-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K7BGpbXye1Ft9LND+pcMSRI2XlsXPpNpdr5UKDvv9V5hql+EIplO1kc21rymrfqv x5lvk6bn93uf3CSmHOhxTw== 0000950123-97-002830.txt : 19970401 0000950123-97-002830.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950123-97-002830 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GT INTERACTIVE SOFTWARE CORP CENTRAL INDEX KEY: 0001002607 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133689915 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27338 FILM NUMBER: 97570023 BUSINESS ADDRESS: STREET 1: 16 EAST 4OTH ST CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2127266500 MAIL ADDRESS: STREET 1: 16 EAST 40TH ST CITY: NEW YORK STATE: NY ZIP: 10016 10-K 1 FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. Commission File No. 0-27338 ----------- GT INTERACTIVE SOFTWARE CORP. (Exact name of registrant as specified in its charter) DELAWARE 13-3689915 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 16 EAST 40TH STREET, NEW YORK, NY 10016 (Address of principal executive offices) (Zip code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 726-6500 ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.01 par value ----------- 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 of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] ----------- The aggregate market value of the registrant's Common Stock, held by non-affiliates of the registrant, based on the closing sale price of the Common Stock on February 28, 1997 as reported on the Nasdaq National Market, was $166,940,983. As of February 28, 1997, there were 66,398,458 shares of the registrant's Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement ("Proxy Statement") for the 1997 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. Total Number of Pages ______ Index to Exhibits at Page _______ 2 GT INTERACTIVE SOFTWARE CORP. 1996 ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
PART I Item 1. Business..................................................................... 1 Item 2. Properties................................................................... 15 Item 3. Legal Proceedings............................................................ 16 Item 4. Submission of Matters to a Vote of Security Holders ......................... 16 Item 4A. Executive Officers of the Registrant ........................................ 17 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ... 18 Item 6. Selected Financial Data ..................................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 22 Item 8. Index to the Financial Statements and Supplementary Data..................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................... 28 PART III Item 10. Directors and Executive Officers of the Registrant........................... 29 Item 11. Executive Compensation ...................................................... 29 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 29 Item 13. Certain Relationships and Related Transactions............................... 29 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............. 30 Signatures ............................................................................. 33
3 PART I This annual report contains forward-looking statements regarding future events or the future financial performance of the Company that involve certain risks and uncertainties. Actual events or the actual future results of the Company may differ materially from the results discussed in the forward-looking statements due to various factors, including, but not limited to, those discussed in "Factors Affecting Future Performance" below at pages 10 to 15. ITEM 1. BUSINESS GENERAL GT Interactive Software Corp. (the "Company"), a Delaware corporation incorporated in September 1992, creates, publishes and merchandises interactive entertainment, edutainment and value-priced consumer software for a variety of platforms on a world-wide basis. Similar to major film studios and record companies, the Company employs a portfolio approach to achieve a broad base of products across most major consumer software categories. The Company obtains new software content by blending its internal software development capabilities with the multi-title publishing relationships it has established with a variety of independent software design groups and content providers. Recognizing that software distribution capabilities attract software publishing content, the Company has used its strong distribution foundation to build its current position as a leader in the consumer software publishing business. According to PC Data, in 1996 the Company achieved the industry's second highest market share in number of units sold in the personal computer ("PC") software game category and the industry's highest market share in number of units sold in the PC software budget/value-priced category. The Company has experienced significant growth in its published front-line titles, growing from 5 titles released in 1994 to 24 titles released in 1995 to 67 titles released in 1996. The Company believes that it is currently the largest distributor of consumer software to mass merchants in the United States. The Company is the primary supplier of its own and third party consumer software to approximately 2,320 Wal-Mart stores and approximately 760 Target stores and supplies value-priced software under specially designed programs to approximately 2,150 Kmart stores. In addition, the Company has established direct selling relationships for its own published software with a variety of major retailers, including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and Computer City, among others. In December 1995, following the Company's initial public offering, the Company's Common Stock was listed on the Nasdaq National Market under the symbol "GTIS". Unless the context otherwise provides, the "Company" or "GTIS" refers to GT Interactive Software Corp. and its subsidiaries. INDUSTRY BACKGROUND The world-wide consumer software market has grown dramatically in recent years, driven by the increasing installed base of multimedia PCs in the home, the introduction of new dedicated game systems from Sony, Sega, Nintendo and others, the proliferation of software titles, and the development of new and expanding distribution channels. Recent improvements in computer technology have presented an opportunity to fundamentally change the user's PC experience by introducing an interactive element to audio and visual entertainment. Multimedia PCs, generally configured with enhanced memory, high-resolution color monitors, sound boards, stereo speakers and high-capacity CD-ROM drives, provide interactive entertainment and learning environments that combine text, realistic sound, advanced graphics and animation. Rapidly declining prices of microprocessors and CD-ROM drives have made these computers more affordable. The world-wide consumer software industry has also recently undergone a number of profound changes with the introduction of new hardware platforms and new technologies, such as on-line networks 1 4 and the Internet. The "next generation" of game systems are based on 32- and 64-bit microprocessors that incorporate dedicated graphics chipsets. The Sony PlayStation ("PlayStation") and Sega Saturn ("Saturn") hardware systems began shipping in Japan in the last quarter of 1994 and in North America in 1995. The Nintendo 64 ("N64") system began shipping in Japan in June 1996 and began shipping in North America in 1996. Historically, sales of console software titles have exceeded sales of PC titles in both units and dollars. In addition, the proliferation of on-line networks and the Internet has created new opportunities for the consumer software industry, including on-line game playing by users in various locations, additional promotional techniques including on-line distribution of shareware, and direct on-line marketing, sales and distribution to end users. Growth in the installed base of multimedia PCs and in other powerful and functional platforms has created a mass market for consumer software products. The development of a mass market for software products has been characterized by the rise in importance of mass merchant software sales as a distribution channel, increasing price pressure as well as competition for limited retail shelf space to accommodate the abundance of new titles. This abundance has resulted in the increased importance of brand name recognition in a hit driven market. Faced with the challenges of marketing and distribution, many independent software developers and content providers are pursuing relationships with publishing companies with broader distribution capabilities, including enhanced access to mass market retailers and greater merchandising, marketing and promotional support. At the same time, retailers are faced with the challenge of managing the increasing number of new titles with limited shelf space. Another result of these market pressures is the trend in the industry toward the consolidation of software companies and the diversification of products offered by such companies. The Company believes that success in the industry will be achieved by those companies that are able to create significant brand name recognition or hits, establish strong retail relationships and consistently offer a diversified high-quality software portfolio providing significant sell-through opportunities for retailers of all kinds. BUSINESS STRATEGY The Company's objective is to become one of the world's leading consumer software companies. GTIS' initial business strategy was to establish a strong distribution capability as a foundation to build its current position as a leader in the consumer software publishing business. The Company believes that significant growth opportunities exist in international markets and across a variety of next generation hardware platforms, including PlayStation, Saturn and N64, for which the Company is creating software products. Key elements of its strategy are to: Continue to expand and diversify the publishing business. The Company's current strategy is to obtain new software content by blending its in-house software development capabilities with the multi-title publishing relationships it has established with independent software developers and content providers. To that end, the Company completed several acquisitions of leading software companies in 1995 and 1996 which have substantially increased its internal development capabilities and its publishing base. The Company acquired Humongous Entertainment, Inc. ("Humongous"), a premier developer and publisher of award-winning children's software which has become the centerpiece of its edutainment business. In addition, the Company acquired WizardWorks Group, Inc. ("WizardWorks"), a developer and publisher of value-priced software, and Candel Inc., the parent company of FormGen, Inc. ("FormGen"), a publisher of interactive PC shareware and software. These 1996 acquisitions supplemented the Company's 1995 acquisition of Slash Corporation ("Slash"), a publisher, purchaser, repackager and distributor of value-priced software. On an ongoing basis, GTIS intends to evaluate potential acquisitions of or investments in other software publishers or developers which it believes will complement or enhance its existing business. 2 5 With the acquisitions of Slash and WizardWorks, the Company has significantly enhanced its presence in the value-priced software market. WizardWorks' internal development capabilities have enabled the Company to create original lines of value-priced software. The Company's value-priced software marketing operations give the Company the flexibility to offer a particular product at various price points in response to market pricing pressures. This enables the Company to manage the entire life-cycle of its published product from the initial release of the product through the final closeout sale. The Company intends to seek additional ways to deepen and broaden its software product lines, including exploring new genres and platforms. Pursuant to this goal, the Company's strategies include attracting and retaining top developers and content providers, such as id Software Inc. ("id Software"), Williams Entertainment Group ("Williams"), 3d Realms, Mercer Mayer, Stan and Jan Berenstain and Scavenger, as well as developing its own titles. Similar to the music industry, GTIS employs its own "A&R" (Artists & Repertoire) group whose sole responsibilities are to identify, attract and retain independent software developers. Develop a leading position in the 32- and 64-bit game platforms. The Company is leveraging its strength in the PC software market to build a leading position in the emerging 32- and 64-bit game software market. To that end, the Company has become an approved licensee of PlayStation and Saturn in North America. Nintendo has approved the Company as a licensee of its products, and they are in the process of finalizing a definitive agreement which will cover N64 products. In addition, the Company has entered into multi-title relationships with id Software, Williams, 3D Realms and other content providers and software developers for the publishing of titles for use on these game systems. As additional platforms that are suited to the Company's products emerge, the Company intends to publish products that it believes will have the greatest sales potential in the consumer software market. Broaden its international presence. The Company believes that markets outside the United States present significant growth opportunities. The Company began to broaden its international sales efforts in late 1994 by establishing relationships with software publishers and distributors in the largest international markets. In January 1995, the Company established a publishing operation in the United Kingdom with responsibility for European markets. That operation was expanded in November 1996 when the Company acquired the business of Warner Interactive Entertainment Europe ("Warner Interactive Europe"), a subsidiary of Warner Music Group. In 1996, GTIS successfully launched Doom for PlayStation in Europe and in Japan. In addition, the Company released Quake for PCs in Europe, where it was the number one selling title upon its release. In September 1995, the Company entered into joint venture agreements with SOFTBANK Corporation ("SOFTBANK"), the leading distributor of PC software in Japan, and Roadshow Entertainment PTY LTD ("Roadshow"), a leading entertainment company in Australia, for the publishing and distribution of the Company's products in Japan and Australia, respectively. It was pursuant to the SOFTBANK arrangement that Doom was launched in Japan. The Company is aggressively seeking new opportunities to form alliances with local publishers and distributors in other foreign markets. Develop new brands and leverage hit titles. The Company believes that, with the proliferation of software titles and the competition for shelf space, brand name recognition of its published products, whether created internally or by third parties, is an important component of its success as a publisher. For example, the Company has licensed titles from Mercer Mayer in order to capitalize on the popularity of Mercer Mayer's multi-million selling The Little Critter book series. In addition, the popularity of Doom has resulted in the success of Doom-related products which have sold over 4.0 million copies. Further, Humongous has built significant brand name recognition in the edutainment area with its critically acclaimed software titles and identifiable characters. The Company intends to further build its characters and other properties to which the Company has exclusive rights through licensing and merchandising across various media, including books, television and films. Pursue the Internet and on-line network opportunities. The Internet and on-line networks are an 3 6 integral element of all GTIS marketing and promotional efforts. The Company generates awareness through its Web site for its software titles prior to their market debut. The wide acceptance of the Internet into consumers' homes has created new opportunities for the consumer software industry. The Company intends to further explore these opportunities, including on-line game playing by users in various locations, additional promotional techniques including on-line distribution of shareware, and direct on-line marketing, sales and distribution to end users. Maintain its leadership position as a distributor and merchandiser. GTIS believes that it is the largest distributor of third party computer software to mass merchants in the United States and intends to maintain its position in this area. The Company believes that its distribution capabilities have served as a foundation upon which it has built its current position as a leader in the consumer software publishing business. The Company's proprietary state-of-the-art distribution and point-of-sale replenishment system, as well as its experienced management team, enable it to handle efficiently high sales volumes, manage and replenish inventory on a store by store basis and assemble for its customers regional and store by store data based on product sell-through. GTIS intends to continue to invest in and upgrade that system and seeks to explore innovative value-added programs to establish and strengthen retail relationships. There can be no assurance that the Company will successfully implement all or any part of its strategy. GTIS PUBLISHING The Company publishes high quality consumer software, developed internally or in collaboration with independent developers, which is available in various formats for use on multiple platforms. Like major film studios and record companies, GTIS employs a portfolio approach to achieve a broad base of products across all major consumer software categories. The Company combines its internal software development capabilities with relationships with a variety of independent software design groups, such as id Software, a leading developer of 3-D action games (Quake, Final Doom, Doom II and Hexen); Williams, the home entertainment division of leading arcade company WMS Industries (Mortal Kombat 3, NBA Hang Time and War Gods); 3D Realms, the creator of the best selling Duke Nukem 3D; Scavenger, designers of Scorcher, Amok and Into the Shadows; and Cybersites, creators of the popular Internet game, S.P.Q.R. During 1996, the Company has consummated a number of strategic acquisitions and investments that have significantly increased its internal development capabilities and added to its expanding publishing base. In July 1996, the Company acquired Humongous, a premier developer and publisher of original interactive children's entertainment software. Humongous' award-winning software line features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear and Buzzy the Knowledge Bug. USA Today (December 26, 1995) listed Humongous as one of "Six Firms Worth Watching in '96," and Fortune magazine (July 10, 1995) named Humongous one of "25 Cool Companies." Humongous, which has become the centerpiece of the Company's edutainment business, joins the Company's existing popular children's titles, strengthening the Company's presence in the growing children's software category. The Company further increased its internal software development capabilities in June 1996 when it acquired WizardWorks, a developer and publisher of a wide variety of consumer software products. The WizardWorks product line includes GameWizards, a series of gaming strategy, hint and tip guides on CD-ROM that incorporate full-motion video game segments, cheat codes and detailed maps. WizardWorks also offers the !Zone line of add-on levels that complement the industry's most popular entertainment titles, including GTIS titles such as Doom, Heretic, Hexen and Duke Nukem 3D. Through the CompuWorks line, WizardWorks offers a line of home office productivity software that includes such well-known titles as CompuWorks Publisher and CompuWorks Draw. Also included in the acquisition of WizardWorks was MacSoft, a leading publisher of entertainment, edutainment and productivity software for the Macintosh. GTIS is consolidating all of its Macintosh offerings under the MacSoft brand, 4 7 strengthening its position in this segment of the market. In June 1996, the Company also acquired FormGen, a publisher of interactive PC shareware and software. Foremost among FormGen's current titles is the best-selling Duke Nukem 3D for PCs, published under license from 3D Realms. Independent of its acquisition of FormGen, the Company has secured the rights to publish Duke Nukem 3D world-wide directly from 3D Realms for all next generation platforms. In November 1996, the Company invested in convertible preferred stock of Off World Entertainment, Inc. (also known as "OddWorld Inhabitants" or "OddWorld"), which is convertible into 50% of the common equity. OddWorld's principal developers have extensive experience in the ground-breaking application of computer-generated images in film, commercials and theme park rides. OddWorld is currently developing "StoryDwellings" -- a game series that combines life-like character motion with intuitive controller interfaces inside highly rendered backgrounds, bringing players into a rich, deeply developed world that is more like a film than a game. The Company has also pursued strategic relationships with independent developers of software products. GTIS believes it has been successful in identifying talented developers and establishing mutually beneficial relationships with those developers. The Company's early publishing success was based in large part on the Doom series of software titles. These products have sold an aggregate of over 4.0 million copies since the introduction of the series in 1994 and have been the Company's most popular titles. The Doom series, which includes Doom II, Doom-related products, Heretic and Hexen, is licensed to the Company from, and developed by, id Software. Another id Software title, Quake, is currently being published by the Company in the U.S. and Europe. The Company believes that its success with the Doom-related titles and its software distribution capabilities have enabled it to attract and retain additional quality independent software developers and content providers. Consequently, the Company has experienced significant growth in its published titles, growing from 5 front-line titles released in 1994 to 24 titles released in 1995 to 67 titles released during 1996. The Company has entered into several multi-title publishing contracts with Williams, pursuant to which the Company has acquired the rights to publish software products based on virtually all of Williams' coin-operated video games, for use on a number of platforms world-wide, excluding Japan and North America. The Company has acquired similar rights to games developed by Atari Games Corporation ("Atari"), which was recently acquired by Williams. GTIS is also leveraging its strength in the PC software market to build a leading position in the emerging 32- and 64-bit video game software market. To that end, the Company has become an approved licensee of PlayStation and Saturn in North America. Nintendo has approved the Company as a licensee of its products, and they are in the process of finalizing a definitive agreement which will cover N64 products. In addition, the Company has entered into relationships with id Software, Williams, 3D Realms and other content providers and software developers for the publishing of next generation titles, such as Doom II, Quake, Duke Nukem 3D and Mortal Kombat 3. Edutainment In July 1996, the Company acquired Humongous, a premier developer and publisher of original interactive children's entertainment software. Humongous software features popular characters such as Putt-Putt, Freddi Fish, Fatty Bear and Buzzy the Knowledge Bug. Humongous titles, such as Putt-Putt Saves The Zoo, Freddi Fish and the Case of the Missing Kelp Seeds and Fatty Bear's Birthday Surprise, have won dozens of awards in the past few years. Humongous has become the centerpiece of the Company's edutainment business. Current Humongous titles join GTIS' existing popular children's properties, including those from award-winning 5 8 children's author Mercer Mayer (Just Me and My Dad and Just Me and My Mom), strengthening the Company's presence in the growing children's software category. Among the edutainment software products to be published by the Company are software titles based on the Berenstain Bears series, created by Stan and Jan Berenstain. Value-Priced Software In addition to publishing front-line software, GTIS also creates, publishes and distributes a variety of value-priced products. The Company believes that the value-priced segment of the consumer software market affords a growth opportunity as a result of the proliferation of software titles which cannot find front-line shelf space and the demand by many PC owners for moderately priced products. The Company's value-priced marketing operations give the Company the flexibility to offer a particular product at various price points in response to market pricing pressures. This enables the Company to manage the entire life-cycle of its published product from the initial release of the product through the final closeout sale. In early 1995, the Company began to repackage and offer for distribution to mass merchants five- and ten-pack boxes of value-priced software titles. These generally include previously top-selling software titles whose popularity had peaked at higher retail price points or titles that never realized substantial popular recognition. The Company's acquisition in June 1995 of Slash, a leading publisher, purchaser, repackager and distributor of value-priced software, solidified the Company's presence in the value-priced market. Through its Slash Division, the Company licenses catalog titles, purchases excess inventory (primarily in the CD-ROM format) from major publishers and may repackage the titles into compilation boxes, such as five-packs and ten-packs. The Company further expanded its value-priced product line in June 1996, when it acquired WizardWorks, a leading developer and publisher of value-priced interactive entertainment, edutainment and productivity software. The WizardWorks value-priced product line includes GameWizards, a series of gaming strategy, hint and tip guides; the !Zone line of add-on level software that complements the industry's most popular entertainment titles; and the CompuWorks line of home office productivity software. The Company believes that the recent consolidation of the Slash Division and WizardWorks into one distinct value-priced division will serve to strengthen its position in the value-priced market. In 1995, the Company commenced supplying value-priced software under specially designed fixture-based programs to Kmart and Wal-Mart. These programs utilize sophisticated distribution and point of sale replenishment systems similar to those already in use by the Company for front-line products. International In January 1995, the Company established a publishing operation in London, England, with responsibility for European markets. The Company is currently publishing, marketing and distributing its consumer software products in over 39 countries world-wide, including Quake which was the number one selling PC title in Europe upon its release. The Company distributes its products direct to retail merchants in most of the U.K., through a sub-distribution agreement with Virgin Interactive Entertainment plc in French- and German-speaking countries and through wholesalers in most of the rest of the European market. The Company believes that the European market for 32- and 64-bit game systems software represents a significant growth opportunity. In late 1995, the Company successfully launched Doom for PlayStation in Europe and, in Spring 1996, in Japan. Through its strategic alliance with Williams, the Company has acquired the exclusive right to publish and distribute, in most major markets excluding North America and Japan, 32- and 64-bit software products based on virtually all of Williams' coin-operated video games, as well as games developed by Atari, which was recently acquired by 6 9 Williams. These titles include NBA Hang Time, based on the popular arcade basketball game, NHL Open Ice, an arcade-style hockey brawl, Robotron X, the sequel to the arcade classic, Mortal Kombat Trilogy, based on the record-setting martial arts arcade series, and Area 51, based on the popular arcade game. In November 1996, the Company acquired the business of Warner Interactive Europe, a European subsidiary of Warner Music Group. The acquisition established direct GTIS operations in France and Germany, as well as Australia. As part of the transaction, the Company also acquired an internal product development team based in Manchester, England. The Company has also entered into joint venture agreements with SOFTBANK, the leading distributor of personal computer software in Japan, and Roadshow, a leading entertainment company in Australia, under which the Company and each of the other parties publish and distribute the Company's titles in Japan and Australia, respectively. In October 1995, the Company and SOFTBANK further strengthened their relationship through the purchase from the Company and certain stockholders, by an affiliate of SOFTBANK, of an equity interest in the Company. Additionally, in June 1996, the Company purchased a 9.9% interest in, and entered into a multi-title publishing agreement with, Mirage, a U.K. developer of entertainment software. The Company is aggressively seeking new opportunities to form strategic alliances with local publishers and distributors in other foreign markets. THE GTIS MERCHANDISING AND DISTRIBUTION APPROACH The Company believes that it is the only software publisher that sells directly to substantially all of the major retailers of computer software in the U.S. and that it is the largest distributor of computer software to mass merchants in the U.S. GTIS sells its own published titles to specialty retailers and distributes its own products, as well as those of other publishers, to certain mass merchants. The Company is the primary supplier of its own and third-party consumer software to approximately 2,320 Wal-Mart stores and approximately 760 Target stores and supplies value-priced software under specially designed fixture-based programs to approximately 2,150 Kmart stores. In addition, the Company sells its own published products to a variety of major retailers, including Sam's Club, Price-Costco, CompUSA, Best Buy, Egghead and Computer City, among others. The Company believes that its merchandising and distribution capability is an important element of its success and gives it a competitive advantage. The Company's distribution approach is based on direct sales to a significant number of specialty, multi-purpose and mass merchant retailers of computer software. This approach includes shipment of software directly to individual stores or warehouse locations for each of its retail accounts, in-store merchandising programs for a variety of its retail accounts and value-added distribution programs employing a proprietary point-of-sale inventory replenishment system for certain of its mass merchant accounts. GTIS initially designed its merchandising and distribution program in collaboration with Wal-Mart. Under this program currently executed for certain mass merchants, the Company typically manages substantially all of a store's software inventory, by designing, supplying and restocking displays of software according to a program plan devised in concert with the customer specifically for each individual store. Drawing upon its regional and store specific data base, the Company updates each store plan on a continual basis. This store-specific program plan, together with the Company's proprietary point-of-sale replenishment system, enables the Company to ensure that the mass merchants' shelves will remain fully stocked with a tailored mix of titles designed to maximize the sales volume per square foot of shelf space. Utilizing its point-of-sale replenishment systems and electronic data interchange (EDI) links with its largest mass merchant accounts, the Company is able to efficiently handle high sales volumes to those customers, manage and replenish inventory on a store-by-store basis and assemble for its customers regional and store-by-store data based on product sell-through. The Company utilizes state-of-the-art 7 10 technology systems for order processing, inventory management, purchasing and tracking of shipments thereby increasing the efficiency and accuracy of order processing and payments and shortening order turnaround time. These systems automatically track software orders from order processing to point-of-sale, thereby enhancing customer satisfaction through prompt delivery of the desired software titles. Based on the strength of its current consumer software distribution operation, GTIS has successfully attracted other publishers to utilize its mass merchant distribution services for their products. Such products are generally distributed by GTIS under the name of the publisher who is, in turn, responsible for the publishing, packaging, marketing and customer support of such products. GTIS believes that its program of distributing other publishers' products leverages the Company's distribution capabilities and adds a source of revenue that does not require additional product development expenditures. The Company's agreements with other publishers typically provide for certain retail distribution rights in designated territories for a specific period of time, after which those rights are subject to negotiated renewal. MARKETING GTIS believes that marketing is critically important to the success of its products. The Company employs a wide range of sophisticated marketing techniques including (i) in-store promotions that utilize display towers and endcaps, (ii) direct mailings, (iii) advertising in computer and general consumer publications and (iv) on-line marketing to promote sales of its products. The Company monitors and measures the effectiveness of its marketing strategies throughout the product lifecycle. The Internet is an integral element of GTIS' marketing efforts used, in part, to generate awareness for its titles months prior to their market debut. GTIS incorporates the Internet into its marketing programs through the creation of product-dedicated mini-sites, on-line promotions and news group seedings. To capitalize on the innovative nature of its products, the Company has developed a public relations program that has resulted in coverage for the Company by trade journals and also by well-recognized publications such as The New York Times, Entertainment Weekly, Newsweek and USA Today. Among the marketing strategies the Company utilizes is the creation of special press events to coincide with the launch of a new product. GTIS' marketing programs have continued to expand along with the Company's publishing business. For example, to launch Just Me and My Mom, an interactive storybook based on the popular Mercer Mayer book, GTIS unveiled a multi-tiered marketing campaign which included cross-promotions with Family PC magazine and Scholastic Software Clubs, the showcasing of the game at an EPCOT Center exhibit and magazine subscriber invoice inserts, as well as game demos sent to approximately 750,000 educators. As of December 31, 1996, the Company's staff included 105 employees in domestic sales and marketing and 84 employees in international marketing and distribution. The Company expects to increase its sales and marketing staff to provide greater penetration into the retail market and increased marketing support for its products. The Company also uses independent field sales representative organizations to assist in the sales of software products and customer support. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company generally sells a significant portion of its published software under licenses from independent developers and, in such cases, does not acquire the copyrights for the underlying work. The Company relies primarily on a combination of trademark, copyright, trade secret and other proprietary 8 11 rights laws, license agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights and the rights of its developers. United States copyright law, international conventions and international treaties, however, may not provide meaningful protection against unauthorized duplication or infringement of the Company's software. Policing unauthorized use of an easily duplicated and broadly disseminated product such as computer software is very difficult. Software piracy is expected to be a persistent problem for the software industry. These problems are particularly acute in certain international markets such as South America, the Middle East, the Pacific Rim and the Far East. If a significant amount of unauthorized copying of the Company's products were to occur, the Company's business, operating results and financial condition could be adversely affected. Software developers and publishers are subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. There has been substantial litigation in the industry regarding copyright, trademark and other intellectual property rights. Any such claims or litigation, with or without merit, could be costly and a diversion of management's attention, which could have a material adverse effect on the Company's business, operating results and financial condition. Adverse determinations in such claims or litigation could have a material adverse effect on the Company's business, operating results and financial condition. The Company is presently in litigation against Micro Star Software ("Micro Star"), the publisher of a product entitled "Nuke It" comprised largely of additional levels of play for Duke Nukem 3D which are created by game users and available over the Internet ("Player Created Levels"). The Company contends that the sale of Nuke It infringes the copyright on Duke Nukem 3D (which the Company publishes under license with the owner of 3D Realms) and violates the Lanham Act's trademark, unfair competition and false advertising provisions. On September 26, 1996, the Company obtained a preliminary injunction in federal court in San Diego, California ordering the recall of all copies of Nuke It then in the stores, based on the use of Duke Nukem 3D's protected expression on Nuke It's packaging and in some copies of the Nuke It CD-ROM. The Court also held as a preliminary matter that the Player Created Levels contained in Nuke It did not themselves contain expression from the Duke Nukem 3D game in protectable form. Because the Company believes that this holding is erroneous, it is pursuing an appeal to the U.S. Court of Appeals for the Ninth Circuit, seeking an injunction halting the sale of Nuke It and any subsequent Micro Star product containing additional levels of play for Duke Nukem 3D. Micro Star has appealed the Court's decision granting the injunction. The Company intends vigorously to pursue this litigation to protect its intellectual property rights. EMPLOYEES As of December 31, 1996, GTIS had 967 employees, consisting of 105 in domestic sales and marketing, 504 in distribution, 39 in manufacturing, 84 in international marketing and distribution, 96 in publishing and product development, 28 in information services, 9 in purchasing and 102 in administration and finance. Of the 504 employees in distribution, 312 are members of Local 734, L.I.U. of N.A., AFL-CIO (the "Union"). These employees, who are located at the Company's distribution center in Edison, New Jersey, are subject to a collective bargaining agreement the Company entered into with the Union on May 12, 1995. The Company believes that its relations with its employees are good. 9 12 FACTORS AFFECTING FUTURE PERFORMANCE CUSTOMER CONCENTRATION AND CREDIT RISK The Company is the primary supplier of software to Wal-Mart, including titles published by the Company and products from other publishers. On a pro forma basis, giving effect to the acquisition of Slash, sales to Wal-Mart accounted for approximately 48% and 45% of the Company's net sales for 1995 and 1996, respectively. The Company's status as Wal-Mart's primary supplier is not based upon any written agreement or understanding. Accordingly, such status could be terminated at any time by Wal-Mart. In addition, Wal-Mart has dedicated, and the Company currently anticipates that Wal-Mart will continue to dedicate, the software department in a limited number of stores to other software distributors on a test basis. There can be no assurance that Wal-Mart will continue to use the Company as its primary supplier of consumer software, or at all. The loss of Wal-Mart as a customer, a significant decrease in product shipments to or an inability to collect receivables from Wal-Mart or any other adverse change in the Company's relationship with Wal-Mart would have a material adverse effect on the Company's business, operating results and financial condition. In late March 1997, the Company and Wal-Mart reached an understanding whereby Wal-Mart expects to begin testing direct purchasing of software from three publishers (CUC International, Electronic Arts, and Lucas Arts Entertainment) during the second half of 1997. Sales of products of these publishers to Wal-Mart accounted for approximately $20 million of the Company's net sales in 1996. RISKS ASSOCIATED WITH ACQUISITIONS In June 1995 the Company acquired Slash, in June 1996 the Company acquired WizardWorks and FormGen, in July 1996 the Company acquired Humongous and in November 1996 the Company acquired the business of Warner Interactive Europe. The Company undertook these acquisitions to expand its publishing and distribution capabilities with the assumption that the combined entity would be better able to take advantage of market opportunities than if each of the companies were operated individually. This synergy will depend in part on the ability of the Company to retain in-house publishing staffs and third-party relationships and to utilize distribution, sales and marketing capabilities. The Company is in the process of integrating the acquired companies by consolidating certain operations, offices and facilities, and combining administrative, accounting, sales and marketing and distribution functions. The integration of these acquired companies will involve, among other things, the opening of new facilities or the expansion of existing facilities, the expansion of accounting systems, controls and procedures, the increase in warehouse and distribution capabilities, the closing of redundant facilities and the elimination of duplicate personnel. The Company is in the early stages of integrating certain of the acquired companies and there can be no assurance that the integration will be completed without disrupting the Company's business. Should the Company not be able to achieve such integration in a timely manner or in a coordinated fashion, it could materially and adversely affect the Company's business, operating results or financial condition. The Company believes that its future growth will depend, in part, on its ability to continue to identify, acquire and integrate companies which have software development and publishing capabilities. While the Company reviews acquisition opportunities in the ordinary course of its business, some of which may be material and some of which are currently under investigation or discussion, the Company presently has no commitments or understandings with respect to any material acquisitions and there can be no assurance that the Company will be successful in identifying and acquiring suitable acquisition candidates or integrating the acquired businesses into the Company's operations. FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY The Company has experienced and may continue to experience significant quarterly fluctuations in net sales and operating results due to a variety of factors, including fluctuations in the mix of products 10 13 with varying profit margins sold by the Company, the size and timing of acquisitions, the size and growth rate of the consumer software market, market acceptance of the Company's products (including the Company's published and third-party distributed titles) and those of its competitors, development and promotional expenses relating to the introduction of new products or enhancements of existing products, projected and actual changes in computing platforms, the timing and success of product introductions by the Company and its competitors, product returns, changes in pricing policies by the Company and its competitors, the accuracy of retailers' forecasts of consumer demand, the timing of orders from major customers, order cancellations and delays in shipment. In addition, delays in the introduction of the Company's front-line titles could result in material fluctuations of the Company's operating results. The Company has experienced, and expects to experience in the future, significant fluctuations in its quarterly net sales and operating results as a result of such factors. In response to competitive pressures, the Company may take certain pricing or marketing actions that could materially and adversely affect the Company's business, operating results and financial condition. Products are generally shipped as orders are received and, accordingly, the Company operates with little backlog. The Company's expense levels are based, in part, on its expectations regarding future sales and, as a result, operating results would be disproportionately adversely affected by a decrease in sales or a failure to meet the Company's sales expectations. Defective front-line published products may result in higher customer support costs and product returns. Further, the consumer software business is seasonal. Net sales are typically significantly higher during the fourth calendar quarter, due primarily to the increased demand for consumer software during the year-end holiday buying season. Net sales in other quarters are generally lower and vary significantly. Accordingly, the Company believes that period to period comparisons of operating results are not necessarily meaningful and should not be relied upon as an indication of future performance. There can be no assurance that the Company will achieve consistent profitability on a quarterly or annual basis. Due to all of the foregoing factors, the Company's operating results in any quarter may be below the expectations of public market analysts and investors. In such event, the market price of the Company's Common Stock would likely be materially and adversely affected. See "--Possible Volatility of Stock Price". DEPENDENCE ON NEW PRODUCT AND PRODUCT ENHANCEMENT INTRODUCTIONS; PRODUCT DELAYS The Company's continued success in the publishing business depends on the timely introduction of successful new products or enhancements of existing products to replace declining revenues from older products. Consumer preferences for software products are difficult to predict, and few consumer software products achieve sustained market acceptance. If revenues from new products or enhancements were to fail to replace declining revenues from existing products, the Company's business, operating results and financial condition could be adversely affected. The process of developing software products such as those offered by the Company is extremely complex and is expected to become more complex and expensive in the future as new platforms and technologies are addressed. A significant delay in the introduction of one or more new products or enhancements could have a material adverse effect on the ultimate success of such products and on the Company's business, operating results and financial condition, particularly in view of the seasonality of the Company's business. The Company's contracts with hardware licensors, which are also some of the Company's chief competitors, often grant significant control to the licensor over the manufacturing of the Company's products. This fact could, in certain circumstances, leave the Company unable to get its products manufactured and shipped to customers. In most events, control of the manufacturing process by hardware companies increases both the manufacturing lead times and the expense to the Company over the lead times and costs that the Company can achieve independently. In fiscal 1996, for example, the Company experienced delays in the manufacturing of PlayStation products which caused delays in shipping those products. The results of future periods may be affected by similar delays. Finally, the Company's contracts with its hardware licensers often require the Company to take significant risks in holding or prepaying for its inventory of products. See "-- Reliance on Third-Party Software Developers; Reliance on Other Publishers," "-- Fluctuations in Quarterly Operating Results; Seasonality," and 11 14 "Business -- GTIS Publishing." RELIANCE ON THIRD-PARTY SOFTWARE DEVELOPERS; RELIANCE ON OTHER PUBLISHERS Although the Company substantially increased, primarily through acquisitions, its internal software development capabilities in 1996, a significant portion of the Company's published products have been licensed from, or developed by, the Company in collaboration with independent software developers. Due primarily to the increased demand for consumer software programs, the payment of advances and guaranteed royalties to independent developers has increased and may continue to increase. As of December 31, 1996, the Company had recorded approximately $69.2 million of royalty advances on its balance sheet. There can be no assurance that the release of products associated with such advances will not be delayed, which would delay the Company's ability to receive revenue to offset such advances or royalties, or that the sales of such products will be sufficient to cover the amount of such advances or royalty prepayments. The Company's success depends in part on its continued ability to obtain and renew product development agreements with independent software developers. As independent developers are in high demand, there can be no assurance that independent developers, including those which have developed products for the Company in the past, will be available to develop products for the Company in the future. For instance, the Company does not currently have any contractual agreement with id Software pursuant to which the Company has control over, or has been promised rights to, future products to be developed by id Software; such rights are negotiated on a title-by-title basis. Many independent developers have limited financial resources, which could expose the Company to the risk that such developers may go out of business prior to completing a project. In addition, because the Company's published products are often developed with outside developers, the Company cannot always control the timing of the introduction of its products. While the Company maintains production liaisons with independent developers, there can be no assurance that new products developed by third-party developers whose products are published by the Company will be introduced on schedule or at all or within acceptable quality guidelines or that they will achieve market acceptance. The Company's success is also dependent in part on its ability to obtain content for its products from external sources. There can be no assurance that the Company will be able to obtain or renew product development agreements, or to obtain such content, on favorable terms, or at all. Such agreements are terminable, in some cases without notice, upon the occurrence of one or more of the following events: those involving the bankruptcy or insolvency of either party to such agreements, the cessation of operations by either of such parties or the material breach of specified provisions of such agreements which breach is not cured within a designated time frame. See "Business -- GTIS Publishing." The Company also distributes products on behalf of other publishers. There can be no assurance that the Company will obtain or renew any rights to distribute such products. Failure to retain or obtain such rights could have a material adverse effect on the Company's business, operating results and financial condition. See "Business -- The GTIS Merchandising and Distribution Approach" and "-- GTIS Publishing." CHANGING PRODUCT PLATFORMS The consumer software market is characterized by rapidly changing technology, particularly with respect to product platforms. The Company must continually anticipate the emergence of, and adapt its products to, popular platforms for consumer software. When the Company chooses to publish or develop a product for a new platform, it may be required to make a substantial development investment one to two years in advance of shipments of products on that platform. If the Company invests in the development of a product for a platform that does not achieve significant market penetration, the Company's planned revenues from that product will be adversely affected and it may not recover its development investment. If the Company does not choose to publish or co-develop for a platform that achieves significant market success, the Company's revenue growth may also be adversely affected. See "Business -- Industry Background" and "-- GTIS Publishing." 12 15 INTERNATIONAL SALES The Company began to broaden its international sales efforts in late 1994 by establishing relationships with software publishers and distributors in leading international markets. The Company expects that international sales will account for a significant portion of its net sales in the future. International sales are subject to inherent risks, including unexpected changes in regulatory requirements, tariffs and other barriers, fluctuating exchange rates, potential political instability, difficulties installing and managing foreign operations and difficulty in collection of accounts receivable. In addition, acceptance of the Company's products in certain markets has required, and may in the future require extensive, time-consuming and costly modifications to localize the products for use in particular markets. Software piracy presents a particularly acute problem in certain international markets such as South America, the Middle East, the Pacific Rim and the Far East, and the laws of foreign jurisdictions may not protect the Company's proprietary rights to the same extent as the laws of the United States. There can be no assurance that these or other factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, operating results and financial condition. See "Business -- GTIS Publishing" and "-- International." COMPETITION The market for consumer software products is highly competitive. Only a small percentage of products introduced in the consumer software market achieve any degree of sustained market acceptance. Competition is based primarily upon price, access to retail shelf space, product enhancements, ability to operate on popular platforms, availability of titles, new product introductions, marketing support and distribution systems. Many of the companies with which the Company currently competes or may compete in the future have comparable or greater financial, technical, marketing, sales and customer support resources, larger and more seasoned internal development teams, greater name recognition and a larger customer base, than the Company. In addition, the Company believes that large software companies, media companies and film studios are increasing their focus on the interactive entertainment and edutainment software markets and, as a result of their financial and other resources, name recognition and customer base, may become significant competitors of the Company. Moreover, in a number of geographic markets, certain of the titles offered by the Company, including various hit titles, are offered on a limited number of platforms and compete with the same titles offered by the Company's competitors on other platforms. Current and future competitors with greater financial resources than the Company may be able to carry larger inventories, undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make higher offers or guarantees to software developers and licensors than the Company. The market is also extremely competitive with respect to access to third party developers and content providers. This competition is based primarily on breadth of distribution, development funding, reputation and royalty rates. To the extent that competitors maintain or achieve greater title portfolio breadth, title rights for popular platforms, or access to third party developers and content providers, or price, shelf access, marketing support, distribution or other selling advantages, the Company could be materially and adversely affected. In addition, several competitors of the Company have recently sought to expand their distribution capabilities. New hardware platforms and electronic delivery systems may be introduced into the software market and potential new competitors may enter the software development and distribution market, resulting in greater competition for the Company. There can be no assurance that the Company will have the resources required to respond effectively to market or technological changes or to compete successfully with current or future competitors or that competitive pressures faced by the Company will not materially and adversely affect its business, operating results and financial condition. In addition, as part of its value-added distribution program, the Company seeks to provide its mass merchant customers with a wide variety of popular titles. Achieving such a product mix requires the Company to supplement the distribution of its published products with certain third party software products, including products published by the Company's competitors. There can be no assurance that such competitors will continue to provide such products to the Company for distribution at 13 16 the Company's mass merchant customers. The failure to obtain software titles developed or published by one or more of the Company's competitors, and not being able to obtain these products from other distributors could have a material adverse effect on the Company's relationships with such mass merchant customers, which in turn would have a material adverse effect on the Company's business, operating results and financial condition. In late March 1997, the Company and Wal-Mart reached an understanding whereby Wal-Mart expects to begin testing direct purchasing of software from three publishers during the second half of 1997. See "-- Customer Concentration and Credit Risk". DEPENDENCE ON KEY PERSONNEL The continued success of the Company depends to a significant extent upon the continued performance and contribution of its senior management and on its ability to continue to attract, motivate and retain highly qualified employees. In particular, the Company is highly dependent on the management services of Joseph J. Cayre, the Chairman of the Board of Directors, Ronald Chaimowitz, the President and Chief Executive Officer of the Company and Charles F. Bond, President of the Company's Slash Division. The loss of the services of any of the Company's senior management could have a material adverse effect on the Company's business, operating results and financial condition. Competition for highly skilled employees with technical, management, marketing, sales, product development and other specialized training is intense, and there can be no assurance that the Company will be successful in attracting and retaining such personnel. Specifically, the Company may experience increased costs in order to attract and retain skilled employees. In addition, while the Company has entered into employment agreements with Messrs. Chaimowitz and Bond, there can be no assurance that such employees will not leave or compete with the Company. The Company's failure to attract additional qualified employees or to retain the services of key personnel could materially and adversely affect the Company's business, operating results and financial condition. POSSIBLE VOLATILITY OF STOCK PRICE The market prices for the Common Stock have been, and may in the future be, volatile. Market prices for the Company's Common Stock will be influenced by a number of factors, including quarterly variations in the financial results of the Company and its competitors, acquisitions, changes in earnings estimates by analysts and conditions in the computer software industry, the overall economy and the financial markets. These and other factors may adversely affect the market price of the Common Stock. See "Market for Registrant's Common Equity and Related Stockholder Matters". PRODUCT RETURNS The Company accepts product returns or provides markdowns or other credits on varying terms in the event that the customer holds excess inventory of the Company's products. Software products as complex as those published by the Company may contain undetected errors when first introduced or when new versions are released. It is the Company's practice to accept returns of defective or damaged products at any time. At the time of product shipment, the Company establishes a return reserve which covers expected future returns and, if necessary, price protection, the Company's policies for stock balancing and returns of defective or damaged products. This estimate of the potential for future returns of products is based on historical return rates, seasonality of sales, retailer inventories of the Company's products and other factors. The Company has historically experienced, and reserved for, product returns at a rate of approximately 30% of gross sales. Product returns that exceed the Company's reserves, or loss of or delay in market acceptance of a new product as a result of software failures or otherwise, could materially and adversely affect the Company's business, operating results and financial condition. Although the Company maintains reserves which it believes to be adequate with respect to product returns and price reductions, there can be no assurance that actual returns to the Company will not exceed the reserves established. 14 17 RAPID EXPANSION The Company has experienced significant and rapid sales growth since it commenced operations. There can be no assurance that the Company will be able to maintain its present level of sales or continue to experience sales growth. There can be no assurance that, if the Company continues to experience sales growth, it can do so without adversely affecting its profitability. The Company's ability to manage its growth effectively will require it to continue to attract, train, motivate, manage and retain key employees and to improve its operational, financial and management information systems. If the Company's management becomes unable to manage growth effectively, the Company's business, operating results and financial condition could be adversely affected. See "Business- Business Strategy" and "Properties". RISK OF CUSTOMER BUSINESS FAILURE Sales are typically made on credit, with terms that vary depending upon the customer and the nature of the product. The Company does not hold collateral to secure payment. Retailers and distributors compete in a volatile industry and are subject to the risk of business failure. For example, the Company currently has an uninsured receivable in the amount of approximately $1.6 million from Neostar, a retailer currently engaged in Chapter 11 bankruptcy proceedings. A motion to convert the proceedings to Chapter 7 liquidation proceedings has been made, but no decision in respect thereto has been made as of March 28, 1997. The Company believes its existing reserves are adequate to cover its exposure with respect to such receivable. Although the Company maintains a reserve for uncollectible receivables that it believes to be adequate, there can be no assurance that such reserve is adequate or that additional payment defaults on significant sales would not materially and adversely affect its business, operating results and financial condition. INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS The Company sells a significant portion of its published software under licenses from independent developers and, in such cases, does not acquire the copyrights for the underlying work. The Company relies primarily on a combination of patent, trademark, copyright, trade secret and other proprietary rights laws, license agreements, employee and third-party nondisclosure agreements and other methods to protect its proprietary rights and the rights of its co-developers. Unauthorized copying occurs within the software industry, and if a significant amount of unauthorized copying of the Company's published products or products distributed by it were to occur, the Company's business, operating results and financial condition could be materially and adversely affected. Also, as the number of software products in the industry increases and the functionality of these products further overlaps, software developers and publishers may increasingly become subject to infringement claims. There can be no assurance that third parties will not assert infringement claims against the Company in the future with respect to current or future products. There has been substantial litigation in the industry regarding copyright, trademark and other intellectual property rights. Any such claims or litigation, with or without merit, could be costly and cause a diversion of management's attention, which could have a material adverse effect on the Company's business, operating results and financial condition. See "Business--Intellectual Property and Proprietary Rights" for the description of the Company's litigation against Micro Star Software. ITEM 2. PROPERTIES The Company's principal administrative, sales, marketing and development facilities are located in approximately 18,000 square feet of space at 16 East 40th Street and approximately 13,000 square feet of space at 10 East 40th Street in New York City. The leases on the facility located at 16 East 40th Street 15 18 will expire in December 2002, and the lease on the facility located at 10 East 40th Street will expire in June 1997. Due to the Company's significant and rapid expansion, the Company has leased approximately 60,000 square feet of new office space, which is currently being renovated, at 417 Fifth Avenue in New York City under a lease expiring in 2007. The Company expects to move the operations currently located at 16 East 40th Street and 10 East 40th Street to the new office space in late 1997. Rent payments under this lease do not begin until December 1997. The Company intends to either sublet or assign the leases for its space at 16 East 40th Street, although there is no assurance that it will be able to do so. The Company also maintains a facility in London, England of approximately 6,000 square feet, from which it conducts its European operations, under a lease that expires in the year 2020. The buildings which house the 16 East 40th Street facility in New York City and the London facility are owned by 16 East 40th Associates and Marylebone 248 Realty LLC, respectively, affiliates of Joseph J. Cayre. The Company believes that the terms of the leases are no less favorable to the Company than those it could obtain from independent third parties. The Company maintains a 192,900 square-foot distribution center in Edison, New Jersey under a lease that expires in July 1999. In Redwood, California, the Company maintains 4,000 square-feet of office space under a lease that expires in November 1998. The Slash and WizardWorks businesses have been consolidated and are occupying approximately 240,000 square feet of office, warehouse and distribution space in the Minneapolis, Minnesota area under a lease that expires in September 1999. The Company is actively trying to sublet its prior offices and warehouse space (although there is no assurance that it will be able to do so) which consists of 2,400 square feet of office space in Edina, Minnesota, a 34,400 square foot distribution center in Edina, Minnesota, a 79,900 square foot distribution center in Edina, Minnesota, and 15,000 square feet of office space, warehouse and distribution space in the Minneapolis area. The Company also maintains offices in Scottsdale, Arizona and Woodinville, Washington for each of its FormGen and Humongous subsidiaries, respectively. In Scottsdale, the Company maintains 25,000 square-feet of office space under a lease that expires in December 1998. In Woodinville, the Company maintains 25,000 square-feet of office and warehouse space under a lease that expires in December 1997. In addition, in connection with the Company's recent acquisition of the business of Warner Interactive Europe, the Company has assumed the leases for offices in Hamburg, Germany and Paris, France. Such leases will expire in March 1998 and December 2003, respectively. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any pending legal proceedings material to its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS There were no items submitted to a vote of security holders during the quarter ended December 31, 1996. 16 19 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their respective ages as of March 28, 1997 and their positions held with the Company, are as follows:
Name Age Position ---- --- -------- Ronald Chaimowitz 49 President, Chief Executive Officer and Director Jack J. Cayre 24 Executive Vice President and Director Harry M. Rubin 44 Executive Vice President and General Manager - International Division and Business Affairs Andrew Gregor 48 Chief Financial Officer and Senior Vice President, Finance and Administration Chris Garske 41 Senior Vice President of Publishing Richard Burns 42 Senior Vice President of Sales Charles F. Bond 40 President, Slash Division Frank Herman 63 Chairman and Managing Director, G.T. Interactive Software (Europe) Limited
Ronald Chaimowitz, a co-founder of the Company, has been President and Chief Executive Officer of the Company since February 1995. From January 1994 to January 1995, Mr. Chaimowitz served as Executive Vice President and General Manager of the Company. From December 1990 to December 1992, Mr. Chaimowitz was the President of Entertainment Consultants, a management consultant firm to the entertainment industry. Prior thereto, Mr. Chaimowitz served as Executive Vice President of GoodTimes Home Video Corp., a publisher and distributor of pre-recorded video tapes. Jack J. Cayre has been Executive Vice President and a Director of the Company since its incorporation. From January 1993 to January 1995, Mr. Cayre was Vice President of Licensing and Product Acquisition. From January 1990 to August 1992, Mr. Cayre was the President of Double J Records, a privately-held record company. Harry M. Rubin has been Executive Vice President and General Manager -- International Division and Business Affairs of the Company since March 1995. From June 1994 to August 1995, Mr. Rubin served as Chief Financial Officer of the Company. From November 1993 to June 1994, Mr. Rubin was an independent management consultant to several entertainment companies. From 1988 to November 1993, Mr. Rubin was the Vice President and General Manager of Home Video Operations for the National Broadcasting Company, Inc. Andrew Gregor has been Chief Financial Officer of the Company since August 1995. Prior to being appointed as Senior Vice President, Finance and Administration, in April 1996, Mr. Gregor had been Vice President of Finance of the Company since August 1995. From February 1992 to August 1995, Mr. Gregor served as Vice President and Chief Financial Officer of Lillian Vernon Corp., a consumer direct merchant. For more than five years prior thereto, Mr. Gregor was Senior Vice President and Chief Financial Officer of McCrory Corp., a national retailer. Chris Garske has been Senior Vice President of Publishing since September 1995. From December 1991 to August 1995, Mr. Garske was employed by Sega of America, a manufacturer of video game consoles and related products, where he served in various capacities, including the group Vice President of Marketing. From April 1991 to December 1991, Mr. Garske served as Brand Manager of Sierra On-line, a consumer software publisher. Prior thereto, Mr. Garske served as Director of Marketing for Activision, a consumer software publisher. 17 20 Richard Burns has been Senior Vice President of Sales since December 1995. From March to November 1995, Mr. Burns was Vice President and General Manager of Mattel Media, Inc., a consumer software publisher. From October 1994 to March 1995, Mr. Burns was Vice President of Worldwide Sales of Rocket Science Games, Inc., a startup consumer software company. From July 1991 to October 1994, Mr. Burns served as Senior Vice President of Sales for Sega of America, Inc. Prior thereto, Mr. Burns was Senior Zone Vice President of Sony Corporation of America. Charles F. Bond has been President of the Slash Division of the Company since June 1995, when Slash Corporation was acquired by the Company. From May 1991 to June 1995, Mr. Bond was the President of Slash Corporation. Prior thereto, Mr. Bond was Vice President -- Merchandising for Lieberman Enterprise, a rack-jobber. Frank Herman has been Chairman and Managing Director of G.T. Interactive Software (Europe) Limited since May 1995. From April to October 1995, Mr. Herman was also Chairman of Probe Software Ltd., a software development house. From July 1991 to April 1995, Mr. Herman was Deputy Chairman and Managing Director of Sega (Europe) Ltd. From August 1988 to July 1991, Mr. Herman served as Managing Director of Virgin Mastertronic Ltd., an entertainment software publisher. Each executive officer is elected annually by the Board of Directors of the Company and serves at the pleasure of the Board. 18 21 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is quoted on the Nasdaq National Market. The high and low sale prices for the Common Stock as reported by the Nasdaq National Market for the periods since the Company's initial public offering in December 1995 are summarized below. These over-the-counter market quotations reflect interdealer prices, without retail mark-ups, mark-downs, or commissions and may not necessarily represent the actual transactions.
HIGH LOW ---------- ---------- 1995 Fourth Quarter ( from December 14, 1995 ) $ 16 1/2 $ 12 1/4 1996 First Quarter $ 15 $ 8 7/8 Second Quarter $ 25 $ 10 5/8 Third Quarter $ 26 3/4 $ 16 3/4 Fourth Quarter $ 26 3/4 $ 6 5/8
On February 28, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $7 7/8. As of February 28, 1997, there were approximately 129 registered holders of record of the Common Stock. The Company currently anticipates that it will retain all of its future earnings for use in the expansion and operation of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. In addition, the payment of cash dividends may be limited by financing agreements entered into by the Company in the future. Prior to March 1995, the Company had elected to be treated as an S corporation for tax purposes. During the two months ended February 28, 1995, the Company paid distributions of $6.0 million to its stockholders out of funds generated from operations. The Company has not paid cash dividends on its Common Stock or other securities since its conversion to a C corporation for Federal and New York state tax purposes on March 1, 1995. There were no issuances of unregistered securities by the Company during the year ended December 31, 1996, except the issuance: (i) in May 1996, to Big Tuna New Media, LLC, of warrants to purchase 250,000 shares of Common Stock at an exercise price of $20.00 per share, in connection with a licensing arrangement; (ii) in May 1996, to Apogee Software, Ltd., of warrants to purchase 250,000 shares of Common Stock at an exercise price of $19.125 per share, in connection with a licensing arrangement; (iii) in June 1996, to the former stockholders of WizardWorks of 2,350,000 shares of Common Stock, in connection with the acquisition of WizardWorks; (iv) in June 1996, to the former stockholders of Candel Inc. ("Candel"), of 1,032,777 shares of Common Stock, in connection with the acquisition of Candel; (v) in July 1996, to the former stockholders of Humongous of 3,458,375 shares of Common Stock, in connection with the acquisition of Humongous; (vi) in August 1996, to Epic Megagames, Inc., of warrants to purchase 37,500 shares of Common Stock at an exercise price of $20.00 per share, in connection with a licensing arrangement; and (vii) in October 1996, to Midway Home Entertainment Inc., the assignee of the warrants originally issued to WMS Industries Inc., an aggregate of 24,754 shares of Common Stock, upon the exercise of such warrants. All of such issuances were made in reliance upon Section 4(2) of the Securities Act of 1933, as amended. 19 22 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected consolidated financial information of the Company which, for each of the three years in the period ended December 31, 1996, is derived from the restated audited consolidated financial statements of the Company. Pro forma information is unaudited and reflects the acquisition of Slash as if the acquisition had occurred as of January 1, 1995 and the income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. These tables should be read in conjunction with the Company's Consolidated Financial Statements, including the notes thereto, appearing elsewhere in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- PRO FORMA 1994 1995 1995(1) 1996 ------------- --------------- ---------------- ---------------- (in thousands, except per share data) Statement of Operations Data: Net sales $ 101,826 $ 234,461 $ 253,851 $ 365,490 Cost of goods sold 54,449 138,662 152,381 214,580 Selling and distribution expenses 16,104 41,740 43,661 74,396 General and administrative expenses 10,539 21,201 22,986 34,911 Merger and other costs -- -- -- 3,718 Amortization of goodwill -- 567 1,092 1,092 ------------- --------------- ---------------- ---------------- Operating income 20,734 32,291 33,731 36,793 Interest and other income, net 41 795 840 3,974 ------------- --------------- ---------------- ---------------- Income before income taxes 20,775 33,086 34,571 40,767 Provision for (benefit) from income taxes: Federal and state (historical) 2,427 14,002 14,002 15,628 Benefit from change in tax status(2) -- (3,520) (3,520) -- Pro forma adjustment to Federal and state taxes (unaudited)(3) -- -- 5,461 -- ------------- --------------- ---------------- ---------------- Total provision for income taxes 2,427 10,482 15,943 15,628 ------------- --------------- ---------------- ---------------- Net income $ 18,348 $ 22,604 $ 18,628 $ 25,139 ============= =============== ================ ================ Net income per share $ 0.38 Weighted average shares outstanding 66,391 Pro forma net income per share (unaudited) $ 0.30 Pro forma number of weighted average shares outstanding (unaudited)(4) 61,082
DECEMBER 31, --------------------------------- 1995 1996 ---------------- ---------------- Balance Sheet Data: Cash, cash equivalents and short-term investments $ 93,694 $ 76,584 Working capital 105,748 113,652 Total assets 301,641 367,111 Stockholders' equity 126,040 152,138
(1) Reflects the Company's acquisition of Slash as if the same had been consummated on January 1, 1995 and the income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. (See Note 2 and Note 9 of the Notes to the Company's Consolidated Financial Statements). (2) The benefit from change in tax status occurred as a result of the transition from an S corporation to a C corporation on March 1, 1995, which allowed the Company to accrue certain tax benefits which would otherwise have flowed to the stockholders of the S corporation. This benefit would not have arisen for the year ended December 31, 1995 had the Company been a C corporation beginning January 1, 1994. (3) Reflects additional income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. (See Note 2 and Note 9 of the Notes to the Company's Consolidated Financial Statements). (4) Pro forma weighted average number of shares outstanding has been calculated as if all stock issued in the twelve month period prior to the initial public offering (including common stock equivalents such as options and warrants) had been outstanding throughout the periods presented and assuming the proceeds from such issuances (including the assumed exercise prices of options and warrants) had been used to reacquire shares at the initial public offering price at the beginning of the period. 20 23 PRO FORMA FINANCIAL DATA The following unaudited pro forma consolidated statements of operations are based on the historical consolidated statements of operations of the Company for the year ended December 31, 1995 and the historical statements of operations of Slash for the period ended June 22, 1995. The pro forma consolidated statements of operations reflect the acquisition of Slash as if the same had been consummated on January 1, 1995 and the income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods. The unaudited pro forma consolidated statements of operations are presented for informational purposes only and are not necessarily indicative of what the results of operations would have been had the events referred to above been consummated as of January 1, 1995, nor are they necessarily indicative of the Company's future results of operations.
DECEMBER 31, 1995 -------------------------------------------------- COMPANY SLASH (1) ADJUSTMENTS PRO FORMA --------- --------- --------- --------- (in thousands, except per share data) Statement of Operations Data: Net sales $ 234,461 $ 21,525 $ (2,135)(2) $ 253,851 Cost of goods sold 138,662 15,700 (1,981)(2) 152,381 Selling and distribution expenses 41,740 1,921 -- 43,661 General and administrative expenses 21,201 1,785 -- 22,986 Amortization of goodwill 567 -- 525 (3) 1,092 --------- --------- --------- --------- Operating income 32,291 2,119 (679) 33,731 Interest and other income, net 795 45 -- 840 --------- --------- --------- --------- Income before income taxes 33,086 2,164 (679) 34,571 Provision for (benefit) from income taxes: Federal and state (historical) 14,002 -- -- 14,002 Benefit from change in tax status (3,520) -- -- (3,520) Pro forma adjustment to Federal and state taxes (unaudited)(4) -- -- 5,461 (4) 5,461 --------- --------- --------- --------- Total provision for income taxes 10,482 -- 5,461 15,943 --------- --------- --------- --------- Net income $ 22,604 $ 2,164 $ (6,140) $ 18,628 ========= ========= ========= ========= Pro forma net income per share (unaudited)(5) $ 0.30 Pro forma number of weighted average shares outstanding (unaudited)(5) 61,082
(1) Reflects the results of operations of Slash for the period to June 22, 1995. The results of Slash subsequent to June 22, 1995 are included in the Company's results of operations. (2) Reflects the elimination of intercompany sales between the Company and Slash. (3) Reflects amortization of goodwill, which has an estimated useful life of 20 years, arising from the acquisition of Slash to the extent not already reflected in the Company's historical statements of operations. (4) Reflects the additional income tax provision that would have been provided had both the Company and Slash been C corporations for the relevant periods (See Note 2 and Note 9 of the Notes to the Company's Consolidated Financial Statements) resulting in an effective rate of 46.1% for the year ended December 31, 1995 due to some of the acquired companies not being able to utilize net operating losses. (5) Pro forma weighted average number of shares outstanding has been calculated as if all stock issued in the twelve month period prior to the initial public offering (including common stock equivalents such as options and warrants) had been outstanding throughout the periods presented and assuming the proceeds from such issuances (including the assumed exercise prices of options and warrants) had been used to reacquire shares at the initial public offering price at the beginning of the period. 21 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company creates, publishes, merchandises and distributes interactive entertainment, edutainment and value-priced consumer software for a variety of platforms on a world-wide basis. Since it commenced operations in February 1993, the Company has experienced rapid revenue growth and its product and customer mix have changed substantially. An important element of the Company's financial performance is its product mix, which has varied over time as the Company has built its business. The Company's product mix has been composed of two broad product categories: published software and third-party software. Because each of these product categories has different associated costs, the Company's margins have depended and will depend, in part, on the percentage of net sales attributable to each category. In addition, the Company's margins may vary significantly from quarter to quarter depending on the timing of its new published product releases. To the extent that mass merchants require greater proportions of third party software products, some of which may yield lower margins, the Company's operating results may be impacted accordingly. Through February 28, 1995, the Company was an S corporation for Federal and New York state income tax purposes. The income tax provision for the year ended December 31, 1995 includes a deferred tax benefit of approximately $3.5 million due to the Company's change in tax status. On June 23, 1995, the Company acquired all of the outstanding stock of Slash, a leading publisher, purchaser, repackager and distributor of value-priced software in exchange for 2,793,600 (after giving effect to the Company's initial public offering) newly issued shares of the Company's Common Stock and a nominal amount of cash. Historically, Slash purchased excess inventory from major publishers and sublicensed catalog titles. It sold these products at lower price points or repackaged these and other products into compilation boxes, such as five-packs and ten-packs, for volume sales primarily to mass merchants. Slash's sales of purchased excess inventory have traditionally occurred at lower margins than its sales of sublicensed catalog products. The Company's value-priced software business primarily consists of sublicensed catalog titles which are sold largely to mass merchant customers. Slash's financial results have been included in the Company's Consolidated Financial Statements on a purchase basis for the period since the acquisition. On June 24, 1996, the Company acquired all of the outstanding stock of WizardWorks, a leading developer and publisher of value-priced interactive entertainment, edutainment and productivity software, in exchange for 2,350,000 newly issued shares of the Company's Common Stock. WizardWorks develops, publishes and distributes consumer software for Windows, DOS and Macintosh formats. On June 28, 1996, the Company acquired all of the outstanding stock of Candel Inc., the parent company of FormGen, a leading publisher of interactive PC shareware and software in exchange for 1,032,777 newly issued shares of the Company's Common Stock. On July 9, 1996, the Company acquired all of the outstanding common stock of Humongous, a premier developer and publisher of quality children's software, in exchange for 3,458,375 newly issued shares of the Company's Common Stock. WizardWorks, FormGen and Humongous (collectively the "Acquired Companies"), have each been accounted for as a pooling of interests. Accordingly, the Company's historical Financial Statements have been restated to include the results of the Acquired Companies. In November 1996, the Company acquired the business of Warner Interactive Europe for 22 25 approximately $6.3 million in cash, including acquisition costs. Warner's financial results have been included in the Company's Consolidated Financial Statements on a purchase basis for the period since the acquisition. Sales are recorded net of expected future returns which historically have been experienced and reserved for at approximately 30% of gross sales. The consumer software industry is seasonal. Net sales are typically highest during the fourth calendar quarter. This seasonality is primarily a result of the increased demand for consumer software during the year-end holiday buying season. RESULTS OF OPERATIONS The following table sets forth certain consolidated statement of operations data as a percentage of net sales for the periods indicated:
YEARS ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 ---- ---- ---- Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold 53.5 59.1 58.7 Selling and distribution expenses 15.8 17.8 20.3 General and administrative expenses 10.3 9.1 9.6 Merger and other costs -- -- 1.0 Amortization of goodwill -- 0.2 0.3 ---- --- --- Operating income 20.4 13.8 10.1 Interest and other income, net -- 0.3 1.1 ---- --- --- Income before income taxes 20.4 14.1 11.2 Provision for income taxes 2.4 4.5 4.3 ---- --- --- Net income 18.0 % 9.6 % 6.9 % ==== === ===
1996 COMPARED TO 1995 Net sales for the year ended December 31, 1996 ("1996") increased approximately $131.0 million or 56% as compared to the year ended December 31, 1995 ("1995"). In the third quarter of 1995, Microsoft(R) Windows(R) 95 was introduced and distributed to certain retailers by the Company. This one time event added net sales of approximately $15.2 million. Without these sales, net sales would have increased 67%. This growth in net sales was primarily attributable to the introduction of newly published titles such as Duke Nukem 3D, Quake, Area 51, Final Doom for the PlayStation, Heretic: Shadow of the Serpent Rider, Bedlam, "9" and Just Me & My Dad, the continuing strong sales of Doom and Doom-related products and increased royalty income. Additionally, the expansion of the Company's value-priced line of software, an increase in the shelf space available from its existing mass merchant customers, an increase in the number of mass merchant stores supplied and serviced by the Company and an increase in sales from its existing mass merchant shelf space contributed to the growth in net sales. The purchase of Slash by the Company effective June 23, 1995 and the increase in the distribution of third party software also contributed to the growth in net sales. Cost of goods sold primarily includes costs of purchased products and royalties paid to software developers. Cost of goods sold for 1996 increased approximately $75.9 million or 55% as compared to 1995. Cost of goods sold as a percentage of net sales decreased to 58.7% in 1996 compared to 59.1% in 23 26 1995. This decrease was primarily due to a change in product mix toward the Company's higher margin published products, which increased to approximately 53.8% of net sales in 1996 as compared to approximately 50.7% in 1995. Additionally, during the last half of 1995, the Company's sales of Microsoft(R) Windows(R) 95 contributed to the increase in cost of goods sold as a percentage of net sales for that year. Selling and distribution expenses primarily include shipping expenses, sales and distribution labor expenses, advertising and promotion expenses and distribution facilities costs. These expenses increased approximately $32.7 million or 78% during 1996 compared to 1995. The increase was due in part to additional advertising costs of approximately $9.6 million to support the growth of the Company's published products and an increase in shipping costs of approximately $4.8 million attributable to the overall increase in sales volume. In addition, costs associated with the expansion of the Company's sales and distribution staff and distribution center increased approximately $13.7 million to support its growth. Selling and distribution expenses as a percentage of net sales increased to 20.3% for 1996 compared to 17.8% for 1995. General and administrative expenses primarily include personnel expenses, facilities costs, professional expenses and other overhead charges. These expenses for 1996 increased approximately $13.7 million or 65% as compared to 1995. The increase was due primarily to the expansion of the Company's operations. General and administrative expenses as a percentage of net sales increased to 9.6% from 9.1%. Merger costs consist of legal, accounting and other professional fees incurred by the Company to complete the acquisitions of the Acquired Companies and for the Company's canceled second offering. Amortization of goodwill increased by approximately $.5 million or 93% during 1996 compared to 1995. This increase is attributable to the full year impact of the June 1995 acquisition of Slash. Operating income for 1996 increased from approximately $32.3 million to approximately $36.8 million, while operating margins decreased from 13.8% to 10.1%. Excluding merger costs, operating income and operating margins would have been approximately $40.5 million and 11.1% for 1996. Interest and other income, net increased approximately $3.2 million for 1996 as compared to 1995. This is primarily attributable to greater short-term investments and cash balances. The Company's provision for income taxes for 1996 includes the reversal of a valuation allowance relating to a net operating loss carry-forward of one of the Acquired Companies. Additionally, had the Company been a C corporation for the entire year ended December 31, 1995, the Company's provision for income taxes would have been approximately $15.1 million and 6.4% of net sales for the period. Net income and net income as a percentage of net sales, on a tax adjusted basis, for 1996 increased from $18.0 million and 7.7% to $25.1 million and 6.9%. Excluding merger costs, net income and net income as a percentage of net sales would have been $28.9 million and 7.9% for 1996. 1995 COMPARED TO 1994 Net sales for 1995 increased approximately $132.6 million or 130% as compared to the year ended December 31, 1994 ("1994"). This growth in net sales was primarily attributable to an increase in the number of mass merchant stores supplied and serviced by the Company, an increase in the shelf space available to the Company from its existing mass merchant customers, an increase in sales from its existing mass merchant shelf space, the purchase of Slash by the Company effective June 23, 1995, which 24 27 accounted for approximately $30.4 million of net sales, and the Company's sales of Microsoft(R) Windows(R) 95, which accounted for approximately $15.2 million in net sales. In addition, the introduction of newly published front-line titles, such as Hexen, Mortal Kombat 3 and Ultimate Doom, the continuing strong sales of other Doom products and the expansion of its value-priced line of software contributed to the growth in net sales. Cost of goods sold for 1995 increased approximately $84.2 million or 155% as compared to 1994. Costs of goods sold as a percentage of net sales for 1995 increased to 59.1% from 53.5% for 1994. The percentage increase in cost of goods sold was primarily due to a change in product mix driven by increased demand from mass merchants for third-party software products which yielded the Company lower margins. Additionally, the Company's sales of Microsoft(R) Windows(R) 95 during the last half of 1995 and, less significantly, certain product lines of Slash contributed to the increase in cost of goods sold. Excluding Microsoft(R) Windows(R) 95 and the acquisition of Slash, cost of goods sold as a percentage of net sales would have been approximately 53.8%. The percentage increase was partially offset by increased sales of the Company's higher margin published front-line and value-priced products. Selling and distribution expenses increased approximately $25.6 million or 159% during 1995 as compared to 1994. The increase was due to the Company's increased sales volume, additional advertising costs of approximately $11.7 million to support the Company's published products and costs associated with the expansion of sales and distribution staff and distribution center of approximately $1.2 million, to support the Company's growth. Selling and distribution expenses as a percentage of net sales increased to 17.8% for 1995 as compared to 15.8% for 1994. General and administrative expenses increased approximately $10.7 million or 101% as compared to 1994. The increase was due primarily to costs of approximately $6.6 million associated with additional personnel required to support the expansion of the Company's operations, costs of approximately $1.0 million associated with new facilities (including depreciation) to accommodate the increase in personnel, approximately $1.5 million in professional fees, and other expenses related to the expansion of the Company's operations. General and administrative expenses as a percentage of net sales for 1995 decreased to 9.1% from 10.3% for 1994. 25 28 LIQUIDITY AND CAPITAL RESOURCES Resources used to finance significant expenditures for the three years ended December 31, 1996 are reflected in the following table:
YEARS ENDED DECEMBER 31, -------------------------- 1994 1995 1996 ------ ------ ------ (in millions) Resources used: Royalty advances $ (5.4) $(23.6) $(33.3) Inventories, net (9.7) (30.5) (10.5) Purchase of investments -- -- (9.8) Receivables, net (39.2) (36.0) (8.9) Purchase of Warner Interactive Europe -- -- (6.3) Purchase of property and equipment (1.3) (5.3) (5.7) Repayment of notes -- (10.5) -- Distributions to shareholders (28.4) (6.0) -- Other, net -- (11.0) (0.6) ------ ------ ------ (84.0) (122.9) (75.1) ------ ------ ------ Financed by: Net income 18.3 22.6 25.1 Payables and accrued liabilities 56.5 86.9 37.1 Issuance of stock and warrants and exercise of stock options 5.2 93.0 0.7 Proceeds from issuance of note 6.0 -- -- Other, net 0.3 -- -- ------ ------ ------ 86.3 202.5 62.9 ------ ------ ------ Cash and cash equivalents balance - increase (decrease) $ 2.3 $ 79.6 $(12.2) ====== ====== ======
As of December 31, 1996, the Company's principal sources of liquidity included cash, cash equivalents and short-term investments of approximately $76.6 million. Cash and cash equivalents decreased for the twelve months ended December 31, 1996 by approximately $12.2 million. The primary source of cash during 1996 was net income of $25.1 million and an increase in payables and accrued liabilities, which includes accounts payable, royalties payable, income taxes payable and accrued liabilities, of $37.1 million. These internally generated funds were used to fund royalty advances of $33.3 million, investments of $9.8 million, purchase of Warner of $6.3 million and property and equipment of $5.7 million. Financing of inventory and receivables were also a use of cash of approximately $10.5 million and $8.9 million, respectively. Inventory and receivables balances increased reflecting higher calendar fourth quarter sales and their replenishment. Additionally, inventory increased to fund anticipated sales growth. Royalty advances of $69.2 million as of December 31, 1996 represent advances to approximately 135 developers for various products expected to be developed throughout the next several years. Such advances are amortized to cost of goods sold on a per unit basis as licensed products are sold in accordance with the individual agreements. Working capital at December 31, 1996 was $113.7 million compared to $105.7 at December 31, 1995. On January 21, 1997, the Company entered into a revolving credit agreement (the "Credit Agreement") with banks expiring on December 31, 1998. The Credit Agreement provides for a maximum of $40 million for borrowings and letters of credit. The borrowings under the Credit Agreement bear interest at either the banks' reference rate (which is generally equivalent to the published prime rate) or the LIBOR rate plus 1 1/4%. The Company pays a commitment fee of 1/4% based on the unused portion of the line. The Credit Agreement requires maintenance of certain financial ratios and net income levels. As of December 31, 1996, the Company had an outstanding standby letter of credit amounting to 26 29 approximately $1.7 million. The Company expects continued volatility in the use of cash due to varying seasonable and quarterly working capital needs to finance its growing publishing and distribution business. The Company believes that existing cash, cash equivalents and short-term investments, together with cash expected to be generated from operations and cash available through the Agreement, will be sufficient to fund the Company's anticipated operations for the next twelve months. 27 30 ITEM 8. INDEX TO THE FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements, and notes thereto, and the Financial Statement Schedule of the Company, are presented on pages F-1 through F-21 hereof as set forth below:
Page GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES Report of Independent Public Accountants F-1 Consolidated Balance Sheets as of December 31, 1995 and 1996 F-2 Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and 1996 F-3 Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and 1996 F-4 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1994, 1995 and 1996 F-5 Notes to the Consolidated Financial Statements F-6 to F-20 FINANCIAL STATEMENT SCHEDULE For the Three Years Ended December 31, 1996 Schedule II -- Valuation and Qualifying Accounts F-21
The Combined Financial Statements, and notes thereto, of Wizardworks Group, set forth on pages F-20 through F-29 in the Prospectus included in the Company's Registration Statement on Form S-1 (Registration No. 333-14441) at effectiveness, are incorporated by reference herein. The report of Ernst & Young LLP with respect to such financial statements is included in Item 14 hereof. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE During the Company's last two fiscal years, there have been no changes in the independent accountants nor disagreements with such accountants as to accounting and financial disclosures of the type required to be disclosed in this Item 9. 28 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding the directors of the Company required by this Item 10 is incorporated herein by reference to the section entitled "Election of Directors" in the Company's Proxy Statement. The information regarding executive officers of the Company required by this Item 10 is included in Item 4A hereof. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated herein by reference to the section entitled "Executive Compensation" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is incorporated herein by reference to the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is incorporated herein by reference to the section entitled "Certain Relationships and Related Transactions" in the Company's Proxy Statement. 29 32 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FROM 8-K (A) (1) AND (2) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES See Item 8 hereof. Report of Ernst & Young LLP: Report of Independent Auditors Board of Directors and Shareholders WizardWorks Group Armstrong-Olson, Inc. Promotional Software Group, Inc. SVI,LLC We have audited the combined balance sheets of WizardWare Group, Inc. (d.b.a. WizardWorks), Armstrong-Olson, Inc., Promotional Software Group, Inc. and SVI, LLC (hereafter referred to as WizardWorks Group or the Company) as of March 31, 1996 and 1995, and the related combined statements of income and retained earnings and cash flows for each of the three years in the period ended March 31, 1996 (not presented separately herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of WizardWorks Group at March 31, 1996 and 1995, and the combined results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. Ernst & Young LLP May 10, 1996 (A) (3) EXHIBITS
Exhibit No. Description - ----------- ----------- 2.1 (1) Agreement and Plan of Reorganization by and among the Registrant, GT Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders of WizardWorks Group, Inc., dated June 24, 1996. 2.2 (1) Escrow Agreement by and among the Registrant, Paul D. Rinde, as the Stockholder Representative of WizardWorks Group, Inc., and Republic National Bank of New York, as Escrow Agent, dated June 24, 1996. 3.1 (2) Amended and Restated Certificate of Incorporation. 3.2 (3) Amended and Restated By-laws (as amended on October 31, 1996). 4.1 (4) Specimen form of stock certificate for Common Stock. 10.1 (3) The 1995 Stock Incentive Plan (as amended on October 31, 1996). 10.2 (4) Services Agreement between the Registrant and GoodTimes Home Video Corp., dated as of January 1, 1995. 10.3 (4) 4.5% Subordinated Secured Promissory Note, due February 28, 1996. 10.4 (4) Employment Agreement between the Registrant and Ronald Chaimowitz. 10.5 (4) Employment Agreement between the Registrant and Charles F. Bond. 10.6 (4) Non-Competition Agreement between the Registrant and Charles F. Bond. 10.7 (4) Employment Agreement between the Registrant and Harry M. Rubin. 10.8 (4) Employment Agreement between the Registrant and Harry Steck. 10.9 (4) Employment Agreement between the Registrant and Chris Garske. 10.10 (4) GTIS Master Option and License Agreement between the Registrant and the Williams Entertainment Group, dated December 28, 1994, and the Amendment to such agreement, dated March 31, 1995. 10.11 (4) GTIS Master Option and License Agreement (Home Video Games) between the Registrant and the Williams Entertainment Group, dated March 31, 1995.
30 33
Exhibit No. Description - ----------- ----------- 10.12 (4) Agreement between the Registrant and SOFTBANK Corporation, dated October 9, 1995. 10.13 (4) Agreement between the Registrant and Roadshow PTY LTD, dated October 3, 1995. 10.14 (4) Agreement and Plan of Reorganization by and between Charles F. Bond, Slash Corporation and the Registrant, dated June 22, 1995. 10.15 (4) Lease Agreements between the Registrant and 16 East 40th Associates. 10.16 (4) Sub-lease Agreement between the Registrant and Michael Stevens Ltd., dated February 22, 1995. 10.17 (4) Lease Agreement between GT Interactive Software (Europe) Limited and Marylebone 248 Realty LLC, dated May 2, 1995. 10.18 (4) Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the Registrant. 10.19 (4) Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the Registrant. 10.20 (4) Agreement by and between the Registrant and REPS. 10.21 (5) Second Amendment to GTIS Master Option and License Agreement between the Registrant and Williams Entertainment Group, dated March 27, 1996. 10.22 (5) Amendment to GTIS Master Option and License Agreement (Home Video Games) between the Registrant and Williams Entertainment Group, dated March 27, 1996. 10.23 (5) Master Option and License Agreement for Atari PC Games between the Registrant and WMS Industries Inc., dated March 27, 1996. 10.24 (5) Master Option and License Agreement for Atari Home Video Games between the Registrant and WMS Industries Inc., dated March 27, 1996. 10.25 (5) Employment Agreement between the Registrant and Andrew Gregor. 10.26 (3) 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor. 10.27 (3) 6.15% Promissory Note, due August 31, 1998, of Chris Garske. 10.28 (6) Lease Agreement between the Registrant and Plymouth 2200, LLP, dated September 6, 1996. 10.29 Agreement of Lease, dated as of December 12, 1996, by and between the Registrant and F.S. Realty Corp. 10.30 Amendment to Stockholders Agreement, dated as of December 18, 1995, by and among
31 34
Exhibit No. Description - ----------- ----------- Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the trusts parties thereto and the Registrant. 10.31 Credit Agreement, dated as of January 21, 1997, by and among the Registrant, the banks parties thereto and Republic National Bank of New York, as Agent. 11.1 Computation of Pro Forma Earnings Per Share. 11.2 Computation of Earnings Per Share. 21.1 The Registrant's Subsidiaries. 23.1 Consent of Ernst & Young LLP 23.2 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule for the year ended December 31, 1996.
- -------------- (1) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Current Report on Form 8-K filed on July 9, 1996. (2) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Registration Statement on Form S-1 filed October 18, 1996, and all amendments thereto (Registration No. 333-14441). (4) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Registration Statement on Form S-1 filed October 20, 1995, and all amendments thereto (Registration No. 33-98448). (5) Incorporated herein by reference to an exhibit filed as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (6) Incorporated herein by reference to an exhibit filed as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. (B) REPORTS ON FORM 8-K A report on Form 8-K, dated November 5, 1996, was filed with the Securities and Exchange Commission on November 6, 1996 announcing the Company's decision not to proceed with its proposed follow-on public offering. 32 35 SIGNATURES Pursuant to the requirements of the 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. GT Interactive Software Corp. By: /s/ Ronald Chaimowitz ----------------------------------- Name: Ronald Chaimowitz Title: President and Chief Executive Officer Date: March 28, 1997 Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons, on behalf of the registrant in the capacities and on the dates indicated.
Signature Title(s) Date --------- -------- ---- /s/ Joseph J. Cayre Chairman of the Board March 28, 1997 - -------------------- Joseph J. Cayre /s/ Andrew Gregor Senior Vice President, Finance March 28, 1997 - ------------------ and Administration, and Chief Andrew Gregor Financial Officer (Principal Financial and Accounting Officer) /s/ Ronald Chaimowitz President, Chief Executive Officer March 28, 1997 - ---------------------- and Director Ronald Chaimowitz /s/ Jack J. Cayre Executive Vice President, Director March 28, 1997 - ------------------ Jack J. Cayre /s/ Kenneth Cayre Director March 28, 1997 - ------------------ Kenneth Cayre /s/ Stanley Cayre Director March 28, 1997 - ------------------ Stanley Cayre /s/ Steven A. Denning Director March 28, 1997 - ---------------------- Steven A. Denning /s/ William E. Ford Director March 28, 1997 - -------------------- William E. Ford /s/ Jordan A. Levy Director March 28, 1997 - ------------------- Jordan A. Levy /s/ Alvin N. Teller Director March 28, 1997 - ------------------- Alvin N. Teller
33 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders of GT Interactive Software Corp. and Subsidiaries: We have audited the accompanying consolidated balance sheets of GT Interactive Software Corp. (a Delaware corporation) and Subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1995 and 1994 financial statements of WizardWorks Group, a company acquired during 1996 in a transaction accounted for as a pooling of interests, as discussed in Note 1. Such statements are included in the consolidated financial statements of GT Interactive Software Corp. and Subsidiaries and reflect total assets and total net sales of 3.3% and 6.6% in 1995, respectively, and total net sales of 9.4% in 1994, of the related consolidated totals. The 1995 and 1994 financial statements of WizardWorks Group were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to the amounts included for WizardWorks Group, is based solely upon the report of other auditors. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of GT Interactive Software Corp. and Subsidiaries as of December 31, 1996 and 1995 and the results of their operations and cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to the financial statements and supplementary data is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, based on our audits and the report of other auditors, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP New York, New York February 7, 1997 F-1 37 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
December 31, ---------------------- 1995 1996 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 84,069 $ 71,867 Short-term investments 9,625 4,717 Receivables, net 84,810 95,941 Inventories, net 49,145 60,457 Royalty advances 29,577 69,202 Deferred income taxes 14,014 15,283 Prepaid expenses and other current assets 1,996 6,510 --------- --------- Total current assets 273,236 323,977 Property and equipment, net 6,087 10,082 Investments -- 9,829 Goodwill, net 21,286 21,003 Other assets 1,032 2,220 --------- --------- Total assets $ 301,641 $ 367,111 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 87,518 $ 107,842 Accrued liabilities 45,306 52,812 Royalties payable 23,509 33,378 Deferred income 4,091 4,783 Income taxes payable 4,696 9,575 Current portion of long-term liabilities 1,413 1,334 Due to related party 955 601 --------- --------- Total current liabilities 167,488 210,325 Other long-term liabilities 8,113 4,648 --------- --------- Total liabilities 175,601 214,973 --------- --------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par, 150,000,000 shares authorized, 66,391,318 shares issued and outstanding 661 664 Cumulative translation adjustment (28) 813 Additional paid-in capital 117,919 118,220 Retained earnings 7,488 32,441 --------- --------- Total stockholders' equity 126,040 152,138 --------- --------- Total liabilities and stockholders' equity $ 301,641 $ 367,111 ========= =========
The accompanying footnotes are an integral part of these financial statements. F-2 38 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
Years Ended December 31, ------------------------------ 1994 1995 1996 -------- -------- -------- Net sales ($0,$0, and $3,488 to a related party for the periods presented, respectively) $101,826 $234,461 $365,490 Cost of goods sold ($717, $3,558, and $7,516 to a related party for the periods presented, respectively) 54,449 138,662 214,580 Selling and distribution expenses ($7,234, $3,129, and $3,577 to a related party for the periods presented, respectively) 16,104 41,740 74,396 General and administrative expenses ($2,284, $654, and $931 to a related party for the periods presented, respectively) 10,539 21,201 34,911 Merger and other costs -- -- 3,718 Amortization of goodwill -- 567 1,092 -------- -------- -------- Operating income 20,734 32,291 36,793 Interest and other income, net 41 795 3,974 -------- -------- -------- Income before income taxes 20,775 33,086 40,767 Provision for income taxes 2,427 10,482 15,628 -------- -------- -------- Net income $ 18,348 $ 22,604 $ 25,139 ======== ======== ======== Pro forma adjustment to income tax provision (unaudited) 7,098 4,616 -------- -------- Pro forma net income (unaudited) $ 11,250 $ 17,988 ======== ======== Net income per share $ 0.38 Weighted average shares outstanding 66,391
The accompanying footnotes are an integral part of these financial statements. F-3 39 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
Years Ended December 31, -------------------------------- 1994 1995 1996 -------- -------- -------- OPERATING ACTIVITIES: Net income $ 18,348 $ 22,604 $ 25,139 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 289 1,494 3,202 Deferred income taxes (1,133) (11,660) (1,269) Deferred income 596 11,090 (3,754) Changes in operating assets and liabilities: Receivables, net (39,241) (35,983) (8,880) Inventories, net (9,675) (30,473) (10,481) Royalty advances (5,436) (23,590) (33,293) Due to related party, net 1,546 (591) (354) Prepaid expenses and other current assets 134 (832) (1,316) Accounts payable 25,590 49,821 16,480 Accrued liabilities 17,748 23,630 7,507 Royalties payable 10,842 11,219 6,720 Income taxes payable 2,313 2,246 6,382 Other (161) (798) (1,907) -------- -------- -------- Net cash provided by operating activities 21,760 18,177 4,176 -------- -------- -------- INVESTING ACTIVITIES: Purchases of investments -- -- (9,829) Purchases of property and equipment (1,303) (5,275) (5,703) Purchases (sales) of short-term investments, net -- (9,625) 4,908 Purchase of Slash Corporation, net of cash acquired of approximately $516 -- 218 -- Purchase of Warner Interactive Entertainment Europe net of cash acquired of approximately $7 -- -- (6,297) -------- -------- -------- Net cash used in investing activities (1,303) (14,682) (16,921) -------- -------- -------- FINANCING ACTIVITIES: Repurchase of warrants -- -- (1,935) Proceeds from exercise of stock options -- -- 636 Issuance of common stock -- 77,935 100 Long-term liabilities (980) (417) 901 Issuance of preferred stock and warrants 5,182 15,017 -- Proceeds from issuance of note to a related party 6,000 -- -- Repayment of notes -- (10,471) -- Distributions to stockholders (28,390) (6,000) -- -------- -------- -------- Net cash provided by (used in) financing activities (18,188) 76,064 (298) -------- -------- -------- Effect of exchange rates on cash and cash equivalents 24 14 841 Net increase (decrease) in cash and cash equivalents 2,293 79,573 (12,202) Cash and cash equivalents - beginning of year 2,203 4,496 84,069 -------- -------- -------- Cash and cash equivalents - end of year $ 4,496 $ 84,069 $ 71,867 ======== ======== ========
The accompanying footnotes are an integral part of these financial statements. F-4 40 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
Cumulative Additional Retained Common Translation Paid-in Earnings Stock Adjustment Capital (Deficit) Total ----------------------------- --------------- --------------- Balance, January 1, 1994 $ -- $ (18) $ 380 $ 886 $ 1,248 Proceeds from sale of preferred stock -- -- 5,182 -- 5,182 Net income -- -- -- 18,348 18,348 Distributions -- -- (41) (28,350) (28,391) Currency translation adjustment -- (24) -- -- (24) --------- --------- --------- --------- --------- Balance December 31, 1994 -- (42) 5,521 (9,116) (3,637) Increase in par value of stock 468 -- (468) -- -- Issuance of stock in connection with the acquisition of Slash Corporation 28 -- 19,972 -- 20,000 Proceeds from sales of preferred stock and warrants -- -- 15,017 -- 15,017 Proceeds from sales of common stock in private placement 4 -- 7,647 -- 7,651 Net proceeds from initial public offering 55 -- 70,229 -- 70,284 Conversion of preferred stock to common stock immediately prior to the initial public offering 106 -- (106) -- -- Exercise of stock options -- -- 107 -- 107 Net income -- -- -- 22,604 22,604 Distributions -- -- -- (6,000) (6,000) Currency translation adjustment -- 14 -- -- 14 --------- --------- --------- --------- --------- Balance, December 31, 1995 661 (28) 117,919 7,488 126,040 Exercise of stock options 2 -- 634 -- 636 Tax benefit relating to exercise of stock options -- -- 1,503 -- 1,503 Issuance of stock 1 -- 99 -- 100 Repurchase of warrants -- -- (1,935) -- (1,935) Net income -- -- -- 25,139 25,139 Currency translation adjustment -- 841 -- -- 841 Unrealized loss on securities -- -- -- (186) (186) --------- --------- --------- --------- --------- Balance, December 31, 1996 $ 664 $ 813 $ 118,220 $ 32,441 $ 152,138 ========= ========= ========= ========= =========
The accompanying footnotes are an integral part of these financial statements. F-5 41 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Business GT Interactive Software Corp., a Delaware corporation, and its subsidiaries (the "Company") is a leading developer, publisher, merchandiser and distributor of consumer software. The Company derives its revenues primarily from the sale of its published, licensed and purchased products to mass merchants, specialty software stores, computer superstores and distributors located throughout North America and also in selected international locations. The Company was incorporated in September 1992 and commenced operations in February 1993. Restatements In 1996, the Company acquired all of the outstanding common stock of WizardWorks Group, Inc. ("WizardWorks"), all of the outstanding common stock of Candel Inc., the parent company of FormGen, Inc. ("FormGen"), and all of the outstanding common stock of Humongous Entertainment, Inc. ("Humongous"). WizardWorks, FormGen and Humongous (collectively, the "Acquired Companies") have been accounted for as pooling of interests and accordingly are included in the Company's Consolidated Financial Statements as if the acquisitions had occurred as of the beginning of all periods presented. Principles of Consolidation The consolidated financial statements include the accounts of GT Interactive Software Corp. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. Revenue Recognition Revenue is recognized upon shipment of merchandise to customers. At the time the revenue is recognized, a reserve is provided for expected future returns net of the related cost of such items. The net reserve is included in accrued liabilities. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks and highly liquid, short-term investments with original maturities of three months or less at the date acquired. Inventories Inventories are stated at the lower of cost (based upon the first-in, first-out method) or market. Allowances are established (and reassessed quarterly) to reduce the recorded cost of obsolete inventory and slow moving inventory to its net realizable value. F-6 42 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Royalty Advances Royalty advances represent the unamortized elements of prepayments to third party licensors of software products for the right to manufacture and/or distribute their products under various licensing agreements. Such advances are amortized to cost of goods sold on a per unit basis as licensed products are sold in accordance with the individual agreements. Future realization of royalty advances is assessed quarterly by management and charged to expense if it is not likely that the amounts will be recovered through sales of the related product. Goodwill Goodwill is amortized using the straight-line method over a 20 year life. Management reassesses quarterly the appropriateness of both the carrying value and remaining life of goodwill, principally based on forecasts of future undiscounted cash flows of businesses acquired. Property and Equipment Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which range from three to seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the lease term or the estimated useful lives of the related assets. Income Taxes The Company recognizes income taxes in accordance with the liability method. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the period in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Through February 28, 1995 the Company was an S corporation for Federal and New York state income tax purposes. On March 1, 1995, the Company became a C corporation for Federal and New York state income taxes. Unaudited pro forma adjustments to the income tax provision represent the additional tax provision the Company would have recorded had it been a C corporation for Federal and New York state income tax purposes during the relevant periods. Fair Values of Financial Instruments The carrying amount of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximates fair value due to the short term nature of such items. Research and Development Costs Research and development costs related to the designing, developing and testing of new software products are charged to expense as incurred. Research and development expense for the years ended December 31, 1994, 1995 and 1996 amounted to $117, $520 and $342, respectively. F-7 43 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Advertising Expenses Advertising costs are expensed as incurred. Advertising expense for the years ended December 31, 1994, 1995 and 1996 amounted to $2,675, $14,387 and $23,987, respectively. Foreign Currency Translation The Company's foreign subsidiaries maintain their accounting records in their local currency. The currencies are then converted to United States dollars and the effect of the foreign currency translation is reflected as a component of stockholders' equity. Reclassifications Certain reclassifications have been made to the prior years' financial statements to conform to classifications used in the current period. Net Income Per Share Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are shares issuable upon the exercise of stock options and warrants, net of shares assumed to have been purchased using the treasury stock method. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2-ACQUISITION OF SLASH CORPORATION On June 23, 1995, the Company acquired Slash Corporation ("Slash"), for a total purchase price of approximately $20,299. The acquisition was accounted for as a purchase and, accordingly, the accompanying consolidated financial statements include the results of operations of Slash as of the date of acquisition. The excess cost over fair value of assets acquired of approximately $21,853 is being amortized on a straight-line basis over twenty years. The fair value of acquired assets and assumed liabilities is as follows as of the acquisition date: F-8 44 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 2-ACQUISITION OF SLASH CORPORATION (CONTINUED)
Purchase price: Cash paid $ 299 Common stock issued 20,000 -------- Total purchase price $ 20,299 ======== Allocated as follows: Current assets $ 11,437 Other assets 132 Current liabilities (13,123) Cost in excess of net assets acquired 21,853 -------- $ 20,299 ========
The following unaudited pro forma summary represents the consolidated results of operations of the Company as though the acquisition had been made as of January 1, 1995:
YEAR ENDED DECEMBER 31, 1995 ----------------- Net sales $253,851 Operating income 33,731 Net income 18,628 Pro forma net income per share 0.30 Pro forma weighted average shares outstanding 61,082
The primary pro forma adjustments for the year ended December 31, 1995 are the additional taxes that would have been provided had Slash been a C corporation for the relevant periods of approximately $845, the elimination of sales between the Company and Slash of approximately $2,135 and the recording of the amortization of goodwill of approximately $525. In association with the filing of the Company's 1995 income tax return, the Company adjusted the estimated deferred tax asset recorded on Slash relating to the differences in the financial statement and tax basis of the assets and liabilities acquired to the actual amounts. This resulted in an increase in goodwill amounting to approximately $810. F-9 45 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 3 - ACQUISITION OF THE BUSINESS OF WARNER INTERACTIVE ENTERTAINMENT EUROPE In November 1996, the Company purchased 100% of the business of Warner Interactive Entertainment Europe, which consisted of Warner Interactive Entertainment Limited, Bramblewold Computers Limited, Warner Interactive France S.A. and Warner Interactive Entertainment Germany GmbH, for approximately $6,300 in cash. Immediately subsequent to the acquisition, the Company renamed three of the four companies to: Renegade Interactive Entertainment Limited, GT Interactive Software France S.A. and GT Interactive Entertainment Germany GmbH. This acquisition has been accounted for as a purchase and accordingly the operating results of the acquired companies have been included in the Company's Consolidated Financial Statements as of the date of the acquisition. Management has not yet finalized the allocation of the purchase price to the net assets acquired and does not believe this will have a material impact on the Company's Consolidated Financial Statements. NOTE 4 - RECEIVABLES, NET Receivables consist of the following:
DECEMBER 31, ----------------------- 1995 1996 -------- -------- Trade accounts receivable $ 86,518 $ 98,995 Royalties receivable 136 1,015 -------- -------- 86,654 100,010 Less: allowance for doubtful accounts 1,844 4,069 -------- -------- $ 84,810 $ 95,941 ======== ========
NOTE 5 - INVENTORIES, NET Inventories consist of the following:
DECEMBER 31, ----------------------- 1995 1996 -------- -------- Finished goods $ 45,078 $ 58,464 Raw materials 4,067 1,993 -------- -------- $ 49,145 $ 60,457 ======== ========
F-10 46 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 6 - INVESTMENTS In 1996, the Company purchased for approximately $2,507 in cash a 9.9% investment in, and entered into a multi-titled publishing agreement with Mirage, a U.K. developer of entertainment software. In 1996, the Company invested approximately $7,122 in convertible preferred stock of Off World Entertainment, Inc., a developer of entertainment software, which is convertible into 50% of the common equity. NOTE 7 - PROPERTY AND EQUIPMENT, NET Property and equipment consists of the following:
DECEMBER 31, ----------------------- 1995 1996 ------- ------- Computer equipment $ 1,990 $ 4,704 Furniture and fixtures 2,059 4,726 Machinery and equipment 2,312 3,232 Leasehold improvements 1,212 1,463 ------- ------- 7,573 14,125 Less: accumulated depreciation 1,486 4,043 ------- ------- $ 6,087 $10,082 ======= =======
Depreciation expense for the years ended December 31, 1994, 1995 and 1996 amounted to approximately $289, $1,065 and $2,110, respectively. NOTE 8 - ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ----------------------- 1995 1996 ------- ------- Sales return reserve $37,567 $37,367 Other 7,739 15,445 ------- ------- $45,306 $52,812 ======= =======
F-11 47 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 9 - INCOME TAXES The components of the provision for income taxes are as follows:
YEARS ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 -------- -------- -------- Federal: Current $ 181 $ 16,199 $ 20,474 Deferred 452 (5,607) (9,286) -------- -------- -------- 633 10,592 11,188 -------- -------- -------- State and local: Current 2,689 3,773 4,376 Deferred (955) (812) (1,737) -------- -------- -------- 1,734 2,961 2,639 -------- -------- -------- Foreign Current 60 449 1,801 -------- -------- -------- Provision for income taxes 2,427 14,002 15,628 -------- -------- -------- Benefit arising from change in tax status -- (3,520) -- -------- -------- -------- $ 2,427 $ 10,482 $ 15,628 ======== ======== ======== Pro forma adjustment to income taxes (unaudited) 7,098 4,616 -------- -------- Pro forma provision for income taxes (unaudited) $ 9,525 $ 15,098 ======== ========
On March 1, 1995, the Company became a C corporation for Federal and New York state income tax purposes. As a result, the C corporation assumed the tax basis of the assets and liabilities of the former S corporation, which differed from the financial statement basis of those items. Accordingly, the Company recorded a deferred tax asset as of March 1, 1995 of approximately $3,520, which primarily relates to the sales return reserve and inventory valuation. F-12 48 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 9 - INCOME TAXES (CONTINUED) The reconciliation of the income tax provision computed at the Federal statutory rate to the reported unaudited pro forma provision for income taxes is as follows:
YEARS ENDED DECEMBER 31, ----------------------- 1995 1996 --------- --------- Provision computed at Federal statutory rate $ 11,580 $ 14,268 Increase (decrease) in provision resulting from: State and local taxes, net of Federal tax benefit 2,647 2,683 Reversal of deferred tax asset valuation allowance -- (1,306) Non-deductible merger costs -- 1,158 Foreign tax benefit (150) (36) Other, net 1,021 (1,139) -------- -------- Pro forma provision for income taxes (unaudited) $ 15,098 ======== Provision for income taxes $ 15,628 ======== Effective income tax rate 46% 38%
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of the Company's deferred tax assets and liabilities as of December 31, 1995 and 1996 are as follows:
YEARS ENDED DECEMBER 31, ----------------------- 1995 1996 --------- --------- Deferred tax assets: Inventory valuation $ 5,342 $ 6,154 Deferred income 4,425 3,851 Sales return reserve 2,037 2,196 Tax loss carryforwards 1,255 1,255 Other 2,278 1,934 -------- -------- 15,337 15,390 -------- -------- Deferred tax liabilities: Depreciation (17) (107) -------- -------- (17) (107) -------- -------- Valuation allowance (1,306) -- -------- -------- Net deferred tax asset $ 14,014 $ 15,283 ======== ========
As of December 31, 1996, one of the Company's subsidiaries had a net operating loss carryforward of approximately $2,915 for tax purposes expiring in the years 2007 through 2011. F-13 49 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 10 - STOCKHOLDERS' EQUITY Capital Stock consists of the following:
DECEMBER 31, ------------------------- 1995 1996 ------- ------- Preferred Stock: Par value per share $ .01 $ .01 Shares authorized 5,000 5,000 Shares issued -- -- Common Stock: Par value per share $ .01 $ .01 Shares authorized 150,000 150,000 Shares issued 66,146 66,391
On July 31, 1995, the Company established par value at $.01 on all classes of its stock. Concurrently, the Company effected a four thousand for one split of its then existing Class A and Class B Common Stock together with an increase in the number of authorized shares. On February 28, 1995, the Company's stockholders sold 10.5% of their then outstanding shares in the Company to an investor (the "Investor"). The Company issued warrants to the Investor for the right to purchase an aggregate of 2,520 shares of Common Stock at an exercise price of $4.17 per share. Additionally, the Company received a $15,000 loan from the Investor. This loan was repaid upon the consummation of the initial public offering and bore interest at 4.5% per annum. In conjunction with such loan the Company issued warrants to the Investor representing the right to purchase an aggregate of 504 shares of Common Stock at an exercise price of $4.17 per share. Under certain circumstances, the Company has the right to redeem the warrants for a nominal amount. The Company received $15 in connection with the issuance of the aforementioned warrants. On June 30, 1995, the Investor paid the Company $15,000 for five hundred twenty five shares of Series A Convertible Preferred Stock, which was converted into 2,520 shares of Common Stock immediately prior to the consummation of the Company's initial public offering. Additionally, the Investor surrendered its warrants to purchase an aggregate of 2,520 shares of Class A and Class B Common Stock. In connection with the acquisition of Slash on June 23, 1995, the Company issued approximately 2,794 shares of its Common Stock. In October 1995, the Company sold approximately $7,650 of Common Stock to another investor. F-14 50 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED) As of December 31, 1996, the Company had outstanding warrants to content-providers to purchase an aggregate of approximately 956 shares of Common Stock at exercise prices (ranging from $9.47 to the initial public offering price) not less than the fair market value at the date of issue. None of the outstanding warrants vested prior to May 1996; vesting subsequent to such date is dependent upon the achievement of sales levels of certain products, the rights to which were granted to the Company. On July 19, 1996, the Company repurchased approximately 211 of these warrants amounting to $1,936. On June 24, 1996, the Company acquired all of the outstanding common stock of WizardWorks in exchange for 2,350 shares of the Company's common stock. On June 28, 1996, the Company acquired all of the outstanding common stock of FormGen in exchange for approximately 1,033 shares of the Company's common stock. On July 9, 1996, the Company acquired all of the outstanding common stock of Humongous in exchange for approximately 3,458 shares of the Company's common stock. NOTE 11 - STOCK OPTIONS The Company has a stock option plan (the "Plan") which began in 1995. The Company accounts for this Plan under APB Opinion No. 25, under which no compensation cost has been recognized. In connection with the acquisition of Humongous, the Company converted options outstanding under Humongous' stock option plan to options under the Company's plan. No additional shares will be granted under Humongous' stock option plan. Had compensation cost for these plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
1995 1996 ---------- ---------- Net income: As reported $ 22,604 $ 25,139 Pro forma 21,701 21,872 Net income per share: As reported $ -- $ 0.38 Pro forma $ -- $ 0.33
Under the Plan, options may be granted to purchase shares of the Company's common stock at no less than the fair market value at the date of the grant, vest over a period of four or five years and are exercisable for a period of ten years from the grant date. F-15 51 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 11 - STOCK OPTIONS (CONTINUED) A summary of the status of the Company's Plan at December 31, 1995 and 1996 and changes during the years then ended is as follows (conversion of Humongous' stock options have been treated as though they were granted in 1995).
1995 1996 ------------------------------- --------------------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price --------------- -------------- ----------------- -------------- Outstanding at beginning of year -- $ -- 4,865 $ 10.22 Granted 4,873 10.20 916 15.35 Exercised (8) .12 (218) 2.92 Forfeited -- -- (105) 14.08 Expired -- -- -- -- --------------- ----------------- Outstanding at end of year 4,865 10.22 5,458 11.30 --------------- ----------------- Exercisable at end of year 311 .05 1,041 9.28 Weighted average fair value of options granted $ 5.27 $ 7.66
2,220 of the 5,458 options outstanding at December 31, 1996 have exercise prices between $.04 and $12.38 per share, a weighted average exercise price of $6.03 and a weighted average remaining contractual life of approximately eight years. Approximately 639 of these options are exercisable. The remaining 3,238 options outstanding at December 31, 1996 have exercise prices between $14 and $23.50, with a weighted average exercise price of $14.91 and a weighted average remaining contractual life of approximately nine years. Approximately 402 of these options are exercisable. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1995 and 1996: no dividends will be paid for the entire term of the option, expected volatility of 57.9% for both years, risk-free interest rates averaging 5.15% for both years and expected lives of five years in 1995 and four years in 1996, respectively. NOTE 12 - RELATED PARTY TRANSACTIONS During 1996, the Company sold approximately $3,488 of software to a related party, GoodTimes Home Video Corporation ("GoodTimes") at fair market value. At December 31, 1996, the Company had a receivable from GoodTimes for this merchandise amounting to approximately $3,343. During 1994, the Company had an agreement with GoodTimes, whereby GoodTimes and affiliated companies provided certain management, accounting, selling and distribution services. The amount charged to operations for these services was $10,235 in 1994. This fee was based on a percentage of gross sales plus a fixed amount. The amount due for 1994 included $6,000 which was unpaid as of December 31, 1994. This amount was paid in January 1995. F-16 52 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED) On January 1, 1995, the Company entered into a one year services agreement with GoodTimes. The services agreement was intended to facilitate the Company's establishment of fully independent systems and administration during 1995. The services agreement provided for a fee based on specific services performed and was terminable by the Company at any time upon written notice. The total amount charged to operations for services provided by GoodTimes and affiliated companies for the year ended December 31, 1995 amounted to approximately $7,341. As of December 31, 1995, there were no services being provided to the Company under the services agreement, however, GoodTimes is providing manufacturing services under a separate manufacturing agreement. The total amount charged to operations for manufacturing services for the year ended December 31, 1996 amounted to $7,516. In servicing its mass merchant accounts, the Company uses field representatives supplied by REPS, a company owned by three directors of the Company. REPS provides such services to the Company as well as to third parties. The Company has an agreement with REPS pursuant to which REPS will supply such services, at its cost, through December 31, 1997. Prior to entering into the REPS Agreement, REPS' services were provided to the Company as part of the services agreement with GoodTimes. The total amount charged to operations for these services amounted to approximately $3,025 for the year ended December 31, 1996. The Company frequently hires Taughannock Aviation Corp. ("Taughannock") and Eastway Aircraft Services Inc. ("Eastway") to provide business travel services for its officers and employees. Taughannock leases one plane from JT Aviation Corp. ("JTAC"), a company owned by Joseph J. Cayre, Chairman of the Board of Directors of the Company, and one plane from KCS Aviation Corp., a company owned by Kenneth Cayre, a Director of the Company. Eastway leases two planes from JTAC. Neither Taughannock nor Eastway is owned in whole or in part by any member of the Cayre family. Taughannock and Eastway provide air travel to the Company at an hourly rate and on an as needed and as available basis. During the years ended December 31, 1995 and 1996 the Company's aggregate air travel fees paid to Taughannock were approximately $357 and $219, respectively. The Company made no payments to Eastway during the year ended December 31, 1995. During the year ended December 31, 1996, the Company paid approximately $226 to Eastway. There were no payments to Eastway or Taughannock during the year ended December 31, 1994. The Company believes that the amounts charged by related parties materially approximate those amounts which would have been incurred from non-affiliates. On December 30, 1994, the Company extended a loan to Ronald Chaimowitz, President of the Company, in the principal amount of $209. Such loan bore interest at the rate of 4.5% per annum and has been repaid. On August 31, 1996, the Company extended a loan to Andrew Gregor, Chief Financial Officer of the Company, in the principal amount of $250. Such loan bears interest at the rate of 6.15% per annum and becomes due and payable on August 31, 1998. On August 31, 1996, the Company extended a loan to Chris Garske, a Senior Vice President of the Company, in the principal amount of $200. Such loan bears interest at a rate of 6.15% per annum and becomes due and payable on August 31, 1998. F-17 53 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 12 - RELATED PARTY TRANSACTIONS (CONTINUED) The Company has extended loans to the former stockholders of FormGen and a former employee of the Company in the aggregate amount of $2,245. Such loans bear interest at rates ranging from 6% to 8.25% per annum and become due and payable on dates ranging from January 8, 1997 to December 1, 1997. The Company has entered into agreements with Upgrade Corporation of America (doing business as SOFTBANK Services Group) ("Upgrade") pursuant to which Upgrade (i) provides toll-free customer support for some of the Company's published products and (ii) takes direct customer orders and provides fulfillment services for the Company, in each case on a per service basis. The agreement relating to customer support service expired on December 17, 1996 and the agreement providing for the fulfillment service expires on August 2, 1997. Both agreements provide for automatic renewal on a month to month basis upon expiration unless terminated by either party. As of December 31, 1996, the Company has charged to operations approximately $164 in fees to Upgrade. Jordan A. Levy, a Director of the Company, is the President and the Co-Chief Executive Officer of Upgrade. See Notes 10 and 13 for information concerning other related party transactions. NOTE 13 - LEASES The Company leases its executive and administrative offices from a related party, and its distribution center, under leases that are accounted for as operating leases. These leases have expiration dates ranging from 2002 through 2020. Future minimum annual rental payments and receipts under the leases are as follows:
1997 $ 3,350 1998 3,773 1999 3,180 2000 2,211 2001 2,240 Thereafter 13,129 ------- $27,883 =======
Total rent expense charged to operations for the years ended December 31, 1994, 1995 and 1996 amounted to approximately $444, $1,824 and $3,207, respectively. Of the total rent expense charged to operations, approximately $100, $751 and $1,037 was paid to the Company's related party during the years ended December 31, 1994, 1995 and 1996, respectively. NOTE 14 - COMMITMENTS AND CONTINGENCIES The Company had an outstanding standby letter of credit at December 31, 1995 and 1996 amounting to approximately $26,700 and $1,667, respectively. The letter of credit outstanding at December 31, 1995 was secured by certain assets of the Company. F-18 54 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 15 - ROYALTY ADVANCES The Company has committed to pay advance royalty payments under certain royalty agreements. These obligations are not guaranteed and are dependent, in part, on the delivery of the contracted services by the licensor. Future advance royalty payments due under these royalty agreements are as follows:
1997 $ 49,003 1998 6,287 1999 -- 2000 -- 2001 5,000 Thereafter -- ------- $60,290 =======
NOTE 16 - CONCENTRATION OF CREDIT RISK The Company extends credit to various companies in the retail and mass merchandising industry for the purchase of its merchandise which results in a concentration of credit risk. This concentration of credit risk may be affected by changes in economic or other industry conditions and may, accordingly, impact the Company's overall credit risk. Although the Company generally does not require collateral, the Company performs ongoing credit evaluations of its customers and reserves for potential losses are maintained. The Company had sales constituting 61%, 52% and 45% of net sales to a single customer in the years ended December 31, 1994, 1995 and 1996, respectively. Accounts receivable due from this significant customer aggregated 48% and 22% of accounts receivable at December 31, 1995 and 1996, respectively. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which the Company conducts business. Cash and cash equivalents and short-term investments consist of cash on hand and investments in state and local government bonds. NOTE 17 - SUPPLEMENTAL CASH FLOW INFORMATION
YEARS ENDED DECEMBER 31, -------------------------------- 1994 1995 1996 ------- ------- ------- Issuance of common stock in connection with the acquisition of Slash Corporation $ -- $20,000 $ -- Cash paid for income taxes 1,416 19,169 9,783 Cash paid for interest 31 669 685
F-19 55 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share data) NOTE 18 - QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for the year ended December 31, 1995 are as follows:
THREE MONTHS ENDED ----------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Net sales $ 34,894 $ 31,752 $ 63,755 $104,060 Operating income 5,668 2,954 6,529 17,140 Net income 6,931 1,682 3,757 10,234 Net income per share $ 0.16 Weighted average shares outstanding 62,786
Summarized quarterly financial data for the year ended December 31, 1996 are as follows:
THREE MONTHS ENDED ---------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- ------- ------------ ----------- Net sales $ 70,757 $ 73,526 $ 86,192 $135,015 Operating income 7,211 5,999 12,187 11,396 Net income 4,392 3,502 8,730 8,515 Net income per share $ 0.07 $ 0.05 $ 0.13 $ 0.13 Weighted average shares outstanding 66,145 66,145 69,217 66,391
NOTE 19 - SUBSEQUENT EVENTS On January 21, 1997, the Company entered into a Revolving Credit Agreement (the "Agreement") with banks expiring on December 31, 1998. The Agreement provides for a maximum of $40,000 for borrowings and letters of credit. The borrowings under this agreement bear interest at either the banks reference rate (which is generally equivalent to the published prime rate) or the LIBOR rate plus 1 1/4%. The Company pays a commitment fee of 1/4% based on the unused portion of the line. The Agreement requires maintenance of certain financial ratios and net income levels. On January 13, 1997, the Company acquired all of the outstanding capital stock of Premier Promotion Limited, the parent company of One Stop Direct Limited, a leading European value software publisher, for approximately $400 in cash. F-20 56 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions Balance- Charged to Balance- Beginning of Costs and End of Description Year Expenses Deductions Year - ----------- ---------- ---------- ---------- ---------- Allowance for doubtful accounts: Years ended: December 31, 1996 $ 1,844 $ 2,225 $ -- $ 4,069 ========== ========== ========== ========== December 31, 1995 $ 235 $ 1,609 $ -- $ 1,844 ========== ========== ========== ========== December 31, 1994 $ 30 $ 205 $ -- $ 235 ========== ========== ========== ========== Reserve for obsolescence: Years ended: December 31, 1996 $ 7,066 $ -- $ (985) $ 6,081 ========== ========== ========== ========== December 31, 1995 $ 1,561 $ 5,505 $ -- $ 7,066 ========== ========== ========== ========== December 31, 1994 $ 315 $ 1,246 $ -- $ 1,561 ========== ========== ========== ==========
F-21 57 EXHIBIT INDEX
Page Exhibit No. Description Number - ----------- ----------- ------ 2.1 (1) Agreement and Plan of Reorganization by and among the Registrant, GT Acquisition Sub, Inc., WizardWorks Group, Inc. and the Stockholders of WizardWorks Group, Inc. dated June 24, 1996. 2.2 (1) Escrow Agreement by and among the Registrant, Paul D. Rinde, as the Stockholder Representative of WizardWorks Group, Inc., and Republic National Bank of New York, as Escrow Agent, dated June 24, 1996. 3.1 (2) Amended and Restated Certificate of Incorporation. 3.2 (3) Amended and Restated By-laws (as amended on October 31, 1996). 4.1 (4) Specimen form of stock certificate for Common Stock. 10.1 (3) The 1995 Stock Incentive Plan (as amended on October 31, 1996). 10.2 (4) Services Agreement between the Registrant and GoodTimes Home Video Corp., dated as of January 1, 1995. 10.3 (4) 4.5% Subordinated Secured Promissory Note, due February 28, 1996. 10.4 (4) Employment Agreement between the Registrant and Ronald Chaimowitz. 10.5 (4) Employment Agreement between the Registrant and Charles F. Bond. 10.6 (4) Non-Competition Agreement between the Registrant and Charles F. Bond. 10.7 (4) Employment Agreement between the Registrant and Harry M. Rubin. 10.8 (4) Employment Agreement between the Registrant and Harry Steck. 10.9 (4) Employment Agreement between the Registrant and Chris Garske. 10.10 (4) GTIS Master Option and License Agreement between the Registrant and the Williams Entertainment Group, dated December 28, 1994, and the Amendment to such agreement, dated March 31, 1995. 10.11 (4) GTIS Master Option and License Agreement (Home Video Games) between the Registrant and the Williams Entertainment Group, dated March 31, 1995. 10.12 (4) Agreement between the Registrant and SOFTBANK Corporation, dated October 9, 1995. 10.13 (4) Agreement between the Registrant and Roadshow PTY LTD, dated October 3, 1995.
58
Page Exhibit No. Description Number - ----------- ----------- ------ 10.14 (4) Agreement and Plan of Reorganization by and between Charles F. Bond, Slash Corporation and the Registrant, dated June 22, 1995. 10.15 (4) Lease Agreements between the Registrant and 16 East 40th Associates. 10.16 (4) Sub-lease Agreement between the Registrant and Michael Stevens Ltd., dated February 22, 1995. 10.17 (4) Lease Agreement between GT Interactive Software (Europe) Limited and Marylebone 248 Realty LLC, dated May 2, 1995. 10.18 (4) Stockholders' Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the Registrant. 10.19 (4) Registration Rights Agreement by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the Trusts listed on Schedule I attached thereto and the Registrant. 10.20 (4) Agreement by and between the Registrant and REPS. 10.21 (5) Second Amendment to GTIS Master Option and License Agreement between the Registrant and Williams Entertainment Group, dated March 27, 1996. 10.22 (5) Amendment to GTIS Master Option and License Agreement (Home Video Games) between the Registrant and Williams Entertainment Group, dated March 27, 1996. 10.23 (5) Master Option and License Agreement for Atari PC Games between the Registrant and WMS Industries Inc., dated March 27, 1996. 10.24 (5) Master Option and License Agreement for Atari Home Video Games between the Registrant and WMS Industries Inc., dated March 27, 1996. 10.25 (5) Employment Agreement between the Registrant and Andrew Gregor. 10.26 (3) 6.15% Promissory Note, due August 31, 1998, of Andrew Gregor. 10.27 (3) 6.15% Promissory Note, due August 31, 1998, of Chris Garske. 10.28 (6) Lease Agreement between the Registrant and Plymouth 2200, LLP, dated September 6, 1996. 10.29 Agreement of Lease, dated as of December 12, 1996, by and between the Registrant and F.S. Realty Corp. 10.30 Amendment to Stockholders Agreement, dated as of December 18, 1995, by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the trusts parties thereto and the Registrant. 10.31 Credit Agreement, dated as of January 21, 1997, by and among the Registrant, the banks parties thereto and Republic National Bank of New York, as Agent.
59
Page Exhibit No. Description Number - ----------- ----------- ------ 11.1 Computation of Pro Forma Earnings Per Share. 11.2 Computation of Earnings Per Share. 21.1 The Registrant's Subsidiaries. 23.1 Consent of Ernst & Young LLP 23.2 Consent of Arthur Andersen LLP 27.1 Financial Data Schedule for the year ended December 31, 1996.
- ----------- (1) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Current Report on Form 8-K filed on July 9, 1996. (2) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Registration Statement on Form S-1 filed October 18, 1996, and all amendments thereto (Registration No. 333-14441). (4) Incorporated herein by reference to the exhibit with the corresponding number filed as part of the Registrant's Registration Statement on Form S-1 filed October 20, 1995, and all amendments thereto (Registration No. 33-98448). (5) Incorporated herein by reference to an exhibit filed as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. (6) Incorporated herein by reference to an exhibit filed as part of the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996. EX-10.29 2 AGREEMENT OF LEASE 1 AGREEMENT OF LEASE BETWEEN F.S. REALTY CORPORATION LANDLORD AND GT INTERACTIVE SOFTWARE CORP. TENANT PREMISES: 417 FIFTH AVENUE 7TH AND 8TH FLOORS NEW YORK, NEW YORK 10016 -1- 2 TABLE OF CONTENTS Page ARTICLE 1 PREMISES; RENT........................................ 5 ARTICLE 2 CONDITION OF PREMISES................................. 7 ARTICLE 3 ARBITRATION........................................... 8 ARTICLE 4 REAL ESTATE TAX ESCALATION............................ 10 ARTICLE 5 USE................................................... 12 ARTICLE 6 ALTERATIONS AND INSTALLATIONS......................... 14 ARTICLE 7 REPAIRS............................................... 17 ARTICLE 8 REQUIREMENTS OF LAW................................... 19 ARTICLE 9 INSURANCE, LOSS, REIMBURSEMENT, LIABILITY............. 21 ARTICLE 10 DAMAGE BY FIRE OR OTHER CAUSE......................... 24 ARTICLE 11 ASSIGNMENT, MORTGAGING, SUBLETTING, ETC............... 26 ARTICLE 12 ELECTRICITY........................................... 31 ARTICLE 13 ADJACENT EXCAVATION - SHORING......................... 33 ARTICLE 14 CONDEMNATION.......................................... 34 ARTICLE 15 ACCESS TO PREMISES; CHANGES........................... 35 ARTICLE 16 CONDITIONS OF LIMITATION.............................. 37 ARTICLE 17 RE-ENTRY BY LANDLORD; INJUNCTION...................... 38 ARTICLE 18 DAMAGES............................................... 39 ARTICLE 19 LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS........................................... 41 ARTICLE 20 QUIET ENJOYMENT....................................... 41 ARTICLE 21 SERVICES AND EQUIPMENT................................ 41 ARTICLE 22 HAZARDOUS MATERIALS................................... 45 ARTICLE 23 INVALIDITY OF ANY PROVISION........................... 46 ARTICLE 24 BROKERAGE............................................. 46 ARTICLE 25 SUBORDINATION......................................... 47 ARTICLE 26 CERTIFICATE OF TENANT/LANDLORD........................ 49 ARTICLE 27 LEGAL PROCEEDINGS AND WAIVER OF JURY TRIAL............ 50 ARTICLE 28 SURRENDER OF PREMISES................................. 50 ARTICLE 29 RULES AND REGULATIONS................................. 51 ARTICLE 30 CONSENTS AND APPROVALS................................ 51 ARTICLE 31 NOTICES............................................... 51 ARTICLE 32 NO WAIVER............................................. 52 ARTICLE 33 INABILITY TO PERFORM.................................. 53 ARTICLE 34 ENTIRE AGREEMENT; NO REPRESENTATIONS; NO ORAL MODIFICATION.................................. 54 ARTICLE 35 SECURITY.............................................. 54 ARTICLE 36 INTENTIONALLY OMITTED................................. 56 ARTICLE 37 NON-LIABILITY AND INDEMNIFICATION..................... 56 -ii- 3 ARTICLE 38 INTENTIONALLY OMITTED................................. 57 ARTICLE 39 RIGHT OF FIRST OFFER.................................. 57 ARTICLE 40 MISCELLANEOUS......................................... 58 ARTICLE 41 ROOF SPACE............................................ 59 ARTICLE 42 OPTION................................................ 61 SCHEDULES 1 - Floor Plan for 7th and 8th floors 2 - Cleaning Specifications-Intentionally Omitted 3 - Form of Estoppel Letter 4 - Rules and Regulations 5 - Construction Rules and Regulations 6 - Crosshatch of Roof Premises EXHIBITS A - Work Letter B- Assignment and Assumption Agreement C - Nondisturbance Agreement -iii- 4 AGREEMENT OF LEASE dated as of December 12, 1996, by and between F.S. REALTY CORP, a New York Corporation, with its office at c/o Prince Management Corp., 57-18 Flushing Avenue, Maspeth, New York 11378 (hereinafter referred to as "Landlord") and, GT INTERACTIVE SOFTWARE CORP., a Delaware Corporation with an office at 16 East 40th Street, New York, New York 10016 (hereinafter referred to as "Tenant"). REFERENCE PAGE LEASE DEFINITIONS In addition to other terms elsewhere defined in this Lease, the following words and phrases whenever used in this Lease shall have the meanings set forth in this Reference Page. "Alteration" shall mean any and every structural addition, construction, improvement, installation or modification of or to the Premises which affects building services outside the Premises including, but not limited to, electrical, plumbing, heating, ventilating and air-conditioning services. "Base Taxes" shall mean the Taxes (as hereinafter defined) for the twenty four-month period commencing July 1, 1996 and ending June 30, 1998 divided by two. "Brokers" shall mean S.L. Green Real Estate and Jenel Management Corp. "Building" shall mean the building known as 417 Fifth Avenue, New York, New York 10016. "Business Days" shall mean all days excluding Sundays and all days observed by the federal, state or local governments as legal holidays as well as all other days recognized as holidays under applicable union contracts. "Business Hours" shall mean the hours between 8:00 a.m. and 6:00 p.m. on Business Days except that on Saturdays Business Hours shall mean the hours between 8:00 a.m. and 1:00 p.m. "Commencement Date" shall mean the date that the Landlord delivers possession of the Premises to Tenant. "Construction Rules and Regulations" shall mean those certain rules and regulations issued by Landlord with respect to the performance of any construction at the Premises annexed hereto and incorporated herein as Schedule 5. "Consumer Price Index" or the "CPI-U" shall mean the Consumer Price Index for All Urban Consumers of the United States Department of Labor's Bureau of Labor -1- 5 Statistics in effect for New York, Northeastern N.J. (1984=100) and generally published at the time the computation is to be made. If the CPI-U is no longer published, then another price index, generally recognized as authoritative, shall be substituted by mutual agreement of Landlord and Tenant. In the event the parties are unable to so agree, the matter shall be submitted to binding arbitration according to the rules of the American Arbitration Association. During any period while the determination of such a dispute is pending, Tenant shall continue to pay the sum previously in effect; provided, however, that the adjusted sum as finally determined shall be retroactive from the prescribed date and any deficiency owed by Tenant shall be paid promptly upon a final determination of the dispute. "Expiration Date" shall mean the tenth anniversary of the Commencement Date as the same may be extended. "Fair Market Rental Value" shall mean the fair market rental value of the Premises six months prior to the end of the Initial Term (as hereinafter defined) with respect to Option 1 (as hereinafter defined) and six months prior to the end of Option 1 with respect to Option 2 (as hereinafter defined) respectively. In the event that Landlord and Tenant are unable to agree on the Fair Market Rental Value of the Premises five months prior to the end of the Initial Term for Option 1 or five months prior to the end of Option 1 with respect to Option 2, then the same shall be determined by binding arbitration in accordance with Article 3 of this Lease. The arbitrator shall make his/her respective determination based upon the following assumptions and directions, and the arbitrator shall be so instructed and bound with respect thereto: (i) The Premises is available in the then rental market for comparable tenant space in comparable buildings in the City of New York; (ii) Neither Landlord nor Tenant is under a compulsion to rent; (iii) The Premises is to be rented as a whole to a single tenant for general office use for a term of five (5) years, taking into consideration such market factors and other lease provisions as may then customarily be in effect and applicable to the rental of such space in that location; (iv) The Premises shall be rented in an "as is," condition equal to the condition of the Premises as it exists six months prior to the end of the Term with respect to Option 1 and equal to the condition of the Premises as it exists six months prior to the end of Option 1 with respect to Option 2; (v) Landlord is not paying a brokerage commission to lease the Premises for either Option 1 or Option 2; -2- 6 (vi) Landlord is not making any improvements or alterations to the Premises for either Option 1 or Option 2; and (vii) Landlord is not giving Tenant any period of free rent for Option 1 or Option 2. "Fixed Annual Rent," "Fixed Rent" or "fixed annual rent" shall mean One Million Two-Hundred Thousand Dollars ($1,200,000.00) per annum for the period from the first anniversary of the Commencement Date through the second anniversary of the Commencement Date. Provided Tenant is not otherwise in default of the terms and conditions of this Lease, beyond applicable notice and grace periods, Fixed Annual Rent shall be abated for the period from the Commencement Date through the first anniversary of the Commencement Date (all additional rent (as hereinafter defined) shall remain due and payable). Thereafter, Fixed Annual Rent shall be adjusted on each anniversary of the Commencement Date beginning on the second anniversary of the Commencement Date through the tenth anniversary of the Commencement Date by multiplying the immediately preceding year's Fixed Annual Rent by a fraction, the numerator of which shall be the Consumer Price Index (as defined herein) in effect on the anniversary of the Commencement Date for the year in which Fixed Annual Rent is being adjusted and the denominator of which shall be the Consumer Price Index in effect on the immediately preceding anniversary of the Commencement Date, which escalation shall not exceed three (3) percent per annum. The increases in the Fixed Annual Rent set forth herein shall always be calculated upon, and added to, the prior year's Fixed Annual Rent. "Initial Term" shall mean a period of ten (10) years beginning on the Commencement Date. "Interest Rate" shall mean a fluctuating rate of interest per annum equal to the lesser of (a) 2% above the prime commercial lending rate of interest announced from time to time by The Chase Manhattan Bank, National Association (or any successor institution, or, if said bank and its successors are no longer in existence, any other member bank of The New York Clearing House Association selected by Landlord), at its principal office in New York City, in effect from time to time or (b) the maximum applicable legal rate of interest, if any. "Landlord" shall mean only the owner, or the mortgagee in possession, of the Land (as hereinafter defined) and Building (and the owner of a lease of the Building or of the Land and Building), so that in the event of any transfer of title to the Land and Building or said lease, or in the event of a lease of the Building, or of the Land and Building, upon notification to Tenant of such transfer or lease the said transferor Landlord shall be and hereby is entirely freed and relieved of future covenants, obligations and liabilities of Landlord hereunder. It shall be deemed and construed as a covenant running with the land without further agreement between the parties or -3- 7 their successors in interest, or between the parties and the transferee of title to the Land and Building or said lease, or the said lessee of the Building, or of the Land and Building, that the transferee or the lessee has assumed and agreed to carry out any and all such covenants, obligations and liabilities of Landlord hereunder from and after the date of such transfer. "Legal Requirement(s)" shall mean (i) any laws, statutes, ordinances (including building codes and zoning regulations and ordinances and the Americans with Disabilities Act of 1990) and the orders, rules, regulations, directives and requirements of all federal, state, county, city, municipal and borough departments, bureaus, boards (including the New York Board of Fire Underwriters), agencies, offices, commissions and subdivisions thereof, or of any official thereof, or of any other governmental public or quasi-public authority, whether now or hereafter in force, which may be applicable to the Land, the Building or the Premises or any part thereof, or the sidewalks, curbs or areas adjacent thereto, and (ii) all requirements, obligations and conditions of all instruments of record on the date of this Lease. "Lien" shall mean any and every lien of any kind whatsoever for the furnishing (or alleged furnishing) of (or on account of) labor, materials, services, facilities or any other things whatsoever. "Premises" shall mean the entire seventh (7th) and eighth (8th) floors of the Building and the Roof Premises (as defined in Article 41 hereof) as shown hatched on the floor plan annexed hereto as Schedules 1 and 6 respectively. "Permitted Use" shall mean executive and general offices including kitchen facilities, employee cafeteria, executive dining room, employee snack bar concession, product display room, telemarketing operation and for similar uses excluding any and all manufacturing and retail sales to the public but for no other purposes whatsoever. "Security Deposit" shall have the meaning set forth in Article 35 hereof. "Tenant's Proportionate Share" shall mean 18.2%. The Tenant's Proportionate Share shall decrease in the proportion to the additional space built on top of the roof of the Building and the adjustment of the Tenant's Proportionate Share shall become effective upon the sale or rental of the additional space. "Term" shall mean the Initial Term as the same may be extended by Option 1 and Option 2. Notwithstanding anything in this Lease to the contrary, (a) provided (i) Tenant is not otherwise in default of this Lease beyond all applicable notice and cure periods and (ii) Tenant provides Landlord with written notice no later than six months prior to the end of the Initial Term of its exercise of this option, Tenant is entitled to extend this Lease for an additional five years ("Option 1") beginning on the day after the expiration of the Initial Term and ending on the fifth anniversary of the day after -4- 8 the expiration of the Initial Term at a Fixed Annual Rent which is ninety percent (90%) of the Fair Market Rental Value (as such term is defined herein); and (b) provided (i) Tenant is not otherwise in default of this Lease beyond all applicable notice and cure periods and (ii) Tenant provides Landlord with written notice no later than six months prior to the end of the term of Option 1 of its exercise of this option, Tenant is entitled to extend this Lease for an additional five years ("Option 2") beginning on the day after the expiration of the term of Option 1 and ending on the fifth anniversary of the day after the expiration of the term of Option 1 at a Fixed Annual Rent which is ninety percent (90%) of the Fair Market Rental Value (as such term is defined herein). The Reference Pages information is incorporated into and made a part of the within Lease. In the event of any conflict between any Reference Pages information and the Lease, the Lease shall control. W I T N E S S E T H: The parties hereto, for themselves, their heirs, distributees, executors, administrators, legal representatives, trustees, successors and assigns, hereby covenant as follows: ARTICLE 1. PREMISES: RENT 1.(a) Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the Premises for the Initial Term to commence on the Commencement Date and to end at 11:59 p.m. on the Expiration Date or until such term shall sooner cease and terminate or be extended as herein provided. In the event that the Commencement Date does not occur on or before the six-month anniversary after the date this Lease is executed by Landlord, Tenant may elect to terminate this Lease, by first providing Landlord with a thirty (30) day written notice of Tenant's election to terminate this Lease, and if such situation shall continue and shall not be remedied by Landlord within such thirty (30) days, then the Term shall expire at the expiration of such thirty (30) days, and the estate hereby granted shall terminate with the same effect as if that day were the end of the Term (provided that Tenant, its agents, servants or employees are not responsible for the Commencement Date not occurring). 1.(b) (i) From and after the Commencement Date, Tenant shall pay to Landlord the Electrical Charge and after the first anniversary of the Commencement Date, Tenant shall pay to Landlord the fixed annual rent at the fixed annual rental rate set forth in the Reference Page, which shall be payable in equal monthly installments -5- 9 in advance on the first day of each and every calendar month during the Term. The first monthly installment of fixed annual rent due on the first anniversary of the Commencement Date shall be payable by Tenant upon the execution of this Lease and shall be applied to the first full installment of Fixed Annual Rent due hereunder. Should the Commencement Date fall on any day other than the first day of a month, the fixed annual rent due on the first day of the first anniversary of the Commencement Date shall be pro-rated on a per diem basis, and Tenant shall pay the amount for such partial month on the Commencement Date. Should the last day of the Term fall on any day other than the last day of a month, then the fixed annual rent for such partial period shall be pro-rated on a per diem basis. (ii) Any sum other than fixed annual rent payable hereunder (hereinafter called "additional rent") shall be deemed additional rent, and together with fixed annual rent shall be included in the term "rent" and shall, unless otherwise stated, be due within seven days after demand. Fixed annual rent and additional rent shall be paid in lawful money of the United States by good and sufficient check (subject to collection) drawn to Landlord's order or as Landlord may direct. Said checks shall be sent to Landlord at its address as hereinabove set forth, or to such other party or parties and/or at such other address(es) as Landlord shall designate by notice to Tenant. (iii) Tenant shall pay the fixed annual rent promptly when due without notice or demand and additional rent when billed therefor and without offset, credit, abatement, deduction, counterclaim, set off for any reason whatsoever, except such deduction as may be expressly set forth herein. 1.(c) If any of the fixed annual rent or additional rent payable under the terms and provisions of this Lease shall be or become uncollectible, reduced or required to be refunded because of any Legal Requirements, Tenant shall enter into such agreement(s) and take such other steps as Landlord may reasonably request and as legally may be permissible to permit Landlord to collect the maximum rents that, from time to time during the continuance of such legal rent restriction, legally may be permissible (and not in excess of the amounts reserved therefor under this Lease). Upon the termination of such legal rent restriction, (a) the rents shall become and thereafter shall be payable in accordance with the amounts reserved herein for the periods following such termination and (b) Tenant shall pay to Landlord, to the maximum extent legally permissible, an amount equal to (i) the rents that would have been paid pursuant to this Lease but for such legal rent restriction less (ii) the rents paid by Tenant during the period such legal rent restriction was in effect. 1.(d) No payment by Tenant or receipt or acceptance by Landlord of a lesser amount than the correct fixed annual rent or additional rent shall be deemed to be other than a payment on account, nor shall any endorsement or statement on any check or any letter accompanying any check or payment be deemed an accord and -6- 10 satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance or pursue any other remedy provided in this Lease or at law. 1.(e) In order to compensate Landlord for the expenses involved in handling delinquent payments, Tenant shall pay, as additional rent, a late charge of four (4%) percent of the amount of any installment of fixed annual rent or payment of additional rent remaining unpaid on the tenth day after written notice to Tenant. Nothing herein contained shall excuse Tenant from paying all rent or any other sum due under this Lease on the dates when same are due hereunder. 1.(f) Landlord shall have the same rights and remedies (including, without limitation, the right to commence a summary proceeding) for a default in the payment of additional rent as for a default in the payment of fixed annual rent notwithstanding the fact that Tenant may not then also be in default in the payment of fixed annual rent. ARTICLE 2. CONDITION OF PREMISES 2.(a) Tenant is fully familiar with the condition of the Premises and hereby accepts possession of the Premises in their current "as is" condition except for latent defects other than asbestos. 2.(b) Tenant acknowledges that the Building including the Premises, is sprinklered and that the bathrooms in the Premises will be delivered to Tenant in their current "as-is" condition. 2.(c) Landlord shall not be required to perform any work in the Premises except that Landlord shall, at its sole cost and expense, remove all asbestos from the Premises of which Tenant informs Landlord in writing, prior to the completion of Tenant's Initial Work (as hereinafter defined). Landlord shall not be responsible for removing any asbestos from the Premises of which Tenant fails to inform Landlord in writing prior to completion of Tenant's Initial Work and Landlord shall not be responsible for removing any floor or ceiling tiles containing asbestos. Landlord shall perform all such asbestos removal work: (i) promptly after being notified of the existence of any such asbestos by Tenant in writing; (ii) in a manner so as not to interfere with, or delay, Tenant's Initial Work; and (iii) in compliance with all Legal Requirements. In the event that Landlord shall fail to perform any such asbestos removal work in accordance with all of the terms and conditions of the immediately preceding sentence and Landlord does not remedy any such failure within ten (10) days following written notice from Tenant, then Tenant, following an additional (10) day written notice to Landlord, shall have the right to perform any such asbestos -7- 11 removal work on behalf of Landlord and may offset Tenant's reasonable cost therefor against the next installments of fixed annual rent due under this Lease. Prior to Tenant's completion of Tenant's Initial Work, Landlord shall deliver to Tenant a letter from the asbestos removal company indicating that the asbestos that Tenant informed Landlord of in writing was removed from the Premises. Notwithstanding anything to the contrary contained herein, any asbestos which may be discovered in the Premises following the completion of Tenant's Initial Work, shall be promptly removed by Landlord, (provided Tenant informs Landlord in writing of the asbestos to be removed), in accordance with all Legal Requirements and in a manner so as not to interfere with Tenant's use of the Premises. Tenant shall reimburse Landlord for one half of all of Landlord's actual costs in connection with such removal. Landlord and Tenant acknowledge that the removal of asbestos from the Premises by Landlord may occur simultaneously with the performance of Tenant's Initial Work and Landlord and Tenant agree to cooperate in good faith, with the other party so as not to interfere with the performance of each other's work. 2.(d) All work performed by Tenant in accordance with the provisions of this Lease shall require the installation of new materials at least comparable to the quality now present in the Building and shall be performed in accordance with the terms and conditions of this Lease and the Construction Rules and Regulations. 2.(e) Landlord shall make available to Tenant, the amount of Landlord's Contribution (as such term is defined in the Work Letter annexed hereto as Exhibit A and made a part hereof) subject to, and in accordance with, the terms of such Work Letter. ARTICLE 3. ARBITRATION 3.(a) In any case in which it is specifically provided by the terms of this Lease that a matter shall be determined by arbitration, such arbitration shall be conducted by a single arbitrator pursuant to applicable statutes of the State of New York at the time in effect and, to the extent permitted by said statutes, in the manner specified in this Article 3 and, to the extent not inconsistent with said statutes and this Article 3, in accordance with the Commercial Arbitration Rules for expedited arbitration at the time in effect of the American Arbitration Association; provided that the arbitrator selected hereunder shall be a person of recognized competence who is unaffiliated with either party to this Lease (either by direct or indirect relationship or significant business relationship) and shall have at least ten (10) years' experience as a commercial real estate broker or appraiser in the City of New York. The arbitrator shall be chosen by the American Arbitration Association in accordance with the Commercial Arbitration Rules for expedited arbitration. -8- 12 3.(b) The party desiring such arbitration shall give written notice to that effect to the other party and, in such notice, shall specify the nature of the dispute to be arbitrated. Each of Tenant and Landlord shall submit (a "Submission") stating its position (including all relevant figures and amounts, as appropriate) in such dispute to the arbitrator, in writing, within seven (7) days of the selection of the arbitrator and such arbitrator shall determine such matter as promptly as possible; provided that: (i) The arbitrator shall have the right only to interpret and apply the terms of this Lease, and may not change any such terms or deprive any party to this Lease of any right or remedy expressly or impliedly provided in this Lease. Landlord and Tenant each shall be entitled to present evidence and arguments to the arbitrator; and (ii) The arbitrator shall select either Tenant's or Landlord's Submission (without modification) as its decision, which decision shall be final and binding in accordance with the provisions of the laws of the State of New York. The arbitrator shall give written notice of its determination to Landlord and Tenant and shall furnish to each a signed copy of such determination. 3. (c) The fees and expenses of the arbitrator shall be borne equally by Landlord and Tenant. 3. (d) In the event of the failure, refusal or inability of the arbitrator to act, a new arbitrator shall be appointed in his/her stead, which appointment shall be made in the same manner as hereinbefore provided for the appointment of the arbitrator so failing, refusing or unable to act, or to continue to act. 3.(e) During any period of arbitration under this Article 3, neither Landlord nor Tenant shall be deemed to be in default with respect to the performance of any covenant, duty or obligation relating to such matter, and any grace period or permitted delay in such performance otherwise provided for in this Lease shall be automatically extended by such period of arbitration. However, notwithstanding the foregoing in the event that Fair Market Rental Value for Option 1 or Option 2 is being determined by arbitration, Tenant agrees to pay during the period of arbitration, the Fixed Annual Rent chargeable and in effect on the Expiration Date with respect to Option 1, and on the last day of Option 1 with respect to Option 2, without prejudice to any of its rights until there has been a determination of the arbitration. After such determination of the arbitrator the Fixed Annual Rent shall be adjusted in accordance with the arbitrator's decision and Tenant shall be credited for any overpayment or debited for the additional Fixed Annual Rent due and owing. -9- 13 ARTICLE 4. REAL ESTATE TAX ESCALATION 4.(a) For the purposes of this Article 4, the following definitions shall apply: (i) The term "Taxes" shall mean all real estate taxes, assessments, sewer and water rents, governmental levies, municipal taxes, county taxes or any other governmental charge, general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind or nature whatsoever (excluding metered charges) that are or may be assessed, levied or imposed upon all or any part of the land (hereinafter referred to as the "Land") on which the Building is situated, the Building and the sidewalks, vaults (excluding vaults used by tenants), arcades, plazas, alleys or streets in front of or adjacent thereto, including any tax, excise or fee payable as a result of the Building being situated in a business improvement district, including any tax, excise or fee measured by or payable with respect to any rent levied against Landlord and/or the Land and/or the Building as though this was the only property of the Landlord, under the laws of the United States, the State of New York, or any political subdivision thereof, or by the City of New York, or any political subdivision thereof but excluding any income, franchise, corporate, estate, inheritance, succession, capital stock, transfer or mortgage recording tax levied on Landlord. If, due to a future change in the method of taxation or in the taxing authority, a new or additional real estate tax, or a franchise, income, transit, profit or other tax or governmental imposition, however designated, shall be levied against Landlord, and/or the Land and/or the Building, and/or the sidewalks, arcades, plazas,--alleys or streets in front of or adjacent thereto, in substitution in whole or in part for any tax which would constitute "Taxes," or in lieu of additional Taxes, such tax or imposition shall be deemed for the purposes hereof to be included within the term "Taxes." (ii) The term "Tax Year" shall mean each period of twelve months, commencing on the first day of July of each such period, in which occurs any part of the Term or such other period of twelve months occurring during the Term as hereafter may be duly adopted as the fiscal year for real estate tax purposes of the City of New York. (iii) The term "Escalation Statement" shall mean a statement setting forth the amount payable by Tenant for a specified Tax Year pursuant to this Article 4 as reasonably estimated by Landlord (not to exceed 105% of Tenant's Tax Payment (as hereinafter defined) for the preceding Tax Year) and a copy of all relevant tax bills. 4.(b) (i) Tenant shall pay as additional rent for the Tax Year beginning on July 1, 1998 and each Tax Year thereafter a sum (hereinafter referred to as "Tenant's Tax Payment") equal to Tenant's Proportionate Share of the amount by which the Taxes for such Tax Year exceed the Base Taxes. Tenant's Tax Payment for each Tax -10- 14 Year shall be due and payable in advance in monthly installments on the first day of each month during each Tax Year, initially based upon the Escalation Statement furnished prior to the commencement of such Tax Year, until such time as the amount of the Taxes for such Tax Year shall be determined by the City of New York, at which point, such monthly installments shall be adjusted based on the actual amount of the Taxes for such Tax Year. Tenant shall, within thirty (30) days thereafter, pay to Landlord an amount equal to the amount of any underpayment of Tenant's Tax Payment with respect to any Tax Year and, in the event of an overpayment, Tenant may credit against subsequent payments of fixed annual rent and additional rent the amount of Tenant's overpayment. If there shall be any increase in Taxes for any Tax Year, whether during or after such Tax Year, Landlord shall furnish a revised Escalation Statement for such Tax Year, and Tenant's Tax Payment for such Tax Year shall be adjusted and paid substantially in the same manner as provided in the preceding sentence. If during the Term, Taxes are required to be paid to the appropriate taxing authorities in full or in monthly, quarterly, semiannually or other installments, on any other date or dates than as presently required, then at Landlord's option, Tenant's Tax Payments shall be correspondingly accelerated or revised so that said Tenant's Tax Payments are due at least 30 days prior to the date payments are due to the taxing authorities. The benefit of any discount for any early payment or prepayment of Taxes shall accrue solely to the benefit of Landlord and such discount shall not be subtracted from Taxes. Landlord shall provide Tenant with a copy of the tax invoices upon which the Tenant's Tax Payment is based. Tenant shall not pay any portion of late charges or interest on late Tax Payments. (ii) If the real estate tax fiscal year of The City of New York shall be changed during the Term, any Taxes for such fiscal year, a part of which is included within a particular Tax Year and a part of which is not so included, shall be apportioned on the basis of the number of days in such fiscal year included in the particular Tax Year for the purpose of making the computations under this Section 4.(b). (iii) If the Taxes for any Tax Year for which Tenant shall have paid additional rent pursuant to this Article shall be adjusted, corrected or reduced whether as the result of protest of any tentative assessment, or by means of agreement, or as the result of legal proceedings, the additional rent becoming due for said Tax Year pursuant to this Article shall be determined on the basis of said corrected, adjusted or reduced Taxes. If Tenant shall have paid any additional rent pursuant to this Article for such Tax Year prior to any said adjustment, Landlord shall credit or refund to Tenant any excess amount thus paid as reflected by said adjusted Taxes, less Tenant's Proportionate Share of any cost, expense or fees, not to exceed thirty three percent (33%) of the Tax reduction (including experts' and attorneys' fees but excluding Landlord's actual out-of-pocket costs of administration and coordination) incurred by Landlord in obtaining said tax adjustment. If said tax adjustment shall occur prior to Tenant's payment of any said Taxes due hereunder as additional rent, -11- 15 Tenant shall pay, as additional rent, Tenant's Proportionate Share of any cost, expenses or fees (including experts' and attorneys' fees but excluding Landlord's costs of administration and coordination) incurred by Landlord in obtaining said tax adjustment. 4.(c) In the event that the date of the expiration or other termination of this Lease shall be a day other than the last day of a Tax Year, then, in applying the provisions of this Article 4 with respect to any Tax Year in which such event shall have occurred, appropriate adjustments shall be made to reflect the occurrence of such event on the basis of the portion of such Tax Year that shall have elapsed prior to the date of such expiration or termination in the case of the Expiration Date or other termination. 4.(d) In no event shall the fixed annual rent be reduced by operation of this Article 4. Except as provided in Section 4(e) hereof, the rights and obligations of Landlord and Tenant under the provisions of this Article 4 with respect to any additional rent shall survive the expiration or other termination of this Lease. 4.(e) Landlord's failure to render an Escalation Statement with respect to any Tax Year shall not prejudice Landlord's right thereafter to render an Escalation Statement with respect thereto or with respect to any subsequent Tax Year so long as the Escalation Statement is rendered within one (1) year of the preceding Tax Year. For example, Landlord may render an Escalation Statement for the 1998/1999 Tax Year through and including June 30, 2000. Subject to the previous sentence, payments shall be made pursuant to this Article 4 notwithstanding the fact that an Escalation Statement is furnished to Tenant after the expiration of the Term. 4.(f) Landlord shall deliver to Tenant within a reasonable time upon its receipt, a statement containing a copy of the City's tax bill for the applicable Tax Year ("Statement") which shall be conclusive and binding upon Tenant unless within 60 days after receipt of such Statement, Tenant shall notify Landlord in writing that it disputes the correctness of Tenant's Tax Payment for such Tax Year, specifying the particular respects in which such Statement is claimed to be incorrect. Pending the determination of such dispute, Tenant shall pay additional rent in accordance with the relevant Escalation Statement, without prejudice to Tenant's position. ARTICLES 5. USE 5.(a) The Premises may only be used by Tenant for the Permitted Use and for no other purpose whatsoever. -12- 16 5.(b) Tenant shall not use or permit the use of the Premises or any part thereof in any way that would violate any of the covenants, agreements, terms, provisions and conditions of this Lease or for any unlawful purposes or in any unlawful manner. Tenant shall not suffer or permit the Premises or any part thereof to be used in any manner or anything to be done therein or anything to be brought into or kept therein that shall in any way impair or interfere with (a) the character, reputation or appearance of the Building as a high quality office building, (b) any of the Building services, (c) the proper and economic heating, cleaning, air-conditioning, ventilating or other servicing of the Building or the Premises, or (d) the use of any of the other areas of the Building by, or occasional discomfort, inconvenience or annoyance to any of the other tenants or occupants of the Building. Tenant shall not install any electrical or other equipment of any kind that causes any such impairment, interference, discomfort, inconvenience or annoyance. 5.(c) If any governmental license or permit (other than a Certificate of Occupancy for the Building or any other license or permit required of all tenants occupying space for executive and general office use in the Borough of Manhattan) shall be required for the proper and lawful conduct of Tenant's business in the Premises or any part thereof or for Tenant's occupancy of the Premises, Tenant at its expense shall procure, maintain and comply with the terms and conditions of such license or permit and, promptly after request, submit the same to Landlord for inspection. 5.(d) Tenant acknowledges and agrees that the value of the Premises and the reputation of the Landlord will be seriously injured if the Premises are used for any obscene or pornographic purposes or any sort of commercial sex establishment. Tenant agrees that it will not bring or permit any obscene or pornographic material on the Premises, however, Tenant may receive obscene software for its review only and shall not permit or conduct any pornographic, nude, or semi-nude live performances on the Premises, nor permit use of the Premises for nude modeling, rap sessions, or as a so-called rubber goods shop, or as a sex club of any sort, or as a "massage parlor." Tenant agrees further that it will not permit any of these uses by any sublessee of the Premises or assignee of this Lease. This Section 5(d) shall directly bind any successors in interest to Tenant. Tenant agrees that if at any time it violates any of the provisions of this Section 5(d), such violation shall be deemed a breach of a substantial obligation of the terms of this Lease and objectionable conduct. Pornographic material is defined for purposes of this Section 5(d) as any written or pictorial matter with prurient appeal or any objects or instrument that are primarily concerned with lewd or prurient sexual activity. For the purposes of this Section 5.(d) the term "obscene material" shall have the meaning as set forth in New York State Penal Law Section 235.00. -13- 17 ARTICLE 6. ALTERATIONS AND INSTALLATIONS 6.(a) Tenant shall make no Alterations in or to the Premises without Landlord's prior written consent (including, without limitation, any work in connection with the Tenant's initial occupancy of the Premises) which approval shall not be unreasonably withheld, conditioned or delayed. Every Alteration shall be done at Tenant's sole cost and expense and in the case of Tenant's Initial Work, shall be performed in accordance with the Work Letter annexed hereto as Exhibit A and incorporated herein. Tenant shall notify Landlord in writing of every addition, construction, improvement, installation or modification of or to the Premises which requires filings with any state or municipal agency, including, but not limited to the New York City Department of Buildings and Landlord shall cooperate in processing and signing Tenant's filings to perform such alterations. 6.(b) Every Alteration in or to the Premises shall be performed in accordance with and shall conform to the Contractor Rules and Regulations incorporated herein in Schedule 5 and the provisions of this Lease and shall be effected solely in accordance with plans and specifications first approved in writing by Landlord. Such plans and specifications shall be prepared at Tenant's sole cost and expense by a professional registered architect and shall be complete, finished detailed architectural drawings and specifications for the Alteration. Landlord will not unreasonably withhold, condition or delay its consent to any Alterations, the plans therefor or the contractors who are to perform same. 6.(c) With respect to every Alteration: (i) All work shall be done in a good and worker like manner and shall not interfere with the operation of the Building or impose any additional expense upon Landlord in the construction, maintenance, repair or operation of the Building. (ii) Tenant will inform Landlord in writing of the names of any contractor or subcontractor Tenant proposes to use in the Premises at least ten days prior to the beginning of work by such contractor or subcontractor. Any contractor employed by Tenant (and all subcontractors) shall agree to employ only such labor as will not result in jurisdictional disputes or strikes or cause disharmony with other workers employed at the Building. Upon the happening of any such dispute, strike or disharmony, Tenant shall immediately upon notice from Landlord discontinue the labor giving rise thereto. In the event Tenant fails to do so, Landlord, in addition to any rights available to it under this Lease and pursuant to law, shall have the right to seek an injunction with or without notice. -14- 18 (iii) Except with respect to Tenant's Initial Work, Tenant shall pay its contractors or subcontractors, in a timely fashion and perform the work shown on Tenant's approved plans and specifications subject to reasonable retainage. Within a reasonable time, not to exceed 30 days, after completion of the Alteration, Tenant shall furnish Landlord with reasonable evidence that payment has been made for the Alteration together with a waiver of lien by Tenant's contractor in the amount of such payment. (iv) Tenant shall cause the Alteration to be made in compliance with Legal Requirements. Tenant shall furnish to Landlord copies of all governmental permits and authorizations that may be required in connection with any Alteration. All such governmental permits and authorizations shall be obtained by Tenant at its sole cost and expense and Tenant shall pay the cost of filing Tenant's plans and specifications with the appropriate governmental authorities. (v) Tenant shall perform any Alterations so that they: (i) are of good quality; (ii) are free and clear of Liens; (iii) substantially conform to the plans and specifications as approved by Landlord; and (iv) be fit for the intended use and purpose. In the event that the Alterations do not comply with provisions (i) through (iv) of this subparagraph, Tenant shall commence to cure such nonconforming work within five (5) days after written notice from Landlord. (vi) Tenant shall keep the Building and the Premises free and clear of all Liens for any work or material claimed to have been furnished to Tenant or to the Premises on Tenant's behalf, and all work to be performed by Tenant shall be done in a manner that will not unreasonably interfere with or disturb other tenants or occupants of the Building. (vii) During the progress of the work to be done by Tenant, said work shall be subject to reasonable inspection by representatives of Landlord who shall be permitted access and the opportunity to inspect, at all reasonable times on reasonable notice, but this provision shall not in any way whatsoever create any obligation on Landlord to conduct any such inspection. (viii) Except with respect to Tenant's Initial Work as defined in the Work Letter annexed hereto and incorporated herein, with respect to any Alteration costing more than $100,000.00, Tenant agrees to pay Landlord, as additional rent, within ten days of demand, an amount equal to Landlord's out of pocket expenses in connection with the Alteration (not to exceed $1,000.00) in question for the review of Tenant's plans and specifications. (ix) Prior to commencement of any Alteration, Tenant's Initial Work, or any subsequent structural work, Tenant shall furnish to Landlord original certificates -15- 19 of insurance naming Landlord and its designated managers and agents as additional insureds as their respective interests may appear and evidencing the existence of: o Workers' compensation insurance covering all persons employed for such work; and o Commercial general liability (including contractual liability) and property damage insurance, with coverage of at least $5,000,000 per occurrence for bodily or personal injury (including death) and $1,000,000 in respect of property damage. Such insurance shall be maintained at all times during the performance of the work and shall not be cancelable except on 30 days' prior written notice to Landlord. (x) Upon completion of each Alteration, Tenant shall remove, at its sole cost and expense, all debris from the Premises and clean the same. (xi) Upon completion of each Alteration for which plans are prepared, Tenant shall deliver "marked" or "as-built" plans for such Alteration to Landlord at Tenant's sole cost and expense. 6.(d) Landlord shall not be responsible for any labor or materials furnished to Tenant, or for delays of any kind experienced by Tenant's contractors unless such delay is caused by Landlord. No Lien for any labor, materials, or other services or things furnished to Tenant shall attach to or affect Landlord's estate or interest in the Premises, the Land and/or the Building. Tenant agrees to discharge, at Tenant's expense (whether by payment, bonding, or otherwise) every Lien filed against the Premises, the Land and/or the Building for work claimed to have been done for or materials claimed to have been furnished to Tenant, within 30 days after receiving notice of the same. Tenant shall require that all contractors and subcontractors engaged in connection with Tenant's Alterations indemnify and hold Landlord harmless against any and all claims for injury to persons or damage to property by reason of such contractor's or subcontractor's use of the Premises or performance of the work, including any claims, fines and penalties imposed due to a failure to comply with Laws. 6.(e) Notice is hereby given that Landlord shall not be liable for any labor or materials furnished or to be furnished to Tenant upon credit, and that no mechanic's or other Lien for any such labor or materials shall attach to or affect the reversion or other estate or interest of Landlord in and to the Premises. 6.(f) All Alterations, additions, paneling, partitions, doors, railings and like installations installed in the Premises at any time, either by Tenant or by Landlord or others on Tenant's behalf and whether installed or purchased at Landlord's or -16- 20 Tenant's expense (collectively, the "Leasehold Improvements") shall become the property of Landlord upon the expiration or earlier termination of this Lease. The Leasehold Improvements shall remain upon, and shall be surrendered with, the Premises. 6.(g) If any alterations, installations, additions, improvements or other property that Tenant shall be obligated to remove are not removed on or prior to the expiration of the Term, Landlord shall have the right to remove such property and to dispose of the same without accountability to Tenant and at the sole cost and expense of Tenant. In case of any damage to the Premises or the Building resulting from the removal of the property by Tenant, Tenant shall repair such damage or, in default thereof, shall reimburse Landlord for Landlord's actual out of pocket cost in repairing such damage. Tenant's obligations under this Section 6.(g) shall survive the expiration or other termination of this Lease. 6.(h) Tenant shall keep records of Tenant's Alterations, installations, additions and improvements costing in excess of $5,000.00, and of the component (category) cost thereof. Tenant shall, within 45 days after demand by Landlord, furnish to Landlord copies of such records and cost if Landlord shall require same in connection with any proceeding to reduce the assessed valuation of the Building, or in connection with any proceeding instituted pursuant to Article 14 hereof. ARTICLE 7. REPAIRS 7.(a) (i) Tenant shall, at its sole cost and expense, take good care of the Premises and the fixtures and appurtenances therein (including, without limitation, bathroom and plumbing fixtures and appurtenances) and make all repairs thereto as and when needed to preserve them in good working order and condition and maintain the Premises in a condition consistent with offices in comparable office buildings. Landlord, at its sole cost and expense, shall promptly replace all broken glass of the exterior windows in the Premises. Tenant shall be responsible for all repairs, maintenance and replacement of wall and floor coverings in the Premises and for the repair and maintenance of all sanitary and electrical fixtures (excluding the Class E System) and equipment therein. Subject to the provisions of Sections 9(h)(i) and 9(h)(iii) hereof, all damage or injury to the Premises and to its fixtures, appurtenances and equipment or to the Building or to its fixtures, appurtenances and equipment caused by or which arises out of (i) Tenant moving property in or out of the Building, or (ii) the installation or removal of furniture, fixtures or other property by Tenant, or (iii) the performance by Tenant or existence of any Alterations or repairs in the Premises or (iv) the installation, use or operation of Tenant's property in the Premises or (v) negligence, wilful or improper conduct on the part of Tenant, its servants, -17- 21 employees, agents, visitors, or licensees, shall be repaired, restored or replaced promptly at Tenant's sole cost and expense to the reasonable satisfaction of Landlord. However, if by reason of (1) strike, (2) labor troubles, (3) governmental preemption in connection with a national emergency, (4) any rule, order or regulation of any governmental agency, or (5) conditions of supply or demand which are affected by war or other national, state or municipal emergency (each, a "Force Majeure Event"), Tenant shall not be able to fulfill its obligations under this Lease, this Lease and Tenant's obligation to pay fixed annual rent and additional rent hereunder, shall not otherwise be affected, impaired or excused, but Tenant shall not be deemed in default in the performance of any obligations under this Lease, provided, that as soon as Tenant shall learn of the happening of any Force Majeure Event, Tenant shall promptly notify Landlord of same, and, if ascertainable, its estimated duration, and Tenant will proceed promptly and diligently with the fulfillment of its obligations as soon as reasonably possible. Any repairs required to be made by Tenant to the mechanical, electrical, plumbing, sanitary, heating, ventilating, Building's air-conditioning, fire safety or other systems of the Building shall be performed only by contractor(s) who are reasonably acceptable and approved by Landlord. All repairs, restorations and replacements made by Tenant shall be in quality and class equal to the original work or installations currently in the Building. If Tenant fails to make such repairs, restoration or replacements within thirty (30) days after notice and demand, subject to any necessary extension as a result of a Force Majeure Event, same may be made by Landlord at the expense of Tenant and such expense shall be collectible as additional rent and shall be paid by Tenant within ten (10) days after rendition of a bill therefor. (ii) Except as otherwise provided for herein, the exterior walls of the Building, elevators and elevator shafts, and other Building shafts, and conduits which extend to any floor above or below the Premises, and the portions of any window sills outside the windows, and the windows are not part of the Premises and Landlord reserves all rights to such parts of the Building. 7.(b) Tenant shall not place a load upon any floor of the Premises exceeding the floor load per square foot area that such floor was designed to carry and that is allowed by law. If Tenant shall desire a floor load in excess of that which such floor was designed to carry and which is allowed by law, Tenant shall submit plans and specifications for such floor load to Landlord for Landlord's review and approval which shall not be unreasonably withheld, conditioned or delayed. In determining whether to grant its consent Landlord shall consider whether the work necessary to increase such floor load (i) adversely affects the structure of the Building, (ii) interferes with the amount or availability of any space adjoining alongside, above or below the Premises, (iii) will interfere with the occupancy of other tenants in the Building and (iv) may be accomplished without disturbing the load bearing columns, walls or configuration of the Building. -18- 22 7.(c) Business machines and mechanical equipment used by Tenant that cause vibration, noise, cold or heat that may be transmitted to the Building structure or to any leased space to such a degree as to be reasonably objectionable to Landlord or to any other tenant in the Building shall be placed and maintained by Tenant at its expense in settings of cork, rubber or spring type vibration eliminators sufficient to absorb and prevent such vibration or noise, or prevent transmission of such cold or heat. 7.(d) Except as otherwise specifically provided in this Lease, there shall be no allowance to Tenant for a diminution of rental value and no liability on the part of Landlord by reason of inconvenience, annoyance or injury to business arising from the making of any repairs, alterations, additions or improvements in or to any portion of the Building or the Premises or in or to fixtures, appurtenances or equipment thereof. Landlord shall exercise reasonable diligence so as to minimize any interference with Tenant's business operations, but shall not be required to perform the same on an overtime or premium pay basis unless the inconvenience or annoyance to Tenant's business materially interferes with Tenant's business operations. 7.(e) Tenant will not clean, nor require, permit, suffer or allow any window in the Premises to be cleaned from the outside in violation of Section 202 of the Labor Law or any other applicable Legal Requirement. 7.(f) Landlord shall maintain and repair the exterior and structural portions of the Building including the structural portions of the Premises and shall maintain and repair the public portions of the Building's interior and the Building's plumbing, fire safety, electrical, heating and ventilating systems serving the Premises. ARTICLE 8. REQUIREMENTS OF LAW 8.(a) If Tenant receives any notice of any violation of any Legal Requirement, Tenant shall give prompt written notice thereof to Landlord. Tenant shall comply with all Legal Requirements which shall impose any violation, order or duty upon Landlord or Tenant with respect to the Premises (including, without limitation, the performance of any alterations under the Americans with Disabilities Act of 1990) or the use or occupation thereof (in which event Tenant shall effect such compliance at its sole cost and expense) provided, however, that the need for compliance with any such Legal Requirement directly arises out of Tenant's particular manner of use of the Premises and is not a Legal Requirement of general application. Landlord shall be responsible, at its own cost and expense, for compliance with all other Legal Requirements. If, as a result of any act by Tenant in violation of this Lease, any Legal Requirement is violated, Tenant, at its sole cost and expense, shall cause any such violation to be promptly cured. The foregoing shall include any structural alterations necessary to -19- 23 effect such a cure provided the act or omission by Tenant in violation of this Lease is attributable to Tenant's use or occupancy of the Premises. 8.(b) (i) Without limiting the generality of Section 8.(a), if any Legal Requirement shall require (i) the inspection of Building systems or any Tenant improvement to ascertain the amount of chlorofluorocarbons ("CFCs"), including freon, that Tenant improvements are emitting or leaking into the atmosphere, (ii) additional maintenance of any Tenant improvements relating to the presence of CFCs, or (iii) any Tenant improvement to reduce or eliminate the emission or presence of CFCs, then Tenant shall pay upon written demand, Tenant's Proportionate Share of the cost of such compliance by Landlord or Tenant shall, at Tenant's sole cost and expense, promptly make such conversion, change, alteration, modification or replacement of Tenant's improvements as may be necessary or required in the Premises. (ii) Without limiting the generality of Section 8.(a), Tenant, at its sole cost and expense, shall comply with all Legal Requirements regarding the collection, sorting, separation and recycling of its waste products, garbage, refuse and trash. Tenant shall sort and separate such waste products, garbage, refuse and trash into such categories as is provided by any Legal Requirements. Each separately sorted category of waste products, garbage, refuse and trash shall be placed in separate receptacles reasonably supplied by and approved by Landlord. Such separate receptacles may, at Landlord's option, be removed from the Premises in accordance with a collection schedule prescribed by any Legal Requirements. Landlord reserves the right to refuse to collect or accept from Tenant any waste products, garbage, refuse or trash that is not separated and sorted as required by any Legal Requirement, and to require Tenant to arrange for such collection at Tenant's sole cost and expense, utilizing a contractor satisfactory to Landlord. In the event Landlord receives any monetary benefit from the disposal or recycling of Tenant's garbage, refuse and trash, Tenant shall receive a credit, after Landlord deducts its reasonable actual expenses, in the amount of Tenant's Proportionate Share of such amount, to its fixed annual rental payment in the month after Landlord receives such monetary benefit. 8.(c) Notwithstanding the provisions of Sections 8.(a) and 8.(b) hereof, Tenant, at its own cost and expense, in its name and/or (whenever necessary) Landlord's name, may contest, in any manner permitted by law (including appeals to a court or governmental department or authority having jurisdiction in the matter), the validity or the enforcement of any governmental act, regulation or directive with which Tenant is required to comply pursuant to this Lease, and may defer compliance therewith during the course of such contest, provided that (a) such non-compliance shall not subject Landlord to criminal prosecution or subject the Land and/or Building to Lien or sale, (b) such non-compliance shall not be in violation of any fee mortgage or of any ground or underlying lease or any mortgage thereon and (c) Tenant shall prosecute such contest promptly and diligently to its conclusion. -20- 24 8.(d) Landlord, without expense or liability to it, shall cooperate with Tenant and execute any documents or pleadings required for such purpose, provided that Landlord shall be reasonably satisfied that the facts set forth in any such documents or pleadings are accurate. ARTICLE 9. INSURANCE. LOSS. REIMBURSEMENT AND LIABILITY 9.(a) Tenant shall not do, permit or suffer to be done any act or thing upon the Premises that would invalidate or be in conflict with New York standard fire and property damage insurance policies covering the Building, and fixtures and property therein, or that would increase the rate of insurance applicable to the Building to an amount higher than it otherwise would be; and Tenant shall not do nor shall Tenant permit to be done any act or thing upon the Premises that shall or might subject Landlord to any liability or responsibility for injury to any person or persons or to property by reason of any business or operation being carried on within the Premises. 9.(b) If, as a result of any act or omission by Tenant or violation of this Lease, after applicable notice, grace and cure periods, the rate of any insurance applicable to the Building shall be increased to an amount higher than it otherwise would be, Tenant shall reimburse Landlord and provide copies of all insurance bills for all increases of Landlord's insurance premiums so caused provided that Landlord provides to Tenant copies of Landlord's insurance bills evidencing any such increase; such reimbursement to be additional rent payable upon the first day of the month following any outlay by Landlord for such increased insurance premiums. In any action or proceeding wherein Landlord and Tenant are parties, a schedule or "make-up" of rates for the Building or Premises issued by the body making insurance rates for the Premises, shall be presumptive evidence of the facts therein stated and of the several items and charges in the insurance rate then applicable to the Premises. 9.(c) Landlord or its agents shall not be liable for any injury or damage to persons or property (including, but not limited to, loss of profits and injury to business) resulting from fire, explosion, falling plaster, steam, gas, electricity, water, rain or snow or leaks from any part of the Building, or from the pipes, appliances or plumbing works or from the roof, street or subsurface or from any other place or by dampness or by any other cause of any nature, unless any of the foregoing shall be caused by or due to the negligence or willful misconduct of Landlord, its agents, servants, contractors or employees. 9.(d) Landlord shall not be liable for any damage which Tenant may sustain, if at any time any window of the Premises is broken, due to Tenant's arbitrary or negligent acts nor shall Landlord be liable for any damage which Tenant may sustain, -21- 25 if at any time any window of the Premises is broken, or temporarily darkened unless same is due to Landlord's arbitrary or negligent acts. For purposes hereof, "temporarily" shall mean five (5) days or less. 9.(e) Subject to the provisions of Section 8.(c) hereof, where applicable, Tenant shall have the right, at Tenant's own cost and expense, to participate in the defense of any action or proceeding brought against Landlord, and in negotiations for settlement thereof if, pursuant to this Section 9.(e), Tenant could have any liability in connection therewith. 9.(f) Tenant shall give Landlord notice in case of fire, discovery of asbestos or accidents in the Premises promptly after Tenant becomes aware of such event. 9.(g) Landlord's officers, directors and members (and, in case Landlord shall be a joint venture, partnership, tenancy-in-common, association or other form of joint ownership, the members of any such joint venture, partnership, tenancy-in-common, association or other form of joint ownership) shall have absolutely no personal liability with respect to any provision of this Lease or any obligation or liability arising therefrom. Tenant shall look solely to Landlord's estate and interest in the Land and Building, and the lease of the Building or of the Land and Building, the Premises and insurance proceeds for the satisfaction of any right or remedy of Tenant for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord. No other property or assets of Landlord or any agent, officer, director or member shall be subject to levy, execution, attachment, or other enforcement procedure for the satisfaction of Tenant's remedies under or with respect to this Lease, the relationship of Landlord and Tenant hereunder, or Tenant's use and occupancy of the Premises, or any other liability of Landlord to Tenant. However, nothing contained in this Section shall be construed to permit Tenant to offset against rents due a successor landlord a judgment (or other judicial process) requiring the payment of money by reason of any default of a prior landlord. Notwithstanding anything herein to the contrary, Tenant's officers, shareholders, directors and members shall have no personal liability with respect to any provisions of this Lease. 9.(h) (i) Landlord shall obtain all-risk insurance for the Building in amount equal to the replacement cost thereof, including the replacement cost of Tenant's leasehold improvements but, excluding Tenant's furniture, furnishings and other removable personal property and fixtures. Such policies shall include appropriate clauses pursuant to which the insurance companies (i) waive all right of subrogation against Tenant with respect to losses payable under such policies and (ii) agree that such policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policies. -22- 26 (ii) Tenant shall obtain all-risk insurance in an amount equal to the full replacement cost of Tenant's furniture, furnishings and other removable personal property and all fixtures to the extent that the same has been paid for by Landlord's Contribution (as defined in the Work Letter). Tenant shall include in any property insurance policy or policies appropriate clauses pursuant to which the insurance company or companies (i) waive the right of subrogation against Landlord and/or any tenant of space in the Building with respect to losses payable under such policy or policies and/or (ii) agree that such policy or policies shall not be invalidated should the insured waive in writing prior to a loss any or all right of recovery against any party for losses covered by such policy or policies. (iii) Provided that Landlord's right of full recovery under its policy or policies aforesaid is not adversely affected or prejudiced thereby, Landlord hereby waives any and all right of recovery that it might otherwise have against Tenant, its servants, agents and employees, for loss or damage occurring to the Building and the fixtures, appurtenances and equipment therein, to the extent of the net proceeds of insurance actually received by Landlord as a result of such loss or damage, notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, agents or employees. Provided that Tenant's right of full recovery under its aforesaid policy or policies is not adversely affected or prejudiced thereby, Tenant hereby waives any and all right of recovery which it might otherwise have against Landlord, its servants, and employees, and against every other tenant in the Building who shall have executed a similar waiver as set forth in this Section 9.(h)(iii) for loss or damage to, Tenant's furniture, furnishings, fixtures and other property removable by Tenant under the provisions hereof to the extent of the net proceeds of insurance actually received by Tenant as a result of such loss or damage, notwithstanding that such loss or damage may result from the negligence or fault of Landlord, its servants, agents or employees, or such other tenant and the servants, agents or employees thereof. (iv) In the event that Tenant does not obtain the all-risk property insurance provided for in Section 9(h)(ii) above, Tenant waives any and all claims against Landlord for loss or damage to all such furniture, furnishings and other removable personal property and fixtures. Notwithstanding that such loss or damage may result from the negligence or fault of Tenant, its servants, agents or employees, Tenant agrees to indemnify and hold Landlord harmless against any and all claims for loss or damage to Tenant's furniture, furnishings and other removable personal property and fixtures. 9.(i) (i) Tenant shall provide on or before the Commencement Date and shall keep in force during the Term hereof for the benefit of Landlord and Tenant a commercial general liability insurance policy (including contractual liability) arising out of the use of the Premises or any appurtenances thereto or occasioned by any occurrence on or about the Premises or any appurtenances thereto. Such policy shall -23- 27 be not less than the amount of $5,000,000 per occurrence for bodily or personal injury (including death) and in the amount of $1,000,000 in respect of property damage. (ii) All insurance required by this Lease shall be evidenced by valid and enforceable policies issued by companies (i) licensed to do business in the State of New York and (ii) having a financial size category of not less than VII and with general policy holders rating of not less than "B+" as rated by "Best's" insurance reports. All liability insurance policies maintained by Tenant shall name Landlord and its designated managers and agents as additional insureds. The insurance required by this Article may be carried under a blanket policy covering the Premises and other locations of Tenant, if any. Prior to the time such insurance is first required to be carried by Tenant and thereafter, at least 15 days prior to the effective date of any such policy, Tenant shall deliver to Landlord either a duplicate original of the aforesaid policies or a certificate(s) evidencing such insurance. Said certificate(s) shall contain an endorsement that such insurance may not be canceled except upon 30 days' written notice to Landlord. ARTICLE 10. DAMAGE BY FIRE OR OTHER CAUSE 10.(a) If the Premises or any part thereof shall be damaged by fire or other casualty Tenant shall give immediate notice thereof to Landlord and this Lease shall continue in full force and effect except as hereinafter set forth. 10.(b) (i) If the Premises are partially damaged or rendered partially untenantable by fire or other casualty, the damage thereto shall be repaired, including restoration of the leasehold improvements by and at the expense of Landlord and the fixed annual rent and the additional rent payable under Articles 1 and 4 shall be paid for the portion of the Premises affected to the time of the casualty and Tenant shall resume such payment in accordance with the provisions of Article 10(b)(iv). (ii) If the Premises are totally or substantially damaged or are rendered wholly or substantially untenantable by fire or other casualty, the damage thereto shall be repaired, including restoration of the leasehold improvements by and at the expense of Landlord and the fixed annual rent and the additional rent payable under Articles 1 and 4 shall be paid to the time of the casualty and Tenant shall resume such payment in accordance with the provisions of Article 10(b)(iv). (iii) If the Building shall be so damaged that Landlord shall decide to demolish it or if at least 50% of the floor area of the Premises is damaged or -24- 28 destroyed during the last eighteen (18) months of the Initial Term, or, if the Term is extended by Tenant, then, during the last eighteen (18) months of Option 1 or Option 2, as the case may be, then, in any such events, Landlord may elect to terminate this Lease by written notice to Tenant. Such notice shall be given by Landlord within sixty (60) days after such fire or casualty specifying a date for the expiration of the Lease, which date shall not be more than thirty (30) days after the giving of such notice, and upon the expiration date specified in such notice the Term shall expire as fully and completely as if such date were the date set forth above for the termination of this Lease and Tenant shall forthwith quit, surrender and vacate the Premises without prejudice, however, to Landlord's rights and remedies against Tenant under the Lease provisions in effect prior to such termination. Any rent owing shall be paid up to such date (subject to abatement as provided in subparagraphs 10.(b)(i) and (ii) above) and any payments of rent made by Tenant that were on account of any period subsequent to such date shall be promptly returned to Tenant. Landlord shall make the required repairs and restoration, in accordance with subparagraphs 10.(b)(i) and 10.(b)(ii) with all reasonable expedition during Business Days and Business Hours, subject to delays due to adjustment of insurance claims, labor troubles and causes beyond Landlord's control. Notwithstanding anything to the contrary set forth herein, if at least thirty-three percent (33%) of the floor area of the Premises is damaged and: (a) in the opinion of an independent architect selected by Landlord (which Landlord shall select within fourteen (14) days of any such casualty), and reasonably acceptable to Tenant, the Premises cannot be substantially restored within twelve (12) months after the date of such casualty, Tenant may, within fifteen (15) days following such determination, terminate this Lease, by notice to Landlord and if Tenant timely exercises such option, this Lease shall ipso facto terminate and come to an end as of the date that is thirty (30) days after such event as fully and completely as if such date were the date set forth herein for the expiration of this Lease and Tenant shall forthwith quit, surrender and vacate the Premises, without prejudice however, to Landlord's rights and remedies against Tenant under the provisions in effect prior to such termination; or (b) if restoration of the Premises is not substantially completed within twelve (12) months from the date of any such casualty, Tenant may terminate this Lease, by first providing Landlord with a thirty (30) day written notice to cure, and if such situation shall continue and shall not be remedied by Landlord within thirty (30) days, then Tenant may give to Landlord a notice of intention to end the Term at the expiration of fifteen (15) days from the date of the service of such notice of intention and upon the expiration of said fifteen (15) days this Lease and the Term and estate hereby granted, shall terminate with the same effect as if that day were the end of the Term. If less than 33% of the floor area of the Premises is damaged and if Landlord does not substantially restore the Premises within twelve (12) months of such casualty, Tenant may at its option, restore the Premises, at its own cost and expense, and receive an abatement of the installments of fixed annual rent in an amount equal to the actual cost of the repairs together with interest at the Interest Rate until such time as Landlord reimburses Tenant for such costs. -25- 29 (iv) After any such casualty, Tenant shall cooperate with Landlord's restoration of the Premises by removing from the Premises as promptly as reasonably possible, all of Tenant's salvageable inventory and movable equipment, furniture and other property. Tenant's liability for rent shall resume sixty (60) days after written notice from Landlord that the Premises is substantially ready for Tenant's occupancy, and in fact, the Premises is substantially ready for Tenant's occupancy. 10.(c) No damages, compensation or claim shall be payable by Landlord for inconvenience, loss of business or annoyance arising from any repair or restoration of any portion of the Premises or of the Building pursuant to this Article 10. 10.(d) Landlord will not carry separate insurance of any kind on Tenant's property, furniture, furnishings and other removable personal property and fixtures alterations, installations or additions (excluding Tenant's leasehold improvements) made to the Premises, and, except as provided by law or by reason of its breach of any of its obligations hereunder, shall not be obligated to repair any damage thereto or replace the same. 10.(e) The provisions of this Article 10 shall be considered an express agreement governing any cause of damage or destruction of the Premises by fire or other casualty, and Section 227-a the Real Property Law of the State of New York, providing for such a contingency in the absence of an express agreement, and any other law of like import, now or hereafter in force, shall have no application in such case. ARTICLE 11. ASSIGNMENT. MORTGAGING. SUBLETTING. ETC. 11.(a) Except as otherwise provided for herein, Tenant shall not by operation of law or otherwise (a) assign or otherwise transfer this Lease or the Term and estate hereby granted, (b) sublet the Premises or any part thereof or allow the same to be used or occupied by others, (c) mortgage, pledge or encumber this Lease or the Premises or any part thereof in any manner by reason of any act or omission on the part of Tenant or (d) advertise, or authorize a broker to advertise, for a subtenant or assignee, the price for any portion of the Premises. For purposes of this Article 11, (i) the transfer of a majority of the issued and outstanding capital stock of any corporate tenant, or of a corporate subtenant, or the transfer of a majority of the total interest in any partnership tenant or subtenant, or the transfer of control in any limited partnership tenant or subtenant, however accomplished, whether in a single transaction or in a series of related or unrelated transactions, shall be deemed an assignment of this Lease, or of such sublease, as the case may be, (ii) an agreement by any other person or entity, directly or indirectly, to assume Tenant's obligations under this Lease shall be deemed an assignment, (iii) any person or legal -26- 30 representative of Tenant, to whom Tenant's interest under this Lease passes by operation of law, or otherwise, shall be bound by the provisions of this Article 11, and (iv) a modification, amendment or extension of a sublease shall be deemed a sublease. 11. (b) Notwithstanding anything to the contrary contained herein, any transaction: (i) with a corporation into, or with which, Tenant is merged or consolidated; or (ii) with an entity to which all, or substantially all, of Tenant's assets are transferred; or (iii) with an entity that controls, or is controlled by Tenant or is under common control with Tenant; or (vi) involving the sale or transfer of the stock of Tenant over a nationally recognized public stock exchange; shall not be deemed to be an assignment for purposes of this Lease and shall not require Landlord's prior consent, except that with respect to any transaction pursuant to which Tenant is merged or consolidated with another entity, the same shall not require Landlord's consent provided that: (i) if such merger or consolidation occurs during the first five (5) years of the Term the entity resulting from such merger or consolidation shall have a net worth of at least One Hundred Million Dollars ($100,000,000.00); and (ii) if such merger or consolidation occurs after the first five (5) years of the Term, the entity resulting from such merger or consolidation shall have a net worth of at least Forty Million Dollars ($40,000,000.00). In the event that the net worth of Tenant following any such merger or consolidation occurring during the first five (5) years of the Term is less than One Hundred Million Dollars ($100,000,000.00), Landlord's prior consent shall not be required for any such merger or consolidation provided that Tenant delivers to Landlord a letter of credit, in the amount of One Million Three Hundred Thirty Three Thousand Dollars, to be held by Landlord as additional security in accordance with the provision of Article 35 hereof. Such letter of credit may be reduced by Tenant to Six Hundred Sixty Seven Thousand Dollars following the fifth anniversary of the Commencement Date. In the event that the net worth of Tenant following any merger or consolidation occurring after the first five (5) years of the Term is less than Forty Million Dollars ($40,000,000.00), Landlord's prior consent for such merger or consolidation shall not be required, provided that Tenant delivers to Landlord a letter of credit, in the amount of Six Hundred Sixty Seven Thousand Dollars to be held by Landlord as additional security in accordance with the provisions of Articles 35 hereof. Nothing in this Section 11(b) shall permit Tenant or any successor to use or occupy the Premises for any purpose other than the purposes stated in Article 5 hereof. 11.(c) Any assignment or transfer, whether made with Landlord's consent as required by Section 11(a) or without Landlord's consent pursuant to this Article shall be made only if, and shall not be effective until, the assignee shall execute, acknowledge and deliver to Landlord a recordable agreement, in the form annexed hereto as Exhibit B. Tenant covenants that, notwithstanding any assignment or transfer, whether or not in violation of the provisions of this Lease, and notwithstanding the acceptance of rent by Landlord from an assignee or transferee or any other party, Tenant shall remain fully and primarily liable for the payment of the -27- 31 rent due and to become due under this Lease and for the performance of all of the covenants, agreements, terms, provisions and conditions of this Lease on the part of Tenant to be performed or observed. 11.(d) The liability of Tenant, and the due performance by Tenant of the obligations on its part to be performed under this Lease, shall not be discharged, released or impaired in any respect by an agreement or stipulation made by Landlord or any grantee or assignee of Landlord, by way of mortgage, or otherwise, extending the time of, or modifying any of the obligations contained in this Lease, or by any waiver or failure of Landlord to enforce any of the obligations on Tenant's part to be performed under this Lease, and Tenant shall continue to be liable hereunder. If any such agreement or modification operates to increase the obligations of a tenant under this Lease, the liability under this Section 11.(d) of Tenant named in this Lease or any of its successors in interest (unless such party shall have expressly consented in writing to such agreement or modification) shall continue to be no greater than if such agreement or modification had not been made. 11.(e) Landlord shall not withhold or delay its consent unreasonably to an assignment of this Lease or a subletting of the whole or a part of the Premises so long as: (i) Tenant shall furnish Landlord with the name and business address of the proposed subtenant or assignee, information with respect to the nature and character of the proposed subtenant's or assignee's business, or activities and such references and current financial information with respect to net worth, credit and financial responsibility as are reasonably requested by Landlord; (ii) the proposed subtenant or assignee is a reputable party whose financial net worth, credit and financial responsibility is, considering the responsibilities involved, reasonably satisfactory to Landlord, and with respect to any proposed assignment, such assignment complies with those requirements set forth paragraph 11.(c); (iii) the nature and character of the proposed subtenant or assignee, its business or activities and intended use of the Premises is, in Landlord's reasonable judgment, in keeping with the standards of the Building and the floor or floors on which the Premises are located; (iv) in the event that there is comparable space available to be leased in the Building, the proposed subtenant or assignee is not then an occupant of any part of the Building or a party who dealt with Landlord or Landlord's agent (directly or through a broker) with respect to space in the Building during the six months immediately preceding Tenant's request for Landlord's consent; -28- 32 (v) all costs incurred with respect to providing reasonably appropriate means of ingress and egress from the sublet space or to separate the sublet space from the remainder of the Premises shall, subject to the provisions of Article 6 with respect to alterations, installations, additions or improvements, be borne by Tenant; (vi) each sublease shall state specifically that (i) it is subject to all of the terms, covenants, agreements, provisions and conditions of this Lease, (ii) the subtenant or assignee, as the case may be, will not have the right to a further assignment thereof or sublease or assignment thereunder, or to allow the Premises to be used by others, except in accordance with the terms of this Article, (iii) a consent by Landlord thereto shall not be deemed or construed to modify, amend or affect the terms and provisions of this Lease, or Tenant's obligations hereunder, which shall continue to apply to the premises involved, and the occupants thereof, as if the sublease or assignment had not been made, (iv) if Tenant defaults in the payment of any rent, beyond any applicable notice and grace period, Landlord is authorized to collect any rents due or accruing from any assignee, subtenant or other occupant of the Premises and to apply the net amounts collected to the fixed annual rent and additional rent reserved herein and (v) the receipt by Landlord of any amounts from an assignee or subtenant, or other occupant of any part of the Premises shall not be deemed or construed as releasing Tenant from Tenant's obligations hereunder or the acceptance of that party as a direct tenant; (vii) Tenant, shall have paid Landlord any reasonable costs incurred by Landlord to review the requested consent including, without limitation, any reasonable attorney's fees incurred by Landlord not to exceed $2,500.00; (viii) Tenant shall have complied with the provisions in Section 11(f) with respect to any sublease; (ix) the proposed subtenant or assignee is not (i) an employment or recruitment agency; (ii) a school, college, university or educational institution whether or not for profit; (iii) a government or any subdivision or agency thereof; (iv) engaged in the business of providing office space and facilities to sublessees or licensees; or (v) using the Premises for manufacturing or retail sales to the public; or (vi) a public stenographer or typist, barber shop, beauty shop, beauty parlor or shop, telephone or telegraph agency, telephone or secretarial service, messenger service, commercial document reproduction or offset printing service or public vending machine service; (x) in the case of a subletting of a portion of the Premises, the portion so sublet shall be regular in shape and suitable for normal renting purposes; and (xi) the nature of the occupancy of the proposed assignee or subtenant will not cause an excessive density of employees or traffic or make excessive demands on the Building's services or facilities. -29- 33 11.(f) All subleases for which Landlord's consent is required shall be in a form reasonably satisfactory to Landlord's counsel and approved in writing at least two weeks prior to the commencement date of the sublease term on all the terms contained in this Lease, except that said sublease shall provide as follows: (i) The sublease shall provide that in the case of a subletting of a portion of the Premises subtenant shall erect a demising wall as is necessary to separate the subleased premises from the remainder of the Premises and to provide access thereto; and (ii) Such sublease shall negate expressly any intention that any estate created by or under such sublease be merged with any other estate held by either of the parties thereto. 11.(g) If Landlord shall give its consent to any assignment of this Lease or to any sublease, Tenant, in consideration therefor, shall pay the following to Landlord, as additional rent: o in the case of an assignment, an amount equal to thirty percent (30%) of all sums and other consideration paid to Tenant by the assignee for or by reason of such assignment (including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture, furnishings or other personal property) less, in the case of a sale thereof, an amount equal to the then net unamortized or undepreciated cost thereof to Tenant determined on the basis of Tenant's federal income tax returns except that, with respect to Tenant's fixtures and leasehold improvements, depreciation shall be computed on a straight-line basis over the Term, without regard to any renewal options); and o in the case of a sublease, thirty percent (30%) of any rents, additional charges and other consideration payable under the sublease to Tenant by the subtenant in excess of the fixed annual rent and additional rent accruing during the term of the sublease in respect of the subleased space (at the rate per square foot payable by Tenant hereunder)(including, but not limited to, sums paid for the sale or rental of Tenant's fixtures, leasehold improvements, equipment, furniture or other personal property, less, in the case of the sale thereof, an amount equal to the then net unamortized or undepreciated cost thereof to Tenant determined on the basis of Tenant's federal income tax returns except that, with respect to Tenant's Fixtures and leasehold improvements, depreciation shall be computed on a straight line basis over the Term, without regard to any renewal options). The sums payable under this Section 11(g) shall be paid to Landlord as and when paid by the assignee or subtenant to Tenant. -30- 34 11.(h) Notwithstanding anything in this Lease to the contrary, Tenant shall be permitted to sublet, on no more than three occasions, up to Twenty-Thousand (20,000) square feet of the Premises, in aggregate, without first obtaining Landlord's prior written consent so long as Tenant provides Landlord with (at least two weeks prior to its commencement date) a copy of the sublease and erects a demising wall in accordance with Section 11.(f)(i). 11.(i) Tenant shall have the right, without obtaining Landlord's prior written consent, to sublet all, or any part, of the Premises, to any affiliate or related entity of Tenant for purposes hereof; "affiliate" or "related entity" shall mean any entity in which Tenant owns more than fifty (50%) of the interests or any entity which owns more than fifty percent (50%) of the interests in Tenant. 11.(j) Tenant shall have the right, without obtaining Landlord's prior written consent, to sublet all, or any part, of the Premises, to any affiliate or related entity of Tenant. For purposes hereof, "affiliated or related entity" shall mean any entity in which Tenant owns more than fifty (50%) of the interests or any entity which owns more than fifty (50%) percent of the interests in Tenant. 11.(k) Landlord shall have no liability for brokerage commissions incurred with respect to any assignment of this Lease or any subletting of all or any part of the Premises by or on behalf of Tenant. Tenant shall pay, and shall indemnify and hold Landlord harmless from and against, any and all cost, expense (including, without limitation, reasonable attorneys' fees, costs and disbursements) and liability in connection with any compensation, commissions or charges claimed by any broker or agent with respect to any such assignment or subletting. 11.(k) The listing of any name other than that of Tenant, whether on the doors of the Premises or the Building directory, or otherwise, shall not operate to vest any right or interest in this Lease or in the Premises in the person or entity therein named, nor shall it be deemed to be the consent of Landlord to any assignment or transfer of this Lease or to any sublease of the Premises or to the use or occupancy thereof by others. ARTICLE 12. ELECTRICITY 12.(a) For the purposes of this Article, the term "Electric Rate" shall mean the prevailing rate Service Classification SC-9 (or successor service classification rate), and not the time of day rate schedule (if any), including all surcharges, taxes, fuel costs and adjustments, taxes regularly passed on to consumers by the public utility, and other sums payable in respect thereof. 12.(b) (i) Landlord shall, upon request of Tenant, furnish and install all replacement lighting tubes, lamps, bulbs and ballasts required in the Premises, and Tenant shall pay to Landlord or its designated contractor upon demand the then established charges therefor of Landlord or its designated contractor, as the case may be. Landlord shall not be liable in any way to Tenant for any failure or defect in the supply or character of electric energy furnished to the Premises by reason of any requirement, act or omission of the public utility serving the Building or for any other reason not attributable to Landlord. Tenant shall pay for the cost of electricity consumed by any supplemental air-conditioning equipment only servicing the Premises irrespective of whether any such equipment is located in the Premises or in any other portion of the Building. The term "air-conditioning equipment" as used herein shall be -31- 35 deemed to include, without limitation, all components and auxiliary equipment used in connection with air-conditioning equipment servicing the Premises. 12.(c) Landlord will furnish 576 amps, 3 phase, 4 wire, 120/208 volts of electric energy per floor distributed amongst four panel locations per floor ( exclusive of the Building's heating, ventilating and air-conditioning system) to Tenant through presently existing electric facilities for Tenant's reasonable use of its lighting, and other electrical fixtures, appliances and equipment. 12.(d) Tenant's use of electric energy in the Premises shall not at any time, in the reasonable judgment of Landlord cause or result in any impairment or interference with Building systems, annoyance or inconvenience to other tenants or the overloading of the risers or feeders serving the Building. 12.(e) If any tax is imposed upon Landlord's receipts from the sale or resale of electrical energy service to Tenant by any Federal, state or municipal authority, Tenant covenants and agrees that, where permitted by law, Tenant's pro rata share of such taxes based on Tenant's actual electrical usage shall be passed on, and included in the bill of, and paid by, Tenant to Landlord. All sums due and payable to Landlord or its contractor, consultant or designee under this Article 12 shall be payable as additional rent. If all or part of the amounts payable by Tenant under this Article 12 for electrical energy becomes uncollectible or reduced or refundable by virtue of any law, order or regulation, the parties agree that, at Landlord's option, in lieu of electrical submetering or direct metering, and in consideration of Tenant's use of the Building's electrical distribution system and receipt of redistributed electricity and payment by Landlord of the consultant's fees and other distribution expenses, the fixed annual rent payable under this Lease shall be increased by an amount equal to the actual cost to Landlord of Tenant's usage, subject to Tenant's right to dispute such charge in accordance with Section 12(i) hereof. 12.(f) Landlord reserves the right to discontinue furnishing electrical energy to Tenant in the Premises at any time upon not less than 120 days' notice to Tenant. If Landlord exercises such right, this Lease shall continue in full force and effect and shall be unaffected thereby, except that from and after the effective date of such termination Landlord shall not be obligated to furnish electric energy to Tenant. If Landlord so discontinues furnishing electric energy to Tenant, Tenant shall arrange to obtain electric energy directly from the public utility company furnishing electric energy to the Building. Such electric energy may be furnished to Tenant by means of the then existing building system feeders, risers and wiring to the extent that the same are, in Landlord's reasonable judgment, available, suitable and safe for such purpose. All meters and additional panel boards, feeders, risers, wiring and other conductors and equipment whatsoever, which may be required to obtain electric energy directly from such public utility company whether currently available for Tenant's use or -32- 36 requiring Landlord's installation shall be furnished and installed by Landlord at Landlord's sole cost and expense. 12.(g) (i) Notwithstanding anything to the contrary contained in this Article, Tenant, at any time during the Term on not less than 30 days' prior written notice to Landlord, may purchase electricity directly from Consolidated Edison or any other supplier of electric energy. If Tenant shall elect to purchase electricity directly from Consolidated Edison or any other supplier of electric energy, then all meters and additional panel boards, feeders, risers, wiring and other conductors and equipment whatsoever, which may be required to obtain electric energy directly from such public utility company, shall be furnished and installed by Tenant at Tenant's sole cost and expense (but with Landlord's reasonable cooperation). (ii) If and so long as Landlord provides electricity to the Premises on a submetering basis: o Tenant covenants and agrees to purchase the same from Landlord or Landlord's designated agent at the Electric Rate plus an overhead charge ("Overhead Charge") equal to four percent (4%) (collectively "Electrical Charge") excluding the 4% Overhead Charge on any sales taxes, representing the Landlord's administrative costs. 12.(h) INTENTIONALLY OMITTED 12.(i) In the event Landlord or Tenant shall dispute any findings under this Article, either party may, within 1 year of receiving notice of such findings, dispute the findings by serving a notice in accordance with Article 31 hereof on the other party. The right to dispute such findings shall be deemed waived unless such a notice is served in accordance with this Lease within the 1 year period. In the case where a notice is timely served in accordance with Article 31 hereof the dispute shall be resolved by arbitration in accordance with Article 3 of this Lease. ARTICLE 13. ADJACENT EXCAVATION -- SHORING 13.(a) If an excavation or other substructure work shall be made upon land adjacent to the Building, or shall be authorized to be made, Tenant shall afford to the person causing or authorized to cause such excavation, license to enter upon the Premises for the purpose of doing such work as shall be necessary to preserve the wall of the Building of which the Premises form a part from injury or damage and to support the same by proper foundations. -33- 37 ARTICLE 14. CONDEMNATION 14.(a) In the event that the whole of the Premises lawfully shall be condemned or taken in any manner for any public or quasi-public use, this Lease and the Term and estate hereby granted shall cease and terminate as of the date of vesting of title, as if that were the Expiration Date, and the fixed annual rent and the additional rent payable pursuant to Articles 1 and 4 of this Lease shall be apportioned as of such date. 14.(b) In the event that only a part of the Premises shall be so condemned or taken, then, unless a greater part of the Premises is no longer useful, effective as of the date of vesting of title, the fixed annual rent and the additional rent payable pursuant to Articles 1 and 4 hereof shall be abated in an amount thereof apportioned according to the area of the Premises so condemned or taken. In the event that such condemnation or taking shall be of a substantial part of the Premises or materially affects Tenant's use of the Premises or of a substantial part of the means of access thereto, including use of the semi-exclusive entrance on 37th Street, Tenant, at Tenant's option, by delivery of notice in writing to Landlord within 30 days following the date on which Tenant shall have received notice of vesting of title, may terminate this Lease and the Term and estate hereby granted as of the date of vesting of title, if neither Landlord nor Tenant elects to terminate this Lease, as aforesaid, this Lease shall be and shall remain unaffected by such condemnation or taking, except that the fixed annual rent and the additional rent payable pursuant to Articles 1 and 4 shall be abated to the extent hereinbefore provided in this Article 14. In the event that only a part of the Premises shall be so condemned or taken and this Lease and the Term and estate hereby granted with respect to the remaining portion of the Premises are not terminated as hereinbefore provided, Landlord, with reasonable diligence and at its expense, will restore the remaining portion of the Premises as nearly as practicable to the same condition as it was in prior to such condemnation or taking. 14.(c) In the event of any condemnation or taking hereinbefore mentioned of all or a part of the Building, Landlord shall be entitled to receive the entire award in the condemnation proceeding, including any award made for the value of the estate vested by this Lease in Tenant, and Tenant hereby expressly assigns to Landlord any and all right, title and interest of Tenant now or hereafter arising in or to any such award or any part thereof, and Tenant shall be entitled to receive no part of such award. Tenant shall be entitled to make a separate claim for the value of its trade fixtures actually taken and for moving expenses. -34- 38 14.(d) If the temporary use or occupancy of all or any part of the Premises shall be taken by condemnation or in any other manner for any public or quasi-public use or purpose during the Term, Tenant shall be entitled, except as hereinafter set forth, to receive that portion of the award or payment for such taking which represents compensation for the use and occupancy of the Premises, for the taking of Tenant's property and for moving expenses, and Landlord shall be entitled to receive that portion which represents reimbursement for the cost of restoration of the Premises. This Lease shall be and remain unaffected by such taking and Tenant shall continue to be responsible for all of its obligations hereunder insofar as such obligations are not affected by such taking and shall continue to pay in full the fixed annual rent and additional rent due. If the period of temporary use or occupancy shall extend beyond the Expiration Date, that part of the award which represents compensation for the use and occupancy of the Premises (or a part thereof) shall be given to Tenant so that Tenant shall receive so much thereof as represents the period up to and including the Expiration Date. 14.(e) In the event of any taking of less than the whole of the Building that does not result in a termination of this Lease, or in the event of a taking for a temporary use or occupancy of all or any part of the Premises that does not result in a termination of this Lease, Landlord, at its expense, and whether or not any award or awards shall be sufficient for the purpose, shall proceed with reasonable diligence to repair, alter and restore the remaining parts of the Building and the Premises to substantially their former condition to the extent that the same may be feasible and so as to constitute a tenantable Building and Premises. 14.(f) In the event that any part of the Premises shall be taken to effect compliance with any law or requirement of public authority other than in the manner hereinabove provided in this Article 14, then, (a) if such compliance is the obligation of Tenant under this Lease, Tenant shall not be entitled to any diminution or abatement of rent or other compensation from Landlord therefor, but (b) if such compliance is the obligation of Landlord under this Lease, the fixed annual rent payable under Article 1 shall be reduced and additional rent payable under Articles 1 and 4 shall be adjusted in the same manner as is provided in Section 14(a) according to the reduction in rentable area of the Premises resulting from such taking. ARTICLE 15. ACCESS TO PREMISES; CHANGES 15.(a) Tenant shall permit Landlord (i) to erect, use and maintain pipes, ducts and conduits in and through the Premises, provided the same are installed and concealed behind walls and ceilings of the Premises or in an innocuous manner or in such manner as shall not unreasonably impair Tenant's use of the Premises, and (ii) to use any air-conditioning rooms, telephone equipment rooms, heating, ventilating, -35- 39 air-conditioning, electrical and mechanical facilities and service closets (collectively, the "Building Equipment") in the Premises in a manner so as not to unreasonably impair Tenant's use of such rooms and facilities. Landlord or its agents or designees shall have the right: (i) to enter the Premises, at reasonable times on reasonable notice during Business Hours on Business Days, to examine such pipes, ducts, conduits and Building Equipment or to make any repairs or alterations in a reasonable manner that Landlord may deem necessary or reasonably desirable for the Building or that Landlord shall be required to or shall have the right to make by the provisions of this Lease or any other lease in the Building, and (ii) to take all material into and upon the Premises that may be required for the repairs or alterations above mentioned as the same is required for such purpose, without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while said repairs or alterations are being made by reason of loss or interruption of the business of Tenant because of the prosecution of any such work; provided, however, that Landlord shall exercise reasonable diligence to minimize any disturbance to Tenant but nothing contained herein shall be deemed to require Landlord to perform the same on an overtime or premium pay basis unless the inconvenience or annoyance to Tenant's business materially interferes with Tenant's business operations. 15.(b) Landlord reserves the right, without the same constituting an eviction and without incurring liability to Tenant therefor, to change the arrangement and/or location of public entrances, passageways, doors, doorways, corridors, elevators (except for the semi-exclusive elevator(s) and Building entrance located on 37th street designated for Tenant's use as set forth in Article 21 of this Lease), stairways, toilets and other public parts of the Building; provided, however, that: (i) Tenant shall continue to have access to the Building; and (ii) Landlord does not interfere with Tenant's use of the semi-exclusive entrance to the Building on 37th Street or Tenant's exclusive use of one of two existing elevators in the Building on 37th Street. Landlord shall use reasonable efforts not to have any floors of the Premises designated as fire "re-entry" floors. 15.(c) Landlord may, during the last year of the term hereof, on reasonable prior notice to Tenant, exhibit the Premises to prospective tenants; provided, however, that in the event of a default, after applicable notice and grace periods, by Tenant hereunder, Landlord may exhibit the Premises to prospective tenants at reasonable times on reasonable notice. Landlord shall also have the right to enter the Premises at reasonable times on reasonable notice for the purpose of exhibiting them to prospective purchasers or lessees of the entire Building or to prospective mortgagees or to prospective assignees of any such mortgages or to the holder of any mortgage on the Landlord's interest in the property, its agents or designees. 15.(d) If Tenant shall not be present personally to open and to permit an entry into the Premises at any time when for any reason an entry therein urgently shall be necessary in case of fire or other emergency, Landlord or Landlord's agents may enter -36- 40 the same forcibly without rendering Landlord or such agents liable therefor (if during such entry Landlord or Landlord's agents shall accord reasonable care to Tenant's property) and without in any manner affecting the obligations and covenants of this Lease. ARTICLE 16. CONDITIONS OF LIMITATION 16.(a) This Lease and the Term and estate hereby granted are subject to the limitation that whenever Tenant shall be unable to pay its debts generally as they become due, or shall make an assignment of the property of Tenant for the benefit of creditors, or shall consent to, or acquiesce in, the appointment of a liquidator, receiver, trustee, or other custodian of itself or the whole or any part of its properties or assets, or shall commence a voluntary case for relief under the United States Bankruptcy Code or file a petition or take advantage of any bankruptcy or insolvency act or applicable law of like import, or whenever an involuntary case under the United States Bankruptcy Code shall be commenced against Tenant or if a petition shall be filed against it seeking similar relief under any bankruptcy or insolvency or other applicable law of like import, or whenever a receiver, liquidator, trustee, or other custodian of Tenant or of or for substantially all of the property of Tenant shall be appointed without Tenant's consent or acquiescence, then, (a) at any time after receipt of notice of the occurrence of any such event, or (b) if such event occurs without the acquiescence of Tenant, at any time after the event continues for 120 days, Landlord may give Tenant a notice of intention to end the Term at the expiration of five days from the date of service of such notice of intention, and upon the expiration of said five day period, this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the Expiration Date, but Tenant shall remain liable for damages as provided in Article 18. 16.(b) This Lease and the Term and estate hereby granted are subject to further limitation as follows: (i) whenever Tenant shall do or permit anything to be done, whether by action or inaction, contrary to any of Tenant's obligations hereunder, other than the failure to pay fixed annual rent or additional rent, and if such situation shall continue and shall not be remedied by Tenant within twenty (20) days (within ten (10) days, in the case of Tenant's failure (A) to keep in force insurance throughout the Term and furnish any certificate of insurance required under Article 6 or 9 or (B) to furnish any instrument required under Article 25 or 26), after Landlord shall have given to Tenant a notice specifying the same or in the case of a happening or default that cannot with due diligence be cured within a period of twenty (20) days and the continuation of -37- 41 which for the period required for cure will not subject Landlord to the risk of criminal liability (as more particularly described in Article 8 hereof) or termination of any superior lease or foreclosure of any superior mortgage, if Tenant shall not, (i) within said 20 day period advise Landlord of Tenant's intention duly to institute all steps necessary to remedy such situation, (ii) duly institute within said 20 day period, and thereafter diligently and continuously prosecute to completion all steps necessary to remedy the same and (iii) complete such remedy within such time after the date of the giving of said notice by Landlord as shall reasonably be necessary, or (ii) whenever any event shall occur or any contingency shall arise whereby this Lease or the estate hereby granted or the unexpired balance of the Term hereof, by operation of law or otherwise, would devolve upon or pass to any person, firm or corporation other than Tenant, except as expressly permitted by Article 11 and the same shall not be remedied within five (5) days after written notice by Landlord in accordance with Article 31 hereof, or (iii) whenever Tenant shall abandon the Premises or vacate the Premises without paying the Fixed Annual Rent and the same shall not be remedied within five (5) days after written notice by Landlord in accordance with Article 31 hereof, or (iv) whenever Tenant shall default in the due keeping, observing or performance of any covenant, agreement, provision or condition of Article 5 hereof on the part of Tenant to be kept, observed or performed and such default shall continue and shall not be remedied by Tenant within 72 hours after Landlord shall have given to Tenant a notice specifying the same, then in any of said cases set forth in the foregoing subsections (i)-(iv) Landlord may give to Tenant a notice of intention to end the Term of this Lease at the expiration of seven days from the date of the service of such notice of intention, and upon the expiration of said seven days this Lease and the Term and estate hereby granted, whether or not the Term shall theretofore have commenced, shall terminate with the same effect as if that day were the end of the Term, but Tenant shall remain liable for damages as provided in Article 18. ARTICLE 17. RE-ENTRY BY LANDLORD; INJUNCTION 17.(a) If Tenant shall default in the payment of any installment of fixed annual rent, or of any additional rent, on any date that the same becomes due, and such default shall continue uncured for ten days after notice and demand, or if this Lease shall expire as in Article 16 provided, Landlord or Landlord's agents and employees immediately or at any time thereafter may re-enter the Premises, or any part thereof, either by summary dispossess proceedings or by any suitable action or proceeding at -38- 42 law, without being liable to indictment, prosecution or damages therefor, to the end that Landlord may have, hold and enjoy the Premises again as and of its first estate and interest therein. The word re-enter, as herein used, is not restricted to its technical legal meaning. In the event of any termination of this Lease under the provisions of Article 16 or if Landlord shall re-enter the Premises under the provisions of this Article 17 or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, (a) Tenant thereupon shall pay to Landlord the fixed annual rent and additional rent payable by Tenant to Landlord up to the time of such termination of this Lease, or of such recovery of possession of the Premises by Landlord, as the case may be, and (b) Tenant also shall pay to Landlord damages as provided in Article 18. 17.(b) In the event of a breach or threatened breach by Landlord or Tenant of any of its obligations under this Lease, Landlord and Tenant shall have the right of injunction. The special remedies to which Landlord and Tenant may resort hereunder are cumulative and are not intended to be exclusive of any other remedies or means of redress to which Landlord and Tenant lawfully may be entitled at any time and Landlord and Tenant may invoke any remedy allowed at law or in equity as if specific remedies were not provided for herein. 17.(c) If this Lease shall terminate under the provisions of Article 16, or if Landlord shall re-enter the Premises under the provisions of this Article 17, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Landlord shall be entitled to retain all moneys, if any, paid by Tenant to Landlord, whether as advance rent, security or otherwise, but such moneys shall be credited by Landlord against any fixed annual rent or additional rent due from Tenant at the time of such termination or re-entry or, at Landlord's option against any damages payable by Tenant under Article 18 or pursuant to law. 17.(d) Tenant expressly waives any and all rights of redemption granted by or under any present or future laws in the event of Tenant being evicted or dispossessed for any cause, or in the event of Landlord obtaining possession of the Premises, by reason of the violation by Tenant of any of the covenants and conditions of this Lease or otherwise. ARTICLE 18. DAMAGES 18.(a) If this Lease is terminated under the provisions of Article 16, or if Landlord shall re-enter the Premises under the provisions of Article 17, or in the event of the termination of this Lease, or of re-entry, by or under any summary dispossess -39- 43 or other proceeding or action or any provision of law by reason of default hereunder on the part of Tenant, Tenant shall pay to Landlord as damages, at the election of Landlord, either (i) a sum which at the time of such termination of this Lease or at the time of any such re-entry by Landlord, as the case may be, represents the then value of the excess, if any, of (1) the aggregate of the fixed annual rent and the additional rent payable hereunder that would have been payable by Tenant (conclusively presuming the additional rent to be the same as was payable for the year immediately preceding such termination except that additional rent on account of increases in Taxes shall be presumed to increase at the average of the rates of increase thereof previously experienced by Landlord during the period (not to exceed 3 years) prior to such termination) for the period commencing with such earlier termination of this Lease or the date of any such re-entry, as the case may be, and ending with the Expiration Date, had this Lease not so terminated or had Landlord not so reentered the Premises, over (2) the aggregate rental value of the Premises for the same period (each sum in subparagraphs (1) and (2) being first discounted to present value at the rate then being paid by new ten year U.S. Treasury Bonds); or (ii) sums equal to the aggregate of the fixed annual rent and the additional rent (as above presumed) payable hereunder that would have been payable by Tenant had this Lease not so terminated, or had Landlord not so reentered the Premises, payable upon the due dates therefor specified herein following such termination or such re-entry and until the Expiration Date, provided, however, that if Landlord shall re-let the Premises during said period, Landlord shall credit Tenant with the net rents received by Landlord from such re-letting, such net rents to be determined by first deducting from the gross rents as and when received by Landlord from such reletting, the expenses incurred or paid by Landlord in terminating this Lease or in reentering the Premises and in securing possession thereof, as well as the expenses of reletting, including altering and preparing the Premises for new tenants, brokers' commissions, attorneys' fees and disbursements, and all other expenses properly chargeable against the Premises and the rental thereof; it being understood that any such re-letting may be for a period shorter or longer than the remaining Term and that Landlord may grant concessions and free rent; but in no event shall Tenant be entitled to receive any excess of such net rents over the sums payable by Tenant to Landlord hereunder, or shall Tenant be entitled in any suit for the collection of damages pursuant to this subsection to a credit in respect of any net rents from a re- letting, except to the extent that such net rents actually are received by Landlord. If -40- 44 the Premises or any part thereof should be re-let in combination with other space, then proper apportionment on a square foot basis shall be made of the rent received from such re-letting and of the expenses of re-letting. Landlord in no event shall be liable in any way whatsoever for failure to re-let the Premises nor shall such failure affect Tenant's liability for damages. 18.(b) If the Premises or any part thereof shall be re-let by Landlord for the unexpired portion of the Term, or any part thereof, before presentation of proof of such damages to any court, commission or tribunal, the amount of rent reserved upon such re-letting, prima facie, shall be the fair and reasonable rental value for the Premises, or part thereof, so re-let during the term of the re-letting. 18.(c) Suit or suits for the recovery of such damages, or any installments thereof, may be brought by Landlord from time to time at its election, and nothing contained herein shall be deemed to require Landlord to postpone suit until the date when the Term would have expired if it had not been so terminated under the provisions of Article 16, or under any provision of law, or had Landlord not reentered the Premises. ARTICLE 19. LANDLORD'S RIGHT TO PERFORM TENANT'S OBLIGATIONS If Tenant shall default in the observance or performance of any term or covenant on Tenant's part to be observed or performed under or by virtue of any of the terms or provisions in any Article of this Lease beyond all applicable grace and cure periods after notice, (a) Landlord may, but shall not be obligated to, remedy such default for the account of Tenant, immediately and without notice in case of emergency, or in any other case only provided that Tenant shall fail to remedy such default with all reasonable dispatch after Landlord shall have notified Tenant in writing of such default and the applicable grace period for curing such default shall have expired; and (b) if Landlord makes any expenditures or incurs any obligations for the payment of money in connection with such default (including, but not limited to, reasonable attorneys' fees in instituting, prosecuting or defending any action or proceeding), such sums paid or obligations incurred shall be deemed to be additional rent hereunder and shall be paid by Tenant to Landlord within fifteen days after rendition of a bill to Tenant therefor together with interest at the Interest Rate. ARTICLE 20. QUIET ENJOYMENT Landlord covenants and agrees that, subject to the terms, obligations and provisions of this Lease, if, and so long as, Tenant keeps and performs each and every -41- 45 covenant, agreement, term, provision and condition herein contained on the part or on behalf of Tenant to be kept or performed, then Tenant may peaceably and quietly enjoy the Premises and Tenant's rights under this Lease shall not be cut off or ended before the expiration of the Term of this Lease. ARTICLE 21. SERVICES AND EQUIPMENT 21.(a) Landlord shall throughout the Term, provided that Tenant is not in default of any of the terms or conditions of this lease, beyond applicable notice and grace periods: (i) provide Tenant with a separate and semi-exclusive entrance to the Building on 37th Street together with only the other tenants at the Building for which the 37th street entrance is its sole means of egress. One of the two existing elevators located in the 37th Street lobby shall be used for the sole and exclusive use of Tenant. The second elevator shall be made available to all tenants at the Building for which the 37th street entrance is its sole means of egress. The elevator facilities (excluding the 5th Avenue entrance which will be made available during Business Hours on Business Days), will be provided to Tenant 24 Hours per day, 7 days per week. Landlord has advised Tenant that the three elevators servicing the Fifth Avenue entrance to the Building may be upgraded and refurbished. (ii) maintain and keep in good order and repair the heating and building- wide air-conditioning systems that serve the Premises. Landlord shall provide heat during Business Hours on Business Days and air-conditioning supplied by the Building's system (and not by any supplemental system servicing the Premises) during Business Hours on Business Days, maintaining interior conditions of 72(degree) - 77(degree) in the cooling season and 66(degree)-74(degree) in the heating season and will provide fresh air in a quantity not less than .14 (14/100) cubic feet per minute per square foot of floor area provided that in any given room or area of the Premises the occupancy does not exceed one (1) person for each 100 square feet. Landlord shall have no responsibility or liability for the ventilating conditions and/or temperature of the Premises during the hours or days Landlord is not required to furnish heat or air conditioning pursuant to this Article. Tenant shall cause all of the windows in the Premises to be kept closed and shall keep entirely unobstructed all the vents, intakes, outlets and grilles whenever the air-conditioning or heating system is in operation and shall comply with and observe all reasonable regulations and requirements prescribed by Landlord for the proper functioning of the heating, ventilating and air-conditioning systems. Notwithstanding anything in this Lease to the contrary, Tenant shall be solely responsible for all maintenance costs of the supplemental air-conditioning system presently servicing the Premises. Nothing contained herein shall be deemed to require Landlord to furnish at Landlord's expense such electric energy as is required to operate the supplemental air- -42- 46 conditioning and ventilating systems serving the Premises. Subject to the provisions of Article 12 hereof all such electric energy shall be furnished by Landlord to Tenant at Tenant's cost and expense except for electric energy for the building-wide air-conditioning systems which Landlord shall furnish at Landlord's cost. If Tenant shall require air conditioning at times when Landlord is not required to furnish same, Tenant shall give Landlord notice, by noon of the same day, of such requirement and, if same is furnished by Landlord, Tenant shall pay on demand Landlord's reasonable charges not to exceed $90.00 per hour for the entire Premises, as additional rent for air-conditioning Monday through Friday after 6:00 P.M., Saturdays after 1:00 P.M. and Sundays all day which overtime charge may be increased by Landlord in direct proportion to Landlord's costs increase therefor. If Tenant shall require heating at times when Landlord is not required to furnish same, Tenant shall give Landlord notice, by noon of the same day, of such requirement and, if same is furnished by Landlord, Tenant shall pay on demand Landlord's reasonable charges not to exceed $90.00 per hour for the entire Premises as additional rent for heating Monday through Friday after 6:00 P.M., Saturdays after 1:00 P.M. and Sundays all day, which overtime charge may be increased by Landlord in direct proportion to Landlord's costs increase therefor. In the event another Tenant in the Building advises Landlord that it requires overtime heating or air-conditioning service from Landlord and Tenant subsequently requests overtime heating or air-conditioning service, Landlord shall not charge Tenant for such overtime service so long as Landlord receives full compensation for such overtime service. (iii) Tenant shall maintain the Premises in a neat and clean manner. Tenant shall provide, at its sole cost and expense, all cleaning supplies and materials as Tenant deems necessary, Landlord shall have no obligation to provide any cleaning services whatsoever or furnish any cleaning supplies or materials to the Premises, except that Landlord shall be responsible for the carting and disposal of all of Tenant's refuse and rubbish. In consideration thereof, the Fixed Annual Rent due hereunder shall be decreased ("Decrease") by Seventy-Eight Thousand Dollars ($78,000.00) per annum from the date Tenant takes physical occupancy of the Premises through the day immediately preceding the second anniversary of the Commencement Date, which Decrease shall be increased on each anniversary of the Commencement Date by multiplying the Decrease for the immediately preceding year by a fraction, the numerator of which shall be the CPI in effect on the immediately preceding anniversary of the Commencement Date and the denominator of which shall be the CPI in effect on such anniversary of the Commencement Date. The amount of the Decrease, for each year of the Term, (including the first year of the Term) shall be credited, in equal monthly installments, against the next installments of fixed annual rent payable hereunder. For example, if Tenant takes physical occupancy of the Premises on March 1, 1997 and the Commencement Date of this Lease is December 1, 1996, the total Decrease for the period through the date preceding the second anniversary of the Commencement Date would be equal to $136,500.00 ($78,000.00 / 12 =$6,500.00 x 21 months) which will be credited against fixed annual rent from the -43- 47 first anniversary of the Commencement Date through the second anniversary of the Commencement Date in equal monthly installments of $11,375.00. (iv) Furnish hot and cold water for lavatory, drinking, plant watering and office cleaning purposes. If Tenant uses or consumes water for any other purposes in unusual quantities, Landlord may install a meter or meters or other means to measure Tenant's water consumption, and Tenant shall reimburse Landlord for the cost of the meter or meters and the installation thereof, and shall pay for the maintenance of said meter equipment and/or shall pay Landlord's costs of other means of measuring such water consumption by Tenant. Tenant shall reimburse Landlord for the cost of all water consumed in unusual quantities, including sewer rents, as measured by said meter or meters or as otherwise measured, and the cost to heat such water. 21.(b) Landlord reserves the right, without any liability whatsoever and without abatement of fixed annual rent or additional rent, to stop the heating, air-conditioning, elevator, plumbing, sanitary, electric and other systems when necessary by reason of accident or emergency or for repairs, alterations, replacements or improvements, provided that except in case of emergency, Landlord will notify Tenant in advance, if possible, of any such stoppage and, if ascertainable, its estimated duration, and will proceed diligently with the work necessary to resume such service as promptly as possible and in a manner so as to minimize interference with Tenant's use and enjoyment of the Premises. Landlord shall not be liable in any way to Tenant for any failure of the heating, air-conditioning, elevator, plumbing, sanitary, electric and other systems by reason of any failure or defect in the supply or character of electric energy furnished to the Building or the Premises by the public utility serving the Building. 21.(c) Landlord, at Tenant's request, shall maintain listings on the Building directory of the names of Tenant, permitted assignees or subtenants, and the names of any of Tenant's officers and employees, provided, however, that the aggregate number of names so listed shall not exceed sixty-seven (67). The reasonable charge of Landlord for any changes in such listings requested by Tenant shall be paid by Tenant to Landlord on demand. 21.(d) Landlord shall not be required to furnish any other services, except as otherwise provided in this Lease. However, Landlord agrees to provide Tenant, throughout the Term, services similar to those of comparable buildings in the borough of Manhattan. 21. (e) Landlord upon reasonable notice from Tenant, shall provide Tenant with access to building risers, shafts and conduits for the purpose of running cabling or wiring in connection with Tenant's installation of a communication system. -44- 48 21. (f) Landlord shall maintain the sprinkler system servicing the Premises. However, Landlord shall not be obligated to repair the sprinkler system servicing the Premises if damage to the sprinkler system is due to Tenant's negligence or wilful conduct. ARTICLE 22. HAZARDOUS MATERIALS 22.(a) Tenant shall not, without the prior written consent of Landlord, cause or knowingly permit, any Hazardous Material (hereinafter defined) to be brought or remain upon, kept or used in or about the Premises or the Building. As used in this Lease, "Hazardous Material(s)" shall mean any hazardous, toxic or radioactive substance, material, matter or waste which is or becomes regulated by any federal, state or local law, rule regulation, code, ordinance or any other governmental restriction or requirement. However, "Hazardous Materials" shall not include asbestos or substances which are used in the ordinary course of a business similar to Tenant's as permitted pursuant to Article 5 of this Lease, provided, however, that such substances are used, handled, transported or stored in strict compliance with any applicable Legal Requirement. If such substances are not so used, handled, transported or stored then they shall be deemed "Hazardous Materials" for purposes of this Lease. Should Landlord consent in writing to Tenant bringing, using or storing any Hazardous Material in or upon the Premises or the Building, Tenant shall strictly obey and adhere to any and all Legal Requirements which in any way regulates, governs or impacts Tenant's possession, use, storage or disposal of said Hazardous Material. Upon Landlord's written request, prior to the Commencement Date of this Lease, and on January 1 of each year thereafter, Tenant shall disclose in writing to Landlord the names and amounts of all Hazardous Material which Tenant is then currently or is intending to bring, use, or store in or upon the Premises or the Building, or which Tenant has in the past brought, used or stored in or upon the Premises or the Building. 22.(b) In addition to, and in no way limiting Landlord's duties and obligations as set forth in this Lease, should Tenant breach any of its respective duties and obligations as set forth in this Article or if the presence of any Hazardous Material in or upon the Premises or the Building that Tenant causes or knowingly permits to brought upon, used, remained upon or kept at the Premises (excluding those Hazardous Materials that were present in the Premises prior to Tenant's occupancy and those Hazardous Materials brought upon the Premises by Landlord after Tenant's occupancy) results in contamination of the Premises, the Building, any land or the Building, the atmosphere, or any water or waterway (including groundwater), or if contamination of the Premises, or the Building by any Hazardous Material otherwise occurs for which Tenant is otherwise legally liable to Landlord for damage resulting -45- 49 therefrom, Tenant shall indemnify, save harmless, and, at Landlord's option and with attorneys approved in writing by Landlord (which approval shall not be unreasonably withheld or delayed), defend Landlord, its agents, employees, partners, officers, directors, and mortgagees, if any, from any and all claims, demands, damages, expenses, fees, costs, fines, penalties, suits, proceedings, actions, causes of action, and losses of any and every kind and nature, including, without limitation, diminution in value of the Premises or the Building, damages for the loss or restriction on use of the rentable or usable space or of any amenity of the Premises or the Building, damages arising from any adverse impact on marketing space in the Building, and sums paid in settlement of claims and for reasonable attorneys' fees, consultant fees and expert fees, which may arise during or after the Lease Term or any extension thereof as a result of such contamination. This includes, without limitation, reasonable costs and expenses incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present on or about the Premises (excluding those Hazardous Materials that were present in the Premises prior to Tenant's occupancy and those Hazardous Materials brought upon the Premises by Landlord after Tenant's occupancy, that Tenant causes or permits knowingly to be brought upon, used, remained upon or kept at the Premises) or because of the presence of Hazardous Material anywhere else which came or otherwise emanated from Tenant or the Premises (excluding those Hazardous Materials that were present in the Premises prior to Tenant's occupancy and those Hazardous Materials brought upon the Premises by Landlord after Tenant's occupancy, that Tenant causes or permits knowingly to be brought upon, used, remained upon or kept at the Premises). Without limiting the foregoing, if the presence of any Hazardous Material on or about the Premises, or the Building caused or permitted by Tenant results in any contamination of the Premises or the Building, Tenant shall, at its sole expense, promptly take all actions as are necessary to return the Premises and the Building to the condition existing prior to the introduction or any such Hazardous Material to the Premises and the Building; provided, however, that Landlord's approval of such actions shall first be obtained. ARTICLE 23. INVALIDITY OF ANY PROVISION If any term, covenant, condition or provision of this Lease or the application thereof to any circumstance or to any person, firm or corporation shall be invalid or unenforceable to any extent, the remaining terms, covenants, conditions and provisions of this Lease or the application thereof to any circumstances or to any person, firm or corporation other than those as to which any term, covenant, condition or provision is held invalid or unenforceable, shall not be affected thereby and each -46- 50 remaining term, covenant, condition and provision of this Lease shall be valid and shall be enforceable to the fullest extent permitted by law. ARTICLE 24. BROKERAGE Tenant covenants, represents and warrants that Tenant has had no dealings or negotiations with any broker or agent other than the Brokers in connection with the consummation of this Lease, and Landlord covenants, represents and warrants that Landlord has had no dealings or negotiations with any broker or agent other than the Brokers in connection with the consummation of this Lease. Tenant and Landlord covenant and agree to pay, hold harmless and indemnify each other from and against any and all cost, expense (including reasonable attorneys' fees) and liability in connection with any compensation, commissions or charges claimed by any broker or agent, claiming to have dealt with it, other than the Brokers, with respect to this Lease or the negotiation thereof. Landlord agrees to pay S.L. Green Real Estate in connection with the consummation of this Lease and Tenant agrees to pay Jenel Management Corp. in connection with the consummation of this Lease a commission in accordance with the terms of separate brokerage agreements between Landlord and S.L. Green Real Estate and Tenant and Jenel Management Corp. respectively. Landlord shall not bear any responsibility whatsoever for the payment of Jenel Management Corp.'s brokerage commission and Tenant shall not bear any responsibility whatsoever for the payment of S.L. Green Real Estate's brokerage commission. The provisions of this Article shall survive the expiration or sooner termination of this Lease. ARTICLE 25. SUBORDINATION 25.(a) Subject to the provisions of Section 25(e) hereof, this Lease is and shall be subject and subordinate to all present and future ground or underlying leases and to all mortgages, options, and building loan agreements that may now or hereafter affect such leases or the real property of which the Premises are a part and to all renewals, modifications, consolidations, replacements and extensions of any such ground or underlying leases, options, building loan agreements and mortgages. The provisions of this Section 25(a) shall be self-operative and no further instrument of subordination shall be required. In confirmation of such subordination, Tenant shall execute and deliver promptly at its own cost and expense any instrument, in recordable form if required, that Landlord, the lessor of the ground or underlying lease or the holder of any such mortgage or any of their respective successors in interest may reasonably request to evidence such subordination. -47- 51 25.(b) In the event of a termination of any ground or underlying lease, or if the interests of Landlord under this Lease are transferred by reason of, or assigned in lieu of, foreclosure or other proceedings for enforcement of any mortgage, or if the holder of any mortgage acquires a lease in substitution therefor, then Tenant under this Lease, at the option to be exercised in writing by the lessor under such ground or underlying lease or such mortgagee or purchaser, assignee or lessee, as the case may be, either (a) will attorn to it and will perform for its benefit all the terms, covenants and conditions of this Lease on Tenant's part to be performed with the same force and effect as if said lessor, such mortgagee or purchaser, assignee or lessee, were the landlord originally named in this Lease, or (b) will enter into a new lease with said lessor or such mortgagee or purchaser, assignee or lessee, as landlord, for the remaining Term and otherwise on the same terms and conditions and with the same options, if any, then remaining. The foregoing provisions of clause (a) of this Section 25(b) shall enure to the benefit of such lessor, mortgagee, purchaser, assignee or lessee, shall be self-operative upon the exercise of such option, and no further instrument shall be required to give effect to said provisions. Tenant, however, upon demand of any such lessor, mortgagee, purchaser, assignee or lessee, shall execute, from time to time, instruments in confirmation of the foregoing provisions of this Section 25(b) reasonably satisfactory to any such lessor, mortgagee, purchaser, assignee or lessee, acknowledging such attornment and setting forth the terms and conditions of its tenancy. 25.(c) Anything herein contained to the contrary notwithstanding, under no circumstances shall any lessor under any ground lease or mortgagee or purchaser, assignee or lessee, as the case may be, whether or not it shall have succeeded to the interests of the landlord under this Lease, be: (i) liable for any act, omission or default of any prior landlord or for the return of any security deposit or part thereof not actually received by such lessor, mortgagee, purchaser, assignee, or lessee, as the case may be; or (ii) subject to any offsets, claims or defenses that Tenant might have against any prior landlord: or (iii)bound by any rent or additional rent that Tenant might have paid to any prior landlord for more than one month in advance or for more than three months in advance where such rent payments are payable at intervals of more than one month (other than payments for Tenant's Tax Payment which shall be paid in accordance with the terms and conditions of Article 4 of this Lease); or (iv) bound by any modification, amendment or abridgment of this Lease, or any cancellation or surrender of the same, made without its prior written approval. -48- 52 25.(d) If, in connection with the financing of the Land and/or the Building, the holder or prospective holder of any mortgage shall request reasonable modifications in this Lease as a condition of approval thereof, Tenant will not unreasonably withhold, delay or defer making such modifications. 25.(e) As a condition to this lease being subordinate to any future mortgage or ground lease, anything herein contained to the contrary notwithstanding, Landlord shall provide Tenant with a non-disturbance agreement, in the form annexed hereto as Exhibit C, in recordable form executed by all such future mortgagees or ground lessors . ARTICLE 26. CERTIFICATE OF TENANT/LANDLORD 26.(a) Landlord or Tenant, without charge, at any time and from time to time, within ten days after request by the party requesting it, shall deliver a written instrument to Landlord or Tenant or any other person, firm or corporation specified by Landlord or Tenant, duly executed and acknowledged, certifying (i) that this Lease is unmodified and in full force and effect or, if there has been any modification, that the same is in full force and effect as modified and stating any such modification, that there is no existing basis to cancel or terminate this Lease, and to the best of Tenant's knowledge, Landlord is not in default thereunder and if requested by Tenant, to the best of Landlord's knowledge, Tenant is not in default thereunder; (ii) whether the Term has commenced and rent become payable under this Lease, and whether Tenant is in possession of all of the Premises except for such portions of the Premises that have been sublet or being held for sublet pursuant to the provisions of this Lease; (iii)whether or not there are then existing any defenses or offsets that are not claims under paragraph (v) of this Section 26.(a) against the enforcement of any of the agreements, terms, covenants, or conditions of this Lease and any modification thereof upon the part of Tenant to be performed or complied with, and, if so, specifying the same; (iv) the amount of the fixed annual rent payable under this Lease and the dates to which the fixed annual rent and additional rent and other charges hereunder have been paid; (v) whether or not Tenant has made any claim against Landlord under this Lease and, if so, the nature and the dollar amount, if any, of such claim. -49- 53 26.(b) Tenant agrees that, except for the first month's rent hereunder, it will pay no rent under this Lease more than one month in advance of its due date. In the event of any act or omission by Landlord, Tenant will not exercise any right to terminate this Lease or to remedy the default and deduct the cost thereof from rent due hereunder until Tenant shall have given written notice of such act or omission to the ground lessor and to the holder of any mortgage on the fee or the ground lease who shall have furnished such lessor's or holder's last address to Tenant and until a reasonable period for remedying such act or omission shall have elapsed following the giving of such notices, during which time such lessor or holder shall have the right, but shall not be obligated, to remedy or cause to be remedied such act or omission. Tenant shall not exercise any right pursuant to this Section 26(b) if the holder of any mortgage or such aforesaid lessor commences to cure such aforesaid act or omission within a reasonable time and diligently prosecutes such cure thereafter. 26.(c) At Landlord's or Tenant's request, the other party shall deliver promptly to the requesting party and to the holder of any mortgage on the fee or ground lease and the lessor under any ground or underlying lease, after the occurrence of the Commencement Date, a letter signed by Tenant or Landlord and acknowledged, in substantially the form annexed hereto as Schedule 3. ARTICLE 27. LEGAL PROCEEDINGS AND WAIVER OF JURY TRIAL 27.(a) Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the Premises, and/or any other claims (except claims for personal injury or property damage), and any emergency statutory or any other statutory remedy. If Landlord commences any summary proceeding, Tenant shall not interpose and hereby waives the right to interpose any counterclaim of whatever nature or description in any such proceeding. ARTICLE 28. SURRENDER OF PREMISES 28.(a) Upon the expiration or other termination of the Term, Tenant shall quit and surrender the Premises to Landlord, broom clean, in good order and condition, ordinary wear and tear and damage by fire, the elements or other casualty excepted, and Tenant shall remove all of its moveable property as herein provided. Tenant's -50- 54 obligation to observe or perform the covenants in this Article 28 shall survive the expiration or other termination of the Term. 28.(b) If possession of the Premises is not surrendered to Landlord within 24 hours after the date of the expiration or sooner termination of the Term then, notwithstanding anything to the contrary contained in this Lease, Tenant shall pay to Landlord for each month and the pro rata portion of any month during which Tenant holds over in the Premises after the expiration or sooner termination of the Term of this Lease, rent at the greater of (a) a rate equal to one and a half times the aggregate of that portion of the fixed annual rent and additional rent that was payable under this Lease for the last month of the Initial Term or the last month of Option 1 or Option 2, if exercised, or (b) the then market rent for the Premises; provided, however, that in no event shall Landlord be entitled to receive an amount in excess of the maximum amount permitted by Legal Requirements. Nothing herein contained shall be deemed to permit Tenant to retain possession of the Premises after the expiration or sooner termination of the Term. The provisions of this Section 28.(b) shall survive the expiration or other termination of the Term. ARTICLE 29. RULES AND REGULATIONS 29.(a) Tenant and Tenant's servants, employees and agents shall observe faithfully and comply strictly with the Rules and Regulations set forth in Schedule 4 annexed hereto and made part hereof entitled "Rules and Regulations" and such other and further reasonable Rules and Regulations as Landlord or Landlord's agents may adopt from time to time. In the event of any conflict or inconsistency between the provisions of this Lease and of any of the Rules and Regulations as originally or as hereafter adopted, the provisions of this Lease shall control. Reasonable written notice of any additional Rules and Regulations shall be given to Tenant. Landlord shall not enforce the Rules and Regulations against Tenant in a discriminatory manner. 29.(b) Nothing in this Lease contained shall be construed to impose upon Landlord any duty or obligation to enforce the Rules and Regulations or the terms, covenants or conditions in any other lease, against any other tenant of the Building, and Landlord shall not be liable to Tenant for violation of the same by any other tenant, its servants, employees, agents, visitors or licensees. ARTICLE 30. CONSENTS AND APPROVALS 30.(a) Wherever in this Lease Landlord's consent or approval is required, if Landlord shall delay or refuse such consent or approval, Tenant in no event shall be -51- 55 entitled to make, nor shall Tenant make, any claim, and Tenant hereby waives any claim, for money damages (nor shall Tenant claim any money damages by way of set-off, counterclaim or defense) based upon any claim or assertion by Tenant that Landlord unreasonably withheld or unreasonably delayed its consent or approval. Tenant's sole remedies, except as otherwise set forth in this Lease, shall be: (i) an action or proceeding to enforce any such provision, or (ii) arbitration as set forth in Article 3 herein, in each such instance for specific performance, injunction or declaratory judgment. ARTICLE 31. NOTICES Any notice, demand, consent, approval, disapproval, or statement (collectively, "Notices") from Landlord to Tenant or from Tenant to Landlord shall be in writing and shall be deemed duly given (a) if mailed by registered or certified mail, postage prepaid, return receipt requested, (b) if delivered by recognized national overnight delivery service with receipt acknowledged, or (c) only in the case of Notices that are Escalation Statements or bills for rent, if mailed by first class mail, postage prepaid, to the address(es) for Notices set forth in this Article 31. Notices to Tenant shall be sent to Tenant at the Premises with a copy of default notices only to Kramer Levin Naftalis & Frankel attention: Larry Loeb, Esq. Notices to Landlord shall be sent (i) to the address of Landlord set forth on page 1 of this Lease or (ii) to such other address as Landlord shall have last designated by notice in writing to Tenant, with a copy of default notices only to Belkin Burden Wenig & Goldman, LLP attention: Daniel T. Altman, Esq. Notice shall be deemed given on the third business day after depositing same in an official depository of the United States Postal Service, Return Receipt Requested (or successor organization) or, if given by overnight delivery, upon delivery to Landlord or Tenant, as the case may be. ARTICLE 32. NO WAIVER No agreement to accept a surrender of this Lease shall be valid unless in writing signed by Landlord. No employee of Landlord or of Landlord's agents shall have any power to accept the keys to the Premises prior to the termination of this Lease. The delivery of keys to any employee of Landlord or of Landlord's agent shall not operate as a termination of this Lease or a surrender of the Premises. If Tenant at any time desires to have Landlord sublet the Premises for Tenant's account, Landlord or Landlord's agents are authorized to receive said keys for such purpose without releasing Tenant from any of the obligations under this Lease. The failure of Landlord to seek redress for violation of, or to insist upon the strict performance of, any covenant or condition of this Lease or any of the Rules and Regulations set forth -52- 56 herein, or hereafter adopted by Landlord, shall not prevent a subsequent act, which would have originally constituted a violation, from having all the force and effect of an original violation. The receipt by Landlord of rent with knowledge of the breach of any covenant of this Lease shall not be deemed a waiver of such breach. The failure of Landlord to enforce any of the Rules and Regulations set forth herein, or hereafter adopted, against Tenant and/or any other tenant in the Building shall not be deemed a waiver of any such Rules and Regulations. No provision of this Lease shall be deemed to have been waived by Landlord, unless such waiver be in writing signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly rent herein stipulated shall be deemed to be other than on the account of the earliest stipulated rent, nor shall any endorsement or statement on any check or any letter accompanying any check or payment of rent be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such rent or pursue any other remedy in this Lease provided. ARTICLE 33. INABILITY TO PERFORM If, for any reason within Landlord's control, Tenant is not provided with: (i) electricity in accordance with Article 12 hereof; or (ii) heating and air-conditioning in accordance with Article 21 hereof; or (iii) elevator service; or (iv) water; and such condition is not remedied within three (3) business days following notice to Landlord of any such event, Tenant's obligation to pay fixed annual rent and additional rent hereunder shall proportionately abate in relation to the rentable square footage of the portion of the Premises Tenant is unable to reasonably use and which Tenant in fact does not use and has vacated, provided that Tenant shall not be entitled to any such abatement if the rentable square footage of the portion of the Premises affected by such condition is less than 1,200 rentable square feet. However, if it is finally determined by a court of competent jurisdiction that Tenant has unreasonably withheld payment of fixed annual rent and additional rent and that Tenant was able to reasonably use the Premises so affected, Tenant, for the purposes of this Article 33 only, shall reimburse Landlord, on demand, for all costs and expenses, including reasonable legal fees, incurred by Landlord as a result of Tenant withholding any such fixed annual rent and additional rent. -53- 57 ARTICLE 34. ENTIRE AGREEMENT; NO REPRESENTATIONS; NO ORAL MODIFICATION 34.(a) This Lease and the Schedules attached hereto set forth all of the covenants, promises, assurances, agreements, representations, conditions, warranties, statements and understandings (collectively, the "Representations") between Landlord and Tenant concerning the Premises and the Building, and there are no Representations, either oral or written, between Landlord and Tenant other than those set forth in this Lease. 34.(b) This Lease supersedes and revokes all previous negotiations, arrangements, letters of intent, offers to lease, lease proposals, brochures, Representations, and information conveyed, whether oral or in writing, between Landlord and Tenant or their respective representatives or any other person purporting to represent Landlord or Tenant. Landlord and Tenant acknowledge that they have not been induced to enter into this Lease by any representations not set forth in this Lease, they have not relied on any such representation, no such representations shall be used in the interpretation or construction of the Lease, and Landlord and Tenant shall have no liability for any consequences arising as a result of any such representations. 34.(c) Except as otherwise provided in this Lease, no subsequent alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless in writing and signed by the party against whom enforcement of the alteration, amendment, change or addition is sought. ARTICLE 35. SECURITY 35.(a) Simultaneous with the execution of this Lease, Tenant shall deliver to Landlord a clean, unconditional, irrevocable standby Letter of Credit (the "LC") having a one (1) year term, automatically renewable through and including the third anniversary after the Commencement Date, naming Landlord as beneficiary, in a form and substance reasonably satisfactory to Landlord, initially in an amount equal to One Million Six Hundred and Sixty-Six Thousand Six Hundred Sixty-Six Dollars and Sixty- Six cents ($1,666,666.66) as and for the security deposit (the "Security Deposit") for the faithful performance and observance by Tenant of the terms, provisions, covenants and conditions of this Lease including the terms and conditions of the Work -54- 58 Letter annexed as Exhibit A. Provided that Tenant is not in default in respect of any of the terms, provisions, covenants and conditions of this Lease beyond applicable notice and grace periods, including, but not limited to, the provisions of the Work Letter annexed as Exhibit A, the LC may be replaced by Tenant with an amendment reducing the amount of LC to Six Hundred and Sixty-Six Thousand Six Hundred Sixty- Six Dollars and Sixty-Six cents ($666,666.66) on the second anniversary after the Commencement Date. Landlord shall return the LC to Tenant on the third anniversary after the Commencement Date. If Tenant defaults in respect of any of the terms, provisions, covenants and conditions of this Lease beyond applicable notice and grace periods, including, but not limited to, the payment of fixed annual rent and additional rent, Landlord may use, apply or retain the whole or any part of the Security Deposit to the extent required for the payment of any fixed annual rent and additional rent or any other sum as to which Tenant is in default or for any sum that Tenant is obligated to pay Landlord or that Landlord may expend or may be required to expend by reason of Tenant's default in respect of any of the terms, provisions, covenants and conditions of this Lease beyond any applicable notice and grace period, including but not limited to any damages payable by Tenant pursuant to Article 18 hereof. To the extent that Landlord, during the Term, so uses, applies, or retains all or any part of the Security Deposit, Tenant, on demand, shall pay to Landlord as additional rent a sum sufficient to restore the Security Deposit to the amount then required to be deposited. If Tenant shall comply fully and faithfully with all of the terms, provisions, covenants and conditions of this Lease, the Security Deposit shall be returned to Tenant within a reasonable number of days after the date fixed as the end of the Lease (not to exceed 14 days) and after delivery of entire possession of the Premises to Landlord. 35.(b) In the event of a sale of the Land and the Building or the leasing or transfer of the Building, Landlord shall transfer the Security Deposit to the vendee or lessee or transferee and Landlord thereupon shall be released by Tenant from all liability for the return of such Security Deposit. Tenant shall look solely to the new landlord for the return of the Security Deposit. The provisions hereof shall apply to every transfer or assignment made of the Security Deposit to a new landlord. 35.(c) Tenant covenants that it will not assign, transfer or encumber or attempt to assign, transfer or encumber the money deposited as the Security Deposit under this Lease (except in connection with an assignment of this Lease in accordance with the terms hereof) and that neither Landlord nor its successors or assigns shall be bound by any such assignment, transfer, encumbrance, attempted assignment, transfer or attempted encumbrance. In the event that any bankruptcy, insolvency, reorganization or other debtor-creditor proceedings shall be instituted by or against Tenant, its successors or assigns, or any guarantor of Tenant hereunder, the Security Deposit shall be deemed to be applied to the payment of the fixed annual rent and for additional rent due Landlord for periods prior to the institution of such proceedings and the balance, if any, may be retained by Landlord in partial satisfaction of Landlord's damages. -55- 59 35.(d) Landlord shall deposit a cash Security Deposit into an interest-bearing account at a banking organization selected by Landlord. All interest and/or dividends, if any, accruing on the Security Deposit, less a 1% per annum charge for administrative expense, shall be added to, held and included within the term Security Deposit and, provided that Tenant is not in default in the performance of the terms, provisions, covenants and conditions of this Lease beyond any applicable notice and grace, shall accrue to the account of Tenant and paid to Tenant on a quarterly basis. Landlord shall not be required to credit Tenant with any interest for any period during which Landlord does not receive interest on the Security Deposit. ARTICLE 36. INTENTIONALLY OMITTED ARTICLE 37. NON-LIABILITY INDEMNIFICATION 37.(a) No partner, member, director, officer, agent, servant or employee of Landlord shall be liable to Tenant for any loss, injury, damage, except to the extent the same are caused by or result from the negligence of Landlord, its agents, partners, members, directors, officers, agents, servants or employees. Further, neither Landlord nor Tenant, nor any respective partner, member, director, officer, agent, servant or employee of Landlord or Tenant shall be liable (a) for any damage caused by other tenants or persons in, upon or about the Building or caused by the operations in construction of any private, public or quasi-public work; or (b) even if negligent, for consequential damages in any action relating to this Lease. 37.(b) Except as otherwise provided for in this Lease, including, the provisions of Sections 9(h)(i), 9(h)(iii) and 37(a) hereof, Tenant shall indemnify and hold harmless Landlord and all lessors under underlying leases, of, and mortgagees under mortgages affecting, the Land and/or the Building and its and their respective partners, members, directors, officers, agents and employees from and against any and all claims arising from or in connection with (a) the use or occupation of the Premises by Tenant or anyone in the Premises with Tenant's permission, or the conduct or management of the Premises or of any business therein, or any work or thing whatsoever done (other than by Landlord, its agents, servants or employees), or any condition created in the Premises during the Term or during the period of time, if any, prior to the Commencement Date, that Tenant may have been given access to the Premises; (b) any act, omission or negligence of Tenant or any of its sublessees or licensees or its or their partners, members, directors, officers, agents, employees or contractors; (c) any accident, injury or damage whatsoever (except to the extent caused by the negligence of Landlord, its agents, servants or employees) occurring in, at or upon the Premises; and (d) any breach or default by Tenant in the full and prompt payment and -56- 60 performance of Tenant's obligations under this Lease. Tenant's indemnity shall include the payment to Landlord of all reasonable costs, expenses and liabilities incurred in or in connection with each such claim or action or proceeding brought thereon, including without limitation, all reasonable attorneys' fees, costs and expenses. In case any action or proceeding shall be brought against Landlord and/or any such lessor or mortgagee and/or its or their partners, directors, officers, agents and/or employees by reason of such claim, Tenant, upon notice from Landlord or such lessor or mortgagee (as the case may be), shall resist and defend such action or proceeding (by Tenant's counsel, Kramer Levin, Naftalis & Frankel or Tenant's assigned insurance counsel). ARTICLE 38. INTENTIONALLY OMITTED ARTICLE 39. RIGHT OF FIRST OFFER Each time that the entire sixth (6th), ninth (9th) or tenth (10th) floors or any portion of such floors ("Contiguous Space") becomes vacant and available to lease in the Building, Landlord shall promptly give notice ("Notice") to Tenant in accordance with Article 31 of this Lease, that Contiguous Space is available. The Notice shall include the location of the Contiguous Space, the approximate square footage, the term for which the Landlord would lease the Contiguous Space to Tenant and such other business terms (the "Terms") as Landlord deems relevant including, without limitation, the fair market rent per square foot of the Contiguous Space and the proposed fair market escalations. If the Contiguous Space is less than Five Thousand square feet, within thirty (30) days after the giving of such Notice, Tenant may elect to lease the Contiguous Space, by notifying Landlord ("Acceptance Notice") that the Terms contained in the Notice are acceptable. If the Contiguous Space is more than Five Thousand square feet, within forty-five (45) days after the giving of such Notice, Tenant may elect to lease the Contiguous Space, by notifying Landlord in an Acceptance Notice that the Terms contained in the Notice are acceptable. In the event that Tenant wishes to lease the Contiguous Space contained in the Notice, but Landlord and Tenant cannot agree on the Terms for the Contiguous Space, Tenant shall notify Landlord, within the above stated time frames (within 30 days for less than 5000 sq. ft. and within 45 days for 5000 sq. ft. and over) that it wishes to lease the Contiguous Space but it disputes that the Terms contained in the Notice are the fair market terms for the Contiguous Space. The right to dispute the Terms contained in the Notice shall be deemed waived unless the Acceptance Notice is served in accordance with this Article. In the case where an Acceptance Notice is timely served in accordance with this Article, the dispute as to the Terms of the Premises, shall be resolved by binding arbitration in accordance with Article 3 of this -57- 61 Lease. In determining each of the Terms for the Contiguous Space, the arbitrator shall make his/her decision based upon what the fair market value would be for the Contiguous Space at the time the Notice is sent to Tenant. In connection with such arbitration, Landlord shall submit a Submission to the arbitrator in accordance with Article 3 containing the Terms in its Notice. However, notwithstanding the foregoing, Tenant agrees to pay during the period of arbitration the Fixed Annual Rent in effect for the immediately preceding year without prejudice to any of Landlord's or Tenant's rights until there has been a determination of the arbitration. ARTICLE 40. MISCELLANEOUS 40.(a) Irrespective of the place of execution or performance, this Lease shall be governed and construed in accordance with the laws of the State of New York. 40.(b) This Lease shall be construed without regard to any presumption or other rule requiring construction against the party causing this Lease to be drafted. 40.(c) Intentionally Omitted. 40.(d) All terms and words used in this Lease, regardless of the number or gender in which they are used, shall be deemed to include any other number and other gender as the context may require. 40.(e) Time shall be of the essence with respect to the exercise of any option granted under this Lease. 40.(f) Except as otherwise provided in this Lease, whenever the payment of interest is required to be made by Tenant to Landlord by the terms hereof it shall be at the Interest Rate. 40.(g) In the event that Tenant is in arrears in the payment of fixed annual rent or additional rent hereunder, Tenant waives Tenant's right, if any, to designate the items against which any payments made by Tenant are to be credited, and Tenant agrees that Landlord may apply any payments made by Tenant to any items it sees fit, irrespective of and notwithstanding any designation or request by Tenant as to the items against which any such payments shall be credited. 40.(h) The submission of this document for examination does not constitute an option or an offer to lease space in the Building. This Lease shall have no binding effect on the parties unless executed by Landlord and Tenant and a fully executed copy is delivered to Landlord and Tenant. -58- 62 40.(i) The captions are inserted only as a matter of convenience and for reference, and in no way define, limit or describe the scope of this Lease or the intent of any provision hereof. 40.(j) Landlord, upon reasonable notice to Tenant, shall have the full right at any time to name and change the name of the Building and to change the designated address of the Building. The Building may be named after any person, firm, or otherwise, whether or not such name is, or resembles, the name of a tenant of the Building (except that the building shall not be named for one of Tenant's direct competitors). The cost or expense associated with changing Tenant's address, not to exceed $5,000.00, shall be borne by Landlord. 40.(k) Tenant shall be permitted to install signage in the Premises so long as such signage complies with the terms and conditions of this Lease and has been approved in advance by Landlord, which approval shall not be unreasonably withheld or delayed. Under no circumstances shall any signage in the Premises (and visible outside of the Premises) be illuminated (including, without limitation, a "light box" or any sign with neon). Signs and canopies are permitted at the exclusive entrance, lobby and elevator of the Building and are to be installed at Tenant's expense, subject to Landlord's prior written approval which approval shall not be unreasonably withheld or delayed. Tenant may use the name of an affiliate or division of Tenant on entrance, lobby and elevator of Building, subject to Landlord's prior written approval which approval shall not be unreasonably withheld or delayed. In addition, Tenant, at its sole cost and expense, shall be permitted, subject to Article 6 of this Lease, to make Alterations or improvements to the semi-exclusive lobby of the Building located at the 37th Street entrance to the Building. 40.(l) This Lease may be executed in several counterparts each of which shall be deemed an original, and such counterparts shall constitute but one and the same instrument. ARTICLE 41 ROOF SPACE 41. (a) Landlord hereby leases to Tenant, without charge, one hundred (100) square feet of space on the rooftop of the Building as shown on Schedule 6 annexed hereto and made a part hereof (the "Roof Premises"). Tenant may elect to relocate the Roof Premises at its sole cost and expenses so long as it does not interfere with the penthouse tenant's use and occupancy of its premises and the Building systems. (b) Tenant shall use the Roof Premises for the installation, operation and maintenance of telecommunication equipment, associated antenna, base stations, dishes, switches, power supplies, batteries and accessories (the "Installation"). The -59- 63 Installation or other property attached to or otherwise brought onto the Roof Premises shall at all times remain Tenant's personal property and are not considered fixtures. Tenant, at its sole cost and expense, shall be responsible for obtaining electrical service for the Roof Premises from the utility company servicing the Building and shall pay for such electricity, on a submetered basis, in accordance with the provisions of Article 12 of this Lease. Tenant shall be responsible, at its own cost and expense, to install and maintain any submeters necessary for the metering of the electric consumption of the Installation. Landlord, at Tenant's sole cost and expense, shall make available to Tenant the panel boards, feeders, conduits and risers in the Building as may be necessary in order to bring electric energy to the Roof Premises. (c) The placement of the Installation on the Roof Premises shall be deemed to be an Alteration and shall be subject to the provisions of Article 6 hereof and to any other applicable provisions of this Lease. Landlord agrees to cooperate with Tenant, at Tenant's expense, in making application for, and obtaining, any local, state, and federal licenses, permits and any other approvals which may be required to allow Tenant to use the Roof Premises. Tenant shall employ due diligence to obtain said approvals within a timely manner. (d) Landlord agrees to provide Tenant, Tenant's employees and authorized agents, at reasonable times and on reasonable notice (which may be oral), access to the Roof Premises. (e) The Installation may be removed by Tenant at any time during the Term, and, in such event, Tenant shall be responsible, at its sole cost and expense, to repair any damage to the Roof Premises resulting from Tenant's removal of the Installation. Furthermore, Tenant shall repair any damage to the Roof Premises caused by Tenant during the Term, ordinary wear and tear and damage from the elements excepted, and said obligation shall survive the expiration or sooner termination of the Lease. (f) In the event that Landlord elects, in its sole discretion, to construct additional floors to the Building above the Roof Premises, Landlord shall provide Tenant with comparable space on the new roof of the Building (the "New Roof Premises") promptly following the completion of any such addition and Tenant may, at its sole cost and expense, move the Installation to the New Roof Premises. Landlord shall not be responsible or liable in any manner whatsoever, for any costs, damages, abatements and/or set-offs due to an interruption in the use and occupancy of the Roof Premises during such construction period. (g) Tenant agrees not to cause any unreasonable interference to the telecommunication operation of Landlord or any other tenants in the Building. Tenant shall operate the Installation in compliance with all applicable Federal Communications Commission (FCC) regulations. -60- 64 (h) Notwithstanding any provision in this Lease to the contrary, Tenant may not sublet or assign any portion of the Roof Premises (except in connection with an assignment of this Lease in accordance with the terms hereof) without the prior written consent of Landlord, which consent may be withheld by Landlord in its sole discretion. ARTICLE 42 OPTION 42. (a) Tenant shall have the right, exercisable by sending written notice (the "Notice") to Landlord on or before January 26, 1997, time being of the essence, to lease the entire ninth (9th) floor of the Building effective on the date (the "Effective Date") set forth in the Notice, which Effective Date shall not be later than five (5) business days following the date of the Notice. In the event that Tenant timely sends the Notice to Landlord, the ninth (9th) floor of the Building shall be, and be deemed to be, a part of the Premises subject to all of the terms and conditions of this Lease, except that from and after the Effective Date: (i) The phrase "One Million Two Hundred Thousand Dollars ($1,200,000.00)" in the definition of "Fixed Annual Rent" contained on page 3 of this Lease shall be replaced with "One Million Eight Hundred Thousand Dollars ($1,800,000.00); (ii) "Tenant's Proportionate Share" shall mean 27.3%; (iia) The following changes shall be made to Article 11(b) of this Lease: the phrase "One Hundred Million Dollars ($100,000,000.00)" on the twelfth and seventeenth lines shall be replaced with "One Hundred Twenty-Five Million Dollars ($125,000,000.00)," the number "Forty Million Dollars ($40,000,000.00)" on the fifteenth and twenty-fifth lines shall be replaced with "Fifty Million Dollars ($50,000,000.00)," the number "One Million Three Hundred Thirty Three Thousand Dollars ($1,333,000.00)," on the nineteenth line shall be replaced with "Two Million Dollars ($2,000,000.00)," the number "Sixty Hundred Sixty Seven Thousand Dollars ($667,000.00)" on lines twenty-two and twenty seven shall be replaced with "One Million Dollars ($1,000,000.00)." (iii) The following changes shall be made to paragraph 21(a)(iii) of this Lease: the phrase "Seventy-Eight Thousand Dollars ($78,000.00)" on the seventh (7th) line thereof shall be replaced with "One Hundred Seventeen-Thousand Dollars ($117,000.00)," the number "$136,500.00" on the twentieth (20th) line thereof shall be replaced with "$204,750.00" the number "$78,000.00" on the twentieth (20th) line thereof shall be replaced with "$117,000.00", the number "$6,500.00" on the twenty-first (21st) line thereof shall be replaced with "$9,725.00" and the number -61- 65 "$11,375.00" on the twenty-third (23rd) line thereof shall be replaced with "$17,062.50"; (iv) The number "sixty-seven" (67) on the fourth (4th) line of paragraph 21(c) of this Lease shall be replaced with "one hundred (100)"; (v) The following changes shall be made to Article 35 of this Lease: the phrase "One Million Six Hundred and Sixty-Six Thousand Six Hundred Sixty-Six and 66/100 Dollars ($1,666,666.66)" beginning on the fifth (5th) line thereof shall be replaced with "Two Million Five Hundred Thousand Dollars ($2,500,000.00", the phrase "Six Hundred and Sixty-Six Thousand Six Hundred Sixty Six and 66/100 Dollars ($666,666.66)" beginning on the thirteenth (13th) line thereof shall be replaced with "One Million Dollars ($1,000,000.00)"; (vi) the phrase "ninth" (9th) on the first (1st) line of Article 39 of this Lease shall be deleted in its entirety; and (vii) the following changes shall be made to Exhibit A of this Lease: the number "$2,700,000.00" on the third (3rd) line of paragraph 4A shall be replaced with "$4,050,000.00," the phrase "Two Hundred and Seventy Thousand Dollars ($270,000.00)" beginning on the seventh (7th) line of such paragraph 4A shall be replaced with "Four Hundred Five Thousand Dollars ($405,000.00)," the number "$2,550,000.00" on the tenth (10th) line of such paragraph 4A shall be replaced with "$3,900,000.00," the phrase "Eight Hundred Thousand Dollars ($800,000.00)" on the fifth (5th) line of paragraph 4C thereof shall be replaced with "One Million Two Hundred Thousand Dollars ($1,200,000.00)," the number "$1,900,000.00" on the first (1st) line of the second (2nd) paragraph of such paragraph 4C shall be replaced with "$2,850,000.00" and the number "$800,000.00" on the fourth (4th) line of the second (2nd) paragraph of such Exhibit A shall be replaced with "$1,200,000.00." (b) On or before the Effective Date: (i) Tenant shall deliver to Landlord an amendment to the LC required to be delivered by Tenant pursuant to the provisions of Article 35 of this Lease increasing the amount thereof to $2,500,000.00; and (ii) Landlord shall deliver to Tenant: (x) an amendment to the LC required to be delivered by Landlord pursuant to the provisions of Exhibit A of this Lease increasing the amount thereof to $1,200,000.00; and (y) a check, in the amount of $8,333.33, representing the payment to Tenant for Tenant's installation of submeters on the ninth (9th) floor of the Building. (c) In the event that Tenant does not timely send the Notice, Tenant's right to exercise its option pursuant to this Article 42 shall be of no further force and effect. Nothing contained herein shall limit Tenant's rights with respect to the sixth (6th), ninth (9th) and tenth (10th) floors of the Building pursuant to the terms of Article 39 of this Lease. -62- 66 IN WITNESS WHEREOF, Landlord and Tenant have respectively executed this Lease as of the day and year first above written. LANDLORD: F.S. Realty Corp. By: /s/ Joseph Chetrit ------------------------------------- Name: Joseph Chetrit Title: TENANT: GT INTERACTIVE SOFTWARE CORP. By: /s/ Joseph Cayre ------------------------------------- Name: Joseph Cayre Title: Chairman of the Board -63- EX-10.30 3 AMENDMENT TO STOCKHOLDERS AGREEMENT 1 EXHIBIT 10.30 AMENDMENT TO STOCKHOLDERS AGREEMENT AMENDMENT TO STOCKHOLDERS AGREEMENT, dated as of December 16, 1996 (the "Amendment"), amending the STOCKHOLDERS AGREEMENT, dated as of December 18, 1995 (the "Agreement"), by and among Joseph J. Cayre, Kenneth Cayre, Stanley Cayre, Jack J. Cayre, the trusts listed on Schedule I to the Agreement (collectively, the "Trusts") and GT Interactive Software Corp. (the "Company"). WHEREAS, the parties to the Agreement wish to make certain amendments to the Agreement; NOW, THEREFORE, for good and valuable consideration, the adequacy of which is hereby acknowledged, the undersigned hereby amend Section 2.1 of the Agreement as follows: 2.1 Limitation on Transfer. No Stockholder shall sell, give, assign, hypothecate, pledge, encumber, grant a security interest in or otherwise dispose of (whether by operation of law or otherwise) (each a "transfer") any Shares or any right, title or interest therein or thereto, except in accordance with the provisions of this Agreement; provided, however, a Stockholder may hypothecate, pledge, encumber or grant a security interest, the foreclosure of which shall be deemed an Involuntary Transfer subject to Section 3.6 of this Agreement, in any Shares to a bank or other financial institution. Any attempt to transfer any Shares or any rights hereunder in violation of the preceding sentence shall be null and void ab initio and the Company shall not register any such transfer. Anything in this Agreement to the contrary notwithstanding, the limitations on transfer in this Section 2.1 shall not apply to (i) any transfer of Shares by gift made by any Stockholder to any bona fide charitable organization (including a foundation of which the donor and/or its family members are trustees), (ii) any sale of Shares through a widely distributed underwritten Public Offering, or (iii) any sale of Shares made in compliance with Rule 144 under the Securities Act. In all other respects, the terms of the Agreement remain unchanged. All capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Agreement. This Amendment may be executed in one or more counterparts, each of which shall be deemed an original, and all of which taken together shall constitute one and the same instrument. 2 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers or trustees as of the date hereof. GT Interactive Software Corp. By /s/ RONALD CHAIMOWITZ ---------------------------------------------- Name: Ronald Chaimowitz Title: President, Chief Executive Officer and Director Joseph J. Cayre /s/ JOSEPH J. CAYRE ------------------------------------------------ Kenneth Cayre /s/ KENNETH CAYRE ------------------------------------------------ Stanley Cayre /s/ STANLEY CAYRE ------------------------------------------------ Jack J. Cayre /s/ JACK J. CAYRE ------------------------------------------------ -2- 3 FOR THE TRUSTS: Michael Cayre Irrevocable Grantor Trust /s/ TRINA CAYRE ------------------------------------------------ By: Trina Cayre, Trustee Steven Cayre Irrevocable Grantor Trust /s/ TRINA CAYRE ------------------------------------------------ By: Trina Cayre, Trustee Daniel Cayre Irrevocable Grantor Trust /s/ TRINA CAYRE ------------------------------------------------ By: Trina Cayre, Trustee Grace E. Cayre Irrevocable Grantor Trust /s/ TRINA CAYRE ------------------------------------------------ By: Trina Cayre, Trustee -3- 4 Jack S. Cayre Irrevocable Grantor Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee Amin Cayre Irrevocable Grantor Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee David Cayre Irrevocable Grantor Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee Robert Cayre Irrevocable Grantor Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee Grace S. Cayre Irrevocable Grantor Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee -4- 5 Jack Kennedy Cayre Irrevocable Grantor Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee Nathan Cayre Irrevocable Grantor Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee Michelle Cayre Irrevocable Grantor Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee Grace K. Cayre Irrevocable Grantor Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee Raquel Cayre Irrevocable Grantor Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee -5- 6 Joseph J. Cayre Grantor Retained Annuity Trust /s/ TRINA CAYRE ------------------------------------------------ By: Trina Cayre, Trustee Jack J. Cayre Grantor Retained Annuity Trust /s/ JOSEPH CAYRE ------------------------------------------------ By: Joseph Cayre, Trustee Stanley Cayre Grantor Retained Annuity Trust /s/ FRIEDA CAYRE ------------------------------------------------ By: Frieda Cayre, Trustee Kenneth Cayre Grantor Retained Annuity Trust /s/ LILLIAN CAYRE ------------------------------------------------ By: Lillian Cayre, Trustee -6- EX-10.31 4 CREDIT AGREEMENT 1 EXHIBIT 10.31 $40,000,000 CREDIT AGREEMENT dated as of January 21, 1997 among GT Interactive Software Corp. The Banks Listed Herein, The Letter of Credit Issuing Bank Named Herein and Republic National Bank of New York as Agent 2
TABLE OF CONTENTS PAGE ARTICLE 1 DEFINITION.............................................................................................1 SECTION 1.01. Definitions...............................................................................1 SECTION 1.02. Accounting Terms and Determinations.......................................................10 ARTICLE 2 The Credits...........................................................................................10 SECTION 2.01. Commitments to Lend......................................................................10 SECTION 2.02. Method of Borrowing......................................................................11 SECTION 2.03. Notes....................................................................................12 SECTION 2.04. Maturity of Loans........................................................................12 SECTION 2.05. Interest Rates...........................................................................12 SECTION 2.06. Fees.....................................................................................13 SECTION 2.07. Optional Termination or Reduction of Commitments; Optional Prepayment.........................................................14 SECTION 2.08. Method of Electing Interest Rates........................................................14 SECTION 2.09. Mandatory Termination of Commitments.....................................................15 SECTION 2.10. General Provisions as to Payments........................................................15 SECTION 2.11. Funding Losses...........................................................................16 SECTION 2.12. Computation of Interest and Fees.........................................................16 SECTION 2.13. Letters of Credit........................................................................16 ARTICLE 3 CONDITION .........................................................................................19 SECTION 3.01. Closing..................................................................................19 SECTION 3.02. Borrowings and Issuances of Letters of Credit...................................................................................19 ARTICLE 4 REPRESENTATIONS AND WARRANTIES........................................................................20 SECTION 4.01. Corporate Existence and Power............................................................20 SECTION 4.02. Corporate and Governmental Authorization; No Contravention.........................................................................20 SECTION 4.03. Binding Effect...........................................................................20 SECTION 4.04. Financial Information....................................................................20 SECTION 4.05. Litigation...............................................................................21 SECTION 4.06. Compliance with ERISA....................................................................21 SECTION 4.07. Environmental Matters....................................................................21 SECTION 4.08. Taxes....................................................................................22 SECTION 4.09. Intellectual Property....................................................................22 SECTION 4.10. Capitalization...........................................................................22 SECTION 4.11. Debt and Liens...........................................................................22 SECTION 4.12. Subsidiaries.............................................................................23 SECTION 4.13. Regulatory Restrictions on Borrowing.....................................................23 SECTION 4.14. Full Disclosure..........................................................................23 ARTICLE 5 COVENANTS.............................................................................................24 SECTION 5.01. Information..............................................................................24 SECTION 5.02. Payment of Obligations...................................................................25 SECTION 5.03. Maintenance of Property; Insurance.......................................................26 SECTION 5.04. Conduct of Business and Maintenance of Existence................................................................................26 SECTION 5.05. Compliance with Laws.....................................................................26 SECTION 5.06. Inspection of Property, Books and Records................................................26
-i- 3 SECTION 5.07. Merger and Sales of Assets...............................................................27 SECTION 5.08. Use of Proceeds..........................................................................27 SECTION 5.09. Negative Pledge..........................................................................27 SECTION 5.10. Limitation on Debt.......................................................................28 SECTION 5.11. Minimum Tangible Net Worth...............................................................28 SECTION 5.12. Debt: Tangible Net Worth.................................................................28 SECTION 5.13. Investments..............................................................................29 SECTION 5.14. Working Capital..........................................................................29 SECTION 5.15. Current Ratio............................................................................29 SECTION 5.16. Restricted Payments......................................................................29 SECTION 5.17. Minimum Net Income.......................................................................29 SECTION 5.18. Sale-Leaseback Transactions..............................................................29 SECTION 5.19. Transactions with Affiliates.............................................................29 SECTION 5.20. Lines of Business........................................................................30 ARTICLE 6 DEFAULTS..............................................................................................30 SECTION 6.01. Events of Default........................................................................30 SECTION 6.02. Notice of Default........................................................................31 SECTION 6.03. Cash Cover...............................................................................31 ARTICLE 7 THE AGENT.............................................................................................32 SECTION 7.01. Appointment and Authorization............................................................32 SECTION 7.02. Agent and Affiliates.....................................................................32 SECTION 7.03. Action by Agent..........................................................................32 SECTION 7.04. Consultation with Experts................................................................32 SECTION 7.05. Liability of Agent.......................................................................32 SECTION 7.06. Indemnification..........................................................................32 SECTION 7.07. Credit Decision..........................................................................33 SECTION 7.08. Successor Agent..........................................................................33 SECTION 7.09. Agent's Fee..............................................................................33 ARTICLE 8 CHANGES IN CIRCUMSTANCE...............................................................................33 SECTION 8.01. Basis for Determining Interest Rate Inadequate or Unfair.........................................................33 SECTION 8.02. Illegality...............................................................................34 SECTION 8.03. Increased Cost and Reduced Return........................................................34 SECTION 8.04. Taxes....................................................................................35 SECTION 8.05. Base Rate Loans Substituted for Affected EuroDollar Loans....................................................36 ARTICLE 9 MISCELLANEOUS.........................................................................................37 SECTION 9.01. Notices..................................................................................37 SECTION 9.02. No Waivers...............................................................................37 SECTION 9.03. Expenses; Indemnification................................................................37 SECTION 9.04. Sharing of Set-offs......................................................................38 SECTION 9.05. Amendments and Waivers...................................................................38 SECTION 9.06. Successors and Assigns...................................................................38 SECTION 9.07. Collateral...............................................................................40 SECTION 9.08. Continuing Obligation....................................................................40 SECTION 9.09. Governing Law; Submission to Jurisdiction................................................40 SECTION 9.10. Counterparts; Integration; Effectiveness.................................................40 SECTION 9.11. WAIVER OF JURY TRIAL.....................................................................40 SECTION 9.12. Confidentiality..........................................................................41
-ii- 4 AGREEMENT dated as of January 21, 1997 among GT INTERACTIVE SOFTWARE CORP., the BANKS listed on the signature pages hereof, the LETTER OF CREDIT ISSUING BANK named herein and REPUBLIC NATIONAL BANK OF NEW YORK, as Agent. The parties hereto agree as follows: ARTICLE 1. DEFINITION SECTION 1.1. Definitions. The following terms, as used herein, have the following meanings: "ADJUSTED LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.05(b). "AFFILIATE" means (i) any Person that directly, or indirectly through one or more intermediaries, controls the Borrower (a "CONTROLLING PERSON") or (ii) any Person (other than the Borrower or a Subsidiary) which is controlled by or is under common control with a Controlling Person. As used herein, the term "control" means possession, directly or indirectly, of the power to vote 25% or more of any class of voting securities of a Person or to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "AGENT" means RNB, in its capacity as agent for the Banks hereunder, and its successors in such capacity. "APPLICABLE LENDING OFFICE" means, with respect to any Bank, (i) in the case of its Base Rate Loans, its Domestic Lending Office and (ii) in the case of its EuroDollar Loans, its EuroDollar Lending Office. "ASSET SALE" means any sale or other disposition (excluding any lease or license and any such transaction effected by way of merger or consolidation) by the Borrower or any of its Subsidiaries of any asset, but excluding (i) dispositions of inventory, cash, cash equivalents and other cash management investments and obsolete, unused or unnecessary equipment and undeveloped real estate, in each case in the ordinary course of business and (ii) dispositions to the Borrower or a Subsidiary of the Borrower. "ASSIGNEE" has the meaning set forth in Section 9.06(c). "BANK" means each bank listed on the signature pages hereof, each Assignee which becomes a Bank pursuant to Section 9.06(c), and their respective successors and shall include, as the context may require, any Issuing Bank in such capacity. "BASE RATE" means, for any day, a rate per annum equal to the Reference Rate for such day. 5 "BASE RATE LOAN" means (i) a Loan which bears interest at the Base Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or the provisions of Article 8 or (ii) an overdue amount which was a Base Rate Loan immediately before it became overdue. "BENEFIT ARRANGEMENT" means at any time an employee benefit plan within the meaning of Section (3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "BORROWER" means GT Interactive Software Corp., a Delaware corporation, and its successors. "BORROWING" means a borrowing hereunder consisting of Loans made to the Borrower on the same day pursuant to Article 2, all of which Loans are of the same type (subject to Article 8) and, except in the case of Base Rate Loans, have the same initial Interest Period. A Borrowing is a "BASE RATE BORROWING" if such Loans are Base Rate Loans or a "EURODOLLAR BORROWING" if such Loans are EuroDollar Loans. "CAYRE FAMILY" shall have the meaning set forth in Section 6.01(j) hereof. "CLOSING DATE" means the date on or after the Effective Date on which the Agent shall have received the documents specified in or pursuant to Section 3.01. "COMMITMENT" means, with respect to each Bank, the amount set forth opposite the name of such Bank on the signature pages hereof, as such amount may be reduced from time to time pursuant to Section 2.07. "CONSOLIDATED CAPITAL EXPENDITURES" means, for any period, the additions to property, plant and equipment and other capital expenditures of the Borrower and its Consolidated Subsidiaries for such period, as the same are or would be set forth in a consolidated statement of cash flows of the Borrower and its Consolidated Subsidiaries for such period. "CONSOLIDATED DEBT" means at any date the Debt of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis as of such date. "CONSOLIDATED NET INCOME" means, for any fiscal period, the net income of the Borrower and its Consolidated Subsidiaries, determined on a consolidated basis for such period, exclusive of the effect of any extraordinary or other nonrecurring gain or loss. "CONSOLIDATED CURRENT ASSETS" means all cash, short term investments, customers' accounts receivable, inventory and deposits, of the Borrower and its Consolidated Subsidiaries. -2- 6 "CONSOLIDATED CURRENT LIABILITIES" means those amounts due or to become due for payment within twelve (12) months subsequent to the relevant statement date, including all outstanding Loans (regardless of when due), Standby Letter of Credit Liabilities and Documentary Letter of Credit Liabilities of the type described in clause (x) of the definition of Letter of Credit Liabilities, but excluding Documentary Letter of Credit Liabilities of the type described in clause (y) of the definition of Letter of Credit Liabilities, by the Borrower or its Consolidated Subsidiaries (excluding intercompany amounts due to the Borrower). "CONSOLIDATED TANGIBLE NET WORTH" means at any date (1) the aggregate amount at which all assets of Borrower and its Consolidated Subsidiaries would be shown on a balance sheet at such date after deducting capitalized research and development costs, capitalized interest, goodwill, patents, trademarks, copyrights, franchises, licenses and such other assets as are properly classified as "intangible assets", less (2) the aggregate principal amount of all indebtedness, liabilities (including tax and other proper accruals and all Loans and Standby Letter of Credit Liabilities, but excluding Documentary Letter of Credit Liabilities), deferred tax assets and reserves of Borrower and its Consolidated Subsidiaries but only to the extent not deducted in clause (1). "CONSOLIDATED SUBSIDIARY" means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date. "CONSOLIDATED TOTAL LIABILITIES" means at any date all liabilities of the Borrower and its Consolidated Subsidiaries (including all Loans and Letter of Credit Liabilities (other than in the case of Documentary Letters of Credit only, liabilities described in clause (y) of the definition of Letter of Credit Liabilities)) which would properly appear on the liability side of a balance sheet, other than capital stock, capital surplus, retained earnings, minority interest, deferred credits, and contingency reserves. "CONSOLIDATED WORKING CAPITAL" means at any date the excess of Consolidated Current Assets over Consolidated Current Liabilities. "DEBT" of any Person means at any date, without duplication, (i) the principal portion of all obligations of such Person for borrowed money, (ii) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all obligations of such Person to pay the deferred purchase price of property or services, except trade accounts payable and accrued expenses arising in the ordinary course of business, (iv) all obligations of such Person as lessee which are capitalized in accordance with generally accepted accounting principles (the -3- 7 amount of such Debt being the capitalized amount thereof on the Borrower's financial statements), (v) all non-contingent obligations (and, for purposes of Section 5.09 and the definition of Material Debt, all contingent obligations) of such Person to reimburse any bank or other Person in respect of amounts paid under a letter of credit or similar instrument, (vi) all Debt secured by a Lien on any asset of such Person, whether or not such Debt is otherwise an obligation of such Person (the amount of such Debt being limited to the fair market value of such asset if such Person's liability with regard to such Debt is limited solely to such asset) and (vii) all Debt of others Guaranteed by such Person, it being understood that Debt shall not include amounts of outstanding Documentary Letters of Credit but shall include amounts of outstanding Standby Letters of Credit. "DEFAULT" means any condition or event which constitutes an Event of Default or which with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default. "DOCUMENTARY LETTER OF CREDIT" means a letter of credit which is used as the payment mechanism for the acquisition of goods, rights or other assets. "DOCUMENTARY LETTER OF CREDIT LIABILITIES" means any liabilities ensuing from Documentary Letters of Credit. "DOMESTIC BUSINESS DAY" means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized by law to close. "DOMESTIC LENDING OFFICE" means, as to each Bank, its office located at its address set forth below its name on the signature page thereof as its Domestic Lending Office or such other office as such Bank may hereafter designate as its Domestic Lending Office by notice to the Borrower and the Agent. "DOMESTIC SUBSIDIARY" means any Subsidiary of the Borrower organized in a jurisdiction within the United States. "EFFECTIVE DATE" means the date this Agreement becomes effective in accordance with Section 9.10. "ENVIRONMENTAL LAWS" means any and all federal, state, local and foreign statutes, laws, judicial decisions, regulations, ordinances, rules, judgments, orders, decrees, plans, injunctions, permits, concessions, grants, franchises, licenses, agreements and other governmental restrictions relating to the environment, the effect of the environment on human health or to emissions, discharges or releases of pollutants, contaminants, Hazardous Substances or wastes into the environment including, without limitation, ambient air, surface water, ground water, or land, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or -4- 8 handling of pollutants, contaminants, Hazardous Substances or wastes or the clean-up or other remediation thereof. "EQUITY RIGHTS" means with respect to any Person, any outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class of, or partnership or other ownership interests of any type in, such Person. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, or any successor statute. "ERISA GROUP" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "EURODOLLAR BUSINESS DAY" means any Domestic Business Day on which commercial banks are open for international business (including dealings in dollar deposits) in London. "EURODOLLAR LENDING OFFICE" means, as to each Bank, its office, branch or affiliate located at its address set forth below its name on the signature page thereof as its EuroDollar Lending Office or such other office, branch or affiliate of such Bank as it may hereafter designate as its EuroDollar Lending Office by notice to the Borrower and the Agent. "EURODOLLAR LOAN" means (i) a Loan which bears interest at a EuroDollar Rate pursuant to the applicable Notice of Borrowing or Notice of Interest Rate Election or (ii) an overdue amount which was a EuroDollar Loan immediately before it became overdue. "EURODOLLAR MARGIN" means 1 1/4%. "EURODOLLAR RATE" means a rate of interest determined pursuant to Section 2.05(b) on the basis of an Adjusted London Interbank Offered Rate. "EURODOLLAR RESERVE PERCENTAGE" has the meaning set forth in Section 2.05(b). "EVENT OF DEFAULT" has the meaning set forth in Section 6.01. "EXISTING APPLICATION FOR COMMERCIAL CREDIT" means the Application for Commercial Credit dated December 24, 1996 between the Borrower and the Issuing Bank. -5- 9 "EXISTING LETTER OF CREDIT" means the letter of credit in the face amount of $1,666,666.66 issued before the Closing Date under the existing Application for Commercial Credit. "FEDERAL FUNDS RATE" means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Domestic Business Day next succeeding such day, provided that (i) if such day is not a Domestic Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Domestic Business Day as so published on the next succeeding Domestic Business Day, and (ii) if no such rate is so published on such next succeeding Domestic Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent on such day on such transactions as reasonably determined by the Agent to be relevant. "FINANCING DOCUMENTS" means this Agreement and the Notes. "FOREIGN SUBSIDIARY" means any Subsidiary of the Borrower that is not a Domestic Subsidiary. "GROUP OF LOANS" means at any time a group of Loans consisting of (i) all Loans which are Base Rate Loans at such time or (ii) all EuroDollar Loans having the same Interest Period at such time, provided that, if a Loan of any particular Bank is converted to or made as a Base Rate Loan pursuant to Article 8, such Loan shall be included in the same Group or Groups of Loans from time to time as it would have been in if it had not been so converted or made. "GUARANTEE" by any Person means any obligation, contingent or otherwise, of such Person directly or indirectly guaranteeing any Debt or other obligation for the payment of money of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or other obligation for the payment of money (whether arising by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (ii) entered into for the purpose of assuring in any other manner the holder of such Debt or other obligation of the payment thereof or to protect such holder against loss in respect thereof (in whole or in part), provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning. -6- 10 "HAZARDOUS SUBSTANCES" means any toxic, radioactive, caustic or otherwise hazardous substance, including petroleum, its derivatives, by-products and other hydrocarbons, or any substance having any constituent elements displaying any of the foregoing characteristics. "INDEMNITEE" has the meaning set forth in Section 9.03(b). "INTEREST PERIOD" means with respect to each EuroDollar Loan, the period commencing on the date of borrowing specified in the applicable Notice of Borrowing or on the date specified in the applicable Notice of Interest Rate Election and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice; provided that: (i) any Interest Period which would otherwise end on a day which is not a EuroDollar Business Day shall be extended to the next succeeding EuroDollar Business Day unless such EuroDollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding EuroDollar Business Day; (ii) any Interest Period which begins on the last EuroDollar Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last EuroDollar Business Day of a calendar month; and (iii) any Interest Period which would otherwise end after the Termination Date shall end on the Termination Date. "INTERNAL REVENUE CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. "INVESTMENT" means any investment in any Person, whether by means of share purchase, capital contribution, loan, Guarantee, time deposit or otherwise (but not including any demand deposit). "ISSUING BANK" means RNB as issuer of a Letter of Credit hereunder. "JOINT VENTURE" means at any time (i) any corporation of which not less than 10% nor more than 50% of each class of capital stock having ordinary voting power to elect the board of directors of such corporation or other persons performing similar functions are at the time directly or indirectly owned by the Borrower and (ii) any partnership, association or joint venture not less than 10% nor more than 50% of the equity interests of which are at the time directly or indirectly owned by the Borrower, but excluding in any event any Subsidiary of the Borrower. -7- 11 "LETTER OF CREDIT" means a letter of credit to be issued under Section 2.13(b) by the Issuing Bank. "LETTER OF CREDIT LIABILITIES" means, for any Bank and at any time, the sum of (x) the amounts then owing to such Bank (including in the case of RNB in its capacity as an Issuing Bank) by the Borrower to reimburse it in respect of amounts drawn under Letters of Credit and (y) such Bank's ratable participation in the aggregate amount then available for drawing under all outstanding Letters of Credit. "LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset. "LOAN" means a Base Rate Loan or a EuroDollar Loan and "Loans" means Base Rate Loans or EuroDollar Loans or any combination of the foregoing.. "LONDON INTERBANK OFFERED RATE" has the meaning set forth in Section 2.05(b). "MATERIAL DEBT" means Debt (other than the Notes) of the Borrower and/or one or more of its Subsidiaries (other than intercompany indebtedness), arising (a) in a single transaction, in a principal or face amount exceeding $1,000,000, or (b) in more than one related or unrelated transactions in an aggregate principal or face amount exceeding $2,000,000. "MATERIAL PLAN" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $1,000,000. "MATERIAL SUBSIDIARY" means a subsidiary, including its subsidiaries, (i) the investments in and advances to which by the Borrower and its other subsidiaries exceed 10% of the total consolidated assets of the Borrower and its consolidated subsidiaries as of the end of the most recently completed fiscal quarter, or (ii) the proportionate share of the Borrower or its other subsidiaries in the total assets of which exceeds 10% of the total assets (after intercompany eliminations) of the Borrower and its other subsidiaries consolidated as of the end of the most recently completed fiscal quarter, or (iii) of which the Borrower's or its other subsidiaries' equity in the income from continuing operations before income taxes, extraordinary items and cumulative effect of a change in accounting principles of the subsidiary exceeds 10% of such income of the Borrower and its -8- 12 subsidiaries consolidated for the most recently completed fiscal quarter. "MONTHLY DATES" means the last day of each calendar month. "MULTIEMPLOYER PLAN" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "NBD" means NBD Bank, a Michigan banking corporation and its successors. "NOTES" means promissory notes of the Borrower, substantially in the respective forms of Exhibits A-1 and A-2 hereto, evidencing the obligation of the Borrower to repay the Loans, and "Note" means any one of such promissory notes issued hereunder. "NOTICE OF BORROWING" has the meaning set forth in Section 2.02. "NOTICE OF ISSUANCE" has the meaning set forth in Section 2. 13(b). "NOTICE OF INTEREST RATE ELECTION" has the meaning set forth in Section 2.08. "PARENT" means, with respect to any Bank, any Person controlling such Bank. "PARTICIPANT" has the meaning set forth in Section 9.06(b). "PBGC" means the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. "PERMITTED ACQUISITION" means the acquisition by the Borrower or any Subsidiary of any Person or of any division or line of business of any Person or of any minority or majority equity interest therein, either by merger, consolidation, purchase of stock or other equity interest, or purchase of all or a substantial part of the assets of such business or purchase of less than all of the equity of any Person; provided that, unless waived by the Agent and each of the Banks, in the exercise of their respective sole discretions, each of the following conditions shall have been satisfied: (a) such acquisition shall be of a business which is a developer, publisher, merchandiser or distributor of consumer software or a business related thereto or is a start-up company intending to engage in any such business (including in each case, -9- 13 without limitation, Internet and similar on-line or electronic related businesses); and (b) such transaction shall not be a "hostile" acquisition or other "hostile" transaction (i.e., such transaction shall not be opposed by the Board of Directors of the business), provided that in the event the Borrower proposes to initiate such transaction as a hostile transaction with the intent to attempt to subsequently obtain the approval of the Board of Directors of such business, the Borrower may notify the Agent and each Bank in writing in advance of the initiation of such proposed transaction together with any information concerning such transaction as the Agent and Bank may reasonably request, and, provided that each Bank shall have approved such transaction in writing prior to the initiation of such transaction, with the approval of each Bank being based solely on a conflict of any kind of such Bank concerning such proposed acquisition and with such approval not to be unreasonably withheld, the Borrower may proceed with such transaction so long as the transaction ultimately is approved by the Board of Directors of such business (and a majority of which were members of such Board of Directors at the time such transaction was initiated) and is otherwise in accordance with the terms of this Agreement. "PERSON" means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof "PLAN" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (i) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (ii) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group, and as to which Borrower may have contingent liability exceeding $1,000,000. "REFERENCE RATE" means the rate of interest established by RNB from time to time at its principal domestic office as its reference lending rate for domestic commercial loans. "REFERENCE BANK" means the principal London offices of RNB. "REGULATION U" means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time. "REIMBURSEMENT OBLIGATIONS" means at any date the obligations of the Borrower then outstanding under Section 2.13 -10- 14 to reimburse any Bank for the amount paid by such Bank in respect of a drawing under a Letter of Credit. "REQUIRED BANKS" means at any time Banks having at least 75% of the aggregate amount of the Commitments or, if the Commitments shall have been terminated, holding Notes evidencing at least 75% of the sum of the aggregate unpaid principal amount of the Loans and Letter of Credit Liabilities. "RESTRICTED PAYMENT" means (i) any dividend or other distribution on any shares of the Borrower's capital stock (except dividends payable solely in shares of its capital stock) or (ii) any payment on account of the purchase, redemption, retirement or acquisition of (a) any shares of the Borrower's capital stock or (b) any option, warrant or other right to acquire shares of the Borrower's capital stock (but not including payments of principal, premium (if any) or interest made pursuant to the terms of convertible debt securities prior to conversion), in each case excluding repurchases under employee stock option plans and warrant agreements, other than with the Cayre Family, to which the Borrower is a party in an aggregate amount not exceeding $1,000,000; and excluding the acquisition by the Borrower of shares of its Common Stock in open market or privately negotiated transactions pursuant to a stock repurchase program approved by its Board of Directors, provided that (i) the aggregate amount expended therefor does not exceed $20,000,000, and (ii) such shares are not acquired in privately negotiated transactions from any members of the Cayre Family. "REVOLVING CREDIT PERIOD" means the period from and including the Closing Date to but not including the Termination Date. "RNB" means Republic National Bank of New York, a bank organized and existing under the laws of the United States and it successors. "SALE-LEASEBACK TRANSACTION" means any arrangement with any Person providing for the leasing by the Borrower or any Subsidiary of any property that, or of any property similar to and used for substantially the same purposes as any other property that, has been or is to be sold, assigned, transferred or otherwise disposed of by the Borrower or any of its Subsidiaries to such Person with the intention of entering into such a lease. "STANDBY LETTER OF CREDIT" means any Letter of Credit which is not a Documentary Letter of Credit. "STANDBY LETTER OF CREDIT LIABILITIES" means any liabilities ensuing from Standby Letters of Credit. -11- 15 "SUBSIDIARY" means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person; unless otherwise specified, "SUBSIDIARY" means a Subsidiary of the Borrower. "TEMPORARY CASH INVESTMENT" means any Investment in (a) (i) direct obligations of the United States or any agency thereof, or obligations guaranteed by the United States or any agency thereof, (ii) commercial paper rated at least A-1 by Standard & Poor's Ratings Services and PI by Moody's Investors Service, Inc., (iii) time deposits with, including certificates of deposit issued by, any office located in the United States of any bank or trust company which is organized under the laws of the United States or any state thereof and has capital, surplus and undivided profits aggregating at least $1,000,000,000 or (iv) repurchase agreements with respect to securities described in clause (i) above entered into with an office of a bank or trust company meeting the criteria specified in clause (iii) above, provided in each case that such Investment matures within one year from the date of acquisition thereof by the Borrower or a Subsidiary, (b) any money market mutual fund, provided its investment policies require substantially all of its assets to be limited to Temporary Cash Investments described in clause (a) above, or (c) such obligations or instruments as are permitted under the Company's "Investment Policy Guidelines", attached hereto as Exhibit C. "TERMINATION DATE" means December 31, 1998, or, if such day is not a EuroDollar Business Day, the next succeeding EuroDollar Business Day unless such EuroDollar Business Day falls in another calendar month, in which case the Termination Date shall be the next preceding EuroDollar Business Day. "UNFUNDED LIABILITIES" means, with respect to any Plan at any time, the amount (if any) by which (i) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (ii) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "UNITED STATES" means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions. -12- 16 SECTION 1.2. Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time, applied on a basis consistent (except for changes concurred in by the Borrower's independent public accountants) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Banks; provided that, if the Borrower notifies the Agent that the Borrower wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Borrower that the Required Banks wish to amend Article 5 for such purpose), then the Borrower's compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted accounting principles became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Required Banks. ARTICLE 2 The Credits SECTION 2.1. Commitments to Lend. During the Revolving Credit Period, each Bank severally agrees, on the terms and conditions set forth in this Agreement, to make loans to the Borrower from time to time in amounts such that the aggregate principal amount of Loans by such Bank at any one time outstanding plus its Letter of Credit Liabilities shall not exceed the amount of its Commitment. Each Borrowing under this Section shall be in an aggregate principal amount of $1,000,000 or any larger multiple of $100,000 (except that any such Borrowing may be in the aggregate amount of the unused Commitments) and shall be made from the several Banks ratably in proportion to their respective Commitments. Within the foregoing limits, the Borrower may borrow under this Section, prepay Loans to the extent permitted by Section 2.07 and reborrow at any time during the Revolving Credit Period under this Section. SECTION 2.2. Method of Borrowing. (a) The Borrower shall give the Agent notice (a "NOTICE OF BORROWING") not later than 11:00 A.M. (New York City time) on (x) the date of each Base Rate Borrowing and (y) the third EuroDollar Business Day before each EuroDollar Borrowing, specifying: (i) the date of such Borrowing, which shall be a Domestic Business Day in the case of a Base Rate Borrowing or a EuroDollar Business Day in the case of a EuroDollar Borrowing; (ii) the aggregate amount of such Borrowing; -13- 17 (iii) whether the Loans comprising such Borrowing are to bear interest initially at the Base Rate or the EuroDollar Rate; and (iv) in the case of a EuroDollar Borrowing, the duration of the initial Interest Period applicable thereto, subject to the provisions of the definition of Interest Period. (b) Upon receipt of a Notice of Borrowing, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower. (c) Not later than 12:30 P.M. (New York City time) on the date of each Borrowing, each Bank shall make available its ratable share of such Borrowing, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. Unless the Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Agent will make the funds so received from the Banks available to the Borrower at the Agent's aforesaid address. (d) Unless the Agent shall have received notice from a Bank prior to the date of any Borrowing that such Bank will not make available to the Agent such Bank's share of such Borrowing, the Agent may assume that such Bank has made such share available to the Agent on the date of such Borrowing in accordance with subsection (c) of this Section and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Bank shall not have so made such share available to the Agent, such Bank and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, a rate per annum equal to the higher of the Federal Funds Rate and the interest rate applicable thereto pursuant to Section 2.05 and (ii) in the case of such Bank, the Federal Funds Rate. If such Bank shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Bank's Loan included in such Borrowing for purposes of this Agreement. SECTION 2.3. Notes. (a) The Loans of each Bank shall be evidenced by a single Note payable to the order of such Bank in an amount equal to the aggregate unpaid principal amount of such Bank's Loans. (b) Each Bank may, by notice to the Borrower and the Agent, request that its Loans of a particular type be evidenced by a separate Note in an amount equal to the aggregate unpaid principal amount of such Loans. Each such Note shall be in substantially the form of Exhibit A hereto with appropriate -14- 18 modifications to reflect the fact that it evidences solely Loans of the relevant type. Each reference in this Agreement to the "Note" of such Bank shall be deemed to refer to and include any or all of such Notes, as the context may require. (c) Upon receipt of each Bank's Note pursuant to Section 3.01(c), the Agent shall forward such Note to such Bank. Each Bank shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Bank so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that the failure of any Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Notes. Each Bank is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required. SECTION 2.4. Maturity of Loans. Each Loan shall mature, and the principal amount thereof shall be due and payable, on the Termination Date. SECTION 2.5. Interest Rates. (a) Each Base Rate Loan shall bear interest on the outstanding principal amount thereof for each day from the date such Loan is made until it becomes due, at a rate per annum equal to the Base Rate for such day. Such interest shall be payable monthly in arrears on each Monthly Date and, with respect to the principal amount of any Base Rate Loan converted to a EuroDollar Loan, on each date a Base Rate Loan is so converted. Any overdue principal of any Base Rate Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate otherwise applicable to Base Rate Loans for such day. (b) Each EuroDollar Loan shall bear interest on the outstanding principal amount thereof for each day during each Interest Period applicable thereto, at a rate per annum equal to the sum of the EuroDollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Interest Period. Such interest shall be payable for each Interest Period on the last day thereof and, if such Interest Period is longer than one month, at intervals of one month after the first day thereof. The "ADJUSTED LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means a rate per annum equal to the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (i) the applicable London Interbank Offered Rate by (ii) 1.00 minus the EuroDollar Reserve Percentage. The "LONDON INTERBANK OFFERED RATE" applicable to any Interest Period means the average (rounded upward, if necessary, -15- 19 to the next higher 1/8 of 1%) of the respective rates per annum at which deposits in dollars in immediately available funds are offered to the Reference Bank by prime commercial banks in the London interbank market at approximately 11:00 A.M. (London time) two EuroDollar Business Days before the first day of such Interest Period for delivery on the first day of such Interest Period in an amount approximately equal to the principal amount of the EuroDollar Loan of the Reference Bank to which such Interest Period is to apply and for a period of time comparable to such Interest Period. "EURODOLLAR RESERVE PERCENTAGE" means for any day that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement for a member bank of the Federal Reserve System in New York City with deposits exceeding five billion dollars in respect of "EUROCURRENCY LIABILITIES" (or in respect of any other category of liabilities which includes deposits by reference to which the interest rate on EuroDollar Loans is determined or any category of extensions of credit or other assets which includes loans by a non-United States office of any Bank to United States residents). The Adjusted London Interbank Offered Rate shall be adjusted automatically on and as of the effective date of any change in the EuroDollar Reserve Percentage. (c) Any overdue principal of any EuroDollar Loan shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the higher of (i) the sum of 2% plus the EuroDollar Margin for such day plus the quotient obtained (rounded upward, if necessary, to the next higher 1/100 of 1%) by dividing (x) the average (rounded upward, if necessary, to the next higher 1/8 of 1%) of the respective rates per annum at which one day (or, if such amount due remains unpaid more than three EuroDollar Business Days, then for such other period of time not longer than three months as the Agent may select) deposits in dollars in an amount approximately equal to such overdue payment due to Banks are offered to the Reference Bank by prime commercial banks in the London interbank market for the applicable period determined as provided above by (y) 1.00 minus the EuroDollar Reserve Percentage (or, if the circumstances described in clause (a) or (b) of Section 8.01 shall exist, at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day) and (ii) the sum of 2% plus the EuroDollar Margin for such day plus the Adjusted London Interbank Offered Rate applicable to such Loan at the date such payment was due. (d) The Agent shall determine each interest rate applicable to the Loans hereunder. The Agent shall give prompt notice to the Borrower and the participating Banks of each rate of interest so determined, and its determination thereof shall be conclusive in the absence of demonstrable error. -16- 20 SECTION 2.6. Fees. (a) During the Revolving Credit Period, the Borrower shall pay to the Agent for the account of the Banks ratably in proportion to their Commitments a commitment fee of 1/4 of 1% per annum on the daily amount by which the aggregate amount of the Commitments exceeds the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities. Such commitment fee shall accrue from and including the Closing Date to but excluding the date of termination of the Commitments in their entirety. (b) The Borrower shall pay to the Agent for the account of the Issuing Bank (to be shared with the Banks in accordance with a letter agreement among the Issuing Bank and the Banks) (i) a letter of credit fee accruing daily on the aggregate amount then available for drawing under all Documentary Letters of Credit at a rate per annum equal to 3/4 of 1% and (ii) a Letter of Credit fee accruing daily on the aggregate amount then available for drawing under all Standby Letters of Credit at a rate per annum equal to 3/4 of 1%, plus upon each draw 1/8 of 1% the amount so drawn upon. (c) The Borrower shall pay to the Agent, for the account of the Banks ratably on the Closing Date, a non-refundable facility fee in an amount equal to 1/4 of 1% of the aggregate amount of the Commitments. (d) Other than the standby letter of credit drawing fee referred to in clause (b) above (which is due upon the Issuing Bank's payment of such draw) and the facility fee referred to in clause (c) above, the accrued fees under this Section shall be payable quarterly in arrears commencing March 31, 1997 and on the date of termination of the Commitments in their entirety (and, if later, the date the Loans and the aggregate amount of Letter of Credit Liabilities shall be repaid in their entirety to the extent Letters of Credit have been drawn upon, or to the extent not drawn upon, the date such Letter of Credit shall have terminated). SECTION 2.7. Optional Termination or Reduction of Commitments; Optional Prepayment. (a) During the Revolving Credit Period, the Borrower may, upon at least three Domestic Business Days' notice to the Agent, (i) terminate the Commitments at any time, if no Loans or Letter of Credit Liabilities are outstanding at such time or (ii) ratably reduce from time to time by an aggregate amount of $1,000,000 or a larger multiple of $100,000, the aggregate amount of the Commitments in excess of the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities. (b) Subject in the case of any EuroDollar Borrowing to Section 2.11, the Borrower may, upon at least one Domestic Business Day's notice to the Agent, prepay any Group of Base Rate Loans or upon at least three EuroDollar Business Day's notice to the Agent, prepay any Group of EuroDollar Loans, in each case in -17- 21 whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $100,000, by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Banks included in such Group. (c) Upon receipt of a notice of prepayment pursuant to this Section, the Agent shall promptly notify each Bank of the contents thereof and of such Bank's ratable share of such prepayment and such notice shall not thereafter be revocable by the Borrower. SECTION 2.8. Method of Electing Interest Rates. (a) The Loans included in each Borrowing shall bear interest initially at the type of rate specified by the Borrower in the applicable Notice of Borrowing. Thereafter, the Borrower may from time to time elect to change or continue the type of interest rate borne by each Group of Loans (subject in each case to the provisions of Article 8), as follows: (i) if such Loans are Base Rate Loans, the Borrower may elect to convert such Loans to EuroDollar Loans as of any EuroDollar Business Day; and (ii) if such Loans are EuroDollar Loans, the Borrower may elect to convert such Loans to Base Rate Loans or elect to continue such Loans as EuroDollar Loans for an additional Interest Period, subject to Section 2.11 in the case of any such conversion or continuation effective on any day other than the last day of the then current Interest Period applicable to such Loans. Each such election shall be made by delivering a notice (a "NOTICE OF INTEREST RATE ELECTION") to the Agent not later than 11:00 A.M. (New York City time) on the third EuroDollar Business Day before the conversion or continuation selected in such notice is to be effective. A Notice of Interest Rate Election may, if it so specifies, apply to only a portion of the aggregate principal amount of the relevant Group of Loans; provided that (i) such portion is allocated ratably among the Loans comprising such Group and (ii) the portion to which such Notice applies, and the remaining portion to which it does not apply, are each $1,000,000 or any larger multiple of $100,000. (b) Each Notice of Interest Rate Election shall specify: (i) the Group of Loans (or portion thereof) to which such notice applies; (ii) the date on which the conversion or continuation selected in such notice is to be effective, which shall comply with the applicable clause of subsection(a) above; -18- 22 (iii) if the Loans comprising such Group are to be converted, the new type of Loans and, if the Loans being converted are to be EuroDollar Loans, the duration of the next succeeding Interest Period applicable thereto; and (iv) if such Loans are to be continued as EuroDollar Loans for an additional Interest Period, the duration of such additional Interest Period. Each Interest Period specified in a Notice of Interest Rate Election shall comply with the provisions of the definition of Interest Period. (c) Upon receipt of a Notice of Interest Rate Election from the Borrower pursuant to subsection (a) above, the Agent shall promptly notify each Bank of the contents thereof and such notice shall not thereafter be revocable by the Borrower. (d) An election by the Borrower to change or continue the rate of interest applicable to any Group of Loans pursuant to this section shall not constitute a "Borrowing" subject to the provisions of Section 3.02. SECTION 2.9. Mandatory Termination of Commitments. The Commitments shall terminate on the Termination Date and any Loans then outstanding (together with accrued interest thereon) shall be due and payable on such date. SECTION 2.10. General Provisions as to Payments. (a) The Borrower shall make each payment of principal of and interest on, the Loans and of Letter of Credit Liabilities and interest thereon and of fees hereunder (other than fees payable directly to the Issuing Bank), not later than 12:00 Noon (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Agent at its address referred to in Section 9.01. The Agent will promptly distribute to each Bank its ratable share of each such payment received by the Agent for the account of the Banks. Whenever any payment of principal of or interest on, the Base Rate Loans or of Letter of Credit Liabilities or interest thereon or of fees shall be due on a day which is not a Domestic Business Day, the date for payment thereof shall be extended to the next succeeding Domestic Business Day. Whenever any payment of principal of or interest on, the EuroDollar Loans shall be due on a day which is not a EuroDollar Business Day, the date for payment thereof shall be extended to the next succeeding EuroDollar Business Day unless such EuroDollar Business Day falls in another calendar month, in which case the date for payment thereof shall be the next preceding EuroDollar Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. (b) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the -19- 23 Banks hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Bank on such due date an amount equal to the amount then due to such Bank. If and to the extent that the Borrower shall not have so made such payment, each Bank shall repay to the Agent forthwith on demand such amount distributed to such Bank together with interest thereon, for each day from the date such amount is distributed to such Bank until the date such Bank repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.11. Funding Losses. If the Borrower makes any payment of principal with respect to any EuroDollar Loan or any EuroDollar Loan is converted (pursuant to Article 2, 6 or 8 or otherwise) on any day other than the last day of an Interest Period applicable thereto, or the last day of an applicable period fixed pursuant to Section 2.05(c), or if the Borrower fails to borrow, prepay, convert or continue any EuroDollar Loans after notice has been given to any Bank in accordance with Section 2.02(b) or 2.08 the Borrower shall reimburse each Bank within 15 days after demand for any resulting loss or expense incurred by it (or by an existing or prospective Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after any such payment or conversion or failure to borrow, prepay, convert or continue, provided that such Bank shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of demonstrable error. SECTION 2.12. Computation of Interest and Fees. All interest and fees hereunder shall be computed on the basis of a year of 360 days and paid for the actual number of days elapsed (including the first day but excluding the last day). SECTION 2.13. Letters of Credit. (a) On the Closing Date, the Issuing Bank that has issued the Existing Letter of Credit shall be deemed, without further action by any party hereto, to have sold to each Bank, and each such Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in the Existing Letter of Credit and the related Letter of Credit Liabilities in proportion to their Commitments. On and after the Closing Date, the Existing Letter of Credit shall constitute a Letter of Credit for all purposes hereof. (b) Subject to the terms and conditions hereof the Issuing Bank agrees to issue Letters of Credit hereunder from time to time before the 30th day before the Termination Date upon the request of the Borrower; provided that, immediately after each Letter of Credit is issued, the aggregate amount of the Letter of Credit Liabilities shall not exceed $15,000,000 and the aggregate -20- 24 amount of the Letter of Credit Liabilities plus the aggregate outstanding amount of all Loans shall not exceed the aggregate amount of the Commitments. Upon the date of issuance by the Issuing Bank of a Letter of Credit, the Issuing Bank shall be deemed, without further action by any party hereto, to have sold to each Bank, and each Bank shall be deemed, without further action by any party hereto, to have purchased from the Issuing Bank, a participation in such Letter of Credit and the related Letter of Credit Liabilities in the proportion their respective Commitments bear to the aggregate Commitments. (c) The Borrower shall give the Issuing Bank notice at least three days prior to the requested issuance of a Letter of Credit specifying the date such Letter of Credit is to be issued, and describing the terms of such Letter of Credit and the nature of the transactions to be supported thereby (such notice, including any such notice given in connection with the extension of a Letter of Credit, a "NOTICE OF ISSUANCE"). Upon receipt of a Notice of Issuance, the Issuing Bank shall promptly notify the Agent, and the Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank's participation in such Letter of Credit. The issuance by the Issuing Bank of each Letter of Credit shall be subject to the conditions precedent that such Letter of Credit shall be in such form and contain such terms as shall be satisfactory to the Issuing Bank and that the Borrower shall have executed and delivered such other instruments and agreements relating to such Letter of Credit as the Issuing Bank shall have reasonably requested. The Borrower shall also pay to the Issuing Bank for its own account amendment and extension charges in the amounts and at the times as agreed between the Borrower and the Issuing Bank. The extension or renewal of any Letter of Credit shall be deemed to be an issuance of such Letter of Credit, and if any Letter of Credit contains a provision pursuant to which it is deemed to be extended unless notice of termination is given by the Issuing Bank, the Issuing Bank shall timely give such notice of termination unless it has theretofore timely received a Notice of Issuance and the other conditions to issuance of a Letter of Credit have also theretofore been met with respect to such extension. No Letter of Credit shall have a term of more than one year; provided that a Letter of Credit may contain a provision pursuant to which it is deemed to be extended on an annual basis unless notice of termination is given by the Issuing Bank; provided further that no Letter of Credit shall have a term extending or be so extendible beyond six (6) months following the Termination Date. (d) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the Issuing Bank shall notify the Agent and the Agent shall promptly notify the Borrower and each other Bank as to the amount to be paid as a result of such demand or drawing and the payment date. Subject to the foregoing, the Borrower shall be irrevocably and unconditionally obligated forthwith to reimburse -21- 25 the Issuing Bank for any amounts paid by the Issuing Bank upon any drawing under any Letter of Credit, without presentment, demand, protest or other formalities of any kind. All such amounts paid by the Issuing Bank and remaining unpaid by the Borrower shall bear interest, payable on demand, for each day until paid at a rate per annum equal to the sum of 2% plus the rate applicable to Base Rate Loans for such day. In addition, each Bank will pay to the Agent, for the account of the Issuing Bank, immediately upon the Issuing Bank's demand at any time during the period commencing after such drawing until reimbursement therefor in full by the Borrower, an amount equal to such Bank's ratable share of such drawing (in proportion to its participation therein), together with interest on such amount for each day from the date of the Issuing Bank's demand for such payment (or, if such demand is made after 12:00 Noon (New York City time) on such date, from the next succeeding Domestic Business Day) to the date of payment by such Bank of such amount at a rate of interest per annum equal to the rate applicable to Base Rate Loans for such period. The Issuing Bank will pay to each Bank ratably all amounts received from the Borrower for application in payment of its Reimbursement Obligations in respect of any Letter of Credit, but only to the extent such Bank has made payment to the Issuing Bank in respect of such Letter of Credit pursuant hereto. (e) The obligations of the Borrower and each Bank under subsection (d) above shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances (except to the extent such obligation of the Borrower to such Bank arose as a result of such Bank's (including the Issuing Bank's) gross negligence or willful misconduct): (i) any lack of validity or enforceability of this Agreement or any Letter of Credit or any document related hereto or thereto; (ii) any amendment or waiver of or any consent to departure from all or any of the provisions of this Agreement or any Letter of Credit or any document related hereto or thereto; (iii) the use which may be made of the Letter of Credit by, or any acts or omission of a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting); (iv) the existence of any claim, set-off defense or other rights that the Borrower may have at any time against a beneficiary of a Letter of Credit (or any Person for whom the beneficiary may be acting), the Banks (including the Issuing Bank) or any other Person, whether in connection -22- 26 with this Agreement or the Letter of Credit or any document related hereto or thereto or any unrelated transaction; (v) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (vi) payment under a Letter of Credit against presentation to the Issuing Bank of a draft or certificate that does not comply with the terms of the Letter of Credit, provided that the Issuing Bank's determination that documents presented under the Letter of Credit comply with the terms thereof shall not have constituted gross negligence or willful misconduct of the Issuing Bank; or (vii) any other act or omission to act or delay of any kind by any Bank (including the Issuing Bank), the Agent or any other Person or any other event or circumstance whatsoever that might, but for the provisions of this subsection (vii), constitute a legal or equitable discharge of the Borrower's obligations hereunder. (f) The Borrower hereby indemnifies and holds harmless each Bank (including the Issuing Bank) and the Agent from and against any and all claims, damages, losses, liabilities, reasonable costs or expenses (including without limitation, reasonable counsel fees and disbursements) which such Bank or the Agent may incur (including, without limitation, any claims, damages, losses, liabilities, reasonable costs or expenses (including without limitation reasonable counsel fees and disbursements incurred by such indemnified party in connection with any of the below stated indemnified acts or omissions in any action, suit or proceeding between such indemnified party and the Borrower or between such indemnified party and any third party or otherwise) which the Issuing Bank may incur by reason of or in connection with the failure of any other Bank to fulfill or comply with its obligations to such Issuing Bank hereunder (but nothing herein contained shall affect any rights the Borrower may have against such defaulting Bank)), and none of the Banks (including an Issuing Bank) nor the Agent nor any of their officers or directors or employees or agents shall be liable or responsible, by reason of or in connection with the execution and delivery or transfer of or payment or failure to pay under any Letter of Credit, including without limitation any of the circumstances enumerated in subsection (e) above, as well as (i) any error, omission, interruption or delay in transmission or delivery of any messages, by mail, telefax, telex or otherwise, (ii) any error in interpretation of technical terms, (iii) any loss or delay in the transmission of any document required in order to make a drawing under a Letter of Credit, (iv) any consequences arising from causes beyond the control of the Issuing Bank, including without limitation any government acts, or any other circumstances whatsoever in making or failing to make payment -23- 27 under such Letter of Credit; provided that the Borrower shall not be required to indemnify the Issuing Bank for any claims, damages, losses, liabilities, costs or expenses, and the Borrower shall have a claim for direct (but not consequential) damage suffered by it, to the extent found by a court of competent jurisdiction to have been caused by (x) the willful misconduct or gross negligence of the Issuing Bank in determining whether a request presented under any Letter of Credit complied with the terms of such Letter of Credit or (y) the Issuing Bank's failure to pay under any Letter of Credit after the presentation to it of a request strictly complying with the terms and conditions of the Letter of Credit. Nothing in this subsection (f) is intended to limit the obligations of the Borrower under any other provision of this Agreement. To the extent the Borrower does not indemnify an Issuing Bank as required by this subsection, the Banks agree to do so ratably in accordance with their Commitments. ARTICLE 3 CONDITIONS SECTION 3.1. Closing. The closing hereunder shall occur upon receipt by the Agent of the following documents, each dated the Closing Date unless otherwise indicated: (a) counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, telefax, telex or other written confirmation, in form satisfactory to the Agent, from such party of execution of a counterpart hereof by such party); (b) a duly executed Note for the account of each Bank dated on or before the Closing Date complying with the provisions of Section 2.03; (c) an opinion of counsel for the Borrower, substantially in the form of Exhibit B hereto; (d) a certificate signed by the chief financial officer or treasurer of the Borrower as to the matters set forth in Sections 3.02(d) and 3.02(e) immediately before and after giving effect to the transactions contemplated to occur on or before the Closing Date; (e) all documents the Agent may reasonably request relating to the existence of the Borrower, the corporate authority for and the validity of the Financing Documents, and any other matters relevant hereto, all in form and substance satisfactory to the Agent. The Agent shall promptly notify the Borrower and the Banks of the Closing Date, and such notice shall be conclusive and binding on all parties hereto. -24- 28 SECTION 3.2. Borrowings and Issuances of Letters of Credit. The obligation of any Bank to make a Loan, on the occasion of any Borrowing, and the obligation of the Issuing Bank to issue (or renew or extend the term of) any Letter of Credit is subject to the satisfaction of the following conditions: (a) the fact that the Closing Date shall have occurred on or prior to January 31, 1997; (b) receipt by the Agent of a Notice of Borrowing as required by Section 2.02, or receipt by the Issuing Bank of a Notice of Issuance as required by Section 2.13(c); (c) the fact that, immediately after giving effect to such Borrowing or issuance of a Letter of Credit, the sum of the aggregate outstanding principal amount of the Loans and the aggregate amount of Letter of Credit Liabilities will not exceed the aggregate amount of the Commitments; (d) the fact that, immediately after giving effect to such Borrowing or issuance of a Letter of Credit, no Default shall have occurred and be continuing; and (e) the fact that the representations and warranties of the Borrower contained in this Agreement and any other Financing Document shall be true in all material respects on and as of the date of and after giving effect to such Borrowing or issuance of a Letter of Credit. Each Borrowing and issuance of a Letter of Credit hereunder shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing or issuance of a Letter of Credit as to the facts specified in clauses (c), (d) and (e) of this Section. ARTICLE 4 REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants that: SECTION 4.1. Corporate Existence and Power. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted and is qualified to do business and is in good standing under the laws of the State of New York and each other jurisdiction where the nature of its business or the ownership of property so requires, except where the failure to so qualify does not have a material adverse effect on the business, financial condition or results of operations of the Borrower and its Consolidated Subsidiaries, taken as a whole. -25- 29 SECTION 4.2. Corporate and Governmental Authorization; No Contravention. The execution, delivery and performance by the Borrower of this Agreement and the Notes are within the corporate powers of the Borrower, have been duly authorized by all necessary corporate action, require no action by or in respect of or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the certificate of incorporation or by-laws of the Borrower or of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Subsidiaries or result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries, except for any contravention of or default under any agreement or other instrument (other than agreements or instruments constituting or evidencing Debt) not material to the business of the Borrower and its Subsidiaries, taken as a whole, which contravention or default would not materially adversely affect the business, financial position or results of operations of the Borrower and its Subsidiaries, taken as a whole, or adversely affect in any substantive way the rights and remedies of the Agent and the Banks hereunder and under the Notes. SECTION 4.3. Binding Effect. This Agreement constitutes a valid and binding agreement of the Borrower and each Note, when executed and delivered in accordance with this Agreement, will constitute a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. SECTION 4.4. Financial Information. (a) The Borrower has heretofore furnished to each of the Banks (x) the consolidated balance sheet as of December 31, 1995 and the related consolidated statements of income and cash flows for the fiscal year then ended and (y) the consolidated balance sheet as of September 30, 1996 and the related consolidated statements of income and cash flows for the nine months then ended of each of the Borrower and its Subsidiaries; Each such set of annual financial statements and each such set of nine month financial statements is complete and correct and presents fairly, in all material respects, the consolidated financial condition of such entity and its subsidiaries as of such date and the consolidated results of operations and cash flows for the fiscal year or nine month period ended on said date, as the case may be, all in accordance with generally accepted accounting principles and practices applied on a consistent basis (subject to normal year-end adjustments, in the case of such nine month financial statements). Each such set of financial statements was accompanied by an opinion of Arthur Andersen LLP opining as to the foregoing. None of such entities or its subsidiaries has on the date thereof any liabilities which -26- 30 are required by generally accepted accounting principles to be set forth on the face of such financial statements, except as referred to or reflected or provided for in said financial statements (or in the notes thereto) as at said date, and as to which appropriate and reasonable reserves have been provided, and since December 31, 1995, there has been no material adverse change in the business, financial position or results of operations of any such entity and its subsidiaries taken as a whole from that set forth in said financial statements as at said date. (b) The Borrower has heretofore furnished to each of the Banks projected consolidated balance sheets of the Borrower and its Subsidiaries as at December 31 for each of the years 1996 through 1998 and the related projected consolidated statements of income and cash flows of the Borrower and its Subsidiaries for each of the fiscal years that will end on said dates. It is understood and agreed that such projections are not a representation or warranty of future performance. SECTION 4.5. Litigation. There is no action, suit or proceeding pending against, or to the knowledge of the Borrower threatened against or affecting, the Borrower or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable possibility of an adverse decision which could (taking into account available insurance coverage) materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity or enforceability of this Agreement or the Notes. SECTION 4.6. Compliance with ERISA. Each member of the ERISA Group has fulfilled its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance in all material respects with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan. No member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. SECTION 4.7. Environmental Matters. The Borrower believes that it is in substantial compliance with all applicable Environmental Laws. -27- 31 SECTION 4.8. Taxes. The Borrower and its wholly owned Subsidiaries are members of an affiliated group of corporations filing consolidated returns for Federal income tax purposes, of which the Borrower is the "common parent" (within the meaning of Section 1504 of the Internal Revenue Code) of such group. There is no tax sharing, tax allocation or similar agreement currently in effect providing for the manner in which tax payments owing by the members of such affiliated group (whether in respect of Federal or state income or other taxes) are allocated among the members of the group. The Borrower and its Subsidiaries have filed all United States Federal income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any Subsidiary except where the same is being contested in good faith and by appropriate proceeding and appropriate reserves have been maintained in accordance with generally accepted accounting principles. The charges, accruals and reserves on the books of the Borrower and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Borrower, adequate, and the Borrower has not given or been requested to give a waiver of the statute of limitations relating to the payment of Federal, state, local and foreign taxes or other impositions. SECTION 4.9. Intellectual Property. The Borrower and each of its Subsidiaries owns or possesses or holds under valid licenses all patents, trademarks, service marks, trade names, copyrights, licenses and other intellectual property rights that are necessary for the operation of their respective properties and businesses, and neither the Borrower nor any of its Subsidiaries is in violation of any provision thereof except for any such failures to own, possess or hold or violations which, individually or in the aggregate, would not have a material adverse effect on the business, financial condition or results of operations of the Borrower and its Subsidiaries, taken as a whole. To the best of its knowledge, none of the proprietary intellectual properties of the Borrower or its subsidiaries infringe any license, patent, trademark, trade name, service mark, copyright, trade secret or any other intellectual property right of others and there is no infringement by others of any license, patent, trademark, trade name, service mark, copyright, trade secret or other intellectual property right of the Borrower and its Subsidiaries, except for such infringements, if any, by the Borrower, its Subsidiaries or others which, individually or in the aggregate, would not have a material adverse effect on the business, financial condition or results of operations of the Borrower and its Subsidiaries, taken as a whole. SECTION 4.10. Capitalization. The authorized capital stock of the Borrower consists, on the date hereof of an aggregate of 150,000,000 shares consisting of shares of common stock, $0.01 par value per share, of which 66,391,318 shares of common stock -28- 32 are duly and validly issued and outstanding, each of which shares is fully paid and nonassessable. SECTION 4.11. Debt and Liens. (a) Part I of Schedule 4.11(a) hereto is a complete and correct list, as of the date of this Agreement, of each credit agreement, loan agreement, indenture, securities purchase agreement, Guarantee, letter of credit or other arrangement providing for or otherwise relating to any Debt or any extension of credit (or commitment for any extension of credit) to, or Guarantee by, the Borrower or any of its Subsidiaries the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000, and the aggregate principal or face amount outstanding or that may become outstanding under each such arrangement is correctly described in Part II of Schedule 4. 11(a). (b) Part I of Schedule 4.11(b) hereto is a complete and correct list, as of the date of this Agreement, of each Lien securing Debt of any Person the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000 and covering any property of the Borrower or any of its Subsidiaries, and the aggregate Debt secured (or which may be secured) by each such Lien and the property covered by each such Lien is correctly described in Part II of Schedule 4.11(b). (c) None of the Borrower and its Subsidiaries is, on the date of this Agreement, party to or subject to any indenture, agreement, instrument or other arrangement of the type described in Section 5.18, except for this Agreement. SECTION 4.12. Subsidiaries. (a) Set forth in Part I of Schedule 4.12(a) hereto is a complete and correct list, as of the date hereof of all of the Subsidiaries of the Borrower, together with, for each such Subsidiary, (i) the exact corporate name of such Subsidiary, (ii) the jurisdiction of organization of such Subsidiary, (iii) each Person holding ownership interests in such Subsidiary, (iv) the nature of the ownership interests held by each such Person and the percentage of ownership of such Subsidiary represented by such ownership interests and, (v) whether such Subsidiary is a Foreign Subsidiary. Except as disclosed in Part II of Schedule 4.12 hereto, as of the date hereof (x) each of the Borrower and its Subsidiaries owns, free and clear of Liens, and has the unencumbered right to vote, all outstanding ownership interest in each Person shown to be held by it in Part I of Schedule 4.12(a) hereto, (y) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (z) there are no outstanding Equity Rights with respect to such Person. (b) Set forth in Part I of Schedule 4.12(b) hereto is a complete and correct list, as of the date hereof of all Investments (other than Investments disclosed in Part I of Schedule 4.12(a) hereto) held by the Borrower or any of its -29- 33 Subsidiaries in any Person and, for each such Investment, (x) the identity of the Person or Persons holding such Investment and (y) the nature of such Investment. Except as disclosed in Part II of Schedule 4.12(b) hereto, as of the date of this Agreement, each of the Borrower and its Subsidiaries owns, free and clear of all Liens, all such Investments. (c) Each of the Borrower's corporate Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, and has all corporate powers and all material governmental licenses, authorizations, consents and approvals required to carry on its business as now conducted. SECTION 4.13. Regulatory Restrictions on Borrowing. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, a "holding company" within the meaning of the Public Utility Holding Company Act of 1935, as amended, or otherwise subject to any regulatory scheme which restricts its ability to incur debt. SECTION 4.14. Full Disclosure. All material factual information heretofore furnished by the Borrower to the Agent or any Bank for purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all such information hereafter furnished by the Borrower to the Agent or any Bank will be, taken as a whole, true, complete and accurate in all material respects (it being understood and agreed that with respect to projections, such projections are not a representation or warranty of future performance). All such information heretofore furnished, when taken as a whole, does not, as of the date hereof contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. ARTICLE 5 COVENANTS The Borrower agrees that, so long as any Bank has any Commitment hereunder or any amount payable under any Note or any Letter of Credit Liability remains unpaid: SECTION 5.1. Information. The Borrower will deliver to each of the Banks: (a) with respect to the Borrower, as soon as available and in any event within 90 days after the end of each fiscal year, a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of income and cash flow for such fiscal year, accompanied by the figures for the previous years in each case and an audit report by Arthur Andersen LLP or other independent certified public accountants of nationally recognized -30- 34 standing (which may be a single report as to all such financial statements) and, if prepared, as soon as available, a consolidating balance sheet of the Borrower and its Consolidated Subsidiaries as of the end of such fiscal year and related consolidating statements of income and cash flow for such fiscal year; (b) with respect to the Borrower, as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of such entity, a consolidated (and, if prepared, consolidating) balance sheet of such entity and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated (and, if prepared, consolidating) statements of income and cash flow for such quarter and for the portion of such entity's fiscal year ended at the end of such quarter, accompanied by the figures for the corresponding quarter and corresponding portion of the previous year in each case; (c) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate as to fairness of presentation, generally accepted accounting principles and consistency (subject to normal year end adjustments) on behalf of the Borrower executed by the senior financial officer of the Borrower or of the entity to which such financial statements relate, provided that such certificate need not be made with respect to the annual financial statements under clause (a); (d) simultaneously with the delivery of each set of financial statements referred to in clauses (a) and (b) above, a certificate of the senior financial officer of the Borrower (i) setting forth in reasonable detail the calculations required to establish whether the Borrower was in compliance with the requirements of Sections 5.07 and 5.09 to 5.15, inclusive, and 5.17, on the date of such financial statements and (ii) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (e) simultaneously with the delivery of each set of annual financial statement referred to in clause (a) above, a statement of the firm of independent public accountants which reported on such statements (i) whether anything has come to their attention to cause them to believe that any Default existed on the date of such statements and (ii) confirming the calculations set forth in the officer's certificate delivered simultaneously therewith pursuant to clause (c) above; (f) within five days after any of the chairman, the president, the executive vice president or the chief financial officer of the Borrower obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting -31- 35 forth the details thereof and the action which the Borrower is taking or proposes to take with respect thereto; (g) promptly upon the filing thereof copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) or other periodic reports which the Borrower or any of its Subsidiaries shall have filed with the Securities and Exchange Commission, NASDAQ or any national securities exchange; (h) if and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer or the chief accounting officer of the Borrower setting forth details as to such occurrence and action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (i) at the request of the Banks, as soon as available and in any event not less than 30 days after the first day of each fiscal year of the Borrower, forecasts prepared by management of the Borrower, including consolidated and consolidating statement of income and cash flow of the Borrower and its Consolidated Subsidiaries, on a quarterly and annual basis for such fiscal year and on an annual basis for the next fiscal year of the Borrower (provided that in preparing such forecasts the Borrower and its Subsidiaries may be treated on a consolidated basis); (j) Promptly upon receipt thereof, copies of any reports submitted to the Borrower by its accountants in connection with -32- 36 any examination of the financial statements of the Borrower or any of its Consolidated Subsidiaries made by such accountants, and copies of any other communications received by the Borrower, or any of its directors from such accountants relative to any internal controls and systems of the Borrower (unless the delivery of such report to the Banks would constitute the waiver of any attorney-client privilege otherwise in effect with respect to any Person other than the Agent or the Banks); and (k) from time to time such additional information regarding the financial position or business of the Borrower and its Subsidiaries as the Agent, at the request of any Bank, may reasonably request. SECTION 5.2. Payment of Obligations. The Borrower will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities (including, without limitation, tax liabilities and claims of materialmen, warehousemen and the like which if unpaid would by law give rise to a Lien on the Borrower's assets), except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same. SECTION 5.3. Maintenance of Property; Insurance. (a) The Borrower will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted. (b) The Borrower will, and will cause each of its Subsidiaries to, maintain (either in the name of the Borrower or in such Subsidiary's own name) with financially sound and responsible insurance companies, insurance on all their respective properties in at least such amounts, against at least such risks and with such risk retention as are usually maintained, insured against or retained, as the case may be, in the same general area by companies of established repute engaged in the same or a similar business, subject to, and including reasonable provisions for self-insurance; and will furnish to the Banks, upon request for the Agent, information presented in reasonable detail as to the insurance so carried. SECTION 5.4. Conduct of Business and Maintenance of Existence. The Borrower will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Borrower and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect their respective corporate existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Section 5.04 shall prohibit (i) the merger of a -33- 37 Subsidiary into the Borrower or the merger or consolidation of a Subsidiary with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing or (ii) the termination of the corporate existence of any Subsidiary if the Borrower in good faith determines that such termination is in the best interest of the Borrower and is not materially disadvantageous to the Banks. SECTION 5.5. Compliance with Laws. The Borrower will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, and requirements of governmental authorities (including, without limitation, Environmental Laws and ERISA and the rules and regulations thereunder) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings or where the failure to so comply, individually or in the aggregate, would not have a material adverse effect on the business, financial position or results of operations of the Borrower and its Subsidiaries, taken as a whole. SECTION 5.6. Inspection of Property, Books and Records. The Borrower will keep, and will cause each Subsidiary to keep, proper books of record and account in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank's expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times and as often as may reasonably be desired. SECTION 5.7. Merger and Sales of Assets. (a) The Borrower will not, and will not permit any Subsidiary to, consolidate or merge with or into any other Person, provided that (i) the Borrower may merge with another Person if the Borrower is the corporation surviving such merger and immediately after giving effect to such merger, no Default shall have occurred and be continuing, and (ii) any Subsidiary may merge with any other Person if the corporation surviving the merger is the Borrower or a Subsidiary and, immediately after giving effect to such merger, no Default have occurred and be continuing. (b) The Borrower will not, and will not permit any of its Subsidiaries to, make any Asset Sale, unless the consideration therefor is not less than the fair market value of the related asset. SECTION 5.8. Use of Proceeds. The proceeds of the Loans made under this Agreement will be used by the Borrower for general corporate purposes and for Permitted Acquisitions. None of such proceeds will be used, directly or indirectly, for the -34- 38 purpose, whether immediate, incidental or ultimate, of buying or carrying any "margin stock" within the meaning of Regulation U. SECTION 5.9. Negative Pledge. Neither the Borrower nor any Subsidiary will create, assume or suffer to exist any Lien on any asset now owned or hereafter acquired by it, except: (a) Liens existing on the date of this Agreement securing Debt outstanding on the date of this Agreement in an aggregate principal or face amount not exceeding $1,000,000; (b) any Liens existing on any asset of any Person at the time such person becomes a Subsidiary (or such asset is acquired by the Borrower or any Subsidiary) and not created in contemplation of such event, and Liens on the proceeds thereof; (c) any Lien on any asset securing Debt incurred or assumed for the purpose of financing all or any part of the cost of acquiring such asset (including Capital Leases), provided that such Lien attaches to such asset concurrently with or within 180 days after the acquisition thereof; (d) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Borrower or a Subsidiary and not created in contemplation of such event; (e) any Lien existing on any asset prior to the acquisition thereof by the Borrower or a Subsidiary and not created in contemplation of such acquisition; (f) any Lien arising out of the refinancing, extension, renewal or refunding of any Debt secured by any Lien permitted by any of the foregoing clauses of this Section, provided that such Debt is not increased or is not secured by any additional assets (other than by virtue of an after-acquired property clause covering assets of the same category or description as were covered by such original Lien); (g) Liens arising in the ordinary course of its business which (i) do not secure Debt, and (ii) do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business; (h) Liens for taxes not yet payable or being contested in good faith and by appropriate proceedings and adequate reserves have been maintained in accordance with generally accepted accounting principles; (i) Statutory liens of landlords, carriers and other statutory liens incurred in the ordinary course of business; (j) zoning restrictions, easements, rights of way, licenses, encroachments, covenants, conditions, tenancies, minor -35- 39 defects in title, and other restrictions, charges or encumbrances affecting real property that do not in the aggregate have a material adverse effect on the Borrower; (k) deposits made and liens incurred to secure performance of bids, trade contracts, licenses, leases and statutory and other similar obligations; (l) rights of set-off or security interests in deposit accounts held at banks and other financial institutions to secure the payment or reimbursement of overdraft, acceptance or other facilities maintained at such financial institution, to the extent permitted by this Agreement; and (m) Liens not otherwise permitted by the foregoing clauses of this Section securing Debt or other obligations in an aggregate principal or face amount at any one time outstanding not to exceed $1,000,000 (excluding the Debt referred to in clause (a)). SECTION 5.10. Limitation on Debt. The Borrower will not, and will not permit any of its Subsidiaries to, incur or at any time become liable with respect to any Debt except: (a) Debt under this Agreement; (b) Debt secured by Liens permitted by Section 5.09(c) in an aggregate principal amount at any time outstanding not exceeding $200,000; and (c) Debt of the Borrower and its Subsidiaries not otherwise permitted by this Section incurred after the Closing Date in an aggregate principal amount at any time outstanding not to exceed $1,000,000. SECTION 5.11. Minimum Tangible Net Worth. The Borrower will not permit Consolidated Tangible Net Worth as at December 31, 1996 to be less than $106,500,000, as at June 30, 1997 to be less than $106,500,000 plus 25% of Consolidated Net Income for the six-month period ending on such date, as at December 31, 1997 to be less than $106,500,000 plus 25% of Consolidated Net Income for the 12-month period ending on such date, as at June 30, 1998 to be less than such December 31, 1997 required minimum amount plus 25% of Consolidated Net Income for the six-month period ending on June 30, 1998 and as at December 31, 1998 such December 31, 1997 required amount plus 25% of the Consolidated Net Income for the 12-month period ending on December 31, 1998. SECTION 5.12. Debt: Tangible Net Worth. The Borrower will not permit the ratio of Consolidated Total Liabilities to Consolidated Tangible Net Worth at the end of any fiscal quarter to exceed 1.7 to 1.0. -36- 40 SECTION 5.13. Investments. The Borrower will not purchase or make any Investment in the stock, securities or evidences of indebtedness (excluding accounts receivable from others) of any other Person except: (i) the Borrower; (ii) the United States Government and its agencies; (iii) certificates of deposit of domestic banks having capital and surplus in excess of $100,000,000; (iv) Temporary Cash Investments, and (v) Permitted Acquisitions. SECTION 5.14. Working Capital. The Borrower will not permit Consolidated Working Capital at the end of any fiscal quarter prior to October 1, 1997 to be less than $20,000,000, and at the end of any fiscal quarter any time after October 1, 1997 to be less than $30,000,000. SECTION 5.15. Current Ratio. The Borrower will not permit the ratio of Consolidated Current Assets to Consolidated Current Liabilities as at December 31, 1996 and thereafter as at the last day of each fiscal quarter to be less than 1.1 to 1.0. SECTION 5.16. Restricted Payments. Neither the Borrower nor any Subsidiary will declare or make any Restricted Payment. SECTION 5.17. Minimum Net Income. The Borrower will not permit: its Consolidated Net Income for its fiscal year ending December 31, 1996 to be less than $20,000,000, for its fiscal year ending December 31, 1997 to be less than $25,000,000, and for its fiscal year ending December 31, 1998 to be less than $25,000,000; and will not permit its Consolidated Net Income for any two consecutive quarters (whether or not in the same fiscal year) to be less than $5,000,000. SECTION 5.18. Sale-Leaseback Transactions. Neither the Borrower nor any of its Subsidiaries will engage in any Sale-Leaseback Transactions unless the Borrower or such Subsidiaries would be entitled, pursuant to the other provisions of Article 5, to incur Debt with a principal amount equal to or exceeding the Value of such Sale-Leaseback Transaction secured by a Lien on the property to be leased (after giving similar effect to all other Sale-Leaseback Transactions in effect at such time). For purposes of this Section, "VALUE" means, with respect to a Sale-Leaseback Transaction, at any time, the amount equal to the greater of (i) the net proceeds of the sale or transfer of the property leased pursuant to such Sale-Leaseback Transaction and (ii) the fair value in the opinion of the Board of Directors of the Borrower of such property at the time of entering into such Sale-Leaseback Transaction, in either case divided first by the number of full years of the term of the lease and then multiplied by the number of full years of such term remaining at the time of determination, without regard to any renewal or extension options contained in the lease. SECTION 5.19. Transactions with Affiliates. The Borrower will not, and will not permit any Subsidiary to, directly or -37- 41 indirectly, pay any funds to or for the account of, make any investment (whether by acquisition of stock or indebtedness, by loan, advance transfer of property, guarantee or other agreement to pay, purchase or service, directly or indirectly, any Debt, or otherwise) in, lease, sell, transfer or otherwise dispose of any assets, tangible or intangible, to, or participate in, or effect, any transaction with, any Affiliate except on an arms-length basis on terms at least as favorable to the Borrower or such Subsidiary as could have been obtained from a third party who was not an Affiliate; provided that the foregoing provisions of this Section shall not prohibit any such Person from declaring or paying any lawful dividend or other payment ratably in respect of all of its capital stock of the relevant class so long as, after giving effect thereto, no Default shall have occurred and be continuing. SECTION 5.20. Lines of Business. The Borrower will not, and will not permit any of its Subsidiaries to, engage in any line or lines of business activity other than the business of developing, publishing, merchandising and distributing consumer software and related businesses (including, in each case, without limitation, Internet and similar on-line or electronic related businesses). ARTICLE 6 DEFAULTS SECTION 6.1. Events of Default. If one or more of the following events ("EVENTS OF DEFAULT") shall have occurred and be continuing: (a) the Borrower shall fail to reimburse any drawing under the Letter of Credit when required hereunder or to pay when due any principal of any Loan or pay within 10 days after due any interest or fees payable hereunder or under the Notes; (b) the Borrower shall fail to observe or perform any covenant or agreement contained in Article 5, other than those contained in Sections 5.01 through 5.06, 5.13, 5.19 or 5.20; (c) the Borrower shall fail to observe or perform any covenant or agreement contained in any Financing Document (other than those covered by clause (a) or (b) above) for 30 days after notice thereof has been given to the Borrower by the Agent at the request of any Bank; (d) any material representation, warranty, certification or statement made by the Borrower in any Financing Document or in any certificate, financial statement or other document delivered pursuant to any such Financing Document shall prove to have been incorrect in any material respect when made (or deemed made); (e) any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or -38- 42 with the giving of notice or lapse of time or both, would enable) the holder of such Debt or any Person acting on such holder's behalf to accelerate the maturity thereof; (f) the Borrower or any Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; (g) an involuntary case or other proceeding shall be commenced against the Borrower or any Material Subsidiary seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against the Borrower or any Material Subsidiary under the federal bankruptcy laws as now or hereafter in effect; (h) any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $1,000,000 which it shall have become liable (pursuant to a final determination by a court of competent jurisdiction, not subject to further appeal) to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of or to cause a trustee to be appointed to administer any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $1,000,000; (i) any judgment or order for the payment of money in excess of $1,000,000 shall be rendered against the Borrower or any Material Subsidiary and such judgment or order shall continue unsatisfied or unstayed for a period of 45 days if such judgment or order is for an amount in excess of $1,000,000 but less than -39- 43 $15,000,000 or unsatisfied or unstayed for a period of 30 days if in an amount equal to or in excess of $15,000,000; or (j) Joseph J. Cayre, Jack J. Cayre, Stanley Cayre, Kenneth Cayre, their spouses and their lineal descendents, including trusts for the benefit of any of the foregoing (collectively the "Cayre Family"), shall (i) collectively beneficially own less than 30%, but more than 20%, of the outstanding voting stock of the Borrower at a time when another Person or group (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934, as in effect on the date hereof) beneficially owns shares of the outstanding voting stock of the Borrower of an equal or greater percentage than the Cayre Family; or (ii) cease collectively to beneficially own at least 20% of the outstanding voting stock of the Borrower; then, and in any such event, the Agent shall if requested by the Required Banks, by notice to the Borrower, terminate the Commitments and they shall thereupon terminate and/or declare the Loans and the Letter of Credit Liabilities (together with accrued interest thereon) to be, and the Loans and the Letter of Credit Liabilities shall thereupon become, immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; provided that in the case of any of the Events of Default specified in clause 6.01(f) or 6.01(g) above with respect to the Borrower, without any notice to the Borrower or any other act by the Agent or the Banks, the Commitments shall thereupon terminate and the Loans and the Letter of Credit Liabilities (together with accrued interest thereon) shall become immediately due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. SECTION 6.2. Notice of Default. The Agent shall give notice to the Borrower under Section 6.01(c) promptly upon being requested to do so by any Bank and shall thereupon notify all the Banks thereof. SECTION 6.3. Cash Cover. The Borrower agrees, in addition to the provisions of Section 6.01 hereof that upon the occurrence and during the continuance of any Event of Default, it shall, if requested by the Agent upon the written instruction of the Required Banks, pay to the Agent an amount in immediately available funds (which funds shall be held as collateral pursuant to arrangements satisfactory to the Agent) equal to the aggregate amount available for drawing under all Letters of Credit then outstanding at such time, provided that, upon the occurrence of any Event of Default specified in Section 6.01(f) or 6.01(g) with respect to the Borrower, the Borrower shall pay such amount -40- 44 forthwith without any notice or demand or any other act by the Agent or the Banks. ARTICLE 7 THE AGENT SECTION 7.1. Appointment and Authorization. Each Bank irrevocably appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Agent by the terms hereof or thereof together with all such powers as are reasonably incidental thereto. SECTION 7.2. Agent and Affiliates. RNB shall have the same rights and powers under this Agreement as any other Bank and may exercise or refrain from exercising the same as though it were not the Agent, and RNB and its affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or affiliate of the Borrower as if it were not the Agent. SECTION 7.3. Action by Agent. The obligations of the Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 6. SECTION 7.4. Consultation with Experts. The Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts. SECTION 7.5. Liability of Agent. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it as Agent in connection herewith (i) with the consent or at the request of the Required Banks or (ii) in the absence of its own gross negligence or willful misconduct. Neither the Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (i) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (ii) the performance or observance of any of the covenants or agreements of the Borrower; (iii) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Agent; or (iv) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement, or other writing (which may be a bank wire, telex, facsimile transmission -41- 45 or similar writing) believed by it to be genuine or to be signed by the proper party or parties. SECTION 7.6. Indemnification. Each Bank shall, ratably in accordance with its Commitment, indemnify the Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements incurred by such indemnitees in any action; suit or proceeding between such indemnitees and such indemnifying Bank or between such indemnities and any third party or otherwise), claim, demand, action, loss or liability (except such as result from such indemnities' gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder. SECTION 7.7. Credit Decision. Each Bank acknowledges that it has, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Bank also acknowledges that it will, independently and without reliance upon the Agent or any other Bank, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement. SECTION 7.8. Successor Agent. The Agent may resign at any time by giving notice thereof to the Banks and the Borrower. Upon any such resignation, the Required Banks shall have the right to appoint a successor Agent reasonably acceptable to Borrower. If no successor Agent shall have been so appointed by the Required Banks, and shall have accepted such appointment, within 30 days after the retiring Agent gives notice of resignation, then the retiring Agent may, on behalf of the Banks, appoint a successor Agent reasonably acceptable to Borrower, which shall be a commercial bank organized or licensed under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent. -42- 46 SECTION 7.9. Agent's Fee. The Borrower shall pay to the Agent for its own account fees in the amounts and at the times previously agreed upon between the Borrower and the Agent. ARTICLE 8 CHANGES IN CIRCUMSTANCE SECTION 8.1. Basis for Determining Interest Rate Inadequate or Unfair. If on or prior to the first day of any Interest Period for any EuroDollar Loan: (a) the Agent is advised by the Reference Bank that quotations for deposits (in the applicable amounts) are not being offered to the Reference Bank, or (b) Banks having 50% or more of the aggregate principal amount of the affected Loans advise the Agent that the Adjusted London Interbank Offered Rate will not adequately and fairly reflect the cost to such Banks of funding their EuroDollar Loans for such Interest Period, the Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Agent notifies the Borrower that the circumstances giving rise to such suspension no longer exist (which notice shall be given forthwith upon receipt by the Agent of notice of such determination), (i) the obligations of the Banks to make EuroDollar Loans, or to continue or convert outstanding Loans as or into EuroDollar Loans, shall be suspended and (ii) each outstanding EuroDollar Loan, shall be converted into a Base Rate Loan on the last day of the then current Interest Period applicable thereto. Unless the Borrower notifies the Agent at least two Domestic Business Days before the date of any EuroDollar Borrowing for which a Notice of Borrowing has previously been given (which has not been followed by a notification from the Agent as aforesaid) that it elects not to borrow on such date, such Borrowing shall instead be made as a Base Rate Borrowing. SECTION 8.2. Illegality. If after the date of this Agreement, the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Bank (or its EuroDollar Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall make it unlawful or impossible for any Bank (or its EuroDollar Lending Office) to make, maintain or fund its EuroDollar Loans and such Bank shall so notify the Agent, the Agent shall forthwith give notice thereof to the other Banks and the Borrower, whereupon until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist, the obligation of such Bank to make EuroDollar Loans or to convert outstanding Loans into EuroDollar Loans shall be suspended. Before giving any notice to the Agent pursuant to -43- 47 this Section, such Bank shall designate a different EuroDollar Lending Office if such designation will avoid the need for giving such notice and will not, in the reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. If such notice is given, each EuroDollar Loan of such Bank then outstanding shall be converted to a Base Rate Loan either (a) on the last day of the then current Interest Period applicable to such EuroDollar Loan if such Bank may lawfully continue to maintain and fund such Loan to such day or (b) immediately if such Bank shall determine that it may not lawfully continue to maintain and fund such Loan to such day. SECTION 8.3. Increased Cost and Reduced Return. (a) If after the date hereof the adoption of any applicable law, rule or regulation, or any change in any applicable law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof or compliance by any Bank (or its Applicable Lending Office) with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System, but excluding any such requirement included in an applicable EuroDollar Reserve Percentage in the case of a EuroDollar Loan), special deposit, insurance assessment or similar requirement against assets of deposits with or for the account of or credit extended by, any Bank (or its Applicable Lending Office) or shall impose on any Bank (or its Applicable Lending Office) or the London interbank market or other relevant market any other condition affecting its EuroDollar Loans, its Note or its obligation to make EuroDollar Loans or its obligations hereunder in respect of Letters of Credit and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any EuroDollar Loan or of issuing or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount reasonably deemed by such Bank to be material, then, within 15 days after demand, which demand shall include a brief description of the change giving rise to such increased cost or reduction and an explanation as to how such increased cost or reduction was determined, by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. (b) If any Bank shall have determined that, after the date hereof the adoption of any applicable law, rule or regulation regarding capital adequacy, or any change in any such law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or -44- 48 administration thereof or any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on capital of such Bank (or its Parent) as a consequence of such Bank's obligations hereunder to a level below that which such Bank (or its Parent) could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect to capital adequacy) by an amount reasonably deemed by such Bank to be material, then from time to time, assuming such Bank was not compensated for such reduction pursuant to Section 8.03(a) above, within 15 days after demand, which demand shall include a brief description of the change giving rise to such reduction and an explanation as to how such reduction was determined, by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank (or its Parent) for such reduction. (c) Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof which will entitle such Bank to compensation pursuant to this section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of such compensation and will not, in the reasonable judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of demonstrable error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. SECTION 8.4. Taxes. (a) For the purposes of this Section 8.04, the following terms have the following meanings: "TAXES" means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Bank and the Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the laws of which such Bank or the Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Bank, in which its Applicable Lending Office is located and (ii) in the case of each Bank, any United States withholding tax imposed on such payments. "OTHER TAXES" means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of or otherwise with respect to, this Agreement or any Note. -45- 49 (b) Any and all payments by the Borrower to or for the account of any Bank or the Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by law to deduct any Taxes or Other Taxes from any such payments, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Bank or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law, and (iv) the Borrower shall furnish to the Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt evidencing payment thereof. (c) The Borrower agrees to indemnify each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by such Bank or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 days after such Bank or the Agent (as the case may be) makes demand therefor. (d) Each Bank organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Bank listed on the signature pages hereof and on or prior to the date on which it becomes a Bank in the case of each other Bank, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Bank remains lawfully able to do so), shall provide the Borrower and the Agent with (i) Internal Revenue Service form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Bank is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Bank from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Bank or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States or (ii) solely if such Lender is claiming exemption from United States withholding tax under Section 871(h) or 881(c) of the Internal Revenue Code with respect to payments of "portfolio interest", a Form W-8, or any successor form prescribed by the Internal Revenue Service, and a certificate representing that such Lender is not a bank for purposes of Section 881(c) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Borrower and is not a controlled foreign corporation related to the Borrower -46- 50 (within the meaning of Section 864(d)(4) of the Internal Revenue Code). (e) For any period with respect to which a Bank has failed to provide the Borrower or the Agent with the appropriate form pursuant to Section 8.04(d) (unless such failure is due to a change in treaty, law or regulation occurring subsequent to the date on which such form originally was required to be provided), such Bank shall not be entitled to indemnification under Section 8.04(b) or 8.04(c) with respect to Taxes imposed by the United States; provided that if a Bank, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower, at such Bank's sole expense, shall take such steps as such Bank shall reasonably request to assist such Bank to recover such Taxes. (f) If the Borrower is required to pay additional amounts to or for the account of any Bank pursuant to this Section, then such Bank will change the jurisdiction of its Applicable Lending Office if in the reasonable judgment of such Bank, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous (other than in any insignificant respect) to such Bank. SECTION 8.5. Base Rate Loans Substituted for Affected EuroDollar Loans. If (i) the obligation of any Bank to make, or convert outstanding Loans to, EuroDollar Loans has been suspended pursuant to Section 8.02 or (ii) any Bank has demanded compensation under Section 8.03 or 8.04 with respect to its EuroDollar Loans and the Borrower shall, by at least five EuroDollar Business Days' prior notice to such Bank through the Agent, have elected that the provisions of this section shall apply to such Bank, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such suspension or demand for compensation no longer exist: (a) all Loans which would otherwise be made by such Bank as (or continued as or converted into) EuroDollar Loans, as the case may be, shall instead be Base Rate Loans (on which interest and principal shall be payable contemporaneously with the related EuroDollar Loans of the other Banks); and (b) after each of its EuroDollar Loans, has been repaid (or converted to a Base Rate Loan), all payments of principal which would otherwise be applied to repay such EuroDollar Loans shall be applied to repay its Base Rate Loans instead. If such Bank notifies the Borrower that the circumstances giving rise to such notice no longer apply, the principal amount of each such Base Rate Loan shall be converted into a EuroDollar Loan on the first day of the next succeeding Interest Period applicable to the related EuroDollar Loans of the other Banks. -47- 51 ARTICLE 9 MISCELLANEOUS SECTION 9.1. Notices. All notices, requests and other communications to any party hereunder shall be in writing (including bank wire, telex, facsimile transmission or similar writing) and shall be given to such party: (a) in the case of the Borrower, any Bank or the Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, or (b) in the case of any party, such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Agent, the Banks and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number specified on the signature pages hereof and the appropriate answerback is received, (ii) if given by facsimile transmission, when transmitted to the facsimile number specified on the signature pages hereof and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid, (iv) if sent by recognized overnight courier, on the next business day after delivery to such courier, or (v) if given by any other means, when delivered at the address specified on the signature pages hereof; provided that notices to the Agent or the Issuing Bank under Article 2 or Article 8 shall not be effective until received. SECTION 9.2. No Waivers. No failure or delay by the Agent or any Bank in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law. SECTION 9.3. Expenses; Indemnification. (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Agent, including reasonable fees and disbursements of special counsel for the Agent, in connection with the preparation of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default hereunder and (ii) if any Default or Event of Default occurs and is continuing, all out-of-pocket expenses incurred by the Agent and each Bank, including the reasonable fees and disbursements of counsel (which shall be limited to counsel to the Agent unless an Event of Default has occurred and is continuing), in connection with such Default or Event of Default and collection, bankruptcy, insolvency and other enforcement proceedings resulting therefrom. (b) The Borrower agrees to indemnify the Agent, the Issuing Bank and each Bank, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an "INDEMNITEE") and hold each Indemnitee -48- 52 harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind (including, without limitation, the reasonable counsel fees and disbursements incurred by an Indemnitee in any proceedings between such Indemnitee and the Borrower or between such Indemnitee and any third party or otherwise), which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee's own gross negligence or willful misconduct as determined by a court of competent jurisdiction. SECTION 9.4. Sharing of Set-offs. Each Bank agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate amount of principal and interest due with respect to any Note held by it and any Letter of Credit Liabilities which is greater than the proportion received by any other Bank in respect of the aggregate amount of principal and interest due with respect to any Note and Letter of Credit Liabilities held by such other Bank, the Bank receiving such proportionately greater payment shall purchase such participations in the Notes and Letter of Credit Liabilities held by the other Banks, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes and Letter of Credit Liabilities held by the Banks shall be shared by the Banks pro rata in proportion with their Commitments; provided that nothing in this section shall impair the right of any Bank to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of any Obligor other than its indebtedness hereunder. Borrower agrees, to the fullest extent it may effectively do so under applicable law, that any holder of a participation in a Note or Letter of Credit Liabilities, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of Borrower in the amount of such participation. SECTION 9.5. Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if but only if such amendment or waiver is in writing and is signed by the Borrower and the Required Banks (and, if the rights or duties of the Agent or the Issuing Banks are affected thereby, by the Agent or the Issuing Banks, as relevant); provided that no such amendment or waiver shall, unless signed by all the Banks, (i) increase or decrease the Commitment of any Bank (except for a ratable decrease in the Commitments of all Banks) or subject any Bank to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or the amount to be reimbursed in -49- 53 respect of any Letter of Credit or any interest thereon or any fees hereunder, (iii) postpone the date fixed for any payment of principal of or interest on any Loan or the amount to be reimbursed in respect of any Letter of Credit or any interest thereon or any fees hereunder or for any scheduled reduction or termination of any Commitment or (except as expressly provided in Section 2.13) expiry date of any Letter of Credit, or (iv) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes and Letter of Credit Liabilities, or the number of Banks, which shall be required for the Banks or any of them to take any action under this section or any other provision of this Agreement. SECTION 9.6. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer any of its rights under this Agreement without the prior written consent of all Banks other than in connection with a merger or consolidation permitted under Section 5.07. (b) Any Bank may at any time grant to one or more banks or other financial institutions (each a "PARTICIPANT") participating interests in its Commitment or any or all of its Loans and Letter of Credit Liabilities. In the event of any such grant by a Bank of a participating interest to a Participant, whether or not upon notice to the Borrower and the Agent, such Bank shall remain responsible for the performance of its obligations hereunder, and the Borrower, the issuing Banks and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement. Any agreement pursuant to which any Bank may grant such a participating interest shall provide that such Bank shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Bank will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii), or (iii) of Section 9.05 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits (and subject to also having the corresponding obligations) of Article 8 with respect to its participating interest. An assignment or other transfer which is not permitted by subsection (c) or (d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (b). (c) Any Bank may at any time assign to one or more banks or other institutions (each an "ASSIGNEE") all, or a proportionate part (equivalent to an initial Commitment of not less than $5,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such -50- 54 rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form provided by the Agent executed by such Assignee and such transferor Bank, with (and subject to) the subscribed consent of the Borrower, the Agent, and the Issuing Bank, except that no such consents shall be required if such Assignee is an Affiliate of such assigning Bank or if at the time of such assignment an Event of Default has occurred and is continuing and no such assignment shall be made if after giving effect thereto the number of Banks would exceed four. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Bank of an amount equal to the purchase price agreed between such transferor Bank and such Assignee, such Assignee shall be a Bank party to this Agreement and shall have all the rights and obligations of a Bank with a Commitment as set forth in such instrument of assumption, and the transferor Bank shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (c), the transferor Bank, the Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Bank shall pay to the Agent an administrative fee for processing such assignment in the amount of $2,500. If the Assignee is not incorporated under the laws of the United States of America or a state thereof it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 8.04. (d) No Assignee, Participant or other transferee of any Bank's rights shall be entitled to receive any greater payment under Section 8.03 or 8.04 than such Bank would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower's prior written consent or by reason of the provisions of Section 8.02, 8.03 or 8.04 requiring such Bank to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist. (e) The Borrower designates the Agent to serve as the Borrower's agent, solely for purposes of this subsection to maintain a register (the "REGISTER") on which the Agent will record the Commitments from time to time of each Bank, the Loans made by each Bank and each repayment in respect of the principal amount of the Loans of each Bank and to retain a copy of each Assignment and Assumption Agreement delivered to the Agent pursuant to this Section. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower's obligations in respect of such Loans. The Borrower, the Agent, the Issuing Bank and the Banks shall treat each Person in whose name a Loan and the Note evidencing the same is registered as the owner thereof for all purposes of this Agreement, notwithstanding notice or any provision herein to the contrary. With respect to -51- 55 any Bank, no assignment or other transfer of any of its rights or obligations under this Agreement or its Note shall be effective until such assignment or other transfer is recorded on the Register and otherwise complies with this Section 9.06, and prior to such recordation all amounts owing to the transferor Bank under this Agreement and its Note shall remain owing to the transferor Bank. The registration of any such assignment or other transfer shall be recorded by the Agent on the Register only upon the acceptance by the Agent of a properly executed and delivered Assignment and Assumption Agreement. The Register shall be available at the offices where kept by the Agent for inspection by the Borrower or any Bank at any reasonable time upon reasonable prior notice to the Agent. SECTION 9.7. Collateral. Each of the Banks represents to the Agent and each of the other Banks that it in good faith is not relying upon any "margin stock" (as defined in Regulation U) as collateral in the extension or maintenance of the credit provided for in this Agreement. SECTION 9.8. Continuing Obligation. Notwithstanding the occurrence and continuance of an Event of Default or the occurrence of the Termination Date, the Borrower's obligations and agreements hereunder shall continue until all obligations, direct or contingent, have been satisfied and all Letter of Credit Liabilities have terminated. SECTION 9.9. Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the laws of the State of New York. Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. Borrower irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum. SECTION 9.10. Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective upon receipt by the Agent of counterparts hereof signed by each of the parties hereto (or, in the case of any party as to which an executed counterpart shall not have been received, receipt by the Agent in form satisfactory to it of telex, facsimile or other -52- 56 written confirmation from such party of execution of a counterpart hereof by such party). SECTION 9.11. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENT AND THE BANKS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. SECTION 9.12. Confidentiality. The Agent and each Bank agrees to keep any information delivered or made available by the Borrower pursuant to the provisions of this Agreement or any other Financing Document confidential from anyone other than persons employed or retained by the Agent or such Bank who are engaged in evaluating, approving, structuring or administering the credit facility contemplated hereby; provided that nothing herein shall prevent the Agent or any Bank from disclosing such information (a) to any other Bank or to the Agent, as the case may be, (b) upon the order of any court or administrative agency, (c) upon the request or demand of any regulatory agency or authority, (d) which had been publicly disclosed other than as a result of a disclosure by the Agent or any Bank prohibited by this Agreement, (e) in connection with any litigation to which the Agent, any Bank or its subsidiaries or parent may be a party arising out of or otherwise relating to this Agreement, (f) to such Bank's or Agent's legal counsel and independent auditors, or other professional advisers engaged in connection with this facility, so long as in each case such Persons are advised of the provisions of this Section, and (g) subject to the receipt by such Bank of an agreement or undertaking containing provisions substantially similar to those contained in this Section, to any actual or proposed Participant or Assignee. IN WITNESS WHEREOF this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. GT INTERACTIVE SOFTWARE CORP. By: /s/ ANDREW GREGOR --------------------------------- Name: Andrew Gregor Title: Chief Financial Officer 16 East 40th Street New York, NY 10016 Attention: Chief Financial Officer Facsimile: (212) 726-6590 -53- 57 LENDERS $25,000,000 REPUBLIC NATIONAL BANK OF NEW YORK as a Lender and as Issuing Bank By: /s/ ESTELLE DICHAZI --------------------------------- Name: Estelle Dichazi Title: Senior Vice President Domestic Lending Office 452 Fifth Avenue New York, NY 10018 Attention: Middle Market Lending, Department 381 Attn.: Estelle Dichazi, Senior Vice President Telex: 234967; Answerback: BLICBANK Facsimile: (212) 525-6905 EuroDollar Lending Office: London, England $15,000,000 NBD BANK By: /s/ THOMAS A. LEVASSEW --------------------------------- Name: Thomas A. Levassew Title: Vice President Domestic Lending Office: 611 Woodward Avenue Detroit, Michigan 48226 Attention: Corporate Banking Department Attn.: Sharon Popp, Administrative Assistant Facsimile: (313) 225-1212 EuroDollar Lending Office: London, England -54- 58 $40,000,000 REPUBLIC NATIONAL BANK OF NEW YORK, as Agent By: /s/ ESTELLE DICHAZI --------------------------------- Name: Estelle Dichazi Title: Senior Vice President 452 Fifth Avenue New York, NY 10018 Attention: Middle Market Lending, Department 381; Attn.: Estelle Dichazi, Senior Vice President Telex: 234967; Answerback: BLICBANK Facsimile: (212) 525-6905 -55- 59 EXHIBIT A-1 NOTE New York, New York January 21, 1997 For value received, GT INTERACTIVE SOFTWARE CORP., a Delaware corporation (the "BORROWER"), promises to pay to the order of Republic National Bank of New York (the "Bank"), the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of the Agent at 452 Fifth Avenue, New York, New York 10018. All Loans made by the Bank, the respective types thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of January __, 1997 among the Borrower, the banks listed on the signature pages thereof, the Letter of Credit Issuing Bank party thereto and Republic National Bank of New York, as Agent (as the same may be amended from time to time, the "CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. GT INTERACTIVE SOFTWARE CORP. By: --------------------------------- Name: Title: -56- 60
LOANS AND PAYMENTS OF PRINCIPAL - ----------------------------------------------------------------------------------------------------------------------------------- Amount of Principal Date Amount of Type of Loan Prepaid Notation Made Loan By - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
-57- 61 EXHIBIT A-2 NOTE New York, New York January 21, 1997 For value received, GT INTERACTIVE SOFTWARE CORP., a Delaware corporation (the "BORROWER"), promises to pay to the order of NBD Bank (the "Bank"), the unpaid principal amount of each Loan made by the Bank to the Borrower pursuant to the Credit Agreement referred to below on the maturity date provided for in the Credit Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Credit Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of the Agent at 452 Fifth Avenue, New York, New York 10018. All Loans made by the Bank, the respective types thereof and all repayments of the principal thereof shall be recorded by the Bank and, if the Bank so elects in connection with any transfer or enforcement hereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Bank on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof provided that the failure of the Bank to make any such recordation or endorsement shall not affect the obligations of the Borrower hereunder or under the Credit Agreement. This note is one of the Notes referred to in the Credit Agreement dated as of January __, 1997 among the Borrower, the banks listed on the signature pages thereof, the Letter of Credit Issuing Bank party thereto and Republic National Bank of New York, as Agent (as the same may be amended from time to time, the "CREDIT AGREEMENT"). Terms defined in the Credit Agreement are used herein with the same meanings. Reference is made to the Credit Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof. GT INTERACTIVE SOFTWARE CORP. By: --------------------------------- Name: Title: -58- 62
LOANS AND PAYMENTS OF PRINCIPAL - ----------------------------------------------------------------------------------------------------------------------------------- Amount of Principal Date Amount of Type of Loan Prepaid Notation Made Loan By - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------------------
-59- 63 EXHIBIT B - OPINION January __, 1997 To the Banks and the Agent Referred to Below c/o Republic National Bank of New York as Agent 452 Fifth Avenue New York, New York 10018 Ladies and Gentlemen: We have acted as counsel for GT Interactive Software Corp. (the "BORROWER") and certain of its Subsidiaries in connection with the Credit Agreement (the "CREDIT AGREEMENT") dated as of December , 1996 among the Borrower, the banks listed on the signature pages thereof, the Letter of Credit Issuing Banks party thereto and Republic National Bank of New York, as Agent. Terms defined in the Credit Agreement are used herein as therein defined. This opinion is being rendered to you at the request of our clients pursuant to Section 3.01(d) of the Credit Agreement. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such documents, corporate records, certificates of public officials and other instruments and have conducted such other investigations of fact and law as we have deemed necessary or advisable for purposes of this opinion. Upon the basis of the foregoing, we are of the opinion that: 1. The Borrower is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware and is qualified to do business and is in good standing under the laws of the State of New York and has the corporate power to enter into the Credit Agreement and the documents and instruments referred to therein. 2. The execution, delivery and performance by the Borrower of the Credit Agreement and the Notes are within the corporate powers of the Borrower, have been duly authorized by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any -60- 64 provision of applicable law of regulation or of the certificate of incorporation or by-laws of the Borrower or, to our knowledge, of any agreement, judgment, injunction, order, decree or other instrument binding upon the Borrower or any of its Material Subsidiaries or, to our knowledge, result in the creation or imposition of any Lien on any asset of the Borrower or any of its Subsidiaries. 3. The Credit Agreement constitutes a valid and binding agreement of the Borrower and each Note constitutes a valid and binding obligation of the Borrower, in each case enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and by general principles of equity. 4. To our knowledge, there is no action, suit or proceeding pending or threatened against or affecting the Borrower or any of its Material Subsidiaries before any court or arbitrator or any governmental body, agency or official, in which there is a reasonable possibility of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the borrower and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity of the Credit Agreement or the Notes. 5. Each of the Borrower's Material Subsidiaries is a corporation validly existing and in good standing under the laws of its jurisdiction of incorporation. The foregoing opinions are subject to the following qualifications: (a) We are members of the Bar of the State of New York and do not purport to be expert or express any opinion except as to matters involving the laws of such State, the General Corporation Law of the State of Delaware, and the federal laws of the United States of America. (b) [We express no opinion as to the validity, binding effect or enforceability of any choice of law, consent to jurisdiction, consent to venue or consent to service provision in a court other than a court of the State of New York]. (c) [The enforceability of Sections 2.13(e), 9.03 and [9.11] of the Agreement may be limited by laws rendering unenforceable indemnification contrary to -61- 65 state or federal laws or public policy underlying such laws.] (d) We express no opinion as to the enforceability of any provision purporting to waive unmatured rights to the extent such provision may be limited by applicable state or federal laws or public policy underlying such laws. (e) As used in this opinion letter, "to our knowledge" shall mean the knowledge that attorneys employed by us have obtained solely from their representation of the Borrower. Nothing has come to our attention which has caused us to believe that the statements so made herein "to our knowledge" are untrue or incorrect. However, except as specifically noted above, we do not purport to have made any review of court records or proceedings or made any other independent review or investigation of any factual matter. This opinion letter is being provided to you pursuant to Section 3.01(d) of the Credit Agreement and may not be relied upon by any other person or for any purpose other than in connection with the transactions contemplated by the Credit Agreement without our prior written consent in each instance. Very truly yours, -62- EX-11.1 5 COMPUTATION OF PROFORMA EARNINGS PER SHARE 1 EXHIBIT 11.1 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES COMPUTATION OF PRO FORMA EARNINGS PER SHARE (in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31, 1995 ----------- Pro forma net income $18,628 ======= Pro forma weighted average shares outstanding: Actual 59,305 Dilutive impact of shares issued during the period and treated as being outstanding throughout the periods presented 1,777 ------- 61,082 ------- Pro forma net income per share $ 0.30 =======
EX-11.2 6 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11.2 GT INTERACTIVE SOFTWARE CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (in thousands, except per share data)
FOR THE YEAR ENDED DECEMBER 31, 1996 ----------- Net income $25,139 ======= Weighted average shares outstanding: Actual 66,391 Dilutive impact of shares issued during the period and treated as being outstanding throughout the periods presented -- ------- 66,391 ------- Net income per share $ 0.38 =======
EX-21.1 7 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21.1 G.T. Interactive Entertainment (Europe) Limited WizardWorks Group, Inc. Humongous Entertainment, Inc. Candel Inc. FormGen, Inc. Gold Medallion Software, Inc. Mediatechnics Ltd. 1051236 Ontario, Inc. FormGen Corp. Renegade Interactive Entertainment Limited Bramblewold Computers Limited GT Interactive Software France S.A. GT Interactive Entertainment Company Germany GmbH Premier European Promotion Limited One Stop Direct Limited Software Sourcerers International Limited Wizardworks (UK) Limited EX-23.1 8 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-428) of GT Interactive Software Corp. of our report dated May 10, 1996, with respect to the combined financial statements of Wizardworks Group, Inc. as of March 31, 1996 and 1995 and the related combined statements of income and retained earnings and cash flows for each of the three years in the period ended March 31, 1996. ERNST & YOUNG LLP Minneapolis, Minnesota March 28, 1997 EX-23.2 9 CONSENT OF ARTHUR ANDERSON LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report included in this Annual Report on Form 10-K, into the Company's previously filed Registration Statements on Form S-3 (Registration No. 333-19435) and Form S-8 (Registration No. 333-00428) of GT Interactive Software Corp. ARTHUR ANDERSEN LLP New York, New York March 28, 1997 EX-27.1 10 FINANCIAL DATA SCHEDLUE
5 1,000 12-Mos Dec-31-1996 Jan-01-1996 Dec-31-1996 71,867 4,717 95,941 4,069 60,457 323,977 14,125 4,043 367,111 210,325 0 0 0 664 151,474 367,111 365,490 365,490 214,580 214,580 114,117 2,225 0 40,767 15,628 25,139 0 0 0 25,139 0.38 0
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