<PAGE>
As Filed with the Securities and Exchange Commission on October 24, 1997.
................................................................................
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SECOND AMENDMENT TO
FORM SB-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
................................................................................
ACTIVE ANKLE SYSTEMS, INC.
(Name of small business issuer in its charter)
Kentucky 3842 61-1163669
- ----------------------- --------------------- ------------------------
(State or jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
................................................................................
509 Barret Avenue
Louisville, Kentucky 40204
(502) 582-2655
(Address and telephone number of principal executive offices)
................................................................................
509 Barret Avenue
Louisville, Kentucky 40204
(Address of principal place of business or intended place of business)
<PAGE>
................................................................................
Diane K. Lilly
509 Barret Avenue
Louisville, Kentucky 40204
(502) 582-2655
(Name, address and telephone number of agent for service)
Please send copies of communications to:
James N. Williams, Esq.
Middleton & Reutlinger
2500 Brown & Williamson Tower
Louisville, Kentucky 40202
(502) 584-1135
Approximate date of proposed sale to the public: As soon as practical after the
effective date of this registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the 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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
Title of each class Dollar Amount Proposed Proposed Amount of
of securities to to be maximum maximum registration fee
be registered registered offering price per aggregate
unit offering price
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of $4,000,000 $40.00 $4,000,000.00(1) $1,212.12
Common Stock
with no par value
- -------------------------------------------------------------------------------------------------
</TABLE>
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
<PAGE>
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.
Disclosure alternative used (check one): Alternative 1 X ; Alternative 2
--- ---
(1) Before deducting offering expenses estimated to be $117,212 in the
aggregate, comprised of the following: Securities and Exchange Commission fees
($1,212), State Divisions of Securities fees ($5,000), printing and engraving
fees ($10,000), legal and accounting fees ($100,000), and escrow agent fees
($1,000). If all of the Shares being offered are not sold, the proceeds to the
Company will be reduced accordingly.
................................................................................
<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 DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE A 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.
INFORMATION CONCERNING ISSUER
The registrant is currently not a reporting company. The registrant has no
securities listed on any national securities exchange.
PURCHASES BY OFFICERS, DIRECTORS AND BENEFICIAL STOCKHOLDERS
The Company's officers, directors and beneficial stockholders may purchase in
the aggregate up to 4,500 Shares in order that the minimum number of Shares
offered herein is reached. See Risk Factor 11.
<PAGE>
PRELIMINARY PROSPECTUS DATED OCTOBER 24, 1997
ACTIVE ANKLE SYSTEMS, INC.
100,000 Shares of Common Stock (total maximum)
45,000 Shares of Common Stock (total minimum)
Active Ankle Systems, Inc., a Kentucky corporation (the "Company"), is
offering for sale a maximum of 100,000 and minimum of 45,000 shares of its
common stock, without par value (the "Common Stock" or the "Shares"), at a per
share offering price of $40.00 from the date this Prospectus is effective for a
period one hundred eighty (180) days thereafter.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK AND
IMMEDIATE SUBSTANTIAL DILUTION. THE SECURITIES OFFERED HEREBY SHOULD NOT BE
PURCHASED BY ANYONE WHO CANNOT AFFORD A LOSS OF HIS ENTIRE INVESTMENT. SEE
"RISK FACTORS" ON PAGES 1 THROUGH 4 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY AND SUCH AUTHORITIES HAVE NOT CONFIRMED THE
ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Underwriting Discounts Proceeds to
and Issuer or
Price to Public Commissions Other Persons
----------------------------------------------------------------
Per Share $ 40.00 $ 0.00 $ 40.00
Total 4,000,000.00 0.00 4,000,000.00
Total Minimum 1,800,000.00 0.00 1,800,000.00
Total Maximum 4,000,000.00 0.00 4,000,000.00
SUBJECT TO COMPLETION
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.
The date of this Preliminary Prospectus is October 24, 1997.
1
<PAGE>
INVESTMENT IN SMALL BUSINESSES INVOLVES A HIGH DEGREE OF RISK, AND INVESTORS
SHOULD NOT INVEST ANY FUNDS IN THIS OFFERING UNLESS THEY CAN AFFORD TO LOSE
THEIR ENTIRE INVESTMENT . SEE QUESTION NO. 2 FOR THE RISK FACTORS THAT
MANAGEMENT BELIEVES PRESENT THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN THIS
OFFERING.
IN MAKING AN INVESTMENT DECISION, INVESTORS MUST RELY ON THEIR OWN EXAMINATION
OF THE ISSUER AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS
INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED OR APPROVED BY ANY FEDERAL
OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE
FOREGOING AUTHORITIES HAVE NOT PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE U.S. SECURITIES AND EXCHANGE COMMISSION DOES NOT PASS UPON THE MERITS OF ANY
SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE
ACCURACY OR COMPLETENESS OF ANY PROSPECTUS OR SELLING LITERATURE.
This offering has been registered for offer and sale in the following states:
STATE STATE FILE NO. EFFECTIVE DATE
- -------------------------------------------------------------------------------
Kentucky 34089
- -------------------------------------------------------------------------------
Indiana 97-0486 RC
- -------------------------------------------------------------------------------
Ohio 10827
- -------------------------------------------------------------------------------
Illinois
- -------------------------------------------------------------------------------
California
- -------------------------------------------------------------------------------
Washington
- -------------------------------------------------------------------------------
Tennessee
- -------------------------------------------------------------------------------
Massachusetts
- -------------------------------------------------------------------------------
North Carolina
- -------------------------------------------------------------------------------
Georgia
- -------------------------------------------------------------------------------
Florida
- -------------------------------------------------------------------------------
Rhode Island
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
West Virginia
- -------------------------------------------------------------------------------
PART I - NARRATIVE INFORMATION REQUIRED IN PROSPECTUS
ITEM 1. SIGNIFICANT PARTIES
(a) ISSUER'S DIRECTORS.
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Andrew Pfeifer 531 Fairfield Drive 531 Fairfield Drive
Louisville, KY 40206 Louisville, KY 40206
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Louisville, KY 40204 Prospect, KY 40059
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
John C. Nichols, II 1510 North Wind Road 1510 North Wind Road
Louisville, KY 40207 Louisville, KY 40207
Douglas D. Stegner 1644 Cherokee Road 1644 Cherokee Road
Louisville, KY 40205 Louisville, KY 40205
James T. Crain, Jr. Day Enterprises 18 Glenwood Road
620 West Main Street Louisville, KY 40258
Suite 320
Louisville, KY 40202
(b) ISSUER'S OFFICERS.
Full Name and Position Business Address Residential Address
---------------------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Chairman of the Board Louisville, KY 40222 Louisville, KY 40222
3
<PAGE>
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
President and CEO Louisville, KY 40204 Louisville, KY 40222
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Treasurer and CFO Louisville, KY 40204 Prospect, KY 40059
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Senior Vice President Louisville, KY 40204 New Albany, IN 47150
Diane K. Lilly 509 Barret Avenue 3205 Edwardsville Galena Road
Secretary and Assistant Louisville, KY 40204 Georgetown, IN 47122
Treasurer
Christina B. Wessling 509 Barret Ave. 1721 Southerland Dr.
Assistant Secretary Louisville, KY 40204 Louisville, KY 40205
(c) ISSUER'S GENERAL PARTNERS.
None. Issuer is a corporation.
(d) RECORD OWNERS OF FIVE (5) PERCENT OR MORE OF ANY CLASS OF THE ISSUER'S
EQUITY SECURITIES.
Based Upon the share holdings as of 3/31/97:
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Douglas D. Stegner 1644 Cherokee Road 1644 Cherokee Road
Louisville, KY 40205 Louisville, KY 40205
Ronald W. Schultz 509 Barret Avenue 6708 Foxcroft Road
Louisville, KY 40204 Prospect, KY 40059
Andrew Pfeifer 531 Fairfield Dr. 531 Fairfield Dr.
Louisville, KY 40206 Louisville, KY 40206
John C. Nichols, II 1510 North Wind Rd. 1510 North Wind Rd.
Louisville, KY 40207 Louisville, KY 40207
Joan Cralle Day c/o Mr. James T. Crain, 509 Jarvis Lane
Jr. Louisville, KY 40207
620 West Main St., #320
Louisville, KY 40202
Assuming that all options are exercised, and that all preferred stock is
converted, the following additional shareholders would own at least Five (5)
Percent:
4
<PAGE>
Gary G. Herzberg 509 Barret Ave. 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
(e) BENEFICIAL OWNERS OF FIVE (5) PERCENT OR MORE OF ANY CLASS OF THE ISSUER'S
EQUITY SECURITIES.
Same as stated in paragraph (d) above.
(f) PROMOTERS OF THE ISSUER.
Full Name Business Address Residential Address
--------- ---------------- -------------------
Henry H. Porter, Jr. 5806 River Knolls Dr. 5806 River Knolls Dr.
Louisville, KY 40222 Louisville, KY 40222
Andrew Pfeifer 531 Fairfield Dr. 531 Fairfield Dr.
Louisville, KY 40206 Louisville, KY 40206
Gary G. Herzberg 509 Barret Avenue 2903 River's Edge Rd.
Louisville, KY 40204 Louisville, KY 40222
Glen R. Snow 509 Barret Avenue 2427 East Elm St.
Louisville, KY 40204 New Albany, IN 47150
(g) AFFILIATES OF THE ISSUER.
None.
(h) COUNSEL TO THE ISSUER WITH RESPECT TO THE PROPOSED OFFERING.
Middleton & Reutlinger, P.S.C.
2500 Brown & Williamson Tower
Louisville, KY 40202
5
<PAGE>
(i) UNDERWRITER(S) WITH RESPECT TO THE PROPOSED OFFERING.
None.
(j) UNDERWRITER'S DIRECTORS.
No Underwriters. No Directors.
(k) UNDERWRITER'S OFFICERS.
No Underwriters. No Officers.
(l) UNDERWRITER'S GENERAL PARTNERS.
No Underwriters. No General Partners.
(m) COUNSEL TO THE UNDERWRITER(S).
No Underwriter. No Counsel.
(n) The financial statements of Active Ankle Systems, Inc. at June 30, 1997
and 1996 and for the years then ended, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
6
<PAGE>
ITEM 2. RELATIONSHIP WITH ISSUER OF EXPERTS NAMED IN REGISTRATION STATEMENT
The Company is independent of all named experts and counsel in this Prospectus.
No expert or counsel has any financial interest in the Company.
ITEM 3. SELLING SECURITY HOLDERS
No security holder of the Company is offering securities.
ITEM 4. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
During the Company's two most recent fiscal years or any later interim period,
no principal independent accountant resigned (or declined to stand for
re-election) or was dismissed.
ITEM 5. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES
There are no indemnification provisions for directors, officers and controlling
persons of the Company specifically dealing with liability under the Securities
Act. The following general provisions are applicable to indemnification of
directors, officers and controlling persons:
The Company's Articles of Incorporation and Bylaws authorize the Company to
indemnify its directors and officers to the full extent permitted by Kentucky
law.
KRS Sec. 271B.8-510 provides the authority to indemnify directors. The statute
permits corporations to indemnify an individual made a party to a proceeding
because he or she is or was a director against liability incurred in the
proceeding if:
(a) he or she conducted himself in good faith; and
(b) he or she reasonably believed:
(1) In the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in the best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to its best interests; and
(c) In the case of any criminal proceedings, the director had no
reasonable cause to believe his or her conduct was unlawful.
Further, 271B.8-520 provides for mandatory indemnification for a director
who was wholly successful, on the merits or otherwise, in the defense of any
proceeding to which he was a party
7
<PAGE>
because he or she was a director of the corporation against reasonable expense
incurred by him in connection with the proceedings.
KRS 271B.8-560 provides for certain mandatory and permissive indemnification for
corporate officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Company pursuant to Kentucky law and the Company's Articles of
Incorporation and Bylaws, the Company has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
8
<PAGE>
TABLE OF CONTENTS
Page
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Business and Properties. . . . . . . . . . . . . . . . . . . . . . . . . . 5
Offering Price Factors . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Description of Securities. . . . . . . . . . . . . . . . . . . . . . . . . 32
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Dividends, Distributions and Redemptions . . . . . . . . . . . . . . . . . 37
Officers and Key Personnel of the Company. . . . . . . . . . . . . . . . . 37
Directors of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 41
Principal Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Management Relationships, Transactions and Remuneration. . . . . . . . . . 46
Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Federal Tax Aspects. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Miscellaneous Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Management's Discussion and Analysis of Certain Relevant Factors . . . . . 50
EXHIBITS
Exhibit 3.(i) - Articles of Incorporation, as amended*
Exhibit 3.(ii) - Bylaws*
Exhibit 5 - Opinion of Counsel
Exhibit 10.1 - Distribution Agreement with Cramer Products, Inc., as amended*
Exhibit 10.2 - Distribution Agreement with The Volleyball Connection, Inc.
as amended*
Exhibit 10.3 - Distribution Agreement with AOA Division of Kirschner
Medical Corporation*
Exhibit 10.4 - License Agreement*
Exhibit 23.1 - Auditor's Consent
Exhibit 23.2 - Consent of Counsel
Exhibit 27 - Financial Data Schedule*
Exhibit 99.1 - Deferred Compensation Agreements*
Exhibit 99.2 - Escrow Agreement*
Exhibit 99.3 - Subscription Agreement
Exhibit 99.4 - Lease Agreement
THIS PROSPECTUS CONTAINS ALL OF THE REPRESENTATIONS BY THE COMPANY CONCERNING
THIS OFFERING, AND NO PERSON SHALL MAKE DIFFERENT OR BROADER STATEMENTS THAN
THOSE CONTAINED HEREIN. INVESTORS ARE CAUTIONED NOT TO RELY UPON ANY
INFORMATION NOT EXPRESSLY SET FORTH IN THIS PROSPECTUS.
- --------------
* Previously filed.
9
<PAGE>
THE COMPANY
1. EXACT CORPORATE NAME: Active Ankle Systems, Inc.
------------------------------------------------------
STATE AND DATE OF INCORPORATION: Kentucky, June 7, 1989
-------------------------------------------
STREET ADDRESS OF PRINCIPAL OFFICE: 509 Barret Avenue, Louisville, KY 40204
----------------------------------------
COMPANY TELEPHONE NUMBER: (502) 582-2655
--------------------------------------------------
FISCAL YEAR: June 30
---------------------------------------------------------------
PERSON(S) TO CONTACT AT COMPANY WITH RESPECT TO OFFERING: Gary G. Herzberg,
------------------
President, CEO and Director; Andrew Pfeifer, Director; Glen R. Snow, Senior
---------------------------------------------------------------------------
Vice President and Director; Henry H. Porter, Jr., Chairman and Director
---------------------------------------------------------------------------
TELEPHONE NUMBER (IF DIFFERENT FROM ABOVE): ( ) Same
--------------------------------
RISK FACTORS
2. LIST IN THE ORDER OF IMPORTANCE THE FACTORS WHICH THE COMPANY CONSIDERS TO
BE THE MOST SUBSTANTIAL RISKS TO AN INVESTOR IN THIS OFFERING IN VIEW OF ALL
FACTS AND CIRCUMSTANCES OR WHICH OTHERWISE MAKE THE OFFERING ONE OF HIGH RISK OR
SPECULATIVE (I.E., THOSE FACTORS WHICH CONSTITUTE THE GREATEST THREAT THAT THE
INVESTMENT WILL BE LOST IN WHOLE OR IN PART, OR NOT PROVIDE AN ADEQUATE RETURN).
(1) ARBITRARY OFFERING PRICE. The price of the Shares offered herein
was arbitrarily determined by the Company based upon such factors as an
increase in revenues and earnings, based on the successful results of the use
of proceeds to be raised by this offering and anticipated future performance.
The pricing of these Shares does not bear any relationship to the assets,
book value, or net worth, cash flows or past operating results of the
Company, and should not be considered to be an indication of the actual value
of the Company.
(2) DILUTION. Purchasers of the Common Stock offered herein will
suffer an immediate dilution of net tangible book value per share (as of June
30, 1997, assuming conversion of the Company's preferred stock into common
stock, and assuming the tendering of an estimated 24,389 shares pursuant to a
tender offer discussed elsewhere herein). The Company's net tangible book
value based on the Company's successful conclusion of this offering is $25.02
per share (if the maximum is sold) and $16.54 (if the minimum is sold) and
the offering price for the securities offered herein is $40 per share.
Therefore, investors will suffer an immediate dilution to their investment of
$23.46 if the minimum is sold and $14.98 if the maximum is sold, based on the
pre-Offering net tangible book value of the Company, which is $7.61, as of
June 30, 1997. Additionally, holders of options and warrants have been granted
certain rights which include but are not limited to an exercise price
1
<PAGE>
significantly lower than the offering price. Further, investors will not have a
preemptive right to acquire the Company's unissued shares which could result in
additional dilution.
(3) SIGNIFICANT COMPETITION. In the ankle brace business and catalog
business there are numerous competitors, many of which are larger and with more
resources than the Company. Some companies have introduced rigid stirrup-type
braces that are similar in design and function to the Active Ankle at lower
prices. The Company intends to continue as a marketer of a line of proprietary
ankle braces and other products, as well as selling at retail the products of
other manufacturers, as described in this Prospectus. While the Company
believes it offers a significant improvement in product and delivery/sales
systems versus existing similar enterprises, the business in which the Company
competes is subject to numerous competitive factors which include, among others,
service and product design. There can be no assurance that other companies
with significantly greater financial, marketing, technological or other
resources than the Company will not develop and market products and sales
techniques similar to those of the Company, which could have an adverse effect
upon the Company's profitability. Accordingly, there can be no assurance that
the Company will be able to successfully compete in the industry.
(4) ANTICIPATED OPERATING LOSSES AND SUBSTANTIAL ACCUMULATED EARNINGS
DEFICIT. The Company anticipates operating losses in its retail and catalog
operations over the next several years, and there can be no assurance as
to when, if ever, the Company will have positive operating results and
cash flow. Further, the Company has historically incurred operating losses
resulting in a substantial accumulated deficit as the product was being
improved and channels of distribution were being developed.
(5) "FORWARD-LOOKING STATEMENTS." Information included in this
Prospectus contains "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes," "contemplates,"
"expects," "may," "will," "should," "would," or "anticipates," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. No assurance can be given that the future results
encompassed within the forward-looking statements will be achieved.
Important factors with respect to such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to vary
materially from the future results encompassed within such forward-looking
statements are discussed herein under the caption "RISK FACTORS" and in other
information included herein. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
(6) UNPROVEN RETAIL CONCEPT. The Company's concept of marketing through
consumer resource centers selling orthopedic soft goods and training room
sundries to the general public is new and unproven.
(7) LACK OF RETAIL AND CATALOG BUSINESS EXPERIENCE. The Company has
been a marketer of ankle products, but has no track record in retail or
catalog, although Company personnel have experience in these areas. The
Company may not be able to secure acceptable locations, negotiate
commercially acceptable leases, or employ the personnel necessary to manage
the operations.
2
<PAGE>
(8) RELIANCE ON KEY PERSONNEL. The Company has a relatively small number
of key management personnel, and is reliant upon those people to fulfill its
business plan. If one or more of them should become ill, incapacitated, die or
otherwise become unavailable to the Company, it could significantly affect the
Company's ability to attain its goals. Further, no such key personnel have a
contractual employment agreement or non-competition agreement with the
Company, and the Company has no life insurance on any key personnel.
(9) ABILITY TO MAINTAIN SALES AND DISTRIBUTION. By opening retail
stores and operating a catalog, the Company will be in competition with
retail and catalog distributors of the Active Ankle. Moreover, the Company
currently relies upon a series of distributors who wholesale the Company's
product; there can be no assurance that the Company can maintain such a
relationship in the future.
(10) OFFERING NOT SUFFICIENT TO CAPTURE U.S. MARKET; WORKING CAPITAL
INSUFFICIENT IF MINIMUM SOLD. The amount to be raised in the offering is not
sufficient to saturate the U.S. Market. If the Company is successful in its
first five consumer resource centers, it will be necessary to raise additional
debt or equity capital in order to attain the long-term goals in the Company's
business plan.
If only the minimum number of shares are sold, the Company may not open
the desired number of consumer resource centers in the time period discussed
in Question 3(a). If only the minimum number of shares are sold, the Company
will be required to utilize existing working capital or funds from its
existing line of credit (on which the balance is currently zero) for funds to
implement the business plan in full. In the alternative, the Company may
delay the opening of consumer resource centers rather than utilize its
existing line of credit if the offering proceeds and working capital are
insufficient to finance these stores. If the Company is unable to expand the
scope of the consumer resource centers as extensively as planned, this will
likely reduce future income or increase losses in the future.
(11) CONTINUED CONTROL BY OFFICERS AND DIRECTORS OF THE COMPANY. Upon
completion of this offering (and assuming that 24,389 shares are tendered
pursuant to the Tender Offer, and that all options and warrants are exercised
and preferred shares are converted), officers and directors of the Company
are expected to have beneficial ownership and voting control over
approximately 55.4% of the common stock (if the minimum shares are sold) and
37.6% (if the maximum shares are sold) of the outstanding shares of the
common stock of the Company. As a result, current officers and directors may
be in a position to elect a majority of the directors of the Company and to
control decisions pertaining to financing, material expenditures, on-going
operations, investment decisions and issuance of additional securities.
Further, the Company's officers, directors and beneficial stockholders may
purchase in the aggregate 4,500 additional shares of the Company's stock
offered herein. The stock must be purchased with investment intent and may be
used to reach the established minimum of $1,800,000. No shares have been
assumed purchased in the above percentages or throughout this Prospectus.
(12) TENDER OFFER/POTENTIAL USE OF PROCEEDS. The Company in June,
1997, made a Tender Offer to its shareholders at a price of $27 per common
share. The Tender Offer was canceled by the Company prior to its completion.
However, prior to its cancellation, 24,389 Shares were tendered. The Company
may elect to initiate a similar tender offer subsequent to the closing of
this Offering. In such case, the Company anticipates that no officers will
tender shares and that two directors (17,509 shares) will tender shares.
Approximately $658,500 of the proceeds of this offering would be used to fund
the tender, assuming 24,389 shares are tendered.
(13) LACK OF A PUBLIC TRADING MARKET. No public market exists for the
Shares offered herein, and no significant market is expected to develop as a
result of this offering. Although these shares are registered and may be
freely-tradable in certain states, purchasers should view their investment in
these securities for long-range investment purposes only and not with a view to
resell or otherwise dispose of their shares in the near future. Furthermore,
the shares may not be readily accepted as collateral for a loan.
3
<PAGE>
(14) LIMITED LIQUIDITY. The Shares offered herein may be offered in
reliance on an exemption from the registration and reporting requirements
under the laws of Florida and thus may be a restricted security with respect
to Florida. It is not anticipated that the shares offered herein will be
offered in reliance upon an exemption in any other state. Further, the Shares
contained herein are registered only under the Securities laws of those
states itemized in this Prospectus and may only be bought, sold, resold or
otherwise transferred as authorized within those specific states listed.
(15) DIVIDENDS NOT ANTICIPATED. The Company has never paid a dividend.
For the foreseeable future, the Company anticipates that earnings will be
retained to be used in the business. There can be no assurance that any
dividends will be paid in the foreseeable future.
(16) RISKS INHERENT IN SELF-UNDERWRITING. Since there are no underwriters
involved in this offering, the Company will not have the benefit of the
independent due diligence examination performed by an underwriter to insure that
the disclosures are accurate and the Company may, because it is not a securities
broker, have difficulty selling the Shares.
(17) GOVERNMENT REGULATION. Medical devices in the United States are
highly regulated in such areas as product development, testing, marketing and
manufacturing. In general, these statutes and regulations require that
manufacturers adhere to certain standards designed to ensure the safety and
effectiveness of medical devices. As of July 17, 1995, Section 510 of the Food
& Drug Act requires that manufacturers must list their devices with the FDA.
The Company has listed with the FDA. Since its inception in 1989, the Company
has operated in full compliance with all applicable regulations and foresees no
reason why it cannot continue to enjoy such status. However, there can be no
assurance that the Company will remain in compliance with all regulations and
absence of such a status could have a material adverse effect on the Company's
financial position, operating results and cash flow.
(18) AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK. The
Company's Articles of Incorporation authorize the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to designate and issue
additional series of preferred stock with dividend, liquidation, conversion,
voting or other rights which could adversely affect the voting power or other
rights of the holders of the Company's Common Stock. In the event of issuance,
the preferred stock could be utilized, under certain circumstances, as a method
discouraging, delaying or preventing a change in control of the Company. See
Offering Price Factors.
(19) ESCROW AGREEMENT. A potential investor's investment will be
subject to the terms and conditions of the Escrow Agreement. An investment
will be illiquid during the term of the Escrow Agreement and will earn
no interest.
NOTE: IN ADDITION TO THE ABOVE RISKS, BUSINESSES ARE OFTEN SUBJECT TO RISKS
NOT FORESEEN OR FULLY APPRECIATED BY MANAGEMENT. IN REVIEWING THIS
PROSPECTUS POTENTIAL INVESTORS SHOULD KEEP IN MIND OTHER POSSIBLE
RISKS THAT COULD BE IMPORTANT.
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BUSINESS AND PROPERTIES
3. WITH RESPECT TO THE BUSINESS OF THE COMPANY AND ITS PROPERTIES:
(a) DESCRIBE IN DETAIL WHAT BUSINESS THE COMPANY DOES AND PROPOSES TO DO,
INCLUDING WHAT PRODUCTS OR GOODS ARE OR WILL BE PRODUCED OR SERVICES THAT ARE OR
WILL BE RENDERED:
THE CURRENT BUSINESS OF THE COMPANY
The Company markets sports medicine products. Its primary product is an ankle
orthosis (in layman's terms, a "brace") which is unique in form and purpose (the
"Active Ankle"). The Active Ankle has anatomically correct hinges which fit the
ankle and permit normal foot movement up and down but limit the movement of the
ankle from side to side. Its solid U shape cups the heel while a posterior
strap prevents the ankle brace from moving in the shoe from activity. By using
different plastic shells, padding, and strapping systems, the Active Ankle can
be tailored to needs and desires of a particular user and used as either an
injury prevention device, support for an acute ankle injury or for
rehabilitation.
The Company has research, development, and field testing programs and has a new
knee brace undergoing conceptual development.
The Company sells to the medical sector, primarily orthopedic surgeons, but
also to hospitals and other clinics where the brace is used in the treatment
of acute injuries. Sales to the medical sector are about 30% of total sales.
Approximately 30% of the Company's sales are to sports teams at all levels -
club, high school, college and professional, where the brace is used
primarily as a device to prevent ankle injuries but also is used as a
rehabilitation brace. Sales to the retail sector, primarily sporting goods
stores, total approximately 30% of sales. The Company sells internationally
in Japan, Canada, The United Kingdom, Switzerland, Norway, Germany, Taiwan,
Australia, and other foreign countries.
The Company distributes its products through three primary distributors. EBI, a
subsidiary of Biomet, Inc, distributes the Active Ankle to orthopedic surgeons,
hospitals, and sports medicine clinics. The Volleyball Connection, Inc.
distributes the Active Ankle to retail stores and consumer catalogs through a
network of manufacturers representatives. Cramer Products, Inc. distributes the
Active Ankle to professional catalogs and team dealers who sell mainly to teams
as well as to retail accounts. The Company sells directly to foreign
distributors as well as to selected domestic accounts. Written distribution
agreements, and any amendments thereto, with The Volleyball Connection, Inc.,
EBI, a subsidiary of Biomet, Inc. (surviving corporation of a merger with
Kirschner Medical Corporation) and Cramer Products, Inc. are attached as
exhibits to the Registration Statement.
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HISTORY
The Company was formed in 1989 by a group of venture investors to acquire the
product and business of Mr. Rick Peters, an athletic trainer who invented the
Active Ankle. Mr. Peters' efforts began in 1984 as a class project. After
obtaining patent protection, Mr. Peters sought financing to bring the Active
Ankle to market. The Company commenced operations in June, 1989, and spent two
years conducting market research. Sales commenced in 1990 when the Active Ankle
was positioned as a rehabilitation device for use by medical and athletic
training personnel to deal with an ankle injury. The initial distribution was
through medical distribution systems. In 1992, a contact was made with U.S.
Volleyball (the U.S. men's and women's national volleyball teams) and the brace
was tested by U.S. Volleyball. Based on feedback from customers and the
Company's experience, the Active Ankle proved to be a brace which produced
significant injury reduction rates for volleyball players. In 1992, distribution
agreements were established with The Volleyball Connection, Inc. and Cramer
Products, Inc. to distribute the Active Ankle to retail and team accounts and
medical distribution through Biomet, Inc. was expanded. In 1993, the Company
made a strategic decision to reposition the brace as a preventative device and
to expand its marketing effort to other sports such as basketball. A revised
model of the Active Ankle, the "T2", a lower profile, lighter and more
convenient brace was introduced into the market in June, 1995.
INDUSTRY OVERVIEW
The Company participates in the Orthopedic Soft Goods industry. The term
"orthopedic soft goods" is taken from a 1996 report entitled "U.S. Orthopedic
Soft Goods Product Markets" by Frost & Sullivan, an international market
research firm with offices throughout the country, including New York. All
descriptions herein of competitors and/or industries are taken from this study.
This report is referred to as the Frost & Sullivan Report. The products in this
industry are used to brace or support portions of a person's body that have been
injured, sprained or fractured or, in some cases, to prevent injury. The
industry is largely segmented by the body extremity for which a product is used.
The segments that comprise the industry include ankle, knee, wrist, back, elbow,
shoulder, cervical, etc.
According to a forecast of the U.S. Orthopedic Soft Goods market by Frost &
Sullivan, total industry revenues were approximately $661 million in 1996. For
the past two years, industry growth has averaged 4.5% annually and future growth
is forecast at 6.4%. As a percent of overall sales, ankle products represent
25% of industry sales, knee products 43% of sales and wrist and back products 9%
of sales with other categories being less than 5% of the total industry. The
majority of sales occur in the medical and institutional markets such as
orthotic and prosthetic shops, hospitals, medical clinics or medical equipment
dealers.
Industry retail sales are approximately $90 million, of which ankle products
represent 27% of sales, knee products 34% of sales and wrist products 20% of
sales. Retail outlets include drug stores, sporting goods stores, and mass
merchandisers.
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The Company participates in the Ankle Brace and Support segment of the market.
Total ankle segment sales are estimated at $164 million. The market is further
broken into three sub segments - soft ankle supports, rigid ankle stirrups and
lower leg walkers, representing 37%, 38% and 25% of the market, respectively.
Soft ankle supports are constructed from various combinations of nylon, rayon,
cotton and neoprene and use a variety of hook and loop, strap or lace closures
often with various forms of stays to provide support. The rigid stirrup brace
consists of a molded rigid shell that conforms to the ankle with various forms
of padding for compression and closure systems. Lower leg walkers are devices
like a boot into which the foot is inserted. Walkers have various forms of
padding and hinges that limit range of motion and are used primarily in acute
situations in place of casting. While the Active Ankle itself falls into the
rigid stirrup category, from a competitive situation in the medical, team and
retail markets, it is competing with the soft ankle supports.
COMPETITION
According to the Frost & Sullivan report, there are some 74 manufacturers
who compete in the ankle segment. 61 market a soft ankle support, 33 a
rigid stirrup brace and 22 a lower leg walker. In the non-retail rigid brace
category, Aircast, Inc. has approximately a 65% market share, Centec
Orthopaedics (a division of Royce Medical Company) a 15% share and the
Company an 8% share. Aircast, Inc. was the first company to develop the
rigid brace, creating the category, and is dominant in the hospital and
clinical market.
In the soft brace category, Smith & Nephew, Inc., Medical Specialties, Inc.,
Professional Products, Inc. and Zimmer, Inc. are the dominant braces in the
medical category. Swede-O, Inc. and McDavid Kneeguard, Inc. are leaders in the
team and retail business.
DISTRIBUTION
MEDICAL.
Distribution in the industry is highly fragmented with a variety of patterns,
depending upon sector. In the medical sector, most manufacturers distribute
direct with company salespeople, although several firms use manufacturers
representatives. Heavy emphasis is placed on gaining use by orthopedic surgeons
as a practice pattern and on sales to clinics and hospitals. The selling
emphasis in medical is on performance and price, supported by research.
The Company has had a distribution arrangement with Biomet, Inc. since 1992.
Initially, Active Ankles were sold by Biomet's independent distributor system
which focused on selling joint implants and soft goods to orthopedic surgeons.
When Biomet, Inc. acquired Kirschner Medical Products, Inc., Active Ankle's
distribution was transferred to the AOA division of Kirschner in 1994. AOA
focused on selling a broad line of orthopedic soft goods to surgeons, hospitals
and clinics. With the merger of AOA into EBI, Inc, another Biomet subsidiary in
1996, distribution was
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transferred to EBI. EBI's primary line of business is the sale of electronic
bone growth stimulators and external fixation devices to orthopedic surgeons
through a company sales force.
TEAM AND RETAIL.
Team and retail distribution is also highly fragmented. Most manufacturers and
distributors sell through a network of multi-line sales representatives who
place the product with team dealers, medical and sports medicine catalogs,
consumer catalogs and retail stores. A large proportion of sales to teams and
institutional customers occur through specialized catalogs which focus on
medical products. For a product like the Active Ankle, the certified athletic
trainer is the primary purchaser or influencer of purchase. For the retail
account, the sporting goods store sports medicine buyer is the key person in the
purchase process.
Cramer Products, Inc. of Gardner, KS has been an Active Ankle distributor since
1992. Through its catalog and an independent representative sales force of
about 60, Cramer distributes Active Ankle to the key catalog houses such as
Micro Bio-Medics, Inc., Sports Health, a division of School Health Corp., and
Alert Services, Inc., sporting goods stores who focus on team business and
national retail accounts.
The Volleyball Connection, Inc. of Louisville, Kentucky has been a distributor
since 1992 and distributes through an independent representative sales force to
national sporting goods chains, specialty sporting goods stores and certain
catalogs such as Eastbay and Spike Nashbar.
SEASONALITY
While the medical sector does not appear to have seasonality, the team and
retail sectors are seasonal, tied to the school year and seasonal sports
schedules. August and September are higher sales months with seasonal lows in
December, January and July.
GOVERNMENTAL REGULATION
The U.S. Food and Drug Administration (FDA) device regulations apply to firms
that make devices intended for human use. As of July 17, 1995, Section 510
of the FDA Act, manufacturers must list their devices with the FDA. The
Company has listed and complied with this requirement. The Active Ankle does
not require FDA approval, is exempt from premarket notification procedures
and is exempt from current goods manufacturing practice regulation.
MANUFACTURING
The Active Ankle is assembled in the U.S. by two contract assembly plants, using
components and parts manufactured by other vendors. One of these manufacturers,
K-P Ventures, Inc., is heavily dependent on Active Ankle. The Company owns
the molds which produce the Company's products. Accordingly, the Company is
not dependent on any particular manufacturer.
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EMPLOYEES
At June 30, 1997, the Company employed 11 management, sales and administrative
persons located at Corporate headquarters. Five of the Company's employees are
certified athletic trainers with 7 to 35 years experience as a trainer. Senior
management has from 4 to 8 years experience with the Company and industry. In
addition, the management has from 10 to 20 years experience with small
businesses.
THE MARKET OPPORTUNITY
The overall market for orthopedic soft goods has been discussed previously (see
Industry Overview). There are several trends in the retail market place which
suggest there is an opportunity for a multi-faceted marketer of orthopedic soft
goods.
Sports medicine and fitness encompass a broad range of disciplines and a wide
variety of products. The market is highly fragmented with many large and small
marketing and manufacturing companies. Historically, the sports medicine market
focused on the professional, major college or high level athlete. This is
beginning to change and the market is being driven by a number of factors:
(a) There is an increased awareness of the role of fitness in health, an
increased emphasis on exercise and sports, and an increased emphasis on
wellness.
(b) There is a desire by amateur and leisure time athletes to use the same
techniques, gear and equipment for training that high level athletes use.
(c) There is an increasing interest in self care and injury protection.
This is coming both from a more active population with an interest in
health as the "baby boomers" age, and the health care system in general is
moving towards prevention and protection as evidenced by HMO penetration,
medical practice focus, and more managed care in non hospital settings.
The emergence of sports medicine clinics, dedicated wellness clinics,
cardiac and occupational rehabilitation centers and health and fitness
clubs illustrate this trend. Management believes that a significant
percentage of injured people do not seek medical attention.
(d) The targets for any sports medicine and fitness products are expanding
from the active 16 to 22 year old group to the 35 to 55 age group, which is
growing faster than the general population.
(e) More physicians are turning toward off-the-shelf products or sending
consumers elsewhere as medical reimbursement practices change. In
addition, based on the experience of the Company, physicians are
increasingly reluctant to carry an inventory of products for patients.
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The experience of the Company in the market suggests that the average consumer
has very limited knowledge of sports medicine or orthopedic soft goods products.
In general, the products must be demonstrated or tried and recommended by a
knowledgeable person in athletic training, or in a medical or clinical setting.
Most orthopedic soft goods have not reached the mass market because of lack of
knowledge on the part of the buying public and wholesale and retail distribution
systems.
In the existing market, companies marketing to institutional and retail
customers are not prepared to evaluate and provide advice or recommendations on
orthopedic soft goods to their customers. Even in medical markets, few sales
people have personal knowledge to change historic practice patterns to more
effective ones. Increasingly, products to the medical trade are sold on the
basis of price and equivalency, creating a gap in the market driven by
recommendations that existing organizations are not prepared to address.
There is a gap in this overall market:
- Management believes that a significant percentage of injured persons
do not seek medical assistance; many self-prescribe.
- No distributor reaches a broad customer profile: general
consumer, senior citizen, athletes, clinics, schools and doctors,
all of whom have need for orthopedic soft goods to maintain and
increase quality of life.
- Depth and breadth of sports medicine products is limited,
particularly at retail.
- With the exception of the medical sector, there is limited
product knowledge and expertise available to the purchaser.
- Orthopedic soft goods are generally inaccessible to the general
public.
- Compared to most consumer goods, marketing and merchandising are
limited.
The Business Plan of the Company is to address this gap in the market through a
multi prong plan of product and distribution system development. One element is
the Company's product business which will focus on the development and marketing
of high value, high function sports medicine products. A second is an
institutional catalog focused on the athletic trainer and medical professional,
and the third is a consumer resource center which will offer a range of
professional products to the general consumer, recreational programs such as
Little Leagues, and serve as a referral outlet for the medical and clinic
sector.
These segments will overlap and reinforce each other. The consumer resource
center will be an outlet for medical referrals, with the catalog as an adjunct
for non stock items. The catalog will
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serve the needs of the traditional athletic program as well as serve as an
extension of the consumer resource center and as a marketing tool for the
center.
A key marketing element is a group of regional directors who will be responsible
for marketing the resource center, catalog and products to the institutional
markets and will develop special promotions and a referral network.
THE BUSINESS PLAN OF THE COMPANY
The business plan of the Company is to leverage the sales base, management and
marketing expertise of the Company to build a multi-stage business in orthopedic
soft goods and athletic trainer supplies. There are three parts to the business
plan:
PROPRIETARY PRODUCTS. The Company will continue its existing business by
aggressively marketing its products through its existing distribution
system as well as adding distribution through the new catalog and consumer
resource centers. The Company will continue its efforts to develop product
line extensions of the Active Ankle as well as the development and
marketing of additional high value, high function sports medicine products.
The Company plans to develop new products both internally as well as
through licensing and acquisition.
SPORTS MEDICINE CATALOG. The Company will develop a sports medicine
catalog which will offer a broad line of sports medicine and orthopedic
soft goods to the institutional market such as schools, teams, hospitals,
clinics and other professional outlets. This catalog will target those who
already purchase through catalogs as well as serve as a marketing device
for the product and consumer divisions. The Company may acquire an
existing catalog company to develop this business area and the Company
is exploring possible acquisitions. There are no agreements in
principle at the present time.
CONSUMER RESOURCE CENTERS. These retail centers will be located in
shopping centers, and will offer orthopedic soft goods and training room
supplies to the consumer market. They will be 1,500 to 2,500 square feet
in size, upscale in decor and treatment and will be staffed primarily by
athletic trainers who will provide the expertise for a consumer to buy the
product that best fits his or her need. In addition to selling to the
general public, the centers will be a referral resource for doctors,
clinics and athletic trainers to send their patients and athletes as well
as provide a resource for college, high school and recreational teams and
clubs, such as Little Leagues, who need sports medicine products.
PROPRIETARY PRODUCTS BUSINESS PLAN
The Company will continue to market and develop the Active Ankle, increasing
volume through additional market penetration to additional sports and broader
distribution, both domestically and internationally.
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While the Active Ankle is a patented product, it does not depend upon the
patents as a part of its competitive profile, rather focusing on its strong
features and proven functions. The Active Ankle has been positioned as a high
value, high function brace for both prevention of ankle injuries and as a
rehabilitation device. The Company has been able to maintain premium pricing on
the basis of its value. Certain competitors have announced products which
appear to look similar to the Active Ankle. The Company has not been able to
evaluate these products fully and ascertain, whether under the
law, these products infringe on Active Ankle's patent or trade style.
The Company has marketed its product through a program of grass roots marketing
based on samples. The Company advertises to consumers to create consumer demand
and provide support to its distributors and retailers. The Company plans to
continue to expand these activities.
The Company tests its products in actual use as well as in academic and medical
research. The Company has R&D arrangements with a major university
biomechanical engineer as well as with a university rapid prototyping center.
The Company is continuously reviewing and evaluating the needs in the
marketplace, as well as the cost and function of the Active Ankle. Product
improvements and enhancements are under development, particularly a lower cost
brace which can compete on a price basis in the medical market.
Design and marketing parameters are being developed for other new products and
two products developed by others are under evaluation. Assuming these products
meet the Company's market and function expectations, exclusive license
agreements will be negotiated.
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SPORTS MEDICINE CATALOG BUSINESS PLAN
The Company will publish a catalog with product offerings which will parallel
that of the consumer center but offer additional items focused on the
professional trade. In general, the products carried in the catalog will be the
same as the competition. However, as a point of difference, rather than carry
the same or similar items from a variety of vendors, the catalog will focus on a
limited number of products which offer efficacy and quality for specific needs
at different price points. In addition, the Company will focus on customer
service.
SPORTS MEDICINE CATALOG INDUSTRY OVERVIEW
The catalog operation will participate in the marketing and sales of orthopedic
soft goods and training room supplies and equipment. Its principal target
customers are the athletic trainer or coach at colleges, junior colleges and
high schools, orthopedic physicians, physical therapists as well as organized
sports activities, hospital and physical therapy clinics.
Catalog companies have historically distributed a full line of products directed
at a specific segment of the institutional market. These segments include
hospitals, nurses, and industrial markets with sports medicine in many cases
being a secondary target. For the most part, these catalogs offer a wide
variety of products in each product category with little information on quality
or efficacy, that decision being left to the purchaser. These catalogs do not
reach the general consumer, nor do they reach team or athletic activities
without a professional trainer involved, such as high school, recreational,
youth sports or club programs.
Industry size is unknown, as there is a wide variety of similar operations which
serve various facets of the institutional market, such as hospitals, industry,
clinics, nursing homes, school nurses and athletic trainers. The catalog market
directed at athletic trainers is estimated by the Company's management at $25
million with another $25 million purchased by athletic trainers from retail
dealers. There is a limited number of catalogs which offer products to the
general public. These catalogs focus more on health and beauty aids rather than
professional level products.
COMPETITION
There are approximately eleven significant companies in the U.S. who distribute
orthopedic, medical and first aid supplies to the athletic training market. Of
these, seven have catalogs, the others selling via pricing sheets and catalogs
from vendors whose products they distribute. The major companies are Micro
Bio-Medics, Inc., Sports Health, a division of School Health Corp., Alert
Services, Inc., Medco Supply, Inc., Athletic Medical, Inc., Econoline Products,
Inc., Seneca, and Mundy's, Inc. These companies range in size from less than $.5
million sales to in excess of $100 million.
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SALES, MARKETING AND DISTRIBUTION
Although all the above companies sell athletic training supplies through a
catalog, most are regionally focused and target customers in two or three
states. Most distribute the Active Ankle in addition to other ankle products.
Three of these companies distribute throughout the United States and only one
has more than one distribution center.
For the most part, these companies have limited sales forces and sell primarily
through distributing their catalog through the mail and at trade shows and
either receiving orders or, in the case of most large customers, responding to
bid requests. Marketing efforts are primarily through attendance at trade shows
focused on the athletic trainer and physical therapists.
Under the Company's business plan, there will be a regional marketing director
for the consumer resource centers, product operations and catalog operations who
would promote the entire business to athletic trainers, doctors, clinics and
other professionals via a calling program. The Company will also participate in
trade shows and other promotional efforts. Market research suggests that
calling on accounts presents a significant competitive advantage over the
competition who have limited sales forces.
In addition, because the Company already has sponsorship programs in place with
many institutions as well as endorsers, there are joint promotional
opportunities such as sponsorships and seminars. The Company is unique in that
it has a strong grass roots program in place with athletic trainers throughout
the U.S. This grass roots network offers the opportunity to capture sales to
athletic programs by offering equivalent or better sales, service and pricing.
SEASONALITY
While the medical and industrial sectors do not exhibit seasonality, sales of
athletic training products is highly seasonal, tied to the school year and sport
season. August and September are seasonal highs with seasonal lows in July,
December and January.
GOVERNMENT REGULATION
The catalog industry has no specific government regulation.
MANUFACTURING
Most catalog companies do not manufacture any products but offer the products of
a wide variety of vendors, although they may do some repackaging of vendor's
products.
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FACILITIES
The Company plans to lease approximately 5,000 square feet of warehouse space to
conduct catalog operations. The capital equipment is conventional shelving,
computer equipment and software.
PERSONNEL
The catalog operations will employ a general manager, a purchasing agent/bid
specialist, an administrative assistant, and a shipping/receiving person with
part time seasonal help. The employees are not expected to be unionized.
CONSUMER RESOURCE CENTER BUSINESS PLAN
INDUSTRY OVERVIEW
Historically, sales of orthopedic soft goods and athletic trainer supplies have
been directed to and through the institutional markets of schools, hospitals,
and clinics and have not been available to the general public. For the most
part, products available to the general public have been limited in breadth and
depth, focusing on relatively low value, low priced, low function products such
as ankle and knee sleeves, wrist braces, back braces and orthotic supplies.
The products are distributed through various retail outlets such as sporting
goods stores, mass merchants, and pharmacies with none of these outlets carrying
a complete line.
One of the characteristics of this market is that the average consumer has very
limited knowledge of orthopedic soft goods or trainer supplies, and relies on
professional advice. For this reason, only the simplest products are available
to the consumer. For the most part, the products are not advertised to the
public nor is any selling expertise available to the general public. As
previously discussed, there is consumer interest in this product category, but
lack of knowledge and distribution has limited growth of retail sales.
The consumer resource center is a new form of distribution, making available
specialty products to the general market in a conveniently accessible way
coupled with high service in the form of expertise to assist consumers in
meeting their needs.
The Company plans to open one consumer resource center within the calendar
year regardless of whether the minimum shares offered herein are sold. The
Company plans to utilize its existing working capital to finance these
expenditures. Provided that the proceeds from this offering are sufficient,
the Company plans to open four additional consumer resource centers by the
Spring of 1998. The Company may accelerate its planned expansion in the event
of a fully subscribed offering. A material portion of the proceeds of this
offering will be used to open these centers. See "Use of Proceeds." The
Company expects each center to cost approximately $250,000 to open and
intends to use the proceeds of this offering to finance these expenditures.
COMPETITION
This industry is an emerging form of distribution. A few small retailers of
orthopedic supplies have emerged across the U.S. in the past two years. One of
these retailers has two outlets, the remainder one. None is associated with
major catalog companies or product manufacturers. Sales of individual outlets
are believed by management in the $300,000 to $500,000 year range. The product
offerings are similar to those envisioned by the Company and in some cases, the
sales staff is comprised of
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athletic trainers offering sales expertise. These retailers have typically
moved from the institutional side of the business, have been founded by athletic
trainers and orthopedic surgeons, and they have not focused on the athletic
trade or general consumer, but rely primarily upon referrals from medical
professionals. These outlets are generally located in strip malls. Advertising
and marketing are generally limited.
There are several retailers who offer portions of the expected product line.
Sporting goods stores, pharmacies, and mass merchants offer limited lines of
sundry items. There are some stores focusing on backs or feet which offer
portions of the lines envisioned. Several consumer catalogs offer portions of
the product line but tend to focus more on health and beauty aids versus
orthopedic and trainer supplies.
PRODUCT LINE
The consumer resource center will offer orthopedic soft goods and trainer
supplies. Orthopedic soft goods will include bracing for various joints of the
body, cold and heat packs, safety equipment such as first aid kits and guards,
trainer sundries such as tape, balms, specialized bandages, underwrap, cinder
suds, etc. In each product category there will be one high value, high function
product, one product with a price and function orientation and one low level
product. Products will be selected on the basis of function and quality. The
product base and vendors will parallel that of the catalog operation.
MARKETING
For the most part, with the exception of the Company, manufacturers do not
consumer market, relying on trade promotions and advertising as the basis of
their marketing programs. Further, with the fragmentation of the industry, the
focus on institutional sales, and the limited resources of most manufacturers,
traditional consumer marketing has not emerged. Advertising has not been a
source of consumer information. Marketing has been directed at the
institutional trade rather than the consumer and organized recreational
activities.
The Company has a strong network of professionals and athletic trainers in
place. In addition, the Company has team and school sponsorships as well as
high profile endorsers. The consumer resource center will be able to use these
sponsorships. The resource centers will develop additional sponsorship
opportunities with various groups such as the mall walkers, club volleyball,
high school and local college teams.
In addition, the Company plans to offer a series of seminars and educational,
in-store activities such as injury management, stretching, sports technique, and
rehabilitation as a part of an in-store program.
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PHYSICAL PLANT
The consumer resource centers will be leased 1,500 to 2,500 square foot
facilities in major shopping malls. The Company believes high traffic, high
visibility locations, which are convenient to consumers, are a key to sales
volume. In addition, the stores will be both a beneficiary of and a contributor
to mall traffic with the marketing plan of education and special promotions.
The stores will project an image of professionalism. The estimated investment
in leasehold improvements will be approximately $60 per square foot. The stores
will have seating areas for trying and fitting products, and an area for
in-store seminars and promotions, autograph signings, etc.
GEOGRAPHIC LOCATION
The initial five stores will be located in cities near the Company's
headquarters in Louisville, Kentucky. Initial stores are expected in
Louisville, Kentucky; Lexington, Kentucky; Indianapolis, Indiana; and
Cincinnati, Ohio. The expected direction of growth from the initial sites will
be to Tennessee, Georgia, Florida, Ohio, Indiana, Illinois and Michigan.
STAFFING
The consumer resource centers will be staffed primarily by Certified Athletic
Trainers who are certified by state governments or by the Board of
Certification, a sister organization of the National Association of Athletic
Trainers, and by college students enrolled in a program to become Certified
Athletic Trainers. There will be a permanent full time staff of two persons per
store supplemented by qualified part time associates.
(b) DESCRIBE HOW THESE PRODUCTS OR SERVICES ARE TO BE PRODUCED OR RENDERED
AND HOW AND WHEN THE COMPANY INTENDS TO CARRY OUT ITS ACTIVITIES. IF THE
COMPANY PLANS TO OFFER A NEW PRODUCT(S), STATE THE PRESENT STAGE OF DEVELOPMENT,
INCLUDING WHETHER OR NOT A WORKING PROTOTYPE(S) IS IN EXISTENCE. INDICATE IF
COMPLETION OF DEVELOPMENT OF THE PRODUCT WOULD REQUIRE A MATERIAL AMOUNT OF
RESOURCES OF THE COMPANY, AND THE ESTIMATED AMOUNT. IF THE COMPANY IS OR IS
EXPECTED TO BE DEPENDENT UPON ONE OR A LIMITED NUMBER OF SUPPLIERS FOR ESSENTIAL
RAW MATERIALS, ENERGY OR OTHER ITEMS, DESCRIBE. DESCRIBE ANY MAJOR EXISTING
SUPPLY CONTRACTS.
The proprietary product operation has vendors who supply the parts for the
Active Ankle to the Company's specifications. The Company owns the tooling used
to injection-mold the plastic parts. As a policy, the Company out-sources as
much as it can, concentrating on management, marketing and development. While
the Company has major supply arrangements with Velcro, Inc., and High Tech Mold
and Tool, Inc., there are alternate suppliers who can meet the Company's needs.
17
<PAGE>
Design and marketing parameters are being developed for other new products.
Two products developed by others are under evaluation. Assuming these products
meet the Company's market and function expectations, exclusive license
agreements may be negotiated.
(c) DESCRIBE THE INDUSTRY IN WHICH THE COMPANY IS SELLING OR EXPECTS TO
SELL ITS PRODUCTS OR SERVICES AND, WHERE APPLICABLE, ANY RECOGNIZED TRENDS
WITHIN THAT INDUSTRY. DESCRIBE THAT PART OF THE INDUSTRY AND THE GEOGRAPHIC
AREA IN WHICH THE BUSINESS COMPETES OR WILL COMPETE.
INDICATE WHETHER COMPETITION IS OR IS EXPECTED TO BE BY PRICE, SERVICE, OR
OTHER BASIS. INDICATE (BY ATTACHED TABLE IF APPROPRIATE) THE CURRENT OR
ANTICIPATED PRICES OR PRICE RANGES FOR THE COMPANY'S PRODUCTS OR SERVICES, OR
THE FORMULA FOR DETERMINING PRICES, AND HOW THESE PRICES COMPARE WITH THOSE OF
COMPETITORS' PRODUCTS OR SERVICES, INCLUDING A DESCRIPTION OF ANY VARIATIONS IN
PRODUCT OR SERVICE FEATURES. NAME THE PRINCIPAL COMPETITORS THAT THE COMPANY
HAS OR EXPECTS TO HAVE IN ITS AREA OF COMPETITION. INDICATE THE RELATIVE SIZE
AND FINANCIAL AND MARKET STRENGTHS OF THE COMPANY'S COMPETITORS IN THE AREA OF
COMPETITION IN WHICH THE COMPANY IS OR WILL BE OPERATING. STATE WHY THE COMPANY
BELIEVES IT CAN EFFECTIVELY COMPETE WITH THESE AND OTHER COMPANIES IN ITS AREA
OF COMPETITION.
PROPRIETARY PRODUCTS
With 74 manufacturers of ankle braces in the market place, competition
occurs on two levels. One, there is a large group of essentially similar ankle
braces, which, while certain features are emphasized, largely compete on the
basis of price. There is a second group with proprietary features, such as the
Aircast and Active Ankle, which compete on the basis of product features and
function. The Company created a new category of brace and has premium-priced
the product based on function and proprietary features. With the expiration of
the patent on the Aircast brace in 1998, and with competitors introducing braces
with Active Ankle look-alike characteristics, management believes the basis of
competition in institutional markets will be price. The Company will address
future price competition in several ways. First, the Company may change its
distribution. Second, the Company has reduced product cost by approximately 11%
over the past three years and plans to continue that effort. Third, the Company
plans to develop and market new forms of the Active Ankle.
In medical markets, the principal competition is Aircast, Inc., with a
market share of approximately 65% and a long established market position,
largely in hospitals. Active Ankle's
18
<PAGE>
market share is higher in the sports medicine clinics and in orthopedic offices
than Active Ankle's market share in hospitals. The Company has successfully
competed with Aircast for the past 7 years. Management estimates Aircast has
$26-32 million in annual sales, of which $16-20 million is derived from the
sale of ankle braces. The Active Ankle generated $2.7 million in fiscal year
1997 sales.
In the team sports market, the key competitors are McDavid Knee Guard,
Inc., Swede-O, Inc., and Mueller Sports Medicine, Inc. These companies have had
strong positions with soft, lace up braces and are introducing rigid braces.
These companies are believed to be approximately the same size as the Company or
larger. The Company has built a strong brand awareness and market presence
through its marketing programs and will continue those efforts.
The Company maintains a premium pricing policy, recognizing the
high-function, high-quality features of its products. The Company's products
retail in the $29-42/unit price range, depending on the retailer's pricing
strategy. The Company's products are sold to team and medical users in the
$25-33/unit range. The products are priced to reflect the premium features
but remain price-competitive with competing manufacturers.
The Active Ankle brace is a solid, U-shaped, hinged device made of
polypropylene. The solid U-shape design surrounds the ankle in a semi-rigid
shell limiting inversion and eversion (movement from side to side) thereby
providing stability. The U-shape also transfers a small percent of body
weight from the heel and ankle to the side panels of the brace promoting
earlier activity with less of the pain that comes with an injured ankle. The
bilateral hinges are anatomically correct as well as allowing plantarflexion
and dorsiflexion (moving the foot and toes up and down) for basic normal
movement. The brace comes with a posterior strap that provides some stability
in extreme inversion and prevents forward migration of the brace in a shoe.
The Active Ankle brace fits either a left or a right ankle (universal) and
comes in four sizes to accommodate different shoe sizes. The cushioning or
padding is a systemic approach with three types including: the BubbleFlex for
acute injuries, neoprene pads for activity or the EVA pads for activity and
athletic participation. All the padding systems are interchangeable with the
various models of the Active Ankle Brace.
SPORTS MEDICINE CATALOG
The catalog operation will be competing with competitors ranging in size
from in excess of $100 million in sales to less than $500,000 in sales. Key
direct competitors include Medco Supply Company, Alert Services, Inc., and
Econoline Products, Inc. These companies are focused primarily on the school
and athletic trainer market. Micro Bio-Medics, Inc. and Sports Health, a
division of School Health Corp., focus on the hospital and school nurse market,
respectively, but also sell to the target market. Each of these competitors
sells the Active Ankle, as well as other ankle braces.
In terms of product line, the Company's product line will be similar to
that of its competitors. A key point of difference is expected to be a more
limited product line, focused on products with quality and efficacy. Posted
catalog prices will be comparable to those of the competition, and the catalog
operations will respond to requests for bid on a competitive basis.
Another difference from the competition will be the marketing effort. The
regional director of marketing, coupled with the consumer resource center, are
unique in the industry. The Company expects to have a larger sales force than
the competition in each of its regions of operation.
CONSUMER RESOURCE CENTERS
Because the consumer resource centers are a new concept, there currently
are only isolated comparable retail outlets. Portions of the product line are
available in a wide variety of retail outlets such as sporting goods stores,
mass merchants, medical equipment dealers and medical clinics. However, a large
portion of the product offerings are not available at all to the general public.
The key competitive elements will be knowledgeable service provided by trained
personnel and products not generally available in conveniently accessible form.
NOTE: BECAUSE THE PROSPECTUS FOCUSES PRIMARILY ON DETAILS CONCERNING THE
COMPANY RATHER THAN THE INDUSTRY IN WHICH THE COMPANY OPERATES OR WILL
OPERATE, POTENTIAL INVESTORS MAY WISH TO CONDUCT THEIR OWN SEPARATE
INVESTIGATION OF THE COMPANY'S INDUSTRY TO OBTAIN BROADER INSIGHT IN
ASSESSING THE COMPANY'S PROSPECTUS.
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<PAGE>
(d) DESCRIBE SPECIFICALLY THE MARKETING STRATEGIES THE COMPANY IS
EMPLOYING OR WILL EMPLOY IN PENETRATING ITS MARKET OR IN DEVELOPING A NEW
MARKET. SET FORTH IN RESPONSE TO QUESTION 4 BELOW THE TIMING AND SIZE OF THE
RESULTS OF THIS EFFORT WHICH WILL BE NECESSARY IN ORDER FOR THE COMPANY TO BE
PROFITABLE. INDICATE HOW AND BY WHOM ITS PRODUCTS OR SERVICES ARE OR WILL BE
MARKETED (SUCH AS BY ADVERTISING, PERSONAL CONTACT BY SALES REPRESENTATIVES,
ETC.), HOW ITS MARKETING STRUCTURE OPERATES OR WILL OPERATE AND THE BASIS OF ITS
MARKETING APPROACH, INCLUDING ANY MARKET STUDIES. NAME ANY CUSTOMERS THAT
ACCOUNT FOR, OR BASED UPON EXISTING ORDERS WILL ACCOUNT FOR A MAJOR PORTION (20%
OR MORE) OF THE COMPANY'S SALES. DESCRIBE ANY MAJOR EXISTING SALES CONTRACTS.
The Company's business lines will be marketed by regional marketing
directors who through a calling and special promotion program will reach
athletic trainers, schools, sports clubs, doctors and medical clinics. The
objective is to build a network of referrals to the consumer centers and catalog
and product sales. The elements of this marketing program are sampling,
education, school and club sponsorship, consumer advertising and trade shows.
The consumer resource centers will do direct newspaper and radio advertising as
well as special in-store promotions focused on athletes, education, and medical
information.
The Company currently sells through the following distributors who each
handle in excess of 20% of the Company's Sales:
<TABLE>
<CAPTION>
Year end June 30
----------------
1997 1996
---- ----
<S> <C> <C>
Volleyball Connection, Inc. 22% 30%
Biomet, Inc. 30% 28%
Cramer Products, Inc. 30% 25%
</TABLE>
(e) STATE THE BACKLOG OF WRITTEN FIRM ORDERS FOR PRODUCTS AND/OR SERVICES
AS OF A RECENT DATE (WITHIN THE LAST 90 DAYS) AND COMPARE IT WITH THE BACKLOG OF
A YEAR AGO FROM THAT DATE.
AS OF: _____/_____/_____ $____________
(A RECENT DATE)
AS OF: _____/_____/_____ $____________
(ONE YEAR EARLIER)
None, no backlog. The Company maintains sufficient out-sourcing capacity,
and the short production time allows the Company to fill orders within 30 days.
EXPLAIN THE REASON FOR SIGNIFICANT VARIATIONS BETWEEN THE TWO FIGURES, IF
ANY. INDICATE WHAT TYPES AND AMOUNTS OF ORDERS ARE INCLUDED IN THE BACKLOG
FIGURES. STATE THE SIZE OF TYPICAL ORDERS, IF THE COMPANY'S SALES ARE SEASONAL
OR CYCLICAL, EXPLAIN.
Not applicable.
20
<PAGE>
(f) STATE THE NUMBER OF THE COMPANY'S PRESENT EMPLOYEES AND THE NUMBER OF
EMPLOYEES IT ANTICIPATES IT WILL HAVE WITHIN THE NEXT 12 MONTHS. ALSO, INDICATE
THE NUMBER BY TYPE OF EMPLOYEE (I.E., CLERICAL, OPERATIONS, ADMINISTRATIVE,
ETC.) THE COMPANY WILL USE, WHETHER OR NOT ANY OF THEM ARE SUBJECT TO COLLECTIVE
BARGAINING AGREEMENTS, AND THE EXPIRATION DATE(S) OF ANY COLLECTIVE BARGAINING
AGREEMENT(S). IF THE COMPANY'S EMPLOYEES ARE ON STRIKE, OR HAVE BEEN IN THE
PAST THREE YEARS, OR ARE THREATENING TO STRIKE, DESCRIBE THE DISPUTE. INDICATE
ANY SUPPLEMENTAL BENEFITS OR INCENTIVE ARRANGEMENTS THE COMPANY HAS OR WILL HAVE
WITH ITS EMPLOYEES.
The Company has 3 employees in senior management, 3 in administration, 4 in
marketing and 1 in manufacturing and development. During the coming 12 months,
the Company expects to add 13 full time and 12 part time employees in the
consumer and catalog operations. No employees are subject to collective
bargaining agreements nor are any anticipated.
The Company offers all employees health and life insurance, a 401(k)
retirement plan, and discretionary bonuses and stock options based on
performance.
(g) DESCRIBE GENERALLY THE PRINCIPAL PROPERTIES (SUCH AS REAL ESTATE,
PLANT AND EQUIPMENT, PATENTS, ETC.) THAT THE COMPANY OWNS, INDICATING ALSO WHAT
PROPERTIES IT LEASES AND A SUMMARY OF THE TERMS UNDER THOSE LEASES, INCLUDING
THE AMOUNT OF PAYMENTS, EXPIRATION DATES AND THE TERMS OF ANY RENEWAL OPTIONS.
INDICATE WHAT PROPERTIES THE COMPANY INTENDS TO ACQUIRE IN THE IMMEDIATE FUTURE,
THE COST OF SUCH ACQUISITIONS AND THE SOURCES OF FINANCING IT EXPECTS TO USE IN
OBTAINING THESE PROPERTIES, WHETHER BY PURCHASE, LEASE OR OTHERWISE.
The Company leases 4,400 square feet of office space at a gross rent of $6
per square foot under a lease which expires in 2001. There is one five-year
renewal option. The Company owns the tooling for the Active Ankle and various
office equipment and furniture.
The sports medicine catalog will be operated in leased warehouse space
under normal commercial terms. The Company expects to invest approximately
$100,000 in equipment and computers.
The consumer resource centers will lease space in regional shopping centers
under normal commercial terms including rent, common area charges, and
percentage rent. The average consumer resource center will have approximately
$150,000 in leasehold improvements and fixed assets.
(h) INDICATE THE EXTENT TO WHICH THE COMPANY'S OPERATIONS DEPEND OR ARE
EXPECTED TO DEPEND UPON PATENTS, COPYRIGHTS, TRADE SECRETS, KNOW-HOW OR OTHER
PROPRIETARY INFORMATION AND THE STEPS UNDERTAKEN TO SECURE AND PROTECT THIS
INTELLECTUAL PROPERTY, INCLUDING ANY USE OF CONFIDENTIALITY AGREEMENTS,
COVENANTS-NOT-TO-COMPETE AND THE LIKE. SUMMARIZE THE PRINCIPAL TERMS AND
EXPIRATION DATES OF ANY SIGNIFICANT LICENSE AGREEMENTS. INDICATE THE AMOUNTS
EXPENDED BY THE COMPANY FOR RESEARCH AND DEVELOPMENT DURING THE LAST FISCAL
YEAR, THE
21
<PAGE>
AMOUNT EXPECTED TO BE SPENT THIS YEAR AND WHAT PERCENTAGE OF REVENUES RESEARCH
AND DEVELOPMENT EXPENDITURES WERE FOR THE LAST FISCAL YEAR.
Several features of the Active Ankle are patented, but the Company relies
primarily upon marketing and product features. Canadian patent No. 2,024,615
expires September 5, 2010. An EPO patent expires September 6, 2010. U.S.
patent 5,031,607 expires September 7, 2009 and U.S. patent 5,366,439 expires
November 22, 2011. The Company has four U.S. and international patents
pending. The Company expects significant competition from its competitors
upon the expiration of the patents.
There is a license agreement with the inventor of the Active Ankle under
which royalty payments of 3% of Active Ankle sales are due until the
expiration of the base patent no earlier than April 14, 2003 and no later
than September 7, 2009.
The Company invested $12,368 or 0.5% of sales in research and development
in fiscal year 1996 and spent $36,728 or 1.4% of sales in fiscal year 1997.
(i) IF THE COMPANY'S BUSINESS, PRODUCTS, OR PROPERTIES ARE SUBJECT TO
MATERIAL REGULATION (INCLUDING ENVIRONMENTAL REGULATION) BY FEDERAL, STATE, OR
LOCAL GOVERNMENTAL AGENCIES, INDICATE THE NATURE AND EXTENT OF REGULATION AND
ITS EFFECTS OR POTENTIAL EFFECTS UPON THE COMPANY.
The Company is subject to regulation by the Food and Drug Administration as
discussed under the Business of the Company. In the opinion of management,
regulation is not a material factor in the business operations.
(j) STATE THE NAMES OF ANY SUBSIDIARIES OF THE COMPANY, THEIR BUSINESS
PURPOSES AND OWNERSHIP, AND INDICATE WHICH ARE INCLUDED IN THE FINANCIAL
STATEMENTS ATTACHED HERETO. IF NOT INCLUDED, OR IF INCLUDED BUT NOT
CONSOLIDATED, PLEASE EXPLAIN.
The Company has no subsidiaries.
(k) SUMMARIZE THE MATERIAL EVENTS IN THE DEVELOPMENT OF THE COMPANY
(INCLUDING ANY MATERIAL MERGERS OR ACQUISITIONS) DURING THE PAST FIVE YEARS, OR
FOR WHATEVER LESSER PERIOD THE COMPANY HAS BEEN IN EXISTENCE. DISCUSS ANY
PENDING OR ANTICIPATED MERGERS, ACQUISITIONS, SPIN-OFFS OR RECAPITALIZATION. IF
THE COMPANY HAS RECENTLY UNDERGONE A STOCK SPLIT, STOCK DIVIDEND OR
RECAPITALIZATION IN ANTICIPATION OF THIS OFFERING, DESCRIBE (AND ADJUST
HISTORICAL PER SHARE FIGURES ELSEWHERE IN THIS PROSPECTUS ACCORDINGLY).
The Company has not made any acquisitions or spin-offs during the last five
years. There have been no dividends paid on the Common Stock.
The Company in June, 1997, made a Tender Offer to its shareholders at a
price of $27 per common share. The Tender Offer was canceled by the Company
prior to its completion. However, prior to its cancellation, 24,389 Shares
were tendered. The Company may elect to initiate a similar tender offer
subsequent to the closing of this Offering. In such case, the Company
anticipates that no officers will tender shares and that two directors (a
total of 17,509 shares) will tender shares. Approximately $658,500 of the
proceeds of this offering would be used to fund the tender assuming 24,389
shares are tendered.
22
<PAGE>
In June, 1997, the Company sold 4,125 preferred, $40 par value,
convertible, 6% non-cumulative shares. The total funds received was $165,000.
Each share may be converted into two common shares after July 1, 1999. The
purposes of this preferred offering were to provide funds for expenditures
related to this offering and the sports medicine catalog business plan.
In September, 1994, the Company raised $255,175 in a private offering of
common stock at a price of $25 per share and issuance of warrants to purchase
5,103 shares of common stock at $25 per share. $217,405 in debt was retired
out of the proceeds of this offering.
In January, 1993, the Company accomplished a ten for one stock split. This
did not change the relative percentage of ownership of shares.
4. (a) IF THE COMPANY WAS NOT PROFITABLE DURING ITS LAST FISCAL YEAR, LIST
BELOW IN CHRONOLOGICAL ORDER THE EVENTS WHICH IN MANAGEMENT'S OPINION MUST OR
SHOULD OCCUR OR THE MILESTONES WHICH IN MANAGEMENT'S OPINION THE COMPANY MUST OR
SHOULD REACH IN ORDER FOR THE COMPANY TO BECOME PROFITABLE, AND INDICATE THE
EXPECTED MANNER OF OCCURRENCE OR THE EXPECTED METHOD BY WHICH THE COMPANY WILL
ACHIEVE THE MILESTONES.
EVENT OR EXPECTED MANNER OF DATE OR NUMBER OF MONTHS
MILESTONE OCCURRENCE OR METHOD OF AFTER RECEIPT OF PROCEEDS
ACHIEVEMENT WHEN SHOULD BE ACCOMPLISHED
Not applicable. The Company was profitable during the last fiscal year.
(b) STATE THE PROBABLE CONSEQUENCES TO THE COMPANY OF DELAYS IN ACHIEVING
EACH OF THE EVENTS OR MILESTONES WITHIN THE ABOVE TIME SCHEDULE, AND
PARTICULARLY THE EFFECT OF ANY DELAYS UPON THE COMPANY'S LIQUIDITY IN VIEW OF
THE COMPANY'S THEN ANTICIPATED LEVEL OF OPERATING COSTS. (SEE QUESTION NOS. 11
AND 12.)
Not applicable.
NOTE: AFTER REVIEWING THE NATURE AND TIMING OF EACH EVENT OR MILESTONE,
POTENTIAL INVESTORS SHOULD REFLECT UPON WHETHER ACHIEVEMENT OF EACH
WITHIN THE ESTIMATED TIME FRAME IS REALISTIC AND SHOULD ASSESS THE
CONSEQUENCES OF DELAYS OR FAILURE OF ACHIEVEMENT IN MAKING AN
INVESTMENT DECISION.
As to Question 4, if more than five events or milestones exist, add
additional lines as necessary. A "milestone" is a significant point in the
Company's development or an obstacle which the Company must overcome in order to
become profitable.
23
<PAGE>
OFFERING PRICE FACTORS
IF THE SECURITIES OFFERED ARE COMMON STOCK, OR ARE EXERCISABLE FOR OR
CONVERTIBLE INTO COMMON STOCK, THE FOLLOWING FACTORS MAY BE RELEVANT TO THE
PRICE AT WHICH THE SECURITIES ARE BEING OFFERED.
5. WHAT WERE NET, AFTER-TAX EARNINGS FOR THE LAST FISCAL YEAR?
TOTAL: $204,541 ($2.77 per share) for the fiscal year ended June 30,
1997. See Risk Factor 15.
6. IF THE COMPANY HAD PROFITS, SHOW OFFERING PRICE AS A MULTIPLE OF EARNINGS.
ADJUST TO REFLECT FOR ANY STOCK SPLITS OR RECAPITALIZATION, AND USE CONVERSION
OR EXERCISE PRICE IN LIEU OF OFFERING PRICE, IF APPLICABLE.
OFFERING PRICE PER SHARE = $40/$2.77 = 14.44
----------------------------------
NET AFTER-TAX EARNINGS LAST YEAR PER SHARE
7. (a) WHAT IS THE NET TANGIBLE BOOK VALUE OF THE COMPANY? (IF DEFICIT, SHOW
IN PARENTHESIS.) FOR THIS PURPOSE, NET TANGIBLE BOOK VALUE MEANS TOTAL ASSETS
(EXCLUSIVE OF COPYRIGHTS, PATENTS, GOODWILL, RESEARCH AND DEVELOPMENT COSTS AND
SIMILAR INTANGIBLE ITEMS) MINUS TOTAL LIABILITIES.
$582,231 ($7.61 per share) (Based on historical net tangible book
value and shares of common stock outstanding as of June 30, 1997, assuming
conversion of the Company's preferred stock into shares of common stock.)
IF THE NET TANGIBLE BOOK VALUE PER SHARE IS SUBSTANTIALLY LESS THAN
THIS OFFERING (OR EXERCISE OR CONVERSION) PRICE PER SHARE, EXPLAIN THE
REASONS FOR THE VARIATION.
The net tangible book value is substantially less than the offering price.
Fixed assets are not a significant factor in the business because the Company
out-sources its manufacturing. The tooling and molding are owned by the
Company, but the fixed assets associated with the manufacturing process are not
held by the Company. The Company has expended its funds in building market
position and brand awareness.
24
<PAGE>
The Company was a start-up for its first five years. As a start-up, the
Company invested resources in only product development and marketing. Operating
losses resulted in negative retained earnings.
The Company believes its present value is attributable to product quality,
name recognition, product functionality and market share of the rigid ankle
brace segment of the market.
The Company expects to continue to minimize capital requirements by
out-sourcing and not acquiring tangible assets, but concentrating on building
sales and earnings.
(b) STATE THE DATES ON WHICH THE COMPANY SOLD OR OTHERWISE ISSUED
SECURITIES DURING THE LAST 12 MONTHS, THE AMOUNT OF SUCH SECURITIES SOLD, THE
NUMBER OF PERSONS TO WHOM THEY WERE SOLD, ANY RELATIONSHIP OF SUCH PERSONS TO
THE COMPANY AT THE TIME OF SALE, THE PRICE AT WHICH THEY WERE SOLD AND, IF NOT
SOLD FOR CASH, A CONCISE DESCRIPTION OF THE CONSIDERATION. (EXCLUDE BANK DEBT.)
The Company has a class of preferred stock which has a $40 par and
liquidation value per share, carries a 6% non-cumulative dividend, and each
share is convertible after July 1, 1999 into two shares of the Company's
Common Stock. A total of 100,000 of such preferred shares are authorized,
and a total of 4,125 shares of the preferred stock are issued and
outstanding. The 4,125 shares were sold at a cash sale price of $40 per
share on June 10, 1997 . The preferred shares were sold to six accredited
investors, all of whom are either stockholders, officers or directors of the
Company prior to the filing of this registration statement. The proceeds
from this preferred stock offering are to be used as seed money for the
development of a catalog sales division. The preferred stock offering was
an exempt offering under Rule 506 of Regulation D of the Securities Act.
During the past 12 months, the Company has issued to employees and
consultants to the Company options to purchase 4,000 and 300 shares of common
stock, respectively, at an exercise price of $25 per share.
8. (a) WHAT PERCENTAGE OF THE OUTSTANDING SHARES OF THE COMPANY WILL THE
INVESTORS IN THIS OFFERING HAVE? (ASSUME EXERCISE OF OUTSTANDING OPTIONS,
WARRANTS OR RIGHTS AND CONVERSION OF CONVERTIBLE SECURITIES, IF THE RESPECTIVE
EXERCISE OR CONVERSION PRICES ARE AT OR LESS THAN THE OFFERING PRICE. ALSO
ASSUME EXERCISE OF ANY OPTIONS, WARRANTS OR RIGHTS AND CONVERSIONS OF ANY
CONVERTIBLE SECURITIES OFFERED IN THIS OFFERING.)
IF THE MINIMUM IS SOLD: 38.5%
IF THE MAXIMUM IS SOLD: 58.2%
This assumes that 24,389 shares are tendered pursuant to a possible
post-Offering tender offer. In addition, see Risk Factor 11. The above
percentages will be lower if the Company's officers or directors purchase any
of the shares offered herein.
25
<PAGE>
(b) WHAT POST-OFFERING VALUE IS MANAGEMENT IMPLICITLY ATTRIBUTING TO THE
ENTIRE COMPANY BY ESTABLISHING THE PRICE PER SECURITY SET FORTH ON THE COVER
PAGE (OR EXERCISE OR CONVERSION PRICE IF COMMON STOCK IS NOT OFFERED)? (TOTAL
OUTSTANDING SHARES AFTER OFFERING TIMES OFFERING PRICE, OR EXERCISE OR
CONVERSION PRICE IF COMMON STOCK IS NOT OFFERED.)
IF THE MINIMUM IS SOLD: Approximately $4,675,000
IF THE MAXIMUM IS SOLD: Approximately $6,875,000
(These figures assume all preferred shares are converted, all options are
exercised [and cash received], and assumes 24,389 shares are tendered under
a possible post-Offering tender offer.)
(FOR ABOVE PURPOSES, ASSUME OUTSTANDING OPTIONS ARE EXERCISED IN
DETERMINING "SHARES" IF THE EXERCISE PRICES ARE AT OR LESS THAN THE
OFFERING PRICE. ALL CONVERTIBLE SECURITIES, INCLUDING OUTSTANDING
CONVERTIBLE SECURITIES, SHALL BE ASSUMED CONVERTED AND ANY OPTIONS,
WARRANTS OR RIGHTS IN THIS OFFERING SHALL BE ASSUMED EXERCISED.)
*THESE VALUES ASSUME THAT THE COMPANY'S CAPITAL STRUCTURE WOULD BE
CHANGED TO REFLECT ANY CONVERSIONS OF OUTSTANDING CONVERTIBLE
SECURITIES AND ANY USE OF OUTSTANDING SECURITIES AS PAYMENT IN THE
EXERCISE OF OUTSTANDING OPTIONS, WARRANTS OR RIGHTS INCLUDED IN THE
CALCULATION. THE TYPE AND AMOUNT OF CONVERTIBLE OR OTHER SECURITIES
THUS ELIMINATED WOULD BE:
19,703 shares are under stock options and warrants.
8,250 shares are subject to conversion from the preferred shares.
THESE VALUES ALSO ASSUME AN INCREASE IN CASH IN THE COMPANY BY THE AMOUNT
OF ANY CASH PAYMENTS THAT WOULD BE MADE UPON CASH EXERCISE OF OPTIONS, WARRANTS
OR RIGHTS INCLUDED IN THE CALCULATIONS. THE AMOUNT OF SUCH CASH WOULD BE:
Approximately $500,000
NOTE: AFTER REVIEWING THE ABOVE, POTENTIAL INVESTORS SHOULD CONSIDER WHETHER
OR NOT THE OFFERING PRICE (OR EXERCISE OR CONVERSION PRICE, IF
APPLICABLE) FOR THE SECURITIES IS APPROPRIATE AT THE PRESENT STAGE OF
THE COMPANY'S DEVELOPMENT.
26
<PAGE>
USE OF PROCEEDS
9. (a) THE FOLLOWING TABLE SETS FORTH THE USE OF THE PROCEEDS FROM THIS
OFFERING:
<TABLE>
<CAPTION>
If Minimum If Maximum
Sold Sold
---------- ----------
Amount % Amount %
------ - ------ -
<S> <C> <C> <C> <C>
Total Proceeds $1,800,000 100.0% $4,000,000 100.0%
LESS: OFFERING EXPENSES
Commissions and Finders Fee 0.0 0.0% 0.0 0%
Legal & Accounting 100,000 5.6% 100,000 2.5%
Copying & Advertising 10,000 0.5% 10,000 0.2%
Other (Specify):
Registration Fees 6,212 0.3% 6,212 0.2%
Escrow Fees 1,000 0.1% 1,000 0.0%
-------- ---- --------- ----
Total 117,212 6.5% 117,212 2.9%
-------- ---- --------- ----
Net Proceeds from Offering 1,682,788 93.5% 3,882,788 97.1%
Use of Net Proceeds
Fixed Assets 603,000 35.8% 603,000 15.5%
Recapitalization (1) 658,503 39.1% 658,503 16.9%
Working Capital 421,285 25.1% 2,621,285 67.6%
-------- ------ --------- -----
Total Use of Net Proceeds: $1,682,788 100.0% $3,882,788 100.0%
</TABLE>
(1) This figure assumes tender of an estimated 24,389 shares of the
Company's common stock at $27/share. This assumption is based on shares
tendered through June 30, 1997, prior to cancellation of the Tender Offer.
Note, however, that no tender offer is currently outstanding, and the Company
may or may not make a post-Offering tender offer; if it does, the figures
assume that the same number of shares will be tendered. See Risk Factor 12.
(B) IF THERE IS NO MINIMUM AMOUNT OF PROCEEDS THAT MUST BE RAISED BEFORE
THE COMPANY MAY USE THE PROCEEDS OF THE OFFERING, DESCRIBE THE ORDER OF PRIORITY
IN WHICH THE PROCEEDS SET FORTH ABOVE IN THE COLUMN "IF MAXIMUM SOLD" WILL BE
USED.
Not Applicable.
NOTE: AFTER REVIEWING THE PORTION OF THE OFFERING ALLOCATED TO THE PAYMENT
OF OFFERING EXPENSES, AND TO THE IMMEDIATE PAYMENT TO MANAGEMENT AND
PROMOTERS OF ANY FEES, REIMBURSEMENTS, PAST SALARIES OR SIMILAR
PAYMENTS, A POTENTIAL INVESTOR SHOULD CONSIDER WHETHER THE REMAINING
PORTION OF HIS INVESTMENT, WHICH WOULD BE THAT PART AVAILABLE FOR
FUTURE DEVELOPMENT OF THE COMPANY'S BUSINESS AND OPERATIONS, WOULD BE
ADEQUATE.
27
<PAGE>
10. (a) IF MATERIAL AMOUNTS OF FUNDS FROM SOURCES OTHER THAN THIS OFFERING ARE
TO BE USED IN CONJUNCTION WITH THE PROCEEDS FROM THIS OFFERING, STATE THE
AMOUNTS AND SOURCES OF SUCH OTHER FUNDS, AND WHETHER FUNDS ARE FIRM OR
CONTINGENT. IF CONTINGENT, EXPLAIN.
None
(b) IF ANY MATERIAL PART OF THE PROCEEDS ARE TO BE USED TO DISCHARGE
INDEBTEDNESS, DESCRIBE THE TERMS OF SUCH INDEBTEDNESS, INCLUDING INTEREST RATES.
IF THE INDEBTEDNESS TO BE DISCHARGED WAS INCURRED WITHIN THE CURRENT OR PREVIOUS
FISCAL YEAR, DESCRIBE THE USE OF THE PROCEEDS OF SUCH INDEBTEDNESS.
None
(c) IF ANY MATERIAL AMOUNT OF THE PROCEEDS ARE TO BE USED TO ACQUIRE
ASSETS, OTHER THAN IN THE ORDINARY COURSE OF BUSINESS, BRIEFLY DESCRIBE AND
STATE THE COST OF THE ASSETS AND OTHER MATERIAL TERMS OF THE ACQUISITIONS. IF
THE ASSETS ARE TO BE ACQUIRED FROM OFFICERS, DIRECTORS, EMPLOYEES OR PRINCIPAL
STOCKHOLDERS OF THE COMPANY OR THEIR ASSOCIATES, GIVE THE NAMES OF THE PERSONS
FROM WHOM THE ASSETS ARE TO BE ACQUIRED AND SET FORTH THE COST TO THE COMPANY,
THE METHOD FOLLOWED IN DETERMINING THE COST, AND ANY PROFIT TO SUCH PERSONS.
All proceeds will be used to acquire assets in the ordinary course of
business and no assets are being acquired from officers, directors, principal
shareholders or their associates, except that a portion of the proceeds may be
used to fund a post-Offering tender offer on terms similar to those
contained in the June, 1997 Tender Offer, which was canceled.
The fixed assets to be acquired with the proceeds of this offering
include leasehold improvements and fixtures for the consumer resource
centers, various tooling for products and computer end data processing
equipment for the sports medicine catalog, and consumer resource centers.
(d) IF ANY AMOUNT OF THE PROCEEDS ARE TO BE USED TO REIMBURSE ANY OFFICER,
DIRECTOR, EMPLOYEE OR STOCKHOLDER FOR SERVICES ALREADY RENDERED, ASSETS
PREVIOUSLY TRANSFERRED, OR MONIES LOANED OR ADVANCED, OR OTHERWISE, EXPLAIN:
None
11. INDICATE WHETHER THE COMPANY IS HAVING OR ANTICIPATES HAVING WITHIN THE
NEXT 12 MONTHS ANY CASH FLOW OR LIQUIDITY PROBLEMS AND WHETHER OR NOT IT IS IN
DEFAULT OR IN BREACH OF ANY NOTE, LOAN, LEASE OR OTHER INDEBTEDNESS OR FINANCING
ARRANGEMENT REQUIRING THE COMPANY TO MAKE PAYMENTS. INDICATE IF A SIGNIFICANT
AMOUNT OF THE COMPANY'S TRADE PAYABLES HAVE NOT BEEN PAID WITHIN THE STATED
TRADE TERM. STATE WHETHER THE COMPANY IS SUBJECT TO ANY UNSATISFIED JUDGMENTS,
LIENS OR SETTLEMENT OBLIGATIONS AND THE AMOUNTS THEREOF. INDICATE THE COMPANY'S
PLANS TO RESOLVE ANY SUCH PROBLEMS.
28
<PAGE>
The Company does not anticipate any cash flow or liquidity problems over
the next twelve months. The Company is not in default or breach of any note,
lease or other financing arrangement. The Company's trade payables are current.
There are no unsatisfied judgments, liens, or settlement obligations.
12. INDICATE WHETHER PROCEEDS FROM THIS OFFERING WILL SATISFY THE COMPANY'S
CASH REQUIREMENTS FOR THE NEXT 12 MONTHS AND WHETHER IT WILL BE NECESSARY TO
RAISE ADDITIONAL FUNDS. STATE THE SOURCE OF ADDITIONAL FUNDS, IF KNOWN.
The offering proceeds will satisfy the Company's cash needs for the
next twelve months in developing and implementing its business plan.
However, if only the minimum number of shares are sold, the Company will be
required to utilize existing working capital or funds from its existing line
of credit (on which the balance is currently zero) for funds to implement the
business plan in full. In the alternative, the Company may delay the opening
of consumer resource centers rather than utilize its existing line of credit
if the offering proceeds and working capital are insufficient to finance
these stores. If the Company is unable to expand the scope of the consumer
resource centers as extensively as planned, this will likely reduce future
income or increase losses in the future. Significant additional funds will be
required in future years to implement growth and expansion plans.
29
<PAGE>
CAPITALIZATION
13. INDICATE THE CAPITALIZATION OF THE COMPANY AS OF THE MOST RECENT BALANCE
SHEET DATE (ADJUSTED TO REFLECT ANY SUBSEQUENT STOCK SPLITS, STOCK
DIVIDENDS, RECAPITALIZATION OR REFINANCING) AND AS ADJUSTED TO REFLECT THE
SALE OF THE MINIMUM AND MAXIMUM AMOUNT OF SECURITIES IN THIS OFFERING AND
THE USE OF THE NET PROCEEDS THEREFROM:
The following table sets forth the actual capitalization of the Company
as of June 30, 1997, and as adjusted to give effect to the issuance and
sale by the Company of the minimum and maximum number of shares of common
stock in this offering (45,000 and 100,000 shares, respectively) and the
application of the net proceeds therefrom. This table should be read in
conjunction with the financial statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Amount Outstanding
----------------------------------------
As of: As Adjusted
6/30/97 Minimum Maximum
-------- ------- ----------
<S> <C> <C> <C>
Debt:
Short-term debt (average interest rate ____%) $ 0 $ 0 $ 0
---------- ---------- ----------
Long-term debt (average interest rate 9.5%) (1) $ 74,481 $ 74,481 $ 74,481
---------- ---------- ----------
Total debt $ 74,481 $ 74,481 $ 74,481
---------- ---------- ----------
Stockholders' equity (deficit):
Preferred Stock-par value
(by class of preferred in order of
preferences)
Convertible Preferred Stock,
$40 par value and liquidation
value per share, authorized
shares: 100,000, outstanding
shares: 4,125 (2) $165,000 $ 165,000 $ 165,000
Common stock, no par value,
Authorized shares: 2,000,000,
issued and outstanding shares: 68,267
(88,878 minimum, 143,878 maximum) (1) $1,049,565 $2,073,850 $4,273,850
Additional paid in capital $ 0 $ 0 $ 0
30
<PAGE>
<CAPTION>
<S> <C> <C> <C>
Retained earnings (deficit) $ (565,791) $ (565,791) $ (565,791)
---------- ---------- ----------
Total Stockholders' equity (deficit) $ 648,774 $1,673,059 $3,873,059
---------- ---------- ----------
Total Capitalization $ 723,255 $1,747,540 $3,947,540
---------- ---------- ----------
</TABLE>
(1) Reflects the sale of the minimum and maximum amount of common stock in this
offering at $40 per share and the estimated use of proceeds of : a) the
tendering of an estimated 24,389 shares of the Company's common stock at
$27/share. This assumption is based on shares tendered through June 30,
1997 prior to cancellation of the Tender Offer. Note, however, that no
tender offer is currently outstanding, and the Company may or may not make
a post-Offering tender offer; if it does, the figures assume that the same
number of shares will be tendered. See Risk Factor 12. and b) estimated
expenses of the offering of $117,212.
(2) In June, 1997, the Company issued the preferred stock for cash, which
shares are each convertible after July 1, 1999 into two shares of common
stock.
31
<PAGE>
NUMBER OF PREFERRED SHARES
AUTHORIZED TO BE OUTSTANDING:
NUMBER OF PAR VALUE
CLASS OF PREFERRED SHARES PER SHARE
- ------------------ ------ ---------
ONE CLASS 100,000 40.00
NUMBER OF COMMON SHARES AUTHORIZED: 2,000,000 shares. Par or stated value per
share, if any:
None.
There are 22 shareholders of record, including six shareholders who own both
common and preferred stock.
NUMBER OF COMMON SHARES RESERVED TO MEET CONVERSION REQUIREMENTS OR FOR THE
ISSUANCE UPON EXERCISE OF OPTIONS, WARRANTS OR RIGHTS: 19,703 shares to meet
options outstanding and 8,250 shares to meet conversion requirements.
DESCRIPTION OF SECURITIES
14. THE SECURITIES BEING OFFERED HEREBY ARE:
[X] Common Stock
[ ] Preferred or Preference Stock
[ ] Notes or Debentures
[ ] Units of two or more types of securities, composed of: ______________
[ ] Other ___________________________________
15. THESE SECURITIES HAVE:
Yes No
[X] [ ] Cumulative voting rights
[ ] [X] Other special voting rights
[ ] [X] Preemptive rights to purchase in new issues of shares
[ ] [X] Preference as to dividends or interest
[ ] [X] Preference upon liquidation
[ ] [X] Other special rights or preferences (specify): ____
Explain: _______________________________
16. ARE THE SECURITIES CONVERTIBLE? ( ) Yes (X) No
32
<PAGE>
IF SO, STATE CONVERSION PRICE OR FORMULA. N/A
DATE WHEN CONVERSION BECOMES EFFECTIVE: / /
DATE WHEN CONVERSION EXPIRES: / /
17. (a) IF THE SECURITIES ARE NOTES OR OTHER TYPES OF DEBT SECURITIES: Not
applicable.
(1) WHAT IS THE INTEREST RATE? N/A %.
IF INTEREST RATE IS VARIABLE OR MULTIPLE RATES, DESCRIBE: Not
Applicable.
(2) WHAT IS THE MATURITY DATE? N/A
IF SERIAL MATURITY DATES, DESCRIBE: Not Applicable.
(3) IS THERE A MANDATORY SINKING FUND? ( ) (X) No. Describe
Not Applicable.
(4) IS THERE A TRUST INDENTURE? ( ) Yes (X) No
NAME, ADDRESS AND TELEPHONE NUMBER OF TRUSTEE: Not Applicable.
(5) ARE THE SECURITIES CALLABLE OR SUBJECT TO REDEMPTION?
( ) Yes (X) No. DESCRIBE, INCLUDING REDEMPTION PRICES:
Not Applicable.
(6) ARE THE SECURITIES COLLATERALIZED BY REAL OR PERSONAL PROPERTY?
( ) Yes (X) No. DESCRIBE: Not Applicable.
(7) IF THESE SECURITIES ARE SUBORDINATED IN RIGHT OF PAYMENT OF
INTEREST OR PRINCIPAL, EXPLAIN THE TERMS OF SUCH SUBORDINATION.
Not applicable.
HOW MUCH CURRENTLY OUTSTANDING INDEBTEDNESS OF THE COMPANY IS SENIOR
TO THE SECURITIES IN RIGHT OF PAYMENT OF INTEREST OR PRINCIPAL? All
of the Company's debt is senior to the Securities in right of payment
of principal. The Company's debt includes a term loan in the amount
of $74,481 and the Company's general trade creditors.
HOW MUCH INDEBTEDNESS SHARES IN RIGHT OF PAYMENT ON AN EQUIVALENT
(PARI PASSU) BASIS? $0.00
HOW MUCH INDEBTEDNESS IS JUNIOR (SUBORDINATED) TO THE SECURITIES?
$0.00
33
<PAGE>
(b) IF NOTES OR OTHER TYPES OF DEBT SECURITIES ARE BEING OFFERED AND THE
COMPANY HAD EARNINGS DURING ITS LAST FISCAL YEAR, SHOW THE RATIO OF EARNINGS TO
FIXED CHARGES ON AN ACTUAL AND PRO FORMA BASIS FOR THAT FISCAL YEAR. "EARNINGS"
MEANS PRETAX INCOME FROM CONTINUING OPERATIONS PLUS FIXED CHARGES AND
CAPITALIZED INTEREST. "FIXED CHARGES" MEANS INTEREST (INCLUDING CAPITALIZED
INTEREST), AMORTIZATION OF DEBT DISCOUNT, PREMIUM AND EXPENSE, PREFERRED STOCK
DIVIDEND REQUIREMENTS OF MAJORITY OWNED SUBSIDIARY, AND SUCH PORTION OF RENTAL
EXPENSE AS CAN BE DEMONSTRATED TO BE REPRESENTATIVE OF THE INTEREST FACTOR IN
THE PARTICULAR CASE. THE PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES SHOULD
INCLUDE INCREMENTAL INTEREST EXPENSE AS A RESULT OF THE OFFERING OF THE NOTES OR
OTHER DEBT SECURITIES.
Not Applicable.
NOTE: CARE SHOULD BE EXERCISED IN INTERPRETING THE SIGNIFICANCE OF THE RATIO
OF EARNINGS TO FIXED CHARGES AS A MEASURE OF THE "COVERAGE" OF DEBT
SERVICE, AS THE EXISTENCE OF EARNINGS DOES NOT NECESSARILY MEAN THAT
THE COMPANY'S LIQUIDITY AT ANY GIVEN TIME WILL PERMIT PAYMENT OF DEBT
SERVICE REQUIREMENTS TO BE TIMELY MADE. SEE QUESTION NOS. 11 AND 12.
SEE ALSO THE FINANCIAL STATEMENTS AND ESPECIALLY THE STATEMENT OF CASH
FLOWS.
18. IF SECURITIES ARE PREFERENCE OR PREFERRED STOCK: Not Applicable.
ARE UNPAID DIVIDENDS CUMULATIVE? ( ) Yes ( ) No
ARE SECURITIES CALLABLE? ( ) Yes ( ) No Explain:
NOTE: ATTACH TO THIS PROSPECTUS COPIES OR A SUMMARY OF THE CHARTER, BYLAW OR
CONTRACTUAL PROVISION OR DOCUMENT THAT GIVES RISE TO THE RIGHTS OF
HOLDERS OF PREFERRED OR PREFERENCE STOCK, NOTES OR OTHER SECURITIES
BEING OFFERED.
19. IF SECURITIES ARE CAPITAL STOCK OF ANY TYPE, INDICATE RESTRICTIONS ON
DIVIDENDS UNDER LOAN OR OTHER FINANCING ARRANGEMENTS OR OTHERWISE:
Under the terms of the term loan described above, the Company has no
specific restrictions on dividends except as implied by covenants on debt to
worth ratio and net worth. The net worth covenant requires a tangible net
worth of $200,000. The Company had a tangible net worth of $582,231 on
June 30, 1997. See Risk Factor 18.
20. CURRENT AMOUNT OF ASSETS AVAILABLE FOR PAYMENT OF DIVIDENDS (IF DEFICIT
MUST BE FIRST MADE UP, SHOW DEFICIT IN PARENTHESIS): $204,541 as of
6/30/97. See Risk Factor 18.
34
<PAGE>
PLAN OF DISTRIBUTION
21. THE SELLING AGENTS (THAT IS, THE PERSONS SELLING THE SECURITIES AS AGENT
FOR THE COMPANY FOR A COMMISSION OR OTHER COMPENSATION) IN THIS OFFERING
ARE: NONE. (SEE RESPONSE PROVIDED TO QUESTION 24.)
22. DESCRIBE ANY COMPENSATION TO SELLING AGENTS, OR FINDERS, INCLUDING CASH,
SECURITIES, CONTRACTS OR OTHER CONSIDERATION IN ADDITION TO THE CASH
COMMISSION SET FORTH AS A PERCENT OF THE OFFERING PRICE ON THE COVER PAGE
OF THIS PROSPECTUS. ALSO INDICATE WHETHER THE COMPANY WILL INDEMNIFY THE
SELLING AGENTS OR FINDERS AGAINST LIABILITIES UNDER THE SECURITIES LAWS.
("FINDERS" ARE PERSONS WHO FOR COMPENSATION ACT AS INTERMEDIARIES IN
OBTAINING SELLING AGENTS OR OTHERWISE MAKING INTRODUCTIONS IN FURTHERANCE
OF THIS OFFERING.)
There are no selling agents or finders involved with this offering. All
sales are being conducted by Officers and Directors of the Company as
described in response to question 24 below. Those Officers and Directors
involved as Agents on behalf of the Company in consummating sales of the
securities described herein will not receive any form of additional
consideration for their efforts in respect to this offering.
23. DESCRIBE ANY MATERIAL RELATIONSHIPS BETWEEN ANY OF THE SELLING AGENTS OR
FINDERS AND THE COMPANY OR ITS MANAGEMENT.
There are no selling agents or finders involved in this offering.
NOTE: AFTER REVIEWING THE AMOUNT OF COMPENSATION TO THE SELLING AGENTS OR
FINDERS FOR SELLING THE SECURITIES, AND THE NATURE OF ANY RELATIONSHIP BETWEEN
THE SELLING AGENTS OR FINDERS AND THE COMPANY, A POTENTIAL INVESTOR SHOULD
ASSESS THE EXTENT TO WHICH IT MAY BE INAPPROPRIATE TO RELY UPON ANY
RECOMMENDATION BY THE SELLING AGENTS OR FINDERS TO BUY THE SECURITIES.
24. IF THIS OFFERING IS NOT BEING MADE THROUGH SELLING AGENTS, THE NAMES OF
PERSONS AT THE COMPANY THROUGH WHICH THIS OFFERING IS BEING MADE:
NAME: Gary G. Herzberg NAME: Glen R. Snow
ADDRESS: 509 Barret Avenue ADDRESS: 509 Barret Avenue
Louisville, Kentucky Louisville, Kentucky
Telephone No.(502) 582-2655 Telephone No. (502) 582-2655
NAME: Andrew Pfeifer NAME: Henry H. Porter, Jr.
ADDRESS: 509 Barret Avenue ADDRESS: 509 Barret Avenue
Louisville, Kentucky Louisville, Kentucky
Telephone No.(502) 582-2655 Telephone No.(502) 582-2655
35
<PAGE>
25. IF THIS OFFERING IS LIMITED TO A SPECIAL GROUP, SUCH AS EMPLOYEES OF THE
COMPANY, OR IS LIMITED TO A CERTAIN NUMBER OF INDIVIDUALS (AS REQUIRED TO
QUALIFY UNDER SUBCHAPTER S OF THE INTERNAL REVENUE CODE) OR IS SUBJECT TO
ANY OTHER LIMITATIONS, DESCRIBE THE LIMITATIONS AND ANY RESTRICTIONS ON
RESALE THAT APPLY:
This offering is not limited to any special group of individuals and there
are no restrictions on the resale of shares issued through this offering.
(See response provided to question 27 with respect to the voluntary
restriction placed on certain pre-offering shareholders.)
WILL THE CERTIFICATES BEAR A LEGEND NOTIFYING HOLDERS OF SUCH RESTRICTIONS?
( ) Yes (X) No
26. (a) NAME, ADDRESS AND TELEPHONE NUMBER OF INDEPENDENT BANK OR SAVINGS AND
LOAN ASSOCIATION OR OTHER SIMILAR DEPOSITORY INSTITUTION ACTING AS
ESCROW AGENT IF PROCEEDS ARE ESCROWED UNTIL MINIMUM PROCEEDS ARE
RAISED:
Bank One Kentucky
416 West Jefferson Street - 4th Floor
Louisville, Kentucky 40202
(502) 566-2117
Attn: Bette J. Purucker
(b) DATE AT WHICH FUNDS WILL BE RETURNED BY ESCROW AGENT IF MINIMUM
PROCEEDS ARE NOT RAISED:
180 days after the registration of this prospectus is effective.
WILL INTEREST ON PROCEEDS DURING ESCROW PERIOD BE PAID TO INVESTORS?
( ) Yes (X) No
27. EXPLAIN THE NATURE OF ANY RESALE RESTRICTIONS ON PRESENTLY OUTSTANDING
SHARES, AND WHEN THOSE RESTRICTIONS WILL TERMINATE, IF THIS CAN BE DETERMINED:
None on common shares. The 4,125 preferred shares outstanding may be
transferred only upon receipt of an opinion of counsel that such transfer will
not violate any securities laws; such shares are convertible into 8,250 shares
of common stock after July 1, 1999.
NOTE: EQUITY INVESTORS SHOULD BE AWARE THAT UNLESS THE COMPANY IS ABLE TO
COMPLETE A FURTHER PUBLIC OFFERING OR THE COMPANY IS ABLE TO BE SOLD
FOR CASH OR MERGED WITH A PUBLIC COMPANY THAT THEIR INVESTMENT IN THE
COMPANY MAY BE ILLIQUID INDEFINITELY.
36
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS
28. IF THE COMPANY HAS WITHIN THE LAST FIVE-YEARS PAID DIVIDENDS, MADE
DISTRIBUTIONS UPON ITS STOCK OR REDEEMED ANY SECURITIES, EXPLAIN HOW MUCH AND
WHEN:
The Company has not paid any dividends.
The Company made a tender offer which was subsequently withdrawn. As
such, no shares were redeemed. See Risk Factor 12.
By written agreement dated January 31, 1995, the 4,900 shares owned by Mr.
Rick Peters were redeemed at $6.00 per share. Mr. Peters also agreed to a
noncompetition covenant, received consulting fees of $7,000.00 through
December, 1995, and a patent royalty on sales of the Active Ankle. The royalty
will cease when the patent expires no earlier than April 14, 2003 and no
later than September 7, 2009. The noncompetition covenant is now expired and
is of no effect.
OFFICERS AND KEY PERSONNEL OF THE COMPANY
29. CHIEF EXECUTIVE OFFICER: TITLE: President and CEO
NAME: Gary G. Herzberg AGE: 57
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502 ) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
GARY G. HERZBERG
Owner of 200 common shares of Active Ankle, 1,250 preferred shares and options
to purchase 7,100 shares of common stock.
MR. HERZBERG, age 57, was elected President and Chief Executive Officer of
the Company in April, 1994. He has served on the Board since February, 1994.
From August, 1993 thru September, 1997 he was CEO of National Records
Management Corporation of Louisville, Kentucky. Prior to joining National
Records, Mr. Herzberg was a consultant affiliated with International Finance
and Management Group, Inc., Minneapolis, MN, specializing in planning,
financial and project management. From 1977-1982 he was Vice President and
Treasurer of BATUS, Inc. Prior experience includes executive
37
<PAGE>
positions with General Mills, Inc., International Multifoods, Inc., Piper,
Jaffray and Hopwood, an executive on loan to the Minnesota and Kentucky State
Governments and a shipboard officer in the U.S. Navy. Mr. Herzberg is a
graduate of the U.S. Naval Academy and holds a Masters Degree in Industrial
Administration from Carnegie Mellon University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 100%
30. CHIEF MARKETING OFFICER: TITLE: Senior Vice President
NAME: Glen R. Snow AGE: 47
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
GLEN R. SNOW
Owner of 1,000 common shares of Active Ankle, 150 preferred shares and options
to purchase 4,000 shares of common stock.
MR. SNOW, age 47, is Senior Vice President of Marketing. He has served as Vice
President, Sales and Marketing of the Company since 1990 and as a director since
April, 1995. He is a certified athletic trainer and has served as an athletic
trainer for Ball State University, The University of Washington, the Seattle
Seahawks Professional Football Team, and Floyd Central High School. He has
consulted with a variety of schools and teams on athletic training services and
facilities. Mr. Snow is active in the National Athletic Trainers Association
and the NATA Education and Research Committee. He has held district offices,
committee appointments as well as being named National High School Trainer of
the Year three times. He was recently inducted into the State of Indiana
Trainers Association Hall of Fame. Prior business experience includes positions
as Director of Corporate Development for Baxter Physical Therapy, a division of
Baxter International, and Development Director at Ball State University. Mr.
Snow holds Bachelor of Science and Master of Arts degrees from Ball State
University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 100%
38
<PAGE>
31. CHIEF FINANCIAL OFFICER: TITLE: Chief Financial Officer
NAME: Ronald W. Schultz AGE: 64
Office Street Address: TELEPHONE NO.:
509 Barret Avenue (502) 582-2655
Louisville, Kentucky 40204
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
RONALD W. SCHULTZ
Owner of 6,640 common shares of Active Ankle, and options to purchase 500 shares
of common stock.
MR. SCHULTZ, age 64, is Chief Financial Officer, Treasurer and a founder of the
Company. He served as the Company's Chief Executive Officer and Treasurer from
1989 to 1993, Chief Financial Officer since June, 1995, and as a director since
1989. He was Chief Executive Officer for Innovative Computer Management
Systems, Inc., a computer software firm, from 1987 to 1988. From 1985 to 1987,
Mr. Schultz was President of Equine Dynamics Ltd., a start-up company in the
horse products industry that included four retail stores and three manufacturing
facilities. From 1985 to 1988, Mr. Schultz was also a part owner and Director
of JML Computers, Inc., a retail computer business. From 1956 to 1984, Mr.
Schultz held various executive positions in Finance, Marketing and Human
Resources Management with the General Electric Company. Mr. Schultz received
his MBA from Northwestern University in 1962, and his Bachelor of Business
Administration in 1954, from the University of Minnesota.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
Indicate amount of time to be spent on Company matters if less than full
time: 100%
32. OTHER KEY PERSONNEL:
(A) NAME: Andrew Pfeifer AGE: 40
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
531 Fairfield Dr. (502) 895-3336
Louisville, Kentucky 40206
39
<PAGE>
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
ANDREW PFEIFER
Owner of 3,906 common shares of Active Ankle, 1,250 preferred shares and
warrants to purchase 1,023 shares of common stock.
MR. PFEIFER, age 40, became a Director of the Company in 1992. He retired as
a Global Partner of AMVESCAP Plc. (NYSE:AVC), a global investment management
company, in April, 1997. Mr. Pfeifer's employment began in April 1985 and
his responsibilities included CFO, Treasurer, account management, portfolio
management and credit analysis for PRIMCO Capital Management, Inc., an
AMVESCAP member company. In 1985, Mr. Pfeifer co-founded PRIMCO Capital
Management, Inc., an investment management company which was purchased by
AMVESCAP Plc. in 1990. From 1974 to 1985, Mr. Pfeifer held positions with
SCA Services, Inc., Coopers & Lybrand and William M. Mercer, Inc. He is a
Chartered Financial Analyst (CFA), Certified Public Accountant (CPA), and a
Certified Employee Benefit Specialist (CEBS). Mr. Pfeifer has been self
employed since April, 1997. Mr. Pfeifer received his Bachelor of Science
Degree from Indiana University Southeast in 1978.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 10%
OTHER KEY PERSONNEL:
(B) NAME: Henry H. Porter, Jr. AGE: 62
TITLE: Chairman of the Board
Office Street Address: TELEPHONE NO.:
5806 River Knolls Dr. (502) 426-4161
Louisville, Kentucky 40222
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
Education (degrees, schools, and dates):
HENRY H. PORTER, JR.
Owner of 19,810 common shares of Active Ankle, 1,250 preferred shares and
warrants to purchase 2,000 shares of common stock.
40
<PAGE>
MR. PORTER, age 62, is Chairman of the Board. A founder of the Company, has
served as a Director and Chairman since the Company's incorporation in 1989. He
served as the Company's President from October, 1993 to April of 1994. Since
1980, Mr. Porter has been a professional director, private investor and self
employed consultant. From 1977 to 1980, he was Senior Vice President , Chief
Financial Officer, Director and Executive Committee member of Brown and
Williamson Industries, Inc. and its successor, BATUS, Inc. From 1962 to 1976,
Mr. Porter was with General Mills, Inc. and from 1969 to 1976 was its Vice
President Finance and Treasurer. Currently, Mr. Porter is a director of SEI
Corporation (an SEC registered company) and several small private companies.
Mr. Porter received a Master's Degree in Business Administration from Harvard
Graduate School of Business Administration and a Bachelor of Arts degree from
Yale University.
ALSO A DIRECTOR OF THE COMPANY (X) YES ( ) NO
INDICATE AMOUNT OF TIME TO BE SPENT ON COMPANY MATTERS IF LESS THAN FULL
TIME: 10%
DIRECTORS OF THE COMPANY
33. NUMBER OF DIRECTORS: 8.
IF DIRECTORS ARE NOT ELECTED ANNUALLY, OR ARE ELECTED UNDER A VOTING TRUST
OR OTHER ARRANGEMENT, EXPLAIN: Not Applicable.
34. INFORMATION CONCERNING OUTSIDE OR OTHER DIRECTORS (I.E., THOSE NOT
DESCRIBED ABOVE):
Name of employers, titles and dates of positions held during past five
years with an indication of job responsibilities.
EDUCATION (DEGREES, SCHOOLS, AND DATES):
NAME: John C. Nichols II AGE: 65
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
1510 North Wind Rd. (502) 896-4712
Louisville, Kentucky 40207
JOHN C. NICHOLS II
Owner of 5,900 common shares of Active Ankle. It is anticipated that the
5,900 common shares will be tendered, if the Company participates in a
post-Offering tender offer.
Mr. Nichols, a founder of the Company, has served as a director since 1989.
Since 1984, he has been President of Northdel, Inc., a financial consulting
and equipment leasing firm. Mr. Nichols has also been a self employed
consultant since 1992, and is currently a consultant to DHN Enterprises, Inc.
in Dallas, Texas. From 1974 to
41
<PAGE>
1984, Mr. Nichols was Senior Vice President and Chief Financial Officer of Conna
Corporation. From 1956 to 1974, Mr. Nichols was Vice President of the
Commercial Division of Citizens Fidelity Bank and Trust Company, Louisville,
Kentucky. Mr. Nichols received a Bachelor of Science Degree in Commerce from
the University of Kentucky and graduate degrees from Rutgers Graduate School of
Banking, the Columbia School of Banking and the Indiana Management School.
NAME: Douglas D. Stegner AGE: 68
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
1644 Cherokee Rd. (502) 458-8017
Louisville, Kentucky 40205
DOUGLAS D. STEGNER
Owner of 11,609 common shares of Active Ankle, and warrants to purchase
954 shares of common stock. However, it is expected that the 11,609 common
shares will be tendered, if the Company participates in a post-Offering
tender offer. See Use of Proceeds footnote (1).
Mr. Stegner has served as a director of the Company since 1989. He is President
of and has been employed since 1992 by Stegner Group, Ltd., a real estate
development firm, and Chairman of Stegner Investment Associates, an investment
advisory firm. He also serves on several boards of charitable organizations in
the Louisville area. Prior to a long career of leadership in the employee
benefit services profession, Mr. Stegner attended graduate school at Butler
University and received a Bachelor of Business from the University of
Wisconsin.
NAME: James T. Crain, Jr. AGE: 58
TITLE: Director
OFFICE STREET ADDRESS: TELEPHONE NO.:
620 West Main St., #320 (502) 581-1148
Louisville, Kentucky 40202
JAMES T. CRAIN, JR.
Owner of 50 common shares of Active Ankle.
Mr. Crain has served as a director of the Company since 1992. He is
Executive Director of the Cralle Foundation and Day Enterprises and has been
employed in such capacity since 1992. Joan Cralle Day, the Principal of Day
Enterprises, owns 6,932 common shares and warrants to purchase 826 common
shares of the Company. Mr. Crain, for eight years, was Executive Vice
President and Group Head of the Trust and Investment Division of Liberty
National Bank. Prior to joining Liberty National Bank, Mr. Crain had, for
18 years, been associated with the Trust Departments of United
42
<PAGE>
Kentucky Bank and Louisville Trust Company. Mr. Crain is a member of the Board
of Trustees of Lindsey-Wilson College and is Chairman of the Associates Board of
Georgetown College. Mr. Crain serves on the Board of Directors of Carman
Industries, NUMA Technologies, and several other small companies. Mr. Crain
received his B.A. degree from the University of Kentucky in 1960 and his J.D.
degree in 1963 from the University of Louisville.
35(a). HAVE ANY OF THE OFFICERS OR DIRECTORS EVER WORKED FOR OR MANAGED A
COMPANY (INCLUDING A SEPARATE SUBSIDIARY OR DIVISION OF A LARGER ENTERPRISE) IN
THE SAME BUSINESS AS THE COMPANY?
( ) YES (X) NO
Explain:
(b) IF ANY OF THE OFFICERS, DIRECTORS OR OTHER KEY PERSONNEL HAVE EVER
WORKED FOR OR MANAGED A COMPANY IN THE SAME BUSINESS OR INDUSTRY AS THE COMPANY
OR IN A RELATED BUSINESS OR INDUSTRY, DESCRIBE WHAT PRECAUTIONS, IF ANY,
(INCLUDING THE OBTAINING OF RELEASES OR CONSENTS FROM PRIOR EMPLOYERS) HAVE BEEN
TAKEN TO PRECLUDE CLAIMS BY PRIOR EMPLOYERS FOR CONVERSION OR THEFT OF TRADE
SECRETS, KNOW-HOW OR OTHER PROPRIETARY INFORMATION.
Not Applicable.
(c) IF THE COMPANY HAS NEVER CONDUCTED OPERATIONS OR IS OTHERWISE IN THE
DEVELOPMENT STAGE, INDICATE WHETHER ANY OF THE OFFICERS OR DIRECTORS HAS EVER
MANAGED ANY OTHER COMPANY IN THE START-UP OR DEVELOPMENT STAGE AND DESCRIBE THE
CIRCUMSTANCES, INCLUDING RELEVANT DATES.
Not Applicable.
(d) IF ANY OF THE COMPANY'S KEY PERSONNEL ARE NOT EMPLOYEES BUT ARE
CONSULTANTS OR OTHER INDEPENDENT CONTRACTORS, STATE THE DETAILS OF THEIR
ENGAGEMENT BY THE COMPANY.
Not Applicable.
(e) IF THE COMPANY HAS KEY MAN LIFE INSURANCE POLICIES ON ANY OF ITS
OFFICERS, DIRECTORS OR KEY PERSONNEL, EXPLAIN, INCLUDING THE NAMES OF THE
PERSONS INSURED, THE AMOUNT OF INSURANCE, WHETHER THE INSURANCE PROCEEDS ARE
PAYABLE TO THE COMPANY AND WHETHER THERE ARE ARRANGEMENTS THAT REQUIRE THE
PROCEEDS TO BE USED TO REDEEM SECURITIES OR PAY BENEFITS TO THE ESTATE OF THE
INSURED PERSON OR A SURVIVING SPOUSE.
Not Applicable.
36. IF A PETITION UNDER THE BANKRUPTCY ACT OR ANY STATE INSOLVENCY LAW WAS
FILED BY OR AGAINST THE COMPANY OR ITS OFFICERS, DIRECTORS OR OTHER KEY
PERSONNEL, OR A RECEIVER, FISCAL
43
<PAGE>
AGENT OR SIMILAR OFFICER WAS APPOINTED BY A COURT FOR THE BUSINESS OR PROPERTY
OF ANY SUCH PERSONS, OR ANY PARTNERSHIP IN WHICH ANY OF SUCH PERSONS WAS A
GENERAL PARTNER AT OR WITHIN THE PAST FIVE YEARS, OR ANY CORPORATION OR BUSINESS
ASSOCIATION OF WHICH ANY SUCH PERSON WAS AN EXECUTIVE OFFICER AT OR WITHIN THE
PAST FIVE YEARS, SET FORTH BELOW THE NAME OF SUCH PERSONS, AND THE NATURE AND
DATE OF SUCH ACTION.
None.
NOTE: AFTER REVIEWING THE INFORMATION CONCERNING THE BACKGROUND OF THE
COMPANY'S OFFICERS, DIRECTORS AND OTHER KEY PERSONNEL, POTENTIAL
INVESTORS SHOULD CONSIDER WHETHER OR NOT THESE PERSONS HAVE ADEQUATE
BACKGROUND AND EXPERIENCE TO DEVELOP AND OPERATE THIS COMPANY AND TO
MAKE IT SUCCESSFUL. IN THIS REGARD, THE EXPERIENCE AND ABILITY OF
MANAGEMENT ARE OFTEN CONSIDERED THE MOST SIGNIFICANT FACTORS IN THE
SUCCESS OF A BUSINESS.
44
<PAGE>
PRINCIPAL STOCKHOLDERS
37. PRINCIPAL OWNERS OF THE COMPANY (THOSE WHO BENEFICIALLY OWN DIRECTLY OR
INDIRECTLY 10% OR MORE OF THE COMMON AND PREFERRED STOCK PRESENTLY OUTSTANDING)
STARTING WITH THE LARGEST COMMON STOCKHOLDER. INCLUDE SEPARATELY ALL COMMON
STOCK ISSUABLE UPON CONVERSION OF CONVERTIBLE SECURITIES (IDENTIFYING THEM BY
ASTERISK) AND SHOW AVERAGE PRICE PER SHARE AS IF CONVERSION HAS OCCURRED.
INDICATE BY FOOTNOTE IF THE PRICE PAID WAS FOR A CONSIDERATION OTHER THAN CASH
AND THE NATURE OF ANY SUCH CONSIDERATION.
<TABLE>
<CAPTION>
Average No. of Shares % if All
Price No. of % of Held After Offering Securities
Name Per Share Shares Held Total if All Securities Sold Sold
- ---- --------- ----------- ----- ---------------------- ----
<S> <C> <C> <C> <C> <C>
Douglas D. Stegner $16.28 12,563 13.1% 954 0.6%
Henry H. Porter, Jr.
(Preferred)* $20.00 2,500 2.6% 2,500 1.4%
Henry H. Porter, Jr.
(Common) $15.24 21,810 22.7% 21,810 12.7%
Henry H. Porter, Jr.
(Total) $15.75 24,310 25.3% 24,310 14.1%
Gary G. Herzberg $20.00 2,500 2.6% 2,500 1.4%
(Preferred)*
Gary G. Herzberg $25.00 7,300 7.6% 7,300 4.3%
(Common)
Gary G. Herzberg
(Total) $23.72 9,800 10.2% 9,800 5.7%
</TABLE>
NOTE: Shares shown above include shares of common stock outstanding as of
June 30, 1997, shares of common stock reserved for conversion of
preferred stock and shares of common stock reserved for exercise of
currently outstanding options and warrants. The number of shares
assumes 24,389 shares are tendered pursuant to a possible
post-Offering tender offer.
38. NUMBER OF SHARES BENEFICIALLY OWNED BY OFFICERS AND DIRECTORS AS A GROUP:
BEFORE OFFERING: 82,200 common shares (85.4% OF TOTAL OUTSTANDING)
AFTER OFFERING:
45
<PAGE>
a) ASSUMING MINIMUM SECURITIES SOLD:
64,691 common shares (55.4% of total outstanding)
b) ASSUMING MAXIMUM SECURITIES SOLD:
64,691 common shares (37.6% of total outstanding)
These figures assume that 17,509 shares will be tendered by directors or
officers pursuant to a possible post-Offering tender offer. These figures
include options and warrants.
MANAGEMENT RELATIONSHIPS,
TRANSACTIONS AND REMUNERATION
39. (a) IF ANY OF THE OFFICERS, KEY PERSONNEL OR PRINCIPAL STOCKHOLDERS ARE
RELATED BY BLOOD OR MARRIAGE, PLEASE DESCRIBE.
The Company was sub-leasing office space from a business partially owned by
a stockholder of the Company until November 30, 1995. Rent expense for the
years ended June 30, 1996 and 1995 amounted to $4,600 and $11,565, respectively.
The Company owed certain stockholders during fiscal 1995 under notes
payable. Interest expense on these loans amounted to approximately $3,000 in
1995. The loans were repaid during fiscal 1995. In addition, the Company
incurred $4,105 and $7,384 in loan guarantee fees to certain stockholders during
1996 and 1995 respectively. Under the terms of the loan, no guarantee will be
required after September 30, 1997.
(b) IF THE COMPANY HAS MADE LOANS TO OR IS DOING BUSINESS WITH ANY
OF ITS OFFICERS, DIRECTORS, KEY PERSONNEL OR 10% STOCKHOLDERS, OR ANY OF
THEIR RELATIVES (OR ANY ENTITY CONTROLLED DIRECTLY OR INDIRECTLY BY ANY SUCH
PERSONS) WITHIN THE LAST TWO YEARS, OR PROPOSES TO DO SO WITHIN THE FUTURE,
EXPLAIN. (THIS INCLUDES SALES OR LEASE OF GOODS, PROPERTY OR SERVICES TO OR
FROM THE COMPANY, EMPLOYMENT OR STOCK PURCHASE CONTRACTS, ETC.) STATE THE
PRINCIPAL TERMS OF ANY SIGNIFICANT LOANS, AGREEMENTS, LEASES, FINANCING OR
OTHER ARRANGEMENTS.
None.
(c) IF ANY OF THE COMPANY'S OFFICERS, DIRECTORS, KEY PERSONNEL OR 10%
STOCKHOLDERS HAS GUARANTEED OR CO-SIGNED ANY OF THE COMPANY'S BANK DEBT OR OTHER
OBLIGATIONS, INCLUDING ANY INDEBTEDNESS TO BE RETIRED FROM THE PROCEEDS OF THIS
OFFERING, EXPLAIN AND STATE THE AMOUNTS INVOLVED.
46
<PAGE>
Certain shareholders have guaranteed a bank term loan at Bank One. The
guarantee fee is 3% annually. The balance due as of June 30, 1997, was
$74,481. No guarantee is required after September 30, 1997.
40. (a) LIST ALL REMUNERATION BY THE COMPANY TO OFFICERS, DIRECTORS AND KEY
PERSONNEL FOR THE LAST FISCAL YEAR:
Cash,
Salary & Bonus Other Stock Options
Gary G. Herzberg
Chief Executive Officer $57,775 $16,093* 1,000
Glen R. Snow
Senior Vice President, $72,500 $ 600 1,000
Marketing
Ronald W. Schultz
Chief Financial Officer $42,500 $ 390 500
Total:
Directors as a group
(number of persons: 3) $172,775 $17,083 2,500
*This includes a deferral of salary of $14,725 pursuant to a written
deferred compensation agreement with Mr. Herzberg.
(b) IF REMUNERATION IS EXPECTED TO CHANGE OR HAS BEEN UNPAID IN PRIOR
YEARS, EXPLAIN:
Beginning in Fiscal Year 1997, non-management directors receive a fee of
$500.00 per meeting attended, which may be taken in cash or stock, plus
out-of-pocket expenses.
(c) IF ANY EMPLOYMENT AGREEMENTS EXIST OR ARE CONTEMPLATED, DESCRIBE:
No current employment agreements.
41. (a) NUMBER OF SHARES SUBJECT TO ISSUANCE UNDER PRESENTLY OUTSTANDING STOCK
PURCHASE AGREEMENTS, STOCK OPTIONS, WARRANTS OR RIGHTS: 19,703 shares are
subject to issuance under outstanding options and warrants. INDICATE WHICH HAVE
BEEN APPROVED BY SHAREHOLDERS. STATE THE EXPIRATION DATES, EXERCISE PRICES AND
OTHER BASIC TERMS FOR THESE SECURITIES:
47
<PAGE>
19,703 shares are subject to options or warrants. All options or
warrants are exercisable at $25/share. 6,000 are 10 year options, and the
remainder are five year options. All 5 year options expire in fiscal years
1998 through 2001 and are exercisable on issuance. Gary G. Herzberg is the
only person holding 10 year options; he holds a total of 6,000 ten year
options, 4,000 of which were granted to him in 1994 and 2,000 in 1995; 20% of
each grant becomes exercisable each year after the grant date and expire ten
years after the grant date. The following are the persons who hold these
options and warrants:
Henry H. Porter, Jr. 2,000
Douglas D. Stegner 954
Joan Cralle Day 826
Ronald W. Schultz 500
Andrew Pfeifer 1,023
Glen R. Snow 4,000
Gary G. Herzberg 7,100
Diane Lilly 1,000
Christina Wessling 500
Greg Deuser 200
Scott Morton 1,000
Jim Whitesel 300
Ron O'Neil 300
------
19,703
(b) NUMBER OF COMMON SHARES SUBJECT TO ISSUANCE UNDER EXISTING STOCK
PURCHASE OR OPTION PLANS BUT NOT YET COVERED BY OUTSTANDING PURCHASE,
AGREEMENTS, OPTIONS OR WARRANTS:
6,400 shares.
(c) DESCRIBE THE EXTENT TO WHICH FUTURE STOCK PURCHASE AGREEMENTS, STOCK
OPTIONS, WARRANTS OR RIGHTS MUST BE APPROVED BY SHAREHOLDERS.
There are no provisions in the Company's Articles of Incorporation or
Bylaws, or in any plan or contract, which require shareholder approval of such
future transactions. The Company is subject to general corporate legal
requirements governing the necessity to obtain shareholder approval of such
transactions.
42. IF THE BUSINESS IS HIGHLY DEPENDENT ON THE SERVICES OF CERTAIN KEY
PERSONNEL, DESCRIBE ANY ARRANGEMENT TO ASSURE THAT THESE PERSONS WILL REMAIN
WITH THE COMPANY AND NOT COMPETE UPON ANY TERMINATION: None.
NOTE: AFTER REVIEWING THE ABOVE, POTENTIAL INVESTORS SHOULD CONSIDER WHETHER
OR NOT THE COMPENSATION TO MANAGEMENT AND OTHER KEY PERSONNEL DIRECTLY
OR INDIRECTLY, IS REASONABLE IN VIEW OF THE PRESENT STAGE OF THE
COMPANY'S DEVELOPMENT.
48
<PAGE>
LITIGATION
43. DESCRIBE ANY PAST, PENDING OR THREATENED LITIGATION OR ADMINISTRATIVE
ACTION WHICH HAS HAD OR MAY HAVE A MATERIAL EFFECT UPON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION OR OPERATIONS, INCLUDING ANY LITIGATION OR
ACTION INVOLVING THE COMPANY'S OFFICERS, DIRECTORS OR OTHER KEY PERSONNEL.
STATE THE NAMES OF THE PRINCIPAL PARTIES, THE NATURE AND CURRENT STATUS OF
THE MATTERS, AND AMOUNTS INVOLVED. GIVE AN EVALUATION BY MANAGEMENT OR
COUNSEL, TO THE EXTENT FEASIBLE, OF THE MERITS OF THE PROCEEDINGS OR
LITIGATION AND THE POTENTIAL IMPACT ON THE COMPANY'S BUSINESS, FINANCIAL
CONDITION, OR OPERATIONS.
Except as stated below, there is no litigation, past, pending or
threatened or administrative action which has had or may have a material
effect upon the Company's business, financial condition or operations,
including any litigation or action involving the Company's Officers,
Directors or other key personnel. The Company received correspondence
October 23, 1991 implying that the Company may have infringed on a patent
held by a competitor. The cost of defending any claim, if asserted, could
have a material adverse impact on the Company's financial statements. In
view of the facts that the competitor has known about the Company and its
products since 1984, and the competitor has been wholly non-responsive to
the Company's positions of non-infringement since December of 1992,
management is of the view that the probability that the competitor will
actually assert a claim against the Company is low. Based on these
facts, and further based on the advice of outside legal counsel that the
Company's products do not infringe on the competitor's patent, it is
management's opinion that the ultimate resolution of this matter will not
have a material adverse effect on the Company's financial statements.
FEDERAL TAX ASPECTS
44. IF THE COMPANY IS AN S CORPORATION UNDER THE INTERNAL REVENUE CODE OF 1986,
AND IT IS ANTICIPATED THAT ANY SIGNIFICANT TAX BENEFITS WILL BE AVAILABLE
TO INVESTORS IN THIS OFFERING, INDICATE THE NATURE AND AMOUNT OF SUCH
ANTICIPATED TAX BENEFITS AND THE MATERIAL RISKS OF THEIR DISALLOWANCE.
ALSO, STATE THE NAME, ADDRESS AND TELEPHONE NUMBER OF ANY TAX ADVISOR THAT
HAS PASSED UPON THESE TAX BENEFITS. ATTACH ANY OPINION OR ANY DESCRIPTION
OF THE TAX CONSEQUENCES OF AN INVESTMENT IN THE SECURITIES BY THE TAX
ADVISOR.
The Company is unaware of any tax advantages which would become available
as a result of an investment in the securities described herein.
NAME OF TAX ADVISOR: Not applicable
Address
------------------------------
--------------------------------------
Telephone No. ( )
-----------------------
NOTE: POTENTIAL INVESTORS ARE ENCOURAGED TO HAVE THEIR OWN PERSONAL TAX
CONSULTANT CONTACT THE TAX ADVISOR TO REVIEW DETAILS OF THE TAX BENEFITS AND THE
EXTENT THAT THE BENEFITS WOULD BE AVAILABLE AND ADVANTAGEOUS TO THE PARTICULAR
INVESTOR.
MISCELLANEOUS FACTORS
45. DESCRIBE ANY OTHER MATERIAL FACTORS, EITHER ADVERSE OR FAVORABLE, THAT WILL
OR COULD AFFECT THE COMPANY OR ITS BUSINESS (FOR EXAMPLE, DISCUSS ANY
DEFAULTS UNDER MAJOR
49
<PAGE>
CONTACTS, ANY BREACH OF BYLAW PROVISIONS, ETC.) OR WHICH ARE NECESSARY TO
MAKE ANY OTHER INFORMATION IN THIS DISCLOSURE DOCUMENT NOT MISLEADING OR
INCOMPLETE.
The Company is unaware of any information, either adverse or favorable
including any defaults under major contracts, breach of bylaws or any other
items which would need to be provided to make the information contained
within this Disclosure Document not misleading or incomplete.
FINANCIAL STATEMENTS
46. PROVIDE THE FINANCIAL STATEMENTS REQUIRED BY PART F/S OF THIS PROSPECTUS
SECTION FOR FORM 1-A.
See attached Exhibit C, Historical Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
CERTAIN RELEVANT FACTORS
47. IF THE COMPANY'S FINANCIAL STATEMENTS SHOW LOSSES FROM OPERATIONS, EXPLAIN
THE CAUSES UNDERLYING THESE LOSSES AND WHAT STEPS THE COMPANY HAS TAKEN OR
IS TAKING TO ADDRESS THESE CAUSES.
The Company lost money during the start up but has made a profit during
each of the three years in the period ended June 30, 1997. Losses from
1990 through 1994 resulted as sales grew from zero to 78,000 braces in
1994. The Company invested heavily in marketing and staff during this
period to build the business. There were significant product refinements
made during this early period with the help of the Company athletic
trainer network, and feedback from teams wearing the product.
48. DESCRIBE ANY TRENDS IN THE COMPANY'S HISTORICAL OPERATING RESULTS.
INDICATE ANY CHANGES NOW OCCURRING IN THE UNDERLYING ECONOMICS OF THE
INDUSTRY OF THE COMPANY'S BUSINESS WHICH, IN THE OPINION OF MANAGEMENT,
WILL HAVE A SIGNIFICANT IMPACT (EITHER FAVORABLE OR ADVERSE) UPON THE
COMPANY'S RESULTS OF OPERATIONS WITHIN THE NEXT 12 MONTHS AND GIVE A ROUGH
ESTIMATE OF THE PROBABLY EXTENT OF THE IMPACT, IF POSSIBLE.
This discussion is based upon past operating experience. If the offering
is successful, the Company's operations will change significantly (as
described elsewhere in this Prospectus).
The Company anticipates operating losses in its retail and catalog
operations over the next several years, and there can be no assurance
as to when, if ever, the Company will have positive operating results and
cash flow.
FISCAL YEAR 1996 V. FISCAL YEAR 1995
The Company increased unit brace sales from 136,109 units in 1995 to
173,134 units in 1996. Cost reductions and design changes reduced average
cost per brace from $6.19 in 1995 to $5.79 in 1996 resulting in an
improvement in gross margin percent from 54.9% to
50
<PAGE>
58.3%. Sales revenue increased 29% to $2,404,236 and net income was
$140,048, up 54% over 1995.
Marketing and promotional costs increased as planned to 23.1% of sales in
1996 compared to 18.6% in 1995. These marketing investments supported the
Company's market share growth and contributed to building name and brand
awareness.
General and administrative expenses increased 24.6%, reflecting the
addition of three certified athletic trainers to the staff. This personnel
increase enables the Company to dedicate specific resources to the
medical, team, retail and international markets. The addition of these
talented people is critical to provide the human resources for future
growth.
The Company generated positive cash flow from operations enabling debt
reduction and a working capital increase. Close management of inventory
and receivables provided funds to grow and not use a working capital line
from December 1995 through June 1996. Continuing profitability and an
expanded $300,000 working capital line are providing the Company the
flexibility to continue aggressively marketing the Active Ankle brace
and to fund research and development of new products.
FISCAL YEAR 1997 V. FISCAL YEAR 1996
Unit Active Ankle brace sales for the year ending June 30, 1997 of
188,612 increased 8.9%. Average product cost is 4.8% per brace below
last year and average price is 1.3% per brace higher than last year
resulting in an increase in gross margin from 58.3% to 60.9%. Sales
revenue increased 10.4% to $2,653,217 and net income is $204,541, up
46% over 1996.
Marketing and promotional costs of 22% of sales increased 5% in line
with plans to grow market and market share. Building name and brand
awareness continues to be critical to the Company's growth.
General and administrative expenses increased 15.4%, continuing to
reflect the personnel additions in marketing in early 1996 and the
$30,000 non-operating legal expense for trademark defense. Investment in
research and development increased by approximately $24,000 in 1997
primarily to fund the development of a new generation of ankle
braces planned for introduction in mid 1998.
The Company generated positive cash flow from operations enabling debt
reduction and a working capital increase. An additional $165,000 was
generated from the sale of preferred stock. No borrowing is anticipated
against the credit line of $300,000.
The Company is currently in the process of opening a consumer resource
center in the Louisville, Kentucky area and has recently executed a
long-term lease in connection with this objective. The Company is financing
this store from working capital.
49. IF THE COMPANY SELLS A PRODUCT OR PRODUCTS AND HAS HAD SIGNIFICANT SALES
DURING ITS LAST FISCAL YEAR, STATE THE EXISTING GROSS MARGIN (NET SALES
LESS COST OF SUCH SALES AS PRESENTED IN ACCORDANCE WITH GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES) AS A PERCENTAGE OF SALES FOR THE LAST FISCAL YEAR:
60.9%. WHAT IS THE ANTICIPATED GROSS MARGIN FOR NEXT YEAR OF OPERATIONS?
Approximately 60% for the fiscal year ending June 30, 1998. IF THIS IS
EXPECTED TO CHANGE, EXPLAIN. ALSO, IF REASONABLY CURRENT GROSS MARGIN
FIGURES ARE AVAILABLE FOR THE INDUSTRY, INDICATE THESE FIGURES AND THE
SOURCE OR SOURCES FROM WHICH THEY ARE OBTAINED.
51
<PAGE>
Industry figures are not readily available.
50. FOREIGN SALES AS A PERCENT OF TOTAL SALES FOR LAST FISCAL YEAR: 8%.
DOMESTIC GOVERNMENT SALES AS A PERCENT OF TOTAL DOMESTIC SALES FOR LAST
FISCAL YEAR: Not material.
EXPLAIN THE NATURE OF THESE SALES, INCLUDING ANY ANTICIPATED CHANGES:
52
<PAGE>
Index to Financial Statements
Audited Page
- ------- ----
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of June 30 1997 and 1996. . . . . . . . . . . . . . . . . F-3
Statements of Income for the Years Ended June 30, 1997 and 1996 . . . . . . F-4
Statements of Stockholders' Equity for the Years Ended June 30, 1997
and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Statements of Cash Flows for the Years Ended June 30, 1997 and 1996 . . . . F-6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Active Ankle Systems, Inc.
We have audited the accompanying balance sheets of Active Ankle Systems, Inc. as
of June 30, 1997 and 1996, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Active Ankle Systems, Inc. at
June 30, 1997 and 1996, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
August 8, 1997, except for Note 13, as to
which the date is October 9, 1997
Louisville, Kentucky
F-2
<PAGE>
Active Ankle Systems, Inc.
Balance Sheets
JUNE 30
1997 1996
----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 336,099 $ 90,263
Trade accounts receivable 199,006 145,336
Inventories, principally raw materials 204,586 153,241
Prepaid expenses 137,017 61,950
----------------------
Total current assets 876,708 450,790
Machinery and equipment, net 122,689 151,411
Patents, net of accumulated amortization of
$13,741 in 1997 and $10,164 in 1996 51,219 43,978
Other intangible assets 15,324 20,015
----------------------
Total assets $1,065,940 $ 666,194
----------------------
----------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 302,896 $ 220,972
Accrued liabilities 39,789 42,194
Current portion of long-term debt 21,652 53,748
----------------------
Total current liabilities 364,337 316,914
Long-term debt 52,829 74,297
Stockholders' equity:
Preferred stock, $40 par and liquidation
value per share:
Authorized shares--100,000
Issued and outstanding shares--4,125 in 1997 165,000 -
Common stock, no par value:
Authorized shares--2,000,000
Issued and outstanding shares--68,267 in 1997
and 68,097 in 1996 1,049,565 1,045,315
Accumulated deficit (565,791) (770,332)
----------------------
Total stockholders' equity 648,774 274,983
----------------------
Total liabilities and stockholders' equity $1,065,940 $ 666,194
----------------------
----------------------
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Active Ankle Systems, Inc.
Statements of Income
YEAR ENDED JUNE 30
1997 1996
----------------------
Net sales $2,653,217 $2,404,236
Cost of sales 1,038,396 1,001,950
----------------------
Gross profit 1,614,821 1,402,286
Selling, general and administrative expenses 1,396,513 1,239,410
----------------------
Operating income 218,308 162,876
Interest expense 10,967 21,135
----------------------
Income before income tax expense 207,341 141,741
Income tax expense 2,800 1,693
----------------------
Net income $ 204,541 $ 140,048
----------------------
----------------------
Earnings per common share $ 2.77 $ 1.90
----------------------
----------------------
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Active Ankle Systems, Inc.
Statements of Stockholders' Equity
Years ended June 30, 1997 and 1996
TOTAL
PREFERRED COMMON ACCUMULATED STOCKHOLDERS'
STOCK STOCK DEFICIT EQUITY
------------------------------------------------
Balances at July 1, 1995 $ - $1,045,315 $(910,380) $134,935
Net income - - 140,048 140,048
------------------------------------------------
Balances at June 30, 1996 - 1,045,315 (770,332) 274,983
Issuance of 4,125 shares of
preferred stock 165,000 - - 165,000
Issuance of 170 shares of
common stock - 4,250 - 4,250
Net income - - 204,541 204,541
------------------------------------------------
Balances at June 30, 1997 $165,000 $1,049,565 $(565,791) $648,774
------------------------------------------------
------------------------------------------------
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Active Ankle Systems, Inc.
Statements of Cash Flows
YEAR ENDED JUNE 30
1997 1996
---------------------
OPERATING ACTIVITIES
Net income $ 204,541 $ 140,048
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 55,072 37,474
Amortization 8,627 5,508
Loss on disposal of machinery and equipment 2,212 1,607
Directors' fees 4,250 -
Changes in operating assets and liabilities:
Trade accounts receivable (53,670) (31,558)
Inventories (51,345) 90,822
Prepaid expenses (75,067) (25,892)
Trade accounts payable 81,924 (66,431)
Accrued liabilities (2,405) 2,714
---------------------
Net cash provided by operating activities 174,139 154,292
INVESTING ACTIVITIES
Payments for machinery and equipment (28,521) (57,034)
Other assets (11,218) (5,450)
---------------------
Net cash used in investing activities (39,739) (62,484)
FINANCING ACTIVITIES
Payments on notes payable to banks
and other notes payable - (55,000)
Issuance of long-term debt - 106,000
Payments on long-term debt (53,564) (109,550)
Proceeds from issuance of preferred stock 165,000 -
---------------------
Net cash provided by (used in) financing activities 111,436 (58,550)
---------------------
Net increase in cash and cash equivalents 245,836 33,258
Cash and cash equivalents at beginning of year 90,263 57,005
---------------------
Cash and cash equivalents at end of year $ 336,099 $ 90,263
---------------------
---------------------
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements
June 30, 1997
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
Active Ankle System, Inc. (the Company) produces and sells various types of
ankle support orthoses (braces). The Company sells to three market segments
(athletes, teams/schools and medical providers) principally throughout the
United States, each comprising approximately one-third of net sales. The
braces are assembled by two independent companies located in Louisville and
Taylorsville, Kentucky.
A summary of the Company's significant accounting policies follows:
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Sales are recognized when customer orders are completed and shipped. Credit
is extended to customers based on an evaluation of their financial condition
and collateral is not required.
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid investment instruments purchased, with an original maturity of three
months or less when purchased, to be cash equivalents.
F-7
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES (CONTINUED)
INVENTORIES
Inventories are stated at the lower of cost, determined using the first-in,
first-out cost flow method, or market.
MACHINERY AND EQUIPMENT
Machinery and equipment is stated at cost. Depreciation is provided for in
amounts sufficient to relate the cost of depreciable assets to operations
over their estimated service lives, which range from three to seven years
using the straight-line method.
AMORTIZATION OF PATENTS
Patents are being amortized over a seventeen year period using the straight-
line method.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense was
approximately $245,000 and $195,000 in 1997 and 1996, respectively.
F-8
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
2. MACHINERY AND EQUIPMENT, NET
Machinery and equipment, net consists of the following:
1997 1996
--------------------
Tooling and manufacturing equipment $ 149,433 $ 129,315
Office furniture and computer equipment 98,980 100,224
--------------------
248,413 229,539
Less accumulated depreciation (125,724) (78,128)
--------------------
$ 122,689 $ 151,411
--------------------
--------------------
3. DEBT
The Company has available $300,000 under a bank line of credit, all of which
is unused at June 30, 1997. Borrowings are limited to 80% of trade accounts
receivable less than 90 days outstanding. Advances bear interest equal to the
bank's index rate plus .5% (9.0% at June 30, 1997). The line expires October
15, 1997 and is cross collateralized with the installment note payable to the
bank.
Long-term debt consists of the following:
1997 1996
--------------------
Installment note payable to bank at the bank's index
rate plus 1% (9. 5% at June 30, 1997), monthly
principal and interest payments of $2,300 due
through August 2000 with a final balloon payment
due in September 2000, secured by substantially
all assets $ 74,481 $ 94,043
Note payable to an unrelated corporation at 8.25%,
repaid in 1997 - 34,002
--------------------
74,481 128,045
Less current portion 21,652 53,748
--------------------
$ 52,829 $ 74,297
--------------------
--------------------
F-9
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
3. DEBT (CONTINUED)
Aggregate annual maturities of long-term debt are as follows:
1998 $21,652
1999 23,741
2000 26,033
2001 3,055
-------
$74,481
-------
-------
4. INCOME TAXES
At June 30, 1997, the Company has net operating loss carryovers of
approximately $514,000 for federal income tax reporting purposes which are
available to offset any future taxable income and which expire in various
amounts in the years 2005 through 2009.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets (liabilities) are as follows:
1997 1996
---------------------------
Deferred tax assets (liabilities):
Net operating loss carryforwards $ 199,341 $ 282,634
Depreciation and amortization (15,226) (21,536)
Other 7,780 6,497
---------------------------
Net deferred tax assets 191,895 267,595
Valuation allowance for net deferred tax assets (191,895) (267,595)
---------------------------
$ - $ -
---------------------------
---------------------------
The valuation allowance was provided to offset the net deferred tax assets
principally related to federal and state net operating loss carryforwards,
the realization of which is uncertain due to the Company's accumulated
deficit.
F-10
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
4. INCOME TAXES (CONTINUED)
Income tax expense relates to local income taxes. The significant components
of income tax expense are as follows:
1997 1996
---------------------------
Current federal, state and local tax expense $ 86,093 $ 48,927
Benefit of operating loss carryforward (83,293) (47,234)
---------------------------
$ 2,800 $ 1,693
---------------------------
---------------------------
A reconciliation of the normal statutory federal income tax on the Company's
pretax income with the Company's actual income tax expense follows:
1997 1996
---------------------------
Tax at U.S. statutory rate of 34% $ 70,496 $ 48,192
State income taxes, net of federal benefit 10,948 7,087
Reduction of valuation allowance for net
deferred tax assets (75,700) (62,972)
Other, net (2,944) 9,386
---------------------------
$ 2,800 $ 1,693
---------------------------
---------------------------
5.COMPUTATION OF EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
and common equivalent shares outstanding during each year. Shares of common
stock issuable under the Company's stock option plans, warrants and
convertible preferred stock issues are treated as common stock equivalents
when dilutive.
F-11
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
5. COMPUTATION OF EARNINGS PER SHARE (CONTINUED)
A summary of the components of the weighted average shares of common and
common equivalents shares outstanding during the years ended June 30, 1997
and 1996, computed in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 83, "Earnings Per Share in an
Initial Public Offering," is as follows:
1997 1996
--------------------
Weighted average number of common shares outstanding
throughout the period 68,183 68,097
Common shares issuable upon assumed conversion of
convertible preferred stock (see Note 7) 8,250 8,250
Common shares issued at $25 per share (see Note 7) 84 170
Common shares issuable upon exercise of outstanding
stock options issued at an exercise price of
$25 per share (see Note 7) 4,300 4,300
Less assumed repurchase of common shares at an
estimated IPO price of $40 per share related to:
Convertible preferred stock (4,125) (4,125)
Common shares issued (53) (106)
Stock options (2,688) (2,688)
--------------------
(6,866) (6,919)
--------------------
Total weighted average shares and equivalents outstanding 73,951 73,898
--------------------
--------------------
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." The Company
is required to adopt SFAS 128 in December 1997, and at that time will present
earnings per share (EPS) for all prior periods using the methodology
specified by SFAS 128. Although the Company has not yet determined the full
effect of SFAS 128, it believes that basic EPS as computed under SFAS 128
will be greater than primary EPS under the prior accounting rules because
basic EPS excludes the dilutive effect of common stock equivalents (such as
stock options awarded to the Company's employees and the Company's
convertible preferred stock). Diluted EPS under SFAS 128 is computed
similarly to fully diluted EPS pursuant to prior accounting rules.
F-12
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the years ended June 30, 1997 and 1996 relating to interest
expense was $10,967 and $21,135, respectively.
7. PREFERRED AND COMMON STOCK, OPTIONS AND WARRANTS
In 1997, the Company adopted Statement of Financial Accounting Standards No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). In accordance with
SFAS 123, the Company has elected to follow Accounting Principles Board
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
Interpretations, in accounting for its stock based compensation because, as
discussed below, the alternative fair value accounting principle provided for
under SFAS 123 requires use of option valuation models that were not
developed for use in valuing stock options. Under APB 25, when the exercise
price of the Company's employee stock options is at least equal to the fair
value of the underlying stock on the date of grant, no compensation expense
is recognized.
The Company has three stock option plans that provide for both incentive and
non-qualified stock options. Stock options are granted at a price
approximating the estimated fair market value of the stock on the date of
grant. Options for a total of 6,000 shares of common stock are exercisable
equally over five years, and expire in ten years from the date of grant.
Options for a total of 600 shares are exercisable equally over three years
from the date of grant and expire in 2001. All other options granted were
exercisable at the date of grant and expire five years from the date of
grant. At June 30, 1997, a total of 21,000 shares of common stock are
reserved for issuance under the stock option plans. A summary of the
Company's stock option activity for the years ended June 30 follows:
1997 1996
---------------------------------------------
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------------------------------------------
Outstanding-beginning of year 10,300 $ 25 10,000 $ 25
Granted 4,300 25 300 25
---------------------------------------------
Outstanding-end of year 14,600 $ 25 10,300 $ 25
---------------------------------------------
---------------------------------------------
Exercisable at end of year 12,500 $ 25 7,200 $ 25
---------------------------------------------
---------------------------------------------
Expiration dates: December 1999 - June 2005.
F-13
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
7. PREFERRED AND COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
Pro forma information regarding net income and earnings per common share is
required by SFAS 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to June 30, 1995 under SFAS 123. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rate of
6%; no dividend yields; volatility factor of the expected market price of the
Company's common stock of .175; and weighted-average expected and contractual
life of the options of 5 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1997 1996
-------------------------------
Pro forma net income $ 173,333 $ 139,943
Pro forma earnings per common share $ 2.33 $ 1.89
During 1995, the Company issued stock warrants in conjunction with common
stock sold during that year. A total of 5,103 shares of common stock are
reserved for these warrants at an exercise price of $25 per share. The
warrants expire on September 1, 1999.
F-14
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
7. COMMON STOCK, OPTIONS AND WARRANTS (CONTINUED)
At a special meeting on May 29, 1997, the Company's stockholders approved:
a. new class of voting preferred shares (100,000 shares authorized);
b. an increase in the authorized number of common shares from 100,000 to
2,000,000 shares;
c. cancellation of a Shareholders Agreement dated September 30, 1995
providing for, upon the death of certain stockholders, a put option
for the estate of the deceased stockholder with respect to the
stockholders' shares of stock;
d. an initial public offering (IPO) of common shares.
The preferred stock has a $40 par and liquidation value per share; carries a
6% non-cumulative dividend; each share is convertible after July 1, 1999 into
two shares of the Company's common stock; and the shares have no voting
rights until conversion. In June 1997, 4,125 shares of the preferred stock
were sold for $40 per share to existing stockholders and/or directors of the
Company.
In June 1997, the Company filed a registration statement (Form SB-1) with the
Securities and Exchange Commission for the sale of a maximum of 100,000 and
minimum of 45,000 shares of the Company's common stock at an expected
offering price of $40 per share.
During fiscal 1997, certain directors elected to receive 170 shares of the
Company's common stock (at an estimated fair value of $25 per share) in lieu
of cash for their directors' fees.
F-15
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
8. SALES TO MAJOR CUSTOMERS
Sales to major customers as a percentage of net sales were as follows:
1997 1996
-------------------------
Customer A 22% 30%
Customer B 30 28
Customer C 30 25
Approximately 80% and 83% of the Company's trade accounts receivable balance
at June 30, 1997 and 1996, respectively, was from these customers.
9. RELATED PARTY TRANSACTIONS
The Company incurred $2,781 and $4,105 in loan guarantee fees to certain
stockholders during 1997 and 1996, respectively.
The Company was sub-leasing office space from a business partially owned by a
stockholder of the Company until November 30, 1995. Rent expense for the year
ended June 30, 1996 amounted to $4,600.
10. FOREIGN OPERATIONS
The Company had approximately $246,000 and $182,000 of net sales to
distributors in foreign countries during the years ended June 30, 1997 and
1996, respectively. All amounts collected from sales to foreign customers are
in U.S. dollars.
11. EMPLOYEE BENEFIT PLAN
In January 1996, the Company established a defined (401k) contribution plan
covering substantially all employees. In accordance with Plan provisions,
employee contributions are matched 25% for the first 4% of the employee's
contributions. Company contributions amounted to $3,091 and $390 in 1997 and
1996, respectively.
F-16
<PAGE>
Active Ankle Systems, Inc.
Notes to Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES
The Company has entered into agreements with various individuals and sports
teams for their endorsement of the Company's products. The terms of the
agreements vary from one to three years. Future payments under these
agreements amount to $134,000 at June 30, 1997.
The Company leases office space from a third party for $2,240 per month. The
lease is noncancelable and expires February 2001, with a five-year renewal
option period. Future minimum rental payments under this operating lease are
as follows:
1998 $ 26,880
1999 26,880
2000 26,880
2001 17,920
--------
$ 98,560
--------
--------
Operating lease rental expense for the years ended June 30, 1997 and 1996 was
approximately $26,880 and $9,000, respectively (exclusive of the lease rental
expense disclosed in Note 9).
The Company is required to pay a former employee a royalty on net sales of
braces covered in whole or in part by applicable patents until the patents
expire, which is no earlier than 2003 nor later than 2009. The royalty rate
began at 5% and decreased to 3% on cumulative net sales greater than
$2,000,000.
The Company received correspondence in October 1991 which implies that the
Company may have infringed on a patent held by a competitor. In view of the
facts that the competitor has known about the Company and its products since
1984, and the competitor has been wholly non-responsive to the Company's
positions of non-infringement since December of 1992, management is of the
view that the probability that the competitor will actually assert a claim
against the Company is low. However, the cost of defending any claim is not
estimable and, if asserted, could have a material adverse impact on the
Company's financial statements. Based on these facts, and further based on
the advice of outside legal counsel that the Company's products do not
infringe on the competitor's patent, it is management's opinion that the
ultimate resolution of this matter will not have a material adverse effect on
the Company's financial statements.
13. SUBSEQUENT EVENT
On October 9, 1997, the Company entered into an eight year lease agreement
related to opening a consumer resource center. Minimum annual rental payments
required under the non-cancelable operating lease approximate $60,000. The
lease provides for an increase to the annual rental payment calculated based
on 8% of gross store sales in excess of $675,000.
F-17
<PAGE>
PART II - INFORMATION
ITEM 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Articles of Incorporation and Bylaws authorize the Company to
indemnify its directors and officers to the full extent permitted by Kentucky
law.
KRS Sec. 271B.8-510 provides the authority to indemnify directors. The statute
permits corporations to indemnify an individual made a party to a proceeding
because he or she is or was a director against liability incurred in the
proceeding if:
(a) he or she conducted himself in good faith; and
(b) he or she reasonably believed:
(1) In the case of conduct in his or her official capacity with the
corporation, that his or her conduct was in the best interests; and
(2) In all other cases, that his or her conduct was at least not
opposed to its best interests; and
(c) In the case of any criminal proceedings, the director had no
reasonable cause to believe his or her conduct was unlawful.
Further, KRS 271.B.8-520 provides for mandatory indemnification for a director
who was wholly successful, or the merits or otherwise, in the defense of any
proceeding to which he was a party because he or she was a director of the
corporation against reasonable expense incurred by him in connection with the
proceedings.
KRS 271B.8-560 provides for certain mandatory and permissive indemnification for
corporate officers.
ITEM 2. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. *
Securities and Exchange Commission Fee $ 1,212
Escrow Fees 1,000
Legal and Accounting Fees 100,000
Printing Fees 10,000
State Securities Filing Fees 5,000
---------
$ 117,212
* All amounts estimated except Securities and Exchange Commission Filing Fee.
II-1
<PAGE>
ITEM 3. UNDERTAKINGS.
Not Applicable.
ITEM 4. UNREGISTERED SECURITIES ISSUED OR SOLD WITHIN ONE YEAR.
The Company has a class of preferred stock which has a $40 par and
liquidation value per share, carries a 6% non-cumulative dividend, and each
share is convertible after July 1, 1999 into two shares of the Company's
Common Stock. A total of 100,000 of such preferred shares are authorized,
and a total of 4,125 shares of the preferred stock are issued and
outstanding. The 4,125 shares were sold at a cash sale price of $40 per
share in June, 1997. The preferred shares were sold to six individuals, all
of whom were accredited purchasers. The proceeds of this preferred stock
offering are to be used for the costs of this offering and seed money for the
development of a catalog sales division. The preferred stock offering was
an exempt offering under Rule 506 of Regulation D of the Securities Act.
The Company has issued during the past 12 months 4,300 options to employees
and consultants to the Company at a price of $25 per share.
During Fiscal 1997, 170 shares have been issued as directors' fees.
ITEM 5 INDEX TO EXHIBITS.
Exhibit 3.(i) - Articles of Incorporation as amended*
Exhibit 3.(ii) - Bylaws*
Exhibit 5 - Opinion of Counsel
Exhibit 10.1 - Distribution Agreement with Cramer Products, Inc., as amended*
Exhibit 10.2 - Distribution Agreement with The Volleyball Connection,
Inc., as amended*
Exhibit 10.3 - Distribution Agreement with AOA Division of Kirschener
Medical Corporation*
Exhibit 10.4 - License Agreement*
Exhibit 23.1 - Auditor's Consent
Exhibit 23.2 - Consent of Counsel
Exhibit 27 - Financial Data Schedule*
Exhibit 99.1 - Deferred Compensation Agreements*
Exhibit 99.2 - Escrow Agreement*
Exhibit 99.3 - Subscription Agreement
Exhibit 99.4 - Lease Agreement
ITEM 6 DESCRIPTION OF EXHIBITS.
Exhibit 3.(i) - Articles of Incorporation as amended*
Exhibit 3.(ii) - Bylaws*
Exhibit 5 - Opinion of Counsel
Exhibit 10.1 - Distribution Agreement with Cramer Products, Inc., as amended*
Exhibit 10.2 - Distribution Agreement with The Volleyball Connection,
Inc., as amended*
Exhibit 10.3 - Distribution Agreement with AOA Division of Kirschener
Medical Corporation*
Exhibit 10.4 - License Agreement*
Exhibit 23.1 - Auditor's Consent
Exhibit 23.2 - Consent of Counsel
Exhibit 27 - Financial Data Schedule*
Exhibit 99.1 - Deferred Compensation Agreements*
Exhibit 99.2 - Escrow Agreement*
Exhibit 99.3 - Subscription Agreement
Exhibit 99.4 - Lease Agreement
- --------------
* Previously filed.
II-2
<PAGE>
SIGNATURES:
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets
all the requirements of filing on Form SB-1 and authorized this Second
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Louisville, State of KY, on October 23, 1997.
(Registrant) ACTIVE ANKLE SYSTEMS, INC.
By: /s/ Gary G. Herzberg
---------------------------------------------------------
Gary G. Herzberg, President and CEO
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Officers Directors
- -------- ---------
/s/ Gary G. Herzberg /s/ Henry H. Porter
- ------------------------------------- -----------------------------------
Gary G. Herzberg Henry H. Porter, Jr.
President and Chief Executive Officer
Date: October 23, 1997 Date: October 23, 1997
-------------------------------- ------------------------------
/s/ Ronald W. Schultz
- ------------------------------------
Ronald W. Schultz /s/ Gary G. Herzberg
Treasurer and Chief Financial Officer -----------------------------------
Gary G. Herzberg
Date: October 23, 1997
------------------------------
Date: October 23, 1997
------------------------------
/s/ Ronald W. Schultz
-----------------------------------
Ronald W. Schultz
Date: October 23, 1997
------------------------------
II-3
<PAGE>
/s/ James T. Crain, Jr.
-----------------------------------
James T. Crain, Jr.
Date: October 23, 1997
------------------------------
/s/ Glen R. Snow
-----------------------------------
Glen R. Snow
Date: October 23, 1997
------------------------------
II-4
<PAGE>
October 22, 1997
Active Ankle Systems, Inc.
509 Barret Avenue
Louisville, Kentucky 40204
Dear Sirs:
We have acted as special counsel to Active Ankle Systems, Inc. in
connection with the offering of 100,000 shares of common stock, pursuant to
the Second Amendment to the Registration Statement (Form SB-1) and the related
Prospectus dated October 24, 1997 ("Prospectus").
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate or
similar records and other instruments as we have deemed necessary or
appropriate for the purposes of this opinion. In such examinations we have
assumed the genuineness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to authentic original
documents of all documents submitted to us as certified, conformed or
photostatic copies or facsimiles. We have also assumed (i) the due
incorporation and valid existence of you, (ii) that you have the requisite
corporate power and authority to enter into and perform the transactions
described in the Prospectus and (iii) the due authorization, execution and
delivery of the Prospectus by you.
Based upon the foregoing, we are of opinion as follows:
Upon receipt of the consideration stated in the Prospectus (i.e. $40 in
cash per share), and upon subsequent issuance of the shares, each share will,
in our opinion, be legally issued, fully paid and nonassessable.
We are admitted to practice only in the State of Kentucky and express no
opinion as to matters governed by any laws other than the laws of the State
of Kentucky and the federal laws of the United States of America, and we
express no opinion as to the effect on the matters covered by this letter of
the laws of any other jurisdiction.
Very truly yours,
MIDDLETON & REUTLINGER
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated August 8, 1997, except for Note 13, as to which
the date is October 9, 1997, in the Second Amendment to the Registration
Statement (Form SB-1) and the related Prospectus of Active Ankle Systems,
Inc. for the registration of 100,000 shares of its common stock.
Louisville, Kentucky
October 22, 1997
<PAGE>
CONSENT OF COUNSEL
We consent to the use of our Opinion of Counsel in the Second Amendment to
the Registration Statement (Form SB-1) and the related Prospectus of Active
Ankle Systems, Inc. for the registration of 100,000 shares of its common
stock.
Louisville, Kentucky
October 23, 1997
<PAGE>
ACTIVE ANKLE SYSTEMS, INC.
SUBSCRIPTION AGREEMENT
October __, 1997
ACTIVE ANKLE SYSTEMS, INC.
ATTN: Gary G. Herzberg
509 Barret Avenue
Louisville, Kentucky 40204
Phone: (502) 582-2655
Ladies and Gentlemen:
1. PURCHASE OF COMMON STOCK.
Intending to be legally bound , I hereby agree to purchase ________ shares
of voting, no par value common stock (the "Shares") of Active Ankle Systems,
Inc. (the "Corporation") for ______________ U.S. Dollars (number of Shares to be
purchased multiplied by $40). This offer to purchase is submitted in accordance
with and subject to the terms and conditions described in this Subscription
Agreement (the "Agreement"). I acknowledge that the Corporation reserves the
right, in its sole and absolute discretion, to accept or reject this
subscription and the subscription will not be binding until accepted by the
Corporation in writing.
2. PAYMENT.
I agree to deliver to the Corporation immediately available funds in the
full amount due under this Agreement, by certified or cashier's check payable to
the "Active Ankle 1997 Public Offering Escrow Account." The Corporation shall
promptly deposit the funds into the Escrow Account.
3. ISSUANCE OF SHARES.
The Shares subscribed for herein will only be issued upon acceptance by the
Corporation as evidenced by the Corporation returning to the investor an
executed Agreement acknowledging acceptance and upon satisfaction of the terms
and conditions of the Escrow Agreement.
4. REPRESENTATION AND WARRANTIES.
A. I understand that the offering and sale of the Shares is registered
under (i) the Securities Act of 1933, as amended (the "Securities Act"), and
(ii) various States' Divisions of Securities in compliance with their
administration and enforcement of the
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 2
respective States' Blue Sky Laws and Regulations. In accordance therewith and
in furtherance thereof, I represent and warrant to and agree with the
Corporation as follows:
[1] I am a resident of the State of ________________ as of the date
of this Agreement and I have no present intention of becoming a resident of
any other state or jurisdiction;
[2] I have received and have reviewed the Corporation's Prospectus
dated September ____, 1997;
[3] I have had a reasonable opportunity to ask questions of and
receive answers from a person or persons acting on behalf of the
Corporation concerning this investment, including the terms and conditions
of this offering, and all such questions have been answered to my full
satisfaction;
[4] No oral or written representations have been made or oral or
written information furnished to me or to my advisors in connection with
the offering of Shares which was in any way inconsistent with the
information stated in the Prospectus;
[5] I have reached the age of majority, have adequate means of
providing for my current needs and personal contingencies, am able to bear
the substantial economic risks of an investment in the Shares for an
indefinite period of time, have no need for liquidity in such an investment
and, at the present time, could afford a complete loss of such investment;
B. Within five (5) days after receipt of a request from the Corporation,
I hereby agree to provide such information and to execute and deliver such
documents as
2
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 3
may reasonably be necessary to comply with any and all laws, regulations or
ordinances to which the Corporation is subject.
C. The foregoing representations, warranties and agreements, together
with all other representations and warranties made or given by me to the
Corporation in any other written statement or document delivered in connection
with the transaction contemplated hereby shall be true and correct in all
respects on and as of the date of the Closing as if made on and as of such date
and shall survive the date of the Closing.
5. INDEMNIFICATION.
I agree to indemnify and hold harmless the Corporation, the officers,
directors, agents, employees and affiliates of any thereof against any and all
loss, liability, claim or damage, (including attorney's fees and disbursements)
together with all costs and expense whatsoever arising out of or based upon any
false representation or warranty or breach or failure by me to comply with any
representation, warranty, covenant or agreement made by me herein or in any
other document furnished by me of the foregoing in connection with this
transaction.
6. IRREVOCABILITY; BINDING EFFECT.
I hereby acknowledge and agree that the purchase hereunder is irrevocable,
that I am not entitled to cancel, terminate or revoke this Agreement or any
agreements of the undersigned hereunder and that this Agreement and such other
agreements shall survive my death or disability and shall be binding upon and
inure to the benefit of the parties and their heirs, executor, administrators,
successors, legal representatives and assigns. If the undersigned is more than
one person, the obligations of the undersigned hereunder shall be joint and
several, and the agreements, representations, warranties and acknowledgments
herein contained shall be deemed to be made by and are binding upon each such
person and his heirs, executors, administrators, successors, legal
representatives and assigns.
7. MODIFICATION.
Neither this Agreement not any provisions hereof shall be waived, modified,
discharged or terminated except by an instrument in writing signed by the party
against whom any such waiver, modification, discharge or termination is sought.
3
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 4
8. NOTICES.
Any notice, demand or other communication which any party hereto may
require, or may elect to give to anyone interested hereunder shall be
sufficiently given if [a] deposited, postage prepaid, in a United States mail
box, stamped registered or certified mail, return receipt requested addressed to
such address as may be listed on the books of the Corporation, [b] delivered
personally at such address, or [c] delivered (in person, or by a facsimile
transmission, telex or similar telecommunications equipment) against receipt.
9. COUNTERPARTS.
This Agreement may be executed through the use of separate signature pages
or in any number of counterparts, and each of such counterparts shall, for all
purposes, constitute one agreement binding on all parties, notwithstanding that
all parties are not signatories to the same counterpart.
10. ENTIRE AGREEMENT.
This Agreement contains the entire agreement of the parties with respect to
the subject matter hereof, and there are no representations, covenants or other
agreements except as stated or referred to herein.
11. SEVERABILITY.
Each provision of the Agreement is intended to be severable from every
other provision, and the invalidity or illegality of any portion hereof shall
not affect the validity or legality of the remainder hereof.
12. ASSIGNABILITY.
This Agreement is not transferable or assignable by the undersigned except
as may be provided herein.
13. APPLICABLE LAW.
This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Kentucky as applied to residents of that state
executing contracts wholly to be performed in that state.
4
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 5
INDIVIDUAL(S) SUBSCRIBER
IN WITNESS WHEREOF, I have executed this Agreement as of the ______ day of
October, 1997.
- -------------------------------------
Signature of Purchaser
- -------------------------------------
Name(s) of Purchaser (Please print or type)
- -------------------------------------
Purchaser(s) Social Security Number
STATE OF ______________)
) SS
COUNTY OF _____________)
On the ________day of October, 1997, before me personally appeared
___________________________________________, known to me to be the individual(s)
described herein and who acknowledged the foregoing instruments and swore and
acknowledged that (he)(she)(they) executed the same as (his)(her)(their) free
act and deed.
----------------------------------
Notary Public, State at Large
My commission expires:
---------------
ENTITY SUBSCRIBER
5
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 6
IN WITNESS WHEREOF, I have executed this Agreement as of the ______ day of
October, 1997.
- -------------------------------------
Entity
- -------------------------------------
Signed By
Its:
--------------------------------
- -------------------------------------
Date
STATE OF ______________)
) SS
COUNTY OF _____________)
On the _____day of October, 1997, before me personally appeared
___________________________________________, known to me to be the individual
described herein and who acknowledged the foregoing instruments and swore and
acknowledged that (he)(she) executed the same as (his)(her) free act and deed.
----------------------------------
Notary Public, State at Large
My commission expires:
---------------
PURCHASE ACCEPTED FOR _________ SHARES:
ACTIVE ANKLE SYSTEMS, INC.
By: ________________________________
Gary G. Herzberg, CEO
Date: _______________________________
6
<PAGE>
Active Ankle Systems, Inc.
ATTN: Gary G. Herzberg
October ___, 1997
Page 7
7
<PAGE>
JEFFERSON MALL
LOUISVILLE, KENTUCKY
LEASE
TENANT: ACTIVE ANKLE SYSTEMS, INC.
UNIT: B316
<PAGE>
TABLE OF CONTENTS
Article 1: Introductory Provisions. . . . . . . . . . . . . . . . . .
Section 1: Basic Lease Provisions. . . . . . . . . . . . . . . .
Section 2: Exhibits. . . . . . . . . . . . . . . . . . . . . . .
Section 3: General Definitions . . . . . . . . . . . . . . . . .
Article 2: PREMISES and Term of Lease . . . . . . . . . . . . . . . .
Section 1: Lease of PREMISES . . . . . . . . . . . . . . . . . .
Section 2: Term of Lease . . . . . . . . . . . . . . . . . . . .
Section 3: Lease Year. . . . . . . . . . . . . . . . . . . . . .
Section 4: Election to Terminate . . . . . . . . . . . . . . . .
Article 3: Construction of PREMISES . . . . . . . . . . . . . . . . .
Section 1: LANDLORD'S Work . . . . . . . . . . . . . . . . . . .
Section 2: TENANT'S Work . . . . . . . . . . . . . . . . . . . .
Section 3: Ready for Occupancy . . . . . . . . . . . . . . . . .
Article 4: Rent Commencement Date . . . . . . . . . . . . . . . . . .
Section 1: Rent Commencement Date. . . . . . . . . . . . . . . .
Section 2: Supplemental Lease and Short Form Lease . . . . . . .
Article 5: Rent . . . . . . . . . . . . . . . . . . . . . . . . . . .
Section 1: Fixed Minimum Rent. . . . . . . . . . . . . . . . . .
Section 2: Percentage Rent . . . . . . . . . . . . . . . . . . .
Section 3: Additional Rent . . . . . . . . . . . . . . . . . . .
Section 4: Common Area Charge. . . . . . . . . . . . . . . . . .
Section 5: Merchants Association/Marketing Fund Charge . . . . .
Section 6: Property Insurance Charge . . . . . . . . . . . . . .
Section 7: Real Estate Taxes and Assessments . . . . . . . . . .
Section 8: Municipal, County, State or Federal Taxes . . . . . .
Section 9: Rental Taxes. . . . . . . . . . . . . . . . . . . . .
Section 10: Payments for Fractional Month . . . . . . . . . . . .
Article 6: Utilities and Energy Conversation. . . . . . . . . . . . .
Section 1: Utility Services and Charges. . . . . . . . . . . . .
Section 2: LANDLORD'S Right to Discontinue Services. . . . . . .
Section 3: Energy Conservation Methods and Compliance. . . . . .
Article 7: Common Areas . . . . . . . . . . . . . . . . . . . . . . .
Section 1: Development Plan. . . . . . . . . . . . . . . . . . .
Section 2: Use of Common Areas . . . . . . . . . . . . . . . . .
Section 3: Right to Close Common Areas . . . . . . . . . . . . .
Article 8: TENANT'S Covenants . . . . . . . . . . . . . . . . . . . .
<PAGE>
Section 1: TENANT'S Use of PREMISES. . . . . . . . . . . . . . .
Section 2: TENANT'S Covenant to Operate. . . . . . . . . . . . .
Section 3: TENANT'S Covenants with Respect to Occupancy. . . . .
Article 9: Indemnity and Insurance. . . . . . . . . . . . . . . . . .
Section 1: Indemnification by TENANT . . . . . . . . . . . . . .
Section 2: Commercial General Liability Insurance. . . . . . . .
Section 3: Property Insurance. . . . . . . . . . . . . . . . . .
Section 4: Waiver of Subrogation . . . . . . . . . . . . . . . .
Section 5: Limit on LANDLORD'S Liability for Damage. . . . . . .
Article 10: Repairs and Alterations. . . . . . . . . . . . . . . . . .
Section 1: Repairs by LANDLORD . . . . . . . . . . . . . . . . .
Section 2: Repairs by TENANT . . . . . . . . . . . . . . . . . .
Section 3: Alterations or Improvements by TENANT . . . . . . . .
Section 4: Removal of Improvements . . . . . . . . . . . . . . .
Article 11: Assigning and Subletting . . . . . . . . . . . . . . . . .
Section 1: No Assigning or Subletting. . . . . . . . . . . . . .
Section 2: Change in Ownership . . . . . . . . . . . . . . . . .
Article 12: Default and Remedies . . . . . . . . . . . . . . . . . . .
Section 1: Events of Default . . . . . . . . . . . . . . . . . .
Section 2: LANDLORD'S Remedies . . . . . . . . . . . . . . . . .
Section 3: Remedy for Failure to Open or Operate . . . . . . . .
Section 4: Default in Other Centers. . . . . . . . . . . . . . .
Section 5: LANDLORD'S Right of Self-Help . . . . . . . . . . . .
Section 6: No Limitation of Rights and Remedies. . . . . . . . .
Section 7: Late Charge . . . . . . . . . . . . . . . . . . . . .
Section 8: Attorney's Fees . . . . . . . . . . . . . . . . . . .
Section 9: Waiver of Trial by Jury . . . . . . . . . . . . . . .
Article 13: Damage, Destruction and Restoration. . . . . . . . . . . .
Article 14: Eminent Domain . . . . . . . . . . . . . . . . . . . . . .
Article 1: All of PREMISES Taken . . . . . . . . . . . . . . . .
Article 2: Less Than Twenty-Five Percent (25%) of PREMISES Taken
Article 3: Twenty-Five Percent (25%) or More of PREMISES Taken .
Article 4: More Than Fifty Percent (50%) of the GLA of the Mall
Stores Taken. . . . . . . . . . . . . . . . . . . . .
Article 5: LANDLORD'S Restoration Obligation . . . . . . . . . .
Article 6: Ownership of Awards . . . . . . . . . . . . . . . . .
Article 15: Subordination and Attornment . . . . . . . . . . . . . . .
Article 16: Estoppel Certificates. . . . . . . . . . . . . . . . . . .
<PAGE>
Article 17: Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . .
Article 18: Access to PREMISES . . . . . . . . . . . . . . . . . . . .
Article 19: Liability of LANDLORD. . . . . . . . . . . . . . . . . . .
Article 20: Liability of Executing Agent . . . . . . . . . . . . . . .
Article 21: Miscellaneous. . . . . . . . . . . . . . . . . . . . . . .
<PAGE>
LEASE
THIS LEASE, made and entered into at Cleveland, Ohio as of this ______ day
of _________________, 19___, by and between JEFFERSON MALL COMPANY a(n) OHIO
LIMITED partnership, having an address for purposes hereof at 25425 Center Ridge
Road, Cleveland, Ohio 44145, hereinafter referred to as "LANDLORD," and ACTIVE
ANKLE SYSTEMS, INC., a Kentucky corporation, having an address for purposes
hereof at 509 Barrett Avenue, Louisville, Kentucky 40204, hereinafter referred
to as "TENANT."
ARTICLE 1: INTRODUCTORY PROVISIONS
SECTION 1. BASIC LEASE PROVISIONS
The Following Basic Lease Provisions are an integral part of this lease,
are referred to in other Sections hereof, including, but without limitation, the
Sections identified below and are presented in this Section for the convenience
of the parties. Each reference in this lease to a Basic Lease Provision shall
be construed to incorporate all of the terms provided for under such provisions.
(a) Shopping Center: Jefferson Mall. (Article 2, Section 3[a])
(b) Unit Number: B316. (Article 2, Section 1)
(c) Approximate GLA of PREMISES: 1,686.28 square
feet. (Article 2, Section 1)
(d) Term of Lease: 8 Lease Years (plus a Partial
Lease Year, if any, prior to the first
Lease Year). (Article 2, Section 2)
(e) Rent Commencement Date: (Article 4, Section 1)
(f) Fixed Minimum Rent: $53,961.00 per Lease Year. (Article 5, Section 1)
$4,496.75 per month for
Lease Years 1 through 8;
subject to adjustment
pursuant to Article 5,
Section 1, for each
Department Store in excess
of 4 within the Shopping
Center.
(g) Percentage Rent: 8.00% of Gross Sales in (Article 5, Section 2)
excess of $674,512.50
("Minimum Basis of
Sales"), for Lease Years 1
through 8.
<PAGE>
(h) Merchants
Association/ $2,107.92 per Lease Year, (Article 5, Section 5)
Marketing Fund $175.66 per month.
Charge
(i) Property Insurance $202.36 for Lease Years (Article 5, Section 7)
Charge: 1 through 4;
$303.54 for Lease Years
5 through 8.
(j) Other Sums Additional Rent (Article 5, Section 3)
Payable: Common Area Charge (Article 5, Section 4)
TENANT'S Share of Taxes (Article 5, Section 8)
Utility Services and Charges (Addendum No. 1)
(k) TENANT'S Trade
Name: ACTIVE ANKLE SYSTEMS (Article 8, Section 1)
(l) Permitted Use: (Article 8, Section 1)
TENANT shall use the PREMISES primarily for the display and
sale, at retail, of somatic supports (i.e., foot, ankle,
knee, shoulder, back, elbow, wrist and hand braces). As an
incidental use, TENANT may sell, at retail, items typically
sold at a medical supply store including rehabilitation
weights, crutches, tapes, adhesives, first aid kits and hot
and cold compresses. TENANT may use ten percent (10%) of
the Gross Leasable Area to sell nutritional fluids,
supplements or novelty items which include hats and shirts
bearing TENANT'S logo, or sell literature on nutrition,
athletics or sports medicine. TENANT expressly agrees NOT
to sell weights or exercise equipment typically associated
with traditional sporting good stores, or any pharmaceutical
items which must be dispensed by a licensed pharmacist.
(m) Trading Area: a radius of 5.00 miles. (Article 8, Section 2)
(n) Security Deposit: $ NONE (Article 19)
(o) Guarantor: NONE
SECTION 2. EXHIBITS
6
<PAGE>
The following Exhibits are attached to and are a part of this lease:
EXHIBIT A - A plan of the Enclosed Mall and the Mall Stores constructed
or to be constructed by LANDLORD showing the location and
approximate dimensions of the PREMISES.
EXHIBIT B - A plan showing the parcels presently comprising the Shopping
Center and the existing development thereof.
EXHIBIT C - A description of the work to be performed by LANDLORD (if
any) and TENANT with respect to the PREMISES.
EXHIBIT D - Electrical Energy Service Charge.
EXHIBIT E - VAC System Requirements (if applicable).
EXHIBIT F - Material Profile Sheet.
SECTION 3. GENERAL DEFINITIONS
For purposes of this lease, the following terms have the following
meanings:
(a) "Shopping Center" means the integrated retail shopping center
comprised of the Developer Parcel and the parcels of the Department Stores which
are depicted on Exhibit B, as the same may be changed from time to time by
addition thereto or subtraction therefrom, together with the improvements
constructed thereon from time to time.
(b) "Developer Parcel" means the parcel(s) within the Shopping Center
identified as such on Exhibit B, as the parcel(s) may be changed from time to
time by addition thereto or subtraction therefrom, in which, at any time in
question, LANDLORD has an ownership or a possessory interest.
(c) "PREMISES" means the space within the building improvements
constructed or to be constructed by LANDLORD on the Developer Parcel which is
identified by unit number in Article 1, Section 1(b) and outlined in red on
Exhibit A and shall consist of the space within the walls, floor and underside
of the drop ceiling required by Exhibit C. If the PREMISES does not have a drop
ceiling, the PREMISES shall extend vertically to where, in LANDLORD's judgment,
a drop ceiling would otherwise exist. "PREMISES" does not include the land
underlying a one level or first level unit, space below the structural slab of
an upper level unit, nor the space above the drop ceiling (or where the same
would exist in LANDLORD'S judgment); provided, however, TENANT shall have the
non-exclusive right to use a portion of the space above the drop ceiling (or
where the same would exist in LANDLORD'S judgment) for the location of TENANT'S
construction and equipment serving the PREMISES subject to the approval of
LANDLORD as to location and
7
<PAGE>
installation, such right to be in common with LANDLORD and all others to whom
LANDLORD has or may hereafter grant such rights.
(d) "Enclosed Mall" means the climate controlled pedestrian mall wholly or
partially located on the Developer Parcel and identified as such on Exhibit B,
as the same may be changed from time to time by addition thereto or subtraction
therefrom.
(e) "Mall Store(s)" means the individual store unit(s), other than a
Department Store(s), from time to time constructed on the Developer Parcel,
within the areas designated as Mall Stores on Exhibit B, as the same may be
changed from time to time by addition thereto or subtraction therefrom.
(f) "Department Store" means any owner or occupant of the Lazarus store,
the Sears store, the Dillard's store, the J.C. Penney store and the successors
and assigns, respectively, of the named stores, and any owner or occupant in the
Shopping Center carrying on business in not less than thirty-five thousand
(35,000) square feet of floor area.
(g) "Rent" means Fixed Minimum Rent, Percentage Rent and all items of
Additional rent.
(h) "Gross Leasable Area" or "GLA" means, with respect to the PREMISES and
all other leasable area, the number of square feet of floor area on all levels,
including any mezzanines or balconies, but excluding basements (if any), Common
Areas and Service Areas, measured from the exterior face of the exterior walls
and/or the exterior face of service corridor walls, the exterior lease line for
mall frontage and the center line of party walls. No deductions will be made
for columns, stairs, elevators or any interior construction or equipment.
Changes in the Gross Leasable Area will be deemed in effect on the first day of
the month following such change.
(i) "Common Areas" mean all malls, whether open or enclosed, mall
amenities, parking areas, sidewalks, walkways, roadways, driveways, auditoriums
and public meeting rooms, public restrooms, elevators, escalators, landscaping
and all other areas and facilities within the Shopping Center which are
available for use in common by occupants of the Shopping Center and their
customers and invitees.
(j) "Service Areas" mean all garbage and refuse disposal facilities,
Shopping Center offices, maintenance and storage rooms and buildings, loading
areas and all other areas and facilities which are used in the maintenance and
operation of the Shopping Center, whether or not located thereon.
(k) "Common Utilities" mean storm and sanitary sewer systems, including
storm water retention/detention facilities, lift stations and disposal plants,
water treatment and filtration facilities, water storage and distribution
facilities and other common utilities that serve the Shopping Center
8
<PAGE>
directly, whether or not located thereon, which have not been installed by or
dedicated to a governmental authority or private utility.
ARTICLE 2: PREMISES AND TERM OF LEASE
SECTION 1. LEASE OF PREMISES
LANDLORD does hereby demise and lease the PREMISES to TENANT for the term,
at the Rent and upon the provisions and conditions herein set forth reserving,
however, unto LANDLORD, the exterior face of exterior walls and/or the exterior
face of service corridor walls, the roof and the use of the aforesaid areas and
the right to install, maintain, use repair and replace such pipes, duct work,
support columns, conduits, utility lines, tunneling, wires and the like in,
through, under or above the PREMISES, through ceiling plenum areas, column space
and in or beneath floor slabs, as may be reasonably necessary or advisable for
the servicing of the PREMISES and the servicing, alteration, addition, or
deletion of other portions of the Shopping Center.
SECTION 2. TERM OF LEASE
TO HAVE AND TO HOLD the PREMISES until TENANT upon the covenants and
agreements herein set forth for a term commencing on the first to occur of the
Rent Commencement Date (see Article 4, Section 1), the date a fully executed
copy of this lease is delivered to TENANT or the date upon which TENANT first
enters upon the PREMISES and continuing until the expiration of the number of
Lease Years specified in Article 1, Section 1(d), unless sooner terminated as
provided herein.
SECTION 3. LEASE YEAR
"Lease Year" means each successive period of twelve (12) consecutive full
calendar months from February 1 to January 31, inclusive, occurring after the
Rent Commencement Date. Any period between the Rent Commencement Date, if such
date is not February 1, and the next succeeding January 31 and any period
occurring between the termination of this lease and the next preceding February
1, shall constitute a "Partial Lease Year" for purposes of this lease. With
respect to a Partial Lease Year which precedes the first Lease Year, the
applicable dollar amounts and percentages for purposes of determining any item
of Rent shall be as provided in Article 1, Section 1 for the first Lease Year.
With respect to a Partial Lease Year ending on the termination of this lease,
the applicable dollar amounts and percentages for such purposes shall be as
provided in Article 1, Section 1 for the Lease Year commencing on the February 1
next preceding the date of termination.
SECTION 4. ELECTION TO TERMINATE
In the event that either the PREMISES is not Ready for Occupancy or the
Rent Commencement Date has not occurred within two (2) years following the date
hereof, this lease may
9
<PAGE>
be terminated, at the election of LANDLORD by notice to TENANT, whereupon
both parties will be relieved of all obligations hereunder except that
LANDLORD will return to TENANT any Security Deposit (see Article 19) then
being retained by LANDLORD.
SECTION 3: CONSTRUCTION OF PREMISES
SECTION 1. LANDLORD'S WORK
LANDLORD shall, at LANDLORD'S own cost and expense, perform the work and
make the installations in the PREMISES which are variously set forth as work to
be done by LANDLORD in Exhibit C and/or Exhibit C-1 ("LANDLORD'S Work"). Except
as may be otherwise expressly provided in Exhibit C and/or Exhibit C-1, LANDLORD
shall have no responsibility for (a) the removal, modification or upgrading of
any existing construction or equipment to accommodate TENANT'S occupancy of the
PREMISES, (b) the undertaking of any alterations or additional improvements, of
(c) the installation of any equipment.
SECTION 2. TENANT'S WORK
With the exception of the obligations, if any, set forth in Exhibit C
and/or C-1 as LANDLORD'S Work, TENANT will, at its own cost and expense: perform
all work and complete all installations as required by Exhibit C and/or C-1; and
fully improve the PREMISES with all furniture, fixtures, equipment and other
items of personal property necessary for the completion of the PREMISES and the
proper operation of TENANT'S business ("TENANT'S Work").
SECTION 3. READY FOR OCCUPANCY
The PREMISES shall be deemed "Ready for Occupancy" under the terms of this
lease if LANDLORD has substantially completed LANDLORD'S Work to the extent the
same can be accomplished prior to and independently of TENANT'S Work. The
failure by TENANT to give notice within thirty (30) calendar days of its taking
possession of the PREMISES specifying in detail those items of LANDLORD'S Work
which are not then substantially completed shall be deemed conclusive that
TENANT has accepted the PREMISES with all items of LANDLORD'S Work substantially
completed. In the event a dispute occurs as to whether or not LANDLORD'S Work
has been substantially completed as aforesaid, the certification of LANDLORD'S
architect that LANDLORD'S Work is substantially complete shall be conclusive and
binding upon the parties. Following TENANT'S taking position of the PREMISES
and its completion of any TENANT'S Work necessary to permit LANDLORD to complete
LANDLORD'S Work, LANDLORD will carry forward LANDLORD'S Work to completion.
LANDLORD may, upon request of TENANT, make the PREMISES available to TENANT
for the commencement of TENANT'S Work (at TENANT'S sole risk) prior to the date
LANDLORD has substantially completed LANDLORD'S Work. In such event, LANDLORD
shall issue to TENANT a letter of authorization for access to the PREMISES, the
date of which shall be
10
<PAGE>
deemed to be TENANT'S Ready for Occupancy date notwithstanding the fact that
LANDLORD may revoke TENANT'S right to continue TENANT'S Work if LANDLORD
determines that TENANT'S Work shall interfere with LANDLORD'S Work. Under no
circumstances shall LANDLORD be liable to TENANT in damages or otherwise for
a delay in delivering the PREMISES to TENANT occasioned by the holding over
or retention of possession by any prior occupant or for any other reason.
ARTICLE 4: RENT COMMENCEMENT DATE
SECTION 1. RENT COMMENCEMENT DATE
As used in this lease, the term "Rent Commencement Date" shall mean the
earlier of:
(a) the date specified in Article 1, Section 1(e); or
(b) the date on which TENANT shall open the PREMISES for business to the
public.
SECTION 2. SUPPLEMENTAL LEASE AND SHORT FORM LEASE
The parties will promptly, upon request of LANDLORD, enter into a
Supplemental Lease prepared by LANDLORD stipulating the Rent Commencement Date
and the expiration of the term of this lease, once the same have been
determined. The parties agree that this lease shall not be recorded, but upon
written request of LANDLORD or TENANT, a Short Form Lease prepared by LANDLORD
shall be promptly executed by both parties. Any costs of recording either the
Supplemental Lease or the Short Form Lease shall be borne by the party recording
same.
ARTICLE 5: RENT
SECTION 1. FIXED MINIMUM RENT
(a) TENANT covenants and agrees to pay to LANDLORD, without deduction or
setoff whatsoever, for each Lease Year and any Partial Lease Year, as "Fixed
Minimum Rent," the amount(s) set forth in Article 1, Section 1(f) (or a
proportionate part thereof for a Partial Lease Year), together with any increase
in the Fixed Minimum Rent provided for elsewhere in this lease, said amount(s)
to be due and payable in monthly installments in advance on the first day of
each and every calendar month. TENANT agrees at no time to pay the monthly
Fixed Minimum Rent More than one (1) month in advance of its due date.
(b) If, at any time during the term of this lease, the Shopping Center is
expanded by the addition of one or More Department Stores so that the number of
Department Stores exceeds the number set forth in Article 1, Section 1(f) TENANT
agrees that theh Fixed Minimum Rent then being paid and any increases set forth
in Article 1, Section 1(f) shall automatically be increased by ten percent (10%)
percent for each such additional Department Store upon the date each such
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additional Department Store first opens for business and LANDLORD agrees that
the "Minimum Basis of Sales" set forth in Article 1, Section 1(g), shall
likewise be increased proportionally.
SECTION 2. PERCENTAGE RENT
In addition to the Fixed Minimum Rent, TENANT covenants and agrees to pay
to LANDLORD, without deduction or setoff whatsoever, for each Lease Year and any
Partial Lease Year, "Percentage Rent" in an amount equal to the percentage set
forth in Article 1, Section 1(g) of Gross Sales during such Lease Year (or
Partial Lease Year) in, upon and from the PREMISES in excess of the Minimum
Basis of Sales set forth in Article 1, Section 1(g) (or a proportionate part
thereof for a Partial Lease Year based upon the number of days in the Partial
Lease Year). In the event the fixed Minimum Rent for any Lease Year or Partial
Lease Year is reduced or abated for any reason, the Minimum Basis of Sales for
determining Percentage Rent will be reduced proportionately for so long as such
reduction or abatement of Fixed Minimum Rent shall continue.
(a) SALES STATEMENTS AND PAYMENT OF PERCENTAGE RENT. On or before the
10th day of each calendar month, TENANT will furnish to LANDLORD a written
statement of Gross Sales for the preceding calendar month, such statement to be
in form and style and to contain such details as LANDLORD may reasonably
determine. On or before the tenth (10th) day of the seventh (7th) month of each
Lease Year, TENANT shall pay to LANDLORD as Percentage Rent, a sum equal to the
percentage hereinbefore specified of TENANT'S Gross Sales for the first six (6)
months of such Lease Year in excess of one-half (1/2) of the Minimum Basis of
Sales. On or before the last day of the month following the close of each Lease
Year (or Partial Lease Year), TENANT will furnish to LANDLORD a statement,
certified by either a Certified Public Accountant employed by TENANT or by an
officer of TENANT, of Gross Sales for the preceding Lease Year (or Partial Lease
Year) and will tender therewith the balance of Percentage Rent due, if any, for
such Lease Year (or Partial Lease Year). If the Percentage Rent installments
paid by TENANT during any Lease Year (or Partial Lease Year) exceed the
Percentage Rent due for such Lease Year (or Partial Lease Year), LANDLORD will
credit the amount of such overpayment, first to the payment of Rent due and
unpaid, and the residue, if any, shall be applied to the Percentage Rent
payments next due.
(b) GROSS SALES. "Gross Sales" as used in this lease shall mean the
aggregate gross amount of all sales of merchandise transacted or made and all
charges for services performed by TENANT or any persons, firms or corporations
on its behalf, or any subtenants, licensees or concessionaires of TENANT, from,
in or upon the PREMISES, including orders accepted by means of electronic,
telephonic, video, computer or other technology based systems whether existing
now or developed in the future, orders taken upon the PREMISES for delivery from
sources other than the PREMISES, and whether wholesale or retail, and whether
cash or credit, including the amount of all consideration other than money
received for any of the foregoing including, specifically, but not limited to,
the amount of credit allowed for any trade-ins, but less refunds for merchandise
returned for which cash has been refunded or credit given provided the sales
price was originally included in Gross Sales. The amount of any sales and
excise taxes, however imposed, computed or paid for sales from, in or upon the
PREMISES shall, to the extent a specific record of the amount
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of such tax is made at the time of each sale and the amount thereof is
expressly charged to the customer and included in sales, be deducted when
determining Gross Sales. Merchandise transferred from the PREMISES to another
store of TENANT or merchandise returned for credit to factories or jobbers
shall not be included in determining Gross Sales. No deduction shall be
permitted for uncollected or uncollectible credit or charge accounts.
(c) BOOKS OF ACCOUNT AND LANDLORD'S RIGHT TO AUDIT. TENANT agrees to
prepare in accordance with generally accepted accounting practice and to keep on
the PREMISES or at its principal accounting office, accurate books of account
and records of Gross Sales, including, but not limited to, all federal, state
and local tax returns relating to Gross Sales, daily cash register and point of
sale tapes, retained detail continuous tapes, sales slips, daily sales reports,
cash receipts, the original records of all orders accepted by means of
electronic, telephonic, video, computer or other technology based systems and
sales journals, disbursement journals, general ledger(s), chart of accounts,
bank statements including deposit slips, financial statements, and other support
documents related to Gross Sales. All books and records, including tax returns,
with respect to Gross Sales for any Lease Year or Partial Lease Year shall be
kept by TENANT and open to examination or audit by LANDLORD for a period of four
(4) years following the close of such Lease Year or Partial Lease Year. In the
event TENANT is delinquent in furnishing LANDLORD monthly Gross Sales statements
for two (2) consecutive months, LANDLORD may conduct an examination or audit of
TENANT'S books and records with the cost thereof, together with any charges
occasioned thereby, to be the obligation of TENANT and to be paid to LANDLORD
upon demand. In any other case where LANDLORD elects to examine or audit
TENANT'S books and records and such examination or audit reveals that TENANT has
understated Gross Sales by one percent (1%) or more, TENANT agrees to pay to
LANDLORD the reasonable cost of such examination or audit. In the event the
examination or audit discloses that TENANT has understated Gross Sales by three
percent (3%) or more, LANDLORD may, in addition to the foregoing rights,
terminate this lease. Any additional Percentage Rent found due and owing as a
result of the examination or audit as well as a late charge (calculated as
described in Article 12, Section 7) from the date such sums were due LANDLORD
shall be immediately due and payable. If an examination or audit determines
TENANT has paid excess Percentage Rent, the excess, less the cost of such
examination or audit, shall be refunded by LANDLORD. In connection with an
examination or audit, LANDLORD shall have the right to inspect the records of
sales from any other store operated by TENANT, but only if such examination is
necessary to ascertain Gross Sales from the PREMISES.
SECTION 3. ADDITIONAL RENT
In addition to the Fixed Minimum Rent and Percentage Rent, TENANT covenants
and agrees to pay to LANDLORD, as "Additional Rent," any and all sums of money
or charges to be paid by TENANT, whether designated Additional Rent or not, and
such amounts, if not paid when due, shall be collectible with the next
installment of Fixed Minimum Rent thereafter falling due and shall be subject to
all provisions of this lease and of law as to default in the payment of Rent;
provided, however, nothing herein shall be deemed to excuse or delay the
obligation of TENANT to pay any amount of money or charge at the time the same
becomes due under the terms of this lease.
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SECTION 4. COMMON AREA CHARGE
(a) From and after the Rent Commencement Date, TENANT agrees to pay to
LANDLORD as its "Common Area Charge," a proportionate share of the total cost
and expense of (i) operating and maintaining the Common Areas on the
Developer Parcel; (ii) operating and maintaining the Service Areas; (iii)
operating and maintaining Shopping Center signs, whether on or off the
Developer Parcel; (iv) operating and maintaining Common Utilities; (v)
providing security for Common Areas on the Developer Parcel and all Service
Areas; and (vi) providing on-and-off-site traffic control. Such cost and
expense shall include, but not limited to: costs of management, operating,
cleaning, maintaining, repairing, substituting and replacing Common Area,
Service Area and Common Utility improvements (except to the extent proceeds
of insurance or condemnation awards are available therefor); alterations or
improvements required by governmental laws, rules or regulations not
promulgated or applicable when originally constructed or installed; lighting,
heating, ventilating and air conditioning; snow removal; striping, painting,
replanting and maintaining landscaping; supplying music to the Enclosed Mall;
all costs and expenses of providing trash removal, transportation, storage or
processing services; providing commercial general liability, property damage,
fire and extended coverage insurance and other insurance as LANDLORD deems
appropriate; obtaining and providing public transportation or shuttle bus
service to transport customers or employees on or off the Shopping Center;
total compensation and benefits (including premiums for workers' compensation
and other insurance) paid to or on behalf of employees; personal property
taxes; supplies; fire protection and fire hydrant charges; water, sewer and
runoff charges or fees; utility charges; license and permit fees; parking
area surcharges or levies; reasonable depreciation of equipment used in
operating and maintaining the Common Areas and Service Areas including an
energy management system, if any, and rent paid for the leasing of any such
equipment; and, for LANDLORD'S administrative costs with respect thereto, an
amount equal to fifteen percent (15%) of the total cost and expense of all
the foregoing items. To the extent that any utility services used in
connection with Common Areas and Service Areas shall not be separately
metered and billed by the local serving utility, LANDLORD shall provide
submeters for such service and shall include with the foregoing, and amounts)
determined by applying to the metered usage, the rate(s) that would be
applicable if the local serving utility were providing direct service.
TENANT'S Common Area Charge for each accounting period (or partial accounting
period) shall be determined by multiplying LANDLORD'S total costs (less the
contributions therefor made by occupants of the Mall Stores, if any, which do
not front on the Enclosed Mall) by the ratio of the square feet of Gross
Leasable Area within the PREMISES to the total square feet of Gross Leasable
Area within the Mall Stores fronting on the Enclosed Mall which are from time
to time occupied and open for business.
(b) TENANT'S Common Area Charge shall be paid in monthly installments on
the first day of each month in an amount to be estimated annually, by LANDLORD.
Following the close of each of LANDLORD'S annual accounting periods, LANDLORD
will furnish to TENANT a statement of the actual amount of TENANT'S Common Area
Charge for such period. If the actual amount of TENANT'S Common Area Charge is
less than the total amount theretofore paid by TENANT for such period, such
excess shall be credited, first, to the payment of Rent due and unpaid, and the
residue, if any, shall be credited against the next installment due from TENANT
to
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LANDLORD under this Section. If the actual amount of TENANT'S Common Area
Charge exceeds the total amount paid by TENANT for such period, TENANT will
pay to LANDLORD, within fifteen (15) calendar days following its receipt of
LANDLORD'S statement, the amount shown as due thereon.
SECTION 5. MERCHANTS ASSOCIATION/MARKETING FUND CHARGE
(a) From and after the Rent Commencement Date, TENANT agrees to pay to
LANDLORD on the first day of each month, the amount specified in Article 1,
Section 1(h), toward the expense of advertising and promotional activities for
the benefit of the Shopping Center. LANDLORD has established (or may establish)
either a Merchants Association or Marketing Fund in connection with such
advertising and promotional activities. LANDLORD may, at any time, in its sole
discretion, elect to substitute a Merchants Association for an existing
Marketing Fund or a Marketing Fund for an existing Merchants Association. If a
Marketing Fund is utilized, funds for advertising and promotional activities
shall be expended by or under the direction of LANDLORD or its designated
representative. If a Merchants Association approved by LANDLORD shall be in
existence, funds collected by LANDLORD for advertising and promotional
activities shall be delivered to such Merchants Association and LANDLORD shall
have no obligation to account (except to said Merchants Association) for any
such funds. TENANT agrees to join, maintain membership in and cooperate with
any such Merchants Association. Notwithstanding the fact that all or a portion
of the compensation and benefits of LANDLORD'S designated representative who
shall oversee advertising and promotional activities, shall be paid from either
the Marketing Fund or the treasury of the Merchants Association, such
representative shall be under the exclusive control and supervision of LANDLORD
who shall have the sole authority to employ, discharge and determine the annual
compensation of such representative.
(b) The amount payable in Subsection (a) above and in the Addendum to
Article 8, Section 3(g) shall be adjusted at the end of the first Lease Year and
annually thereafter by the lesser of five percent (5%) of the amount payable in
the immediately preceding Lease Year or a percentage equal to the percentage
increase, if any, in the Consumer Price Index for All Urban Consumers, U.S. City
Average, All Items (1982-84=100) published by the Bureau of Labor Statistics of
the United States Department of Labor for the month of February of each Lease
Year over the Consumer Price Index for the immediately preceding adjustment date
(or the Consumer Price Index published for the month immediately prior to the
date of this lease in the case of the first such adjustment). If during the
term of this lease the Bureau of Labor Statistics, United States Department of
Labor, ceases to maintain said Consumer Price Index, such other index or
standard which in LANDLORD'S judgment will most nearly accomplish the aim and
purpose of the Consumer Price Index and the use thereof by the parties hereto
shall be used in determining the amount of any such adjustment.
SECTION 7. PROPERTY INSURANCE CHARGE
TENANT agrees to pay to LANDLORD annually, in advance, for each Lease Year
and a proportionate part thereof for any Partial Lease Year, the amount
specified in Article 1, Section 1(j),
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as a contribution toward LANDLORD'S cost of carrying Property Insurance for
the PREMISES. Such coverage shall be for those items set forth in Article 9,
Section 3, and shall specifically exclude TENANT'S personal property. If,
due to increases in LANDLORD'S premiums, the contribution to be made by
TENANT is less than TENANT'S share of LANDLORD'S cost of maintaining Property
Insurance for the Mall Stores for any Lease Year, TENANT will pay to LANDLORD
in addition to and at the time such increase totals ten percent (10%) or more
of the amount provided under Article 1, Section 1(j), the total amount of
such deficiency within fifteen (15) calendar days following its receipt of
LANDLORD'S statement. For purposes hereof, TENANT'S share means the ratio
determined by dividing the square feet of Gross Leasable Area within the
PREMISES by the total square feet of Gross Leasable Area within the Mall
Stores covered by LANDLORD'S policies set forth in Article 9, Section 3.
SECTION 8. REAL ESTATE TAXES AND ASSESSMENTS
(a) For the purpose of determining the amount of Real Estate Taxes to be
paid by TENANT for any calendar year or part thereof during the term of this
lease, the following definitions shall apply:
(1) "Real Estate Taxes" mean (i) all general or ad valorem real estate
taxes; (ii) assessments, both general and special, for public improvements or
benefits, which shall, during the term hereof, be levied or assessed (and in the
case of any prior assessments, the installments thereof which shall be payable
during the term hereof) against or upon the land, buildings and other
improvements within the Tax Parcel; provided, however, that with respect to any
assessments levied against or upon the Tax Parcel and the improvements thereon
which under the laws then in force may be paid in installments, there will be
included within Real Estate Taxes with respect to any calendar year only the
installment(s) of such assessment for such calendar year; and (iii) all costs
and expenses paid or incurred by LANDLORD in connection with efforts to reduce
or prevent increases in the amount of items (i) and (ii). The term Real Estate
Taxes does not include any income, gross income, franchise, personal property,
devolution, estate, inheritance or gift taxes.
(2) "Tax Parcel" means the Developer Parcel and any additional land owned
by LANDLORD improved for use as part of the Shopping Center, but excluding any
portions thereof which are (i) separately assessed and taxed or are the subject
of records maintained by the taxing authority from which the amount of tax
fairly allocable to such portions may be determined; and/or (ii) billed to any
entity other than LANDLORD or paid directly by an entity other than LANDLORD
even though billed to LANDLORD.
(3) "TENANT'S Share of Taxes" means a proportionate share of all Real
Estate Taxes which may be levied or assessed against the Tax Parcel determined
by multiplying the amount of such Real Estate Taxes by a fraction of which the
numerator shall be the Gross Leasable Area of the PREMISES and the denominator
shall be the total square feet of Gross Leasable Area of the buildings within
the Tax Parcel which are from time to time occupied and open for business. For
the purpose of this Section, the Gross Leasable Area in effect for any calendar
year (or partial
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calendar year) for the buildings within the Tax Parcel shall be the average
of the Gross Leasable Area occupied and open on the first day of each
calendar month in such calendar year (or partial calendar year).
(b) From and after the Rent Commencement Date, TENANT agrees to pay
TENANT'S Share of Taxes to LANDLORD in monthly installments, in advance, on the
first day of each month, in installment amounts to be estimated by LANDLORD.
After tax bills have been issued which assess the Tax Parcel on the basis that
the buildings and improvements thereon are fully completed, LANDLORD'S estimates
of monthly installment amounts shall be based on the most recent tax bills. If
the actual amount of TENANT'S Share of Taxes with respect to any calendar year,
once determined, is less than the total amount theretofore paid by TENANT for
such period, such excess shall be credited, first to the payment of Rent due and
unpaid, and the residue, if any, shall be credited against the next installment
due from TENANT to LANDLORD under this Section. If the actual amount of
TENANT'S Share of Taxes exceeds the total amount paid by TENANT for such period.
TENANT will pay to LANDLORD, within fifteen (15) calendar days following its
receipt of LANDLORD'S statement, the amount shown as due thereon.
SECTION 9. MUNICIPAL, COUNTY, STATE OR FEDERAL TAXES
TENANT agrees to pay, before delinquency, all municipal, county, state or
federal taxes levied, assessed or imposed upon its business operations, its
leasehold interest and any fixtures, furnishings, equipment, stock-in-trade or
other personal property of any kind owned, installed or used in or on the
PREMISES.
SECTION 10. RENTAL TAXES
Should any governmental taxing authority acting under any present or future
law, ordinance, or regulation, levy, assess, or impose a tax, excise and/or
assessment (other than net income or franchise tax) upon or against this lease,
the execution hereof and/or the Rent payable by TENANT to LANDLORD, either by
way of substitution for or in addition to any existing tax on land and buildings
or otherwise, and whether or not evidenced by documentary stamps or the like,
TENANT agrees to be responsible for and to pay such tax, excise and/or
assessment, or to reimburse LANDLORD for the amount thereof, as the case may be.
SECTION 12. PAYMENTS FOR FRACTIONAL MONTH
If the Rent Commencement Date is other than the first day of a calendar
month, or if the day on which this lease terminates is other than the last day
of a calendar month, then TENANT will pay to LANDLORD Fixed Minimum Rent and any
other items of Additional rent which are calculated on a monthly basis prorated
on a per diem basis.
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ARTICLE 6: UTILITIES AND ENERGY CONSERVATION
SECTION 1. UTILITY SERVICES AND CHARGES
The type of utility services and the manner of payment with respect to all
utilities to be utilized in the PREMISES are more fully set forth in Addendum
No. 1, attached hereto and made a part hereof.
SECTION 2. LANDLORD'S RIGHT TO DISCONTINUE SERVICES
In the event LANDLORD shall be providing any utility services as set forth
in Addendum No. 1, LANDLORD may discontinue furnishing such services if the
charges therefor are not paid as provided in Addendum No. 1 upon five (5)
calendar days written notice of its intention to do so and no resulting
discontinuation shall be deemed an eviction or render LANDLORD liable to TENANT,
in damages or otherwise, if the furnishing of any utility services to the
PREMISES shall be interrupted or curtailed because of necessary repairs or
improvements to LANDLORD'S system, damage to or destruction of any of LANDLORD'S
equipment or disruption or curtailment of primary sources of supply. No
interruption or termination of such services shall release TENANT from the
performance of its obligations under this lease, nor shall it constitute a
constructive eviction or permit any abatement or diminution of Rent. LANDLORD
shall have the right at any time to cease to furnish utility services without
any responsibility to TENANT except to connect such service facilities with such
other sources of supply as may be available. If LANDLORD shall elect to
discontinue furnishings any one or more of such utility services, TENANT shall
thereafter pay charges for such service directly to the serving utility.
SECTION 3. ENERGY CONSERVATION METHODS AND COMPLIANCE
TENANT agrees, at its cost and expense, to cooperate with LANDLORD'S
reasonable directives to reduce energy consumption on the PREMISES. This shall
include, but not limited to, TENANT'S express agreement to pay to LANDLORD the
cost of acquisition and installation of any existing or new central electrical
demand control panel, and the repair, replacement and maintenance of such
equipment as may become necessary in LANDLORD'S discretion throughout the term
of this lease. In the event mandatory energy conservation is ordered by any
governmental authority or if LANDLORD elects voluntarily to cooperate in energy
conservation at the request of any governmental authority, including, but
without limitation, a reduction of operating hours or lighting usage, TENANT
agrees to observe such requirements so imposed and acknowledges that any
reduction or conversation required shall not entitle TENANT to any abatement of
Rent or damages for any injury or inconvenience occasioned thereby, nor shall it
constitute a constructive eviction.
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ARTICLE 7: COMMON AREAS
SECTION 1. DEVELOPMENT PLAN
It is understood that Exhibit B indicates, in general, the present
development of the Shopping Center. The same does not constitute a
representation that the Shopping Center will remain as depicted thereon.
LANDLORD, in operating the improvements on the Developer Parcel, and any
Department Store, in operating the improvements on its Parcel, may each make
such departures from the plan as such party, at its sole discretion, may from
time to time find proper and LANDLORD may, at is discretion, change the location
of other tenants and the nature of any occupancy of any Department Store or Mall
Store at any time. TENANT also understands and agrees that LANDLORD and anyone
claiming by, through or under LANDLORD, and any Department Store may, from time
to time, undertake alterations of, additions to, or deletions from the buildings
and/or Common Areas and/or Food Court or Food Court Areas on the Developer
Parcel, the Parcels of the Department Stores and any lands added thereto,
construct additional buildings or improvements and place permanent kiosks
thereon and make alterations thereto, relocate and/or eliminate mall entrances,
build additional stories on any buildings, construct a Food Court or Food Court
Area, construct multi-story, elevated or underground parking facilities, and
construct roofs, walls and any other improvements over, to or in connection with
any part of the Shopping Center and mall areas in order to enclose or expand
same.
SECTION 2. USE OF COMMON AREAS
LANDLORD grants to TENANT and its employees, agents, customers, business
visitors, business guests, licensees and invitees during the term of this lease,
but subject to Sections 1 and 3 of this Article 7, the non-exclusive use for
pedestrian and vehicular traffic, as the case may be, of the Common Areas. Such
use shall be in common with LANDLORD, other occupants of the Shopping Center and
all others to whom LANDLORD has or may hereafter grant rights to use the same
and shall be subject to such reasonable rules and regulations as LANDLORD may
from time to time adopt governing the same. TENANT acknowledges and agrees that
LANDLORD shall, at all times, have full control, management and direction of the
Common Areas, including the right to utilize portions of the Common Areas for
carnival type shows, rides, displays, product shows, the location of kiosks or
such other uses which, in LANDLORD'S sole discretion, tend to benefit the
customers of the Shopping Center. LANDLORD further reserves the right at any
time to change the layout of the Common Areas, including the right to add to or
subtract from their shape and size as well as to alter their location.
SECTION 3. RIGHT TO CLOSE COMMON AREAS
LANDLORD shall have the right to close all or any portions of the Common
Areas to such extent as may, in the opinion of LANDLORD'S counsel, be legally
sufficient to prevent a dedication thereof or the accrual of any rights to
any person or to the public therein and to close temporarily, if necessary,
any part of the Common Areas in order to discourage non-customer parking, to
permit
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alterations of existing buildings and other improvements or the construction
of additional buildings and other improvements, including underground or
multi-level parking facilities.
ARTICLE 8: TENANT'S COVENANTS
SECTION 1. TENANT'S USE OF PREMISES
TENANT agrees to: (1) operate its business in the PREMISES under the
trade name specified in Article 1, Section 1(l); and (ii) use the PREMISES
solely for the permitted use specified in Article 1, Section 1(m) and for no
other business or purpose. TENANT further agrees not to conduct catalog
sales in or from the PREMISES except of merchandise which TENANT is permitted
to sell "over-the-counter" pursuant to the provisions of this Article 8,
Section 1. TENANT recognizes that the specific limited use prescribed herein
is a material consideration to LANDLORD in order that the Shopping Center
will maintain an appropriate tenant mix so as to produce the maximum Gross
Sales possible for all tenants and that the continued operation of a full
service regional retail development will be assured. If TENANT'S business in
the PREMISES is to be conducted pursuant to a franchise agreement, the
existence and continuation of such franchise agreement is a material
consideration to LANDLORD in entering into this lease and if such franchise
agreement is terminated, LANDLORD shall be entitled to treat such event as an
event of default and elect any of the remedies provided in Article 12.
SECTION 2. TENANT'S COVENANT TO OPERATE
(a) HOURS AND MANNER OF OPERATION. TENANT agrees to complete TENANT'S
work and open the PREMISES for business to the public fully fixtured, stocked
and staffed on the Rent Commencement Date, and thereafter throughout the term of
this lease, to continuously operate in one hundred percent (100%) of the space
within the PREMISES the business prescribed in Article 1, Section 1(m) on all
business days during the hours of 10:00 a.m. until 9:30 p.m., Monday through
Saturday and 12:00 noon until 5:30 p.m. on Sundays or such other hours as
LANDLORD shall establish, from time to time, as the standard Shopping Center
business hours. TENANT agrees it will not open earlier or close later than the
hours established by LANDLORD as the standard Shopping Center business hours
except that TENANT may open at 9:00 a.m. for the convenience of pedestrians in
the Enclosed Mall provided that LANDLORD has opened the Enclosed Mall to
pedestrian traffic at such earlier hour and TENANT agrees to observe such hours
as LANDLORD may prescribe during special events, seasonal shopping periods, or
such other times that LANDLORD determines that the standard hours should be
modified. In operating its business, TENANT agrees to carry sufficient
merchandise in the PREMISES at all times, but to warehouse, store and/or stock
only such quantities of merchandise as are reasonably required to facilitate
sales from the PREMISES. TENANT agrees to fully and adequately staff the
PREMISES with sufficient sales personnel and to use for office, clerical or
other non-selling purposes only such space in the PREMISES as is reasonably
required for TENANT'S business therein (not including any other business of
TENANT in locations other than the PREMISES). TENANT recognizes that the
covenants of TENANT in this Article 8, Section 2 are a material consideration
to LANDLORD in
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order that TENANT might produce the maximum Gross Sales possible from the
PREMISES during the lease term.
(b) OTHER OPERATIONS WITHIN TRADING AREA. TENANT agrees that so long as
this lease remains in effect, TENANT, its parent corporation, subsidiaries and
affiliated corporations (and any officer, director or shareholder owning capital
stock of TENANT if TENANT be a corporation) and any person, firm, corporation or
other entity who or which controls or is controlled by TENANT will not, either
within the Shopping Center (except under lease from LANDLORD) or within the
Trading Area specified in Article 1, Section 1(n) (measured from the closest
perimeter of the Shopping Center), directly or indirectly, own, operate or be
financially interested in, either itself or with others, a business like or
similar to the business authorized to be conducted under Article 8, Section 1
hereof. Due to the difficulty in determining the extent to which LANDLORD would
be damaged by reason of loss of Percentage Rent or otherwise in the event that
TENANT should breach the foreging covenant, TENANT agrees that LANDLORD shall,
in addition to any other remedies otherwise available to it, be entitled to add
seventy-five percent (75%) of the Gross Sales (as defined in this lease) from
any such location establishes in violation of the foregoing covenant to the
Gross Sales from the PREMISES for the determination of Percentage Rent due under
Article 5, Section 2 hereof. TENANT agrees to furnish to LANDLORD an annual
certified statement of Gross Sales from any such location(s) in accordance with
Article 5, Section 2.
SECTION 3. TENANT'S COVENANTS WITH RESPECT TO OCCUPANCY
(a) NATURE OF USE. TENANT agrees to use and occupy the PREMISES in a
careful, safe and proper manner, to commit no waste, and to keep the PREMISES in
a clean and safe condition in accordance with this lease and in compliance with
all laws, regulations, orders, ordinances and the lawful directions of proper
public officers. TENANT'S use of the PREMISES shall be consistent with present
standards of good shopping center operations and TENANT agrees not to permit
solicitations, demonstrations, itinerant vending or any other activities
inconsistent with such standards.
(b) EXTRA HAZARDOUS ACTIVITY. TENANT agrees that if anything done,
omitted to be done, or keep upon or about the PREMISES shall cause the rate of
fire or other insurance on the PREMISES or any portion of the Shopping Center to
be increased beyond the minimum rate which would be applicable to the PREMISES
for the use permitted herein, TENANT will pay the amount of such increase to
LANDLORD upon demand.
(c) TRASH REMOVAL. TENANT will not permit the accumulation of rubbish,
trash, garbage or other refuse in or around the PREMISES and will either remove
same at TENANT'S expense or, if LANDLORD provides trash compactor service,
utilize the service as LANDLORD directs. In the event TENANT fails to remove
any accumulation of rubbish immediately upon notice to do so, LANDLORD shall
have the rights provided Article 12, Section 5.
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(d) STOREFRONT SIGN. TENANT agrees, at its expense, to maintain in its
storefront sign in a good state of repair. TENANT further agrees to remove such
storefront sign upon the expiration or termination of this lease and to repair
any damage which is caused by the erection, maintenance or removal of same.
(e) ILLUMINATION OF SIGNS AND DISPLAYS. TENANT agrees to keep its
storefront sign and the front ten feet (10') within the interior of the
PREMISES, including showing or display windows, if any, illuminated until thirty
(30) minutes after the close of each business day. TENANT further agrees to
maintain a night light within the PREMISES at all times the same is not open for
business.
(f) TENANT'S ADVERTISING WITHIN PREMISES. As to any position of the
PREMISES which has an enclosed storefront, TENANT will not (i) affix any signs,
placards, banners, pennants or advertising matter of any kind on the surface of
any display window or customer door; (ii) place or suspend any signs, placards,
banners, pennants or advertising matter of any kind, except "readers," within
three feet (3') in depth in which case the rear wall of the display area may be
utilized; nor (iii) place or suspend from the ceiling and/or walls of any
vestibule area, any signs, placards, banners, pennants or advertising matter of
any kind except that TENANT may place one (1) pedestal sign not to exceed six
square feet (6) in area within any such vestibule so long as the same shall be
at least five feet (5') behind the lease line. As to any portion of the
PREMISES which has an open storefront, TENANT will not (i) place any
merchandise, signs, placards or advertising matter of any kind within five feet
(5') of the lease line; nor (ii) suspend from the ceiling or walls of the
PREMISES within five feet (5') of the lease line any pennants, advertising
matter, banners or signs of any type except departmental identification signs
and motif or decor items which have received LANDLORD'S prior approval. All
signs, placards, banners, pennants or other advertising matter permitted
hereunder shall be professionally prepared. LANDLORD may, without notice and
without any liability therefor, enter the PREMISES and remove any items
installed or maintained by TENANT in violation of the provisions of this
Article 8, Section 3(f).
(g) ADVERTISING IN MEDIA. AMENDED SEE ADDENDUM
(h) CHARACTER OF OPERATIONS. In order to establish and preserve the
character of the Shopping Center as a high quality retail development, TENANT
will not conduct any type of auction, fire, bankruptcy, close out, distress,
liquidation or going-out-of-business sales, nor conduct its business in the
manner which is commonly known and accepted in the retail trade as a "wholesale
store" or "outlet store" or "surplus store;" provided, however, that this
provision shall not preclude periodic seasonal, promotional or clearance sales
nor be deemed to give LANDLORD the right to approve or disapprove the price at
which TENANT will offer its merchandise for sale.
(i) ADDITIONAL GENERAL COVENANTS OF TENANT. TENANT will (i) keep the
inside and outside of all glass in the doors and windows of the PREMISES clean;
(ii) not place or maintain any merchandise, sign or other thing of any kind in
the vestibule or entry of the PREMISES or on the malls or walkways adjacent
thereto or elsewhere on the exterior of the PREMISES (except signs permitted
under Article 8, Sections 3[d] and 3[f] hereof); (iii) maintain the PREMISES in
a clean,
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orderly and sanitary condition and free of insects, rodents, vermin and
other pests; (iv) regularly clean and, when necessary, replace all floor
treatment (including carpet) which adjoins any Common Areas; (v) comply with all
recommendations of any public or private agency having authority over insurance
rates with respect to the use or occupancy of the PREMISES by TENANT;
(vi) install and maintain any fire extinguishing apparatus required by local
regulations or the requirements of insurance underwriters; (vii) comply with all
reasonable rules and regulations which LANDLORD may from time to time establish
for the use and care of the PREMISES, Common Areas, Service Areas and other
facilities and buildings on the Shopping Center; (viii) not advertise the
PREMISES for sale, lease, sublease or any other transfer; (ix) not solicit
business in the Common Areas, nor distribute handbills or other matter to
customers nor place the same in or on vehicles in the Common Areas; (x) not park
and require its employees to refrain from parking any vehicles on Shopping
Center land except in such places as may be designated from time to time by
LANDLORD for the use of TENANT and its employees, and furnish to LANDLORD or its
agent or designee, within five (5) calendar days after request therefor, the
license numbers of its own and its employees' vehicles, and if LANDLORD has so
requested such numbers, will notify LANDLORD of any changes within five (5)
calendar days after such changes occur, (xi) reimburse LANDLORD for the cost of
towing away from the Shopping Center any vehicles of TENANT or its employees
that are improperly parked; (xii) not use the PREMISES for any unethical,
unlawful, disreputable or immoral purpose or in any other manner which might
damage the reputation of the Shopping Center, (xiii) not use nor permit the use
of any equipment or apparatus producing, reproducing or transmitting sound which
is audible beyond the interior of the PREMISES; (xiv) not permit objectionable
odors to emanate or be unreasonably dispelled from the PREMISES; (xv) not load
or unload nor permit the loading or unloading of merchandise, supplies or other
property except at the rear of the PREMISES or such other area designated by
LANDLORD for such purposes; (xvi) use its best efforts to prevent the parking or
standing of trucks, trailers, or other vehicles or equipment except when
actually engaged in such loading or unloading; (xvii) not maintain nor permit
any coin or token-operated machines of any nature within the PREMISES except
vending machines located In non-sales areas which are solely for the use of
TENANT'S employees; (xviii) not erect any satellite dishes, antennae, wiring or
aerials upon the roof of the PREMISES or the building d which it is a part;
(xix) not permit the display or sale of catalogs other than catalogs exclusively
promoting TENANT'S merchandise; and (xx) will keep its doors, if any, which
front on the Enclosed Mail in an open position to promote the free flow of
pedestrian traffic during the hours that TENANT'S store is open for business.
(j) MECHANIC'S LIENS AND OTHER ENCUMBRANCES. TENANT will not permit to be
created nor to remain undischarged any lien, encumbrance or charge arising out
of any work of any contractor, mechanic, laborer or materialman which might be
or become a lien or encumbrance or charge upon the PREMISES or any part thereof
or the income therefrom. TENANT will not enter into any mortgage, conditional
sale, security agreement or like instrument nor suffer any other matter or thing
whereby the estate, right and Interest of LANDLORD in the PREMISES or any part
thereof might be impaired or diminished. If any lien or notice of lien on
account of an alleged debt of TENANT or any notice of contract by a party
engaged by TENANT or TENANT'S contractor to work on the PREMISES is fled against
the PREMISES or any part of the Shopping Center, TENANT will, within ten (10)
calendar days after notice of the filing thereof, cause the same to be
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discharged of record by payment, deposit, bond, order of a court of competent
jurisdiction, letter of credit or other adequate security. If TENANT fails to
cause such lien or notice of lien to be discharged within such period, LANDLORD
may, but shall not be obligated to, discharge the same either by paying the
amounts claimed to be due or by procuring the discharge of such lien by deposit,
bond, or otherwise and TENANT shall reimburse LANDLORD for such amounts upon
demand. In any event, LANDLORD will be entitled, if LANDLORD so elects, to
compel the prosecution of a judgment in favor of the lienor with interest, costs
and allowances. Nothing herein shall obligate TENANT to pay or discharge any
lien created by LANDLORD.
(k) OPERATION OF TENANT'S HEATING, VENTILATING AND AIR CONDITIONING
SYSTEM. TENANT agrees to operate its heating, ventilating and air conditioning
(VAC) system so as to adequately heat or cool the PREMISES, as the case may be,
during the hours that TENANT'S store is open for business, and if the PREMISES
has an entrance on any Enclosed Mail, to maintain at all times, whether or not
TENANT is open for business, temperatures in the PREMISES consistent with the
temperature in the Enclosed Mall so as not to cause any decrease or increase in
the temperature in the Enclosed Mall when the same is being heated or cooled, as
the case may be.
ARTICLE 9: INDEMNITY AND INSURANCE
SECTION 1. INDEMNIFICATION BY TENANT
Commencing on the earlier of the Rent Commencement Date or the date upon
which TENANT first enters upon the PREMISES, TENANT will indemnify, defend and
hold harmless LANDLORD and/or any fee owner or underlying lessor(s) of the
Developer Parcel or the Shopping Center from and against all claims, actions,
liens, demands, expenses and judgments for loss, damage, or injury to property
or persons resulting or occurring by reason of the construction, use or
occupancy of the PREMISES by TENANT. If LANDLORD is made a party to any
litigation commenced by or against TENANT, TENANT agrees to protect, defend and
hold LANDLORD harmless therefrom and to pay all costs, expenses and reasonable
attorney fees incurred or paid by LANDLORD in connection with such litigation.
SECTION 2. COMMERCIAL GENERAL LIABILITY INSURANCE
TENANT agrees to carry at its own expense, commercial general liability
insurance covering the PREMISES and TENANT'S use thereof with companies and in a
form satisfactory to LANDLORD. Such policy or policies shall include
contractual liability, personal injury liability and product liability and shall
have a minimum combined single limit of Three Million Dollars ($3,000,000.00)
per occurrence and in the aggregate for bodily injuries and for property damage.
The liability insurance required of TENANT may be provided under a primary and
an excess limits policy covering the PREMISES and other property, provided that
TENANT shall furnish a certificate of such policy to LANDLORD evidencing the
minimum coverage referred to herein. The coverage may also be provided under a
blanket liability policy, provided that the minimum limits required herein are
provided under such policy on an aggregate per location basis. TENANT'S
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policy or policies shall name LANDLORD, The Richard E. Jacobs Group, Inc.,
and JG Shopping Center Management LLC (LANDLORD'S management company) as
additional insureds and shall bear endorsements to the effect that the
insurer agrees to notify LANDLORD not less than thirty (30) calendar days in
advance of any modifications or cancellation thereof. TENANT shall deposit
certificates evidencing such coverage with LANDLORD prior to the date of any
use or occupancy of the PREMISES by TENANT.
SECTION 3. PROPERTY INSURANCE
LANDLORD agrees to carry policies insuring the Mall Stores and the Enclosed
Mall, to the extent located on the Developer Parcel, against fire and such
perils or loss as LANDLORD may deem appropriate, including at least those perils
from time to time included in standard "all risk coverage" endorsements or
policies and loss of rentals. LANDLORD'S coverage shall be in an amount equal
to at least ninety percent (90%) of the replacement cost of such improvements
and shall include so much of TENANT'S original construction pursuant to Exhibit
C as are commonly called "leasehold improvements" or "betterments" and which are
to remain upon TENANT'S vacating the PREMISES. Such policies shall not,
however, include trade fixtures, furnishings, ceiling-hung chandeliers and other
adornments, special equipment and personal property including, but not limited
to inventory of TENANT, all of which TENANT agrees to insure, at its expense,
against fire and such other risks as are from time to time included in standard
"all risk coverage" endorsements or policies in an amount equal to at least
ninety percent (90%) of replacement cost thereof. Prior to the Rent
Commencement Date, TENANT agrees to furnish LANDLORD with a certificate
evidencing such coverage, with companies and in a form satisfactory to LANDLORD.
SECTION 4. WAIVER OF SUBROGATION
LANDLORD and TENANT each hereby waive any rights they may have against the
other, including but not limited to a direct action for damages, on account of
any loss or damage occasioned to LANDLORD or TENANT, as the case may be (whether
or not such loss or damage is caused by the fault, negligence or other tortious
conduct, acts or omissions of LANDLORD or TENANT or their respective officers,
directors, employees, agents or invitees), to their respective property, the
PREMISES, its contents or to any other portion of the Shopping Center to the
extent such property is or should have been covered by the property insurance
required under this lease. The parties hereto each, on behalf of their
respective insurance companies insuring the property of either LANDLORD or
TENANT against any such loss, waive any right to subrogation that LANDLORD or
TENANT or their respective insurers may have against the other party or their
respective officers, directors, employees, agents or invitees and all rights of
their respective insurance companies based upon an assignment from its insured.
Each party to this lease agrees immediately to give to each such insurance
company written notification of the terms of the mutual waivers contained in
this Section, and to have said insurance policies properly endorsed, if
necessary, to prevent the invalidation of said insurance coverage by reason of
said waivers. The foregoing waiver shall be effective whether or not the
parties maintain the required insurance.
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SECTION 5. LIMIT ON LANDLORD'S LIABILITY FOR DAMAGE
Notwithstanding anything in this Article 9 to the contrary, LANDLORD shall
not be responsible or liable for and TENANT hereby expressly waives all claims
against LANDLORD for injury to persons or damage to TENANT'S property resulting
from (i) water, snow or Ice being upon or coming through the roof, walls,
windows or otherwise; (ii) wind, water or flooding; (iii) any act, omission or
negligence of co-tenants or other persons or occupants of the Shopping Center;
(iv) the acts of any owners or occupants of adjoining or contiguous property; or
(v) failure of the electrical system, the heating or air conditioning systems,
or the plumbing and sewer systems. LANDLORD shall not be liable for any damage
occasioned by Its failure to keep the PREMISES in repair unless LANDLORD is
obligated to make such repairs under the terms hereof, notice of the need for
such repairs has been given LANDLORD, a reasonable time has elapsed and LANDLORD
has failed to make such repairs.
ARTICLE 10: REPAIRS AND ALTERATIONS
SECTION 1. REPAIRS BY LANDLORD
LANDLORD will keep and maintain the foundations, roof and Common Utilities
up to the point of entry to the PREMISES and structural portions of the exterior
walls of the PREMISES (excepting any walls which are installed by or on behalf
of TENANT) in good condition and repair, except for repairs required thereto by
reason of the acts of TENANT, its employees, agents, invitees, licensees, or
contractors. TENANT agrees to give LANDLORD written notice of the necessity for
repairs coming to the attention of TENANT. The provisions of this Section shall
not apply in the case of damage or destruction by fire or other casualty or a
taking by Eminent Domain, in which events the obligations of LANDLORD shall be
controlled by Article 13 or Article 14 hereof, as the case may be.
SECTION 2. REPAIRS BY TENANT
Subject only to the specific obligations of LANDLORD set forth in this
Article 10, Section 1, TENANT will keep and maintain the PREMISES and every part
thereof and any fixtures, facilities or equipment contained therein in good
condition and repair, including, but not limited to, the heating, air
conditioning, electrical, plumbing and sewer systems, floors, the exterior
doors, security grilles, interior walls, ceilings, window frames and all
portions of the storefront area, and shall make any replacements thereof and
shall replace all broken and cracked glass. The provisions of this Section
shall not apply in the case of damage or destruction by fire or other casualty
or a taking by Eminent Domain, in which events the obligations of TENANT shall
be controlled by Article 13 or Article 14 hereof, as the case may be.
SECTION 3. ALTERATIONS OR IMPROVEMENTS BY TENANT
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TENANT shall not make or permit to be made any alterations, additions, or
improvements of any kind or nature to the PREMISES or any part thereof,
including any exterior walls or the exterior face of service corridor walls,
without first obtaining the written consent of LANDLORD, which consent shall
be at LANDLORD'S sole discretion (unless required by code or under any local,
state or federal law or regulation In which event LANDLORD'S consent shall
not be unreasonably withheld). If LANDLORD grants consent, TENANT shall make
such alterations, additions or improvements in accordance with applicable
provisions of Exhibit C, applicable laws and building codes and in good and
workmanlike manner, LANDLORD'S review or approval of the plans,
specifications and drawings for TENANT'S alterations shall create no
responsibility or liability on the part of LANDLORD for their completeness,
design sufficiency, or compliance with all laws, rules and regulations, all
of which shall be TENANT'S sole responsibility. TENANT agrees to promptly
repair any damage to the PREMISES or to the building of which the PREMISES is
a part caused by such alterations, additions or Improvements by TENANT.
Notwithstanding the above, LANDLORD in its discretion reserves the right to
require TENANT, at its expense, to make alterations to any exterior walls or
service corridor walls, which alterations may include but are not limited to,
requiring windows to be located in same and in such event, TENANT agrees to
comply with all applicable provisions of this Article 10, Section 3.
SECTION 4. REMOVAL OF IMPROVEMENTS
Except as otherwise provided herein, all items of construction, primary
lighting fixtures, heating and air conditioning equipment, and all alterations,
installations, additions and other leasehold improvements made by TENANT will
become the property of LANDLORD and may not be removed from the PREMISES. All
trade fixtures, furniture, furnishings and signs installed in the PREMISES by
TENANT will remain the property of TENANT and may be removed upon the expiration
or earlier termination of the term of this lease; provided (i) that any of such
Items as are affixed to the PREMISES and require severance may be removed only
if TENANT repairs any damage caused by such removal so that the PREMISES is
restored to the condition existing immediately prior to such removal; and (ii)
that TENANT has fully performed all of the covenants and agreements to be
performed by TENANT under the provisions of this lease. If TENANT falls to
remove such items from the PREMISES prior to the expiration or earlier
termination of this lease, all trade fixtures, furniture, furnishings and signs
shall become the property of the LANDLORD unless LANDLORD elects to require
their removal, in which case TENANT will promptly remove same and restore the
PREMISES to its prior condition. In the event TENANT falls to remove its trade
fixtures, furniture, furnishings, and signs, LANDLORD, In its sole discretion,
may deem such Items to be abandoned by TENANT, and LANDLORD shall have the right
to dispose of same, which shall not be construed or deemed as a realization on
such property and which shall In no way Impair LANDLORD'S right to pursue any
outstanding Rent due hereunder as otherwise provided, and shall not affect
LANDLORD'S right to declare TENANT to be a holdover.
ARTICLE 11: ASSIGNING AND SUBLETTING
SECTION 1. NO ASSIGNING OR SUBLETTING
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TENANT will not, voluntarily, involuntarily or by operation of law, assign,
sell, mortgage, pledge or in any manner transfer this lease or any interest
therein (all of which shall be deemed to constitute an assignment for purposes
of this lease), nor sublet the PREMISES or any part thereof, nor license
concessions nor lease departments In the PREMISES (all of which shall be deemed
to constitute a sublease for purposes of this lease), notwithstanding any
references herein to assignees, sublessees or other persons. LANDLORD has
entered into this lease with TENANT in order to obtain for the benefit of the
entire Shopping Center the unique attraction of TENANT'S trade name,
merchandising mix and the product line associated with TENANT'S business as
described in Article 8, Sections 1 and 2, respectively, and the prohibition on
assignment or subletting or the like provided for In this Article 11 is
expressly agreed to by TENANT as an Inducement to LANDLORD to enter into this
lease. In the event of a purported subletting of all or any part of said
PREMISES or purported assignment of this lease, it is mutually agreed that
TENANT will nevertheless remain fully and primarily liable under the terms,
covenants and conditions of this lease. At LANDLORD'S election, LANDLORD may
consider any purported subletting or assignment a default and elect any remedies
provided in Article 12. If this lease is assigned or if the PREMISES or any
part thereof be subleased or occupied by anybody other than TENANT in
contravention of this lease, LANDLORD may, nevertheless, collect from the
assignee, sublessee or occupant any Rent payable by TENANT under this lease and
apply the amount collected to Rent herein reserved, but such election by
LANDLORD will not be deemed an acceptance of the assignee, sublessee or occupant
as TENANT nor a release of TENANT from performance under this lease.
SECTION 2. CHANGE IN OWNERSHIP
If TENANT or any guarantor of this lease is a corporation the stock of
which is not traded on any national securities exchange (as defined in the
Securities Exchange Act of 1934, as amended), then the following shall
constitute a prohibited assignment of this lease for all purposes of this
Article 11: (i) the merger, consolidation, liquidation or reorganization of such
corporation; and/or (ii) the sale, Issuance, or transfer, cumulatively or in one
transaction, of any voting stock, by TENANT or any guarantor of this lease or
the stockholders of record of either as of the date of this lease, which results
in a change in the voting control of TENANT or the guarantor of this lease,
except any such transfer by inheritance or testamentary disposition.
If TENANT or any guarantor of this lease is a partnership, joint venture,
trust, limited liability company, unincorporated association or other business
entity, then the sale, issuance or transfer of a controlling interest therein,
or the transfer of a majority interest in or a change In the voting control of
any partnership, joint venture, trust, limited liability company, unincorporated
association or other business entity which directly or indirectly controls
TENANT, or the transfer of any portion of any general partnership or managing
interest in TENANT or in any such entity, shall be deemed to be a prohibited
assignment of this lease, except any transfer by Inheritance or testamentary
disposition.
ARTICLE 12: DEFAULT AND REMEDIES
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SECTION 1. EVENTS OF DEFAULT
This lease is made upon the condition that TENANT will punctually and
faithfully perform all of the covenants and agreements by it to be performed as
herein set forth and the occurrence of any of the following shall constitute an
event of default and a breach of this lease by TENANT:
(a) Any item comprising Rent required to be paid by TENANT remaining in
arrears and unpaid for ten (10)calendar days after written notice from LANDLORD
to TENANT of delinquency; provided that if within any twelve (12) consecutive
calendar month period TENANT is delinquent in the payment of Rent more than two
(2) times and LANDLORD shall have served upon TENANT two (2) or more ten (10)
calendar day notices of delinquency, the requirements for notice and the ten
(10) calendar day grace period shall be deemed waived by TENANT for the balance
of such twelve (12) consecutive calendar month period and any further arrearage
In Rent during the balance of such twelve (12) consecutive calendar month period
shall constitute an event of default on the day same was due;
(b) The PREMISES shall be vacated or abandoned;
(c) This lease shall be assigned or the PREMISES sublet in contravention
of Article 11;
(d) There shall be an attachment, execution or other judicial seizure of
substantially all of TENANT'S assets located in the PREMISES or of TENANT'S
interest in this lease;
(e) TENANT, or any guarantor of this lease, shall file a petition in
bankruptcy or be adjudicated a bankrupt, file any petition or answer seeking any
reorganization, arrangement, composition, readjustment, liquidation, dissolution
or similar relief for itself under any present or future federal, state or other
statute, law or regulation, make an assignment for the benefit of creditors or
if a trustee, receiver or liquidator of all or a substantial part of TENANT'S or
any guarantor's properties or of the PREMISES shall be appointed in any action,
suit or proceeding by or against TENANT or any guarantor and such proceeding or
action shall not have been dismissed within thirty (30) calendar days after such
appointment;
(f) With the exception of items (a) through (e) above, a failure by TENANT
to observe or perform any of the other covenants, agreements or conditions of
this lease on the part of TENANT to be kept or performed and said failure shall
continue for a period of ten (10) calendar days after written notice thereof
from LANDLORD to TENANT (unless such default cannot reasonably be cured within
ten [10] calendar days and TENANT shall, within such period, commence such cure
and thereafter diligently prosecute the same to completion).
(g) TENANT shall be in default on or before the Rent Commencement Date
hereof under a prior lease with LANDLORD for the PREMISES or other premises
within the Shopping Center which default remains uncured or resulted in TENANT'S
dispossession of the PREMISES or such other premises within the Shopping Center.
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SECTION 2. LANDLORD'S REMEDIES
Should any of the foregoing events of default occur, LANDLORD, at its
option, may exercise the following remedies:
(a) LANDLORD may terminate this lease and re-enter the PREMISES and take
possession thereof with full right to sue for and collect all sums or amounts
with respect to which TENANT may be in default and accrued up to the time of
such entry, Including damages to LANDLORD by reason of any breach or default on
the part of TENANT, and TENANT'S liability under all of the provisions of this
lease shall continue thereafter notwithstanding any such termination or re-entry
by LANDLORD;
lb) LANDLORD may retake possession of the PREMISES, by summary proceedings
or otherwise, without terminating this lease, and the commencement and
prosecution of any action by LANDLORD In forcible entry and detainer, ejectment
or otherwise, or any execution of any judgment or decree obtained in any action
to recover possession of the PREMISES, or the recovery of possession without
resort to legal process including, without limitation. the termination of
utility service to, removal of personal property from and the changing of locks
upon the PREMISES, shall not be construed as an election to terminate this lease
or to absolve or discharge TENANT from any of its obligations and liabilities
for the remainder of the term of this lease, and TENANT will, not withstanding
such reentry, continue to be liable for the payment of Rent and the performance
of the other covenants and conditions hereof and will pay to LANDLORD all
deficits after any such reentry in monthly installments as the amounts of such
deficits from time to time are ascertained; provided that LANDLORD may at any
time following such reentry during the remaining unexpired term hereof, without
further notice to TENANT, terminate this lease; and/or
(c) LANDLORD may bring suit for the collection of all sums or amounts with
respect to which TENANT may be in default and/or all damages attributable to any
default by TENANT, or any action seeking injunctive relief to specifically
enforce the covenants of TENANT in this lease, or any other suit or proceeding
for any other relief available to LANDLORD at law or In equity. For purposes
hereof, such Rent to which LANDLORD shall be entitled to recover as damages in
the event of TENANT'S default shall include, but not be limited to, the greatest
effective Rent paid or accrued throughout the term of this lease. Effective
Rent shall be defined as the sum of Fixed Minimum Rent and Percentage Rate due
LANDLORD from TENANT in any full or Partial Lease Year.
A termination of this lease by LANDLORD or the recovery of possession of
the PREMISES by LANDLORD, or any voluntary or other surrender of this lease by
TENANT or a mutual cancellation thereof, shall not work a merger and shall, at
the option of LANDLORD, terminate all or any existing franchises, concessions,
licenses, permits, subleases, subtenancies, departmental operating arrangements
or the like between TENANT and any third party with respect to the PREMISES, or
may, at the option of LANDLORD, operate as an assignment to LANDLORD of TENANT'S
Interest in the same.
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Should LANDLORD terminate this lease or retake possession of the PREMISES
without terminating this lease, LANDLORD may enter upon the PREMISES and remove
TENANT, TENANT'S agents, sublessees, licensees, franchisees and invitees and
their property without being deemed guilty of trespass or becoming liable for
any loss or damage which may be occasioned thereby. In the event LANDLORD
relets the PREMISES to some other person, firm or corporation (whether for a
term greater, less than or equal to the unexpired portion of the term created
hereunder) and at the time of such reletting there exists within the Shopping
Center vacant Mall Store space of a size which could accommodate the replacement
tenant for the PREMISES (the "Alternate Space"), no amount of the Rent received
by LANDLORD for the reletting of the PREMISES shall be credited against the
obligation of TENANT to pay Rent under this lease until such time, if ever,
during the remainder of the term of this lease as no Alternate Space exists.
Thereafter, all Rent received by LANDLORD from such reletting shall be applied,
first, to the payment of any costs and expenses of such reletting, including
brokerage commissions, attorney's fees and costs of placing the PREMISES in a
tenantable condition or otherwise; second, to the payment of any damages or
Indebtedness other than Rent due hereunder from TENANT to LANDLORD; third, to
the payment of Rent due and unpaid hereunder, and the residue, if any, shall be
held by LANDLORD and applied in payment of future Rent as the same may become
due and payable hereunder. LANDLORD may immediately upon the making of such new
lease or the creation of such new tenancy accelerate the balance of the Rent due
under the terms of this lease and TENANT shall be responsible for the deficiency
in Rent for the balance of the term of this lease. In determining the
Percentage Rent component of the aggregate Rent payable by TENANT hereunder, the
greatest effective Rent paid or accrued throughout the term of this lease shall
be used. If such lease or tenancy is made for a shorter term than the balance
of the term of this lease, any such action brought by LANDLORD to collect the
deficit for that period shall not bar LANDLORD from thereafter suing for any
loss accruing for the balance of the unexpired term of this lease. If the
tenant under any such replacement lease defaults In the payment of Rent, any
previous action against TENANT to accelerate the balance of the Rent due
hereunder shall not bar LANDLORD from thereafter suing for any additional loss
accruing for the balance of the unexpired term of this lease resulting from the
defaults of the replacement tenant, up to the full amount of the Rent due under
this lease for the remainder of the term. In connection with any such
reletting, LANDLORD reserves the right to subdivide or expand the PREMISES or
otherwise change the size and/or configuration thereof without in any way
affecting TENANT'S liability hereunder. Should LANDLORD relet the PREMISES to
another tenant in the Shopping Center, thereby causing an Interruption in the
payment of Rent accruing under the lease for such other tenant's previous
location within the Shopping Center, TENANT shall become and remain liable for
the payment of any such sums as they otherwise would have accrued, to the extent
the same do not exceed the amounts which would otherwise be payable by TENANT to
LANDLORD hereunder. Nothing contained in this Article 12 or elsewhere In this
lease shall obligate LANDLORD to attempt to relet the PREMISES under any
circumstances during the term created hereunder.
SECTION 3. REMEDY FOR FAILURE TO OPEN OR OPERATE
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Recognizing the difficulty or impossibility of determining LANDLORD'S
damages for loss of Percentage Rent anticipated from TENANT and/or occupants of
the Shopping Center or for loss of value of the Shopping Center because of
diminished salability, mortgagability, adverse publicity or appearance which may
result from any one or more of the events hereinafter enumerated, LANDLORD and
TENANT covenant and agree that in the event that TENANT (i) falls to take
possession of, construct and thereafter open the PREMISES for business, fully
fixtured, stocked and staffed on the Rent Commencement Date; or (ii) vacates or
abandons the PREMISES; or (iii) ceases to operate TENANT'S business within the
PREMISES In full compliance with the use and business hours requirements of
Article 8, Sections 1 and 2 hereof, then and In any of such events, LANDLORD
shall have the right, at Its option to (a) collect not only the Rent reserved,
but also an amount equal to three-fourths (3/4) of the Rent reserved for the
period or periods during which any of the aforementioned events shall continue,
prorated on a daily basis for each and every day during such period, such
additional amount to constitute liquidated damages for TENANT'S breach, which
the parties agree represents a reasonable estimate of LANDLORD'S damages
sustained by reason of TENANT'S breach, and/or (b) to treat such action or
omission by TENANT as an event of default as hereinabove described and to
exercise any remedy therefor, whether reserved in this lease or available at law
or In equity. For purposes of this Article 12, the terms "vacate(s)" and
"abandon(s)" shall not be abrogated because TENANT may have left all or any part
of its trade fixtures, furniture, furnishings or stock-in-trade within the
PREMISES.
SECTION 4. DEFAULT IN OTHER CENTERS
The Shopping Center identified in this lease is one of several shopping
centers operated by LANDLORD'S agent. LANDLORD and TENANT herein expressly
recognize that part of the Inducement for LANDLORD, by and through Its agent,
The Richard E. Jacobs Group, Inc., to enter into this lease with TENANT In this
Shopping Center Is the performance of TENANT and/or any affiliate of TENANT of
all of Its obligations with respect to Its lease for space In one or more of
such other shopping centers. To this end, any default by TENANT, or any parent,
subsidiary, or affiliate of TENANT under any lease in any shopping center law .
managed, or otherwise operated or owned, In whole or In part, by LANDLORD, The
Richard E. Jacobs Group, Inc. (or its affiliates), Center Ridge Co., Commercial
Realty Management Co. or Weston Management Company Limited Partnership, whether
such other lease Is executed prior or subsequent to the date of this lease,
shall at LANDLORD'S option constitute a default by TENANT hereunder.
SECTION 5. LANDLORD'S RIGHT OF SELF-HELP
In addition to LANDLORD'S rights of self-help set forth elsewhere in this lease,
if TENANT at any time falls to pay any taxes, assessments or liens, to make any
other payment or to perform any act required by this lease in a manner
reasonably satisfactory to LANDLORD. Including repairs to the PREMISES,
LANDLORD, without warning or releasing TENANT from any obligation or default
under this lease, may (but shall be under no obligation to) at any time
thereafter make such payment or perform such act for the account and at the
expense of TENANT. All sums so paid by LANDLORD and all costs and expenses
Incurred In connection therewith will constitute Additional
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Rent payable by TENANT to LANDLORD upon billing by LANDLORD or LANDLORD may,
in its sole discretion, apply all or any portion of any Security Deposit
toward the satisfaction of said sums.
SECTION 6. NO LIMITATION OF RIGHTS AND REMEDIES
All rights and remedies of LANDLORD herein enumerated shall be cumulative
and shall not be construed to exclude any other remedies allowed at law or in
equity.
SECTION 7. LATE CHARGE
All sums (i) payable by TENANT to LANDLORD under this lease, including, but
not limited to Rent and any amounts due LANDLORD or LANDLORD'S contractor under
Exhibit C; or (ii) expended by LANDLORD on behalf of TENANT pursuant to Section
5 of this Article 12, is not paid when due, will accrue a late charge from the
date due as set forth in this lease until paid at the rate of one and one-half
percent (1 1/2%) per month or the maximum lawful contract rate, whichever is
less, said late charge to be deemed Additional Rent payable by TENANT to
LANDLORD upon billing by LANDLORD.
SECTION 8. ATTORNEYS' FEES
If either LANDLORD or TENANT institutes any action or proceeding or asserts
any counterclaim against the other relating to the provisions of this lease or
any default hereunder, the unsuccessful party in such action or proceeding
agrees to reimburse the successful party for the reasonable expense of
attorneys' fees, costs, expenses and disbursements incurred by the successful
party before, during and after trial and on appeal.
SECTION 9. WAIVER OF TRIAL BY JURY
To the extent permitted by applicable law LANDLORD and TENANT hereby waive
all right to trial by jury in any claim, action, proceeding or counterclaim by
either LANDLORD or TENANT against each other on any matter arising out of or in
any way connected with this lease, the relationship of landlord and tenant or
TENANT'S use or occupancy of the PREMISES.
ARTICLE 13: DAMAGE, DESTRUCTION AND RESTORATION
In the event that the PREMISES is damaged by any peril covered by
LANDLORD'S Insurance to the extent of less than twenty-five percent (25%) of the
cost of replacement of the PREMISES, the damage to the PREMISES will promptly be
repaired by LANDLORD at LANDLORD'S expense, but in no event shall LANDLORD be
required to repair or replace TENANT'S stock-in-trade, trade fixtures,
furniture, furnishings or other items of personal property which TENANT is
obligated to insure pursuant to Article 9, Section 3. in the event of any damage
and (i) LANDLORD Is not required to repair as hereinabove provided; or (ii) the
PREMISES is
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damaged to the extent of twenty-five percent (25%) or more of the
cost of replacement; or (iii) the building of which the PREMISES is a part is
damaged to the extent of fifty percent (50%) or more of the cost of replacement;
or (iv) such damage occurs during the last three (3) Lease Years of the term,
LANDLORD may elect either to repair or rebuild the PREMISES or the building of
which the PREMISES is a part as the case may be, or to terminate this lease upon
giving notice of such election in writing to TENANT within ninety (90) calendar
days after the happening of the event causing the damage. If the casualty,
repairing, or rebuilding shall render the PREMISES untenantable, in whole or in
part, a proportionate abatement of the Rent shall be allowed from the date when
the damage occurred until the date LANDLORD completes the repairs or rebuilding,
said proportion to be computed on the basis of the rotation which the Gross
Leasable Area of the space rendered untenantable bears to the Gross Leasable
Area of the PREMISES. If LANDLORD Is required or elects to repair the PREMISES
as herein provided, TENANT will repair or replace Its stock-in-trade, trade
fixtures, furniture, furnishings and other items of personal property which
TENANT is obligated to insure in a manner and to at least a condition equal to
that prior to its damage or destruction.
ARTICLE 14: EMINENT DOMAIN
SECTION 1. ALL OF PREMISES TAKEN
If the whole of the PREMISES is taken by any public authority under the
power of Eminent Domain, this lease shall terminate as of the date possession is
taken by such public authority and TENANT shall pay Rent up to that date with an
appropriate refund by LANDLORD of such Rent as may have been paid in advance for
a period subsequent to the date of the taking.
SECTION 2. LESS THAN TWENTY-FIVE PERCENT (25%) OF PREMISES TAKEN
If less than twenty-five percent (25%) of the Gross Leasable Area of the
PREMISES is taken, this lease shall terminate only with respect to the part
taken as of the date possession Is taken by such public authority, and TENANT
shall pay Rent up to that date with an appropriate refund by LANDLORD of such
Rent as may have been paid in advance for a period subsequent to the date of the
taking and, thereafter, the Rent shall be equitably adjusted and LANDLORD will,
at its expense, make all necessary repairs or alterations to the basic building
and exterior work so as to constitute the remainder of the PREMISES a complete
architectural unit.
SECTION 3. TWENTY-FIVE PERCENT (25%) OR MORE OF PREMISES TAKEN
If twenty-five percent (25%) or more of the Gross Leasable Area of the
PREMISES Is taken, this lease shall terminate only with respect to the part so
taken as of the date possession is taken by such public authority, and TENANT
shall pay Rent up to that date with an appropriate refund by LANDLORD of such
Rent as may have been paid in advance for a period subsequent to the date of the
taking, and either party shall have the right to terminate this lease upon
notice in writing to the other party given within thirty (30) calendar days from
the date of such taking. If neither party elects
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to so terminate, all of the terms herein provided will continue In effect
except that Rent shall be equitably adjusted and LANDLORD will, at its
expense, make all necessary repairs or alterations to the basic building and
exterior work so as to constitute the remainder of the PREMISES a complete
architectural unit.
SECTION 4. MORE THAN FIFTY PERCENT (50%) OF THE GLA OF THE MALL STORES TAKEN
If more than fifty percent (50%) of the Gross Leasable Area of the Mail
Stores or more than fifty percent (50%) of the parking area within the Shopping
Center is taken, either party shall have the right to terminate this lease upon
notice In writing to the other party given within thirty (30) days from the date
of such taking. If this lease is not so terminated in its entirety, this lease
shall terminate only with respect to that portion of the Gross Leasable Area of
the PREMISES taken, if any, as of the date possession is taken by such public
authority, whereupon TENANT shall receive an appropriate refund by LANDLORD of
any Rent paid in advance with respect to that portion of the PREMISES taken, and
the Rent shall be equitably adjusted for the remainder of the term; furthermore,
LANDLORD shall, at Its expense, make all necessary repairs and alterations to
the basic building and exterior work so as to make the PREMISES, or the
remainder thereof in the event a portion of the PREMISES is taken, a complete
architectural unit.
SECTION 5. LANDLORD'S RESTORATION OBLIGATION
In the event LANDLORD is obligated to restore the PREMISES to a complete
architectural unit pursuant to this Article 14, LANDLORD will not be required to
spend for such work an amount in excess of amount received by LANDLORD as
damages for the part of the PREMISES so taken, less any amount paid LANDLORD'S
mortgagee from such award.
SECTION 6. OWNERSHIP OF AWARDS
In the event the Shopping Center, the Developer Parcel, the PREMISES or any
portions thereof are taken or condemned either permanently or temporarily for
any public or quasi-public use or purpose by a competent authority in
appropriation proceedings or by the exercise of any right of Eminent Domain, the
entire compensation award therefor, including, but not limited to, all damages
as compensation diminution in value of the leasehold, reversion, and fee, shall
belong to LANDLORD without any deduction therefrom for any present or future
estate of the TENANT, and TENANT hereby assigns to LANDLORD all its right, title
and interest to any such award. Although all damages In the event of any
condemnation to belong to LANDLORD, whether such damages are awarded as
compensation for diminution in value the leasehold, reversion or to the fee of
the PREMISES, TENANT shall have the right to claim and rec from the condemning
authority, but not from LANDLORD, such compensation as may be separately awarded
or recoverable by TENANT in TENANT'S own right on account of damage to TENANT'S
business by reason of the taking and for or on account of any cost or loss to
which TENANT might be put removing TENANT'S merchandise, furniture, fixtures,
improvements and equipment.
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ARTICLE 15: SUBORDINATION AND ATTORNMENT
Upon written request or notice by LANDLORD, concurred in by any mortgagee,
trustee or security holder of the Developer Parcel or any part thereof which
includes the PREMISES, or by any person, firm corporation intending to become a
mortgagee, trustee, or security holder, TENANT agrees to subordinate its rights
under this lease to the lien or liens of any mortgage, deed of trust or other
method of financing refinancing now or hereafter existing and to any and all
advances to be made thereunder, and to the interest thereon, and all renewals,
replacements and extensions thereof, provided the mortgagee or trustee named in
said mortgage or deed of trust or security holder under a different method of
financing shall agree recognize this lease of TENANT In the event of foreclosure
if TENANT is not in default. TENANT also agrees that any mortgagee, trustee or
security holder may elect to have this lease prior to the lien of its mortgage
deed of trust or other method of financing, and in the event of such election
and upon notification by such mortgages, trustee or security holder to TENANT to
that effect, this lease shall be deemed prior in lien (but not in respect to the
priority of entitlement to insurance proceeds or any award in condemnation) to
mortgage, deed of trust or other method of financing, whether this lease is
dated prior to or subsequent the date of said mortgage, deed of trust or other
method of financing. TENANT agrees that upon ten (10) calendar days prior
written request from LANDLORD, any mortgagee or any trustee named in such
mortgage or deed of trust or security holder under a different method of
financing, it will execute and deliver whatever instruments may be required for
such purposes. TENANT will, in the event of the sale assignment of LANDLORD'S
interest in the Developer Parcel or in the event of any proceedings brought if
the foreclosure of, or in the event of the exercise of the power of sale under
any mortgage covering the Developer Parcel, attorn to and recognize such
purchaser or mortgagee as LANDLORD under this lease.
ARTICLE 16: ESTOPPEL CERTIFICATES
At any time and from time to time, TENANT agrees, upon ten (10) calendar
days prior written request from LANDLORD, to execute, acknowledge and deliver to
LANDLORD, or to LANDLORD'S mortgagee(s), or any other party designated by
LANDLORD or LANDLORD'S mortgagee(s), a statement in writing and form and
substance satisfactory to LANDLORD certifying to all or any part of the
following information LANDLORD shall request to the extent that the same is then
true and ascertainable: (i) that this lease constitutes the entire agreement
between LANDLORD and TENANT and 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);, (ii) the date to which the Rent
hereunder has been paid, and the amount of any security deposited with LANDLORD:
(iii) that the PREMISES has been completed on or before the date of such letter
and that all conditions precedent to the Rent Commencement Date have been
carried out; (iv) that TENANT has accepted possession, is occupying the PREMISES
and knows of no defaults or offsets which TENANT has against the enforcement of
this lease by LANDLORD; (v) the Rent Commencement Date of this lease and the
expiration date of this lease; (vi) that TENANT'S store is open for business;
and (vii) any to matters relating to the status of the lease, the condition of
the PREMISES and the operation of TENANT business as shall be requested by
LANDLORD.
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ARTICLE 17: QUIET ENJOYMENT
LANDLORD covenants and agrees that if TENANT performs all the covenants and
agreements herein stipulated to be performed on TENANT'S part, TENANT will, at
all times during the continuance hereof, the peaceable and quiet enjoyment and
possession of the PREMISES without any manner of let or hindrance from LANDLORD
or any person or persons lawfully claiming the PREMISES.
ARTICLE 18: ACCESS TO PREMISES
LANDLORD shall have free access to the PREMISES at all reasonable times
for the purpose of examining the same or making any alterations or repairs to
the PREMISES and/or adjacent areas that LANDLORD deems necessary and during
the last three (3) months of the term for the purpose of exhibiting the
PREMISES and putting up the usual notice "to Rent," which notice shall not be
removed, obliterated or hidden by TENANT. Any such entry by LANDLORD will be
undertaken in a manner so as to cause as little Inconvenience as Is
reasonably practicable. The exercise of such right of access shall not be
deemed an eviction or disturbance of TENANT nor will TENANT be allowed any
abatement of Rent for inconvenience occasioned thereby.
ARTICLE 20: LIABILITY OF LANDLORD
Anything in this lease to the contrary notwithstanding, the covenants,
undertakings and agreements herein made on the part of LANDLORD are made and
intended not for the purpose of binding LANDLORD personally or the assets of
LANDLORD but are made and intended to bind only the LANDLORD'S Interest in the
PREMISES and Developer Parcel, as the same may, from time to time, be
encumbered. If LANDLORD, or any successor or assign, fails to perform any
covenant, term or condition of this lease upon LANDLORD'S part to be performed
and as a consequence of such default TENANT recovers a money judgment against
LANDLORD, such judgment shall be satisfied only out of the proceeds of sale
received upon execution of such judgment and levy thereon against the right,
title and interest of LANDLORD in the PREMISES and the Developer Parcel (as the
same may then be encumbered) and no personal liability shall at any time be
asserted or enforceable against LANDLORD or Its stockholders, officers,
partners, members or managers or their respective heirs, legal representatives,
successors and assigns on account of the lease or on account of any covenant
undertaking or agreement of LANDLORD In this lease. It is understood that in no
event shall TENANT have the right to levy execution against any property of
LANDLORD other than its Interest in the PREMISES and the Developer Parcel as
hereinbefore expressly provided. In the event of any transfer(s) of LANDLORD'S
interest in the PREMISES or the Developer Parcel, other than a transfer for
security purposes only, the transferor shall be automatically relieved of any
and all obligations and liabilities on the part of LANDLORD accruing from and
after the date of such transfer.
ARTICLE 21: LIABILITY OF EXECUTING AGENT
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This lease is executed by The Richard E. Jacobs Group, Inc. not personally,
but as agent for LANDLORD in the exercise of the power and authority conferred
on it by LANDLORD. It is expressly understood and agreed that nothing in this
lease will be construed as creating any liability whatsoever against said
corporation, Its shareholders, officers or directors and, in particular, without
limiting the generality of the foregoing, there shall be no personal liability
to pay any indebtedness accruing hereunder or to perform any covenant, either
express or implied, herein contained to the end that LANDLORD, as principal,
will be solely responsible therefor.
ARTICLE 22: MISCELLANEOUS
SECTION 1. NOTICES
Any notice or consent to be given or on behalf of either party to the other
shall be in writing and will be deemed given when notice or consent is mailed by
registered or certified mail, return receipt requested, or, if sent by Federal
Express or other overnight courier which provides written evidence of delivery,
upon the day such delivery to the overnight courier is made, addressed to
LANDLORD at the address hereinabove specified, and to TENANT at the address
hereinabove specified, or the PREMISES, or at such other address as may be
specified from time to time by written notice sent to the other party in
compliance with this section.
SECTION 2. ACCORD AND SATISFACTION
No payment by TENANT or receipt by LANDLORD of a lesser amount than the
Rent herein stipulated will be deemed to other than on account of the earliest
stipulated Rent nor shall any endorsement or statement on any check or any
letter accompanying any check or payment of Rent be deemed an accord and
satisfaction, and LANDLORD may accept such check or payment without prejudice to
LANDLORD'S right to recover the balance of such Rent or pursue any other remedy
provided for in this lease or available at law or in equity.
SECTION 3. WAIVER
No waiver of any condition or legal right or remedy shall be implied by the
failure of LANDLORD to declare a forfeiture, or for any other reason, and no
waiver of any condition or covenant will be valid unless it be in writing signed
by LANDLORD. No waiver by LANDLORD in respect to one or more tenants or
occupants of the Shopping Center shall constitute a waiver in favor of any other
tenant, nor will the waiver of a breach of any condition be claimed or pleaded
to excuse a future breach of the same condition or covenant. The mention in
this lease of any specific right or remedy shall not preclude LANDLORD from
exercising any other right or from having any other remedy or from maintaining
any action to which it may be otherwise entitled either at law or in equity and
for the purpose of any suit by LANDLORD brought or based on this lease, this
lease shall be construed to be a divisible contract, to the end that successive
actions may be maintained as successive periodic sums shall mature under this
lease. It is further agreed that failure to include
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in any suit or action any sum then matured shall not be a bar to the
maintenance of any suit or action for the recovery of said sum or sums so
omitted.
SECTION 4. BROKER'S COMMISSION
LANDLORD and TENANT warrant that there are no claims for broker's
commissions or finder's fees in connection with their execution of this lease
and agree to indemnify and save each other harmless from any liability that may
arise from such claim, including reasonable attorney's fees.
SECTION 5. INTERPRETATION
Wherever either the word "LANDLORD" or "TENANT" is used in this lease, it
shall be considered as meaning "LANDLORD'S" or "TENANT'S" respectively, wherever
the context permits or requires, and when the singular and/or neuter pronouns
are used herein, the same shall be construed as including all persons and
corporations designated respectively as LANDLORD or TENANT in the heading of
this instrument wherever the context requires.
SECTION 6. FORCE MAJEURE
In the event that either party hereto shall be delayed or hindered in or
prevented from the performance of any act required hereunder by reason of
strikes, lockouts, inability to procure labor or materials, failure of power,
restrictive governmental laws or regulations, riots, insurrection, war, fire or
other casualty or other reason of a similar or dissimilar nature beyond the
reasonable control of the party delayed in performing work, or doing acts
required under the terms of this lease, then performance of such act shall be
excused for the period of the delay and the period for the performance of any
such act shall be extended for period equivalent to the period of such delay.
After the Rent Commencement Date the provisions of this Section shall not
operate to excuse TENANT from the prompt payment of Rent as required by this
lease and shall not extend the term of this lease. Delays or failures to
perform resulting from lack of funds shall not be deemed delays beyond the
reasonable control of a party.
SECTION 7. RELATIONSHIP OF PARTIES
Nothing herein contained shall be deemed or construed by LANDLORD or
TENANT, as creating the relationship of principal and agent or of a partnership
or joint venture or as establishing a fiduciary responsibility between LANDLORD
or TENANT, it being understood and agreed that none of the provisions herein,
nor any acts of LANDLORD and TENANT will be deemed to create any relationship
other than that of LANDLORD and TENANT.
SECTION 8. NO THIRD PARTY RIGHTS
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The rights and obligations arising under this lease are personal between
LANDLORD and TENANT and such rights and obligations shall not be enforceable by
any third party. Furthermore, TENANT recognizes that it has not third party
rights arising out of any agreement between LANDLORD and any party other than
TENANT regardless of any benefits accruing to TENANT by virtue of such
agreement.
SECTION 9. NO NET INCOME ARRANGEMENT
TENANT specifically covenants and agrees that neither TENANT nor anyone
claiming an interest in or a right of occupancy or use of all or any portion of
the PREMISES by, through or under TENANT, shall enter into any sublease,
license, concession or other agreement for the use, occupancy or utilization of
space within the PREMISES which provides for rental or other payment for such
use, occupancy or utilization based on whole or in part on the net income or
profits derived by any person from the PREMISES, other than an amount based on a
fixed percentage of receipts or sales. Any such purported agreement in
violation of this covenant shall be absolutely void and ineffective as a
conveyance of any right or interest in the use, occupancy or the utilization of
any part of the PREMISES.
SECTION 10. SUCCESSORS
This lease and all of the covenants, provisions and conditions herein
contained will inure to the benefit of and be binding upon the heirs, personal
representatives, successors and assigns, respectively, of the parties hereto,
provided, however, that no assignment by, from, through or under TENANT in
violation of the provisions hereof shall vest in such assignee any right, title
or interest whatsoever.
SECTION 11. ENTIRE AGREEMENT
This lease sets forth all the covenants, promises, agreements, conditions
and understandings between LANDLORD and TENANT concerning the PREMISES and there
are no covenants, promises, agreements, conditions, or understandings, either
oral or written, between them other than as herein set forth. No subsequent
alteration, amendment, change or addition to this lease shall be binding upon
LANDLORD or TENANT unless reduced to writing and signed by them. TENANT agrees
that LANDLORD and its agents have made no representations or promises with
respect to the PREMISES or the building or property of which the same are a part
except as herein expressly set forth.
SECTION 12. SURRENDER AND HOLDING OVER
TENANT shall deliver up and surrender to LANDLORD possession of the
PREMISES upon the expiration of this lease, or its termination in any way, in as
good condition and repair as the same shall be at the commencement of said term
(damage by fire and other perils covered by insurance and ordinary wear and
decay only excepted) and shall deliver the keys at the office of LANDLORD
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or LANDLORD'S agent. Should TENANT or any party claiming under TENANT remain
in possession of the PREMISES or any part thereof, without the express
written consent of LANDLORD, after any termination of this lease, not tenancy
or interest in the PREMISES shall result therefrom but such holding over
shall be an unlawful detainer and all such parties shall be subject to
immediate eviction and TENANT will pay to LANDLORD, upon demand (i) the Rent;
and (ii) as liquidated damages, a sum equal to double the Fixed Minimum Rent
specified herein for any period during which TENANT shall hold the PREMISES
after the term of this lease has expired.
SECTION 13. AUTHORITY
If TENANT is a corporation, TENANT warrants and represents to LANDLORD that
the execution of this lease by the person or persons signing has been authorized
by a resolution of TENANT'S Board of Directors or other appropriate corporation
action; if TENANT is a partnership, TENANT warrants and represents to LANDLORD
that TENANT'S execution of this lease by the partner or partners so signing is
in accordance with its partnership documents.
SECTION 14. NO OPTION
The submission of this lease for examination does not constitute a
reservation of or option for the PREMISES or any other space within the shopping
Center and shall vest no right in either party. This lease will become
effective as a lease only upon the execution and delivery thereof by the parties
hereto.
SECTION 15. ARTICLE AND SECTION HEADINGS
Article and section headings are inserted only as a matter of convenience
and for reference and in no way define, limit or describe the scope or intent of
this lease nor in any way affect this lease.
SECTION 16. SEVERABILITY
In the event that any portions, articles or sections of this lease are
rendered invalid by the decision of any court or by the enactment of any law,
ordinance or regulation, such provision of this lease will be deemed to have
never been included therein and the balance of this lease shall continue in
effect in accordance with its terms.
SECTION 17. HAZARDOUS MATERIALS
TENANT shall not, without LANDLORD'S prior written consent, keep in, on
or about the PREMISES, Common Areas or Shopping Center, for use, disposal,
generation, transportation, storage, treatment or sale, any Hazardous
Materials. "Hazardous Materials" means and includes any materials (or
components thereof) now or hereafter designated and/or regulated as
hazardous, dangerous, toxic or harmful under Governmental Regulations.
"Governmental Regulations" means
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and includes any provisions of law, statutes, ordinances, rules, regulations,
permits, licenses, judgments, writs, injunctions, decrees, orders, awards and
standards now or hereafter in effect or promulgated by any federal, state or
local government or by any court, agency, instrumentality, regulatory
authority or commission of any of the foregoing concerning health, safety and
the protection of the environment or the use, disposal, generation,
transportation, storage, treatment or sale of Hazardous Materials. If TENANT
desires to use, dispose of, generate, transport, store, treat or sell any
Hazardous Materials, then, in each such instance, TENANT shall first complete
and submit to LANDLORD for LANDLORD'S review a Material Profile Sheet in the
form attached hereto as Exhibit F, as the same may be revised from time to
time in LANDLORD'S discretion. Notwithstanding anything herein to the
contrary, TENANT may, without LANDLORD'S consent and without completing the
Material Profile Sheet, sue, store, and dispose of cleaning solvents in, on
or about the PREMISES, provided, however, that each such cleaning solvent is
of a type customarily used in the shopping center industry for maintenance of
retail stores, in a quantity no greater than the amount that can be utilized
in, on or about the PREMISES within a thirty (30) calendar day period, and is
used, disposed and stored in compliance with any Governmental Regulations.
Each Material Profile Sheet submitted by TENANT shall be accompanied by
copies of all permits required under applicable Governmental Regulations for
TENANT'S proposed use, disposal, generation, transportation, storage, treatment
or sale of any Hazardous Materials at the PREMISES. TENANT shall submit a new
Material Profile Sheet whenever it proposes to use, dispose of, generate,
transport, store, treat or sell a new Hazardous Material at the PREMISES, or
when it proposes to expand during any thirty (30) calendar day period, the
volume of existing Hazardous Materials to be used, disposed of, generated,
transported, stored, treated or sold at the PREMISES by ten percent (10%) of the
monthly volume originally consented to by LANDLORD. If LANDLORD in its sole
discretion finds the information set forth on the Material Profile Sheet
acceptable, LANDLORD shall delivery its written consent to TENANT. With respect
to any such Hazardous Material consented to by LANDLORD, TENANT shall:
(i) Comply with all applicable Governmental Regulations with respect to
such Hazardous Materials;
(ii) Allow LANDLORD'S agent or representative to come on the PREMISES at
all times to check all conditions relating to the Hazardous Materials;
(iii) Submit to LANDLORD immediately after receipt true and correct
copies of any notice, inquiry or order issued by any authority pursuant to
Governmental Regulations investigating or citing any actual or alleged failure
to comply with any Governmental Regulations respecting such Hazardous Materials,
or seeking any cessation of activity or any corrective action in connection with
the use, disposal, generation, transportation, storage, treatment or sale of
such Hazardous Materials; and
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(iv) Within five (5) calendar days of LANDLORD'S request, submit written
reports to LANDLORD regarding TENANT'S use, disposal, generation,
transportation, storage, treatment or sale of Hazardous Materials and provide
evidence satisfactory to LANDLORD of TENANT'S compliance with all applicable
Governmental Regulations.
If TENANT keeps in, on or about the PREMISES, Common Areas and/or the
Shopping Center any Hazardous Materials for use, disposal, generation,
transportation, storage, treatment or sale, then, in addition to any and all
other conditions and restrictions which LANDLORD may impose, LANDLORD shall have
the right to require TENANT to purchase environmental impairment liability
insurance with a company or companies satisfactory to LANDLORD, affording
coverage of no less than One Million Dollars ($1,000,000.00) per occurrence or
such greater amount as LANDLORD shall determine in its sole discretion.
TENANT'S policy shall name LANDLORD, The Richard E. Jacobs Group, Inc., and
LANDLORD'S management company (identified in Article 9, Section 2) as additional
insureds and shall bear endorsements to the effect that the insurer agrees to
notify LANDLORD not less than thirty (30) calendar days in advance of any
modifications or cancellation thereof.
TENANT shall be fully and completely liable to LANDLORD for any and all
cleanup costs to ensure that anything contaminated with or by the Hazardous
Materials be removed from the PREMISES, Common Areas and/or the Shopping Center,
and that the PREMISES, Common Areas and/or the Shopping Center be restored to a
clean, neat, attractive, healthy, sanitary and non-contaminated condition, and
any and all other charges, fees and penalties (civil and criminal) imposed by
any authority pursuant to Governmental Regulations with respect to TENANT'S use,
disposal, generation, transportation, storage, treatment or sale of Hazardous
Materials, in, on or about the PREMISES or the Shopping Center.
TENANT shall indemnify, defend and save LANDLORD, and its contractors,
agents, employees, partners, officers, directors and mortgagees, if any,
harmless from any and all of the costs, fees, penalties, liabilities, charges,
damages (including, without limitation, diminution in value), attorneys' fees
and other costs incurred or charged as a result of TENANT'S use, disposal,
generation, transportation, storage, treatment or sale of Hazardous Materials
including, without limitation, costs and expenses, incurred in connection with
any investigation of site conditions or any cleanup, remedial, removal or
restoration work to ensure that anything contaminated with or by the Hazardous
Materials be removed from the PREMISES, Common Areas and/or the Shopping Center,
and that the PREMISES, Common Areas and/or the Shopping Center be restored to a
clean, neat, attractive, healthy, sanitary and non-contaminated condition.
With respect to any known or subsequently discovered noncompliance by
TENANT with any Governmental Regulations regarding Hazardous Materials, and
without in any way limiting the scope of TENANT'S obligations under the
indemnification provisions of this Section, as between TENANT and LANDLORD,
TENANT will be responsible for all investigations, studies, cleanup, corrective
action or response or remedial action required by any local, state or federal
government agency now or hereafter authorized to regulate environmental matters,
or by any Governmental
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Regulations; provided, however, that TENANT shall secure LANDLORD'S prior
written approval of any cleanup, corrective action or response o remedial
action that TENANT plans to conduct at the Shopping Center and TENANT shall
at its expense be responsible for hiring properly licensed contractors,
approved by LANDLORD and insured in accordance with LANDLORD'S requirements,
to complete such work. TENANT shall deliver copies of all licenses and
permits to LANDLORD. LANDLORD shall have the right to have a representative
present during such work and TENANT shall comply with all requirements of
LANDLORD with respect to such work. In the event TENANT fails to complete an
investigation or study and/or fails to cause the cleanup, corrective action
or response or remedial action to ensure that anything contaminated with or
by the Hazardous Materials be removed from the PREMISES, Common Areas and/or
the Shopping Center, and that the PREMISES, Common Areas and/or the Shopping
Center be restored to a clean, neat, attractive, healthy, sanitary and
non-contaminated condition, LANDLORD may perform such work at the expense of
TENANT, which sum will constitute Additional Rent payable by TENANT to
LANDLORD upon billing by LANDLORD.
Upon TENANT'S default under this Section, in addition to and
notwithstanding anything to the contrary set forth in this lease, LANDLORD shall
be entitled to the following rights and remedies:
(a) At LANDLORD'S option, to terminate this lease immediately (which
termination would not, however, terminate or diminish TENANT'S obligations and
liability under this Section 17); and
(b) To recover any and all damages associated with the default, including,
but not limited to cleanup costs (to ensure that anything contaminated with or
by the Hazardous Materials be removed from the PREMISES, Common Areas and/or the
Shopping Center, and that the PREMISES, Common Areas and/or the Shopping Center
be restored to a clean, neat, attractive, healthy, sanitary and non-contaminated
condition) and charges (including replacement of contaminated materials or
structures with new materials or structures, as the case may be), civil and
criminal penalties and fees, loss of business and sales by LANDLORD and other
tenants of the Shopping Center, diminution in value, any and all damages and
claims asserted by third parties and LANDLORD'S attorneys' fees and costs.
TENANT represents and warrants to and covenants with LANDLORD that all
materials used to construct the PREMISES and all equipment, trade fixtures and
personal property therein shall be completely free of asbestos and asbestos
containing materials (collectively "ACM") and that no part of the PREMISES,
including, but not limited to the walls, ceilings, flooring or pipes, shall be
wrapped, insulated, fireproofed, glued or surfaced with any ACM.
At the end of this lease, TENANT will surrender the PREMISES to LANDLORD
free of any and all Hazardous Materials (including ACM) and in compliance with
all Governmental Regulations regarding Hazardous Materials.
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Any action, consent, review or inaction by LANDLORD under this Section 17,
including, but not limited to LANDLORD'S review or approval of: (i) TENANT'S
use, disposal, generation, transportation, storage, treatment or sale of
Hazardous Materials (as set forth on any Material Profile Sheet submitted by
TENANT); or (ii) any cleanup, corrective action or response or remedial action
that TENANT plans to conduct at the Shopping Center, shall create no
responsibility or liability on the part of LANDLORD for compliance with
Governmental Regulations nor shall LANDLORD be responsible or liable to perform
TENANT'S obligations under this Section 17, all of which shall be TENANT'S sole
responsibility.
SECTION 18. DISCOVERY OF ASBESTOS CONTAINING MATERIAL IN PREMISES
(a) In the event TENANT discovers asbestos containing material ("ACM") in
the PREMISES during its initial construction of the PREMISES pursuant to
Exhibits C and/or C-1 hereof, TENANT shall immediately cease any work which may
disturb the ACM and (no later than twenty-four [24] hours after such discovery)
notify LANDLORD. In the event the ACM was installed in the PREMISES by LANDLORD
or any predecessor in title and/or a prior tenant, other than TENANT (an
affiliate of TENANT, or an assignor from which TENANT has taken its interest),
LANDLORD shall, at its expense, remove, transport and dispose of the ACM or, at
LANDLORD'S option encapsulate the ACM, to the extent required by and in
accordance with all applicable Governmental Regulations (collectively called
"abatement"). In the event TENANT has not previously occupied the PREMISES, the
time period allocated for TENANT'S construction of the PREMISES, which is set
forth in Article 1, Section 1(e), and the Rent Commencement Date and attendant
obligations, shall be extended for the number of days equal to the number of
days from the date of TENANT'S notice through the date LANDLORD has completed
the removal of the ACM from the PREMISES or the encapsulation thereof to the
extent required by and in accordance with all applicable Governmental
Regulations. In the event TENANT'S construction is pursuant to Exhibit C-1 and
TENANT did not install such ACM in the PREMISES, TENANT shall receive an
abatement of Fixed Minimum Rent if TENANT is precluded from doing business
during the removal of the ACM from the PREMISES or the encapsulation thereof to
the extent required by and in accordance with all applicable Governmental
Regulations. TENANT agrees that LANDLORD'S liability to TENANT in connection
with the presence of ACM in the PREMISES shall be limited to the cost of
abatement, and TENANT hereby waives any claims against LANDLORD, and further
will indemnify LANDLORD and hold LANDLORD harmless from claims which might arise
from TENANT'S contractor(s) or otherwise for any delay in TENANT'S construction
schedule which is or might be attributable to LANDLORD'S compliance herewith.
LANDLORD shall notify TENANT or TENANT'S contractor of the projected completion
date of its work, or promptly upon completion thereof. For purposes of this
Section, notice shall be deemed delivered when given orally by LANDLORD or
TENANT to the other party; provided, however, that such notice shall thereafter
promptly be confirmed in writing.
(b) Subsequent to the initial construction required under Exhibits C
and/or C-1 hereof, if TENANT elects or is required to repair or make alterations
during the term of this lease, TENANT must give LANDLORD thirty (30) calendar
days prior notice of all such work by TENANT and
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obtain LANDLORD'S consent where necessary under the terms of this lease. In
the event TENANT discovers ACM in the PREMISES, TENANT shall immediately
cease any work which may disturb the ACM and (no later than twenty-four [24]
hours after such discovery) notify LANDLORD.
(i) In the event TENANT'S work is pursuant to repairs which are mandatory
under this lease and the ACM was installed in the PREMISES by LANDLORD or any
predecessor in title and/or a prior tenant, other than TENANT (an affiliate of
TENANT, or an assignor from which TENANT has taken its interest), then LANDLORD
shall at its expense cause the abatement of the ACM.
(ii) In the event TENANT'S work is pursuant to (aa) repairs which are
mandatory under this lease and the ACM was installed in the PREMISES by TENANT
(an affiliate of TENANT, or an assignor from which TENANT has taken its
interest); (bb) voluntary alterations or voluntary remodeling of the PREMISES;
or (cc) in the event TENANT shall be vacating the PREMISES and there remains ACM
installed in the PREMISES by TENANT (an affiliate of TENANT, or an assignor from
which TENANT has taken its interest), then TENANT shall at its expense be
responsible for hiring properly licensed contractors, approved by LANDLORD and
insured in accordance with LANDLORD'S requirements, to cause the removal of the
ACM, and TENANT shall delivery copies of all licenses and permits to LANDLORD.
LANDLORD shall have the right to have a representative present during such
removal, and TENANT shall comply with all requirements of LANDLORD with respect
to such removal. In the event TENANT fails to cause the removal of such ACM,
LANDLORD may perform such removal at the expense of TENANT, which sum will
constitute Additional Rent payable by TENANT to LANDLORD upon billing by
LANDLORD and shall survive the termination, cancellation or surrender of this
lease.
(c) It is understood and agreed that neither (i) the presence of ACM in
the PREMISES, and/or the Shopping Center, nor (ii) the abatement of the ACM by
TENANT, by other tenants in the Shopping Center, or by LANDLORD shall be deemed
an eviction or disturbance of TENANT nor shall TENANT be entitled to an
abatement of Rent (except as otherwise set forth herein) or other damages for
any injury or inconvenience occasioned thereby. Any work undertaken by LANDLORD
as set forth above shall be undertaken in a manner so as to cause as little
inconvenience to TENANT as is reasonably possible.
SECTION 20. SURVIVAL
All obligations of TENANT under this lease shall survive the expiration or
earlier termination of this lease.
In Testimony Whereof, LANDLORD and TENANT have caused this lease to be
signed as of the day and year first above written.
Witnesses as to LANDLORD ___________________________
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_________________________________ LANDLORD: Jefferson Mall Company
By: The Richard E. Jacobs Group,
Inc., Agent
Witnesses as to TENANT By:________________________________
_________________________________ By_________________________________
_________________________________ TENANT: Active Ankle Systems, Inc.
____________________________________
____________________________________
State of Ohio )
) ss:
County of Cowhage )
Before me, a Notary Public, in and for said County and State, personally
appeared the above named _____________________________ and
___________________________, to me known to be the ____________________________
and __________________________ respectively of The Richard E. Jacobs Group,
Inc., the corporation which executed the foregoing instrument, as Agent, who
acknowledged that they did sign the foregoing instrument for, and on behalf of
said corporation as such officers, respectively, being thereunto duly authorized
by its board of directors; that the same is their free act and deed as such
officers and the free act and deed of said corporation.
In Testimony Whereof, I have hereunto set my hand and official seal at
Cleveland, Ohio this ____ day of ______________, 19___.
____________________________________
NOTARY PUBLIC
____________________________________
Print, Type or Stamp Commissioned Name
MY COMMISSION EXPIRES:_____________
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State of _____________)
) ss:
County of ___________ )
Before me, a Notary Public, in and for said County and State, personally
appeared the above named ____________________ and ______________________, to me
known to be the ___________________________ and _________________________
respectively of Active Ankle Systems, Inc., the corporation which executed the
foregoing instrument, who acknowledged that they did sign and seal the foregoing
instrument for, and on behalf of said corporation, being thereunto duly
authorized by its board of directors; that the same is their free act and deed
as such officers and the free act and deed of said corporation.
In Testimony Whereof, I have hereunto set my hand and official seal at
______________ ____________________________ this _____ day of
_______________________, 19____.
______________________________________
NOTARY PUBLIC
______________________________________
Print, Type or Stamp Commissioned Name
MY COMMISSION EXPIRES: ____________
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ADDENDUM NO. 1
UTILITY SERVICES AND CHARGES
1. GAS SERVICE AND CHARGES. If the serving utility shall make gas
service available to the Shopping Center and TENANT has received LANDLORD'S
approval for gas usage, TENANT shall at its expense procure a meter from such
serving utility, furnish and install all required piping and equipment to extend
service from LANDLORD'S service point to the PREMISES and shall pay all charges
for such service directly to the serving utility. The design and method of
extension of service referred to herein shall be in accordance with all
governing building codes and subject to LANDLORD'S prior approval.
2. ELECTRICAL SERVICE AND CHARGES. TENANT shall install a complete
electrical distribution system and shall provide all equipment and fixtures
required for TENANT'S use strictly in accordance with the provisions of
Exhibit C. If the local serving utility shall directly serve the PREMISES with
electric service, TENANT shall, at its expense procure a meter from such serving
utility and shall pay all charges for such service directly to the serving
utility. If LANDLORD, who shall have the option to do so, shall elect to supply
electric service, TENANT shall purchase such service from LANDLORD and shall pay
LANDLORD therefor an Electrical Energy Service Charge based on TENANT'S
consumption at rates, including any established minimum rate or service charge,
that would be applicable if TENANT were obtaining electric service directly
from the serving utility. TENANT'S consumption of electrical service shall be
measured by one or more of the following methods, depending on the location of
the Shopping Center and the applicable utility laws and regulations: (i) by a
meter to be furnished and installed by LANDLORD and read monthly by LANDLORD,
(ii) by a meter to be furnished and installed by LANDLORD which shall be used
for check metering (monitoring) of electrical service, which may be undertaken
at the request of TENANT, but not more frequently than once a year, unless
TENANT has varied its equipment, service, use or load demand, or (iii) on the
basis of a load demand and usage to be determined by LANDLORD from an
Electrical Data Tabulation form to be provided in LANDLORD'S Drawings and
completed by TENANT. In the event that TENANT shall fail to complete the
aforesaid form, LANDLORD shall establish and TENANT hereby agrees to pay the
resulting Electrical Energy Service Charge. TENANT'S Electrical Energy Service
Charge, once determined shall be deemed to be Additional Rent and shall be
subject to adjustment as provided in Exhibit D. At its option, LANDLORD may
elect to provide monthly statements of TENANT'S Electrical Energy Service Charge
or may elect to establish an annual Electrical Energy Service Charge, in which
event TENANT shall pay to LANDLORD, on or before the first day of each month,
one twelfth (1/12) of such annual Electrical Energy Service Charge.
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3. WATER AND SEWER SERVICE CHARGES. In the event a local serving utility
shall provide water and/or sewer service directly to the PREMISES, TENANT shall
procure a meter from such serving utility and shall pay all charges (including
any and all tap-in or initial connection fees) for such service directly to the
serving to the PREMISES, pay an fees or charges on TENANT'S behalf, or in the
event that no water charges or sewer charges are levied or charged specifically
against the PREMISES, TENANT shall pay to LANDLORD water and/or sewer charges
(including any and all tap-in or initial connection fees) in an amount equal to
rates then in effect for the local serving utility based upon (i) the current
minimum demand rate, or (ii) at LANDLORD'S sole option, (a) consumption by
TENANT within the PREMISES determined by a meter utilized at such times and for
such periods as may be permitted by the local utility or (b) an alternate method
of calculating consumption applied uniformly to all Mall Store tenants receiving
such service.
4. TELEPHONE SERVICE AND CHARGES. If telephone service is desired,
TENANT shall be responsible for the obtaining and installation of such service,
equipment, and fixtures in accordance with the provisions of Exhibit C. If the
local serving utility shall directly serve the PREMISES with telephone service,
TENANT shall, at its expense, pay all charges for such service directly to the
serving utility. If LANDLORD, who shall have the option to do so, shall elect
to supply telephone service, TENANT shall purchase such service from LANDLORD
and shall pay to LANDLORD a Telephone Service Charge that would be similar to
that paid if TENANT were obtaining telephone service directly from the serving
utility. At its option, LANDLORD may elect to provide monthly statements of
TENANT'S Telephone Service Charge or may elect to establish an annual Telephone
Service Charge in which event TENANT shall pay to LANDLORD on or before the
first day of each month, one twelfth (1/12) of such annual Telephone Service
Charge.
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ACTIVE ANKLE SYSTEMS, INC.
JEFFERSON MALL/UNIT #B316
DBA: ACTIVE ANKLE SYSTEMS
ADD: 00000070.BSH
ADDENDUM NO. 2
ADDENDUM TO ARTICLE 8, SECTION 3(G)
TENANT agrees to pay to LANDLORD as its advertising requirement, an amount
equivalent to Three Thousand One Hundred Eighty Seven and 08/100 Dollars
($3,187.08) per Lease Year and a proportionate part thereof for any Partial
Lease Year. Said amount shall be due and payable in equal monthly installments
of Two Hundred Sixty Five and 59/100 Dollars ($265.59) in advance on the first
day of each and every month during the term of this lease. Said amount shall be
adjusted at the end of the First Lease Year and annually thereafter in
accordance with the Consumer Price Index provision set forth in Article 5,
Section 5(b). Said amount shall be expended by or under the direction of
LANDLORD or its designated representative toward advertising and promotional
activities for the Shopping Center, as LANDLORD in it sole discretion shall
determine. TENANT understands that this covenant is a material consideration to
LANDLORD and agrees that in the event that TENANT fails or refuses to comply
with such minimum advertising requirement, recognizing the difficulty of
determining the actual damage sustained by LANDLORD and other merchants within
the Shopping Center, TENANT will pay to LANDLORD as liquidated damages to be
used for advertising and promotion, an amount equal to the unpaid amount
together with an amount equal to fifty percent (50%) of such unpaid advertising
contribution as an offset against LANDLORD'S administrative expenses resulting
from such failure to contribute for each time which TENANT failed or refused to
contribute as provided herein, such amount to be payable to LANDLORD upon
demand. In the event TENANT continuously fails or refuses to comply with such
minimum advertising requirement, LANDLORD shall be entitled to terminate this
lease. TENANT agrees to use the name of the Shopping Center to refer to the
location of the PREMISES in all local or metropolitan area advertising and
further agrees to include reference to the PREMISES in all advertisements in
which the identity of any other local business activity of like character
conducted by TENANT may be mentioned.
51
