connection therewith, Retailers
agree, subject to applicable privacy and other laws, to make data regarding
the Program available to Bank and in connection therewith to permit Bank to
make copies of such documentation.
SECTION 8.05 ADDITIONAL NEGATIVE COVENANT OF RETAILERS. Until the
expiration or termination of the Commitment Period, unless Bank shall
otherwise consent in writing, Retailers will not advertise, promote, sponsor,
solicit, permit solicitation of, or make available to customers of Retailers
or otherwise provide at any Retailer Location any program for open-end or
closed-end consumer accounts or any other credit program, credit facility,
credit card program, charge program or debit or secured card program or
facility which is similar in purpose or effect to this Program (whether
open-end, closed-end, private label or third party), other than (i) credit
provided in connection with the Program hereunder; (ii) credit provided by
generally accepted multi-purpose credit or charge cards such as American
Express, Mastercard, Visa and the Discover card or by any generally accepted
multi-purpose debit or secured cards (provided that none of the cards
referred to in this clause (ii) may be "co-branded", "sponsored" or
"co-sponsored" with a Retailer and provided that no Retailer Name or any
variation thereof may appear on such cards); (iii) credit provided under a
Second Source Program during the Commitment Period to customers who have
first applied and been rejected for credit under the Program established by
this Agreement; (iv) credit provided on or before June 30, 1997 under the
credit program maintained by Retailers as of the date of this Agreement with
a third-party provider; and (v) credit for add-on sales provided on or before
November 30, 1997 under the credit program maintained by Retailers as of the
date of this Agreement with a third-party provider. As used herein, "Second
Source Program" shall mean any credit program, credit facility, credit card
program, charge program or debit or secured card program or facility which is
similar in purpose or effect to this Program (whether open-end, closed-end,
private label or third party) offered by a third-party or a Retailer where
Bank was first offered the opportunity to provide such program on the same or
substantially similar terms and conditions as such third-party is willing to
provide.
ARTICLE IX
WARRANTIES OF BANK
SECTION 9.01 REPRESENTATIONS AND WARRANTIES OF BANK. To induce
Retailers to participate in the Program and to promote the extension of
credit thereunder, Bank makes the following representations and warranties to
Retailers, each of which shall survive the execution and delivery of this
Agreement, and each of which shall be deemed to be restated and remade on
each date on which Bank originates Accounts or extends credit hereunder:
(a) Bank (i) is a banking corporation duly organized, validly
existing, and in good standing under the laws of the State of Georgia; (ii)
has the requisite corporate power and
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authority and the legal right to own, pledge, mortgage, and operate its
properties, to lease the properties it operates under lease, and to conduct
its business as now conducted and as it is contemplated to be conducted
hereafter; and (iii) is in compliance with its articles of incorporation and
bylaws.
(b) The execution, delivery, and performance of this Agreement and
all instruments and documents to be delivered by Bank hereunder: (i) are
within Bank's corporate power; (ii) have been duly authorized by all
necessary and proper corporate action; (iii) do not and will not contravene
any provision of Bank's certificate of incorporation or bylaws; (iv) do not
and will not violate any law or regulation or an order or decree of any court
or governmental instrumentality to which Bank is subject; (v) do not and will
not conflict with or result in the breach of, or constitute a default under,
any indenture, mortgage, deed of trust, lease, agreement, or other instrument
to which Bank is a party or by which Bank or any of its assets or property
are bound; and (vi) do not require any filing or registration by Bank with or
the consent or approval of any governmental body, agency, authority, or any
other person which has not been made or obtained. This Agreement has been
duly executed and delivered by Bank and constitutes the legal, valid, and
binding obligation of Bank, enforceable against Bank in accordance with its
terms.
(c) Bank is Solvent.
ARTICLE X
EVENTS OF DEFAULT; RIGHTS AND REMEDIES
SECTION 10.01 EVENTS OF DEFAULT. The occurrence of any one or more of
the following events (regardless of the reason therefor) shall constitute an
"Event of Default" hereunder:
(a) Any Retailer shall fail to pay Bank any amount when due and
payable and the same shall remain unpaid for a period of fifteen (15) days
after Bank shall have made written demand therefor.
(b) Any Retailer shall fail or neglect to perform, keep, or
observe any term, provision, condition, or covenant contained in this
Agreement that is required to be performed, kept, or observed by it and such
failure or neglect shall continue for a period of thirty (30) days after Bank
shall have given written notice thereof.
(c) Any representation, warranty or statement, made, delivered or
deemed made by any Retailer or by any officer of a Retailer shall prove not
to have been true and correct in any material respect as of the date when
made, delivered or deemed made and the failure to be true and correct has a
material adverse effect on any Retailer's ability to perform its obligations
hereunder.
(d) Any Retailer (i) shall no longer be Solvent; (ii) shall
generally not pay its debts as such debts become due, or shall admit in
writing its inability to pay its debts generally; (iii) shall
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make a general assignment for the benefit of its creditors; or (iv) any
proceeding shall be instituted by or against it seeking to adjudicate it a
bankrupt or insolvent or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency, or reorganization or
relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official for
it or for any substantial part of its property, and, in the case of any
proceeding instituted against it (but not instituted by it), either such
proceeding shall remain undismissed or unstayed for a period of thirty (30)
days, or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or any
substantial part of its property) shall occur; or (v) any Retailer shall take
any corporate action to authorize any of the actions set forth above in this
paragraph (d).
(e) A default shall occur under any other agreement, document or
instrument to which any Retailer is a party or by which any Retailer or any
of its property is bound, and such default (i) involves the failure to make
any payment (whether of principal, interest or otherwise) due (whether by
scheduled maturity, required prepayment, acceleration, demand or otherwise)
in respect of any indebtedness of any Retailer in an aggregate amount
exceeding $2,000,000, or (ii) causes (or permits any holder of such
indebtedness or a trustee to cause) such indebtedness or a portion thereof in
an aggregate amount exceeding $2,000,000, to become due prior to its stated
maturity or prior to its regularly scheduled dates of payment.
(f) Any of the following events (a "Change of Control") shall
occur: (i) Any person or group of persons shall acquire beneficial ownership
of fifty percent (50%) or more of the combined voting power of the then
outstanding voting securities of Select Comfort Corporation entitled to vote
generally in the election of directors; (ii) individuals who, as of the date
hereof, constitute the Board of Directors of Select Comfort Corporation (the
"Incumbent Board") shall cease to constitute at least a majority of such
Board, PROVIDED that any individual becoming a director subsequent to the
date hereof whose election or nomination for election by Select Comfort
Corporation's stockholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board; (iii) the
stockholders of Select Comfort Corporation shall approve a reorganization,
merger or consolidation (each a "Reorganization"), in each case through which
all or substantially all the persons who were the respective beneficial
owners of the voting securities of Select Comfort Corporation immediately
prior to such Reorganization do not beneficially own, following such
Reorganization, directly or indirectly, more than fifty percent (50%) of the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors of the corporation, as a result
of such Reorganization; (iv) all or substantially all the assets or property
of any Retailer shall be sold or otherwise disposed of in one transaction or
series of related transactions; (v) Select Comfort Corporation or another
wholly-owned subsidiary thereof shall cease to own all of the outstanding
legal and beneficial interests in each other Retailer (other than the capital
stock of any such Retailer owned by its key management employees provided
such management employees do not own in the aggregate more than ten percent
(10%) of the capital stock of such Retailer); or (vi) any person
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other than Select Comfort Corporation shall have, directly or indirectly, the
power to direct or cause the direction of the management or policies of any
other Retailer, by contract or otherwise.
(g) Final judgment or judgments for the payment of money shall be
rendered against any Retailer and the same shall not be either (i) covered by
insurance where the insurer has affirmatively and expressly accepted
liability therefor (with reasonable deductibles, if any, having been paid by
Retailers) or (ii) vacated, stayed, bonded, paid, or discharged prior to
expiration of the applicable appeal period.
(h) A material adverse change has occurred in the operations,
financial condition, business or prospects of any Retailer which Bank has
determined, in good faith and in its commercially reasonable judgment, has
impaired or is reasonably likely to impair, the ongoing operation or
continued viability of the Program.
(i) Accounts, indebtedness, Charge Slips or proceeds thereof shall
be (or shall purportedly be) (i) attached, seized, levied upon or subject to
a writ by a creditor of any Retailer, or shall come within the possession of
any receiver, trustee, custodian, or assignee for the benefit of creditors of
any Retailer or (ii) subject to any lien or right of any third party directly
or indirectly arising by, through or on account of any Retailer or any
creditor thereof.
SECTION 10.02 REMEDIES.
(a) If any Event of Default shall have occurred and be continuing,
all of the Retailers' payment obligations hereunder shall, in the Bank's sole
discretion, be deemed immediately due and payable.
(b) If any Event of Default shall have occurred and be continuing,
Bank shall have the right to discontinue originating or offering Accounts,
accepting Charge Slips, or otherwise extending credit, may declare the
Commitment Period terminated and may exercise all such other rights and
remedies as Bank may have under this Agreement and under all applicable laws.
ARTICLE XI
TERM/TERMINATION
SECTION 11.01 COMMITMENT PERIOD. The Commitment Period shall continue
until the fifth anniversary of the Program Commencement Date (the "Initial
Term"). Unless a party shall provide written notice of non-extension to the
other parties hereto at least six (6) months prior to the expiration of the
initial Term (or, where applicable, the expiration of any extension term) the
Commitment Period shall thereafter be extended automatically for successive
5-year periods. If any party does provide written notice of non-extension in
a timely manner to all other parties hereto, the Commitment Period will
expire at the end of the Initial Term or any extension term then in effect.
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SECTION 11.02 TERMINATION. Notwithstanding anything in
Section 11.01 to the contrary, the Commitment Period shall terminate on the
date provided below without need of any prior judicial declaration:
(a) Retailers, acting collectively, shall have the right to
terminate the Commitment Period upon thirty (30) days written notice if a
Bank Termination Event shall occur and be continuing.
(b) Bank shall have the right to terminate the Commitment Period
upon thirty (30) days written notice if an Event of Default shall occur and
be continuing.
(c) Retailers, acting collectively, shall have the right, upon
thirty (30) days prior written notice, to terminate the Commitment Period at
any time after Bank makes an election pursuant to Section 2.02(b) (ii) hereof.
(d) As provided in Section 13.02, Bank shall have the right to
terminate the Commitment Period upon written notice if a Retailer Primary
Divestiture shall occur.
(e) As provided in Section 11.04, either Bank or Retailers, acting
collectively, shall have the right to terminate the Commitment Period.
(f) Bank shall have the right to terminate the Commitment Period
upon written notice if all of the following have occurred: (i) usury rates
for the State of Georgia change, laws regulating Bank's rate structure
change, or federal or state laws, regulations or other authority preempt the
exportation of Bank's rate structure; and (ii) Bank has sought to engage
Retailers in a good faith renegotiation of the terms of this Agreement; and
(iii) the parties hereto have not agreed to modifications to the terms of
this Agreement which the Bank reasonably believes necessary to prevent a
material adverse effect on Bank (or on its ability to perform the
transactions contemplated by this Agreement) resulting from the change in
usury rates or other laws regulating Bank's rate structure or the exportation
thereof; and (iv) either Bank is required to initiate changes to the Program
to comply with applicable law or more than one hundred fifty (150) days have
passed since the Bank first sought to engage Retailers in a good faith
renegotiation of the terms of this Agreement. Bank shall give Retailers at
least thirty (30) days prior notice of any termination under this Section
11.02(f) unless Bank is required to initiate changes to the Program to comply
with applicable law before the expiration of such a thirty-day period.
SECTION 11.03 PURCHASE OF ACCOUNTS BY RETAILERS UPON TERMINATION.
(a) Subject to Section 14.08 hereof, Retailers, acting
collectively, shall have the option, exercisable as provided below, to
purchase or to arrange for the purchase of the portfolio of Accounts (other
than Defaulted Accounts) (including the Cardholder List to the extent
relating to such Accounts) upon the termination or expiration of the
Commitment Period for a purchase price payable in immediately available funds
and in an amount equal to the sum of (i) an amount
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equal to (A) in the case of an expiration or termination of the Commitment
Period other than a termination pursuant to Section 11.02 (d) hereof, one
hundred three percent (103%) of the then aggregate Indebtedness of all
Accounts (other than Defaulted Accounts) or (B) in the case of a termination
of the Commitment Period pursuant to Section 11.02(d) above, one hundred four
percent (104%) of the then aggregate Indebtedness of all Accounts (other than
Defaulted Accounts), and (ii) the product of (A) Eight Thousand Three Hundred
and Thirty-three Dollars and Thirty-three Cents ($8,333.33) and (B) the
number of months, if any, (rounded up to the next integer), remaining before
the fifth anniversary of the Program Commencement Date PROVIDED, HOWEVER,
that any amounts previously paid under Sections 13.02(c) (iv), 13.02(e) (ii),
13.03(c) (iv) or 13.03(d) (ii) hereof shall be credited against the purchase
price which Retailers would otherwise be obligated to pay hereunder.
(b) If the Commitment Period is expiring as a result of a notice
of non-extension given by Bank or by Retailers under Section 11.01 hereof,
Retailers, acting collectively, shall, if they determine to do so, exercise
their option to purchase the Accounts and related Cardholder List as set
forth in 11.03(a) by giving notice of such election not later than the
ninetieth (90th) day following the Termination Notice Date. Retailers shall
thereafter complete such purchase on the first Business Day after expiration
of the Commitment Period.
(c) If the Commitment Period is terminating as a result of a
notice of termination given under Section 11.02 (other than a notice given in
respect of a Retailer Primary Divestiture), Retailers, acting collectively,
shall, if they determine to do so, exercise their option to purchase the
Accounts and related Cardholder List as set forth in 11.03(a), by giving
notice of such election not later than the forty-fifth (45th) day following
the date on which the Commitment Period terminates, which notice shall
specify a date for the purchase of such Accounts and Cardholder List which is
not more than ninety (90) days after the date Retailers first give their
notice exercising their option to purchase. Retailers shall thereafter
complete such purchase on the date specified in the notice exercising their
option to purchase.
(d) If the Commitment Period is terminating as a result of a
notice of termination given by Bank in respect of a Retailer Primary
Divestiture, Retailers, acting collectively, shall, if they determine to do
so, exercise their option to purchase the Accounts and related Cardholder
List as set forth in 11.03(a), by giving notice of such election not later
than the tenth (10th) day prior to the Primary Divestiture Date. Retailers
shall thereafter complete such purchase on the Primary Divestiture Date.
(e) If Retailers, acting collectively:
(i) fail to deliver a notice within the terms required by
this Section 11.03; or
(ii) fail to complete a purchase of the Accounts and related
Cardholder List on the date designated for the closing of such purchase;
or
(iii) prior to completing a purchase of the Accounts and
related Cardholder List, make available to customers of Retailers or
otherwise provide at any Retailer
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Location any credit program, credit facility, credit card program,
charge program or debit or secured card program or facility which is
similar in purpose or effect to this Program (whether open-end,
closed-end, private label or third party), other than (A) credit
provided in connection with the Program hereunder, (B) credit provided
by generally accepted multi-purpose credit or charge cards such as
American Express, Mastercard, Visa and the Discover card or by any
generally accepted multi-purpose debit or secured cards (provided that
none of the cards referred to in this clause (B) may be "co-branded",
"sponsored" or "co-sponsored" with a Retailer and provided that no
Retailer Name or any variation thereof may appear on such cards) and (C)
credit provided under a Second Source Program during the Commitment
Period to customers who have first applied and been rejected for credit
under the Program established by this Agreement;
then the option herein provided to purchase the Accounts and the related
Cardholder List shall expire.
SECTION 11.04 TERMINATION FOR FORCE MAJEURE.
(a) The Commitment Period may be terminated by Retailers, acting
collectively by written notice to the Bank, or by Bank by written notice to
the Retailers without penalty after the passing of sixty (60) days following
the notice by one party to the others that its performance hereunder is
prevented or materially impeded, without the ability to cure, by one of the
following force majeure events: acts of God, fire, explosion, accident, war,
nuclear disaster, riot or material changes in applicable laws or regulations
rendering it illegal or impossible for the notifying party to perform as
contemplated in this Agreement. Such sixty (60) day period may be shortened
upon written agreement executed by duly-authorized officers of each party or
if required by applicable law or regulation. This Agreement may also be
terminated by any party hereto on thirty (30) days' prior written notice to
the other parties hereto if the performance of another party has been
prevented by such a force majeure event for a period of at least sixty
consecutive (60) days.
(b) Any failure to perform caused by a force majeure event shall not be
considered a breach of this Agreement during the period of such disability if
the disabled party promptly advises the other parties in writing that it is
unable to perform due to such a force majeure event, setting forth: (i) the
nature of the event; (ii) its expected effect(s) and duration; (iii) any
expected development which may further affect performance hereunder; and (iv)
the efforts, if any, which will be made to cure such force majeure or provide
substitute performance.
SECTION 11.05 LIQUIDATION OF ACCOUNTS.
(a) Except as is expressly provided to the contrary in this Agreement
all of the terms, conditions and covenants of this Agreement shall continue
in effect following the expiration or termination of the Commitment Period
until the Final Liquidation Date. Upon the termination or expiration of the
Commitment Period, Bank shall continue to own the Accounts unless and until
Retailers shall have purchased such Accounts pursuant to Section 11.03
hereof. As is expressly provided elsewhere in this Agreement, and without
limiting other express provisions of this
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Agreement, following the expiration or termination of the Commitment Period,
Bank shall have no further obligation to originate any Accounts or extend
further credit and shall not be required to provide insert or message
services in connection with any billings statements. In addition, from and
after the Termination Notice Date, Bank shall have no further obligation to
credit amounts to the Marketing Fund. Notwithstanding anything herein to the
contrary, however, (i) all warranties, representations and indemnities
contained herein and (ii) Retailers' and Bank's obligations under Section
14.13 shall survive the termination of the Agreement and the Final
Liquidation Date.
(b) Upon any termination or expiration of the Commitment Period, if
Retailers, acting collectively, do not exercise their option to purchase or
arrange for a purchase of all Accounts (other than Defaulted Accounts) from
Bank, then:
(i) Bank shall have the right, in addition to and retaining all
other rights it may have under the terms of this Agreement or applicable
law to:
(A) liquidate the remaining Accounts in any lawful manner
which may be expeditious or economically advantageous to Bank
including the issuance of a replacement or substitute bank or
industry credit card; and
(B) use the Retailer Names in accordance with the provisions
of this Agreement in communicating with existing Cardholders.
(ii) Retailers expressly agree that in complying with their
obligations to accept a replacement or substitute bank or industry
credit card, Retailers will cooperate with Bank in order to effectuate
any such liquidation or replacement or substitute card issuance in an
orderly manner.
ARTICLE XII
INDEMNIFICATION
SECTION 12.01 INDEMNIFICATION BY RETAILERS. Retailers agree to protect,
indemnify, and hold harmless Bank, its Affiliates, and their respective
employees, officers, and directors, from and against any and all losses,
damages, liabilities, costs, and expenses (including reasonable attorneys'
fees and expenses), judgments, damages, claims, demands, offsets, defenses,
counterclaims, actions, or proceedings ("Losses") by whomsoever asserted,
including, without limitation: (i) the Cardholders or other persons
responsible for the payment of Accounts; (ii) any person or persons who
prosecute or defend any proceedings as representatives of or on behalf of a
class or interest group; (iii) any governmental instrumentality; or (iv) any
other third party, arising out of, connected with or resulting from:
(a) any transaction, contract, understanding, promise, representation,
or any other relationship, actual, asserted, or alleged, between a Retailer
and any Cardholder relating to an Account;
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(b) any Goods and Services the purchase of which was financed by an
Account (including, without limitation, sales thereof and any product
liability or warranty claims with respect thereto);
(c) any act, or any omission where there was a duty to act, by a
Retailer or its employees, officers, directors, shareholders, agents,
lessees, franchisees or independent contractors, relating to an Account or
any item of Indebtedness;
(d) any breach by a Retailer of any of the terms, covenants, or other
provisions contained in this Agreement or any other instrument or document
delivered by a Retailer to Bank in connection herewith;
(e) any representation or warranty made by any Retailer in this
Agreement or in any other instrument or document delivered by a Retailer to
Bank which proves to have been untrue or incorrect in any material respect as
of the date when made or deemed made hereunder;
(f) the failure of a Retailer to comply in all material respects with
any law, rule or regulation applicable to such Retailer; or
(g) any advertisements, solicitations or other promotions of the
Program including credit-based promotions by or at the direction of any
Retailer. Excluded from the foregoing indemnity shall be any Losses to the
extent the same (i) arise out of or result from any violation by Bank or any
of its Affiliates of any law; (ii) arise out of or result from any violation
by Bank of any term of this Agreement, any Credit Card Agreement or any
agreement, understanding or promise between Bank and any Cardholder relating
to such Cardholder's Account; or (iii) arise solely out of a Retailer's use
of a Program Document (solely and only to the extent such document is in the
form prepared and provided by Bank without additions, deletions or
modifications) and in accordance with the requirements of the Operating
Procedures.
SECTION 12.02 INDEMNIFICATION BY BANK. Bank agrees to protect,
indemnify, and hold harmless Retailers, their Affiliates, and their
respective employees, officers, and directors, from and against any and all
Losses by whomsoever asserted, including, but not limited to, (i) the
Cardholders or other persons responsible for the payment of Accounts; (ii)
any person or persons who prosecute or defend any proceedings as
representatives of or on behalf of a class or interest group; (iii) any
governmental instrumentality; or (iv) any other third party, arising out of,
connected with or resulting from:
(a) any breach by Bank of any of the terms, covenants, or other
provisions contained in this Agreement;
(b) any representation or warranty made by Bank in this Agreement which
proves to have been untrue or incorrect in any material respect as of the
date when made or deemed made hereunder;
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(c) any act (including any exercise of the power of attorney provided
Bank pursuant to Section 14.12 hereof), or omission where there was a duty to
act, by Bank or its employees, officers, directors, shareholders, agents,
licensees or independent contractors relating to an Account or any item of
Indebtedness; or
(d) the failure of Bank (including any failure of Bank in the exercise
of the power of attorney provided Bank pursuant to Section 14.12 hereof) or
the failure of any Program Document to comply in all material respects with
all applicable federal, state and local statutes, regulations, ordinances or
administrative rulings, including, but not limited to, the Federal Truth in
Lending Act and Regulation Z thereunder, the Federal Equal Credit Opportunity
Act and Regulation B thereunder, and the Federal Fair Credit Reporting Act,
PROVIDED that Bank shall have no liability for Losses resulting from any act
or omission by any Retailer or by any other person acting at the direction of
or on behalf of a Retailer not taken or omitted at the direction of Bank or
pursuant to the requirements of the Operating Procedures including without
limitation Losses resulting from (i) descriptions of Goods and/or Services,
pricing, charges, and related wording and content of the Program Documents
where such wording or content is furnished by a Retailer, (ii) Retailers'
sales material or practices, including, but not limited to, the sales order
forms, sales invoices, promotional and advertising materials and similar
forms and/or (iii) actions or omissions (at the point-of-sale or otherwise)
of a Retailer's employees, agents or sales representatives including
unauthorized changes or omissions in Program Documents provided by Bank.
Excluded from the foregoing indemnity shall be any Losses to the extent the
same arise out of or result from (i) any violation by a Retailer or its
Affiliates of any law except where such violation is caused solely by a
Retailer's use of a Program Document where such document is in the form
prepared and provided by Bank without additions, deletions or modifications
and where such form is used in accordance with the requirements of the
Operating Procedures; (ii) any violation by a Retailer of any term of this
Agreement, any Credit Card Agreement or any agreement, understanding or
promise between such Retailer and any Cardholder relating to such
Cardholder's Account; or (iii) any exercise by Bank of the power of attorney
granted pursuant to Bank pursuant to Section 14.12 where such power is
exercised to perform an obligation of one or more Retailers hereunder or
under applicable law which such Retailers failed to perform.
SECTION 12.03 PAYMENT OF INDEMNIFIED AMOUNTS. After any final judgment
or award shall have been rendered by a court, arbitration board, or
administrative agency of competent jurisdiction and the time for an appeal of
such judgment or award has expired without an appeal being taken by any
party, or after any settlement agreed to by the parties shall have been
consummated, the party seeking indemnification shall forward to the other
party notice of any sums due and owing by such other party with respect to
such matter and such party shall be required to pay all of the sums so owing
to the party seeking indemnification within thirty (30) days after the date
of such notice unless otherwise mutually agreed to in writing by the parties.
SECTION 12.04 NOTICE. Each party shall promptly notify the other party
of any claim, demand, suit or threat of suit of which that party becomes
aware (except with respect to a threat of suit any party might institute
against another party hereto) which may give rise to a right of
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indemnification pursuant to this Agreement. The indemnifying party will be
entitled to participate in the settlement or defense thereof and, if the
indemnifying party elects, to take over and control the settlement or defense
thereof with counsel satisfactory to the indemnified party. In any case, the
indemnifying party and the indemnified party shall cooperate (at no cost to
the indemnified party) in the settlement or defense of any such claim,
demand, suit or proceeding.
ARTICLE XIII
OTHER AGREEMENTS
SECTION 13.01 RETAILER ACQUISITIONS; NEW RETAILER SUBSIDIARIES.
(a) In the event that any Retailer or any of its Affiliates, directly or
indirectly, acquires (i) all or substantially all of the assets of a New
Retailer, (ii) more than 50% of the outstanding voting securities of a New
Retailer or (iii) the power to direct or cause the direction of any New
Retailer's management or policies, whether through the ownership of securities,
control of its board of directors, contract or otherwise, then, Retailers shall
engage in good faith discussions with Bank regarding the possibility of adding
such New Retailer as a "Retailer" hereunder or of Bank's providing a private
label credit card program to such New Retailer on additional or different terms
and conditions. If the parties are unable to mutually agree on terms and
conditions pursuant to which Bank will provide a private label credit card
program to the New Retailer, Retailers agree that they will not enter into any
such program with any other person unless they shall have first offered Bank the
opportunity to provide such program to the New Retailer on the same or
substantially similar terms and conditions as such other person would be willing
to provide. Notwithstanding anything herein to the contrary, however,
Retailers' obligations under this Section 13.01(a) shall be subject to the terms
and conditions of any private label credit card program to which a New Retailer
is party as of the date it is acquired by a Retailer, it being agreed that
Retailers shall use their best efforts to terminate any such program as soon as
possible after any such acquisition if Bank is willing to provide a comparable
program on the same or substantially similar terms.
(b) Subject to Section 13.01(a), in the event that any direct or indirect
subsidiary of Retailer that is not a party to this Agreement on the date hereof
(whether such subsidiary is now existing or hereafter created), shall be engaged
in the ownership or operation of a retail store or the sale of Goods and/or
Services through retail stores, mail orders or otherwise, Retailers shall cause
such subsidiary to execute and deliver to Bank instruments satisfactory to Bank
pursuant to which such subsidiary shall agree to join the Program and be bound
by the terms and conditions of this Agreement. Upon the execution and delivery
of such documents, such subsidiary shall be an additional "Retailer" for all
purposes of this Agreement.
SECTION 13.02 RETAILER PRIMARY DIVESTITURES.
(a) Retailers shall deliver written notice to Bank not later than
forty-five (45) days prior to the consummation of any Retailer Primary
Divestiture (the date of such consummation being referred to as the "Primary
Divestiture Date"). Such notice (the "Primary Divestiture
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Notice") shall set forth in reasonable detail the circumstances of the
impending Retailer Primary Divestiture (including, without limitation, the
identity of all acquirors).
(b) Bank shall deliver written notice to Retailers not later than thirty
(30) days after receipt from Retailers of the Primary Divestiture Notice, which
notice shall either (i) state that Bank shall, simultaneously with the
consummation of the Retailer Primary Divestiture, require Retailers to cause the
acquiror(s) to enter into an agreement on the same terms as this Agreement (with
such changes to non-financial terms as may be necessary to reflect changes in
facts) pursuant to which the acquiror(s) will assume all of Retailer's
obligations under this Agreement with respect to the Primary Divestiture Stores
unless Retailers elect to exercise the option provided in Section 13.02(c) (ii)
hereof or (ii) include a notice of termination of the Commitment Period pursuant
to Section 11.02(a) (iv) or (iii) include a notice of termination of the
Commitment Period with respect to the Accounts and Indebtedness of the Primary
Divestiture Stores (a "Partial Termination Notice"). As used herein, "Primary
Divestiture Stores" shall mean, in the case of a Retailer Primary Divestiture
resulting from the sale of Retailer Locations, the Retailer Locations being
sold, or in the case of a Retailer Primary Divestiture resulting from the sale
of all or substantially all of the assets, or fifty percent (50%) or more of the
outstanding voting securities, of any Retailer, the Retailer Locations at which
such Retailer makes or has made sales of Goods and Services.
(c) If Bank's notice states that Bank intends to require Retailers to
cause the acquiror(s) to assume all of Retailers' obligations under this
Agreement with respect to the Primary Divestiture Stores, Retailers shall not
consummate the Retailer Primary Divestiture unless either (i) all documents and
agreements reasonably required by Bank to effect such assumption have been
executed and delivered by the applicable parties or (ii) all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Primary
Divestiture Date relating to the Primary Divestiture Stores are simultaneously
purchased by Retailers or their assignee. The purchase price to be paid to Bank
by Retailers (or such assignee) shall be payable in immediately available funds
and in an amount equal to the sum of (iii) one hundred four percent (104%) of
the then aggregate Indebtedness of all such Accounts, and (iv) the product of
(A) Eight Thousand Three Hundred and Thirty-three Dollars and Thirty-three Cents
($8,333.33); (B) the number of months, if any, (rounded up to the next integer)
remaining before the fifth anniversary of the Program Commencement Date; and (C)
a fraction, the numerator of which is the sum of the aggregate Indebtedness for
all Accounts relating to the Primary Divestiture Stores for each day during the
immediately preceding Billing Period and the denominator of which is the sum of
the aggregate Indebtedness for all Accounts for each day during the immediately
preceding Billing Period.
(d) If Bank's notice includes a notice of termination of the Commitment
Period, Retailers shall have the option to purchase the Accounts (other than
Defaulted Accounts) together with the related Cardholder List and Indebtedness
as provided in Section 11.03.
(e) If Bank's notice includes a Partial Termination Notice, Retailers
shall not consummate the Retailer Primary Divestiture unless all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Primary
Divestiture Date relating to the
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Primary Divestiture Stores are simultaneously purchased by Retailers or their
assignee. The purchase price to be paid to Bank by Retailers (or such
assignee) for such Accounts and Indebtedness shall be payable in immediately
available funds and in an amount equal to the sum of (i) one hundred four
percent (104%) of the then aggregate Indebtedness of all such Accounts, and
(ii) the product of (A) Eight Thousand Three Hundred and Thirty-three Dollars
and Thirty-three Cents ($8,333.33); (B) the number of months, if any, rounded
up to the next integer, remaining before the fifth anniversary of the Program
Commencement Date; and (C) a fraction, the numerator of which is the sum of
the aggregate indebtedness for all Accounts relating to the Primary
Divestiture Stores for each day during the immediately preceding Billing
Period divided by the number of days in such period and the denominator of
which is the Average Net Receivables for the immediately preceding Billing
Period.
SECTION 13.03 RETAILER SECONDARY DIVESTITURES.
(a) Retailers shall deliver written notice to Bank not later than
forty-five (45) days prior to the consummation of any Retailer Secondary
Divestiture (the date of such consummation being referred to as the
"Secondary Divestiture Date"). Such notice (the "Secondary Divestiture
Notice") shall set forth in reasonable detail the circumstances of the
impending Retailer Secondary Divestiture (including, without limitation, the
identity of all acquiror(s).
(b) Bank shall deliver written notice to Retailers not later than thirty
(30) days after receipt from Retailers of the Secondary Divestiture Notice,
which notice shall either (i) state that Bank shall, simultaneously with the
consummation of the Retailer Secondary Divestiture, require Retailers to cause
the acquiror(s) to enter into an agreement on the same terms as this Agreement
(with such changes to non-financial terms as may be necessary to reflect changes
in facts) pursuant to which the acquiror(s) will assume all of Retailers'
obligations under this Agreement with respect to the Retailer Locations that are
the subject of the Retailer Secondary Divestiture (the "Secondary Divestiture
Stores") unless Retailers elect to exercise the option provided in Section
13.03(c) (ii) hereof, or (ii) include a notice of termination of the Commitment
Period with respect to the Accounts and Indebtedness of the Secondary
Divestiture Stores (a "Partial Termination Notice").
(c) If Bank's notice states that Bank intends to require Retailers to
cause the acquiror(s) to assume all of Retailer's obligations under this
Agreement with respect to the Secondary Divestiture Stores, Retailers shall not
consummate the Retailer Secondary Divestiture unless either (i) all documents
and agreements reasonably required by Bank to effect such assumption have been
executed and delivered by the applicable parties or (ii) all Accounts (other
than Defaulted Accounts) and Indebtedness owned by Bank as of the Secondary
Divestiture Date relating to the Secondary Divestiture Stores are simultaneously
purchased by Retailers or their assignee. The purchase price to be paid to Bank
by Retailers (or such assignee) shall be payable in immediately available funds
and in an amount equal to the sum of (iii) one hundred four percent (104%) of
the then aggregate Indebtedness of all such Accounts, and (iv) the product of
(A) Eight Thousand Three Hundred and Thirty-three Dollars and Thirty-three Cents
($8,333.33); (B) the number of months, if any, (rounded up to the next integer)
remaining before the fifth anniversary of the Program Commencement Date; and (C)
a fraction, the numerator of which is
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the sum of the aggregate Indebtedness for all Accounts relating to the
Secondary Divestiture Stores for each day during the immediately preceding
Billing Period and the denominator of which is the sum of the aggregate
Indebtedness for all Accounts for each day during the immediately preceding
Billing Period.
(d) If Bank's notice includes a Partial Termination Notice, Retailers
shall not consummate the Retailer Secondary Divestiture unless all Accounts
(other than Defaulted Accounts) and Indebtedness owned by Bank as of the
Secondary Divestiture Date relating to the Secondary Divestiture Stores are
simultaneously purchased by Retailers or their assignee. The purchase price to
be paid to Bank by Retailers (or such assignee) shall be payable in immediately
available funds and in an amount equal to the sum of (i) one hundred four
percent (104%) of the then aggregate Indebtedness of all such Accounts, and (ii)
the product of (A) Eight Thousand Three Hundred and Thirty-three Dollars and
Thirty-three Cents ($8,333.33); (B) the number of months, if any, rounded up to
the next integer, remaining before the fifth anniversary of the Program
Commencement Date; and (C) a fraction, the numerator of which is the sum of the
aggregate Indebtedness for all Accounts relating to the Secondary Divestiture
Stores for each day during the immediately preceding Billing Period divided by
the number of days in such period and the denominator of which is the Average
Net Receivables for the immediately preceding Billing Period.
SECTION 13.04 OTHER PROGRAMS. If during the term of this Agreement, any
Retailer desires to make arrangements for the provision by any person of either
(i) any private label commercial or business credit program or facility for use
at Retailer Locations or (ii) any private label credit program or facility for
use outside of the United States, then Retailers shall engage in good faith
discussions with Bank regarding the possibility of Bank providing either or both
of such programs. If the parties are unable to mutually agree on terms and
conditions pursuant to which Bank will provide one or both such programs,
Retailers agree that they will not enter into any such programs with any other
person unless they shall have first offered Bank the opportunity to provide such
program(s) on the same or substantially similar terms and conditions as such
other person would be willing to provide.
ARTICLE XIV
MISCELLANEOUS
SECTION 14.01 ASSIGNABILITY. Neither Bank nor any Retailer may assign its
rights and obligations under this Agreement without the prior written consent of
the other party, which consent shall not be unreasonably withheld; except that
Bank may, without such prior written consent (i) assign all or part of its
rights and obligations under this Agreement to an Affiliate; (ii) engage third
parties to perform services pursuant to this Agreement; and (iii) securitize all
or any portion of the Accounts or any related rights under this Agreement or
sell participation interests therein.
SECTION 14.02 AMENDMENT. This Agreement may not be amended except by
written instrument signed by the parties hereto.
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SECTION 14.03 NON-WAIVER. No delay by any party hereto in exercising any
of its rights hereunder, or in the partial or single exercise of such rights,
shall operate as a waiver of that or any other right. The exercise of one or
more of any party's rights hereunder shall not be a waiver of, nor preclude the
exercise of, any other rights or remedies available to such party under this
Agreement or in law or equity.
SECTION 14.04 SEVERABILITY. If any provision of this Agreement is held to
be invalid, void or unenforceable, all other provisions shall remain valid and
be enforced and construed as if such invalid provision were never a part of this
Agreement.
SECTION 14.05 GOVERNING LAW. This Agreement and all rights and obligations
hereunder, including, but not limited to, matters of construction, validity and
performance, shall be governed by and construed in accordance with the laws of
the state of Georgia without regard to internal principles of conflict of laws.
SECTION 14.06 CAPTIONS. Captions of the Sections of this Agreement are for
convenient reference only and are not intended as a summary of such Sections and
do not affect, limit, modify or construe the contents thereof.
SECTION 14.07 USE OF RETAILER NAMES AND MARKS. Subject to the provisions
of this Agreement, Retailers hereby grant Bank a non-exclusive license to
create, develop, market and administer the Program and to use the names set
forth on Schedule 3 hereto, the related marks, tradestyles, trademarks, service
marks, logos or similar proprietary designations and such additional names,
marks, tradestyles, logos and other designations as may be adopted by Retailers
from time to time (collectively, the "Retailer Names") , in the creation,
development, marketing and administration of the Program PROVIDED, HOWEVER, that
with respect to the initial Program Documents and the initial other Account
Documentation prepared by Bank, Bank may not use the Retailer Names without the
prior consent of Retailers which consent will not be unreasonably withheld. If
from time to time prior to the Final Liquidation Date, Retailers should change
their names, marks, tradestyles, trademarks, service marks, logos or similar
proprietary designations, Retailers agree to promptly inform Bank thereof and
Bank and Retailers shall cooperate to make the appropriate changes and additions
to the Program Documents and other Account Documentation in a timely and cost
efficient manner. This license shall extend to all aspects of Bank's operation
and administration of the Program and the discharge of its obligations under the
Agreement, including but not limited to its use in connection with Cardholder
services; adverse action letters; billing statements and inquiries; credit card
applications, agreements, mailers, and card carriers; and matters incidental to
collection and recovery.
SECTION 14.08 SECURITIZATION/PARTICIPATION. Any rights to purchase the
Accounts which Retailers may have hereunder shall be subject to Bank's right to
securitize or participate the Accounts and Indebtedness. Purchase rights shall
be available to Retailers only with respect to Accounts and Indebtedness owned
by Bank at the time Retailers elect to exercise their option to purchase
pursuant to Section 11.03 hereof.
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SECTION 14.09 FURTHER ASSURANCES. Each party hereto agrees to execute all
such further documents and instruments and to do all such further things as any
other party may reasonably request in order to give effect to and to consummate
the transactions contemplated hereby.
SECTION 14.10 ENTIRE AGREEMENT. This Agreement is the entire agreement of
the parties with respect to the subject matter hereof and supersedes all other
prior understandings and agreements whether written or oral.
SECTION 14.11 NOTICES. All notice, demands and other communications
provided for in this Agreement shall be in writing or (unless otherwise
specified) by telex or telephonic facsimile transmission and shall be sent by
certified mail or nationally-recognized overnight courier, or delivered to the
other party at the address set forth opposite its name on Schedule 4 hereof, or
at such other address as shall be designated by such party in a written notice
given to all other parties in accordance with the terms of this Section 14.11.
All such notices and communications if duly given or made, when sent by
certified mail, shall be effective three (3) Business Days after deposit in the
mails, when sent by overnight courier, shall be effective one (1) Business Day
after delivery to such overnight courier, and otherwise shall be effective upon
receipt.
SECTION 14.12 POWER OF ATTORNEY. Retailers authorize and empower Bank and
grant to Bank a power of attorney (i) to sign and endorse any Retailer's name on
checks, drafts, money orders or other forms of payment in respect of Accounts;
(ii) to do all the things reasonably necessary to carry out or enforce the
Accounts; (iii) to sign any Retailer's name on any notices to any Cardholder in
connection with the collection of Accounts; (iv) to send requests for
verification of any Account to Cardholders; (v) to sue Cardholders for the
collection of Accounts in the name of Bank or any Retailer; (vi) to do any and
all things Bank determines may be necessary or appropriate to carry out or
enforce the obligations of Cardholders under Credit Card Agreements; and (vii)
to take any action which any Retailer is obligated to take hereunder if
Retailers fail to take such action, including without limitation, the execution
of Uniform Commercial Code financing statements. The limited power of attorney
conferred hereby is deemed a power coupled with an interest and shall be
irrevocable.
SECTION 14.13 CONFIDENTIAL INFORMATION.
(a) All proprietary and non-public material and information supplied by
any Retailer to Bank or vice versa heretofore or hereafter, or supplied to any
Retailer or Bank by Cardholders or applicants for Credit Cards, including,
without limitation, (i) the pricing and other financial terms of this Agreement,
(ii) information concerning the parties' marketing plans, objectives, financial
results and employee compensation and benefits, and (iii) the Cardholder List,
is confidential and proprietary ("Confidential Information"). Notwithstanding
the foregoing, however, Confidential Information shall not include any
information which (i) at the time of disclosure by one party hereto or
thereafter is generally available or known to the public (other than as a result
of an unauthorized disclosure by another party hereto); (ii) was available to
one party on a non-confidential basis from a source other than another party
(provided that such source, to the best of such party's knowledge, was not
obligated to another party to keep such
52
<PAGE>
information confidential); or (iii) was in one party's possession prior to
disclosure by another party to it.
(b) Confidential Information shall be used by each party solely in the
performance of its obligations or the exercise of its rights pursuant to this
Agreement. Each party shall receive Confidential Information in confidence and
not disclose Confidential Information to any third party, except (i) as may be
necessary to perform its obligations or exercise its rights pursuant to this
Agreement or to effect a securitization or participation, (ii) as may be agreed
upon in writing by the other parties, or (iii) as otherwise required by law or
judicial or administrative process. Each party will use its best efforts to
ensure that its officers, employees, and agents take such action as shall be
necessary or advisable to preserve and protect the confidentiality of
Confidential Information. Upon written request or upon the termination of this
Agreement, each party shall destroy or return to the other party all
Confidential Information in its possession or control, subject to each party's
respective document retention policies with respect to information required to
be maintained by regulatory authorities and subject to the Bank's rights to
retain information and documents necessary to administer and operate the
Program.
SECTION 14.14 NO PARTNERSHIP. Nothing contained in this Agreement shall be
construed to constitute Bank and any Retailer (or Parent) as partners, joint
venturers, principal and agent, or employer and employee.
SECTION 14.15 THIRD PARTIES. Bank shall have the right to engage third
parties to perform services pursuant to this Agreement. Notwithstanding the
foregoing, this Agreement is not for the benefit of any third party and shall
not be deemed to give any right or remedy to any such third party.
SECTION 14.16 INTERPRETATION. As each of the parties have contributed to
the drafting of the language of this Agreement, it is agreed and understood that
in any interpretation of this Agreement, the language utilized will be construed
equally as and between the parties without regard to which party provided the
language of any particular provision.
SECTION 14.17 MEETINGS OF PARTIES. From time to time, upon the request of
any party hereto, the parties agree to meet and confer in good faith regarding
any aspect of the Program including, without limitation, any proposed changes in
operating procedures, reserve requirements, and Promotion Reserve Holdbacks.
Except as expressly provided elsewhere in this Agreement, however, no party
hereto shall be required to take any action, refrain from taking any action or
make any changes to the Program except as is acceptable to such party in its
sole discretion and except as expressly provided elsewhere in this Agreement, no
party's refusal to take such action, to refrain from taking such action or to
making any proposed change shall be subject to challenge by any other party
hereto.
SECTION 14.18 JOINT AND SEVERAL OBLIGATIONS. Each obligation of a Retailer
hereunder shall be a joint and several obligation of all Retailers. For all
purposes of this Agreement, notice given to or demand made upon any Retailer
shall be deemed to be notice given to or demand
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<PAGE>
made upon all Retailers. Retailers covenant for the benefit of Bank to enter
into such agreements and to make such other arrangements as may be necessary
to ensure that each Retailer receives copies of all such notices or demands
from the other Retailers hereunder. Whenever this Agreement requires that
payments be made to any Retailer, Bank may make such payments directly to any
Retailer, which Retailer shall receive such payment in trust for itself and
all other Retailers entitled to all or any portion thereof. Bank shall have
no obligation to ensure and no liability for the correct application of any
payments made by it among the different Retailers.
SECTION 14.19 MULTIPLE COUNTERPARTS. This Agreement may be executed in any
number of multiple counterparts, all of which shall constitute but one and the
same original.
54
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IN WITNESS WHEREOF, Bank and Retailers have caused this Agreement to be
executed by their respective officers thereunto duly authorized as the date
first above written.
SELECT COMFORT CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President and Controller
-------------------------------
SELECT COMFORT RETAIL CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
SELECT COMFORT DIRECT CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
SELECT COMFORT SC CORPORATION
By /s/ Tom Erickson
-------------------------------------
Its Vice President & Controller
-------------------------------
MONOGRAM CREDIT CARD BANK OF GEORGIA
By /s/ Richard A. Hayes
-------------------------------------
Its Vice Chairman
-------------------------------
55
<PAGE>
FIRST AMENDMENT TO CONSUMER CREDIT CARD PROGRAM AGREEMENT
THIS FIRST AMENDMENT TO CONSUMER CREDIT CARD PROGRAM AGREEMENT
("Amendment") is made as of the 18th day of November, 1997, by and among
Monogram Credit Card Bank of Georgia, a Georgia banking corporation with its
principal place of business at 7840 Roswell Road, Building 100, Suite 210,
Atlanta, Georgia 30350 (together with its successors, assigns and transferees,
the "Bank") and Select Comfort Corporation, Select Comfort Retail Corporation,
Select Comfort Direct Corporation, and Select Comfort SC Corporation, each a
Minnesota corporation and each having its principal place of business at 6105
Trenton Lane North, Minneapolis, Minnesota 55442 (jointly and severally, the
"Retailers").
R E C I T A L S
A. Retailers and Bank are parties to that certain Consumer Credit Program
Agreement dated as of May 22, 1997 (the "Program Agreement") pursuant to which
Bank has agreed to extend credit to qualified customers of Retailers for the
purchase of certain goods and services.
B. Pursuant to the terms of the Program Agreement, Retailers and Bank
have agreed to share losses incurred by Bank on accounts originated by Bank
under the Program Agreement based upon an agreed loss sharing formula. The
parties hereto now desire to amend the loss sharing formula and to provide
additional reserves in support thereof in order to induce Bank to make
adjustments to the credit standards applied in evaluating applications for new
accounts and requests for credit thereunder.
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:
AGREEMENT
1. AMENDMENT TO PROGRAM AGREEMENT.
a. AMENDMENT TO DEFINITIONS. The definition of "Liquidation Reserve
Factor" in Section 1.01 of the Program Agreement is hereby deleted and the
following substituted in its stead:
"Liquidation Reserve Factor" means XXXXX. [A portion of this section
have been omitted pursuant to a request for confidential treatment under Rule
406 under the Securities Act of 1933, as amended. A copy of this section with
the portion intact has been filed separately with the Securities and Exchange
Commission]
b. AMENDMENT TO SECTION 5.01(b). Section 5.01(b) of the Program
Agreement is hereby amended as follows:
(i) Subclause (iv) is hereby deleted and the following
substituted in its stead:
(iv) an amount equal to the sum of (A)
the product of (1) the In-Store Sale
Factor and (2) the total amount
(including any applicable sales and use
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tax and shipping charges) of the
Purchases on Accounts identified in such
Charge Transaction Data other than
Purchases made in respect of
telemarketing, mail order or catalog
sales ("In-Store Purchases") and (B) the
product of (1) the Direct Sale Factor
and (2) the total amount (including any
applicable sales and use tax and
shipping charges) of the Purchases on
Accounts identified in such Charge
Transaction Data which were Purchases
made in respect of telemarketing, mail
order or catalog sales ("Direct
Purchases").
(ii) The following two sentences shall be added to the end of
Section 5.01(b):
As used herein "Direct Sale Factor" and
"In-Store Sale Factor" shall mean XXX
and XXX, respectively. Retailers agree
not to submit Charge Transaction Data to
Bank under this Agreement if the
weighted average for any Billing Period
of the Direct Sale Factor and the In-Store
Sale Factor (based upon the sales volumes
for Direct Purchases and In-Store Purchases
for such Billing Period, respectively)
would exceed XXXXX.
[Portions of this section have been omitted
pursuant to a request for confidential
treatment under Rule 406 under the Securities
Act of 1933, as amended. A copy of this
section with the portions intact has been
filed separately with the Securities and
Exchange Commission]
c. AMENDMENT TO SECTION 6.03(b). Section 6.03(b) of the Program
Agreement is hereby deleted and the following substituted in its stead:
(b) As provided in Section 5.01, in connection with each Purchase,
Bank shall deduct from amounts otherwise payable to Retailers in
respect thereof, an amount equal to the sum of (i) the product of (A)
the In-Store Sale Factor and (B) the total amount (including any
applicable sales and use tax and shipping charges) of the In-Store
Purchases on Accounts identified in such Charge Transaction Data and
(ii) the product of (A) the Direct Sale Factor and (B) the total
amount (including any applicable sales and use tax
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<PAGE>
and shipping charges) of the Direct Purchases on Accounts identified
in such Charge Transaction Data. Such amounts shall be credited to
the Liquidation Reserve.
d. AMENDMENT TO SECTION 6.05(b). Section 6.05(b) of the Program
Agreement is hereby amended by deleting the reference to "XXXXX" and
substituting a reference to "XXXXX" in its stead. [Portions of this section
have been omitted pursuant to a request for confidential treatment under Rule
406 under the Securities Act of 1933, as amended. A copy of this section with
the portions intact has been filed separately with the Securities and Exchange
Commission]
e. AMENDMENT TO SECTION 6.05(c). Section 6.05(c) of the Program
Agreement is hereby amended by deleting the reference to "XXXX" and substituting
a reference to "XXXX" in its stead. [Portions of this section have been
omitted pursuant to a request for confidential treatment under Rule 406 under
the Securities Act of 1933, as amended. A copy of this section with the
portions intact has been filed separately with the Securities and Exchange
Commission]
2. CONDITIONS TO EFFECTIVENESS. Notwithstanding anything contained
herein to the contrary, this Amendment shall not become effective until each of
the following conditions is fully and simultaneously satisfied on or prior to
November 21, 1997:
a. CORPORATE AUTHORITY. Bank shall have received in form and
substance reasonably satisfactory to it such evidence of Retailers' corporate
authority to execute, deliver and perform the Program Agreement as amended
hereby as Bank shall request.
b. REPRESENTATIONS TRUE; NO DEFAULT. The representations and
warranties of Retailers in Section 8.03 of the Program Agreement shall be true
on and as of the effective date of this Amendment with the same force and effect
as if made on and as of such date. No Event of Default or Default (as such
terms are defined in the Program Agreement) shall have occurred and be
continuing or will occur as a result of the execution of this Amendment.
3. NO FURTHER AMENDMENT. Except as expressly modified by this Amendment,
the Program Agreement shall remain unmodified and in full force and effect and
the parties hereby reaffirm and ratify their respective obligations thereunder.
4. MISCELLANEOUS.
a. ENTIRE AGREEMENT; ETC. This Amendment comprises the entire
agreement of the parties with respect to the subject matter hereof and
supersedes all prior oral or written agreements, representations or commitments.
b. GOVERNING LAW. This Amendment and the rights and obligations of
the parties hereto shall be construed and interpreted in accordance with the
laws of the State of Georgia.
c. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original, and all of which taken
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers or agents thereunder duly authorized as of
the date first above written.
SELECT COMFORT CORPORATION
By /s/ D. J. McAthie
-----------------------------------------------
Its Executive Vice President, CFO and CEO
-----------------------------------------
SELECT COMFORT RETAIL CORPORATION
By /s/ Thomas Erickson
-----------------------------------------------
Its VP - Finance
-----------------------------------------
SELECT COMFORT DIRECT CORPORATION
By /s/ Charles Dorsey
-----------------------------------------------
Its President
-----------------------------------------
SELECT COMFORT SC CORPORATION
By /s/ D. J. McAthie
-----------------------------------------------
Its Executive Vice President, CFO and CEO
-----------------------------------------
MONOGRAM CREDIT CARD BANK OF GEORGIA
By /s/ Richard A. Hayes
-----------------------------------------------
Its Vice Chairman
-----------------------------------------
59
<PAGE>
Exhibit 10.13
MAJOR MERCHANT AGREEMENT
THIS Agreement ("AGREEMENT"), by and between FIRST NATIONAL BANK OF OMAHA
("FNBO"), a national banking association with principal offices at One First
National Center, Omaha, Nebraska, and SELECT COMFORT CORPORATION with its
subsidiaries SELECT COMFORT SO. CAROLINA CORPORATION, SELECT COMFORT RETAIL
CORPORATION, and SELECT COMFORT DIRECT CORPORATION ("MERCHANT") a Minnesota
corporation with offices at 6105 Trenton Lane North, Minneapolis, Minnesota
55442-3240, shall become effective on the date executed by a duly authorized
representative of FNBO. FNBO and MERCHANT shall be collectively known hereafter
as the "PARTIES."
A WHEREAS FNBO is a Member of VISA U.S.A., Inc. ("VISA") and MasterCard
International, Inc. ("MASTERCARD") and provides transaction processing and other
services ("SERVlCES") in relation to financial services cards ("CARDS") issued
by VISA, MASTERCARD and other financial service card organizations. VISA,
MASTERCARD, and the other financial service card organizations shall be
collectively known as "ASSOCIATIONS";
B. WHEREAS MERCHANT, in furtherance of its business operations, wishes to
accept CARDS issued by the members of the ASSOCIATIONS and have FNBO process the
resulting transactions ("SALES") pursuant to the terms and conditions set out
below;
C. WHEREAS ASSOCIATIONS and FNBO each have adopted rules and regulations
relating to all aspects of SALES processing. Such rules and regulations, as
amended from time to time, are incorporated by this reference herein and shall
be referred to as the "RULES";
D. WHEREAS MERCHANT understands that this is an agreement for transaction
processing and that the fees for the services herein are calculated based on the
term of this AGREEMENT, the number of transactions processed, and the method of
processing.
NOW THEREFORE, in consideration of the mutual promises made herein and other
valuable consideration, receipt and sufficiency of which are hereby
acknowledged, the PARTIES do hereby agree as follows:
1. GENERAL:
1.1 The CARDS designated herein will be processed under the terms and
conditions of AGREEMENT as long as FNBO is contractually permitted to
offer such SERVICES by the respective ASSOCIATIONS. At the time of this
contract, FNBO is not aware of any condition, issue or circumstance that
would prevent FNBO providing services.
1.2 MERCHANT agrees to submit all SALES from CARDS accepted in MERCHANT's
business as defined in SCHEDULE A ("BUSINESS"), to FNBO in accordance
with the RULES and pursuant to the terms of this AGREEMENT.
1.3 MERCHANT agrees that this AGREEMENT is confidential and will not disclose
it to any third party without the prior written consent of FNBO.
1
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1.4 MERCHANT and FNBO agree to abide by the RULES. FNBO and ASSOCIATIONS may
from time to time amend the RULES or operating procedures related to
SALES and SERVICES to be effective upon thirty (30) days written notice
to MERCHANT.
1.5 MERCHANT has been supplied with the RULES and by signing AGREEMENT,
acknowledges that it has received and understands them.
1.6 Submission by MERCHANT of SALES at any time after thirty (30) days from
the date of receipt by MERCHANT of amended RULES to MERCHANT's address
via certified mail for processing statements, shall be evidence that
MERCHANT has received the amended RULES and has agreed to abide by them.
2. SPECIFIC OPERATING PROCEDURES:
2.1 MERCHANT agrees that it will comply with all CARD Acceptance Procedures
in RULES for each SALE, including, but not limited to the following:
2.1.1 MERCHANT agrees that it will obtain and record a valid positive
authorization for all SALES in accordance with the RULES before
submitting them to FNBO for processing; and
2.1.2 MERCHANT must be able to prove, by evidence of a terminal capture of a
magnetic stripe or signed sales draft showing imprint of the CARD, that
the CARD was present at the time of SALE, unless specifically set up for
Mail Order and Telephone Order ("MO/TO") transactions.
3. PAYMENT OF SUMS DUE:
3.1 MERCHANT agrees to pay FNBO the fees as set out in SCHEDULE B and other
sums owed to FNBO, (collectively "FEES") for SERVICES as set forth in
this AGREEMENT as amended from time to time.
3.2 As set out in the SCHEDULE B, discount ("DISCOUNT") is calculated as a
per item charge based on gross items (SALES and credits) processed per
month by FNBO for MERCHANT and generally includes "Processing,"
"Authorizations," "Assessments," and "Interchange." Assessments and
Interchange are the standard fees that the ASSOCIATIONS charge for the
clearing of SALES transactions and are subject to change by the
ASSOCIATIONS; FNBO has no direct control over these fees. Any adjustment
in Interchange and Assessments by the ASSOCIATIONS may result in an
adjustment in the DISCOUNT charged to MERCHANT. FNBO will notify
MERCHANT of any change in FEES caused by action of ASSOCIATIONS, in
writing, prior to any such change becoming effective. Notice to MERCHANT
of any change in FEES caused by ASSOCIATIONS may be less than thirty (30)
days.
3.3 DISCOUNT is quoted by FNBO based on the information supplied by MERCHANT
("ASSUMPTIONS"). MERCHANT agrees that the FEES are based on the term of
this AGREEMENT, the ASSUMPTIONS, and the method of processing. MERCHANT
agrees that the ASSUMPTIONS are material facts in the calculation of the
DISCOUNT
2
<PAGE>
and other FEES. MERCHANT agrees that if the ASSUMPTIONS are
shown to be materially incorrect, FNBO may amend FEES as set out herein
to reflect such change. MERCHANT agrees to pay such amended FEES.
3.4 Unless provided otherwise herein, FNBO may amend the PASS THROUGH FEES or
ASSOCIATION FEES on thirty (30) days written notice to MERCHANT.
3.5 MERCHANT is obligated to pay FNBO for all CHARGEBACKS. "CHARGEBACKS" are
SALES submitted for credit in favor of the Issuing Bank or cardholder as
a result of an Issuing Bank or cardholder dispute. MERCHANT understands
that FNBO is in no way financially responsible for CHARGEBACKS. Failure
to comply with the RULES will increase MERCHANT's exposure to
CHARGEBACKS. MERCHANT's obligation to pay chargebacks shall survive the
termination or expiration of AGREEMENT.
3.6 In the event that ASSOCIATIONS should levy a fine or penalty or assess a
charge to FNBO as a result of MERCHANT's SALES or CHARGEBACK activity
that is inconsistent with the RULES, MERCHANT agrees to pay such fines,
penalties, or charges, and any administrative fees associated with such
fines, penalties, or charges.
3.7 MERCHANT shall establish a designated account ("DESIGNATED ACCOUNT") for
the credit and debit of sums between the PARTIES. MERCHANT agrees to
maintain a positive balance in the DESIGNATED ACCOUNT. If AGREEMENT is
terminated for any reason, the DESIGNATED ACCOUNT shall be maintained for
a period of one hundred twenty (120) days in order to secure the
obligations of MERCHANT hereunder unless otherwise agreed in writing by
the PARTIES hereto.
3.8 FNBO agrees to pay MERCHANT for SALES less CHARGEBACKS and FEES owed to
FNBO by MERCHANT. FNBO shall deduct CHARGEBACKS and FEES from incoming
transactions or debit the same from MERCHANT's DESIGNATED ACCOUNT.
3.9 In the event that FNBO invoices MERCHANT for any FEES and MERCHANT does
not pay such sums within thirty (30) days from date of receipt of
invoice, FNBO will charge, and MERCHANT agrees to pay, a late fee of one
and one-half percent (1.5%) on the balance outstanding on the unpaid
invoices accruing on a monthly basis.
3.10 If MERCHANT breaches AGREEMENT or if FNBO identifies suspicious or
irregular activity related to SALES, FNBO may refuse to process SALES
and/or may hold funds pending the cure of such breach or resolution of
such activity.
3.11 Voice Assisted Calls are considered to be any call to the Voice
Authorization Center for any reason other than a Voice Authorization.
3.12 In the event AGREEMENT is terminated early for any reason other than set
out in Section 5.1, 5.2.1, 5.2.2, or 5.2.4, MERCHANT agrees to pay FNBO a
liquidated damages sum ("LIQUIDATED DAMAGES"). The LIQUIDATED DAMAGES
amount shall be determined by computing the number of months remaining
from the effective date of termination to the end of the INITIAL TERM and
multiplying that number by
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two-thousand dollars ($2,000.00). MERCHANT and FNBO agree that
the damages suffered by FNBO as a result of such early
termination would be extremely difficult to calculate with
precision. For that reason, the PARTIES agree that the LIQUIDATED
DAMAGES should be computed as set forth above.
3.13 MERCHANT agrees that LIQUIDATED DAMAGES shall also be due to FNBO if
MERCHANT discontinues submitting SALES for processing during the term of
AGREEMENT.
3.14 In the event either PARTY takes any action against the other PARTY to
collect any FEES or monies due, and judgment is obtained, the indebted
PARTY agrees to pay all costs of collection, including but not limited
to, attorney's fees, to the extent allowed by law.
4. TERM OF AGREEMENT:
4.1 The initial term of this AGREEMENT shall be for the term of three (3)
years (the "INITIAL TERM") commencing on the date this AGREEMENT is
executed by authorized agents of FNBO and MERCHANT. The INITIAL TERM
shall expire in the year 2000 on the last day of same month in which this
AGREEMENT was executed.
At the expiration of the INITIAL TERM, this AGREEMENT will automatically renew
for successive one (1) year periods ("RENEWAL TERM") unless terminated as set
out below.
5. TERMINATION OF AGREEMENT:
5.1 This AGREEMENT, except for any included terminal rental agreement, may be
terminated by FNBO at any time effective upon ninety (90) days written
notice.
5.2 This AGREEMENT may be terminated by MERCHANT as follows:
5.2.1 Upon FNBO's default of any material obligation to MERCHANT
hereunder and the failure of FNBO to cure such default within
thirty (30) days after written notice of such default; or
5.2.2 Upon written notice of non-renewal at least thirty (30) days
prior to the commencement of any RENEWAL TERM; or
5.2.3 On ninety (90) days written notice of termination accompanied
by payment to FNBO of the LIQUIDATED DAMAGES due at that time.
5.2.4 On ninety (90) days written notice of termination in the event
that FNBO fails to comply with Section 1.3 in SCHEDULE B.
5.3 In order to protect the ASSOCIATIONS and FNBO, FNBO may terminate this
AGREEMENT effective immediately for any of the following reasons:
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5.3.1 MERCHANT's default of any material obligation to FNBO hereunder
and the failure of MERCHANT to cure such default within thirty
(30) days after written notice by FNBO of such default;
5.3.2 In the event of insolvency, receivership or voluntary or
involuntary bankruptcy; or in the event of an assignment of any
of MERCHANT's assets for the benefit of MERCHANT's property
creditors, or in the event that any part of MERCHANT's property
is or becomes subject to any levy, seizure, assignment or sale
for or by any creditor or governmental agency without being
released within thirty (30) days thereafter; or
5.3.3 If MERCHANT fails to pay any FEES when due within ten (10) days
of written notification of delinquent payment, delivered to
MERCHANT's address via certified mail; or
5.3.4 If MERCHANT has misrepresented or omitted any material
information provided to FNBO; or
5.3.5 If MERCHANT is in breach of the RULES and has not taken
corrective action within thirty (30) days of notification of a
breach of the RULES or such period as mandated by the
ASSOCIATIONS; or
5.3.6 If MERCHANT, after FNBO's request, fails to send copies of
SALES drafts to FNBO; or
5.3.7 If MERCHANT submits for processing SALES that were not
originated as a result of a direct SALE transaction between a
cardholder and MERCHANT in the normal course of business
("LAUNDERING"); or
5.3.8 If the number of CHARGEBACKS received by MERCHANT in any one
month exceed one percent (1%) of SALES for that month in dollar
amount or transaction amount; or
5.3.9 If the number of RETURNS received by MERCHANT in any one month
exceed twenty percent (20%) of SALES for that month in dollar
amount or transaction amount
5.3.10 In the event of a material change of BUSINESS; or
5.3.11 In the event that MERCHANT, its principal, or associated
parties, is identified by the ASSOCIATIONS under any program
designed to monitor merchants; or
5.3.12 If MERCHANT fails to maintain an Accrued Return Cost in
accordance with Generally Accepted Accounting Principles
("GAAP").
5.4 Termination of the AGREEMENT shall be effective the last business day of
the month following the appropriate notice period, regardless of which
day of the month notice is given.
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5.5 Upon the notice of termination with cause or expiration of the AGREEMENT,
FNBO is entitled to retain sufficient funds to cover anticipated FEES on
a maximum of three (3) months sales. In the event that there is not
enough money retained to cover the anticipated FEES, FNBO may require
MERCHANT to deposit sufficient funds. This sum will be retained by FNBO
for a period of one hundred twenty (120) days from the date of the last
SALE processed by MERCHANT under AGREEMENT. FEES due to FNBO received
during this period will be debited from this sum. At the end of the
period defined above FNBO will release to MERCHANT the balance of the
sums retained, plus accrued interest of 1.5% per month, net of any FEES
that are then being processed or disputed.
5.6 Upon the notice of termination or expiration of the AGREEMENT, FNBO is
entitled to retain funds equal to four (4) times the monthly incoming
CHARGEBACK volume (as calculated from VISA and MASTERCARD system reports
for MERCHANT) averaged over the prior four (4) calendar months to cover
anticipated CHARGEBACKS. In the event that there is not enough money
retained to cover the anticipated CHARGEBACKS, FNBO may require MERCHANT
to deposit sufficient funds. This sum will be retained by FNBO for a
period of one hundred twenty (120) days from the date of the last SALE
processed by MERCHANT under AGREEMENT. CHARGEBACKS received during this
period will be debited from this sum. At the end of the period defined
above FNBO will release to MERCHANT the balance of the sums retained,
plus accrued interest of 1.5% per month, net of any CHARGEBACKS that are
then being processed or disputed.
6. BANKRUPTCY:
6.1 It is not the intention of the PARTIES that FNBO remain obligated to
continue processing SALES in the event of a Bankruptcy filing by
MERCHANT. Upon filing voluntary or involuntary bankruptcy proceedings by
or against MERCHANT, MERCHANT must notify FNBO in writing within five (5)
days. Notification must be sent by certified mail to FNBO at the address
for NOTICES set out herein.
6.2 Credits to MERCHANT's DESIGNATED ACCOUNT and other payments to MERCHANT
are provisional and the PARTIES agree that AGREEMENT is a contract
whereby FNBO is extending financial accommodations to MERCHANT within the
meaning of Section 365 of the Bankruptcy Code as amended from time to
time. The right of MERCHANT to receive any amounts due or to become due
from FNBO is expressly subject and subordinate to the CHARGEBACKS,
setoff, lien, and security interest rights of FNBO under this AGREEMENT
without regard to whether such CHARGEBACKS, setoff, lien, and/or security
interest rights are being applied to claims that are liquidated,
unliquidated, fixed, contingent, matured, or unmatured.
7. INFORMATION AND DOCUMENTATION:
7.1 MERCHANT shall furnish FNBO with such financial reports and statements as
FNBO may reasonably require which may include, but not be limited to the
following: (i) MERCHANT will
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provide to FNBO a copy of its Form 10K and Annual Report within one
hundred twenty (120) days of the close of its fiscal year; and (ii)
MERCHANT will provide to FNBO copies of its Form 10Q within sixty
(60) days of the close of the first three (3) fiscal quarters.
7.2 If in the opinion of FNBO, information received or discovered about
MERCHANT reflects a materially adverse change in status, or in the event
that any reasonable information requested by FNBO is not received, FNBO
may withhold the payment for SALES or require a reserve of funds be
deposited in an account at FNBO with the deposit established to cover
MERCHANT's obligations under AGREEMENT.
7.3 MERCHANT is supplied with monthly reports by FNBO regarding MERCHANT's
SALES activity. It is MERCHANT's sole responsibility to report any error
or discrepancies detected by MERCHANT in writing to FNBO within ninety
(90) days following MERCHANT's receipt of the monthly report. After such
period, MERCHANT will be deemed to have accepted the monthly reports as
delivered.
8. PROCESSING RESTRICTIONS:
8.1 MERCHANT understands that FNBO is not responsible for and is not able to
provide customer service for the POS devices installed by and/or operated
by any Third Party with which MERCHANT has contracted. MERCHANT should
contact the Third Party for service in respect of this equipment.
MERCHANT shall not allow any Third Party to install, remove, or modify
any terminal software application at MERCHANT's location without the
express written consent of FNBO. MERCHANT understands and agrees that
FNBO can only process SALES that are received by FNBO, and that any Third
Party is responsible for ensuring that the SALES are formatted and
transmitted to FNBO in accordance with the then current FNBO and
ASSOCIATIONS' requirements. MERCHANT also understands and agrees that in
the event that a Third Party presents SALES transactions that are not in
accordance with the then current ASSOCIATIONS' requirements that the FEES
charged to MERCHANT by FNBO may increase.
8.2 MERCHANT agrees that it will not materially change its BUSINESS or the
method in which it markets or sells the goods and services of BUSINESS
without informing FNBO. FNBO may only process SALES from BUSINESS as
defined in the AGREEMENT.
9. WARRANTIES AND INDEMNITIES:
9.1 MERCHANT understands that FNBO merely provides processing services for
SALES and is neither a partner in MERCHANT's business operations nor a
guarantor of the receipt by MERCHANT of the proceeds of SALES.
Furthermore, FNBO does not guarantee that SALES will not be subject to
CHARGEBACKS. However, this Section does not eliminate FNBO's legal
obligation to remit proceeds of SALES to MERCHANT nor limit MERCHANT's
ability to pursue payment of SALES proceeds submitted to FNBO in
accordance with the terms of this AGREEMENT.
9.2 MERCHANT warrants that it has not been terminated from depositing SALES
with any other member of the ASSOCIATIONS.
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9.3 MERCHANT warrants that at the time of depositing SALES for processing (i)
it has the right to assign such SALES to FNBO and does by this reference
assign all its rights, title, and interest to payment for such SALES to
FNBO so that FNBO may process SALES under AGREEMENT; (ii) it has no
knowledge of any fact that would impair the collectability of the SALES;
and (iii) that the SALES represent a valid obligation of the cardholder
in the amount indicated for merchandise sold and delivered or services
rendered to the cardholder by the MERCHANT only and does not involve any
element of credit for any other purpose.
9.4 Each PARTY agrees to indemnify and hold harmless the other PARTY from and
against any claims, demands, or judgments, made or recovered against it
and arising out of any breach by either PARTY of the terms of this
AGREEMENT or arising from any act or omission by either PARTY which
violates any applicable federal, state, or local laws, regulations, or
the RULES. The PARTY seeking indemnification (the "INDEMNIFIED PARTY")
shall promptly notify the PARTY from whom indemnification is sought (the
"INDEMNIFYING PARTY") of the claim and, when known, all of the facts
constituting the basis for such claim. The INDEMNIFYING PARTY shall be
entitled to control the defense thereof with counsel reasonably
satisfactory to the INDEMNIFIED PARTY and, after notices from
INDEMNIFYING PARTY to the INDEMNIFIED PARTY of its election so to control
the defense thereof, the INDEMNIFYING PARTY shall not be liable to the
INDEMNIFIED PARTY under this Section for any fees of other counsel or any
other expenses with respect to the defense of such proceeding, in each
case subsequently incurred by INDEMNIFIED PARTY in connection with the
defense thereof, other than reasonable costs of investigation. If an
INDEMNIFYING PARTY controls the defense of such a proceeding, no
compromise or settlement thereof may be effected by the INDEMNIFYING
PARTY without the INDEMNIFIED PARTY's consent.
9.5 MERCHANT shall be solely responsible for losses and CHARGEBACKS, incurred
as a result of, or arising out of any fraud including LAUNDERING,
negligence, or willful misconduct on the part of MERCHANT, or one or more
of MERCHANT's employees or agents.
9.6 MERCHANT covenants and warrants that it shall maintain a positive net
worth during the term of this AGREEMENT. If MERCHANT fails to maintain a
positive net worth during the term of this AGREEMENT, FNBO may, at its
option, immediately terminate this AGREEMENT.
9.7 FNBO hereby represents that the entering into of this AGREEMENT has been
duly authorized by FNBO and that this AGREEMENT constitutes a legal,
valid and binding obligation of FNBO, and is enforceable against FNBO in
accordance with its terms.
9.8 FNBO hereby represents that it has the full legal power and authority to
enter into performance obligations under this AGREEMENT.
10. NOTICES:
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10.1 All notices required under this AGREEMENT shall be written notices
effective, unless otherwise stated in AGREEMENT, upon the earlier of
actual receipt thereof or the third (3rd) business day following such
notices being deposited postage prepaid in the United States Postal
System. Additionally, notices may be delivered via Telecopy and will be
deemed received on the date such notices are sent.
10.2 All notices shall be sent to the following addresses:
IF TO FNBO:
First National Bank of Omaha.
One First National Center
16th & Dodge Street
Box 2196
Omaha, NE 68103-0196
Attention: Merchant Legal and Compliance
10.3 If to MERCHANT: At the address set out in SCHEDULE A hereto or such
alternative address as designated in writing by MERCHANT.
10.4 Either PARTY may designate alternate addresses by giving the other
fourteen (14) days written notice of the change in address.
11. MISCELLANEOUS:
11.1 FNBO, may from time to time, delegate duties under AGREEMENT without
giving notice to MERCHANT, provided, however, that FNBO will remain
liable to MERCHANT for any obligations existing under AGREEMENT. Except
as expressly provided in AGREEMENT, MERCHANT may not assign its rights or
delegate its responsibilities under this AGREEMENT without the prior
written consent of FNBO, which reasonable consent will not be withheld.
11.2 This AGREEMENT shall be governed by and construed in accordance with the
laws of the State of Nebraska. The PARTIES also agree that in the event
of any dispute regarding this AGREEMENT, the courts of the State of
Nebraska shall have and be vested with personal jurisdiction over the
PARTIES.
11.3 No delay or failure by either PARTY to exercise any right under
AGREEMENT, and no partial or single exercise of that right, shall
constitute a waiver of that right or any other right, unless expressly
provided for in AGREEMENT.
11.4 Neither PARTY is liable nor responsible for any failure or delay in
performance caused by any Act of God, strikes, flood, fire, war, public
enemy, electrical or equipment failure, failures by third parties, or
other events beyond their control.
11.5 The obligations of all PARTIES incurred prior to the effective date of
termination of AGREEMENT will survive the termination of AGREEMENT. In
the event that any portion of AGREEMENT is held invalid or unenforceable
for any reason, it is agreed that any invalidity or unenforceability will
not affect the remainder of the same and the
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remaining provisions will remain in full force and effect. The PARTIES
agree that any Court of competent jurisdiction may modify any
objectionable provision of the AGREEMENT so as to render it valid,
reasonable and enforceable. 11.6 This AGREEMENT may be amended or
modified by mutual consent of the PARTIES.
11.7 By signing the AGREEMENT, MERCHANT represents that it has the full legal
power and authority to enter into performance obligations under
AGREEMENT. MERCHANT also represents that the entering into of this
AGREEMENT has been duly authorized by MERCHANT, that the signer is a duly
authorized signatory for the MERCHANT and that this AGREEMENT constitutes
a legal, valid, and binding obligation of MERCHANT and is enforceable
against MERCHANT in accordance with its terms.
11.8 FNBO agrees not to use any information supplied by MERCHANT in the
Purchasing Card Information which is required for acceptance of
purchasing cards, in its decision as to whether to accept MERCHANT for
processing. MERCHANT agrees to hold FNBO harmless from any and all
claims relating to the collection, processing, dissemination, and use or
misuse of the information contained in the Purchasing Card Information.
MERCHANT acknowledges that the information from the Purchasing Card
Information will be sent to MERCHANT's corporate customers who pay with a
purchasing card. MERCHANT agrees that FNBO is not responsible for any
actions or omissions of others regarding this information.
11.9 With respect to Sections 2.5 and 18.2 of the RULES, FNBO acknowledges
that MERCHANT submits SALES for processing prior to shipping of products.
11.10 This AGREEMENT constitutes the entire understandings of the PARTIES and
supersedes all prior contracts, agreements, and negotiations between the
PARTIES whether verbal or written, as to the matter contained herein.
IN WITNESS WHEREOF, the PARTIES hereto have caused this AGREEMENT to be executed
by their duly authorized officers, effective as of the date executed by FNBO.
First National Bank of Omaha Select Comfort, Inc.
By: /s/ Nick Baxter By: /s/ D.J. McAthie
------------------------------ -----------------------------------
Print Name: Nick Baxter Print Name: D.J. McAthie
---------------------- ---------------------------
Title: Vice President Title: EVP - CFO & CAO
--------------------------- --------------------------------
Date: 12/19/97
----------------------------
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Exhibit 10.14
As Adopted
SELECT COMFORT CORPORATION
1990 OMNIBUS STOCK OPTION PLAN
(AS AMENDED THROUGH AUGUST 28, 1997)
ARTICLE 1. ESTABLISHMENT AND PURPOSE
1.1 ESTABLISHMENT. Select Comfort Corporation (the "Company") hereby
establishes a plan providing for the grant of stock options to certain eligible
employees, directors and consultants of the Company and its subsidiaries. This
plan shall be known as the 1990 Omnibus Stock Option Plan (the "Plan").
1.2 PURPOSE. The purpose of the Plan is to advance the interests of
the Company and its shareholders by enabling the Company and its subsidiaries to
attract and retain persons of ability as employees, directors and consultants,
by providing an incentive to such individuals through equity participation in
the Company and by rewarding such individuals who contribute to the achievement
by the Company of its long-term economic objectives.
ARTICLE 2. DEFINITIONS
The following terms shall have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "CHANGE IN CONTROL" means an event described in Section 11.1 below.
2.3 "CODE" means the Internal Revenue Code of 1986, as amended.
2.4 "COMMITTEE" means the entity administering the Plan, as provided in
Article 3 below.
2.5 "COMMON STOCK" means the common stock of the Company, par value
$.0l per share, or the number and kind of shares of stock or other securities
into which such Common Stock may be changed in accordance with Section 4.3
below.
2.6 [This section was deleted in its entirety pursuant to an amendment
on August 28, 1997]
<PAGE>
2.7 "DISABILITY" means the occurrence of an event which constitutes
permanent and total disability within the meaning of Section 22(e)(3) of the
Code.
2.8 "ELIGIBLE PERSONS" means individuals who are (a) full-time or
part-time employees (including, without limitation, officers and directors
who are also employees) of the Company or any Subsidiary, (b) Non-Employee
Directors, prior to the date on which the Company first registers a class of
its equity securities under Section 12 of the Exchange Act, or (c)
consultants to the Company or any Subsidiary.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date:
(a) if the Common Stock is listed or admitted to unlisted trading
privileges on any national securities exchange or is not so listed or
admitted but transactions in the Common Stock are reported on the NASDAQ
National Market System, the mean between the reported high and low sale
prices of the Common Stock on such exchange or by the NASDAQ National
Market System as of such date (or, if no shares were traded on such day, as
of the next preceding day on which there was such a trade); or
(b) if the Common Stock is not so listed or admitted to unlisted
trading privileges or reported on the NASDAQ National Market System, and
bid and asked prices there for in the over-the-counter market are reported
by the NASDAQ System or the National Quotation Bureau, Inc. (or any
comparable reporting service), the mean of the closing bid and asked prices
as of such date, as so reported by the NASDAQ System, or, if not so
reported thereon, as reported by the National Quotation Bureau, Inc. (or
such comparable reporting service); or
(c) if the Common Stock is not so listed or admitted to unlisted
trading privileges, or reported on the NASDAQ National Market System, and
such bid and asked prices are not so reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion.
2.11 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Section 6.5 of the Plan that qualifies as an
incentive stock option within the meaning of Section 422A of the Code.
2.12 "NON-EMPLOYEE DIRECTOR" means any member of the Board who is not an
employee of the Company or any Subsidiary.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Optionee pursuant to Section 6.6 of the Plan that does not qualify
as an Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option, a Non-Statutory Stock
Option or a Director Stock Option.
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2.15 "OPTIONEE" means an Eligible Person who receives one or more
Incentive Stock Options or Non-Statutory Stock Options under the Plan or a
Non-Employee Director who receives a grant of a Director Stock Option under
the Plan.
2.16 "PERSON" means any individual, corporation, partnership, group,
association or other "person" (as such term is used in Section 14(d) of the
Exchange Act), other than the Company, a wholly owned subsidiary of the Company
or any employee benefit plan sponsored by the Company.
2.17 "RETIREMENT" means the retirement of an Optionee pursuant to and in
accordance with the regular retirement plan or practice of the Company or the
Subsidiary employing the Optionee.
2.18 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.19 "SUBSIDIARY" means any corporation that is a subsidiary corporation
of the Company (within the meaning of Section 425(f) of the Code).
2.20 "TAX DATE" means a date defined in Section 6.6(c) of the Plan.
ARTICLE 3. PLAN ADMINISTRATION
The Plan shall be administered by the Board or by a committee of the Board
consisting of not less then two persons; provided, however, that from and after
the date on which the Company first registers a class of its equity securities
under Section 12 of the Exchange Act the Plan shall be administered by the
Board, a majority of which Board and a majority of whom acting on any matter
under the Plan shall be "disinterested persons" as defined by Rule l6b-3 of the
Rules and Regulations of the Securities and Exchange Commission or by a
committee consisting solely of not less than three members of the Board who are
"disinterested persons" within the meaning of Rule l6b-3 of the Rules and
Regulations of the Securities and Exchange Commission. Members of such a
committee, if established, shall be appointed from time to time by the Board,
shall serve at the pleasure of the Board and may resign at any time upon written
notice to the Board. A majority of the members of such a committee shall
constitute a quorum. Such a committee shall act by majority approval of its
members, shall keep minutes of its meetings and shall provide copies of such
minutes to the Board. Action of such a committee may be taken without a meeting
if unanimous written consent thereto is given. Copies of minutes of such a
committee's meetings and of its actions by written consent shall be provided to
the Board and kept with the corporate records of the Company. As used in this
Plan, the term "Committee" will refer either to the Board or to such a
committee, if established. From and after the date on which the Company first
registers a class of its equity securities under Section 12 of the Exchange Act,
no member of the Committee shall be eligible, or shall have been eligible at any
time within the lesser of one year or the period since the Company first
registered a class of its equity securities under Section 12 of the Exchange
Act, to receive an Incentive Stock Option or a Non-Statutory Stock Option under
the Plan.
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In accordance with and subject to the provisions of the Plan, with respect
to Incentive Stock Options and Non-Statutory Stock Options, the Committee shall
select the Optionees from Eligible Persons; shall determine the number of shares
of Common Stock to be subject to such Options granted pursuant to the Plan, the
time at which such Options are granted, the Option exercise price, Option period
and the manner in which each such Option becomes exercisable; and shall fix such
other provisions of such Options as the Committee may deem necessary or
desirable and as consistent with the terms of the Plan. Grants of Director
Stock Options under the Plan and the amount and terms of such Options shall be
automatic, as described in Section 6.7 of the Plan. The Committee shall
determine the form or forms of the agreements with Optionees which shall
evidence the particular terms, conditions, rights and duties of the Company and
the Optionees under Options granted pursuant to the Plan. The Committee shall
have the authority, subject to the provisions of the Plan, to establish, adopt
and revise such rules and regulations relating to the Plan as it may deem
necessary or advisable for the administration of the Plan (other than with
respect to Section 6.7). With the consent of the Optionee affected thereby, the
Committee may amend or modify the terms of any outstanding Incentive Stock
Option or Non-Statutory Stock Option in any manner, provided that the amended or
modified terms are permitted by the Plan as then in effect. Without limiting
the generality of the foregoing sentence, the Committee may, with the consent of
the Optionee affected thereby, modify, extend, renew or accept the surrender of
any outstanding Incentive Stock Option or Non-Statutory Stock Option, to the
extent not previously exercised, and the Committee may authorize the grant of
new Options in substitution therefor to the extent not previously exercised.
Each determination, interpretation or other action made or taken by the
Committee pursuant to the provisions of the Plan shall be conclusive and binding
for all purposes and on all persons, including, without limitation, the Company
and its Subsidiaries, the shareholders of the Company, the Committee and each of
the members thereof, the directors, officers and employees of the Company and
its Subsidiaries, and the Optionees and their respective successors in interest
(except that the Committee shall have no right to exercise any discretion with
respect to Director Sock Options). No member of the Committee shall be liable
for any action or determination made in good faith with respect to the Plan or
any Option granted under the Plan.
From and after the date on which the Company first registers a class of its
equity securities under Section 12 of the Exchange Act, any member of the Board
who is an Eligible Person under the Plan shall have no vote on (a) any proposed
amendment to the Plan or (b) any other matter that might affect such member's
individual interest under the Plan; nor shall such member's presence be counted
in determining whether a quorum is present at any meeting at which a vote
involving the Plan or individual rights thereunder is taken.
ARTICLE 4. STOCK SUBJECT TO THE PLAN
4.1 NUMBER. The maximum number of shares of Common Stock that shall be
reserved for issuance under the Plan shall be 2,800,000, subject to adjustment
upon changes in capitalization of the Company as provided in Section 4.3 below.
The maximum number of shares authorized may be increased from time to time by
approval of the Board and the shareholders of the Company. Shares of Common
Stock that may be issued upon exercise of
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Options shall be applied to reduce the maximum number of shares of Common
Stock remaining available for use under the Plan.
4.2 UNUSED STOCK. Any shares of Common Stock that are subject to an
Option (or any portion thereof) that lapses, expires or for any reason is
terminated unexercised shall automatically again become available for use under
the Plan.
4.3 CAPITAL ADJUSTMENTS. If the number of outstanding shares of Common
Stock is increased or decreased or changed into or exchanged for a different
number or kind of shares of stock or other securities of the Company or of
another corporation by reason of any reorganization, merger, consolidation,
recapitalization, reclassification, stock dividend, stock split, combination of
shares, rights offering or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation) shall make appropriate adjustment as to the number and kind of
securities subject to and reserved under the Plan (including, without
limitation, the number of shares for which Director Stock Options are to be
automatically granted pursuant to Section 6.7) and, in order to prevent dilution
or enlargement of the rights of Optionees, the number and kind of securities
subject to outstanding Options. Any such adjustment in any outstanding Option
shall be made without change in the aggregate purchase price applicable to the
unexercised portion of the Option but with an appropriate adjustment in the
price for each share or other unit of any security covered by the Option.
However, no change shall be made in the terms of any outstanding Incentive Stock
Option as a result of any such change in the corporate structure or shares of
the Company, without the consent of the Optionee affected thereby, that would
disqualify such Incentive Stock Option from treatment under Section 422A of the
Code or would be considered a modification, extension or renewal of an option
under Section 425(h) of the Code.
ARTICLE 5. PARTICIPATION
Optionees who are selected to receive grants of Incentive Stock Options or
Non-Statutory Stock Options shall be those Eligible Persons who, in the judgment
of the Committee, are performing, or during the term of an Option, will perform,
vital services in the management, operation and development of the Company or a
Subsidiary, and significantly contribute or are expected to significantly
contribute to the achievement of long-term corporate economic objectives.
Optionees may be granted from time to time one or more Non-Statutory Stock
Options under the Plan, and Optionees who are employees of the Company or a
Subsidiary may be granted from time to time one or more Incentive Stock Options
under the Plan, in any case as may be determined by the Committee in its sole
discretion. The number, type, terms and conditions of Options granted to
various Eligible Persons need not be uniform, consistent or in accordance with
any plan, whether or not such Eligible Persons are similarly situated. Upon
determination by the Committee that an Option is to be granted to an Optionee,
written notice shall be given such person specifying such terms, conditions,
rights and duties related thereto. Each Optionee shall enter into an agreement
with the Company, in such form as the Committee shall determine and which is
consistent with the provisions of the Plan, specifying the terms, conditions,
rights and duties of Incentive Stock Options and Non-Statutory Stock Options
granted under the Plan. Options shall be deemed to be granted as of the date
specified in the
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grant resolution of the Committee, which date shall be the date of the
related agreement with the Optionee.
ARTICLE 6. TERMS OF OPTIONS
6.1 GRANT OF OPTIONS. An Optionee may be granted one or more Incentive
Stock Options or Non-Statutory Stock Options under the Plan, and the Committee
in its sole discretion may designate whether an Option is to be considered an
Incentive Stock Option or a Non-Statutory Stock Option; provided, however, that
only Optionees who are employees of the Company or a Subsidiary shall be
eligible to be granted Incentive Stock Options. The Committee may grant both an
Incentive Stock Option and a Non-Statutory Stock Option to the same Optionee at
the same time or at different times. Incentive Stock Options and Non-Statutory
Stock Options, whether granted at the same or different times, shall be deemed
to have been awarded in separate grants, shall be clearly identified, and in no
event will the exercise of one Option affect the right to exercise any other
Option or affect the number of shares of Common Stock for which any other Option
may be exercised.
6.2 MANNER OF OPTION EXERCISE. An Option may be exercised by an
Optionee in whole or in part from time to time, subject to the conditions
contained herein and in the agreement evidencing such Option, by delivery, in
person or through certified or registered mail, of written notice of exercise to
the Company at its principal executive office in Maple Grove, Minnesota
(Attention: Secretary), and by paying in full the total Option exercise price
for the shares of Common Stock purchased. Such notice shall be in a form
satisfactory to the Committee and shall specify the particular Option (or
portion thereof) that is being exercised and the number of shares with respect
to which the Option is being exercised. Subject to Section 9.1, the exercise of
the Option shall be deemed effective upon receipt of such notice and payment.
As soon as practicable after the effective exercise of the Option, the Optionee
shall be recorded on the stock transfer books of the Company as the owner of the
shares purchased and the Company shall deliver to the Optionee one or more duly
issued stock certificates evidencing such ownership.
6.3 PAYMENT OF OPTION EXERCISE PRICE. At the time of the exercise of
an Incentive Stock Option or a Non-Statutory Stock Option, the Optionee may
determine whether the total purchase price of the shares to be purchased shall
be paid solely in cash or by transfer from the Optionee to the Company of
previously acquired shares of Common Stock, or by a combination thereof. In the
event the Optionee elects to pay the purchase price in whole or in part with
previously acquired shares of Common Stock, the value of such shares shall be
equal to their Fair Market Value on the date of exercise. The Committee may
reject an Optionee's election to pay all or part of the purchase price with
previously acquired shares of Common Stock and require such purchase price to be
paid entirely in cash. For purposes of this Section 6.3, "previously acquired
shares" shall include both shares of Common Stock that are already owned by the
Optionee at the time of exercise and shares of Common Stock that are to be
acquired pursuant to the exercise of the Option concerned. In its sole
discretion, the Committee may determine either at the time of grant or exercise
of an Incentive Stock Option or a Non-Statutory Stock Option, to permit an
Optionee to pay all or any portion of the purchase price by delivery of a
promissory note in form and substance acceptable to the Committee.
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6.4 RIGHTS AS A SHAREHOLDER. The Optionee shall have no rights as a
shareholder with respect to any shares of Common Stock covered by an Option
until the Optionee shall have become the holder of record of such shares, and no
adjustments shall be made for dividends or other distributions or other rights
as to which there is a record date preceding the date the Optionee becomes the
holder of record of such shares except as the Committee may determine pursuant
to Section 4.3.
6.5 INCENTIVE STOCK OPTIONS.
(a) INCENTIVE STOCK OPTION EXERCISE PRICE. The per share price to
be paid by the Optionee at the time an Incentive Stock Option is exercised
will be determined by the Committee, but shall not be less than (i) 100% of
the Fair Market Value of one share of Common Stock on the date the Option
is granted, (ii) 110% of the Fair Market Value of one share of Common Stock
on the date the Option is granted if, at that time the Option is granted,
the Optionee owns, directly or indirectly (as determined pursuant to
Section 425(d) of the Code), more than 10% of the total combined voting
power of all classes of stock of the Company, any Subsidiary or any parent
corporation of the Company (within the meaning of Section 425(e) of the
Code).
(b) AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK
OPTIONS. Notwithstanding any other provision of the Plan, the aggregate
Fair Market Value (determined as of the date an Incentive Stock Option is
granted) of the shares of Common Stock with respect to which incentive
stock options (within the meaning of Section 422A of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and any other incentive stock option plans of the Company,
any Subsidiary or any parent corporation of the Company (within the meaning
of Section 425(e) of the Code)) shall not exceed $100,000.
(c) DURATION OF INCENTIVE STOCK OPTIONS. The period during which
an Incentive Stock Option may be exercised shall be fixed by the Committee
at the time such Option is granted, but in no event shall such period
exceed ten years from the date the Option is granted or, in the case of an
Optionee that owns, directly or indirectly (as determined pursuant to
Section 425(d) of the Code) more than 10% of the total combined voting
power of all classes of stock of the Company, any Subsidiary or any parent
corporation of the Company (within the meaning of Section 425(e) of the
Code), five years from the date the Incentive Stock Option is granted. An
Incentive Stock Option shall become exercisable at such times and in such
installments (which may be cumulative) as shall be determined by the
Committee at the time the Option is granted. Upon the completion of its
exercise period, an Incentive Stock Option, to the extent not then
exercised, shall expire. Except as otherwise provided in Articles 7 or 11,
all Incentive Stock Options granted to an Optionee hereunder shall
terminate and may no longer be exercised if the Optionee ceases to be an
employee of the Company and all Subsidiaries or if the Optionee is an
employee of a Subsidiary and the Subsidiary ceases to be a Subsidiary of
the Company (unless the Optionee continues as an employee of the Company or
another Subsidiary).
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(d) DISPOSITION OF COMMON STOCK ACQUIRED PURSUANT TO THE EXERCISE
OF INCENTIVE STOCK OPTIONS. Prior to making a disposition (as defined in
Section 425(c) of the Code) of any shares of Common Stock acquired pursuant
to the exercise of an Incentive Stock Option granted under the Plan before
the expiration of two years after the date on which the Option was granted
or before the expiration of one year after the date on which such shares of
Common Stock were transferred to the Optionee pursuant to exercise of the
Option, the Optionee shall send written notice to the Company of the
proposed date of such disposition, the number of shares to be disposed of,
the amount of proceeds to be received from such disposition and any other
information relating to such disposition that the Company may reasonably
request. The right of an Optionee to make any such disposition shall be
conditioned on the receipt by the Company of all amounts necessary to
satisfy any federal, state or local withholding tax requirements
attributable to such disposition. The Committee shall have the right, in
its sole discretion, to endorse the certificates representing such shares
with a legend restricting transfer and to cause a stop transfer order to be
entered with the Company's transfer agent until such time as the Company
receives the amounts necessary to satisfy such withholding requirements or
until the later of the expiration of two years from the date the Option was
granted or one year from the date on which such shares were transferred to
the Optionee pursuant to the exercise of the Option.
(e) WITHHOLDING TAXES. The Company is entitled to withhold and
deduct from future wages of the Optionee, or make other arrangements for
the collection of, all legally required amounts necessary to satisfy any
federal, state or local withholding tax requirements attributable to any
action by the Optionee, including, without limitation, a disposition of
shares of Common Stock described in Section 6.5(d) above, that causes the
Incentive Stock Option to cease to qualify as an incentive stock option
within the meaning of Section 422A of the Code.
6.6 NON-STATUTORY STOCK OPTIONS.
(a) OPTION EXERCISE PRICE. The per share price to be paid by the
Optionee at the time a Non-Statutory Stock Option is exercised will be
determined by the Committee, but shall not be less than 85% of the Fair
Market Value of one share of Common Stock on the date the Option is
granted.
(b) DURATION OF NON-STATUTORY STOCK OPTIONS. The period during
which a Non-Statutory Stock Option may be exercised shall be fixed by the
Committee at the time such option is granted, but in no event shall such
period exceed 10 years and one month from the date the Option is granted.
A Non-Statutory Stock Option shall become exercisable at such times and in
such installments (which may be cumulative) as shall be determined by the
Committee at the time the Option is granted. Upon the completion of its
exercise period, a Non-Statutory Stock Option, to the extent not then
exercised, shall expire. Except as otherwise provided in Articles 7 or 11,
all Non-Statutory Stock Options granted hereunder to an Optionee who is an
employee of the Company and all Subsidiaries shall terminate and may no
longer be exercised if the Optionee ceases to be
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an employee of the Company or a Subsidiary or if the Optionee is an
employee of a Subsidiary and the Subsidiary ceases to be a Subsidiary
of the Company (unless the Optionee continues as an employee of the Company
or another Subsidiary). A Non-Statutory Stock Option granted hereunder to
an Optionee who is not an employee of the Company or a Subsidiary will
terminate as determined by the Committee at the time of grant.
(c) WITHHOLDING TAXES.
(i) The Company is entitled to (aa) withhold and deduct from
future wages of the Optionee, or make other arrangements for the collection
of, all legally required amounts necessary to satisfy any federal, state or
local withholding tax requirements attributable to the Optionee's exercise
of a Non-Statutory Stock Option or otherwise incurred with respect to the
Option, or (bb) require the Optionee promptly to remit the amount of such
withholding to the Company before acting on the Optionee's notice of
exercise of the Option.
(ii) The Committee may, in its discretion and subject to such
rules as the Committee may adopt, permit an Optionee to satisfy, in whole
or in part, any withholding tax obligation which may arise in connection
with the exercise of a Non-Statutory Stock Option either by electing to
have the Company withhold from the shares of Common Stock to be issued upon
exercise that number of shares of Common Stock, or by electing to deliver
to the Company already-owned shares of Common Stock, in either case having
a Fair Market Value, on the date such tax is determined under the Code (the
"Tax Date"), equal to the amount necessary to satisfy the withholding
amount due. An Optionee's election to have the Company withhold shares of
Common Stock or to deliver already-owned shares of Common Stock upon
exercise is irrevocable and is subject to the consent or disapproval of the
Committee. If the Optionee is an officer, director or beneficial owner of
more than 10% of the outstanding Common Stock of the Company and at the
time of exercise of the Option the Company has a class of equity securities
registered under Section 12 of the Exchange Act, such election may not be
made within six months of the date the Non-Statutory Stock Option is
granted (unless the death or Disability of the Optionee occurs prior to the
expiration of such six-month period), and must be made either six months
prior to the Tax Date or between the third and twelfth business days
following public release of any of the Company's quarterly or annual
summary earnings statements. When shares of Common Stock are issued prior
to the Tax Date to an Optionee making such an election, the Optionee shall
agree in writing to surrender that number of shares on the Tax Date having
an aggregate Fair Market Value equal to the tax due.
6.7 [This section was deleted in its entirety pursuant to an amendment
on March 25, 1997]
<PAGE>
ARTICLE 7. EFFECT OF TERMINATION OF EMPLOYMENT ON OPTIONS
7.1 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT.
In the event an Optionee's employment is terminated with the Company and all
Subsidiaries by reason of his death, Disability or Retirement, all outstanding
Incentive Stock Options and Non-Statutory Stock Options then held by the
Optionee shall become immediately exercisable in full and remain exercisable for
a period of three months in the case of Retirement and one year in the case of
death or Disability, but notwithstanding the foregoing, exercise may not occur
after the expiration date of any such Option.
7.2 TERMINATION OF EMPLOYMENT FOR REASONS OTHER THAN DEATH, DISABILITY
OR RETIREMENT.
(a) Except as otherwise provided in Article 11 and subsection
(b) below, in the event an Optionee's employment is terminated with the
Company and all Subsidiaries for any reason other than his death,
Disability or Retirement, all rights of the Optionee under the Plan shall
immediately terminate without notice of any kind and no Incentive Stock
Option or Non-Statutory Stock Option then held by the Optionee shall
thereafter be exercisable.
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(b) Notwithstanding the provisions of Subsection (a) above, upon
an Optionee's termination of employment with the Company and all
Subsidiaries, the Committee may, in its sole discretion (which may be
exercised before or following such termination), cause Incentive Stock
Options and Non-Statutory Stock Options then held by such Optionee to
become exercisable and to remain exercisable following such termination of
employment in the manner determined by the Committee; provided, however,
that no Option shall be exercisable after the expiration date thereof and
no Incentive Stock Option may be exercisable more than three months
following termination of employment.
7.3 DATE OF EMPLOYMENT TERMINATION. For purposes of the Plan, an
Optionee's employment shall be deemed to have terminated on the last day of the
pay period covered by the Optionee's final paycheck. Notwithstanding the
foregoing, the Optionee shall not be deemed to have ceased to be an employee for
purposes of the Plan until the later of the 91st day of any bona fide leave of
absence approved by the Company or a Subsidiary for the Optionee (including,
without limitation, any layoff) or the expiration of the period of any bona fide
leave of absence approved by the Company or a Subsidiary for the Optionee
(including without limitation any layoff) during which the Optionee's right to
reemployment is guaranteed either by statute or contract.
ARTICLE 8. RIGHTS OF EMPLOYEES; OPTIONEES.
8.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in
any way the right of the Company or any Subsidiary to terminate the employment
of any Eligible Person or Optionee at any time, nor confer upon any Eligible
Person or Optionee any right to continue in the employ of the Company or any
Subsidiary.
8.2 NONTRANSFERABILITY. No right or interest of any Optionee in an
Option granted pursuant to the Plan shall be assignable or transferable during
the lifetime of the Optionee, either voluntarily or involuntarily, or subjected
to any lien, directly or indirectly, by operation of law, or otherwise,
including execution, levy, garnishment, attachment, pledge or bankruptcy. In
the event of an Optionee's death, an Optionee's rights and interest in any
Options shall be transferable by testamentary will or the laws of descent and
distribution, and payment of any amounts due under the Plan shall be made to,
and exercise of any Options (to the extent permitted pursuant to Section 6.7 or
Section 7.1) may be made by, the Optionee's legal representatives, heirs or
legatees. If in the opinion of the Committee an Optionee holding any Option is
disabled from caring for his or her affairs because of mental condition,
physical condition or age, any payments due the Optionee may be made to, and any
rights of the Optionee under the Plan shall be exercised by, such Optionee's
guardian, conservator or other legal personal representative upon furnishing the
Committee with evidence satisfactory to the Committee of such status.
8.3 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to amend, modify or rescind any previously approved compensation plans
or programs entered into by the Company. The Plan will be construed to be an
addition to any and all such other plans or programs. Neither the adoption of
the Plan nor the submission of the Plan to the shareholders of
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the Company for approval will be construed as creating any limitations on the
power or authority of the Board to adopt such additional or other
compensation arrangements as the Board may deem necessary or desirable.
ARTICLE 9. SHARE ISSUANCE AND TRANSFER RESTRICTIONS
9.1 SHARE ISSUANCES. Notwithstanding any other provision of the Plan
or any agreements entered into pursuant hereto, the Company shall not be
required to issue or deliver any certificate for shares of Common Stock under
this Plan (and an Option shall not be considered to be exercised,
notwithstanding the tender by the Optionee of any consideration there for),
unless and until each of the following conditions has been fulfilled:
(a) (i) there shall be in effect with respect to such shares a
registration statement under the Securities Act and any applicable state
securities laws if the Committee, in its sole discretion, shall have
determined to file, cause to become effective and maintain the
effectiveness of such registration statement; or (ii) if the Committee has
determined not to so register the shares of Common Stock to be issued under
the Plan, (A) exemptions from registration under the Securities Act and
applicable state securities laws shall be available for such issuance (as
determined by counsel to the Company) and (B) there shall have been
received from the Optionee (or, in the event of death or disability, the
Optionee's heir(s) or legal representative(s)) any representations or
agreements requested by the Company in order to permit such issuance to be
made pursuant to such exemptions; and
(b) there shall have been obtained any other consent, approval
or permit from any state or federal governmental agency which the Committee
shall, in its sole discretion upon the advice of counsel, deem necessary or
advisable.
9.2 SHARE TRANSFERS. Shares of Common Stock issued pursuant to the
exercise of Options granted under the Plan may not be sold, assigned,
transferred, pledged, encumbered or otherwise disposed of (whether voluntarily
or involuntarily) except pursuant to registration under the Securities Act and
applicable state securities laws or pursuant to exemptions from such
registrations. The Company may condition the sale, assignment, transfer,
pledge, encumbrance or other disposition of such shares not issued pursuant to
an effective and current registration statement under the Securities Act and all
applicable state securities laws on the receipt from the party to whom the
shares of Common Stock are to be so transferred of any representations or
agreements requested by the Company in order to permit such transfer to be made
pursuant to exemptions from registration under the Securities Act and applicable
state securities laws.
9.3 LEGENDS. Unless a registration statement under the Securities Act
is in effect with respect to the issuance or transfer of shares of Common Stock
issued under the Plan, each certificate representing any such shares shall be
endorsed with a legend in substantially the following form, unless counsel for
the Company is of the opinion as to any such certificate that such legend is
unnecessary:
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THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED ("THE ACT"), OR UNDER APPLICABLE STATE
SECURITIES LAWS. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT AND SUCH STATE LAWS OR PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND SUCH STATE LAWS, THE
AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE SATISFACTION OF THE
COMPANY.
ARTICLE 10. PLAN AMENDMENT, MODIFICATION AND TERMINATION
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time (other than in any respect
relating to Director Stock Options) in such respects as the Board may deem
advisable in order that Incentive Stock Options and Non-Statutory Stock Options
under the Plan shall conform to any change in applicable laws or regulations or
in any other respect the Board may deem to be in the best interests of the
Company; provided, however, that no such amendment, without approval of the
shareholders of the Company, may (a) materially increase the benefits accruing
to Optionees under the Plan, (b) increase the total number of shares of Common
Stock as to which Options may be granted under the Plan, except as provided in
Section 4.3 of the Plan, or (c) materially modify the requirements as to
eligibility for participation in the Plan. No termination, suspension or
amendment of the Plan shall alter or impair any outstanding Option without the
consent of the Optionee affected thereby; provided, however, that this sentence
shall not impair the right of the Committee to take whatever action it deems
appropriate under Section 4.3.
ARTICLE 11. CHANGE IN CONTROL
11.1 CHANGE IN CONTROL. For purposes of this Section 11.1, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the effective date of
the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided that,
without limitation, such a Change in Control shall be deemed to have occurred at
such time as (x) any Person, other than any Person who owns any shares of Common
Stock on the effective date of the Plan, becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly, of 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors or (y) individuals who constitute the Board of Directors
on the effective date of the Plan cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
effective date of the Plan whose election, or nomination for election by
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the Company's shareholders, was approved by a vote of at least a majority of
the directors comprising the Board of Directors on the effective date of the
Plan (either by a specific vote or by approval of the proxy statement of the
Company in which such person is named as a nominee for director, without
objection to such nomination) shall be, for purposes of this clause (y) and
the following sentence, considered as though such person were a member of the
Board of Directors on the effective date of the Plan. Notwithstanding
anything in the foregoing to the contrary, no Change in Control shall be
deemed to have occurred for purposes of this Section 11.1 by virtue of any
transaction which shall have been approved by the affirmative vote of at
least a majority of the members of the Board of Directors on the effective
date of the Plan.
11.2 ACCELERATION OF VESTING. If any of the events described in Section
11.1 above constituting a Change in Control of the Company shall occur, then,
without any action by the Committee or the Board, all outstanding Options shall
become immediately exercisable in full and shall remain exercisable during the
remaining term thereof, whether or not the Optionees to whom such options have
been granted remain employees of the Company or a Subsidiary or, in the case of
Non-Employee Directors, remain members of the Board (and any Incentive Stock
Options remaining unexercised more than three months following termination of
employment shall thereafter be deemed Non-Statutory Stock Options).
11.3 LIMITATION ON ACCELERATION OF VESTING. Notwithstanding anything in
Section 11.2 above to the contrary, if, with respect to an Optionee,
acceleration of the vesting of Options as provided in Section 11.2 above (which
acceleration could be deemed a payment within the meaning of Section 280G(b) (2)
of the Code), together with any other payments which such Optionee has the right
to receive from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504 (a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b) (2) of the Code), the
payments to such Optionee pursuant to Section 11.2 above shall be reduced to the
largest amount as will result in no portion of such payments being subject to
the excise tax imposed by Section 4999 of the Code.
ARTICLE 12. EFFECTIVE DATE OF THE PLAN
12.1 EFFECTIVE DATE. The Plan is effective as of May 30, 1990, the date
it was adopted by the Board subject to the approval of the shareholders.
Options may be granted under the Plan prior to shareholder approval if made
subject to shareholder approval.
12.2 DURATION OF THE PLAN. The Plan shall terminate at midnight on May
29, 2000, and may be terminated prior thereto by Board action, and no Options
shall be granted after such termination. Options outstanding upon termination
of the Plan may continue to be exercised in accordance with their terms.
ARTICLE 13. MISCELLANEOUS
13.1 GOVERNING LAW. The Plan and all agreements hereunder shall be
construed in accordance with and governed by the laws of the State of Minnesota.
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13.2 GENDER AND NUMBER. Except when otherwise indicated by the context,
reference to the masculine gender in the Plan shall include, when used, the
feminine gender and any term used in the singular shall also include the plural.
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Exhibit 10.15
SELECT COMFORT CORPORATION
1997 STOCK INCENTIVE PLAN
1. PURPOSE OF PLAN.
The purpose of the Select Comfort Corporation 1997 Stock Incentive Plan
(the "Plan") is to advance the interests of Select Comfort Corporation (the
"Company") and its shareholders by enabling the Company and its Subsidiaries to
attract and retain persons of ability to perform services for the Company and
its Subsidiaries by providing an incentive to such individuals through equity
participation in the Company and by rewarding such individuals who contribute to
the achievement by the Company of its economic objectives.
2. DEFINITIONS.
The following terms will have the meanings set forth below, unless the
context clearly otherwise requires:
2.1 "BOARD" means the Board of Directors of the Company.
2.2 "BROKER EXERCISE NOTICE" means a written notice pursuant to which
a Participant, upon exercise of an Option, irrevocably instructs a broker or
dealer to sell a sufficient number of shares or loan a sufficient amount of
money to pay all or a portion of the exercise price of the Option and/or any
related withholding tax obligations and remit such sums to the Company and
directs the Company to deliver stock certificates to be issued upon such
exercise directly to such broker or dealer.
2.3 "CHANGE IN CONTROL" means an event described in Section 13.1 of the
Plan.
2.4 "CODE" means the Internal Revenue Code of 1986, as amended.
2.5 "COMMITTEE" means the group of individuals administering the Plan,
as provided in Section 3 of the Plan.
2.6 "COMMON STOCK" means the common stock of the Company, $0.01 par
value, or the number and kind of shares of stock or other securities into which
such common stock may be changed in accordance with Section 4.3 of the Plan.
2.7 "DISABILITY" means the disability of the Participant such as would
entitle the Participant to receive disability income benefits pursuant to the
long-term disability plan of the Company or Subsidiary then covering the
Participant or, if no such plan exists or is applicable to the Participant, the
permanent and total disability of the Participant within the meaning of
Section 22(e)(3) of the Code.
2.8 "ELIGIBLE RECIPIENTS" means all employees of the Company or any
Subsidiary and any non-employee directors, consultants and independent
contractors of the Company or any Subsidiary.
2.9 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
<PAGE>
2.10 "FAIR MARKET VALUE" means, with respect to the Common Stock, as of
any date (or, if no shares were traded or quoted on such date, as of the next
preceding date on which there was such a trade or quote) (a) the mean between
the reported high and low sale prices of the Common Stock if the Common Stock is
listed, admitted to unlisted trading privileges or reported on any foreign or
national securities exchange or on the Nasdaq National Market or an equivalent
foreign market on which sale prices are reported; (b) if the Common Stock is not
so listed, admitted to unlisted trading privileges or reported, the closing bid
price as reported by the Nasdaq SmallCap Market, OTC Bulletin Board or the
National Quotation Bureau, Inc. or other comparable service; or (c) if the
Common Stock is not so listed or reported, such price as the Committee
determines in good faith in the exercise of its reasonable discretion. If
determined by the Committee, such determination will be final, conclusive and
binding for all purposes and on all persons, including, without limitation, the
Company, the shareholders of the Company, the Participants and their respective
successors-in-interest. No member of the Committee will be liable for any
determination regarding the fair market value of the Common Stock that is made
in good faith.
2.11 "INCENTIVE AWARD" means an Option, Stock Appreciation Right,
Restricted Stock Award, Performance Unit or Stock Bonus granted to an Eligible
Recipient pursuant to the Plan.
2.12 "INCENTIVE STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that
qualifies as an "incentive stock option" within the meaning of Section 422 of
the Code.
2.13 "NON-STATUTORY STOCK OPTION" means a right to purchase Common Stock
granted to an Eligible Recipient pursuant to Section 6 of the Plan that does not
qualify as an Incentive Stock Option.
2.14 "OPTION" means an Incentive Stock Option or a Non-Statutory Stock
Option.
2.15 "PARTICIPANT" means an Eligible Recipient who receives one or more
Incentive Awards under the Plan.
2.16 "PERFORMANCE UNIT" means a right granted to an Eligible Recipient
pursuant to Section 9 of the Plan to receive a payment from the Company, in the
form of stock, cash or a combination of both, upon the achievement of
established employment, service, performance or other goals.
2.17 "PREVIOUSLY ACQUIRED SHARES" means shares of Common Stock or
Preferred Stock that are already owned by the Participant or, with respect to
any Incentive Award, that are to be issued upon the grant, exercise or vesting
of such Incentive Award.
2.18 "RESTRICTED STOCK AWARD" means an award of Common Stock granted to
an Eligible Recipient pursuant to Section 8 of the Plan that is subject to the
restrictions on transferability and the risk of forfeiture imposed by the
provisions of such Section 8.
2.19 "RETIREMENT" means termination of employment or service pursuant to
and in accordance with the regular (or, if approved by the Board for purposes of
the Plan, early) retirement/pension plan or practice of the Company or
Subsidiary then covering the Participant,
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provided that if the Participant is not covered by any such plan or practice,
the Participant will be deemed to be covered by the Company's plan or
practice for purposes of this determination.
2.20 "SECURITIES ACT" means the Securities Act of 1933, as amended.
2.21 "STOCK APPRECIATION RIGHT" means a right granted to an Eligible
Recipient pursuant to Section 7 of the Plan to receive a payment from the
Company, in the form of stock, cash or a combination of both, equal to the
difference between the Fair Market Value of one or more shares of Common Stock
and the exercise price of such shares under the terms of such Stock Appreciation
Right.
2.22 "STOCK BONUS" means an award of Common Stock granted to an Eligible
Recipient pursuant to Section 10 of the Plan.
2.23 "SUBSIDIARY" means any entity that is directly or indirectly
controlled by the Company or any entity in which the Company has a significant
equity interest, as determined by the Committee.
2.24 "TAX DATE" means the date any withholding tax obligation arises
under the Code or other applicable tax statute for a Participant with respect to
an Incentive Award.
3. PLAN ADMINISTRATION.
3.1 THE COMMITTEE. The Plan will be administered by the Board or by a
committee of the Board. So long as the Company has a class of its equity
securities registered under Section 12 of the Exchange Act, any committee
administering the Plan will consist solely of two or more members of the Board
who are "non-employee directors" within the meaning of Rule 16b-3 under the
Exchange Act and, if the Board so determines in its sole discretion, who are
"outside directors" within the meaning of Section 162(m) of the Code. Such a
committee, if established, will act by majority approval of the members (but may
also take action with the written consent of a majority of the members of such
committee), and a majority of the members of such a committee will constitute a
quorum. As used in the Plan, "Committee" will refer to the Board or to such a
committee, if established. To the extent consistent with corporate law, the
Committee may delegate to any officers of the Company the duties, power and
authority of the Committee under the Plan pursuant to such conditions or
limitations as the Committee may establish; provided, however, that only the
Committee may exercise such duties, power and authority with respect to Eligible
Recipients who are subject to Section 16 of the Exchange Act. The Committee may
exercise its duties, power and authority under the Plan in its sole and absolute
discretion without the consent of any Participant or other party, unless the
Plan specifically provides otherwise. Each determination, interpretation or
other action made or taken by the Committee pursuant to the provisions of the
Plan will be conclusive and binding for all purposes and on all persons, and no
member of the Committee will be liable for any action or determination made in
good faith with respect to the Plan or any Incentive Award granted under the
Plan.
3.2 AUTHORITY OF THE COMMITTEE.
(a) In accordance with and subject to the provisions of the Plan,
the Committee will have the authority to determine all provisions of Incentive
Awards as the
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Committee may deem necessary or desirable and as consistent with the terms of
the Plan, including, without limitation, the following: (i) the Eligible
Recipients to be selected as Participants; (ii) the nature and extent of the
Incentive Awards to be made to each Participant (including the number of
shares of Common Stock to be subject to each Incentive Award, any exercise
price, the manner in which Incentive Awards will vest or become exercisable
and whether Incentive Awards will be granted in tandem with other Incentive
Awards) and the form of written agreement, if any, evidencing such Incentive
Award; (iii) the time or times when Incentive Awards will be granted; (iv)
the duration of each Incentive Award; and (v) the restrictions and other
conditions to which the payment or vesting of Incentive Awards may be
subject. In addition, the Committee will have the authority under the Plan
in its sole discretion to pay the economic value of any Incentive Award in
the form of cash, Common Stock or any combination of both.
(b) The Committee will have the authority under the Plan to amend
or modify the terms of any outstanding Incentive Award in any manner, including,
without limitation, the authority to modify the number of shares or other terms
and conditions of an Incentive Award, extend the term of an Incentive Award,
accelerate the exercisability or vesting or otherwise terminate any restrictions
relating to an Incentive Award, accept the surrender of any outstanding
Incentive Award or, to the extent not previously exercised or vested, authorize
the grant of new Incentive Awards in substitution for surrendered Incentive
Awards; provided, however that the amended or modified terms are permitted by
the Plan as then in effect and that any Participant adversely affected by such
amended or modified terms has consented to such amendment or modification. No
amendment or modification to an Incentive Award, however, whether pursuant to
this Section 3.2 or any other provisions of the Plan, will be deemed to be
a re-grant of such Incentive Award for purposes of this Plan.
(c) In the event of (i) any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, extraordinary dividend or divestiture
(including a spin-off) or any other change in corporate structure or shares,
(ii) any purchase, acquisition, sale or disposition of a significant amount of
assets or a significant business, (iii) any change in accounting principles or
practices, or (iv) any other similar change, in each case with respect to the
Company or any other entity whose performance is relevant to the grant or
vesting of an Incentive Award, the Committee (or, if the Company is not the
surviving corporation in any such transaction, the board of directors of the
surviving corporation) may, without the consent of any affected Participant,
amend or modify the vesting criteria of any outstanding Incentive Award that is
based in whole or in part on the financial performance of the Company (or any
Subsidiary or division thereof) or such other entity so as equitably to reflect
such event, with the desired result that the criteria for evaluating such
financial performance of the Company or such other entity will be substantially
the same (in the sole discretion of the Committee or the board of directors of
the surviving corporation) following such event as prior to such event;
provided, however, that the amended or modified terms are permitted by the Plan
as then in effect.
4. SHARES AVAILABLE FOR ISSUANCE.
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4.1 MAXIMUM NUMBER OF SHARES AVAILABLE. Subject to adjustment as
provided in Section 4.3 of the Plan, the maximum number of shares of Common
Stock that will be available for issuance under the Plan will be 1,500,000
shares of Common Stock.
4.2 ACCOUNTING FOR INCENTIVE AWARDS. Shares of Common Stock that are
issued under the Plan or that are subject to outstanding Incentive Awards will
be applied to reduce the maximum number of shares of Common Stock remaining
available for issuance under the Plan. Any shares of Common Stock that are
subject to an Incentive Award that lapses, expires, is forfeited or for any
reason is terminated unexercised or unvested and any shares of Common Stock that
are subject to an Incentive Award that is settled or paid in cash or any form
other than shares of Common Stock will automatically again become available for
issuance under the Plan. Any shares of Common Stock that constitute the
forfeited portion of a Restricted Stock Award, however, will not become
available for further issuance under the Plan.
4.3 ADJUSTMENTS TO SHARES AND INCENTIVE AWARDS. In the event of any
reorganization, merger, consolidation, recapitalization, liquidation,
reclassification, stock dividend, stock split, combination of shares, rights
offering, divestiture or extraordinary dividend (including a spin-off) or any
other change in the corporate structure or shares of the Company, the Committee
(or, if the Company is not the surviving corporation in any such transaction,
the board of directors of the surviving corporation) will make appropriate
adjustment (which determination will be conclusive) as to the number and kind of
securities or other property (including cash) available for issuance or payment
under the Plan and, in order to prevent dilution or enlargement of the rights of
Participants, (a) the number and kind of securities or other property (including
cash) subject to outstanding Options, and (b) the exercise price of outstanding
Options.
5. PARTICIPATION.
Participants in the Plan will be those Eligible Recipients who, in the
judgment of the Committee, have contributed, are contributing or are expected to
contribute to the achievement of economic objectives of the Company or its
Subsidiaries. Eligible Recipients may be granted from time to time one or more
Incentive Awards, singly or in combination or in tandem with other Incentive
Awards, as may be determined by the Committee in its sole discretion. Incentive
Awards will be deemed to be granted as of the date specified in the grant
resolution of the Committee, which date will be the date of any related
agreement with the Participant.
6. OPTIONS.
6.1 GRANT. An Eligible Recipient may be granted one or more Options
under the Plan, and such Options will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee in its sole discretion. The Committee may designate whether an Option
is to be considered an Incentive Stock Option or a Non-Statutory Stock Option.
To the extent that any Incentive Stock Option granted under the Plan ceases for
any reason to qualify as an "incentive stock option" for purposes of Section 422
of the Code, such Incentive Stock Option will continue to be outstanding for
purposes of the Plan but will thereafter be deemed to be a Non-Statutory Stock
Option.
6.2 EXERCISE PRICE. The per share price to be paid by a Participant
upon exercise of an Option will be determined by the Committee in its discretion
at the time of the Option grant; provided, however, that (a) such price will not
be less than 100% of the Fair Market Value of one
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share of Common Stock on the date of grant with respect to an Incentive Stock
Option (110% of the Fair Market Value if, at the time the Incentive Stock
Option is granted, the Participant owns, directly or indirectly, more than
10% of the total combined voting power of all classes of stock of the Company
or any parent or subsidiary corporation of the Company), and (b) such price
will not be less than 85% of the Fair Market Value of one share of Common
Stock on the date of grant with respect to a Non-Statutory Stock Option.
6.3 EXERCISABILITY AND DURATION. An Option will become exercisable at
such times and in such installments as may be determined by the Committee in its
sole discretion at the time of grant; provided, however, that no Option may be
exercisable after 10 years from its date of grant.
6.4 PAYMENT OF EXERCISE PRICE. The total purchase price of the shares
to be purchased upon exercise of an Option will be paid entirely in cash
(including check, bank draft or money order); provided, however, that the
Committee, in its sole discretion and upon terms and conditions established by
the Committee, may allow such payments to be made, in whole or in part, by
tender of a Broker Exercise Notice, Previously Acquired Shares, a promissory
note (on terms acceptable to the Committee in its sole discretion) or by a
combination of such methods.
6.5 MANNER OF EXERCISE. An Option may be exercised by a Participant in
whole or in part from time to time, subject to the conditions contained in the
Plan and in the agreement evidencing such Option, by delivery in person, by
facsimile or electronic transmission or through the mail of written notice of
exercise to the Company (Attention: Chief Financial Officer) at its principal
executive office in Minneapolis, Minnesota and by paying in full the total
exercise price for the shares of Common Stock to be purchased in accordance with
Section 6.4 of the Plan.
6.6 AGGREGATE LIMITATION OF STOCK SUBJECT TO INCENTIVE STOCK OPTIONS.
To the extent that the aggregate Fair Market Value (determined as of the date an
Incentive Stock Option is granted) of the shares of Common Stock with respect to
which incentive stock options (within the meaning of Section 422 of the Code)
are exercisable for the first time by a Participant during any calendar year
(under the Plan and any other incentive stock option plans of the Company or any
subsidiary or parent corporation of the Company (within the meaning of the
Code)) exceeds $100,000 (or such other amount as may be prescribed by the Code
from time to time), such excess Options will be treated as Non-Statutory Stock
Options. The determination will be made by taking incentive stock options into
account in the order in which they were granted. If such excess only applies to
a portion of an Incentive Stock Option, the Committee, in its discretion, will
designate which shares will be treated as shares to be acquired upon exercise of
an Incentive Stock Option.
7. STOCK APPRECIATION RIGHTS.
7.1 GRANT. An Eligible Recipient may be granted one or more Stock
Appreciation Rights under the Plan, and such Stock Appreciation Rights will be
subject to such terms and conditions, consistent with the other provisions of
the Plan, as may be determined by the Committee in its sole discretion.
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7.2 EXERCISE PRICE. The exercise price of a Stock Appreciation Right
will be determined by the Committee, in its discretion, at the date of grant but
may not be less than 100% of the Fair Market Value of one share of Common Stock
on the date of grant.
7.3 EXERCISABILITY AND DURATION. A Stock Appreciation Right will
become exercisable at such time and in such installments as may be determined by
the Committee in its sole discretion at the time of grant; provided, however,
that no Stock Appreciation Right may be exercisable after 10 years from its date
of grant. A Stock Appreciation Right will be exercised by giving notice in the
same manner as for Options, as set forth in Section 6.5 of the Plan.
8. RESTRICTED STOCK AWARDS.
8.1 GRANT. An Eligible Recipient may be granted one or more Restricted
Stock Awards under the Plan, and such Restricted Stock Awards will be subject to
such terms and conditions, consistent with the other provisions of the Plan, as
may be determined by the Committee in its sole discretion. The Committee may
impose such restrictions or conditions, not inconsistent with the provisions of
the Plan, to the vesting of such Restricted Stock Awards as it deems
appropriate, including, without limitation, that the Participant remain in the
continuous employ or service of the Company or a Subsidiary for a certain period
or that the Participant or the Company (or any Subsidiary or division thereof)
satisfy certain performance goals or criteria.
8.2 RIGHTS AS A STOCKHOLDER; TRANSFERABILITY. Except as provided in
Sections 8.1, 8.3 and 14.3 of the Plan, a Participant will have all voting,
dividend, liquidation and other rights with respect to shares of Common Stock
issued to the Participant as a Restricted Stock Award under this Section 8 upon
the Participant becoming the holder of record of such shares as if such
Participant were a holder of record of shares of unrestricted Common Stock.
8.3 DIVIDENDS AND DISTRIBUTIONS. Unless the Committee determines
otherwise in its sole discretion (either in the agreement evidencing the
Restricted Stock Award at the time of grant or at any time after the grant of
the Restricted Stock Award), any dividends or distributions (including regular
quarterly cash dividends) paid with respect to shares of Common Stock subject to
the unvested portion of a Restricted Stock Award will be subject to the same
restrictions as the shares to which such dividends or distributions relate. In
the event the Committee determines not to pay such dividends or distributions
currently, the Committee will determine in its sole discretion whether any
interest will be paid on such dividends or distributions. In addition, the
Committee in its sole discretion may require such dividends and distributions to
be reinvested (and in such case the Participants consent to such reinvestment)
in shares of Common Stock that will be subject to the same restrictions as the
shares to which such dividends or distributions relate.
8.4 ENFORCEMENT OF RESTRICTIONS. To enforce the restrictions referred
to in this Section 8, the Committee may place a legend on the stock certificates
referring to such restrictions and may require the Participant, until the
restrictions have lapsed, to keep the stock certificates, together with duly
endorsed stock powers, in the custody of the Company or its transfer agent or to
maintain evidence of stock ownership, together with duly endorsed stock powers,
in a certificateless book-entry stock account with the Company's transfer agent.
9. PERFORMANCE UNITS.
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An Eligible Recipient may be granted one or more Performance Units under
the Plan, and such Performance Units will be subject to such terms and
conditions, consistent with the other provisions of the Plan, as may be
determined by the Committee in its sole discretion. The Committee may impose
such restrictions or conditions, not inconsistent with the provisions of the
Plan, to the vesting of such Performance Units as it deems appropriate,
including, without limitation, that the Participant remain in the continuous
employ or service of the Company or any Subsidiary for a certain period or that
the Participant or the Company (or any Subsidiary or division thereof) satisfy
certain performance goals or criteria. The Committee will have the sole
discretion to determine the form in which payment of the economic value of
vested Performance Units will be made to the Participant (i.e., cash, Common
Stock or any combination thereof) or to consent to or disapprove the election by
the Participant of the form of such payment.
10. STOCK BONUSES.
An Eligible Recipient may be granted one or more Stock Bonuses under the
Plan, and such Stock Bonuses will be subject to such terms and conditions,
consistent with the other provisions of the Plan, as may be determined by the
Committee. The Participant will have all voting, dividend, liquidation and
other rights with respect to the shares of Common Stock issued to a Participant
as a Stock Bonus under this Section 10 upon the Participant becoming the holder
of record of such shares; provided, however, that the Committee may impose such
restrictions on the assignment or transfer of a Stock Bonus as it deems
appropriate.
11. EFFECT OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
11.1 TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. Unless
otherwise provided by the Committee in its sole discretion in the agreement
evidencing an Incentive Award, in the event a Participant's employment or other
service with the Company and all Subsidiaries is terminated by reason of death,
Disability or Retirement:
(a) All outstanding Options and Stock Appreciation Rights then
held by the Participant that are currently exercisable by the Participant
as of the time of such termination will remain exercisable for a period
of one year after such termination (but in no event after the expiration
date of any such Option or Stock Appreciation Right); and
(b) All Restricted Stock Awards, Performance Units and Stock
Bonuses then held by the Participant will vest and/or continue to vest in
the manner determined by the Committee and set forth in the agreement
evidencing such Restricted Stock Awards, Performance Units or Stock
Bonuses.
11.2 TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR RETIREMENT.
(a) Unless otherwise provided by the Committee in its sole
discretion in the agreement evidencing an Incentive Award, in the event a
Participant's employment or other service is terminated with the Company
and all Subsidiaries for any reason other than death, Disability or
Retirement, or a Participant is in the employ or service of a Subsidiary
and the Subsidiary ceases to be a Subsidiary of the Company (unless the
Participant continues in the employ or service of the Company or another
Subsidiary), all rights of the Participant under the Plan and any
agreements evidencing an Incentive Award will immediately terminate
without notice of any kind, and no Options or Stock
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Appreciation Rights then held by the Participant will thereafter be
exercisable, all Restricted Stock Awards then held by the Participant
that have not vested will be terminated and forfeited, and all
Performance Units and Stock Bonuses then held by the Participant will
vest and/or continue to vest in the manner determined by the Committee
and set forth in the agreement evidencing such Performance Units or
Stock Bonuses; provided, however, that if such termination is due to
any reason other than termination by the Company or any Subsidiary
for "cause," all outstanding Options or Stock Appreciation Rights then
held by such Participant that are currently exercisable by the
Participant as of the time of such termination will remain exercisable
for a period of three months after such termination (but in no event
after the expiration date of any such Option or Stock Appreciation
Right).
(b) For purposes of this Section 11.2, "cause" (as determined by
the Committee) will be as defined in any employment or other agreement or
policy applicable to the Participant or, if no such agreement or policy
exists, will mean (i) dishonesty, fraud, misrepresentation, embezzlement
or deliberate injury or attempted injury, in each case related to the
Company or any Subsidiary, (ii) any unlawful or criminal activity of a
serious nature, (iii) any intentional and deliberate breach of a duty or
duties that, individually or in the aggregate, are material in relation
to the Participant's overall duties, or (iv) any material breach of any
employment, service, confidentiality or non-compete agreement entered
into with the Company or any Subsidiary.
11.3 MODIFICATION OF RIGHTS UPON TERMINATION. Notwithstanding the other
provisions of this Section 11, upon a Participant's termination of employment or
other service with the Company and all Subsidiaries, the Committee may, in its
sole discretion (which may be exercised at any time on or after the date of
grant, including following such termination), cause Options and Stock
Appreciation Rights (or any part thereof) then held by such Participant to
become or continue to become exercisable and/or remain exercisable following
such termination of employment or service and Restricted Stock Awards,
Performance Units and Stock Bonuses then held by such Participant to vest and/or
continue to vest or become free of transfer restrictions, as the case may be,
following such termination of employment or service, in each case in the manner
determined by the Committee; provided, however, that no Option or Stock
Appreciation Right may remain exercisable beyond its expiration date.
11.4 BREACH OF CONFIDENTIALITY OR NONCOMPETE AGREEMENTS.
Notwithstanding anything in the Plan to the contrary, in the event that a
Participant materially breaches the terms of any confidentiality or non-compete
agreement entered into with the Company or any Subsidiary, whether such breach
occurs before or after termination of such Participant's employment or other
service with the Company or any Subsidiary, the Committee in its sole discretion
may immediately terminate all rights of the Participant under the Plan and any
agreements evidencing an Incentive Award then held by the Participant without
notice of any kind.
11.5 DATE OF TERMINATION OF EMPLOYMENT OR OTHER SERVICE. Unless the
Committee otherwise determines in its sole discretion, a Participant's
employment or other service will, for purposes of the Plan, be deemed to have
terminated on the date recorded on the personnel or other records of the Company
or the Subsidiary for which the Participant provides employment or other
service, as determined by the Committee in its sole discretion based upon such
records.
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12. PAYMENT OF WITHHOLDING TAXES.
12.1 GENERAL RULES. The Company is entitled to (a) withhold and deduct
from future wages of the Participant (or from other amounts that may be due and
owing to the Participant from the Company or a Subsidiary), or make other
arrangements for the collection of, all legally required amounts necessary to
satisfy any and all foreign, federal, state and local withholding and
employment-related tax requirements attributable to an Incentive Award,
including, without limitation, the grant, exercise or vesting of, or payment of
dividends with respect to, an Incentive Award or a disqualifying disposition of
stock received upon exercise of an Incentive Stock Option, or (b) require the
Participant promptly to remit the amount of such withholding to the Company
before taking any action, including issuing any shares of Common Stock, with
respect to an Incentive Award.
12.2 SPECIAL RULES. The Committee may, in its sole discretion and
upon terms and conditions established by the Committee, permit or require a
Participant to satisfy, in whole or in part, any withholding or
employment-related tax obligation described in Section 12.1 of the Plan by
electing to tender Previously Acquired Shares, a Broker Exercise Notice or a
promissory note (on terms acceptable to the Committee in its sole
discretion), or by a combination of such methods.
13. CHANGE IN CONTROL.
13.1 CHANGE IN CONTROL. For purposes of this Section 13, a "Change in
Control" of the Company shall mean (a) the sale, lease, exchange or other
transfer of all or substantially all of the assets of the Company (in one
transaction or in a series of related transactions) to a corporation that is not
controlled by the Company, (b) the approval by the shareholders of the Company
of any plan or proposal for the liquidation or dissolution of the Company, or
(c) a change in control of a nature that would be required to be reported
(assuming such event has not been "previously reported") in response to Item
1(a) of the Current Report on Form 8-K, as in effect on the effective date of
the Plan, pursuant to Section 13 or 15(d) of the Exchange Act, whether or not
the Company is then subject to such reporting requirement; provided that,
without limitation, such a Change in Control shall be deemed to have occurred at
such time as (x) any Person, other than any Person who owns any shares of Common
Stock on the effective date of the Plan, becomes after the effective date of the
Plan the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act)
directly or indirectly, of 50% or more of the combined voting power of the
Company's outstanding securities ordinarily having the right to vote at
elections of directors or (y) individuals who constitute the Board of Directors
on the effective date of the Plan cease for any reason to constitute at least a
majority thereof, provided that any person becoming a director subsequent to the
effective date of the Plan whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of the
directors comprising the Board of Directors on the effective date of the Plan
(either by a specific vote or by approval of the proxy statement of the Company
in which such person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (y) and the following
sentence, considered as though such person were a member of the Board of
Directors on the effective date of the Plan. Notwithstanding anything in the
foregoing to the contrary, no Change in Control shall be deemed to have occurred
for purposes of this Section 13 by virtue of any transaction which shall have
been approved by the affirmative vote of at least a majority of the members of
the Board of Directors on the effective date of the Plan.
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13.2 ACCELERATION OF VESTING. Without limiting the authority of the
Committee under Sections 3.2 and 4.3 of the Plan, if a Change in Control of the
Company occurs, then, unless otherwise provided by the Committee in its sole
discretion either in the agreement evidencing an Incentive Award at the time of
grant or at any time after the grant of an Incentive Award, (a) all outstanding
Options and Stock Appreciation Rights will become immediately exercisable in
full and will remain exercisable for the remainder of their terms, regardless of
whether the Participant to whom such Options or Stock Appreciation Rights have
been granted remains in the employ or service of the Company or any Subsidiary;
(b) all outstanding Restricted Stock Awards will become immediately fully vested
and non-forfeitable; and (c) all outstanding Performance Units and Stock Bonuses
then held by the Participant will vest and/or continue to vest in the manner
determined by the Committee and set forth in the agreement evidencing such
Performance Units or Stock Bonuses.
13.3 CASH PAYMENT FOR OPTIONS. If a Change in Control of the Company
occurs, then the Committee, if approved by the Committee in its sole discretion
either in an agreement evidencing an Incentive Award at the time of grant or at
any time after the grant of an Incentive Award, and without the consent of any
Participant effected thereby, may determine that some or all Participants
holding outstanding Options will receive, with respect to some or all of the
shares of Common Stock subject to such Options, as of the effective date of any
such Change in Control of the Company, cash in an amount equal to the excess of
the Fair Market Value of such shares immediately prior to the effective date of
such Change in Control of the Company over the exercise price per share of such
Options.
13.4 LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything
in Section 13.2 or 13.3 of the Plan to the contrary, if, with respect to a
Participant, the acceleration of the vesting of an Incentive Award as provided
in Section 13.2 or the payment of cash in exchange for all or part of an
Incentive Award as provided in Section 13.3 (which acceleration or payment could
be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code),
together with any other "payments" that such Participant has the right to
receive from the Company or any corporation that is a member of an "affiliated
group" (as defined in Section 1504(a) of the Code without regard to
Section 1504(b) of the Code) of which the Company is a member, would constitute
a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then the
"payments" to such Participant pursuant to Section 13.2 or 13.3 of the Plan will
be reduced to the largest amount as will result in no portion of such "payments"
being subject to the excise tax imposed by Section 4999 of the Code; provided,
however, that if a Participant is subject to a separate agreement with the
Company or a Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation, that
"payments" under such agreement or otherwise will be reduced, that such
"payments" will not be reduced or that the Participant will have the discretion
to determine which "payments" will be reduced), then this Section 13.4 will not
apply, and any "payments" to a Participant pursuant to Section 13.2 or 13.3 of
the Plan will be treated as "payments" arising under such separate agreement.
14. RIGHTS OF ELIGIBLE RECIPIENTS AND PARTICIPANTS; TRANSFERABILITY.
14.1 EMPLOYMENT OR SERVICE. Nothing in the Plan will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of any Eligible Recipient or Participant at any time, nor
confer upon any Eligible Recipient or Participant any right to continue in the
employ or service of the Company or any Subsidiary.
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14.2 RIGHTS AS A SHAREHOLDER. As a holder of Incentive Awards (other
than Restricted Stock Awards and Stock Bonuses), a Participant will have no
rights as a stockholder unless and until such Incentive Awards are exercised
for, or paid in the form of, shares of Common Stock and the Participant becomes
the holder of record of such shares. Except as otherwise provided in the Plan,
no adjustment will be made for dividends or distributions with respect to such
Incentive Awards as to which there is a record date preceding the date the
Participant becomes the holder of record of such shares, except as the Committee
may determine in its discretion.
14.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or
the laws of descent and distribution or as otherwise expressly permitted by the
Plan, unless approved by the Committee in its sole discretion, no right or
interest of any Participant in an Incentive Award prior to the exercise or
vesting of such Incentive Award will be assignable or transferable, or subjected
to any lien, during the lifetime of the Participant, either voluntarily or
involuntarily, directly or indirectly, by operation of law or otherwise. A
Participant will, however, be entitled to designate a beneficiary to receive an
Incentive Award upon such Participant's death, and in the event of a
Participant's death, payment of any amounts due under the Plan will be made to,
and exercise of any Options (to the extent permitted pursuant to Section 11 of
the Plan) may be made by, the Participant's legal representatives, heirs and
legatees.
14.4 NON-EXCLUSIVITY OF THE PLAN. Nothing contained in the Plan is
intended to modify or rescind any previously approved compensation plans or
programs of the Company or create any limitations on the power or authority of
the Board to adopt such additional or other compensation arrangements as the
Board may deem necessary or desirable.
15. SECURITIES LAW AND OTHER RESTRICTIONS.
Notwithstanding any other provision of the Plan or any agreements entered
into pursuant to the Plan, the Company will not be required to issue any shares
of Common Stock under this Plan, and a Participant may not sell, assign,
transfer or otherwise dispose of shares of Common Stock issued pursuant to
Incentive Awards granted under the Plan, unless (a) there is in effect with
respect to such shares a registration statement under the Securities Act and any
applicable state or foreign securities laws or an exemption from such
registration under the Securities Act and applicable state or foreign securities
laws, and (b) there has been obtained any other consent, approval or permit from
any other regulatory body which the Committee, in its sole discretion, deems
necessary or advisable. The Company may condition such issuance, sale or
transfer upon the receipt of any representations or agreements from the parties
involved, and the placement of any legends on certificates representing shares
of Common Stock, as may be deemed necessary or advisable by the Company in order
to comply with such securities law or other restrictions.
16. PLAN AMENDMENT, MODIFICATION AND TERMINATION.
The Board may suspend or terminate the Plan or any portion thereof at any
time, and may amend the Plan from time to time in such respects as the Board may
deem advisable in order that Incentive Awards under the Plan will conform to any
change in applicable laws or regulations or in any other respect the Board may
deem to be in the best interests of the Company; provided, however, that no
amendments to the Plan will be effective without approval of the shareholders of
the Company if stockholder approval of the amendment is then required pursuant
to Section 422 of the Code or the rules of any stock exchange or Nasdaq or
similar regulatory body. No termination, suspension or amendment of the Plan
may adversely affect any outstanding
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Incentive Award without the consent of the affected Participant; provided,
however, that this sentence will not impair the right of the Committee to
take whatever action it deems appropriate under Sections 3.2, 4.3 and 13 of
the Plan.
17. EFFECTIVE DATE AND DURATION OF THE PLAN.
The Plan is effective as of March 28, 1997. The Plan will terminate at
midnight on March 28, 2007, and may be terminated prior to such time to by Board
action, and no Incentive Award will be granted after such termination.
Incentive Awards outstanding upon termination of the Plan may continue to be
exercised, or become free of restrictions, in accordance with their terms.
18. MISCELLANEOUS.
18.1 GOVERNING LAW. The validity, construction, interpretation,
administration and effect of the Plan and any rules, regulations and actions
relating to the Plan will be governed by and construed exclusively in accordance
with the laws of the State of Minnesota, notwithstanding the conflicts of laws
principles of any jurisdictions.
18.2 SUCCESSORS AND ASSIGNS. The Plan will be binding upon and inure to
the benefit of the successors and permitted assigns of the Company and the
Participants.
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Exhibit 10.16
[FORM OF INCENTIVE STOCK OPTION AGREEMENT
UNDER 1997 STOCK INCENTIVE PLAN]
STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into and effective as of this _____ day of
__________, _____ (the "Date of Grant"), by and between Select Comfort
Corporation, a Minnesota corporation (the "Company"), and [NAME OF OPTIONEE]
(the "Optionee").
A. The Company has adopted the Select Comfort Corporation 1997 Stock
Incentive Plan (the "Plan") authorizing the Board of Directors of the
Company, or a committee as provided for in the Plan (the Board or such a
committee to be referred to as the "Committee"), to grant stock options to
employees and non-employee directors, consultants and independent contractors
of the Company and its Subsidiaries (as defined in the Plan).
B. The Company desires to give the Optionee an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company by granting to the Optionee an option to purchase
shares of common stock of the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to the Optionee the right, privilege, and option
(the "Option") to purchase ____________________ (__________) shares (the "Option
Shares") of the Company's common stock, $0.01 par value (the "Common Stock"),
according to the terms and subject to the conditions hereinafter set forth and
as set forth in the Plan. If and to the extent that the Option qualifies as an
"incentive stock option," as that term is used in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), and consistent with the
provisions of Section 6.6 of the Plan, the Option is intended to be an incentive
stock option within the meaning of such term. The Optionee acknowledges and
agrees, however, that the Company makes no assurance or warranty of any kind
regarding the qualification of the Option as an "incentive stock option" as such
term is used in Section 422 of the Code.
2. OPTION EXERCISE PRICE.
The per share price to be paid by Optionee in the event of an exercise of
the Option will be $_____.
3. DURATION OF OPTION AND TIME OF EXERCISE.
3.1 PERIOD OF EXERCISABILITY. So long as the Optionee remains employed by
the Company or one or more of its Subsidiaries, the Option will become
exercisable with respect to the Option Shares in thirty-six (36) monthly
installments, consisting of 1/36th of the aggregate number of Option Shares,
rounded (on an aggregate basis) to the next highest whole number of Option
Shares, but in any event not to exceed the aggregate maximum of
<PAGE>
____________________ (__________) Option Shares. The initial installment of the
Option Shares shall become exercisable on __________, 19___, with each
additional installment becoming exercisable on the ___th day of each subsequent
month (so long as the Optionee remains employed by the Company or one or more of
its Subsidiaries) until the Option Shares are fully exercisable. The foregoing
rights to exercise this Option will become void and expire as to all unexercised
Option Shares at 5:00 p.m. (Minneapolis, Minnesota time) on __________, 20___
(the "Time of Termination"), subject to earlier expiration as set forth below.
3.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
(a) TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event
that the Optionee's employment or other service with the Company and all
Subsidiaries is terminated by reason of the Optionee's death or the
Optionee's Disability or Retirement (as defined in the Plan), this Option,
to the extent that it is currently exercisable by the Optionee as of the
time of such termination, will remain exercisable for a period of one year
after such termination (but in no event after the Time of Termination).
(b) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR
RETIREMENT. In the event that the Optionee's employment or other
service with the Company and all Subsidiaries is terminated for any
reason other than death, Disability or Retirement, or the Optionee
is in the employ or service of a Subsidiary and the Subsidiary
ceases to be a Subsidiary of the Company (unless the Optionee
continues in the employ or service of the Company or another
Subsidiary), all rights of the Optionee under the Plan and this
Agreement will immediately terminate without notice of any kind,
and this Option will no longer be exercisable; provided, however,
that if such termination is due to any reason other than
termination by the Company or any Subsidiary for "cause" (as
defined in the Plan), this Option, to the extent that it is
currently exercisable by the Optionee as of the time of such
termination, will remain exercisable for a period of three months
after such termination (but in no event after the Time of
Termination).
3.3 CHANGE IN CONTROL.
(a) IMPACT OF CHANGE IN CONTROL. If a Change in Control (as
defined in the Plan) of the Company occurs, this Option will become
immediately exercisable in full and will remain exercisable until
the Time of Termination, regardless of whether the Optionee remains
in the employ or service of the Company or any Subsidiary. In
addition, if a Change in Control of the Company occurs, the
Committee, in its sole discretion and without the consent of the
Optionee, may determine that the Optionee will receive, with
respect to some or all of the Option Shares, as of the effective
date of any such Change in Control of the Company, cash in an
amount equal to the excess of the Fair Market Value (as defined in
the Plan) of such Option Shares immediately prior to the effective
date of such Change in Control of the Company over the option
exercise price per share of this Option.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in this Section 3.3 to the contrary, if, with respect to
the Optionee, acceleration of the vesting of this Option or the
payment of cash in exchange for all or part of the Option Shares as
provided above (which acceleration or payment could be deemed a
"payment"
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within the meaning of Section 280G(b)(2) of the Code), together
with any other payments which the Optionee has the right to receive
from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code
without regard to Section 1504(b) of the Code) of which the Company
is a member, would constitute a "parachute payment" (as defined in
Section 280G(b)(2) of the Code), the payments to the Optionee as
set forth herein will be reduced to the largest amount as will
result in no portion of such payments being subject to the excise
tax imposed by Section 4999 of the Code; provided, however, that if
the Optionee is subject to a separate agreement with the Company or
a Subsidiary that expressly addresses the potential application of
Sections 280G or 4999 of the Code (including, without limitation,
that "payments" under such agreement or otherwise will be reduced,
that such "payments" will not be reduced or that the Optionee will
have the discretion to determine which "payments" will be reduced),
then this Section 3.3(b) will not apply, and any "payments" to the
Optionee pursuant to Section 3.3(a) of this Agreement will be
treated as "payments" arising under such separate agreement.
4. MANNER OF OPTION EXERCISE.
4.1 NOTICE. This Option may be exercised by the Optionee in whole or in part
from time to time, subject to the conditions contained in the Plan and in this
Agreement, by delivery, in person, by facsimile or electronic transmission or
through the mail, to the Company at its principal executive office in
Minneapolis, Minnesota (Attention: Chief Financial Officer), of a written
notice of exercise. Such notice must be in a form satisfactory to the
Committee, must identify the Option, must specify the number of Option Shares
with respect to which the Option is being exercised, and must be signed by the
person or persons so exercising the Option. Such notice must be accompanied by
payment in full of the total purchase price of the Option Shares purchased. In
the event that the Option is being exercised, as provided by the Plan and
Section 3.2 above, by any person or persons other than the Optionee, the notice
must be accompanied by appropriate proof of right of such person or persons to
exercise the Option. As soon as practicable after the effective exercise of the
Option, the Optionee will be recorded on the stock transfer books of the Company
as the owner of the Option Shares purchased, and the Company will deliver to the
Optionee one or more duly issued stock certificates evidencing such ownership.
4.2 PAYMENT. At the time of exercise of this Option, the Optionee will pay the
total purchase price of the Option Shares to be purchased entirely in cash
(including a check, bank draft or money order, payable to the order of the
Company); provided, however, that the Committee, in its sole discretion, may
allow such payment to be made, in whole or in part, by tender of a promissory
note (on terms acceptable to the Committee in its sole discretion) or a Broker
Exercise Notice or Previously Acquired Shares (as such terms are defined in the
Plan), or by a combination of such methods. In the event the Optionee is
permitted to pay the total purchase price of this Option in whole or in part
with Previously Acquired Shares, the value of such shares will be equal to their
Fair Market Value on the date of exercise of this Option.
5. RIGHTS OF OPTIONEE; TRANSFERABILITY.
5.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere with or
limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of
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the Optionee at any time, nor confer upon the Optionee any right to continue
in the employ or service of the Company or any Subsidiary at any particular
position or rate of pay or for any particular period of time.
5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a shareholder
unless and until all conditions to the effective exercise of this Option
(including, without limitation, the conditions set forth in the Plan) have been
satisfied and the Optionee has become the holder of record of such shares. No
adjustment will be made for dividends or distributions with respect to this
Option as to which there is a record date preceding the date the Optionee
becomes the holder of record of such shares, except as may otherwise be provided
in the Plan or determined by the Committee in its sole discretion.
5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the laws
of descent and distribution or as otherwise expressly permitted by the Plan, no
right or interest of the Optionee in this Option prior to exercise may be
assigned or transferred, or subjected to any lien, during the lifetime of the
Optionee, either voluntarily or involuntarily, directly or indirectly, by
operation of law or otherwise. The Optionee will, however, be entitled to
designate a beneficiary to receive this Option upon such Optionee's death, and,
in the event of the Optionee's death, exercise of this Option (to the extent
permitted pursuant to Section 3.2(a) of this Agreement) may be made by the
Optionee's legal representatives, heirs and legatees.
6. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of the
Optionee (or from other amounts that may be due and owing to the Optionee from
the Company), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any federal, state or local withholding
and employment-related tax requirements attributable to the grant or exercise of
this Option or otherwise incurred with respect to this Option, or (b) require
the Optionee promptly to remit the amount of such withholding to the Company
before acting on the Optionee's notice of exercise of this Option. In the event
that the Company is unable to withhold such amounts, for whatever reason, the
Optionee agrees to pay to the Company an amount equal to the amount the Company
would otherwise be required to withhold under federal, state or local law.
7. ADJUSTMENTS.
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or extraordinary dividend
(including a spin-off), or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of the
Optionee, will make appropriate adjustment (which determination will be
conclusive) as to the number and kind of securities or other property (including
cash) subject to, and the exercise price of, the Option.
8. SUBJECT TO PLAN.
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The Option and the Option Shares granted and issued pursuant to this
Agreement have been granted and issued under, and are subject to the terms of,
the Plan. The terms of the Plan are incorporated by reference in this Agreement
in their entirety, and the Optionee, by execution of this Agreement,
acknowledges having received a copy of the Plan. The provisions of this
Agreement will be interpreted as to be consistent with the Plan, and any
ambiguities in this Agreement will be interpreted by reference to the Plan. In
the event that any provision of this Agreement is inconsistent with the terms of
the Plan, the terms of the Plan will prevail.
9. MISCELLANEOUS.
9.1 BINDING EFFECT. This Agreement will be binding upon the heirs, executors,
administrators and successors of the parties to this Agreement.
9.2 GOVERNING LAW. This Agreement and all rights and obligations under this
Agreement will be construed in accordance with the Plan and governed by the laws
of the State of Minnesota, without regard to conflicts of laws provisions. Any
legal proceeding related to this Agreement will be brought in an appropriate
Minnesota court, and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
9.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire
agreement and understanding of the parties to this Agreement with respect to the
grant and exercise of this Option and the administration of the Plan and
supersede all prior agreements, arrangements, plans and understandings relating
to the grant and exercise of this Option and the administration of the Plan.
9.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this Agreement
may be amended, waived, modified or canceled only by a written instrument
executed by the parties to this Agreement or, in the case of a waiver, by the
party waiving compliance.
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<PAGE>
The parties to this Agreement have executed this Agreement effective the
day and year first above written.
SELECT COMFORT CORPORATION
By
----------------------------------
Its
--------------------------------
By execution of this Agreement, OPTIONEE
the Optionee acknowledges having
received a copy of the Plan. ------------------------------------
(Signature)
------------------------------------
(Name and Address)
------------------------------------
------------------------------------
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Exhibit 10.17
[FORM OF PERFORMANCE BASED STOCK OPTION AGREEMENT
UNDER 1997 STOCK INCENTIVE PLAN]
STOCK OPTION AGREEMENT
THIS AGREEMENT is entered into and effective as of this ___ day of
__________, ____ (the "Date of Grant"), by and between Select Comfort
Corporation, a Minnesota corporation (the "Company") and [NAME OF OPTIONEE] (the
"Optionee").
A. The Company has adopted the Select Comfort Corporation 1997 Stock
Incentive Plan (the "Plan") authorizing the Board of Directors of the
Company, or a committee as provided for in the Plan (the Board or such a
committee to be referred to as the "Committee"), to grant stock options to
employees and non-employee directors, consultants and independent contractors
of the Company and its Subsidiaries (as defined in the Plan).
B. The Company desires to give the Optionee an inducement to acquire a
proprietary interest in the Company and an added incentive to advance the
interests of the Company by granting to the Optionee an option to purchase
shares of common stock of the Company pursuant to the Plan.
Accordingly, the parties agree as follows:
1. GRANT OF OPTION.
The Company hereby grants to the Optionee the right, privilege, and option
(the "Option") to purchase ________ (______) shares (the "Option Shares") of the
Company's common stock, $0.01 par value (the "Common Stock"), according to the
terms and subject to the conditions hereinafter set forth and as set forth in
the Plan. If and to the extent that the Option qualifies as an "incentive stock
option," as that term is used in Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and consistent with the provisions of Section 6.6
of the Plan, the Option is intended to be an incentive stock option within the
meaning of such term. The Optionee acknowledges and agrees, however, that the
Company makes no assurance or warranty of any kind regarding the qualification
of the Option as an "incentive stock option" as such term is used in Section 422
of the Code.
2. OPTION EXERCISE PRICE.
The per share price to be paid by Optionee in the event of an exercise of
the Option will be $_____.
3. DURATION OF OPTION AND TIME OF EXERCISE.
3.1 PERIOD OF EXERCISABILITY. The Option will become exercisable with
respect to all of the Option Shares upon the earliest to occur of: (i) such
date as both (A) the Common Stock shall have been listed or admitted to unlisted
trading privileges on any national securities exchange for a continuous period
of at least thirty (30) consecutive trading days, or (B) transactions in the
Common Stock shall have been reported on the NASDAQ National Market
<PAGE>
for a continuous period of at least thirty (30) consecutive trading days, or
(C) bid and asked prices for the Common Stock in the over-the-counter market
shall have been reported by the NASDAQ SmallCap Market, the OTC Bulletin
Board or the National Quotation Bureau, Inc. or other comparable service for
a continuous period of at least thirty (30) consecutive trading days, AND, in
addition to one of (A), (B) or (C) above, the Fair Market Value (as defined
in the Plan) shall have exceeded Twenty-Two Dollars ($22.00) per share of
Common Stock (as adjusted to reflect the effects of any stock split, stock
dividend or similar recapitalization effected after the date hereof) for a
continuous period of at least thirty (30) consecutive trading days on any
such national securities exchange, NASDAQ market or over-the-counter market;
or (ii) March 28, 2002. The foregoing rights to exercise this Option will
become void and expire as to all unexercised Option Shares at, 5:00 p.m.
(Minneapolis, Minnesota time) on March 28, 2007 (the "Time of Termination"),
subject to earlier expiration as set forth below.
3.2 TERMINATION OF EMPLOYMENT OR OTHER SERVICE.
(a) TERMINATION DUE TO DEATH, DISABILITY OR RETIREMENT. In the event
that the Optionee's employment or other service with the Company and all
Subsidiaries is terminated by reason of the Optionee's death or the
Optionee's Disability or Retirement (as defined in the Plan), this Option,
to the extent that it is currently exercisable by the Optionee as of the
time of such termination, will remain exercisable for a period of one year
after such termination (but in no event after the Time of Termination).
(b) TERMINATION FOR REASONS OTHER THAN DEATH, DISABILITY OR
RETIREMENT. In the event that the Optionee's employment or other service
with the Company and all Subsidiaries is terminated for any reason other
than death, Disability or Retirement, or the Optionee is in the employ or
service of a Subsidiary and the Subsidiary ceases to be a Subsidiary of the
Company (unless the Optionee continues in the employ or service of the
Company or another Subsidiary), all rights of the Optionee under the Plan
and this Agreement will immediately terminate without notice of any kind,
and this Option will no longer be exercisable; provided, however, that if
such termination is due to any reason other than termination by the Company
or any Subsidiary for "cause" (as defined in the Plan), this Option, to the
extent that it is currently exercisable by the Optionee as of the time of
such termination, will remain exercisable for a period of three months
after such termination (but in no event after the Time of Termination).
3.3 CHANGE IN CONTROL.
(a) IMPACT OF CHANGE IN CONTROL. If a Change in Control (as defined
in the Plan) of the Company occurs, and such Change in Control of the
Company is the result of (i) a sale, lease, exchange or other transfer of
all or substantially all of the assets of the Company (in one transaction
or in a series of related transactions) followed by a liquidation of the
Company, or (ii) the acquisition of all or substantially all of the issued
and outstanding shares of capital stock of the Company through a merger or
other acquisition of all or substantially all of the issued and outstanding
shares of capital stock of the Company, AND the consideration received or
to be received by the shareholders of the Company as a result of such
transaction exceeds Twenty-Two Dollars ($22.00) per share of Common Stock
on a fully diluted basis, this Option will become immediately exercisable
in full and will remain exercisable until the Time of Termination,
regardless
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of whether the Optionee remains in the employ or service of the Company
or any Subsidiary. Except as expressly set forth above and except
as may be expressly provided by the Committee at the time of any such
Change in Control of the Company, no Change in Control of the Company shall
accelerate or otherwise affect the vesting or exercisability of this
Option. In addition, if a Change in Control of the Company occurs, the
Committee, in its sole discretion and without the consent of the Optionee,
may determine that the Optionee will receive, with respect to some or all
of the Option Shares, as of the effective date of any such Change in
Control of the Company, cash in an amount equal to the excess of the Fair
Market Value (as defined in the Plan) of such Option Shares immediately
prior to the effective date of such Change in Control of the Company over
the option exercise price per share of this Option.
(b) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in this Section 3.3 to the contrary, if, with respect to the
Optionee, acceleration of the vesting of this Option or the payment of cash
in exchange for all or part of the Option Shares as provided above (which
acceleration or payment could be deemed a "payment" within the meaning of
Section 280G(b)(2) of the Code), together with any other payments which the
Optionee has the right to receive from the Company or any corporation which
is a member of an "affiliated group" (as defined in Section 1504(a) of the
Code without regard to Section 1504(b) of the Code) of which the Company is
a member, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code), the payments to the Optionee as set forth herein
will be reduced to the largest amount as will result in no portion of such
payments being subject to the excise tax imposed by Section 4999 of the
Code; provided, however, that if the Optionee is subject to a separate
agreement with the Company or a Subsidiary that expressly addresses the
potential application of Sections 280G or 4999 of the Code (including,
without limitation, that "payments" under such agreement or otherwise will
be reduced, that such "payments" will not be reduced or that the Optionee
will have the discretion to determine which "payments" will be reduced),
then this Section 3.3(b) will not apply, and any "payments" to the Optionee
pursuant to Section 3.3(a) of this Agreement will be treated as "payments"
arising under such separate agreement.
4. MANNER OF OPTION EXERCISE.
4.1 NOTICE. This Option may be exercised by the Optionee in whole or in
part from time to time, subject to the conditions contained in the Plan and in
this Agreement, by delivery, in person, by facsimile or electronic transmission
or through the mail, to the Company at its principal executive office in
Minneapolis, Minnesota (Attention: Chief Financial Officer), of a written
notice of exercise. Such notice must be in a form satisfactory to the
Committee, must identify the Option, must specify the number of Option Shares
with respect to which the Option is being exercised, and must be signed by the
person or persons so exercising the Option. Such notice must be accompanied by
payment in full of the total purchase price of the Option Shares purchased. In
the event that the Option is being exercised, as provided by the Plan and
Section 3.2 above, by any person or persons other than the Optionee, the notice
must be accompanied by appropriate proof of right of such person or persons to
exercise the Option. As soon as practicable after the effective exercise of the
Option, the Optionee will be recorded on the stock transfer books of the Company
as the owner of the Option Shares purchased, and the Company
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will deliver to the Optionee one or more duly issued stock certificates
evidencing such ownership.
4.2 PAYMENT. At the time of exercise of this Option, the Optionee will
pay the total purchase price of the Option Shares to be purchased entirely in
cash (including a check, bank draft or money order, payable to the order of the
Company); provided, however, that the Committee, in its sole discretion, may
allow such payment to be made, in whole or in part, by tender of a promissory
note (on terms acceptable to the Committee in its sole discretion) or a Broker
Exercise Notice or Previously Acquired Shares (as such terms are defined in the
Plan), or by a combination of such methods. In the event the Optionee is
permitted to pay the total purchase price of this Option in whole or in part
with Previously Acquired Shares, the value of such shares will be equal to their
Fair Market Value on the date of exercise of this Option.
5. RIGHTS OF OPTIONEE; TRANSFERABILITY.
5.1 EMPLOYMENT OR SERVICE. Nothing in this Agreement will interfere with
or limit in any way the right of the Company or any Subsidiary to terminate the
employment or service of the Optionee at any time, nor confer upon the Optionee
any right to continue in the employ or service of the Company or any Subsidiary
at any particular position or rate of pay or for any particular period of time.
5.2 RIGHTS AS A SHAREHOLDER. The Optionee will have no rights as a
shareholder unless and until all conditions to the effective exercise of this
Option (including, without limitation, the conditions set forth in the Plan)
have been satisfied and the Optionee has become the holder of record of such
shares. No adjustment will be made for dividends or distributions with respect
to this Option as to which there is a record date preceding the date the
Optionee becomes the holder of record of such shares, except as may otherwise be
provided in the Plan or determined by the Committee in its sole discretion.
5.3 RESTRICTIONS ON TRANSFER. Except pursuant to testamentary will or the
laws of descent and distribution or as otherwise expressly permitted by the
Plan, no right or interest of the Optionee in this Option prior to exercise may
be assigned or transferred, or subjected to any lien, during the lifetime of the
Optionee, either voluntarily or involuntarily, directly or indirectly, by
operation of law or otherwise. The Optionee will, however, be entitled to
designate a beneficiary to receive this Option upon such Optionee's death, and,
in the event of the Optionee's death, exercise of this Option (to the extent
permitted pursuant to Section 3.2(a) of this Agreement) may be made by the
Optionee's legal representatives, heirs and legatees.
6. WITHHOLDING TAXES.
The Company is entitled to (a) withhold and deduct from future wages of the
Optionee (or from other amounts that may be due and owing to the Optionee from
the Company), or make other arrangements for the collection of, all legally
required amounts necessary to satisfy any federal, state or local withholding
and employment-related tax requirements attributable to the grant or exercise of
this Option or otherwise incurred with respect to this Option, or (b) require
the Optionee promptly to remit the amount of such withholding to the Company
before acting on the Optionee's notice of exercise of this Option. In the event
that the Company is unable to withhold such amounts, for whatever reason, the
Optionee agrees to pay to the Company an
4
<PAGE>
amount equal to the amount the Company would otherwise be required to
withhold under federal, state or local law.
7. ADJUSTMENTS.
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, divestiture or extraordinary dividend
(including a spin-off), or any other change in the corporate structure or shares
of the Company, the Committee (or, if the Company is not the surviving
corporation in any such transaction, the board of directors of the surviving
corporation), in order to prevent dilution or enlargement of the rights of the
Optionee, will make appropriate adjustment (which determination will be
conclusive) as to the number and kind of securities or other property (including
cash) subject to, and the exercise price of, the Option.
8. SUBJECT TO PLAN.
The Option and the Option Shares granted and issued pursuant to this
Agreement have been granted and issued under, and are subject to the terms of,
the Plan. The terms of the Plan are incorporated by reference in this Agreement
in their entirety, and the Optionee, by execution of this Agreement,
acknowledges having received a copy of the Plan. The provisions of this
Agreement will be interpreted as to be consistent with the Plan, and any
ambiguities in this Agreement will be interpreted by reference to the Plan. In
the event that any provision of this Agreement is inconsistent with the terms of
the Plan, the terms of the Plan will prevail.
9. MISCELLANEOUS.
9.1 BINDING EFFECT. This Agreement will be binding upon the heirs,
executors, administrators and successors of the parties to this Agreement.
9.2 GOVERNING LAW. This Agreement and all rights and obligations under
this Agreement will be construed in accordance with the Plan and governed by the
laws of the State of Minnesota, without regard to conflicts of laws provisions.
Any legal proceeding related to this Agreement will be brought in an appropriate
Minnesota court, and the parties to this Agreement consent to the exclusive
jurisdiction of the court for this purpose.
9.3 ENTIRE AGREEMENT. This Agreement and the Plan set forth the entire
agreement and understanding of the parties to this Agreement with respect to the
grant and exercise of this Option and the administration of the Plan and
supersede all prior agreements, arrangements, plans and understandings relating
to the grant and exercise of this Option and the administration of the Plan.
9.4 AMENDMENT AND WAIVER. Other than as provided in the Plan, this
Agreement may be amended, waived, modified or canceled only by a written
instrument executed by the parties to this Agreement or, in the case of a
waiver, by the party waiving compliance.
The parties to this Agreement have executed this Agreement effective the
day and year first above written.
5
<PAGE>
SELECT COMFORT CORPORATION
By
----------------------------------
Its
---------------------------------
By execution of this Agreement, OPTIONEE
the Optionee acknowledges having
received a copy of the Plan. ------------------------------------
(Signature)
------------------------------------
(Name and Address)
------------------------------------
------------------------------------
6
<PAGE>
April 3, 1997
Mr. H. Robert Hawthorne
4607 Moorland Avenue
Edina, MN 55424
Dear Rob:
I am pleased to confirm our conversation of March 31 in which I offered you
the position of Chief Executive Officer and President of Select Comfort
Corporation, as well as membership on the Board of Directors. This letter
lays out the specific elements of the offer and requests that you indicate
your acceptance by signing the bottom of the page.
We have agreed on a salary of $325,000 per year, and this will include
compensation for items which you may have been used to at Pillsbury, such as
a company car allowance and club memberships. Your bonus target in 1997 will
be 50% of salary earned during the year, depending upon company performance
relative to plan. Once you establish yourself in the Company, you should
firm up the company performance objectives and appropriate bonus percentages
with the Compensation Committee of the Board.
You will receive 400,000 stock options with an exercise price of $5.25 per
share. 100,000 of the options will be "Incentive Stock Options with a
performance option feature" which will become fully vested if and when the
stock prices exceeds $22.00 per share for 30 consecutive trading days in the
public market. 300,000 of the options will vest over three years in 36 equal
installments. Details on the stock options will be included in the stock
option agreements.
<PAGE>
If you are terminated within the first twelve months without cause, you will
be eligible to receive 12 months severance paid monthly. After your first
twelve months of employment, your severance will increase to 24 months of
salary. During the severance period, if this were to occur, your stock will
not continue to vest, and you will not be eligible to receive bonuses.
You will eligible to be enrolled in Select Comfort's fringe benefit programs
for items like health insurance, etc; as soon as you begin employment.
Please call Karen Jones, Vice President of Human Resources, for specific
information on the benefits programs.
The Board of Directors and management team is extremely enthusiastic about
your joining Select Comfort to lead it to the next century when it will be
recognized as the most successful mattress company of all time. Under your
leadership, we are confident that Sealy and Serta may soon join Willy's and
Studebaker as forgotten brand names. You are taking on an enormous
challenge, however, be assured that the Board and management team are
available to help you in whatever way we can.
To formally acknowledge your acceptance of this offer letter, please sign the
bottom of this page and send a copy back to me.
I am looking forward to a long and prosperous working relationship.
Sincerely,
/s/ Patrick A. Hopf
Patrick A. Hopf
Co-Chairman of Select Comfort
I accept the offer to become the CEO and President of Select Comfort
Corporation as described above:
/s/ H. Robert Hawthorne
----------------------------
<PAGE>
Exhibit 10.19
October 20, 1995
Mr. Daniel J. McAthie
5408 Vining Point Road
Minnetonka, MN 55345
Dear Dan,
It is with great pleasure that I extend a modified offer for you to join our
team! I believe that you can have a significant and immediate impact on our
business, and I look forward to working with you.
The specifics of the terms of employment are:
- - The position is Executive Vice President - CFO and CAO reporting directly
to me. You will also be a member of our Senior Management Team and
participate on our various senior operating committees. Your ability and
opportunity to influence the strategic direction and success of Select
Comfort will be maximized in this way.
- - The compensation is as follows:
- Base salary of $175,000 per year subject to performance based adjustment
at least once per year;
- Participation in the Senior Management Incentive Plan which in 1995
provides a payout of up to 80% of base salary if certain performance
criteria is met. The primary performance criteria is business
profitability with a Plan performance earning a 50% payout level; of
course, if a minimum profitability level is not reached, no incentive
would be earned;
<PAGE>
- Incentive Stock Options in the amount of 85,000 common shares priced
at an exercise price of $4.80 per share. The options will vest monthly
over a 36-month period of employment and have a 10-year exercise term
(the stock has a potential of being valued at $1.5 - $2.0 million
within twenty-four months, see attached Montgomery assessment);
additional options could be granted on the basis of performance.
- Four weeks paid vacation plus medical, dental, short-term and
long-term disability insurance options;
- Participation in Select Comfort's 401(k) Plan which in 1995 provides
for Company matching of up to $.50 on every dollar you contribute up
to 6% of your base salary. The amount of matching is based upon
Company profitability relative to fiscal plan;
<PAGE>
- You will be entitled to a minimum severence payment equal to nine
month's base salary should your employment be involuntarily terminated
without cause.
I believe the above covers all essential points of the terms of employment.
I am very excited about the possibility of you joining our Management Team and
the people who have met you look forward to your contributions. I believe your
vision, technical skills and leadership abilities are the right combination to
help Select Comfort become a world-wide innovative leader. I also look forward
to you and I forming an effective team that will take the investment community
by storm!
Per our conversation, I am looking forward to a response from you on Monday,
October 23rd.
Sincerely,
/s/
Mark de Naray
President and CEO
MdeN/bms
c: Ms. Karen Jones - Vice President, Human Resources
Mr. David Nosal - Heidrick & Struggles
<PAGE>
Exhibit 10.20
SELECT COMFORT
July 11, 1995
Mr. Gregory T. Kliner
5733 Royal Hill Drive
Riverside, CA 92506
Dear Greg:
It is with great pleasure that I extend a revised offer for you to join our
team! I believe that you can have a significant and immediate impact on our
business and I look forward to working with you.
The specifics of the terms of employment are:
- - The position is Senior Vice President Operations reporting directly to me.
You will also be a member of our Management Team and participate on our
various senior operating committees.
- - The compensation is as follows:
- Base salary of $125,000 per year subject to performance based
adjustment at least once per year;
- Participation in the Senior Management Incentive Plan which in 1995
provides a payout of up to 80% of base salary if certain performance
criteria is met. The primary performance criteria is business
profitability with a Plan performance earning a 50% payout level; of
course, if a minimum profitability level is not reached, no incentive
would be earned;
- Incentive Stock Options in the amount of 65,000 common shares priced
at an exercise price of $4.80 per share. The options will vest monthly
over a 36-month period of employment and have a 10-year exercise term
(the stock has a potential of being valued at $1.3 million within
twenty-four months); Additional options could be granted basis
performance;
- Three weeks paid vacation plus medical, dental, short-term and
long-term disability insurance options;
Select Comfort Corporation
____ Trenton Lane North, Minneapolis, MN 55442
Tel. 612-551-7000 Fax 612 551-7826
<PAGE>
- Participation in Select Comfort's 401(k) Plan which provides for
Company matching of up to $.25 on every dollar you contribute up to 6%
of your base salary. The amount of matching is based upon Company
profitability relative to fiscal plan.
- A "signing bonus" of $10,000;
- - Relocation expenses will be covered as follows:
- Moving/relocation expenses will be covered by the Company up to a
maximum of $35,000. Any personal tax consequences resulting from
expense reimbursement will be your responsibility and are intended to
be covered under the above maximum figure;
- A temporary housing allowance of up to $1,700 per month is available
for up to 12 months from the date of employment; If your current house
sells and closes sooner, the allowance will terminate;
- A $20,000 non-interest bearing loan will be available to you to
complete the purchase of a Twin Cities residence; The loan will be
payable from the first available performance incentive due you and
will be secured by the net value of vested stock options; in other
words, if the net value between exercise price ($4.80/share) and
"market" value is $5.00/share ($9.80/share total value), the Company
would place in reserve the first 4,000 options vested (4,000 shares X
$5/share = $20,000) until the loan is repaid in full;
- Reasonable travel to your California home will be at Company expense
as needed to complete the sale;
- - You will be entitled to a severance payment equal to six month's base
salary should your employment be involuntarily terminated without cause
during your first twelve months of employment.
I believe the above covers all essential points of the terms of employment.
As we discussed, I am expecting you to resign your current employment on August
2nd and to commence employment at Select Comfort as soon as possible after
August 21,1995 but no later than August 28,1995.
I am very excited about you joining our Management Team and everyone looks
forward to your contributions. I believe your vision, technical skills and
leadership abilities are the right combination to help Select Comfort become a
world-wide innovative leader.
<PAGE>
Please give me a call with any questions. We will keep in touch over the next
several weeks to help you in any way possible during the transition.
Sincerely,
Mark de Naray
President and CEO
MdeN/bms
c: Mr. Pat Hopf - Chairman
Ms. Karen Jones - Director, Human Resources
Mr. David Nosal - Heidrick & Struggles
<PAGE>
Exhibit 10.21
CONSULTING AGREEMENT
THIS AGREEMENT is effective as of April 1, 1996 between SELECT COMFORT
CORPORATION, a Minnesota corporation (the "Company"), and ERVIN R. SHAMES (the
"Consultant").
WHEREAS, the Consultant will be elected to serve as a member of, and as
Chairman of, the Board of Directors of the Company (the "Board") ; and
WHEREAS, the Company also desires to engage the Consultant to perform
certain consulting services in order to benefit from the Consultant's management
experience and abilities, and the Consultant desires to accept such engagement,
all upon the terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises contained herein,
the Company and the Consultant, each intending to be legally bound, agree as
follows:
1. ENGAGEMENT. Subject to all of the terms and conditions of this
Agreement, the Company agrees to engage the Consultant to assist the Company in
various executive and management duties as may be agreed to from time to time
between the Board and the Consultant, and the Consultant agrees to accept such
engagement.
2. DUTIES.
(a) During the term of this Agreement, the Consultant agrees to consult
with the Board and the Company regarding such matters, and to provide such
services to the Board and the Company, as may reasonably be requested by
the Board consistent with the Consultant's expertise and experience and
Consultant's position as Chairman of the Company and agreed to by the
Consultant.
(b) The services to be rendered by the Consultant to the Company pursuant
to this Agreement will be as an independent contractor, and this Agreement
does not make the Consultant an employee, agent or legal representative of
the Company for any purpose whatsoever, including without limitation
participation in any benefits or privileges given or extended by the
Company to its employees. No right or authority is granted to the
Consultant to assume or create any obligation or responsibility, express or
implied, on behalf of or in the name of the Company. The Company will not
withhold from the amounts paid to the Consultant under this Agreement for
any federal or state taxes, and the Consultant agrees that he will pay all
taxes due on such amounts paid.
(c) During the first six (6) months of the engagement hereunder, the
Consultant agrees to devote approximately 40% to 50% of his business hours
to the performance of the Consultant's duties hereunder. During the six (6)
months from October 1, 1996 to March 31, 1997, the Consultant agrees to
devote approximately 30% to 35% of his business hours to the performance of
the Consultant's duties hereunder. During the remaining term of the
engagement hereunder, the Consultant agrees to devote approximately 20% of
his business hours to the performance of the Consultant's duties hereunder.
Time spent in performance of duties as director or Chairman shall be deemed
to be time devoted to Consultant's duties hereunder.
<PAGE>
(d) Notwithstanding anything to the contrary contained in this Agreement
other than Section 7 hereof, nothing shall be construed to limit the
ability of the Consultant to consult for or serve on the Board of Directors
of such other corporations, trade associations, charitable organizations or
other entities as the Consultant shall from time to time deem appropriate
and to engage in such other activities as the Consultant shall reasonably
deem not to be in conflict with his duties to the Company.
(e) The Consultant shall have no obligation to accept a position as an
officer or director, including the position of Chairman of the Board, until
directors and officers liability insurance in customary and reasonable
amounts shall have been purchased by the Company and shall be in full force
and effect.
3. TERM. The term of this Agreement will commence on April 1, 1996 and,
subject to earlier termination in accordance with Section 4 below, will continue
for a period of three (3) years.
4. TERMINATION. Subject to the respective continuing obligations of the
Company and the Consultant under Sections 5(b), 5(c), 6, 7 and 9 of this
Agreement:
(a) This Agreement may be terminated by the Company immediately upon
written notice to the Consultant "for cause," with the basis for
termination specified in such notice. For purposes of this Agreement, "for
cause" will mean (i) dishonesty, fraud, gross misrepresentation,
embezzlement or material and deliberate injury or attempted injury, in each
case related to the Company or its business, (ii) any unlawful or criminal
activity of a serious nature, (iii) any willful breach of duty, habitual
neglect of duty or unreasonable job performance, or (iv) a material breach
of any provision of this Agreement.
(b) This Agreement may be terminated by the Company or the Consultant
upon not less than thirty (30) days prior written notice without cause.
(c) This Agreement may be terminated by the Company ninety (90) days
following the Consultant's Total Disability. For purposes of this
Agreement, "Total Disability" will be as defined in the long-term
disability plan of the Company then in effect for employees of the Company
(regardless of whether the Consultant is covered by such plan) or, if no
such plan exists, "Total Disability" will mean such disability that
prevents the Consultant from performing his duties under Section 2 of this
Agreement for a continuous period of ninety (90) days.
(d) This Agreement will be automatically terminated upon the death of
the Consultant.
5. COMPENSATION.
(a) MONTHLY RETAINER. In consideration of the Consultant's services
under this Agreement, the Company will pay the Consultant a retainer of
$10,000 per month payable on the 15th day of each month commencing April
15, 1996.
(b) STOCK OPTIONS. In addition to the monthly retainer described
above, and subject to the terms and conditions set forth below, the
Consultant will be entitled to receive non-qualified stock options (i.e.,
options that are not intended to be incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended) as
follows:
<PAGE>
(i) Effective April 1, 1996, the Consultant will receive
non-qualified stock options to purchase one hundred fifty thousand
(150,000) shares of the Common Stock of the Company at an exercise
price of $5.25 per share, fifty thousand (50,000) of which will be
exercisable immediately and the balance will become exercisable in
equal increments of one-thirty-sixth (1/36) of such balance at the end
of each of the first thirty-six (36) months of the term of this
Agreement so long as the Consultant remains engaged as a consultant,
officer or director by the Company.
(ii) Effective April 1, 1997, subject to the discretion of the
Board to refuse to approve the grant of such options if the Board is
dissatisfied with the performance of the Consultant or the Company's
progress to such date, the Consultant will receive non-qualified
options to purchase fifty thousand (50,000) shares of Common Stock,
exercisable at the fair market value per share as of April 1, 1997 as
determined by the Board in good faith, which options will become
exercisable in equal increments of one-twenty-fourth (1/24) of such
number of shares at the end of each of the twenty-four (24) months
beginning April of 1997 so long as the Consultant remains engaged as a
consultant, officer or director by the Company.
(iii) Effective April 1, 1998, subject to the discretion of the
Board to refuse to approve the grant of such options if the Board is
dissatisfied with the performance of the Consultant or the Company's
progress to such date, the Consultant will receive non-qualified
options to purchase twenty-five thousand (25,000) shares of Common
Stock, exercisable at the fair market value per share as of April 1,
1998 as determined by the Board in good faith, which options will
become exercisable in equal increments of one-twelfth (1/12) of such
number of shares at the end of each of the twelve (12) months
beginning April of 1998 so long as the Consultant remains engaged as a
consultant, officer or director by the Company.
(iv) Effective April 1, 1999, subject to the discretion of the
Board to refuse to approve the grant of such options if the Board is
dissatisfied with the performance of the Consultant or the Company's
progress to such date, the Consultant will receive non-qualified
options to purchase twenty-five thousand (25,000) shares of Common
Stock, exercisable at the fair market value per share as of April 1,
1999 as determined by the Board in good faith, which options will be
immediately exercisable upon the date of grant.
(v) Upon a "Change in Control," as defined in the Company's
1990 Omnibus Stock Option Plan (without giving effect to the last
sentence of Section 11.1 thereof), if the Consultant remains engaged
as a consultant, director or officer to the Company immediately prior
to such Change in Control or immediately prior to the Company entering
into an agreement or understanding of any kind providing for such
Change in Control, all of the foregoing options that are scheduled to
be granted under clauses (ii) to (iv) above prior to the date that is
ninety (90) days after the effective date of such Change in Control
will be deemed to have been granted at the fair market value per share
as of the effective date of such Change in Control (to the extent not
yet granted), and all of such options that have been granted or are
deemed granted pursuant to this clause (v) and remain outstanding as
of the date of such Change in Control will become immediately
exercisable. All such options that become exercisable shall remain
exercisable until the earlier of: (A) ten (10) years after the date of
grant, (B) ninety (90) days after the date that the Consultant no
longer serves the Company in any capacity, whether as a consultant;
director or officer, unless such cessation of service is due to the
<PAGE>
death of the Consultant, or (C) one (1) year after the death of the
Consultant. All of the foregoing options will be evidenced by the
form of non-statutory stock option agreement attached hereto as
Exhibit A to be executed and delivered as of the respective dates of
grant and reflecting the foregoing terms and conditions, PROVIDED,
HOWEVER, that all of the foregoing options, when granted or deemed
granted, will be deemed outstanding for all purposes of Articles 3, 10
and 11 of the Company's 1990 Omnibus Stock Option Plan; and PROVIDED
FURTHER, that Section 11.3 of the Company's 1990 Omnibus Stock Option
Plan shall not apply to any of the foregoing options.
(c) EXPENSES. The Company will pay or reimburse the Consultant for
reasonable expenses that the Consultant incurs while performing his duties under
this Agreement, whether as Consultant, Chairman or a director, provided that
such expenses are incurred and properly accounted for in accordance with the
Company's policies regarding reimbursement of business expenses as may be in
effect from time to time.
6. CONFIDENTIAL INFORMATION.
(a) "Confidential Information," as used in this Section 6, means
information that is not generally known and that is proprietary to the Company
or that the Company is obligated to treat as proprietary. This information
includes, without limitation:
(i) trade secret or other proprietary information about the
Company and its products; and
(ii) proprietary information concerning any of the Company's
past, current, or possible future products, including (without limitation)
proprietary information about the Company's research, development,
engineering, purchasing, manufacturing, accounting, marketing, selling or
leasing.
Notwithstanding anything to the contrary contained herein, the term
"Confidential Information" does not include information which (i) is or becomes
available to the public other than as a result of a disclosure by the
Consultant, (ii) was within the Consultant's possession prior to its being
furnished to the Consultant by or on behalf of the Company pursuant to this
Agreement, or (iii) becomes available to the Consultant on a non-confidential
basis from a source other than the Company or its representatives.
(b) The Consultant will not, either during or after his engagement by the
Company, use or disclose Confidential Information to any person not authorized
by the Company to receive it, except (i) as required in the performance of the
Consultant's duties to the Company, (ii) as required to enforce this Agreement,
or (iii) as otherwise required by law. When the Consultant's engagement with the
Company ends, he will, upon the Company's request, promptly turn over to the
Company all records and any compositions, articles, devices, apparatus and other
items that disclose, describe or embody Confidential Information, including all
copies, reproductions and specimens of the Confidential Information in his
possession, regardless of who prepared them.
7. COMPETITIVE ACTIVITIES. The Consultant agrees that during the term
of this Agreement and for a period of two (2) years after termination of this
Agreement, regardless of the reason for such termination:
(a) He will not alone, or in any capacity with another firm:
<PAGE>
(i) directly or indirectly compete with the Company's
business, as the Company has conducted it during the Consultant's
engagement with the Company, within any state in the United States or any
country in which state or country the Company directly or indirectly
markets or services products or provides services or reasonably plans or
intends during Consultant's engagement period to market or service products
or provide services;
(ii) solicit or encourage any Company customer or potential
customer (for mattress products made by the Company) to cease to do
business with or to not do business with the Company in such products; or
(iii) employ or attempt to employ any of the Company's then
employees on behalf of any other entity competing with the Company.
(b) The Consultant may, however, accept employment or service with an
entity competing with the Company so long as the business of such entity is
diversified, and the employment or service by the Consultant is with a
separately managed and operated part of its business that does not compete with
the Company.
8. NO ADEQUATE REMEDY. The Consultant understands that if he fails to
fulfill his obligations under this Agreement, the damages to the Company would
be very difficult to determine. Therefore, in addition to any other rights or
remedies available to the Company at law, in equity or by statute, the
Consultant hereby consents to the specific enforcement by the Company of
Sections 6 and 7 of this Agreement through an injunction or restraining order
issued by an appropriate court.
9. INDEMNIFICATION; DIRECTORS AND OFFICERS LIABILITY INSURANCE.
(a) The Company shall pay or reimburse to the Consultant the fees and
expenses of personal counsel for their professional services rendered to
the Consultant in connection with this Agreement and any other agreement or
benefit plan entered into or adopted in connection herewith and matters
related hereto and thereto (provided that the fees and expenses of such
counsel in connection with the execution and delivery of this Agreement
shall not exceed $5,000), including in connection with any enforcement
hereof and thereof if the Consultant is the prevailing party in any such
dispute or enforcement action. Without limiting the foregoing, in the
event that the Company terminates, or seeks to terminate this Agreement,
alleging as justification for such termination "for cause" as specified in
Section 4 hereof and the Consultant in good faith disputes such termination
or attempted termination, and the Company disputes its obligations pursuant
to any provision of this Agreement, the Company shall pay, or reimburse to
the Consultant, all reasonable costs incurred by the Consultant in such
dispute, including attorneys' fees and costs, if the Consultant is the
prevailing party in any such dispute or enforcement action.
(b) The Company shall indemnify and hold the Consultant harmless
against all claims, damages, judgments, fines, amounts paid in settlement
and reasonable expenses, including attorneys' fees and expenses, incurred
by the Consultant: (i) for any breach of any covenant of the Company
contained herein, or in any agreement entered into in connection herewith,
or (ii) in connection with the defense of, or as a result of any action or
proceeding (or any appeal from any action or proceeding) (x) brought by the
Company or any third party challenging the validity or enforceability of
all or any portion of this Agreement and any other agreement entered into
or adopted in connection herewith or (y) in which the Consultant is made or
is threatened to be made a party by reason of the fact that the Consultant
is or was an officer
<PAGE>
or director of the Company, regardless of when such action or proceeding
may be brought and regardless of whether such action or proceeding is
one brought by or in the right of the Company to procure a judgment in
its favor (or other than by or in the right of the Company). The
undertakings of subparagraph (a) are independent of and shall not be
limited or prejudiced by the undertakings of this subparagraph (b).
(c) In addition to the foregoing (and not in limitation):
(i) the Consultant will at all times be entitled to
indemnification from the Company in accordance with Article VIII of
the Restated Bylaws of the Company as in effect on the date hereof,
the Consultant will be deemed to be an "Indemnified Person" as defined
therein for all purposes, and the Consultant's rights thereunder will
not be adversely affected by any subsequent amendment thereof; and
(ii) the Company will maintain in full force and effect one or
more policies of directors and officers liability insurance providing
for such coverage (in amounts not less than present amounts) as may be
determined from time to time by the Board.
(d) The provisions of this Section 9 shall survive the termination of
this Agreement.
10. MISCELLANEOUS.
(a) SUCCESSORS AND ASSIGNS. This Agreement may not be assigned by either
party without the other party's prior written consent.
(b) MODIFICATION. This Agreement may be modified or amended only by a
writing signed by each of the parties hereto.
(c) GOVERNING LAW. The laws of the State of Minnesota will govern the
validity, construction, and performance of this Agreement, without regard to the
conflict of laws provisions of any jurisdictions. Any legal proceeding related
to this Agreement will be brought in an appropriate Minnesota court, and each of
the parties hereto hereby consents to the exclusive jurisdiction of such courts
for this purpose.
(d) CONSTRUCTION. Wherever possible, each provision of this Agreement will
be interpreted so that it is valid under applicable law. If any provision of
this Agreement is to any extent invalid under applicable law in any
jurisdiction, that provision will still be effective to the extent it remains
valid. The remainder of this Agreement also will continue to be valid, and the
entire Agreement will continue to be valid in other jurisdictions.
(e) NON-WAIVER. No failure or delay by either the Company or the
Consultant in exercising any right or remedy under this Agreement will waive any
provision of the Agreement. Nor will any single or partial exercise by either
the Company or the Consultant of any right or remedy under this Agreement
preclude either of them from otherwise or further exercising these rights or
remedies, or any other rights or remedies granted by any law or any related
document.
(f) COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which will constitute an original, but all of which, when
taken together, will constitute one and the same instrument.
<PAGE>
(g) ENTIRE AGREEMENT. This Agreement supersedes all previous and
contemporaneous oral negotiations, commitments, writings, and understandings
among the parties hereto concerning the matters in this Agreement, including,
without limitation, any policy or personnel manuals of the Company or any of its
subsidiaries or affiliates.
(h) NOTICES. All notices and other communications required or permitted
under this Agreement will be in writing and hand delivered or sent by registered
first-class Mail, postage prepaid, and will be effective upon receipt, if sent
to the following address or such other address as either party will have
notified the other party:
If to the Company: Select Comfort Corporation
6105 Trenton Lane North
Minneapolis, Minnesota 55442
Attn: Mark L. de Naray
If to the Consultant: Ervin R. Shames
35 Mollbrook Drive
Wilton, Connecticut 06897
IN WITNESS WHEREOF, the Company and the Consultant have executed this Agreement
as of the date first above written.
SELECT COMFORT CORPORATION
By: /s/
--------------------------------
Its: CEO
/s/
--------------------------------
Ervin R. Shames
<PAGE>
Exhibit 10.22
SEPARATION AGREEMENT
THIS AGREEMENT, dated as of February 20, 1997, is entered into by and between
Select Comfort Corporation, a Minnesota corporation (the "Company"), and Mark L.
de Naray, an individual presently residing in the State of Minnesota (the
"Employee").
RECITALS
A. The Company and the Employee have agreed to certain terms and conditions
relating to the remaining term of the Employee's employment with the
Company and the Employee's separation from the Company.
B. All of the terms and conditions relating to the Employee's employment with
the Company and the Employee's separation from the Company are set forth
herein and this Agreement supersedes and replaces in its entirety any
previous agreement or understanding relating thereto between the Company
and the Employee.
In consideration of the foregoing and the mutual agreements set forth below the
parties hereto agree as follows:
1. TERM OF SERVICE; SEPARATION FROM SERVICE. The Company agrees that the
Employee's employment with the Company will continue until the earlier of
(i) the date that the Employee's successor assumes the Employee's duties
and responsibilities, as determined by the Company, or (ii) April 30, 1997
(the "Separation Date"). The Employee agrees to continue performing
services as an employee of the Company as directed by the Board of
Directors through the Separation Date. On the Separation Date, the
Employee agrees to submit his resignation as an officer of the Company and
all of its subsidiaries. The Employee will continue to participate in all
employee benefit plans for which he is eligible through the Separation
Date. Any compensation or benefits due and owing to the Employee as of the
Separation Date will be paid as of the Separation Date, including accrued
vacation. From and after the Separation Date and for so long as the
Company is obligated to pay the severance compensation set forth in Section
2 below, the Company will pay the premiums for the Employee's family
coverage in the Company's health and dental plans and will continue to pay
the premiums on the existing term life insurance policy for the benefit of
the Employee. The Employee acknowledges that the Company is currently
engaged in a search for the Employee's successor, and the Employee agrees
to cooperate with the Company as reasonably requested by the Company in
connection with such search.
2. SEVERANCE COMPENSATION. Subject to reasonable compliance by the Employee
with the terms and conditions of this Agreement, and subject to the
execution and delivery by the Employee of the release in the form of
Exhibit A attached hereto (the "Release") and the effectiveness of the
Release following the passage of any applicable period of time during which
the Release may be revoked by the Employee, and in consideration for the
obligations of the Employee under Section 7 below, the Company agrees to
pay severance compensation to the Employee over a period of fifteen (15)
months commencing May 1, 1997 at the Employee's current rate of base
salary. Such severance will be paid in accordance with the Company's
standard payroll practices, including timing and manner of payment and the
Company will be entitled to deduct and withhold any amounts necessary to
satisfy any income or employment-related tax requirements.
<PAGE>
3. ELIGIBILITY FOR BONUS FOR SECURING FUNDING. The Company further agrees to
pay to the Employee a cash bonus in the amount of $50,000 if the Employee
assists the Company in successfully obtaining "Funding" for the Company, as
defined below, of $5,000,000 or more by April 30, 1997. Such bonus will be
payable upon the closing of such Funding by the Company. The term
"Funding" as used in this Agreement shall mean equity or debt financing, or
any combination of equity or debt financing, and shall also include (i) a
strategic alliance that includes debt or equity financing, (ii) a sale of
all or substantially all of the assets of the Company approved by the Board
of Directors of the Company, (ii) the consummation of a merger involving
the Company after which the shareholders of the Company immediately prior
to the merger no longer control 50% or more of the outstanding shares of
capital stock of the Company, or (iii) the acquisition of 50% or more of
the outstanding shares of capital stock of the Company in a transaction
approved by the Board of Directors of the Company.
4. STOCK OPTIONS. All options to purchase shares of Common Stock of the
Company heretofore granted to the Employee and not previously exercised
will be deemed to be fully vested and will remain exercisable for a period
of up to three (3) months from the Separation Date. To the extent that any
options held by the Employee are not exercised within three (3) months from
the Separation Date, such options will terminate as of such date and will
no longer be exercisable. If requested by the Employee, the Company will
loan the Employee the amount necessary for the purchase of the shares
subject to such options. At the time of the loan, the Employee will
execute a promissory note and a pledge agreement in form and content
satisfactory to the Company providing that: (i) the loan balance will be
due in full upon the earlier of (A) six (6) months following the completion
by the Company of an initial public offering of its securities, or (B)
April 30, 1999; (ii) the loan will bear interest at the rate equal to the
Company's bank borrowing rate in effect at the time of the loan; (iii) the
loan will be secured by a pledge of 150,000 shares issued upon exercise of
such options, which will provide, among other things, that the Company
shall retain possession of such shares until the loan is paid in full. The
outstanding principal amount and accrued interest owing to the company from
the Company's previous loan to the Employee made as of February 28, 1994 in
the original principal amount of $50,000 shall be added to and become
payable in accordance with the terms set forth above and the promissory
note and pledge agreement made as of February 28, 1994 will be replaced and
superseded by the promissory note and pledge agreement delivered pursuant
to this Section 4. In the event that the Company consummates a Funding of
$10,000,000 or more between the date hereof and April 30, 1997, and has not
completed its initial public offering on or before March 31, 1998, the
Company agrees, upon the request of the Employee made at any time during
April of 1998, to extend a loan to the Employee in an amount not to exceed
one-half (1/2) of the Employee's marginal federal income tax liability for
the tax year 1997 resulting solely from the exercise by the Employee of the
stock options referred to above in this Section 4. Such loan will be upon
the same terms and conditions as are set forth above, including the pledge
by the Employee of 150,000 shares of Common Stock to secure the obligation
of the Employee to repay such loan.
5. OPPORTUNITY TO SELL SHARES. The Company agrees to use its good faith
efforts to enable the Employee to participate by selling up to 50,000
shares in any significant sale of equity to new investors in which there
may be opportunities for participation by selling shareholders, including
for example, in connection with: (i) a public offering in which selling
shareholders are able to participate in such a manner that does not
interfere with the successful marketing of shares to be sold by the
Company, as determined by the Company based on advice from the Company's
underwriters; or (ii) an investment by a strategic or financial partner in
the Company that is willing to acquire shares from one or more selling
shareholders. Notwithstanding the foregoing, the Employee understands and
acknowledges that: (i) the requirements of the Company to raise funds
through equity financing shall take precedence over the opportunities for
selling
2
<PAGE>
shareholders to liquidate shares; and (ii) the Company has granted
certain contractual registration rights to the holders of the Company's
preferred stock and may grant additional registration rights to other
holders of capital stock of the Company in the future, and nothing
contained in this Agreement shall be construed to interfere with or
supersede any such contractual rights or to require the Company to
violate, amend or modify any such contractual rights. The Company
further agrees that in the event that the Company consummates a Funding
of $10,000,000 or more on or before April 30, 1997, then subject to such
shareholder approval as may be necessary under the Company's Articles of
Incorporation or pursuant to contractual commitments to preferred
stockholders of the Company, which the Company agrees to use its
reasonable good faith efforts to obtain, the Company agrees, at the
Employee's option exercisable at any time within three (3) months after
closing of the Funding described above, to purchase up to 50,000 shares
of Common Stock from the Employee at the same effective price per share
of Common Stock as is paid in the Funding. In the event that the Funding
is in the form of debt financing from which an effective price per share
of Common Stock is not readily determinable, the Company and the
Employee agree that the valuation of the Common Stock shall be the fair
market value as may be agreed upon by the Company and the Employee based
on arms-length negotiations or based upon an agreed upon appraisal
methodology.
6. OUTPLACEMENT SERVICES. The Company will provide the Employee with
outplacement services or the establishment of office services for the
continuing career development of the Employee, as requested by the
Employee, for a period of up to one (1) year and in an amount not to exceed
$10,000.
7. NON-COMPETITION AND NON-DISCLOSURE OF CONFIDENTIAL INFORMATION. The
Employee agrees that from and after the date hereof and through a period of
one (1) year following the cessation of the severance payments provided for
in Section 2 above, the Employee will not alone or in any capacity with any
other person or entity:
A. directly or indirectly engage in any commercial activity that competes
with the Company's business anywhere in the world; or
B. in any way interfere or attempt to interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors or customers; or
C. employ or attempt to employ any of the Company's employees so long as
they remain employees of the Company.
The Employee further agrees that from and after the date hereof and for a
period of five (5) years following the cessation of the severance payments
provided for in Section 2 above, except as required in the performance of
the Employee's duties for and on behalf of the Company, the Employee will
not use or disclose to any party any of the Company's proprietary or
confidential information.
8. SERVICE ON BOARD OF DIRECTORS/BOARD OBSERVATION RIGHTS. The Company and
the Employee agree that he will continue to serve on the Board of Directors
of the Company until the earliest of (i) the date on which the Employee
voluntarily resigns from the Board of Directors; (ii) the date on which the
shareholders elect a successor to the Employee's position on the Board of
Directors; or (iii) the date on which the Board determines to nominate
another person to fill the Employee's position on the Board of Directors.
Thereafter the Company agrees that the Employee will be given notice of and
the right to attend as a non-voting observer all meetings of the full Board
of Directors of the Company until the earliest of: (i) the date that the
Company completes an initial
3
<PAGE>
public offering of its securities; or (ii) the date that the Employee
ceases to own or have the contractual right to acquire an aggregate of
five hundred thousand or more shares of the Company's Common Stock. The
Company also agrees to give the Employee the same information as is
provided to other Board observers so long as the Employee has rights to
attend Board meetings. Notwithstanding the foregoing, the Employee
acknowledges that there may be occasions during meetings of the Board of
Directors when observers are asked to leave the meeting to enable only
the full Board of Directors to meet in executive session, and the
Employee agrees to leave any meeting of the Board of Directors as and
when so requested.
9. NON-DISPARAGEMENT. The Employee agrees that he will not, at any time,
disparage, demean or criticize, or do or say anything to cause injury to,
the business, reputation, management, employees or products of the Company.
The Company agrees that it will not, at any time, disparage, demean or
criticize, or do or say anything to cause injury to the reputation or
career development of the Employee. In addition to any other damages or
remedies that may be available to a non-breaching party for any breach of
this Section 9, any breaching party shall further be obliged to the
non-breaching party for any reasonable attorneys fees and costs incurred by
the non-breaching party to enforce the provisions of this Section 9.
10. CONFIDENTIALITY AGREEMENT. The Company and the Employee each agree that
they will hold the facts and circumstances of this Agreement in strict
confidence and will not reveal the existence or the terms of this Agreement
to anyone except as may be required by law. Notwithstanding the foregoing,
each of the parties hereto will be entitled to advise their respective
professional advisors of the terms hereof, and the Employee will be
entitled to discuss the terms hereof with immediate family members.
11. NO OTHER COMPENSATION. The Employee agrees and understands that he is
entitled to no other compensation other than as expressly enumerated in
this Agreement and will not accrue or become entitled to any benefits other
than as expressly enumerated herein. The Employee also understands that
payments made pursuant to this Agreement may be subject to withholding of
applicable income and other employment-related taxes and consents to the
Company's right to withhold from such payments. Furthermore, the Employee
acknowledges that the benefits under this Agreement are more than he would
have received under normal policies in the absence of this Agreement and
the attached Release.
12. KNOWING AND WILLFUL AGREEMENT. The Employee hereby acknowledges he fully
understands and accepts the terms of this Agreement, that his signature is
freely, voluntarily and knowingly given, and that he has been provided a
full opportunity to review and reflect on the terms of this Agreement and
to obtain the advice of legal counsel of his choice, which advice the
Company has encouraged him to obtain.
13. RESCISSION PERIOD. After executing this Agreement, the Employee
understands that he may rescind this Agreement by delivering written notice
of such rescission within fifteen (15) days of this date of such execution
by certified mail, return receipt requested, to Select Comfort Corporation,
6105 Trenton Lane North, Minneapolis, Minnesota 55442, Attn.: Chairman of
the Board. The Employee understands that this Agreement will not become
effective until the end of such 15-day period and only if the Employee does
not rescind this Agreement.
14. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties and supersedes all previous negotiations, representations and
agreements heretofore made by the parities with respect to the subject
matter hereof. No amendment waiver or discharge hereof shall be valid
unless in writing and executed by both parties hereto.
4
<PAGE>
15. GOVERNING LAW. The laws of the State of Minnesota will govern the
validity, construction and performance of this Agreement, without regard to
the conflict of law provisions of any jurisdictions. Any legal proceeding
related to this Agreement, will be brought in an appropriate Minnesota
court, and both the Company and the Employee hereby consent to the
exclusive jurisdiction of that court for this purpose.
16. SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted so that it is valid under applicable law. If any provision of
the Agreement is to any extent rendered invalid under applicable law, that
provision will still be effective to the extent it remains valid. The
remainder of this Agreement also will continue to be valid, and the entire
Agreement will continue to be valid in other jurisdictions.
17. NO ASSIGNMENT. The Employee may not assign this Agreement to any third
party for whatever purpose without the express written consent of the
Company. The Company may not assign this Agreement to any third party,
except by operation of law through merger, consolidation, liquidation or
recapitalization, or by sale of all or substantially all of the assets of
the Company, without the express written consent of the Employee.
18. REMEDIES. The parties hereto agree that the rights granted by this
Agreement are both unique and special, and the parties contemplate that
enforcement of this Agreement may be had by recourse to the equitable
remedies available in courts of appropriate jurisdiction in addition to any
other remedies which may be or may become available at law.
19. BINDING EFFECT. This Agreement and the obligations of the respective
parties hereunder shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto. In furtherance of, and not
in limitation of, the foregoing, the Company agrees that the provisions of
this Agreement shall be binding upon any successor to the business and
assets of the Company and the provisions of this Agreement for the benefit
of the Employee shall inure to the benefit of the Employee's estate in the
event of the Employee's death.
5
<PAGE>
The parties have duly executed this Agreement as of the date set forth above.
SELECT COMFORT CORPORATION
By: /s/
-----------------------------------------
Its: Board Compensation Committee Chairman
MARK L. DE NARAY
/s/
---------------------------------------------
6
<PAGE>
EXHIBIT A
RELEASE
I, Mark L. de Naray, for good and valuable consideration, do hereby fully and
completely release and waive any and all claims, complaints, causes of action or
demands of whatever kind, which I have or may have against Select Comfort
Corporation. its predecessors, successors, subsidiaries and affiliates and all
of its past and present board members, officers, employees, consultants and
agents of those persons and companies for any actions, conduct, decisions,
behavior or events relating to or arising out of the terms, conditions, or
circumstances of my employment and separation from employment with Select
Comfort Corporation occurring up through the date of my signature on this
Release.
I understand and accept that I am giving up any claims, complaints, causes of
actions or demands which I have or may have against Select Comfort Corporation
relating in any way to the terms, conditions or circumstances of my employment
and my separation from employment including, but not limited to, claims for
employment discrimination prohibited under Title VII of the Federal Civil Rights
Act of 1964, as amended, the Civil Rights Act of 1991, the Age Discrimination in
Employment Act, the Americans With Disabilities Act and the Minnesota Human
Rights Act, any other state or federal statutes and all claims which I may have
based on statutory or common law claims for negligence or other breach of duty,
wrongful discharge, breach of express or implied contract, sexual harassment,
promissory estoppel, breach of any express or implied promise,
misrepresentation, fraud, retaliation, negligent or intentional infliction of
emotional distress, defamation, invasion of privacy, tortuous interference with
contract, negligent hiring, retention or supervision, retaliatory discharge
contrary to public policy and any other theory whether legal or equitable.
I acknowledge that I have been given 21 days to consider whether I should enter
into this Release and have been advised to consult with legal counsel of my
choice, which I have done.
By my signature below, I acknowledge that I freely, voluntarily and knowingly
accept the terms of this Release. I believe that the money and other
consideration I am receiving from Select Comfort Corporation is a full and fair
payment for this Release. I understand that I may rescind this Release if I do
so in writing delivered by certified mail, return receipt requested, to Select
Comfort Corporation in the care of the Chairman of the Board, 6105 Trenton Lane
North, Minneapolis, Minnesota 55442 postmarked within fifteen days of the date
below. I further acknowledge that I have been given the full opportunity to
review and reflect on the terms of this Release and have consulted with legal
counsel.
/s/
----------------------------
Mark L. de Naray
Subscribed and sworn to
before me this 20 day
of February, 1997
/s/
- --------------------------
Notary Public
7
<PAGE>
Exhibit 10.23
PROMISSORY NOTE
$386,546.64 Minneapolis, Minnesota
February 20, 1997
FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order of
Select Comfort Corporation, a Minnesota corporation ("Company"), at its
principal office, or at such other place as Company may from time to time
designate, the principal sum of Three Hundred Eighty-Six Thousand Five Hundred
Forty-Six and 64/100 Dollars ($386,546.64), in lawful money of the United
States, together with interest on the unpaid principal balance compounded
annually at the rate of nine and one-quarter percent (9-1/4%) per annum.
The entire principal balance and all accrued interest thereon shall be due and
payable on the earlier of (a) six (6) months following the completion by Company
of an initial public offering of its securities, or (b) April 30, 1999 (or on
the next business day thereafter if such date is not a business day).
The obligations of Maker under this Promissory Note shall be secured by the
pledge by Maker of 150,000 shares of the Common Stock, par value $0.01 per
share, which pledge shall be in form and substance reasonably satisfactory to
Company and shall provide for Company to retain possession of such shares, duly
endorsed for transfer or with a separate stock power attached, until all
obligations of Maker under this Promissory Note shall have been satisfied.
This Promissory Note may be prepaid in full or in part at any time without
penalty, provided that all prepayments shall be applied first to accrued
interest and then to the principal balance hereof.
No delay or omission on the part of Company in exercising any right hereunder
shall operate as a waiver of such right or of any other remedy under this
Promissory Note. A waiver on any occasion shall not be construed as a bar to or
waiver of any such right or remedy on a future occasion.
Maker agrees to pay all expenses, including without limitation, reasonable
attorneys' fees and legal expenses, whether or not suit is commenced, incurred
by Company in enforcing the obligations of Maker under this Promissory Note.
The makers, endorsers, sureties, guarantors and all other persons liable for all
or any part of the indebtedness evidenced by this Promissory Note jointly and
severally waive presentment for payment, protest, demand, and notice of protest,
demand, dishonor and nonpayment. Such parties hereby consent without affecting
their liability to any extension or alteration of the time or terms of payment
hereof, any renewal, any release of all or any part of the security given for
the payment hereof, any acceptance of additional security of any kind, and any
release of, or resort to any party liable for payment hereof.
This Promissory Note shall be construed in accordance with and governed by the
laws of the State of Minnesota, without regard to the conflict of laws
provisions thereof. Maker hereby
<PAGE>
irrevocably consents to the jurisdiction of the state and federal courts of
the State of Minnesota and hereby agrees that such courts will be the proper
and only forums in which to adjudicate any case or controversy arising under
or relating to this Promissory Note.
/s/
-------------------------------
Mark L. de Naray
2
<PAGE>
Exhibit 10.24
PLEDGE AGREEMENT
The undersigned ("Pledgor") hereby pledges, assigns and grants to Select Comfort
Corporation, a Minnesota corporation ("Secured Party"), a security interest in
150,000 shares of the common stock, par value $0.01 per share, of Secured Party
represented by certificate number 142 registered in the name of Pledgor, as well
as any and all proceeds thereof (as that term is defined in the Uniform
Commercial Code in effect in the State of Minnesota, as amended from time to
time), whether such proceeds constitute cash or noncash proceeds, including
noncash proceeds of every type and classification whether or not acquired with
cash proceeds (the "Collateral"), in order to secure payment to Secured Party of
any and all amounts due under the terms of that certain Promissory Note of even
date herewith payable by Pledgor to Secured Party in the original principal
amount of $386,546.64 (the "Note").
Pledgor warrants, represents and agrees that:
1. TERM OF THE PLEDGE. The Collateral shall be pledged to Secured Party
pursuant to this Pledge Agreement until payment in full of all obligations of
Pledgor under the Note.
2. COLLATERAL ON DEPOSIT. Throughout the term of this Pledge Agreement, the
Collateral shall remain in the possession of Secured Party, together with a
separate stock power enabling Secured Party to effect a transfer of the
Collateral on the books of the Company.
3. LIENS AND ENCUMBRANCES. Pledgor presently has and will maintain as long as
the Note remains outstanding, absolute title to the Collateral free and clear of
any and all liens and encumbrances. Any and all costs of maintaining the
Collateral free and clear of any encumbrances and security interests which are
prohibited by the terms of this Pledge Agreement and of removing the same, if
they should arise, shall be borne and paid solely by Pledgor.
4. NO RESTRICTIONS. Pledgor has the full power and authority to execute this
Pledge Agreement and to subject the Collateral to the security interest created
hereby. No pledge agreement, financing statement or assignment (reflecting the
grant of a security interest in favor of one other than Secured Party) covering
all or any part of the Collateral is in existence or on file in any public
office; nor is any of the Collateral which is pledged hereunder subject to any
restrictions on distribution, except pursuant to federal and state securities
laws.
5. NO DISPOSITION OF COLLATERAL. Except as otherwise agreed to from time to
time by Pledgor and Secured Party, Pledgor will not sell, transfer, lease, grant
a security interest in or otherwise dispose of any of the Collateral, to any
person, party or entity other than Secured Party, and Pledgor shall pay, when
such sums become due and owing, all taxes and other governmental charges levied
or assessed upon any of the Collateral.
6. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an event of default hereunder (an "Event of Default"): (a) the failure on the
part of Pledgor to comply with any material obligation contained herein or in
the Note; or (b) any statement, representation or warranty of Pledgor that is
made herein or at any time furnished in writing to Secured Party is untrue or
misleading in any respect as of the date that such statement, representation or
warranty is made.
7. REMEDIES. If any Event of Default arises, Secured Party may, at its
option, exercise any and all rights and remedies of a secured party under the
Uniform Commercial Code (as then in effect in the State of Minnesota) or any
other applicable law.
8. MISCELLANEOUS. This Pledge Agreement shall be binding upon and inure to
the benefit of Pledgor and Secured Party and their respective heirs,
representatives, successors and assigns. It shall take effect when signed by
Pledgor and delivered to Secured Party, and Pledgor hereby waives notice of
Secured Party's acceptance hereof. This Pledge Agreement shall be governed by
and construed in accordance with the laws of the State of Minnesota and, unless
the context otherwise requires, all of the terms used herein which are defined
in Articles 1 and 9 of the Uniform Commercial Code (as in effect in the State of
Minnesota and as amended from time to time) shall have the meanings stated
therein. If any provision or application of this Pledge Agreement is held by an
appropriate tribunal to be unlawful or unenforceable in any respect, then such
illegality or unenforceability shall not affect any other provision or
application of this Pledge Agreement which may be given effect, and this Pledge
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. Any and all
representations and warranties contained in this PledgeAgreement shall survive
the execution and delivery of this Pledge Agreement and shall expire upon
payment of all sums due under the Note.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be
executed and delivered effective as of February 20, 1997.
/S/
-----------------------------
Mark L. de Naray
<PAGE>
STOCK POWER
FOR VALUE RECEIVED, Mark L. De Naray, hereby sells, assigns and transfers unto
Select Comfort Corporation (the "Company"), One Hundred Fifty Thousand (150,000)
shares of the Common Stock of the Company standing in his name on the books of
the Company represented by Certificate No. 142, and does hereby irrevocably
constitute and appoint the Secretary of the Company as attorney-in-fact to
transfer such shares on the books of the Company with full power of substitution
in the premises.
Dated February 20, 1997
/s/
- --------------------------------
Mark L. de Naray
In Presence of
/s/
- ---------------------------------
<PAGE>
Exhibit 10.25
PROMISSORY NOTE
$425,000 Minneapolis, Minnesota
April 13, 1998
FOR VALUE RECEIVED, the undersigned ("Maker") promises to pay to the order of
Select Comfort Corporation, a Minnesota corporation ("Company"), at its
principal office, or at such other place as Company may from time to time
designate, the principal sum of Four Hundred Twenty-Five Thousand and 00/100
Dollars ($425,000), in lawful money of the United States, together with
interest on the unpaid principal balance compounded annually at the rate of
nine and one-quarter percent (9-1/4%) per annum.
The entire principal balance and all accrued interest thereon shall be due and
payable on the earlier of (a) six (6) months following the completion by Company
of an initial public offering of its securities, or (b) April 30, 1999 (or on
the next business day thereafter if such date is not a business day).
The obligations of Maker under this Promissory Note shall be secured by the
pledge by Maker of 150,000 shares of the Common Stock, par value $0.01 per
share, which pledge shall be in form and substance reasonably satisfactory to
Company and shall provide for Company to retain possession of such shares, duly
endorsed for transfer or with a separate stock power attached, until all
obligations of Maker under this Promissory Note shall have been satisfied.
This Promissory Note may be prepaid in full or in part at any time without
penalty, provided that all prepayments shall be applied first to accrued
interest and then to the principal balance hereof.
No delay or omission on the part of Company in exercising any right hereunder
shall operate as a waiver of such right or of any other remedy under this
Promissory Note. A waiver on any occasion shall not be construed as a bar to or
waiver of any such right or remedy on a future occasion.
Maker agrees to pay all expenses, including without limitation, reasonable
attorneys' fees and legal expenses, whether or not suit is commenced, incurred
by Company in enforcing the obligations of Maker under this Promissory Note.
The makers, endorsers, sureties, guarantors and all other persons liable for all
or any part of the indebtedness evidenced by this Promissory Note jointly and
severally waive presentment for payment, protest, demand, and notice of protest,
demand, dishonor and nonpayment. Such parties hereby consent without affecting
their liability to any extension or alteration of the time or terms of payment
hereof, any renewal, any release of all or any part of the security given for
the payment hereof, any acceptance of additional security of any kind, and any
release of, or resort to any party liable for payment hereof.
<PAGE>
This Promissory Note shall be construed in accordance with and governed by the
laws of the State of Minnesota, without regard to the conflict of laws
provisions thereof. Maker hereby irrevocably consents to the jurisdiction of
the state and federal courts of the State of Minnesota and hereby agrees that
such courts will be the proper and only forums in which to adjudicate any case
or controversy arising under or relating to this Promissory Note.
/s/
--------------------------------
Mark L. de Naray
2
<PAGE>
Exhibit 10.26
PLEDGE AGREEMENT
The undersigned ("Pledgor") hereby pledges, assigns and grants to Select
Comfort Corporation, a Minnesota corporation ("Secured Party"), a security
interest in 150,000 shares of the common stock, par value $0.01 per share, of
Secured Party represented by certificate number 143 registered in the name of
Pledgor, as well as any and all proceeds thereof (as that term is defined in
the Uniform Commercial Code in effect in the State of Minnesota, as amended
from time to time), whether such proceeds constitute cash or noncash
proceeds, including noncash proceeds of every type and classification whether
or not acquired with cash proceeds (the "Collateral"), in order to secure
payment to Secured Party of any and all amounts due under the terms of that
certain Promissory Note of even date herewith payable by Pledgor to Secured
Party in the original principal amount of $425,000 (the "Note").
Pledgor warrants, represents and agrees that:
1. TERM OF THE PLEDGE. The Collateral shall be pledged to Secured Party
pursuant to this Pledge Agreement until payment in full of all obligations of
Pledgor under the Note.
2. COLLATERAL ON DEPOSIT. Throughout the term of this Pledge Agreement, the
Collateral shall remain in the possession of Secured Party, together with a
separate stock power enabling Secured Party to effect a transfer of the
Collateral on the books of the Company.
3. LIENS AND ENCUMBRANCES. Pledgor presently has and will maintain as long as
the Note remains outstanding, absolute title to the Collateral free and clear of
any and all liens and encumbrances. Any and all costs of maintaining the
Collateral free and clear of any encumbrances and security interests which are
prohibited by the terms of this Pledge Agreement and of removing the same, if
they should arise, shall be borne and paid solely by Pledgor.
4. NO RESTRICTIONS. Pledgor has the full power and authority to execute this
Pledge Agreement and to subject the Collateral to the security interest created
hereby. No pledge agreement, financing statement or assignment (reflecting the
grant of a security interest in favor of one other than Secured Party) covering
all or any part of the Collateral is in existence or on file in any public
office; nor is any of the Collateral which is pledged hereunder subject to any
restrictions on distribution, except pursuant to federal and state securities
laws.
5. NO DISPOSITION OF COLLATERAL. Except as otherwise agreed to from time to
time by Pledgor and Secured Party, Pledgor will not sell, transfer, lease, grant
a security interest in or otherwise dispose of any of the Collateral, to any
person, party or entity other than Secured Party, and Pledgor shall pay, when
such sums become due and owing, all taxes and other governmental charges levied
or assessed upon any of the Collateral.
6. EVENTS OF DEFAULT. The occurrence of any of the following shall constitute
an event of default hereunder (an "Event of Default"): (a) the failure on the
part of Pledgor to comply with
<PAGE>
any material obligation contained herein or in
the Note; or (b) any statement, representation or warranty of Pledgor that is
made herein or at any time furnished in writing to Secured Party is untrue or
misleading in any respect as of the date that such statement, representation or
warranty is made.
7. REMEDIES. If any Event of Default arises, Secured Party may, at its
option, exercise any and all rights and remedies of a secured party under the
Uniform Commercial Code (as then in effect in the State of Minnesota) or any
other applicable law.
8. MISCELLANEOUS. This Pledge Agreement shall be binding upon and inure to
the benefit of Pledgor and Secured Party and their respective heirs,
representatives, successors and assigns. It shall take effect when signed by
Pledgor and delivered to Secured Party, and Pledgor hereby waives notice of
Secured Party's acceptance hereof. This Pledge Agreement shall be governed by
and construed in accordance with the laws of the State of Minnesota and, unless
the context otherwise requires, all of the terms used herein which are defined
in Articles 1 and 9 of the Uniform Commercial Code (as in effect in the State of
Minnesota and as amended from time to time) shall have the meanings stated
therein. If any provision or application of this Pledge Agreement is held by an
appropriate tribunal to be unlawful or unenforceable in any respect, then such
illegality or unenforceability shall not affect any other provision or
application of this Pledge Agreement which may be given effect, and this Pledge
Agreement shall be construed as if the unlawful or unenforceable provision or
application had never been contained herein or prescribed hereby. Any and all
representations and warranties contained in this PledgeAgreement shall survive
the execution and delivery of this Pledge Agreement and shall expire upon
payment of all sums due under the Note.
IN WITNESS WHEREOF, the undersigned has caused this Pledge Agreement to be
executed and delivered effective as of April 13, 1998.
/s/
------------------------------------
Mark L. de Naray
2
<PAGE>
EXHIBIT 10.27
SEPARATION AGREEMENT
THIS AGREEMENT, dated as of July 13, 1998 entered into by and between Select
Comfort Corporation, a Minnesota Corporation (the "Company") and John D. Watson,
an individual presently residing in the State of Minnesota (the "Employee").
RECITALS
A. The Company and the Employee have agreed to certain terms and conditions
relating to the remaining term of the Employee's employment with the
Company and the Employee's separation from the Company.
B. All of the terms and conditions relating to the Employee's employment with
the Company and the Employee's separation from the Company are set forth
herein and this Agreement supersedes and replaces in its entirety any
previous agreement or understanding relating thereto between the Company
and the Employee.
In consideration of the foregoing and the mutual agreements set forth below the
parties hereto agree as follows:
1. TERM OF SERVICE: SEPARATION FROM SERVICE. The Company agrees that the
Employee's employment with the Company will continue until September 1,
1998 (the "Separation Date"). The Employee agrees to continue performing
services as an employee of the Company as directed by the President and
Chief Executive Officer of the Company through the Separation Date. On the
Separation Date, the Employee understands that his position as an employee
and officer of the Company and all of its subsidiaries has been eliminated.
2. COVERAGE UNDER PLANS. The Employee will continue to participate in all
employee benefit plans for which he is eligible through the Separation
Date. From and after the Separation Date and until the earlier of (i)
eleven months after the Separation Date or (ii) the date that the Employee
becomes employed by another employer, the Company will continue to pay the
employer portion of the premiums for the Employee's coverage in the
Company's health and dental plans and the Employee will remain responsible
for the Employee's portion of such premiums.
3. SEVERANCE COMPENSATION. Subject to compliance by the Employee with the
terms and conditions of this Agreement, and subject to the execution and
delivery by the Employee of the release in the form of Exhibit A attached
hereto (the "Release") and the effectiveness of the Release following the
passage of any applicable period of time during which the Release may be
revoked by the Employee, and in consideration for the obligations of the
Employee under Section 6 below, the Company agrees to pay severance
compensation to the over a period of eleven (11) months commencing
immediately following the "Separation Date of the Employee" at the current
rate of
<PAGE>
annual salary of $155,000. Such severance compensation will be paid in
accordance with the Company's standard payroll practices, including timing
and manner of payment and the Company will be entitled to deduct and
withhold any amounts necessary to satisfy any income or employment-related
tax requirements.
4. BONUS COMPENSATION. The Company agrees to pay out 8/12 of the employee's
normal eligible bonus. Payment will be determined at the end of fiscal
1998 and paid in accordance with the Company's standard payroll practices,
including timing and manner of payment and the Company will be entitled to
deduct and withhold any amounts necessary to satisfy any income or
employment-related tax requirements.
5. STOCK OPTIONS. All options to purchase shares of Common Stock of the
Company heretofore granted to the Employee that are vested and exercisable
in accordance with their terms as of the Separation Date and not previously
exercised will remain exercisable for a period of three (3) months
following the Separation Date. To the extent that any options held by the
Employee are not exercised within three (3) months following the Separation
Date, such options will terminate and will no longer be exercisable.
6. OUTPLACEMENT SERVICES. The Company will provide the Employee with
outplacement services for the continuing career development of the
Employee, as requested by the Employee, for a period of up to one (1) year
and in an amount not to exceed $5,000.
7. NON-COMPETITION AND NON-DISCLOSURE OF CONFIDENTIAL INFORMATION, The
Employee agrees that from and after the date hereof and through a period of
eighteen (18) months following the cessation of the severance payments
provided for in Section 3 above, the Employee will not alone or in any
capacity with any other person or entity:
A. directly or indirectly engage in any commercial activity that competes
with the Company's business anywhere in the world; or
B. in any way interfere or attempt to interfere with the Company's
relationships with any of its current or potential vendors, suppliers,
distributors, joint venture partners or customers; or
C. solicit for employment, employ or attempt to employ any employee
currently employed by the Company or any employee that hereafter
becomes employed by the Company.
The Employee further agrees that from and after the date hereof, except as
may be expressly required in the performance of the Employee's duties for
and on behalf of the Company the Employee will not use or disclose to any
party any of the Company's proprietary or confidential information.
8. NON-DISPARAGEMENT: The Employee agrees that he will not, at any time,
disparage, demean or criticize, or do or say anything to cause injury to,
the business, reputation, management, employees, members of the Board of
Directors or products of the
<PAGE>
Company. The Company agrees that it will not, at any time, disparage,
demean or criticize, or do or say anything to cause injury to the
reputation or career development of the Employee. In addition to any
other damages or remedies that may be available to a non-breaching party
for any breach of this Section 7, any breaching party shall further be
obliged to the non-breaching party for any reasonable attorneys fees and
costs incurred by the non-breaching party to enforce the provisions of
this Section 7.
9. CONFIDENTIALITY AGREEMENT. The Company and the Employee each agree that
they will hold the facts and circumstances of this Agreement is strict
confidence and will not reveal the impending separation of the Employee
from employment with the Company, the existence of this Agreement or the
terms of this Agreement to anyone except as may be required by law.
Notwithstanding the foregoing, each of the parties hereto will be entitled
to advise their respective professional advisors of the terms hereof, and
the Employee will be entitled to discuss the terms hereof with immediate
family members.
10. NO OTHER COMPENSATION. The Employee agrees and understands that he is
entitled to no other compensation other than as expressly enumerated in
this Agreement and will not accrue or become entitled to any benefits other
than as expressly enumerated herein. The Employee also understands that
payments made pursuant to this Agreement may be subject to withholding of
applicable income and other employment-related taxes and consents to the
Company's right to withhold from such payments. Furthermore, the Employee
acknowledges that the benefits under this Agreement are more than he would
have received under normal policies in the absence of this Agreement and
the attached Release.
11. KNOWING AND WILLFUL AGREEMENT. The Employee hereby acknowledges he fully
understands and accepts the terms of this Agreement, that his signature is
freely, voluntarily and knowingly given, and that he has been provided a
full opportunity to review and reflect on the terms of this Agreement and
to obtain the advise of legal counsel of his choice, which advice the
Company has encouraged him to obtain.
12. RESCISSION PERIOD. After executing this Agreement, the Employee
understands that he may rescind this Agreement by delivering written notice
of such rescission within fifteen (15) days of the date of such execution
by certified mail, return receipt requested, to Select Comfort Corporation,
6105 Trenton Lane North, Minneapolis, Minnesota 55442, Attn: President and
Chief Executive Officer. The Employee understands that this Agreement will
not become effective until the end of such 15-day period and only if the
Employee does not rescind this Agreement.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between
the parties and supersedes all previous negotiations, representations and
agreements heretofore made by the Parties with respect to the subject
matter hereof. No amendment waiver or discharge hereof shall be valid
unless in writing and executed by both parties hereto.
14. GOVERNING LAW. The laws of the State of Minnesota will govern the
validity, construction and performance of this Agreement, without regard to
the conflict of law
<PAGE>
provisions of any jurisdictions. Any legal proceeding related to this
Agreement, will be brought In an appropriate Minnesota court, and both the
Company and the Employee hereby consent to the exclusive jurisdiction of
that court for this purpose.
15. SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted so that it is valid under applicable law, If any provision of
the Agreement is to any extent rendered invalid under applicable law, that
provision will still be effective to the extent it remains valid. The
remainder of this Agreement also will continue to be valid, and the entire
Agreement will continue to be valid in other jurisdictions.
16. NO ASSIGNMENT. The Employee may not assign this Agreement to any third
party for whatever purpose without the express written consent of the
Company. The Company may not assign this Agreement to any third party,
except by operation of law through merger, consolidation, liquidation or
recapitalization, or by sale of all or substantially all of the assets of
the Company, without the express written consent of the Employee.
17. REMEDIES. The parties hereto agree that the rights granted by this
Agreement are both unique and special, and the parties contemplate that
enforcement of this Agreement may be had by recourse to the equitable
remedies available in courts of appropriate jurisdiction in addition to any
other remedies which may be or may become available at law.
18. BINDING EFFECT. This Agreement and the obligations of the respective
parties hereunder shall be binding upon and inure to the benefit of the
successors and assigns of the parties hereto. In furtherance of, and not
in limitation of, the foregoing, the Company agrees that the provisions of
this Agreement shall be binding upon any successor to the business and
assets of the Company and the provisions of this Agreement for the benefit
of the Employee shall inure to the benefit of the Employee's estate in the
event of the Employee's death.
The parties have duly executed this Agreement as of the date set forth above.
SELECT COMFORT CORPORATION
By /s/ Robert Hawthorne
---------------------------------
Its: President and CEO
JOHN D. WATSON
/s/ John D. Watson
- ------------------------------------
<PAGE>
Exhibit 21.1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
<TABLE>
<CAPTION>
JURISDICTION OF NAME UNDER WHICH
NAME OF THE SUBSIDIARY INCORPORATION SUBSIDIARY DOES BUSINESS
<S> <C> <C>
Select Comfort SC Minnesota Select Comfort SC
Corporation Corporation
Select Comfort Retail Minnesota Select Comfort Retail
Corporation Corporation
Select Comfort Direct Minnesota Select Comfort Direct
Corporation Corporation
Direct Call Centers, Inc. Minnesota Direct Call Centers, Inc.
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Select Comfort Corporation:
The audits referred to in our report dated February 13, 1998, except as to
notes 7, 8 and 9 which are as of August 26, 1998, and note 16 which is as of
November ___, 1998, included the related financial statement schedule as of
January 3, 1998, and for each of the years in the three-year period ended
January 3, 1998, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 2, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> YEAR YEAR YEAR 6-MOS
6-MOS
<FISCAL-YEAR-END> DEC-30-1995 DEC-28-1996 JAN-03-1998 JAN-03-1998
JAN-02-1999
<PERIOD-START> JAN-01-1995 DEC-31-1995 DEC-29-1996 DEC-29-1996
JAN-04-1998
<PERIOD-END> DEC-30-1995 DEC-28-1996 JAN-03-1998 JUN-28-1997
JUL-04-1998
<CASH> 0 2,422 12,670 0
8,732
<SECURITIES> 0 0 0 0
0
<RECEIVABLES> 0 1,402 7,902 0
10,856
<ALLOWANCES> 0 200 1,901 0
2,504
<INVENTORY> 0 5,582 7,749 0
9,846
<CURRENT-ASSETS> 0 10,895 30,676 0
30,620
<PP&E> 0 22,130 32,151 0
36,145
<DEPRECIATION> 0 3,814 6,968 0
9,274
<TOTAL-ASSETS> 0 29,794 57,241 0
58,799
<CURRENT-LIABILITIES> 0 18,704 29,919 0
27,977
<BONDS> 0 1,162 19,511 0
20,712
0 27,612 27,612 0
27,612
0 0 0 0
0
<COMMON> 0 28 37 0
43
<OTHER-SE> 0 (18,244) (21,075) 0
(19,073)
<TOTAL-LIABILITY-AND-EQUITY> 0 29,794 57,241 0
58,799
<SALES> 68,629 102,028 184,430 82,077
118,800
<TOTAL-REVENUES> 68,629 102,028 184,430 82,077
118,800
<CGS> 28,833 38,521 66,629 28,995
41,546
<TOTAL-COSTS> 28,833 38,521 66,629 28,995
41,546
<OTHER-EXPENSES> 73 77 231 284
0
<LOSS-PROVISION> 237 63 2,101 525
1,821
<INTEREST-EXPENSE> 34 88 5,234 1,816
2,736
<INCOME-PRETAX> (4,560) (3,685) (2,705) (597)
2,348
<INCOME-TAX> 0 0 141 12
1,101
<INCOME-CONTINUING> (4,560) (3,685) (2,846) (609)
1,247
<DISCONTINUED> 0 0 0 0
0
<EXTRAORDINARY> 0 0 0 0
0
<CHANGES> 0 0 0 0
0
<NET-INCOME> (4,560) (3,685) (2,846) (609)
1,247
<EPS-PRIMARY> (2.11) (1.74) (1.06) (0.31)
0.20
<EPS-DILUTED> (1.87) (1.58) (0.99) (0.29)
0.04
</TABLE>
