SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997
or
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
to
Commission File Number:
1-13792
------------------------
GLOBAL DIRECTMAIL CORP
(Exact name of registrant as specified in its charter)
DELAWARE 11-3262067
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22 HARBOR PARK DRIVE
PORT WASHINGTON, NEW YORK 11050
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (516) 625-1555
---------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
Common Stock, par value $ .01 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best knowledge of the registrant, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 23, 1998 was approximately $184,964,312. For purposes
of this computation, all executive officers and directors of the Registrant and
all parties to the Stockholders Agreement dated as of June 15, 1995 have been
deemed to be affiliates. Such determination should not be deemed to be an
admission that such persons are, in fact, affiliates of the Registrant.
The number of shares outstanding of the registrant's common stock, as of
March 23, 1998, was 38,231,990 shares.
Documents incorporated by reference: The definitive Proxy Statement of
Global DirectMail Corp relating to the 1998 Annual Meeting of Stockholders is
incorporated by reference in Part III hereof.
<PAGE>
TABLE OF CONTENTS
Part I
Item 1. Business..........................................................1
General..........................................................1
Products.........................................................2
Sales and Marketing..............................................3
Distribution Centers.............................................5
Suppliers........................................................5
Management Information Systems...................................6
Research and Development.........................................7
Competition......................................................7
Employees........................................................9
Environmental Matters............................................9
Item 2. Properties.......................................................10
Item 3. Legal Proceedings................................................10
Item 4. Submission of Matters to a Vote
of Security Holders............................................10
Part II
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters............................................11
Item 6. Selected Financial Data..........................................11
Item 7. Management's Discussion and
Analysis of Financial Condition
and Results of Operations......................................13
Item 7A.Quantitative and Qualitative
Disclosures About Market Risk..................................17
Item 8. Financial Statements and
Supplementary Data.............................................18
Item 9. Changes in and Disagreements
With Accountants on Accounting
and Financial Disclosure.......................................18
Part III
Item 10. Directors and Executive Officers of the Registrant..............18
Item 11. Executive Compensation..........................................18
Item 12. Security Ownership of Certain Beneficial
Owners and Management..........................................18
Item 13. Certain Relationships and Related Transactions..................18
Part IV
Item 14.Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................18
Signatures......................................................20
<PAGE>
PART I
UNLESS OTHERWISE INDICATED, ALL REFERENCES HEREIN TO "GLOBAL DIRECTMAIL
CORP" ("GLOBAL" OR THE "COMPANY") INCLUDE ITS SUBSIDIARIES AND PREDECESSORS.
GLOBAL IS THE SUCCESSOR TO A NUMBER OF CORPORATIONS (THE "PREDECESSOR
COMPANIES") THAT OPERATED WITH RELATED OWNERSHIP.
ITEM 1. BUSINESS.
GENERAL
Global is a direct marketer of over 40,000 products including brand name
and private label personal desktop computers ("PCs"), notebook computers,
computer related products, office products and industrial products in North
America and Europe. In addition, the Company assembles build-to-order PCs in
North America, under the brand names MIDWEST MICRO(R), ULTRA(TM), TIGER(R) and
SYSTEMAX(TM). The Company emphasizes a broad selection of in-stock products,
frequent mailings of a variety of distinctively branded full color catalogs,
extensive customer service and prompt, complete order fulfillment. The Company's
portfolio of catalogs includes such established brand names as GLOBAL(TM),
MISCO(R), HCS GLOBAL(TM), HCS MISCO(TM), ARROWSTAR(TM), DARTEK(R), POWER UP!(R),
TIGER(R), 06 (TM), MIDWEST MICRO(TM) and INFOTEL(TM). GLOBAL HAS grown rapidly
as a result of internal growth and strategic acquisitions while maintaining a
high level of profitability. The Company's net sales have increased at a
compound annual growth rate of 31% to $1.15 billion in 1997 from $393.6 million
in 1993. During this same period, income from operations increased at a compound
annual growth rate of 19% from $29.8 million to $59.3 million.
The Company has positioned itself as a "corporate supplier" offering a
broad spectrum of business products. The Company believes that direct marketing
is the most effective and convenient distribution method to reach business
customers who place many small orders requiring a wide selection of products.
Computers and computer related products accounted for 80% of the Company's net
sales in 1997.
The Company markets its products to businesses through mailings of its
"full-line" and specialty catalogs and through outbound telemarketing. The
Company targets individuals at major account customers(more than 1,000
employees), mid-sized businesses (20 to 1,000 employees), small office/home
office customers ("SOHO") and value added resellers ("VARs"). VARs select,
install and maintain PCs and networks for business customers who do not have
their own computer technicians. Catalog mailings increased from approximately 98
million catalogs comprising 18 different titles in 1993 to approximately 162
million catalogs comprising 41 different titles in 1997. At December 31, 1997,
the Company had 1.8 million "active" customers (defined as individuals that have
purchased from the Company within the proceeding 12 months) and combined
customer and prospect files of more than 40 million names.
The Company operates in eight locations in North America. The Company's
North American operations contributed 76% of net sales in 1997. For some of the
Company's businesses, certain functions, such as merchandising, marketing,
purchasing and information systems, are performed centrally.
European operations, which represented 24% of net sales for 1997, are
generated from seven sales and distribution centers located across Europe: two
in the United Kingdom, and one each in France, Germany, Italy, Spain and the
Netherlands. For a more detailed geographic breakdown of the Company's
operations, see Note 10 to the Consolidated Financial Statements.
Most of the Company's products are carried in stock, and orders for such
products are fulfilled directly from the Company's distribution centers,
typically on the day on which the order was received. The strategic location of
the Company's distribution centers allows next day or second day delivery via
low cost ground carriers throughout the United States, Canada and Western
Europe. The strategic locations in Europe have enabled the Company to market
into four additional countries with limited incremental investment.
RECENT ACQUISITIONS
During 1997 the Company completed two strategic acquisitions. During the
first quarter, the Company acquired the assets of 06 Software Centre Europe B.V.
("06"), a direct marketer of computers and computer products in the Netherlands.
Although 06 does not materially increase the Company's European operations, it
adds an additional market to that region, bringing to 10 the number of countries
serviced there.
At the end of the third quarter the Company acquired the assets of Infotel,
Inc. ("Midwest Micro"), an assembler and direct marketer of private label
build-to-order PCs and a direct marketer of brand name PCs, notebook computers
and computer related products. See Footnote 3 to the Consolidated Financial
Statements.
PRODUCTS
In positioning itself as a "corporate supplier", the Company has
consistently expanded the breadth of its product offerings in order to fulfill
an increasingly wide range of business product needs. In total, Global offers
over 40,000 brand name and private label products.
The Company's computer related products include: supplies such as laser
printer toner cartridges, ink jet printer cartridges, and paper; media such as
floppy disks and magnetic tape cartridges; peripherals such as hard disk drives
and memory upgrades; data communication and networking equipment; ergonomic
accessories such as adjustable monitor support arms and antiglare screens;
packaged software; and hardware. Computer sales include a wide array of
build-to-order PCs complimented with offerings of the most popular brand named
PCs and notebook computers.
Office products include furniture, chairs, small office machines and
related supplies. The Company's industrial product lines focus primarily on
storage equipment such as metal shelving, bins, lockers, light material handling
equipment such as hand carts and hand trucks and consumable industrial products
such as first aid items, safety items, protective clothing and OSHA compliance
items. The table below summarizes the Company's mix of sales by product
category:
PRODUCT TYPE - YEAR ENDED DECEMBER 31 (PERCENTAGE OF TOTAL SALES)
1997 1996 1995
---- ---- ----
Computer and Computer Related Products ..... 80% 75% 66%
Office Products and Industrial Products...... 20 25 34
-- -- --
Total ................................. 100% 100% 100%
=== === ===
Historically, the Company focused primarily on non-branded or private label
products. Although the Company continues to experience strong growth in its
private label products, in recent years the Company made the strategic decision
to leverage its distribution and marketing strengths into the market for high
volume brand name products which the Company believes offer significant
opportunities to increase sales. In 1993 the Company expanded its offerings of
brand name computer related products, including peripherals, data communications
and networking equipment, software and supplies. In 1995 the Company further
expanded its offering of brand name products to include notebooks, desktops and
servers. In addition, in 1997 the Company entered the "build to order" PC market
through the acquisition of Midwest Micro. These strategies have impacted the
overall gross profit margin percentages as those incremental sales typically
have lower gross profit margin percentages than many of the Company's other
products. A significant amount of the decrease in gross profit margin has been
offset by reduced catalog production costs resulting from increased levels of
vendor supported advertising, improved catalog management, and increased cost
efficiencies.
SALES AND MARKETING
The Company produces a total of 41 "full-line" and targeted specialty
catalogs under distinct titles. "Full- line" computer related product catalogs
offer products such as computer supplies and magnetic media, peripherals, data
communication, networking and power protection equipment, ergonomic accessories,
furniture, software, PCs and hardware. "Full-line" industrial products catalogs
offer products such as material handling products and industrial supplies.
Specialty catalogs contain more focused product offerings and are targeted to
individuals most likely to purchase from such catalogs. Global mails multiple
catalogs to many individuals at each location, providing the Company with
multiple points-of-entry into a business location. Once a prospect purchases a
particular product, however, the Company's customers have exhibited strong brand
loyalty resulting in limited customer overlap among the Company's various
catalog brands. This multiple brand strategy, and the accompanying customer
exposure to the Company's products, is a crucial factor in the Company's
strategy to increase sales volume through broader market coverage and improve
the productivity of its customer file through more focused marketing.
Global has invested consistently and aggressively in developing a
proprietary customer and prospect database. This database, which includes more
than 40 million names, represents a major asset of the Company. The Company
considers its customers to be the various individuals that work within an
organization rather than the business location itself. The customer and prospect
database includes detailed information, including company size, number of
employees, industry, various demographic and geographic characteristics and
purchase history. Management believes that this variety and depth of information
on its customers provides Global a significant competitive advantage.
During 1997, the Company distributed approximately 162 million catalogs of
which approximately 125 million catalogs were mailed in North America and
approximately 37 million catalogs were distributed in Europe. At December 31,
1997, the Company had 1.8 million "active" customers (defined as individuals
that have purchased from the Company within the preceding 12 months).
In its mailings, the Company seeks to maximize the response rates of its
catalogs. The Company calculates response rate as total catalogs mailed for the
period divided by the total number of orders entered for the same period. The
following table shows the approximate number of catalogs distributed by the
Company and the catalog response rates:
CATALOGS DISTRIBUTED - YEAR ENDED DECEMBER 31
(IN MILLIONS EXCEPT RESPONSE RATES) 1997 1996 1995
----------------------------------- ---- ---- ----
North America.................................... 125 120 90
Europe........................................... 37 40 32
---- ---- ----
Total........................................ 162 160 122
====== ====== ======
Response rates................................... 2.18% 2.12% 2.08%
The Company's in-house staff designs all of the Company's catalogs. Catalog
paper is purchased from various sources and has historically been subject to
price fluctuations. The printing of the catalogs is done by several sources
under fixed pricing arrangements. In-house catalog production helps reduce
overall catalog expense and shortens catalog production time. This allows the
Company the flexibility to alter its product offerings and pricing and refine
its catalog formats more quickly.
INBOUND SALES
Global's catalogs generate calls to the in-bound sales group. Sales
representatives use the capabilities of the Company's systems to fulfill orders
and explore additional customer product needs. Each sales representative has
immediate access to customer files, including usage and billing information, and
real-time inventory levels by distribution center. Using this data, inbound
sales personnel are also prompted by their computer screen to cross-sell
selected products and obtain specific information relating to customer-specific
purchasing habits and product needs.
MAJOR ACCOUNT MANAGEMENT
The Company has established a major accounts management program focused on
expanding penetration of larger businesses. In the United States, Global has the
ability to provide such customers with EDI ordering and customized billing
services, customer savings reports and stocking of specialty items specifically
requested by customers. The Major Account sales force's goal is to increase the
purchasing productivity of current customers and to actively solicit newly
targeted prospects to become customers.
OTHER MARKETING
The Company also uses targeted fax campaigns, special single-product "solo"
mailings and the Internet to generate incremental sales to business customers.
During 1997, the Company initiated Internet marketing with three build-to-order
PC configurator websites.
CUSTOMER SERVICE AND SUPPORT
Order entry and fulfillment occurs at each of the Company's 15 locations.
Global generally provides toll-free telephone number access to its customers.
The integration of the Company's call centers also provide some domestic
locations with telephone backup in the event of a disruption in phone service.
In addition to telephone orders, Global also receives orders by mail, by fax,
via electronic data interchange ("EDI") and on the Internet.
When an order is entered into the system, a credit check is performed, and,
if the credit is approved, the order is electronically transmitted to the
warehouse and a packing slip is printed for order fulfillment. Approximately 70%
of the Company's 1997 sales were on open account and the Company's bad debt
experience has traditionally been less than 1% of sales. Orders generally are
shipped by United Parcel Service in the United States and by similar national
small package delivery services in Europe, as well as by various freight lines
and local carriers. Air freight is also available. As a result of the regional
locations of the Company's warehouses, Global estimates that most customers
receive their orders (other than custom items, large furniture and large
industrial items shipped directly by the vendor) within one or two business days
of the order date. Customers are invoiced for merchandise, shipping and handling
promptly after shipment.
The Company conducts regular on-site training seminars for its sales
representatives and operates a separate customer service department which
responds to customer concerns. The Company also maintains a separate technical
support group dedicated to answering customer inquiries and assisting customers
with the operation of their products. Technical support questions are logged
into the computer, thus forming a database of commonly asked questions for each
product. This database helps sales representatives respond quickly to similar
questions from future customers and also allows product managers to monitor the
effectiveness of the information provided in the catalogs. The Company also
employs a fax-back system that allows customers to call directly into a computer
system that automatically faxes the requested information to the customer.
DISTRIBUTION CENTERS
NORTH AMERICA
The Company operates eight separate facilities in North America. Each sales
and distribution center has a general manager in charge of inbound sales,
outbound telemarketing, on-site operations, credit review, product fulfillment
and asset management.
Many of the facilities are linked by a wide area network management
information system. In the event of adverse delivery conditions (such as bad
weather) the Company can shift inbound calls and/or order fulfillment and
shipping to an alternative location. Management believes this provides Global
with important operating flexibility and protection from possible sales
interruptions for many of its North American businesses. See "Management
Information Systems."
A large number of the Company's products are carried in stock, and
consequently orders for such products are fulfilled from the distribution
center. Certain products (such as selected computer hardware and large furniture
and industrial items) are shipped directly by the supplier. The layout of the
Company's distribution centers is managed with a computer-based tracking system
which dictates the location of specific stock items. Individual product types
are consistently stocked in the same physical picking location, allowing ease of
picking and minimizing picking errors. Picking of products at the distribution
centers is done continuously throughout the day. Customer orders are packed and
shipped as they are received.
EUROPE
The Company has seven separate European market branch facilities in six
countries and a central office near London to direct their activities. The
central office is responsible for marketing support, catalog production,
financial reporting, logistics and computer programming support. In addition,
each market has a full service sales and distribution center to process orders
and reports to the respective country manager who has ultimate profit and loss
responsibility.
SUPPLIERS
In North America, the Company purchases the majority of its products and
components directly from manufacturers, except for certain peripherals, software
and hardware products which are purchased through wholesale distributors. In
Europe, products are sourced from a combination of local manufacturers and
wholesalers. Substantially all of the European catalog product content is
sourced in Europe. No single supplier accounted for more than 10% of Global's
total purchases in 1997.
Private label products are manufactured either by the Company or by third
parties to the Company's specifications. Many of these private label products
have been designed or developed by the Company's in-house research and
development team. See "Research and Development.
MANAGEMENT INFORMATION SYSTEMS
In North America, the Company operates a proprietary system that allows
centralized management of key management functions. These include communication
links between distribution centers, inventory and accounts receivable
management, purchasing, pricing, sales and distribution, and the preparation of
daily operating control reports which provide concise and timely information
regarding key aspects of its business. This proprietary management information
system enables the Company to enhance its flexibility by shipping customer
orders usually on a same-day basis, responding quickly to order changes and
providing a high level of customer service. The Company maintains a database of
over 40 million customer and prospect names and keeps records of historical
purchasing patterns in order to prompt sales personnel with product suggestions
to expand customer order values. In addition, the Company has developed a
customer prospecting function based upon geographic, economic and demographic
data which enables Global to utilize its information systems to maintain and
expand its customer data file. These applications enable the Company to achieve
cost savings, deliver extensive customer service and centrally manage its
operations.
In the United States, the Company's management information systems are
networked, real-time information systems. These allow each distribution center
to share information and monitor daily progress relating to sales activity,
credit approval, inventory levels, stock balancing, vendor returns, order
fulfillment and other measures of performance.
THE YEAR 2000 ISSUE
As is the case with virtually all companies and organizations, the Company
currently utilizes certain computer programs that store two digits in
identifying the year in the date field. Those programs were designed and
developed without considering the impact of the upcoming change in the century.
If not corrected those computer programs could fail or create erroneous results
by or at the year 2000.
The Company currently believes it will be able to modify or replace any
affected computer program in time to minimize any potential harmful effects on
operations. While it is not possible, at present, to give an accurate estimate
of the impact on the Company's operations or the cost of correcting the affected
computer programs, the Company expects that the impact and associated costs will
not be material to the Company's operations. The Company is in the process of
contacting customers and vendors to determine which of them is affected by the
year 2000 problem, and to what extent, in order to assess the potential impact
on the Company.
System maintenance and modification costs to existing computer programs
will be expensed as incurred. The costs associated with new computer programs
that are year 2000 compliant will be capitalized and amortized over the
software's expected useful life.
RESEARCH AND DEVELOPMENT
The Company's research and development team designs and develops products
for Global's private label program. The individuals responsible for research and
development have backgrounds in engineering and industrial design.
This in-house capability provides important support to the private label
program. Many of the Company's private label products were designed or developed
by the in-house research and development team. Examples of products designed
in-house include: furniture, ergonomic monitor support arms, printer and monitor
stands, wrist rests and other durable computer related products, storage racks
and shelving systems, various stock and storage carts, work benches, plastic
bins and shop furniture. The Company owns the tooling for many of these
products, including plastic bins, computer accessories, furniture, and metal
alloy monitor arms. See "Research and Development Costs" in Footnote 1 to the
Consolidated Financial Statements.
COMPETITION
COMPUTER RELATED PRODUCTS
The North American computer related products market is highly fragmented
and characterized by multiple channels of distribution, including direct
response (mail order) distributors, local and national retail computer stores
that carry computer supplies, computer resellers, mass merchants, computer
"superstores" and the Internet. The tremendous growth in the computer related
products market during the past 10 years has been accompanied by substantial
changes in the nature of product distribution and sales. The decentralization of
computers throughout factory, business, engineering and office environments has
made it increasingly difficult and expensive for many suppliers to use
traditional direct sales methods to locate users, initiate sales contacts and
effectively provide service to customers. Average order values also tend to be
smaller than in the past, reflecting individual requirements rather than the
greater needs traditionally associated with centralized data processing
departments. These changes in the structure of the computer related products
market have placed traditional distributors with direct sales forces at a
competitive disadvantage due to their cost structures and established selling
methods. As a result, direct marketers have been able to increase sales to the
larger businesses that have traditionally been served by contract stationers and
VARs. They have also been able to capture sales volume and market share from the
numerous small retail computer stores.
In Europe, the Company's major competitors are regional or country-specific
retail and direct-mail distribution companies. The Company's presence in seven
major European countries provides Global with the flexibility to purchase large
volumes centrally. In addition, the commonality of certain core pages of the
European catalogs provides for economies in catalog production. The Company
believes that these factors allow it to take advantage of cost savings not
available to many of its competitors in Europe.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
PCS AND NOTEBOOK COMPUTERS
The computer industry is fiercely competitive with many U.S., Asian and
European companies vying for market share. There are few barriers to the PC
market with PCs being sold through the direct market channel, directly from
manufacturers, computer superstores, mass merchants and over the Internet.
Timely introduction of new products or product features are critical elements to
maintaining a competitive advantage. Other competitive factors include product
performance, quality and reliability, technical service and customer support,
marketing and distribution and price. There can be no assurance that the Company
will be able to maintain or improve its current competitive position with
respect to any of these or other competitive factors. Some of the Company's
competitors have stronger brand-recognition, broader product lines and greater
financial, marketing, manufacturing and technological resources than the
Company. Additionally, the Company's results could also be adversely affected
should it be unable to implement effectively its technological and marketing
arrangements with other companies, such as Microsoft(R) and Intel(R).
OFFICE PRODUCTS
The distribution of office products in the United States is highly
fragmented, with no one participant having more than a 10% market share.
Sourcing of products from vendors and distributors also has been through a
highly-fragmented supplier base without volume discounts or central purchasing
efficiencies. Office products are typically sold through one of three channels:
retail outlets, contract stationers and direct mail. However, due to the rapid
growth of the office products market, competition and consolidation in this
market are increasing, particularly with respect to the SOHO and large corporate
(companies with over 1,000 employees) segments. Large contract stationers,
direct mail distributors and office products superstores have grown at the
expense of small independent retail dealers. The companies leading this
consolidation have not, however, captured a large market position with the
mid-sized facilities which the Company targets. The Company believes that this
lack of penetration results from the fact that office products superstores and
direct mail marketers have focused on serving the SOHO segment while contract
stationers have focused on serving the large corporate sector. The Company
believes that direct mail will continue to be a growing channel of distribution
for office products and that price, breadth of product line and customer service
will be key factors in the success of direct mail distribution of office
products. There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
INDUSTRIAL PRODUCTS
The market for the sale of industrial products in the United States is
highly fragmented and is characterized by multiple distribution channels such as
retail outlets, small dealerships, direct mail distribution and large warehouse
stores. Global also faces competition from manufacturers' own sales
representatives who sell industrial equipment directly to customers, and from
regional or local distributors. Many high volume purchasers, however, utilize
catalog distributors as their first source of product specifications. In the
industrial products market, customer purchasing decisions are, primarily, based
on price, product selection, product availability, level of service and
convenience. As is the case with the office products industry, the Company
believes that direct mail is one of the most effective and convenient
distribution methods to reach mid-sized facilities which place many small orders
and require a wide selection of products. In addition, because the industrial
product market is highly fragmented and generally less brand oriented, it is
well suited to private label products. The majority of the Company's industrial
products are high gross profit margin, private label products.
Competition, with respect to industrial products, in the United Kingdom is
similar to competition in the U.S. with the exception that most direct mail
companies in the United Kingdom drop ship the majority of their products from
the manufacturer, resulting in long delivery lead times. As Global intends to
stock the majority of its products, management believes it will have a
significant advantage over most of its direct mail competitors in the United
Kingdom.
There can be no assurance that the Company will be able to maintain or
improve its current competitive position with respect to any of these or other
competitive factors.
EMPLOYEES
As of December 31, 1997, the Company employed a total of 2,792 employees,
including 2,554 full-time and 238 part-time employees, of whom 2,137 were in
North America and 655 were in Europe.
None of the Company's North American employees is represented by a labor
union, except for approximately 60 warehouse and assembly employees in New York
who are covered by an "open-shop" agreement with the Company, which expires at
the end of 1998. These employees are not required to join the union. In Europe,
union membership and affiliations vary by country. In general, the European
unions tend to be national, rather than local, in scope and are industry
specific.
The Company considers its relationships with employees to be good and has
not experienced a work stoppage in 22 years.
ENVIRONMENTAL MATTERS
Under various national, state and local environmental laws and regulations
in North America and Europe, a current or previous owner or operator (including
the lessee) of real property may become liable for the costs of removal or
remediation of hazardous substances at such real property. Such laws and
regulations often impose liability without regard to fault. The Company leases
most of its facilities. In connection with such leases, the Company could be
held liable for the costs of removal or remedial actions with respect to
hazardous substances. Although the Company has not been notified of, and is not
otherwise aware of, any material environmental liability, claim or
non-compliance, there can be no assurance that the Company will not be required
to incur remediation or other costs in connection with environmental matters in
the future.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
See "Geographic Information" contained in Footnote 10 to the financial
statements.
ITEM 2. PROPERTIES.
The Company's primary facilities, which are leased except where otherwise
indicated, are as follows:
<TABLE>
<CAPTION>
APPROX EXPIRATION
FACILITY LOCATION SQ. FT. OF LEASE
<S> <C> <C> <C>
Headquarters, Sales and
Distribution Center, Catalog
Operations(1).............................Port Washington, NY 178,000 2007
Sales and Distribution Center(1)............Suwanee, GA 130,000 1999
Sales and Distribution Center...............Compton, CA 140,000 2007
Sales and Distribution Center...............Naperville, IL 241,000 2010
Sales and Distribution Center...............Holmdel, NJ 51,000 1999
Sales and Distribution Center...............Markham, Ontario 45,000 2005
Sales and Distribution Center...............Verrieres le Buisson, France 24,000 2000
Sales and Distribution Center...............Dreieich, Germany 55,000 2000
Sales and Distribution Center...............Madrid, Spain 35,000 2 months notice
Sales and Distribution Center...............Milan, Italy 80,000 1999
Sales and Distribution Center...............Greenock, Scotland 78,000 owned
Sales and Distribution Center...............Wellingborough, England 38,000 2013
Sales Center and Catalog Operations.........Miami, FL 32,000 2000
Sales Center................................Amstelveen, Netherlands 5,000 2000
Assembly, Sales and Distribution Center.....Fletcher, Ohio 185,000 owned
European Headquarters.......................Uxbridge, England 7,400 2005
- -----------
(1) Facilities leased from related party. See "Certain Relationships and
Related Transactions--Agreements-- Leases and Related Guarantees."
</TABLE>
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to various legal actions arising out of the normal
course of business, none of which is anticipated to have a material adverse
effect on the Company's financial position or results of operations.
On March 9, 1998 the Company filed suit in U.S. District Court (Eastern
District of New York) against a bankrupt supplier and its lenders seeking
monetary damages for breach of contract and warranty as well as a declaration
that the Company has certain legal and equitable rights of offset against
amounts otherwise due the supplier, including a contractual right to offset $4
million paid by the Company to one of the lenders under a letter of credit. The
Company believes that the ultimate outcome of this matter will not have a
material adverse effect on the Company's consolidated financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the quarter ended December 31, 1997, there were no matters submitted
to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the New York Stock Exchange
under the symbol "GML" since its initial public offering on June 26, 1995 (the
"IPO"). The following table sets forth the high and low sales price of the
Company's Common Stock as reported on the New York Stock Exchange for the
periods indicated.
1997 HIGH LOW
FIRST QUARTER.................................. 43 7/8 17
SECOND QUARTER................................. 26 1/4 13 1/8
THIRD QUARTER.................................. 27 3/4 20
FOURTH QUARTER................................. 22 3/8 15 5/8
1996
First quarter.................................. 35 24 1/4
Second quarter................................. 47 32 1/8
Third quarter.................................. 47 1/4 36 1/4
Fourth quarter................................. 52 1/4 39 1/4
On March 23, 1998, the last reported sale price of the Company's Common
Stock on the New York Stock Exchange was $1813/16 per share. As of March 23,
1998, the Company had 255 stockholders of record.
The Company has not paid any dividends since its initial public offering
and anticipates that all of its income in the foreseeable future will be
retained for the development and expansion of its business, and therefore does
not anticipate paying dividends on its Common Stock in the foreseeable future.
See "Certain Relationships and Related Transactions" for a description of the
Company's historical distributions.
On September 30, 1997 the Company acquired the assets of Midwest Micro for
approximately $40 million in cash and 375,000 shares of the Company's common
stock. These shares have not been registered with the Securities and Exchange
Commission as they were issued privately to Midwest Micro pursuant to the
private placement exemption provided in Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D promulgated thereunder.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information is qualified by reference to,
and should be read in conjunction with, the Company's Consolidated Financial
Statements and the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained elsewhere in this
report. The selected income statement data for the years ended December 31,
1997, 1996 and 1995 and the selected balance sheet data as of December 31, 1997
and 1996 is derived from the audited consolidated financial statements which are
included elsewhere herein. The selected balance sheet data as of December 31,
1995 is derived from the audited financial statements of the Company which are
not included herein. The selected balance sheet data as of December 31, 1994 and
1993 and the selected income statement data for the years ended December 31,
1994 and 1993 are derived from the audited financial statements of the
Predecessor Companies which are not included herein.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA:
(IN MILLIONS, EXCEPT PER COMMON SHARE DATA, NUMBER OF CATALOG TITLES AND NUMBER OF COUNTRIES)
YEAR ENDED DECEMBER 31 1997 1996 1995 1994 1993
---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales....................................... $ 1,145.4 $ 911.9 $ 634.5 $ 484.2 $ 393.6
Cost of sales................................... 879.8 662.3 437.2 318.5 244.5
----- ----- ----- ----- -----
Gross profit.................................... 265.6 249.6 197.3 165.7 149.1
Selling, general and
administrative expenses...................... 206.3 180.1 143.2 129.5 119.3
Income from operations.......................... 59.3 69.5 54.1 36.2 29.8
Interest income................................. 3.3 2.5 1.2 1.1 1.1
Interest expense................................ .4 .5 1.3 1.8 2.1
Income taxes.................................... 23.3 27.7 21.0(3) 14.0(3) 11.1(3)
Net income...................................... 38.8 43.7 33.1(3) 21.9(3) 17.4(3)
Net income per common share:
Basic....................................... $ 1.02 $ 1.16 $ .93(3) $ .65(3) $ .51(3)
Diluted..................................... $ 1.02 $ 1.15 $ .93(3) $ .65(3) $ .51(3)
Weighted average common shares outstanding
Basic....................................... 38.0 37.6 35.5(3) 33.8(3) 33.8(3)
Diluted..................................... 38.2 38.1 35.5(3) 33.8(3) 33.8(3)
SELECTED OPERATING DATA:
Active customers (1)............................ 1.8 1.7 1.7 1.1 .9
Orders entered.................................. 3.5 3.4 2.5 2.2 1.9
Number of catalogs distributed.................. 162 160 122 114 98
Number of catalog titles........................ 41 40 32 24 18
Number of countries receiving catalogs.......... 13 12 10 7 7
BALANCE SHEET DATA (AT DECEMBER 31, IN MILLIONS):
Working capital (2)............................. $ 135.3 $ 128.7 $ 99.1 $ 84.6 $ 65.8
Total assets.................................... 399.7 331.4 247.5 164.2 127.1
Short-term debt................................. - .5 5.4 19.2 4.8
Long-term debt, excluding
current portion............................... 2.0 2.0 2.9 11.5 13.9
Stockholders' equity............................ 272.2 228.6 154.0 69.1 58.1
(1) An "active customer" is defined as a customer who has purchased from the
Company within the preceding 12 months.
(2) Working capital excludes cash and cash equivalents, short-term investments
and short-term debt.
(3) Amount is calculated on a pro forma basis. Net income per common share and
weighted average common shares outstanding give effect to the shares
outstanding and exchanged prior to the Company's IPO.
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
The following table represents the Company's statement of income data
expressed as a percentage of net sales for the three most recent fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales..................................................... 100.0% 100.0% 100.0%
Gross profit.................................................. 23.2 27.4 31.1
Selling, general and administrative expenses.................. 18.0 19.8 22.5
Income from operations........................................ 5.2 7.6 8.6
Interest income............................................... .3 .3 .2
Interest expense.............................................. - .1 .4
Income taxes.................................................. 2.0 3.0 2.0
Net income.................................................... 3.4 4.8 5.6
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net sales increased by $233.5 million or 25.6% to $1.15 billion in 1997
from $911.9 million in 1996. The increase was primarily attributable to (i) an
increase in revenue from the Company's major account sales program, (ii) the
inclusion of sales from Midwest Micro since its acquisition at the end of
September 1997, (iii) an increase in the sales of brand name and private label
PCs and notebook computers and (iv) an increased average order value resulting
from increased offerings and sales of brand name products. Sales attributable to
the Company's North American operations increased 29.1% to $875.2 million in
1997 from $677.8 million in 1996. European sales increased to $270.2 million in
1997 from $234.1 million in 1996, an increase of 15.4%. In local currencies
without foreign exchange rate effects, European sales increased 21.3%.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $15.9 million or 6.4% to $265.5
million in 1997 from $249.6 million in 1996. Gross profit margin decreased to
23.2% in 1997 from 27.4% in 1996. The decrease in gross profit margin was
primarily due to (i) the Company's strategic decision to increase the proportion
of net sales attributable to brand name products, particularly PCs, notebook
computers, computer related products and hardware which typically have lower
gross profit margin percentages than many of the Company's other products, (ii)
the increase in the proportion of sales from the Company's major account sales
group which generally sells to larger customers at discounted prices, and (iii)
increased shipping and other costs associated with the United Parcel Service
labor action in August 1997.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $26.1 million or 14.5% to $206.3 million in 1997 from $180.1
million in 1996, as a percentage of net sales they decreased to 18.0% in 1997
from 19.8% in 1996. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased efficiencies from larger average order sizes, vendor supported
advertising, continued expense control and the leveraging of selling, general
and administrative expenses over a larger sales base. Included in selling,
general and administrative expenses in 1997 was a one time charge of $9.6
million incurred during the third quarter relating to the impairment of certain
long lived assets, principally goodwill.
As a result of the above, income from operations decreased by $10.2 million
or 14.7% to $59.3 million in 1997 from $69.5 million in 1996. Income from
operations as a percentage of net sales decreased to 5.2% from 7.6% in 1996.
Interest income increased $ .8 million to $3.3 million in 1997 from $2.5
million in 1996 primarily due to higher levels of investments in short-term
securities. Interest expense decreased $ .1 million to $ .4 million in 1997 from
$ .5 million in 1996.
Net income decreased $4.9 million or 11.2% to $38.8 million in 1997
principally as a result of the above.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net sales increased by $277.4 million or 43.7% to $911.9 million in 1996
from $634.5 million in 1995. The increase was primarily attributable to (i)
internal growth fueled by an increase in the number of catalogs mailed
(including eight new catalog titles), an increase in revenue from the Company's
major account sales program and an increased average order value resulting from
increased offerings and sales of brand name products and (ii) the inclusion of a
full year of sales from TigerDirect verses one month in 1995. Sales attributable
to the Company's North American operations increased 52.1% to $677.8 million in
1996 from $445.7 in 1995 as compared with a 24.0% increase in European sales to
$234.1 million in 1996 from $188.8 million in 1995.
Gross profit, which consists of net sales less product, shipping and
certain distribution center costs, increased by $52.3 million or 26.5% to $249.6
million in 1996 from $197.3 million in 1995. Gross profit margin decreased to
27.4% in 1996 from 31.1% in 1995. The decrease in gross profit margin was due in
part to the inclusion of a full year of sales from TigerDirect whose product mix
has a lower gross profit margin, and the Company's strategic decision to
increase the proportion of net sales attributable to brand name products,
particularly computer related products and hardware which typically have lower
gross profit margins than many of the Company's other products.
A significant portion of this decline in gross profit margin has been
offset by the continued decline in selling, general and administrative expenses
as a percentage of net sales. While selling, general and administrative expenses
increased by $37.1 million or 25.9% to $180.1 million in 1996 from $143.0
million in 1995, as a percentage of net sales they decreased to 19.8% in 1996
from 22.5% in 1995. The decrease as a percentage of net sales was primarily
attributable to reduced catalog costs in North America as a result of the
increased vendor supported advertising, continued expense control and the
leveraging of selling, general and administrative expenses over a larger sales
base. As a result of expenses associated with the Company's launching of cross
border catalogs in the first quarter in Europe, selling, general and
administrative expenses as a percentage of net sales for Europe did not decrease
significantly. These European cross border catalogs were mailed into countries
where the Company did not have an existing customer base and accordingly yielded
lower catalog response rates than the Company's other catalogs.
Income from operations increased by $15.2 million or 28.0% to $69.5 million
in 1996 from $54.3 million in 1995. Income from operations as a percentage of
net sales decreased to 7.6% from 8.6% in 1995 as a result of a $4.6 million
decrease in operating profits for Europe and the inclusion of a full year of
Tiger which had a lower operating profit margin than the rest of North America.
Interest income increased $1.3 million to $2.5 million in 1996 from $1.2
million in 1995 primarily due to investment in short-term securities.
Interest expense decreased $1.9 million to $ .5 million in 1996 from $2.4
million in 1995 primarily as a result of the repayments of officers' notes
issued during 1995.
Net income increased $8.0 million or 22.4% to $43.7 million in 1996 as a
result of the increase in income from operations described above and a $4.7
million decrease in Officers Compensation and an increase of $15.0 million in
income taxes as a result of the predecessor companies termination of S
Corporation status. Net income increased $10.6 million or 32.0% compared to 1995
pro forma net income of $33.1 million, as described below.
SEASONALITY
The operations of the Company are somewhat seasonal. In particular, net
sales have historically been modestly weaker during the second and third quarter
as a result of lower business activity during the summer months. The following
table sets forth net sales, gross profit and income from operations for each of
the quarters since January 1, 1996 (AMOUNTS IN MILLIONS).
<TABLE>
<CAPTION>
1997 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
NET SALES...................................... $273.5 $259.5 $259.7 $352.7 (1)
GROSS PROFIT................................... 69.4 64.2 57.3 74.7
INCOME FROM OPERATIONS......................... 18.6 17.9 2.5 20.3
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---- -------- ------- ------------ -----------
Net sales...................................... $ 218.7 $ 213.7 $ 225.9 $ 253.6
Gross profit................................... 65.0 60.1 60.3 64.2
Income from operations......................... 18.3 15.5 16.8 18.9
(1) Includes approximately $62 million of net sales from Midwest Micro acquired
on September 30, 1997.
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary capital needs have been to fund the working capital
requirements necessitated by its sales growth and acquisitions. The Company's
primary sources of financing have been cash from operations, equity offerings,
and to a lesser extent bank borrowings. The Company believes that its cash flows
from operations and available lines of credit will be adequate to support its
current and anticipated activities.
Net cash provided by operating activities was $33.1 million, $22.7 million
and $11.0 million in 1997, 1996 and 1995, respectively. The increase from 1996
to 1997 was due to increased asset management, specifically accounts receivable
and inventory. The increase from 1995 to 1996 was due to increased working
capital as a result of increased sales, improved management of inventory and
accounts receivable and reduced levels of unprinted catalog paper in response to
stabilizing paper prices.
Net cash used in investing activities in 1997 was primarily the result of
the acquisition of Midwest Micro and the acquisition of additional furniture,
fixtures and leasehold improvements at the new Compton, California facility to
accommodate the increased staff levels. Those expenditures were partially offset
by a decrease in short-term investments, for a net outlay of $25.2 million for
the year. For 1996, net cash used in investing activities was $39.8 million,
resulting from the investment of surplus cash and the acquisition of computer
equipment and additional furniture and fixtures at the Naperville, Illinois
facility to accommodate increased staff levels. For 1995, net cash used in
investing activities was $11.7 million resulting from the acquisition of
TigerDirect, property and equipment and the repayment of amounts due to
affiliates.
Net cash (used in) provided by financing activities was ($ .5) million,
$23.9 million and $20.2 million in 1997, 1996 and 1995, respectively. The use of
funds in 1997 was primarily due to the repayment of long-term debt. For 1996 net
cash provided by financing activities resulted from the net proceeds from the
sale and issuance of 1.0 million shares of common stock, as partially offset by
the repayment of long-term bank debt and the settlement of long-term capital
leases. The source of funds in 1995 was due mainly to the net proceeds of the
Company's initial public offering net of the repayment of officers' notes
payable and repayment of bank debt.
The Company maintains unsecured lines of credit with various financial
institutions under which the maximum aggregate amount available is $95.0
million. As of December 31, 1997, the Company had no outstanding borrowings
under the lines of credit. The lines of credit bear interest at either the prime
rate, LIBOR plus 63 basis points or at the respective bank's base rate and
expire on various dates through December 1998. In addition, the Company may have
outstanding letters of credit equal to an amount of the total line less
outstanding borrowings.
The Company also maintains a secured line of credit with a bank with a
maximum amount available of 2.0 Pounds Sterling. There were no borrowings under
this facility as of December 31, 1997. This line expires in April 1998 and
provides for interest at the bank's base rate (6% at December 31, 1997) plus 2%.
The Company does not anticipate any difficulty in renewing or replacing any
of its lines of credit as they expire.
Anticipated capital expenditures in 1998 are expected to be approximately
$20 million, which the Company plans to fund out of cash from operations and
existing cash and cash equivalents. These capital expenditures are primarily for
(i) the relocation and expansion of the Company's sales and distribution centers
and (ii) the acquisition of information technology systems and other fixed
assets.
FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of that
term in the Private Securities Litigation Reform Act of 1995 (Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
Additional written or oral forward looking statements may be made by the Company
from time to time, in filings with the Securities Exchange Commission or
otherwise. Statements contained herein that are not historical facts are forward
looking statements made pursuant to the safe harbor provisions referenced above.
Forward looking statements may include, but are not limited to, projections of
revenue, income or loss and capital expenditures, statements regarding future
operations, financing needs, compliance with financial covenants in loan
agreements, plans for acquisition or sale of assets or businesses and
consolidation of operations of newly acquired businesses, and plans relating to
products or services of the Company, assessments of materiality, predictions of
future events and the effects of pending and possible litigation, as well as
assumptions relating to the foregoing. In addition, when used in this
discussion, the words "anticipates", "believes", "estimates", "expects",
"intends", "plans" and variations thereof and similar expressions are intended
to identify forward looking statements.
Forward looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the forward
looking statements contained in this report. Statements in this report,
particularly in "Item 1. Business", "Item 3. Legal Proceedings", "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations", and the Notes to Consolidated Financial Statements describe certain
factors, among others, that could contribute to or cause such differences. Other
factors that could contribute to or cause such differences include, but are not
limited to, unanticipated developments in any one or more of the following
areas: (i) the Company's ability to manage rapid growth as a result of internal
expansion and strategic acquisitions, (ii) the effect on the Company of
volatility in the price of paper and periodic increases in postage rates, (iii)
the operation of the Company's management information systems including the
costs and effects associated with the year 2000 date change problem, (iv) the
general risks attendant to the conduct of business in foreign countries,
including currency fluctuations associated with sales not denominated in United
States dollars, (v) significant changes in the computer products retail
industry, especially relating to the distribution and sale of such products,
(vi) competition in the PC, notebook computer, computer related products, office
products and industrial products markets from superstores, direct response (mail
order) distributors, mass merchants, value added resellers, the Internet and
other retailers, (vii) the potential for expanded imposition of state sales
taxes, use taxes, or other taxes on direct marketing companies, (viii) the
continuation of key vendor relationships including the ability to continue to
receive vendor supported advertising, (ix) timely availability of existing and
new products, (x) risks due to shifts in market demand and/or price erosion of
owned inventory, (xi) borrowing costs, (xii) changes in taxes due to changes in
the mix of U.S. and non-U.S. revenue, (xiii)pending or threatened litigation and
investigations and (xiv) the availability of key personnel, as well as other
risk factors which may be detailed from time to time in the Company's Securities
and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risks, which include changes in U.S. and
international interest rates as well as changes in currency exchange rates as
measured against the U.S. dollar and each other. Global attempts to reduce these
risks by utilizing certain derivative financial instruments.
The value of the U.S. dollar affects the Company's financial results.
Changes in exchange rates may positively or negatively affect Global's sales (as
expressed in U.S. dollars), gross margins, operating expenses and retained
earnings. The Company engages in hedging programs aimed at limiting in part the
impact of certain currency fluctuations. Using primarily forward exchange and
foreign currency option contracts, Global, from time to time, hedges certain of
its assets that, when remeasured according to generally accepted accounting
principles, may impact the Statement of Consolidated Income. These hedging
activities provide only limited protection against currency exchange risks.
Factors that could impact the effectiveness of the Company's hedging programs
include accuracy of sales forecasts, volatility of the currency markets,
availability of hedging instruments and the credit-worthiness of the parties
which have entered into such contracts with the Company. All currency contracts
that are entered into by Global are for the sole purpose of hedging an existing
or anticipated currency exposure, not for speculative or trading purposes. In
spite of Global's hedging efforts to reduce the effect of changes in exchange
rates against the U.S. dollar, the Company sales or costs could still be
adversely affected by changes in those exchange rates.
As of December 31,1997, the Company had outstanding forward exchange
contracts in the amount of 1.0 million Pounds Sterling, 30.0 million French
Francs and 700.0 million Italian Lire.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by Item 8 of Part II is incorporated herein by
reference to the Consolidated Financial Statements filed with this report; see
Item 14 of Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Part III is hereby incorporated by
reference from the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Part III is hereby incorporated by
reference from the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Part III is hereby incorporated by
reference from the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Part III is hereby incorporated by
reference from the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. The Consolidated Financial Statements of Global DirectMail Corp.
2. Financial Statement Schedules:
Schedules not included with this additional financial data have
been omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------ --------------------------------------------------------------------
3.1 Certificate of Incorporation of Registrant*
3.2 By-laws of Registrant*
4.1 Stockholders Agreement**
4.2 Specimen Stock Certificate of Registrant*
10.1 Form of 1995 Long-Term Stock Incentive Plan***+
10.2 Exchange Agreement dated as of May 8, 1995 between certain stockholders
of the Predecessor Companies and the Company*
10.3 Lease Agreement dated October 14, 1992 between the Company and 2RB
Associates Co. (Port Washington facility)*
10.4 Lease Agreement dated September 20, 1988 between the Company and Addwin
Realty Associates (Port Washington facility)*
10.5 Lease Agreement dated May 25, 1989 between the Company and Addwin Realty
Associates (Suwanee facility)*
10.6 Lease Agreement dated as of July 17, 1997 between the Company and South
Bay Industrials Company (New Compton facility)
10.7 Build-to-Suit Lease Agreement dated April, 1995 among the Company,
American National Bank and Trust Company of Chicago and Walsh, Higgins &
Company (Naperville facility)*
10.8 Rent Guaranty dated as of October 14, 1992 by the Company to the Bank of
New York*
10.9 Royalty Agreement dated June 30, 1986 between the Company and Richard
Leeds, Bruce Leeds and Robert Leeds, and Addendum thereto*
10.10 Consulting Agreement dated as of December 22, 1992 between the Company
and Paul Leeds*+
10.11 Form of 1995 Stock Plan for Non-Employee Directors***+
10.12 Consulting Agreement dated as of January 1, 1996 between the Company and
Gilbert Rothenberg***+
10.13 Asset Purchase Agreement dated September 12, 1997 among Infotel, Inc.,
Mark L. Runkle, Midwest Micro Corp. and the Company ****
10.14 Employment Agreement dated as of December 12, 1997 between the Company
and Steven M. Goldschein+
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel: Consent of Independent Public Accountants
27 Financial Data Schedule (EDGAR version only)
- --------
* Incorporated herein by reference to the Company's registration statement
on Form S-1 (Registration No. 33-92052).
** Incorporated herein by reference to the Company's quarterly report on
Form 10-Q for the quarterly period ended September 30, 1995.
*** Incorporated herein by reference to the Company's registration statement
on Form S-1 (Registration No. 333-1852).
**** Incorporated herein by reference to the Company's report on Form 8-K
dated September 26,1997
+ Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K.
On October 15, 1997, the Company filed a report on Form 8-K regarding its
September 30, 1997 acquisition of substantially all of the assets of
Infotel, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on the 27th day of March, 1998.
GLOBAL DIRECTMAIL CORP
By: /s/ RICHARD LEEDS
....................................
Richard Leeds
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ RICHARD LEEDS Chairman and Chief Executive Officer March 27, 1998
...................... (Principal Executive Officer)
Richard Leeds
/s/ BRUCE LEEDS Vice Chairman and President of March 27, 1998
...................... International Operations
Bruce Leeds
/s/ ROBERT LEEDS Vice Chairman and President of March 27, 1998
...................... Domestic Operations
Robert Leeds
/s/ ROBERT DOOLEY Director and Senior Vice President-- March 27, 1998
...................... Worldwide Computer Sales and
Robert Dooley Marketing
/s/ STEVEN GOLDSCHEIN Senior Vice President and Chief March 27, 1998
...................... Financial Officer
Steven Goldschein (Principal Financial Officer)
/s/ HOWARD KOHOS Corporate Controller March 27, 1998
...................... (Principal Accounting Officer)
Howard Kohos
/s/ ROBERT D. ROSENTHAL Director March 27, 1998
......................
Robert D. Rosenthal
/s/ STACY DICK Director March 27, 1998
......................
Stacy Dick
********
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors of THE GLOBAL DIRECTMAIL CORP:
We have audited the accompanying consolidated balance sheets of Global
DirectMail Corp and its subsidiaries, (the "Company"), as of December 31, 1997
and 1996 and the related consolidated statements of income, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company at
December 31, 1997 and 1996, and the consolidated results of their operations and
their cash flows for each of the three years ended December 31, 1997 in
conformity with generally accepted accounting principles.
/S/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
New York, New York
February 5, 1998, March 9, 1998 as it relates to the second paragraph under
LITIGATION of Note 9.
<PAGE>
GLOBAL DIRECTMAIL CORP
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
---- ----
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 43,432 $ 35,211
Short term investments 9,017 31,031
Accounts receivable, net 132,741 111,709
Inventories 102,599 93,033
Prepaid catalog expense 11,917 12,305
Other prepaid expenses and current assets 9,565 7,427
Deferred income tax benefit 4,059 3,266
--------- ----------
Total current assets 313,330 293,982
PROPERTY, PLANT AND EQUIPMENT, net 29,401 21,878
GOODWILL, net 53,258 13,545
DEFERRED INCOME TAX BENEFIT 3,122 -
OTHER ASSETS 634 2,034
--------- ----------
TOTAL $ 399,745 $ 331,439
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 125,562 $ 99,053
Current portion of long-term debt 12 495
--------- ----------
Total current liabilities 125,574 99,548
--------- ----------
LONG-TERM DEBT 1,972 2,030
--------- ----------
DEFERRED INCOME TAXES - 1,224
--------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred shares - -
Common shares 382 379
Additional paid-in capital 176,743 168,356
Retained earnings 97,204 58,392
Cumulative translation adjustment (2,130) 1,510
---------- ----------
Total shareholders' equity 272,199 228,637
---------- ----------
TOTAL $ 399,745 $ 331,439
========= ==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS, EXCEPT PER COMMON SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET SALES $1,145,388 $ 911,893 $ 634,484
COST OF SALES 879,846 662,277 437,179
---------- --------- ----------
GROSS PROFIT 265,542 249,616 197,305
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 206,280 180,142 143,034
---------- --------- ----------
INCOME FROM OPERATIONS 59,262 69,474 54,271
OTHER (INCOME) EXPENSE, net (including $4,707 of
Shareholders' compensation in 1995) (6) 39 4,748
INTEREST INCOME (3,255) (2,470) (1,246)
INTEREST EXPENSE 425 521 2,394
---------- --------- ----------
INCOME BEFORE INCOME TAXES 62,098 71,384 48,375
PROVISION FOR INCOME TAXES 23,286 27,680 12,655
---------- --------- ----------
NET INCOME $ 38,812 $ 43,704 $ 35,720
========== ========= ==========
NET INCOME PER COMMON SHARE:
BASIC $ 1.02 $ 1.16
========== =========
DILUTED $ 1.02 $ 1.15
========== =========
PRO FORMA INCOME DATA (UNAUDITED)
Historical income before income taxes $ 48,375
Pro forma other adjustments 5,684
----------
Pro forma income before income taxes 54,059
Pro forma income taxes 21,008
----------
Pro forma net income $ 33,051
==========
Pro forma net income per common share - basic and diluted $ 0.93
==========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
Notes
Receivable
Additional Cumulative from
Common Paid-in Retained Translation Related
SHARES CAPITAL EARNINGS ADJUSTMENT PARTIES
------ --------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1995 $ 24,934 $ 14,539 $ 39,591 $ 315 $ (10,273)
Differences arising from translation of
foreign statements - - - 165 -
Dividends paid - - (2,000) - -
Other (30) - 30 - -
Effect of exchange of common
shares, issuance of notes and collection of
notes receivable (24,620) (14,528) (58,653) - 10,273
Initial public offering of common shares 83 134,329 - - -
Issuance of common shares for the acquisition
of TigerDirect, Inc. 2 4,130 - - -
Net income - - 35,720 - -
-------- --------- --------- ------- ---------
BALANCES, DECEMBER 31, 1995 369 138,470 14,688 480 -
Differences arising from translation of
foreign statements - - - 1,030 -
Net proceeds from sale of common shares 10 29,886 - - -
Net income - - 43,704 - -
-------- --------- --------- ------- ----------
BALANCES, DECEMBER 31, 1996 379 168,356 58,392 1,510 -
Differences arising from translation of
foreign statements - - - (3,640) -
Issuance of 375,000 common shares as partial consideration
for the acquisition of the net assets of Infotel, Inc. 3 8,387 - - -
Net income - - 38,812 - -
-------- --------- --------- ---------- --------
BALANCES, DECEMBER 31, 1997 $ 382 $ 176,743 $ 97,204 $ (2,130) $ -
======== ========= ========= ========== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GLOBAL DIRECTMAIL CORP
STATEMENTS OF CONSOLIDATED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 38,812 $ 43,704 $ 35,720
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization, net 5,715 3,813 2,098
Charges associated with the impairment of certain
long lived assets 9,200 - -
Benefit for deferred income taxes (5,308) (330) (1,959)
Provision for returns and doubtful accounts 3,283 2,745 4,178
Changes in certain assets and liabilities:
Accounts receivable (18,395) (29,242) (15,261)
Inventories 3,103 (20,748) (12,155)
Prepaid catalog and other prepaid expenses (1,569) 7,028 (8,500)
Accounts payable and accrued expenses (1,727) 15,760 6,921
------ ------ -----
Net cash provided by operating activities 33,114 22,730 11,042
--------- ----------- ------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net change in short term instruments 22,014 (31,031) -
Investments in property, plant and equipment (9,989) (8,805) (4,859)
Loans to affiliated entities - - (5,631)
Acquisition of net assets of businesses acquired (37,227) - (1,185)
--------- --------- ----------
Net cash used in investing activities (25,202) (39,836) (11,675)
-------- --------- ----------
CASH FLOWS (USED IN) PROVIDED BY FINANCING
ACTIVITIES:
Net cash provided by short term borrowings from banks - 478 -
Borrowings of long term debt - - 8,392
Repayment of long term debt (470) (6,442) (27,550)
Repayment from related parties - - 4,702
Proceeds from sale and issuance of common shares - 29,896 134,412
Dividends paid - - (2,000)
Payment of notes payable to shareholders - - (97,800)
------------- -------------- ----------------
Net cash (used in) provided by financing activities (470) 23,932 20,156
------------ --------------- ----------------
EFFECTS OF EXCHANGE RATES ON CASH 779 (92) 128
-------- ---------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,221 6,734 19,651
--------- ---------- -----------
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 35,211 28,477 8,826
--------- ---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 43,432 $ 35,211 $ 28,477
========= ========== ===========
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 376 $ 1,194 $ 2,548
======== ========= ===========
Income taxes paid $ 29,497 $ 26,606 $ 14,957
======== ========= ===========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
GLOBAL DIRECTMAIL CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1. BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial statements
include the accounts of Global DirectMail Corp and its wholly-owned
subsidiaries (collectively, the "Company" or "Global"). The Company is the
successor to several corporations, previously referred to as the Global
Group, which were owned by related shareholders. In connection with the
consummation of an initial public offering in June 1995 (the "IPO"), the
stockholders of these predecessor companies exchanged all of the
outstanding capital stock for common shares of Global. That transaction was
accounted for as a pooling of interests.
DESCRIPTION OF BUSINESSES - The Company is involved in the marketing and
sale of personal computers (PCs), notebook computers, computer related
products, office products and industrial products, through the distribution
of mail order catalogs and a network of major account sales representatives
in the North America and Western Europe.
PRINCIPLES OF CONSOLIDATION - All significant intercompany accounts and
transactions have been eliminated in consolidation. When necessary, the
results of operations of the Company's foreign subsidiaries have been
adjusted to conform to accounting principles generally accepted in the
United States of America.
CASH AND CASH EQUIVALENTS - The Company considers amounts held in money
market accounts and other short-term investments with an original maturity
date of approximately three months or less to be cash equivalents.
SALES RECOGNITION AND ACCOUNTS RECEIVABLE - The Company recognizes sales of
products, including shipping revenue at the time of shipment. Accounts
receivable are shown in the consolidated balance sheets net of allowances
for doubtful collections and subsequent customer returns of approximately
$7,338,000 and $7,724,000 at December 31, 1997 and 1996, respectively. The
changes in these allowance accounts are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
----------------------- -------- ------------ ------
<S> <C> <C> <C>
Balance, beginning of year..................................$ 7,724 $7,731 $ 4,598
Charged to expense........................................... 3,283 2,745 4,178
Reductions, principally write-offs...........................(3,669) (2,752) (1,045)
------- ------- -------
Balance, end of year........................................$ 7,338 $7,724 $ 7,731
======= ====== =======
</TABLE>
INVENTORIES - Inventories consist primarily of finished goods and are
stated at the lower of cost or market value. Cost is determined by using
the first-in, first-out method.
PREPAID CATALOG EXPENSE - Prepaid catalog expense includes (i) unused
catalog paper, (ii) cost associated with the production and mailing of
finished catalogs, net of (iii) funding from certain of the Company's
vendors for advertisements placed, advertising allowances and incentives
("Co-op") relating to those catalogs. Finished catalog expense net of the
respective Co-op is deferred and charged to expense over the period that
the catalog remains the most current selling vehicle, generally three
months.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment is stated at
cost. Depreciation of furniture, fixtures and equipment is on the straight
line or accelerated method over their estimated useful lives ranging from
three to eight years. Depreciation of buildings is on the straight line
method over estimated useful lives of 30 to 50 years. Leasehold
improvements are amortized over the lesser of their useful lives or the
term of the lease.
FOREIGN CURRENCY TRANSLATION - The financial statements of the foreign
entities are translated into U.S. dollars, the reporting currency, using
year-end exchange rates for consolidated balance sheet items and average
exchange rates for the consolidated statement of income items. The
translation differences are recorded directly in the consolidated statement
of shareholders' equity.
FOREIGN CURRENCY TRANSACTIONS - Transactions in foreign currencies are
recorded at the exchange rate in effect at the transaction date. Realized
and unrealized exchange gains and losses during the year are included in
the respective year's consolidated statement of income.
RESEARCH AND DEVELOPMENT COSTS - Costs incurred in connection with research
and development are expensed as incurred. Such expenses for the years ended
December 31, 1997, 1996 and 1995 aggregated approximately $674,000,
$573,000 and $443,000, respectively.
GOODWILL, NET - Goodwill and negative goodwill are combined and presented
net of the respective accumulated amortization. For acquisitions that the
Company has recorded as purchase transactions, the amount of the excess of
the purchase price over the identifiable assets, is recorded as goodwill.
In instances where the Company had acquired a business below the fair value
of the assets acquired, the Company recorded negative goodwill. Goodwill
and negative goodwill are being amortized over periods ranging from 10 to
40 years.
USE OF ESTIMATES IN FINANCIAL STATEMENTS - The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amount 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.
NET INCOME PER COMMON SHARE - In December 1997 the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
and restated net income per common share for all periods presented. Net
income per common share-basic was calculated based upon the weighted
average number of common shares outstanding during respective periods. Net
income per common share-diluted was calculated based upon the weighted
average number of common shares outstanding and included the equivalent
shares for dilutive options outstanding during the respective periods.
The weighted average common shares outstanding for the computation of basic
earnings per common share for 1997 and 1996 were 38.0 million and 37.6
million, respectively. Additionally 262,000 and 505,000 of equivalent
common shares were included in 1997 and 1996, respectively, for the diluted
calculation.
2. PRO FORMA INFORMATION (UNAUDITED)
PRO FORMA INCOME ADJUSTMENTS
The pro forma income data for the year ended December 31, 1995 present the
effects on the historical consolidated financial statements of certain
transactions related to the June 1995 IPO as if they occurred as of the
beginning of the year, including (1) reduced levels of compensation and
royalty payments to officers, (2) the elimination of $500,000 per year of
compensation paid to a shareholder pursuant to a consulting agreement
entered into in 1992 which terminated in connection with the IPO, (3) the
elimination of interest paid on officers notes in 1995, and (4) the
provision for income taxes to eliminate the benefit, for income tax
purposes, of the predecessor companies with S Corporation status.
PRO FORMA NET INCOME PER COMMON SHARE
Pro forma net income per common share-basic was based on the weighted
average number of shares of common stock outstanding prior to and after the
IPO. Pro forma net income per common share-diluted was calculated based on
the weighted average number of shares outstanding plus the effect of
approximately 201,000 options assumed outstanding after the IPO.
3. ACQUISITIONS
During 1997 the Company acquired the net assets of three businesses for a
total of $50.8 million in cash, stock and purchase related costs with
additional contingent cash consideration possible. These acquisitions are
being accounted for as purchase transactions. The Company recorded the fair
market value of the net assets acquired at $15.9 million and the excess of
the purchase price over that amount as goodwill.
The unaudited pro forma results of operations of the Company, including the
pro forma effect as if those companies had been acquired as of January 1,
1995, are as follows (in thousands, except earnings per common share):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- ---- ---- ----
<S> <C> <C> <C>
Net sales $ 1,334,183 $1,207,625 $ 975,946
Net income $ 39,286 $ 42,251 $ 29,839
Earnings per common share - basic and diluted $ 1.02 $ 1.10 $ .83
</TABLE>
In November 1995, Global acquired TigerDirect, Inc. ("Tiger") and recorded,
at that time the purchase price in excess of the fair value of the net
assets acquired as goodwill. The estimated fair values were further
evaluated by the Company during 1996 and, as
a result, goodwill was reduced by approximately $3.1 million. During 1997
the Company had determined that, as a result of its decision to exit
certain lines of Tiger's business acquired as part of the original
purchase, an impairment of the goodwill associated with those exited
business lines had occurred. As such, the Company recorded a write down in
the value of the goodwill of approximately $6.3 million.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
----------- --------- -------
<S> <C> <C>
Land and buildings...............................................................$ 8,085 $ 5,226
Furniture and fixtures, office and warehouse equipment........................... 32,857 27,273
Leasehold improvements........................................................... 6,096 3,990
Transportation equipment......................................................... 1,817 1,555
--------- ----------
48,855 38,044
Less accumulated depreciation and amortization................................... 19,454 16,166
--------- ----------
Net property, plant and equipment..........................................$ 29,401 $ 21,878
========== ============
</TABLE>
During 1997 the Company recorded a charge relating to the impairment of
certain long-lived assets of approximately $2.9 million
5. RELATED PARTY TRANSACTIONS
The Company leases several warehouse and office facilities from affiliates
(see Note 9). Rent expense under those leases aggregated approximately
$1,901,000, $2,130,000 and $2,366,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
6. LONG-TERM DEBT
Long-term debt consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31 1997 1996
----------- -------- -----
<S> <C> <C>
Foreign denominated secured loan (a)..................................$1,972 $ 2,030
Capitalized lease obligations......................................... 12 17
------ -------
Total............................................................ 1,984 2,047
Less: current maturities......................................... 12 17
------ -------
Long-term debt .................................................$1,972 $ 2,030
===== =======
</TABLE>
At December 31, 1997, the aggregate maturities of long-term debt are as
follows (in thousands):
YEAR ENDING DECEMBER 31 AMOUNT
1998.................................................$ 12
1999.................................................. 1,972
Total notes payable...................................$ 1,984
==========
(a) A subsidiary of the Company entered into a mortgage agreement
("Mortgage") in the amount of 1.2 million Pounds Sterling due in its
entirety in June 1999, with interest payable semi-annually at a rate
of 9.6 percent per annum. The Mortgage is secured by land and building
with an aggregate net book value of 2.4 million Pounds Sterling at
December 31, 1997. The Mortgage contains certain covenants calling for
timely reporting of financial information, restrictions on changes in
ownership and employment levels by such subsidiary. As of December 31,
1997 the Company was in compliance with those covenants.
The Company maintains lines of credit with various financial institutions.
The maximum aggregate amounts available under these lines of credit were
$95 million and $52 million at December 31, 1997 and 1996. No amounts were
outstanding under these lines at December 31, 1997. These lines accrue
interest at variable rates of either the prime rate or LIBOR plus 63 basis
points. The prime rate and LIBOR were 8.25 percent and 5.9 percent,
respectively, at December 31, 1997. These lines expire on various dates
through December 1998.
Associated with the lines of credit, the Company may have outstanding
letters of credit equal to the amount of the total line less outstanding
borrowings. At December 31, 1997 there was a $4 million outstanding standby
letter of credit.
The Company maintains a secured line of credit with a bank with a maximum
amount available of 2.0 million Pounds Sterling. Borrowings, of which there
were none as of December 31, 1997 and 1996, bear interest at the bank's
base rate (6% at December 31, 1997) plus 2% and are secured by
substantially all of the assets of the Company's United Kingdom
subsidiaries. This line expires in April 1998 and is renewable at the
Company's option.
7. SHAREHOLDERS' EQUITY
At December 31, 1997, there were 25.0 million shares of preferred stock,
$.01 par value, of which none were issued. Common stock at such date
consisted of 150.0 million shares authorized, par value of $.01 per share,
of which 38,231,990 were issued and outstanding.
As required by law, certain foreign subsidiaries must retain a percentage
of shareholders' capital in the respective company. Accordingly, a portion
of retained earnings is restricted and not available for distribution to
shareholders. Such amount at December 31, 1997 was not material.
STOCK OPTION PLANS - The Company has two fixed option plans which reserve
shares of common stock for issuance to key employees, directors,
consultants and advisors to the company. The following is a description of
these plans:
THE 1995 LONG-TERM STOCK INCENTIVE PLAN - This plan allows the Company to
issue from time to time qualified, non-qualified and deferred compensation
stock options, stock appreciation rights, restricted stock and restricted
unit grants, performance unit grants and other stock based awards
authorized by the Compensation Committee of the Board of Directors. Options
issued under this plan expire ten years after the options are granted and
generally become exercisable ratably on the third, fourth, and fifth
anniversary of the grant date. A maximum total number of 2.0 million shares
may be granted under this plan of which a maximum of 800,000 shares may be
of restricted stock and restricted stock units. No award shall be granted
under this plan after December 31, 2005. A total of 1,290,948 options were
outstanding under this plan as of December 31, 1997.
THE 1995 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS - This plan provides
for automatic awards of non-qualified options to directors of the company
who are not employees of the Company or its affiliates. All options granted
under this plan will have a ten year term from grant date and are
immediately exercisable. A maximum of 100,000 shares may be granted for
awards under this plan. This plan will terminate the day following the
tenth annual stockholders meeting. A total of 14,000 options were
outstanding under this plan as of December 31, 1997.
The Company accounts for these plans in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees",
under which no compensation costs have been recognized for stock options.
Had compensation costs of the plans been determined under a fair value
alternative method as stated in Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensations", the Company would have
prepared a fair value model for such options and recorded such amount in
the accompanying consolidated financial statements as compensation expense.
On a pro forma basis, net income for 1997 and 1996 would have been $37.7
million and $42.3 million respectively and diluted earnings per common
share for 1997 and 1996 would have been $.99 and $1.11 respectively. The
Company arrived at the fair value of stock grant at the date of the grant
by using the Black-Scholes pricing option model with the following
assumptions used for grants: risk-free interest rate of 6.2%; expected
dividend rate of 0%; expected level of 3.75 years; and expected volatility
of 35%. The weighted average stock options at December 31, 1997 have a
weighted average contractual level of 8 years. The following table reflects
the plan activity for year ended December 31, 1997:
OPTIONS
FOR SHARES OPTION PRICES
---------- -------------
Outstanding, January 1, 1997 1,206,500 $17.50 to $49.13
Granted during the year 604,146 $17.50 to $18.41
Cancelled during the year (505,698) $24.38 to $49.13
Exercised during the year - -
---------------- ---------------
Outstanding, December 31 1,304,948 $17.50 to $39.06
========= =================
The following table summarizes information for the three years ended
December 31, 1997 concerning currently outstanding and exercisable options:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- --------------------------- ----------------------
Weighted-Average Weighted Average Weighted Average
Fixed Options SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,206,500 $25.45 865,500 $ 20.49 - -
Granted .............................. 604,146 $19.19 365,150 $ 36.80 876,900 $20.45
Exercised ............................ - - - - - -
Cancelled ............................ (505,698) $33.90 (24,150) $ 19.39 (11,400) $17.50
-------- ------ ------- ------- ------- ------
Outstanding at end of year............1,304,948 $19.28 1,206,500 $ 25.45 865,500 $20.49
========== ====== ========= ======= ======= ======
Options exercisable at year end....... 189,000 139,000 10,000
Weighted average fair value per
option granted during the year..... $13.05 $13.57 $7.05
</TABLE>
<TABLE>
<CAPTION>
Range of Number Weighted-Average Weighted-Average Number Weighted-Average
Exercise Outstanding at Remaining Exercise Exercisable Exercise
PRICE 12/31/97 CONTRACTUAL LIFE PRICE AT 12/31/97 PRICE
-------------------- --------------- ------------------ --------------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
$ 17.50 to $ 22.50 1,070,948 8.11 $ 17.57 5,000 $ 21.56
$ 22.51 to $ 30.00 230,000 7.64 $ 26.88 180,000 $ 26.87
$ 30.01 to $ 39.06 4,000 8.33 $ 39.06 4,000 $39.06
$ 17.50 to $ 39.06 1,304,948 8.03 $ 19.28 189,000 $ 26.99
================== ========= ==== ======= ======= =======
</TABLE>
Of the options issued during 1997, 420,348 options originally issued with
exercise prices ranging from $24.38 to $49.13 were repriced on April 28,
1997 with an exercise price of $17.50, representing the market price of the
outstanding common stock at that time.
All other terms of these options remained unchanged.
8. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- -------- ---------- -------
Current:
Federal $ 23,274 $ 23,140 $ 10,400
State 4,107 3,787 1,895
Foreign 1,041 1,038 2,319
Deferred (5,279) (865) (369)
Change in valuation allowance 143 580 (1,590)
-------- -------- ---------
Total $ 23,286 $ 27,680 $ 12,655
======== ======== =========
Prior to the IPO, a number of the predecessor companies were S
Corporations and accordingly their income was not taxable for Federal and
certain state tax purposes. Subsequent to the IPO, all of the former S
Corporations terminated such status and accordingly became taxable
entities thereafter. Income taxes are accrued and paid by each foreign
entity in accordance with applicable local regulations. The difference
between the income tax expense and the computed income tax based on the
Federal statutory corporate rate is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31 1997 1996 1995
---------------------- -------- ---------- -------
<S> <C> <C> <C>
Federal statutory rate $ 21,734 $ 24,984 $ 16,931
State and local income taxes, net of
Federal tax benefit 2,092 2,456 1,001
Foreign tax (303) (175) 2,778
Foreign source income (72) (573) (2,685)
Increase (reduction) in valuation allowance 143 580 (923)
Net operating loss utilized 165 335 -
Other items, net (473) 73 -
Federal, state and local tax benefit of S Corporation status - - (4,447)
---------- ---------- ----------
$23,286 $27,680 $ 12,655
======== ======== =========
</TABLE>
The deferred tax assets (liabilities) at December 31, 1997 and 1996 are
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
Current:
<S> <C> <C>
Deductible assets....................................................$(3,649) $ (2,542)
Non-deductible accruals and reserves.................................. 7,458 4,244
Non-deductible assets................................................. 553 826
Foreign net operating loss carryforwards.............................. 26 1,027
Other................................................................. (329) (289)
------- ---------
Current........................................................... 4,059 3,266
------ --------
Non-Current:
Foreign net operating loss carryforwards.............................. 4,980 1,712
Accelerated depreciation..............................................(1,243) (1,441)
Basis differences from acquisitions................................... 1,843 356
Other assets.......................................................... - (332)
Valuation allowances..................................................(2,458) (1,519)
------- ---------
Non-Current....................................................... 3,122 (1,224)
------ ---------
Total........................................................$ 7,181 $ 2,042
======= ========
</TABLE>
The foreign net operating loss carryforwards generally expire at dates
through 2004. The Company maintains valuation allowances against its
foreign net operating loss carryforwards since, at this time, the
realizability of the related deferred tax benefits can not be reasonably
assured.
9. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
LEASES - The Company is obligated under operating lease agreements for the
rental of certain office and warehouse facilities and equipment which
expire at various dates through October 2013.
At December 31, 1997 future minimum annual lease payments for related and
third-party leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 RELATED PARTY THIRD PARTY TOTAL
----------------------- ------------- ----------- ------
<S> <C> <C> <C>
1998................................ $ 1,632 $ 4,163 $ 5,795
1999................................ 1,122 3,862 4,984
2000................................ 612 2,448 3,060
2001................................ 612 1,897 2,509
2002................................ 612 1,897 2,509
2003-2007........................... 2,958 9,062 12,020
2008-2012........................... - 3,935 3,935
Thereafter.......................... - 410 410
----------- -------- -------
$ 7,548 $ 27,674 $35,222
=========== ======== =======
</TABLE>
Rent expense for the years ended December 31, 1997, 1996 and 1995
aggregated approximately $7,151,000, $7,406,000 and $5,235,000
respectively.
GUARANTEES - The Company has guaranteed a mortgage obtained by an affiliate
($2.3 million at December 31, 1997) relating to property which the Company
leases from the affiliate. Additionally the Company's U.K. subsidiaries
have granted a security interest for substantially all of their assets to
secure a line of credit with a U.K. financial institution.
LITIGATION - The Company has been named as a defendant in lawsuits
incidental to its businesses. Management of the Company, based on
discussions with legal counsel, believes the ultimate resolution of these
lawsuits will not have a material effect on the Company's consolidated
financial position or results of operations.
At December 31, 1997 the Company was contingently liable under a standby
letter of credit guaranteeing the obligations of a third party supplier in
the amount of $4 million. Such amount was paid on March 2, 1998. The
Company has initiated legal action seeking a declaration that the Company
has a contractual right to offset the $4 million against amounts otherwise
due to the supplier. The Company believes that the ultimate outcome of this
matter will not have a material adverse effect on the Company's
consolidated financial statements.
CONTINGENCY - The Company is required to collect sales tax on certain of
its out-of-state sales. In accordance with current law, approximately 20%
of the Company's 1997 domestic sales were subject to sales tax. A change in
law could require the Company to collect sales tax in additional states.
EMPLOYEE BENEFIT PLANS - Certain of the U.S. subsidiaries participate in
defined contribution compensatory 401(k)/profit sharing benefit plans
covering such eligible employees as defined by the plan document.
Contributions to the plan by the Company is determined as a percentage of
the employees' contributions. Aggregate expense to the Company for
contributions to such plans was approximately $373,000, $267,000 and
$211,000 in the years ended December 31, 1997, 1996 and 1995, respectively.
Certain foreign entities require amounts to be accrued for each employee's
retirement, determined in accordance with labor laws and labor agreements
in effect in the respective country. Liabilities relative to such
termination indemnities were not material.
FOREIGN EXCHANGE RISK MANAGEMENT - The Company has limited involvement with
derivative financial instruments and does not use them for trading
purposes. The Company enters into foreign currency options or forward
exchange contracts to hedge certain foreign currency transactions. The
intent of this practice is to minimize the impact of foreign exchange rate
movements on the Company's operating results. As of December 31,1997, the
Company had outstanding forward exchange contracts in the amount of 1.0
million Pounds Sterling, 30.0 million French Francs and 700.0 million
Italian Lire.
FAIR VALUE OF FINANCIAL INSTRUMENTS - Financial instruments consist
primarily of investments in cash, trade account receivables, accounts
payable and debt obligations. The Company estimates the fair value of
financial instruments based on interest rates available to the Company and
by comparison to quoted market prices. At December 31, 1997 and 1996, the
fair value of the Company's financial instruments approximated their
carrying values.
CONCENTRATION OF CREDIT RISK - Concentrations of credit risk with respect
to trade account receivables are limited due to the large number of
customers comprising the Company's customer base. Ongoing credit
evaluations of customer's financial condition are performed.
10. GEOGRAPHIC INFORMATION
The Company conducts its business in North America (the United States and
Canada) and Europe. The following sets forth the Company's operations in
its two geographic markets (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 EUROPE NORTH AMERICA TOTAL
---------------------------- ------------------ ---------------- --------------
<S> <C> <C> <C>
Net sales.............................. $ 270,236 $ 875,152 $ 1,145,388
Income from operations................. 3,423 55,839 59,262
Identifiable assets.................... 82,548 317,197 399,745
YEAR ENDED DECEMBER 31, 1996 EUROPE NORTH AMERICA TOTAL
---------------------------- ------------------ ----------------- ----------------
Net sales.............................. $ 234,078 $ 677,815 $ 911,893
Income from operations................. 4,224 65,250 69,474
Identifiable assets.................... 78,490 252,949 331,439
YEAR ENDED DECEMBER 31, 1995 EUROPE NORTH AMERICA TOTAL
---------------------------- ----------------- ------------------ -----------------
Net sales.............................. $ 188,765 $ 445,719 $ 634,484
Income from operations................. 8,846 45,425 54,271
Identifiable assets.................... 66,369 181,146 247,515
</TABLE>
11. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
DECEMBER 31, 1997 QUARTER QUARTER QUARTER QUARTER
----------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales............................... $273,537 $ 259,485 $ 259,661 $ 352,705
Gross profit............................ 69,407 64,167 57,289 74,679
Net income.............................. 12,088 11,665 2,136 12,923
Net income per common share:
Basic and diluted.............. $ .32 $ .31 $ .06 $ .34
FIRST SECOND THIRD FOURTH
DECEMBER 31, 1996 QUARTER QUARTER QUARTER QUARTER
----------------- ------- ------- ------- -------
Net sales............................... $218,732 $ 213,707 $ 225,868 $ 253,586
Gross profit............................ 65,021 60,070 60,313 64,212
Net income.............................. 11,392 9,787 10,683 11,842
Net income per common share:
Basic and diluted.............. $ .31 $ .26 $ .28 $ .31
* * * * * *
</TABLE>
EXHIBIT INDEX
10.6 Lease Agreement dated as of July 17, 1997
between the Company and South Bay Industrials
Company (New Compton facility)
10.14 Employment Agreement dated as of December 12, 1997
between the Company and Steven M. Goldschein
21.1 Subsidiaries of the Registrant
23 Consent of experts and counsel; Consent of Independent
Public Accountants
27 Financial Data Schedule
STANDARD FORM
SINGLE TENANT INDUSTRIAL LEASE
(NET)
LANDLORD: South Bay Industrials Company, L.L.C.,
a Delaware limited liability company
TENANT: Systemax, Inc., a New York corporation,
dba: Global Computer Supplies
PROJECT: 921 West Artesia Boulevard
CITY, STATE Compton, California
DATE: July 17, 1997
<PAGE>
STANDARD FORM
SINGLE TENANT INDUSTRIAL LEASE
(NET)
TABLE OF CONTENTS
PAGE
1. Basic Lease Term.......................................................1
2. Premises...............................................................2
3. Lease Term.............................................................3
4. Possession.............................................................3
5. Rent...................................................................4
6. Prepaid Rent...........................................................5
7. Security Deposit.......................................................5
8. Use Of Premises And Project Facilities.................................6
9. Surrender Of Premises; Holding Over....................................7
10. Signage...............................................................8
11. Taxes.................................................................8
12. Utilities.............................................................9
13. Maintenance...........................................................9
14. Alterations..........................................................12
15. Release And Indemnity................................................12
16. Insurance............................................................13
17. Destruction..........................................................15
18. Condemnation.........................................................16
19. Assignment Or Sublease...............................................17
20. Default..............................................................19
21. Landlord's Remedies..................................................19
22. Default By Landlord..................................................20
23. Entry Of Premises And Performance By Tenant..........................21
24. Subordination........................................................22
25. Notice...............................................................23
26. Waiver...............................................................23
27. Limitation Of Liability..............................................23
28. Force Majeure........................................................24
29. Professional Fees....................................................24
30. Examination Of Lease.................................................25
31. Estoppel Certificate.................................................25
32. Rules And Regulations................................................26
33. Liens................................................................26
34. Miscellaneous Provisions.............................................26
RIDERS
1. Early Entry..........................................................R-1
2. Option to Extend.....................................................R-2
EXHIBITS [OMITTED]
A. Depiction of Premises................................................A-1
B. Project Site Plan....................................................B-1
C. Work Letter Agreement................................................C-1
D. Notice of Lease Term Dates...........................................D-1
E. Tenant Estoppel Certificate..........................................E-1
F. Rules and Regulations................................................F-1
G. Project Signage Criteria.............................................G-1
H. Hazardous Materials Addendum.........................................H-1
I. Hazardous Materials Questionnaire....................................I-1
<PAGE>
STANDARD INDUSTRIAL LEASE
(NET)
1. BASIC LEASE TERM.
a. DATE OF LEASE EXECUTION: July 17, 1997
b. TENANT: Systemax, Inc., a New York corporation
Trade Name Global Computer Supplies
Address (Leased Premises): 921 West Artesia Boulevard
City, State Zip Code: Compton, CA 90220
Building/Suite/Unit: 921 West Artesia Boulevard
c. LANDLORD: South Bay Industrials Co., L.L.C., a Delaware limited
liability company Address (FOR RENT AND NOTICES): c/o SARESoREGIS
Group 9500 Telstar Avenue, Suite 106, El Monte, CA 91731, with a copy
to: J.P. Morgan Investment Management, 522 Fifth Avenue, New York, NY
10036 and to: SARESoREGIS Group, 18802 Bardeen Avenue, Irvine, CA
92712
d. TENANT'S PERMITTED USE OF PREMISES: Warehousing and distribution of
computer related products, materials handling equipment, retail sales
and related office activities.
e. PREMISES: Those Certain Premises Defined in PARAGRAPH 2 Below.
f. PREMISES AREA: approximately 140,720 Rentable Square Feet
g. TERM: Commencement Date: NOVEMBER 1, 1997 Expiration Date: OCTOBER 21,
2007 Number of Months 120
h. MONTHLY BASIC RENT: FORTY-SIX THOUSAND FOUR HUNDRED THIRTY-SEVEN AND
60/100 DOLLARS ($46,437.60)
i. ANNUAL BASIC RENT: FIVE HUNDRED FIFTY-SEVEN THOUSAND TWO HUNDRED
FIFTY-ONE AND 20/100 DOLLARS ($557,251.20)
j. RENT ADJUSTMENT:
Cost of Living. The cost of living provisions of Subparagraph 5(c)
apply using the Consumer Price Index - Urban Wage Earners and Clerical
Workers (Los Angeles- Anaheim-Riverside), all items, Base 1982-1984
("Index"), (1967=100), with a minimum increase of 3% per annum and a
maximum increase of 7%, said adjustments calculated and effective at
the commencement of the 31st, 61st and 91st months of the Term.
k. PREPAID RENT (for FIRST month of term): FORTY-SIX THOUSAND FOUR
HUNDRED THIRTY-SEVEN AND 60/100 DOLLARS ($46,437.60).
l. TOTAL SECURITY DEPOSIT: $60,590.50, including a $0.00 non-refundable
cleaning fee.
m. BROKER(S): CB Commercial - Jeffery S. Morgan and John J. Schumacher,
representing Tenant.
n. GUARANTOR(S): N/A
o. TENANT IMPROVEMENTS: All work performed by Landlord to prepare the
Premises for occupancy pursuant to the terms of the work Letter
Agreement attached hereto as EXHIBIT C.
p. TENANT IMPROVEMENT ALLOWANCE: If applicable, Landlord grants to Tenant
a Tenant Improvement Allowance pursuant to the terms of the Work
Letter Agreement attached hereto as EXHIBIT C.
q. PARKING: Tenant shall have exclusive rights to all available designed
parking appurtenant to the property.
r. ADDITIONAL SECTIONS: Additional sections of this Lease, contained in
the "Addendum to the Lease", numbered 36 through 0 - - are attached
hereto and made a part hereof. If none, so state in the following
space NONE.
v. RIDERS: Riders numbered 1 through 2 are attached hereto and made a
part hereof. If none, so state in the following space - - .
w. EXHIBITS: Exhibits lettered A through I are attached hereto and made a
part hereof. If none, so state in the following space - - .
This PARAGRAPH 1 represents a summary of the basic terms of this
lease. In the event of any inconsistency between the terms contained
in this PARAGRAPH 1 and any specific provision of this Lease, the
terms of the more specific provision shall prevail.
2. PREMISES.
(a) Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, the premises referenced in PARAGRAPH 1 and outlined in
EXHIBIT A (the "Premises"), consisting of that certain building (the
"Building") AND THE EXCLUSIVE PARKING AND DELIVERY AREAS APPURTENANT
THERETO which is a part of the project described on EXHIBIT B (the
"Project"). By entry on the Premises, Tenant acknowledges that it has
examined the Premises and accepts the Premises in their present
condition, subject to any additional work Landlord has agreed to
perform pursuant to the provisions of this Lease.
(b) The parties agree that the letting and hiring of the Premises is upon
and subject to the terms, covenants and conditions herein set forth
and Tenant covenants as a material part of the consideration for this
Lease to keep and perform each and all of said terms, covenants and
conditions by it to be kept and performed and that this Lease is made
upon the condition of such performance.
3. LEASE TERM.
The term of this Lease shall be for the period designated in Subparagraph
1(g) commencing on the commencement Date, and ending on the Expiration Date
as set forth in said Subparagraph 1(g), unless the term hereby demised
shall be sooner terminated as herein provided ("Term"). Notwithstanding the
foregoing, if the Commencement Date falls on any day other than the first
day of a calendar month then the Term of this Lease shall be measured from
the first day of the month following the month in which the commencement
Date occurs.
4. POSSESSION.
(a) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the
Premises to Tenant upon the substantial completion of the Tenant
Improvements as determined by Landlord's architect or space planner in
accordance with the terms of this Lease and the Work Letter Agreement
attached hereto as exhibit C. Notwithstanding the foregoing, Landlord
shall not be obligated to deliver possession of the Premises to Tenant
until Landlord has received from Tenant all of the following: (i) the
Security Deposit and first monthly installment of Annual Basis Rent;
(ii) executed copies of policies of insurance of certificates thereof
as required under Paragraph 18 of this Lease; (iii) copies of all
governmental permits and authorizations required in connection with
Tenant's operation of its business upon the Premises; and (iv) an
executed original of the Hazardous Materials Questionnaire in the form
attached hereto as Exhibit 1.
(b) CONDITION OF PREMISES. Prior to the Commencement Date and in
accordance with the Work Schedule to be prepared by Landlord and
Tenant pursuant to the Work Letter Agreement attached hereto as
Exhibit C, Landlord and Tenant shall jointly conduct a walk-through
inspection of the Premises and shall jointly prepare a list (the
"Punch-List") of items needing additional work; provided, however, the
Punch- List shall be limited to items required to be installed by
landlord under the Work Letter Agreement and the Punch-List will not
include any items of damage to the Premises caused by Tenant's move-in
or early entry, if permitted. Damage caused by Tenant will be
corrected or repaired by Landlord, at Tenant's expense. Other than the
items specified in the Punch-List, by taking possession of the
Premises, Tenant will be deemed to have accepted the Premises and the
Building in their condition on the date of delivery of possession and
to have acknowledged that Landlord has installed the Tenant
Improvements as required by the work Letter Agreement and that there
are no additional items needing work or repair. Landlord shall cause
all items set forth in the Punch-List to be repaired or corrected
within thirty (30) days following the preparation of the Punch-List or
as soon as reasonably practicable after the preparation of the
Punch-List. Tenant acknowledges that neither Landlord nor any agent of
Landlord has made any representation or warranty with respect to the
Premises, the Building, the Project or any portions thereof or with
respect to the suitability of same for the conduct of Tenant's
business. Without limiting the foregoing, if the Building is newly
constructed or renovated, Tenant's execution of the Notice attached
hereto as Exhibit D shall constitute a specific acknowledgment and
acceptance of the various start-up inconveniences that may be
associated with the use of the Project and the Common Areas such as
certain construction obstacles including scaffolding, uneven air
conditioning services and other typical conditions incident to
recently constructed or renovated buildings.
5. RENT.
(a) BASIC RENT. Tenant agrees to pay Landlord as Annual Basic Rent for the
Premises the annual basic Rent designated in SUBPARAGRAPH 1(I)
(adjusted as hereinafter provided) in twelve (12) equal monthly
installments as designated in Subparagraph 1(h), each in advance on
the first day of each and every calendar month during the Term, except
that one month's rent shall be paid upon the execution of this Lease.
If the Term of this Lease commences on a day other than the first day
of a calendar month or ends on a day other than the last day of a
calendar month, then the rent for such periods shall be prorated in
the proportion that the number of days this Lease is in effect during
such periods bears to thirty days (30), and such rent shall b paid at
the commencement of such period. In addition to the Annual Basic Rent,
Tenant agrees to pay additional rent as provided in PARAGRAPH 6 and
the amount of all rental adjustments as and when hereinafter provided
in this Lease. The Annual Basic Rent, any additional rent payable
pursuant to the provisions of this lease and any rental adjustments
shall be paid to Landlord, without any prior demand therefor, and
without any deduction or offset whatsoever in lawful money of the
United States of America, which shall be legal tender at the time of
payment, at the address of Landlord designated in SUBPARAGRAPH 1(C) or
to such other person or at such other place as Landlord may from time
to time designate in writing. Further, all charges to be paid by
Tenant hereunder, including, without limitation, payments for real
property taxes, insurance, repairs, and parking, if any, shall be
considered additional rent for the purposes of this Lease, and the
word "rent" in this Lease shall include such additional rent unless
the context specifically or clearly implies that only the Annual Basic
Rent is referenced. Annual Basic Rent shall be adjusted as provided in
SUBPARAGRAPH 1(I).
(b) LATE PAYMENTS. Tenant acknowledges that late payment by Tenant to
Landlord of any rent or other sums due under this Lease will cause
Landlord to incur costs not contemplated by this Lease, the exact
amount of such costs being extremely difficult and impracticable to
ascertain. Such costs include, without limitation, processing and
accounting charges and late charges and late charges that may be
imposed on Landlord by the terms of any encumbrance or note secured by
the Premises. Therefore, if any rent or other sum due from Tenant is
not received WITHIN FIVE (5) BUSINESS DAYS OF THE DATE when due,
Tenant shall pay to landlord immediately thereafter an additional sum
equal to FIVE PERCENT (5%) of such overdue payment. Landlord and
Tenant hereby agree that such late charge represents a fair and
reasonable estimate of the costs that Landlord will incur by reason of
any such late payment. Additionally, all such delinquent rent or other
sums, plus this late charge, shall bear interest at the then maximum
lawful rate permitted to be charged by Landlord. Any payments of any
kind returned for insufficient funds will be subject to an additional
handling charge of $25.00.
(c) COST OF LIVING RENT ADJUSTMENT. Annual Basic Rent, including all prior
adjustments, shall be increased (but never decreased) effective each
thirty (30) month anniversary of the Commencement Date of this Lease
or each anniversary of the first day of the month immediately
following the month in which the Commencement Date occurs if the
Commencement date occurs other than on the first day of a month
("Adjustment Date"), in accordance with the percentage increase, if
any, in the Index described in SUBPARAGRAPH 1(L)1 as published by the
United States Department of Labor, Bureau of Labor Statistics
("Bureau"). The Index most recently published prior to the Adjustment
date shall be compared with the Index for the same month of the
preceding period and the Annual Basic Rent shall be increased in
accordance with the percentage increase, if any, between such Indices.
Should the Bureau discontinue the publication of the Index, or publish
the same less frequently, or alter the same in some other manner,
Landlord, in its discretion, shall adopt a substitute index or
procedure with reasonably reflects and monitors consumer prices.
6. PREPAID RENT.
Upon execution of this Lease, Tenant shall pay to Landlord the Prepaid Rent
set forth in SUBPARAGRAPH 1(K), and if Tenant is not in default of any
provisions of this Lease, such Prepaid Rent shall be applied toward the
rent due for the FIRST month of the Term. Landlord's obligation with
respect to the Prepaid Rent are those of a debtor and not of a trustee, and
Landlord can commingle the Prepaid Rent with Landlord's general funds.
Landlord shall not be required to pay Tenant interest on the Prepaid Rent.
Landlord shall be entitled to immediately endorse and cash Tenant's Prepaid
Rent; however, such endorsement and cashing shall not constitute Landlord's
acceptance of this Lease. In the event Landlord does not accept this Lease,
Landlord shall return said Prepaid Rent. If Landlord sells the Premises and
deposits with the purchaser the Prepaid Rent, landlord shall be discharged
from any further liability with respect to the Prepaid Rent.
7. SECURITY DEPOSIT.
Upon execution of this Lease, Tenant shall deposit the Security Deposit set
forth in SUBPARAGRAPH 1(L) with Landlord, as security for the performance
by Tenant of the provisions of this Lease. If Tenant is in default,
regardless if such default is monetary or non-monetary. Landlord can use
the Security Deposit or any portion of it to cure the default or to
compensate Landlord for any damages sustained by Landlord resulting from
Tenant's default. Upon demand, Tenant shall immediately pay to Landlord a
sum equal to the portion of the Security Deposit expended or applied by
Landlord to maintain the Security Deposit in the amount initially deposited
with Landlord. If Tenant is not in default at the expiration or termination
of this Lease, Landlord shall return the entire Security Deposit to Tenant.
Landlord's obligations with respect to the Security Deposit are those of a
debtor and not a trustee, and Landlord can commingle the Security Deposit
with landlord's general funds. Landlord shall not be required to pay Tenant
interest on the Security Deposit. Landlord shall be entitled to immediately
endorse and cash Tenant's Security Deposit; however, such endorsement and
cashing shall not constitute landlord's acceptance of this Lease. In the
event Landlord does not accept this Lease, Landlord shall return said
Security Deposit. If Landlord sells the Premises and deposits with the
purchaser the then amount of the Security Deposit, Landlord shall be
discharged from any further liability with respect to the Security Deposit.
8. USE OF PREMISES AND PROJECT FACILITIES.
(a) TENANT'S USE OF THE PREMISES. Tenant shall use the Premises for the
use or uses set forth in SUBPARAGRAPH 1(D) above, and shall not use or
permit the Premises to be used for any other purpose without the prior
written consent of Landlord, which consent Landlord may withhold in
its sole and absolute discretion. Nothing contained herein shall be
deemed to give Tenant any exclusive right to such use in the Project.
(b) COMPLIANCE. At Tenant's sole cost and expense, Tenant shall procure,
maintain and hold available for Landlord's inspection, all
governmental licenses and permits required for the proper and lawful
conduct of Tenant's business from and at the Premises. Tenant shall
maintain the Premises in compliance with any and all CC&Rs and all
laws, statutes, zoning restrictions, ordinances or governmental laws,
rules, regulations or requirements of any duly constituted public
authority having jurisdiction over the Premises now or hereafter in
force, the requirements of the Board of Fire Underwriters or any other
similar body now or hereafter constituted, or of the Certificate of
Occupancy issued for the Building. Tenant shall not use or occupy the
Premises in violation of any of the foregoing. Tenant shall, upon
written notice from landlord, discontinue any use of the Premises
which is declared by any authority having jurisdiction over the
Premises, governmental or otherwise, to be a violation of law or of
said Certificate of Occupancy. NOTWITHSTANDING THE FOREGOING, TENANT
SHALL HAVE THE RIGHT TO CONTEST SUCH DECLARATION SO LONG AS SAME SHALL
STAY THE ENFORCEMENT OF ANY PROCEEDING AND NOT RESULT IN ANY PECUNIARY
LOSS TO LANDLORD. Tenant shall comply with all rules, orders,
regulations and requirements of any insurance authority having
jurisdiction over the Project or any present or future insurer
relating to the Premises or the Project. Tenant shall promptly, upon
demand, reimburse Landlord for any additional premium charged for any
existing insurance policy or endorsement required by reason of
Tenant's failure to comply with the provisions of this PARAGRAPH 8.
Tenant shall not do or permit anything to be done in or about the
Premises which will in any manner obstruct or interfere with the
rights of other tenants or occupants of the Project, or injure or
annoy them, or use or allow the Premises to be used for any improper,
immoral, unlawful or objectionable purpose, nor shall Tenant cause,
maintain or permit any nuisance in, on or about the Premises. Tenant
shall comply with all restrictive covenants and obligations crated by
private contracts which affect the use and operation of the Premises,
or the Project including, without limitation, the CURRENT Rules and
Regulations referred to in PARAGRAPH 32 and attached hereto as EXHIBIT
F, as THEY RELATE TO THE PERMITTED USES DEFINED IN SECTION 1(D) OF
THIS LEASE. Tenant shall not commit or suffer to be committed any
waste in or upon the Premises and shall keep the Premises in first
class repair and appearance. Further, Tenant's business machines and
mechanical equipment which cause vibration or noise that may be
transmitted to the Building structure or to any other space in the
Building shall be so installed, maintained and used by Tenant as to
eliminate or minimize such vibration or noise. Tenant shall be
responsible for all structural engineering required to determine
structural load, as well as the expense thereof.
9. SURRENDER OF PREMISES; HOLDING OVER.
Upon expiration of the Term of this Lease, Tenant shall surrender to
Landlord the Premises and all Tenant Improvements and alterations in good
condition, except for ordinary wear and tear and alterations Tenant has the
right or is obligated to remove under the provisions of PARAGRAPH 14
herein. Tenant shall remove all personal property and shall perform all
restoration made necessary by the removal of any alterations of Tenant's
personal property before the expiration of the Term, including for example,
restoring all wall surfaces to their condition prior to the commencement of
this Lease. Landlord can elect to retain or dispose of in any manner
Tenant's personal property not removed from the Premises by Tenant prior to
the expiration of the Term. Tenant waives all claims against Landlord for
any damage to the Tenant resulting from Landlord's retention or disposition
of Tenant's personal property. Tenant shall be liable to Landlord for
Landlord's costs for storage, removal or disposal of Tenant's personal
property.
If Tenant, with Landlord's consent, remains in possession of the Premises
after expiration or termination of the Term, or after the date in any
notice given by Landlord to Tenant terminating this Lease, such possession
by Tenant shall b deemed to be a month-to-month tenancy terminable on
written 30-day notice at any time, by either party. All provisions of this
Lease, except those pertaining to term and rent, shall apply to the
month-to-month tenancy. Tenant shall pay monthly rent in an amount equal to
125% of Monthly Basic Rent, subject to increases as provided in
SUBPARAGRAPH 5(C), if applicable, for the last full calendar month during
the regular Term plus 100% of said last month's estimate to Tenant's share
of Expenses pursuant to PARAGRAPH 13, subject to increase as provided
therein. If Tenant fails to surrender the Premises after expiration or
termination of the Term, Tenant shall indemnify, defend and hold Landlord
harmless from all loss or liability, including, without limitation, any
loss or liability resulting from any claim against Landlord made by any
succeeding tenant founded on or resulting from Tenant's failure to
surrender the Premises together with actual attorney's fees and costs.
10. SIGNAGE.
Landlord shall designate the location on the Building and/or the Premises,
if any, for one or more exterior Tenant identification sign(s) Tenant shall
install and maintain its identification sign9s) in such designated location
in accordance with this PARAGRAPH 10 and EXHIBIT G. Tenant shall have no
rights to install or maintain Tenant identification signs in any other
location in, on or about the Premises or the Project and shall not display
or erect any other signs, displays or other advertising materials that are
visible from the exterior of the Building. The size, design, color and
other physical aspects of permitted signs) shall be subject to: (i)
Landlord's written approval prior to installation, which approval may be
withheld in landlord's discretion, (ii) any covenants, conditions or
restrictions encumbering the Premises, and (iii) any applicable municipal
or governmental permits and approvals. The cost of the sign(s), including
the installation, maintenance and removal thereof shall be at Tenant's sole
cost and expense. If Tenant fails to install or maintain its sign(s), or if
Tenant fails to remove same upon termination of this Lease and repair any
damage caused by such removal including, without limitation, repainting the
Building (if required by Landlord, in Landlord's sole but reasonable
judgment), Landlord may do so at Tenant's expense. Tenant shall reimburse
Landlord for all costs incurred by Landlord to effect such installation,
maintenance or removal, which amount shall be deemed additional rent, and
shall include, without limitation, all sums disbursed, incurred or
deposited by Landlord including Landlord's costs, expenses and actual
attorney's fees with interest thereon at the maximum interest rate
permitted by law from the date of Landlord's demand until payment. Any sign
rights granted to Tenant under this Lease are personal to Tenant and may
not be assigned, transferred or otherwise conveyed to any assignee or
subtenant of Tenant without Landlord's prior written consent, which consent
Landlord may withhold in its sole and absolute discretion.
11. TAXES.
(a) PERSONAL PROPERTY TAXES. Tenant shall pay before delinquency all
taxes, assessments, license fees and public charges levied, assessed
or imposed upon its business operation as well as upon all trade
fixtures, leasehold improvements, merchandise and other personal
property in or about the Premises.
(b) REAL PROPERTY TAXES. Tenant shall pay, as additional rent, all Real
Property Taxes including all taxes, assessments (general and special)
and other impositions or charges which may be taxed, charged, levied,
assessed or imposed with respect to any calendar year or part thereof
included within the term upon all or any portion of or in relation to
the PREMISES, any leasehold estate in the Premises or measured by rent
from the Premises, including any increase caused by the transfer, sale
or encumbrance of the Project or any portion thereof. "Real Property
Taxes" shall also include any form of assessment, levy, penalty,
charge or tax (other than estate, inheritance, net income or franchise
taxes) imposed by any authority having a direct or indirect power to
tax or charge, including, without limitation, any city, county, state,
federal or any improvement or other district, whether such tax is: (i)
determined by the area of the PREMISES or the rent or other sums
payable under this Lease: (2) upon or with respect to any legal or
equitable interest of Landlord in the PREMISES or any part thereof;
(3) upon this transaction or any document to which Tenant is a party
creating a transfer in any interest in the PREMISES; (4) in lieu of or
as a direct substitute in whole or in part of or in addition to any
real property taxes on the PREMISES; (5) based on any parking spaces
or parking facilities provided in the PREMISES or (6) in consideration
for services, such as police protection, fire protection,, street,
sidewalk and roadway maintenance, refuse removal or other services
that may be provided by any governmental or quasi-governmental agency
from time to time which were formerly provided without charge or with
less charge to property owners or occupants. Tenant shall pay Real
Property Tax cost on the date any taxes or installments of taxes are
due and payable as determined by the taxing authority, evidenced by
the tax bill. Landlord shall determine and notify Tenant of Tenant's
share not less than thirty (30) days in advance of the date such taxes
or installment of taxes is due and payable. In the event Landlord
fails to deliver such timely determination and notice to Tenant, then
Tenant shall have thirty (30) days from receipt of such notice to
remit payment of Tenant's share to Landlord. The foregoing
notwithstanding, upon notice from Landlord, Tenant shall pay as
additional rent Tenant's share to landlord in advance monthly
installments equal to one twelfth (1/12) of Landlord's reasonable
estimate of Tenant's share of the Real Estate Taxes payable under this
Lease, together with monthly installments of base rent, and Landlord
shall hold such payments in a non-interest bearing account. Landlord
shall determine and notify Tenant of any deficiency in the impound
account Tenant shall pay any deficiency of funds in the impound
account not less than thirty (30) days in advance of the date such
taxes or installment of taxes is due and payable. In the event
Landlord fails to deliver such timely deficiency determination and
notice to Tenant, then Tenant shall have thirty (30) days from receipt
of such notice to remit payment of such deficiency to Landlord. If
Landlord determines that Tenant's impound account has accrued an
amount in excess of Tenant's share, then such excess shall b credited
to Tenant within said notice from Landlord.
12. UTILITIES.
Tenant shall pay directly to the utility companies providing such services,
the cost of all water, gas, heat, light, power, sewer, electricity,
telephone or other service metered, chargeable or provided to the Premises.
Landlord shall not be liable in damages or otherwise for any failure or
interruption of any utility or other service furnished to the Premises. No
such failure or interruption shall entitle Tenant to terminate this Lease
or abate rent in any manner.
13. MAINTENANCE.
(a) PERFORMANCE BY TENANT. Except as provided below, Tenant shall maintain
and repair the premises in good condition, including, without
limitation, maintaining and repairing all walls; floors; ceilings;
telephone equipment and wiring; doors exterior and interior windows
and fixtures as wells damage caused by Tenant, its agents,
contractors, employees or invites. Upon expiration or termination of
this Lease, Tenant shall surrender the Premises to Landlord in the
same condition as existed at the commencement of the Term, except for
reasonable wear and tear or damage caused by fire or other casualty
for which Landlord has received all funds necessary for restoration of
the Premises from insurance proceeds.
If Tenant refuses or neglects to repair and maintain the Premises as
required hereunder and to the reasonable satisfaction of Landlord. Landlord
may at any time following ten (10) days from the date on which Landlord
shall make a written demand on Tenant to effect such repair and
maintenance, enter upon the Premises and make such repairs and/or
maintenance without liability to tenant for any loss or damage which might
occur to Tenant's merchandise, fixtures or other property or to Tenant's
business by reason thereof, and upon completion thereof, Tenant shall pay
to Landlord, Landlord's costs for making such repairs FIFTEEN PERCENT (15%)
overhead, upon presentation of a bill therefor. Said bill shall include
interest at the maximum rate permitted by law on said costs from the date
of completion of the maintenance and repairs by Landlord.
Tenant shall, at its own expense, provide, install and maintain in good
condition all of its Personal Property required in the conduct of its
business on the Premises.
(b) PERFORMED BY LANDLORD. (i) Landlord shall be responsible at its own
cost and expense to maintain in good condition the structural part of
the Premises, which shall include only the structural beams which
support the roof deck and membrance, exterior walls, building
foundations and floors. (ii) In the event that the roof system or
existing HVAC equipment suffers major failure during the term hereof,
Landlord shall replace or repair same, and the cost thereof shall be
amortized on monthly basis over the expected useful life or the repair
or replacement, and Lessee, as an item of Addition Rent, shall pay to
Landlord on a monthly basis for the portion of such amortized cost
which shall accrue during the remaining term hereof. Subject to
reimbursement by Tenant as hereinafter provided, Landlord shall be
responsible to maintain, in good condition the roof system and
skylights; the paved and hardscaped parking and driveway areas
(including resurfacing and restriping); gutters and downspouts on the
Building; the heating, ventilating and air condition system servicing
the Premises; landscaping (including replacement thereof), sprinkler
system, walkways, parking areas AND EXTERIOR PAINTING (PERFORMED NOT
MORE THAN ONCE DURING ANY FIVE YEAR INTERVAL).
(c) REIMBURSEMENT BY TENANT. Prior to the commencement of each calendar
year, Landlord shall give Tenant a written estimate of the expenses
Landlord anticipates will be incurred for the ensuing calendar year
with respect to the maintenance and repair to be performed by Landlord
as herein described (the "Maintenance Expenses"). Tenant shall pay, as
additional rent, such estimated expenses is equal monthly installments
in advance on or before the first day of each month concurrent with
its payment of Monthly Rent. Within ninety (90) days after the end of
each calendar year, Landlord shall furnish Tenant a statement showing
in reasonable detail the actual expenses incurred for the period in
question and the parties shall within thirty (30) days thereafter make
payment or allowance as necessary to adjust Tenant's estimated
payments to the actual expenses as shown by applicable periodic
statements submitted by Landlord. If Landlord shall determine at any
time that the estimate of expenses for the current calendar year is or
will become inadequate to meet all such expenses for any reason,
Landlord shall immediately determine the appropriate amount of such
inadequacy and issue a supplemental estimate as to such expenses, and
Tenant shall pay and increase in the estimated expenses as reflected
by such supplemental estimate.
Tenant's failure to timely pay any of the charges in connection with
the performance of its maintenance and repair obligations to be paid
under this Paragraph 13 shall constitute a material default under this
Lease.
Landlord shall keep or cause to be kept separate and complete books of
account covering costs and expenses incurred in connection with its
maintenance and repair of the Building and outside areas, which costs
and expenses shall include, without limitation, the actual costs and
expenses incurred in connection with labor and material utilized in
performance of the maintenance and repair obligations hereinafter
described, public liability, property damage and other forms of
insurance which Landlord may or is required to maintain, reasonable
reserves for replacements and/or repairs of improvements to the
outside areas, equipment and supplies, employment of such personnel as
Landlord may deem reasonably necessary, payment or provision for
unemployment insurance, worker's compensation insurance and other
employee costs, depreciation of machinery and equipment used in
connection with the maintenance of the outside areas, the cost of
bookkeeping and accounting services, a management fee to cover
Landlord's management, overhead and administrative expenses,
assessments which may be levied against the Premises under any
recorded covenants, conditions and restrictions, and any other items
reasonable necessary from time to time to properly repair, replace and
maintain the outside areas and any interest paid in connection
therewith. Landlord may elect to delegate its duties hereunder to a
professional property manager in which event all costs and expenses of
such property management shall be included as expenses to be
reimbursed by Tenant hereunder.
Except as provided in PARAGRAPH 17, there shall be no abatement of
rent and no liability of Landlord by reason of any injury to or
interference with Tenant's business arising from the making of any
repair, alterations or improvements in or to any portion of the
Project or the Premises. Tenant hereby waives any and all rights to
make repairs at the expense of Landlord under the provisions of
Sections 1941 and 1942 of the California Civil Code or any similar
statue now or hereafter enacted. LANDLORD SHALL USE ALL REASONABLE
EFFORTS TO MINIMIZE ANY DISRUPTION TO THE OPERATION OF TENANT'S
BUSINESS WHILE MAKING SUCH REPAIRS, ALTERATIONS OR IMPROVEMENTS AND,
UNLESS IN AN EMERGENCY, SHALL SCHEDULE SAME OUTSIDE OF NORMAL BUSINESS
HOURS (ONLY IF STANDARD BILLING RATES APPLY FOR THE SERVICE OR TRADE
PERFORMING SUCH WORK) AND UPON TWENTY-FOUR (24) HOURS' WRITTEN NOTICE
TO TENANT.
14. ALTERATIONS.
Tenant shall not make any alterations to the Premises, or to the Project,
including any changes to the existing landscaping, without Landlord's prior
written consent WHICH CONSENT SHALL NOT BE UNREASONABLY WITHHELD.
NOTWITHSTANDING THE FOREGOING, TENANT SHALL HAVE THE RIGHT TO (I) PAINT AND
CARPET THE PREMISES, AND (II) UNDERTAKE OTHER NON-STRUCTURAL ALTERATIONS
COSTING LESS THAN $50,000, WITHOUT LANDLORD'S PRIOR WRITTEN CONSENT, BUT
WITH NOT LESS THAN THIRTY (30) DAYS PRIOR WRITTEN NOTICE TO LANDLORD. If
Landlord gives its consent to such alterations, Landlord may post notices
in accordance with the laws of the state in which the Premises are located.
Any alterations make shall remain on and be surrendered with the Premises
upon expiration of the Term, except that Landlord may, within 30 days
before or 30 days after expiration of the Term UNLESS TENANT, AT ITS SOLE
AND EXPENSE, REMOVES SAME, AND RESTORES THE PREMISES TO ITS CONDITION AS OF
THE COMMENCEMENT DATE, REASONABLE WEAR AND TEAR EXCEPTED, OR UNLESS
LANDLORD NOTIFIES TENANT AS A CONDITION OF ITS CONSENT TO REMOVE ANY
PARTICULAR IMPROVEMENT, OR PORTION THEREOF, AND RESTORE THE PREMISES TO THE
CONDITION IMMEDIATELY PRIOR TO THE INSTALLATION OF THE PARTICULAR
IMPROVEMENT.
Should Landlord consent in writing to Tenant's alteration of the Premise,
Tenant shall contract with a contractor approved by Landlord for the
construction of such alterations, shall secure all appropriate governmental
approvals and permits, and shall complete such alterations with due
diligence in compliance with plans and specifications approved by Landlord,
and in compliance with all applicable laws, statutes and regulations. All
such construction shall be performed in a manner which will not interfere
with the quiet enjoyment of other tenants of the Project. Tenant shall pay
all costs for such construction and shall keep the Premises and the Project
free and clear of all mechanics' liens which may result from construction
by Tenant.
15. RELEASE AND INDEMNITY.
As material consideration to Landlord, Tenant agrees that Landlord, its
agents, and its employees shall not be liable to Tenant, its agents,
employees, sublessee, invitees, licensees and other persons claiming under
Tenant for; (i) any damage to any property entrusted to employees of the
Project, (ii) loss or damage to any property by theft or otherwise, (iii)
consequential damages arising out of any loss of the use of the Premises or
any equipment or facilities therein; or (iv) any injury or damage to person
or property resulting from fire, explosion, falling plaster, steam, gas,
electricity, water or rain which may leak from any part of the PREMISES
from pipes, appliances or plumbing work therein or from the roof, street,
sub-surface or from any other place or resulting from dampness or any other
cause whatsoever. Landlord or its agents shall not be liable for
interference with light or other incorporeal hereditaments, nor shall
Landlord be liable for any latent defects in the Premises or the Project.
Tenant shall give prompt notice to Landlord in case of fire or accidents in
the Premises or in the Project, and of defects therein or in the fixtures
or equipment located therein.
To the fullest extent permitted by law, Tenant agrees to indemnify, defect
(with counsel reasonably satisfactory to Landlord) and hold harmless
Landlord, its agents, successors in interest with respect to the Building
and their directors, officers, partners, employees, shareholders, agents
and representatives and the directors, officers, partners, employees,
shareholders, agents and representatives of the partners of Landlord from
(i) all claims, actions, liabilities, and proceedings arising from Tenant's
use of the Premises or the conduct of its business or from any activity,
work or thing done, permitted or suffered by Tenant, its agents,
contractors, sublessees, employees or invitees, in or about the Premises,
the Building, or the Project and any breach or default in the performance
of any obligation to be performed by Tenant under the terms of this Lease,
or arising from any at, neglect, fault or omission of Tenant, or of its
agents, contractors, sublessees, employees or invitees, and (ii) any and
all costs, attorneys' fees, expenses and liabilities incurred with respect
to any such claims, actions, liabilities, or proceedings, and in the event
any actions or proceedings shall be brought against Landlord by reason of
any such claims. Tenant, upon notice from Landlord, shall defend the same
at Tenant's expense by counsel approved in writing by Landlord. Tenant
hereby assumes all risk of damage to property or injury to person in, upon
or about the Premises from any cause whatsoever except that which is caused
by the failure of Landlord to observe any of the terms and conditions of
this Lease where such failure has persisted for an unreasonable period of
time after Landlord receives written notice of such, and Tenant hereby
waives al its claims in respect thereof against Landlord.
As used herein, the term "liabilities" shall include all suits, actions,
claims and demands and all expenses (including attorneys' fees and costs of
defense) incurred in or about any such liability and any action or
proceeding brought thereon. If any claim shall be made or any action or
proceeding brought against Landlord on the basis of any liability described
in this Paragraph. Tenant shall, upon notice from Landlord defend the same
at Tenant's expense by counsel reasonably satisfactory to Landlord. It is
understood that payment shall not be a condition precedent to recovery upon
the foregoing indemnity. See Addendum (#1)
16. INSURANCE.
Tenant, at its cost, shall pay for and keep in full fore and effect
throughout the Term of this Lease:
(a) COMPREHENSIVE GENERAL LIABILITY OR COMMERCIAL GENERAL LIABILITY
insurance with respect to the Premises and the operations of or on
behalf of Tenant, in, of or about the Premises, including, but not
limited to, personal injury, product liability (if applicable),
blanket contractual, owner's protective, broad from property damage
liability, liquor liability (if applicable) and owned and non-owned
automobile liability in amounts not less than $3,000,00 per occurrence
on the commencement date of this Lease. The insurance policy or
policies shall contain the following provisions: (1) severability of
interest, (2) cross liability, (3) an endorsement naming Landlord,
Landlord's Mortgagees and any other parties in interest designated by
Landlord as additional insured, (4) an endorsement stating "such
insurance as is afforded by this policy for the benefit of the
Landlord and any other additional insured shall be primary as respects
any liability or claims arising out of the occupancy of the Premises
by the Tenant, or Tenant's operations and any insurance carried by
Landlord, or any other additional insured shall be non-contributory,"
(5) with respect to improvements or alterations permitted under this
Lease, contingent liability and builder's risk insurance, (6) an
endorsement allocating to the Premises the full amount of liability
limits required by this Lease, and (7) coverage must be on an
"occurrence basis". "Claims-Made" forms are not acceptable.
(b) WORKERS COMPENSATION COVERAGE as required by law, together with
Employers Liability coverage with a limit of not less than $1,000,000.
(c) TENANT'S PROPERTY INSURANCE: Tenant shall at all times during the term
hereof and at its cost and expense, maintain in effect policies of
insurance covering (1) all Tenant Improvements on the Premises
installed by Tenant, (2) all personal property of Tenant located in or
at the Premises including, but not limited to, fixtures, furnishings,
equipment and furniture, in an amount not less than their full
replacement value, and (3) loss of income or business interruption
covering a period of not less than one (1) year. These policies shall
provide protection against any peril included within the
classification "All Risk" including, but not limited to, insurance
against sprinkler leakage, vandalism and malicious mischief. The
proceeds of such insurance shall be used to repair or replace the
Tenant Improvements and personal property so insured.
All policies of insurance required to be kept or maintained by Tenant AND
LANDLORD hereunder shall include a clause or endorsement denying the
insurer any rights of subrogation against the other party to the extent
rights have been waived by the insured before the occurrence of injury or
loss, if same are obtainable without unreasonable cost. Landlord and Tenant
each hereby waive any rights of recovery against the other for injury or
loss to such waiving party or to its property or the property of others
under its control, arising from any cause required to be insured against
under any policy of insurance required to be carried to be carried by such
waiving party under this Lease. The foregoing waiver shall be effective
whether or not the waiving party shall actually obtain and maintain the
insurance which such waiving party is obligated to obtain and maintain
under this Lease.
All insurance required to be provided by Tenant under this Lease: (a) shall
be issued by insurance companies authorized to do business in the state in
which the Premises are located and holding a General Policyholders Rating
of "A" and a Financial Rating of "X" or better, as set forth in the most
recent edition of Best's Insurance Reports; (b) shall contain an
endorsement requiring at least 30 days prior written notice to Landlord and
Landlord's lender, before cancellation or change in coverage scope or
amount of any policy. Tenant shall deliver a certificate or copy of such
policy together with evidence of payment of all current premiums to
Landlord within 30 days of execution of this Lease and within fifteen (15)
days of expiration of each policy. Tenant's failure to provide evidence of
such coverage to Landlord shall constitute a default under this Lease.
Subject to being reimbursed by Tenant, Landlord shall insure the Building
(excluding all property which Tenant is obligated to insure) against damage
with "All Risk" insurance and public liability insurance (See Addendum #2)
including rental abatement insurance, all in such amounts and with such
deductibles as Landlord considers appropriate, BUT IN NO EVENT LESS THAN
THE REPLACEMENT COST THEREOF. Tenant shall pay, as additional rent, the
cost of any insurance maintained by Landlord hereunder and any other
insurance Landlord may elect to obtain for the PREMISES from time to time
during the Term (including, without limitation, earthquake and/or flood
insurance). Tenant shall pay insurance cost within fifteen days (15) days
after Tenant's receipt of statement from Landlord determining Tenant's
share of the insurance cost. The foregoing notwithstanding, upon notice
from Landlord, Tenant shall pay as additional rent Tenant's share to
Landlord in advance monthly installments equal to one twelfth (1/12) of
Landlord's reasonable estimate of Tenant's share of the insurance premiums
payable under this Lease, together with monthly installments of base rent,
and Landlord shall hold such payments in a non-interest bearing account.
Landlord shall determine and notify Tenant of any deficiency in the impound
account and Tenant shall pay any deficiency of funds in the impound account
within fifteen days (15) days after Tenant's receipt of statement from
Landlord determining Tenant's share of the actual insurance cost. If
Landlord determines that Tenant's impound account has accrued an amount in
excess of Tenant's share, then such excess shall be credited to Tenant
within said notice from landlord. Notwithstanding any contribution by
Tenant to the cost of insurance premiums as provided herein, Tenant
acknowledges that it has no right to receive any proceeds from any
insurance policies carried by Landlord.
17. DESTRUCTION.
If during the Term of this Lease, any portion of the Premises, access to
the Premises or any part of the PROJECT which is essential to the use of
the Premises is damaged or destroyed and such damage or destruction can, in
Landlord's reasonable estimation, be repaired within 180 days following
such damage or destruction, this Lease shall remain in full force and
effect and Landlord shall promptly commence to repair and restore the
damage or destruction to substantially the same condition as existed prior
to such damage and shall complete such repair and restoration with due
diligence in compliance with all then existing laws. If (1) such damage or
destruction cannot, in landlord's reasonable estimation, be repaired within
180 days following such damage or destruction; or (2) more than forty
percent (40%) of the Building is damaged or destroyed (regardless of its
impact on the Premises); or (3) any mortgage of the Building will not allow
the application of insurance proceeds to be applied to repair and
restoration; or (5) the damage or destruction occurs within the last twelve
(12) months of the Term of this Lease or any extension hereof, then
Landlord may, in its sole discretion, terminate this Lease by delivery of
notice to Tenant within 30 days of the date Landlord learns of the damage.
IN THE EVENT ANY MORTGAGE OF THE BUILDING DOES NOT ALLOW THE APPLICATION OF
INSURANCE PROCEEDS TO BE APPLIED TO REPAIR AND RESTORE THE BUILDING,
LANDLORD SHALL REFUND TO TENANT ANY SPECIFIC PREMIUMS COLLECTED FROM TENANT
FOR THE PARTICULAR COVERAGE INVOLVED.
In the event of repair, reconstruction and restoration by Landlord as
herein provided, the rent payable under this Lease shall be abated
proportionately BY AN AMOUNT IN THE SAME RATIO AS THE NUMBER OF SQUARE FEET
IN THE DAMAGED PORTION OF THE PREMISES BEARS TO THE TOTAL NUMBER OF SQUARE
FEET OF THE PREMISES; provided that there shall be no abatement of rent if
such damage is the result of Tenant's negligence or intentional wrongdoing.
Tenant shall not be entitled to any compensation or damages for loss of the
use of the whole or any part of the Premises, damage to Tenant's Personal
Property and/or any inconvenience or annoyance occasioned by such damage,
repair, reconstruction or restoration.
If Landlord is obligated to or elects to repair or restore at herein
provided, Landlord shall be obligated to make repair or restoration only to
those portions of the Building and the Premises which were originally
provided at landlord's expense, and the repair and restoration of items not
provided at Landlord's expense shall be the obligation of Tenant. Tenant
agrees to coordinate the restoration and repair of those items it is
required to restore or repair with Landlord's repair and restoration work
and in coordination with a work schedule prepared by Landlord, or
Landlord's contractor. Further, Tenant's work shall be performed in
accordance with the terms, standards and conditions contained in Paragraph
14 above.
The provisions of California Civil Code Section 1932, Subsection 2, and
Section 1933, Subsection 4, and any other similarly enacted statute or
court decision relating to the abatement or termination of a lease upon
destruction of the leased premises, are hereby waived by Tenant; and the
provisions of this PARAGRAPH 17 shall govern in case of such destruction.
18. CONDEMNATION.
(a) DEFINITIONS. The following definitions shall apply: (1) "Condemnation"
means (a) the exercise of any governmental power of eminent domain,
whether by legal proceedings or otherwise by condemnor and (b) the
voluntary sale or transfer by Landlord to any condemnor either under
threat of condemnation or while legal proceedings for condemnation are
proceeding; (2) "Date of Taking" means the date the condemnor has the
right to possession of the property being condemned; (3) "Award" means
all compensation, sums or anything of value awarded, paid or received
on a total or partial condemnation; and (4) "Condemnor" means any
public or quasi-public authority, or private corporation or
individual, having a power of condemnation.
(b) OBLIGATIONS TO BE GOVERNED BY LEASE. If during the Term of this Lease
there is any taking of all or any part of the Premises or the Project,
the rights and obligations of the parties shall be determined pursuant
to this Lease.
(c) TOTAL OR PARTIAL TAKING. If the Premises are totally taken by
condemnation, this Lease shall terminate on the date of taking. If any
portion of the Premises is taken by condemnation, this Lease shall
remain in effect, except that Tenant can elect to terminate this Lease
if the remaining portion of the Premises is rendered unsuitable for
Tenant's continued use of the Premises. If Tenant elects to terminate
this Lease, Tenant must exercise its right to terminate by giving
notice to Landlord within 30 days after the nature and extent of the
taking have been finally determined. If Tenant elects to terminate
this Lease, Tenant shall also notify Landlord of the date of
termination, which date shall not be earlier than 30 days nor later
than 90 days after Tenant has notified landlord of its election to
terminate; except that this Lease shall terminate on the date of
taking if the date of taking falls on a date before the date of
termination as designated by Tenant. If any portion of the Premises is
taken by condemnation and this Lease remains in full force and effect,
on the date of taking the rent shall be reduced by an amount in the
same ratio as the total number of rentable square feet in the portion
of the Premises taken bears to the total number of rentable square
feet in the Premises immediately before the date of taking. In the
case where a portion of the Premises is taken and the Lease remains in
full force and effect. Landlord shall, at its own cost and expense,
make all alterations or repairs to the Premises so as to make the
portion of the Premises not taken a complete architectural unit. Such
work shall not, however, exceed the scope of work done by Landlord in
originally constructing the Premises. If any portion of the Building
other than the Premises is taken and in Landlord's reasonable opinion
the Building should be restored in a manner that materially alters the
Premises, or if severance damages from the condemning authority are
not available to Landlord in sufficient amounts to permit such
restoration, Landlord may terminate this Lease upon written notice to
Tenant. Basic Monthly Rent due and payable hereunder shall be
temporarily abated during such restoration period in proportion to the
degree to which there is substantial interference with Tenant's use of
the Premises, as reasonably determined by Landlord or Landlord's
architect. Each party hereby waives the provisions of Section 1265.130
of the California Code of Civil procedures and any present or future
law allowing either party to petition the Superior Court to terminate
this Lease in the event of a partial taking of the Building or
Premises.
If the Premises are totally or partially taken by condemnation, Tenant
shall not asset any claim against Landlord or the taking authority for
any compensation because of such taking, and Landlord shall be
entitled to receive the entire amount of the award without any
deduction for any estate of interest of Tenant. NOTWITHSTANDING THE
FOREGOING, TENANT MAY MAKE A SEPARATE CLAIM AGAINST THE CONDEMNING
AUTHORITY FOR ITS MOVING EXPENSES AND OTHER CLAIMS TYPICALLY ALLOWED
OF TENANTS IN SIMILAR SITUATIONS.
19. ASSIGNMENT OR SUBLEASE.
Tenant shall not assign or encumber its interest in this Lease or the
Premises or sublease all or any part of the Premises or allow any other
person or entity (except Tenant's authorized representatives, employees,
invitees, or guests) to occupy or use all or any part of the Premises
without first obtaining Landlord's consent which Landlord shall not
unreasonably withhold. Landlord shall be deemed reasonable in withholding
its consent if it determines in its sole discretion that: (i) the financial
net worth of the proposed assignee or sublessee is not equal to or greater
than Tenant's financial net worth as of the date of this Lease as increased
by the increase in the Consumer Price Index, if any, between the date of
this Lease and the date of the assignment or sublease, (ii) (NOTE:
PREVIOUSLY TYPED LANGUAGE DELETED); (iii) the intended use of the Premises
by the proposed assignee or sublessee will require more than insignificant
alteration of the Premises; (iv) the intended use of the Premises by the
proposed assignee or sublessee will constitute a violation of this Lease or
any governmental law, rule, ordinance or regulation governing the Premises
or would involve the storage, use or keeping of Hazardous Materials (as
defined in Exhibit H attached hereto) in, on or about the Premises, the
Common Areas or any other portion of the Project; or if (v) the proposed
rent for the proposed assignee is less than the Rent then in effect under
the Lease; or (vi) the proposed assignee or sublessee is a tenant in the
Project or has negotiated to be a tenant in the Project any time in the six
(6) months just preceding Tenant's request for Landlord's consent AND
LANDLORD IS THEN LEASING A SIMILAR AMOUNT OF SPACE IN THE PROJECT. Any
assignment, encumbrance or sublease without Landlord's written consent
shall be voidable and at Landlord's election, shall constitute a default.
Landlord's waiver or consent to any assignment or subletting shall not
relieve Tenant of any assignee or sublessee from any obligation under this
Lease whether or not accrued.
If Tenant is a partnership, a withdrawal or change, voluntary, involuntary
or by operation of law of any partner, or the dissolution of the
partnership, shall be deemed a voluntary assignment. If Tenant is a
corporation, any dissolution, merger, consolidation or other reorganization
of Tenant, or sale or other transfer of a controlling percentage of the
capital stock of Tenant, or the sale of at least 25% of the value of the
assets of Tenant shall be deemed a voluntary assignment. The phase
"controlling percentage" means ownership of and right to vote stock
possessing at least 25% of the total combined voting power of all classes
of Tenant's capital stock issued, outstanding and entitled to vote for
election of directors. The preceding two sentences of this paragraph shall
not apply to corporations the stock of which is traded through a public
exchange. If Landlord shall consent to any assignment or sublease of this
Lease, three-quarters (3/4) of all sums and other consideration payable to
or for the benefit of the Tenant from its assignee or subtenant in excess
of the rent payable by Tenant to Landlord under this Lease, or in the case
of a sublease, in excess of the rent fairly allocable to such subleased
portion as reasonably determined by Landlord PLUS, IN EITHER CASE, THE
LEGAL FEES, BROKERAGE COMMISSIONS AND TENANT-PAID ALTERATIONS REQUIRED TO
CONSUMMATE SUCH ASSIGNMENT, shall be paid to Landlord, as and when such
sums are due and payable. If Tenant requests Landlord to consent to a
proposed assignment or subletting Tenant shall pay to Landlord, whether or
not consent is ultimately given, $100 or Landlord's reasonable attorneys'
fees incurred in connection with such request, whichever is greater.
No interest of Tenant in this lease shall be assignable by involuntary
assignment through operation of law (including, without limitation, the
transfer of this Lease by testacy or intestacy). Each of the following acts
shall be considered an involuntary assignment: (a) If Tenant is or becomes
bankrupt or insolvent, makes an assignment for the benefit of creditors, or
institutes proceedings under the Bankruptcy Act in which Tenant is the
bankrupt; or it Tenant is a partnership or consists of more than one person
or entity, if any partner of the partnership or other person or entity is
or becomes bankrupt or insolvent, or makes an assignment for the benefit of
creditors; or (b) If a writ of attachment or execution is levied on this
Lease; or (c) If in any proceeding or action to which Tenant is a party, a
receiver is appointed with authority to take possession of the Premises. An
involuntary assignment shall constitute a default by Tenant and Landlord
shall have the right to elect to terminate this Lease, in which case this
Lease shall not be treated as a asset of Tenant.
20. DEFAULT.
The occurrence of any of the following shall constitute a default by
Tenant: (a) A failure to pay rent or any other charge WITHIN FIVE (5) DAYS
OF THE DATE when due; (b) Abandonment of the premises (failure to occupy
and operate Premises for thirty (30 consecutive days shall be deemed an
abandonment); (c) The making by Tenant or any guarantor of this Lease
("Guarantor") of any general assignment for the benefit of creditors; the
filing by or against Tenant or any Guarantor of a petition to have Tenant
or such Guarantor adjudged a bankrupt or a petition for reorganization or
arrangement under any law relating to bankruptcy (unless, in the case of a
petition filed against Tenant or a Guarantor, the same is dismissed within
sixty (60) days); the appointment of a trustee or receiver to Tenant's
assets located at the Premises or of Tenant's interest in this Lease, of
substantially all of Guarantor's assets, where possession is not restored
to Tenant or such Guarantor, as the case may be, within sixty (60) days;
the attachment, execution or other judicial seizure of substantially all of
Tenant's assets located at the Premises or of Tenant's interest in this
Lease where such seizure is not discharged within sixty (60) days; or if
this Lease shall, by operation of law or otherwise, pass to any person or
persons other than Tenant except as provided in PARAGRAPH 19 herein; (d)
The failure of Tenant to timely comply with the provisions of PARAGRAPH 24
or PARAGRAPH 31 of this Lease regarding, respectively, Subordination and
Estoppel Certificates; or (e) The failure to perform any other provision of
this Lease WITHIN THIRTY (30) DAYS OF LANDLORD'S NOTICE OF SUCH FAILURE,
UNLESS SAME CANNOT BE CURED WITHIN SUCH THIRTY (30) DAY PERIOD, AND IF
TENANT SHALL HAVE PROMPTLY COMMENCED AND BE DILIGENTLY PURSUING SUCH CURE,
THE CURE PERIOD SHALL BE EXTENDED UNTIL TENANT CURES SAME, BUT IN NO EVENT
LONGER THAN NINETY (90) DAYS.
21. LANDLORD'S REMEDIES.
Landlord shall have the remedies described in this PARAGRAPH 21 if Tenant
is in default. These remedies are not exclusive; they are cumulative and in
addition to any remedies now or later allowed by law.
Upon any such default, Landlord may terminate Tenant's right to possession
of the Premises at any time AFTER TEN (10) DAYS NOTICE. No act by Landlord
other than giving notice to Tenant shall terminate this Lease. Act of
maintenance, efforts to relet the Premises, or the appointment of a
receiver on Landlord's initiative to protect Landlord's interest under this
Lease shall not constitute a termination f Tenant's right to possession.
Upon termination of Tenant's right to possession, Landlord has the right to
recover from Tenant; (1) The worth at the time of award of any unpaid rent
which had been earned at the time of termination of Tenant's right to
possession; (2) The worth at the time of award of the amount by which the
unpaid rent which would have been earned after the date of termination of
Tenant's right to possession until the time of award exceeds the amount of
such rental loss that Tenant proves could have been reasonably avoided; (3)
The worth at the time of award of the amount by which the unpaid rent for
the balance of the Term after the time of award exceeds the amount of such
rental loss that Tenant proves could be reasonably avoided; (4) Any other
amount, including court attorney and collection costs, necessary to
compensate Landlord for all detriment proximately caused by Tenant's
default. "The worth" as used for Items (1) and (2) in this PARAGRAPH 21 is
to be computed by allowing interest at the lesser of 12%, whichever is
grater. "The worth" as used for Item (3) in this PARAGRAPH 21 is to be
computed by discounting the amount at the discount rate of the Federal
Reserve Bank of San Francisco at the time of termination plus one
percent(1%).
In the event of any default by Tenant, Landlord shall also have the right,
with or without terminating this Lease, to re-enter the Premises and remove
all persons and property from the Premises; such property may be removed
and stored in a public warehouse or elsewhere at the cost of and for the
account of Tenant or disposed of in a reasonable manner by Landlord. No
re-entry or taking possession of the Premises by Landlord pursuant to this
PARAGRAPH 21 shall be construed as an election to terminate this Lease
unless a written notice of such intention is given to Tenant or unless the
termination thereof is decreed by a court of competent jurisdiction.
22. DEFAULT BY LANDLORD.
Landlord shall not be in default hereunder unless Landlord fails to perform
the obligations required of Landlord within a reasonable time, but in no
event later than forty-five (45) days after written notice by Tenant to
Landlord and to the holder of any first mortgage or deed of trust covering
the Premises, or the lessor of any underlying or ground lease affecting the
Project, in writing specifying wherein Landlord has failed to perform such
obligation, OR IF LANDLORD FAILS TO MAINTAIN THE INSURANCE REQUIRED UNDER
PARAGRAPH 16 HEREOF; provided, however, that if the nature of Landlord's
obligation is such that more than forty-five (45) days is required for
performance, then Landlord shall not be in default if Landlord commences
performance within such forty-five (45) day period and thereafter
diligently prosecutes the same to completion. In no event shall Tenant have
the right to terminate this Lease as a result of Landlord's default;
Tenant's remedies shall be limited to any other remedy available at law or
in equity. Nothing herein contained shall be interpreted to mean that
Tenant is excused from paying rent due hereunder as a result of any default
by landlord. IN THE EVENT OF DAMAGE TO THE PORTIONS OF THE PREMISES WHICH
LANDLORD IS OBLIGATED TO REPAIR AND MAINTAIN UNDER THIS LEASE AND WHICH
AFFECT THE PREMISES TO SUCH AN EXTENT (A) AS TO CAUSE AN IMMINENT THREAT OF
INJURY TO PERSONS OR DAMAGE TO PERSONAL PROPERTY WITHIN THE PREMISES, OR
(B) AS TO PREVENT TENANT'S OCCUPANCY OR USE OF ALL OR ANY MATERIAL PORTION
OF THE PREMISES FOR ITS EXISTING PERMITTED USES, IF LANDLORD FAILS TO
RESPOND WITHIN SEVENTY-TOW (72) HOURS AFTER NOTICE FROM TENANT THEN TENANT
SHALL HAVE THE RIGHT (SO LONG AS TENANT IS NOT IN DEFAULT UNDER THIS LEASE)
TO UNDERTAKE REPAIRS, TO THE EXTENT NECESSARY ONLY TO SECURE THE PREMISES
FROM THE IMMINENT THREAT OF INJURY TO PERSONS OR DAMAGE TO PERSONAL
PROPERTY OR TO ALLOW TENANT TO OPERATE ITS BUSINESS FORM THE PREMISES. THE
COST OF SUCH REPAIRS SHALL BE BORNE BY TENANT, BUT SHALL BE SUBJECT TO
REIMBURSEMENT FROM LANDLORD THROUGH WRITTEN REQUEST FOR PAYMENT ACCOMPANIED
BY COPIES OF ITEMIZED, PAID INVOICES AND LIEN RELEASE WAIVERS EXECUTED BY
ALL CONTRACTORS WHO PROVIDED SUCH REPAIR SERVICES, AND LANDLORD SHALL HAVE
FORTY-FIVE (45) DAYS FROM RECEIPT OF SUCH REQUEST AND ALL SUPPORTING
DOCUMENTATION TO PAY SUCH COSTS TO TENANT.
23. ENTRY OF PREMISES AND PERFORMANCE BY TENANT.
Landlord and its authorized representatives shall have the right to enter
the Premises at all reasonable times DURING NORMAL BUSINESS HOURS AND UPON
TWENTY-FOUR (24) HOURS NOTICE for any of the following purposes: (a) To
determine whether the Premises are in good condition and whether Tenant is
complying with its obligations under this Lease; (b) To do any necessary
maintenance and to make any restoration to the Premises or the Project that
Landlord has the right or obligation to perform under this Lease; (c) To
post "for sale" signs at any time during the Term, to post "for rent" or
"for lease" signs during the last 90 days of the Term, or during any period
while Tenant is in default; (d) To show the Premises to prospective
brokers, agents, buyers, tenants or persons interested in an exchange, at
any time during the Term; (e) To repair, maintain or improve the Project
and to erect scaffolding and protective barricades around and about the
Premises or the Project; or (f) To discharge Tenant's obligations hereunder
when Tenant has failed to do so in accordance with the terms of this Lease.
Landlord shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising out of
Landlord's entry onto the Premises as provided in this PARAGRAPH 23. Tenant
shall not be entitled to an abatement or reduction of rent if Landlord
exercises any rights reserved in this PARAGRAPH 23. Landlord shall
reasonably attempt to conduct his activities on the Premises as provided
herein in a manner that will cause the least inconvenience, annoyance or
disturbance to Tenant. For each of these purposes, Landlord shall at all
times have and retain a key with which to unlock all the doors in, upon and
about the Premises, excluding Tenant's vaults and safes. Tenant shall not
alter any lock or install a new or additional lock or bolt on any door of
the Premises, without the prior written consent of Landlord. If Landlord
gives it s consent, Tenant shall furnish Landlord with a key for any such
lock.
All covenants and agreements to be performed by Tenant under any of the
terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense without any abatement of rent. If Tenant shall fail to pay any sum
of money, other than Monthly Basic Rent, required to be paid by it
hereunder or shall fail to perform any other act on its part to be
performed hereunder, and such failure shall continue for ten (10) days
after notice thereof by Landlord (or such other period as specifically
provided herein), Landlord may, without waiving or releasing Tenant from
any obligations of Tenant, but shall not be obligated to, make any such
payment or perform any such other act on Tenant's part to be made or
performed in this Lease; provided, however, all sums so paid by Landlord
and all necessary incidental costs together with interest thereon at the
lesser of 12% or the maximum rate an individual is permitted to charge by
law from the date of such payment by Landlord, shall be payable to Landlord
on demand. Tenant covenants to pay any such sums, and Landlord shall have
(in addition to all other rights or remedies of Landlord) the same rights
and remedies in the event of the nonpayment thereof by Tenant as in the
case of default by Tenant in the payment of the rent. FOLLOWING FOUR (4)
LATE PAYMENTS OF RENT DURING ANY TWELVE MONTH PERIOD, LANDLORD SHALL HAVE
THE OPTION TO REQUIRE THAT TENANT INCREASE THE AMOUNT OF SECURITY DEPOSIT
REQUIRED UNDER PARAGRAPH 8 BY FIFTY PERCENT (50%), WHICH ADDITIONAL
SECURITY DEPOSIT SHALL BE RETAINED BY LANDLORD AND MAY BE APPLIED BY
LANDLORD IN THE MANNER PROVIDED IN PARAGRAPH 7.
24. SUBORDINATION.
Without the necessity of any additional document being executed by Tenant
for the purpose of effecting a subordination, and unless otherwise elected
by Landlord or any mortgagee or any beneficiary of a Deed of Trust with a
lien on the Project or any ground lessor with respect to the Project(or any
part thereof), this Lease shall be subject and subordinate at all times to
(a) all ground leases or underlying leases which may now exist or hereafter
be executed affecting the Project, or the land upon which the Project is
situated, or both, and (b) the lien of any mortgage or deed of trust which
may now exist or hereafter be executed in any amount for which the Project,
ground leases or underlying leases, or Landlord's interest or estate in any
of said items is specified as security. Notwithstanding the foregoing,
Tenant acknowledges that Landlord shall have the right to subordinate or
cause to be subordinated this Lease to any such ground leases or underlying
lease or any such liens to this Lease. In the event that any ground leases
or underlying leases or any such liens to this Lease. In the event that nay
ground lease or underlying lease terminates for any reason or any mortgage
or Deed of Trust is foreclosed or a conveyance in lieu of foreclosure is
made for any reason, Tenant shall, notwithstanding any subordination,
attorn to and become the tenant of the successor in interest to Landlord,
and TENANT'S OCCUPANCY OF THE PREMISES SHALL NOT BE DISTURBED FOR SO LONG
AS TENANT IS IN COMPLIANCE WITH THE PROVISIONS OF THIS LEASE. Tenant
covenants and agrees to execute and deliver, upon demand by landlord and in
the form requested by landlord any additional documents evidencing the
priority or subordination of this Lease with respect to any such ground
lease or underlying leases or the lien of any such mortgage or Deed of
Trust. Tenant hereby irrevocably appoints Landlord as attorney-in-fact of
Tenant to execute, deliver and record any such document in the name and on
behalf of Tenant.
Notwithstanding the foregoing, Tenant acknowledges that the Project is
encumbered by a deed of trust including an assignment of rents (the
"Mortgage") in favor of Connecticut General Life Insurance Company
("Mortgagee"), and that this Lease is and shall be subordinate to the lien
of the Mortgage. If Mortgagee succeeds to the interest of Landlord under
this Lease, Tenant acknowledges and agrees that Mortgagee shall not be (i)
liable for any act or omission of any prior landlord (including Landlord),
(ii) liable for the return of any security deposit unless such deposit has
been delivered to Mortgagee by Landlord or is in an escrow fund available
to Mortgagee, (iii) subject to any offsets or defenses that Tenant might
have against prior landlord (including Landlord), (iv) bound by any rent or
additional rent that Tenant might have paid for more than the current month
to any prior landlord (including Landlord), (v) bound by any amendment,
modification or termination of this Lease made without Mortgagee's consent,
(vi) personally liable under this Lease, Mortgagee's liability hereunder
being limited to its interest in the Project, or (vii) bound by any notice
of termination given by Landlord to Tenant without Mortgagee's prior
written consent thereto.
25. NOTICE.
Any notice, demand, request, consent, approval or communication desired by
either party or required to be given, shall be in writing and served either
personally or sent by prepaid certified fist class mail, return receipt
requested, addressed as set forth in SUBPARAGRAPH 1(B) AND 1(C). Either
party may change its address by notification to the other party. NOTICES TO
TENANT SHALL ALSO BE SENT TO GENERAL COUNSEL, 22 HARBOR PARK DRIVE, PORT
WASHINGTON, NEW YORK 11050. Notice shall be deemed to be communicated 48
hours from the time of mailing, or at the time of service as provided in
this PARAGRAPH 25.
26. WAIVER.
No delay or omission in the exercise of any right or remedy by Landlord
shall impair such right o remedy or be construed as a waiver. No act or
conduct of Landlord, including, without limitation, acceptance of the keys
to the Premises, shall constitute acceptance of the surrender of the
Premises by Tenant before the expiration of the Term. Only written notice
from Landlord to Tenant shall constitute acceptance of the surrender of the
Premises and accomplish termination of this Lease. Landlord's consent to or
approval of any act by Tenant requiring Landlord's consent or approval
shall not be deemed to waive or render unnecessary Landlord's consent to or
approval of any subsequent act by Tenant. Any waiver by Landlord of any
default must be in writing and shall not be a waiver of any other default
concerning the same or any other provision of this Lease.
27. LIMITATION OF LIABILITY.
In consideration of the benefits accruing hereunder, Tenant and all
successors and assigns of Tenant covenant and agree that, in the event of
any actual or alleged failure, breach or default hereunder by Landlord or
otherwise pertaining to any obligation of Landlord in respect of the
Premises:
(a) The sole and exclusive remedy against Landlord shall be against the
Landlord's or otherwise pertaining to any obligation of Landlord in
respect of the PROJECT:
(b) No partner, officer, director, owner, shareholder or advisor of
Landlord shall be sued or named as a party in any suit or action
(except as may be necessary to secure jurisdiction of the
partnership);
(c) No service of process shall be made against any partner, officer,
director, owner, shareholder or advisor of Landlord (except as may be
necessary to secure jurisdiction o f the partnership);
(d) No partner, officer, director, owner, shareholder or advisor of
Landlord shall be required to answer or otherwise plead to any service
of process;
(e) No judgment taken against any partner, officer, director, owner,
shareholder or advisor of Landlord may be vacated and set aside at any
time after the fact;
(f) Any judgment taken against any partner, officer, director, owner,
shareholder or advisor of Landlord may be vacated and set aside at any
time after the fact;
(g) No writ of execution will ever be levied against the assets of any
partner, officer, director, owner, shareholder or advisor of Landlord;
(h) The obligations under this Lease do not constitute personal
obligations of the individual partner, officer, director, owner,
shareholder or advisor of Landlord, and Tenant shall not seek recourse
against any such persons or entities of Landlord or any of their
personal assets for satisfaction of a y liability in respect to this
Lease; and
(i) These covenants and agreements are enforceable both by Landlord and
also by any partner, officer, director, owner, shareholder or advisor
of Landlord.
Tenant agrees that each of the foregoing provisions shall be applicable to
any covenant or agreement either expressly contained in this Lease or
imposed by statute or at common law.
28. FORCE MAJEURE.
Landlord shall have no liability whatsoever to Tenant on account of (a) the
inability or delay of Landlord in fulfilling any of Landlord's obligations
under this Lease by reason of strike, other labor trouble, governmental
restrictions, controls or inaction, or shortages of fuel, supplies or labor
resulting therefrom or any other cause, whether similar or dissimilar to
the above, beyond Landlord's reasonable control; or (b) any failure or
defect in the supply, quantity or character of electricity or water
furnished to the Premises, by reason of any requirement, act or omission of
the public utility or others furnishing the Project with electricity or
water, or for any other reason, whether similar or dissimilar to the above,
beyond Landlord's reasonable control. If this Lease specifies a time period
for performance of an obligation of Landlord, that time period shall be
extended by the period of any delay in Landlord's performance caused by any
of the events of force majeure described above.
29. PROFESSIONAL FEES.
(a) If Landlord should engage any professional including, without
limitation, attorneys, appraisers, accountants, environmental or other
consultants for the purpose of bringing suit for possession of the
Premises, for the recovery of any sum due under this Lease, or because
of the breach of any provisions of this Lease, or for any other relief
against Tenant hereunder, or in the event of any other litigation
between the parties with respect to this Lease, then all REASONABLE
costs and expenses including, without limitation, actual professional
fees such as appraisers', accountants', attorneys' and other
consultants' fees, incurred by the prevailing party therein shall be
paid by the other party, which obligation on the part of the other
party shall be deemed to have accrued on the date of the commencement
of such action and shall be enforceable whether or not the action is
prosecuted to judgment. If Landlord employs a collection agency to
recover delinquent charges, Tenant agrees to pay all collection agency
fees charged to Landlord in addition to rent, late charges, interest
and other sums payable under this Lease.
(b) If Landlord is named as a defendant in any suit brought against Tenant
in connection with or arising out of Tenant's occupancy hereunder,
Tenant shall pay to Landlord its costs and expenses incurred in such
suit including, without limitation, its actual professional fees such
as appraisers', accountants' and attorneys' fees.
30. EXAMINATION OF LEASE.
Submission of this instrument for examination or signature by Tenant shall
not create a binding agreement between Landlord and Tenant nor shall it
constitute a reservation or option to lease on the part of Tenant and this
instrument shall not be effective as a lease and shall not create any
obligations on the part of Landlord or Tenant until this Lease has been
validly executed by, and delivered to, both Landlord and Tenant.
31. ESTOPPEL CERTIFICATE.
(a) Within ten (10) BUSINESS days following any written request which
Landlord may make from time to time, Tenant shall execute and deliver
to Landlord a statement, ("Estoppel Certificate") in a form
substantially similar to the form of EXHIBIT E attached hereto or in
such other form as Landlord's lender or purchaser may require,
certifying: (i) the date of commencement of this Lease; (ii) the fact
that this Lease is unmodified and in full force and effect (or, if
there have been modifications, stating the nature and date of such
modification), (iii) the date to which the rent and other sums payable
under this Lease have been paid; (iv) that there are no current
defaults under this Lease by either Landlord or Tenant except as
specified in Tenant's statement; and (v) such other matters requested
by Landlord. Landlord and Tenant intend that any statement delivered
pursuant to this Paragraph 31 may be relied upon by any mortgagee,
beneficiary, purchaser or prospective purchaser of the Project or any
interest therein.
(b) Tenant's failure to deliver such statement within such time shall be
conclusive upon Tenant (i) that this Lease is in full force and
effect, without modification except as may be represented by landlord,
(ii) that there are no uncured defaults in Landlord's performance, and
(iii) that not more than one (1) month's rent has been paid in
advance. Tenant's failure to deliver said statement to Landlord within
ten (10) days of receipt shall constitute a default under this Lease.
(c) Tenant hereby irrevocably appoints Landlord as Tenant's
attorney-in-fact, which appointment is coupled with an interest, to
act in Tenant's name, place and stead to execute such Estoppel
Certificate on Tenant's behalf.
32. RULES AND REGULATIONS.
Tenant shall faithfully observe and comply with the "Rules and
Regulations", a copy of which is attached hereto and marked Exhibit F, and
all reasonable and nondiscriminatory modifications thereof and additions
thereto from time to time put into effect by landlord. Landlord shall not
be responsible to Tenant for the violation or non-performance by any other
tenant or occupant of the Project of any of said Rules and Regulations.
33. LIENS.
Tenant shall, within FIFTEEN (15) days after receiving notice of the filing
of any mechanic's lien for material or work claimed to have been furnished
to the Premises on Tenant's behalf or at Tenant's request, discharge the
lien or post a bond equal to the amount of the disputed claim with a
bonding company reasonably satisfactory to Landlord. If Tenant posts a
bond, it shall contest the validity of the lien with all due diligence.
Tenant shall indemnify, defend and hold Landlord harmless from any and all
losses and costs incurred by Landlord as a result of any such liens
attributable to Tenant. If Tenant does not discharge any lien or post a
bond for such lien within FIFTEEN (15) day period, Landlord may discharge
such lien at Tenant's expense and Tenant shall promptly reimburse Landlord
for all costs incurred by Landlord in discharging such lien including,
without limitation, attorney's fees and costs and interest on all sums
expended at the maximum interest rate permitted by law. Tenant shall
provide Landlord with not less than FIFTEEN (15) days prior written notice
of its intention to have work performed at or materials furnished to the
Premises so that Landlord may post appropriate notices of non-
responsibility.
34. MISCELLANEOUS PROVISIONS.
(a) TIME OF ESSENCE. Time is on the essence of each provision of this
Lease.
(b) SUCCESSOR. This Lease shall be binding on and inure to the benefit of
the parties and their successors, except as provided in PARAGRAPH 19
herein.
(c) LANDLORD'S CONSENT. Any consent required by Landlord under this Lease
must be granted in writing and may be withheld by Landlord in its sole
and absolute discretion, unless otherwise expressly provided herein.
(d) COMMISSION. Each party represents that it has not had dealings with
any real estate broker, finder or other person with respect to this
Lease in any manner. except for the broker identified in SUBPARAGRAPH
1(M). If EITHER PARTY has dealt with any other person or real estate
broker with respect to leasing or renting space in the Project, such
party shall be solely responsible for the payment of any fees due said
person or firm and shall hold the other party free and harmless and
indemnify and defend Landlord from any liabilities, damages or claims
with respect thereto, including attorneys fees and costs.
(e) LANDLORD'S SUCCESSORS. In the event of a sale or conveyance by
Landlord of the Project, the same shall operate to release Landlord
from any liability under this Lease, and in such event Landlord's
successor in interest shall be solely responsible for all obligations
of Landlord under this Lease.
(f) PRIOR AGREEMENT OR AMENDMENTS. This Lease contains all of the
agreements of the parties hereto with respect to any matter covered or
mentioned in this Lease, and no prior agreement or understanding
pertaining to any such matter shall be effective for any purpose. No
provisions of this Lease may be amended or added to except by an
agreement in writing signed by the parties hereto or their respective
successors-in-interest.
(g) RECORDING. Tenant shall not record this Lease nor a short form
memorandum thereof without the consent of Landlord. Landlord may
record a short form memorandum of this Lease and Tenant shall execute
and acknowledge such form if requested to do so by Landlord.
(h) SEPARABILITY. Any provision of this Lease which shall prove to be
invalid, void or illegal shall in no way affect, impair or invalidate
any other provision hereof, and all other provisions of this Lease
shall remain in full force and effect.
(i) NO PARTNERSHIP OR JOINT VENTURE. Nothing in this Lease shall be deemed
to constitute Landlord and Tenant as partners or joint venturers. It
is the express intent of the parties hereto that their relationship
with regard to this Lease and the Premises be and remain that of
lessor and lessee.
(j) INTERPRETATION. This Lease shall be construed and interpreted in
accordance with the laws of the state in which the Premises are
located. This Lease constitutes the entire agreement between the
parties with respect to the Premises and the Project, except for such
guarantees or modifications as may be executed in writing by the
parties from time to time. When required by the context of this Lease,
the singular shall include the plural, and the masculine shall include
the feminine and/or neuter. "Party" shall mean Landlord or Tenant. If
more than one person or entity constitutes Tenant, the obligations
imposed upon Tenant shall be joint and several as to all persons or
entities constituting Tenant. The enforceability, invalidity or
illegality of any provision shall not render the other provisions
unenforceable, invalid or illegal.
(k) MORTGAGEE PROTECTION. In the event of any default on the part of
Landlord, Tenant will give notice by registered or certified mail to
any beneficiary of a deed of trust, mortgagee, or ground lessor
covering the Premises, and shall offer such beneficiary, mortgagee, or
ground lessor, a reasonable opportunity to cure the default, including
time to obtain possession of the Premises by power of sale or a
judicial foreclosure, or in the event of a ground lessor, by
appropriate judicial action, if such should prove necessary to effect
a cure.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date first
above written.
LANDLORD: South Bay Industrials Company, L.L.C.
a Delaware limited liability company
By: /S/ JAMES M. WALSH Date: 9/4/97
James M.Walsh
Its: Vice President
TENANT: Systemax, Inc., a New York corporation
dba: Global Computer Supplies
By: /S/ BRUCE LEEDS Date: 9/3/97
Bruce Leeds
Its: Vice President
<PAGE>
ADDENDUM TO SINGLE TENANT INDUSTRIAL LEASE
(NET) BETWEEN SOUTH BAY INDUSTRIALS COMPANY, L.L.C.
AND
SYSTEMAX, INC.
DATED SEPTEMBER 3, 1997
1. To the fullest extend permitted by law, Landlord agrees to indemnify,
defend (with counsel satisfactory to Tenant) and hold harmless Tenant,, its
agents, successors in interest, directors, officers, partners, employees,
shareholders, agents and representatives from (i) all claims, actions,
liabilities, and proceedings arising from any breach or default in the
performance of any obligation to be performed by Landlord under the terms
of this Lease, and (ii) any and all costs, attorney's fees, expenses and
liabilities incurred with respect to any such claims, actions, liabilities,
and proceedings.
2. including a comprehensive boiler and machinery policy,
EMPLOYMENT AGREEMENT
AGREEMENT, made as of the 19th day of December, 1997, by and among Global
DirectMail Corp (the "Company" or "Global") and Steven M. Goldschein (the
"Employee").
RECITALS
The Company wishes to employ the Employee upon the terms and conditions set
forth in this Agreement.
The Employee is willing to make his services available to the Company on
the terms and conditions hereinafter set forth.
NOW, THEREFORE, it is mutually agreed as follows:
1. EMPLOYMENT.
(a) TITLE. The Company hereby agrees to employ the Employee, as Senior Vice
President and Chief Financial Officer of the Company, and the Employee hereby
accepts such employment, effective on the date hereof, on the terms and
conditions set forth herein. In addition to such other duties as may be
determined by the Board of Directors of the Company, consistent with the duties
stated herein, the Employee shall have general responsibility for managing the
financial affairs of the Company, subject to the authority and direction of the
Chief Executive Officer and the Board of Directors. The Employee shall perform
his duties primarily at the Company's offices located in Port Washington, New
York subject to travel and other duties outside of such location consistent with
the Company's business as the Board of Directors shall reasonably determine.
(b) TERM. The term of employment of the Employee by the Company under this
Agreement shall commence on January 5, 1998 and shall continue for a period of
two (2) years (the initial "Employment Period"), unless earlier terminated as
provided in Section 4 hereof. This agreement shall thereafter continue from year
to year unless terminated by either party by written notice to the other party
at least ninety days prior to the end of the then current yearly Employment
Period.
(c) DUTIES. In performing his duties. the Employee shall report to the
Chief Executive Officer and Board of Directors and shall be subject to the
direction of the Chief Executive Officer and Board of Directors of the Company.
The Employee shall devote his full working time. attention and skill to the
business and affairs of the Company and shall use his best efforts to advance
the best interests of the Company.
2. COMPENSATION.
(a) BASE SALARY. For the performance of all duties, responsibilities and
services by the Employee hereunder during the Employment Period, the Company
shall pay to the Employee, and the Employee agrees to accept, a base salary (the
"Base Salary' ) at an annual rate of Three Hundred and Ten Thousand Dollars
($310,000), payable in accordance with the Company's normal payroll practices.
In addition, Employee shall be entitled to receive a bonus during the first year
of the Employment Period in an amount up to Seventy Five Thousand Dollars
($75,000) (the "Bonus") contingent upon the Company achieving certain
performance targets for each year, as mutually agreed upon by the Employee and
the Board of Directors. The Bonus, if earned shall be paid by the Company to
Employee within 75 days following the end of each calendar year during the
Employment Period. The Bonus for the second year of the Employment Period shall
be in an amount and subject to such terms as agreed between the Company and the
Employee.
(b) PARTICIPATION IN BENEFIT PLANS. The Employee shall be entitled to
participate in and receive benefits under all medical plans or other employee
insurance or benefit plans and arrangements that are made available to executive
employees of the Company and on the terms that such plans, insurance and
arrangements are made available to executive employees of the Company. to the
extent Employee is eligible to participate in such plans. To the extent that any
such plan or arrangement generally permits the participation or coverage of
dependents of the employees of the Company, the Employee's dependents may
participate in or be covered under such plan or program. Notwithstanding the
foregoing. the Employee's coverage under the Company's medical and dental plans
shall become effective immediately upon the date hereof.
(c) EXPENSES. During the Employment Period, the Employee shall be entitled
to receive reimbursement for all ordinary and necessary business expenses
reasonably incurred by him in accordance with industry custom in performing
services hereunder, provided that the Employee provides the Company with written
documentation, satisfactory to the Company, evidencing such expenses.
(d) VACATIONS AND HOLIDAYS. The Employee shall be entitled to four (4)
weeks of paid vacation in each twelve (12) month period. At no time. however,
shall Employee take more than two (2) weeks of vacation consecutively. The
Employee shall have the holidays and sick days as determined by the Company's
policies in effect on the date hereof and as amended.
(e) OPTIONS. As soon as practicable after the date hereof, the Company
shall grant to the Employee an option to purchase 75,000 shares of the Company's
common stock exercisable at an exercise price per share equal to the market
value on the date of grant in accordance with the Company's standard stock
option agreement for executive employees as set forth in the Company's 1995 Long
Term Stock Incentive Plan provided, however, that such option shall vest over a
period of five years beginning one year from the date of grant at the rate of
20% per year.
3. TERMINATION
(a) DEATH. The Employee's employment hereunder shall terminate upon his
death.
(b) TERMINATION RESULTING FROM DISABILITY. If the Employee becomes disabled
during his employment hereunder so that he is unable substantially to perform
his services by regularly attending on a daily basis to his duties hereunder (i)
for a period of three (3) consecutive months, or (ii) for an aggregate of ninety
(90) days within any period of six consecutive months, then this Agreement may
be terminated by the Board of Directors within ten (10) days after the
expiration of the applicable time period, by providing Employee with written
notice thereof.
(c) CAUSE. The Company may terminate the Employee's employment hereunder
for "Cause." For the purposes of this Agreement, the Company shall have "Cause"
to terminate the Employee's employment hereunder upon (i) the continued failure
by the Employee, for a period of three days after receipt of notice to comply
with any policies of the Company or any directions of the Board of Directors
consistent with the Employee's duties hereunder (including the Employee's
responsibility to devote his full working time and attention to the business of
the Company), other than any such failure resulting from the Employee's
incapacity due to disability, or (ii) the conviction of the Employee of a felony
(or a plea of nolo contendere with respect thereto) or other conviction or
judgment against the Employee involving the Employee's dishonest or illegal
actions, (iii) the Employee's gross negligence or willful misconduct or breach
of any of the material terms or conditions of this Agreement coupled, in the
case of such breach, with the failure to cure the same within three days after
the receipt of notice thereof, (iv) Employee engaging in an act of theft, fraud
or dishonesty, involving the Company, or (v) the Employee making any false,
disparaging or malicious statement, oral or written, about the Company or its
subsidiaries (collectively the "Global Companies") or any director, officer or
employee of the of the Global Companies which is injurious to the business or
operations of any of the Global Companies, or which may in any material respect
interfere with the goodwill of any of the Global Companies or its relations with
customers or suppliers.
(d) VOLUNTARY RESIGNATION. The Employee may terminate his employment by
providing the Company with ninety (90) days prior written notice.
(e) WITHOUT CAUSE. The Company may terminate the Employee without "Cause"
at any time prior to the expiration of the Employment Period upon three months
prior written notice.
(f) NOTICE OF TERMINATION. If the Employee's employment hereunder is
terminated pursuant to Section 3(b). 3(c) or 3(e) hereof, the Company shall give
the Employee written notice of termination (the "Notice of Termination"). Any
Notice of Termination delivered by the Company pursuant to Section 3(b) or 3(c)
hereof shall indicate the applicable termination provision in this Agreement
relied upon to provide a basis for termination of the Employee's employment. In
the case of any termination pursuant to Section 3(c), the Notice of Termination
shall also set forth the factual basis for the termination.
(g) DATE OF TERMINATION. "Date of Termination" shall mean (i) if the
Employee's employment is terminated by his death, the date of his death, (ii) if
the Employee's employment is terminated pursuant to Section 3(b) hereof, ten (
10) days after the date the Notice of Termination is given, (iii) if the
Employee's employment is terminated pursuant to Section 3(c) hereof, immediately
following the giving of the Notice of Termination; (iv) if the Employee
voluntarily resigns pursuant to Section 3(d) hereof, on the day following the
ninety (90) day period set forth therein or such earlier day following the
Company's receipt of the notice set forth therein as the Company shall determine
in its sole discretion, and (v) if the Employee's employment is terminated
pursuant to Section 3(e) hereof, three (3) months following the giving of the
Notice of Termination
4. COMPENSATION UPON TERMINATION
(a) DISABILITY. If the Employee's employment is terminated pursuant to
Section 3(b) as a result of the Employee's Disability, the Company shall pay to
the Employee the applicable portion of his Base Salary due through the Date of
Termination at the Rate in effect at the time Notice of Termination is given,
and following such payment have no further obligation (relating to the
Employee's status as an employee) to the Employee under this Agreement:
provided, however, that the foregoing shall have no effect upon any benefits due
the Employee under any disability or medical plan or other employee benefit plan
or arrangement of the Company then in effect and provided further that any stock
option held by the Employee shall continue to be exercisable in accordance with
its terms. In addition, the Company shall pay to the Employee that portion of
the Bonus. on the date set forth herein, that is equal to the number of days the
Employee was employed by the Company, in the year that such Date of Termination
occurred, divided by 365 and multiplying the result thereof by the Bonus
otherwise payable through the end of the year in which such Date of Termination
occurred, as if such termination had not occurred.
(b) DEATH. If the Employee's employment shall be terminated by reason of
his death, the Company shall pay to such person as the Employee shall have
previously designated, in a notice filed with the Company, or, if no such person
shall have been designated, to his estate, the applicable portion of his Base
Salary due through the applicable Date of Termination at the rate in effect on
the date of death and, following such payments, the Company shall have no
further obligations (relating to the Employee's status as an employee) to such
designated person or the Employee's estate, as the case may be, under this
Agreement provided, however, that the foregoing shall have no effect upon any
benefits due the Employee under any disability or medical plan or other employee
benefit plan or arrangement of the Company then in effect and provided further
that any stock option held by the Employee shall continue to be exercisable in
accordance with its terms. In addition, the Company shall pay to such designated
person or the estate that portion of the Bonus. on the date set forth herein,
that is equal to the number of days the Employee was employed by the Company, in
the year that such Date of Termination occurred, divided by 365 and multiplying
the result thereof by the Bonus otherwise payable through the end of the year in
which such Date of Termination occurred, as if such termination had not
occurred.
(c) CAUSE. If the Employee's employment shall be terminated pursuant to
Section 3(c), the Company shall pay the Employee the applicable portion of his
Base Salary due through the applicable Date of Termination at the rate in effect
at the time Notice of Termination is given and, following such payments, the
Company shall have no further obligation (relating to the Employee's status as
an employee) to the Employee under this Agreement provided, however, that the
foregoing shall have no effect upon any benefits due the Employee under any
disability or medical plan or other employee benefit plan or arrangement of the
Company then in effect and provided further that any stock option held by the
Employee shall continue to be exercisable in accordance with its terms.
(d) VOLUNTARY RESIGNATION. If the Employee voluntarily resigns pursuant to
Section 3(d), the Company shall pay Employee the applicable portion of his Base
Salary due through the applicable Date of Termination at the rate in effect at
the time notice is given to the Company and, following such payments, the
Company shall have no further obligation relating to the Employee's status as an
employee to the Employee under this Agreement provided, however, that the
foregoing shall have no effect upon any benefits due the Employee under any
disability or medical plan or other employee benefit plan or arrangement of the
Company then in effect and provided further that any stock option held by the
Employee shall continue to be exercisable in accordance visit its terms.
(e) WITHOUT CAUSE. If the Employee's employment shall be terminated without
"Cause" pursuant to Section 3(e), the Company shall pay the Employee, as
severance pay, the applicable portion of his Base Salary due through six (6)
months (the "Severance Period") following the applicable Date of Termination at
the rate in effect at the time Notice of Termination is given and, following
such payments, the Company shall have no further obligation (relating to the
Employee's status as an employee) to the Employee under this Agreement provided,
however, that the foregoing shall have no effect upon any benefits due the
Employee under any disabilities or medical plan or other employee benefit plan
or arrangement of the Company then in effect and provided further that any stock
option held by the Employee shall continue to be exercisable in accordance with
its terms. In addition, the Company shall pay to the Employee that portion of
the Bonus, on the date set forth herein, that is equal to the sum of the number
of days the Employee was employed by the Company and the number of days
constituting the Severance Period, in the year that such Date of Termination
occurred, divided by 365 and multiplying the result thereof by the Bonus
otherwise payable through the end of the year in which such Date of Termination
occurred, as if such termination had not occurred.
(f) ACCRUED VACATION UPON TERMINATION. Upon termination the Employee shall
be paid for all accrued vacation up to a maximum of four (4) weeks based on the
Base Salary then in effect provided that the Employee shall have been afforded
the opportunity to take the available vacation days during each twelve month
period.
5. SUCCESSORS. This Agreement and all rights of the Employee hereunder
shall inure to the benefit of and be enforceable by the Employee's personal or
legal representatives. executors administrators, successors, heirs, distributees
and legatees. This Agreement and all rights and obligations of the Company
hereunder shall inure and be binding on any person, firm or corporation which
shall become the owner of substantially all of the assets or capital stock of
the Company or which shall succeed to the business of the Company or with which
the Company may be consolidated or merged; provided, however that in the absence
of the express written agreement of the Employee, the Company shall not be
released from its obligations to Employee in the event of any such transaction.
and the Company shall be deemed to guaranty the obligations of such person, firm
or corporation to the Employee under this Agreement in the event of such
transaction.
6. CONFIDENTIAL INFORMATION; NON-COMPETITION; INVENTIONS.
(a) CONFIDENTIAL INFORMATION. From and after the date hereof, except for
the carrying out of Employee's duties under this Agreement and except as may be
required by law, the Employee shall not, directly or indirectly, communicate or
make available to anyone other than the Global Companies and their respective
directors, officers, authorized agents or advisors, any trade secret or other
proprietary or confidential information with respect to the Global Companies,
including, but not limited to, any of the products, services, designs or styles.
inventions improvements, know-how, processes, customers, suppliers, methods of
operation, marketing or distribution, systems, procedures, policies or methods
of the Global Companies that constitute trade secrets or other proprietary or
confidential information; provided, however, that "confidential information"
shall not include any information: (I) known generally to the public (other than
as a result of unauthorized disclosure by the Employee), or (II) that is readily
ascertainable by lawful means. Upon request by the Company, the Employee agrees
to deliver promptly to the Company upon termination of his services for the
Company, or at any time thereafter as the Company may request, all Company
memoranda, notes, records, reports, manuals, drawings, designs, computer files
in any media and other documents (and all copies thereof) containing such
confidential information and all property of the Company or any other of the
Global Companies, which he may then possess or have under his control.
(b) COVENANT NOT TO COMPETE. During the period that the Employee is
employed by the Company pursuant to this Agreement and for a period of one ( 1 )
year after the termination of this Agreement pursuant to Section 3(c), 3(d) or
3(e) (the Non-Compete Period"), the Employee hereby covenants and agrees with
the Company that, unless acting as an officer, employee, consultant or
stockholder of the Company, the Employee will not, directly or indirectly,
anywhere in the United States (the "Territory"), (i) compete, directly or
indirectly, as an officer, director, shareholder, partner, investor, agent,
employee or otherwise, with the Company in the business or activities in which
the Company is now engaged; (ii) directly or indirectly, on his own behalf or on
behalf of or as an officer, director, shareholder, partner. investor, agent,
employee or otherwise, of any other person or entity, contact or approach any
person or business, wherever located, for the purpose of competing with the
Company's business, in the Territory; (iii) participate as an officer, director,
shareholder, partner, investor, agent, employee or otherwise, or have any other
direct or indirect financial interest in, any enterprise which engages in the
Company's business in the Territory; provided, however, that the Employee may
own up to two (2%) percent of the capital stock of any corporation (other than
the capital stock of the Company as to which this clause (iii) shall not apply),
required to file reports pursuant to the Securities Exchange Act of 1934; or
(iv) directly or indirectly, hire, solicit or encourage to leave the employment
of the Company, any employee or agent of the Company.
(c) INVENTIONS. The Employee agrees that all processes, technologies and
inventions including new contributions, improvements, formats, packages,
programs. systems, machines, compositions of matter manufactured, developments,
applications and discoveries which are related in any manner to the business
(commercial or experimental of the Company during the term hereof (collectively,
"New Developments"), whether patentable or not, conceived, developed, invented
or made by him or jointly with others during the period of his employment with
the Company, shall belong to the Company and the Company shall be the sole owner
of all the products and proceeds of the Employee's services, including
intellectual or literary property in any form. The Employee shall further: (a)
promptly disclose such New Developments to the Company; (b) assign to the
Company, without additional compensation, all patent or other rights to such New
Developments for the United States and foreign countries; (c) sign all papers
necessary to carry out the foregoing; and (d) give testimony in support of his
inventorship, all at the sole cost and expense of the Company.
(d) REMEDIES. The Employee expressly agrees that upon any breach or
violation of the provisions of this Section 6, the Company shall be entitled, as
a matter of right, in addition to any other rights or remedies it may have, to
temporary and/or permanent injunctive relief in any court of competent
jurisdiction and such damages as are provided at law or in equity. The Employee
hereby acknowledges and agrees that the covenants contained in this Section 7
are reasonable and fully necessary for the protection of the legitimate
interests of the Company and, at the same time are neither harsh nor oppressive
to the rights or interests of the Employee nor will such restrictions prevent
the Employee from earning a livelihood. In the event that any court of competent
jurisdiction determines that the restrictions provided for in this Section 6 are
unreasonable or otherwise unenforceable, the invalidity or unenforceability of
any of such restrictions shall not affect any of the remaining provisions of
this Agreement (including, without limitation, the remaining provisions of this
Section 6 not found to be unreasonable or otherwise unenforceable) and a court
or other trier of fact may make modifications necessary to correct any
unreasonable or unenforceable term and enforce the Companies' intent to the
maximum extenal. The existence of any claim or cause of action against the
Company or its affiliates, whether predicated upon this Agreement or otherwise,
shall not constitute a defense to the enforcement of the restrictions contained
in this Section 6.
7. WITHHOLDING. Anything in this Agreement to the contrary notwithstanding,
all payments required to be made by the Company hereunder to the Employee or his
estate or beneficiaries shall be subject to the withholding of such amounts
relating to taxes as the Company may reasonably determine it should withhold
pursuant to any applicable law or regulation. In lieu of withholding such
amounts, in whole or in part, the Company may. in its sole discretion. accept
other provisions for payment of taxes and withholding as required by law,
provided it is satisfied that all requirements of law affecting its
responsibilities to withhold have been satisfied.
8. NOTICES. Any notice, request, instruction or other document to be given
hereunder by any party hereto to any other party shall be in writing and
delivered personally, sent by registered or certified mail, postage prepaid.
If to the Employee:
Steven M. Goldschein
2075 Blanche Lane
Merrick, NY 11566
If to the Company:
Richard Leeds, CEO
Global DirectMail Corp
22 Harbor Park Drive
Port Washington, N.Y. 11050
or at such other address for a party as shall be specified by like notice. Any
notice which is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party. Any notice which is addressed and mailed in the manner
herein provided shall be conclusively presumed to have been given to the party
to whom it is addressed at the close of business, local time of the recipient
forty-eight hours after the day it is so placed in the mail.
9. ENTIRE AGREEMENT. This Agreement sets forth the entire understanding of
the parties hereto with respect to the subject matter hereof and supersedes all
prior agreements, written or oral, between them as to such subject matter. This
Agreement may not be amended, nor may any provision hereof be modified or
waived, except by an instrument in writing duly signed by the party to be
charged.
10. GOVERNING LAW. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of New
York, without regard to the conflicts of law rules thereof.
11. VALIDITY. The invalidity or unenforceability of any provision or
provisions to this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement. which shall remain in full force and
effect.
12. COUNTERPARTS. This Agreement may be executed in two (2) or more
counterparts. each of which shall be deemed to be an original but all of which
together will constitute one and the same agreement.
13. WAIVERS. No waiver by either party of any breach or non-performance of
any provision or obligation of this Agreement shall be deemed to be a waiver of
any preceding or succeeding breach of the same or any other provision of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
Global DirectMail Corp
By: /S/ RICHARD LEEDS
Richard Leeds, Chairman
and CEO
/S/STEVEN M. GOLDSCHEIN
Steven M. Goldschein
SUBSIDIARIES OF GLOBAL DIRECTMAIL CORP
A. DOMESTIC SUBSIDIARIES
1. Systemax Inc. (a New York corporation)
d/b/a Global Computer Supplies (GA, CA, IL)
d/b/a Global Occupational Safety (NY, GA)
2. Continental Dynamics Corp. (a New York corporation)
d/b/a Global Computer Supplies (NY)
d/b/a Global Industrial Equipment (NY, GA)
d/b/a Global Business Furniture (NY, GA)
3. Arrow Star Inc. (a New York corporation)
4. Dartek Corp. (a Delaware corporation)
5. Nexel Industries (a New York corporation)
6. Misco America Inc. (a Delaware corporation)
7. Tiger Direct Inc. (a Delaware corporation)
8. Midwest Micro Corp. (a Delaware corporation)
B. FOREIGN SUBSIDIARIES
1. Misco German Inc. (a New York corporation)
2. Misco Italy Computer Supplies S.P.A. (an Italian corporation
3. H C S Global SA (a French corporation)
4. Global DirectMail Ltd. (a U.K. corporation)
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the incorporation by reference in Registration Nos.
333-21489 and 333-2149 on Forms S-8 of our report dated February 5, 1998,
March 9 as to the second paragraph under Litigation of Note 9, appearing in
this Annual Report on Form 10-K of Global DirectMail Corp for the year ended
December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE AUDITED CONSOLIDATED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 OF GLOBAL DIRECTMAIL
CORP AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 43,432
<SECURITIES> 9,017
<RECEIVABLES> 132,741
<ALLOWANCES> 0
<INVENTORY> 102,599
<CURRENT-ASSETS> 313,330
<PP&E> 29,401
<DEPRECIATION> 0
<TOTAL-ASSETS> 399,745
<CURRENT-LIABILITIES> 125,574
<BONDS> 1,972
<COMMON> 382
0
0
<OTHER-SE> 271,817
<TOTAL-LIABILITY-AND-EQUITY> 399,745
<SALES> 1,145,388
<TOTAL-REVENUES> 1,145,388
<CGS> 879,846
<TOTAL-COSTS> 879,846
<OTHER-EXPENSES> 206,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,830)
<INCOME-PRETAX> 62,098
<INCOME-TAX> 23,286
<INCOME-CONTINUING> 38,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,812
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
