-----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, WNjIk9CjRBrS/G6oakS9+TksqDw78+776L3Hze0TmJFBHzeNNsjcAIfrVjh9FcgC WxTQKh61wntAoCeg8TaLmA== 0000927016-99-003924.txt : 19991213 0000927016-99-003924.hdr.sgml : 19991213 ACCESSION NUMBER: 0000927016-99-003924 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19991210 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MODUS MEDIA INTERNATIONAL HOLDINGS INC CENTRAL INDEX KEY: 0001100406 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043357799 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-92559 FILM NUMBER: 99772901 BUSINESS ADDRESS: STREET 1: 690 CANTON STREET CITY: WESTWOOD STATE: MA ZIP: 02090 BUSINESS PHONE: 7814072000 MAIL ADDRESS: STREET 1: 690 CANTON STREET STREET 2: C/O MODUS MEDI INTERNATIONAL HOLDINGS CITY: WESTWOOD STATE: MA ZIP: 02090 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on December 10, 1999 Registration No. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------- MODUS MEDIA INTERNATIONAL HOLDINGS, INC. (Exact name of registrant as specified in its charter) ----------- Delaware 7379 04-3400270 (Primary Standard Industrial (I.R.S. Employer (State or other Classification Code Number) Identification Number) jurisdiction of incorporation or organization) 690 Canton Street Westwood, MA 02090 (781) 407-2000 (Address including zip code, and telephone number including area code, of Registrant's principal executive offices) ----------- TERENCE M. LEAHY Chairman of the Board and Chief Executive Officer Modus Media International Holdings, Inc. 690 Canton Street Westwood, MA 02090 (781) 407-2000 (Name, address including zip code and telephone number including area code, of agent for service) Copies to: MARK G. BORDEN, ESQ. KEITH F. HIGGINS, ESQ. PHILIP P. ROSSETTI, ESQ. Ropes & Gray Hale and Dorr LLP One International Place 60 State Street Boston, Massachusetts 02110 Boston, Massachusetts 02109 Telephone: (617) 951-7000 Telephone: (617) 526-6000 Telecopy: (617) 951-7050 Telecopy: (617) 526-5000 ----------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Proposed maximum aggregate Amount of Title of each class of offering registration securities to be registered price(1) fee(2) - -------------------------------------------------------------------------------- Common Stock, $.01 par value per share............... $150,000,000 $39,600 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. (2) Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities and we are not soliciting an offer to buy + +these securities in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED , 2000 PROSPECTUS Shares [MODUS MEDIA INTERNATIONAL LOGO APPEARS HERE] Modus Media International Holdings, Inc. Common Stock --------- We are selling shares of our common stock. The underwriters named in this prospectus may purchase up to additional shares of our common stock to cover over-allotments. This is an initial public offering of common stock. We currently expect the initial public offering price to be between $ and $ per share, and have applied to have the common stock included for quotation on the Nasdaq National Market under the symbol "EMMI". --------- Investing in the common stock involves risks. See "Risk Factors" beginning on page 7. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ---------
Per Share Total --------- ------ Initial Public Offering Price $ $ Underwriting Discount $ $ Proceeds to Modus Media (before expenses) $ $
The underwriters are offering the shares subject to various conditions. The underwriters expect to deliver the shares to purchasers on or about , 2000. --------- Salomon Smith Barney Donaldson, Lufkin & Jenrette Robertson Stephens Thomas Weisel Partners LLC , 2000 You should rely only on the information contained in this prospectus. Modus Media has not authorized anyone to provide you with different information. Modus Media is not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information provided by this prospectus is accurate as of any date other than the date on the front of this prospectus. ------------ TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 7 Special Note Regarding Forward-Looking Statements........................ 15 Use of Proceeds.......................................................... 16 Dividend Policy.......................................................... 16 Capitalization........................................................... 17 Dilution................................................................. 18 Selected Financial Data.................................................. 19 Management's Discussion and Analysis of Results of Operations and Finan- cial Condition.......................................................... 21 Business................................................................. 29 Management............................................................... 40 Certain Transactions..................................................... 48 Principal Stockholders................................................... 50 Description of Capital Stock............................................. 52 Shares Eligible for Future Sale.......................................... 54 Underwriting............................................................. 56 Validity of Common Stock................................................. 58 Experts.................................................................. 58 Where You Can Find Additional Information................................ 58 Index to Consolidated Financial Statements............................... F-1
Until 2000, all dealers that buy, sell or trade the common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 2 PROSPECTUS SUMMARY The following summary highlights information contained in this prospectus and does not contain all the information that may be important to you. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial data and related notes, before making an investment decision. Modus Media International We are a leading, global provider of extended supply chain management services for the technology industry. We provide a broad range of outsource services that include content management, software manufacturing, hardware assembly and order fulfillment. In addition, our services extend to front-end e-commerce and response center order processing, as well as to back-end financial management, reporting and customer care. We have been in operation since 1982 and have built a worldwide infrastructure in 12 countries, consisting of 20 solution centers and over 4,500 employees. Our clients include original equipment manufacturers such as Compaq, Dell, Hewlett Packard, IBM and Sun Microsystems; independent software vendors such as Intuit, Microsoft, Network Associates and Novell; and leading consumer electronics, telecommunications and Internet companies such as Sony, AT&T, E-Stamp and Beyond.com. The length of our relationships with our five leading clients, based on 1999 revenue, has averaged over ten years. The market for business process outsourcing has evolved as companies, particularly in the technology industry, have increasingly sought to outsource critical non-core functions so that they can focus on their core competencies. Market demands for increased productivity have led companies to move beyond outsourcing only their basic production and fulfillment processes to outsourcing all of the business processes involved in their extended supply chains. The supply chain consists of the many steps that must occur between the sourcing of materials for a product to the delivery of that product. The extended supply chain also includes e-commerce support services and order management at the front end and customer care and financial transaction management at the back end. The goal of extended supply chain management is to link supply and demand as closely as possible in order to reduce costs, minimize business risk and better meet client expectations for performance and quality. We believe that the growth of e-commerce is increasing demand for supply chain outsourcing. According to G2R, a subsidiary of Gartner Group, the market for supply chain management outsourcing is estimated to grow from $17.0 billion in 1998 to $42.2 billion in 2003, representing a compound annual growth rate of 20%. We offer a full range of extended supply chain management services that provide our clients with a "one-stop shop" for their outsource requirements. Our capabilities include: . an integrated end-to-end solution, which enables our clients to link supply and demand in real time, reducing costs and improving efficiency and customer satisfaction; . e-commerce support services, which integrate web ordering with fulfillment operations; . flexible production, which allows us to facilitate the customization of hardware and software products; . a global presence, which enables us to reduce time to market, integrate product introductions, and provide local customization, efficient inventory and logistics management; and . substantial experience in supply chain management, which has earned us a reputation as a trusted part of our clients' supply chains. Our outsource services include content manufacturing solutions and e- fulfillment solutions. Our content manufacturing solutions consist of supply chain management services provided to original equipment 3 manufacturers, or OEMs, and independent software vendors, or ISVs. Our e- fulfillment solutions extend our content manufacturing solutions by combining them with additional services that support direct interaction with our clients' customers, who may be end users or retailers. Orders for products that we fulfill through e-fulfillment solutions come directly from end users or retailers, rather than from our OEM and ISV clients. While a majority of the orders received through our e-fulfillment solutions currently are submitted by telephone or facsimile, we expect that an increasing portion will be received over the web as we provide more e-fulfillment services and the Internet becomes a more prevalent medium for commerce. To date, we have built more than 40 e-commerce sites for our clients, ranging from customer store fronts to online tracking and order information sites, and in some cases have built multiple sites for the same client. The following shows our principal outsource services: Content Manufacturing Solutions e-Fulfillment Solutions . Content management; . Web site design, storefront development and connection to fulfillment . Procurement; operations; . Materials management; . Response centers, including telephone, facsimile, email and web; . Manufacturing; . Online, multi-currency payment . Assembly; and processing; . Fulfillment and distribution. . End-user support for product inquiries; . Returns, refunds and rebates processing; . Reporting on end-user activity; and . Electronic license distribution
services. Our strategy is to take advantage of the market trends towards shorter product life cycles, mass customization and growth of e-commerce by implementing strategies to: . Grow our e-fulfillment solutions business; . Expand our services to existing clients; . Leverage our global presence and information technology infrastructure; . Continue to achieve high ratings in outsourcing industry performance measurements; . Improve our financial returns from scalable, higher productivity operations; . Pursue select, high-growth markets and expand client base; and . Pursue strategic acquisitions. ------------ We are a Delaware corporation. Our principal executive offices are located at 690 Canton Street, Westwood, Massachusetts 02090 and our telephone number is (781) 407-2000. Our World Wide Web site address is www.modusmedia.com. The information on our web site is not incorporated by reference into this prospectus. 4 The Offering Common stock offered........ shares Common stock to be outstanding after this offering................... shares Use of proceeds............. For general corporate purposes, including working capital, payment of debt and potential acquisitions. See "Use of Proceeds." Proposed Nasdaq National EMMI Market symbol..............
The number of shares that will be outstanding after the offering is based on the number of shares outstanding as of , 1999 and excludes: . shares of common stock issuable upon exercise of stock options outstanding as of , 1999, with a weighted average exercise price of $ per share, of which options to purchase shares were then exercisable; and . shares of common stock reserved for future grant under our stock option plans. ------------ Unless specifically stated, the information in this prospectus: . assumes no exercise of the underwriters' over-allotment option; . assumes an initial offering price of $ per share, the midpoint of our initial public offering price range; . reflects a -for- stock split effected which will be effected prior to this offering; . assumes the conversion of all shares of non-voting common stock into common stock; and . reflects the filing, as of the closing of the offering, of our Second Amended and Restated Certificate of Incorporation, referred to in this prospectus as the restated certificate of incorporation, and the adoption of our Amended and Restated By-Laws, referred to in this prospectus as the restated by-laws, implementing the provisions described below under "Description of Capital Stock--Delaware Law and Certain Charter and By-Law Provisions, Anti-Takeover Effects." Modus Media and its logo are trademarks of Modus Media. 5 Summary Consolidated Financial Data The following summary historical consolidated financial data should be read along with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and the consolidated financial statements and related notes included elsewhere in this prospectus. The as adjusted balance sheet data gives effect to our receipt of the estimated proceeds from the sale of shares of common stock we are selling in this offering at an assumed public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses.
Nine Months Ended Years Ended December 31, September 30, --------------------------------- ------------------------ 1996 1997 1998 1998 1999 --------- --------- ----------- ----------- ----------- (in thousands, except share and per share data) Statement of Operations Data: Revenue................. $ 811,905 $ 684,523 $ 630,082 $ 418,284 $ 506,235 Gross profit............ 99,716 96,838 118,094 76,148 92,940 Restructuring charges... 100,883 -- -- -- -- Operating income (loss)................. (107,675) (17,014) 17,172 5,087 14,587 Income (loss) before income taxes........... (122,107) (29,843) 15,012 3,525 12,664 Net income (loss)....... $(111,096) $ (32,667) $ 10,747 $ 2,524 $ 9,390 ========= ========= =========== =========== =========== Preferred stock dividends.............. -- 172 5,922 4,369 4,885 ----------- ----------- ----------- Net income (loss) available to common shareholders........... -- -- $ 4,825 $ (1,845) $ 4,505 =========== =========== =========== Net income (loss) per share: Basic................. -- -- $ 0.38 $ (0.14) $ 0.36 =========== =========== =========== Diluted............... -- -- $ 0.37 $ (0.14) $ 0.31 =========== =========== =========== Number of shares used in per share calculations: Basic................. -- -- 12,748,733 13,001,593 12,509,622 Diluted............... -- -- 13,072,117 13,001,593 14,502,653 Selected Operating Data: EBITDA(1)............... $ (84,373) $ 13,005 $ 37,626 $ 20,677 $ 27,756 Capital expenditures.... 15,800 34,032 12,307 7,601 11,325
As of September 30, 1999 -------------------- Actual As Adjusted -------- ----------- (in thousands) Balance Sheet Data: Cash and cash equivalents.................................. $ 20,385 Working capital............................................ 40,658 Total assets............................................... 276,966 Total debt................................................. 8,704 Total shareholders' equity................................. 102,345
- -------- (1) EBITDA is defined as income from operations before depreciation and amortization. EBITDA is presented because we believe that EBITDA is a widely accepted financial indicator of an entity's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of our operating performance or other combined operations or cash flow data prepared in accordance with generally accepted accounting principles, or as an alternative to cash flows as a measure of liquidity. Our computation of EBITDA may differ from similarly titled computations of other companies. 6 RISK FACTORS This offering involves a high degree of risk. You should carefully consider the risks and uncertainties described below and the other information in this prospectus before you decide whether to buy our common stock. While these are the risks and uncertainties we believe are most important for you to consider, you should know that they are not the only risks or uncertainties facing us or which may adversely affect our business. If any of the following risks or uncertainties actually occurs, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline, and you could lose all or part of the money you paid to buy our common stock. Risks Related to Our Business We depend on several key clients, the loss of one or more of which could harm our business A limited number of our clients account for a substantial portion of our revenue and the loss of any one or more of these clients could have a material adverse effect on our revenue. Our largest eight clients accounted for approximately 63% of our revenue in 1998 and 66% for the nine months ended September 30, 1999. Microsoft Corporation accounted for approximately 17% of our revenue in 1997, 23% in 1998 and 26% in the nine months ended September 30, 1999. IBM accounted for approximately 14% of our revenue in 1997, 12% in 1998 and less than 10% in the nine months ended September 30, 1999. There can be no assurance that our revenue from key clients will not decline in future periods. The loss of a significant amount of business with Microsoft, IBM or any other key client could have a material adverse effect on our business and financial results. Developments in the technology sector may adversely affect our ability to satisfy our clients' outsourcing requirements Our clients' products are subject to rapid change as new technologies develop and replace existing products, such as the replacement of CD-ROM technology with DVD technology. In addition, advances in electronic delivery of information, such as broadband online data delivery, when fully developed and accepted in the marketplace, could reduce the need for physical media, which could in turn adversely affect the demand for our services. Also, new technologies for distributing licensed software may be less expensive or more effective than our current services, which could reduce the prices that we are able to charge and could reduce demand for our content manufacturing services. In addition, OEMs are increasingly incorporating more options within the personal computer itself and therefore reducing the number of separate components that must be included in a shipkit. If we do not successfully introduce outsource solutions in response to these and other new trends and technologies, our business and financial results could be seriously harmed. Our failure to meet client expectations could result in losses and negative publicity Many of our engagements involve technology solutions that are critical to our clients' businesses. Our clients face significant uncertainties in forecasting the demand for their products, and limitations on the size of our facilities, number of our personnel and availability of raw materials could make it difficult for us to respond to their changing product requirements. In addition, any disruption in our e-fulfillment services could adversely affect our clients' ability to conduct commerce on their web sites. Any defects or errors in our solutions, or failure to meet clients' specifications, capacity requirements or expectations, could result in: . delayed or lost revenue due to adverse client reaction; . requirements to provide additional services to a client at no charge; 7 . negative publicity about us and our services, which could adversely affect our ability to attract or retain clients; and . claims for substantial damages against us, regardless of our responsibility for such failure, which may not be covered by our insurance policies and which may not be limited by contractual terms of our engagement. Our quarterly revenues and operating results may fluctuate in future periods; any resulting failure to meet market expectations may cause the price of our common stock to decline Our quarterly revenues and operating results are difficult to predict and may fluctuate significantly from quarter to quarter because some of our products and services are relatively new and the future growth of the outsourcing market, and the market for our products and services in particular, is uncertain. If our quarterly revenues or operating results fall below the expectations of investors or public market research analysts, the price of our common stock could decline substantially. Factors that are likely to cause quarterly fluctuations in our operating results include: . timing of new product introductions or software releases by our clients or their competitors; . seasonal fluctuations in demand or fluctuations in production; . the level of product and price competition that we encounter, including the frequency of changes in pricing policies; . temporary shortages in supply from vendors; . inability to add temporary labor during seasonal peaks; . our ability to expand our operations and the amount and timing of expansion-related and infrastructure expenditures; . political instability or natural disasters in the countries in which we operate; and . facility or systems disruption. Our business could be harmed if Microsoft Corporation were to modify its authorized replicator program We have been designated as an Authorized Replicator (AR) for Microsoft Corporation, which gives us a worldwide license to replicate Microsoft software products and documentation for OEMs who want to bundle licensed software with their hardware products. The AR agreement is renegotiated annually, and the current AR agreement expires on August 31, 2000. Microsoft recently announced that it intends to modify the AR program during the year 2000 for Windows operating system software. The modifications could involve a reduction in the printed materials required by OEMs. There can be no assurance that we will continue as an AR for Microsoft or that we will continue to derive revenues under this program at levels comparable with those realized in the past. Failure to maintain AR status, or to render Microsoft AR-related services to OEMs, could adversely affect our business, financial condition and results of operations. We face substantial competition and may not be able to continue to compete effectively The market for our services is very competitive. We expect the intensity of competition to continue to increase. Our failure to maintain and enhance our competitive position will limit our ability to maintain and increase our market share, which would result in serious harm to our business. Increased competition may also result in price reductions, reduced gross margins and loss of market share. 8 We compete against companies engaged in turnkey printing, hardware assembly, CD and diskette replication and teleservices. In addition to large regional and global competitors, we face competition from numerous local producers and from internal departments of our clients and prospective clients. Additionally, we expect competition to emerge from companies engaged in electronic manufacturing services and logistics services as they attempt to deliver a broader range of services. We compete on the basis of quality, performance, service levels, global capabilities, technology, operational efficiency and price. Some of our competitors have substantially greater financial, infrastructure, personnel and other resources than we have. Furthermore, some of our competitors have well established, large and experienced marketing and sales capabilities and greater name recognition than we have, including well established relationships with our current and potential clients. As a result, our competitors may be in a stronger position to respond quickly to new or emerging technologies and changes in client requirements. They may also develop and promote their services more effectively than we do. Also, we may lose potential clients to competitors for various reasons, including the ability or willingness of our competitors to offer lower prices and other incentives that we cannot match. In addition, clients may subject projects to competitive bidding. Our business could also be adversely affected if two or more of our competitors consolidate and offer broader products and services than we do. We may not be able to compete successfully against current and future competitors, and competitive pressures may seriously harm our business. We may not be able to establish client sites where requested, or we may fail to retain key clients at established sites, which could have a material adverse effect on our business and results of operations Our clients have, at times, requested that we add capacity or open a facility in locations near their sites. If we elect not to add required capacity at sites near existing clients or establish sites near existing or potential clients, clients may decide to seek alternate outsource suppliers. In addition, if we lose a significant client of a particular site or open a site with the expectation of business that does not materialize, our operations at that site could become uneconomical or significantly less efficient. Any of these events could have a material adverse effect on our business and financial results. A decline in the technology sector would harm our business A large portion of our revenue comes from clients in the technology sector. Our business, results of operations and financial condition could be materially adversely impacted if the overall financial performance of the technology sector declines, if our clients' products do not gain or do not sustain market acceptance or if PC market demand declines, or the market share of our technology clients declines or fails to grow at historical levels. Our business depends on the growth of the market for extended supply chain management services We derive a substantial portion of our revenue from providing extended supply chain management services. Our business and future growth will depend in large part on the continued growth of the industry trend towards outsourcing extended supply chain management and other business processes. If this trend does not continue, or does not continue at historical levels, our business and financial results could be materially and adversely affected. Our growth could be limited if we are unable to attract and retain qualified personnel We believe that our success depends largely on our ability to attract and retain highly skilled technical, consulting, managerial, sales and marketing personnel. Our industry is very labor-intensive and has experienced high personnel turnover. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating efficiency and productivity could decline. We may not be able to hire or retain the 9 necessary personnel to implement our business strategy. In addition, we may need to pay higher compensation for employees than we currently expect. Individuals with the significant experience and technical skills that we generally require are in very short supply and competition to hire from this limited pool is intense. We may not be able to employ a sufficient number of temporary employees during peak demand periods Our clients often experience both expected and unexpected surges in demand, such as upon the introduction of a new product release, following a special advertising campaign or as a result of seasonal high demand in anticipation of year end holidays. In order to respond to these surges in demand, we employ a large number of skilled temporary employees. If we were unable to obtain the services of such temporary employees, on short notice and in adequate numbers, we might fail to meet the production and distribution requirements of our clients on a timely basis. Any such failure could result in the loss of one or more key clients or could damage our reputation in the industry, which could have an adverse effect on our business. Loss of our Chief Executive Officer or other key employees could harm our business Our future success depends to a significant degree on the skills, experience and efforts of our senior management. In particular, we depend upon the continued services of Terence M. Leahy, our Chief Executive Officer, and other executive officers. Also, due to the competitive nature of our industry, we may not be able to retain all of our senior managers. The loss of the services of any of these individuals could harm our business and operations. In addition, we have not obtained life insurance benefitting Modus Media on any of our key employees. If any of our key employees leaves or is seriously injured or unable to work and we are unable to find a qualified replacement, our business could be harmed. Our success depends on our ability to manage and expand our international operations We currently conduct business in Taiwan, Singapore, Ireland, the United Kingdom, the Netherlands and other foreign locations, in addition to our North American operations. Sales outside North America accounted for 51% and 55% of our total revenue for 1997 and 1998 and 55% for the nine months ended September 30, 1999. We currently expect international revenue to continue to account for a significant percentage of our total revenue in the future. We believe that we must continue to expand our international sales and fulfillment activities in order to be successful. There are certain risks inherent in conducting international operations, including: . added fulfillment complexities in operations, including multiple languages, currencies, bills of materials and stock keeping units; . exposure to currency fluctuations; . longer payment cycles; . greater difficulties in accounts receivable collections; . the complexity of ensuring compliance with multiple U.S. and foreign laws, particularly differing laws on intellectual property rights and export control; and . labor practices, difficulties in staffing and managing foreign operations, political instability and potentially adverse tax consequences. There can be no assurance that one or more of these factors will not have a material adverse effect on our international operations and, consequently, on our business and results of operations. 10 Failure to introduce new e-fulfillment solutions or enhancements to existing solutions would impair our future growth To be competitive, we must continue to develop and introduce on a timely basis new services, solutions and enhancements for companies with supply chain management and e-fulfillment solution needs. Specifically, we are seeking to expand our e-fulfillment offerings to existing and new clients in areas such as on-line merchandising, electronic order fulfillment and customer relationship management. Any failure to expand our e-fulfillment service offerings could significantly impair our future growth. We may not be able to forecast our revenue accurately because our sales cycle is relatively long and variable Our sales cycle is subject to a number of significant risks, including internal acceptance reviews and the size, scope and timing of the client's needs. Consequently, if sales expected from a specific client in a particular quarter are not realized in that quarter, we are unlikely to be able to generate revenue from alternate sources in time to compensate for the shortfall. As a result, due to the relatively large size of particular projects, a lost or delayed sale could result in revenues that are lower than expected. Many of our clients evaluate our services in a deliberative and time- consuming manner, depending on the specific technical capabilities of the client, the size of the engagement and the complexity of the client's network environment. We cannot accurately predict the length of a potential client's pre-purchase evaluation, or whether our investment in pre-purchase time and resources will result in a sale. Our inability to make such predictions may adversely affect our operating results. We may incur substantial inventory expenses if we fail to manage inventory or accumulate the inventory of clients with unsuccessful businesses We frequently purchase components of our clients' products based on contracts, purchase orders and, in some cases, our clients' forecasts. At times, we purchase inventory based on internal forecasts in advance of client commitments. We also bear inventory and working capital risk associated with the financial strength of our clients. If we fail to accurately gauge and manage our inventory, or if our clients do not perform as expected, we may accumulate a substantial amount of products or materials that cannot be profitably disposed of, and our operating results may suffer. Failure to manage our growth successfully could lead to inefficiencies in conducting our business, increased expenses or slower growth Over the past two years, our operations have continued to expand. Our growth has placed, and will continue to place, a significant strain on our management, operating and financial systems, as well as sales, marketing and administrative resources. Additional growth will further strain these resources. If we cannot manage our expanding operations, we may not be able to continue to grow or we may grow at a slower rate. To manage any future growth effectively, we must continue to improve our financial and accounting systems, inventory and production controls, reporting and procedures, integrate new personnel and manage expanded operations. If we fail to do so, the quality of our services and products and our ability to respond to our clients' needs and retain key personnel would suffer. Our acquisition strategy could have an adverse effect on our business A component of our business strategy is the acquisition of, or investment in, complementary businesses, technologies, services or products. Our ability to identify and invest in suitable acquisition and investment candidates on acceptable terms is crucial to this strategy. We may not be able to identify, acquire or make investments in promising acquisition candidates on acceptable terms. Competition for these acquisitions or investment targets could also result in increased cost of acquisitions. An inability to find suitable acquisition or investment candidates at reasonable prices could slow our growth rate. 11 Acquisitions involve a number of risks, including: . adverse effects on our reported operating results due to accounting changes associated with the acquisitions; . difficulties in management and integration of the acquired business; . increased expenses, including compensation expense resulting from newly hired employees; . diversion of management resources and attention; and . potential disputes with sellers of acquired businesses, technologies, services or products. Client dissatisfaction or performance problems with an acquired business, technology, service or product could also have a material adverse impact on our reputation as a whole. In addition, any acquired business, technology, service or product could significantly underperform relative to our expectations. Our business is exposed to risks under existing client contracts and we do not have written contracts with some of our clients We do not have written contracts with many of our clients. We frequently operate only on the basis of product orders with no minimum requirements. Accordingly, we may be subject to client cancellation of projects, changes in specifications or requirements or other client modifications for which no written agreement exists. These types of cancellations or changes could result in loss of revenue and/or significant expenditures of resources and funding that we may be unable to recover. Although we work to sign multi-year contracts with our clients, our contracts generally: . permit termination upon relatively short notice by the client; . contain no minimum purchase requirements; . do not designate us as the client's exclusive outsource service provider; . do not penalize the client for early termination; and . hold us responsible for products which fail to meet the client's specifications. In addition, we may be subject to client claims relating to our services that are inconsistent with the original scope and understanding of the parties and we may have no written contract to resolve these claims. We rely upon contractual provisions and trademark laws to protect our proprietary rights, which may not be sufficient to protect our intellectual property We rely on a combination of laws, such as copyright, trademark and trade secret laws, and contractual restrictions, such as confidentiality agreements and licenses, to establish and protect our proprietary rights. We currently have pending trademark registration applications for our name and logo in the United States and several foreign countries. Moreover, despite any precautions that we have taken: . laws and contractual restrictions may not be sufficient to prevent misappropriation of our technology or deter others from developing similar technologies; . current federal laws that prohibit software copying provide only limited protection from software piracy, and effective trademark, copyright and trade secret protection may be unavailable or limited in foreign countries; . other companies may claim common law trademark rights based upon state or foreign laws that precede the federal registration of our marks; and . policing unauthorized use of our products and trademarks is difficult, expensive and time-consuming, and we may be unable to determine the extent of this unauthorized use. 12 Also, the laws of the countries in which we market our services and solutions may offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without paying us for it, which would significantly harm our business. We may become involved in litigation over proprietary rights, that could be costly and time consuming Many of our agreements require us to indemnify our clients for losses from any claim of misappropriation or theft of their intellectual property while in our possession. Any litigation, brought by us or others, even if without merit, can be time consuming and result in the expenditure of significant financial resources and the diversion of management's time and efforts. Failure of computer systems and software to be year 2000 compliant could increase our costs, disrupt our services and reduce demand from our clients Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems and software products must be able to accept four digit entries in the date code field to distinguish 21st century dates from 20th century dates. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with these year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. If there is a year 2000 problem with respect to a solution provided by us, it may be difficult to determine whether the problem relates to services which we have performed or is due to the software or technology of our clients or the services of other providers. Any failure of our material systems or our clients' or vendors' material systems to be year 2000 compliant could have material adverse consequences for us. We are unable to predict to what extent our business may be affected if our software, the systems that operate in conjunction with our software or our internal systems experience a material year 2000 failure. In addition, we have contractual obligations to some of our clients which contain year 2000 warranties and provide for damages upon any breach of such warranty. If we breach these warranties, and are sued, the damages we might be required to pay could negatively impact our business, financial condition and results of operations. Moreover, we may be subject to other year 2000-related lawsuits, whether or not the services that we have performed are year 2000 compliant. We cannot predict the outcomes of these types of lawsuits. International laws and regulations may expose us to potential costs and litigation Our plans to expand international operations will increase our exposure to international laws and regulations. If we cannot comply with foreign laws and regulations, which are often complex and subject to variation and unexpected changes, we could incur unexpected costs and potential litigation. For example, the governments of foreign countries might attempt to regulate our products and services or levy sales or other taxes relating to our activities. In addition, foreign countries may impose tariffs, duties, price controls or other restrictions on foreign currencies or trade barriers, any of which could make it more difficult to conduct our business. The European Union recently enacted its own privacy regulations that may result in limits on the collection and use of certain user information, which, if applied to the sale of our services, could negatively impact our results of operations. Our revenues, materials and labor costs in countries outside the U.S. are denominated in local currency. Therefore, a strengthening of other currencies versus the U.S. dollar may give us potential exposure for currency fluctuations in foreign markets. We do not currently engage in currency hedging activities. We have not yet but may in the future experience foreign exchange rate losses, especially to the extent that we do not engage in hedging. 13 We may need additional capital that may not be available to us and, if raised, may dilute your ownership interest in us We may need to raise additional funds to develop or enhance our services and solutions, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. Additional financing may not be available on terms that are acceptable to us. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. If adequate funds are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance products or services, or otherwise respond to competitive pressures would be significantly limited. Risks Related to this Offering Our executive officers and directors will continue to control Modus Media after this offering and could delay or prevent a change in control After this offering, our executive officers and directors and their affiliates will together control approximately % of our outstanding common stock. As a result, these stockholders, if they act together, will be able to control all matters requiring approval of a majority of our stockholders, including the election and removal of directors and any merger, sale of assets and other significant corporate transactions. This control could have the effect of delaying or preventing a change in control of Modus Media, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of Modus Media or its assets and might affect the market price of our common stock. We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock After this offering, the board of directors will have the authority to issue up to million shares of preferred stock and, without any further vote or action on the part of the stockholders, will have the authority to determine the price, rights, preferences, privileges and restrictions of the preferred stock. This preferred stock, if issued, might have preference over the rights of the holders of common stock and could adversely affect the price of our common stock. Although the issuance of this preferred stock will provide us with flexibility in connection with possible acquisitions and other corporate purposes, this issuance may make it more difficult for a third party to acquire us or to acquire a majority of our outstanding voting stock. We currently have no plans to issue preferred stock. Also, our certificate of incorporation, bylaws and equity compensation plans include provisions that may deter an unsolicited offer to purchase Modus Media. These provisions, coupled with the provisions of the Delaware General Corporation Law, may delay or impede a merger, tender offer or proxy contest involving Modus Media. For example, our board of directors will be divided into three classes, only one of which will be elected at each annual meeting. Directors will only be removable by the affirmative vote of at least 66 2/3% of all classes of voting stock. These factors may further delay or prevent a change of control of Modus Media. Purchasers in this offering will suffer immediate and substantial dilution of their investment Purchasers of common stock in this offering will pay a price per share which substantially exceeds the per share value of our assets after subtracting our liabilities. In addition, purchasers of common stock in this offering will have contributed approximately % of the aggregate price paid by all purchasers of our stock but will own only approximately % of our common stock outstanding after this offering. 14 The price of our common stock after this offering may be lower than the price you pay If you purchase shares of our common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters based upon a number of factors. The price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay. Our stock price may be highly volatile which could result in substantial losses for investors purchasing shares in this offering The trading price of our common stock is likely to be volatile. The stock market in general, and the market for technology and Internet-related companies in particular, has experienced extreme volatility. This volatility has often been unrelated to the operating performance of particular companies. We cannot be sure that an active public market for our common stock will develop or continue after this offering. Investors may not be able to sell their common stock at or above our initial public offering price. Prices for the common stock will be determined in the marketplace and may be influenced by many factors, including variations in our financial results, changes in earnings estimates by industry research analysts, investors' perceptions of us and general economic, industry and market conditions. Future sales by existing stockholders could depress the market price of our common stock Sales of a substantial number of shares of our common stock in the public market after this offering could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. See "Shares Eligible for Future Sale." Management will have broad discretion as to the use of proceeds of this offering and may not use these funds effectively Our management will retain broad discretion to allocate the proceeds of this offering. Management's failure to apply these funds effectively could have an adverse effect on our ability to implement our strategy. We are at risk of securities class action litigation that could result in substantial costs and divert management's attention and resources In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. Due to the potential volatility of our stock price, we may be the target of securities litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will," and "would" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other "forward-looking" information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed above in the section captioned "Risk Factors," as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have an adverse effect on our business, results of operations and financial position. 15 USE OF PROCEEDS We expect the net proceeds from our sale of shares of common stock will be approximately $ at an assumed initial public offering price of $ per share and after deducting estimated underwriting discounts and our estimated offering expenses. If the underwriters' over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ . We expect to use a portion of the proceeds to repay a $12.7 million note, bearing interest at a rate of 9.5% and maturing upon the closing of this offering, which was issued to R.R. Donnelley in connection with our repurchase of shares of preferred stock on October 14, 1999. We expect to use the balance of the proceeds for general corporate purposes, including working capital and capital expenditures. We may also use portion of the net proceeds to acquire businesses, products or technologies that are complementary to ours, although no specific acquisitions are currently planned and no portion of the net proceeds has been allocated for any acquisition. Pending such uses of the net proceeds, we intend to invest these proceeds in investment grade, interest- bearing securities. DIVIDEND POLICY We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain all of our future earnings, if any, for use in the operation of our business. In addition, the terms of our credit facility restrict our ability to pay dividends. 16 CAPITALIZATION The following table sets forth our cash and cash equivalents and capitalization as of September 30, 1999. This information is presented: . on an actual basis . on an as adjusted basis to give effect to our receipt of the estimated proceeds from the sale of shares of common stock we are selling in this offering at an assumed public offering price of $ per share, after deducting estimated underwriting discounts and commissions and offering expenses.
September 30, 1999 --------------------- Actual As Adjusted -------- ----------- (in thousands) Cash and cash equivalents............................ $ 20,385 ======== === Long-term debt, net of current portion............... $ 7,341 Shareholders equity: Preferred stock, $.01 par value, with a liquidation value of $1,000 per share; Authorized--120,000 Issued and outstanding--71,744 actual; none as adjusted........................................ 71,744 Common stock, $.01 par value Authorized--33,000,000 actual; as adjusted Issued and outstanding--12,821,340 actual; as adjusted........................................ 128 Additional paid-in capital......................... 23,671 Retained earnings.................................. 7,797 Other comprehensive income (loss).................. (995) -------- --- Total shareholders' equity....................... 102,345 -------- --- Total capitalization........................... $109,686 $ ======== ===
The number of shares of common stock is based on the number of shares outstanding as of September 30, 1999 and does not include 1,620,470 shares that could be issued upon the exercise of options outstanding as of September 30, 1999 at a weighted average exercise price of $0.77 per share. 17 DILUTION Our net tangible book value as of September 30, 1999, was approximately $99.3 million or approximately $7.75 per share of common stock. "Net tangible book value" per share represents the amount of our total tangible assets less total liabilities, divided by shares of common stock outstanding. After giving effect to our issuance and sale of the common stock in this offering (at an assumed initial public offering price of $ per share and after deducting the estimated underwriting discounts and commissions and our offering expenses), our net tangible book value as of September 30, 1999 would have been $ , or $ per share of common stock. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors. The following table illustrates the per share dilution: Assumed initial public offering price per share.................. $ Net tangible book value per share before this offering......... $ ---- Increase in net tangible book value per share attributable to new investors................................................. ---- Net tangible book value per share after this offering............ Dilution per share to new investors..............................
The following table summarizes the difference between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share for shares held by existing stockholders and by new investors (at an assumed initial public offering price of $ per share before deduction of estimated underwriting discounts and commissions and our offering expenses):
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders.. 12,821,340 % $23,799,000 % $1.86 New investors.......... ---------- ----- ----------- ----- Total................ 100.0% 100.0% ========== ===== =========== =====
- -------- The table above assumes no exercise of stock options outstanding at , 1999. As of , 1999, there were options outstanding to purchase shares of common stock at a weighted average exercise price of $ per share and shares reserved for future grants under our stock incentive plan. To the extent any of these options are exercised, there will be further dilution to new investors. To the extent all of such outstanding options had been exercised as of , 1999, net tangible book value per share after this offering would be $ and total dilution per share to new investors would be $ . 18 SELECTED FINANCIAL DATA The consolidated statement of operations data for the fiscal years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, and the consolidated balance sheet data at December 31, 1998 and September 30, 1999, are derived from our consolidated financial statements, which have been audited by Arthur Andersen LLP, our independent public accountants. These statements are included elsewhere in this prospectus. The consolidated statement of operations data and consolidated balance sheet data as of and for the year ended December 31, 1996 and the consolidated balance sheet data at December 31, 1997 are derived from our audited consolidated financial statements, which are not included in this prospectus. The consolidated statement of operations data and consolidated balance sheet data as of and for the year ended December 31, 1995 and the consolidated statement of operations data for the nine months ended September 30, 1998 are derived from our unaudited consolidated financial statements, which are not included elsewhere in this prospectus. Our unaudited consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements, and in the opinion of our management, include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the consolidated results of operations for these periods. Please be advised that historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results of the entire year. The following selected financial data should be read in conjunction with "Management's Discussion and Analysis of Results of Operations and Financial Condition" and our consolidated financial statements and related notes, included elsewhere in this Prospectus.
Nine Months Ended Years Ended December 31, September 30, ------------------------------------------- ------------------------ 1995 1996 1997 1998 1998 1999 --------- --------- --------- ----------- ----------- ----------- (in thousands, except share and per share amounts) Consolidated Statement of Operations Data: Revenue................. $ 911,500 $ 811,905 $ 684,523 $ 630,082 $ 418,284 $ 506,235 Cost of revenue......... 751,600 712,189 587,685 511,988 342,136 413,295 --------- --------- --------- ----------- ----------- ----------- Gross profit............ 159,900 99,716 96,838 118,094 76,148 92,940 Selling, general and administrative expenses............... 120,100 106,508 113,852 100,922 71,061 78,353 Restructuring charges... -- 100,883 -- -- -- -- Operating profit (loss)................. 39,800 (107,675) (17,014) 17,172 5,087 14,587 Interest expense........ 8,686 9,534 16,478 3,882 3,172 1,821 Other (income) expense, net.................... 1,600 4,898 (3,649) (1,722) (1,610) 102 --------- --------- --------- ----------- ----------- ----------- Income (loss) before income taxes........... 29,514 (122,107) (29,843) 15,012 3,525 12,664 Provision (benefit) for income taxes........... 13,491 (11,011) 2,824 4,265 1,001 3,274 --------- --------- --------- ----------- ----------- ----------- Net income (loss)....... 16,023 (111,096) (32,667) 10,747 2,524 9,390 Preferred stock dividends ............. -- -- 172 5,922 4,369 4,885 Net income (loss) available to common shareholders........... $ -- $ -- $ -- $ 4,825 $ (1,845) $ 4,505 ========= ========= ========= =========== =========== =========== Net income (loss) per share: Basic.................. $ -- $ -- $ -- $ 0.38 $ (0.14) $ 0.36 ========= ========= ========= =========== =========== =========== Diluted................ $ -- $ -- $ -- $ 0.37 $ (0.14) $ 0.31 ========= ========= ========= =========== =========== =========== Number of shares used in per share calculations: Basic.................. -- -- -- 12,748,733 13,001,593 12,509,622 Diluted................ -- -- -- 13,072,117 13,001,593 14,502,653 Selected Operating Data: EBITDA (1) ............. $ 74,400 $ (84,373) $ 13,005 $ 37,626 $ 20,677 $ 27,756 Capital expenditures.... 29,200 15,800 34,032 12,307 7,601 11,325
19
As of December 31, As of ------------------------------------ September 30, 1995 1996 1997 1998 1999 -------- -------- -------- -------- ------------- (in thousands) Consolidated Balance Sheet Data: Cash and cash equivalents.. $ 2,386 $ 7,857 $ 29,900 $ 8,447 $ 20,385 Working capital (deficit).. 87,733 (1,993) 23,493 43,602 40,658 Total assets............... 394,977 298,071 256,589 291,210 276,966 Long-term debt, net of current portion........... 41,770 24,363 21,978 21,641 7,341 Total shareholders' equity.................... 196,133 82,300 80,989 93,052 102,345
- -------- (1) EBITDA is defined as income from operations before depreciation and amortization. EBITDA is presented because we believe that EBITDA is a widely accepted financial indicator of an entity's ability to incur and service debt. EBITDA should not be considered by an investor as an alternative to net income or income from operations, as an indicator of our operating performance or other combined operations or cash flow data prepared in accordance with generally accepted accounting principles, or as an alternative to cash flows as a measure of liquidity. Our computation of EBITDA may differ from similarly titled computations of other companies. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. Overview Background We are a leading global provider of extended supply chain management solutions to the technology industry. In 1982, we began as the Documentation Services Division of R.R. Donnelley & Sons Company, printing and binding software manuals in the United States. The division's service offerings evolved to include software manufacturing and the assembly and packaging of diskettes, manuals and related hardware accessories into kits. Reflecting its international expansion, the division was renamed Global Software Services in 1993. In April 1995, the division was merged with Corporate Software, Inc., a reseller of software products, to create Stream International Holdings, Inc. In late 1996, we restructured our business to become a global provider of supply chain management solutions to the technology industry and, at the same time, we began to reduce our offset printing business by closing or selling certain of our printing facilities. In December 1997, Stream recapitalized and contributed the assets related to our business to a separate company called Modus Media International Holdings, Inc. In January 1998, Stream distributed all of the capital stock of Modus Media to its stockholders and Modus Media became an independent company. Revenue We derive our revenue primarily from: . content manufacturing solutions; and . e-fulfillment solutions. Our content manufacturing solutions consist of supply chain management services provided to original equipment manufacturers (OEMs) and independent software vendors (ISVs). These services include procurement, inventory and materials management, manufacturing, kitting, assembly and fulfillment. Billings for our content manufacturing solutions consist primarily of management fees, per transaction fees and incremental fees added to the cost of the materials we use in manufacturing and assembly. Our e-fulfillment solutions extend our content manufacturing solutions by combining them with additional services that support direct interaction with our clients' customers, who may be end users or retailers. Orders for products that we provide through these solutions come directly from end users or retailers rather than from our OEM and ISV clients. E-fulfillment solutions revenue consists principally of billings to clients, which may be on the basis of project or development fees or per transaction fees for outsource services, including e-commerce storefront development, product order telesales and customer relationship management. While a majority of the orders that we fill through our e-fulfillment solutions currently are received by telephone or facsimile, we expect that orders will increasingly be placed over the web as we develop more e-commerce storefronts for our clients and the Internet becomes a more prevalent medium for commerce. Revenue is recognized for our services when the product is shipped or the service is performed under contracts or purchase orders from our clients. Components of Costs and Expenses Cost of revenue primarily includes salaries and benefits for personnel in our operations groups, costs of billable third-party contractors, materials and freight charges, depreciation of property, plant and equipment used in operations, and other occupancy and operating costs. Materials and freight charges are variable in 21 nature and consist primarily of CDs, instruction manuals and computer peripherals such as keyboards and mouses. We expect materials, printing, CD duplication, packaging and labor costs to continue to be a key component of our cost of revenue and expenses. All operating expenses, including expenses attributable to technology support, human resource management and other administrative functions that are not allocable to specific client services, are recorded as selling, general and administrative expenses. Inventory We typically purchase components of our clients' products based on contracts with, or purchase orders from, our clients and, in some cases, on our clients' forecasts. At times, we purchase inventory in advance of providing product assembly, package and fulfillment based on our internal forecasts. We generally have the right to be reimbursed by our client for unused inventory if purchased for a contract or a client purchase order. Client-owned inventories are not reflected on our consolidated balance sheet. Results of Operations The following table sets forth for the years ended December 31, 1997 and 1998, and for the nine months ended September 30, 1998 and 1999, the percentage of consolidated revenue represented by selected items in our consolidated statements of operations:
Years Ended Nine Months Ended December 31, September 30, --------------- ------------------ 1997 1998 1998 1999 ------ ------ -------- -------- Revenue.................................... 100.0% 100.0% 100.0% 100.0% Cost of revenue............................ 85.9 81.3 81.8 81.6 ------ ------ -------- -------- Gross profit............................. 14.1 18.7 18.2 18.4 Operating expenses: Selling, general and administrative...... 16.6 16.0 17.0 15.5 ------ ------ -------- -------- Operating income (loss)................ (2.5) 2.7 1.2 2.9 Other expense (income): Interest expense......................... 2.4 0.6 0.8 0.4 Other (income) expense, net.............. (0.5) (0.3) (0.4) -- ------ ------ -------- -------- Income (loss) before taxes............. (4.4) 2.4 0.8 2.5 Provision for income taxes................. 0.4 0.7 0.2 0.6 ------ ------ -------- -------- Net income (loss)........................ (4.8)% 1.7% 0.6% 1.9% ====== ====== ======== ========
Nine Months Ended September 30, 1999 as Compared to Nine Months Ended September 30, 1998 Revenue Revenue increased $87.9 million, or 21.0%, to $506.2 million for the nine months ended September 30, 1999 from $418.3 million for the nine months ended September 30, 1998. This increase was comprised primarily of a 27.9% increase in revenue from content manufacturing solutions, and a 17.6% increase in revenue from e-fulfillment solutions offset by a 55.7% decrease in revenue from offset printing and a deconsolidation of our Japanese and Korean subsidiaries. As a percentage of revenue during these periods, revenue from content manufacturing solutions increased from 71.0% to 75.1%, e-fulfillment solutions revenue decreased from 23.7% to 23.0% and revenue from print services decreased from 5.3% to 1.9%. Growth in revenue came primarily from new clients and from a general increase in the demand for our services as a result of continued strong PC demand and, to a lesser extent, expanding business with existing clients. 22 In December 1998, we sold all of the assets of our wholly owned Korean subsidiary to Modus Media Korea Ltd. for a 20% equity interest. Additionally, in December 1998, we sold certain assets from our wholly owned Japanese subsidiary, Modus Media International Kabushiki Kaisha, to Sasatoku Donnelley KK and reduced our equity interest in Sasatoku Donnelley from 60% to 40%. In 1998, we consolidated the results of operations of our Korean and Japanese subsidiaries and, in 1999, we accounted for these entities under the equity method as minority owned investments. Therefore, our results of operations for the nine months ended September 30, 1998 include revenue of the Japanese and Korean joint ventures of $27.5 million; while the results of operations for the nine months ended September 30, 1999 do not include revenue of the Japanese and Korean joint ventures. Cost of Revenue Cost of revenue increased $71.2 million, or 20.8%, to $413.3 million for the nine months ended September 30, 1999 from $342.1 million for the nine months ended September 30, 1998. This increase in costs is comprised of salaries and benefits, materials and other costs directly related to the increase in services provided to our clients. As a percentage of revenue, cost of revenue was relatively unchanged at 81.6% for the nine months ended September 30, 1999 as compared to 81.8% during the same period of 1998. Gross Profit As a result of the foregoing factors, gross profit increased $16.8 million, or 22.1%, to $92.9 million for the nine months ended September 30, 1999 from $76.1 million for the nine months ended September 30, 1998. As a percentage of revenue, gross profit increased to 18.4% for the nine months ended September 30, 1999 as compared to 18.2% for the nine months ended September 30, 1998. Selling, General and Administrative Expenses Selling, general and administrative expenses increased $7.3 million, or 10.3%, to $78.4 million for the nine months ended September 30, 1999 from $71.1 million for the nine months ended September 30, 1998. This increase was primarily attributable to increased staffing and investments in marketing and information technology to support the continued development of business solutions for our clients, as well as expenses related to human resources, including the initiation of our corporate training program, called MMI University. As a percentage of revenue, selling, general and administrative expenses decreased to 15.5% for the nine months ended September 30, 1999, as compared to 17.0% during the same period of 1998. The decline of these expenses as a percentage of revenue primarily reflects the spreading of these costs over a larger revenue base. Interest Expense Interest expense decreased $1.4 million to $1.8 million for the nine months ended September 30, 1999 from $3.2 million for the nine months ended September 30, 1998, reflecting a reduction in the average outstanding debt balances, including capital leases. Other Income, Net Other expense was $0.1 million for the nine months ended September 30, 1999 versus other income of $1.6 million for the nine months ended September 30, 1998. This change is primarily related to a $2.1 million gain on the sale of an investment in a CD replication company recorded in 1998. Income Taxes The effective tax rate for the nine months ended September 30, 1999 was 25.9% versus 28.4% for the nine months ended September 30, 1998. The decrease in the effective tax rates resulted primarily from changes in the geographical distribution of income and losses. The effective tax rates for the nine months ended September 30, 1999 and 1998 were lower than the federal statutory rate primarily due to the Company's continued expansion into markets with lower tax rates. 23 Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997 Revenue Revenue decreased $54.4 million, or 8.0%, to $630.1 million for 1998 from $684.5 million for 1997. This decrease was comprised primarily of a 7.3% decrease in revenue from content manufacturing solutions, a 2.0% decrease in revenue from e-fulfillment solutions and a 34.5% decrease in revenue from offset printing. The decrease in revenue is primarily related to severe economic conditions and resulting weaker currencies in Asia as well as the elimination of unprofitable offset print businesses in North America. As a percentage of revenue, revenue from content manufacturing solutions increased from 72.7% in 1997 to 73.3% in 1998, revenue from e-fulfillment solutions increased from 20.8% in 1997 to 22.2% in 1998 and revenue from offset printing decreased from 6.5% in 1997 to 4.5% in 1998. Cost of Revenue Cost of revenue decreased $75.7 million, or 12.9%, to $512.0 million in 1998 from $587.7 million in 1997. As a percentage of revenue, cost of revenue decreased to 81.3% in 1998 from 85.9% in 1997. The lower cost as a percentage of revenue primarily reflects lower revenue in the offset print business, which has higher costs as a percentage of revenue. In addition, cost of revenue was decreased by our productivity initiatives, such as increased automation, and programs to reduce fixed operating costs. Gross Profit As a result of the foregoing factors, gross profit increased by $21.3 million, or 22.0%, to $118.1 in 1998 from $96.8 million in 1997. Gross profit as a percentage of revenue increased to 18.7% as compared to 14.1% during these periods. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased by $12.9 million, or 11.4%, to $100.9 million for 1998 from $113.9 million for 1997. This decrease reflects the elimination of costs associated with the discontinuation of offset printing operations in North America. The decrease also reflects the impact of an $8.0 million charge for the write-off of accounts receivable in 1997 which was associated with discontinuing the relationship with a former client in 1996. As a percentage of consolidated revenue, selling, general and administrative expenses decreased to 16.0% in 1998 as compared to 16.6% in 1997. Interest Expense Interest expense decreased $12.6 million to $3.9 million for 1998 from $16.5 million for 1997. The decrease in interest expense was primarily attributable to a reduction in indebtedness arising from exchanging our debt to our former parent company, R.R. Donnelley & Sons Company, for preferred stock. In connection with this exchange, we established a new credit facility and discontinued our practice of factoring accounts receivable in North America. During 1997, interest expense included $9.4 million on indebtedness to R.R. Donnelley and $3.5 million on the factoring of receivables. Other Income, Net Other income decreased $1.9 million to $1.7 million for 1998 from $3.6 million for 1997. This decrease reflects foreign currency losses recorded in 1998, primarily in Asia, in contrast to the foreign currency gains recorded in 1997. In 1998, the foreign currency losses were partially offset by a $2.1 million gain on the sale of an investment. 24 Income Taxes The effective tax rate for 1998 was 28.4% versus 9.5% for 1997. The increase in the effective tax rates resulted primarily from changes in the geographical distribution of income and losses. The effective tax rates for 1998 and 1997 were lower than the federal statutory rate primarily due to our continued expansion into markets with lower tax rates. Quarterly Results of Operations The following table sets forth selected unaudited statement of operations data for our most recent seven quarterly periods. The lower table presents this data as a percentage of revenue. The unaudited quarterly information has been prepared on the same basis as the annual information and, in the opinion of our management, includes all adjustments necessary to present fairly the information for the quarters presented.
1998 Quarters Ended 1999 Quarters Ended ---------------------------------------- ---------------------------- March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 -------- -------- -------- -------- -------- -------- -------- (in thousands) Revenue................. $139,377 $135,892 $143,015 $211,798 $157,492 $172,674 $176,069 Cost of revenue......... 116,614 111,918 113,605 169,851 129,407 142,191 141,697 -------- -------- -------- -------- -------- -------- -------- Gross profit............ 22,763 23,974 29,410 41,947 28,085 30,483 34,372 SG&A expenses........... 22,579 23,078 25,403 29,862 25,799 25,368 27,186 -------- -------- -------- -------- -------- -------- -------- Operating income........ 184 896 4,007 12,085 2,286 5,115 7,186 Other expense (income), net.................... 1,347 1,309 (1,092) 596 691 1,041 191 -------- -------- -------- -------- -------- -------- -------- Income (loss) before taxes.................. (1,163) (413) 5,099 11,489 1,595 4,074 6,995 Provision for income taxes.................. (329) (117) 1,448 3,263 408 1,138 1,728 -------- -------- -------- -------- -------- -------- -------- Net income (loss)..... $ (834) $ (296) $ 3,651 $ 8,226 $ 1,187 $ 2,936 $ 5,267 ======== ======== ======== ======== ======== ======== ======== 1998 Quarters Ended 1999 Quarters Ended ---------------------------------------- ---------------------------- March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 -------- -------- -------- -------- -------- -------- -------- Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of revenue......... 83.7 82.4 79.4 80.2 82.2 82.3 80.5 -------- -------- -------- -------- -------- -------- -------- Gross profit............ 16.3 17.6 20.6 19.8 17.8 17.7 19.5 SG&A expenses........... 16.2 17.0 17.8 14.1 16.4 14.7 15.4 -------- -------- -------- -------- -------- -------- -------- Operating income........ 0.1 0.6 2.8 5.7 1.4 3.0 4.1 Other expense (income), net.................... 0.9 0.9 (0.8) 0.3 0.4 0.6 0.1 -------- -------- -------- -------- -------- -------- -------- Income (loss) before taxes.................. (0.8) (0.3) 3.6 5.4 1.0 2.4 4.0 Provision for income taxes.................. (0.2) (0.1) 1.0 1.5 0.3 0.7 1.0 -------- -------- -------- -------- -------- -------- -------- Net income (loss)..... (0.6)% (0.2)% 2.6% 3.9% 0.7% 1.7% 3.0% ======== ======== ======== ======== ======== ======== ========
We have historically experienced stronger revenue and earnings in the fourth quarter. This is largely the result of strong fourth quarter personal computer hardware and software sales associated with new product launches and holiday season purchase activity. In addition, we typically experience better operating efficiencies and gross profit in the third and fourth quarters resulting from spreading increased revenue over fixed costs. Other factors that may affect the quarterly results include the following: . the demand for our products and services; . the level of product and price competition that we encounter, including the frequency of changes in pricing policies; 25 . timing of new product introductions and product enhancements by us or our competitors; and . our ability to attract, train and retain qualified personnel in all areas of our business. Liquidity and Capital Resources We have funded our operations and capital expenditures primarily through cash flows from operations, borrowings under various lines of credit and capital lease arrangements. Currently, we have available an asset-backed revolving line of credit of $130 million, secured by selected accounts receivable, inventory and fixed assets on a borrowing-base formula. This credit line expires on December 17, 2001. Borrowings under the line of credit bear interest at rates based on either LIBOR, the lenders' prime rate or the federal funds rate, plus an applicable margin, with commitment fees on the unused portion. At September 30, 1999, the borrowing base was $82.1 million and no borrowings were outstanding. We are required to meet certain financial covenants and, as of September 30, 1999, we were in compliance with all of these covenants. We have entered into several capital leases that are payable under various terms through 2008. At September 30, 1999, the outstanding lease obligations were $4.4 million. Cash provided by operating activities increased by $47.6 million to $38.2 million for the nine months ended September 30, 1999 from $9.4 million used in operations for the same period of 1998. This increase is mainly attributable to a decrease in receivables resulting from improved collection efforts. Cash used in operating activities decreased $59.3 million to $6.4 million in 1998 from $52.9 million provided by operations for the same period of 1997. The decrease was attributable to higher working capital requirements resulting from an increase in receivables caused by the discontinuation of our factoring arrangement with R.R. Donnelley, offset by an increase in net income. Cash used in investing activities increased $7.0 million to $11.2 million for the nine months ended September 30, 1999 from $4.2 million used in investing activities for the same period of 1998. This increase is attributable to the increased level of investment in capital improvements such as factory automation, facility expansion, and installation of an upgraded ERP system. In addition, 1998's activity reflected $3.3 million in proceeds from the sale of our investment in a CD-ROM manufacturing company. Cash used in investing activities decreased $13.4 million to $8.9 million in 1998 from $22.3 million in 1997. The higher 1997 investment in capital reflects the expansion of facilities in Ireland and investments in on-demand print equipment in Europe and Asia. Cash used in financing activities increased $10.0 million to $14.4 million for the nine months ended September 30, 1999 from $4.4 million for the same period of 1998. Cash used in financing activities during 1998 decreased $5.7 million to $5.8 million in 1998 from $11.5 million in 1997. The usage of cash primarily reflects the pay down of bank debt and capital lease obligations. Subsequent to September 30, 1999, we repurchased all of our outstanding preferred stock, which had an aggregate redemption value of $71.7 million, for $60.2 million. We funded the repurchase with $10.0 million in cash, a note for $12.7 million and $37.5 million of our existing credit line. We also repurchased 949,812 outstanding shares of our common stock for a total of $9.8 million. We believe our current cash and cash equivalents, net proceeds from this offering, anticipated cash flows from future operations and existing credit facilities will be sufficient to support our operations, capital expenditures and various repayment obligations under our debt and lease agreements for the next 12 months. However, if funds generated from these sources are insufficient to satisfy our liquidity requirements, we will be required to raise additional funds through public or private offerings. Such financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain additional financing, we may be required to reduce the scope of our planned business initiatives, which could harm our business, financial condition and operating results. Proceeds from this offering will be used, in part, to repay our outstanding indebtedness. 26 Year 2000 Readiness Disclosure The year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Any systems that have date sensitive applications may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in system problems or failures. Possible year 2000 worst case scenarios include interruption of significant parts of our business from failures of our and/or third parties' computer systems. Any such failures may have a material adverse impact on future results. Our approach to year 2000 readiness included three main areas: . Focus on large systems (ERP, finance, email, front-end order entry) followed by a review of hardware, software, and non-information technology systems . Assess vendor and supplier year 2000 readiness . Engage an independent firm to review our year 2000 readiness plan As of the end of the third quarter of 1999, we completed an inventory of our internal IT and non-IT systems, assessed the extent to which these systems will be affected, determined whether the affected systems should be repaired, replaced or retired and had begun to develop contingency plans. Our plan was reviewed by an independent firm. We have implemented the majority of our remediations and continue to perform comprehensive tests and to refine contingency plans. Extensive testing has been performed on major systems and their interfaces according to our plan. During the balance of 1999, we will work to remedy any year 2000 problems identified and formulate contingency plans, if appropriate, to reduce risks and exposure to year 2000 related issues. If we nevertheless experience year 2000 problems, the results of operations could be materially affected. As of the end of the third quarter of 1999, we completed an inventory of our vendors of goods and services. We mailed surveys to these vendors, evaluated their responses and sent follow-up letters, as necessary. Further, we performed year 2000 readiness audits of selected key vendors. We have also developed mitigation and contingency plans for those vendors that are considered critical to our business operations. These plans, the intent of which is to reduce the risk of year 2000 business interruption, were substantially complete through September 30, 1999, but will require ongoing maintenance in relation to business changes. During 1999, we substantially completed installing enterprise resource planning systems in each of our solution centers in order to facilitate year 2000 readiness. Based on our ongoing evaluation of the installation process, we do not anticipate significant business interruption, although we can give no assurance that such interruption will not occur. Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. We are required to adopt SFAS No. 133, as amended by SFAS No. 137, no later than fiscal year 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. We plan to adopt this statement in fiscal year 2001. 27 Our management does not believe that the adoption of SFAS No. 133 will have a material effect on our financial position or results of operations. Quantitative and Qualitative Disclosure About Market Risk We are subject to market risk associated with changes in interest rates and foreign currency exchange rates. Our interest rate exposure is primarily related to borrowings under our line of credit under which the interest rate floats with the market. At September 30, 1999, we had no borrowings under the line. We are subject to market risk associated with changes in foreign currency exchange rates. Over 50% of our revenues are derived from international operations. We currently do not act to mitigate our foreign currency rate risk although we are considering entering into contracts to do so. 28 BUSINESS We are a leading, global provider of extended supply chain management services for the technology industry. We provide a broad range of outsource services that include content management, software manufacturing, hardware assembly and order fulfillment. In addition, our services extend to front-end e-commerce and response center order processing as well as back-end financial management, reporting and customer care. We have been in operation since 1982 and have built a worldwide infrastructure in 12 countries, consisting of 20 solution centers and over 4,500 people. Our clients include original equipment manufacturers such as Compaq, Dell, Hewlett Packard, IBM and Sun Microsystems; independent software vendors, such as Intuit, Microsoft, Network Associates and Novell; and leading consumer electronics, telecommunications and Internet companies such as Sony, AT&T, E-Stamp and Beyond.com. The length of our relationships with our five leading clients, based on 1999 revenue, has averaged over ten years. Industry Overview The market for business process outsourcing has evolved as companies have increasingly sought to outsource critical non-core functions so that they can focus on their core competencies. In the early phase of outsourcing, companies contracted with third-party manufacturers to perform basic production and fulfillment processes. More recently, market demands for increased productivity have led companies to outsource additional business processes to external providers whose core competencies include those processes. Technology companies, in particular, have increasingly sought to outsource the business processes involved in their extended supply chains. The supply chain consists of the many steps that must occur between the sourcing of materials for a product to the delivery of that product. These steps include forecasting, procurement, materials management, manufacturing and assembly, order fulfillment and distribution. The extended supply chain also includes e- commerce support services and order management at the front end and customer care, financial transaction management and reporting at the back end. The goal of extended supply chain management is to link supply and demand as closely as possible in order to reduce costs, minimize business risk and better meet client expectations for performance and quality. By outsourcing one or more business processes in the extended supply chain, companies seek not merely to improve their productivity and efficiency, but also to use the outsourced business processes as a critical part of their overall competitive strategy. In performing multiple steps of the extended supply chain for its clients, the outsource provider can expand its role from that of a contractor supplying products on a transactional basis to that of a business partner whose services help the client achieve its strategic objectives. Outsourcing Trends According to G2R, Inc., a subsidiary of Gartner Group, the market for supply chain management outsourcing is estimated to grow from $17.0 billion in 1998 to $42.2 billion in 2003, representing a compound annual growth rate of 20%. Demand for extended supply chain management services is increasing due to the following market trends: . Increased Focus On Core Competencies. The rapid pace of technological change is resulting in shorter product life cycles, which require companies to devote more resources to product innovation and development. By taking advantage of the expertise and technology infrastructures of outsource providers, companies can focus their own resources on their core competencies such as product development and marketing activities and significantly improve their new product introduction and delivery cycles. . Increasing Competitive Pressures. As competitive pressures drive down prices and require improved product performance, companies must improve their operating efficiencies to maintain or increase profitability. Companies can reduce their costs by relying on outsource providers, who can leverage the cost of their infrastructure across multiple products and clients. In addition, outsource providers 29 can sell directly to retailers and end users, bypassing the traditional model of selling to distributors. Direct sales eliminate the costs of a middleman and provide a manufacturer with valuable end user information. . Need for Global Capabilities. As companies seek to expand into new markets, and as the Internet offers the opportunity to reach clients cost-effectively throughout the world, there is increasing demand for experienced outsource providers who can offer production and fulfillment capabilities on a global basis. Companies having or seeking a global presence need outsource partners who can support their product offerings and coordinate supply with demand across all geographic markets. . Need to Improve Customer Satisfaction. To satisfy customer demand for higher levels of service, companies are providing faster and more accurate delivery and better customer care programs. Because many companies are unable to efficiently provide customer care on a global basis, they are increasingly relying on outsource providers for customer relationship management. . Mass Customization. End-users can now order both hardware and software products that are custom-configured to meet their particular requirements. For example, end users typically order personal computers with different keyboard, storage device and memory options and with different combinations of installed software. Companies selling these products are thus faced with the challenge of supplying customized products both quickly and in large or small quantities. To meet this challenge, companies are increasingly relying on outsource providers that have the capability to manage the product inventories and software content necessary to satisfy end-users' build-to-order requirements. e-Commerce Trends The growth of e-commerce is also contributing to increased demand for business process outsourcing. While e-commerce companies typically have core competencies in on-line merchandising and brand marketing, they often do not have the capability to provide end-to-end e-commerce solutions that extend to business processes such as order processing, procurement, materials management, manufacturing and assembly, fulfillment and customer care. For example, Jupiter Communications estimates that 46% of e-commerce web sites lack real-time integration with an inventory management system, 44% lack real- time integration with call center support and 41% lack real-time integration with a fulfillment system. Unlike in the traditional distribution model in which the outsource provider receives orders from the vendor, in the e-commerce model the outsource provider receives orders directly from retailers or end users. The fulfillment of orders placed over the Internet is particularly complex because e-commerce businesses typically facilitate and encourage end users to customize their orders. Adding to this complexity, end users purchasing products through web sites expect that order processing and product delivery will occur with speed and accuracy. The complexity of commerce on the Internet creates an opportunity for outsource providers to manage the extended supply chain for the e-commerce merchant and solidify the merchant's relationships with its customers. The outsource provider can thus provide an end-to-end solution and play a critical role in the e-commerce merchant's competitive strategy. Outsource Services In order to meet the needs of both traditional vendors and emerging e- commerce vendors for the outsourcing of extended supply chain management processes, an outsource provider must be able to offer services in one or more of the following areas: . e-Commerce Support Services, which include website design, storefront development, transaction management and real-time connection to fulfillment operations; . Procurement and Materials Management, which includes procuring materials at low cost on a just-in-time basis and optimizing levels of inventory so that a client's production requirements can be met without running out of stock and with minimal inventory risk; 30 . Manufacturing, which includes producing the ordered products quickly and accurately, and scaling production to meet planned and unplanned changes in demand; . Fulfillment, which includes all of the steps necessary to execute a transaction, ranging from taking orders to arranging for delivery of the ordered products quickly and to the correct destination; and . Customer Relationship Management, which includes providing reliable and timely information regarding the shipment and status of ordered products and answering customer questions regarding orders, shipping, billing, returns and product information. While many outsource providers offer one or more of these services, there are few providers that can offer all of these services on a globally integrated basis. Companies seeking to outsource a significant portion of their business processes require a provider that has the technological infrastructure and expertise to seamlessly integrate these complex business processes with their own operations. Also, because the outsource provider is often a direct link between two of the most valuable assets of a company, namely its products and its customers, the outsource provider must have the experience and expertise necessary to earn and maintain the trust of the company as a reliable and integral part of its supply chain. The Modus Media Solution We offer a broad range of extended supply chain management services that enable our clients to focus on their core competencies, improve their productivity and efficiency and tailor their supply chain processes to achieve competitive differentiation. The Modus Media solution includes the following: . Integrated Services. We establish strategic relationships with our clients by providing a full range of integrated services that satisfy our clients' supply chain management requirements. Our broad portfolio of services provide a "one-stop shop" to which the client can outsource its business processes, including e-commerce support services, content management, procurement, materials management, manufacturing and assembly, fulfillment and customer relationship management. By providing an integrated end-to-end solution, we are able to help clients link supply and demand in real time and thus reduce costs and improve performance throughout their supply chain. We also offer our clients the option of choosing individual services to suit their particular needs. . Global Presence. We have built a worldwide infrastructure in 12 countries, consisting of 20 solution centers, which enables us to offer production and fulfillment capabilities on a global basis. These centers are connected by a wide area network and use common technology to store clients' software content and other intellectual property. Through this network and standard architecture, we can support simultaneous product launches in multiple languages and in multiple geographic markets. . Management of Complex Business Processes. Our experience in designing and re-engineering supply chain processes provides us with a significant knowledge base that we use to optimize these processes for our clients. Our supply chain processes are supplemented by sophisticated information technologies. Our information technology (IT) infrastructure is built upon an enterprise resource planning (ERP) system that has been designed to be flexible so that we can easily modify our supply chain processes to meet the evolving requirements of our clients. This IT infrastructure also enables us to provide the complex business processes required to produce and deliver customized build-to-order hardware and software products for e-commerce businesses. . Flexible Production Capacity. Leading OEMs and ISVs increasingly seek to outsource large-scale manufacturing and assembly programs. These companies often experience both expected and unexpected surges in demand, such as upon the introduction of a new product release or following a special advertising campaign. Our production facilities throughout the world enable us to meet our clients' time-to-market and volume requirements during periods of varying demand. In addition, by shortening production cycles, we can reduce our clients' inventory requirements and overall production costs. We also use internal forecasts to anticipate client demand and employ a skilled temporary labor force to provide quick ramp-ups and ramp-downs in production. 31 . Proven Supply Chain Partner. We have substantial experience in supply chain management and believe that we have established over this period a reputation as a trusted part of our clients' supply chain operations. To maintain our long-term relationships, we must consistently meet their stringent performance requirements in areas such as inventory turns, order fill rates and product quality. To strengthen our client relationships, we have organized our 470 business managers by client and solution center, with groups of managers representing the same client in multiple centers. The length of our relationships with our five leading clients, based on 1999 revenue, has averaged over ten years. . Management of Content Across Multiple Media. We have implemented a content management and production system that enables us to store electronically millions of data files and images that we use to produce products on demand. Our print on demand capability reduces or eliminates obsolescence of paper-based media while also enhancing the client's ability to customize products for specific end users. We also have the capability to manage and supply content such as software on multiple types of media, such as diskettes and CDs. In addition, we can manage complex software licensing programs, including electronic licensing programs in which we deliver keys over the Internet to enable licensed users to gain access to installed software. Strategy Our objective is to increase revenues and earnings by maintaining and enhancing our position as a leading, global provider of extended supply chain management solutions for the technology industry. We believe that we can take advantage of the market trends towards shorter product life cycles, mass customization and growth of e-commerce by implementing the following strategies: Grow e-Fulfillment Solutions Business. We believe that we have significant opportunities to expand our e-fulfillment solutions business. E-fulfillment solutions allow us to expand upon our content manufacturing solutions and to take on the role of designing, implementing and executing a wider array of services, including web storefront development, response center and electronic order processing, fulfillment, financial transaction management, electronic license distribution and customer relationship management services. Expand Services to Existing Clients. We have long-standing relationships with many leading OEMs and ISVs and we believe that they will continue to seek extended supply chain optimization. We believe that we can take advantage of the trend toward increasing outsourcing and that we can provide services across a larger part of our clients' extended supply chain. We plan to continue to develop and market new offerings and solutions and to provide expanded content manufacturing and e-fulfillment solutions to our existing clients. Leverage Global Presence and Information Technology Infrastructure. We offer significant global capabilities to service the needs of multinational companies who seek reduced time to market, integrated product introductions, localized customization and efficient inventory and logistics management. We believe that our continued implementation of process technologies and just-in-time manufacturing across our global network of solution centers will provide important strategic and competitive advantages in the market for globally integrated, outsourced services. We believe that our ability to offer a single point of contact, when combined with our globally distributed solutions centers, is highly valued. Continue to Achieve High Ratings in Outsourcing Industry Performance Measurements. We have built our corporate culture on operational efficiency and excellence. The outsourcing industry has typically benchmarked the performance of outsource providers using recognized performance measures, such as total supply chain management cost, upside production flexibility, cash-to-cash cycle time and delivery performance. We believe that we have performed favorably when measured against these industry standards and, as a result, that we have established a reputation as a trusted part of our clients' supply chain. We believe clients in this industry will continue to place significant importance on these measurements and we seek to continue to achieve high ratings in performance measurements for the outsourcing industry. 32 Improve Our Financial Returns from Scalable, Higher Productivity Operations. By maintaining our commitment to technology and by managing our infrastructure investments and service offering mix, we seek to reduce our costs, promote operating efficiencies and improve financial returns. In particular, we seek to provide our clients with high value-added e-fulfillment services, which generally provide us with improved operating margins. In addition, we intend to leverage increased revenue over our fixed costs through the use of temporary employees during peak periods. We seek to use our best of class operations knowledge and strategic procurement relationships across all of our solutions centers to achieve improved operating margins and financial results. Pursue Select, High-Growth Markets and Expand Client Base. We intend to pursue clients in addressable high-growth market segments, such as e-commerce and telecommunications, that are outsourcing their critical non-core activities. We intend to capitalize on our full range of integrated supply chain management services to attract clients in these high growth markets and expand and diversify our client base. Pursue Strategic Acquisitions. We intend to pursue strategic acquisitions that will provide us with additional industry expertise, enhance our range of service offerings, expand our capacity, broaden our client base and expand our geographical presence. As outsourcing trends require more significant global and technological capabilities, providers who do not offer a full range of services are seeking strategic partners. We believe that we can take advantage of the trend toward consolidation through strategic acquisitions. Modus Media Services We offer our clients a diversified range of services to address their extended supply chain management needs. Our services can be deployed either as independent solutions to address specific needs within the extended supply chain or as an end-to-end integrated solution to manage the entire extended supply chain. Our solutions are depicted in the diagram below. [GRAPH OF EXTENDED SUPPLY CHAIN MANAGEMENT APPEARS HERE] Content Manufacturing Solutions Our content manufacturing solutions consist of the following services: Content Management. We maintain systems that enable us to respond quickly to frequent changes in our clients' bills of material and rules that dictate the specific hardware components and software to be included in shipkits for different product configurations. We also manage the large amount of data files and images used to produce our clients' software and documentation in multiple versions. In addition, we track for our clients the different customized product configurations that are shipped to our clients' customers. Procurement. We manage the purchase of raw materials and subassemblies from vendors selected either by our clients or by us. Our procurement management services include vendor evaluation, product price negotiation, forecasting product quantities and managing the timing of purchases. 33 Materials Management. By integrating our enterprise resource planning system with client forecasts, we can provide automated inventory management to assure real-time stock counts of a client's products, documentation and other items. We also provide to our clients web-based management information, including pricing information, reorder levels and inventory values, that supports consistent and timely stock balances. Manufacturing. We convert content into various media formats that can be distributed to our clients or directly to the distributor or retailer. This content is often intellectual property, such as licensed software products that are distributed to end users in the form of a diskette, CD or manual. Our manufacturing services handle the conversion of multiple releases or versions of software content in various media from a broad variety of input formats. Assembly. We use a streamlined assembly process to incorporate various components and parts into a finished product or subassembly, referred to as kitting. For some products, such as a PC shipkit, we assemble as many as 100 distinct parts and components into a kit. We are increasingly employing automation to realize efficiency, variable cost management and increased throughput. Fulfillment and Distribution. Our fulfillment services include order processing, picking, packing, warehousing and shipping. We use several semi- automated packaging and labeling lines for our pick and pack operation. We also streamline and customize the fulfillment procedures based upon each client's requirements. In addition, our 20 solution centers facilitate compliance with export regulations and provide regional shipping efficiencies. We provide detailed reports on our supply chain activities in multiple currencies and languages. Microsoft Authorized Replicator. We have authorized replicator status with Microsoft, which licenses us to replicate its software products for authorized Microsoft business partners, primarily OEMs. We have been among a limited number of authorized replicators of Microsoft products since 1991. We have historically entered into annual contracts with Microsoft, and our current contract expires in August 2000. We offer our content manufacturing services to OEMs and ISVs as follows: OEM Applications. We provide OEMs with a single source for sub- and final- assembly, packaging and fulfillment for hardware shipkits. These kits contain many components, such as a mouse, a keyboard, a network interface card and other accessories. In addition, shipkits contain intellectual property content such as software, documentation and other printed material. We manufacture or purchase all components of the kit to be assembled and packaged for distribution. For sub-assembly services, we send the shipkits directly to the OEM's production line on a just-in-time basis as one part number to simplify the client's production process. OEM Case Study. Our client, a leading OEM, had experienced significant growth and was challenged to manage the flow of accessories, software and documentation required by its production lines. The client found that it had incurred significant excess inventory of many items and that it had shut down its production line on numerous occasions due to parts shortages of other components. These problems led to decreased customer satisfaction and decreased profitability. We proposed redesigning the OEM's supply chain and production process. We took over procurement, production and assembly of all activities associated with the client's shipkit and implemented a just-in-time manufacturing model. As a result, the OEM's production line shutdowns have significantly decreased. In addition, the client's cash conversion cycle has improved because the client is invoiced when it receives a shipkit. ISV Applications. We provide ISVs with flexible, just-in-time delivery programs allowing software shipments to be closely coordinated with our clients' inventory and distribution requirements. The content of packaged software products is typically comprised of software replicated on CD or diskette, printed documentation, registration, licensing and marketing materials. We provide a single point of contact to coordinate the production of packaged software products and the on-time supply of bulk orders either to distributors or direct to retail stores. Our ISV solutions provide large scale customization and content 34 management as well as adherence to local specifications and languages in different geographic locations. Our ISV solutions allow our clients to continue to support a large number of concurrent software versions and configurations. ISV Case Study. Our client, a leading ISV focused on the desktop, graphic and Internet design marketplace, had accumulated high levels of obsolete CDs and related inventory due to forecasting volatility, inefficient distribution management and excessive lead times in the manufacturing cycle. The client requested that we provide a solution to reduce inventory levels, shorten manufacturing lead times and increase inventory turns. We proposed the implementation of an on- demand manufacturing model, which eliminated a distribution step and enabled the ISV to ship directly to retail stores. As a result, the client's lead-time was reduced, inventory levels decreased, inventory turns increased, the time necessary to fulfill orders decreased and retailers had more flexibility in merchandising. e-Fulfillment Applications Our e-fulfillment solutions consist of an additional set of services that we combine with our content manufacturing solutions. These services typically support direct interaction with our clients' customers, who may be either end users or retailers. We integrate our content manufacturing solutions with front-end services, such as e-commerce and response center order processing, and back-end services, such as financial management, reporting and customer care, which allow us to provide an end-to-end extended supply chain management solution. Orders for products that we provide through e-fulfillment solutions come directly from end users or retailers rather than from our OEM and ISV clients. While a majority of the orders fulfilled through our e-fulfillment solutions are currently being received by us via telephone or facsimile, we expect that orders will increasingly be placed over the web as we develop more e-commerce storefronts for our clients and the Internet becomes a more prevalent medium for the transaction of commerce. To date, we have built more than 40 e-commerce sites for our clients, ranging from customer storefronts to online tracking and order information sites, and in some cases have built multiple sites for the same client. Our e-fulfillment solutions include the following services, which we typically offer in combination with one or more content manufacturing solutions: . Web site design, web storefront development and real-time connection of web sites to fulfillment operations; . Response centers, including telephone, facsimile, email and web; . Accounts receivable collection programs; . Online, multi-currency payment processing; . End-user support for product inquiries; . Returns, refunds and rebates processing; . Reporting on end user activity; and . Electronic license distribution services. Orders for products that we fulfill through our e-fulfillment solutions are handled in one of six response centers located worldwide. As of September 30, 1999, these centers employed approximately 550 response center representatives. Through these response centers we also handle end-user questions or requests, and billing or credit card transactions with the end user. Related services provided for our clients generally include collection activities, management of databases containing end-user information and transaction-based reporting. Our electronic license administration services are offered through our Open Channel Solutions division. This division manages complex software licensing programs, including electronic licensing programs in which we electronically deliver keys over the Internet to enable licensed users to gain access to installed software. 35 E-Fulfillment Case Study. Our client, a developer of personal digital assistants, required a business process outsourcing partner that offered kitting and assembly combined with call center and web- based ordering capabilities and a distribution infrastructure in North America. The client also needed a partner with the flexibility to handle unforeseen increases in demand. Within four weeks, we developed a web storefront for the client and, within five weeks, began accepting orders in our response centers. Using a secured link, we transmit data across our wide area network so that order management and fulfillment centers in North America can process nearly 20,000 orders per month. Clients We provide solutions to a broad array of original equipment manufacturers, independent software vendors and e-commerce companies. The following chart alphabetically lists a representative sample of our clients and the solutions that we provide to them.
Client Content Manufacturing Solutions e-Fulfillment Solutions - ------ ------------------------------- ----------------------- 3Com/Palm Computing..... X X ABN-AMRO................ X Acer.................... X AT&T.................... X Beyond.com.............. X Compaq.................. X X Dell.................... X X E-Stamp................. X Gateway................. X Hewlett-Packard......... X X IBM..................... X X Intuit.................. X Macromedia.............. X Micron.................. X Microsoft............... X X Network Associates...... X X Novell.................. X X Packard Bell............ X Sony.................... X X Sun Microsystems........ X X
Technology We believe that automation of internal processes and automated links to our suppliers, clients and their customers are critical to our business. To provide a competitive advantage in meeting our clients' demands, we use advanced technologies enhanced with proprietary applications and the knowledge and experience of our management and personnel. Our technology infrastructure is capable of supporting and automating most supply chain management processes, including on-demand manufacturing capabilities, electronic license distribution, integrated product introductions and efficient inventory and logistics management. In addition, we use a communications infrastructure consisting of digitally linked data centers, which are capable of supporting various messaging standards and protocols to ensure secure and effective communication among our solution centers, our clients and their customers, and our suppliers. Our technology infrastructure is based on a modular enterprise resource planning, or ERP, system. We enhance our ERP system with our proprietary applications to customize processes for our clients' specific needs 36 and to provide comprehensive information on all functions and services. In 1999, we completed an infrastructure upgrade on our ERP system to standardize our manufacturing, finance and distribution platforms. In addition, this system has been integrated with other applications and technologies, such as customer relationship management software and content management servers. We maintain a frame relay network that has enabled our customers to deliver production ready masters, bills of materials, and other related work orders by means of a secure network repository, file transfer protocol and electronic data interchange. This network and server configuration allows clients to transfer content over the Internet or via private connections to us, enabling an orderly workflow for master materials within our own internal network. Our customers can transmit content and work orders to a single network location, which processes and retransmits this data to the appropriate solution center for production and distribution. We enable the movement of content, such as master files of data and digital images, for printing on demand around the world. As of September 30, 1999 we employed 179 information technology professionals in a range of activities, including network management, web development, internal support and design. Sales and Marketing Our services are sold through a worldwide direct sales force, comprised of approximately 50 full-time, professional sales executives. We have recently initiated a Global Client Sales group within our direct sales force that is designed to provide full-time, focused account teams to our leading global clients. This Global Client Sales organization is complemented by regional sales teams that provide geographic sales leadership and account management to our clients. We have also invested in product marketing, product development and supply chain design organizations in order to create, support and advance our selling effort. Our marketing organization assists in the selling and development of new offerings and is responsible for lead generation, marketing management, development and marketing of our services, sales tool development and value- added consulting services. This organization is leading our continued emphasis on integrating Internet technologies and e-fulfillment capabilities, as well as the packaging, positioning and enhancement of our extended supply chain management solutions. Competition We participate in a competitive marketplace. However, we believe that no single competitor presently offers the same full range of technology-enabled, global and integrated supply chain management services. We compete against companies engaged in turnkey printing, hardware assembly, CD and diskette replication and teleservices. Turnkey printing companies such as Banta, Quebecor and Printech provide document-intensive supply chain solutions to the same base of clients we presently serve. Hardware assembly companies such as Logistix also provide solutions to the same base of clients we serve. CD and diskette replicators, such as Zomax, Bertelsmann, and Technicolor/Nimbus, provide media-based solutions. Other competitors have emerged from the teleservices industry, such as StarTek, Sykes and Convergys. This group of competitors primarily provides front-end capabilities. In addition to these large regional and global competitors, we face competition from numerous local producers and from internal departments of our clients and prospective clients. Additionally, we expect competition to emerge from companies engaged in electronic manufacturing services and logistics services as they attempt to deliver a broader range of services. We compete on the basis of quality, performance, service levels, global capabilities, technology, operational efficiency and price. Operations and Solution Centers Our operations are organized as a "hub and spoke" platform. The "hubs" are large solution centers in centralized locations worldwide that have significant economies of scale and offer a full range of our services. 37 The "spokes" are satellite solution centers that perform services, other than large scale manufacturing, such as on-demand manufacturing and fulfillment on a just-in-time basis to near-site OEMs and ISVs. We typically start a solution center with an enabling client and then diversify the client representation to spread risk. We operate 20 solution centers worldwide with an aggregate square footage of approximately 2.0 million. All of our solution centers are leased, other than Singapore and Kildare, Ireland, which are owned. Set forth below is the location and size for each of our largest solution centers. Each of these solution centers provides content manufacturing and e-fulfillment solutions.
Facility Location Area (sq. ft.) ----------------- -------------- North America: Fremont, CA................................................ 160,000 Raleigh, NC................................................ 140,400 Lindon, UT................................................. 392,500 Salt Lake City, UT......................................... 126,000 Europe: Dublin, Ireland............................................ 110,000 Kildare, Ireland........................................... 135,000 Apeldoorn, Netherlands..................................... 217,300 Cumbernauld, Scotland...................................... 140,000 Asia: Singapore.................................................. 129,000
We also maintain solution centers in Boise, Idaho; Preston, Washington; Angers, France; Orleans, France; Limerick, Ireland; Willsborough, Ireland; Sydney, Australia; Shenzhen, China; Ochiai, Japan; and Taipei, Taiwan. In addition, we are party to two minority owned joint ventures located in Ebina, Japan and KeyHeung, Korea. In addition, we maintain approximately 550 seats in our response centers within these solution centers for the resolution of questions regarding shipping, billing and technical support as well as a variety of other questions. All of our North American solution centers are certified as Client Operations Performance Centers (COPC) and all of our major solution centers are ISO 9002 certified. Employees Our success in recruiting, hiring, and training large numbers of full-time, skilled employees and obtaining large numbers of temporary employees during peak client demand periods is critical to our ability to provide high quality outsourced services. We believe that we maintain good employee relations. As of September 30, 1999 we employed 4,550 employees. The number of temporary employees varies significantly during the year due to the seasonal variations of our business. We believe that the demographics surrounding our solution centers, and our reputation and compensation package, should allow us to continue to attract and retain qualified employees. We are committed to training our employees, and we benchmark our training investment versus the Fortune 500 on a quarterly basis. In 1999, we initiated a corporate program, MMI University, in which selected employees receive broad training in a wide variety of functional areas. We provide in-house training for client care employees on the features of our clients' products and service offerings as well as our internal systems. Intellectual Property Our operations frequently incorporate proprietary and confidential information. We rely upon a combination of copyright and trademark laws and non-disclosure and other intellectual property contractual arrangements to protect our proprietary rights. We have pending trademark registrations on the name Modus Media International and our logo in the United States, the United Kingdom, Benelux, Ireland, France, Australia, China, Malaysia, Singapore, Taiwan, Japan and Korea. In addition, we have pending registrations as 38 to certain other marks in the United States and abroad. We seek to limit disclosure of our intellectual property by requiring employees and consultants with access to our proprietary information and the proprietary information of our clients to execute confidentiality agreements with us and by restricting access to our source code. Due to rapid technological change, we believe that factors such as the technological and creative skills of our personnel, new product developments and enhancements to existing products are more important than the various legal protections of our technology to establishing and maintaining a technology leadership position. Legal Proceedings We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations. 39 MANAGEMENT Executive Officers and Directors Our executive officers and directors, and their ages and positions as of November 30, 1999, are as follows:
Name Age Position ---- --- -------- Terence M. Leahy.............. 43 Chairman of the Board of Directors, Chief Executive Officer and Director Richard M. Darer.............. 46 Executive Vice President and Chief Financial Officer Patrick G. Donnellan.......... 49 Executive Vice President and Chief Operating Officer Ronald Leitch................. 40 Executive Vice President and Chief Process and Technology Officer Edward D. Rose................ 37 President, Open Channel Solutions Division W. Kendale Southerland........ 37 Executive Vice President, Sales/Marketing/Product Development Mary L. Wilson................ 48 Senior Vice President, General Counsel and Secretary Michael J. Dudich............. 42 Senior Vice President, Human Resources Linwood A. Lacy, Jr........... 53 Director Jonathan S. Lavine............ 33 Director Mark E. Nunnelly.............. 41 Director Robert F. White............... 48 Director
Terence M. Leahy has served as our Chairman of the Board and Chief Executive Officer since December 1997. Mr. Leahy also served as Chief Executive Officer of Stream International Inc. from 1996 to 1997 and oversaw the restructuring of Stream into three different companies in 1997. From January 1994 to March 1995, Mr. Leahy served as business unit president of R.R. Donnelley's Global Software Services division, which merged with Corporate Software Inc. to create Stream International Holdings, Inc. in 1995. From 1982 to 1994, Mr. Leahy held various positions at R.R. Donnelley, including positions at the Global Software Services division since 1993. Mr. Leahy is a graduate of New York University Journalism School. Richard M. Darer has served as our Executive Vice President Chief Financial Officer since September 1998. Prior to joining Modus Media, Mr. Darer served as Senior Vice President of Finance and Administration and Chief Financial Officer of Gensym Corporation, an ERP software and services supplier, from April 1997 to August 1998. From June 1996 to March 1997, Mr. Darer served as Chief Financial Officer and Vice President of Administration at White Pine Software, an Internet content software developer. From July 1994 to June 1996, Mr. Darer served as Corporate Controller of Sequoia Systems and then as its Vice President, Treasurer and Controller after its merger with Texas Microsystems. Mr. Darer holds a Bachelor of Science in mathematics from Polytechnic Institute, a Master of Science in industrial engineering from Northeastern University, and a Master of Business Administration from Harvard Business School. Patrick G. Donnellan has served as our Executive Vice President and Chief Operating Officer since May 1999. Previously, Mr. Donnellan served as President of Modus Media/North America from September 1997 to April 1999. From July 1995 to August 1997, Mr. Donnellan served as Vice President of Operations at Stream International/Europe. From December 1994 to June 1995, Mr. Donnellan served as Director of Business Development for Stream International. Mr. Donnellan holds a Bachelor of Arts in mathematics and politics from University College, Galway, Ireland. 40 Ronald Leitch has served as Executive Vice President, Chief Technology and Process Officer since May 1999. From September 1997 to April 1999, Mr. Leitch served as President of Modus Media/Europe. From April 1996 to August 1997, Mr. Leitch served as Vice President and General Manager of Stream International/Northern Europe. From March 1994 to April 1996, Mr. Leitch served as Managing Director of the Dutch Operations at R.R. Donnelley's Global Software Services business unit. Mr. Leitch holds a Post Graduate Diploma in engineering management from the London School of Business and has a Bachelor of Science in electronics and computing. Edward D. Rose has served as President of Open Channel Solutions, a division of Modus Media, since January 1999. From March 1997 to January 1999, Mr. Rose served in various other capacities for Modus Media including Chief Technology Officer and Senior Vice President of Marketing and Product Development. Previously, Mr. Rose served as Vice President of Electronic Commerce for Stream International from August 1996 to March 1997. From June 1994 to August 1996, Mr. Rose served as Vice President of Publishing Technology in R.R. Donnelley's Financial and Information Services Group. Mr. Rose completed his Bachelor of Fine Arts with honors at Alfred University and attended the Rochester Institute of Technology for graduate work in electronic imaging. W. Kendale Southerland has been Executive Vice President, Sales, Marketing and Product Development since May 1999. From December 1997 to April 1999, Mr. Southerland served as President of Modus Media/Asia. From June 1997 to December 1997, Mr. Southerland served as Senior Vice President for Modus Media/South Asia. From August 1994 to June 1997, Mr. Southerland served as General Manager for our Singapore operations. From 1990 to 1994, Mr. Southerland held various positions within the Modus Media organization. Mr. Southerland holds a Bachelor of Science in industrial management from Georgia Institute of Technology. Mary L. Wilson has served as our General Counsel since December 1997. Prior to joining Modus Media, Ms. Wilson served as General Counsel at PictureTel Corporation, a video conferencing solutions developer, from October 1995 to June 1997. From September 1992 to October 1995, Ms. Wilson was an attorney in private practice. Ms. Wilson received her Bachelor of Arts in psychology from Michigan State University and her Juris Doctor from University of Virginia Law School. Michael J. Dudich joined Modus Media as Senior Vice President, Human Resources in November 1999. From September 1998 to October 1999 Mr. Dudich was Senior Vice President, Human Resources for Cookson Electronics, a leading provider of assembly materials, equipment and technology solutions to the printed circuit board industry. From June 1986 to September 1998, Mr. Dudich served in various human resource capacities for divisions of General Electric Company. Mr. Dudich received his Bachelor of Science in industrial management from the University of Akron. Linwood A. Lacy, Jr. has been a director of Modus Media since August 1998. In November 1997, Mr. Lacy retired from Micro Warehouse Incorporated where he had served as President and Chief Executive Officer since October 1996. From 1989 to May 1996, Mr. Lacy served as the Co-Chairman and Chief Executive Officer of Ingram Micro, Inc. Mr. Lacy holds a Bachelor of Science in chemical engineering from the University of Virginia and a Master of Business Administration from the Darden Graduate School of Business Administration at the University of Virginia. Mr. Lacy also serves as a director of pcOrder.com, Entex Information Services, Inc. and Earthlink Networks, Inc. Jonathan S. Lavine has served as a Director of Modus Media since December 1997. Mr. Lavine joined Bain Capital as an investment executive in 1993 and has been a Managing Director since 1997. He also has been Chief Investment Officer of Sankaty Advisors, a fixed income affiliate of Bain Capital since 1997. Prior to joining Bain Capital, Mr. Lavine worked as a consultant at McKinsey & Company. Previously, Mr. Lavine worked in the Mergers and Acquisitions Department of Drexel Burnham Lambert. Mr. Lavine received an Master of Business Administration from Harvard Business School and a B.A. from Columbia College. 41 Mark E. Nunnelly has served as a Director of Modus Media since December 1997. Mr. Nunnelly joined Bain Capital as a General Partner in 1990 and has served as Managing Director since April 1993. Mr. Nunnelly received a Master of Business Administration, from Harvard Business School and received a Bachelor of Arts from Centre College. Mr. Nunnelly is also a member of the board of directors of Dominos, DoubleClick Inc. and Dade International. Robert F. White has served as a Director of Modus Media since January 1998. He has been a Managing Director of Bain Capital since its inception in 1984. Mr. White received his Master of Business Administration from Harvard Business School, and a Bachelor of Arts in mathematics and economics from Bowdoin College. He is also a director of Brookstone, Inc. Executive Officers Each officer serves at the discretion of our Board of Directors and holds office until his successor is elected and qualified or until his earlier resignation or removal. There are no family relationships among any of our directors or executive officers. Election of Directors Following this offering, the board of directors will be divided into three classes, each of whose members will serve for a staggered three-year term. Messrs. Nunnelly and Lavine will serve in the class whose term expires in 2001; Messrs. Lacy and White will serve in the class whose term expires in 2002; and Mr. Leahy will serve in the class whose term expires in 2003. Upon the expiration of the term of a class of directors, directors in such class will be elected for three-year terms at the annual meeting of stockholders in the year in which such term expires. Compensation of Directors We reimburse non-employee directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors. Mr. Lacy received stock options totalling 20,000 shares of common stock in each of July and December 1998 at an exercise price of $.58 per share. Board Committees The board of directors has established a Compensation Committee and an Audit Committee. The Compensation Committee, which consists of and , reviews executive salaries, administers any bonus, incentive compensation and stock option plans, and approves the salaries and other benefits of our executive officers. In addition, the Compensation Committee consults with our management regarding pension and other benefit plans and our compensation policies and practices. The Audit Committee, which consists of and , reviews the professional services provided by our independent accountants, the independence of such accountants from our management, our annual financial statements and our system of internal accounting controls. The Audit Committee also reviews such other matters with respect to our accounting, auditing and financial reporting practices and procedures as it may find appropriate or may be brought to its attention. Executive Compensation The following table sets forth, for the year ended December 31, 1998, the cash compensation paid and shares underlying options granted to our: . Chief Executive Officer; and . four other most highly compensated executive officers who received annual compensation in excess of $100,000, referred to collectively as the Named Executive Officers. 42 Summary Compensation Table
Long-term Compensation Annual Compensation(1) Awards -------------------------------- -------------- Other Annual Shares All Other Name and Salary Bonus Compensation Underlying Compensation Principal Position ($) ($) ($) Options (#)(2) ($) ------------------ -------- ---------- ------------ -------------- ------------ Terence M. Leahy........ $340,000 $1,104,850 $ 0 700,000 $20,741(3) Chairman of the Board of Directors and Chief Executive Officer Richard M. Darer(4)..... 60,000 75,000 0 100,000 375(5) Executive Vice President and Chief Financial Officer Patrick G. Donnellan.... 264,774 195,129 144,996(6) 147,500 159,304(7) Executive Vice President and Chief Operating Officer Ronald Leitch........... 160,390 132,191 0 110,000 50,196(8) Executive Vice President and Chief Process and Technology Officer W. Kendale Southerland.. 175,752 140,333 117,645(9) 132,500 207,870(10) Executive Vice President, Sales/Marketing/Product Development
- -------- (1) In accordance with the rules of the Securities and Exchange Commission, the compensation set forth in the table does not include medical, group life or other benefits which are available to all of our salaried employees, and certain perquisites and other benefits, securities or property which do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. (2) We did not make any restricted stock awards, grant any stock appreciation rights or make any long-term incentive payments during fiscal 1998 to our executive officers. Options granted to the Named Executive Officers were granted at fair market value as determined by the board of directors based on all factors available to them on the grant date. (3) Comprised of $2,400 of employee retirement and savings plan matching payments made by us, $10,498 of insurance premiums paid by us and $7,843 for the buyout of unused vacation time. (4) Mr. Darer became Executive Vice President and Chief Financial Officer of Modus Media in August 1998. (5) Comprised of life insurance premiums paid by us. (6) Comprised of reimbursements for foreign tax liabilities. (7) Comprised of a $96,762 payment for foreign service and related expenses, $7,550 for the buyout of unused vacation time, $500 for tax return preparation services, $45,000 in pension plan contributions, $8,709 in relocation expenses and $783 of life insurance premiums paid by us. (8) Comprised of $29,813 in reimbursements for expenses related to foreign service and $20,383 in pension contributions. (9) Comprised of reimbursements for foreign tax liabilities. (10) Comprised of a $173,946 payment for foreign service and related expenses, $2,400 of employee retirement and savings plan matching payments made by us, $34,853 in income from the exercise of non-statutory stock options and $701 of life insurance premiums paid by us. 43 Stock Options The following table contains information concerning the grant of options to purchase shares of our common stock to each of our Named Executive Officers during the fiscal year ended December 31, 1998: Option Grants in Last Fiscal Year
Potential Realizable Value at Assumed Annual Rates of Stock Appreciation for Option Individual Grants Term(3) ------------------------------------------------ ------------------------ Number of Percent of Securities Total Options Underlying Granted To Exercise Options Employees in Price Expiration Name Granted (#) Fiscal Year(1) ($/Sh)(2) Date 5% ($) 10% ($) ---- ----------- -------------- --------- ---------- ----------- ------------ Terence M. Leahy........ 300,000(4) 6.7% $0.58 4/17/08 $ 109,428 $ 277,311 160,000(5) 3.6 0.71 4/21/05 16,979 67,241 120,000(5) 2.7 1.19 4/21/05 0 0 120,000(5) 2.7 1.73 4/21/05 0 0 Richard M. Darer........ 85,000(4) 1.9 0.58 11/11/08 31,005 78,572 15,000(4) 0.3 0.58 12/18/08 5,471 13,866 Patrick G. Donnellan.... 100,000(4) 2.2 0.58 4/17/08 36,476 92,437 27,000(5) 0.6 0.58 8/15/05 4,820 10,792 20,500(5) 0.5 0.58 12/16/06 4,840 11,280 Ronald Leitch........... 100,000(4) 2.2 0.58 4/17/08 36,476 92,437 10,000(5) 0.2 0.58 12/16/06 2,361 5,503 W. Kendale Southerland.. 85,000(4) 1.9 0.58 4/17/08 31,005 78,572 26,000(5) 0.6 0.58 7/19/06 5,628 12,939 9,000(5) 0.2 0.58 8/15/05 1,775 4,028 12,500(5) 0.3 0.58 12/16/06 2,951 6,878
- -------- (1) Includes options granted to employees of Corporate Software & Technology and Stream International in connection with the reorganization in which Stream spun off Modus Media and Corporate Software & Technology to its stockholders (the "Reorganization"). (2) All options were granted at or above fair market value as determined by the board of directors on the date of grant. (3) Amounts reported in these columns represent amounts that may be realized upon exercise of options immediately prior to the expiration of their term assuming the specified compounded rates of appreciation (5% and 10%) on our common stock over the term of the options. The potential realizable values set forth above do not take into account applicable tax and expense payments that may be associated with such option exercises. Actual realizable value, if any, will be dependent on the future price of the common stock on the actual date of exercise, which may be earlier than the stated expiration date. The 5% and 10% assumed annualized rates of stock price appreciation over the exercise period of the options used in the table above are mandated by the rules of the Commission and do not represent our estimate or projection of the future price of the common stock on any date. There is no representation either express or implied that the stock price appreciation rates for the common stock assumed for purposes of this table will actually be achieved. (4) These options typically vest over five years. They are comprised of three grants. The first grant, representing 40% of the total, becomes exercisable as it vests. The second and third grants, representing 40% and 20% of the total, become exercisable upon the earliest of (a) seven years after the date of grant, (b) the closing of an initial public offering or acquisition meeting certain value thresholds to the extent they are vested or (c) termination without cause or resignation for good reason following an acquisition. (5) Options issued in connection with the Reorganization. Options typically vest over four years, subject to acceleration upon an acquisition of Modus Media. 44 Fiscal Year-End Option Values The following table sets forth information for each of the Named Executive Officers with respect to the value of options outstanding as of December 31, 1998. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Value
Shares Number of Securities Value of Unexercised In-The- Acquired Underlying Unexercised Money Options at on Value Options at Fiscal Year-End (#) Fiscal Year-End ($)(1) Exercise Realized ------------------------------ ---------------------------- Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable ---- -------- -------- ------------------------------ ---------------------------- Terence M. Leahy........ 136,000 0 204,000/360,000 0/0 Richard M. Darer........ 0 0 0/100,000 0/0 Patrick G. Donnellan.... 30,500 0 0/117,000 0/0 Ronald Leitch........... 0 0 5,000/105,000 0/0 W. Kendale Southerland.. 29,252 0 0/103,248 0/0
- -------- (1) There was no public trading market for the common stock as of December 31, 1998. Accordingly, as permitted by the rules of the Commission, these values have been calculated on the basis of the fair market value of our common stock as of December 31, 1998, of $0.58 per share, as determined by the board of directors, less the aggregate exercise price. Employment Agreements We have an employment agreement with Terence Leahy, dated January 1, 1998. The initial term of this agreement expires on December 31, 2000. The agreement provides that Mr. Leahy will receive a minimum base salary of $340,000 per year subject to increase by annual review of the board, plus certain performance- based bonuses. The agreement also provides that if Mr. Leahy is terminated without cause, or resigns for good reason, he will receive monthly severance payments, each in an amount equal to his monthly base compensation at the time of his termination or resignation, until 18 months after such termination or resignation. In addition, in such circumstances Mr. Leahy will receive a pro- rated bonus for the number of days employed with us during the year of the termination or resignation as well as any unpaid portion of any bonus for the year preceding the year of the termination or resignation. Benefit Plans 1997 Stock Incentive Plan. Our 1997 Stock Incentive Plan was adopted by our board of directors and approved by our stockholders in December 1997. Up to 2,800,000 shares of our common stock (subject to adjustment in the event of stock splits and other similar events) may be issued pursuant to awards granted under the 1997 plan. The 1997 plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock awards and other stock-based awards. Our officers, employees, directors, consultants and advisors are eligible to receive awards under the 1997 plan. Under present law, however, incentive stock options may be granted only to employees. No participant may receive any award for more than 900,000 shares in any calendar year. Optionees receive the right to purchase a specified number of shares of our common stock at a specified option price and subject to such other terms and conditions as are specified in connection with the option grant. We may grant options at an exercise price less than, equal to or greater than the fair market value of our common stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise price less than the fair market value of the common stock on the date of grant or less than 110% of 45 the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of Modus Media. The 1997 plan permits our board of directors to determine how optionees may pay the exercise price of their options, including by cash, check or in connection with a "cashless exercise" through a broker, by surrender to us of shares of common stock, by delivery to us of a promissory note, or by any combination of the permitted forms of payments. As of November 30, 1999 approximately 203 persons would have been eligible to receive awards under the 1997 plan, including eight executive officers and one non-employee director. The granting of awards under the 1997 plan is discretionary. Our board of directors administers the 1997 plan. Our board of directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the plan and to interpret its provisions. It may delegate authority under the 1997 plan to one or more committees of the board of directors and, subject to certain limitations, to one or more of our executive officers. Subject to any applicable limitations contained in the 1997 plan, our board of directors or a committee of the board of directors or executive officer to whom our board of directors delegates authority, as the case may be, selects the recipients of awards and determines: . The number of shares of common stock covered by options and the dates upon which such options become exercisable; . The exercise price of options; . The duration of options; and . The number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including the conditions for repurchase, issue price and repurchase price. In the event of a merger, liquidation or other acquisition event, our board of directors may (i) provide that all outstanding options or other stock-based awards will be assumed or substituted for by the successor corporation on such terms the board determines to be appropriate, (ii) provide that any outstanding options or awards will terminate, to the extent unexercised, immediately prior to consummation of the event, (iii) in the event of a cash transaction, provide that cash consideration in the amount of the acquisition price less the exercise price be exchanged for termination of options or awards, (iv) provide that all restricted stock awards outstanding shall become immediately free of all restrictions upon consummation of the event, or (v) provide for a cash payment to participants in the event of a transaction in which stockholders receive cash in exchange for stock. No award may be granted under the 1997 plan after December 15, 2007, but the vesting and effectiveness of awards previously granted may extend beyond that date. Our board of directors may at any time amend, suspend or terminate the 1997 plan, except that no award granted after an amendment of the 1997 plan and designated as subject to Section 162(m) of the Internal Revenue Code by our board of directors shall become exercisable, realizable or vested, to the extent the amendment was required to grant the award, unless and until the amendment is approved by our stockholders. The 1999 Management Incentive Plan Our 1999 Management Incentive Plan was adopted by our board of directors in January 1999. The objective of the 1999 Management Incentive Plan is to recognize and reward the achievement of financial and business goals by management and certain other key employees. The program, in conjunction with base salary, is designed to offer total cash compensation opportunities that are competitive with market levels. Eligible employees are assigned a target payout for the 1999 Management Incentive Plan, expressed as a percentage of total, regular base earnings, including paid time off and holiday hours. This percentage represents the potential dollar award that will be earned at 100% achievement of goals for all three components of the 1999 Management Incentive Plan. The participant is assigned a target payout for each component, expressed as a percentage of regular base salary. 46 The first component relates to performance by an organizational unit, such as global, regional or Solution Center (or a combination thereof) against budgeted performance. The second component is similar to the first, but measured and recorded quarterly. The third component is tied to individual performance against goals established by the participant and his/her manager. A participant must be actively employed by Modus Media or a subsidiary of Modus Media through December 31, 1999 to receive any payout on annual components. There are no annual payouts under the plan unless we meet certain financial performance measures. 1999 Employee Stock Purchase Plan Our 1999 Employee Stock Purchase Plan was adopted by the board of directors in , 2000. The purchase plan authorizes the issuance of up to a total of shares of common stock to participating employees. Subject to local laws and regulations, we intend to broaden participation in this plan to our employees worldwide. All of our employees, including our employee-directors, who are customarily employed by us for more than 20 hours a week and have been employed by us for more than six months are eligible to participate in the purchase plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of our stock or any subsidiary are not eligible to participate. The purchase plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 10% of an employee's compensation, subject to certain limitations. On the first day of a designated payroll deduction period, referred to as the offering period, we will grant to each eligible employee who has elected to participate in the purchase plan an option to purchase shares of common stock. On the last day of the offering period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the purchase plan, the option price is an amount equal to 85% of the fair market value per share of the common stock on either the first day or the last day of the offering period, whichever is lower. The Compensation Committee may, in its discretion, choose an offering period of 12 months or less for each of the offerings and choose a different offering period for each offering. If an employee is not a participant on the last day of the offering period, the employee is not entitled to exercise any option, and the amount of the employee's accumulated payroll deductions will be refunded. An employee's rights under the purchase plan terminate upon voluntary withdrawal from the purchase plan at any time, or when such employee ceases employment for any reason, except that upon termination of employment because of death, the employee's beneficiary has certain rights to elect to exercise the option to purchase the shares which the accumulated payroll deductions in the participant's account would purchase at the date of death. 47 CERTAIN TRANSACTIONS Loans to Officers In January 1998, in connection with the execution of an employment agreement, Terence Leahy, our Chief Executive Officer, executed an Amended and Restated 7.75% Unsecured Promissory Note for the principal sum of $1,000,000 payable to us. This note restated a note to Stream International Inc. which was assigned to us in connection with the reorganization of Stream International in 1997. The entire principal amount of this note becomes due upon the earlier of (a) a merger or a sale of Modus Media in which Mr. Leahy receives at least $3 million for his stock and options, or (b) the termination of Mr. Leahy's employment by us for cause or by Mr. Leahy without good reason. If we terminate Mr. Leahy's employment with us for any reason other than for cause, or if Mr. Leahy resigns for good reason, or if his employment is terminated due to death or disability, the principal and interest payable under this note will be forgiven. As of November 30, 1999, the amount outstanding under this loan was approximately $1.2 million. In connection with the reorganization of Stream International in 1997, we assumed a 7.34% Secured Non-Recourse Note for the principal sum of $400,000. Fifty percent of the principal amount of this loan was forgiven on January 1, 1999. The remaining fifty percent of this loan will be forgiven on January 1, 2000, provided that on December 31, 1999 Mr. Leahy is employed with us. As of November 30, 1999, the amount outstanding under this loan was approximately $262,000. On July 20, 1999, in connection with his relocation from Singapore to the United States, W. Kendale Southerland executed an Amended and Restated 7.25% Unsecured Promissory Note payable to us in the principal amount sum of $70,000. The entire principal amount of the loan becomes due upon the first to occur of (a) a merger or sale of Modus Media in which Mr. Southerland receives at least $300,000 for his shares and options, (b) the termination of Mr. Southerland's employment by us for cause, or by Mr. Southerland, or (c) July 20, 2004. If we terminate Mr. Southerland's employment with us for any reason other than for cause, all principal and interest payable under this note will be forgiven. As of November 30, 1999, the amount outstanding under this loan was approximately $72,000. On August 10, 1999, in connection with his relocation from Ireland to the United States Ronald Leitch executed an Amended and Restated 7.25% Unsecured Promissory Note payable to us in the principal amount of $62,500. Interest on the loan accrues at a rate of 7.25% per year. The entire principal amount becomes due upon (a) a merger or sale of Modus Media in which Mr. Leitch receives at least 300,000 for his shares and options, (b) the termination of Mr. Leitch's employment with us for cause, or (iii) August 10, 2004, whichever event or date occurs first. If we terminate Mr. Leitch for any reason other than for cause, all principal and interest payable under this note will be forgiven. As of November 30, 1999, the amount outstanding under this loan was approximately $64,000. Contribution Agreement In December, 1997, Stream International, Inc. effected a reorganization and contributed the assets and liabilities related to our business to its subsidiary, Modus Media, in exchange for our common and preferred stock. In January 1998, Stream distributed all of the capital stock of Modus Media to its stockholders, and we became an independent company. Stream International concurrently spun-off another subsidiary, Corporate Software and Technology, Inc. In connection with the reorganization, R.R. Donnelley & Sons Company, which was the principal shareholder of Stream International, received shares of preferred stock of Modus Media, with a redemption value of $40.6 million, in cancellation of indebtedness owed to it. R.R. Donnelley then exchanged our common stock for additional shares of preferred stock, valued at approximately $21.7 million. In October 1999, we repurchased all shares of preferred stock from R.R. Donnelley, including additional shares issued as dividends thereon, for a total purchase price of $60.2 million, of which $47.5 million was paid in cash and $12.7 million was paid by a note that will become due and payable upon the closing of this offering. 48 Tax Sharing Agreement In connection with the reorganization, Modus Media, Stream and an affiliate of Stream entered into a tax sharing agreement under which we will indemnify Stream, and Stream will indemnify us, in respect of any taxes relating to our respective businesses prior to the consummation of the reorganization, after taking into account the net operating loss carryforwards and other tax attributes of Stream immediately prior to consummation of the reorganization. The tax sharing agreement provides rules for determining whether certain items relate to a particular business and also defines the parties' obligations with respect to filing tax returns and their rights and obligations with respect to claims made by the Internal Revenue Service or other taxing authority with respect to periods prior to the date of the reorganization. As of November 30, 1999, there were no material claims pending under this agreement. Management Agreement In connection with the reorganization, Modus Media paid to Bain Capital, Inc., for prior services, the sum of $1.7 million, of which $710,000 was paid in cash and $1.0 million was paid by issuance of 1,722,514 shares of our common stock. Also in 1997 we entered into a management agreement with an affiliate of Bain which required us to pay a fee of $1.5 million in each of 1997, 1998 and 1999 in exchange for certain financial and managerial services. This agreement terminates upon the closing of this offering. Bain Capital is an affiliate of the Bain Capital Funds, which hold approximately 39% of our common stock. Three of our directors, Jonathan Lavine, Mark Nunnelly and Robert White, are Managing Directors of Bain Capital. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of our common stock as of , 1999 and as adjusted to reflect the sale of the shares in this offering by: . each person who is known by us to own beneficially more than 5% of the outstanding shares of common stock; . each of our directors and Named Executive Officers; and . all our directors and executive officers as a group.
Shares of Common Stock Shares Beneficially Beneficially Owned Prior Owned After the to the Offering(1) Offering(1) Name and Address of ------------------------------- ---------------------- Beneficial Owner Number Percent Number Percent ------------------- -------------- ------------ --------- ---------- Bain Capital Funds(2)... 5,024,402 38.8% c/o Bain Capital, Inc Two Copley Place Boston, Massachusetts 02116 Morton H. Rosenthal..... 1,390,766 10.7 97 Lake View Avenue Cambridge, Massachusetts 02138 Chemical Equity 1,343,027 10.4 Associates............. c/o Chase Capital Partners 380 Madison Avenue New York, New York 10017 BankAmerica Investment 899,488(3) 6.9 Corporation............ c/o Bank of America Illinois 231 South LaSalle Street Chicago, Illinois 60697 Rory J. Cowan........... 880,937 6.8 281 Fairhaven Hill Concord, Massachusetts 01742 Directors and Executive Officers Terence M. Leahy........ 513,330(4) 3.9 Mark E. Nunnelly........ 1,250,069(5) 9.7 Robert F. White......... 0 0 Jonathan S. Lavine...... 0 0 Linwood A. Lacy, Jr..... 4,000(6) * Richard M. Darer........ 10,000(7) * Patrick Donnellan....... 85,375(8) * W. Kendale Southerland.. 52,876(9) * Ronald Leitch........... 17,500(10) * All executive officers and directors as a group (12 persons)..... 1,955,400(11) 14.7%
- -------- * Less than 1% of the outstanding common stock. (1) The number of shares of common stock deemed outstanding prior to this offering includes: (i) 12,949,743 shares of common stock outstanding as of November 30, 1999; and (ii) 383,874 shares issuable pursuant to options held by the respective person which may be exercised within 60 days after November 30, 1999 set forth below. The number of shares of common stock deemed outstanding after this offering includes the shares that we are offering for sale in this offering. Beneficial ownership is determined in accordance with the rules of the Commission, and includes voting and investment power with respect to shares. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole 50 voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Unless otherwise indicated, the address of each person listed is c/o Modus Media International, 690 Canton Street, Westwood, MA. (2) Includes 956,826 shares held by Bain Capital Fund IV, L.P., 1,094,993 shares held by Bain Capital Fund IV-B, L.P., 143,514 shares held by BCIP Associates, 85,220 shares held by BCIP Trust Associates, 1,021,335 shares held by Information Partners Capital Fund, L.P., and 1,722,514 shares of non-voting common stock held by Bain Capital Fund V, L.P. (3) Consists of shares of non-voting common stock. (4) Includes 294,000 shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (5) Consists of 1,021,335 shares held by Information Partners Capital Fund, L.P., whose general partner is Information Partners, a Massachusetts general partnership, of which Mr. Nunnelly is a general partner, 143,514 shares held by BCIP Associates, a Delaware general partnership of which Mr. Nunnelly is a general partner, and 85,220 shares held by BCIP Trust Associates, LP, a Delaware limited partnership of which Mr. Nunnelly is a general partner. Mr. Nunnelly disclaims beneficial ownership of such shares except to the extent of his pecuniary interest therein. (6) Consists of shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (7) Consists of shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (8) Includes 21,875 shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (9) Includes 23,624 shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (10) Consists of shares subject to outstanding stock options that are exercisable within the 60 day period following November 30, 1999. (11) Includes 383,874 shares of common stock issuable upon the exercise of stock options that vest within 60 days after November 30, 1999. See notes (4) through (10). 51 DESCRIPTION OF CAPITAL STOCK Effective upon the closing of this offering, our authorized capital stock will consist of shares of common stock, $.01 par value per share, shares of non-voting common stock, and shares of preferred stock, $.01 par value per share. The following summary description of our capital stock is not intended to be complete and is qualified in its entirety by reference to the provisions of applicable law and to our restated certificate of incorporation and restated by-laws, filed as exhibits to the registration statement of which this prospectus is a part. Common Stock As of , 1999, there were shares of common stock outstanding held by stockholders of record and shares of non-voting common stock outstanding held by stockholders of record. Based upon the number of shares outstanding as of that date, and giving effect to the issuance of the shares of common stock offered by us in this offering, there will be shares of common stock and shares of non-voting common stock outstanding upon the closing of this offering. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of non-voting common stock are not entitled to any votes, except as required by law. Directors are elected by a plurality of the votes of the shares present in person or by proxy at the meeting and entitled to vote in such election. Holders of common stock and non-voting common stock are entitled to receive ratably such dividends, if any, as may be declared by the board of directors out of funds legally available therefor, subject to any preferential dividend rights of outstanding preferred stock. If the board of directors declares or pays a dividend on common stock, it must declare or pay the same dividend for the non-voting common stock. If the board of directors declares or pays a dividend on the non-voting common stock, it must declare or pay the same dividend on the common stock. Upon the liquidation, dissolution or winding up of Modus Media, the holders of common stock and non-voting common stock are entitled to receive ratably our net assets available after the payment of all our debts and other liabilities, subject to the prior rights of any outstanding preferred stock. Each share of non-voting common stock is convertible into a share of common stock. Holders of our common stock have no preemptive, subscription or redemption rights, nor are they entitled to the benefit of any sinking fund. The outstanding shares of common stock are, and the shares offered by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable. The rights, powers, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which our board of directors may designate and issue in the future. Preferred Stock Our board of directors will be authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue from time to time up to an aggregate of shares of preferred stock, in one or more series. Each such series of preferred stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by our board of directors, which may include, among others, dividend rights, voting rights, redemption provisions, liquidation preferences, conversion rights and preemptive rights. There are no shares of preferred stock outstanding as of November 30, 1999. Our stockholders have granted the board of directors authority to issue the preferred stock and to determine its rights and preferences in order to eliminate delays associated with a stockholder vote on specific issuances. The rights of the holders of common stock will be subject to the rights of holders of any preferred stock issued in the future. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power or other rights of the holders of common stock, and could make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, a majority of our outstanding voting stock. 52 Delaware Law and Certain Charter and By-Law Provisions; Anti-Takeover Effects We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. Our restated certificate of incorporation and restated by-laws provide for the division of the board of directors into three classes, as nearly equal in size as possible, with staggered three-year terms. See "Management--Election of Directors." In addition, our restated certificate of incorporation and restated by-laws provide that directors may be removed only for cause by the affirmative vote of the holders of at least 75% of the shares of our capital stock entitled to vote. Under our restated certificate of incorporation and restated by-laws any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. The classification of the board of directors and the limitations on the removal of directors and filling of vacancies could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, control of Modus Media. Our restated certificate of incorporation and restated by-laws also provide that, after the closing of this offering, any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may only be taken if it is properly brought before such meeting and may not be taken by written action in lieu of a meeting. Our restated certificate of incorporation and restated by-laws further provide that special meetings of the stockholders may only be called by the Chairman of the board of directors, our President, or by the board of directors. Under the restated by- laws, in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with certain requirements regarding advance notice to us. The foregoing provisions could have the effect of delaying until the next stockholders' meeting stockholder actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. Limitation of Liability and Indemnification Our restated certificate of incorporation provides that our directors and officers shall be indemnified by us to the fullest extent authorized by Delaware law, as it now exists or may in the future be amended, against all expenses and liabilities reasonably incurred in connection with the service for or on our behalf. In addition, our restated certificate of incorporation provides that our directors will not be personally liable for monetary damages to us for breaches of their fiduciary duty as directors, unless they violated their duty of loyalty to us or our stockholders, acted in bad faith, knowingly or intentionally violated the law, authorized illegal dividends or redemptions or derived an improper personal benefit from their action as directors. Transfer Agent and Registrar The transfer agent and registrar for the common stock is American Stock Transfer & Trust Company. 53 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, we will have shares of common stock outstanding (assuming no exercise of outstanding options). Of these shares, the shares ( shares if the over-allotment option is exercised in full) to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, except that any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 described below. Sales of Restricted Shares The remaining shares of common stock outstanding upon completion of this offering are deemed "restricted shares" under Rule 144 or Rule 701 under the Securities Act. Approximately shares of restricted shares will be eligible for sale in the public market without any limitation on the date of this prospectus. Upon expiration of the lock-up agreements described below, 180 days after the date of this prospectus, an additional shares of common stock will be eligible for sale in the public market pursuant to Rule 144. In general, under Rule 144, a stockholder who has beneficially owned his or her restricted shares for at least one year is entitled to sell, within any three-month period, a number of shares that does not exceed the greater of: . one percent of the then outstanding shares of common stock (approximately shares immediately after this offering); or . the average weekly trading volume in the common stock in the over-the- counter market during the four calendar weeks preceding the date on which notice of such sale is filed, provided certain requirements concerning availability of public information, manner of sale and notice of sale are satisfied. In addition, our affiliates must comply with the restrictions and requirements of Rule 144, other than the one-year holding period requirement, in order to publicly sell shares of common stock which are not restricted securities. A stockholder who is not one of our affiliates and has not been our affiliate for at least three months prior to the sale and who has beneficially owned restricted shares for at least two years may resell the shares without limitation. In meeting the one- and two-year holding periods described above, a holder of restricted shares can include the holding periods of a prior owner who was not our affiliate. The one- and two-year holding periods described above do not begin to run until the full purchase price or other consideration is paid by the person acquiring the restricted shares from the issuer or one or our affiliates. Rule 701 provides that currently outstanding shares of common stock acquired under our employee compensation plans may be resold beginning 90 days after the date of this prospectus by: . persons, other than our affiliates, subject only to the manner of sale provisions of Rule 144; and . our affiliates under Rule 144 without compliance with its one-year minimum holding period, subject to certain limitations. Options Rule 701 also provides that the shares of common stock acquired upon the exercise of currently outstanding options or pursuant to other rights granted under our 1997 Stock Incentive Plan may be resold beginning 90 days after the date of this prospectus by: . persons, other than our affiliates, subject only to the manner of sale provisions of Rule 144; and . our affiliates under Rule 144, without compliance with its one-year minimum holding period, subject to certain limitations. 54 At , approximately shares of common stock were issued or issuable pursuant to vested options or pursuant to other rights granted under our 1997 Stock Incentive Plan of which approximately shares are not subject to lock- up agreements with the underwriters and will be eligible for sale in the public market in accordance with Rule 701 under the Securities Act beginning 90 days after the date of this prospectus. Following the date of this prospectus, we intend to file one or more registration statements on Form S-8 under the Securities Act to register up to shares of common stock issuable under our 1997 Stock Incentive Plan. These registration statements would become effective upon filing. Lock-up Agreements Subject to limited exceptions, we and our executive officers, directors and stockholders, who collectively own approximately shares of our common stock, have agreed that, without the prior written consent of Salomon Smith Barney Inc., during the period ending 180 days after the date of this prospectus, we will not . offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise transfer or dispose of any shares of our common stock, whether now owned or later acquired by the person executing the agreement or with respect to which the person executing the agreement later acquires the power of disposition, or file any registration statement under the Securities Act relating to any shares of our common stock for a period of 180 days after the date of this prospectus, or . make any demand for or exercise any right with respect to the registration of any shares of common stock or any security convertible into or exercisable or exchangeable for common stock, regardless of whether any such transactions described in the above two clauses of this paragraph are to be settled by delivery of such common stock or such other securities, in cash or otherwise. In addition, for a period of 180 days from the date of this prospectus, except as required by law, we have agreed that our board of directors will not consent to any offer for sale, sale or other disposition, or any transaction which is designed or could be expected, to result in, the disposition by any person, directly or indirectly, of any shares of common stock without the prior written consent of Salomon Smith Barney Inc. See "Underwriting." 55 UNDERWRITING Subject to the terms and conditions stated in the underwriting agreement dated the date of this prospectus, each underwriter named below has severally agreed to purchase, and we have agreed to sell to each underwriter, the number of shares of our common stock set forth opposite its name below:
Number Name of shares ---- ---------- Salomon Smith Barney Inc....................................... Donaldson, Lufkin & Jenrette Securities Corporation............ Robertson Stephens Inc......................................... Thomas Weisel Partners LLC..................................... ----- Total........................................................ =====
The underwriting agreement provides that the obligations of the several underwriters to purchase the shares included in this offering are subject to approval of legal matters by counsel and to other conditions. The underwriters are obligated to purchase all the shares, other than those covered by the over- allotment option described below, if they purchase any of the shares. The underwriters, for whom Salomon Smith Barney Inc., BancBoston Robertson Stephens Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Thomas Weisel Partners, LLC are acting as representatives, propose to offer some of the shares directly to the public at the public offering price set forth on the cover page of this prospectus and some of the shares to dealers at the public offering price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may reallow, a concession of not in excess of $ per share on sales to other dealers. If all of the shares are not sold at the initial offering price, the representatives may change the public offering price and the other selling terms. The representatives have advised us that the underwriters do not intend to confirm any sales to any accounts over which they exercise discretionary authority. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares of our common stock at the public offering price less the underwriting discount. The underwriters may exercise this option solely for the purpose of covering over- allotments, if any, in connection with this offering. To the extent this option is exercised, each underwriter will be obligated, subject to various conditions, to purchase a number of additional shares approximately proportionate to its initial commitment. We, our officers and directors and substantially all of our existing shareholders have agreed that, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Salomon Smith Barney Inc., dispose of or hedge any shares of our common stock or securities convertible or exchangeable for our common stock. Salomon Smith Barney Inc. in its sole discretion may release any of the securities subject to these lock-up agreements at any time without notice. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the shares will be determined by negotiations between us and the representatives. Among the factors to be considered in determining the initial public offering price were our record of operations, our current financial condition, our future prospects, our markets, the economic conditions in and future prospects for the industry in which we compete, our management, and currently prevailing general conditions in the equity securities markets, including current market valuations of publicly traded companies considered comparable to us. We cannot assure you, however, that the prices at which the shares will sell in the public market after this offering will not be lower than the price at which they are sold by the underwriters or than an active trading market in our common stock will develop and continue after this offering. We have applied to have the common stock included for quotation on the Nasdaq National Market under the symbol "EMMI". 56 The following table shows the underwriting discounts and commissions to be paid to the underwriters by us in connection with this offering. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares of common stock.
Paid by Us ------------------------- No Exercise Full Exercise ----------- ------------- Per share........................................ $ $ Total............................................ $ $
In connection with the offering, Salomon Smith Barney Inc., on behalf of the underwriters, may purchase and sell shares of our common stock in the open market. These transactions may include over-allotment, syndicate covering transactions and stabilizing transactions. Over-allotment involves syndicate sales of common stock in excess of the number of shares to be purchased by the underwriters in the offering, which creates a syndicate short position. Syndicate covering transactions involve purchases of our common stock in the open market after the distribution has been completed in order to cover syndicate short positions. Stabilizing transactions consist of certain bids or purchases of our common stock made for the purpose of preventing or retarding a decline in the market price of our common stock while this offering is in progress. The underwriters also may impose a penalty bid. Penalty bids permit the underwriters to reclaim a selling concession from a syndicate member when Salomon Smith Barney Inc., in covering syndicate short positions or making stabilizing purchases, repurchases shares originally sold by that syndicate member. Any of these activities may cause the price of our common stock to be higher than the price that otherwise would exist in the open market in the absence of such transactions. These transactions may be effected on the Nasdaq National Market or in the over-the-counter market, or otherwise and, if commenced, may be discontinued at any time. We will pay the offering expenses, including registration fees, costs of printing and engraving and legal and accounting fees, estimated to be approximately $ , excluding underwriting discounts and commissions. We have agreed to indemnify the underwriters against various liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in respect of any of those liabilities. At our request, the underwriters have reserved up to five percent of the common stock offered in this prospectus for sale to our employees and their family members and to our business associates at the initial public offering price set forth on the cover page of this prospectus. These persons must commit to purchase shares no later than the close of business on the day following the date of this prospectus. The number of shares available for sale to the general public will be reduced to the extent these persons purchase the reserved shares. Thomas Weisel Partners LLC, one of the representatives of the underwriters, was organized and registered as a broker-dealer in December 1998. Since December 1998, Thomas Weisel Partners has been named as a lead or co-managing underwriter in 91 filed public offerings of equity securities, of which 73 have been completed, and has acted as a syndicate member in an additional 48 public offerings of equity securities. Thomas Weisel Partners does not have any material relationship with us or any of our officers, directors or other controlling persons, except with respect to its contractual relationship with us pursuant to the underwriting agreement entered into in connection with this offering. 57 VALIDITY OF COMMON STOCK The validity of the shares of common stock we are offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Legal matters for the underwriters will be passed upon by Ropes & Gray, Boston, Massachusetts. EXPERTS Our consolidated financial statements and financial statement schedule as of December 31, 1998 and September 30, 1999 and for the years ended December 31, 1997 and 1998 and the nine-months ended September 30, 1999 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 to register the shares of our common stock described in this prospectus. This prospectus is part of that registration statement, and provides you with a general description of the common stock being registered, but does not include all of the information you can find in the registration statement or the exhibits. You should refer to the registration statement and its exhibits for more information about Modus Media and the shares of common stock being registered. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file with the Commission at the Commission's public reference room at 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can also be obtained at prescribed rates by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 58 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- Report of Independent Public Accountants................................... F-2 Consolidated Balance Sheets................................................ F-3 Consolidated Statements of Operations...................................... F-4 Consolidated Statements of Shareholders' Equity............................ F-5 Consolidated Statements of Cash Flows...................................... F-6 Notes to Consolidated Financial Statements................................. F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Modus Media International Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Modus Media International Holdings, Inc. as of December 31, 1998, and September 30, 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Modus Media International Holdings, Inc. as of December 31, 1998, and September 30, 1999 and the results of its operations and its cash flows for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999, in conformity with generally accepted accounting principles. Arthur Andersen LLP Boston, Massachusetts November 12, 1999 F-2 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (In Thousands, Except Share Amounts)
December 31, 1998 September 30, 1999 ----------------- ------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents............... $ 8,447 $ 20,385 Receivables, less allowance for doubtful accounts of $4,402 in 1998 and $5,036 in 1999................................ 135,582 119,202 Inventories, net........................ 49,030 46,450 Prepaid expenses and other current assets................................. 17,795 13,438 -------- -------- Total current assets.................. 210,854 199,475 Property, plant and equipment, net of accumulated depreciation............... 70,752 68,010 Other noncurrent assets................. 9,604 9,481 -------- -------- Total assets.......................... $291,210 $276,966 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt....... $ 2,021 $ 1,363 Accounts payable........................ 107,203 99,980 Accrued liabilities..................... 58,028 57,474 -------- -------- Total current liabilities............. 167,252 158,817 Long-term debt, net of current portion.. 21,641 7,341 Deferred income taxes................... 2,482 1,681 Other noncurrent liabilities............ 6,783 6,782 -------- -------- Total liabilities..................... 198,158 174,621 SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, with a liquidation value of $1,000 per share Authorized--120,000 in 1998 and 1999 Issued and outstanding--66,959 in 1998 and 71,744 in 1999.................... 66,959 71,744 Common stock, $.01 par value Authorized--33,000,000 in 1998 and 1999 Issued and outstanding--12,185,278 in 1998 and 12,821,340 in 1999........... 122 128 Additional paid-in capital.............. 22,953 23,671 Retained earnings....................... 3,292 7,797 Other comprehensive loss................ (274) (995) -------- -------- Total shareholders' equity............ 93,052 102,345 -------- -------- Total liabilities and shareholders' equity............................... $291,210 $276,966 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-3 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands, Except Per Share Data)
Year Ended Nine Months December 31, Ended ------------------ September 30, 1997 1998 1999 -------- -------- ------------- Revenue...................................... $684,523 $630,082 $506,235 Cost of Revenue.............................. 587,685 511,988 413,295 -------- -------- -------- Gross profit............................... 96,838 118,094 92,940 Operating Expenses: Selling, general and administrative expenses................................... 113,852 100,922 78,353 -------- -------- -------- Operating income (loss).................... (17,014) 17,172 14,587 Other Expense (Income): Interest expense............................ 16,478 3,882 1,821 Other expense (income), net................. (3,649) (1,722) 102 -------- -------- -------- Income (loss) before income taxes.......... (29,843) 15,012 12,664 Provision for Income Taxes................... 2,824 4,265 3,274 -------- -------- -------- Net income (loss).......................... (32,667) 10,747 9,390 Preferred Stock Dividends.................... 172 5,922 4,885 -------- -------- -------- Net income (loss) available to common shareholders.............................. $(32,839) $ 4,825 $ 4,505 ======== ======== ======== Net income per share: Basic.................................... $ -- $ 0.38 $ 0.36 ======== ======== ======== Diluted.................................. $ -- $ 0.37 $ 0.31 ======== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-4 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In Thousands, Except Share Amounts)
Preferred Stock Common Stock --------------------- ---------------------- Net Parent $1,000 Additional Other Company Number of Liquidation Number of $.01 Paid-In Retained Comprehensive Investment Shares Value Shares Par Value Capital Earnings Income (Loss) Total ---------- --------- ----------- ----------- --------- ---------- -------- ------------- -------- Balance, December 31, 1996................. $131,703 -- $ -- -- $ -- $ -- $ -- $ -- $131,703 -------- ------ ------- ----------- ----- -------- ------- ----- -------- Comprehensive income-- Net loss............ (31,306) (31,306) Translation adjustment (including taxes of $287)............... 3,020 -- -- -- -- -- -- -- 3,020 -------- ------ ------- ----------- ----- -------- ------- ----- -------- Total comprehensive loss................ (28,286) -- -- -- -- -- -- -- (28,286) Net transfers from the Parent Company.. (20,895) -- -- -- -- -- -- -- (20,895) Dividend to the Parent Company...... (40,646) -- -- -- -- -- -- -- (40,646) Conversion of Parent Company debt to equity.............. 40,646 -- -- -- -- -- -- -- 40,646 Capitalization of the Company-- Common stock issued.............. (41,876) -- -- 48,258,737 483 41,393 -- -- -- Preferred stock issued.............. (40,646) 40,646 40,646 -- -- -- -- -- -- -------- ------ ------- ----------- ----- -------- ------- ----- -------- Balance, December 15, 1997................. -- 40,646 40,646 48,258,737 483 41,393 -- -- 82,522 Net loss............ -- -- -- -- -- -- (1,361) -- (1,361) 9.5% Cumulative dividends on preferred stock..... -- -- -- -- -- -- (172) -- (172) -------- ------ ------- ----------- ----- -------- ------- ----- -------- Balance, December 31, 1997................. $ -- 40,646 $40,646 48,258,737 $ 483 $ 41,393 $(1,533) $ -- $ 80,989 Comprehensive income-- Net income.......... -- -- -- -- -- -- 10,747 -- 10,747 Translation adjustment (including tax benefits of $73).... -- -- -- -- -- -- -- (274) (274) -------- ------ ------- ----------- ----- -------- ------- ----- -------- Total comprehensive income.............. -- -- -- -- -- -- 10,747 (274) 10,473 Conversion of common stock to preferred stock............... -- 21,132 21,132 (36,387,466) (364) (20,768) -- -- -- Redemption of preferred stock..... -- (913) (913) -- -- 913 -- -- -- Contribution of capital............. -- -- -- -- -- 1,231 -- -- 1,231 Issuance of common stock under stock option plans........ -- -- -- 314,007 3 184 -- -- 187 9.5% cumulative dividends on preferred stock..... -- 6,094 6,094 -- -- -- (5,922) -- 172 -------- ------ ------- ----------- ----- -------- ------- ----- -------- Balance, December 31, 1998................. $ -- 66,959 $66,959 12,185,278 $ 122 $ 22,953 $ 3,292 $(274) $ 93,052 Comprehensive income-- Net income.......... -- -- -- -- -- -- 9,390 -- 9,390 Translation adjustment (including tax benefits of $216)... -- -- -- -- -- -- -- (721) (721) -------- ------ ------- ----------- ----- -------- ------- ----- -------- Total comprehensive income.............. -- -- -- -- -- -- 9,390 (721) 8,669 Issuance of common stock under stock option plans........ -- -- -- 669,562 6 637 -- -- 643 Purchase and retirement of common stock............... -- -- -- (33,500) -- (19) -- -- (19) Redemption of preferred stock..... -- (100) (100) -- -- 100 -- -- -- 9.5% cumulative dividends on preferred stock..... -- 4,885 4,885 -- -- -- (4,885) -- -- -------- ------ ------- ----------- ----- -------- ------- ----- -------- Balance, September 30, 1999............. $ -- 71,744 $71,744 12,821,340 $ 128 $ 23,671 $ 7,797 $(995) $102,345 ======== ====== ======= =========== ===== ======== ======= ===== ========
The accompanying notes are an integral part of these financial statements. F-5 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Year Ended Nine Months December 31, Ended ------------------- September 30, 1997 1998 1999 --------- -------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................... $ (32,667) $ 10,747 $ 9,390 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.............. 26,370 18,732 13,271 Amortization of deferred financing costs... -- 1,360 965 Loss on disposal of fixed assets........... -- -- 189 Deferred income taxes...................... 2,824 (342) (801) Gain on sale of investment................. -- (2,088) -- Changes in assets and liabilities-- Receivables, net.......................... 17,814 (59,591) 16,380 Inventories............................... 29,504 (3,133) 2,580 Prepaid expenses and other current assets................................... (11,935) (2,507) 4,357 Accounts payable.......................... (11,395) 22,501 (7,223) Accrued liabilities....................... 844 15,872 2,409 Noncurrent assets and liabilities......... (1,025) (562) (2,829) Intercompany receivable from Stream....... 49,403 -- -- Restructuring reserve..................... (16,837) (7,457) (481) --------- -------- -------- Net cash provided by (used in) operating activities.............................. 52,900 (6,468) 38,207 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment......... (34,032) (12,307) (11,325) Proceeds from sale of investment........... -- 3,288 -- Net proceeds from disposal of fixed assets.................................... 11,682 119 157 --------- -------- -------- Net cash used in investing activities.... (22,350) (8,900) (11,168) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of third-party debt............. (18,028) (1,988) (5,722) Cash paid to secure third-party financing.. (3,369) (1,907) -- Net transfers from Parent Company.......... 7,799 -- -- Increase (decrease) of capital lease obligations............................... 2,071 (3,334) (9,282) Purchase and retirement of common stock.... -- -- (19) Cash proceeds related to pre-Reorganization tax receivable............................ -- 1,231 -- Exercise of stock options.................. -- 187 643 --------- -------- -------- Net cash used in financing activities.... (11,527) (5,811) (14,380) --------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS........................... 3,020 (274) (721) --------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ 22,043 (21,453) 11,938 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....................................... 7,857 29,900 8,447 --------- -------- -------- CASH AND CASH EQUIVALENTS, END OF YEAR...... $ 29,900 $ 8,447 $ 20,385 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES: Assets acquired through capital lease...... $ 3,738 $ 1,748 $ 46 ========= ======== ======== Dividend to the Parent Company............. $ 40,646 $ -- $ -- ========= ======== ======== Conversion of Parent Company debt to preferred stock........................... $ 40,646 $ -- $ -- ========= ======== ======== Conversion of Parent Company Investment to common stock.............................. $ 41,876 $ -- $ -- ========= ======== ======== Conversion of common stock to preferred stock..................................... $ -- $ 21,132 $ -- ========= ======== ======== Conversion of cash dividends to preferred stock..................................... $ -- $ 172 $ -- ========= ======== ======== Dividends on preferred stock............... $ 172 $ 5,922 $ 4,885 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest..................... $ 16,448 $ 2,354 $ 771 ========= ======== ======== Cash paid for income taxes................. $ 79 $ 4,607 $ 3,683 ========= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-6 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (1) Nature of Business Modus Media International Holdings, Inc. (the Company or MMI) is a global provider of extended supply chain management services to the technology industry. The Company offers a full range of outsource services including e- commerce support services, content management, procurement, materials management, manufacturing, fulfillment and customer relationship management. The principal North American operations are located in California, Utah, Washington, Idaho and North Carolina. Principal European subsidiaries include operations in Ireland, the United Kingdom, the Netherlands and France. Principal Asian subsidiaries include operations in Singapore, Taiwan, Australia and China. In addition, the Company holds minority interests in joint ventures in Korea and Japan. (2) The Reorganization The Company began as a division of R.R. Donnelley & Sons Company (R.R. Donnelley or the Parent Company). Pursuant to an April 21, 1995 contribution agreement (the Contribution Agreement), R.R. Donnelley purchased approximately 80% of Corporate Software, Inc. (now known as Corporate Software & Technology or CS&T) and merged it with the division (now known as Modus Media International Holdings, Inc., or the Company) to create Stream International Holdings, Inc. (Stream). From April 21, 1995 to December 15, 1997, the Company conducted its business as a unit of Stream. On December 15, 1997, Stream effected a reorganization (the Reorganization), pursuant to which Stream contributed certain assets and liabilities to the Company and CS&T. Because the Reorganization occurred between entities under common control the book basis of assets and liabilities were not adjusted and have been accounted for on a carryover basis. Effective with the Reorganization, Stream allocated to the Company approximately $40.6 million of its (intercompany) indebtedness to R.R. Donnelley or 22.2% of the total Stream debt at September 30, 1997. The debt to R.R. Donnelley was then exchanged for 40,646 shares of the Company's preferred stock. On January 9, 1998, Stream distributed to its stockholders all of the outstanding voting stock, held by Stream, of the Company and CS&T. In addition, R.R. Donnelley exchanged its equity interest in the Company of approximately 36.4 million shares of the Company's common stock for 21,132 shares of preferred stock valued at $21.1 million. Effective with the Reorganization, the Company accounted for all transactions with R.R. Donnelley, Stream and CS&T as arm's-length transactions. These financial statements include only the results of the Company. (3) Summary of Significant Accounting Policies (a) Basis of Presentation and Consolidation The accompanying financial statements include the accounts of the Company and its foreign operations. The accounts of the Company's foreign operations have been translated into United States dollars in accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. All significant intercompany balances and transactions have been eliminated in consolidation. Net operating results through December 15, 1997, the date of the Reorganization, were recorded as a return of capital to or contributions from the Parent Company. F-7 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (b) Cash and Cash Equivalents Cash and cash equivalents include all cash and investments with maturity dates of three months or less. (c) Inventories Inventories include material, labor and overhead and are valued at the lower of cost or market. Materials include, but are not limited to compact discs, instruction manuals and computer peripherals such as keyboards and mice. Substantially all of the Company's domestic inventories are valued using the first-in, first-out (FIFO) method. The cost of the remaining inventories is principally determined using a specific identification method. The components of inventories, net were as follows (in thousands):
December 31, September 30, 1998 1999 ------------ ------------- Raw materials.................................... $ 27,223 $ 27,240 Work-in-process.................................. 4,356 3,411 Finished goods and completed components.......... 17,451 15,799 -------- -------- $ 49,030 $ 46,450 ======== ======== (d) Property, Plant and Equipment Property, plant and equipment are stated at cost. The Company provides for depreciation using the straight-line method over estimated useful lives of 33 to 40 years for buildings and 2 to 12 years for machinery and equipment. Leasehold improvements are depreciated using the straight-line method over the remaining lease terms or estimated useful lives, whichever is shorter. Maintenance and repair costs are charged to operating expenses as incurred. When properties are retired or otherwise disposed of, the asset cost and accumulated depreciation are eliminated and the resulting gain or loss, if any, is included in the consolidated statements of income. Property, plant and equipment consisted of the following (in thousands): December 31, September 30, 1998 1999 ------------ ------------- Leasehold improvements........................... $ 10,716 $ 11,695 Buildings (including assets under capital lease of $10,954 in 1998, and $3,339 in 1999)......... 26,034 25,184 Machinery and equipment (including assets under capital lease of $14,196 in 1998 and $12,027 in 1999)........................................... 140,094 144,804 -------- -------- Total property, plant and equipment............ 176,844 181,683 Less--Accumulated depreciation................... 106,092 113,673 -------- -------- Net property, plant and equipment.............. $ 70,752 $ 68,010 ======== ========
(e) Investments in Joint Ventures As of September 30, 1999, the Company has investments in two joint ventures accounted for under the equity method. The affiliates provide a full range of integrated services including software manufacturing, F-8 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 hardware assembly, on-demand manufacturing and response management. At December 31, 1998 and September 30, 1999, the value of these investments was $0.5 million. (f) Accrued Liabilities Accrued liabilities consisted of the following (in thousands):
December 31, September 30, 1998 1999 ------------ ------------- Accrued compensation and other benefits........... $24,026 $23,330 Accrued taxes..................................... 6,622 6,144 Accrued customer rebates and advances............. 7,299 7,139 Accrued occupancy expenses........................ 7,452 8,098 Other accrued liabilities......................... 12,629 12,763 ------- ------- $58,028 $57,474 ======= =======
(g) Income Taxes The provision for income taxes is based on income before taxes as reported in the accompanying consolidated statements of income. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is realizable, based upon the realization criteria defined in SFAS No. 109, Accounting for Income Taxes. United States federal income taxes are not provided on the unremitted accumulated earnings of foreign subsidiaries, as such earnings are considered to be permanently reinvested abroad. (h) Foreign Currency Translation Foreign currencies are translated in accordance with SFAS No. 52, Foreign Currency Translation. Under this standard, assets and liabilities of the Company's international subsidiaries are translated into United States dollars at current exchange rates. Income and expense items are translated at average exchange rates prevailing during the year. Gains and losses arising from the translation of the Company's international subsidiaries' financial statements are accounted for in shareholders' equity. Gains and losses from foreign currency transactions are included in other expense (income) in the statements of operations. (i) Revenue Recognition Revenue is recognized when the product is shipped or the service is performed under each customer contract. Revenue consists primarily of fees for e-commerce support services, content management, procurement, materials management, manufacturing, fulfillment and customer relationship management. F-9 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (j) Fair Value of Financial Instruments The fair value of cash and cash equivalents, accounts receivable, short-term debt and accounts payable approximate their carrying value due to the immediate or short-term maturity of these financial instruments. The fair value of long- term debt is based on the current rates offered to the Company for debt instruments of similar risks and maturities and approximates its carrying value. (k) 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (l) Reclassification and Presentation Certain reclassifications have been made to prior period amounts to conform with the current year presentation. (m) New Accounting Pronouncements The Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No. 137, is required to be adopted by the Company no later than fiscal year 2001. This statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company plans to adopt this statement in fiscal year 2001. Management does not believe that the adoption of SFAS No. 133 will have a material effect on the Company's financial position or results of operations. (4) Related Party Transactions (a) Accounts Receivable Sold With Recourse During 1997, pursuant to an agreement with R.R. Donnelley, the Company sold certain accounts receivable, with recourse, to R.R. Donnelley Receivables, Inc. (DRI), a wholly owned subsidiary of R.R. Donnelley. The agreement required that DRI pay the Company weekly amounts based on estimated monthly billings for eligible domestic receivables, as defined. During the eleven and a half months ended December 15, 1997, the Company factored $286.4 million of receivables to DRI and the related factoring charge amounted to $3.5 million. The agreement was terminated on December 15, 1997, in connection with the Reorganization. The Company agreed to a final settlement with DRI during 1998 on disputed receivables, which was not material to the Company's financial position or results of operations. F-10 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (b) Sales and Purchases with R.R. Donnelley Prior to the Reorganization, R.R. Donnelley sales representatives sold products that were produced in the Company's facilities. Such sales amounted to $13.9 million for the year ended December 31, 1997 and have been included in revenue in the accompanying statement of income. The Company also purchased approximately $7.3 million of print related materials from entities affiliated with R.R. Donnelley during the year ended December 31, 1997. Effective with the Reorganization on December 15, 1997, all sales to or purchases from R.R. Donnelley are negotiated and accounted for as arm's-length transactions. (c) Loans to Officers The Company has extended nonrecourse loans to certain officers and former officers of the Company. The loans, which totaled $3.5 million and $3.7 million at December 31, 1997 and 1998, and $3.6 million at September 30, 1999, bear interest at rates ranging from 7.25% to 7.75% and become due in 2000 through 2004 or upon the occurrence of certain events as defined in the loan agreements. Interest on the loans is due at maturity. The loans and accrued interest receivable are classified as other noncurrent assets in the accompanying consolidated balance sheets. (d) Transactions with Other Related Parties Effective December 15, 1997, the Company entered into a management agreement with a current shareholder, which requires the shareholder to provide certain advisory and other services to the Company and requires the Company to pay an annual fee of $1.5 million. As part of the Reorganization, the Company entered into agreements (collectively, the Transitional Service Agreements) with Stream and CS&T for certain services formerly shared among such entities. Pursuant to the Transitional Service Agreements, the Company received certain legal, information technology and other services and provided certain tax, employee benefit and financial reporting services. Expenses related to purchased services were approximately $1.0 million and $0.2 million in 1997 and 1998, respectively. These expenses were offset by approximately $4.3 million and $0.2 million of charges in 1997 and 1998, respectively, for services performed by the Company. No such expenses were incurred during the nine months ended September 30, 1999. The Company has entered into a tax sharing agreement with Stream and CS&T under which they will indemnify the Company, and the Company will indemnify Stream and CS&T, with respect to any taxes relating to their businesses prior to the Reorganization, after taking into account, under rules set forth in the tax sharing agreement, the net operating loss carryforwards and other tax attributes of Stream immediately prior to the Reorganization (and in limited circumstances losses and other tax attributes of the Company carried back to periods prior to the Reorganization). The tax sharing agreement also defines the parties' obligations for filing tax returns, and their rights and obligations for claims made by the Internal Revenue Service or other taxing authorities for periods prior to the Reorganization. In 1998, the Company received a $1.2 million tax refund, arising from its business operations prior to the April 21, 1995 Contribution Agreement. This amount was recorded as a contribution of capital in the consolidated statement of shareholders' equity. F-11 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (5) Debt Financing Borrowings during the first eleven and a half months of 1997 were in the form of an intercompany loan with R.R. Donnelley with interest based on LIBOR plus 35 basis points. Interest expense on this facility was approximately $9.4 million for the period ended December 15, 1997. Effective with the Reorganization, the Company discontinued all intercompany loan activity with R.R. Donnelley. On December 15, 1997, the Company and certain of its international subsidiaries entered into a credit agreement with a group of banks for a revolving line of credit of $130 million, expiring on December 17, 2001. The credit facility is collateralized by and the borrowing base is calculated based on eligible receivables, inventories and fixed assets. The credit agreement also contains certain covenants, of which the most restrictive relates to tangible net worth. As of September 30, 1999 the Company was in compliance with all debt covenants. Borrowings under the agreement bear interest at rates based on either LIBOR, the banks' prime rate or the Federal Funds rate, plus an applicable margin. The interest rate at September 30, 1999 was 9.50%. As of December 31, 1998 and September 30, 1999, the borrowing base was $81.9 million and $82.1 million, respectively. Borrowings under the line of credit have been classified as long-term since the Company has the ability and intent to maintain such debt on a long-term basis. Commitment fees are 37.5 basis points on the unused portion of the line of credit. Certain of the Company's foreign subsidiaries have additional lines of credit available to fund local working capital requirements. The lines of credit are collateralized by certain assets of the local entities. Approximately $13.6 million and $14.0 million of these facilities were unused at December 31, 1998, and September 30, 1999, respectively. The Company's debt was as follows (in thousands):
December 31, September 30, 1998 1999 ------------ ------------- Revolving line of credit......................... $ 10,000 $ -- Mortgage payable due in 2004 at an interest rate of 5.14%........................................ -- 4,268 Capital leases payable in varying amounts through 2008 at a weighted average interest rate of 7.13%........................................... 13,662 4,436 -------- ------- 23,662 8,704 Less--Current portion............................ 2,021 1,363 -------- ------- Long-term portion.............................. $ 21,641 $ 7,341 ======== =======
F-12 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (6) Commitments and Contingencies (a) Lease Commitments The Company leases certain offices, facilities and equipment under noncancellable leases, which expire at various dates through 2008. Rent expense for operating leases was $12.4 million, $16.3 million and $12.4 million for the years ended December 31, 1997 and 1998, and the nine months ended September 30, 1999, respectively. At September 30, 1999, future minimum lease payments for noncancellable leases were payable as follows (in thousands):
Year Operating Capital ---- --------- ------- Fourth quarter of 1999.................................... $ 3,997 $ 700 2000...................................................... 14,251 1,871 2001...................................................... 10,550 505 2002...................................................... 8,892 344 2003...................................................... 6,570 336 2004...................................................... 4,075 335 Thereafter................................................ 19,156 1,356 ------- ------- Total minimum payments.................................. $67,491 5,447 ======= Less--Amounts representing interest..................... (1,011) ------- Present value of minimum lease payments................. $ 4,436 =======
(b) Commitments and Contingencies Certain key executives are covered by employment agreements, which establish salaries, certain benefits and incentive compensation and separation terms. Some key executives in foreign countries are also covered by agreements, which contain provisions that are typical in those countries. In connection with the Reorganization, the Company, Stream and CS&T entered into agreements, which contain general indemnities between the companies. Under the agreements, each of the companies indemnifies the others for any losses, liabilities or damages in connection with any liability, claim or action assumed by such company in the Reorganization. The Company is a party to certain litigation arising in the ordinary course of business, which, in the opinion of management, will not have a material adverse effect on the Company's financial position or results of operations. (c) Significant Customers and Concentration of Credit Risk For the year ended December 31, 1997, two customers accounted for approximately 17% and 14% of total Company revenue. For the year ended December 31, 1998, two customers accounted for approximately 23% and 12% of total Company revenue. For the nine months ended September 30, 1999, one customer accounted for approximately 26% of total Company revenue. No other customers accounted for greater than 10% of total Company revenue for the years ended December 31, 1997 and 1998, or for the nine months ended September 30, 1999. Financial instruments that subject the Company to concentrations of credit risk consist primarily of trade receivables with customers in the technology industry. The large number of customers comprising the F-13 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 Company's customer base and their geographic dispersion mitigates this credit risk. To reduce credit risk, the Company performs ongoing credit evaluations of its customers' financial condition and maintains allowances for potentially uncollectible accounts. (7) Income Taxes The provision for income taxes was comprised of the following (in thousands):
Year Ended Nine Months December 31, Ended ------------- September 30, 1997 1998 1999 ------ ------ ------------- Current: Domestic...................................... $ -- $ -- $ -- Foreign....................................... -- 4,607 4,075 Deferred........................................ 2,824 (342) (801) ------ ------ ------ $2,824 $4,265 $3,274 ====== ====== ======
Income before income taxes included approximately $6.6 million, $28.0 million and $9.4 million related to foreign operations for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, respectively. The Company's effective tax rate differed from the statutory United States federal income tax rate as follows:
Year Ended Nine Months December 31, Ended --------------- September 30, 1997 1998 1999 ------ ------ ------------- Federal statutory rate........................ (35.0)% 35.0% 35.0% Foreign tax effect, net....................... (10.0) (40.1) (12.0) Valuation allowance items..................... 54.5 31.6 1.6 Other......................................... -- 1.9 1.3 ------ ------ ----- 9.5% 28.4% 25.9% ====== ====== =====
F-14 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 The components of the Company's deferred income tax assets and liabilities were as follows (in thousands):
December 31, September 30, 1998 1999 ------------ ------------- Deferred tax assets-- Receivable allowances......................... $ 921 $ 1,445 Inventory adjustments......................... 1,680 1,827 Property, plant and equipment................. 1,397 742 Accrued liabilities........................... 670 2,450 Tax loss carryforwards........................ 7,865 7,664 ------- ------- Total deferred tax assets................... 12,533 14,128 Less--Valuation allowance....................... (12,533) (14,128) ------- ------- Deferred tax assets, net of valuation allowance.................................. $ -- $ -- ======= ======= Deferred tax liabilities-- Property, plant and equipment................. $ 2,482 $ 1,681 ------- ------- Total deferred tax liabilities.............. 2,482 1,681 ------- ------- Net deferred tax liabilities.................... $ 2,482 $ 1,681 ======= =======
Undistributed earnings of foreign subsidiaries included in the consolidated retained earnings amounted to approximately $26.6 million at September 30, 1999. U.S. federal income taxes are not provided on the unremitted accumulated earnings of foreign subsidiaries, as such earnings are considered to be permanently reinvested abroad. A valuation allowance has been established to fully reserve the tax benefits associated with certain temporary differences and the net operating loss carryforwards as the realizability of these tax benefits is uncertain. These tax loss carryforwards of $19.2 million at September 30, 1999 will generally expire between 2000 and 2019. (8) Employee Benefit Plans (a) Defined Contribution Plans The Company has a defined contribution 401(k) plan covering substantially all domestic employees who meet certain eligibility requirements. Participants may make contributions to the 401(k) plan from 1% to 15% of their compensation, as defined in the plan. The Company also contributes a certain percentage of the employee's annual compensation to the 401(k) plan, subject to certain limitations. Company contributions are fully vested after two years of service. Contributions and costs attributable to the 401(k) plan amounted to $0.6 million for each of the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, respectively. Certain of the Company's foreign subsidiaries also have defined contribution plans covering those employees who meet certain eligibility requirements. Participants may make contributions to the plans from 1% to 20% of their compensation, as defined. The Company also contributes a certain percentage of the employee's annual compensation to the plans, subject to certain limitations. Contributions attributable to the plans amounted to $1.3 million, $1.4 million and $0.8 million for the years ended December 31, 1997 and 1998 and the nine months ended September 30, 1999, respectively. F-15 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 (b) Defined Benefit Pension Plans Certain of the Company's foreign subsidiaries have defined benefit pension plans for long-term employees. The plans are based on an employee's years of service and earnings. The retirement plan liabilities and their related costs are computed in accordance with the laws and appropriate actuarial practices of the individual countries. The change in benefit obligation and plan assets consisted of the following (in thousands):
Year Ended Nine Months December 31, Ended ---------------- September 30, 1997 1998 1999 ------- ------- ------------- Change in Benefit Obligation: Benefit obligation at beginning of period..... $ 4,148 $ 4,479 $ 4,484 Service cost.................................. (107) (95) (89) Plan participants' contributions.............. 547 622 640 Benefits paid................................. (109) (522) (331) ------- ------- ------- Benefit obligation at end of period........... $ 4,479 $ 4,484 $ 4,704 ======= ======= ======= Change in Plan Assets: Fair value of plan assets at beginning of period....................................... $ 2,015 $ 3,651 $ 4,895 Actual return on plan assets.................. 694 586 1,072 Acquisition................................... 79 0 0 Employer contribution......................... 425 558 513 Plan participants' contributions.............. 547 622 640 Benefits paid................................. (109) (522) (331) ------- ------- ------- Fair value of plan assets at end of period.... $ 3,651 $ 4,895 $ 6,789 ======= ======= =======
The net periodic benefit costs were $0.1 million, $0.2 million and $0.3 million for the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999, respectively. The average rate of compensation increase and the expected return on plan assets used to account for the plans were 6% and 8%, respectively, for each of the years ended December 31, 1997 and 1998 and for the nine months ended September 30, 1999. (9) Shareholders' Equity (a) Common Stock The Company has authorized common stock and nonvoting common stock. The holders of common stock are entitled to one vote for each share held, and the holders of nonvoting common stock have no voting rights. F-16 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 Common stock consisted of the following:
December 31, September 30, 1998 1999 ------------ ------------- Common stock, authorized--30,000,000 shares; shares issued and outstanding................ 9,563,276 10,199,338 Nonvoting common stock, authorized--3,000,000 shares; shares issued and outstanding........ 2,622,002 2,622,002 ---------- ---------- Total shares outstanding...................... 12,185,278 12,821,340 ========== ==========
(b) Preferred Stock The Company has authorized 120,000 shares of 9.50% series senior cumulative preferred stock. Preferred stock shares issued and outstanding at December 31, 1998, and September 30, 1999 were 66,959 and 71,744, respectively. Preferred dividends accrue at the rate of $95 per annum per share and are payable in cash, additional shares, or any combination of the two. At December 31, 1998, and at September 30, 1999, cumulative preferred dividends in arrears were approximately $526,000 and $564,000, respectively. Subsequent to September 30, 1999, the Company repurchased all of its outstanding preferred stock. See Note 13. (c) Stock Option Plans In connection with the Reorganization on December 15, 1997, the Company cancelled all options available for grant under option plans previously administered by Stream. The Company then established the 1997 Stock Incentive Plan (the Plan), which is administered by the Board of Directors of the Company. The Plan, as amended by the Board on September 29, 1999, provides for the issuance of up to 2,800,000 options to purchase shares of common stock, at exercise prices and vesting periods determined by the Board and defined in the applicable option agreements. Options can not be issued under the Plan after December 15, 2007; however, options previously granted under the Plan may still be exercised beyond that date. The Plan also contains certain provisions for the option holders in the event of an acquisition, as defined in the Plan. During 1995, the FASB issued SFAS No. 123, Accounting for Stock Based Compensation, which defines a fair value based method of accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by the Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Entities electing to remain with the accounting in APB No. 25 must make pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting defined in SFAS No. 123 had been applied. The Company has elected to account for its stock-based employee compensation plans under APB No. 25. However, for pro forma disclosure purposes, the Company has computed the compensation expense in 1997 and 1998 and for the nine months ended September 30, 1999 for all options granted, using the Black-Scholes option pricing model as prescribed by SFAS No. 123. The fair value of the 1997, 1998 and 1999 options granted is estimated on the date of grant using the following assumptions: a dividend yield of 0%, an expected volatility of 18% and an expected life of 5 years for each year, and a risk-free interest rate of 6.22%, 5.71% and 5.81%, respectively for 1997, 1998 and 1999. The method prescribed by SFAS No. 123 has not been applied to the options granted prior to January 1, 1995, and as a result, the resulting pro forma compensation expense may not be representative of the amount to F-17 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 be expected in future years. The Company's compensation expense is attributable to options in the Company that Stream and CS&T granted to the Company's employees and does not reflect any compensation attributable to employees of Stream or CS&T. If the Company had accounted for these plans in accordance with SFAS No. 123, the Company's net income would have been reduced and net loss would have been increased to the following pro forma amounts (in thousands):
Year Ended Nine Months December 31, Ended ----------------- September 30, 1997 1998 1999 -------- ------- ------------- Net income (loss) As reported.............................. $(32,667) $10,747 $9,390 Pro forma................................ (33,298) 10,263 9,163
On January 9, 1998, the outstanding awards under Stream's stock option plans were replaced by substitute awards such that for each option then held, the option holder received an option in the Company, Stream and CS&T. The substitute awards have the same ratio of the exercise price per option to the market value per share, the same aggregate difference between market value and exercise price and the same vesting provisions, option periods and other terms and conditions of the options that they replaced. The following table summarizes the status of the Company's stock option plans and changes to the plans during the periods indicated:
Weighted Number of Average Shares Exercise Price ---------- -------------- Outstanding at December 31, 1996.................. 4,473,162 $0.81 Granted........................................... 191,500 0.95 Exercised......................................... (110,952) 0.12 Forfeited/cancelled............................... (722,832) 0.71 ---------- ----- Outstanding at December 31, 1997.................. 3,830,878 0.85 Granted........................................... 1,700,000 0.58 Exercised......................................... (340,158) 0.60 Forfeited/cancelled............................... (1,280,280) 0.81 ---------- ----- Outstanding at December 31, 1998.................. 3,910,440 0.69 Granted........................................... 1,197,374 8.54 Exercised......................................... (669,562) 0.97 Forfeited/cancelled............................... (258,290) 0.56 ---------- ----- Outstanding at September 30, 1999................. 4,179,962 $2.48 ========== ===== Options exercisable at: December 31, 1997............................... 2,484,714 $0.84 December 31, 1998............................... 1,697,732 0.80 September 30, 1999.............................. 1,620,470 0.77
F-18 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 Options available for grant at December 31, 1997 and 1998 and September 30, 1999 were 1,007,512, 100,000 and 257,500, respectively. The following table summarizes information about stock options outstanding and exercisable at September 30, 1999:
Weighted Average Remaining Range of Outstanding at Contractual Exercisable at Exercise Prices September 30, 1999 Life (Years) September 30, 1999 --------------- ------------------ ---------------- ------------------ $ 0.08-0.11 272,975 4.82 272,975 0.58-0.71 2,469,237 7.83 867,495 1.19-1.73 480,000 5.56 480,000 2.30 215,000 9.70 -- 10.35 742,750 10.00 -- ------------ --------- ----- --------- $0.08-$10.35 4,179,962 7.85 1,620,470 ============ ========= ===== =========
(10) Earnings Per Share The following table sets forth the computation of basic and diluted income per share (in thousands, except per share amounts):
Nine Months Year Ended Ended December 31, September 30, 1998 1999 ------------ ------------- Basic: Net income available to common shareholders.... $ 4,825 $ 4,505 ======= ======= Weighted average shares outstanding............ 12,749 12,510 ======= ======= Net income per share........................... $ 0.38 $ 0.36 ======= ======= Diluted: Net income available to common shareholders.... $ 4,825 $ 4,505 ======= ======= Weighted average shares outstanding............ 12,749 12,510 Effect of dilutive common stock options........ 323 1,993 ------- ------- Total........................................ 13,072 14,503 ======= ======= Net income per share........................... $ 0.37 $ 0.31 ======= =======
Prior to the Reorganization, no common shares were outstanding; therefore, income per share data prior to 1998 is not meaningful and has been excluded. (11) Segment Information The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information in fiscal 1999. The Company has three reportable business segments based on geographic regions: the Americas, Europe and Asia-Pacific. The accounting policies of the geographic segments are the same as those described in the summary of significant accounting policies as described in Note 3. The Company evaluates the performance of its F-19 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 geographic segments based on segment earnings before interest and taxes (EBIT). Inter-segment revenue and transfers between geographic regions are accounted for at prices that approximate arm's-length transactions. The table below presents information about the Company's reportable segments (in thousands):
Year Ended Nine Months December 31, Ended ------------------ September 30, 1997 1998 1999 -------- -------- ------------- Revenue: Americas................................ $337,833 $286,574 $229,543 Europe.................................. 226,228 238,970 195,965 Asia-Pacific............................ 147,125 109,881 83,217 Eliminations............................ (26,663) (5,343) (2,490) -------- -------- -------- Net customer revenue.................. $684,523 $630,082 $506,235 ======== ======== ======== EBIT: Americas................................ $ (4,237) $ 20,828 $ 8,626 Europe.................................. 13,942 18,834 9,746 Asia-Pacific............................ 1,720 1,396 11,800 Unallocated............................. (24,790) (22,164) (15,687) -------- -------- -------- Total EBIT............................ (13,365) 18,894 14,485 Interest expense........................ (16,478) (3,882) (1,821) -------- -------- -------- Income (loss) before income taxes..... $(29,843) $ 15,012 $ 12,664 ======== ======== ======== Total property, plant and equipment, net: Americas................................ $ 16,546 $ 16,230 Europe.................................. 30,600 29,138 Asia-Pacific............................ 22,177 21,765 Unallocated............................. 1,429 877 -------- -------- $ 70,752 $ 68,010 ======== ======== Total assets: Americas................................ $107,418 $106,905 Europe.................................. 126,081 114,401 Asia-Pacific............................ 58,524 72,180 Unallocated............................. 12,527 4,721 Eliminations............................ (13,340) (21,241) -------- -------- Total assets.......................... $291,210 $276,966 ======== ========
(12) Restructuring Charge In 1996, management undertook a restructuring of its worldwide manufacturing operations by exiting its offset printing business and focusing on becoming a provider of global supply chain management solutions. The Company recorded a pretax charge of $100.9 million, which included the restructuring of its operations and the write-down of certain equipment, intangibles and other long- lived assets. The restructuring charge included approximately $28.3 million for severance and termination benefits and $7.5 million for the remaining lease obligations related to the closure of four facilities: two in North America, one in Europe, and one in Asia. F-20 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) September 30, 1999 The remaining charge related primarily to impairment losses on long-lived assets, which were calculated based on the excess carrying amounts of the assets over the assets' fair values. The fair value of a long-lived asset was generally determined using undiscounted estimates of the future cash flows generated by that asset. At December 31, 1998, the remaining accrual relating to the above-mentioned charges totaled $0.5 million. At September 30, 1999, there was no remaining accrual relating to the above-mentioned restructuring charge. Cash expenditures and non-cash expenditures were $16.8 million and $11.2 million, respectively, for 1997, $7.5 million and $3.7 million, respectively, for 1998, and $0.5 million and $0, respectively, for the nine months ended September 30, 1999. (13) Subsequent Event (a) Preferred Stock Repurchase During October 1999, the Company repurchased all of its outstanding preferred stock, 71,744 shares, valued at $71.7 million, for $60.2 million, comprised of cash and a note for $12.7 million. The preferred stock value in excess of the repurchase amount of $11.5 million will be added to net earnings to arrive at net earnings available to common shareholders. (b) Common Stock Redemption Subsequent to September 30, 1999, the Company repurchased 949,812 shares of common stock from non-employees at $10.35 per share for $9.8 million. F-21 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Shares Modus Media International Holdings, Inc. Common Stock [Logo of Modus Media International appears here] -------- PROSPECTUS , 2000 -------- Salomon Smith Barney Donaldson, Lufkin & Jenrette Robertson Stephens Thomas Weisel Partners LLC - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table sets forth the costs and expenses, other than the underwriting discount, payable by the Registrant in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration fee, the NASD filing fees and the Nasdaq National Market listing fee. SEC registration fee............................................... $39,600 NASD filing fee.................................................... 15,500 Nasdaq National Market listing fee................................. * Printing and engraving expenses.................................... * Legal fees and expenses............................................ * Accounting fees and expenses....................................... * Blue Sky fees and expenses (including legal fees).................. * Transfer agent and registrar fees and expenses..................... * Miscellaneous...................................................... * ------- Total............................................................ =======
-------- * To be completed by amendment. The Company will bear all expenses shown above. Item 14. Indemnification of Directors and Officers. The Registrant's Amended and Restated Certificate of Incorporation (the "Restated Certificate") provides that, except to the extent prohibited by the Delaware General Corporation Law (the "DGCL"), the Registrant's directors shall not be personally liable to the Registrant or its stockholders for monetary damages for any breach of fiduciary duty as directors of the Registrant. Under the DGCL, the directors have a fiduciary duty to the Registrant which is not eliminated by this provision of the Restated Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms of nonmonetary relief will remain available. In addition, each director will continue to be subject to liability under the DGCL for breach of the director's duty of loyalty to the Registrant, for acts or omissions which are found by a court of competent jurisdiction to be not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are prohibited by the DGCL. This provision also does not affect the directors' responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. The Registrant has obtained liability insurance for its officers and directors. Section 145 of the DGCL empowers a corporation to indemnify its directors and officers and to purchase insurance with respect to liability arising out of their capacity or status as directors and officers, provided that this provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174 of the DGCL including for an unlawful payment of dividend or unlawful stock purchase or redemption, or (iv) for any transaction from which the director derived an improper personal benefit. The DGCL provides further that the indemnification permitted thereunder shall not be deemed exclusive of any other rights to which the directors and officers may be entitled under the corporation's by-laws, any agreement, a vote of stockholders or otherwise. The Restated Certificate eliminates the personal liability of directors to the fullest extent permitted by the DGCL and, together with the Registrant's Amended and Restated By-Laws (the "Restated By-Laws"), provides that the Registrant shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Registrant, or is or was II-1 serving at the request of the Registrant as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding. Reference is made to the Registrant's Form of Amended and Restated Certificate of Incorporation and Form of Amended and Restated By-Laws filed as Exhibits 3.2 and 3.4 hereto, respectively. The Underwriting Agreement provides that the Underwriters are obligated, under certain circumstances, to indemnify directors, officers and controlling persons of the Company against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Act"). Reference is made to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto. At present, there is no pending litigation or proceeding involving any director, officer, employee or agent as to which indemnification will be required or permitted under the Restated Certificate. The Registrant is not aware of any threatened litigation or proceeding that may result in a claim for such indemnification. Item 15. Recent Sales of Unregistered Securities. Since its incorporation as an independent company in December 1997, the Company has issued the following securities that were not registered under the Securities Act as summarized below: (a) Issuances of Capital Stock. On December 10, 1997, we issued 1,722,514 shares of our non-voting common stock to Bain Capital, Inc. as partial payment for services rendered to us. On December 15, 1997, we issued 40,646 shares of our preferred stock to R.R. Donnelley in exchange for the cancellation of certain inter-company debt assigned to us pursuant to the reorganization of Stream International Inc. On January 10, 1998, we were spun off from Stream and, pursuant to that spin-off, our shares were distributed to the shareholders of Stream. Following the spin-off, R.R. Donnelley exchanged its shares of our common stock for 21,132 additional shares of our preferred stock. Dividends on our preferred stock were accrued and were paid in kind by the issuance of 6,094 additional shares of our preferred stock in December 1998, less an offset of 913 shares. Our Board of Directors authorized additional dividends on our preferred stock during 1999 and such dividends accrued on our books. On October 13, 1999, we repurchased in full all of the issued and outstanding shares of our preferred stock. On April 21, 1998, we exchanged 899,488 shares of our common stock, which were owned by BankAmerica Investment Corporation, for 899,488 shares of our non-voting common stock. (b) Certain Grants and Exercises of Stock Options. The Company's 1997 stock option plans were adopted by the Board of Directors and sole stockholder of the Company on December 15, 1997. As of November 30, 1999, options to purchase 2,074,797 shares of common stock had been exercised for a consideration of $1.6 million under the Company's 1997 Stock Incentive Plan and options to purchase 3,235,559 shares of common stock were outstanding under the Company's 1997 stock option plans. No underwriters were involved in the foregoing sales of securities. Such sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder, or, in the case of options to purchase common stock, Rule 701 of the Securities Act. All of the foregoing securities are deemed restricted securities for the purposes of the Securities Act. Item 16. Exhibits and Financial Statement Schedules. (a) Exhibits:
Exhibit No. Description ----------- ----------- *1.1 --Form of Underwriting Agreement 3.1 --Amended and Restated Certificate of Incorporation of the Registrant, as amended *3.2 --Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed prior to the closing of this offering
II-2
Exhibit No. Description ----------- ----------- 3.3 --Amended and Restated By-Laws of the Registrant *3.4 --Form of Second Amended and Restated By-Laws of the Registrant, to be effective upon the closing of this offering *4.1 --Specimen common stock certificate 4.2 --See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining the rights of holders of common stock of the Registrant *5.1 --Opinion of Hale and Dorr LLP 10.1 --Contribution Agreement, dated as of December 15, 1997, among Stream International Inc. (f/k/a Stream International Holdings, Inc.), the Registrant and Modus Media International, Inc. 10.2 --Tax Sharing Agreement, dated as of December 15, 1997, among Stream International Inc., the Registrant, Modus Media International, Inc., Corporate Software & Technology Holdings, Inc. and Corporate Software & Technology, Inc. 10.3 --The Registrant's 1997 Stock Incentive Plan, as amended 10.4 --Forms of Option Grants under the Registrant's 1997 Stock Incentive Plan 10.5 --The Registrant's 1999 Management Incentive Plan *10.6 --The Registrant's 1999 Employee Stock Purchase Plan 10.7 --Sublease, dated June 18, 1997, by and between The Travelers Indemnity Company and Stream International Inc., as amended 10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R. Donnelley Ireland Turnkey Services Kildare and Allied Irish Banks, p.l.c. 10.9 --Lease, dated December 2, 1996, by and between Housing & Development Board and Stream International Pte Ltd., as amended 10.10 --Lease, dated December 3, 1994, by and between Novell, Inc. and R.R. Donnelley & Sons Company, as assigned by Assignment and Assumption of Lease, dated April 21, 1995, by and between R.R. Donnelley & Sons Company and Stream International Holdings, Inc., as amended 10.11 --Amended and Restated 7 3/4 Unsecured Promissory Note, dated March 7, 1997, by and between Terence M. Leahy, as the Borrower, and the Registrant 10.12 --7.34% Secured Non-Recourse Promissory Note, dated September 15, 1995, by and between Terence M. Leahy, as the Borrower, and the Registrant 10.13 --Amended and Restated 7.25% Unsecured Promissory Note, dated July 20, 1999, by and between W. Kendale Southerland, as the Borrower, and the Registrant 10.14 --Amended and Restated 7.25% Unsecured Promissory Note by and between Ronald Leitch, as the Borrower, and the Registrant 10.15 --Employment Agreement, as amended, by and between the Registrant and Terence M. Leahy dated January 1, 1998 10.16 --Credit Agreement dated as of December 15, 1997, among Modus Media International, Inc. and Modus Media International Kabushiki Kaisha, as Borrowers, and the Banks named therein, as Lenders, as amended
II-3
Exhibit No. Description ----------- ----------- 10.17 --Agreement dated January 20, 1999 between the Industrial Development Agency (Ireland), Modus Media International Kildcare and Modus Media International Holdings, Inc. 10.18 --Business Transfer Agreement dated December 28, 1998 by and between Modus Media International Kabushiki Kaisha and Sasatoku Donnelley Kabushiki Kaisha 10.19 --Amended and Restated Joint Venture Agreement dated January 1999 by and between Modus Media International, Inc. and Sasatoku Printing Co. Ltd. 10.20 --Master Agreement dated November 11, 1998 by and among Modus Media International, Inc., the Korean management team of Modus Media International Korea, Ltd. ("MMIK") and MMIK *10.21 --Replication Agreement, dated September 1, 1999, by and between Microsoft Licensing, Inc. and Modus Media International, Inc. *11.1 --Statement re Computation of Earnings per Share 21.1 --Subsidiaries of the Registrant 23.1 --Consent of Arthur Andersen LLP *23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1) 24.1 --Powers of Attorney (see page II-5) 27.1 --Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission (b) Financial Statement: Schedule II--Valuation and Qualifying Accounts Schedule II--Valuation and Qualifying Accounts
Additions Balance Balance at Charged to at End Beginning Costs and of Description of Period Expenses Deductions Period - ----------------------------------- ---------- ---------- ---------- ------- (in thousands) Allowance for Doubtful Accounts: Year ended December 31, 1997...... $ 4,909 $9,003 $ (6,799)(a) $ 7,113 Year ended December 31, 1998...... $ 7,113 $2,776 $ (5,487)(a) $ 4,402 Nine months ended September 30, 1999............................. $ 4,402 $1,722 $ (1,088)(a) $ 5,036 Restructuring Reserve: Year ended December 31, 1997...... $39,744 $ -- $(28,076)(b) $11,668 Year ended December 31, 1998...... $11,668 $ -- $(11,187)(b) $ 481 Nine months ended September 30, 1999............................. $ 481 $ -- $ (481)(b) $ --
(a) Uncollectible accounts receivable written off against the allowance, net of recoveries. (b) Payments and other write-offs for restructuring costs. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. II-4 Item 17. Undertakings. The undersigned registrant hereby undertakes to provide to the Underwriter at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriter to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Act"), may be permitted to directors, officers and controlling persons of the registrant pursuant to the Delaware General Corporation Law, the Restated Certificate of the registrant, the Underwriting Agreement, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes that: (1) For purpose of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For purpose of determining any liability under the Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Westwood, Massachusetts, on this 10th day of December 1999. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. /s/ Terence M. Leahy By: _________________________________ Terence M. Leahy Chairman of the Board and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers, directors and authorized representatives of Modus Media International Holdings, Inc. hereby severally constitute and appoint Terry Leahy, Mary Wilson and Mark Borden, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, with full powers of substitution and resubstitution, to sign for us and in our names in the capacities indicated below, the Registration Statement on Form S-1 filed herewith and any and all pre-effective and post-effective amendments to said Registration Statement, and any subsequent Registration Statement for the same offering which may be filed under Rule 462(b), and generally to do all such things in our names and on our behalf in our capacities as officers and directors to enable Modus Media International Holdings, Inc. to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission, hereby ratifying and confirming our signatures as they may be signed by our said attorneys, or any of them, or their substitute or substitutes, to said Registration Statement and any and all amendments thereto or to any subsequent Registration Statement for the same offering which may be filed under Rule 462(b). Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Terence M. Leahy Chairman of the Board of December 10, 1999 ______________________________________ Directors, and Chief Terence M. Leahy Executive Officer (Principal Executive Officer) /s/ Richard Darer Chief Financial Officer December 10, 1999 ______________________________________ (Principal Financial Richard Darer Officer) /s/ Linwood A. Lacy, Jr. Director December 10, 1999 ______________________________________ Linwood A. Lacy, Jr. /s/ Jonathan Lavine Director December 10, 1999 ______________________________________ Jonathan Lavine /s/ Mark Nunnelly Director December 10, 1999 ______________________________________ Mark Nunnelly /s/ Robert White Director December 10, 1999 ______________________________________ Robert White
II-6 EXHIBIT INDEX
Exhibit No. Description ----------- ----------- *1.1 --Form of Underwriting Agreement 3.1 --Amended and Restated Certificate of Incorporation of the Registrant, as amended *3.2 --Form of Amended and Restated Certificate of Incorporation of the Registrant, to be filed prior to the closing of this offering 3.3 --Amended and Restated By-Laws of the Registrant *3.4 --Form of Second Amended and Restated By-Laws of the Registrant, to be effective upon the closing of this offering *4.1 --Specimen common stock certificate 4.2 --See Exhibits 3.1, 3.2, 3.3 and 3.4 for provisions of the Second Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws of the Registrant defining the rights of holders of common stock of the Registrant *5.1 --Opinion of Hale and Dorr LLP 10.1 --Contribution Agreement, dated as of December 15, 1997, among Stream International Inc. (f/k/a Stream International Holdings, Inc.), the Registrant and Modus Media International, Inc. 10.2 --Tax Sharing Agreement, dated as of December 15, 1997, among Stream International Inc., the Registrant, Modus Media International, Inc., Corporate Software & Technology Holdings, Inc. and Corporate Software & Technology, Inc. 10.3 --The Registrant's 1997 Stock Incentive Plan, as amended 10.4 --Forms of Option Grants under the Registrant's 1997 Stock Incentive Plan 10.5 --The Registrant's 1999 Management Incentive Plan *10.6 --The Registrant's 1999 Employee Stock Purchase Plan 10.7 --Sublease, dated June 18, 1997, by and between The Travelers Indemnity Company and Stream International Inc., as amended 10.8 --Lease, dated December 19, 1994, between Lieboch Limited, R.R. Donnelley Ireland Turnkey Services Kildare and Allied Irish Banks, p.l.c. 10.9 --Lease, dated December 2, 1996, by and between Housing & Development Board and Stream International Pte Ltd., as amended 10.10 --Lease, dated December 3, 1994, by and between Novell, Inc. and R.R. Donnelley & Sons Company, as assigned by Assignment and Assumption of Lease, dated April 21, 1995, by and between R.R. Donnelley & Sons Company and Stream International Holdings, Inc., as amended 10.11 --Amended and Restated 7 3/4 Unsecured Promissory Note, dated March 7, 1997, by and between Terence M. Leahy, as the Borrower, and the Registrant 10.12 --7.34% Secured Non-Recourse Promissory Note, dated September 15, 1995, by and between Terence M. Leahy, as the Borrower, and the Registrant 10.13 --Amended and Restated 7.25% Unsecured Promissory Note, dated July 20, 1999, by and between W. Kendale Southerland, as the Borrower, and the Registrant
Exhibit No. Description ----------- ----------- 10.14 --Amended and Restated 7.25% Unsecured Promissory Note by and between Ronald Leitch, as the Borrower, and the Registrant 10.15 --Employment Agreement, as amended, by and between the Registrant and Terence M. Leahy dated January 1, 1998 10.16 --Credit Agreement dated as of December 15, 1997, among Modus Media International, Inc. and Modus Media International Kabushiki Kaisha, as Borrowers, and the Banks named therein, as Lenders, as amended 10.17 --Agreement dated January 20, 1999 between the Industrial Development Agency (Ireland), Modus Media International Kildcare and Modus Media International Holdings, Inc. 10.18 --Business Transfer Agreement dated December 28, 1998 by and between Modus Media International Kabushiki Kaisha and Sasatoku Donnelley Kabushiki Kaisha 10.19 --Amended and Restated Joint Venture Agreement dated January 1999 by and between Modus Media International, Inc. and Sasatoku Printing Co. Ltd. 10.20 --Master Agreement dated November 11, 1998 by and among Modus Media International, Inc., the Korean management team of Modus Media International Korea, Ltd. ("MMIK") and MMIK *10.21 --Replication Agreement, dated September 1, 1999, by and between Microsoft Licensing, Inc. and Modus Media International, Inc. *11.1 --Statement re Computation of Earnings per Share 21.1 --Subsidiaries of the Registrant 23.1 --Consent of Arthur Andersen LLP *23.2 --Consent of Hale and Dorr LLP (included in Exhibit 5.1) 24.1 --Powers of Attorney (see page II-5) 27.1 --Financial Data Schedule
- -------- * To be filed by amendment. + Confidential treatment requested for certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act, which portions are omitted and filed separately with the Securities and Exchange Commission EX-3.1 2 RESTATED CERTIFICATE OF INCORPORATION OF THE REGIS EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware MODUS MEDIA INTERNATIONAL HOLDINGS, INC. (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "General Corporation Law"), hereby certifies as follows: 1. The name of the corporation was originally Modus Media International, Inc., and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on March 5, 1997. On December 10, 1997, the Corporation filed an Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware changing its name to Modus Media International Holdings, Inc. 2. This Amended and Restated Certificate of Incorporation amends and restates the Certificate of Incorporation of the Corporation, as amended, and was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law, and was approved by written consent of the stockholders of the Corporation given in accordance with the provisions of Section 228 of the General Corporation Law (prompt notice of such action having been given to those stockholders who did not consent in writing). The resolution setting forth the Amended and Restated Certificate of Incorporation is as follows: RESOLVED: That the Certificate of Incorporation of the Corporation, as amended, - -------- be and hereby is amended and restated in its entirety so that the same shall read as follows: FIRST. The name of the Corporation is Modus Media International Holdings, Inc. SECOND. The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the Corporation's registered agent at such address is The Corporation Trust Company. -1- THIRD. The nature of the business or purposes to be conducted or promoted by the Corporation is as follows: To engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 62,320,000 shares, consisting of (i) 60,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), (ii) 2,200,000 shares of non-voting Common Stock, $.01 par value per share ("Non-Voting Common Stock"), and (iii) 120,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The holders of Common Stock, Non- Voting Common Stock and Preferred Stock of the Corporation are referred to herein as the "Stockholders." The Common Stock, Non-Voting Common Stock and Preferred Stock of the Corporation are referred to herein as "Stock." The following is a statement of the designations and the powers, privileges and rights, and the qualifications, limitations or restrictions thereof in respect of each class of capital stock of the Corporation. A. COMMON STOCK. ------------ 1. General. The voting, dividend and liquidation rights of the ------- holders of the Common Stock and Non-Voting Common Stock are subject to and qualified by the rights of the holders of any outstanding Preferred Stock. 2. Voting. The holders of the Common Stock are entitled to one vote ------ for each share held at all meetings of Stockholders (and written actions in lieu of meetings). There shall be no cumulative voting. The holders of the Non-Voting Common Stock shall have no voting rights. The number of authorized shares of Common Stock and Non-Voting Common Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the stock of the Corporation entitled to vote, irrespective of the provisions of Section 242(b)(2) of the General Corporation Law of Delaware. 3. Dividends. Dividends may be declared and paid on the Common Stock --------- and Non-Voting Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding Preferred Stock. No dividend shall be declared or paid on the Common Stock, unless a per share dividend of like kind and amount is concurrently declared and paid on the Non-Voting Common Stock, and no dividend shall be declared or paid on the Non-Voting Common Stock unless a per share -2- dividend of like kind and amount is concurrently declared and paid on the Common Stock. 4. Liquidation. Upon the dissolution or liquidation of the ----------- Corporation, whether voluntary or involuntary, holders of Common Stock and Non- Voting Common Stock will be entitled to receive all assets of the Corporation available for distribution to its Stockholders, subject to any preferential rights of any then outstanding Preferred Stock. B. PREFERRED STOCK. --------------- Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors from time to time to issue the Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issue of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation thereof, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for issuance of any series of Preferred Stock may provide that such series shall be superior or rank equally to or be junior to the Preferred Stock or any other series to the extent permitted by law. Except as otherwise provided in this Amended and Restated Certificate of Incorporation, including any terms of Preferred Stock, no vote of the holders of the Preferred Stock or Common Stock shall be a prerequisite to the designation or issuance of any shares of any series of the Preferred Stock authorized by and complying with the conditions of this Amended and Restated Certificate of Incorporation, the right to have such vote being expressly waived by all present and future holders of the capital stock of the Corporation. FIFTH. A. Restrictions on Transfer. No Stockholder may sell, transfer, assign, ------------------------ give, encumber, pledge or otherwise dispose of ("Transfer") all or any part of its shares of -3- Stock in the Corporation (whether voluntarily, involuntarily or by operation of law), except that a Stockholder may Transfer any or all of its shares of Stock, subject to compliance with the provisions of Sections B and C below: 1. to the Corporation; 2. to any other Stockholder; 3. by gift, bequest or operation of the laws of descent; 4. to an entity unaffiliated with the Corporation pursuant to a merger, consolidation, stock-for-stock exchange or similar transaction involving the Corporation; 5. if such Stockholder is a partnership, to its partners; 6. pursuant to a transaction which would be exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended (the "Securities Act"), by virtue of the exemption provided by Section 4(2) of the Securities Act if the transferor were the issuer of the shares, provided that the transferee is an "Accredited Investor" within the meaning of Rule 501(a) promulgated under the Securities Act; or 7. pursuant to an effective registration statement under the Securities Act. Any such permitted transferee pursuant to clauses (2), (3), (5) or (6) shall receive and hold such shares or portion thereof subject to the terms hereof and the obligations of the transferor Stockholder, and there shall be no further transfer of such shares in the Corporation or portion thereof except in accordance with the terms of this Article FIFTH. Each certificate for shares of Stock shall bear a legend in substantially the following form: "The sale, assignment, pledge, encumbrance or other transfer of the shares represented by this certificate is subject to restrictions, and such shares are subject to certain mandatory transfers, as provided in the Amended and Restated Certificate of Incorporation of the Corporation, a copy of which is on file at the principal executive offices of the Corporation." -4- Until the Corporation has received and opinion of counsel reasonably satisfactory to it that shares of Stock may be Transferred in a transaction involving a public offering within the meaning of the Securities Act without registration thereunder, or are being sold pursuant to a registration statement thereunder, each certificate for shares of Stock shall bear the following legend: "The shares represented by this certificate were issued without registration under the Securities Act of 1933, as amended, and may not be sold, assigned, pledged, encumbered or otherwise transferred unless such shares have been registered under the Act or the Corporation has received an opinion of counsel reasonably satisfactory to it that such registration is not required." Appropriate stop transfer notations shall be entered in the books of the Corporation, and no Transfer shall be recorded therein except upon compliance with the conditions of the foregoing legend. The provisions of this Article FIFTH (including the provisions of Sections B and C below) (i) shall terminate and be of no further force and effect upon the closing of, and shall not apply to shares sold as a part of, the initial public offering of equity securities of the Corporation registered under the Securities Act (the "Initial Public Offering"), and (ii) shall not apply to any Transfer of shares of Stock by Stream International Inc. (f/k/a Stream International Holdings Inc.) to its stockholders. B. Additional Limitations on Transfer. ---------------------------------- 1. Notwithstanding the provisions of Section A above, no Transfer of the shares of Stock shall be made if, in the opinion of outside counsel to the Corporation, such Transfer (i) may not be effected without registration under the Securities Act or (ii) would result in the violation of any applicable state securities laws. Any attempted Transfer of shares of Stock which does not comply with the applicable provisions of this Article FIFTH shall be null and void. The Corporation shall not cooperate with or record on its books any Transfer of shares of Stock not Transferred in accordance with this Article FIFTH, nor shall the Corporation be liable to any Stockholder or Transferee for any damages, losses or expenses, or be subject to any other remedy, as a consequence of any actions taken or not taken by the Corporation hereunder. 2. A permitted transferee of the shares of a Stockholder, or any portion thereof, shall become a Stockholder entitled to all the rights of a Stockholder if, and only if: -5- (a) the transferee or the transferor pays to the Corporation all costs and expenses incurred in connection with such Transfer, including specifically, without limitation, costs incurred in the review and processing of the Transfer; and (b) the transferee executes and delivers such instruments, in form and substance satisfactory to the Corporation, as may be necessary or desirable to effect such Transfer and to confirm the agreement of the transferee to be bound by all of the terms and provisions hereof. 3. The Corporation shall be entitled to treat the record owner of any shares in the Corporation as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to such owner until such time as the Transfer of such shares has been recorded on the books of the Corporation. C. Right of First Offer; Tag Along, Drag Along Rights. --------------------------------------------------- 1. If a Stockholder wishes to Transfer shares of Stock (which Transfer may only be made by way of a sale for cash), the Stockholder wishing to Transfer the shares (the "Offering Stockholder") shall first give thirty days' prior written notice (a "First Offer Notice") to the Corporation stating the desire of such Stockholder to make such Transfer, the number and class of shares to be Transferred (the "First Offer Shares"), and the cash price which such Stockholder proposes to be paid for the First Offer Shares (the "First Offer Price"). Upon receipt of the First Offer Notice, the Corporation shall have the irrevocable and exclusive option to purchase all, but not less than all, of the First Offer Shares at the First Offer Price. The Corporation's option under this Section C(1) shall be exercisable by written notice to the Stockholder wishing to effect the Transfer given on or before the thirtieth day after the date the First Offer Notice was actually received by the Corporation. Delivery of such a written notice of exercise shall constitute an irrevocable obligation on the part of the Corporation to purchase the First Offer Shares at the First Offer Price. If the First Offer Notice has been duly given and the Corporation does not exercise its option and purchase all of the First Offer Shares (or a lesser number consented to by the Stockholder wishing to effect the Transfer), the Stockholder wishing to effect the Transfer shall be free, for a period of 180 days from the expiration of the first offer acceptance period, to sell the First Offer Shares at a cash price not less than 95% of the First Offer Price and on the other material terms set forth in the First Offer Notice, provided that such sale complies with the provisions of Sections A and B hereof. -6- If the proposed purchase price of a transferee for the First Offer Shares is less than 95% of the First Offer Price, the Offering Stockholder shall not Transfer any of the First Offer Shares unless the Offering Stockholder first reoffers the First Offer Shares at such lesser cash price to the Corporation by giving 15 days' prior written notice (the "Reoffer Notice") thereof, stating the Offering Stockholder's intention to make such Transfer at such lower cash price (the "Reoffer Price"). The Corporation shall then have the irrevocable and exclusive option to purchase the First Offer Shares at the Reoffer Price, exercisable by written notice to the Offering Stockholder given on or before the 15th day after the date that the Reoffer Notice was actually received by the Corporation. If the Corporation does not then purchase all the First Offer Shares (or a lesser number consented to by the Offering Stockholder), such First Offer Shares may be sold by the Offering Stockholder to a transferee within 60 days following the date of the expiration of the 15-day reoffer acceptance period, at a cash price equal to or greater than the Reoffer Price, provided that such sale complies with the provisions of Sections A and B hereof. If the Corporation does not exercise the option to purchase the First Offer Shares at the First Offer Price or at the Reoffer Price, and the Offering Stockholder has not sold the First Offer Shares to a transferee for any reason before the expiration of the 60-day period described above in the event of a Reoffer or, if no Reoffer Notice is given, the 180-day period described above, the Offering Stockholder shall not give a First Offer Notice with respect to a transaction which would require compliance with this Section C(1) for a period of 180 days from the expiration of such 60-day or 180-day period, as the case may be. The closing of purchases pursuant to first offer rights granted under this Section C(1) shall take place in the principal executive office of the Corporation at 10:00 a.m. local time on the tenth business day following the delivery to the Offering Stockholder of all notices exercising such first offer rights, or at such other time and/or place as the parties to such purchase may agree. At such closing (a) the Offering Stockholder shall Transfer to the Corporation good and marketable title to the Shares being purchased by the Corporation, free and clear of any lien, claim or encumbrance, by delivery of such instruments of transfer as the Corporation shall reasonably request; and (b) the Corporation shall pay to the Offering Stockholder the purchase price for the Shares being purchased in cash, by delivery of a certified or bank check or by wire transfer of immediately available funds to such account as such Offering Stockholder shall direct by written notice delivered to the Corporation, not later than two business days before such closing. The provisions of this Section C(1) shall not apply to a Transfer described in clauses (1), (3), (4), (5) or (7) of Section A hereof. 2. If any Stockholder or Stockholders (the "Selling Stockholders"), having complied with the provisions of Section C(1) with respect to such proposed -7- Transfer and all applicable waiting periods thereunder having expired, propose to Transfer pursuant to clauses (1), (2) or (6) of Section A in a single transaction or a series of related transactions more than 50% of the aggregate number of outstanding shares of the Common Stock (the "Shares"), such Stockholders shall, not later than 30 days before the closing of such proposed Transfer, give written notice of such proposed Transfer to the Corporation, which shall promptly send a copy thereof to each other Stockholder, and each other Stockholder shall have the right (a "Tag Along Right") to require the Selling Stockholders to reduce the number of Shares to be Transferred by the Selling Stockholders, if necessary, and to require the proposed purchaser to purchase from each of the other Stockholders electing to exercise a Tag Along Right that number of Shares equal to the product obtained by multiplying (i) the total number of Shares to be purchased by the purchaser by (ii) the electing Stockholder's Fractional Shares, rounded up to the nearest whole number, such purchase to be upon the same terms and conditions at the same time and place as the sale of Shares by the Selling Stockholders in the proposed Transfer. In order to exercise any Tag Along Right, an electing Stockholder must be able to transfer good and marketable title to such Stockholder's Shares to the purchaser, free and clear of any lien, claim or other encumbrance. For purposes of this Section C, the term "Fractional Shares" means the quotient obtained by dividing (a) the total number of Shares owned by the electing Stockholder, by (b) the sum of the total number of Shares owned by all electing Stockholders and the Selling Stockholders. Each electing Stockholder shall give written notice of its election to the Selling Stockholders no later than 10 business days after its receipt of the notice from the Corporation described above. This Section C(2) shall not apply to any Selling Stockholder or Stockholders who elect to exercise their Drag Along Rights provided in Section C(3). 3. If any Stockholder or Stockholders which collectively own at least 662/3% of the outstanding Shares (the "Disposing Stockholders"), having complied with the provisions of Section C(1) with respect to such proposed disposition and all applicable waiting periods thereunder having expired, propose to sell or otherwise dispose of all of the Shares then owned by them in a single transaction or a series of related transactions pursuant to clauses (4) or (6) of Section A (a "Total Disposition"), the Disposing Stockholders shall have the right (a "Drag Along Right") to require each of the other Stockholders to sell and deliver good and marketable title to all of the Shares held by such Stockholder to the purchaser, free and clear of any lien, claim or other encumbrance, upon the same terms and conditions, and at the same time and place, as the Disposing Stockholders sell Shares pursuant to this disposition. The Disposing Stockholders may exercise the Drag Along Right by giving written notice (a "Total Disposition Notice") of such proposed Total Disposition no later than 30 days before the proposed closing of such Total Disposition, identifying the purchaser and describing the consideration to be paid and the other material terms thereof, to the Corporation, which shall promptly send a copy thereof to each other Stockholder. -8- 4. None of the restrictions contained in this Section C shall apply to any Transfer: (a) by a Stockholder to a spouse, child, parent, sibling or grandchild of such Stockholder or to a trust of which there are no beneficiaries other than such Stockholder or one or more of such relatives; (b) by a Stockholder which is a corporation, partnership or limited liability corporation to an affiliate (as defined in Rule 405 under the Securities Act) (an "Affiliate") thereof or by a Stockholder which is a partnership to its partners; and (c) by a Stockholder to any other person or entity who, prior to such Transfer, is a Stockholder. SIXTH. In furtherance of and not in limitation of powers conferred by statute, it is further provided: 1. Election of directors need not be by written ballot. 2. The Board of Directors is expressly authorized to adopt, amend or repeal the By-Laws of the Corporation. SEVENTH. Except to the extent that the General Corporation Law of Delaware prohibits the elimination or limitation of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be personally liable to the Corporation or its Stockholders for monetary damages for any breach of fiduciary duty as a director, notwithstanding any provision of law imposing such liability. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment. EIGHTH. The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of Delaware, as amended from time to time, indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he or she is or was, or has agreed to become, a director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a director, officer or trustee of, or in a similar capacity with, another corporation, partnership, joint venture, trust or other enterprise (including any employee benefit plan) (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually -9- and reasonably incurred by or on behalf of an Indemnitee in connection with such action, suit or proceeding and any appeal therefrom. As a condition precedent to his or her right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving him or her for which indemnity will or could be sought. With respect to any action, suit, proceeding or investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. In the event that the Corporation does not assume the defense of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article, the Corporation shall pay in advance of the final disposition of such matter any expenses (including attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom; provided however that the payment of such -------- ------- expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article, which undertaking shall be accepted without reference to the financial ability of the Indemnitee to make such repayment; and further provided that no such advancement of expenses shall ------- -------- be made if it is determined that (i) the Indemnitee did not act in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Corporation, or (ii) with respect to any criminal action or proceeding, the Indemnitee had reasonable cause to believe his or her conduct was unlawful. The Corporation shall not indemnify an Indemnitee seeking indemnification in connection with a proceeding (or part thereof) initiated by such Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. In addition, the Corporation shall not indemnify an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of insurance, and in the event the Corporation makes any indemnification payments to an Indemnitee and such Indemnitee is subsequently reimbursed from the proceeds of insurance, such Indemnitee shall promptly refund such indemnification payments to the Corporation to the extent of such insurance reimbursement. All determinations hereunder as to the entitlement of an Indemnitee to indemnification or advancement of expenses shall be made in each instance by (a) a majority vote of the directors of the Corporation consisting of persons who are not at that time parties to the action, suit or proceeding in question ("disinterested directors"), whether or not a quorum, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for directors, voting as a -10- single class, which quorum shall consist of Stockholders who are not at that time parties to the action, suit or proceeding in question, (c) independent legal counsel (who may, to the extent permitted by law, be regular legal counsel to the Corporation), or (d) a court of competent jurisdiction. The indemnification rights provided in this Article (i) shall not be deemed exclusive of any other rights to which an Indemnitee may be entitled under any law, agreement or vote of Stockholders or disinterested directors or otherwise, and (ii) shall inure to the benefit of the heirs, executors and administrators of the Indemnitees. The Corporation may, to the extent authorized from time to time by its Board of Directors, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article. NINTH. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Amended and Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute and this Amended and Restated Certificate of Incorporation, and all rights conferred upon Stockholders herein are granted subject to this reservation; provided, however, -------- ------- that no amendment to this Amended and Restated Certificate of Incorporation shall amend, alter, change or repeal any provision of any Certificate of Designation relating to any outstanding series of the Preferred Stock unless the amendment effectuating such amendment, alteration, change or repeal shall have received the affirmative vote of the holders of the such affected series (voting separately as a class) specified in such Certificate of Designation. The foregoing proviso shall be in addition to any vote of the holders of capital stock of the Corporation otherwise required by applicable law, this Amended and Restated Certificate of Incorporation or any agreement or contract to which the Corporation is a party. EXECUTED at Westwood, Massachusetts, on 12/15, 1997. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. By: /s/ Terence Leahy ----------------------------------- Terence Leahy President -11- CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF MODUS MEDIA INTERNATIONAL, INC. Modus Media International, Inc., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY: FIRST: That the Board of Directors and sole stockholder of the Corporation, by joint unanimous written consent, duly adopted resolutions setting forth an amendment to the Certificate of Incorporation of said Corporation, declaring said amendment to be advisable and approving said resolution setting forth the proposed amendment is as follows: RESOLVED: That Article 1 of the Certificate of Incorporation of the Corporation, be and hereby is, amended to read as follows: "The name of the Corporation is Modus Media International Holdings, Inc." SECOND: The Board of Directors and sole stockholder of Modus Media International, Inc. have given written consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said Modus Media International, Inc. has caused its corporate seal to be hereunto affixed and this Certificate to be signed by its Secretary this 10th day of December, 1997. MODUS MEDIA INTERNATIONAL, INC. By: /s/ Alicia T. Brophey ------------------------------ Alicia T. Brophey Secretary State of Delaware Office of the Secretary of State ----------------- I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "MODUS MEDIA INTERNATIONAL HOLDINGS, INC.", FILED IN THIS OFFICE ON THE TWENTY-FIRST DAY OF APRIL, A.D. 1998, AT 4:30 O'CLOCK P.M. /s/ Edward J. Freel ------------------------------------ Edward J. Freel, Secretary of State 2720120 8100 AUTHENTICATION: 9038992 981152229 DATE: 04-22-98 CERTIFICATE OF AMENDMENT OF AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Pursuant to Section 242 of the General Corporation Law of the State of Delaware MODUS MEDIA INTERNATIONAL HOLDINGS, INC. (hereinafter called the "Corporation"), organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify: Pursuant to a Written Consent of Board of Directors of the Corporation dated as of April 21, 1998, a resolution was duly adopted, pursuant to Sections 141(f) and 242 of the General Corporation Law of the State of Delaware, setting forth an amendment to the Amended and Restated Certificate of Incorporation of the Corporation, declaring said amendment to be advisable and submitting said amendment to the stockholders of the Corporation for consideration thereof. The holders of a majority of the issued and outstanding shares of the Common Stock of the Corporation approved said proposed amendment pursuant to a written consent of stockholders in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. The resolution setting forth the amendment is as follows: RESOLVED: That the first paragraph of Article FOURTH of the Corporation's Amended and Restated Certificate of Incorporation be and hereby is deleted in its entirety and the following paragraph is inserted in lieu thereof: "FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 33,120,000 shares, consisting of (i) 30,000,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), (ii) 3,000,000 shares of non- voting Common Stock, $.01 par value per share ("Non-Voting Common Stock"), and (iii) 120,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"). The holders of Common Stock, Non- Voting Common Sock and Preferred Stock of the Corporation are referred to herein as the "Stockholders." The Common Stock, Non- Voting Common Stock and Preferred Stock of the Corporation are referred to herein as "Stock." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereto affixed and this Certificate of Amendment to be signed by its President this 21st day of April, 1998. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. By: /s/ Terence M. Leary -------------------------- Terence M. Leary President EX-3.3 3 BY-LAWS OF THE REGISTRANT EXHIBIT 3.3 AMENDED AND RESTATED BY-LAWS OF MODUS MEDIA INTERNATIONAL HOLDINGS, INC. AMENDED AND RESTATED BY-LAWS TABLE OF CONTENTS Page ---- ARTICLE 1 - Stockholders..................................................... 1 1.1 Place of Meetings........................................... 1 1.2 Annual Meeting.............................................. 1 1.3 Special Meetings............................................ 1 1.4 Notice of Meetings.......................................... 1 1.5 Voting List................................................. 2 1.6 Quorum...................................................... 2 1.7 Adjournments................................................ 2 1.8 Voting and Proxies.......................................... 2 1.9 Action at Meeting........................................... 3 1.10 Action without Meeting...................................... 3 ARTICLE 2 - Directors........................................................ 3 2.1 General Powers.............................................. 3 2.2 Number; Election and Qualification.......................... 3 2.3 Enlargement of the Board.................................... 4 2.4 Tenure...................................................... 4 2.5 Vacancies................................................... 4 2.6 Resignation................................................. 4 2.7 Regular Meetings............................................ 4 2.8 Special Meetings............................................ 4 2.9 Notice of Special Meetings.................................. 4 2.10 Meetings by Telephone Conference Calls...................... 5 2.11 Quorum...................................................... 5 2.12 Action at Meeting........................................... 5 2.13 Action by Consent........................................... 5 2.14 Removal..................................................... 5 2.15 Committees.................................................. 6 2.16 Compensation of Directors................................... 6 ARTICLE 3 - Officers......................................................... 6 3.1 Enumeration................................................. 6 3.2 Election.................................................... 6 3.3 Qualification............................................... 7 3.4 Tenure...................................................... 7 3.5 Resignation and Removal..................................... 7 -ii- 3.6 Vacancies................................................... 7 3.7 Chairman of the Board and Vice-Chairman of the Board........ 7 3.8 President................................................... 7 3.9 Vice Presidents............................................. 8 3.10 Secretary and Assistant Secretaries......................... 8 3.11 Treasurer and Assistant Treasurers.......................... 8 3.12 Salaries.................................................... 9 ARTICLE 4 - Capital Stock.................................................... 9 4.1 Issuance of Stock........................................... 9 4.2 Certificates of Stock....................................... 9 4.3 Transfers................................................... 10 4.4 Lost, Stolen or Destroyed Certificates...................... 10 4.5 Record Date................................................. 10 ARTICLE 5 - General Provisions............................................... 11 5.1 Fiscal Year................................................. 11 5.2 Corporate Seal.............................................. 11 5.3 Waiver of Notice............................................ 11 5.4 Voting of Securities........................................ 12 5.5 Evidence of Authority....................................... 12 5.6 Certificate of Incorporation................................ 12 5.7 Transactions with Interested Parties........................ 12 5.8 Severability................................................ 13 5.9 Pronouns.................................................... 13 ARTICLE 6 - Amendments....................................................... 13 6.1 By the Board of Directors................................... 13 6.2 By the Stockholders......................................... 13 -iii- AMENDED AND RESTATED BY-LAWS OF MODUS MEDIA INTERNATIONAL HOLDINGS, INC., a Delaware Corporation ARTICLE 1 - Stockholders ------------------------ 1.1 Place of Meetings. All meetings of stockholders shall be held at such ----------------- place within or without the State of Delaware as may be designated from time to time by the Board of Directors or the President or, if not so designated, at the registered office of the corporation. 1.2 Annual Meeting. The annual meeting of stockholders for the election -------------- of directors and for the transaction of such other business as may properly be brought before the meeting shall be held on a date to be fixed by the Board of Directors or the President (which date shall not be a legal holiday in the place where the meeting is to be held) at the time and place to be fixed by the Board of Directors or the President and stated in the notice of the meeting. If no annual meeting is held in accordance with the foregoing provisions, the Board of Directors shall cause the meeting to be held as soon thereafter as convenient. If no annual meeting is held in accordance with the foregoing provisions, a special meeting may be held in lieu of the annual meeting, and any action taken at that special meeting shall have the same effect as if it had been taken at the annual meeting, and in such case all references in these By-laws to the annual meeting of the stockholders shall be deemed to refer to such special meeting. 1.3 Special Meetings. Special meetings of stockholders may be called at ---------------- any time by the President or by the Board of Directors. Business transacted at any special meeting of stockholders shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 1.4 Notice of Meetings. Except as otherwise provided by law, written ------------------ notice of each meeting of stockholders, whether annual or special, shall be given not -1- less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at such meeting. The notices of all meetings shall state the place, date and hour of the meeting. The notice of a special meeting shall state, in addition, the purpose or purposes for which the meeting is called. If mailed, notice is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 1.5 Voting List. The officer who has charge of the stock ledger of the ----------- corporation shall prepare, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least 10 days prior to the meeting, at a place within the city where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and may be inspected by any stockholder who is present. 1.6 Quorum. Except as otherwise provided by law, the Certificate of ------ Incorporation or these By-laws, the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum for the transaction of business. 1.7 Adjournments. Any meeting of stockholders may be adjourned to any ------------ other time and to any other place at which a meeting of stockholders may be held under these By-laws by the stockholders present or represented at the meeting and entitled to vote, although less than a quorum, or, if no stockholder is present, by any officer entitled to preside at or to act as Secretary of such meeting. It shall not be necessary to notify any stockholder of any adjournment of less than 30 days if the time and place of the adjourned meeting are announced at the meeting at which adjournment is taken, unless after the adjournment a new record date is fixed for the adjourned meeting. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. 1.8 Voting and Proxies. Each stockholder shall have one vote for each ------------------ share of stock entitled to vote held of record by such stockholder and a proportionate vote for each fractional share so held, unless otherwise provided in the Certificate of Incorporation. Each stockholder of record entitled to vote at a meeting of stockholders, or to express consent or dissent to corporate action in writing without a meeting, may vote or express such consent or dissent in person or may authorize another person or persons to vote or act for him by written proxy executed by the -2- stockholder or his authorized agent and delivered to the Secretary of the corporation. No such proxy shall be voted or acted upon after three years from the date of its execution, unless the proxy expressly provides for a longer period. 1.9 Action at Meeting. When a quorum is present at any meeting, the ----------------- holders of shares of stock representing a majority of the votes cast on a matter (or if there are two or more classes of stock entitled to vote as separate classes, then in the case of each such class, the holders of shares of stock of that class representing a majority of the votes cast on a matter) shall decide any matter to be voted upon by the stockholders at such meeting, except when a different vote is required by express provision of law, the Certificate of Incorporation or these By-Laws. When a quorum is present at any meeting, any election by stockholders shall be determined by a plurality of the votes cast on the election. 1.10 Action without Meeting. Any action required or permitted to be taken ---------------------- at any annual or special meeting of stockholders of the corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote on such action were present and voted. Prompt notice of the taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE 2 - Directors 2.1 General Powers. The business and affairs of the corporation shall be -------------- managed by or under the direction of a Board of Directors, who may exercise all of the powers of the corporation except as otherwise provided by law or the Certificate of Incorporation. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full Board until the vacancy is filled. 2.2 Number; Election and Qualification. The number of directors which ---------------------------------- shall constitute the whole Board of Directors shall be determined by resolution of the stockholders or the Board of Directors, but in no event shall be less than one. The number of directors may be decreased at any time and from time to time either by the stockholders or by a majority of the directors then in office, but only to eliminate vacancies existing by reason of the death, resignation, removal or expiration of the term of one or more directors. The directors shall be elected at the annual meeting of -3- stockholders by such stockholders as have the right to vote on such election. Directors need not be stockholders of the corporation. 2.3 Enlargement of the Board. The number of directors may be increased at ------------------------ any time and from time to time by the stockholders or by a majority of the directors then in office. 2.4 Tenure. Each director shall hold office until the next annual meeting ------ and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.5 Vacancies. Unless and until filled by the stockholders, any vacancy in --------- the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected for the unexpired term of his predecessor in office, and a director chosen to fill a position resulting from an increase in the number of directors shall hold office until the next annual meeting of stockholders and until his successor is elected and qualified, or until his earlier death, resignation or removal. 2.6 Resignation. Any director may resign by delivering his written ----------- resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 2.7 Regular Meetings. Regular meetings of the Board of Directors may be ---------------- held without notice at such time and place, either within or without the State of Delaware, as shall be determined from time to time by the Board of Directors; provided that any director who is absent when such a determination is made shall be given notice of the determination. A regular meeting of the Board of Directors may be held without notice immediately after and at the same place as the annual meeting of stockholders. 2.8 Special Meetings. Special meetings of the Board of Directors may be ---------------- held at any time and place, within or without the State of Delaware, designated in a call by the Chairman of the Board, President, two or more directors, or by one director in the event that there is only a single director in office. 2.9 Notice of Special Meetings. Notice of any special meeting of directors -------------------------- shall be given to each director by the Secretary or by the officer or one of the directors calling the meeting. Notice shall be duly given to each director (i) by giving -4- notice to such director in person or by telephone at least 48 hours in advance of the meeting, (ii) by sending a telegram or telex, or delivering written notice by hand, to his last known business or home address at least 48 hours in advance of the meeting, or (iii) by mailing written notice to his last known business or home address at least 72 hours in advance of the meeting. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 2.10 Meetings by Telephone Conference Calls. Directors or any members of -------------------------------------- any committee designated by the directors may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation by such means shall constitute presence in person at such meeting. 2.11 Quorum. A majority of the total number of the whole Board of ------ Directors shall constitute a quorum at all meetings of the Board of Directors. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified; provided, however, that in no case shall less than one-third (1/3) of the number so fixed constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. 2.12 Action at Meeting. At any meeting of the Board of Directors at which ----------------- a quorum is present, the vote of a majority of those present shall be sufficient to take any action, unless a different vote is specified by law, the Certificate of Incorporation or these By-laws. 2.13 Action by Consent. Any action required or permitted to be taken at ----------------- any meeting of the Board of Directors or of any committee of the Board of Directors may be taken without a meeting, if all members of the Board or committee, as the case may be, consent to the action in writing, and the written consents are filed with the minutes of proceedings of the Board or committee. 2.14 Removal. Except as otherwise provided by the General Corporation ------- Law of Delaware, any one or more or all of the directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors, except that the directors elected by the holders of a particular class or series of stock may be removed without cause only by vote of the holders of a majority of the outstanding shares of such class or series. -5- 2.15 Committees. The Board of Directors may designate one or more ---------- committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members of the committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the Board of Directors and subject to the provisions of the General Corporation Law of the State of Delaware, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation and may authorize the seal of the corporation to be affixed to all papers which may require it. Each such committee shall keep minutes and make such reports as the Board of Directors may from time to time request. Except as the Board of Directors may otherwise determine, any committee may make rules for the conduct of its business, but unless otherwise provided by the directors or in such rules, its business shall be conducted as nearly as possible in the same manner as is provided in these By-laws for the Board of Directors. 2.16 Compensation of Directors. Directors may be paid such compensation ------------------------- for their services and such reimbursement for expenses of attendance at meetings as the Board of Directors may from time to time determine. No such payment shall preclude any director from serving the corporation or any of its parent or subsidiary corporations in any other capacity and receiving compensation for such service. ARTICLE 3 - Officers -------------------- 3.1 Enumeration. The officers of the corporation shall consist of a ----------- President, a Secretary, a Treasurer and such other officers with such other titles as the Board of Directors shall determine, including a Chairman of the Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of Directors may appoint such other officers as it may deem appropriate. 3.2 Election. The President, Treasurer and Secretary shall be elected -------- annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be appointed by the Board of Directors at such meeting or any other meeting. -6- 3.3 Qualification. No officer need be a stockholder. Any two or more ------------- offices may be held by the same person. 3.4 Tenure. Except as otherwise provided by law, by the Certificate of ------ Incorporation or by these By-laws, each officer shall hold office until his successor is elected and qualified, unless a different term is specified in the vote choosing or appointing him, or until his earlier death, resignation or removal. 3.5 Resignation and Removal. Any officer may resign by delivering his ----------------------- written resignation to the corporation at its principal office or to the President or Secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. Any officer may be removed at any time, with or without cause, by vote of a majority of the entire number of directors then in office. Except as the Board of Directors may otherwise determine, no officer who resigns or is removed shall have any right to any compensation as an officer for any period following his resignation or removal, or any right to damages on account of such removal, whether his compensation be by the month or by the year or otherwise, unless such compensation is expressly provided in a duly authorized written agreement with the corporation. 3.6 Vacancies. The Board of Directors may fill any vacancy occurring in --------- any office for any reason and may, in its discretion, leave unfilled for such period as it may determine any offices other than those of President, Treasurer and Secretary. Each such successor shall hold office for the unexpired term of his predecessor and until his successor is elected and qualified, or until his earlier death, resignation or removal. 3.7 Chairman of the Board and Vice-Chairman of the Board. The Board of ---------------------------------------------------- Directors may appoint a Chairman of the Board and may designate the Chairman of the Board as Chief Executive Officer. If the Board of Directors appoints a Chairman of the Board, he shall perform such duties and possess such powers as are assigned to him by the Board of Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he shall, in the absence or disability of the Chairman of the Board, perform the duties and exercise the powers of the Chairman of the Board and shall perform such other duties and possess such other powers as may from time to time be vested in him by the Board of Directors. 3.8 President. The President shall, subject to the direction of the Board --------- of Directors, have general charge and supervision of the business of the corporation. -7- Unless otherwise provided by the Board of Directors, he shall preside at all meetings of the stockholders and, if he is a director, at all meetings of the Board of Directors. Unless the Board of Directors has designated the Chairman of the Board or another officer as Chief Executive Officer, the President shall be the Chief Executive Officer of the corporation. The President shall perform such other duties and shall have such other powers as the Board of Directors may from time to time prescribe. 3.9 Vice Presidents. Any Vice President shall perform such duties and --------------- possess such powers as the Board of Directors or the President may from time to time prescribe. In the event of the absence, inability or refusal to act of the President, the Vice President (or if there shall be more than one, the Vice Presidents in the order determined by the Board of Directors) shall perform the duties of the President and when so performing shall have all the powers of and be subject to all the restrictions upon the President. The Board of Directors may assign to any Vice President the title of Executive Vice President, Senior Vice President or any other title selected by the Board of Directors. 3.10 Secretary and Assistant Secretaries. The Secretary shall perform such ----------------------------------- duties and shall have such powers as the Board of Directors or the President may from time to time prescribe. In addition, the Secretary shall perform such duties and have such powers as are incident to the office of the secretary, including without limitation the duty and power to give notices of all meetings of stockholders and special meetings of the Board of Directors, to attend all meetings of stockholders and the Board of Directors and keep a record of the proceedings, to maintain a stock ledger and prepare lists of stockholders and their addresses as required, to be custodian of corporate records and the corporate seal and to affix and attest to the same on documents. Any Assistant Secretary shall perform such duties and possess such powers as the Board of Directors, the President or the Secretary may from time to time prescribe. In the event of the absence, inability or refusal to act of the Secretary, the Assistant Secretary, (or if there shall be more than one, the Assistant Secretaries in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Secretary. In the absence of the Secretary or any Assistant Secretary at any meeting of stockholders or directors, the person presiding at the meeting shall designate a temporary secretary to keep a record of the meeting. 3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such ---------------------------------- duties and shall have such powers as may from time to time be assigned to him by the Board of Directors or the President. In addition, the Treasurer shall perform such -8- duties and have such powers as are incident to the office of treasurer, including without limitation the duty and power to keep and be responsible for all funds and securities of the corporation, to deposit funds of the corporation in depositories selected in accordance with these By-laws, to disburse such funds as ordered by the Board of Directors, to make proper accounts of such funds, and to render as required by the Board of Directors statements of all such transactions and of the financial condition of the corporation. The Assistant Treasurers shall perform such duties and possess such powers as the Board of Directors, the President or the Treasurer may from time to time prescribe. In the event of the absence, inability or refusal to act of the Treasurer, the Assistant Treasurer, (of if there shall be more than one, the Assistant Treasurers in the order determined by the Board of Directors) shall perform the duties and exercise the powers of the Treasurer. 3.12 Salaries. Officers of the corporation shall be entitled to such -------- salaries, compensation or reimbursement as shall be fixed or allowed from time to time by the Board of Directors. ARTICLE 4 - Capital Stock ------------------------- 4.1 Issuance of Stock. Unless otherwise voted by the stockholders and ----------------- subject to the provisions of the Certificate of Incorporation, the whole or any part of any unissued balance of the authorized capital stock of the corporation or the whole or any part of any unissued balance of the authorized capital stock of the corporation held in its treasury may be issued, sold, transferred or otherwise disposed of by vote of the Board of Directors in such manner, for such consideration and on such terms as the Board of Directors may determine. 4.2 Certificates of Stock. Every holder of stock of the corporation shall --------------------- be entitled to have a certificate, in such form as may be prescribed by law and by the Board of Directors, certifying the number and class of shares owned by him in the corporation. Each such certificate shall be signed by, or in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the Board of Directors, or the President or an Executive Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation. Any or all of the signatures on the certificate may be a facsimile. Each certificate for shares of stock which are subject to any restriction on transfer pursuant to the Certificate of Incorporation, the By-laws, applicable securities -9- laws or any agreement among any number of shareholders or among such holders and the corporation shall have conspicuously noted on the face or back of the certificate either the full text of the restriction or a statement of the existence of such restriction. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of each certificate representing shares of such class or series of stock, provided that in lieu of the foregoing requirements there may be set forth on the face or back of each certificate representing shares of such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests a copy of the full text of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 4.3 Transfers. Except as otherwise established by rules and regulations --------- adopted by the Board of Directors, and subject to applicable law, shares of stock may be transferred on the books of the corporation by the surrender to the corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment or power of attorney properly executed, and with such proof of authority or the authenticity of signature as the corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, by the Certificate of Incorporation or by these By-laws, the corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect to such stock, regardless of any transfer, pledge or other disposition of such stock until the shares have been transferred on the books of the corporation in accordance with the requirements of these By-laws. 4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a -------------------------------------- new certificate of stock in place of any previously issued certificate alleged to have been lost, stolen, or destroyed, upon such terms and conditions as the Board of Directors may prescribe, including the presentation of reasonable evidence of such loss, theft or destruction and the giving of such indemnity as the Board of Directors may require for the protection of the corporation or any transfer agent or registrar. 4.5 Record Date. The Board of Directors may fix in advance a date as a ----------- record date for the determination of the stockholders entitled to notice of or to vote at any meeting of stockholders or to express consent (or dissent) to corporate action in -10- writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action. Such record date shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 10 days after the date of adoption of a record date for a written consent without a meeting, nor more than 60 days prior to any other action to which such record date relates. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day before the day on which notice is given, or, if notice is waived, at the close of business on the day before the day on which the meeting is held. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is properly delivered to the corporation. The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating to such purpose. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. ARTICLE 5 - General Provisions ------------------------------ 5.1 Fiscal Year. Except as from time to time otherwise designated by the ----------- Board of Directors, the fiscal year of the corporation shall begin on the first day of January in each year and end on the last day of December in each year. 5.2 Corporate Seal. The corporate seal shall be in such form as shall be -------------- approved by the Board of Directors. 5.3 Waiver of Notice. Whenever any notice whatsoever is required to be ---------------- given by law, by the Certificate of Incorporation or by these By-laws, a waiver of such notice either in writing signed by the person entitled to such notice or such person's duly authorized attorney, or by telegraph, cable or any other available method, whether before, at or after the time stated in such waiver, or the appearance of such person or persons at such meeting in person or by proxy, shall be deemed equivalent to such notice. -11- 5.4 Voting of Securities. Except as the directors may otherwise designate, -------------------- the President or Treasurer may waive notice of, and act as, or appoint any person or persons to act as, proxy or attorney-in-fact for this corporation (with or without power of substitution) at, any meeting of stockholders or shareholders of any other corporation or organization, the securities of which may be held by this corporation. 5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant --------------------- Secretary, or a temporary Secretary, as to any action taken by the stockholders, directors, a committee or any officer or representative of the corporation shall as to all persons who rely on the certificate in good faith be conclusive evidence of such action. 5.6 Certificate of Incorporation. All references in these By-laws to the ---------------------------- Certificate of Incorporation shall be deemed to refer to the Certificate of Incorporation of the corporation, as amended and in effect from time to time. 5.7 Transactions with Interested Parties. No contract or transaction ------------------------------------ between the corporation and one or more of the directors or officers, or between the corporation and any other corporation, partnership, association, or other organization in which one or more of the directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or a committee of the Board of Directors which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (1) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; (2) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee of the Board of Directors, or the stockholders. -12- Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. 5.8 Severability. Any determination that any provision of these By-laws ------------ is for any reason inapplicable, illegal or ineffective shall not affect or invalidate any other provision of these By-laws. 5.9 Pronouns. All pronouns used in these By-laws shall be deemed to refer -------- to the masculine, feminine or neuter, singular or plural, as the identity of the person or persons may require. ARTICLE 6 - Amendments ---------------------- 6.1 By the Board of Directors. These By-laws may be altered, amended or ------------------------- repealed or new by-laws may be adopted by the affirmative vote of a majority of the directors present at any regular or special meeting of the Board of Directors at which a quorum is present. 6.2 By the Stockholders. These By-laws may be altered, amended or ------------------- repealed or new by-laws may be adopted by the affirmative vote of the holders of a majority of the shares of the capital stock of the corporation issued and outstanding and entitled to vote at any regular meeting of stockholders, or at any special meeting of stockholders, provided notice of such alteration, amendment, repeal or adoption of new by-laws shall have been stated in the notice of such special meeting. -13- EX-10.1 4 CONTRIBUTION AGREEMENT DATED DECEMBER 15, 1997 EXHIBIT 10.1 ================================================================================ CONTRIBUTION AGREEMENT Dated as of December 15, 1997 AMONG STREAM INTERNATIONAL INC., MODUS MEDIA INTERNATIONAL, INC., and MODUS MEDIA INTERNATIONAL HOLDINGS, INC. ================================================================================ TABLE OF CONTENTS
Page ARTICLE 1 - DEFINITIONS.................................................................. 2 ARTICLE 2 - THE SEPARATION............................................................... 12 2.1 Transfer of MMI Assets and Assumption of MMI Assumed Liabilities............... 12 2.1.1 Transfer of Assets...................................................... 12 2.1.2 Assumption of Liabilities............................................... 12 2.1.3 Transfer to MMI......................................................... 12 2.1.4 Further Assurances...................................................... 13 2.1.5 Tax Treatment of Drop-down.............................................. 14 2.1.6 Allocation of Cash...................................................... 14 2.2 Ancillary Agreements........................................................... 15 2.3 Resignations................................................................... 15 2.4 Transfers Not Effected on or Prior to the Drop-down............................ 15 2.5 No Representations or Warranties; Consents..................................... 16 2.6 Insurance...................................................................... 16 2.7 Stock Options.................................................................. 16 2.8 Extension of Certain Leases.................................................... 18 2.9 Financial Statements........................................................... 18 ARTICLE 3 - CERTAIN EMPLOYEE AND BENEFIT PLAN MATTERS.................................... 19 3.1 Certain MMI Plans; Assumption of Obligations by MMI............................ 19 3.2 Certain Payments by Stream International....................................... 19 3.3 Employees on Certain Leave..................................................... 20 3.4 Stream Savings Plan............................................................ 20 3.4.1 Creation of Multiple Employer Plan...................................... 20 3.4.2 Subsequent Contributions................................................ 20 3.4.3 New Savings Plan........................................................ 21 3.5 Employee Matters............................................................... 21 3.6 Information Regarding Certain Former Employees of R.R. Donnelley............... 21 ARTICLE 4 - THE DISTRIBUTION............................................................. 21 4.1 Action Prior to the Distribution............................................... 21 4.2 Stream International Board Action; Conditions Precedent to the Distribution.... 22 ARTICLE 5 - INDEMNIFICATION.............................................................. 22 5.1 Indemnification by Stream International for Stream International Liabilities... 22 5.2 Indemnification by MMI for MMI Liabilities..................................... 22
5.3 Limitations on Indemnification Obligations................................. 23 5.4 Procedure for Indemnification.............................................. 24 5.4.1 Third Party Claims; Notice......................................... 24 5.4.2 Defense of Third Party Claims...................................... 24 5.4.3 Cooperation by Indemnitee.......................................... 25 5.4.4 Limitation on Authority to Settle Claim............................ 25 5.4.5 Other Claims....................................................... 25 5.4.6 Advancement of Certain Expenses.................................... 26 5.4.7 Subrogation to Rights of Indemnitee................................ 26 5.4.8 Named Parties...................................................... 26 5.4.9 Dispute Resolution................................................. 26 5.4.10 Determination of Time of Payment of Indemnitee..................... 27 5.5 Remedies Cumulative........................................................ 28 5.6 Nature of Indemnity Payments............................................... 28 ARTICLE 6 - ACCESS TO INFORMATION AND SERVICES....................................... 29 6.1 Provision of Corporate Records............................................. 29 6.2 Access to Information...................................................... 29 6.3 Production of Witnesses.................................................... 29 6.4 Reimbursement.............................................................. 29 6.5 Retention of Records....................................................... 30 6.6 Confidentiality............................................................ 30 6.7 Financial Statements....................................................... 30 ARTICLE 7 - MISCELLANEOUS............................................................ 32 7.1 Rule of Construction....................................................... 32 7.2 Survival of Agreements..................................................... 32 7.3 Expenses................................................................... 32 7.4 Governing Law.............................................................. 32 7.5 Notices.................................................................... 33 7.6 Amendments................................................................. 33 7.7 Successors and Assigns..................................................... 33 7.8 Abandonment of Distribution................................................ 34 7.9 No Third Party Beneficiaries............................................... 34 7.10 Titles and Headings........................................................ 34 7.11 Exhibits and Schedules..................................................... 34 7.12 Counterparts............................................................... 34 7.13 Legal Enforceability....................................................... 34 7.14 Entire Agreement........................................................... 35
List of Schedules Schedules: - --------- Schedule A MMI Subsidiaries Schedule B Stream International Subsidiaries Schedule C Certain Asset and Stock Transfer Agreements Schedule 3.1 - Employee Benefit Plans CONTRIBUTION AGREEMENT This CONTRIBUTION AGREEMENT (the "Agreement"), dated as of December 15, 1997, is among Stream International Inc., a Delaware corporation (f/k/a Stream International Holdings Inc.) ("Stream International"), Modus Media International Holdings, Inc., a Delaware corporation and, as of the date hereof, a wholly- owned direct subsidiary of Stream International ("MMI Holdings"), and Modus Media International, Inc., a Delaware corporation and a wholly-owned subsidiary of MMI Holdings ("MMI"). WHEREAS, Stream International has been engaged in (i) the development, marketing and sale of outsource technical support services to software publishers, hardware manufacturers and corporate customers (as more fully defined below, the "Stream International Business"); (ii) the development, marketing and sale of printing, CD-ROM and disk replication, packaging, fulfillment and inventory management services (as more fully defined below, the "MMI Business"); and (iii) the marketing and resale of software and the development, marketing and sale of software license management services and software consulting services (as more fully defined below, the "CST Business"); WHEREAS, the Board of Directors of Stream International has determined that it is appropriate and desirable to separate the MMI Business into a separate company by (i) transferring the MMI Business to MMI Holdings in exchange for voting common stock and preferred stock of MMI Holdings; (ii) causing MMI Holdings to transfer the MMI Business (other than certain indebtedness owed to R.R. Donnelley) to MMI or certain of its Subsidiaries (together with the transactions described in clause (i), the "Drop-down"); and (iii) prior to the earlier of (a) the closing of the initial public offering of common stock of Stream International (the "Stream IPO") and (b) January 10, 1998, distributing to the holders of common stock of Stream International as of the Record Date all of the voting common stock of MMI Holdings held by Stream International (the "Distribution"); WHEREAS, concurrently with the Drop-down, Stream International is effecting a similar separation of the CST Business by (i) causing Stream International Services Corp., a Delaware corporation (f/k/a Stream International Inc.) ("SISC"), to transfer the CST Business to Corporate Software & Technology Holdings, Inc., a Delaware corporation ("CST Holdings"), in exchange for voting common stock of CST Holdings issued to SISC, and (ii) causing such outstanding voting stock of CST Holdings to be transferred by SISC to Stream International; WHEREAS, Stream International intends thereafter to distribute to the holders of common stock of Stream International as of the Record Date all of the voting common stock of CST Holdings held by Stream International; WHEREAS, Stream International, MMI Holdings and MMI have determined that it is necessary and desirable to set forth the principal corporate transactions required to effect the Drop-down and the Distribution and to set forth other agreements that will govern certain relationships and other matters among Stream International, MMI Holdings and MMI in connection with the Drop-down and the Distribution; and WHEREAS, the Drop-down is intended to be a taxable exchange, not subject to Section 351 of the Code. NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS Certain terms are used in this Agreement as specifically defined herein (such meanings to be equally applicable to both the singular and plural forms of the terms defined). These definitions are set forth in this Article 1. Action means any action, suit, arbitration, inquiry, proceeding or ------ investigation by or before any Governmental Authority or arbitration tribunal. Additional Option shall have the meaning ascribed in Section 2.7. ----------------- Adjusted Option shall have the meaning ascribed in Section 2.7. --------------- Affiliate means "affiliate" as defined in Rule 12b-2 promulgated under the --------- Exchange Act, as such Rule is in effect on the date hereof; provided, however, -------- ------- that (i) MMI Holdings, MMI and the MMI Subsidiaries, (ii) CST Holdings, CST and the CST Subsidiaries and (iii) Stream International and the Stream International Subsidiaries shall not be deemed Affiliates of each other for purposes of this Agreement; and provided further, that R.R. Donnelley (and its Subsidiaries other ------------ ------- than CST Holdings, MMI Holdings and Stream International and their Subsidiaries following the Drop-down), on the one hand, and CST Holdings, MMI Holdings and Stream International (and each of their Subsidiaries following the Drop-down), on the other hand, shall not be deemed Affiliates of each other for purposes of this Agreement. Agreement shall have the meaning ascribed in the Preamble. --------- 2 Ancillary Agreements means all of the agreements, instruments, -------------------- understandings, assignments or other arrangements entered into in connection with the Drop-down and/or the Distribution, including, without limitation, (i) the Conveyancing Instruments, (ii) the Services Agreements, (iii) the Tax Indemnification Agreements, (iv) subleases, subcontracts and other instruments entered into to effect the transactions contemplated hereby, (v) the asset and stock transfer agreements and instruments for certain Subsidiaries and branches of SISC and Subsidiaries of Stream International, including those listed on Schedule C hereto and (vi) the Letter Agreement. - ---------- Assets means, with respect to any Person, the assets, properties and rights ------ (including goodwill) of such Person, wherever located (including in the possession of vendors or other third parties or elsewhere), whether real, personal or mixed, tangible, intangible or contingent, in each case whether or not recorded or reflected or required to be recorded or reflected on the books and records or financial statements of such Person, including the following: (a) all accounting and other books, records and files whether in paper, microfilm, microfiche, computer tape or disc, magnetic tape or any other form; (b) all apparatus, computers and other electronic data processing equipment, fixtures, machinery, equipment, furniture, office equipment, automobiles, trucks, rolling stock, motor vehicles and other transportation equipment, special and general tools, test devices, prototypes and models and other tangible personal property; (c) all inventories of materials, parts, raw materials, supplies, work-in-process and finished goods and products; (d) all interests in real property of whatever nature, including easements, whether as owner, mortgagee or holder of a Security Interest in real property, lessor, sublessor, lessee, sublessee or otherwise; (e) all interests in any capital stock or other equity interests of any Subsidiary of such Person or any other Person, all bonds, notes, debentures or other securities issued by any such Subsidiary or any other Person, all loans, advances or other extensions of credit or capital contributions to any such Subsidiary or any other Person and all other investments in securities of any Person; (f) all license agreements, leases of personal property, open purchase orders, unfilled orders for the manufacture and sale of products and other contracts, agreements or commitments; (g) all deposits, letters of credit and performance and surety bonds; 3 (h) all written technical information, data, specifications, research and development information, engineering drawings, operating and maintenance manuals, and materials and analyses prepared by consultants and other third parties; (i) all domestic and foreign patents, copyrights, trade names, trademarks, service marks and registrations and applications for any of the foregoing, mask works, trade secrets, inventions, other proprietary information and licenses from third Persons granting the right to use any of the foregoing; (j) all computer applications, programs and other software, including operating software, network software, firmware, middleware, design software, design tools, systems documentation and instructions; (k) all cost information, sales and pricing data, customer prospect lists, supplier records, customer and supplier lists, customer and vendor data, correspondence and lists, product literature, artwork, design, development and manufacturing files, vendor and customer drawings, formulations and specifications, quality records and reports and other books, records, studies, surveys, reports, plans and documents; (l) all prepaid expenses, trade accounts and other accounts and notes receivables; (m) all rights under contracts or agreements, all claims or rights against any Person arising from the ownership of any Asset, all rights in connection with any bids or offers and all claims, choses in action or similar rights, whether accrued or contingent; (n) all rights under insurance policies and all rights in the nature of insurance, indemnification or contribution; (o) all licenses, permits, approvals and authorizations which have been issued by any Governmental Authority; (p) subject to Section 2.1.6, cash or cash equivalents, bank accounts, lock boxes and other deposit arrangements; and (q) interest rate, currency, commodity or other swap, collar, cap or other hedging or similar agreements or arrangements. Audited Financial Statements shall have the meaning ascribed in Section ---------------------------- 2.9. Claim Notice shall have the meaning ascribed in Section 5.4.5. ------------ 4 Code means the Internal Revenue Code of 1986, as amended, and regulations ---- and rulings thereunder and shall include corresponding provisions of any subsequently enacted federal tax law. Consents means any consents, waivers or approvals from, or notification -------- requirements to, any third parties. Controlled Group shall have the meaning ascribed in Section 3.4.1. ---------------- Conveyancing Instruments means, collectively, the various agreements, ------------------------ instruments and other documents, in form and substance mutually satisfactory to Stream International and MMI Holdings, entered into or to be entered into to effect the transfer of the MMI Assets by Stream International or its Subsidiaries to MMI Holdings or its Subsidiaries and the assumption by MMI Holdings or its Subsidiaries of the MMI Assumed Liabilities. CST shall have the meaning ascribed in the Preamble. --- CST Assets shall have the meaning ascribed in the CST Contribution ---------- Agreement, as in effect on the date hereof. CST Assumed Liabilities shall have the meaning ascribed in the CST ----------------------- Contribution Agreement, as in effect on the date hereof. CST Balance Sheet shall have the meaning ascribed in the CST Contribution ----------------- Agreement, as in effect on the date hereof. CST Business shall have the meaning ascribed in the CST Contribution ------------ Agreement, as in effect on the date hereof. CST Contribution Agreement shall have the meaning ascribed in Section 7.3. -------------------------- CST Holdings shall have the meaning ascribed in the Preamble. ------------ CST Subsidiary shall have the meaning ascribed in the CST Contribution -------------- Agreement, as in effect on the date hereof. Determination Event shall have the meaning ascribed in Section 5.4.10. ------------------- Distribution shall have the meaning ascribed in the Preamble. ------------ Distribution Date means the date on which the Distribution occurs. ----------------- Drop-down shall have the meaning ascribed in the Preamble. --------- 5 Due Date shall have the meaning ascribed in Section 5.4.10. -------- Employee Benefit Plan means any plan, fund or other arrangement within the --------------------- meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and any fringe benefit or similar arrangement. Exchange Act means the Securities Exchange Act of 1934, as amended. ------------ Former MMI Employee means any person who was an employee of Stream ------------------- International or its Subsidiaries and who worked primarily in the MMI Business but terminated such employment prior to the date hereof, including, without limitation, any person who is listed on Schedule 3.1 hereto and who is not a MMI ------------ Employee. GAAP means United States generally accepted accounting principles ---- consistently applied. Governmental Approvals means any notices, reports or other filings made ---------------------- with or to be made with, or any consents, registrations, approvals, permits or authorizations obtained from to be obtained from, any Governmental Authority. Governmental Authority shall mean any federal, state, local, foreign or ---------------------- international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. Indemnifiable Losses shall have the meaning ascribed in Section 5.1. -------------------- Indemnifying Party shall have the meaning ascribed in Section 5.3. ------------------ Indemnitee shall have the meaning ascribed in Section 5.3. ---------- Information shall have the meaning ascribed in Section 6.2. ----------- Insurance Program means the various insurance policies maintained by Stream ----------------- International and/or R.R. Donnelley pursuant to which various insurance carriers provide insurance coverage to Stream International and its Subsidiaries (including, prior to the Distribution, MMI Holdings and the MMI Subsidiaries and CST Holdings and the CST Subsidiaries); provided, however, that the term -------- ------- "Insurance Program" shall not include any insurance policy used to pay benefits under an Employee Benefit Plan, including but not limited to the Employee Benefit Plans listed on Schedule 3.1 hereto. Letter Agreement means the Letter Agreement among Stream International, MMI ---------------- and MMI Holdings dated the date hereof with respect to certain Assets and Liabilities. 6 Liabilities means, with respect to any Person, any and all debts, ----------- liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including after the Distribution (unless otherwise specified in this Agreement), of such Person including all costs and expenses relating thereto, and including, without limitation, those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. MMI shall have the meaning ascribed in the Preamble. --- MMI Assets means (i) all Assets of Stream International and its ---------- Subsidiaries used primarily in the MMI Business, including but not limited to those Assets shown on Schedule A to the Letter Agreement and those Assets ---------- reflected on the MMI Balance Sheet, (ii) those Assets of Stream International and its Subsidiaries that are not primarily used in the MMI Business but that are identified on Schedule B to the Letter Agreement, and (iii) all Assets of ---------- Stream International and its Subsidiaries other than the Stream International Assets, the CST Assets, the outstanding stock issued by and the Assets of Corporate Software & Technology GmbH (f/k/a Stream International GmbH), and the outstanding stock issued by and the Assets of Corporate Software & Technology Limited (f/k/a Corporate Software Limited) and its Subsidiary, International Software Limited. "MMI Assets" shall not include the original corporate minute books, stock ledgers and certificates and corporate seals of Stream International. MMI Assumed Liabilities means (i) all Liabilities of Stream International ----------------------- or its Subsidiaries relating to the MMI Business, including without limitation, all Liabilities related to the MMI Assets, excluding all indebtedness for borrowed money to R.R. Donnelley other than as set forth in clause (iv) below, (ii) all Liabilities reflected on the MMI Balance Sheet, excluding all indebtedness for borrowed money to R.R. Donnelley other than as set forth in clause (iv) below, (iii) the additional Liabilities listed on Schedule C to the ---------- Letter Agreement, (iv) the net amount of indebtedness to R.R. Donnelley set forth on Schedule D to the Letter Agreement, (v) the Liabilities retained or ---------- assumed by MMI pursuant to Article 3 hereof, and (vi) all Liabilities of Stream International or its Subsidiaries (other than, to the extent covered in clause (i) above, the MMI Subsidiaries) arising out of or related to actions, omissions or events occurring at or prior to the time of the Distribution which are not included in the CST Assumed Liabilities or Stream International Liabilities; provided, however, that the term "MMI Assumed Liabilities" shall not include any - -------- ------- Liabilities related to Taxes (it being understood that Liabilities related to Taxes shall be governed by the Tax Indemnification Agreements). 7 MMI Balance Sheet means the MMI balance sheet as of November 30, 1997, ----------------- prepared in accordance with GAAP, a copy of which will be furnished by MMI to Stream International pursuant to Section 6.7.1 hereof. MMI Benefit Plans shall have the meaning ascribed in Section 3.1. ----------------- MMI Business means (i) the businesses, Assets and operations of Stream ------------ International and its Subsidiaries primarily related to the development, marketing and sale of printing, CD-ROM and disk replication, packaging, fulfillment and inventory management services, including, without limitation, all businesses, Assets or operations primarily managed or operated by, or operationally related primarily to, any of such businesses, which have been sold or otherwise disposed of or discontinued prior to the Drop-down and (ii) following the Drop-down, the businesses, Assets and operations of MMI Holdings and its Subsidiaries as they may be constituted from time to time to the extent not included in clause (i) of this sentence. MMI Compensation Agreement shall have the meaning ascribed in Section -------------------------- 2.1.3. MMI Employee means (i) any individual who, on or immediately prior to the ------------ date hereof was employed by Stream International or any of its Subsidiaries, or who is on a leave of absence approved by Stream International or any of its Subsidiaries and who, immediately after the Distribution, is employed by MMI Holdings or any MMI Subsidiary, or who is continuing on a leave of absence approved by MMI Holdings or any MMI Subsidiary, and (ii) any individual whose employment is transferred from Stream International or any of its Subsidiaries to MMI Holdings or any MMI Subsidiary within 12 months after the date hereof. MMI Foreign Benefit Plans shall have the meaning ascribed in Section 3.1. ------------------------- MMI Holdings shall have the meaning ascribed in the Preamble. ------------ MMI Indemnitee shall have the meaning ascribed in Section 5.1. -------------- MMI Subsidiary means the Subsidiaries of Stream International listed on -------------- Schedule A hereto, each of which were Subsidiaries of MMI Holdings prior to the - ---------- date hereof or will become Subsidiaries of MMI Holdings as a result of the Drop- down. New MMI Savings Plan shall have the meaning ascribed in Section 3.4.3. -------------------- 1995 Contribution Agreement means the Contribution Agreement dated as of --------------------------- April 21, 1995, among R.R. Donnelley, Stream International Holdings Inc. (formerly 8 known as R.R. Donnelley Global Software Services Corp. and now known as Stream International Inc.) and Software Holdings, Inc. Person means any natural person or any corporation, association, ------ partnership, joint venture, company, limited liability company, trust, organization, business or government or any governmental agency or political subdivision thereof. Record Date means the close of business on the date to be determined by the ----------- Stream International Board as the record date for the Distribution. Restructuring Expenses shall have the meaning ascribed in Section 7.3. ---------------------- R.R. Donnelley means R.R. Donnelley & Sons Company, a Delaware corporation. -------------- Security Interest means any mortgage, security interest, pledge, lien, ----------------- charge, claim, option, right to acquire, voting or other restriction, right-of- way, covenant, condition, easement, encroachment, restriction on transfer, or other encumbrance of any nature whatsoever. Services Agreements means the Transitional Service Agreement between SISC ------------------- and MMI, the Transitional Service Agreement between SISC and CST and the Transitional Service Agreement between MMI and CST, each dated the date hereof, pursuant to which the parties will provide various services to each other following the date hereof. SISC shall have the meaning ascribed in the Preamble. ---- Stream International shall have the meaning ascribed in the Preamble. -------------------- Stream International Assets means all Assets of Stream International and --------------------------- its Subsidiaries used primarily in the Stream International Business, including, but not limited to (i) Assets reflected on the Stream International Balance Sheet, and (ii) Assets shown on Schedule E to the Letter Agreement; provided, ---------- -------- however, that the term "Stream International Assets" shall not include the CST - ------- Assets, the MMI Assets, the outstanding stock issued by and the Assets of Corporate Software & Technology GmbH (f/k/a Stream International GmbH), and the outstanding stock issued by and the Assets of Corporate Software & Technology Limited (f/k/a Corporate Software Limited) and its Subsidiary, International Software Limited. Stream International Balance Sheet means the Stream International balance ---------------------------------- sheet as of November 30, 1997, prepared in accordance with GAAP, a copy of which will be furnished to MMI Holdings in accordance with Section 6.7.4. 9 Stream International Board means the Board of Directors of Stream -------------------------- International. Stream International Business means (i) the businesses, Assets and ----------------------------- operations of Stream International and its Subsidiaries primarily related to the development, marketing and sale of outsource technical support services, including, without limitation, all businesses, Assets of any Person or operations primarily managed or operated by, or operationally related primarily to, any of such businesses which have been sold or otherwise disposed of or discontinued prior to the Drop-down and (ii) following the Drop-down, the businesses, Assets and operations of Stream International or its Subsidiaries as they may be constituted from time to time to the extent not included in clause (i) of this sentence; provided, however, that the term "Stream International -------- ------- Business" shall not include the MMI Business or the CST Business. Stream International Common Stock means the Class A, Class A-1, Class B-N --------------------------------- and Class B-V Common Stock, each par value $.01 per share, of Stream International. Stream International Indemnitee shall have the meaning ascribed in Section ------------------------------- 5.2. Stream International Liabilities means (i) all Liabilities of Stream -------------------------------- International or any of its Subsidiaries relating primarily to the Stream International Business, including, without limitation, all Liabilities related primarily to the Stream International Assets, but excluding all indebtedness for borrowed money to R.R. Donnelley other than as set forth in clause (iii) below, (ii) all Liabilities reflected on the Stream International Balance Sheet, but excluding all indebtedness for borrowed money to R.R. Donnelley other than as set forth in clause (iii) below, (iii) the net indebtedness to R.R. Donnelley shown on Schedule F to the Letter Agreement and (iv) the Liabilities identified ---------- on Schedule G to the Letter Agreement; provided, however, that the term "Stream ---------- -------- ------- International Liabilities" shall not include Liabilities of Stream International as a guarantor of or surety for any MMI Assumed Liabilities or CST Assumed Liabilities, shall not include the MMI Assumed Liabilities or the CST Assumed Liabilities, and shall not include any Liabilities related to Taxes (it being understood that Liabilities related to Taxes shall be governed by the Tax Indemnification Agreements). Stream International Option means a stock option, granted under Stream --------------------------- International's 1995 Stock Option Plan, 1995 Replacement Stock Option Plan or 1995 California Stock Option Plan, outstanding as of the Distribution Date. Stream International Subsidiary means the Subsidiaries of Stream ------------------------------- International, other than CST Holdings or any CST Subsidiary, MMI Holdings or any MMI Subsidiary, Corporate Software & Technology GmbH (f/k/a Stream International GmbH), Corporate Software & Technology Limited (f/k/a Corporate Software 10 Limited), and International Software Limited, including without limitation, the entities listed on Schedule B hereto. ---------- Stream IPO shall have the meaning ascribed in the Preamble. ---------- Stream Savings Plan shall have the meaning ascribed in Section 3.4.1. ------------------- Subsidiary, as used herein with respect to any Person, means any other ---------- Person of which such Person shall at the time own, directly or indirectly through one or more Subsidiaries, at least a majority of the outstanding capital stock (or other shares of beneficial interest) entitled to vote generally, or shall hold at least a majority of partnership or similar interests, or shall be a general partner. Target Amounts shall have the meaning ascribed in Section 2.1.6. -------------- Tax shall have the meaning ascribed in the Tax Sharing Agreement. --- Tax Indemnification Agreements means the Tax Sharing Agreement and the Tax ------------------------------ Reimbursement Agreement. Tax Reimbursement Agreement means the Tax Reimbursement Agreement between --------------------------- Stream International and R.R. Donnelley, dated the date hereof. Tax Return shall have the meaning ascribed in the Tax Sharing Agreement. ---------- Tax Sharing Agreement means the Tax Sharing Agreement among Stream --------------------- International, MMI Holdings, MMI, CST Holdings and CST, dated the date hereof. Third Party Claim shall have the meaning ascribed in Section 5.4.1. ----------------- Third Party Claim Notice shall have the meaning ascribed in Section 5.4.1. ------------------------ Transfer Date means (i) with respect to any MMI Employee described in ------------- clause (a) of the definition of MMI Employee, the date hereof, and (ii) with respect to any MMI Employee described in clause (b) of the definition of MMI Employee, the date on which such MMI Employee's employment is transferred from Stream International or any Stream International Subsidiary to MMI Holdings or any MMI Subsidiary. Unaudited Financial Statements shall have the meaning ascribed in Section ------------------------------ 2.9. 11 ARTICLE 2 THE SEPARATION This Article 2 sets forth certain transactions to be consummated in connection with the Drop-down. Subject to the terms and conditions of this Agreement, the parties shall consummate such transactions on (except to the extent specified in Section 2.1.3) the date hereof at such times and in such sequence as they shall mutually agree. 2.1 Transfer of MMI Assets and Assumption of MMI Assumed Liabilities . ---------------------------------------------------------------- 2.1.1 Transfer of Assets. Except as set forth in Section 2.1.3, on ------------------ the date hereof, Stream International and/or the Stream International Subsidiaries shall, to the extent necessary by means of appropriate Conveyancing Instruments, convey, transfer, assign and deliver to MMI Holdings or, if directed by MMI Holdings, to its Subsidiaries, and MMI Holdings (or its Subsidiaries, as applicable) will accept from Stream International and/or the Stream International Subsidiaries, all of Stream International's or its Subsidiaries' rights, title and interest in and to all of the MMI Assets. 2.1.2 Assumption of Liabilities. In consideration for the ------------------------- contribution described in Section 2.1.1, simultaneously with such contribution, (i) MMI Holdings and/or its Subsidiaries shall, to the extent necessary by means of appropriate Conveyancing Instruments, assume all of Stream International's and its Subsidiaries' (other than any MMI Subsidiary) duties, obligations and responsibilities with respect to the MMI Assumed Liabilities and (ii) MMI Holdings shall issue to Stream International voting common stock and preferred stock of MMI Holdings. 2.1.3 Transfer to MMI. Other than certain foreign MMI Assets that --------------- have been assigned prior to the date hereof, no MMI Asset shall be conveyed, transferred, assigned or delivered under this Section 2.1, and any purported conveyance, transfer, assignment, or delivery of any MMI Asset under this Section 2.1 shall be null and void, unless (i) simultaneously therewith or immediately prior thereto MMI Holdings shall have delivered to Bain Capital Inc. shares of non-voting common stock of CST Holdings pursuant to the MMI Compensation Agreement among Stream International, MMI Holdings and Bain Capital Inc. dated as of December 10, 1997 (the "MMI Compensation Agreement") and (ii) at the time of any such conveyance, transfer, assignment or delivery, no person shall own or have any beneficial interest in any non-voting stock of MMI Holdings other than Bain Capital Inc. Immediately after the consummation of all of the transfers and assumptions described in Sections 2.1.1 and 2.1.2, MMI Holdings shall contribute all of the MMI Assets it received to MMI and MMI shall assume all of the MMI Assumed Liabilities 12 which had been assumed by MMI Holdings (other than those described in clause (iv) of the definition of MMI Assumed Liabilities). 2.1.4 Further Assurances. ------------------ (a) In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto shall use commercially reasonable efforts, prior to, on and after the date hereof, to take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by this Agreement and the Ancillary Agreements, including execution of Conveyancing Instruments relating to the assumption by MMI Holdings and MMI of MMI Assumed Liabilities that arise after the Drop-down. (b) Without limiting the foregoing, prior to, on and after the date hereof, each party hereto shall cooperate with each other party hereto, and without any further consideration, but at the expense of the requesting party, to execute and deliver, or use commercially reasonable efforts to cause to be executed and delivered, all instruments, including instruments of conveyance, assignment and transfer, and to make all filings with, and to obtain all consents, approvals or authorizations of, any Governmental Authority or any other Person under any permit, license, agreement, indenture or other instrument (including any Consents or Governmental Approvals), and to take all such other actions as such party may reasonably be requested to take by any other party hereto from time to time, consistent with the terms of this Agreement and the Ancillary Agreements, in order to effectuate the provisions and purposes of this Agreement and the Ancillary Agreements and the transfer of the MMI Assets, and the assignment and assumption of the MMI Assumed Liabilities and the other transactions contemplated hereby and thereby. Without limiting the foregoing, each party will, at the reasonable request, cost and expense of any other party, use commercially reasonable efforts to take such other actions as may be reasonably necessary to vest in such other party good and marketable title, free and clear of any Security Interest other than a Security Interest securing a MMI Assumed Liability, if and to the extent it is practicable to do so. In the event and to the extent that any such required consent, approval or authorization to assign and assume an agreement, lease, commitment or obligation which is an MMI Asset or MMI Assumed Liability is not obtained, (i) Stream International or its applicable Subsidiary shall continue to be bound thereby and (ii) from and after the date hereof, MMI Holdings or its Subsidiaries shall pay, perform and discharge fully all the obligations of Stream International or its applicable Subsidiary thereunder and MMI Holdings and MMI shall indemnify, as set forth in Section 5.2 hereof, Stream International or its applicable Subsidiary for all Indemnifiable Losses arising out of such performance or failure to perform by MMI Holdings or its Subsidiaries or out of the failure to obtain any Consents or Governmental Approval. Stream International 13 or its applicable Subsidiary shall, without the payment of any further consideration, pay and remit to MMI promptly any monies, rights and other considerations received by Stream International or its applicable Subsidiary in respect of such performance. Stream International or its applicable Subsidiary shall exercise or exploit its rights and options under all such third party agreements, leases, licenses and other rights and commitments referred to in this Section 2.1.4(b) which are MMI Assets only as reasonably directed by MMI and at MMI's expense. If and when any such Consent or Governmental Approval shall be obtained or such agreement, lease, license or other right shall otherwise become assignable or be able to be novated, Stream International or its applicable Subsidiary shall promptly assign and novate all its rights and obligations thereunder to MMI Holdings or its Subsidiaries without payment of further consideration and MMI Holdings or its Subsidiaries shall, without the payment of any further consideration, assume such rights and obligations. Without limiting the foregoing obligations, with respect to the Guaranty between Stream International Inc. and Microsoft Corporation dated June 2, 1995, MMI Holdings shall use its best efforts to have such Guaranty assigned to MMI Holdings by February 15, 1998. 2.1.5 Tax Treatment of Drop-down. Each of MMI Holdings, MMI and --------------------------- Stream International shall, and shall cause each of its Affiliates after the Drop-down to (i) treat the transactions provided for in Sections 2.1.1 and 2.1.2 of this Agreement as a taxable exchange, and not as a transaction described in Section 351 of the Code, for federal income tax purposes (and all other applicable income tax purposes) and (ii) file Form 8594, and all their respective federal, state, local and other Tax Returns required to be filed. 2.1.6 Allocation of Cash. Notwithstanding anything herein to the ------------------ contrary, but subject to Section 3.2 hereof, the consolidated aggregate cash held by Stream International and its Subsidiaries as of October 31, 1997, shall be allocated to the particular business (i.e., the CST Business, the MMI Business or the Stream International Business) that generated such cash, provided that the maximum amount allocated to CST pursuant to this sentence shall be $7,500,000, the maximum amount allocated to MMI pursuant to this sentence shall be $12,500,000 and the maximum amount allocated to Stream International pursuant to this sentence shall be $5,000,000 (such amounts are hereinafter referred to as the "Target Amounts"). If any business has generated cash in excess of its Target Amount, such excess shall be allocated to the other businesses, pro rata based on the ratio of their Target Amounts, until one of such businesses has been allocated its Target Amount. Any remaining excess shall be allocated to the remaining business until it has been allocated its Target Amount. If the consolidated aggregate cash held by Stream International and its Subsidiaries as of October 31, 1997 exceeds $25,000,000, the amount in excess of $25,000,000 shall be allocated 30% to CST, 50% to MMI and 20% to Stream International. Any cash generated after October 31, 1997 shall remain with the particular business (i.e., the CST Business, the MMI Business or the Stream International Business) that generated 14 such cash; provided, however, that the proceeds received by Stream International pursuant to that certain Asset Purchase Agreement dated as of the date hereof between Stream International and R.R. Donnelley Norwest, Inc. shall be allocated 40% to the MMI Business and 60% to the CST Business. 2.2 Ancillary Agreements. On (except to the extent specified in -------------------- Section 2.1.3) the date hereof, Stream International, MMI Holdings and MMI, as the case may be, shall enter into each of the Ancillary Agreements. 2.3 Resignations. At the request of Stream International, MMI Holdings ------------ shall cause all MMI Employees to resign effective on the date hereof from all boards of directors or similar governing bodies of Stream International or any Stream International Subsidiary on which they serve, and from all positions as officers of Stream International or any Stream International Subsidiary in which they serve. At the request of MMI Holdings, Stream International shall cause all of its own and all of the Stream International Subsidiaries' employees and directors (other than MMI Employees and those directors of Stream International who will continue to serve as directors of MMI or MMI Holdings) to resign effective on the date hereof from all boards of directors or similar governing bodies of MMI Holdings or any MMI Subsidiary on which they serve, and from all positions as officers of MMI Holdings or any MMI Subsidiary in which they serve. 2.4 Transfers Not Effected on or Prior to the Drop-down. Nothing herein --------------------------------------------------- shall be deemed to require the transfer of any Assets or the assumption of any Liabilities which by their terms or operation of law cannot be transferred or assumed; provided, however, that Stream International and MMI Holdings and their -------- ------- respective Subsidiaries shall cooperate to seek to obtain any necessary Consents or Governmental Approvals for the transactions contemplated by this Article 2. In the event that any transfer of Assets or Liabilities has not been consummated, effective as of or prior to the date hereof, the party retaining such Asset or Liability shall thereafter hold such Asset for the party entitled thereto (at the expense of the party entitled thereto) and retain such Liability for the account of the party by whom such Liability is to be assumed (at the expense of the party to whom such Liability is to be transferred), and each party will take such other action as may be reasonably requested by the other party in order to place the party to whom such Asset is to be transferred, or by whom such Liability is to be assumed, as the case may be, insofar as reasonably possible, in the same position as would have existed had such Asset or Liability been transferred as of the date hereof. As and when any such Asset or Liability becomes transferable, such transfer shall be effected forthwith. 2.5 No Representations or Warranties; Consents. MMI Holdings understands ------------------------------------------ and hereby agrees that Stream International is not, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, nor shall Stream International be deemed or implied to be, representing or 15 warranting in any way except as, and only to the extent, required by applicable law (i) as to the value or freedom from encumbrance or Security Interest of, or any other matter concerning, any of the MMI Assets transferred or to be transferred to MMI Holdings as contemplated by this Article 2 or (ii) as to the legal sufficiency to convey title to any such Asset of the execution, delivery and filing of this Agreement or any Ancillary Agreement, including, without limitation, any Conveyancing Instruments, IT BEING UNDERSTOOD AND HEREBY AGREED THAT ALL MMI ASSETS ARE BEING TRANSFERRED "AS IS, WHERE IS" and that MMI Holdings shall bear the economic and legal risk that any conveyances of such Assets shall prove to be insufficient or that MMI Holdings or any of its Subsidiaries' title to any such assets shall be other than good and marketable and free from encumbrances or Security Interests. Similarly, MMI Holdings understands and hereby agrees that Stream International is not, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, nor shall Stream International be deemed or implied to be, representing or warranting in any way that the obtaining of any Consents or Governmental Approvals, the execution and delivery of any amendatory agreements and the making of any filings or applications contemplated by this Agreement or such other agreements or documents shall satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable laws or judgments, it being understood and hereby agreed that MMI Holdings and the MMI Subsidiaries shall bear the economic and legal risk that any necessary Consents or Governmental Approvals are not obtained or that any requirements of laws or judgments are not complied with. Notwithstanding the foregoing, the parties shall use reasonable efforts to obtain all Consents and Governmental Approvals, to enter into all amendatory agreements and to make all filings and applications which may be required for the consummation of the transactions contemplated by this Agreement. 2.6 Insurance. MMI agrees that it will purchase, to the extent available --------- at a reasonable cost, insurance policies to be in effect as of the Distribution Date which provide substantially the same types of coverage as the policies maintained by Stream International or R.R. Donnelley under the Insurance Program with respect to the MMI Business, including without limitation any insurance required by any lease of real or personal property. Stream International shall, if so requested by MMI, use reasonable efforts to assist MMI in obtaining such initial insurance coverage for MMI from and after the Distribution in such amounts as are agreed upon by Stream International and MMI. Following the Distribution, each of Stream International and MMI shall cooperate with and assist the other party in the prevention of conflicts or gaps in insurance coverage and/or collection of proceeds. 2.7 Stock Options. Prior to the Distribution, Stream International shall ------------- adjust each Stream International Option by reducing to $4.86 the per share exercise price for such option (other than options with exercise prices at or above $4.86 per share and options held by Messrs. Cowan, Leahy, Moore and Rosenthal and certain 16 options held by Mr. Morphis) and by providing, with respect to those option holders who will be employed by MMI Holdings, CST Holdings or their Subsidiaries following the Distribution, that the option terminates three months after the option holder ceases to be employed by MMI Holdings or CST Holdings or their Subsidiaries, as the case may be (each such option, as so adjusted prior to the Distribution Date, the "Adjusted Option"). In connection with the Distribution, each Stream International Option to purchase shares of Class A Common Stock of Stream International shall be supplemented with an option to purchase an identical number of shares of voting stock of each of CST Holdings and MMI Holdings, and each Stream International Option to purchase shares of Class B Common Stock of Stream International shall be supplemented with an option to purchase such number of shares of voting stock of each of CST Holdings and MMI Holdings as is equal to the number of shares of Class A Common Stock into which the shares of Class B Common Stock covered by such option would be convertible at the conversion rate fixed on the date of the Drop-down (collectively, the "Additional Options"). The per share exercise price for the Additional Options shall be equal to the product determined by multiplying the exercise price per share of Stream International Common Stock at which such Stream International Option was exercisable by 11.93% in the case of the Additional Option granted by MMI Holdings and 38.48% in the case of the Additional Option granted by CST Holdings. The per share exercise price for each Stream International Option shall be reduced by an amount equal to the aggregate exercise price of the Additional Options granted in respect of such option. The Additional Options shall be subject to the terms of the MMI Holdings and CST Holdings 1997 Class A Replacement Stock Option Plans, 1997 Class A California Replacement Stock Option Plans and 1997 Class B Replacement Stock Option Plans, as applicable. Notwithstanding all the foregoing in this Section 2.7, if the holder of an outstanding Stream International Option does not consent in writing to the adjustment of such holder's option in accordance with the foregoing, such holder's option shall not be adjusted and no Additional Options shall be granted to such holder. Upon termination of employment of any employee of MMI Holdings or any MMI Subsidiary who has an Adjusted Option, MMI Holdings shall provide to Stream International and CST the name of such employee and the date the employee ceased employment with MMI Holdings or any MMI Subsidiary and shall indicate whether the termination was for cause. Upon Stream International's request from time to time, MMI shall also provide a complete list of employees of MMI Holdings or any MMI Subsidiary who have Adjusted Options, which list shall show such holder's name, Social Security number and address and shall include such other information as Stream International shall reasonably request. 17 Upon termination of employment of any employee of Stream International or any Stream International Subsidiary who has an Additional Options granted by MMI Holdings, Stream International shall provide to MMI Holdings the name of such employee and the date the employee ceased employment with Stream International or a Stream International Subsidiary and shall indicate whether the termination was for cause. Upon MMI Holdings' request from time to time, Stream International shall also provide a complete list of employees of Stream International or any Stream International Subsidiary who have Additional Options granted by MMI Holdings, which list shall show such holder's name, Social Security number and address and shall include such other information as MMI Holdings shall reasonably request. 2.8 Extension of Certain Leases. --------------------------- To the extent Stream International or R.R. Donnelley has any contingent liability following the date hereof, whether as a primary obligor, guarantor or otherwise with respect to any lease of real property to which MMI Holdings or a MMI Subsidiary is a party on the date hereof or which is assigned or purported to be assigned to MMI Holdings or a MMI Subsidiary pursuant to this Agreement or any Ancillary Agreement, MMI Holdings or the MMI Subsidiary, as the case may be, shall cause any such contingent liability of Stream International, any Stream International Subsidiary and R.R. Donnelley to be extinguished upon the earlier of the time of lease renewal or the time of any extension thereof. 2.9 Financial Statements. -------------------- At or prior to the Drop-down, MMI shall deliver to Stream International a complete and correct copy of the audited consolidated balance sheet of MMI as of December 31, 1996, and the related statements of income, stockholders' equity, retained earnings and changes in financial condition of MMI for the fiscal year then ended (collectively, the "Audited Financial Statements"). At or prior to the Drop-down, MMI shall also furnish to Stream International a complete and correct copy of the unaudited balance sheet of MMI as at September 30, 1997 and the related statements of operations and cash flow for the nine months then ended, compiled by MMI (collectively, the "Unaudited Financial Statements"). MMI Holdings represents that, and the Chief Financial Officer or Treasurer of MMI shall deliver a Certificate stating that, the Audited Financial Statements and Unaudited Financial Statements are complete and correct, are in accordance with the books and records of MMI and present fairly the financial condition and results of operations of MMI, as at the dates and for the periods indicated, and have been prepared in accordance with generally accepted accounting principles consistently applied, except that the Unaudited Financial Statements have been prepared for the internal use of management and may not be in accordance with generally accepted accounting principles because of the absence of footnotes normally contained therein and are subject to normal year-end audit adjustments which in the aggregate will not be material. 18 ARTICLE 3 CERTAIN EMPLOYEE AND BENEFIT PLAN MATTERS 3.1 Certain MMI Plans; Assumption of Obligations by MMI. Stream --------------------------------------------------- International or its Subsidiaries maintain the Employee Benefit Plans listed on Schedule 3.1 hereto for the benefit of the U.S. employees of the MMI Business (the "MMI Benefit Plans"). Except as provided in Section 3.4 with respect to the Stream Savings Plan, and concurrently with the action described in Section 2.1.1, Stream International will transfer and assign all MMI Benefit Plans to MMI Holdings, and MMI Holdings will immediately thereafter transfer and assign all MMI Benefit Plans to MMI and MMI will (i) accept such transfer and assignment, (ii) assume and adopt all MMI Benefit Plans, (iii) assume any Liabilities with respect to such MMI Benefit Plans whether arising before or after the date hereof and (iv) assume any Liabilities arising (whether before or after the date hereof) under any Employee Benefit Plan maintained by Stream International or its Subsidiaries, which is not a MMI Benefit Plan, to the extent related to MMI Employees and Former MMI Employees including, but not limited to, under any Employee Benefit Plans maintained up to the date hereof by Stream International or its Subsidiaries under the laws of any country other than the United States (the "MMI Foreign Benefit Plans") with respect to MMI Employees or Former MMI Employees. Nothing in this Agreement shall be construed to prevent MMI from altering or discontinuing any MMI Benefit Plan or MMI Foreign Benefit Plan after the Distribution Date, provided that such alteration or discontinuance relates only to MMI Employees or Former MMI Employees. In addition to the Liabilities assumed pursuant to the foregoing, MMI will assume all Liabilities relating to any Employee Benefit Plan of Stream International or its Subsidiaries which relate to matters occurring prior to the Distribution, such as any Liabilities arising in connection with the administration of any Employee Benefit Plan, to the extent such Liabilities do not relate solely to the CST Business or the Stream International Business or do not relate solely to a specific employee of the CST Business or the Stream International Business. 3.2 Certain Payments by Stream International. Stream International and ---------------------------------------- its Subsidiaries hereby agree to continue making all regular payments, whether for insurance premiums, benefits, expenses or other related purposes to (i) any MMI Benefit Plan, or (ii) any Employee Benefit Plan maintained by Stream International or its Subsidiaries, with respect to any participating MMI Employee or participating Former MMI Employee through the date hereof, consistent with the manner and timing of such payments which are made with respect to any employee or former employee of Stream International or its 19 Subsidiaries who are participating in the same or comparable Employee Benefit Plans maintained by Stream International or its Subsidiaries. The amount of any such payments made after November 30, 1997, or made prior to such date to the extent relating to any period following such date, shall be deducted from the cash allocated to MMI pursuant to Section 2.1.6 and added to the cash allocated to Stream International pursuant to such Section 2.1.6. In addition, Stream International and its Subsidiaries shall continue to make such payments with respect to any MMI Employee whose employment is transferred from Stream International or any of its Subsidiaries to MMI or any MMI Subsidiary within 12 months through the date hereof until the date of such transfer. 3.3 Employees on Certain Leave. If any individual who becomes a MMI -------------------------- Employee is on a leave of absence approved by Stream International or any of its Subsidiaries on his or her Transfer Date and continues on a leave approved by MMI or any MMI Subsidiary after the Transfer Date, then such leave shall continue under MMI's leave policies and MMI shall assume any liability for any benefits provided by Stream International or any Stream International Subsidiary prior to the Transfer Date or any benefits required to be provided to such MMI Employee by law; provided that the maximum amount and duration of such benefits as well as the duration of the leave provided before and after the Transfer Date shall not exceed the limits under the applicable Stream International or Stream International Subsidiary policy. 3.4 Stream Savings Plan. ------------------- 3.4.1 Creation of Multiple Employer Plan. The Stream Savings ---------------------------------- and Retirement Program was established for the benefit of all U.S. employees of Stream International and its Subsidiaries under Section 401(k) of the Code (the "Stream Savings Plan"). On the date hereof the Stream Savings Plan will be adopted by MMI Holdings, the MMI Subsidiaries, CST Holdings and the CST Subsidiaries as additional plan sponsors. Therefore, the Stream Savings Plan will then be maintained by a controlled group of corporations as defined under Section 414 of the Code ("Controlled Group") as well as corporations that are not part of the Controlled Group. In addition, Stream International has approved the amendment of the Stream Savings Plan, effective upon the Distribution Date, into a multiple employer plan in order to continue to provide benefits under the terms of the Stream Savings Plan, as amended, for employees or former employees of any of the corporations that have adopted the Stream Savings Plan, which corporations, as of the Distribution Date, or thereafter, cease to be a member of the Controlled Group that includes Stream International. All assets of the Stream Savings Plan will continue to be maintained in the existing trust established thereunder. 3.4.2 Subsequent Contributions. After the date hereof, MMI ------------------------ Employees will continue to make contributions to the Stream Savings Plan, without interruption, based on elections made by them in accordance with the terms of the Stream Savings Plan. Each MMI Employee who is making salary reduction contributions to the Stream Savings Plan immediately prior to his or her Transfer 20 Date, with respect to compensation paid on or before such Transfer Date, and who continues to be employed by MMI or a MMI Subsidiary until the end of the calendar quarter in which such Transfer Date occurs, will have matching contributions made to the Stream Savings Plan as of the end of such calendar quarter by MMI, with respect to all such contributions made during such calendar quarter. Stream International shall cease making any matching contributions with respect to MMI Employees' salary reduction contributions after making its matching contribution for the calendar quarter which ends immediately prior to the calendar quarter which includes the Transfer Date of MMI Employees. 3.4.3 New Savings Plan. No later than March 31, 1998, MMI shall ---------------- establish a new savings plan under Section 401(k) of the Code with such terms and conditions, subject to the limitations of Code Section 411(d)(6), as MMI may provide and all contributions with respect to MMI Employees will thereafter be made to such new savings plan (the "New MMI Savings Plan"). No later than March 31, 1998, MMI shall direct the trustee of the trust established under the Stream Savings Plan to transfer to the trust established under the New MMI Savings Plan, in such manner and at such time as the trustee of the New MMI Savings Plan and the trustee of the Stream Savings Plan shall reasonably agree, any Assets and Liabilities allocable to the individual accounts maintained with respect to participants and beneficiaries in the Stream Savings Plan who are MMI Employees or Former MMI Employees, subject to the requirements of Section 414 of the Code. 3.5 Employee Matters. MMI agrees to (i) be solely responsible for all ---------------- employment law compliance with respect to the transfer of all MMI Employees; and (ii) to assume any Liabilities, whether arising before or after the date hereof, with respect to any MMI Employee or Former MMI Employee related to (a ) employment with Stream International or any of its Subsidiaries, including, without limitation, any accrued vacation or severance pay, and (b) the transfer of employment to MMI or any MMI Subsidiary or any subsequent termination of such employment. 3.6 Information Regarding Certain Former Employees of R.R. Donnelley. ---------------------------------------------------------------- MMI (or, if applicable, its Subsidiaries) shall assume the obligations under Section 7.2(b)(3) of the 1995 Contribution Agreement including, without limitation, the obligation to provide information relating to the termination of an Eligible RRD Newco Employee (as defined in Section 7.2(b)(6) of the 1995 Contribution Agreement) who is a MMI Employee. Such termination information shall be provided to R.R. Donnelley as such information is available to MMI or any of its Subsidiaries. 21 ARTICLE 4 THE DISTRIBUTION 4.1 Action Prior to the Distribution. Stream International and MMI -------------------------------- Holdings shall take all such action (if any) as may be necessary or appropriate under the securities or blue sky laws of the United States or any individual state (and any comparable laws under any foreign jurisdiction) in connection with the Distribution. 4.2 Stream International Board Action; Conditions Precedent to the -------------------------------------------------------------- Distribution. The Stream International Board shall, in its discretion, - ------------ establish the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution. The consummation of the Distribution shall be subject to the consummation in all material respects of each of the transactions contemplated by Article 2 hereof that are required to be consummated prior to the Distribution; provided, however, that the -------- ------- satisfaction of such condition shall not create any obligation on the part of Stream International to effect the Distribution or in any way limit Stream International's power to abandon the Distribution as set forth in Section 7.8 hereof. ARTICLE 5 INDEMNIFICATION 5.1 Indemnification by Stream International for Stream International ---------------------------------------------------------------- Liabilities. Except as set forth in the Services Agreement between SISC and - ----------- MMI, Stream International shall indemnify, defend and hold harmless MMI Holdings and each Affiliate of MMI Holdings (including the MMI Subsidiaries) and each of their respective directors, officers, employees and agents and each of the heirs, executors, successors and assigns of any of the foregoing (the "MMI Indemnitees") from and against any and all losses, claims, damages, obligations, payments, costs and expenses, matured or unmatured, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, known or unknown (including, without limitation, the costs and expenses of any and all Actions, threatened Actions, demands, assessments, judgments, settlements and compromises relating thereto and reasonable attorneys' fees and any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any such Actions or threatened Actions) (collectively, "Indemnifiable Losses") of the MMI Indemnitees (i) arising out of or due to the failure or alleged failure of Stream International or any of its Affiliates to pay, perform or otherwise discharge in due course any Stream International Liabilities or (ii) arising out of Stream International's or any Stream International Subsidiary's performance of, 22 or failure to perform, any of its covenants or agreements contained in this Agreement. 5.2 Indemnification by MMI for MMI Liabilities. Except as set forth in ------------------------------------------ the Services Agreement between SISC and MMI, MMI Holdings and MMI shall jointly and severally indemnify, defend and hold harmless Stream International and each Affiliate of Stream International (including the Stream International Subsidiaries) and each of their respective directors, officers, employees and agents and each of the heirs, executors, successors and assigns of any of the foregoing (the "Stream International Indemnitees") from and against any and all Indemnifiable Losses (i) arising out of or due to the failure or alleged failure of MMI Holdings or any of its Affiliates to pay, perform or discharge any MMI Assumed Liability (without regard to whether all applicable Consents and Governmental Approvals relating to the assumption thereof have been obtained); (ii) arising out of the failure to obtain any Consents or Governmental Approvals required for the Drop-down and the Distribution; (iii) arising out of any violation or alleged violation of applicable laws, regulations, rules or orders of a Governmental Authority, including, but not limited to, federal or state securities law, in connection with the transactions contemplated by this Agreement, including the Drop-down and the Distribution (other than in connection with the Stream IPO); (iv) arising out of MMI Holdings' or any MMI Subsidiary's performance of, or failure to perform, any obligations described in Section 2.1.4(b)(ii) hereof; (v) arising out of or related to the contingent liabilities referred to in Section 2.8 hereof or (vi) arising out of MMI Holdings' or any MMI Subsidiary's performance of, or failure to perform, any of its covenants or agreements contained in this Agreement. 5.3 Limitations on Indemnification Obligations. The amount which any ------------------------------------------ party (an "Indemnifying Party") is required to pay to any MMI Indemnitee or Stream International Indemnitee (an "Indemnitee") pursuant to Sections 5.1 or 5.2 hereof shall be reduced (including, without limitation, retroactively) by any insurance proceeds or other amounts actually recovered by or on behalf of such Indemnitee in reduction of the related Indemnifiable Loss. To the extent an Indemnifying Party makes full payment in respect of an Indemnifiable Loss and such Indemnifiable Loss is covered by an insurance policy which has not been the subject of an effective assignment to the Indemnifying Party, at the request of the Indemnifying Party, the Indemnitee shall use commercially reasonable efforts at the expense of the Indemnifying Party (which expenses shall be deemed to include any increase in insurance premiums of the Indemnitee attributable to the filing of such claims) to enforce any and all claims under such insurance policy in respect of such Indemnifiable Loss for the benefit of the Indemnifying Party. If any Indemnitee shall have received the full payment required by this Agreement from an Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently actually receive insurance proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to the amount of such insurance proceeds or 23 other amounts actually received (net of any expenses in obtaining the same), but not to exceed the net amount of the payments previously received by the Indemnitee from the Indemnifying Party in respect of such Indemnifiable Loss. An insurer who would otherwise be obligated to pay any claim shall not be relieved of the responsibility with respect thereto or, solely by virtue of the indemnification provisions hereof, have any subrogation rights with respect thereto, it being expressly understood and agreed that no insurer or any other third party shall be entitled to a "windfall" (i.e., a benefit they would not be entitled to receive in the absence of the indemnification provisions) by virtue of the indemnification provisions hereof. Nothing herein shall require an Indemnitee to enforce claims under an insurance policy before proceeding to enforce its rights to indemnification against an Indemnifying Party. 5.4 Procedure for Indemnification. ----------------------------- 5.4.1 Third Party Claims; Notice. If an Indemnitee shall -------------------------- receive notice or otherwise learn of (i) a default or breach by an Indemnifying Party under any agreement or instrument with a third party to which the Indemnifying Party is a party, (ii) the assertion by any other Person of any claim other than a claim relating to Taxes or (iii) the commencement by any such Person of any Action (other than an Action relating to Taxes) (clauses (i), (ii) and (iii) are each hereinafter referred to as a "Third Party Claim") with respect to which an Indemnifying Party may be obligated to provide indemnification pursuant to this Article 5, such Indemnitee shall give such Indemnifying Party written notice thereof within 10 business days after becoming aware of such Third Party Claim ("Third Party Claim Notice"); provided, however, -------- ------- that the failure of any Indemnitee to give notice as provided in this Section 5.4.1 shall not relieve the related Indemnifying Party of its obligations under this Article 5, except to the extent that such Indemnifying Party actually is prejudiced by such failure to give notice. Such notice shall describe the Third Party Claim in reasonable detail, and shall indicate the amount (estimated if necessary) of the Indemnifiable Loss that has been or may be sustained by such Indemnitee. Thereafter, such Indemnitee shall deliver to such Indemnifying Party, within five business days after the Indemnitee's receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitee relating to the Third Party Claim. The Indemnifying Party shall have a period of 20 days after the receipt of a Third Party Claim Notice within which to respond thereto. If such Indemnifying Party does not respond within such 20-day period, such Indemnifying Party shall be deemed to have accepted responsibility to indemnify the Indemnitee in respect of the claims specified in the Third Party Claim Notice and shall have no further right to contest its obligation in respect thereof. If such an Indemnifying Party does respond within such 20-day period and disputes such claim in whole or in part, the Indemnitee and the Indemnifying Party shall resolve the portion of the claim which is disputed in accordance with the provisions of Section 5.4.9 hereof. 24 5.4.2 Defense of Third Party Claims. In case any Third Party ----------------------------- Claim is brought against an Indemnitee and the Indemnifying Party has not disputed its obligation to indemnify the Indemnitee with respect to any part of such Third Party Claim, the Indemnifying Party will be entitled to participate in and to assume the defense thereof to the extent that it may wish, with counsel reasonably satisfactory to such Indemnitee, and after notice from an Indemnifying Party to such Indemnitee of its election so to assume the defense thereof and for so long as the Indemnifying Party diligently pursues such defense, such Indemnifying Party will not be liable to such Indemnitee for any legal or other expenses subsequently incurred by such Indemnitee in connection with the defense thereof; provided, however, that, if the defendants in any such -------- ------- claim include both the Indemnifying Party and one or more Indemnitees and in any Indemnitee's reasonable judgment a conflict of interest between one or more of such Indemnitees and such Indemnifying Party exists in respect of such claim, such Indemnitees shall have the right to employ separate counsel to represent such Indemnitees, and in that event the reasonable fees and expenses of such separate counsel (but not more than one separate counsel reasonably satisfactory to the Indemnifying Party for all Indemnitees with respect to any single Third Party Claim or group of consolidated related Third Party Claims) shall be paid by such Indemnifying Party. If the Indemnifying Party undertakes to assume the defense of a Third Party Claim, it shall promptly notify the Indemnitee in writing of its intention to do so. 5.4.3 Cooperation by Indemnitee. If an Indemnifying Party ------------------------- chooses to defend or to seek to compromise or settle any Third Party Claim, each related Indemnitee shall make available to such Indemnifying Party any personnel or any books, records or other documents within its control or which it otherwise has the ability to make available that are necessary or appropriate for such defense, settlement or comprise, and shall otherwise cooperate in the defense, settlement or compromise of such Third Party Claim. 5.4.4 Limitation on Authority to Settle Claim. Notwithstanding --------------------------------------- anything else in this Section 5.4 to the contrary, neither an Indemnifying Party nor an Indemnitee shall settle or compromise any Third Party Claim over the objection of the other; provided, however, that consent to compromise or -------- ------- settlement shall not be unreasonably withheld, except that consent to any compromise or settlement involving equitable or injunctive relief against any Indemnifying Party or Indemnitee may be withheld by such Indemnifying Party or Indemnitee for any reason. No Indemnifying Party shall consent to any judgment or enter into any settlement or compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to each related Indemnitee of a written release from all Liability with respect to such Third Party Claim. 5.4.5 Other Claims. Any claim on account of any Indemnifiable ------------ Loss which does not result from a Third Party Claim shall be asserted by written notice 25 given by the Indemnitee to the related Indemnifying Party ("Claim Notice"). Such Indemnifying Party shall have a period of 20 days after the receipt of the Claim Notice within which to respond thereto. If such Indemnifying Party does not respond within such 20-day period, such Indemnifying Party shall be deemed to have accepted responsibility to make payment and shall have no further right to contest the validity of such claim. If such Indemnifying Party does respond within such 20-day period and disputes such claim in whole or in part, the Indemnitee and the Indemnifying Party shall resolve the portion of the claim which is disputed in accordance with the provisions of Section 5.4.9 hereof. 5.4.6 Advancement of Certain Expenses. Upon the written demand ------------------------------- of an Indemnitee, an Indemnifying Party shall reimburse or advance funds to such Indemnitee for all Indemnifiable Losses reasonably incurred by it in connection with investigating or defending any Third Party Claim in advance of its final disposition; provided, however, that such reimbursement need be made only upon -------- ------- delivery to the Indemnifying Party of an undertaking by such Indemnitee to repay all amounts so reimbursed or advanced if it shall ultimately be determined that such Indemnitee is not entitled to indemnification under this Article 5 or otherwise. 5.4.7 Subrogation to Rights of Indemnitee. In the event of ----------------------------------- payment by an Indemnifying Party to any Indemnitee in connection with any Third Party Claim of the full amount payable under this Article 5 in respect thereof, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have any right or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or as against any other Person. In such event, such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right or claim. 5.4.8 Named Parties. The parties hereto acknowledge that it may ------------- not be feasible to substitute MMI for Stream International as a named party in any existing Actions constituting MMI Assumed Liabilities. In such event, Stream International shall remain as a named party and will be able to participate in the defense of such Action (with the liability regarding the legal or other expenses for such participation to be determined pursuant to Section 5.4.2 hereof), but following the date hereof, MMI Holdings and MMI shall assume the defense of any such Action in accordance with the provisions of this Section 5.4 and Stream International and its Affiliates shall cooperate with MMI Holdings and MMI as contemplated by Section 5.4 and Article 6 hereof. 5.4.9 Dispute Resolution. If an Indemnifying Party disputes all ------------------ or part of a Third Party Claim pursuant to Section 5.4.1 or all or part of a claim other than a Third Party Claim pursuant to Section 5.4.5, such dispute shall be resolved in 26 accordance with the procedure set forth in this Section 5.4.9. Within 10 days after notice by the Indemnifying Party that it disputes the claim in question, the Indemnitee and the Indemnifying Party shall designate in writing one arbitrator to resolve the dispute; provided that if the Indemnitee and the Indemnifying Party cannot agree on an arbitrator within such 10-day period, the arbitrator shall be selected by the Boston, Massachusetts, office of the American Arbitration Association. The arbitrator so designated shall not be an Affiliate of the Indemnitee or Indemnifying Party or any employee of, or consultant to, the Indemnitee, the Indemnifying Party or any of their Affiliates. Within 15 days after the designation of the arbitrator, the Indemnitee, the Indemnifying Party and the arbitrator shall meet, at which time the Indemnitee and the Indemnifying Party shall each be required to set forth in writing all disputed issues and a proposed ruling on each such issue. The arbitrator shall thereupon set a date for a hearing, which shall be no later than 30 days after the submission of the written proposals described in the immediately preceding sentence, to discuss each of the issues identified by the Indemnitee and the Indemnifying Party. Each of the Indemnitee and the Indemnifying Party shall have the right to be represented by counsel. The arbitration shall be governed by the Commercial Arbitration Rules of the American Arbitration Association; provided, however, that the arbitrator shall have sole discretion with regard to the admissibility of evidence. The arbitrator shall use his or her best efforts to rule on each disputed issue within 30 days after the completion of the hearing described in the immediately preceding paragraph. The determination of the arbitrator as to the resolution of any dispute shall be binding and conclusive upon all parties hereto. All rulings of the arbitrator shall be in writing and shall be delivered to the Indemnitee and the Indemnifying Party. The attorneys' fees of the Indemnitee and the Indemnifying Party in any arbitration shall be borne by them as determined by the arbitrator, together with the fees of the arbitrator and the costs and expenses of the arbitration. Any arbitration pursuant to this Section 5.4.9 shall be conducted in Boston, Massachusetts. Any arbitration award may be entered in and enforced by any court having jurisdiction thereover and shall be final and binding upon the parties. 5.4.10 Determination of Time of Payment of Indemnitee. With ---------------------------------------------- respect to any claim made by an Indemnitee pursuant to this Article 5, the Indemnifying Party shall have no further right to contest its obligations in respect thereof (or a portion thereof, if applicable pursuant to clause (ii) of this Section 5.4.10) following the occurrence of a Determination Event with respect to such claim (or a portion thereof, if applicable pursuant to clause (ii) of this Section 5.4.10), and the Indemnifying Party thereafter shall pay all Indemnifiable Losses related to such claim or applicable portion thereof on their respective Due Dates. With respect to a reimbursement or advance of funds made by an Indemnifying Party pursuant to Section 5.4.6, the Indemnifying Party shall have no right to contest the right of the Indemnitee to indemnification (and, hence, no right to demand repayment pursuant 27 to the proviso clause of Section 5.4.6) with respect to the claim to which the reimbursement or advance relates (or portion thereof, if applicable pursuant to clause (ii) of this Section 5.4.10) following the occurrence of a Determination Event with respect to such claim (or portion thereof, if applicable pursuant to clause (ii) of this Section 5.4.10). "Determination Event" shall mean the earliest of (i) the failure of the Indemnifying Party to respond to a Third Party Claim Notice or Claim Notice within the applicable 20-day period, (ii) with respect to any portion of a claim, the failure of the Indemnifying Party to dispute within the applicable 20-day period, its obligation to pay such portion of the claim in its response to a Third Party Claim Notice or Claim Notice, (iii) the written acknowledgment of the Indemnifying Party of its obligation hereunder with respect to such claim or (iv) the decision of an arbitrator pursuant to Section 5.4.9 hereof upholding the obligation of the Indemnifying Party in respect of such claims. "Due Date" shall mean (a) with respect to a Third Party Claim that has been assumed by the Indemnifying Party pursuant to Section 5.4.2 hereof, as and when any sums related to such claim become due and payable, (b) with respect to any Third Party Claim whose defense has not been assumed by the Indemnifying Party, upon written demand by the Indemnitee and (c) with respect to any claim on account of any Indemnifiable Loss which does not result from a Third Party Claim, upon written demand therefor by the Indemnitee; provided, however, that in no event shall the Due Date for any claim occur prior - -------- ------- to the Determination Event for such claim. 5.5 Remedies Cumulative. The remedies provided in this Article 5 shall ------------------- be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party; provided, however, that all remedies sought or asserted by an Indemnitee -------- ------- against an Indemnifying Party with respect to an Indemnifiable Loss shall be limited by and be subject to the provisions of this Article 5. 5.6 Nature of Indemnity Payments. All payments by the Indemnifying Party ---------------------------- under Section 5.1 or 5.2 hereof shall be treated, to the maximum extent allowable under applicable Tax laws, as an adjustment to the MMI Assets contributed to MMI Holdings in connection with the Drop-down. The amount of each payment by the Indemnifying Party shall be computed after taking into account all Tax consequences to the Indemnitee, or any Affiliate, of (i) the receipt of (or the right to receive) the payment and (ii) the event or incurrence of the liability that gave rise to the right to receive the payment. In determining the Tax consequences to the Indemnitee, or any Affiliate, for purposes of this Section 5.6, any Tax detriment, in the case of a payment, and any Tax benefit, in the case of an event or an incurrence of a liability, shall be taken into account in the taxable years or periods in which the Indemnitee, or any Affiliate, is required to pay additional Taxes by reason of the payment, or is entitled to a refund of Tax or a reduction in the amount of Taxes it would otherwise be required to pay by reason of the event or the incurrence of the liability. 28 ARTICLE 6 ACCESS TO INFORMATION AND SERVICES 6.1 Provision of Corporate Records. Prior to or as soon as practicable ------------------------------ following the date hereof, Stream International shall deliver to MMI Holdings all existing corporate books and records in Stream International's possession relating to the MMI Business, including original corporate minute books, stock ledgers and certificates and corporate seals of each of MMI Holdings and each MMI Subsidiary, and all active agreements, active litigation files and records of filings; provided, however, that Stream International shall retain its own -------- ------- original corporate minute books, stock ledgers and certificates and corporate seals. Stream International shall also provide to MMI Holdings, unless already in the possession of MMI Holdings or a MMI Subsidiary and only to the extent that Stream International maintains them, lists of trademarks, trade names and copyrights included in the MMI Assets. 6.2 Access to Information. From and after the date hereof, Stream --------------------- International shall afford to MMI Holdings and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to third parties possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within Stream International's possession relating to the MMI Business, insofar as such access is reasonably required by MMI Holdings. MMI Holdings likewise shall afford to Stream International and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to third parties possessing information and providing reasonable access to its own employees who are in possession of relevant information) and duplicating rights during normal business hours to Information within MMI Holdings' possession relating to the Stream International Business, insofar as such access is reasonably required by Stream International. Information may be requested under this Section 6.2 for, without limitation, audit, accounting, claims, litigation, insurance and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing this Agreement and the transactions contemplated hereby. 6.3 Production of Witnesses. From and after the date hereof, each of MMI ----------------------- Holdings and Stream International shall use reasonable efforts to make available to the other upon written request, its and its Subsidiaries' officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved. 29 6.4 Reimbursement. Except to the extent otherwise contemplated by the ------------- Services Agreements or any other Ancillary Agreement, a party providing Information or personnel to the other party under this Article 6 shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payments for such amounts, relating to supplies, disbursements and other out-of-pocket expenses, as may be reasonably incurred in providing such Information or personnel; provided, however, that no such reimbursements shall -------- ------- be required for the salary or cost of fringe benefits or similar expenses pertaining to employees or directors of the providing party. 6.5 Retention of Records. Except as otherwise required by law or agreed -------------------- to in writing, each of Stream International and MMI Holdings shall retain, and shall cause each of its Subsidiaries to retain, in accordance with such party's record retention program all material Information within such parties' possession or under its control relating to the other and the other's Subsidiaries. Notwithstanding the foregoing, in lieu of retaining any specific Information, Stream International and MMI Holdings may offer in writing to deliver such Information to the other and if such offer is not accepted within 45 days, the offered Information may be destroyed or otherwise disposed of at any time. If a recipient of such offer shall request in writing prior to the scheduled date for such destruction or disposal that any of the information be delivered to such requesting party, the party proposing the destruction or disposal shall promptly arrange for the delivery of such of the information as was requested at the cost of the requesting party. 6.6 Confidentiality. Each of Stream International and MMI Holdings shall --------------- hold, and shall cause its Subsidiaries, Affiliates, employees, consultants and advisors to hold, in strict confidence all Information concerning the other party and its Affiliates, including without limitation information which the other party and its Affiliates are required by customer or other agreements to keep confidential, obtained by it prior to the Distribution Date or furnished by the other or the other's representatives pursuant to this Agreement (except to the extent that such Information has been (i) in the public domain through no fault of such party or (ii) later lawfully acquired from other sources by such party), and each party shall not release or disclose such Information to any other Person, except as reasonably required to its auditors, attorneys, financial advisors, bankers and other consultants and advisors, unless compelled to disclose by judicial or administrative process or, as advised by its counsel, by other requirements of law or as necessary to enforce its rights under this Agreement. 6.7 Financial Statements. -------------------- 6.7.1 MMI Holdings shall deliver to Stream International: (a) no later than December 31, 1997, the MMI Balance Sheet; 30 (b) within 90 days after the end of each fiscal year of MMI Holdings, an audited balance sheet of MMI Holdings as at the end of such year and audited statements of income and of cash flows of MMI Holdings for such year, certified by certified public accountants of established national reputation selected by MMI Holdings, and prepared in accordance with GAAP; and (c) within 45 days after the end of each fiscal quarter of MMI Holdings, an unaudited balance sheet of MMI Holdings as at the end of such quarter, and unaudited statements of income and of cash flow of MMI Holdings for such fiscal quarter and for the current fiscal year to the end of such fiscal quarter. 6.7.2 The foregoing financial statements shall be prepared on a consolidated basis if MMI Holdings then has any subsidiaries. The financial statements delivered pursuant to clauses (a) and (b) of Section 6.7.1 shall be accompanied by a certificate of the chief financial officer of MMI Holdings stating that such statements have been prepared in accordance with GAAP (except as noted) and fairly present the financial condition and, with respect to the financial statements described in clause (b), results of operations of MMI Holdings at the date thereof and for the periods covered thereby, except that the financial statements may not be in accordance with GAAP because of the absence of footnotes normally contained therein and are subject to normal year- end audit adjustments which in the aggregate will not be material. 6.7.3 MMI Holdings' obligations under clauses (b) and (c) of Section 6.7.1 shall terminate upon the earliest of (i) the sale of all or substantially all of the assets of MMI or MMI Holdings, (ii) the sale of all or substantially all of the outstanding shares of capital stock of MMI Holdings or MMI (by merger, purchase or otherwise Holdings or MMI but in no event including any transaction required to effect the Distribution) or (iii) the consummation of an initial public offering of equity securities of MMI registered under the Securities Act of 1933, as amended. 6.7.4 Stream International shall deliver to MMI Holdings, no later than December 31, 1997, the Stream International Balance Sheet, which shall be accompanied by a certificate of the chief financial officer of Stream International stating that such balance sheet has been prepared in accordance with GAAP (except as noted) and fairly presents the financial condition of Stream International as of the date thereof, except that the balance sheet may not be in accordance with GAAP because of the absence of footnotes normally contained therein and are subject to normal year-end adjustments which in the aggregate will not be material. 31 ARTICLE 7 MISCELLANEOUS 7.1 Rule of Construction. Notwithstanding any other provisions in this -------------------- Agreement, in the event and to the extent that there shall be a conflict between the provisions of this Agreement (or any Ancillary Agreement or Conveyancing Instrument) and the provisions of the Tax Indemnification Agreements or the Services Agreements, the provisions of the Tax Indemnification Agreements or the Services Agreements, as the case may be, shall control. Subject to the preceding sentence, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the provisions of any Ancillary Agreement or Conveyancing Instrument, this Agreement shall control. Except as otherwise specifically provided in any particular Ancillary Agreement, all provisions of Section 2.1.3 and of Articles 5 and 7 shall apply to each agreement constituting an Ancillary Agreement. 7.2 Survival of Agreements. Except as otherwise contemplated by this ---------------------- Agreement, all covenants and agreements of the parties contained in this Agreement and in each Ancillary Agreement, and liabilities for the breach of any obligations contained herein or therein, shall survive the date hereof. 7.3 Expenses. Except as otherwise set forth in this Agreement or any -------- Ancillary Agreement, all costs and expenses incurred prior to or on the earlier of (i) January 10, 1998 and (ii) the closing of the Stream IPO by CST Holdings, MMI Holdings and/or Stream International in connection with the preparation, execution, delivery and implementation of this Agreement, the Ancillary Agreements, the Contribution Agreement, dated as of even date hereto, among Stream International, SISC, CST Holdings and CST (the "CST Contribution Agreement"), the Ancillary Agreements (as defined in the CST Contribution Agreement) and in connection with the consummation of the transactions contemplated by this Agreement and the CST Contribution Agreement, but unpaid as of the earlier of (i) January 10, 1998 and (ii) the closing of the Stream IPO (collectively, the "Restructuring Expenses"), shall be paid equally by CST Holdings and MMI Holdings to the extent that appropriate documentation concerning such costs and expenses shall be provided by CST Holdings, MMI Holdings and Stream International to CST Holdings and MMI Holdings; provided that no costs or expenses shall be required to be paid to the extent incurred after January 10, 1998. 7.4 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the domestic substantive laws of The Commonwealth of Massachusetts without regard to any choice or conflict of law rule or provision that would result in the application of the domestic substantive laws of any other jurisdiction. 32 7.5 Notices. Any notice, request, demand, claim or other communication ------- hereunder shall be in writing and shall be delivered by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below, and shall be deemed duly given on the date which is three days after such notice, request, demand, claim or other communication is sent: to Stream International: Stream International Inc. 275 Dan Road Canton, Massachusetts 02021 Telecopy: (781) 830-7465 Attention: Treasurer to MMI Holdings and MMI: Modus Media International Holdings, Inc. 690 Canton Street Westwood, Massachusetts 02090 Telecopy: (781) 407-3831 Attention: Treasurer Notwithstanding the foregoing, any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 7.6 Amendments. This Agreement may not be modified or amended except by ---------- an agreement in writing signed by the parties hereto; provided, however, that no --------- ------- change to the definition of MMI Assumed Liabilities or defined terms used therein or to the definitions of terms incorporated by reference to the CST Contribution Agreement, which adversely affects CST Holdings or its Subsidiaries, shall be effective unless agreed to in writing by CST Holdings. 7.7 Successors and Assigns. This Agreement and all of the provisions ---------------------- hereof shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any corporation with which, or into which, either party may be merged or which may succeed to its assets or business; 33 provided, however, that no party may assign, delegate or otherwise transfer its - -------- ------- rights or obligations under this Agreement except to a Person that acquires all or substantially all of the assets or business of such party (whether by merger, consolidation, sale of stock, sale of assets or otherwise). Each party agrees not to transfer all or substantially all of its assets unless the transferee agrees in writing to be bound by this Agreement. 7.8 Abandonment of Distribution. The Distribution may be abandoned at --------------------------- any time prior to its consummation by and in the sole discretion of the Stream International Board without the approval of MMI Holdings, MMI or of Stream International's stockholders. 7.9 No Third Party Beneficiaries. Except for R.R. Donnelley in respect ---------------------------- of Section 2.8 hereof, the provisions of Article 5 hereof relating to Indemnitees and the proviso clause of Section 7.6 and except for successors and assigns permitted by Section 7.7, this Agreement is solely for the benefit of the parties hereto and their respective Subsidiaries and Affiliates and shall not be deemed to confer upon third parties any remedy, claim, Liability, reimbursement, claim of action or other right in excess of those existing without reference to this Agreement. 7.10 Titles and Headings. Titles and headings to sections herein are ------------------- inserted for the convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. 7.11 Exhibits and Schedules. The Exhibits and Schedules to this Agreement ---------------------- shall be construed with and as an integral part of this Agreement. 7.12 Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. 7.13 Legal Enforceability. Any provision of this Agreement which is -------------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision or remedies otherwise available to any party hereto in any other jurisdiction. Without prejudice 34 to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. 7.14 Entire Agreement. This Agreement, all Schedules and Exhibits hereto, ---------------- and all agreements and instruments delivered by the parties pursuant hereto represent the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and supersede all prior oral and written and all contemporaneous oral negotiations, commitments and understandings between such parties. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. STREAM INTERNATIONAL INC. By /s/ Judith Salerno ------------------------------------- Name: Judith Salerno Title: President and Chief Operating Officer MODUS MEDIA INTERNATIONAL HOLDINGS, INC. By /s/ Terence M. Leahy ------------------------------------- Terence M. Leahy Chief Executive Officer and President MODUS MEDIA INTERNATIONAL, INC. By /s/ Terence M. Leahy ------------------------------------- Terence M. Leahy Chief Executive Officer and President 35 SCHEDULE A MMI Subsidiaries
New name to be adopted prior to, as of or following the Jurisdiction of Name of Subsidiary date hereof Incorporation - ------------------ ----------- ------------- Modus Media Delaware International, Inc. Donnelley Documentation Modus Media International Delaware Services (Ireland) Limited Documentation Services (Ireland) Limited R.R. Donnelley Holdings Modus Media International Delaware (Australia) Limited Holdings (Australia) Limited R.R. Donnelley (Ireland) Modus Media International Delaware Limited (Ireland) Limited Stream International Pty. Ltd. Modus Media International Australia Pty. Ltd. Stream International Ltd. Modus Media International Brazil Ltda. Stream International Leinster Modus Media International British Virgin Unlimited Leinster Unlimited Islands Stream International France, Modus Media International, S.A. France S.A. Modus Media International Hong Kong (Hong Kong) Pte Limited Stream International Ireland Modus Media International Ireland (Holdings) Ireland (Holdings) Stream International Modus Media International Ireland Dublin Dublin
36 Stream International Modus Media International Ireland Kildare Kildare Stream International Modus Media International Ireland Fulfillment Services Fulfillment Services Donnelley Sasatoku KK Japan Stream International KK Modus Media International Japan Kabushiki Kaisha Stream International Modus Media International Korea Korea Ltd. Korea Ltd. Modus Media (M) Sdn. Bhd. Malaysia Stream International S.A. Modus Media International S.A Mexico de C.V. de C.V. Stream International B.V. Modus Media International B.V. The Netherlands Stream International Pte. Ltd. Modus Media International Pte. Singapore Ltd. Fulfill Plus Pte. Ltd. Singapore Taiwan Modus Media Taiwan International Limited [formation in progress] Stream International Limited Modus Media International United Kingdom Limited Modus Media International [name reserved] PRC Software Services (Shenzhen) Co. Ltd. [formation in progress]
37 SCHEDULE B Stream International Subsidiaries
New name to be adopted prior to, as of or following the Jurisdiction of Name of Subsidiary date hereof Incorporation - ------------------ ----------- ------------- Stream International Services Delaware Corp. (f/k/a Stream International Inc.) Corporate Software Securities Stream International Massachusetts Corporation Securities Corporation Corporate Software Europe Stream International Europe The Netherlands B.V. B.V. Stream International N.I. United Kingdom Limited Stream International Inc. Nevada
38 SCHEDULE C Certain Asset and Stock Transfer Agreements 1. Contribution Agreement between Stream International Holdings Inc. and Modus Media International, Inc. (now known as Modus Media International Holdings, Inc.) dated November 6, 1997 (for the transfer of Modus Media International Korea Limited shares from Stream International to MMI Holdings). 2. Contribution Agreement between MMI Holdings and MMI dated December 12, 1997 (for the transfer of Modus Media International Korea Limited shares from MMI Holdings to MMI). 39 SCHEDULE 3.1 I. The former MMI Employees are listed in the Letter Agreement II. MMI Benefit Plans 1. Employee Welfare Benefit Plans for the Benefit of Employees of Modus Media International currently including, Health Plans, Long Term Disability Plan, Group Life Insurance and AD & D Plan, Dental Plan, Employee Assistance Plan, Tuition Assistance Plan and Short Term Disability Plan. 2. Supplemental Life Insurance Plans for Employees of Modus Media International a. Allmerica Group Variable Life for certain highly paid employees. b. New York Life Insurance Company Executive Life Insurance Premium Payment Program for certain Director level employees or above. c. New York Life Insurance Company Supplemental Whole Life Insurance Payroll Deduction Program. d. Unum Life Insurance Company Supplemental Life Insurance Payroll Deduction Program. 3. Pre-Tax Contribution Plan for Employees of Modus Media International 4. Dependent Care Flexible Spending Accounting Plan for Employees of Modus Media International 5. Health Care Flexible Spending Account Plan for Employees of Modus Media International 6. Stream Savings and Retirement Program for MMI Employees and Former MMI Employees 7. Business Travel Accident Insurance for Employees of Modus Medial International 40 8. Computer Reimbursement Program for Employees of Modus Media International 9. Adoption Assistance Plan for Employees of Modus Media International 10. Matching Charitable Gifts Program 11. Paid Time Off Policy 41 EX-10.2 5 TAX SHARING AGREEMENT EXHIBIT 10.2 TAX SHARING AGREEMENT This TAX SHARING AGREEMENT (the "Agreement"), dated as of December 15, 1997, is among Stream International Inc., a Delaware corporation formerly known as Stream International Holdings Inc. ("Stream"), Modus Media International Holdings, Inc., a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of Stream ("MMI Holdings"), Modus Media International, Inc., a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of MMI Holdings ("MMI"), Corporate Software & Technology Holdings, Inc., a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of Stream ("CST Holdings"), and Corporate Software & Technology, Inc., a Delaware corporation and, as of the date hereof, a wholly owned subsidiary of CST Holdings ("CST"). WHEREAS, in connection with an initial public offering of common stock of Stream, Stream intends to: (i) contribute the MMI Business (as defined below) to MMI Holdings, in exchange for voting common stock and preferred stock of MMI Holdings and the assumption by MMI Holdings of certain liabilities associated with the MMI Business, all in accordance with the terms of the MMI Contribution Agreement, as defined below (the "MMI Drop-down"); (ii) cause MMI Holdings to contribute the MMI Business to Modus Media International, Inc., a Delaware corporation ("MMI"), in exchange for voting common stock of MMI and the assumption by MMI of certain liabilities associated with the MMI Business; (iii) cause Stream International Services Corp., a Delaware corporation formerly known as Stream International Inc. and a wholly owned subsidiary of Stream ("SISC"), to contribute the CST Business (as defined below) to CST Holdings, in exchange for voting common stock of CST Holdings and the assumption by CST Holdings of certain liabilities associated with the CST Business, all in accordance with the CST Contribution Agreement, as defined below (the "CST Drop-down" and, collectively with the MMI Drop-down, the "Drop-down"); (iv) cause CST Holdings to contribute the CST Business to Corporate Software & Technology, Inc., a Delaware corporation ("CST"), in exchange for voting common stock of CST and the assumption by CST of certain liabilities associated with the CST Business; (v) cause SISC to distribute all of the voting common stock of CST Holdings held by SISC to Stream as a dividend; and (v) thereafter distribute all of the voting common stock of MMI Holdings and CST Holdings held by Stream to the shareholders of Stream as a dividend (such distribution, the "Distribution", and all of the foregoing collectively referred to as the "Reorganization"); WHEREAS, the Contribution Agreements contemplate the execution and delivery of this Agreement, the purpose of which is to provide for the allocation among the Stream Group (as hereinafter defined), the MMI Group (as hereinafter defined), and the CST Group (as hereinafter defined) of all responsibilities, liabilities and benefits relating to or affecting Taxes (as hereinafter defined) paid or payable by any of them for all Pre-Drop-down Taxable Periods (as hereinafter defined), and to provide for certain other matters. NOW THEREFORE, in consideration of the mutual agreements, provisions and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE 1 DEFINITIONS ----------- Capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Contribution Agreements. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable both to the singular and the plural forms of the terms defined): "Affiliate" means with respect to any entity, any other individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust or unincorporated organization which directly or indirectly controls, is controlled by or is under common control with such entity; provided, however, that each of (i) members of the Stream Group, (ii) -------- ------- members of the CST Group, and (iii) members of the MMI Group will not be deemed Affiliates of each other for purposes of this Agreement. "Affiliated Group" means an affiliated group of corporations within the meaning of Code section 1504(a), without regard to Section 1504(b), for the taxable period in question. "Business" means any of the CST Business, the MMI Business or the Stream Business. "CST Affiliated Group" means, for each taxable period beginning after the Drop-down Date and the Short Period, CST Holdings and, if such an Affiliated Group exists, members of the Affiliated Group of which CST Holdings is the common parent (or of which CST Holdings would be the common parent if each stockholder of CST Holdings immediately after the Drop-down were an individual). -2- "CST Business" has the meaning set forth in the CST Contribution Agreement. "CST Contribution Agreement" means the Contribution Agreement dated as of the date hereof among Stream, SISC, CST Holdings, and CST. "CST Drop-down" has the meaning ascribed in the Preamble. "CST Group" means, with respect to any taxable period, CST Holdings and the corporations that were members of the Stream Affiliated Group on or prior to the Drop-down Date and that are members of the CST Affiliated Group immediately after the Drop-down Date. "CST Joint Tax Return" means any Tax Return that includes (i) a member of the Stream Group and a member of the CST Group or (ii) Tax Items of the CST Business and Tax Items of the Stream Business, in each case determined under the principles of Section 3.01. "Code" means the Internal Revenue Code of 1986, as amended, and shall include corresponding provisions of any subsequently enacted federal Tax laws. "Contribution Agreements" mean the MMI Contribution Agreement and the CST Contribution Agreement. "Distribution" has the meaning ascribed in the Preamble. "Distribution Date" means the date on which the Distribution is effected. "Drop-down" has the meaning ascribed in the Preamble. "Drop-down Date" means the date on which the MMI Drop-down and the CST Drop-down is effected. "Final Determination" means the final resolution of any liability for Taxes for a taxable period. A Final Determination shall result from the first to occur of: (i) the expiration of 30 days after IRS acceptance of a Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment on IRS Form 870 or 870-AD (or any successor comparable form or the expiration of a comparable period with respect to any comparable agreement or form under the laws of other jurisdictions) unless, within such period, the taxpayer gives notice to the other party of the taxpayer's intention to attempt to recover all or part of any amount paid pursuant to the Waiver by the filing of a timely claim for refund; -3- (ii) a decision, judgment, decree, or other order by a court of competent jurisdiction that is not subject to further judicial review (by appeal or otherwise) and has become final; (iii) the execution of a closing agreement under Section 7121 of the Code or the acceptance by the IRS or its counsel of an offer in compromise under Section 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) the expiration of the time for filing a claim for refund or for instituting suit in respect of a claim for refund disallowed in whole or part by the IRS; (v) any other final disposition of the Tax liability for such period by reason of the expiration of the applicable statute of limitations; or (vi) any other event that the parties agree in writing is a final and irrevocable determination of the liability at issue. "Group" means any of the CST Group, the MMI Group or the Stream Group. "Guaranty" means each of the guaranties made as of the date hereof, pursuant to which RRD guarantees the payment to Stream in respect of certain obligations of MMI Holdings and MMI, in one case, and CST Holdings and CST, in the other case, under the respective Contribution Agreements and this Agreement. "IRS" means the United States Internal Revenue Service or any successor thereto, including but not limited to its agents, representatives, and attorneys. "Income Taxes" means all Taxes imposed upon, or measured by, income and such related franchise, excise and similar Taxes as have been customarily included in the provision for income taxes on the financial statements for periods ending prior to the Drop-down Date of Stream and its Affiliates. "Joint Tax Returns" means CST Joint Tax Returns and/or MMI Joint Tax Returns, and any Tax Return (other than a CST Joint Tax Return or an MMI Joint Tax Return) that includes (i) a member of the CST Group and a member of the MMI Group, or (ii) Tax Items of the CST Group and Tax Items of the MMI Group, in each case determined under the principles of Section 3.01. "Loss Attributes" has the meaning set forth in Section 3.01(d)(vi) of this Agreement. -4- "Loss Item" has the meaning set forth in the Tax Reimbursement Agreement. "MMI Affiliated Group" means, for each taxable period beginning after the Drop-down Date and the Short Period, MMI Holdings and, if such an Affiliated Group exists, members of the Affiliated Group of which MMI Holdings is the common parent (or of which MMI Holdings would be the common parent if each stockholder of MMI Holdings immediately after the Drop-down were an individual). "MMI Business" has the meaning set forth in the MMI Contribution Agreement. "MMI Contribution Agreement" means the Contribution Agreement dated as of the date hereof between Stream, MMI Holdings, and MMI. "MMI Drop-down" has the meaning ascribed in the Preamble. "MMI Group" means, with respect to any taxable period, MMI Holdings and the corporations that were members of the Stream Affiliated Group on or prior to the Drop-down Date and that are members of the MMI Affiliated Group immediately after the Drop-down Date. "MMI Joint Tax Return" means any Tax Return that includes (i) a member of the Stream Group and a member of the MMI Group or (ii) Tax Items of the MMI Business and Tax Items of the Stream Business, in each case determined under the principles of Section 3.01. "Other Taxes" means all Taxes other than Income Taxes. "Post-Drop-down Taxable Periods" means all taxable years or periods beginning after the Drop-down Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Drop-down Date. "Pre-Drop-down Taxable Periods" means all taxable years or periods ending on or before the Drop-down Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Drop-down Date. "RRD" means R. R. Donnelley & Sons Co., a Delaware corporation. "Reorganization" has the meaning ascribed in the Preamble. "Reorganization Taxes" has the meaning set forth in the Tax Reimbursement Agreement. -5- "Short Period" means, with respect to any Straddle Period, the period beginning at the beginning of such Straddle Period and ending on and including the Drop-down Date. "Stream Affiliated Group" means, for each taxable period, the Affiliated Group of which Stream or any successor of Stream is the common parent. "Stream Business" has the meaning ascribed to "Stream International Holdings Business" in the Contribution Agreements. "Stream Group" means, with respect to any taxable period, the corporations that were members of the Stream Affiliated Group on or prior to the Drop-down Date, exclusive of the corporations that are included in the CST Affiliated Group or the MMI Affiliated Group immediately after the Drop-down Date. "Straddle Period" means any taxable year or period that begins before and ends after the Drop-down Date. "Tax" means any federal, state, local or foreign income, profits, alternative or add-on minimum, severance, sales, use, service, service use, ad valorem, gross receipts, license, value added, franchise, transfer, recording, real estate, withholding, payroll, employment, excise, occupation, unemployment insurance, social security, business license, business organization, stamp, environmental, premium or property tax, or any other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any related interest, penalties and additions to any such tax, imposed by any taxing authority upon the Stream Group, the MMI Group, the CST Group or any of their respective members or divisions or branches. "Tax Deficiency" means an assessment of Tax, as a result of a Final Determination. "Tax Detriment" means any item of income, gain, recapture of credit or any other Tax Item which increases Taxes paid or payable. "Tax Item" means any item of income, gain, loss, deduction, credit, provisions for reserves, recapture of credit, receipts, proceeds or any other item which increases or decreases Taxes paid or payable, including an adjustment under Code Section 481 resulting from a change in accounting method. "Tax Refund" means a refund or credit of Tax as the result of a Final Determination. -6- "Tax Reimbursement Agreement" means the agreement entered into as of the date hereof between RRD and Stream with respect to certain Tax liabilities. "Tax Return" means any return, filing, questionnaire, information return or other document required to be filed, including requests for extensions of time, filings made with estimated tax payments, claims for refund and amended returns that may be filed, for any period with any taxing authority (whether domestic or foreign) in connection with any Tax (whether or not a payment is required to be made with respect to such filing). "Transaction Taxes" mean any Other Taxes payable in connection with consummation of the transactions contemplated by the Reorganization, including without limitation the transfer by SISC of Belgium branch operations to CST Holdings, the transfer by SISC of all outstanding shares of Corporate Software & Technology GmbH ("CST GmbH") to CST Holdings and the transfer by SISC of the German branch operations to CST GmbH, the formation by CST Holdings of Corporate Software & Technology B.V. ("CST BV") and the transfer by Stream International Europe B.V. ("SISC BV") of certain Dutch operations to CST BV, the transfer by SISC of French branch operations to Corporate Software & Technology, S.A., the sale by Corporate Software & Technology Limited of all outstanding shares of Stream International N.I. Limited ("SINI") and all outstanding shares of Modus Media International Limited ("MMI UK") to Stream and the contribution by Stream of the shares of SINI and the shares of MMI UK to SISC, the contribution of all outstanding shares of Modus Media International Korea Ltd. by Stream to MMI Holdings, and the contribution of all outstanding shares of Modus Media International, S.A. de C.V. by Stream to MMI Holdings, and any transfers of the aforesaid operations and shares by CST Holdings and MMI Holdings to CST and MMII, respectively. ARTICLE 2 FILING OF TAX RETURNS --------------------- Section 2.01 Manner of Filing. All Tax Returns required to be filed after ---------------- the Drop-down Date shall be filed on a timely basis (including extensions) by the party responsible for such filing under this Agreement. Unless otherwise required by applicable law, all Tax Returns filed after the date of this Agreement shall be prepared on a basis consistent with the elections, accounting methods, conventions, and principles of taxation used for the most recent taxable periods for which Tax Returns involving similar Tax Items have been filed, to the extent that a failure to do so would reasonably be expected to result in a Tax Detriment to another party hereto or a member of its Affiliated Group. Subject to the provisions of this Agreement, all -7- decisions relating to the preparation of Tax Returns shall be made in the sole discretion of the party responsible under this Agreement for such preparation. Notwithstanding anything in this Agreement to the contrary, however, in no event shall any Tax Return be filed in a manner inconsistent with Section 8 of the Tax Reimbursement Agreement. RRD is an intended third-party beneficiary of the preceeding sentence. Section 2.02 Pre-Drop-down Tax Returns. ------------------------- (a) Consolidated Returns. The Stream consolidated federal income Tax -------------------- Returns required to be filed for all Pre-Drop-down Taxable Periods, that have not been previously filed, shall be prepared and filed by Stream. Stream, MMI Holdings and CST Holdings will cooperate in good faith to determine the appropriate amount of Tax Items primarily related to the Stream Business, the MMI Business and the CST Business (determined under the principles of Section 3.01) to be reflected in the consolidated federal income Tax Returns of Stream for Pre-Drop-down Taxable Periods. (b) Combined, Consolidated and Unitary Returns. All state and local ------------------------------------------ combined, consolidated and unitary corporate CST and MMI Joint Tax Returns with respect to Income Taxes which are required to be filed for all Pre-Drop-down Taxable Periods, which have not been previously filed, shall be prepared and filed by Stream. Stream, MMI Holdings and CST Holdings will cooperate in good faith to determine the appropriate amount of Tax Items primarily related to the Stream Business, the MMI Business and the CST Business (determined under the principles of Section 3.01) to be reflected in such Returns of Stream for Pre- Drop-down Taxable Periods. (c) Other Returns. All other Tax Returns not described elsewhere in ------------- this Section 2.02 that are required to be filed for Pre-Drop-down Taxable Periods, including Tax Returns in respect of Transaction Taxes and Joint Tax Returns (other than CST and MMI Joint Tax Returns), shall be prepared and filed by the party responsible under the appropriate law of the taxing jurisdiction. ARTICLE 3 PAYMENT OF TAXES: ENTITLEMENT TO TAX REFUNDS -------------------------------------------- Section 3.01 General. ------- (a) Stream shall be liable for and shall indemnify and hold each member of the MMI Group and each member of the CST Group harmless against all -8- Taxes related to the Stream Business, for all Pre-Drop-down Taxable Periods, to the extent unpaid as of the Drop-down Date. (b) MMI Holdings shall be liable for and shall indemnify and hold each member of the Stream Group and each member of the CST Group harmless against all Taxes related to the MMI Business for all Pre-Drop-down Taxable Periods, to the extent unpaid as of the Drop-down Date. (c) CST Holdings shall be liable for and shall indemnify and hold each member of the Stream Group and each member of the MMI Group harmless against all Taxes related to the CST Business for all Pre-Drop-down Taxable Periods, to the extent unpaid as of the Drop-down Date. (d) For purposes of determining the amount of Taxes related to the Stream Business, the MMI Business or the CST Business pursuant to paragraphs (a), (b), and (c) of this Section 3.01, and for purposes of determining entitlement to Tax Refunds, the following rules shall apply: (i) except as provided below, Tax Items primarily related to the Stream Business will be taken into account in determining Taxes related to the Stream Business, Tax Items primarily related to the MMI Business will be taken into account in determining Taxes related to the MMI Business, and Tax Items primarily related to the CST Business will be taken into account in determining Taxes related to the CST Business; (ii) Tax Items for any taxable period consisting of deductions attributable to the exercise of compensatory options granted to employees of any member of the Stream Affiliated Group to acquire shares of Stream, MMI Holdings or CST Holdings shall be deemed to be primarily related to the Stream Business, the MMI Business or the CST Business if a member of the Stream Group, the MMI Group or the CST Group, respectively, most recently employed the exercising employee at the time of exercise; (iii) except as otherwise provided in this Agreement, Tax Items not primarily related either to the Stream Business, the MMI Business or the CST Business will be taken into account 40% in determining Taxes related to the MMI Business and 60% in determining Taxes related to the CST Business; (iv) in determining the Taxes related to the Stream Business, the MMI Business and the CST Business for any Short Period, and the amount of net operating losses, net capital losses, alternative minimum tax credits and other credits that may be utilized in any Short Period, the Straddle Period shall be treated as two taxable years or periods, one ending at the end of the Short Period and the other -9- beginning at the beginning of the day after the end of the Short Period, in all cases determined on a "closing of the books basis" at the end of the Short Period (except that items computed on an annual basis, such as depreciation, shall be allocated on a daily basis). For all purposes of this Agreement, the portion of the Straddle Period ending at the end of the Short Period and the portion of the Straddle Period beginning at the beginning of the day after the end of the Short Period shall each be treated as a "taxable year or period"; (v) the benefit of (A) the graduated tax rates of Code Section 11, (B) the $25,000 bracket amount in Code Section 38, (C) the $40,000 exemption amount and the $150,000 bracket amount in Code Section 55, and (D) the $2,000,000 bracket amount in Code Section 59A, (and any similar or corresponding benefits under state or local Tax law) shall be taken into account solely in determining Taxes related to the Stream Business; (vi) in determining the Taxes related to the Stream Business, the MMI Business and the CST Business for any period, (A) any net operating losses, net capital losses, alternative minimum tax credits and other credits ("Loss Attributes") carried back to such period from a Post-Drop-down Taxable Period of the Stream Group shall be taken into account solely to determine the Taxes related to the Stream Business to the extent that the Loss Attributes carried back exceed Loss Items as defined in the Tax Reimbursement Agreement, (B) to the extent that the Loss Attributes carried back do not exceed Loss Items, such Loss Attributes shall first be used to eliminate or reduce Tax Items, if any, that, absent this clause (B), would have resulted in the imposition of Reorganization Taxes, and (C) any Loss Attributes carried back to which clause (A) does not apply and which exceed the Tax Items described in clause (B) shall be treated consistently with the principles set forth in Section 3.01(d)(vii), below (see Annex A to the Tax Reimbursement Agreement for examples applying the rules in this paragraph); (vii) notwithstanding the foregoing, subject to paragraph (v) of the definition of Reorganization Taxes in the Tax Reimbursement Agreement, Loss Attributes, determined separately for each Business in accordance with the other principles of this Section 3.01, carried over (other than from a Post-Drop-down Taxable Period) to, or incurred in, a Pre-Drop-down Taxable Period, shall be considered as Tax Items primarily related to the Stream Business, the MMI Business and the CST Business, as the case may be, to the extent necessary to eliminate or reduce Taxes related to the Stream Business, the MMI Business and the CST Business, respectively, for such taxable year or period, with any excess Loss Attributes being allocated among the Stream Business, the MMI Business and the CST Business in proportion to the amount of Taxes that, absent such excess Loss Attributes, would have been paid by each of Stream, MMI Holdings and CST Holdings, respectively, in respect of such period. Schedule 3.01(d)(vii) to this Agreement (and Annex A to the -10- Tax Reimbursement Agreement) set forth examples that illustrate the operation of this paragraph. Section 3.02 Payment of Tax Liabilities With Respect to Unfiled Returns. ---------------------------------------------------------- (a) Consolidated Federal Income Tax Liabilities. Except as otherwise ------------------------------------------- provided in this Agreement, Stream shall pay, on a timely basis, all Taxes due with respect to the consolidated federal income Tax liability for all taxable years or periods beginning on or before the Drop-down Date of the Stream Affiliated Group. Each of MMI Holdings on behalf of the MMI Group and CST Holdings on behalf of the CST Group hereby assumes and agrees to pay (to the extent not previously paid by MMI Holdings or CST Holdings or any member of their respective Groups, as the case may be) the MMI Group's share and the CST Group's share, as the case may be, of those Taxes (with each share determined as described below) for all Pre-Drop-down Taxable Periods, which payments shall be made directly to Stream which shall then forward any balance due to the IRS. The share of the consolidated federal Income Tax liability for each of such periods for the Stream Group, the MMI Group, and the CST Group shall be determined based on the liability of Stream, MMI Holdings and CST Holdings, respectively, in respect of such Tax liability in accordance with the principles set forth in Section 3.01. If the calculations made pursuant to this Section 3.02(a) indicate that either MMI Holdings or CST Holdings has either overpaid or underpaid its share (determined as described above) of the consolidated federal income Tax liability for any period, then not later than 90 days after the filing of Stream's consolidated federal income Tax returns for such period Stream shall pay MMI Holdings or CST Holdings, as the case may be, the amount of any such overpayment, or MMI Holdings or CST Holdings, as the case may be, shall pay Stream the amount of any such underpayment. All calculations and determinations required to be made pursuant to this Section 3.02(a) shall be made jointly by the parties hereto in good faith or, if necessary, pursuant to Section 5.04. (b) Combined, Consolidated and Unitary Corporate Income Taxes. Except --------------------------------------------------------- as otherwise provided in this Agreement, Stream shall pay, on a timely basis, all Taxes due with respect to any combined, consolidated or unitary state, local and foreign corporate Income Tax liability for all taxable years or periods beginning on or before the Drop-down Date with respect to CST and MMI Joint Tax Returns ("Combined Taxes"). Each of MMI Holdings and CST Holdings hereby assumes and agrees to pay (to the extent not previously paid by it) the MMI Group's share and the -11- CST Group's share, as the case may be, of Combined Taxes (with each share described below) for all Pre-Drop-down Taxable Periods, which payments shall be made to Stream, which shall then pay any amount due to the appropriate taxing authority. The share of the Combined Tax liability for each of such taxable years or periods for the Stream Group, the MMI Group, and the CST Group shall be determined based on the liability of Stream, MMI Holdings and CST Holdings, respectively, in respect of such Tax liability in accordance with the principles set forth in Section 3.01. If the calculations made pursuant to this Section 3.02(b) indicate that either MMI Holdings or CST Holdings has either overpaid or underpaid its share (determined as described above) of the Combined Tax liability for any period then at such time as Stream shall reasonably determine, but in any event not later than 90 days after the filing of the relevant Tax Return, Stream shall pay MMI Holdings or CST Holdings, as the case may be, the amount of any such overpayment, or MMI Holdings or CST Holdings, as the case may be, shall pay Stream the amount of any such underpayment. All calculations and determinations required to be made pursuant to this Section 3.02(b) shall be made jointly by the parties hereto in good faith or, if necessary, pursuant to Section 5.04. (c) Other Taxes. All Taxes, to the extent not governed by Section ----------- 3.02(a) or 3.02(b), for Pre-Drop-down Taxable Periods shall be paid, on a timely basis, by the party responsible under this Agreement for filing the Tax Return pursuant to which such Taxes are due, or, if no Tax Return is required, by the party responsible for payment of such Tax under the laws of the taxing jurisdiction, and shall be reimbursed by the other parties to this Agreement based on their respective shares of such Taxes determined in accordance with the principles set forth in Section 3.01. (d) Transaction Taxes. Notwithstanding any provision of this Agreement ----------------- to the contrary, Stream, MMI Holdings or CST Holdings shall be liable for, and shall hold the other parties hereto harmless against, any Transaction Taxes related to the transfer of assets from one Group to another Group in connection with the Reorganization to the extent that such assets are located immediately following the Drop-down Date in a member of the Stream Group, a member of the MMI Group or a member of the CST Group, respectively, notwithstanding the fact that the tax laws of the particular jurisdiction may impose liability for such Transaction Taxes on a member of any other Group. Any party not responsible under this Agreement for -12- paying such Taxes to the taxing authority shall pay the responsible party for its share of such Taxes not later than 3 business days prior to the due date for such Taxes. Section 3.03 Redetermined Tax Liabilities. ---------------------------- (a) Certain Joint Tax Returns. In the case of any Final Determination ------------------------- regarding a CST Joint Tax Return or an MMI Joint Tax Return, any Tax Deficiency shall be paid to the appropriate taxing authority by, and any Tax Refund received from the appropriate taxing authority shall be paid to, Stream; provided, however, that whether or not there is a Tax Deficiency or Tax Refund - -------- ------- or whether or not a payment is required to or from the appropriate taxing authority, MMI Holdings or CST Holdings, as the case may be shall make payments to Stream or receive payments from Stream based upon the following principles: (i) MMI Holdings or CST Holdings, as the case may be, shall make a payment to Stream in an amount equal to any increase in the MMI Group's or the CST Group's share, respectively, of Tax with respect to such Joint Tax Return resulting from such Final Determination to the extent such payments would not be duplicative of any payments therefor previously made by MMI Holdings (or any member of the MMI Group) or CST Holdings (or any member of the CST Group) to Stream (or directly to the appropriate taxing authority). The amount of any such increase in the MMI Group's or the CST Group's share of Tax shall be determined in accordance with the principles set forth in Section 3.01. (ii) Stream shall pay to MMI Holdings or CST Holdings, to the extent not previously paid to MMI Holdings or CST Holdings, or any member of their respective Groups, by the appropriate taxing authority or by Stream, the amount of any decrease in the MMI Group's or the CST Group's share, respectively, of Tax with respect to such Joint Tax Return resulting from such Final Determination. The amount of any such decrease in the MMI Group's or the CST Group's share of Tax shall be determined in accordance with the principles set forth in Section 3.01. (iii) Notwithstanding any provision of this Agreement to the contrary, for purposes of this Section 3.03(a), Stream shall pay to MMI Holdings and CST Holdings 40% and 60%, respectively, of the federal Tax Refund for the taxable year ended December 31, 1993 in respect of a carryback from the taxable year ended April 21, 1995 in respect of Form 1120X filed by Stream in September, 1996, and 40% and 60%, respectively, of any federal or state overpayments of Taxes in respect of any Pre-Drop-down Taxable Periods, and any Tax Deficiency resulting from any subsequent adjustment to Tax Items which gave rise to such Tax Refund or overpayments shall, to the extent of such Tax Refund and overpayments, respectively, be borne by such parties in the same proportions. -13- (iv) Any Tax Deficiency or Tax Refund with respect to (i) a Tax Item not primarily related either to the Stream Business, the MMI Business or the CST Business, or (ii) a CST Joint Tax Return or an MMI Joint Tax Return not arising from an adjustment to, or change in, a Tax Item (e.g., change in applicable law) shall be allocated 40% to MMI Holdings and 60% to CST Holdings. (b) Other Returns. In the case of any Final Determination regarding a ------------- Tax Return other than a Joint Tax Return described in Section 3.03(a): (i) MMI Holdings (or a member of the MMI Group) shall pay any Tax Deficiency to the appropriate taxing authority, and shall be entitled to receive and retain all Tax Refunds, for all periods with respect to Tax Returns that include only Tax Items primarily related to the MMI Business in accordance with the principles set forth in Section 3.01. (ii) CST Holdings (or a member of the CST Group) shall pay any Tax Deficiency to the appropriate taxing authority, and shall be entitled to receive and retain all Tax Refunds, for all periods with respect to Tax Returns that include only Tax Items primarily related to the CST Business in accordance with the principles set forth in Section 3.01. (iii) Stream shall pay any Tax Deficiency to the appropriate taxing authority, and shall be entitled to receive and retain all Tax Refunds, for all periods with respect to Tax Returns that include Tax Items primarily related to the Stream Business in accordance with the principles set forth in Section 3.01. (iv) Any Tax Deficiency or Tax Refund with respect to other Tax Returns shall be paid by, or shall be received and retained by, the parties in accordance with the principles set forth in Section 3.01. (c) Calculation and Payment of Amounts. All calculations and ---------------------------------- determinations required to be made pursuant to this Section 3.03 shall be made jointly by the parties hereto in good faith or, if necessary, pursuant to Section 5.04 and on a basis reasonably consistent with prior years. Any payments made by the parties hereunder to each other shall be treated by each of the parties, to the maximum extent allowable under applicable Tax laws, as adjustments to amounts transferred under the Contribution Agreements. The amount of each payment shall be computed after taking into account all Tax consequences to the recipient, or any Affiliate, of (i) the receipt of (or the right to receive) the payment and (ii) the event or incurrence of the liability that gave rise to the right to receive the payment. In determining the Tax consequences to the recipient, or any Affiliate, for purposes of this Section 3.03(c), any Tax detriment, in the case of a payment, and any Tax benefit, in the case of an event or an incurrence of a liability, shall be taken into account in -14- the taxable years or periods in which the recipient, or any Affiliate, is required to pay additional Taxes by reason of the payment, or is entitled to a refund of Tax or a reduction in the amount of Taxes it would otherwise be required to pay by reason of the event or the incurrence of the liability. Section 3.04 Liability for Taxes with Respect to Post-Drop-down Periods. ---------------------------------------------------------- Unless otherwise provided in this Agreement, or the Tax Reimbursement Agreement, the Stream Group shall pay all Taxes and shall be entitled to receive and retain all Tax Refunds with respect to Post-Drop-down Taxable Periods which are attributable to the Stream Business. Unless otherwise provided in this Agreement, or the Tax Reimbursement Agreement, each of the MMI Group and the CST Group, as the case may be, shall pay all Taxes and shall be entitled to receive and retain all refunds of Taxes with respect Post-Drop-down Taxable Periods which are attributable to the MMI Business and the CST Business, respectively. For purposes of this Section 3.04, each Straddle Period shall be treated as described in Section 3.01. Section 3.05 Carrybacks. Each of MMI Holdings and CST Holdings agrees that ---------- it will not carry back any Tax Item arising after the Drop-down Date to a taxable period with respect to a Joint Tax Return which includes a member of the Stream Group or the other Group of which it is not a member, without the consent of Stream and the common parent of the other Group. In the event that MMI Holdings and CST Holdings do carry back any such Tax Item with the consent of Stream and the common parent of the other Group, any Tax Refund resulting therefrom shall be paid over to MMI Holdings or CST Holdings, as the case may be. To the extent that the carryback of any Tax Item does not result in a Tax Refund (or would not result in a refund if a claim were filed) solely as the result of an offsetting Tax Item attributable to another Group, such other Group shall remit to MMI Holdings or CST Holdings, as the case may be, the amount of any decrease in the MMI Group's or the CST Group's share of Tax with respect to such return as a result of such carryback as determined under the principles contained in Section 3.01 and 3.03(a). Section 3.06 Responsibility for Reorganization Taxes. Stream shall be --------------------------------------- responsible for 100% of any Reorganization Taxes, and shall indemnify, defend and hold harmless MMI Holdings, CST Holdings and each member of their respective Groups from and against all liability for such Reorganization Taxes. -15- ARTICLE 4 INDEMNITY; COOPERATION AND EXCHANGE OF INFORMATION -------------------------------------------------- Section 4.01 Breach. Stream shall be liable for and shall indemnify, defend ------ and hold harmless each member of the MMI Group and each member of the CST Group and their officers and directors, from and against, any payment required to be made as a result of a breach by a member of the Stream Group of any obligation under this Agreement. MMI Holdings shall be liable for and shall indemnify, defend and hold harmless each member of the Stream Group and each member of the CST Group and their officers and directors from and against, any payment required to be made as a result of the breach by a member of the MMI Group of any obligation under this Agreement. CST Holdings shall be liable for and shall indemnify, defend and hold harmless each member of the Stream Group and each member of the MMI Group and their officers and directors, from and against, any payment required to be made as a result of the breach by a member of the CST Group of any obligation under this Agreement. Section 4.02 Contest Rights -------------- (a) Notice. Whenever a party hereto or any Affiliate thereof (the ------ "Notified Party") becomes aware of any audit, action, suit, investigation, claim, assessment, litigation or other administrative or judicial proceeding (collectively, a "Proceeding") that could result in a redetermination or other adjustment to any Tax Item which could increase its liability or the liability of any member of any Group (such party or any such member, hereinafter an "Indemnitee") for any Tax for which another party hereto (hereinafter the "Indemnitor") is or may be liable under this Agreement (hereinafter an "Indemnity Issue"), the Notified Party shall promptly give notice to each other party hereto of such Indemnity Issue. The failure of any Notified Party to give such notice shall not relieve the Indemnitor of its obligations under this Agreement except to the extent such Indemnitor or any of its Affiliates is actually prejudiced by such failure to give notice. (b) General Control Rights. Subject to the other provisions of this ---------------------- Section 4.02, with respect to any Proceeding in respect of a Tax Return relating, in whole or in part, to an Indemnity Issue, the party who has responsibility for filing such Tax Return (the "Responsible Party") shall have the right to decide as between the parties hereto how such Proceeding is to be dealt with and finally resolved with the appropriate taxing authority and shall control all related Proceedings; provided, however, that if the Responsible -------- ------- Party is not the Indemnitor, the Responsible Party shall: -16- (i) promptly deliver to the Indemnitor complete copies of all written notices, requests, or other information received from any taxing authority or judicial or similar body that relate to any Indemnity Issue; (ii) not provide any documents or other information to any taxing authority or judicial or similar body that relate to the Indemnity Issue without the Indemnitor's prior review; (iii) not submit any written response or other written work in respect of any Indemnity Issue to any taxing authority or judicial or similar body without allowing the Indemnitor to review and revise such written response or other written work to the extent it relates to any Indemnity Issue (with any disagreement as to the ultimate language used in any such written response or other written work to be resolved by the Responsible Party); (iv) permit the Indemnitor and its representatives, at the Indemnitor's sole expense, to participate fully in all conferences, meetings, proceedings or judicial appearances with or before any taxing authority or judicial or similar body (whether in person or by telephone) the subject matter of which is or includes the Indemnity Issue; (v) consult in good faith with the Indemnitor with respect to all aspects of any action or position to be taken by the Responsible Party that relates to any Indemnity Issue and take the Indemnitor's interests into account; (vi) not adopt any position in any Proceeding that unfairly compromises an Indemnity Issue so as to gain any advantage with respect to any non-Indemnity Issue which is the subject of the same or any related Proceeding; (vii) if the Proceeding relates solely to one or more Indemnity Issues, permit the Indemnitor to control such Proceeding in all respects; and (viii) except in the circumstances described below, not make any settlement offer to any taxing authority, discuss any settlement offer made by any taxing authority, or accept any settlement offer made by any taxing authority, in each case with respect to any Proceeding that is related, in whole or in part, to any Indemnity Issue. (c) Settlements. With respect to any settlement offer that relates, in ----------- whole or in part, to any Indemnity Issue, the following rules shall apply if the Responsible Party is not the Indemnitor: -17- (i) no settlement offer shall be made by the Responsible Party to any taxing authority except in writing and in such case the amount offered with respect to any Indemnity Issue shall be determined solely by the Indemnitor (as indicated in a written notice to the Responsible Party); (ii) in the case of any settlement offer from a taxing authority that is not in response to a written settlement offer by the Responsible Party, the Responsible Party shall, if requested by the Indemnitor, make a written settlement offer (i.e., a counter offer) to the taxing authority in accordance ---- with paragraph (c)(i); and (iii) in the case of any settlement offer from a taxing authority (other than a settlement offer described in paragraph (c)(ii)): (A) the Responsible Party may make a written settlement offer (i.e., a ---- counter offer) to the taxing authority in accordance with paragraph (c)(i); (B) the Responsible Party may choose not to accept the settlement offer from the taxing authority and instead choose to litigate the issues reflected in such settlement offer, in which case the Responsible Party shall litigate the Indemnity Issue, which litigation shall be conducted subject to the rules of subsection (b) of this Section 4.02; (C) the Responsible Party may notify the Indemnitor of the Responsible Party's proposal that such settlement offer be accepted and entered into and request the Indemnitor's consent to doing so and, upon (x) the written consent to such settlement offer by the Indemnitor, (y) a failure of the Indemnitor to respond to such proposal by the Responsible Party within thirty days after receipt by the Indemnitor of such notice from the Responsible Party, or (z) a failure of the Indemnitor to withhold its consent to such settlement offer in accordance with subparagraph (D) below, the Responsible Party may accept and enter into such settlement offer; or (D) the Indemnitor may withhold its consent to a settlement offer of which the Responsible Party has notified the Indemnitor in accordance with subparagraph (C) above if the Indemnitor (x) notifies the Responsible Party in writing within such 30-day period that the Indemnitor does not consent to the proposed settlement, and (y) provides the Responsible Party with an opinion from tax counsel selected by the Indemnitor and reasonably satisfactory to the Responsible Party to the effect that there is a reasonable possibility that the Responsible Party will prevail on the merits with respect to one or more Indemnity Issues with an aggregate value of not less than the lesser of $1 million or 25% of the -18- amount at issue with respect to the Indemnitor in a tribunal with jurisdiction to adjudicate the Indemnity Issues; (E) if the Indemnitor provides the Responsible Party with written notification withholding consent in accordance with subparagraph (D) above, then: (i) the Indemnitor shall fully indemnify and hold harmless the Responsible Party from and against any and all liabilities (other than liability for payments to the Indemnitor hereunder) for Taxes and other costs and expenses (including, without limitation, additional attorneys' and accountants' fees) over and above the payments that the Responsible Party would have been liable for if the Responsible Party had entered into the proposed settlement; and (ii) the Responsible Party shall select one of the following alternatives: (1) the Responsible party shall enter into a closing agreement or other final resolution with the relevant taxing authority with respect to all issues in accordance with the proposed settlement other than Indemnity Issues (if doing so would not preclude litigation or other judicial proceedings with respect to the Indemnity Issues), provided that (i) such closing agreement or -------- other final resolution specifically provides that it does not apply to the Indemnity Issues, and (ii) the Responsible Party agrees to give the Indemnitor and its representatives control over the relevant Proceedings, and the Responsible Party further agrees (y) to take such actions requested by Indemnitor or its representatives to continue to contest (or, if permitted by applicable law, to permit the Indemnitor to contest) the Indemnity Issues (through administrative proceedings or litigation, which proceedings or litigation shall be conducted pursuant to the provisions of this Section 4.02 using counsel selected by the Indemnitor to the fullest extent possible), and (z) to permit the Indemnitor, if successful, to obtain the full monetary benefit of a successful contest; (2) the Responsible Party shall settle all issues with the relevant taxing authority in accordance with the proposed settlement, in which case each of the Responsible Party and the Indemnitor shall, with respect to its share thereof, pay any additional liability for Taxes as provided for in such proposed settlement, provided that (i) such settlement shall specifically provide that it -------- shall not preclude a refund claim from being filed with respect to the Indemnity Issues and (ii) the Responsible Party agrees to give the Indemnitor and its representatives control over the relevant Proceedings, and agrees (y) to take such actions requested by the Indemnitor to continue to contest (or, if permitted by applicable law, to permit the Indemnitor to contest) the Indemnity Issues (through administrative proceedings or -19- litigation, which proceedings or litigation shall be conducted pursuant to the provisions of this Section 4.02, using counsel selected by the Indemnitor to the fullest extent possible) and (z) to permit the Indemnitor, if successful, to obtain the full monetary benefit of such claim for refund, taking into account any payments to be made under Section 3.03; or (3) the Responsible Party shall pay to the Indemnitor, deposit with the taxing authority, or deposit in escrow any additional liability for Taxes, interest and penalties as provided for in such settlement to the extent that such liability relates to issues other than Indemnity Issues, and the Responsible Party agrees to give the Indemnitor and its representatives control over the relevant Proceedings, and further agrees (y) to take such actions requested by the Indemnitor or its representatives to continue to contest (or, if permitted by applicable law, to permit the Indemnitor to contest) any Indemnity and non-Indemnity Issues (through administrative proceedings or litigation, which proceedings or litigation shall be conducted pursuant to the provisions of this Section 4.02, using counsel selected by the Indemnitor to the fullest extent possible) and (z) to permit the Indemnitor, if successful, to obtain the full monetary benefit of a successful contest. (d) Payments to Stop Interest. An Indemnitor may, at its election, pay ------------------------- to or deposit with the relevant taxing authority an amount of additional Tax for which the Indemnitor would be liable hereunder if such payment or deposit would have the effect of stopping the accrual of interest with respect to such Tax liability. The Indemnitor shall have no further responsibility hereunder for interest with respect to any amount so deposited or paid for so long as such deposit or payment stops the accrual of interest; provided, however, that any -------- ------- such payment or deposit does not affect any right of the Responsible Party or any other liability of the Indemnitor hereunder. The Responsible Party shall pay to the Indemnitor the amount of any Tax received by (or credited to the account of) the Indemnitee as a result of a determination that such payment or deposit resulted in an overpayment of Tax with respect to the Indemnity Issues. (e) Termination. Notwithstanding the foregoing provisions of this ----------- Section 4.02, the Indemnitee in its sole discretion by written notice to the Indemnitor and the Responsible Party may refrain from contesting (through administrative or judicial proceedings) any Indemnity Issue or may settle and instruct the Responsible Party to settle any Indemnitee Issue with the relevant Taxing authority without the consent of the Indemnitor, in which event each of the Responsible Party and the Indemnitee shall be deemed to have unconditionally waived its rights to indemnity with respect to such Indemnity Issue (and other Indemnity Issues which are related to the Indemnity Issue which the Responsible Party or Indemnitee refrained from contesting or settled pursuant to this subsection (e)), In such event, the Responsible Party shall, within ten days after the Indemnitee has decided to refrain from or settle -20- such contest, reimburse the Indemnitor for all amounts previously advanced, deposited or paid to the Responsible Party, Indemnitee or any taxing authority (or deposited pursuant to the provisions of subsection (d) of this Section 4.02) with respect to such Indemnity Issue (and other Indemnity Issues which are related to the Indemnity Issue which the Responsible Party or Indemnitee has refrained from contesting or settled pursuant to this subsection (e)), other than third-party expenses incurred by the Responsible Party or Indemnitee in contesting the Indemnity Issue, together with interest at the rate for underpayment of tax determined pursuant to Section 6621(a)(2) of the Code in effect from time to time, from the date of payment to the date of reimbursement. (f) The rights of the parties under this Section 4.02 shall be subject to the rights of RRD under Section 7 of the Tax Reimbursement Agreement. Section 4.03 Cooperation and Exchange of Information. --------------------------------------- (a) Each of MMI Holdings and CST Holdings shall, and shall cause each appropriate member of the MMI Group and the CST Group, respectively, to prepare and submit to Stream, at MMI Holdings' and CST Holdings' expense, (i) not later than March 1 of the taxable year following the taxable year or period that includes the Drop-down Date, all information as Stream shall reasonably request to enable Stream to file extension requests with respect to the Stream consolidated federal income Tax Return and with respect to any state and local combined or unitary corporate income Tax Returns for the taxable year or period that includes the Drop-down Date, and (ii) not later than July 31 of the taxable year following the taxable year or period that includes the Drop-down Date, all information as Stream shall reasonably request to enable Stream to file the Stream consolidated federal income Tax Return and any state and local combined or unitary corporate income Tax Returns for the taxable year or period that includes the Drop-down Date. Representatives of MMI Holdings and CST Holdings shall meet with representatives of Stream from time to time (but no more frequently than monthly) as requested by Stream to discuss the status of the preparation of the information set forth in clauses (i) and (ii) of this Section 4.03(a). If, as a result of any such meeting, Stream reasonably determines that it is likely that MMI Holdings or CST Holdings will not be able to perform its obligations under this Section 4.03(a) in a timely manner, then Stream shall have the right to engage a certified public accounting firm of its choice to gather such information and the MMI Group or the CST Group, as the case may be, shall permit any such accounting firm full access to all appropriate records or other information in its possession. The expenses of such accounting firm shall be borne equally by Stream and MMI Holdings or CST Holdings, as the case may be. (b) Stream, on behalf of itself and each member of the Stream Group, agrees to provide to the MMI Group and the CST Group, and each of MMI Holdings -21- and CST Holdings, on behalf of itself and each member of the MMI Group and the CST Group, respectively, agrees to provide the Stream Group and the CST Group in the case of MMI Holdings and the MMI Group in the case of CST Holdings, with such cooperation and information as a party shall reasonably request in connection with the preparation or filing of any Tax Return or claim for refund not inconsistent with this Agreement or in conducting any audit or other proceeding in respect to Taxes. Such cooperation and information shall include without limitation promptly forwarding copies of appropriate notices and forms or other communications received from or sent to any taxing authority which relate (i) to the Stream Group or the Stream Business, to Stream in the case of the MMI Group and the CST Group, (ii) to the MMI Group or the MMI Business, to MMI Holdings in the case of the Stream Group and the CST Group, and (iii) to the CST Group or the CST Business, to CST Holdings in the case of the Stream Group and the MMI Group; providing copies of all relevant Tax Returns, together with accompanying schedules and related workpapers, documents relating to rulings or other determinations by taxing authorities, including without limitation, foreign taxing authorities, and records concerning the ownership and Tax basis of property, which a party may possess; and the issuing corporation's providing information to the employer corporation with respect to the exercise of compensatory options to acquire stock of the issuing corporation by an optionholder who was not an employee of the issuing corporation, including the optionholder's name, social security number and address, the exercise date, the exercise price, the fair market value and the number of shares issued, and such other information as the employer corporation may reasonably request. Each party shall make its employees and facilities available on a mutually convenient basis to provide explanations of any documents or information provided hereunder. (c) MMI Holdings, CST Holdings and Stream agree to retain all Tax Returns, related schedules and workpapers, and all material records and other documents as required under Section 6001 of the Code and the regulations promulgated thereunder relating thereto existing on the date hereof or created through the Drop-down Date, until the expiration of the statute of limitations (including extensions) of the taxable years to which such Tax Returns and other documents relate and until the Final Determination of any payments which may be required in respect of such years under this Agreement. Stream, MMI Holdings and CST Holdings agree to advise each other promptly of any such Final Determination. Any information obtained under this Section 4.03 shall be kept confidential, except as may be otherwise necessary in connection with the filing of Tax Returns or claims for refund or in conducting any audit or other proceeding. (d) If any member of the Stream Group, the MMI Group or the CST Group, as the case may be, fails to provide any information requested pursuant to this Section 4.03 by (i) the dates, specified in subsection (a) hereof or, (ii) with respect to information not requested pursuant to subsection (a) hereof, within a reasonable -22- period, then the requesting party shall have the right to engage a certified public accounting firm of its choice to gather such information. Stream, MMI Holdings and CST Holdings, as the case may be, agree upon 24 hours' notice, in the case of a failure to provide information pursuant to subsection (a) hereof, and otherwise upon 30 days' notice after the expiration of such reasonable period, to permit any such accounting firm full access to all appropriate records or other information in the possession of any member of the Stream Group, the MMI Group or the CST Group, as the case may be, during reasonable business hours, and to reimburse or pay directly all costs and expenses in connection with the engagement of such public accountants. (e) If any member of the Stream Group, the MMI Group or the CST Group, as the case may be, supplies information to a non-member of the Stream Group, MMI Group or CST Group, as the case may be, pursuant to this Section 4.03 and an officer of the requesting party signs a statement or other document under penalties of perjury in reliance upon the accuracy of such information, then a duly authorized officer of the party supplying such information shall certify, under penalties of perjury, the accuracy and completeness of the information so supplied. Stream agrees to indemnify and hold harmless each member of the MMI Group and the CST Group and its directors, officers and employees, from and against any cost, fine, penalty or other expense of any kind attributable to the negligence or willful misconduct of a member of the Stream Group, in supplying a member of the MMI Group or the CST Group with inaccurate or incomplete information. Each of MMI Holdings and CST Holdings agrees to indemnify and hold harmless each member of the Stream Group and the CST Group or the MMI Group, as the case may be, and their directors, officers and employees, from and against any cost, fine, penalty or other expense of any kind attributable to the negligence or willful misconduct of a member of the MMI Group or the CST Group, as the case may be, in supplying a member of the Stream Group or the other Group with inaccurate or incomplete information. Section 4.04 Injunction. The parties hereto agree that the payment of ---------- monetary compensation would not be an adequate remedy to a breach of the obligations contained in Section 4.03 hereof, and each party consents to the issuance and entry of an injunction against the taking of any action by it or a member of its Group described in the preceding section. -23- ARTICLE 5 MISCELLANEOUS ------------- Section 5.01 Expenses. Unless otherwise expressly provided in this -------- Agreement, each party shall bear any and all of its expenses that arise from its obligations under this Agreement. Section 5.02 Entire Agreement; Termination of Prior Agreements. This ------------------------------------------------- Agreement constitutes the entire agreement of the parties concerning the subject matter hereof and supersedes all other agreements, whether or not written, in respect of any Tax between or among any member or members of one Group with any member or members of any other Group. Except as otherwise provided herein, effective as of the Drop-down Date, all such agreements are hereby cancelled and any rights or obligations existing thereunder are hereby fully and finally settled without any payment by any party thereto. Anything in this Agreement or the Contribution Agreements to the contrary notwithstanding, in the event and to the extent that there shall be a conflict between the provisions of this Agreement and the Contribution Agreements, the provisions of this Agreement shall control. Section 5.03 Notices. Any notice, request, demand, claim, or other ------- communication hereunder shall be in writing and shall be delivered by registered or certified mail, return receipt requested, postage prepaid, and addressed to the intended recipient as set forth below, and shall be deemed duly given on the date which is three days after the date such notice, request, demand, claim, or other communication is sent: To Stream or any other member of the Stream Group: Stream International Inc. 275 Dan Road Canton, Massachusetts 02021 Fax: (781) 830-7465 Attention: Treasurer To MMI Holdings or any other member of the MMI Group: Modus Media International Holdings Inc. 690 Canton Street Westwood, Massachusetts 02090 Fax: (781) 830-7465 Attention: Treasurer -24- To CST Holdings or any other member of the CST Group: Corporate Software and Technology Holdings Inc. 2 Edgewater Drive Norwood, Massachusetts 02062 Fax: (781) 440-7444 Attention: Treasurer Notwithstanding the foregoing, any party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, fax, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it is actually received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. Section 5.04 Resolution of Disputes. Any disputes between the parties with ---------------------- respect to this Agreement shall be resolved in accordance with the dispute resolution procedures set forth in Section 5.4.9 of each of the Contribution Agreements. Section 5.05 Application to Present and Future Subsidiaries: Joint and --------------------------------------------------------- Several Liability. This Agreement is being entered into by each of Stream, MMI - ----------------- Holdings, MMI, CST Holdings, and CST on behalf of itself and each member of the Stream Group, the MMI Group and the CST Group, respectively. This Agreement shall constitute a direct obligation of each such member and shall be deemed to have been readopted and affirmed on behalf of any corporation which becomes a member of the Stream Affiliated Group, the MMI Affiliated Group or the CST Affiliated Group in the future. Stream, MMI Holdings and CST Holdings hereby guarantee the performance of all actions, agreements and obligations provided for under this Agreement of each member of the Stream Group, the MMI Affiliated Group and the CST Affiliated Group, respectively. Each of Stream, MMI Holdings and CST Holdings shall, upon the written request of the other, cause any of its respective group members formally to execute this Agreement. References in this Agreement to MMI Holdings and CST Holdings shall include MMI and CST, respectively, as the context may require to result in joint and several liability as between MMI Holdings and MMI, and joint and several liability as between CST Holdings and CST, in respect of the obligations under this Agreement. Section 5.06 Term. This Agreement shall commence on the date of execution ---- indicated below and shall continue in effect until otherwise agreed to in writing by the parties, or their successors. -25- Section 5.07 Titles and Headings. Titles and headings to sections herein ------------------- are inserted for the convenience of reference only and are not intended to be a part or to affect the meaning or interpretation of this Agreement. Section 5.08 Legal Enforceability. Any provision of this Agreement which is -------------------- prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party hereto, each party hereto acknowledges that damages would be an inadequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable. Section 5.09 Successors and Assigns. This Agreement and all of the ---------------------- provisions hereof shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. Section 5.10 Amendments. This Agreement may not be modified or amended ---------- except by an agreement in writing, signed by the parties hereto. Section 5.11 Counterparts. This Agreement may be executed in counterparts, ------------ each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. Section 5.12 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the domestic substantive laws of the Commonwealth of Massachusetts without regard to any choice or conflict of law rule or provision that would result in the application of the domestic substantive laws of any other jurisdiction. -26- IN WITNESS WHEREOF, the parties have executed this agreement as of the day and year first above written. STREAM INTERNATIONAL INC. By /s/ Judith G. Salerno -------------------------------- Title: President ---------------------------- MODUS MEDIA INTERNATIONAL HOLDINGS, INC. By -------------------------------- Title: ---------------------------- MODUS MEDIA INTERNATIONAL, INC. By -------------------------------- Title: ---------------------------- CORPORATE SOFTWARE & TECHNOLOGY HOLDINGS, INC. By -------------------------------- Title: ---------------------------- CORPORATE SOFTWARE & TECHNOLOGY, INC. By -------------------------------- Title: ---------------------------- -27-
Tax Sharing Ag't -3.01(d)(vii) Tax Sharing Agreement Schedule 3.01(d)(vii) -------------------------------------------- Separate Tax Items -------------------------------------------- 1995 1996 1997 -------------------------------------------- As filed Post-Audit ----------------------- MMI Holdings and MMl (50) 75 75 75 CST Holdings and CST (50) 50 75 75 Stream - Operating income (loss) (100) (150) 100 100 Stream - Reorganization Tax income - - - 300 -------------------------------------------- Totals (200) (25) 250 550 -------------------------------------------- --------------------------------------------------------------------- Allocation of Loss Attributes from Pre-Drop-down Taxable Periods --------------------------------------------------------------------- 1996 1997 -------------------------------------------- As filed Post-Audit --------------------------------------------------------------------- Cumulative Loss Cumulative Loss Cumulative Loss Separate Attributes Separate Attributes Separate Attributes Tax Items Used Tax Items Used Tax Items Used --------------------------------------------------------------------- 25 (75) 100 (71) 100 - MMI Holdings and MMl - (50) 75 (54) 75 - CST Holdings and CST (250) - (150) (100) (150) - Stream - Operating income (loss) - 300 (225) Stream - Reorganization Tax income --------------------------------------------------------------------- Totals (225) (125) 25 (225) 325 (225) ----------------------------------------------------------------------
"Separate Tax Items" are net Tax Items primarily related to each Business under the principles of Section 3.01 without regard to carryovers. -28- EX-10.3 6 1997 STOCK INCENTIVE PLAN AS AMENDED EXHIBIT 10.3 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. 1997 Stock Incentive Plan ------------------------- 1. Purpose ------- The purpose of this 1997 Stock Incentive Plan (the "Plan") of Modus Media International Holdings, Inc., is to advance the interests of the Company's stockholders by enhancing the Company's ability to attract, retain and motivate persons who make (or are expected to make) important contributions to the Company by providing such persons with equity ownership opportunities and performance-based incentives and thereby better aligning the interests of such persons with those of the Company's stockholders. Except where the context otherwise requires, the term "Company" shall include any present or future subsidiary corporations of Modus Media International Holdings, Inc. as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended, and as further amended from time to time, and any regulations promulgated thereunder (the "Code") (a "Subsidiary"). 2. Eligibility ----------- All of the employees, officers, directors, consultants and advisors of the Company are eligible to be granted options, restricted stock, or other stock- based awards (each, an "Award") under the Plan. Any person who has been granted an Award under the Plan shall be deemed a "Participant". 3. Administration, Delegation -------------------------- a. Administration by Board of Directors. The Plan will be administered by ------------------------------------ the Board of Directors of the Company (the "Board"). The Board shall have authority to grant Awards and to adopt, amend and repeal such administrative rules, guidelines and practices relating to the Plan as it shall deem advisable from time to time, to interpret and correct the provisions of the Plan and any Award. No member of the Board shall be liable for any action or determination relating to the Plan. All decisions by the Board shall be made in their sole discretion and shall be final and binding on all persons having or claiming any interest in the Plan or in any Award. b. Delegation to Executive Officers. To the extent permitted by applicable -------------------------------- law, the Board may delegate to one or more executive officers of the Company the power to make Awards and exercise such other powers under the Plan as the Board may determine, provided that the Board shall fix the maximum number of shares subject to Awards and the maximum number of shares for any one Participant to be made by such executive officers. c. Appointment of Committees. To the extent permitted by applicable law, ------------------------- the Board may delegate any or all of its powers under the Plan to one or more committees or subcommittees of the Board (a "Committee"). If and when the Class A Common Stock, $.01 par value per share, of the Company (the "Common Stock") is registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Board shall appoint one such Committee of not less than two members, each member of which shall be an "outside director" within the meaning of Section 162(m) of the Code and a "non-employee director" as defined in Rule 16b- 3 promulgated under the Exchange Act. All references in the Plan to the "Board" shall mean a Committee or the Board or the executive officer referred to in Section 3(b) to the extent of such delegation. 4. Stock Available for Awards -------------------------- a. Number of Shares. Subject to adjustment under Section 4(c), Awards may ---------------- be made under the Plan for up to 1,800,000 shares of Common Stock. If any Award expires or is terminated, surrendered or canceled without having been fully exercised or is forfeited in whole or in part or results in any Common Stock not being issued, the unused Common Stock covered by such Award shall again be available for the grant of Awards under the Plan, subject, however, in the case of Incentive Stock Options (as defined hereinafter) to any limitation required under the Code. Shares issued under the Plan may consist in whole or in part of authorized but unissued shares or treasury shares. b. Per-Participant Limit. Subject to adjustment under Section 4(c), for --------------------- Awards granted after the Common Stock is registered under the Exchange Act, the maximum number of shares with respect to which an Award may be granted to any Participant under the Plan shall be 900,000 per calendar year. The per- Participant limit described in this Section 4(b) shall be construed and applied consistently with Section 162(m) of the Code. c. Adjustment to Common Stock. In the event of any stock split, stock -------------------------- dividend, recapitalization, combination of shares, liquidation, spin-off, or other similar change in capitalization or event, or any distribution to holders of Common Stock other than a normal cash dividend, (i) the number and class of securities available under this Plan, (ii) the number and class of security and exercise price per share subject to each outstanding Option, (iii) the repurchase price per security subject to each outstanding Restricted Stock Award (as defined hereinafter), and (iv) the terms of each other outstanding stock- based Award shall be appropriately adjusted by the Company (or substituted Awards may be made, if applicable) to the extent the Board shall determine, in good faith, that such an adjustment (or substitution) is necessary and appropriate. -2- 5. Stock Options ------------- a. General. The Board may grant options to purchase Common Stock ------- (each, an "Option") and determine the number of shares of Common Stock to be covered by each Option, the exercise price of each Option and the conditions and limitations applicable to the exercise of each Option, including conditions relating to applicable federal or state securities laws, as it considers necessary or advisable. An Option which is not intended to be an Incentive Stock Option (as hereinafter defined) shall be designated a "Nonstatutory Stock Option". b. Incentive Stock Options. An Option that the Board intends to be an ----------------------- "incentive stock option" as defined in Section 422 of the Code (an "Incentive Stock Option") shall only be granted to employees of the Company and shall be subject to and shall be construed consistently with the requirements of Section 422 of the Code. The Company shall have no liability to a Participant, or any other party, if an Option (or any part thereof) which is intended to be an Incentive Stock Option is not an Incentive Stock Option. c. Exercise Price. The Board shall establish the exercise price at the -------------- time each Option is granted and specify it in the applicable option agreement. d. Duration of Options. Each Option shall be exercisable at such times ------------------- and subject to such terms and conditions as the Board may specify in the applicable option agreement. e. Exercise of Option. Options may be exercised only by delivery to ------------------ the Company of a written notice of exercise signed by the proper person together with payment in full as specified in Section 5(f) for the number of shares for which the Option is exercised. f. Payment Upon Exercise. Common Stock purchased upon the exercise of --------------------- an Option granted under the Plan shall be paid for as follows: (i) in cash or by check, payable to the order of the Company; (ii) except as the Board may otherwise provide in an Option, delivery of an irrevocable and unconditional undertaking by a credit worthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a credit worthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (iii) to the extent permitted by the Board and explicitly provided in the Option (x) by delivery of shares of Common Stock owned by the Participant -3- valued at their fair market value as determined by the Board in good faith ("Fair Market Value"), which Common Stock was owned by the Participant at least six months prior to such delivery, (y) by delivery of a promissory note of the Participant to the Company on terms determined by the Board (and payment to the Company by the Participant of cash in an amount equal to the par value of the shares purchased), or (z) payment of such other lawful consideration as the Board may determine; or (iv) any combination of the above permitted forms of payment. 6. Restricted Stock ---------------- a. Grants. The Board may grant Awards entitling recipients to acquire ------ shares of Common Stock, subject to (i) payment to the Company by the Participant of cash in an amount equal to the par value of the shares purchased, and (ii) the right of the Company to repurchase all or part of such shares at their issue price or other stated or formula price (or to require forfeiture of such shares if issued in an amount equal only to the par value of the shares purchased) from the recipient in the event that conditions specified by the Board in the applicable Award are not satisfied prior to the end of the applicable restriction period or periods established by the Board for such Award (each, "Restricted Stock Award"). b. Terms and Conditions. The Board shall determine the terms and -------------------- conditions of any such Restricted Stock Award, including the conditions for repurchase (or forfeiture) and the issue price, if any. Any stock certificates issued in respect of a Restricted Stock Award shall be registered in the name of the Participant and, unless otherwise determined by the Board, deposited by the Participant, together with a stock power endorsed in blank, with the Company (or its designee). At the expiration of the applicable restriction periods, the Company (or such designee) shall deliver the certificates no longer subject to such restrictions to the Participant or if the Participant has died, to the beneficiary designated by a Participant, in a manner determined by the Board, to receive amounts due or exercise rights of the Participant in the event of the Participant's death (the "Designated Beneficiary"). In the absence of an effective designation by a Participant, Designated Beneficiary shall mean the Participant's estate. 7. Other Stock-Based Awards ------------------------ The Board shall have the right to grant other Awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. -4- 8. General Provisions Applicable to Awards --------------------------------------- a. Transferability of Awards. Except as the Board may otherwise ------------------------- determine or provide in an Award, Awards shall not be sold, assigned, transferred, pledged or otherwise encumbered by the person to whom they are granted, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the life of the Participant, shall be exercisable only by the Participant. References to Participant, to the extent relevant in the context, shall include references to authorized transferees. b. Documentation. Each Award under the Plan shall be evidenced by a ------------- written instrument in such form as the Board shall determine. Each Award may contain terms and conditions in addition to those set forth in the Plan. c. Board Discretion. Except as otherwise provided by the Plan, each ---------------- type of Award may be made alone, in addition to or in relation to any other type of Award. The terms of each type of Award need not be identical, and the Board need not treat Participants uniformly. d. Termination of Status. The Board shall determine the effect on an --------------------- Award of the disability, death, retirement, authorized leave of absence or other change in the employment or other status of a Participant and the extent to which, and the period during which, the Participant, the Participant's legal representative, conservator, guardian or Designated Beneficiary may exercise rights under the Award. e. Acquisition Events ------------------ (i) Consequences of Acquisition Events. Upon the occurrence of an ---------------------------------- Acquisition Event (as defined below), (a) each outstanding Option or Award shall be assumed or an equivalent option or award shall be substituted by the successor corporation or a parent or subsidiary of the successor corporation (unless the successor corporation refuses to assume or substitute for the Option or Award), provided that any such Options substituted for Incentive Stock Options shall satisfy, in the determination of the Board, the requirements of Section 424(a) of the Code, and (b) (x) all Options then outstanding shall become immediately exercisable in full immediately prior to the effectiveness of the Acquisition Event and, unless assumed or substituted by the successor corporation, will terminate, to the extent unexercised, upon the consummation of such Acquisition Event; (y) all Restricted Stock Awards then outstanding shall become immediately free of all restrictions upon the consummation of the Acquisition Event; and (z) all other stock-based Awards shall become immediately exercisable, realizable or vested in full, or shall be immediately free of all restrictions or conditions, as the case may be, upon the consummation of the Acquisition Event. -5- An "Acquisition Event" shall mean: (x) any merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity or its parent) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity or its parent outstanding immediately after such merger or consolidation; (y) any sale of all or substantially all of the assets of the Company; or (z) the complete liquidation of the Company. (ii) Assumption of Options Upon Certain Events. The Board may grant ----------------------------------------- Awards under the Plan in substitution for stock and stock-based awards held by employees of another corporation who become employees of the Company as a result of a merger or consolidation of the employing corporation with the Company or the acquisition by the Company of property or stock of the employing corporation. The substitute Awards shall be granted on such terms and conditions as the Board considers appropriate in the circumstances. f. Withholding. Each Participant shall pay to the Company, or make ----------- provisions satisfactory to the Board for payment of, any taxes required by law to be withheld in connection with Awards to such Participant no later than the date of the event creating the tax liability. The Board may allow Participants to satisfy such tax obligations in whole or in part in shares of Common Stock, including shares retained from the Award creating the tax obligation, valued at their Fair Market Value. The Company may, to the extent permitted by law, deduct any such tax obligations from any payment of any kind otherwise due to a Participant. g. Amendment of Award. The Board may amend, modify or terminate any ------------------ outstanding Award, including but not limited to, substituting therefor another Award of the same or a different type, changing the date of exercise or realization, and converting an Incentive Stock Option to a Nonstatutory Stock Option, provided that the Participant's consent to such action shall be required unless the Board determines that the action, taking into account any related action, would not materially and adversely affect the Participant. h. Conditions on Delivery of Stock. The Company will not be obligated to ------------------------------- deliver any shares of Common Stock pursuant to the Plan or to remove restrictions from shares previously delivered under the Plan until (i) all conditions of the Award have been met or removed to the satisfaction of the Company, (ii) in the opinion of the Company's counsel, all other legal matters in connection with the issuance and delivery of such shares have been satisfied, including any applicable securities laws and any applicable stock exchange or stock market rules and regulations, and (iii) the Participant has executed and delivered to the Company such representations or agreements as the Company may consider appropriate to satisfy the requirements of any applicable laws, rules or regulations. -6- i. Acceleration. The Board may at any time provide that any Options shall ------------ become immediately exercisable in full or in part, that any Restricted Stock Awards shall be free of all restrictions, or that any other stock-based Awards may become exercisable in full or in part or free of some or all restrictions or conditions, or otherwise realizable in full or in part, as the case may be, despite the fact that foregoing options may (i) cause the application of Sections 280G and 4999 of the Code if a change in control of the Company occurs, and (ii) disqualify all or part of the Option as an incentive stock option. 9. Miscellaneous ------------- a. No Right To Employment or Other Status. No person shall have any claim -------------------------------------- or right to be granted an Award, and the grant of an Award shall not be construed as giving a Participant the right to continued employment or any other relationship with the Company. The Company expressly reserves the right at any time to dismiss or otherwise terminate its relationship with a Participant free from any liability or claim under the Plan, except as expressly provided in the applicable Award. b. No Rights As Stockholder. Subject to the provisions of the applicable ------------------------ Award, no Participant or Designated Beneficiary shall have any rights as a stockholder with respect to any shares of Common Stock to be distributed with respect to an Award until becoming the record holder thereof. c. Effective Date and Term of Plan. The Plan shall become effective on the ------------------------------- date on which it is adopted by the Board, but no Award granted to a Participant designated as subject to Section 162(m) by the Board shall become exercisable, vested or realizable, as applicable to such Award, unless and until the Plan has been approved by the Company's stockholders. No Awards shall be granted under the Plan after the completion of ten years from the earlier of (i) the date on which the Plan was adopted by the Board or (ii) the date the Plan was approved by the Company's stockholders, but Awards previously granted may extend beyond that date. d. Amendment of Plan. The Board may amend, suspend or terminate the Plan ----------------- or any portion thereof at any time, provided that no Award granted to a Participant designated as subject to Section 162(m) by the Board after the date of such amendment shall become exercisable, realizable or vested, as applicable to such Award (to the extent that such amendment to the Plan was required to grant such Award to a particular Participant), unless and until such amendment shall have been approved by the Company's stockholders. -7- e. Stockholder Approval. For purposes of this Plan, stockholder approval -------------------- shall mean approval by a vote of the stockholders in accordance with the requirements of Section 162(m) of the Code. f. Governing Law. The provisions of the Plan and all Awards made hereunder ------------- shall be governed by and interpreted in accordance with the laws of the State of Delaware, without regard to any applicable conflicts of law. Adopted by the Board of Directors on December 15, 1997 Approved by the stockholders on December 15, 1997 -8- MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Amendment No. 1 to 1997 Stock Incentive Plan ------------------------- Section 8(e)(i) of the 1997 Stock Incentive Plan of Modus Media International Holdings, Inc. is hereby restated in its entirety as follows: "(i) Consequences of Acquisition. In the event of an Acquisition --------------------------- Event (as defined below), the Board of Directors of the Company, or the board of directors of any corporation assuming the obligations of the Company, may, in its discretion, take any one or more of the following actions as to outstanding Awards: (i) provide that such Awards shall be assumed, or substantially equivalent Awards shall be substituted, by the acquiring or succeeding corporation (or an affiliate thereof) on such terms as the Board determines to be appropriate, (ii) upon written notice to Participants, provide that all unexercised Options or other Awards will terminate immediately prior to the consummation of such transaction unless exercised by the Participant within a specified period following the date of such notice, (iii) in the event of an Acquisition Event under the terms of which holders of the Common Stock of the Company will receive upon consummation thereof a cash payment for each share surrendered in the Acquisition Event (the "Acquisition Price"), make or provide for a cash payment to Participants equal to the difference between (A) the Acquisition Price times the number of shares of Common Stock subject to outstanding Options or other Awards (to the extent then exercisable at prices not in excess of the Acquisition Price) and (B) the aggregate exercise price of all such outstanding Options or other Awards, in exchange for the termination of such Options and other Awards, (iv) provide that all Restricted Stock Awards then outstanding shall become immediately free of all restrictions upon the consummation of the Acquisition Event, and (v) provide that all or any outstanding Awards shall become exercisable or realizable in full prior to the effective date of such Acquisition Event. An "Acquisition Event" shall mean: (x) any merger or consolidation which results in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity or its parent) less than 50% of the combined voting power of the voting securities of the Company or such surviving or acquiring entity or its parent outstanding immediately after such merger or consolidation; (y) any sale of all or substantially all of the assets of the Company; or (z) the complete liquidation of the Company." Adopted by the Board of Directors on April 17, 1998 EX-10.4 7 FORMS OF OPTION GRANTS UNDER 1997 STOCK INCENTIVE EXHIBIT 10.4 FORM OF LEAHY OPTION GRANT #1 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Incentive Stock Option Agreement Granted Under 1997 Stock Incentive Plan --------------------------------------- 1. Grant of Option. --------------- This agreement evidences the grant by Modus Media International Holdings, Inc., a Delaware corporation (the "Company"), on April __, 1998 to Terence M. Leahy, an employee of the Company (the "Participant"), of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 1997 Stock Incentive Plan, as amended (the "Plan"), a total of [__________________] shares of common stock, $.01 par value per share, of the Company ("Common Stock") (the "Shares") at $[__________] per Share. Unless earlier terminated, this option shall expire on April __, 2008 (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. ---------------- (a) Vesting. This option will become exercisable as to _____ Shares, ------- representing 25% of the original number of Shares, on the first anniversary of the date of the grant of this option (the "Grant Date"); _____ Shares, representing 25% of the original number of Shares, on the second anniversary of the Grant Date; _____ Shares, representing 20% of the original number of Shares, on the third anniversary of the Grant Date; _____ Shares, representing 20% of the original number of Shares, on the fourth anniversary of the Grant Date; and _____ Shares, representing 10% of the original number of Shares, on the fifth anniversary of the Grant Date. (b) Right of Exercise Cumulative. The right of exercise shall be cumulative ---------------------------- so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is exercisable until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. (c) Accelerated Vesting. Notwithstanding Section 2(a) above, upon the ------------------- termination of the Participant's employment within six (6) months following an "Acquisition Event" (as defined in the Plan) for any reason other than by the Company for Cause (as defined in the Participant's Employment Agreement with the Company dated as of January 1, 1998 (the "Employment Agreement")) or by the Participant without Good Reason (as defined in the Employment Agreement), this option will become exercisable as to 50% of the original number of Shares that would have otherwise become exercisable on each anniversary of the Grant Date subsequent to such termination. (d) Expiration. This option shall expire upon, and will not be exercisable ---------- after, the Final Exercise Date. 3. Exercise of Option. ------------------ (a) Form of Exercise. Each election to exercise this option shall be in ---------------- writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement and payment in full for the Shares purchased upon such exercise. Common Stock purchased upon the exercise of this option shall be paid for as follows: (i) in cash or by check, payable to the order of the Company; (ii) by delivery of an irrevocable and unconditional undertaking by a credit worthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a credit worthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (iii) by delivery of shares of Common Stock owned by the Participant valued at their Fair Value (as defined below), which Common Stock was owned by the Participant at least six months prior to such delivery; (iv) if permitted by the Board, by delivery of a promissory note of the Participant to the Company on terms determined by the Board (and payment to the Company by the Participant of cash in an amount equal to the par value of the Shares purchased); or (v) any combination of the above permitted forms of payment. The Participant may purchase less than the number of Shares covered hereby, provided that no partial exercise of this option may be for any fractional Share or for fewer than ten whole Shares. (b) Continuous Relationship with the Company Required. Except as otherwise ------------------------------------------------- provided in this Section 3, this option may not be exercised unless the Participant, at the time he exercises this option, is, and has been at all times since the date of grant of this option, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant ceases -------------------------------------------- to be an Eligible Participant for any reason, then, except as provided in -2- paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that -------- ---- the Participant was entitled to exercise this option on the date of such cessation. (d) Exercise Period Upon Death or Disability. If the Participant dies or ---------------------------------------- becomes "disabled" (as defined in the Employment Agreement) prior to the Final Exercise Date while he is an Eligible Participant and the Company has not terminated such relationship for "Cause" (as defined in the Employment Agreement), this option shall be exercisable, within the period of one year following the date of death or disability of the Participant, provided that this -------- ---- option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise ------------------- Date, is discharged by the Company for "Cause" (as defined in the Employment Agreement), the right to exercise this option shall terminate immediately upon the effective date of such discharge. 4. Repurchase Rights. ----------------- (a) Repurchase. Upon any termination of employment or service of the ---------- Participant with the Company, the Company shall have the right to purchase, for cash, Shares issued upon exercise of this option, upon the following terms: (i) Termination for Any Reason Other Than Cause. If the termination ------------------------------------------- of employment or service of the Participant is for any reason other than Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the Fair Value (as defined below) thereof at the time of termination. (ii) Termination for Cause. If the termination of employment or --------------------- service of the Participant is for Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the lesser of (x) Fair Value and (y) the amount paid by the Participant for such Shares. (b) Termination. The repurchase rights of the Company set forth in Section ----------- 4(a) shall terminate upon the earliest of (i) the registration of any class of equity securities of the Company under the Securities Exchange Act of 1934, as amended -3- (the "Exchange Act"), (ii) the closing of the initial public offering of equity securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), or (iii) the closing of an Acquisition Event. (c) Exercise. The Company must exercise its repurchase rights under this -------- Section 4, by written notice to the Participant, within 90 days after the termination of this option. The closing of any purchase pursuant to this Section 4 shall take place as soon as reasonably practicable at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing, the holder of the Shares to be sold shall deliver to the Company an instrument representing such Shares, duly endorsed for transfer, and the Company shall pay the purchase price therefor, by check or wire transfer. (d) Fair Value. As used in this agreement, the term "Fair Value" shall mean ---------- the fair value of the Shares as of the applicable date as determined in good faith by the Board of Directors of the Company, which determination shall be conclusive; provided, however, that, solely for purposes of this Section 4, in -------- ------- the event of a repurchase by the Company of an aggregate of 100,000 or more Shares purchased upon the exercise of the Participant's options (as adjusted for stock splits, stock dividends and similar events), the determination of Fair Value shall be subject to mutual agreement of the Company and the Participant. Absent such an agreement, Fair Value shall be determined by calculating the average of the sum of the determinations of Fair Value made by two independent investment banking firms, one of which shall be retained by the Company and one of which shall be retained by the Participant. However, if the determinations of Fair Value of such two firms differ from one another by more than 15%, the Company and the Participant shall mutually select a third independent investment banking firm to make a final determination of Fair Value with respect to the Shares then being repurchased by the Company. (e) Legend. The Company may require that each certificate representing ------ Shares of Common Stock subject to the repurchase rights set forth in this Section 4 shall bear a legend referencing such repurchase rights. 5. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with an initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause -4- (i) above as may be requested by the Company or the managing underwriters at the time of such offering. 6. Withholding. ----------- No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Common Stock of the Company (which the Participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the Participant has good title, free and clear of all liens and encumbrances) having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of shares of Common Stock having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv), and that in event the Participant is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act and the rules and regulations thereunder. Shares of Common Stock may be delivered or withheld having an aggregate Fair Value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the Participant's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Participant. 7. Nontransferability of Option. ---------------------------- This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. -5- 8. Disqualifying Disposition. ------------------------- If the Participant disposes of Shares acquired upon exercise of this option within two years from the date of grant of the option or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 9. Provisions of the Plan. ---------------------- This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. 10. Termination of Management Retention Agreements. ---------------------------------------------- This agreement supersedes in its entirety any Management Retention Agreement between the Participant and the Company, and, upon the effectiveness of this agreement, any such Management Retention Agreement shall be of no further force and effect. [signature on following page] -6- IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Dated: April __, 1998 By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- -7- PARTICIPANT'S ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 1997 Stock Incentive Plan. PARTICIPANT: ----------------------------- Address: --------------------- --------------------- -8- NOTICE OF STOCK OPTION EXERCISE Date: ____________ Modus Media International Holdings, Inc. 2 Edgewater Drive Norwood, MA 02062 Attention: Treasurer Dear Sir or Madam: I am the holder of an Incentive Stock Option granted to me under the Modus Media International Holdings, Inc. (the "Company") 1997 Stock Incentive Plan on __________ for the purchase of __________ shares of Common Stock of the Company at a purchase price of $__________ per share. I hereby exercise my option to purchase _________ shares of Common Stock (the "Shares"), for which I have enclosed __________ in the amount of ________. Please register my stock certificate as follows: Name(s): _______________________ _______________________ Address: _______________________ Tax I.D. #: _______________________ I represent, warrant and covenant as follows: 1. I am purchasing the Shares for my own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act of 1933 (the "Securities Act"), or any rule or regulation under the Securities Act. 2. I have had such opportunity as I have deemed adequate to obtain from representatives of the Company such information as is necessary to permit me to evaluate the merits and risks of my investment in the Company. -9- 3. I have sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. 4. I can afford a complete loss of the value of the Shares and am able to bear the economic risk of holding such Shares for an indefinite period. 5. I understand that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least two years and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. Very truly yours, _____________________________ (Signature) -10- EXHIBIT 10.6 FORM OF LEAHY OPTION GRANT #2 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Incentive Stock Option Agreement Granted Under 1997 Stock Incentive Plan --------------------------------------- 1. Grant of Option. --------------- This agreement evidences the grant by Modus Media International Holdings, Inc., a Delaware corporation (the "Company"), on April __, 1998 to Terence M. Leahy, an employee of the Company (the "Participant"), of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 1997 Stock Incentive Plan, as amended (the "Plan"), a total of [__________________] shares of common stock, $.01 par value per share, of the Company ("Common Stock") (the "Shares") at $[__________] per Share. Unless earlier terminated, this option shall expire on April __, 2008 (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. ---------------- (a) Vesting Upon Liquidity Condition. This option will become exercisable -------------------------------- ("vest") as to (i) _____ Shares, representing 25% of the original number of Shares, on the first anniversary of the date of the grant of this option (the "Grant Date"), (ii) _____ Shares, representing 25% of the original number of Shares, on the second anniversary of the Grant Date, (iii) _____ Shares, representing 20% of the original number of Shares, on the third anniversary of the Grant Date, (iv) _____ Shares, representing 20% of the original number of Shares, on the fourth anniversary of the Grant Date and (v) _____ Shares, representing 10% of the original number of Shares, on the fifth anniversary of the Grant Date; provided, however, that this option may be exercised as to -------- ------- shares that are vested under this Section 2(a) only if the Liquidity Condition ---- -- is met prior to such exercise. The "Liquidity Condition" shall be deemed to have been met (x) at such time on or after an "Acquisition Event" (as defined in the Plan) that the holders of shares of, or options for, the Company's Common Stock and Non-Voting Common Stock, $.01 par value per share ("Non-Voting Common Stock"), immediately prior to the Acquisition Event receive Liquid Consideration (as defined below) totalling at least $100,000,000 in exchange for their shares of, or options for, the Company's Common Stock and Non-Voting Common Stock or as a result of the sale of the shares of capital stock received by such holders in such Acquisition Event or (y) at such time after the closing of the initial underwritten public offering of the Company that the value of the outstanding shares of, or options for, the Company's Common Stock held by holders prior to the closing is at least $100,000,000. For this purpose, any options for the Company's Common Stock and Non-Voting Common Stock, and any options issued in substitution for such options pursuant to an Acquisition Event, shall be valued net of the applicable option exercise price. "Liquid Consideration" shall mean cash or shares of capital stock registered under the Securities Act of 1933, as amended (the "Securities Act"), or eligible for resale pursuant to Rule 144 under the Securities Act. (b) Right of Exercise Cumulative. The right of exercise pursuant to ---------------------------- Section 2(a) above shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. (c) Other Vesting. Notwithstanding Section 2(a) above, this option will ------------- become vested and exercisable as to 100% of the original number of Shares upon the earlier of (i) December 31, 2004, provided that the Participant is employed by the Company on such date, and (ii) the termination of the Participant's employment following an Acquisition Event for any reason other than by the Company for Cause (as defined in the Participant's Employment Agreement with the Company dated as of January 1, 1998 (the "Employment Agreement")) or by the Participant without Good Reason (as defined in the Employment Agreement). (d) Expiration. This option shall expire upon, and will not be ---------- exercisable after, the Final Exercise Date. 3. Exercise of Option. ------------------ (a) Form of Exercise. Each election to exercise this option shall be in ---------------- writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement and payment in full for the Shares purchased upon such exercise. Common Stock purchased upon the exercise of this option shall be paid for as follows: (i) in cash or by check, payable to the order of the Company; (ii) by delivery of an irrevocable and unconditional undertaking by a credit worthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a credit worthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (iii) by delivery of -2- shares of Common Stock owned by the Participant valued at their Fair Value (as defined below), which Common Stock was owned by the Participant at least six months prior to such delivery; (iv) if permitted by the Board, by delivery of a promissory note of the Participant to the Company on terms determined by the Board (and payment to the Company by the Participant of cash in an amount equal to the par value of the Shares purchased); or (v) any combination of the above permitted forms of payment. The Participant may purchase less than the number of Shares covered hereby, provided that no partial exercise of this option may be for any fractional Share or for fewer than ten whole Shares. (b) Continuous Relationship with the Company Required. Except as ------------------------------------------------- otherwise provided in this Section 3, this option may not be exercised unless the Participant, at the time he exercises this option, is, and has been at all times since the date of grant of this option, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant -------------------------------------------- ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that -------- ---- the Participant was entitled to exercise this option on the date of such cessation. (d) Exercise Period Upon Death or Disability. If the Participant dies or ---------------------------------------- becomes "disabled" (as defined in the Employment Agreement) prior to the Final Exercise Date while he is an Eligible Participant and the Company has not terminated such relationship for "Cause" (as defined in the Employment Agreement), this option shall be exercisable within the period of one year following the date of death or disability of the Participant, provided that this -------- ---- option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise ------------------- Date, is discharged by the Company for "Cause" (as defined in the Employment Agreement), the right to exercise this option shall terminate immediately upon the effective date of such discharge. 4. Repurchase Rights. ----------------- (a) Repurchase. Upon any termination of employment or service of the ---------- Participant with the Company, the Company shall have the right to purchase, for cash, Shares issued upon exercise of this option, upon the following terms: -3- (i) Termination for Any Reason Other Than Cause. If the termination ------------------------------------------- of employment or service of the Participant is for any reason other than Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the Fair Value (as defined below) thereof at the time of termination. (ii) Termination for Cause. If the termination of employment or --------------------- service of the Participant is for Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the lesser of (x) Fair Value and (y) the amount paid by the Participant for such Shares. (b) Termination. The repurchase rights of the Company set forth in ----------- Section 4(a) shall terminate upon the earliest of (i) the registration of any class of equity securities of the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the closing of the initial public offering of equity securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), or (iii) the closing of an Acquisition Event. (c) Exercise. The Company must exercise its repurchase rights under this -------- Section 4, by written notice to the Participant, within 90 days after the termination of this option. The closing of any purchase pursuant to this Section 4 shall take place as soon as reasonably practicable at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing, the holder of the Shares to be sold shall deliver to the Company an instrument representing such Shares, duly endorsed for transfer, and the Company shall pay the purchase price therefor, by check or wire transfer. (d) Fair Value. As used in this agreement, the term "Fair Value" shall ---------- mean the fair value of the Shares as of the applicable date as determined in good faith by the Board of Directors of the Company, which determination shall be conclusive; provided, however, that, solely for purposes of this Section 4, -------- ------- in the event of a repurchase by the Company of an aggregate of 100,000 or more Shares purchased upon the exercise of the Participant's options (as adjusted for stock splits, stock dividends and similar events), the determination of Fair Value shall be subject to mutual agreement of the Company and the Participant. Absent such an agreement, Fair Value shall be determined by calculating the average of the sum of the determinations of Fair Value made by two independent investment banking firms, one of which shall be retained by the Company and one of which shall be retained by the Participant. However, if the determinations of Fair Value of such two firms differ -4- from one another by more than 15%, the Company and the Participant shall mutually select a third independent investment banking firm to make a final determination of Fair Value with respect to the Shares then being repurchased by the Company. (e) Legend. The Company may require that each certificate representing ------ Shares of Common Stock subject to the repurchase rights set forth in this Section 4 shall bear a legend referencing such repurchase rights. 5. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with an initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering. 6. Withholding. ----------- No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Common Stock of the Company (which the Participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the Participant has good title, free and clear of all liens and encumbrances) having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of shares of Common Stock having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv), and that in event the Participant is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act -5- and the rules and regulations thereunder. Shares of Common Stock may be delivered or withheld having an aggregate Fair Value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the Participant's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Participant. 7. Nontransferability of Option. ---------------------------- This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. 8. Disqualifying Disposition. ------------------------- If the Participant disposes of Shares acquired upon exercise of this option within two years from the date of grant of the option or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 9. Provisions of the Plan. ---------------------- This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. 10. Termination of Management Retention Agreements. ---------------------------------------------- This agreement supersedes in its entirety any Management Retention Agreement between the Participant and the Company, and, upon the effectiveness of this agreement, any such Management Retention Agreement shall be of no further force and effect. [signature on following page] -6- IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Dated: April __, 1998 By: _____________________________ Name: ______________________ Title: _____________________ -7- PARTICIPANT'S ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 1997 Stock Incentive Plan. PARTICIPANT: _____________________________ Address: ____________________ ____________________ -8- NOTICE OF STOCK OPTION EXERCISE Date: ____________ Modus Media International Holdings, Inc. 2 Edgewater Drive Norwood, MA 02062 Attention: Treasurer Dear Sir or Madam: I am the holder of an Incentive Stock Option granted to me under the Modus Media International Holdings, Inc. (the "Company") 1997 Stock Incentive Plan on __________ for the purchase of __________ shares of Common Stock of the Company at a purchase price of $__________ per share. I hereby exercise my option to purchase _________ shares of Common Stock (the "Shares"), for which I have enclosed __________ in the amount of ________. Please register my stock certificate as follows: Name(s): _______________________ _______________________ Address: _______________________ Tax I.D. #: _______________________ I represent, warrant and covenant as follows: 1. I am purchasing the Shares for my own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act of 1933 (the "Securities Act"), or any rule or regulation under the Securities Act. 2. I have had such opportunity as I have deemed adequate to obtain from representatives of the Company such information as is necessary to permit me to evaluate the merits and risks of my investment in the Company. -9- 3. I have sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. 4. I can afford a complete loss of the value of the Shares and am able to bear the economic risk of holding such Shares for an indefinite period. 5. I understand that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least two years and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. Very truly yours, _____________________________ (Signature) -10- EXHIBIT 10.6 FORM OF LEAHY OPTION GRANT #3 MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Incentive Stock Option Agreement Granted Under 1997 Stock Incentive Plan --------------------------------------- 1. Grant of Option. --------------- This agreement evidences the grant by Modus Media International Holdings, Inc., a Delaware corporation (the "Company"), on April __, 1998 to Terence M. Leahy, an employee of the Company (the "Participant"), of an option to purchase, in whole or in part, on the terms provided herein and in the Company's 1997 Stock Incentive Plan, as amended (the "Plan"), a total of [__________________] shares of common stock, $.01 par value per share, of the Company ("Common Stock") (the "Shares") at $[__________] per Share. Unless earlier terminated, this option shall expire on April __, 2008 (the "Final Exercise Date"). It is intended that the option evidenced by this agreement shall be an incentive stock option as defined in Section 422 of the Internal Revenue Code of 1986, as amended, and any regulations promulgated thereunder (the "Code"). Except as otherwise indicated by the context, the term "Participant", as used in this option, shall be deemed to include any person who acquires the right to exercise this option validly under its terms. 2. Vesting Schedule. ---------------- (a) Vesting Upon Liquidity Condition. This option will become exercisable -------------------------------- ("vest") as to (i) _____ Shares, representing 25% of the original number of Shares, on the first anniversary of the date of the grant of this option (the "Grant Date"), (ii) _____ Shares, representing 25% of the original number of Shares, on the second anniversary of the Grant Date, (iii) _____ Shares, representing 20% of the original number of Shares, on the third anniversary of the Grant Date, (iv) _____ Shares, representing 20% of the original number of Shares, on the fourth anniversary of the Grant Date and (v) _____ Shares, representing 10% of the original number of Shares, on the fifth anniversary of the Grant Date; provided, however, that this option may be exercised as to -------- ------- shares that are vested under this Section 2(a) only if the Liquidity Condition ---- -- is met prior to such exercise. The "Liquidity Condition" shall be deemed to have been met (x) at such time on or after an "Acquisition Event" (as defined in the Plan) that the holders of shares of, or options for, the Company's Common Stock and Non-Voting Common Stock, $.01 par value per share ("Non-Voting Common Stock"), immediately prior to the Acquisition Event receive Liquid Consideration (as defined below) totalling at least $200,000,000 in exchange for their shares of, or options for, the Company's Common Stock and Non-Voting Common Stock or as a result of the sale of the shares of capital stock received by such holders in such Acquisition Event or (y) at such time after the closing of the initial underwritten public offering of the Company that the value of the outstanding shares of, or options for, the Company's Common Stock held by holders prior to the closing is at least $200,000,000. For this purpose, any options for the Company's Common Stock and Non-Voting Common Stock, and any options issued in substitution for such options pursuant to an Acquisition Event, shall be valued net of the applicable option exercise price. "Liquid Consideration" shall mean cash or shares of capital stock registered under the Securities Act of 1933, as amended (the "Securities Act"), or eligible for resale pursuant to Rule 144 under the Securities Act. (b) Right of Exercise Cumulative. The right of exercise pursuant to ---------------------------- Section 2(a) above shall be cumulative so that to the extent the option is not exercised in any period to the maximum extent permissible it shall continue to be exercisable, in whole or in part, with respect to all Shares for which it is vested until the earlier of the Final Exercise Date or the termination of this option under Section 3 hereof or the Plan. (c) Other Vesting. Notwithstanding Section 2(a) above, this option will ------------- become vested and exercisable as to 100% of the original number of Shares upon the earlier of (i) December 31, 2004, provided that the Participant is employed by the Company on such date, and (ii) the termination of the Participant's employment following an Acquisition Event for any reason other than by the Company for Cause (as defined in the Participant's Employment Agreement with the Company dated as of January 1, 1998 (the "Employment Agreement")) or by the Participant without Good Reason (as defined in the Employment Agreement). (d) Expiration. This option shall expire upon, and will not be exercisable ---------- after, the Final Exercise Date. 3. Exercise of Option. ------------------ (a) Form of Exercise. Each election to exercise this option shall be in ---------------- writing, signed by the Participant, and received by the Company at its principal office, accompanied by this agreement and payment in full for the Shares purchased upon such exercise. Common Stock purchased upon the exercise of this option shall be paid for as follows: (i) in cash or by check, payable to the order of the Company; (ii) by delivery of an irrevocable and unconditional undertaking by a credit worthy broker to deliver promptly to the Company sufficient funds to pay the exercise price, or delivery by the Participant to the Company of a copy of irrevocable and unconditional instructions to a credit worthy broker to deliver promptly to the Company cash or a check sufficient to pay the exercise price; (iii) by delivery of -2- shares of Common Stock owned by the Participant valued at their Fair Value (as defined below), which Common Stock was owned by the Participant at least six months prior to such delivery; (iv) if permitted by the Board, by delivery of a promissory note of the Participant to the Company on terms determined by the Board (and payment to the Company by the Participant of cash in an amount equal to the par value of the Shares purchased); or (v) any combination of the above permitted forms of payment. The Participant may purchase less than the number of Shares covered hereby, provided that no partial exercise of this option may be for any fractional Share or for fewer than ten whole Shares. (b) Continuous Relationship with the Company Required. Except as otherwise ------------------------------------------------- provided in this Section 3, this option may not be exercised unless the Participant, at the time he exercises this option, is, and has been at all times since the date of grant of this option, an employee, officer or director of, or consultant or advisor to, the Company or any parent or subsidiary of the Company as defined in Section 424(e) or (f) of the Code (an "Eligible Participant"). (c) Termination of Relationship with the Company. If the Participant -------------------------------------------- ceases to be an Eligible Participant for any reason, then, except as provided in paragraphs (d) and (e) below, the right to exercise this option shall terminate three months after such cessation (but in no event after the Final Exercise Date), provided that this option shall be exercisable only to the extent that -------- ---- the Participant was entitled to exercise this option on the date of such cessation. (d) Exercise Period Upon Death or Disability. If the Participant dies or ---------------------------------------- becomes "disabled" (as defined in the Employment Agreement) prior to the Final Exercise Date while he is an Eligible Participant and the Company has not terminated such relationship for "Cause" (as defined in the Employment Agreement), this option shall be exercisable within the period of one year following the date of death or disability of the Participant, provided that -------- ---- this option shall be exercisable only to the extent that this option was exercisable by the Participant on the date of his or her death or disability, and further provided that this option shall not be exercisable after the Final Exercise Date. (e) Discharge for Cause. If the Participant, prior to the Final Exercise ------------------- Date, is discharged by the Company for "Cause" (as defined in the Employment Agreement), the right to exercise this option shall terminate immediately upon the effective date of such discharge. 4. Repurchase Rights. ----------------- (a) Repurchase. Upon any termination of employment or service of the ---------- Participant with the Company, the Company shall have the right to purchase, for cash, Shares issued upon exercise of this option, upon the following terms: -3- (i) Termination for Any Reason Other Than Cause. If the termination ------------------------------------------- of employment or service of the Participant is for any reason other than Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the Fair Value (as defined below) thereof at the time of termination. (ii) Termination for Cause. If the termination of employment or --------------------- service of the Participant is for Cause (as defined in the Employment Agreement), the Company shall have the right to purchase all or any portion of the Shares issued upon exercise of this option at a price equal to the lesser of (x) Fair Value and (y) the amount paid by the Participant for such Shares. (b) Termination. The repurchase rights of the Company set forth in Section ----------- 4(a) shall terminate upon the earliest of (i) the registration of any class of equity securities of the Company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the closing of the initial public offering of equity securities of the Company under the Securities Act of 1933, as amended (the "Securities Act"), or (iii) the closing of an Acquisition Event. (c) Exercise. The Company must exercise its repurchase rights under this -------- Section 4, by written notice to the Participant, within 90 days after the termination of this option. The closing of any purchase pursuant to this Section 4 shall take place as soon as reasonably practicable at the principal office of the Company, or at such other time and location as the parties to such purchase may mutually determine. At the closing, the holder of the Shares to be sold shall deliver to the Company an instrument representing such Shares, duly endorsed for transfer, and the Company shall pay the purchase price therefor, by check or wire transfer. (d) Fair Value. As used in this agreement, the term "Fair Value" shall ---------- mean the fair value of the Shares as of the applicable date as determined in good faith by the Board of Directors of the Company, which determination shall be conclusive; provided, however, that, solely for purposes of this Section 4, -------- ------- in the event of a repurchase by the Company of an aggregate of 100,000 or more Shares purchased upon the exercise of the Participant's options (as adjusted for stock splits, stock dividends and similar events), the determination of Fair Value shall be subject to mutual agreement of the Company and the Participant. Absent such an agreement, Fair Value shall be determined by calculating the average of the sum of the determinations of Fair Value made by two independent investment banking firms, one of which shall be retained by the Company and one of which shall be retained by the Participant. However, if the determinations of Fair Value of such two firms differ -4- from one another by more than 15%, the Company and the Participant shall mutually select a third independent investment banking firm to make a final determination of Fair Value with respect to the Shares then being repurchased by the Company. (e) Legend. The Company may require that each certificate representing ------ Shares of Common Stock subject to the repurchase rights set forth in this Section 4 shall bear a legend referencing such repurchase rights. 5. Agreement in Connection with Public Offering. -------------------------------------------- The Participant agrees, in connection with an initial underwritten public offering of the Company's securities pursuant to a registration statement under the Securities Act, (i) not to sell, make short sale of, loan, grant any options for the purchase of, or otherwise dispose of any shares of Common Stock held by the Participant (other than those shares included in the offering) without the prior written consent of the Company or the underwriters managing such initial underwritten public offering of the Company's securities for a period of 180 days from the effective date of such registration statement, and (ii) to execute any agreement reflecting clause (i) above as may be requested by the Company or the managing underwriters at the time of such offering. 6. Withholding. ----------- No Shares will be issued pursuant to the exercise of this option unless and until the Participant pays to the Company, or makes provision satisfactory to the Company for payment of, any federal, state or local withholding taxes required by law to be withheld in respect of this option. Any such withholding tax requirements may be satisfied by (i) making a payment in cash or by personal check, certified check, bank draft or money order payable to the order of the Company, (ii) delivery of an unconditional and irrevocable undertaking by a broker to deliver to the Company promptly upon the settlement of the sale of the Shares to be issued sufficient funds to pay the exercise price, (iii) delivery of whole shares of Common Stock of the Company (which the Participant has held for at least six months prior to the delivery of such shares or acquired on the open market and for which the Participant has good title, free and clear of all liens and encumbrances) having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation or (iv) requesting that the Company withhold from the Shares to be delivered upon the exercise a number of shares of Common Stock having a Fair Value, determined as of the date on which such withholding obligation must be satisfied, equal to such withholding obligation; provided, however, that the Company shall have sole discretion to disapprove of an election pursuant to any of clauses (ii), (iii) or (iv), and that in event the Participant is subject to Section 16 of the Exchange Act, the Company may require that the method of satisfying such an obligation be in compliance with Section 16 of the Exchange Act -5- and the rules and regulations thereunder. Shares of Common Stock may be delivered or withheld having an aggregate Fair Value in excess of the minimum amount required to be withheld, but not in excess of the amount determined by applying the Participant's maximum marginal tax rate. Any fraction of a Share which would be required to satisfy such an obligation shall be disregarded and the remaining amount due shall be paid in cash by the Participant. 7. Nontransferability of Option. ---------------------------- This option may not be sold, assigned, transferred, pledged or otherwise encumbered by the Participant, either voluntarily or by operation of law, except by will or the laws of descent and distribution, and, during the lifetime of the Participant, this option shall be exercisable only by the Participant. 8. Disqualifying Disposition. ------------------------- If the Participant disposes of Shares acquired upon exercise of this option within two years from the date of grant of the option or one year after such Shares were acquired pursuant to exercise of this option, the Participant shall notify the Company in writing of such disposition. 9. Provisions of the Plan. ---------------------- This option is subject to the provisions of the Plan, a copy of which is furnished to the Participant with this option. 10. Termination of Management Retention Agreements. ---------------------------------------------- This agreement supersedes in its entirety any Management Retention Agreement between the Participant and the Company, and, upon the effectiveness of this agreement, any such Management Retention Agreement shall be of no further force and effect. [signature on following page] -6- IN WITNESS WHEREOF, the Company has caused this option to be executed under its corporate seal by its duly authorized officer. This option shall take effect as a sealed instrument. MODUS MEDIA INTERNATIONAL HOLDINGS, INC. Dated: April __, 1998 By:__________________________ Name:_____________________ Title:____________________ -7- PARTICIPANT'S ACCEPTANCE The undersigned hereby accepts the foregoing option and agrees to the terms and conditions thereof. The undersigned hereby acknowledges receipt of a copy of the Company's 1997 Stock Incentive Plan. PARTICIPANT: __________________________________ Address:__________________________ __________________________ -8- NOTICE OF STOCK OPTION EXERCISE Date: ____________ Modus Media International Holdings, Inc. 2 Edgewater Drive Norwood, MA 02062 Attention: Treasurer Dear Sir or Madam: I am the holder of an Incentive Stock Option granted to me under the Modus Media International Holdings, Inc. (the "Company") 1997 Stock Incentive Plan on __________ for the purchase of __________ shares of Common Stock of the Company at a purchase price of $__________ per share. I hereby exercise my option to purchase _________ shares of Common Stock (the "Shares"), for which I have enclosed __________ in the amount of ________. Please register my stock certificate as follows: Name(s): _______________________ _______________________ Address: _______________________ Tax I.D. #: _______________________ I represent, warrant and covenant as follows: 1. I am purchasing the Shares for my own account for investment only, and not with a view to, or for sale in connection with, any distribution of the Shares in violation of the Securities Act of 1933 (the "Securities Act"), or any rule or regulation under the Securities Act. 2. I have had such opportunity as I have deemed adequate to obtain from representatives of the Company such information as is necessary to permit me to evaluate the merits and risks of my investment in the Company. -9- 3. I have sufficient experience in business, financial and investment matters to be able to evaluate the risks involved in the purchase of the Shares and to make an informed investment decision with respect to such purchase. 4. I can afford a complete loss of the value of the Shares and am able to bear the economic risk of holding such Shares for an indefinite period. 5. I understand that (i) the Shares have not been registered under the Securities Act and are "restricted securities" within the meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold, transferred or otherwise disposed of unless they are subsequently registered under the Securities Act or an exemption from registration is then available; (iii) in any event, the exemption from registration under Rule 144 will not be available for at least two years and even then will not be available unless a public market then exists for the Common Stock, adequate information concerning the Company is then available to the public, and other terms and conditions of Rule 144 are complied with; and (iv) there is now no registration statement on file with the Securities and Exchange Commission with respect to any stock of the Company and the Company has no obligation or current intention to register the Shares under the Securities Act. Very truly yours, _____________________________ (Signature) -10- EX-10.5 8 1999 MANAGEMENT INCENTIVE PLAN Exhibit 10.5 - -------------------------------------------------------------------------------- [LOGO] M O D U S M E D I A I N T E R N A T I O N A L 1999 Management Incentive Plan - -------------------------------------------------------------------------------- Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- Modus Media International, Inc. 1999 Management Incentive Plan (MIP) Plan Document - -------------------------------------------------------------------------------- TABLE OF CONTENTS Section Page ---------------------------------------------------- I. Purpose 3. II. Effective Date of Plan 3. III. Eligibility 3. IV. MIP Target Payouts 3. V. Measurement 3. VI. Transition Issues 5. VII. Administration 6. VIII. Management By Objectives 7. Appendix A -- Plan Participant Notification Form re: Goals and Payouts - -------------------------------------------------------------------------------- Page 2. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- Modus Media International 1999 Management Incentive Plan (MIP) Plan Document - -------------------------------------------------------------------------------- I. Purpose ------- The objective of the 1999 Management Incentive Plan (MIP) is to recognize and reward the achievement of financial and business goals. This program, in conjunction with base salary, is designed to offer key employees of Modus Media International, Inc. and its subsidiaries (the "Company") total cash compensation opportunities that are fully competitive with market levels. II. Effective Date of Plan ---------------------- The effective date for implementation of the Plan shall be January 1, 1999. The Plan may be modified or terminated at any time by the executive management of the Company. III. Eligibility ----------- Certain designated employees whose role and responsibilities are deemed by executive management to be critical to operations and who have direct responsibility for achieving the financial results of the Company, are eligible for participation in the 1999 Management Incentive Plan. Target percentage, plan components and component weightings are defined by position. Proposed participation in the MIP Plan for new participants must be approved by the CEO of the Company. All Participants will be notified of eligibility in writing as well as individual MIP components, as shown in Appendix A. IV. MIP Target Payout ----------------- Eligible employees will be assigned a target payout for the MIP, expressed as a percentage of total, regular W-2 base earnings, including paid time off and holiday hours, (or equivalent outside the U.S.). This percentage represents the potential dollar award that will be earned at 100% achievement of goals for all Plan components. The target payout percentage will vary according to the Participant's position. Actual earnings will vary by performance. V. Measurement ----------- The Management Incentive Plan consists of three components. The Participant will be assigned a target payout for each component, expressed as a percentage of regular base salary, which is used to calculate an amount (i.e. 10% of $50,000 base earnings equals $5,000). The weightings of the components and the resultant target percentages will vary according to the Participant's position, but will always total 100% and be equal to the total MIP target payout described in the previous section. - -------------------------------------------------------------------------------- Page 3. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- The Components are: 1. Annual EBITDA minus Capital Expenditures (CapEx) ------------------------------------------------ The first component relates to performance by an organizational unit such as global, regional, or Solution Center (or a combination thereof) against budgeted performance. (In all cases, "budget" refers to the original budget and not to forecasts or QBR results.) The Participant's position determines which unit or units will apply. EBITDA minus CapEx is defined as: "Earnings before Interest and Taxes, Depreciation and Amortization, minus Capital Expenditures." REBITDA minus CapEx is defined at a Regional or a Solution Center Level as: "Earnings before Regional Assessments, Interest and Taxes, Depreciation and Amortization, minus Capital Expenditures." This component is measured on an annual basis with payout determined at year-end after close of the Company's financial reporting. The unit's performance against the budgeted goal(s), expressed as a percentage, generates a payout which is expressed as a percentage of the base salary as shown in Appendix A. This payout percentage is multiplied by the component weighting and then the base salary, for actual payout. A minimum achievement or "threshold" of EBITDA performance, before CapEx, is applied to determine payout. A Participant must be actively employed in the eligible position on December 31st of the plan year to receive any payout under this component. All annual awards are capped at 120% of target for the Annual EBITDA minus CapEx component. 2. Quarterly EBITDA minus CapEx ---------------------------- The second component is similar to the first, but measured and recorded quarterly. The same definitions of EBITDA minus CapEx and REBITDA minus CapEx as shown above apply. This component is measured on a quarterly basis with payout determined at quarter-end after close of the company's financial reporting. The unit's performance against the budgeted goal, expressed as a percentage generates a payout which is expressed as a percentage of the base salary as shown in Appendix A. This payout percentage is multiplied by the component weighting and then multiplied by the base salary for actual payout. For this component, the dollar target is determined using regular base salary for quarter. - -------------------------------------------------------------------------------- Page 4. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- A Participant must be actively employed in the eligible position for at least two out of the three months of the quarter, and be employed with Modus Media through the last day of the applicable fiscal quarter to receive any payout under this component. All Quarterly awards are capped at 120% of target. 3. Personal MBOs (Management By Objectives) ---------------------------------------- The third component is tied to individual performance against goals established by the participant and his/her manager. The Participant will generally be assigned at least three personal MBOs. These objectives may be adjusted throughout the year based on business needs. Performance against the assigned MBOs will be evaluated by the Participant's manager and an overall rating between 0-100% in 5% increments will be assigned at year end. The payout details will be as shown in Appendix A, expressed as a percentage of the annual base, and multiplied by the component weighting and then actual base salary for actual payout. The weighting of the various MBOs is determined by the rating manager. This component is measured on an annual basis with payout determined at year-end. For there to be any payout on this MBO component, the EBITDA threshold for your location must be met as shown in Appendix A. A Participant must be actively employed in the eligible position on December 31st to receive any payout under this component. Awards on MBO targets cannot exceed 100% of target amounts. VI. Transition Issues ----------------- A Participant in the Plan must be actively employed by the Company through December 31, 1999 to receive any payout on annual components. Since the annual components are calculated on regular base salary W-2 earnings (or local country equivalent), payouts for annual components will be pro-rated for those eligible Participants who are hired, promoted or transferred into an eligible position prior to 10/01/99 during fiscal year 1999. Employees who transfer out of an eligible position during the year into a non-eligible position in the Company but who are still employed as of December 31 of that year, will be considered for an award based on the number of weeks in the eligible position and earnings accrued during those weeks as a ratio to the full year. - -------------------------------------------------------------------------------- Page 5. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- A Participant who is promoted into a higher level position prior to 10/01/99, which results in a higher Plan target and/or different Plan components, targets, and goals, will have future quarterly and year-end component calculations based on the new plan. A promotion on 10/01/99 or later, will result in pro-rated payout calculations according to actual time spent under each plan. Employees hired or promoted for the first time into bonus eligible positions after 10/01/99 will not be eligible to participate in any component of the 1999 Plan. Changes in base salary due to promotional, merit or other increases will be included in a year end base earnings total which will be used for the actual Plan and component targets, and payout calculations. Retroactive pay adjustments will be applied as earnings in the quarter received for quarterly purposes and will not be applied to previous quarters. Participants who live and work in a non-United States location will have their MIP payout calculations performed in their local currency. VII. Administration -------------- The adoption of this Plan shall not be deemed to give any employee the right to be retained in the employ of Modus Media International or its subsidiaries or to interfere with the right of the Company to discharge any employee at any time, nor shall it be deemed to give the Company the right to require any employee to remain in its employ. The financial targets assigned and recognized as goals on any of the performance factors may be revised or otherwise modified by the executive management of the Company at any time, to account for any material change in the business or the Company. Any such revisions or modifications will be made in writing to all Participants as soon as possible after the need for such change is determined. A Participant's right to receive payment of an award under the Plan shall be no greater than the right of an unsecured general creditor of the Company. All awards under the Plan shall be paid from the general funds of the Company, and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such awards. The Plan shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. - -------------------------------------------------------------------------------- Page 6. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- 1999 Management by Objectives (MBO) Process -Overview & Instructions - - -------------------------------------------------------------------------------- Overview: The 1999 Management Incentive Plan incorporates an annual Management By Objectives component (MB0). The MBO component is weighted such that it accounts for 20% of a participant's targeted MIP award. All bonus eligible employees will be accountable for delivery against key strategic business objectives. Employees will generally have 3 objectives but may have more or less depending on their position. This MBO process will be instrumental in focusing and driving individual performance and the business toward attainment of 1999 objectives. The 1999 MBO process requires Managers to link all MBOs to MMI's overall 1999 business strategy and goals. All MBOs should support MMI's one or more of the four Strategic Sine Qua Nons: Growth 5% EBIT World Class IT Unparalleled Execution For North America when appropriate, the MBO process should strengthen the - ----------------- connection between MBOs and continuous improvement, based on the nature of the participant's role. Participants whose performance directly impacts external customers should have quality and service MBOs that tie to these customers. Managers of these individuals should ensure that: - -- At least one MBO is based on actions to be taken to improve the quality of products and services MMI provides. - -- At least one MBO is based on actions to be taken to improve the performance levels of the services MMI provides. The third MBO may be based on asset management, qualitative performance, or team based accomplishments. For Asia and Europe, or any participants whose performance does not directly impact external customers, MBOs may be strategic or operational depending on the nature and level of their position. Managers of these individuals should ensure that MBOs are measurable and may be based on asset management, qualitative performance, or team based accomplishments. Or, when appropriate, managers may also choose to develop quality and service MBOs that tie to the participant's internal customers at MMI. The content of MBOs is at the discretion of the manager. - -------------------------------------------------------------------------------- Page 7. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- Instructions: 1) Communicate the overall strategy and objectives of the company and specific --------------------------------------------------------------------------- objectives of function. An individual's objectives must tie directly into ---------------------- the broader business plan. Communicating this link explicitly helps to enhance the individual's understanding of the overall business and of the climate/environment in which his/her own objectives are set. 2) Develop approximately 3 strategic or major business-related objectives for -------------------------------------------------------------------------- the position. Work with the participant to develop objectives that may be ------------ quality or service-related, or strategic or operational in nature, depending on the participant's position. MBOs should involve significant positive change beyond the core responsibilities of the position, i.e., continuous improvement, enhanced service accuracy or timeliness, new or improved processes/systems, new business/product opportunities, etc. Clearly identify: ----------------- a) The goal in measurable terms (e.g., reduction of defects, improvements in service timeliness or accuracy, improved financial performance); b) The time-frames and essential milestones to meet; and c) Specific factors/behaviors likely to influence achievement of the objective. These may be internal or external in nature. 3) Discuss how and when the individual's performance against the MBOs will be -------------------------------------------------------------------------- reviewed and measured. Establish specific follow-up dates for progress --------------------- reviews, at which time, you need to craft any changes necessary and resubmit them to the contacts below for approval. 4) Discuss the year-end evaluation process. Review the MBO rating scale and --------------------------------------- impact of each MBO as it relates to determining the percentage payout achieved. Note that in 1999 there is no incremental payout for exceeding MBOs; awards are capped at 100% of target. Additionally, any payout for the MBO component is contingent upon meeting the EBITDA threshold for the participant's location. MBO Process Steps For Managers: 1. Draft individual MBOs with each bonus eligible individual on your team. 2. Submit the final MBOs to Raymund Chua (for Asia), Mike McHale (for North America), Pat Doyle (for Europe), and Diane Condon (for Corporate and OCS) by March 15, 1999. 3. Meet with employee when final approval is received to discuss any changes and/or to confirm MBOs. 4. Complete a mid-year MBO review with employee and submit any changes to the initial MBO plan with reason adjustment as necessary. 5. Conduct a year-end evaluation process and submit final ratings to the contacts previously named. - -------------------------------------------------------------------------------- Page 8. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- 1999 Management By Objective (MBO) Plan Quantitative, Qualitative and Team Based Objectives: Identify approximately 3 - --------------------------------------------------- major objectives that are Strategic (or operational), Measurable, Achievable, - ----- - - - Results oriented, and Timebound (SMART). These objectives should differentiate - - - from your core responsibilities in that they involve significant change objectives in the areas of continuous quality and service improvement, research or implementing new processes or systems, developing new product/business opportunities, etc. What to Accomplish Success Factors And Time-frame/Milestones Internal External - -------------------------------------------------------------------------------- 1. Timing: Weighting --------- Year-end Achievement: Year-end Rating --------------- -------------------- Express in a percent 0-100% - -------------------------------------------------------------------------------- 2. Timing: Weighting --------- Year-end Achievement: Year-end Rating --------------- -------------------- Express in a percent 0-100% - -------------------------------------------------------------------------------- Page 9. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- 3. Timing: Weighting --------- Year-end Achievement: Year-end Rating --------------- -------------------- Express in a percent 0-100% - -------------------------------------------------------------------------------- Individual MBO Rating --------------------- MBO #1 ------- MBO #2 ------- MBO #3 ------- VIII. Below, designate an overall 1999 final rating for MBO performance ----------------------------------------------------------------- 1999 Overall MBO Rating ----------------------- Express in a percentage 0-100% in 5% increments. ------------ - -------------------------------------------------------------------------------- Page 10. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- 1999 Management By Objective (MBO) Plan SAMPLE ONLY FOR ROLES THAT TIE TO EXTERNAL CUSTOMERS Quantitative, Qualitative and Team Based Objectives: Identify 3 major objectives - --------------------------------------------------- ----- that are Strategic (or operational), Measurable, Achievable, Results oriented, - - - - and Timebound (SMART). These objectives should differentiate from your core - responsibilities in that they involve significant Change objectives in the areas of continuous quality and service improvement, researching or implementing new processes or systems, developing new product/business opportunities, etc.
Success Factors Goal - What to Accomplish --------------------------------------- And Time-frame/Milestones Internal External - -------------------------------------------------------------------------------------------------------- 1. (Quality) Improve accuracy of month-end reporting to five Team Agreement with top customers to 99.5%. Current accuracy level is 98.2% commitment customer on reporting accuracy Timing: Process documentation and improvement action Clear objectives definition and plans implemented by 2/1/99. metrics Displayed VVA's and additional measurement systems in place Defined processes by 2/15/99. Continuous improvement in reporting accuracy metrics, resulting in a sustained accuracy level of 99.5% during and after the 3rd quarter of 1999. Year-end Achievement: Year-end Rating - --------------------- --------------- - ------------------------------------------------------------------------------------------------------- 2. (Service Levels) Improve on-time delivery levels to 99%. Cross-functional Confirm customer work/projects definitions of "On- time" Timing: Opportunity identified, communicated and initiated Defined processes by 6/1/97 Establish regular Daily metrics performance feedback process Problem prevention Year-end Achievement: Year-end Rating - --------------------- ---------------
- -------------------------------------------------------------------------------- Page 11. Modus Media International 1999 Management Incentive Plan - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- 3. Support and participate in the successful certification of Project timeline Support from ISO ISO 9002 for the Raleigh facility. Organizational priority Resources to manage needs Timing: Final certification by 10/31/99 Year-end Achievement: Year-end Rating --------------------- --------------- - --------------------------------------------------------------------------------------------------------
Individual MBO Rating --------------------- MBO #1 ------- MBO #2 ------- MBO #3 ------- IX. Below, designate an overall 1999 final rating for MBO performance ----------------------------------------------------------------- 1999 Overall MBO Rating ----------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 12. Weekly Reporting Template Solution Center: OCS Worldwide Week Ended: 10/22/1999
Software Hardware On-Demand Resp Mgmt Channel Offset US$ Mfg. Assembly Mfg. & Fulfill Prog Mgmt OCS Print Total --------------------------------------------------------------------------------- Month To Date: 1. Billings --------------------------------------------------------------------------------- 2. GL Revenue 0 --------------------------------------------------------------------------------- 3. Shipments $472,812 472,812 ---------------------------------------------------------------------------------
Notes - -------------------------------------- Input information only in yellow areas - -------------------------------------- Definitions 1. Billings Include only the net amount of invoices billed to third parties for the current calendar month 2. GL Revenue Balance in your general ledger for third party sales (Acct 4000XX) for the current calendar month 3. Shipments Net value of any items shipped to third parties (billed or unbilled) for the current calendar month EX-10.7 9 SUBLEASE DATED JUNE 18, 1997 EXHIBIT 10.7 SUBLEASE THIS SUBLEASE (this "Sublease") is made and entered into this 18th day of June, 1997, by and between THE TRAVELERS INDEMNITY COMPANY, a Connecticut corporation, (the "Sublessor"), and STREAM INTERNATIONAL INC., a Delaware corporation (the "Sublessee"). WITNESSETH: WHEREAS, pursuant to that certain lease dated the 12th day of October, 1993, as amended by a First Amendment to Lease dated June 10, 1994, a Second Amendment to Lease dated August 1, 1994 and a Third Amendment to Lease dated May 9, 1995, by and between Beacon Properties, L.P. (successor in interest to The Travelers Insurance Company) as Landlord (the "Master Landlord") and Sublessor (successor by assignment to The Travelers Insurance Company) as tenant (the "Lease"), a copy of which Lease is attached hereto and made a part hereof as Exhibit A --------- (LEASE), the Master Landlord leased to Sublessor approximately 62,972 rentable square feet of office space (the "Premises"), situated in the Building known as Westwood Business Centre, located at 690 Canton Street, Westwood, Massachusetts 02090 (the "Building"), upon and subject to the terms and conditions set forth in the Lease; WHEREAS, said Lease is and continues to be in full force and effect, and to the best of Sublessor's knowledge, Sublessor is not in default of any term or condition thereof; and WHEREAS, Sublessor desires to sublease to Sublessee approximately 23,682 rentable square feet of said Premises, situated on the first (1st) floor, as shown in cross hatching on the floor plan attached hereto and made a part hereof, as Exhibit B (PLAN OF SUBLEASED PREMISES), hereinafter (the "Subleased --------- Premises"). NOW THEREFORE, in consideration of the mutual covenants and agreements herein contained, the Sublessor hereby subleases to Sublessee and Sublessee hereby subleases from Sublessor the Subleased Premises, subject to the Lease and on the terms, covenants and conditions hereinafter provided: 1. INCORPORATION BY REFERENCE This Sublease is subject and subordinate to all of the terms and conditions of the Lease by and between Sublessor and Master Landlord, as the same may be modified or amended, except as specifically set forth herein. In the event of any conflicts between the terms of the Sublease and the terms of the Lease, for all purposes hereof, the terms of the Sublease shall control; however, to the extent that an issue is not addressed in the Sublease, and also not specifically excluded herein, the terms of the Lease shall control. Sublessee, its successors and permitted assigns, shall perform the obligations to be performed by the tenant in the Lease, as set forth therein, to the extent such terms and conditions are applicable to the Subleased Premises, as set forth herein. The terms, provisions, covenants, and conditions of the Lease are incorporated herein by reference on the following mutually accepted understandings: (a) In any case where the Master Landlord reserves the right to enter the Premises pursuant to the Lease, said right shall inure to the benefit of the Master Landlord as well as to Sublessor with respect to entry onto the Subleased Premises. (b) With respect to the performance of any other obligations required of Master Landlord under the Lease, including, but not limited to; work, services, repairs, repainting and restoration, Sublessor's sole obligation shall be to act on Sublessee's behalf in requesting the performance of the same of Master Landlord, after first receiving a request in writing from Sublessee, and to use its best efforts in order to obtain the performance of the same from Master Landlord. In the event that Master Landlord does not perform any obligation which "Landlord" is required to perform pursuant to the terms and conditions of the Lease and such affects the Subleased Premises, or if an incident arises which affects the Subleased Premises, Sublessee shall notify Sublessor in writing detailing the specific incident or describing the obligation which Master Landlord has breached and how such affects the Subleased Premises. Sublessor hereby agrees to notify the Master Landlord of such occurrence. In the event such incident or breach is not cured or remedied by the Master Landlord in the period of time as provided for under the terms of the Lease, Sublessee shall promptly notify Sublessor of the same, and if there is self-help remedy provided to the Tenant under the Lease and Sublessor reasonably determines that such should be exercised, then Sublessor shall exercise such remedy against the Master Landlord, and in such an event, Sublessee may exercise such same remedy against Sublessor. In the event of an incident affecting the use and occupancy of the Subleased Premises whereby the Lease provides the option of termination as a remedy in the event that Master Landlord has not cured the same, Sublessee shall only exercise such option to terminate this Sublease in the event that Sublessor mutually agrees to such action and Sublessor shall be exercising the same action (for the same incident) against Master Landlord. (c) In connection with any alterations, as defined in Article 4.02 of the Lease (ALTERATIONS), which are desired to be made by Sublessee, during the Term of this Sublease, the terms of Article 4.02 shall be applicable to this Sublease, except as provided to the contrary herein. The Sublessee shall obtain the Sublessor's written consent prior to the making of any such alterations, which consent the Sublessor agrees not to unreasonably withhold. All plans and specifications for such work shall be prepared by Sublessee, at Sublessee's sole cost and expense, and in accordance with all applicable Laws (as defined herein), and in a good and workmanlike manner by Sublessee or its contractors or subcontractors. Sublessee shall indemnify and hold Sublessor and Master Landlord harmless from any and all cost, expenses, injury, loss, damages, claims, demands or liability (including reasonable attorney fees) which may arise out of Sublessee's construction of any such alterations. Sublessee shall be solely responsible for any permits and licenses in order to complete the same. Sublessee agrees to employ contractors and subcontractors who will guarantee to use first-class materials and workmanship and Sublessee shall not permit any lien to be placed on record with respect to any part of the Building, or Subleased Premises for work or materials furnished or obligations incurred by or for Sublessee. Sublessee shall not permit any lien to be placed upon the Subleased Premises or the Building as a result of any alterations or improvement work made by it, and Sublessee hereby agrees that if any such lien is filed on account of the acts of Sublessee, Sublessee shall discharge any such lien by payment, bond or otherwise, within ten (10) days of recordation of the same. Upon Sublessor's receipt of Sublessee's request for any such alterations, Sublessor shall also notify Sublessee as to whether Sublessor will require such alterations to be removed upon 2 the expiration of the Sublease term pursuant to the terms and conditions of the Lease, and the Subleased Premises restored to the same condition and configuration as when delivered to Sublessee, normal wear and tear, fire and casualty excepted. Any alterations completed by Sublessee shall be completed in accordance with all applicable Laws, including Environmental Laws (as defined herein) and Sublessee hereby agrees not to use any Hazardous Materials (as defined herein) for such alterations, which shall include, however, not be limited to, the use of asbestos containing materials. (d) The terms and conditions of Article 4.01 of the Lease (SUBLEASING AND ASSIGNMENT), shall not be applicable to this Sublease and the rights of the tenant under such Article of the Lease shall not inure to the benefit of Sublessee herein. Sublessee acknowledges and agrees that no sublease, assignment, mortgage, pledge or encumbrance of this Sublease or the Subleased Premises shall be permitted. However, notwithstanding the foregoing to the contrary, Sublessee may, in accordance with the terms hereof and Article 4.01 of the Lease, except as provided to the contrary herein, assign this Sublease, or further sublease all or a portion of the Subleased Premises to a third party or an Affiliate (as hereafter defined). It is hereby agreed that Sublessee may assign this Sublease or sublease all or a portion of the Subleased Premises to a third party with the prior written consent of Sublessor, which consent shall not be unreasonably withheld or delayed, and that Sublessee may assign this Sublease or sublease all or a portion of the Subleased Premises to an Affiliate, without necessity of Sublessor's prior consent, but with thirty (30) days prior written notice to Sublessor, provided that (i) the assignee or sublessee is a bona fide entity, (ii) in the event of an assignment, the assignee assumes all of the obligations of Sublessee, as set forth in this Sublease; (iii) Sublessee is not in default (beyond any applicable notice or cure periods as provided in this Sublease) of any term or condition of this Sublease at the time that it provides notice to Sublessor of such assignment or sublet; (iv) any sublease is not in conflict with any of the terms or conditions of this Sublease or the Lease; (v) any assignment is subject to all of the terms of this Sublease; and (vi) Sublessee herein shall remain liable for all of the obligations and covenants under this Sublease. For purposes of this section 1(d) an "Affiliate" shall mean a general or limited partnership in which Tenant or its parent or successor owns a general partnership interest and has the right to manage the partnership business, or an entity in which Tenant owns one hundred percent (100%) of the equity interests, and owns or has the right to cast the votes attributable to a majority of the voting interests, or any entity with which Tenant may merge or consolidate, any entity that purchases or owns substantially all of the assets or stock of Tenant, any parent of Tenant, or any parent or subsidiary of Tenant's parent. In the event of an assignment of this Sublease or further sublet of all or any portion of the Subleased Premises to a third party, Sublessor's consent shall not be unreasonably withheld or delayed by Sublessor and Sublessor hereby agrees to provide its consent, provided that (i) the assignee or sublessee is a bona fide entity, (ii) in the event of an assignment, the assignee assumes all of the obligations of Sublessee, as set forth in this Sublease; (iii) Sublessee is not in default (beyond any applicable notice or cure periods as provided in this Sublease) of any term or condition of this Sublease at the time that it requests such consent; (iv) any sublease is not in conflict with any of the terms or conditions of this Sublease or the Lease; (v) any assignment is subject to all of the terms of this Sublease; and (vi) Sublessee herein shall remain liable for all of the obligations and covenants under this Sublease. 3 Sublessor hereby agrees to provide its consent or denial to Sublessee, within twenty (20) days of receipt of Sublessee's request, provided that such request includes the following information in order for Sublessor to provide its determination; (i) the name and address of the proposed assignee or sublessee; (ii) the nature of the proposed assignee's or sublessee's business which it will conduct or operate in the Subleased Premises; (iii) the terms of the proposed assignment or sublease; and (iv) reasonable financial information so that Sublessor can evaluate the proposed assignee. Notwithstanding the foregoing, Sublessor's consent to one assignment or sublease, does not waive the consent requirement for future assignments. (e) Notwithstanding anything in this Sublease or the Lease to the contrary, Sublessee agrees that Sublessor shall not be obligated to furnish for or to Sublessee any service of any nature whatsoever, including, without limitation, those expressly referred to in Article 3.01 of the Lease (SERVICES PROVIDED BY LANDLORD). However, in accordance with provision (b) above, Sublessor shall act on Sublessee's behalf in requesting the performance of and furnishing of such services for the Subleased Premises by Master Landlord pursuant to the terms of the Lease. In the event that Master Landlord does not provide those services as described in such Article 3.01 or in the manner as provided for therein, Sublessee shall have those certain rights in such an event as set forth in Section 1(a) above. (f) The Sublease shall not incorporate any provision of the Lease nor shall Sublessee benefit from the rights or privileges contained in any provision of the Lease, which, pursuant to and in accordance with its particular terms and conditions, is not applicable to subleases or assignments, or any provision of the Lease, which by its nature or pursuant to a specified prohibition contained in the Lease, is personal to Sublessor or would not convey or transfer by a sublease or assignment of all or a portion of the Premises. In accordance with the foregoing, this exclusion shall include the following Articles, which shall therefore not inure to or benefit Sublessee: 1.04 (Premises), 1.05 (Area Verification and Measurement), 1.07 (Lease Term), 1.08 (Improvements), 2.01 (Rent), 4,01 (Subleasing and Assignment), 4.04 (Space Adjustment Options), 4.05 (Right of First Refusal/Offer), 4.06 (Renewal Option), 4.07 (Holding Over), 4.08 (Earth Satellite Station), 7.03 (Recording of Lease) and 9.08 (Broker's Warranty). Sublessee acknowledges and agrees that the provisions specifically set forth in this provision (g) are personal to Sublessor, and those provisions of the Lease, which would by their nature be personal to the tenant under the Lease, shall continue to inure to and benefit Sublessor with respect to the Lease, this Sublease, the Premises and the Subleased Premises. 2. TERM The term of this Sublease shall be for seven (7) years and one (1) month (the "Term") and shall commence on the 1st day of July, 1997 (the "Sublease Commencement Date") and shall expire on the last day of July, 2004 (the "Sublease Expiration Date"), unless sooner terminated pursuant to any provision of the Lease or this Sublease. Sublessor and Sublessee acknowledge and agree that it is the intent of the parties hereto, that, in no event shall the Term of this Sublease extend for a period longer than the term of the Lease, as such Lease term may be canceled, terminated or reduced, pursuant to such Lease, by agreement between Master Landlord and Sublessor, or otherwise. Notwithstanding the foregoing to the contrary, and provided that Sublessee is not in default of any term or condition of this Sublease, beyond any grace or cure periods, as provided for herein, Sublessor hereby agrees (i) not to enter into any voluntary agreements with Master Landlord in order to terminate the Lease or to surrender any portion of the Subleased Premises prior to the Sublease 4 Expiration Date, except as expressly provided for under the terms of the Lease nor (ii) to modify any provision of the Lease to the extent that such modification would have an adverse affect on Sublessee's rights or obligations under this Sublease or Sublessee's use or occupancy of the Subleased Premises. Pursuant to the foregoing, Sublessor hereby covenants not to surrender any portion of the Subleased Premises (provided that this Sublease is in full force and effect) in the event that Sublessor exercises its option(s) to surrender space as expressly provided in Article 4.04 (B) (SURRENDER OF SPACE) of the Lease. Upon the early termination or expiration of this Sublease, Sublessee shall surrender the Subleased Premises to Sublessor in as good condition and order as at the Sublease Commencement Date, reasonable wear and tear excepted. If the Subleased Premises are not surrendered upon the termination or expiration of this Sublease, Sublessee shall and does hereby indemnify and hold Sublessor harmless from any claims or demands which may arise out of Sublessee's continued occupancy of the Subleased Premises, including any liability accruing to Master Landlord under the Lease. Sublessee's obligations under this provision shall survive the expiration or earlier termination of this Sublease. Any personal property owned by Sublessee, if any, which shall remain on the Subleased Premises after the expiration or early termination of this Sublease and the removal of Sublessee from the Subleased Premises may, at the option of Sublessor, be deemed to have been abandoned by Sublessee, In such event, Sublessor shall have the right to either retain such personal property as its sole property or to remove and dispose of such personal property without accountability at the expense of Sublessee, as Sublessor sees fit. If Sublessee fails to remove any property from the Subleased Premises or repair any damage caused by such removal, which removal or repair is required pursuant to any provision of this Sublease, then Sublessor may so remove or repair the same and Sublessee shall reimburse Sublessor for all reasonable and necessary costs Sublessor incurs therefrom. 3. RENT Sublessee shall pay to Sublessor monthly base rent (the "Base Rent") in accordance with the base rent schedule attached hereto and made a part hereof as Exhibit C (BASE RENT SCHEDULE), plus any applicable sales or other tax (other - --------- than an income tax) which may now or hereafter come into effect. The Base Rent shall be paid in advance on the first day of each month, commencing on the Sublease Commencement Date, without notice or demand and without abatement, deduction or offset, except as expressly provided for in this Sublease, and will be sent to The Travelers Indemnity Company, Corporate Real Estate and Services, 4400 North Point Parkway, Alpharetta, Georgia 30202, ATTN: CRE/Accounting. The first month's Base Rent installment (and any other sum due hereunder as of the Sublease Commencement Date) shall be paid upon the execution of this Sublease. In the event that the Term of this Sublease begins or ends on any day other than the first day of a calendar month, then the rental payments for such periods shall be prorated on a per diem basis. A five percent (5%) late charge may, at Sublessor's sole option, be charged as additional rent for any rental payments that arrive later than the fifth (5th) day of the month. All rental payments and any other payments due to Sublessor hereunder shall bear interest, when not received by the fifth (5th) day of the month, from the date due until paid at a rate per annum equal to the prime rate published from time to time in the Wall Street Journal plus two percent (2%). When any provision of this Sublease requires the payment of any sums of money other than Base Rent or the Sublessee 5 Escalation (as hereinafter defined), such sums of money shall be deemed additional rent, and shall be immediately due and payable, unless otherwise provided for in this Sublease. Sublessee agrees to pay Sublessor Sublessee's Proportionate Share, as such term is hereinafter defined, of any amounts payable by Sublessor pursuant to Article 2.02 (ESCALATION) of the Lease (hereinafter, the Sublessee Escalation"), over a base year of calendar year 1997 for Operating Cost Escalation, and over a base year of fiscal year 1997-1998 for Real Estate Tax Escalation, as respectively defined therein. The Building Operating Costs shall be capped in accordance with the terms of Subsection 2.02(A)(4) (CPI CAP) of the Lease. Pursuant to the terms of Subsection 2.02(A) of the Lease, Sublessee's liability for Operating Cost Escalation shall commence to accrue as of January 1, 1998, and Sublessor shall invoice Sublessee for Sublessee's Proportionate Share of the same in accordance with the terms of such Subsection 2.02(A) (and after Sublessor's receipt of Master Landlord's invoice for the same). Pursuant to the terms of Subsection 2.02(B)(7) of the Lease, Sublessee's liability for Real Estate Tax Escalation shall commence to accrue as of July 1, 1998, and Sublessor shall invoice Sublessee for Sublessee's Proportionate Share of the same in accordance with the terms of such Subsection 2.02(B)(7) (and after Sublessor's receipt of Master Landlord's invoice for the same). Sublessee will pay Sublessor such Sublessee Escalation within fifteen (15) days of receipt of an invoice, accompanied by reasonable documentation evidencing the same. Any abatements or other reductions in Building Operating Costs or Real Estate Taxes which Master Landlord passes on to Sublessor pursuant to the terms of Article 2.02 of the Lease, Sublessor agrees to also pass on to Sublessee. As used herein, "Sublessee's Proportionate Share" shall be the percentage calculated by dividing the total rentable square footage of the Subleased Premises by the total rentable square footage of the Premises. For purposes of this Sublease, Sublessee's Proportionate Share shall be deemed to be 37.61%. 4. USE AND SUBLESSEE'S COMPLIANCE WITH LAWS Sublessee shall use the Subleased Premises for general office use consistent with the terms and conditions of the Lease and this Sublease, and for no other purpose without the prior written consent of Sublessor and the Master Landlord. Notwithstanding the foregoing, in no event shall any use be made of the Subleased Premises by or for the benefit of any party in a business which is in competition with Sublessor's property casualty insurance business. Notwithstanding anything in the Lease or in this Sublease to the contrary, from and after the Sublease Commencement Date, Sublessee shall comply with all statutes, rules, ordinances, orders, codes and regulations, and legal requirements and standards issued thereunder, including, but not limited to The Americans With Disabilities Act of 1990 (the "ADA"), as the same may be enacted and amended from time to time (collectively referred to in this Sublease as the "Laws"), to the extent the same are applicable to Sublessee's use or manner of use of the Subleased Premises. In the event that Sublessee's use or manner of use of the Subleased Premises violates any provision of Laws, including but not limited to the ADA, Sublessee shall bear all expense, cost and liability for compliance with such Laws. Sublessee hereby agrees to indemnify, defend and hold Sublessor harmless from all loss, cost, liability or expense, including reasonable attorney fees, resulting from its failure to comply with all Laws relating to Sublessee's use or manner of use of the Subleased Premises. In addition, Sublessee shall (i) comply with all Environmental Laws (as hereinafter defined); (ii) not cause or permit any Hazardous Materials (as hereinafter defined) to be treated, stored, disposed of, 6 generated, or used in the Subleased Premises, provided, however, that Sublessee may store, use or dispose of products customarily found in offices and used in connection with the operation and maintenance of property if Sublessee complies with all Environmental Laws and does not contaminate the Subleased Premises or environment; (iii) promptly after receipt, deliver to Sublessor, any communication concerning any past or present, actual or potential violation of Environmental Laws, or liability of either party for environmental damages. "Environmental Laws" means all applicable present and future statutes, regulations, rules, final administratively approved unappealable guidelines, ordinances, codes, permits, or orders of all governmental agencies, departments, commissions, boards, bureaus, or instrumentalities of the United States, states and their political subdivisions and all applicable judicial, administrative and regulatory decrees and judgments relating to the protection of the public health or safety of the environment. "Hazardous Materials" include substances (a) which require remediation under Environmental Laws; or (b) which are or become defined as a hazardous waste, hazardous substance, pollutant or contaminant under any Environmental Laws; or (c) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic or mutagenic; or (d) which contain petroleum hydrocarbons, polychlorinated byphenyls, asbestos, asbestos containing materials or urea formaldehyde. Sublessor hereby covenants to Sublessee, that (i) Sublessor will perform all of the monetary obligations as the tenant under the Lease in accordance with the terms of the Lease, and that (ii) Sublessor shall perform all of the other obligations of the Lease, as the tenant thereunder, in accordance with the terms of the Lease; however, subject to the acts, actions or inaction's of any other subtenants of Sublessors', within the Premises. 5. IMPROVEMENTS Sublessee accepts the Subleased Premises in an "as is" condition and acknowledges that no representation with respect to the condition thereof has been made to it and that Sublessor has no responsibility of improving the space for Sublessee. Notwithstanding the foregoing, Sublessor shall provide Sublessee with an allowance of up to Five and 00/100 Dollars ($5.00) per rentable square feet (the "Allowance") which shall be applied towards the improvements which Sublessee is to construct in the Subleased Premises in order to prepare the same for its occupancy (hereafter the "Sublessee Improvements"). The amount of the Allowance which is used by Sublessee for the Sublessee Improvements, shall be amortized into the Base Rent over the Term of the Sublease at an interest rate of ten percent (10%). Any construction in and to the Subleased Premises, to be performed by Sublessee, in order to prepare the same for its occupancy, shall be done in accordance with the terms and conditions of Section 1 (c) (INCORPORATION BY REFERENCE) hereof, and in a good and workmanlike manner by Sublessee or its contractors or subcontractors and shall be performed and comply at the time of completion, with all applicable laws, ordinances, regulations and orders of the federal, state, county or other governmental authorities having jurisdiction thereof Sublessee shall indemnify and hold Sublessor and Master Landlord harmless from any and all cost, expenses, injury, loss, damages, claims, demands or liability (including reasonable attorney fees) which may arise out of Sublessee's construction of any such improvements. Sublessee shall be solely responsible for any permits and licenses in order to complete the same. Sublessor shall make payment to Sublessee within thirty (30) days of receipt of invoices evidencing the same. Once all of the Sublessee Improvements have been completed, Sublessee shall notify Sublessor in writing and an amendment to this Sublease shall be drafted modifying the Base Rent in order to incorporate the actual used portion of the Sublessee Allowance (in the method describe above) for the Term of the Sublease. Sublessee's construction of the 7 Sublessee Improvements shall in no way delay the Sublease Commencement Date as set forth in this Sublease. Notwithstanding anything contained herein to the contrary, Sublessee may have access to the Subleased Premises as of June 1, 1997 (provided that this Sublease is fully executed between the parties), in order to prepare the same for its occupancy. In the event that Sublessee occupies the Subleased Premises prior to the Sublease Commencement Date, as set forth herein, all terms and conditions of this Sublease shall apply, to both parties, except for the payment of Base Rent and any other sums due hereunder, and Sublessor shall not be obligated to furnish any services (or request the provision thereof by Master Landlord) to the Subleased Premises until the actual Sublease Commencement Date, except to the extent required in order for Sublessee to install its trade fixtures. In the event that Sublessee commences its business operations on the Subleased Premises prior to the Sublease Commencement Date, the Sublease Commencement Date shall be deemed to have occurred as of such time, and Sublessee shall be obligated to commence all rent payments as of such date. Sublessee agrees to employ contractors and subcontractors who will guarantee to use first-class materials and workmanship and Sublessee shall not permit any lien to be placed on record with respect to any part of the Building, or Subleased Premises for work or materials furnished or obligations incurred by or for Sublessee. Sublessee shall discharge any such lien by payment, bond or otherwise, within ten (10) days of recordation of the same. 6. PARKING Throughout the Term of this Sublease, as long as Sublessee shall have performed within the applicable notice periods all of the agreements on Sublessee's part to be performed, Sublessor shall make available to Sublessee parking spaces, on a non-exclusive basis, based on the ratio of four (4) parking spaces for every 1,000 square feet of rentable area of the Subleased Premises. Of these parking spaces, one (1) covered parking space, located in the parking garage below the Building, shall be provided, per every 2,100 square feet of rentable area, as further described on Exhibit E (PLAN OF PARKING GARAGE PARKING), attached hereto --------- and made a part hereof. The remaining parking spaces shall be located in the paved surface parking lot adjacent to the Building. All parking spaces shall be provided (and utilized) in accordance with the terms and conditions of the Lease. At any time during the Term of this Sublease, if Sublessee or its invitees use more than the specified number of spaces, Sublessee shall, within five (5) days of receipt of a notice from Sublessor cease and desist immediately from using said additional spaces. Failure to so comply with this requirement shall constitute a default of this Sublease. 7. SIGNAGE Notwithstanding the terms of Article 4.03 (TENANT SIGNAGE) of the Lease to the contrary, Sublessor shall provide Sublessee with Building standard directory and suite entry signage, at the sole cost and expense of Sublessee. No other terms or conditions of such Article 4.03 of the Lease shall be applicable to this Sublease. 8. DEFAULT BY SUBLESSEE If (i) Sublessee does not fulfill any of the terms, covenants, or agreements of the Lease or this Sublease to be performed by Sublessee, including, but not limited to, the payment of the Base Rent, the Sublessee Escalation or additional rent, and such breach shall not have been remedied (or proper 8 corrective measures to cure the breach have not commenced) within five (5) days after written notice from Sublessor; or (ii) Sublessee commits any event of default as described in Article 8.01 of the Lease (DEFAULT BY TENANT), as herein incorporated, and such is not cured within the notice and cure period provided for therein; or (iii) Sublessee causes Sublessor to be put into default under the terms of the Lease; or (iv) Sublessee is the subject of an attachment, execution or other judicial seizure of substantially all of Sublessee's assets located at the Subleased Premises or of Sublessee's interest in this Sublease; or (v) Sublessee assigns this Sublease or sublets all or any portion of the Subleased Premises, except as expressly provided for in Section 1 (d) of this Sublease, and such assignment or sublet is not amended, modified or terminated within twenty (20) days after written notice from Sublessor to Sublessee, which notice shall set forth how such assignment or sublet is in violation of the terms of this Sublease; or (vi) Sublessee is the subject of the filing of a petition in any bankruptcy or other insolvency proceeding, by or against Sublessee, or Sublessee commences an act seeking any relief under any state or federal debtor relief law, or Sublessee is the subject of the filing, by or against Sub lessee, for the reorganization or modification of Sublessee's capital structure, or a trustee or receiver is appointed to take possession of substantially all of Sublessee's assets or the leasehold; however, if such a filing or petition is filed against Sublessee by non-affiliated third parties, then such filing shall not be a Sublessee Default unless Sublessee fails to have the proceedings initiated by such petition dismissed within sixty (60) days after filing thereof; or (vii) Sublessee admits or indicates an admission that it cannot meet its obligations as they become due; or (viii) or Sublessee makes an assignment for the benefit of its creditors; then such failure or occurrence or any such events as set forth in (i) through (viii) shall constitute a Sublessee event of default hereunder (a Sublessee Default"). Upon the occurrence of any Sublessee Default which is not cured by Sublessee within the grace periods specified in this Section, Sublessor shall have the following rights and remedies, in addition to all other rights and remedies available to Sublessor pursuant to the Lease, or in law or in equity: (a) Sublessor may give written notice to Sublessee specifying such Sublessee Default or Defaults and stating that this Sublease and the Term hereby demised shall expire and terminate on the date specified in such notice, and upon the date specified in such notice, this Sublease and the Term hereby demised and all rights of Sublessee under the Sublease shall expire and terminate. Upon any termination of this Sublease, Sublessee shall quit and peaceably surrender the Subleased Premises, and all portions thereof, to Sublessor, and Sublessor, upon or at any time after any termination, may, to the extent permitted by law, without further notice, enter upon and reenter the Subleased Premises, and all portions thereof, and possess and repossess itself thereof by force, summary proceeding, ejectment or otherwise, and may dispossess Sublessee and remove Sublessee and all other persons and property from the Subleased Premises and the right to receive all rental and other income of and from the same. (b) Sublessor may elect not to terminate this Sublease, and Sublessor may instead terminate Sublessee's right of possession and may repossess the Subleased Premises by forcible entry and detainer suit, by taking peaceful possession or otherwise, without terminating this Sublease, in which event Sublessor shall exert commercially reasonable efforts to mitigate it damages and relet the Subleased Premises for the account of Sublessee, for such rent and upon such terms as shall be reasonably satisfactory to Sublessor. Sublessor shall not be required to accept any sublessee offered by Sublessee or observe any instruction given by Sublessee about such reletting or do any act or exercise any care or diligence with respect to such reletting or to the mitigation of damages. For the purpose of such reletting, Sublessor may decorate or make any repairs, changes, improvements, 9 alterations, or additions in or to the Subleased Premises to the extent deemed by Sublessor desirable or convenient (the "Reletting Alterations"). (c) No such termination of Sublessee's right to possess the Subleased Premises under this Section shall relieve Sublessee of its liabilities and obligations under this Sublease (as if such right of possession had not been so terminated or expired), and such liabilities and obligations shall survive any such termination of possession. In the event of any such termination of Sublessee's right of possession, whether or not the Subleased Premises, or any portion thereof, shall have been relet, Sublessee shall pay the Sublessor a sum equal to the Base Rent, and the Sublessee Escalation and any other charges required to be paid by Sublessee up to the time of such termination of such right of possession and thereafter Sublessee, until the end of the Term of this Sublease, shall be liable to Sublessor for and shall pay to Sublessor: (i) the equivalent of the amount of the Base Rent and the Sublessee's Escalation payable under this Sublease, less (ii) the net proceeds of any reletting effected ---- pursuant to the provisions of this Section after deducting all of Sublessor's reasonable expenses in connection with such reletting, including, without limitation, all reletting costs, brokerage commissions, attorneys' fees, the costs of Reletting Alterations for the Subleased Premises, or any portion thereof. Sublessee shall pay such amounts in accordance with the terms of this Section as set forth in a written statement thereof from Sublessor to Sublessee (hereinafter, the "Deficiency") to Sublessor in monthly installments on the days on which the Base Rent is payable under this Sublease, and Sublessor shall be entitled to recover from Sublessee each monthly installment of the Deficiency as the same shall arise. Sublessee agrees that Sublessor may file suit to recover any sums that become due under the terms of this Section from time to time, and all reasonable costs and expenses of Sublessor, including attorneys' fees and costs incurred in connection with such suits shall be payable by Sublessee on demand. (d) At any time after a Sublessee Default and the termination of the Sublease by Sublessor, whether or not Sublessor shall have collected any monthly Deficiency as set forth in this Section, Sublessor shall be entitled to recover from Sublessee, and Sublessee shall pay to Sublessor, on demand, as and for final damages for such Sublessee Default and in lieu of any subsequent Deficiency (but without limitation of the provisions of subsection (f) hereof): (i) all the Base Rent and the Sublessee Escalation and other sums due and payable by Sublessee on the date of termination; plus ---- (ii) the costs of curing the Sublessee Default existing at or prior to the date of termination, including the cost of any attorney fees incurred by Sublessor; plus ---- (iii) the cost of recovering possession of the Subleased Premises and preparation for reletting, including, without limitation, Reletting Alterations, brokerage and management commissions, operating expenses, attorney's fees, rent concessions and alteration costs; plus ____ (iv) the amount by which the then present worth of the aggregate of the Base Rent and Sublessee's Escalation and any other charges to be paid by Sublessee hereunder for the then unexpired Term of this Sublease (assuming this Sublease had not been so terminated) is greater than the then present worth of the then aggregate fair market rent of the Subleased Premises which can be reasonably expected during the same period (taking into account rentals received by Sublessor under a replacement Sublease of the Subleased Premises). In the computation of present 10 worth, a discount at the then market discount rate as reasonably determined by Sublessor shall be employed. (e) Any and all property belonging to Sublessee or to which Sublessee is or may be entitled which may be removed from the Subleased Premises by Sublessor pursuant to the authority of this Sublease or applicable law, may be handled, removed or stored in a commercial warehouse or otherwise by Sublessor at Sublessee's risk and expense and Sublessor shall in no event be responsible for the value, preservation or safekeeping thereof. Sublessee shall pay to Sublessor, upon demand, any and all expenses incurred in such removal and all storage charges for such property so long as the same shall be in Sublessor's possession or under Sublessor's control. (f) Sublessor shall have the right of injunction, in the event of a breach or threatened breach by Sublessee of any of the agreements, conditions, covenants or terms hereof, to restrain the same and the right to invoke any remedy allowed by law or in equity, whether or not other remedies, indemnity or reimbursements are herein provided. The rights and remedies given to Sublessor in this Sublease are distinct, separate and cumulative remedies; and no one of them, whether or not exercised by Sublessor, shall be deemed exclusive of any of the others. Sublessor may collect and receive any rent due from Sublessee, and the payment thereof shall not constitute a waiver of or affect any notice or demand given, suit instituted or judgment obtained by Sublessor, or be held to waive, affect, change, modify or alter the rights or remedies that Sublessor has against Sublessee in equity, at law, or by virtue of this Sublease. No receipt or acceptance by Sublessor from Sublessee of less than the monthly rent herein stipulated shall be deemed to be other than a partial payment on account for any due and unpaid stipulated rent; no endorsement or statement on any check or any letter or other writing accompanying any check or payment of rent to Sublessor shall be deemed an accord and satisfaction, and Sublessor may accept and negotiate such check or payment without prejudice to Sublessor's rights to (i) recover the remaining balance of such unpaid rent, or (ii) pursue any other remedy provided in this Sublease. Nothing herein shall limit or prejudice the right of Sublessor to prove for and obtain in proceedings for bankruptcy or insolvency by reason of any such termination, an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which the damages are to be proved, whether or not the amount be greater, equal to or less than the amount of the loss or damage referred to above. 9. INSURANCE Pursuant to Article 5.01 (INSURANCE) of the Lease, Sublessor may self-insure the coverages provided for therein. This self-insurance option is personal to Sublessor and such right shall not be extended to nor inure to the benefit of Sublessee and Sublessee shall be required to maintain, at its expense, during the Term of this Sublease: Commercial General Liability Insurance, including contractual liability coverage, with minimum limits of not less than $1,000,000 per occurrence and $4,000,000 in excess per occurrence; all-risk property damage insurance for all of Sublessee's personal property up to the full replacement value thereof; applicable Worker's Compensation Insurance with statutory minimum limits; and Employer's Liability Insurance with minimum limits of not less than $1,000,000. All such insurance policies shall be issued by insurance companies licensed to do business in the state where the Subleased Premises is located, shall name Sublessor and Master Landlord as additional insureds, as their interests may appear, and shall provide that the insurance shall not be canceled or materially changed in the scope or amount of coverage unless 11 fifteen (15) days advance notice is given to Sublessor. Prior to the Sublease Commencement Date, Sublessee shall provide Sublessor with a certificate of insurance, evidencing such coverages and naming Sublessor and Master Landlord as additional insureds. 10. INDEMNIFICATION Sublessee shall and hereby does indemnify and hold Master Landlord and Sublessor harmless from and against any and all actions, claims, demands, damages, liabilities and expenses (including, without limitation, reasonable attorney's fees) asserted against, imposed upon or incurred by Sublessor or Master Landlord by reason of; (i) any violation caused, suffered or permitted by Sublessee, its agents, servants, employees or invitees, of any of the applicable terms, covenants, conditions of the Lease or of this Sublease; (ii) any damage or injury to persons or property occurring upon or in connection with the use or occupancy of the Subleased Premises (and/or any other facility accessed and used by Sublessor, whether within the Premises or on or about the Building as defined in the Lease, which use shall also be extended to Sublessee), the Premises or the Building, except to the extent caused by the negligence or willful misconduct of Master Landlord or Sublessor, or their respective agents, employees or invitees; and (iii) any damage or injury to persons or property which is caused by the negligence or willful misconduct of Sublessee, its agents, employees, contractors or invitees. Sublessor shall and hereby does indemnify and hold Sublessee harmless from and against any and all actions, claims, demands, damages, liabilities and expenses (including, without limitation; reasonable attorney's fees) asserted against, imposed upon or incurred by Sublessee by reason of (i) any breach or default by Sublessor, or its employees, agents or contractors of any of the applicable terms, covenants, conditions of this Sublease, or (ii) any damage or injury to persons or property which is caused by the negligence or willful misconduct of Sublessor, its agents, employees, contractors or invitees. 11. NOTICES All notices with respect to this Sublease will be sent in writing through certified mail, or via a nationally recognized carrier of overnight mail (e.g. Federal Express), postage prepaid, to Sublessee and to Sublessor at the following addresses or to such other addresses which may be designated in writing from time to time. Sublessee: Stream International Inc. 690 Canton Street Westwood, Massachusetts 02090 with a copy to: Hale and Dorr, LLP. 60 State Street Boston, Massachusetts 02109 Attn: Joel H. Sirkin, Esquire Sublessor: The Travelers Indemnity Company One Tower Square, 1 MSA Hartford, CT 06183-7130 Attn: Corporate Real Estate & Services 12 With a copy to: The Travelers Indemnity Company Corporate Real Estate & Services Senior Manager 4400 North Point Parkway Alpharetta, Georgia 30202 12. BROKERS Sublessor and Sublessee warrant and represent that they have dealt with no real estate broker in connection with this Sublease other than Trammell Crow Company and Spaulding and Slye, and that no other real estate broker is entitled to any commission on account of this Sublease. Each of Sublessor and Sublessee will indemnify and hold the other harmless from any loss, cost, damage or expense, including reasonable attorney fees, which the other shall incur on account of the falsity of the maker's foregoing representation and warranty when made. 13. SECURITY DEPOSIT As security for the faithful performance and observance by Sublessee of the terms, provisions, and conditions of this Sublease, Sublessee shall deliver to Sublessor simultaneously with the execution of this Sublease, an irrevocable letter of credit running in favor of Sublessor, issued by Citicorp Services, Inc., in the amount of Six Hundred Thirty-One Thousand Five Hundred Twenty and 00/100 Dollars ($631,520.00). A copy of such letter of credit shall be attached hereto as Exhibit D. The letter of credit shall be irrevocable for the term thereof and shall provide that it is automatically renewable for a period ending not earlier than sixty (60) days after the expiration of the term hereby demised without any action whatsoever on the part of Sublessor. In addition, Sublessor hereby agrees to allow for a reduction in the amount of the letter of credit, at a rate of 25% (of the initial amount) per year. Such letter of credit shall therefore run in favor of Sublessor in the following amounts: July 1, 1997 - July 31, 2000: $631,520.00 August 1, 2000 - July 31, 2001: $473,640.00 August 1, 2001 - July 31, 2002: $315,760.00 August 1, 2002 - July 31, 2003: $157,880.00 August 1, 2003 - July 31, 2004: $ 39,470.00 (equal to one (1) months rent until the end of the Sublease Term)
The form and terms of the letter of credit (and the bank issuing the same) shall be acceptable to Sublessor and shall provide, among other things, in effect that: (1) As a condition to payment, thereon, Sublessor shall certify that a default by Sublessee under the Sublease has occurred, and that such default remains uncured after the expiration of the applicable default or cure period provided in the Sublease; (2) Sublessor shall have the right to draw down on an amount up to the face amount of the letter of credit, upon the presentation to the issuing bank of Sublessor's statement that such amount is due to Sublessor under the terms and conditions of this Sublease, it being understood that if Sublessor is a corporation, then such statement shall be signed 13 by an officer of such corporation. If Sublessor does draw down on any amount of the letter of credit, upon presentation to the issuing bank of the foregoing, the issuing bank shall wire transfer, in United States dollars, the amount to be drawn down to the bank of Sublessor's choice as stated in its notice; (3) The letter of credit will be honored by the issuing bank without inquiry as to the accuracy thereof and regardless of whether the Sublessee disputes the content of such statement; (4) In the event of a transfer of Sublessor's interest in the Lease of which the Sublease is a part, Sublessor shall have the right to transfer the letter of credit to the transferee and thereupon the Sublessor shall, without any further agreement between the parties, be released by Sublessee from all liability therefore, and it is hereby agreed that the provisions hereof shall apply to every transfer or assignment of said letter of credit to a new Sublessor. (5) Sublessee further covenants that it will not assign or encumber said letter of credit or any part thereof and that neither Sublessor nor its successors or assigns will be bound by any such assignment, encumbrance, attempted assignment or attempted encumbrance; (6) Without limiting the generality of the foregoing, if the letter of credit expires earlier than sixty (60) days after the expiration of the term of the Sublease, or the issuing bank notifies Sublessor that it shall not renew the letter of credit, Sublessor will accept a renewal thereof or substitute letter of credit (such renewal or substitute letter of credit to be in effect not later than thirty (30) days prior to the expiration thereof), irrevocable and automatically renewable as above provided to sixty (60) days after the end of the term of this Sublease upon the same terms and conditions as the expiring letter of credit or such other terms as may be acceptable to Sublessor. 14. WAIVER OF CONSEQUENTIAL DAMAGES Pursuant to Article 8.06 (WAIVER OF CONSEQUENTIAL DAMAGES) of the Lease, and to the extent provided for therein, neither Sublessor nor Sublessee shall be liable to the other under or in connection with this Sublease for any consequential damages and both Sublessor and Sublessee waive, to the full extent permitted by law, any claim for consequential damages. 15. SUBLESSOR'S RIGHT TO PERFORM SUBLESSEE'S COVENANTS If Sublessee shall at any time fail to pay any amounts due under this Sublease or to obtain, pay for, maintain or deliver any of the insurance policies provided for hereunder, or shall fail to perform any other act on its part to be made or performed hereunder, then Sublessor, after twenty (20) days notice to Sublessee, except when other notice is expressly provided for in this Sublease (or without notice in case of an emergency as may in Sublessor's opinion exist), and without waiving or releasing Sublessee from any obligation of Sublessee contained in this Sublease, may (but shall be under no obligation to): (a) Pay any amount payable by Sublessee pursuant to this Sublease; or 14 (b) Obtain, pay for and maintain any of the insurance policies provided for herein to be furnished by Sublessee; or (c) Make any other payments or perform any act on Sublessee's part to be made or performed as provided in this Sublease. Sublessor may enter upon the Subleased Premises for any such purpose, and take all such action thereon as may be necessary therefor. All sums so paid by Sublessor and all costs and expenses incurred by Sublessor in connection with the performance of any such act, together with interest thereon at the rate per annum which is two percentage points above the Prime Rate published in the Wall Street Journal from the respective dates of Sublessor's making of each such payment or incurring of each such cost and expense, shall be paid by Sublessee to Sublessor on demand as additional rent hereunder, and Sublessor shall not be limited in the proof of any damages which Sublessor may claim against Sublessee arising out of or by reason of Sublessee's failure to provide and keep in force insurance as aforesaid to the amount of the insurance premium or premiums not paid or incurred by Sublessee and which would have been payable upon such insurance, but Sublessor shall also be entitled to recover as damages for such breach the uninsured amount of any loss, to the extent of any deficiency in the minimum amount of insurance required by the provisions of this Sublease, and damages, costs and expenses of suit suffered or incurred by reason of damage to, or destruction of, and part of the premiums occurring during any period when Sublessee shall have failed or neglected to provide such insurance as required. Upon the expiration or termination of this Sublease, the unearned premiums upon any such insurance policies lodged with Sublessor by Sublessee shall belong to Sublessor. 16. ENTIRE AGREEMENT This Sublease, the Exhibits attached hereto and the applicable terms and conditions of the Lease which have been incorporated herein by reference, contain the entire agreement between the parties concerning the Subleased Premises and shall supersede any other agreements between the parties concerning this matter, whether oral or written. This Sublease shall not be modified, canceled or amended except by written agreement, signed by both parties. 17. SUCCESSORS AND ASSIGNS The obligations of this Sublease shall bind and benefit the successors and permitted assigns of the parties with the same effect as if mentioned in each instance where a party hereto is named or referred to. 18. TIME IS OF THE ESSENCE Time is of the essence with respect to the performance of all conditions, obligations and elections of Sublessee hereunder. 19. CAPTIONS The captions appearing in this Sublease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this Sublease nor in any way affect this Sublease. 15 20. EXHIBITS The following exhibits (the "Exhibits") were attached to this Sublease and made a part hereof prior to the execution of this Sublease: Exhibit A Lease Exhibit B Plan of Subleased Premises Exhibit C Base Rent Schedule Exhibit D Letter of Credit Exhibit E Plan of Parking Garage Parking 16 IN WITNESS WHEREOF, Sublessor and Sublessee have executed this Sublease as of the day and year first above written. WITNESS: SUBLESSOR: THE TRAVELERS INDEMNITY COMPANY /s/ Ann Buske - -------------------- /s/ [ILLEGIBLE] By: /s/ Wayne E. Mills - -------------------- -------------------------- Wayne E. Mills Its Vice President SUBLESSEE: /s/ [ILLEGIBLE] STREAM INTERNATIONAL INC. - -------------------- 6.13.97 By: /s/ [ILLEGIBLE] - -------------------- -------------------------- Its President 17 ACKNOWLEDGMENT OF SUBLESSOR: STATE OF CONNECTICUT) ) ss. _______________ COUNTY OF HARTFORD ) On this 3rd day of July, 1997, before me, the undersigned officer, personally appeared Wayne E. Mills, known to me to be the Vice President of The Travelers Indemnity Company, a corporation, and that he as such Vice President, duly authorized, executed the foregoing instrument as his free act and deed on behalf of the corporation for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand. /s/ [ILLEGIBLE] -------------------------------- Notary Public/ My commission expires: ___________ ACKNOWLEDGMENT OF SUBLESSEE: STATE OF ) ) ss. ________________ COUNTY OF ) On this ____ day of ______________, 199_, before me, the undersigned officer, personally appeared ___________________, known to me to be the _________________ of _______________________, a ________________________, and that he/she as such _____________________, duly authorized, executed the foregoing instrument as his/her free act and deed on behalf of _______________________ for the purposes therein contained. IN WITNESS WHEREOF, I have hereunto set my hand. /s/ Terese Foley-Groppi -------------------------------- Notary Public/ Commissioner of the Superior Court My commission expires: 8/23/2002 ---------- 18 (PLAN OF SUBLEASED PREMISES) SCHEDULE 1 [DRAWING APPEAR HERE] EXHIBIT C BASE RENT SCHEDULE Rentable Rental Monthly Annual Period Area Rate Rent Rent - ------ ---- ---- ---- ---- 7/1/97- 8/31/98 23,682 $20.00 $ 39,470.00 $473,640.00 8/1/98- 7/31/99 23,682 $20.50 $ 40,456.75 $485,481.00 8/1/99- 7/31/2000 23,682 $20.75 $ 40,950.13 $491,401.50 8/1/00- 7/31/2001 23,682 $21.00 $ 41,443.50 $497,322.00 8/1/01- 7/31/2002 23,682 $21.25 $ 41,936.88 $503,242.50 8/1/02- 7/31/2003 23,682 $21.50 $422,430.25 $509,163.00 8/1/03- 7/31/2004 23,682 $21.75 $ 42,923.63 $515,083.50 19 EXHIBIT D LETTER OF CREDIT CITICORP SERVICES, INC. Citibank, N.A. NORTH AMERICAN TRADE FINANCE JUNE 24, 1997 THE TRAVELERS INDEMNITY COMPANY 4400 NORTH POINT PARKWAY SUITE 170 ALPHARETTA, GA 30202 REF: IRREVOCABLE LETTER OF CREDIT NO. NY-00689-30021370 GENTLEMEN: BY ORDER OF OUR CLIENT, STREAM INTERNATIONAL, INC., 105 ROSEMONT ROAD, WESTWOOD, MA 02090, WE HEREBY OPEN OUR IRREVOCABLE LETTER OF CREDIT NO. NY-00689-30021370 IN YOUR FAVOR FOR AN AMOUNT NOT TO EXCEED IN THE AGGREGATE US DOLLARS 631,520.00 (SIX HUNDRED THIRTY ONE THOUSAND FIVE HUNDRED TWENTY AND 00/100 US DOLLARS), EFFECTIVE AUGUST 1, 1997 AND EXPIRING AT OUR 111 WALL STREET OFFICE, NEW YORK N.Y. 10043, OR SUCH OTHER OFFICE AS WE MAY ADVISE FROM TIME TO TIME, WITH OUR CLOSE OF BUSINESS ON SEPTEMBER 30, 1998, OR ANY FUTURE EXPIRATION DATE AS DESCRIBED HEREIN. FUNDS HEREUNDER ARE AVAILABLE TO YOU AGAINST PRESENTATION OF YOUR SIGHT DRAFT(S) DRAWN ON US MENTIONING THEREON OUR LETTER OF CREDIT NUMBER NY-00689-30021370, ACCOMPANIED BY YOUR PURPORTEDLY SIGNED STATEMENT CERTIFYING THAT THE APPLICANT OF CREDIT IS IN DEFAULT OF THE LEASE AGREEMENT ENTERED INTO BETWEEN THE TRAVELERS INDEMNITY COMPANY AND STREAM INTERNATIONAL, INC., FOR THE PREMISES LOCATED AT 690 CANTON STREET, WESTWOOD, MA 02109 AND THAT THE APPLICABLE NOTICES HAVE BEEN GIVEN AND THE CURE PERIOD EXPIRED. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT THE AVAILABLE BALANCE UNDER THIS LETTER OF CREDIT WILL AUTOMATICALLY REDUCE WITHOUT AMENDMENT BASED UPON THE FOLLOWING SCHEDULE IF THIS LETTER OF CREDIT IS RENEWED FOR THOSE PERIODS: DATE OF REDUCTION AMOUNT AVAILABLE UNDER LETTER OF CREDIT AUGUST 1, 2000: $473,640.00 AUGUST 1, 2001: $315,760.00 AUGUST 1, 2002: $157,880.00 AUGUST 1, 2003: $ 39,470.00 (ONE MONTH'S RENT TO END OF TERM SEE NEXT PAGE EXHIBIT D LETTER OF CREDIT PAGE 2 ________________________________________________________________________________ CITICORP SERVICES, INC. Citibank, N.A. IT IS A CONDITION OF THIS LETTER OF CREDIT THAT IT SHALL BE DEEMED AUTOMATICALLY EXTENDED WITHOUT AMENDMENT FOR 12 MONTHS FROM THE PRESENT OR ANY FUTURE EXPIRATION DATE HEREOF, UNLESS 60 DAYS PRIOR TO ANY SUCH DATE WE SHALL NOTIFY YOU BY REGISTERED MAIL THAT WE ELECT NOT TO CONSIDER THIS LETTER OF CREDIT RENEWED FOR ANY SUCH ADDITIONAL PERIOD, HOWEVER THIS LETTER OF CREDIT WILL NOT BE EXTENDED BEYOND THE FINAL EXPIRATION DATE OF JULY 31, 2004. UPON RECEIPT BY YOU OF SUCH NOTICE, YOU MAY DRAW HEREUNDER BY MEANS OF YOUR DRAFT ON US AT SIGHT ACCOMPANIED BY YOUR WRITTEN STATEMENT THAT THE FUNDS WILL BE RETAINED AND USED BY YOU TO MEET ANY OF YOUR OBLIGATION(S) IN RELATION TO THE LEASE AGREEMENT BY AND BETWEEN THE TRAVELERS INDEMNITY COMPANY AND STREAM INTERNATIONAL, INC., AND FURTHER, THAT IN THE EVENT THE OBLIGATION(S) ARE SATISFIED, YOU WILL REFUND TO US THE AMOUNT PAID BY US TO YOU HEREUNDER. WE HEREBY ENGAGE WITH YOU IF WE RECEIVE YOUR DRAFT AND STATEMENT, AS MENTIONED ABOVE, HERE AT OUR OFFICE AT 111 WALL STREET, NORTH AMERICA TRADE FINANCE, 16TH FLOOR, ZONE 9, NEW YORK, NEW YORK 10043, OR SUCH OTHER OFFICE AS WE MAY ADVISE FROM TIME TO TIME, ON OR PRIOR TO OUR CLOSE OF BUSINESS ON SEPTEMBER 30, 1998 OR ANY FUTURE EXPIRATION DATE AS DESCRIBED HEREIN, WE WILL PROMPTLY HONOR YOUR DRAFT. SHOULD YOU HAVE OCCASION TO COMMUNICATE WITH US REGARDING THIS LETTER OF CREDIT, PLEASE DIRECT YOUR CORRESPONDENCE TO US AT 111 WALL STREET, 16TH FLOOR, ZONE 9, NEW YORK NY 10043, ATTN: NATF LC DEPT., OR SUCH OTHER OFFICE AS WE MAY ADVISE FROM TIME TO TIME, MAKING SPECIFIC MENTION OF THE LETTER OF CREDIT NUMBER INDICATED ABOVE. THIS LETTER OF CREDIT IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICE FOR DOCUMENTARY CREDITS (1993 REVISION) INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION #500, AND AS TO MATTERS NOT GOVERNED BY THE UCP, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND APPLICABLE U.S. FEDERAL LAW, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. CITIBANK N.A. /S/ [ILLEGIBLE] AUTHORIZED SIGNATURE. STREAM INTERNATIONAL ASSIGNED PARKING SPACES: #`s 10-14, 39-44 EXHIBIT E PLAN OF PARKING GARAGE PARKING [DRAWING APPEARS HERE] EXHIBIT A Westwood Business Centre Westwood, Massachusetts THIRD AMENDMENT TO LEASE ------------------------ Date: May 9, 1995 LANDLORD: Beacon Properties, L.P., successor-in-interest to The Travelers Insurance company TENANT: The Travelers Insurance Company LEASE EXECUTION DATE: As of October 12, 1993 PREVIOUS LEASE AMENDMENTS: First Amendment to Lease dated June 10, 1994 Second Amendment to Lease dated as of August 1, 1994 WHEREAS, the parties have agreed to modify Tenant's termination right with respect to the "Premier Premises" on the second (2nd) floor of the Building. NOW THEREFORE, the above-referenced lease, as previously amended (collectively, the "Lease") , is hereby further amended as follows. All capitalized terms used herein shall have the same definitions as used in the Lease. 1. MODIFICATION TO PREMIER PREMISES TERMINATION RIGHT -------------------------------------------------- The first sentence of Section 4.04D of the Lease (which was added to the Lease by Paragraph 8C of the First Amendment to Lease dated June 10, 1994) is hereby deleted in its entirety and replaced by the following: In addition to Tenant's rights under Section 4.04B hereof, Tenant shall have the option to surrender the Premier Premises as of the last day of any month between July 1, 1998 and December 31, 1998 upon giving Landlord written notice on or before the date six (6) months prior to the last day of the month in question. 2. HEADINGS -------- Titles and paragraph headings are for reference purposes and for convenience of the parties only and shall have no bearing upon nor force or effect in respect of the interpretation and application of the substantive provisions contained in this Third Amendment. As hereby amended, the Lease is ratified, confirmed and approved in all respects. EXECUTED UNDER SEAL as of the date first above-written. LANDLORD: TENANT: BEACON PROPERTIES, L.P. THE TRAVELERS INSURANCE COMPANY By: Beacon Properties Corporation, General Partner By:/s/ Lionel P. Fortin By: /s/ Andy F. Bessette -------------------------- ----------------------------- Lionel P. Fortin Name: ANDY F. BESSETTE Senior Vice President Title: NATIONAL DIRECTOR Hereunto Duly Authorized Hereunto Duly Authorized Date Signed: 11/22/95 Date Signed: Oct. 18, 1995 ---------------------- --------------------- _____________ Beacon - ------------- Management - ------------- Company - ------------- 65 William Street Wellesley, Massachusetts 02181 617 235-5140 October 11, 1995 Mr. Franklin L. Hill Regional leasing Manager The Travelers Insurance Company 1100 Abernathy Road Building 500, Suite 1417 Atlanta, Georgia 30328 Re: Westwood Business Centre, 690 Canton Street, Westwood MA Lease Dated October, 1993, as amended by First Amendment dated June 10, 1994, as amended by Second Amendment dated August 1, 1994, by and between The Travelers Insurance Company and Beacon Properties, LP. Dear Mr. Hill: In accordance with Article 4.80 of the above Lease, I am writing to inform you of a proposed installation of an antenna at the above property; and I am seeking your approval. I have been informed by two independent operators that the proposed antenna installation would not interfere with your satellite installation. According to these experts, your system operates in the megahertz range while the proposed antenna operates in the gigahertz range which are two different areas of the spectrum. Also, the proposed installation would not be located in the same area of the roof as yours, and would also be pointed in an opposite direction. Thank you for your cooperation in this matter. Very truly yours, /s/ J. Duncan Gratton - -------------------------- J. Duncan Gratton Director of Leasing cc: B. Baker K. Baker K. LaShoto R. Mack ACCEPTED BY: The Travelers By: /s/ [ILLEGIBLE] Title: Regional Manager --------------------- --------------------- Date: 10/12/95 ------------------- Westwood Business Centre Westwood, Massachusetts SECOND AMENDMENT TO LEASE ------------------------- Date: As of August 1, 1994 LANDLORD: Beacon Properties, L.P., successor-in-interest to The Travelers Insurance Company TENANT: The Travelers Insurance Company LEASE EXECUTION DATE: As of October 12, 1993 PREVIOUS LEASE AMENDMENTS: First Amendment to Lease dated June 10, 1994 WHEREAS, Tenant has, by letter dated July 14, 1994, a copy of which is attached hereto, exercised its right, pursuant to Section J of Article 3.01 of the above-referenced lease, not to utilize a shuttle bus service; WHEREAS, all of the Base Building Improvements and Tenant Improvements required to be made by Landlord under the Lease have been completed and the actual costs thereof have been determined; and WHEREAS, the parties desire to confirm the rental and certain other terms of said lease. NOW THEREFORE, the above-referenced lease, as previously amended (collectively, the "Lease"), is hereby further amended as follows. All capitalized terms used herein shall have the same definitions as used in the Lease. 1. LEASE COMMENCEMENT DATE ----------------------- The parties hereby confirm and agree that the Lease Commencement Date is August 1, 1994. 2. LEASE EXPIRATION DATE --------------------- The parties hereby confirm and agree that the Lease Expiration Date is July 31, 2004. 3. SHUTTLE BUS SERVICE ------------------- Since Tenant has exercised its right, pursuant to Section J of Article 3.01 of the Lease, not to use the shuttle bus service, as described in said Section J, the parties hereby agree that: A. Said Section J is hereby deleted from the Lease in its entirety and is of no further force of effect; B. Effective as of August 1, 1994, Tenant's Base Rent shall be reduced by $.52 per rentable square foot of the Premises. Such reduction in Tenant's Base Rent is reflected in the Revised Base Rent Schedule which is attached hereto as Revised Exhibit G; and C. Subparagraph A(2)(k) of Section 2.02 of the Lease is hereby deleted from the Lease in its entirety and is of no further force or effect. 4. ADJUSTMENTS ON ACCOUNT OF BUILD-OUT ----------------------------------- The parties hereby confirm and agree that the Base Building Improvements and Tenant Improvements required to be made by Landlord under the Lease have been completed, and that the total cost of the same was $1,268,963.14. Accordingly, the parties hereby further confirm and agree that: A. Since the Allowance exceeds the costs of the Base Building Improvements and Tenant Improvements, Tenant's Base Rent, in implementation of the last sentence of Section 2.03 of Exhibit D to the Lease, shall be reduced by $3,935.31 per month effective from and after March 1, 1995. Such reduction in Tenant's Base Rent is reflected in the Revised Base Rent Schedule which is attached hereto as Revised Exhibit G; and B. Since Tenant incurred $198,439.14 on account of the Tenant Improvements for which it was not reimbursed from the Allowance, Landlord hereby agrees to pay such sum of $198,439.14 to Tenant. Tenant acknowledges and agrees that, upon implementation of the rent reduction provided for in Paragraph 4A above and payment by Landlord to Tenant of the sum set forth in Paragraph 4B above, Landlord shall be deemed to have fully satisfied its obligations to Tenant under the Lease with respect to the Allowance. 5. REVISED BASE RENT SCHEDULE -------------------------- In implementation of Paragraphs 3 and 4 above, effective August 1, 1994 Exhibit G to the Lease is hereby deleted in its entirety and the Revised Exhibit G, a copy of which is attached hereto and made a part hereof, is substituted in its place. As hereby amended, the Lease is ratified, confirmed and approved in all respects. EXECUTED UNDER SEAL as of the date first above-written. LANDLORD: BEACON PROPERTIES, L.P. By: Beacon Properties Corporation, General Partner By: /s/ Lionel P. Fortin ----------------------------- Lionel P. Fortin Senior Vice President Hereunto Duly Authorized Date Signed: 8/11/95 ------------------------- TENANT: THE TRAVELERS INSURANCE COMPANY By /s/ Andy F. Bessette ---------------------------------- Name: Andy F. Bessette Title: National Director Hereunto Duly Authorized Date Signed: _____________________ [LOGO OF THE TRAVELERS] Corporate Real Estate & Services The Travelers Companies One Tower Square Hartford, CT 06183 203 277-2747 FAX: 203 954-2819 July 14, 1994 Mr. Claude Hoopes, Leasing Director Beacon Management Company The Wellesley Office Park 65 William Street, Suite 100 Wellesley, Massachusetts 02181-3899 Re: Lease Agreement by and between Beacon Properties L.P. (successor in interest to The Travelers Insurance Company) as "Landlord", and The Travelers Insurance Company as "Tenant", dated October 12, 1993, as amended (the "Lease") for certain premises, as further described in the Lease, located at 690 Canton Street, Westwood, Massachusetts (the "Premises"). Dear Mr. Hoopes: Pursuant to Article 3.01 (SERVICES PROVIDED BY LANDLORD) of the Lease, this letter shall serve as notice that The Travelers Insurance Company as Tenant will not be utilizing the "shuttle bus service", as further described in Section (J) thereof. In accordance with the terms of Section J of Article 3.01, Tenant's Base Rent shall be reduced by $ .52 per rentable square foot and Tenant' s Base Year for Operating Costs, and the calculation of such subsequent years' costs, as further described in Article 2.02 of the Lease, shall also be adjusted accordingly. This change shall be effective as of the Commencement Date of the Lease, August 1, 1994 and the monthly rent payments shall be adjusted accordingly. In addition, Exhibit G (BASE RENT SCHEDULE) of the Lease shall also be modified in the following manner. Period Base Rental ------ Rate Per RSF ------------ Year 1-3 $17.94 Year 4-5 $18.44 Year 6-7 $19.19 Year 8 $19.69 Year 9-10 $20.19 Please review the revised Base Rent Schedule and have this notice executed by or on behalf of Beacon Properties, L.P. as provided below, in order to acknowledge your agreement with the same. Sincerely. AGREED AND ACCEPTED: BEACON PROPERTIES, L.P. /s/ Andy F. Bessette Andy F.Bessette National Director, Leasing & Facilities Mgmt. _______________________________ AFB/cd
REVISED EXHIBIT G ----------------- Revised Base Rent Schedule -- The Travelers TOTAL AREA: 62,972 square feet Period Annual Base Rent Monthly Installment - ------ ---------------- ------------------- August 1, 1994 - $1,129,717.68 $(94,143.14) February 28, 1995 March 1, 1995 - $1,082,493.96 $(90,207.83) July 31, 1997 August 1, 1997 - $1,113,979.92 $(92,831.66) July 31, 1999 August 1, 1999 - $1,161,208.92 $(96,767.41) July 31, 2001 August 1, 2001 - $1,192,695.00 $(99,391.25) July 31, 2002 August 1, 2002 - $1,224,180.96 $102,015.08 July 31, 2004
- ---------- Beacon - ---------- Management - ---------- Company - ---------- 65 William Street Wellesley, Massachusetts 02181 617 235-5140 February 23, 1995 Mr. Lee Eighmy Corporate Real Estate Manager The Travelers Insurance Company 90 Merrick Avenue Eastmeadow, NY 11554 Re: Westwood Business Centre, 890 Canton Street, Westwood MA Lease Dated October, 1993, as amended by First Amendment dated June 10, 1994, as amended by Second Amendment dated August 1, 1994, by and between The Travelers Insurance Company and Beacon Properties, L.P. Dear Lee: In accordance with Article 4.08 of the above Lease, I am writing to inform you of a proposed installation of an antenna at the above property; and I am seeking your approval. I have been informed by two independent operators that the proposed antenna installation would not interfere with your satellite installation. According to these experts, your system operates in the megahertz range while the proposed antenna operates in the gigahertz range which are two different areas of the spectrum. Also, the proposed installation would not be located in the same area of the roof as yours, and would also be pointed in an opposite direction. Thank you for your cooperation in this matter. Very truly yours, /s/ Paula P Renkas Paula P. Renkas Property Manager cc: B. Baker D. Gratton K. LaShoto S. Murphy ACCEPTED BY: The Travelers BY: /s/ (ILLEGIBLE) Title: Manager - Corporate Real Estate ------------------------- -------------------------------- Date: 2/28/95 ---------- - ---------- Beacon - ---------- Management - ---------- Company - ---------- Wellesley Office Park Associates July 18, 1994 Mr. Lee Eighmy Corporate Real Estate Manager The Travelers 90 Merrick Avenue Eastmeadow, NY 11554 Re: Lease dated October 12, 1993 / by and between The Travelers Insurance Company and The Beacon Corporation. Dear Mr. Eighmy: I would like to take this opportunity to wish you well in your new premises at 690 Canton Street, Westwood, MA. For record purposes, we wish to confirm that The Travelers Insurance Company has leased 62,972 square feet on the first, second, and third floors of Westwood Business Centre, 690 Canton Street, Westwood, MA. I also wish to confirm that your entire premises is substantially complete * and a partial move in took place June 24, 1994 and the completed move occured July 8, 1994. The Term Commencement Date August 1,1994 and Termination Date July 31, 2004. If the above accurately states your understanding of the above referenced Lease dates please counter sign below and return one copy to me at Beacon Management Company. We suggest that you file the second copy with your Lease for future reference. Thank you. ------- Very truly yours * as defined in the Lease AB ------- /s/ Paula P. Renkas Paula P. Renkas Property Manager PPL/ikm cc: Claude Hoopes Suzanne King Jennifer O'Keefe Barbara Schnepp AGREED AND CONSENTED TO: The Travelers Insurance Company By: /s/ Andy F. Bessette Title National Director --------------------------- ------------------ (hereunto duly authorized) Date 8/4/94 -------- 65 William Street Wellesley Massachusetts 02181 617 235-5140 Westwood Business Centre Westwood, Massachusetts FIRST AMENDMENT TO LEASE ------------------------ This First Amendment to Lease (this "Amendment") made this 7th day of June, 1994 by and between Beacon Properties, L.P. (the "Landlord") and The Travelers Insurance Company (the "Tenant") amends that certain Lease Agreement by and between The Travelers Insurance Company, as Landlord, and The Travelers Insurance Company, as Tenant, dated as of October 12, 1993 (the "Original Lease"). Capitalized terms used herein without definition which are defined in the Original Lease shall have the meanings ascribed to them therein. WHEREAS, Landlord has, as of the date of this Amendment, purchased the Land and Building from Tenant; WHEREAS, the parties hereto desire to amend the Original Lease so as to modify certain of Tenant's rights thereunder and to accommodate certain of Landlord's concerns in connection with the operation and management of the Building; NOW, THEREFORE, the parties hereto hereby agree the Original Lease is amended as follows (the Original Lease, as amended by this Amendment, being hereinafter referred to as the "Lease"): 1. Amend Building Description. Section 1.03 A. if the Original Lease is hereby -------------------------- amended by inserting at the end thereof, provided that the rentable area of the Building shall be subject to remeasurement as provided on Schedule 2. 2. Clarification of Premises. Sections 1.04 and 1.05, the second sentence of ------------------------- Paragraph A of Section 4.04 (relating to the so-called "6-1-95 Option Space"), and Exhibit A-3 of the Original Lease are hereby deleted in their entirety and the following is substituted in their place: 1.04. PREMISES The Premises consist of the portions of the first, second and third floors of the Building outlined by cross-hatching on Schedule 1 attached to this Amendment and incorporated in the Lease by this reference. The portion of the Premises located on the second floor of the Building, containing 9,354 rentable square feet, which is labelled as "Premier Premises" on Schedule 1, is hereinafter referred to as the "Premier Premises." Wherever in the Lease there is a reference to Exhibit A-3, such reference shall be deemed to be made to Schedule 1 attached to this Amendment. Each portion of the Premises contains the rentable square footage and usable square footage set forth on Schedule 2 attached to this Amendment and incorporated in the Lease by this reference, and, for the purposes of Section 2.02 of the Lease, the Tenant's Proportionate Share applicable to each portion of the Premises is as set forth on said Schedule 2, subject to adjustment as provided in said Schedule 2. 3. Changes Outside of the Premises. The last sentence of Section 1.03 of the ------------------------------- Original Lease is hereby deleted in its entirety and the following is inserted in its place: Notwithstanding anything to the contrary in this Lease contained, but subject to Landlord's obligation, as set forth in Section 3.02 hereof, to maintain the Building in first-class condition, Landlord shall have the right, at any time and from time to time, to make alterations, improvements, and repairs to the Building and/or the Common Area Facilities and the services provided by Landlord therein, provided that no such alteration, improvement or repair (collectively a "Landlord Alteration"): (i) materially adversely affects Tenant's use of, or access to, the Premises, (ii) reduces Tenant's parking rights under the Lease, or (iii) subject to the last sentence of this paragraph, decreases the rentable area of the Building for the purposes of determining Tenant' s Proportionate Share. Notwithstanding the foregoing, if the rentable area of the Building has been previously increased as the result of a Landlord Alteration, then, for the purposes of determining Tenant's Proportionate Share, the rentable area of the Building may be decreased (but not below the rentable area of the Building as of the Lease Commencement Date) as the result of subsequent Landlord Alterations. 4. Force Majeure Extension of Scheduled Lease Commencement ------------------------------------------------------- Date. Section 1.07 of the Original Lease is hereby amended by - ---- inserting the words "subject to extension pursuant to Section 9.01 hereof" after the words "August 1, 1994." 5. Exercise Room. Paragraph L Section 3.01 of the Original Lease is hereby ------------- amended by deleting the words "equipment fitness center" and inserting in their place the words "exercise room." 6. Tenant Work; Allowance. ---------------------- Section 2.03 of Exhibit D of the Original Lease is hereby deleted in its entirety and the following inserted in its place: 2.03 PAYMENT FOR THE TENANT IMPROVEMENTS; SCHEDULED LEASE COMMENCEMENT DATE -2- A. Landlord shall provide Tenant with an allowance of $25.00 per rentable square foot (the "Allowance") to be allocated to the cost of performing all Base Building Improvements and Tenant Improvements required to be made by Landlord under the provisions of Section 1.08 of the Lease, Exhibit C of the Lease and this Exhibit D, including without limitation the following (collectively the "Tenant Work"): (1) All work shown on the plans listed on Schedule 3 attached to this Amendment and incorporated in the Lease by this reference; (2) All overtime costs required to be incurred by Landlord in the performance of the Tenant Improvements and Base Building Improvements, to the extent that such costs are required as the result of the fault or delay of Tenant or Tenant's contractors; (3) Any Building security necessary to protect Tenant's furniture, equipment and other personal property during construction and Tenant's move into the Building; (4) Obtaining a Certificate of Occupancy after the completion of the Tenant Improvements; (5) All punchlist work and any liquidated damages, within the meaning of Section 3.03 of this Exhibit D to which Tenant may be entitled in the event that the punchlist items are not completed on a timely basis, to the extent that such costs are incurred as the result of the fault or delay of Tenant or Tenant's contractors; (6) Any amounts which Landlord is required to reimburse Tenant, pursuant to Section 3.05 of this Exhibit D in event that the Premises are not Substantially Complete by the Scheduled Lease Commencement Date, to the extent that such costs are incurred as the result of the fault or delay of Tenant or Tenant's contractors; (7) All telecommunications wiring and cabling; (8) All design services; (9) Moving expenses; (10) The cost of remeasurment of the rentable area of the Building as provided on Schedule 2; and (11) The cost of re-stripping the parking area. Up to the amount of the Allowance, Landlord shall pay all costs associated with the Tenant Work. If Tenant shall incur any costs for such Tenant Work, Tenant shall submit to Landlord applications for payment or reimbursement from the Allowance, in the amount of the costs of the Tenant Work performed or for services -3- provided. Landlord will make payment to the appropriate vendor or to the Tenant, at Tenant's option, within fifteen (15) days after Landlord's receipt of such application for payment. As soon as all the subject work has been performed, Landlord and Tenant shall make a final computation of the application of the Allowance. In the event that any such costs ("Excess Costs") are incurred by Landlord or Tenant which would require Landlord to pay any amount in excess of the Allowance, Tenant, and not Landlord, shall bear such cost. If Landlord is required to incur any such Excess Costs, Tenant shall within ten (10) days of billing therefor, after the Substantial Completion of the Premises, reimburse Landlord, as additional rent, for such Excess Costs. If any portion of the Allowance has not been spent, the Base Rental Rate shall be decreased based upon the portion of the Allowance remaining, such decrease to be calculated based upon the amortization on a straight-line basis over ten (10) years utilizing an interest rate of 8.5% of such remainder (the "Base Rental Rate Adjustment"); provided, however that the amount of the Base Rental Rate Adjustment shall not exceed $1.19 per square foot of rentable area. 7. Certain Uncontrollable Operating Costs. Subparagraph (4) of Paragraph A of -------------------------------------- Section 2.02 of the Original Lease is hereby amended by deleting the word "utilities" appearing in fourth line and inserting in its place the words "Uncontrollable Operating Costs, as hereinafter defined," and by adding the following at the end thereof: "Uncontrollable Operating Costs" shall mean sewer, water, gas, and electric utility rates and charges, and any other energy-related costs; insurance; taxes; and snow removal. 8. Space Adjustment Option Adjustments. ----------------------------------- A. The first sentence of Section 4.04 of the Original Lease is hereby amended by deleting the word and numeral "six (6)" appearing in the first line and inserting in its place the word and numeral "nine (9)." B. Paragraph A of said Section 4.04 is hereby amended by deleting the word "On" appearing in the first line thereof and inserting in its place the words "Within the Window Period applicable to, as hereinafter defined," by deleting the words "as outlined on Exhibit A-2" appearing in the third and fourth lines ----------- thereof, and by adding the following sentence after the first sentence thereof: -4- The "Window Period" applicable to any anniversary date shall be the six (6) month period commencing on the date three months prior to such anniversary date and expiring on the date three months after such anniversary date. C. Said Section 4.04 is hereby further amended by adding the following additional paragraphs at the end thereof: C. Limitation On Options. (1) Tenant's rights under Section 4.04 A hereof are subject and subordinate, in all respects, to the rights of any other tenant (an "Existing Tenant") in the Building whose lease (an "Existing Lease") was executed prior to the date of this Amendment, including without limitation any renewal, extension or expansion rights provided for in any such Existing Lease, all as set forth on Schedule 4 attached to this Amendment and incorporated in the Lease by this reference. Without limiting the foregoing, Tenant shall have no right to lease any portion of the Building pursuant to either Section 4.04 or 4.05 of the Lease for any time period during which an Existing Tenant who is identified on Schedule 4 has the right, pursuant to its lease with Landlord, to lease such premises. (2) If at the time of exercise of any option under Section 4.04 A hereof there is more than one "contiguous area of additional space" which could be leased to Tenant, then Landlord shall have the right to select which area shall be leased to Tenant. (3) If a "contiguous area of additional space" contains more than 10% of Tenant's then existing rentable area, Landlord shall have no obligation to subdivide such contiguous area if such subdivision would leave Landlord with unleased premises which are not, in Landlord's reasonable judgment, of a size, configuration and location which is reasonably marketable (a "Disadvantageous Subdivision"). If Landlord shall determine that the exercise of Tenant's option will result in such a Disadvantageous Subdivision, Landlord shall notify Tenant of its determination within ten (10) days after notice from Tenant of its option to lease space, which notice shall specify the size, configuration, and location of premises which would eliminate such condition (the "Substitute -5- Configuration"), which Substitute Configuration may contain between 90% and 110% of the amount of space which was the subject of Tenant's election. In such event, Tenant shall have the right, exercisable by notice to Landlord within ten (10) days after the receipt of Landlord's notice, to lease the Substitute Configuration. Failure by Tenant to exercise such right shall constitute a waiver of its option to lease a "contiguous area of additional space" on such anniversary date. (4) Any space surrendered pursuant to Section 4.04 B shall, in Landlord's reasonable judgment, be of a size, configuration and location which is reasonably marketable. (5) If Tenant shall have exercised its right pursuant to Section 4.04 B to surrender any portion of the Premises as of an anniversary date, or shall have failed to exercise a right to lease additional space pursuant to Section 4.04 A as of an anniversary date, then any additional space which Tenant has the right to lease under Section 4.04 A need not be contiguous with the Premises then demised hereunder. (6) Tenant may not exercise rights under both Paragraphs A and B of Section 4.04 as of the same anniversary date. D. Surrender of Premier Premises. In addition to Tenant's rights under Section 4.04 B hereof, Tenant shall have the option, upon giving Landlord written notice on or before the date six (6) months prior to the second anniversary of the Lease Commencement Date, to surrender the Premier Premises as of the second anniversary of the Lease Commencement Date. If Tenant timely exercises its surrender right under this Section 4.04 D: (1) The Base Rent, Operating Cost Escalation, Real Estate Tax Escalation, and Tenant's Proportionate Share shall be proportionately reduced; (2) The number of unreserved parking spaces and underground parking spaces provided to Tenant in Section 3.03 shall be proportionately reduced; (3) Tenant shall pay to Landlord the unamortized portion of the Premier Premises Excess Allowance, -6- as hereinafter defined, which shall be amortized on a straight- line basis over ten (10) years utilizing an interest rate of 8.5%. For the purposes hereof, the "Premier Premises Excess Allowance" shall be defined as the amount by which the cost incurred by Landlord on account of the Allowance exceeds the product of (x) Seventeen ($17.00) Dollars per rentable square foot of the Premier Premises multiplied by (y) the rentable square feet of the Premier Premises. 9. First Refusal Adjustments. ------------------------- A. Section 4.05 of the Original Lease is hereby amended by adding the words "which Landlord is willing to accept" after the word "Building" appearing in the third line thereof. B. Said Section 4.05 is hereby further amended by inserting the words "or, with respect to the space shown on Exhibit A-5 (the "A-5 Space") without regard to Tenant's Proportionate Share," after the word "25%" appearing in the first line thereof, and by substituting the words "A-5 Space" for the words "First Offer Space" wherever they appear. C. Said Section 4.05 is hereby further amended by adding the following at the end of the first paragraph thereof: For the purposes of this Section 4.05, an area shall not be deemed to be "available" unless and until Landlord determines that the existing tenant (or anyone claiming by, through, or under such existing tenant) of such area will vacate such area, and Landlord is willing to market such area to third parties. If Tenant does not timely exercise its right to lease an available space hereunder, Landlord shall have no further obligation to Tenant under this Section 4.05 with respect to such available space unless (i) while such space remains so available, Landlord shall receive an Offer for such space which Landlord is willing to accept on economic terms (giving effect to rent, term, tenant improvement costs and other inducements) which is lower than the Offer previously submitted by more than ten percent (10%), or (ii) such space again becomes available at the expiration or other termination of a new lease of such available space. D. Said Section 4.05 is hereby further amended by deleting the word "reduce" appearing in the last line of the first paragraph of said Section 4.05 and inserting in its place the word "affect." -7- E. The second paragraph of Section 4.05 of the Lease is hereby deleted in its entirety. 10. Renewal Option Adjustments. -------------------------- A. The first sentence of Section 4.06 of the Original Lease is hereby amended by deleting the words "up to" appearing in the second line thereof. B. The fourth sentence of said Section 4.06 is hereby amended by deleting the word and numeral "twelve (12)" and inserting in its place the word and numeral "fourteen (14)" appearing in the second line thereof. C. The fifth sentence of said Section 4.06 is hereby amended by deleting the words "March 1, 2004" and inserting in their place the words "November 1, 2003." 11. Force Majeure for Construction. Section 9.01 of the Original Lease is ------------------------------ hereby amended by deleting the words "After the Lease Commencement Date"" appearing in the first line thereof, and by inserting at the end of the paragraph the words "which occurs after the date as of which The Beacon Corporation or its designee acquires title to the Property." 12. Lease Ratified. The Lease is hereby ratified, confirmed continues in full -------------- force and effect. EXECUTED UNDER SEAL as of the date first above written. LANDLORD: BEACON PROPERTIES, L.P. By: Beacon Properties Corporation, General Partner By:______________________________ Robert J. Perriello, Senior Vice President - Finance and Asset Management Hereunto Duly Authorized TENANT: THE TRAVELERS INSURANCE COMPANY By /s/ Andy F. Bessette ----------------------------------- (Name) (Title) Hereunto Duly Authorized Andy F. Bessette National Director of Leasing & Finance -8- SCHEDULE 1 ---------- [FLOOR PLAN APPEARS HERE] LEVEL ONE [FLOOR PLAN APPEARS HERE] LEVEL TWO-North & South Wings [FLOOR PLAN APPEARS HERE] LEVEL THREE-North Wing SCHEDULE 2 ---------- Portion of Rentable Floor Usable Floor - ---------- -------------- ------------ Premises Area Area -------- ---- ---- First floor 46,026 square feet 41,776 square feet Second floor 14,900 square feet 12,243 square feet Third floor 2,046 square feet 1,900 square feet TOTAL 62,972 square feet 55,919 square feet Tenant's -------- Proportionate Share ------------------- First Floor 30.02%* Second Floor 9.72%* Third Floor l.33%* TOTAL 41.07%* The Proportionate Shares set forth on this Schedule 2 have been calculated by using 153,296 square feet as the rentable area of the Building. Prior to the Scheduled Lease Commencement Date, the Landlord shall cause the rentable area of the Building to be recalculated in accordance with the Building Owners and Management Association (BOMA) Method, American National Standard (ANSI Z65.1-1980, reaffirmed 1989), Landlord and Tenant agreeing that under such BOMA Method, rentable area means the sum of the rentable areas of all of the floors in the Building. Upon such remeasurement, the Proportionate Share set forth herein shall be recalculated using the rentable area so recalculated. -9- SCHEDULE 3 ---------- EXHIBIT "A" PLANS AND SPECIFICATIONS - PHASE II THE TRAVELERS AT WESTWOOD BUSINESS CENTER The following documents have been prepared by Fuller Associates Architects, 286 congress Street, Boston, MA 02210.
No. Description Date Rev. No. Date - --- ----------- ---- -------- ---- Al North Wing Level One Construction Plan 1/21/94 A2 South Wing Level One Construction Plan 1/21/94 A3 North Wing Level Two Construction Plan 1/21/94 A4 South Wing Level Two Construction Plan 1/21/94 A5 North Wing Level Three Plans 1/21/94 A6 North Wing Level One Reflected Ceiling Plan 1/21/94 A7 South Wing Level One Reflected Ceiling Plan 1/21/94 A8 North Wing Level Two Reflected Ceiling Plan 1/21/94 A9 South Wing Level Two Reflected Ceiling Plan 1/21/94 A10 Level One, Two, and Three Sections and Details 1/21/94 All North Wing Level One Finish Plan 1/21/94 A12 South Wing Level One Finish Plan 1/21/94 A13 North Wing Level Two Finish Plan 1/21/94 A14 South Wing Level Two Finish Plan 1/21/94 P-1 Plumbing and Sprinkler Plan West Wing 1/21/94 P-2 Plumbing and Sprinkler Plan East Wing 1/21/94 P-3 Second and Third Floor Sprinkler and Plumbing Plan 1/21/94 P-4 Plumbing and Sprinkler Details and Notes 1/21/94 M-1 Mechanical Floor Plan West Wing 1/21/94 M-2 Mechanical Floor Plan East Wing 1/21/94 M-3 Second and Third Floor Mechanical 1/21/94 M-2 General Notes and Specifications Mechanical 1/21/94 E-1 Lighting Floor Plan West Wing Electrical 1/21/94 E-2 Lighting Floor Plan North Wing Electrical 1/21/94 E-2 Power Floor Plan West Wing Electrical 12/17/93 1 1/21/94 E-4 Power Floor Plan East Wing Electrical 1/21/94 E-5 Second and Third Floor Lighting Electrical 1/21/94 E-6 Second and Third Floor Power Electrical 1/21/94 E-7 Legend, Notes, and Schedule 1/21/94 Specifications: Entitled "The Travelers Companies Westwood Business Center; Project Manual: Phase II" 1/21/94 Memo: Issued by Zbigniew M. Wozny of Q&W 2/1/94 No. Description Date Rev. No. Date - -- ----------- ---- ------- ----
LEASE AGREEMENT BY AND BETWEEN THE TRAVELERS INSURANCE COMPANY, as Landlord AND THE TRAVELERS INSURANCE COMPANY, as Tenant WESTWOOD BUSINESS CENTRE WESTWOOD, MASSACHUSETTS TABLE OF CONTENTS Section Heading Page ARTICLE I. BASIC LEASE PROVISIONS 1.01 Date and Parties........................................ 1 1.02 Notices................................................. 1 1.03 Building and Land....................................... 2 1.04 Premises................................................ 2 1.05 Area Verification and Measurement....................... 3 1.06 Use..................................................... 3 1.07 Lease Term.............................................. 4 1.08 Improvements............................................ 4 ARTICLE II. TENANT'S OBLIGATION TO PAY RENT 2.01 Rent.................................................... 4 2.02 Escalation.............................................. 5 ARTICLE III. LANDLORD'S OBLIGATIONS 3.01 Services Provided By Landlord........................... 16 3.02 Repairs and Maintenance................................. 18 3.03 Parking................................................. 19 3.04 Life Safety and Security Requirements................... 19 3.05 Building Rules and Regulations.......................... 20 ARTICLE IV. TENANT'S RIGHTS AND OPTIONS 3.06 Non-Solicitation........................................ 20 4.01 Subleasing and Assignment............................... 20 4.02 Alterations............................................. 21 4.03 Tenant Signage.......................................... 21 4.04 Space Adjustment Options................................ 21 4.05 Right of First Refusal.................................. 23 4.06 Renewal Option.......................................... 23 4.07 Holding Over............................................ 24 4.08 Earth Satellite Station................................. 25 ARTICLE V. LIABILITY 5.01 Insurance............................................... 25 5.02 Environmental Compliance................................ 27 5.03 Requirements of Law..................................... 32 ARTICLE VI. LOSS OF PREMISES 6.01 Damages................................................. 33 6.02 Eminent Domain.......................................... 34 Section Heading Page ARTICLE VII. NON-DISTURBANCE 7.01 Subordination, Attornment and Non-Disturbance ..................... 35 7.02 Estoppel Certificate.................................... 36 7.03 Recording of Lease...................................... 36 7.04 Quiet Enjoyment......................................... 36 ARTICLE VIII. DISPUTES 8.01 Default by Tenant....................................... 37 8.02 Default by Landlord..................................... 37 8.03 Reduction of Services................................... 38 8.04 Arbitration............................................. 39 8.05 Governing Law........................................... 40 8.06 Waiver of Consequential Damages......................... 40 ARTICLE IX. MISCELLANEOUS 9.01 Force Majeure .......................................... 40 9.02 End of Term............................................. 40 9.03 Entire Agreement........................................ 41 9.04 Non-Discrimation........................................ 41 9.05 Binding on Successors................................... 41 9.06 Ambiguities............................................. 41 9.07 First-Class Building.................................... 41 9.08 Broker's Warranty....................................... 41 9.09 Partial Invalidity...................................... 42 9.10 Captions................................................ 42 9.11 Non-Merger of Parties................................... 42 9.12 Survival................................................ 42 9.13 Attachments............................................. 43 LEASE AGREEMENT ARTICLE I. BASIC LEASE PROVISIONS 1.01. DATE AND PARTIES This Lease Agreement ("Lease") is entered into as of the 12th day of October, 1993, by and between THE TRAVELERS INSURANCE COMPANY, a corporation organized and existing under the laws of Connecticut, having its principal offices at ONE TOWER SQUARE, 13 SHS, HARTFORD, CT 06183 ("Landlord"), and THE TRAVELERS INSURANCE COMPANY, a corporation organized and existing under the laws of the state of Connecticut, having its principal offices at One Tower Square, Hartford, CT 06183- 7130 ("Tenant"). 1.02. NOTICES All notices and notifications required or permitted under this Lease shall be in writing and sent by a nationally recognized private carrier of overnight mail (e.g., Federal Express) or by United States Certified Mail, return receipt requested and postage prepaid, to the parties at the following addresses or at such other addresses as the parties may designate by notice from time to time: Landlord: The Travelers Insurance Company C/O Travelers Realty Investment Company 125 High Street, 15th Floor Boston, MA 02110 Tenant: The Travelers Insurance Company Corporate. Real Estate One Tower Square, 2-30CR Hartford, CT 06183-7130 with a copy to: The Travelers Insurance Company Corporate Real Estate Regional Manager One Tower Square, 2-3OCR Hartford, CT 06183 All notices shall be deemed effective three (3) days after the date of mailing or on the date of actual receipt, if sooner. Form Revised 8/1/93 1 1.03. BUILDING AND LAND Landlord leases to Tenant, upon the terms and conditions contained in this Lease, the Premises (as defined in Section 1.04) together with the right, in common with others, to use the Common Area Facilities (as hereinafter defined) of the Building (as hereinafter defined) and of the Land (as hereinafter defined) on which the Building is located. As used in this Lease, the "Common Area Facilities" shall include all freight and passenger elevators, loading docks, sidewalks, parking areas, driveways, hallways, stairways, public restrooms, common entrances, lobby, cafeteria, fitness center, emergency systems and other similar public areas and access ways of the Building and the Land. A. The "Building" means the building containing 160,000 rentable square feet, with a name and address as follows: Westwood Business Centre 690 Canton Street Westwood, MA 02090 B. The "Land" means the property described in the legal description attached as Exhibit A-1 and the tax assessor's plan attached as ----------- Exhibit A-2. The Land contains 1.25 acres, more or less. ----------- Landlord shall make no change to the Building configuration that increases Tenant's Proportionate Share (as defined in Section 2.02) or that materially affects Tenant's use of or access to the Premises without Tenant's prior written consent. 1.04. PREMISES The Premises consist of the floor area outlined by cross-hatching on Exhibit A-3. Tenant may increase or decrease the rentable area of ----------- Tenant's Premises above or below the range stated in subsection A hereof, and the corresponding rent as described in Exhibit G (BASE RENT --------- SCHEDULE), by up to 10% based upon Tenant's final "design intent" drawings referred to in Exhibit D (WORK LETTER AGREEMENT). --------- Landlord represents and warrants that: A. The net rentable area of the Premises shall be determined by Tenant's final "design intent" drawings and shall be between 48,500 and 60,000 rentable square feet of office space located on the first, second and third floors of the Building. B. The usable area of the Premises shall be determined by Tenant's final "design intent" drawings and shall be based on BOMA measurements of rentable/usable area. 2 1.05. AREA VERIFICATION AND MEASUREMENT For purposes of this Lease, the Premises and the Building shall be measured in accordance with the Building Owners and Management Association (BOMA) Method, American National Standard (ANSI Z65.1-1980, reaffirmed 1989), with modifications as noted on Exhibit L, attached --------- hereto. All references to rentable area and usable area as used in this Lease shall refer to rentable and usable area calculations derived by the application of BOMA. Landlord shall provide, upon Tenant's request, the calculations which show how the rentable area of the Building and Premises were derived. If the net rentable area of the Premises is equal to or exceeds 25,000 square feet, Landlord shall provide Tenant with a certified survey performed by a licensed or registered surveyor, as to the rentable and usable area of the Premises and the rentable area of the Building (the "Survey"), at Landlord's sole cost and expense. The Survey shall bear the surveyor's seal and certification. If the net rentable area of the Premises is less than 25,000 square feet, Landlord shall provide Tenant with an architect's certification as to the rentable and usable area of the Premises and the rentable area of the Building (the "Certification"), at Landlord's sole cost and expense. In addition to the Survey or Certification, as applicable, Landlord shall provide Tenant with final as-built plans of the Premises. The final as-built plans shall indicate the rentable and usable area of the Premises and shall indicate how the rentable area was calculated. Upon request, at any time during the Lease Term, as defined in Section 1.07, Tenant or its authorized representatives shall have the right to access and review the final as-built plans for the Building. The Base Rent (as defined in Section 2.01) and Tenant's Proportionate Share shall be equitably adjusted if the Survey/Certification or the final as-built plans indicate that the net rentable area of the Building or the Premises differs from the numbers set forth in Section 1.03 (BUILDING AND LAND) or Section 1.04 (PREMISES). The Survey/Certification shall be received by Tenant prior to Tenant's first monthly rental payment under this Lease. Tenant may, at any time during the Lease Term and at Tenant's sole cost and expense, retain a licensed or registered surveyor to measure the rentable and usable area of the Premises and the rentable area of the Building. If such re-measurement reveals a material difference between the net rentable area of the Premises or the Building from what is stated in this Lease or in the Survey/Certification, the Base Rent and Tenant's Proportionate Share as defined in Section 2.02 (ESCALATION) shall be equitably adjusted on a retroactive basis. 1.06. USE Tenant may use the Premises for general office use, or for any other uses related to general office use. Form Revised 8/1/93 3 1.07. LEASE TERM The initial term of this Lease is for ten (10) years and is scheduled to begin no sooner than August l, 1994, (the "Scheduled Lease Commencement Date"). The initial term of this Lease shall commence on the date when the entire Premises are Substantially Complete in accordance with Article 3.02 of Exhibit D (WORK LETTER AGREEMENT); the --------- inspection and the preparation of the punchlist have been completed in accordance with Section 3.03 of Exhibit D (WORK LETTER AGREEMENT); --------- Landlord is ready, willing and able to deliver actual possession of the Premises and the Scheduled Lease Commencement Date has passed (the "Lease Commencement Date"). However, if the Lease Commencement Date would be a Saturday, Sunday or holiday, the Lease Commencement Date shall be the first business day following that Saturday, Sunday or holiday. The initial term of this Lease shall end on the day which is the tenth year anniversary date of the Lease Commencement Date if the Lease Commencement Date is the first day of any month (the "Lease Expiration Date"). If the Lease Commencement Date is any day other than the first day of any month, the Lease Expiration Date shall be the last day of the month in which the tenth year anniversary date of the Lease Commencement Date falls. The initial term of this Lease, as extended or renewed in accordance with Section 4.06 (RENEWAL OPTION) of this Lease, shall be referred to as the "Lease Term". Within fifteen (15) days after the Lease Commencement Date, Landlord and Tenant shall execute and be bound by a Commencement Date Agreement, the form of which is attached as Exhibit H. --------- 1.08. IMPROVEMENTS Prior to the Lease Commencement Date, Landlord shall make all Base Building Improvements and Tenant Improvements in a first-class and workmanlike manner in accordance with Exhibit C (BASE BUILDING --------- IMPROVEMENTS) and Exhibit D (WORK LETTER AGREEMENT). All Tenant --------- Improvements shall immediately become the property of Landlord upon completion unless otherwise agreed to in writing. ARTICLE II. TENANT'S OBLIGATION TO PAY RENT 2.01. RENT Tenant agrees to pay to Landlord base rent (the "Base Rent") in monthly installments in the amounts set forth in Exhibit G (BASE RENT --------- SCHEDULE), in advance, prior to the tenth business day of each month of the Lease Term. If the Lease Term commences or ends on a day other than the first day or last day of a calendar month, or if the Base Rent for any calendar month is to be prorated for any reason, the monthly installment of the Base Rent shall be prorated on a per diem basis based on the number of days in the calendar month. The monthly installments of the Base Rent shall be made either by check and sent to Spaulding & Slye, 690 Canton Street, P.O. Box 7247-7953, Philadelphia, PA 19170-7953 or by electronic direct deposit, at Tenant's option. Landlord shall designate a bank account and shall furnish Tenant with a Direct Deposit Authorization in the form of Exhibit F. Landlord --------- Form Revised 8/1/93 4 shall give tenant notice if the address or bank account for rental payments changes. The Base Rent shall be calculated on a "gross lease" basis which includes Building Operating Costs, Real Estate Taxes, Services and utilities, each as hereinafter defined. 2.02. ESCALATION For purposes of calculating the portion of any increases in the operating costs and the real estate taxes for the Building, the Common Area Facilities and the Land which Tenant shall pay Landlord, as set forth in this Section 2.02, "Tenant's Proportionate Share" means the percentage obtained by dividing the total rentable area of the Premises by the total rentable area of the Building. A. Operating Cost Escalation (1) This Operating Cost Escalation provision is intended to assure that Tenant pays only for Tenant's Proportionate Share of all inflationary-type increases in the costs of operating and maintaining the Building over the costs of the Base Year (as hereinafter defined). It is also intended that the Base Rent shall include all building services normally provided in first- class office buildings. In addition to the Base Rent, Tenant shall pay the Building Operating Cost Escalation (as hereinafter defined). The "Operating Cost Escalation" means the difference between Tenant's Proportionate Share of the Building Operating Costs (as hereinafter defined) for the Base Year and Tenant's Proportionate Share of Building Operating Costs for the calendar year in question. For purposes of the Operating Cost Escalation, the "Base Year" means the first full calendar year of the Lease Term. In Landlord's and Tenant's reasonable discretion, the Building Operating Costs for the Base Year shall be adjusted, if necessary, to a level of a 95% occupied and fully operational first-class office building at cost levels prevailing in the geographic market in which the Building is located for an entire year. This adjustment shall include (a) when building systems are under warranty during the Base Year, an adjustment for the cost of service contracts and other expenses that would have been incurred in the absence of such warranties; (b) an adjustment for all other expenses that are not incurred if the Building is new and start-up discounts or similar savings have been achieved; and (c) adjustments for all other atypical costs that occur or do not occur during the Base Year other than those costs which would occur in the Base Year in the ordinary course of business. The purpose Form Revised 8/11/93 5 of these adjustments is to include in the Building Operating Costs for the Base Year all reasonable cost components that occur or are likely to occur in later years. If at any time during the Lease Term, less than 95% of the total rentable, area of the Building is occupied by tenants, or the Landlord is not supplying services to 95% of the total rentable area of the Building at any time during any calendar year, the Building Operating Costs for such calendar year shall be reasonably determined to be an amount equal to the expenses that would normally be expected to be incurred had such occupancy been 95% of the total rentable area of the Building and had Landlord been supplying services to 95% of the total rentable area of the Building throughout the calendar year. The only costs which shall be adjusted in this manner shall be variable expenses where the amount is directly related to the level of occupancy or square foot area receiving a particular service. Landlord will indicate which expenses were adjusted in this manner on Exhibit B-1. Landlord will provide specific ----------- calculations detailing this adjustment upon Tenant's request. If a new category of expense is incurred after the Base Year, the first full year's expense for such item shall be added to the Building Operating Costs for the Base Year commencing with the first full calendar year that such expense is incurred, so that Tenant shall only be required to pay subsequent increases in such expense. The expense incurred for such item during the first year shall be subject to the adjustments described in the immediately preceding paragraphs. Where Landlord allocates Building Operating Costs to the Building, Common Area Facilities or the Land, which Building Operating Costs are shared with other buildings; (i) the costs so allocated must be clearly identified on the Operating Cost Escalation invoice; (ii) the rational and the underlying method of allocation must be set forth in detail; and (iii) the benefit enuring to Tenant quantified. Absent the foregoing - disclosure, allocated costs shall, in no event, be deemed Building Operating Costs. Tenant reserves the right to challenge the propriety of all allocated costs. For the first full calendar year following the Base Year, the Operating Cost Escalation shall be billed as a one-time charge at the close of the year and shall be paid by Tenant within sixty (60) days after receipt of the bill. For the second full calendar year following the Base Year, and all subsequent full or partial calendar years during the Lease Term, Tenant shall pay Landlord, on account, with its monthly installments of Base Rent in accordance with Section 2.01 (RENT), a sum equal to one-twelfth (1/12) of the prior year's 6 Operating Cost Escalation, less any non-recurring expenses ("Operating Cost Escalation Paid on Account"). Landlord shall provide Tenant with a bill for the Operating Cost Escalation in the form and calculated as shown in Exhibit ------- B-1 after the close of each calendar year. Tenant shall, within --- sixty (60) days of the Tenant's receipt of a bill, pay Landlord the difference between the Operating Cost Escalation Paid on Account and the final amount due as set forth in such bill. An example of how Exhibit B-1 is to be completed is attached as ----------- Exhibit B-2. ----------- If for any calendar year the Operating Cost Escalation Paid on Account exceeds the actual Operating Cost Escalation, the excess shall be (i) treated as a prepayment of the next due installment of Base Rent; Operating Cost Escalation Paid on Account or (ii) refunded to Tenant, at Tenant's option. (2) "Building Operating Costs" shall be limited to the following reasonable expenses which are paid or incurred for operating and maintaining the Building, the Common Area Facilities and the Land in a first-class manner: (a) Cleaning Expenses All expenses for routine cleaning, including public areas, atriums, elevators, rest rooms and windows. Cleaning expenses shall include maintenance of cleaning equipment, supplies, contract service and trash removal. (b) Repairs and Maintenance All expenses for general repair and maintenance, including contracted services, elevator, electrical, roof, plumbing, fire and life safety expenses, and other building maintenance supplies. (c) Roads, Grounds and Security Expenses related to exterior maintenance (e.g., landscaping, snow removal, parking lot repairs, site signage and site lighting) and expenses for security. If separate fees are charged for parking, all parking area maintenance and operating costs and Real Estate Taxes (which taxes shall also be excluded from the Real Estate Tax Escalation) shall be excluded from Building Operating Costs. (d) Heating, Ventilation and Air Conditioning Expenses for labor and supplies necessary to operate and maintain air conditioning, heating and ventilating systems, including the cost of 7 contracted services. No replacement costs for major components of the heating, ventilation or air conditioning systems or energy costs are included in this category. (e) Insurance All expenses for insurance of the Building. Excluded from Building Operating Costs shall be any comprehensive general liability insurance coverage with minimum limits in excess of $10,000,000. (f) Salaries All salaries, wages, medical, surgical, union and general welfare benefits (including group life insurance), and pension payments of persons employed by Landlord to the extent such employees are directly engaged in the repair, operation and maintenance of the Building, Common Area Facilities and the Land, together with payroll taxes, workers' compensation insurance premiums, uniforms and related expenses pertaining to such employees, to the extent such expenses are competitive and commercially reasonable. Excluded from such salaries is the salary and benefits of the Building Manager, which is included in Subsection (g) below. (g) Management Fee A management fee which in no event shall exceed 4% of the gross rental income from the Building, as adjusted below. Management fees for the Base Year and the Lease Term shall be computed as if the vacant areas of the Building were fully rented at Tenant's Base Rent, including reasonably anticipated amounts for escalations and other rents, without regard to rent abatements or other concessions, that would have been collected had the Building been fully occupied. After the Base Year, management fees shall be computed by substituting the actual base rents, including reasonably anticipated amounts for escalations and other rents, without regard to rent abatements or other concessions, of tenants for so long as they occupy areas vacant during Tenant's Base Year. (h) Utilities Expenses for utility services, including electricity, gas, fuel oil, steam, chilled water coal and water/sewer. Utilities for tenant areas shall not be in excess of that for typical office use. 8 (i) Certain Capital Expenditures The annual amortization over its useful life with a reasonable salvage value on a straight-line basis of the costs of any equipment or capital improvements made by Landlord after the Lease was signed, as a labor-saving measure or to accomplish other savings in operating, repairing, managing or maintaining of the Building, but only to the extent of the savings. (j) Administration Expenses Any expenditures pertaining to administration of the Building, Common Area Facilities and the Land including payroll and payroll-related expenses associated with administrative and clerical personnel and general office expenditures. However, such administrative expenses shall only be included to the extent that they are not included in the management fee as described in subsection (g) above, and to the extent that such expenses or any associated fees are not allocated to a leasing agent. (k) Shuttle Bus The costs of providing the shuttle bus service as described in Section 3.01(J) of this Lease. (3) Exclusions Building Operating Costs shall not include any expenses or costs incurred or paid by Landlord for the following items: (a) Capital expenditures, including any capital replacement, capital repair or capital improvement made to the Building, the Common Area Facilities or the Land and any other expense which would be deemed to be a capital expenditure under generally accepted accounting principles, consistently applied, except as permitted pursuant to subsection (2)(i) above. Replacement of an item or of a major component of an item and major repairs to such items in lieu of replacement shall each be considered a Capital Expenditure if the original item or a subsequent improvement to such item was, or could have been, capitalized. Capital Expenditures of $1,000 or less may be included in Building Operating Costs. For purposes of this clause, a group of expenditures related to the same capital project shall be considered a single expenditure; 9 (b) Depreciation or amortization of the Building or its contents or components; (c) Expenses for the preparation of space or other work which Landlord performs for any tenant or prospective tenant of the Building; (d) Expenses for repairs or other work which is caused by fire, windstorm, casualty or any other insurable occurrence, including costs subject to Landlord's insurance deductible; (e) Expenses incurred in leasing or obtaining new tenants or retaining existing tenants, including leasing commissions, legal expenses, advertising or promotion; (f) Legal expenses incurred in enforcing the terms of any Lease; (g) Interest, amortization or other costs, including legal fees, associated with any mortgage, loan or refinancing of the Land, Building, or Common Area Facilities; (h) Expenses incurred for any necessary replacement of any item to the extent that it is covered under warranty; (i) Actual cost of any special electrical, heating, ventilation or air conditioning or any other service required by any tenant that exceeds normal building standards or is required during times other than Business Hours, (as defined in Section 3.01, SERVICES FURNISHED BY LANDLORD), whether or not Landlord is reimbursed by such tenant; (j) Accounting and legal fees relating to the ownership, construction, leasing, sale or any litigation relating to the Building, the Common Area Facilities or the Land; (k) Any interest or penalty incurred due to the late payment of any Building Operating Costs; (1) The cost of any item or service which Tenant separately reimburses Landlord or pays to third parties, or that Landlord provides selectively to one or more tenants of the Building, other than Tenant, whether or not Landlord is reimbursed by such other tenant(s); (m) Any amount paid to an entity or individual related to Landlord which exceeds the amount which would be paid for similar goods or services on an arms-length basis between unrelated parties; 10 (n) The cost of correcting defects in the construction of the Building, the Common Area Facilities or the Land; repairs resulting from ordinary wear and tear shall not be deemed to be defects; (o) The amount of any reimbursement or credit received or receivable by Landlord with respect to an item of cost that is included in Building Operating Costs. The intent of this Subsection (o) is that Building Operating Costs shall be calculated on a "net" basis; (p) The initial cost of tools and small equipment used in the operation and maintenance of the Building, the Common Area Facilities and the Land; (q) The initial cost or the replacement cost of any permanent landscaping or the regular landscaping maintenance for any property other than the Land; (r) Any penalty or fine incurred for noncompliance with applicable building or fire codes; (s) Any costs of complying with or correcting violations of any governmental laws, rules, regulations, or other requirements applicable to the Land, the Building, the Common Area Facilities or the Premises. (t) Any ground rent, air space rent or other rent incurred for the Land; (u) Any costs incurred to test, survey, cleanup, contain abate, remove or otherwise remedy Hazardous Materials, as defined in Section 5.02 (ENVIRONMENTAL COMPLIANCE) or asbestos containing materials from the Building, the Common Area Facilities or the Land; (v) Any personal property taxes of Landlord for equipment or items not used directly in the operation or maintenance of the Building; (w) Other--administrative expenditures (including expenditures for travel, entertainment, dues, subscriptions, donations, data processing, errors and omissions insurance, automobile allowances, political donations and professional fees of any kind unless specifically enumerated as Building Operating Costs). (4) CPI Cap Notwithstanding any provision of this Lease to the contrary, Tenant shall not be obligated to pay for any annual increases in Building Operating Costs (however, excluding utilities) that exceed the percentage increase, if any, for such year in the national 11 consumer Price Index for All Urban consumers ("CPIU"), U.S. City Average, published by the Bureau of Labor Statistics of the U.S. Department of Labor, All Items Less Food and Energy. If the CPIU is not published for any year during the Lease Term, the cap on the Operating Cost Escalation shall be determined by substituting a comparable index reasonably selected and mutually agreed to by Landlord and Tenant, which index shall reflect the purchasing power of the consumer dollar and is published by the Bureau of Labor Statistics of the U.S. Department of Labor. If such an index is not published by the Bureau of Labor Statistics, Landlord and Tenant shall select a comparable index published by a nationally recognized responsible financial periodical. The cap on the Operating Cost Escalation shall be determined by comparing the index for the last month of the prior year to that of the last month of the escalation year in question. For example, in determining the 1995 escalation, the index for December 1994 is to be compared to the index for December 1995. The percentage increase in such indices is then to be added to the allowable Building Operating Costs for the prior year and the sum shall be compared to the allowable Building Operating Costs for 1995. The lesser of the two numbers shall be deemed to be the allowable Building Operating Costs for 1995. This limitation shall be calculated each year for which the Operating Cost Escalation is payable. A further example is included in Exhibit B-2. ----------- B. Real Estate Tax Escalation (1) This real estate tax escalation provision requires Tenant to pay Tenant's Proportionate Share of increases in Real Estate Taxes (as hereinafter defined) over Real Estate Taxes for the Base Tax Year (as hereinafter defined). (2) In addition to the Base Rent, Tenant shall pay the Real Estate Tax Escalation (as hereinafter defined). The "Real Estate Tax Escalation" means the difference between Tenant's Proportionate Share of Real Estate Taxes for the Base Tax Year and Tenant's Proportionate Share of Real Estate Taxes for such Tax Year (as hereinafter defined). (3) "Real Estate Taxes" means all real estate taxes levied or assessed against the Building, the Common Area Facilities and the Land as finally determined to be legally payable by legal proceedings or otherwise after taking into account any available discount, excluding any interest or penalty for late payment and any transfer, sales, use or rent taxes. Real Estate Taxes shall include any and all costs and expenses (including attorney's fees) incurred by Landlord in connection with seeking or obtaining reductions in and refunds of Real Estate Taxes and shall be reduced by the amount of 12 any reductions or refunds actually received by Landlord. If Landlord is successful in obtaining any reductions or refunds in Real Estate Taxes, Tenant shall receive its share thereof when such is actually obtained by Landlord. (4) "Tax Year" means the full fiscal period for each levied or assessed Real Estate Tax. (5) "Base Tax Year" means the later to occur of (i) the first Tax Year which falls entirely within the Lease Term and for which Real Estate Taxes are levied or assessed, or (ii) the first Tax Year of the Lease Term during which the Building is 100% fully assessed and 100% fully taxed as a 100% completed structure. (6) "Base Real Estate Taxes" means Real Estate Taxes for the Base Tax Year. (7) For the first Tax Year following the Base Tax Year, the Real Estate Tax Escalation shall be billed as a one-time charge at the close of the year and shall be paid by Tenant within thirty (30) days after receipt of the bill. Commencing with the second Tax Year following the Base Tax Year, and all subsequent Tax Years, no sooner than sixty (60) days prior to the earliest due date of the tax bill to the taxing authority, Tenant shall pay Landlord, on account, within sixty (60) days after receiving an invoice therefore, a sum equal to the Real Estate Tax Escalation for the prior Tax Year (the "Real Estate Tax Escalation Paid on Account"). Notwithstanding the foregoing, if Landlord is required by its lender to escrow Real Estate Taxes on a monthly basis, Tenant shall pay Landlord on account each month, commencing with the second Tax Year following the Base Tax Year, a sum equal to one-twelfth (1/12) of the prior year's Real Estate Tax Escalation as Real Estate Tax Escalation Paid on Account. Landlord shall provide Tenant with an invoice for the Real Estate--Tax Escalation at the close of each Tax Year, after the tax bills have been paid by Landlord, in the form and calculated as shown in Exhibit B-3 and Landlord shall provide ----------- Tenant with copies of paid Real Estate Tax bills. Tenant shall, within sixty (60) days of the Tenant's receipt of such invoice, pay Landlord the difference between the Real Estate Tax Escalation Paid on Account and the final amount due as set forth in such invoice. If for any Tax Year the Real Estate Tax Escalation Paid on Account exceeds the Real Estate Tax Escalation, the excess shall be (i) applied to reduce the Operating Cost Escalation due pursuant to this Lease, (ii) treated as a prepayment of the next due installments of 13 the Base Rent, Operating Cost escalation Paid on Account or (iii) refunded to Tenant, at Tenant's option. (8) This Real Estate Tax Escalation provision is intended to assure that Tenant pays Tenant's Proportionate Share of ordinary increases in Real Estate Taxes due to ordinary jurisdiction- wide increases in tax rates and changes in the Building, Common Area Facilities and Land assessments due to changes in local market values. It is also intended that the Base Rent shall include all Real Estate Taxes applicable to the Land and the fully completed Building and Common Area Facilities at normal tax rate and assessment levels as of the Base Tax Year. Accordingly: (a) Tenant shall not be responsible for any increase in Real Estate Taxes which results solely from the creation of additional rentable area on the Land or in the Building or from improvements or alterations made by Landlord or other tenants. Tenant shall pay the full amount of any increase in Real Estate Taxes which are solely due to improvements to the Premises made by Tenant or requested by Tenant and provided by Landlord. If Tenant seeks to dispute any increase in Real Estate Taxes on its improvements, the burden of proof with respect thereto shall fall solely upon Tenant and Landlord shall give Tenant the necessary authority to challenge any such assessment on Landlord's behalf, and Tenant shall bear the full cost and expense of any such challenge. (b) If (i) there is a tax abatement program in effect at any time during the Lease Term which reduces Real Estate Taxes, or (ii) Real Estate Taxes are "phased in" during the Lease Term, Real Estate Taxes for the Base Tax Year shall be adjusted so that they are computed on the same basis as Real Estate Taxes for the Tax Year(s) during which the tax abatement or phase-in is in effect. For example, if Real Estate Taxes for the Base Tax Year are reduced by 50% as part of a tax abatement program and Real Estate Taxes are reduced by 25% for the next Tax Year (year 2) and are not reduced at all for the following Tax Year (year 3), for purposes of computing the increase for year 2, the Base Year Real Estate Taxes shall be recomputed as if there were a 25% abatement in effect, and for purposes of computing the increase for year 3, the Base Real Estate Taxes shall be computed as if there were no abatement in effect. (c) If Landlord contests the assessment for Tenant's Base Tax Year, then Landlord, at Landlord's sole 14 cost and expense, shall take reasonable steps to contest the assessment in later Tax Years as well. If Tenant's Proportionate Share is equal to or greater than 25%, and Landlord is not contesting the assessment for a Tax Year during the Lease Term, Tenant may bring, at Tenant's option, appropriate proceedings in Landlord's name or Tenant's name, or both, for contesting the assessment for such Tax Year; provided that Tenant gives Landlord ten (10) days written notice of its intention to contest such assessment. The net amount of taxes recovered as a result of such proceedings (e.g., the amount recovered after payment of all sums necessary to attain such recovery) shall be shared between Landlord and Tenant with Tenant receiving Tenant's Proportionate Share thereof; provided that Tenant shall pay one hundred percent (100%) of any increase in Real Estate Taxes (and all costs and expenses in connection with such contest) resulting from Tenant's contest of the assessment for any Tax Year during the Lease Term. Landlord shall cooperate with Tenant with respect to the proceedings so far as is reasonably necessary. (d) Any increase in Real Estate Taxes for the Building resulting from a refinancing or sale shall be added to the Base Real Estate Taxes. (e) Other adjustments shall be made to the Real Estate Tax Escalation as necessary in order to preserve the intent of this Subsection 9 B (8). (9) Subject to the cure rights of any lender of record, Tenant may, at its option, pay any delinquent Real Estate Taxes which are in default for a period of thirty (30) days and such payments shall be deducted from the Base Rent. C. Escalation General Provisions (1) Landlord shall provide Tenant with copies of bills, cancelled checks or contracts relative to the Building Operating Costs upon request. Landlord shall maintain accurate books and records for the Building Operating Costs and Real Estate Taxes in accordance with generally accepted accounting principles consistently applied, however, adjustments to Building Operating Costs and Real Estate Taxes shall be made as provided in this Lease. Landlord shall maintain such books and records and keep copies of the actual paid bills, cancelled checks and copies of any applicable contracts for each year including the Base Year, for the duration of the Lease Term, as extended, and for three (3) years thereafter. The Building Operating Costs, including those for the Base Year, may be audited by Tenant or Tenant's authorized representative during normal business hours, upon reasonable prior notice to Landlord. If Tenant challenges Landlord's computations of the Base Year Building 15 Operating Costs, Base Real Estate Taxes; or the amount of the Operating Cost Escalation or Real Estate Tax Escalation, Tenant shall give Landlord notice stating Tenant's objections. If an independent audit performed on behalf of Tenant verifies that Landlord's computations of the Building Operating Costs or Real Estate Taxes for the Base Year are incorrect or that Tenant was overcharged for the Operating Cost Escalation or Real Estate Tax Escalation, Tenant shall give Landlord notice and Landlord shall promptly repay all such overpayments to Tenant and adjust Tenant's Base Year or Base Tax Year within thirty (30) days of receiving Tenant's notice. If Landlord does not respond to Tenant's notice, Tenant may withhold from its rental payments in the amount of such overcharges or errors from its monthly rental payments until they are resolved, through good faith negotiations or through arbitration as per Section 8.04 (ARBITRATION) of this Lease. If Tenant's internal or independent audit of the Building Operating Costs for the Base Year or Base Real Estate Taxes, or any subsequent year indicates that Tenant was overcharged for the Operating Cost Escalation or Real Estate Tax Escalation by an amount which is greater than or equal to 3% of the amount which should have been paid by Tenant, Landlord shall promptly reimburse Tenant for all of Tenant's travel expenses and audit fees incurred for the audit. (2) Landlord agrees to waive any defense of statute of limitations until after Tenant's receipt of the final Real Estate Tax or Operating Cost Escalation after the Lease Expiration Date. (3) The escalation payments for the last year of the Lease shall be based upon the number of actual months Tenant occupied the Premises during that year and shall be prorated accordingly. (4) If there is a change in ownership of the Building, Landlord agrees to give complete copies of all records affecting Building Operating Costs and Real Estate Taxes to the subsequent owner. Any successor to Landlord's interest shall, by collecting rent under this Lease, be liable to Tenant for any overcharges in the Real Estate Tax Escalation or the Operating Cost Escalation. (5) In no event will the Base Rent be reduced if the Building Operating Costs or Real Estate Taxes for any year during the Lease Term are less than the Base Year amounts. ARTICLE III. LANDLORD'S OBLIGATIONS 3.01. SERVICES PROVIDED BY LANDLORD Landlord shall provide Tenant with the following services (the "Services") at Landlord's sole cost and expense. Landlord shall provide these services, in a first-class manner using first-class materials and workmanship, Monday through Friday from 7 a.m. to 7 p.m. and Saturday from 8 a.m. to 1 p.m. (the "Business Hours"), or as specified below. Landlord shall not be required to provide 16 services on the following holidays: New Year's Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day (the "Holidays"). A. A heating, ventilation and air conditioning ("HVAC") system for the Premises, as described In Exhibit C (BASE BUILDING IMPROVEMENTS), --------- fully equipped and of sufficient capacity to achieve maximum efficiency and conserve energy in its operation for Tenant's employees and business machinery and equipment. The HVAC system shall maintain the temperature in the Premises at not less than 72 (degree) F based upon a "dry-bulb" measurement (and 55 (degree) F based upon a "wet-bulb" measurement) in the winter and not more than 76 (degree) F based upon a "dry-bulb" measurement (and 60 (degree) F based upon a "wet-bulb" measurement) in the summer. B. Electrical current to the Premises for ordinary office use, lighting and the HVAC system. Ordinary office use shall include, but shall not be limited to, the operation of office equipment, typewriters, word processors, personal computers, telephones, telecopy machines and photocopy machines. C. Complete Janitorial and Office Service and Supplies, as described in Exhibit E, which shall include all costs of the replacement of --------- lighting tubes, lamp ballasts, and bulbs. 0. Hot and cold water sufficient for drinking, lavatory, toilet and ordinary cleaning purposes. E. Security Service shall be provided in a manner comparable to other "first-class buildings" (as defined in Section 9.07, FIRST-CLASS BUILDINGS), and consistent with reasonably prudent standards of maintaining a safe operating environment and the deterrence of activities opposing this objective. Landlord reserves the right to use public or private security personnel and services to provide such security. Landlord hereby represents that such security shall include guard service during non-Business Hours. F. Automatic passenger elevators and freight elevators as described in Exhibit C (BASE BUILDING IMPROVEMENTS), which shall provide access --------- to the Premises twenty-four (24) hours a day, seven (7) days a week, including Holidays and when Tenant moves into and out of the Premises. G. Extermination and pest control when necessary. H. Maintenance of and service to all the Common Area Facilities to maintain the same in a first-class condition. The maintenance and service shall include cleaning, HVAC, electrical current and illumination, snow shoveling, de-icing, repairs, replacements, lawn care, trash hauling and landscaping. I. Electrical current and HVAC for the telecommunications rooms as described Exhibit D (WORK LETTER AGREEMENT) shall be --------- 17 provide twenty-four (24) hours a day seven (7) days a week. J. Shuttle Bus Service between the Building and the Quincy, MA MTA Station, which service shall be provided at least two (2) times per day arriving at the Building prior to 9:00 am and twice departing the Building after 4:00 pm, excluding Holidays. In the event Tenant chooses not utilize the shuttle bus service, Tenant shall give Landlord thirty (30) days notice and thereafter Tenant's Base Rent shall be reduced by $.52 per rentable square foot of the Premises and Tenant's Base Year for Operating Cost Escalation shall be adjusted and shuttle bus charges shall no longer be part of the Building Operating Costs. Tenant shall have the option to request Landlord to add one (1) additional van to the shuttle bus service upon giving Landlord thirty (30) days notice and thereafter Tenant's Base Rent shall be increased by $.31 per rentable square foot of Premises and Tenant's Base Year for Operating Cost Escalation shall be adjusted to reflect two (2) vans being in operation rather than one (1). K. Cafeteria and food vending on the first floor substantially similar to the cafeteria in operation as of the date of this Lease. L. An equipment fitness center with showers and changing rooms at no cost for Tenant's use. Tenant shall have the right to request any or all of the Services outside of the Business Hours or the Holidays, and the same shall be supplied upon advance notice, at Tenant's expense. If more than one tenant directly benefits from these services then the cost of providing the services during non-Business Hours shall be allocated proportionately between or among the benefiting tenants based upon the amount of time each tenant benefits and the square footage of each tenant's premises. The cost for these additional Services shall, in no event, exceed Landlord's actual costs. The cost for additional HVAC and electrical services shall be $18.00 per hour per zone, and shall be allocated as described above. 3.02. REPAIRS AND MAINTENANCE Tenant shall keep the Premises and Tenant's fixtures in good order during the Lease Term and make repairs and replacements to the Premises which are necessary due to Tenant's misuse or negligence. Except for repairs and replacements that Tenant is required to make due to its misuse or negligence, Landlord shall pay for and make all other repairs and replacements to the Premises, the Common Area Facilities and the Building, including the Building structure, systems, fixtures and equipment. Landlord shall make all repairs and replacements necessary to maintain the Building in a first-class condition. Landlord may obtain reasonable access to the Premises to perform repairs to the Building, the Common Area Facilities and the Premises at reasonable times upon twenty-four (24) hours prior 18 notice to tenant. Landlord or Tenant may make emergency repairs without giving the other party prior notice. to Tenant makes emergency repairs without giving Landlord prior notice9 Landlord shall be obligated to reimburse Tenant for the cost of such emergency repairs. Any repairs or replacements which Landlord is required to make shall be made within a reasonable period of time after receiving notice or having actual knowledge of the need for such repair or replacement. When making repairs, Landlord shall take all necessary actions to protect Tenant's property and personnel from loss, damage and injury and to avoid disrupting Tenant's use and occupancy of the Premises. 3.03. PARKING Landlord shall provide, at no additional cost to Tenant, four (4) parking spaces for every 1,000 rentable square feet of the Premises. Of the parking spaces provided, one covered parking s ace for every 2,100 rentable square feet of the Premises shall be located in the parking garage below the Building and the remaining spaces shall be located In the paved surface parking lot adjacent to the Building on a non- exclusive basis in common with other Building tenants. The parking areas are shown on Exhibit A-4 and shall be available for Tenant's use during ----------- the Business Hours. In addition, Landlord shell reserve a minimum of fifteen (15) guest and visitor parking spaces which shall be shared in common with other Building visitors. Dir ectional signs for public identification shill be provided, and the parking area shall be adequately striped and lighted and secured red to provide for the safety of Tenant's employees and guests. Tenant reserves the right to identify and segregate such parking spaces, at Tenant's expense. The parking spaces and associated lighting shall be available for Tenant's use at no additional cost in the event that Tenant conducts a second shift operation. Landlord shall maintain the parking area in first -class condition and repair at all times during the Lease Term, Landlord shall only allow parking for vehicles consistent with the typical and reasonable tenant composition of an office building. If Tenant's number of parking spaces as identified above shall be reduced subsequent to an occurrence as set forth in sections 6.01 (DAMAGES) or 6.02 (EMINENT DOMAIN), Landlord shall provide Tenant with comparable alternate parking spaces in order to maintain Tenant's ratio of parking spaces as set forth above. Three (3) additional underground parking spaces in the Building parking garage shall be designated and identified with proper signage, at Landlord's expense, for Tenant's Drive-In Claim operations and an appraisal office to be located adjacent to the parking spaces in the lower level of the Building, as described in Exhibit D, (WORK LETTER --------- AGREEMENT) 3.04. LIFE SAFETY AND SECURITY REQUIREMENTS Landlord shall maintain the Life Safety and Security systems described in Exhibit C (BASE BUIL WING IMPROVEMENTS) and shall --------- comply with all requirements of all prevailing governmental authorities having or claiming jurisdiction over the Building, the Common Area Facilities and the Land. Landlord shall, prior to the Lease Commencement Date, provide to Tenant a written emergency evacuation plan in accordance with OSHA (as defined in Section 5.02.) standards or any comparable standard if OSHA should be superseded. Landlord shall conduct at least two (2) evacuation drills for the Building per calendar year. Any problems discovered during these drills shall be resolved jointly by Landlord and Tenant. 3.05. BUI WING RULES AND REGULATIONS Landlord shall enforce uniformly and on a non-discriminatory basis the Building Rules and Regulations, attached to this Lease as Exhibit J, --------- upon all tenants in the Building. The purpose of the Building Rules and Regulations shall be to ensure the safety, care, order or cleanliness of the Building and Common Area Facilities. If any of the Building Rules or Regulations conflicts with or is inconsistent with any provision of this Lease, the Lease provision shall control. If Landlord modifies or supplements the Building Rules and Regulations, Landlord shall provide Tenant with advanced written notification of such modification or supplement. 3.06 NON-SOLICITATION Landlord shall implement, maintain and enforce a policy which prohibits solicitation, canvassing, peddling, demonstrations, public protests, or any other activity which would be disruptive to tenants in the Building, from occurring in the Common Area Facilities. Landlord shall post written notification of such policy in all the public Common Area Facilities, as is reasonably practicable. ARTICLE IV. TENANT'S RIGHTS AND OPTIONS 4.01 SUBLEASING AND ASSIGNMENT Tenant may, upon notice to Landlord, sublease all or any part of the Premises or assign this Lease, subject to Section 1.06 (USE). Notwithstanding the foregoing, Tenant may sublease all or any portion of the Premises or assign this Lease to its subsidiaries, affiliates and/or independent contracted insurance agents without first notifying Landlord. Any assignment or subleasing shall not release Tenant from liability under this Lease except if the creditworthiness of the proposed sub lessee or assignee is approved by Landlord to be sufficient, which approval shall not be unreasonably withheld or delayed. In order for Landlord to make such determination, Tenant shall provide Landlord, within thirty (30) days of the anticipated sublease commencement date; (i) the name and address of the proposed subtenant or assignee; ( ii) the nature of the proposed subtenant's or assignee's business; (iii) the terms of the proposed sublease or assignment and (iv) reasonable financial information so that Landlord can evaluate the proposed subtenant or assignee. If Landlord and Tenant cannot agree as to the adequacy of such sub lessee's or 20 assignee's creditworthiness, such matter shall be subject to arbitration in accordance with Section 8.04 (ARBITRATION). Notwithstanding any of the foregoing to the contrary, Tenant may not assign this Lease or sublease any portion of the Premises if Tenant is in Default (as defined in Section 8.01.) under this Lease either on the date Tenant provides Landlord with the information set forth above or, unless waived in writing by Landlord, on the proposed commencement date of such sublease or assignment. 4.02 ALTERATIONS Tenant may make improvements, additions, installations, decorations and changes ("Alterations") of a non-structural nature to the Premises without Landlord's prior written approval. Non-structural Alterations means any Alterations which do not affect any of the major Building systems or structural components. All non-structural Alterations shall become Landlord's property at the expiration of the Lease Term unless otherwise agreed to in writing. Systems furniture and Tenant trade fixtures, including moveable partitions, panels, screens, and HVAC systems provided by Tenant, are Tenant's property and shall remain Tenant's property at the expiration of the Lease Term, unless otherwise so elected by Tenant. Tenant shall employ contractors who guarantee to use first-class materials and workmanship and who shall comply with all local building codes. Tenant shall not permit any lien to be placed on record with respect to any part of the Building for work or materials provided or obligations incurred by or for Tenant. Tenant shall discharge any such lien of record within thirty (30) days. 4.03. TENANT SIGNAGE Landlord shall provide Tenant with identification and signage in accordance with Tenant's specifications as described in Exhibit C --------- (BASE BUILDING IMPROVEMENTS). Landlord shall obtain Tenant's prior written consent if any insurance, managed care or financial services competitor of Tenant requests approval to display any exterior sign. Tenant's withholding of consent shall not be unreasonably withheld or delayed. In no event shall the signage of any competitor of Tenant be more prominent than Tenant's signage. 4.04. SPACE ADJUSTMENT OPTIONS Tenant shall have the option, upon giving Landlord six (6) months prior notice, to acquire or surrender space as follows: A. Acquiring Additional Space On the 3rd, 5th and 7th anniversary date(s) of the Lease Commencement Date, Tenant may lease a contiguous area of additional space, up to 10% of Tenant's then existing rentable area on the 1st or 2nd floor(s) as outlined on Exhibit A-2. In addition, on or ----------- before June 1, 1995 Tenant 21 may lease up to 7,400 rentable square ?/feet, as outlined on Exhibit A-2 as the "6-1-95 Option Space". Any additional space ----------- shall be leased to Tenant upon the same terms and conditions as provided in this Lease (including pro-rated Tenant Improvement, Moving, Design and other allowances) for the remainder of the Lease Term and shall be at the net effective Base Rent Rate as described in Section 2.01 (RENT), adjusted for Real Estate Tax Escalation and Operating Cost Escalation. (1) Landlord shall provide the additional space with all Base Building Improvements provided in Exhibit C and a pro-rata --------- share, based on the remaining Lease Term of the Tenant Improvement Allowance as provided in Exhibit D. --------- (2) Tenant shall be entitled to additional parking spaces on the same basis as described in Section 3.03 (PARKING). This does not apply to Drive-In Claim parking spaces. (3) Tenant may not acquire this additional space if Tenant is in Default under this Lease either on the date Tenant exercises its option to Lease the additional space or, unless waived in writing by Landlord, on the proposed commencement date for the additional space. B. Surrender of Space On the 3rd, 5th and 7th anniversary date(s) of the Lease Commencement Date, Tenant may surrender up to 10% of Tenant's then existing rentable area and thereupon the Base Rent, Operating Cost Escalation, Real Estate Tax Escalation and Tenant's Proportionate Share shall be proportionately reduced. In addition, the number of unreserved parking spaces and underground parking spaces provided to Tenant in Section 3.03 (PARKING) above shall be proportionately reduced. (1) If Tenant surrenders space on the 3rd anniversary date, Tenant shall pay Landlord the cost of the unamortized Tenant Improvements for such surrendered area which shall be amortized on a straight- line basis over ten (10) years utilizing an interest rate of 8.5%. (2) If Tenant surrenders space on the 5th anniversary date, Tenant shall pay Landlord the cost of the unamortized Tenant Improvements for such surrendered area which shall be amortized on a straight- line basis over ten (10) years utilizing an interest rate of 8.5%. (3) If Tenant surrenders space in response to Landlord's request, Tenant shall be relieved of all obligations to pay Base Rent, the Operating Cost Escalation and the Real Estate Tax Escalation with respect to the surrendered portion of the Premises. 22 4.05. RIGHT OF FINAL REFUSAL/OFFER If Tenant's Proportionate Share is equal to or exceeds 25%, and Landlord shall receive a bona fide offer (the "Offer") from any third party to lease any available space in the Building, at any time during the Lease Term, Landlord shall notify Tenant of such Offer through written notice, enclosing a copy of the Offer, and Tenant may, within ten (10) days, accept the terms of the Offer in writing and within thirty (30) days thereafter lease the available space under the terms and conditions specified in the Offer, including without limitation, the rental rate which the third party accepted and would have paid if such third party had entered into a lease with Landlord for such space. This right of first refusal is in addition to Tenant's option to acquire additional space under Section 4.04 (SPACE ADJUSTMENT OPTIONS). Any space acquired under this right of first refusal shall not reduce Tenant's ability to acquire space under said Section 4.04. Notwithstanding the foregoing, if Tenant's Proportionate Share is less than 25%, and the space shown on Exhibit A-5 (the "Right of First ----------- Offer Space") shall become available, Landlord shall notify Tenant, in writing of its availability. Tenant shall have ten (10) days from its receipt of Landlord's notice to notify Landlord of its desire to Lease such Right of First Offer Space. Within thirty (30) days of Tenant's notice to Landlord, Landlord and Tenant shall enter into a Lease for such space upon the same terms and conditions as this Lease, including the Base Rent. Notwithstanding the foregoing, Tenant may not exercise either (a) its right of first refusal or (b) its option to lease the right of First Offer Space if Tenant is in Default under this Lease either on the date Tenant exercises its option to Lease the space described in the Offer or the Right of First Offer Space, as the case may be, or, unless waived in writing by Landlord, on the proposed commencement date for such space. 4.06. RENEWAL OPTION Tenant shall have the option to renew this Lease (the "Renewal Option") for an additional term of up to 5 years, upon the same terms and conditions as in the initial Lease Term except that the Base Rent for the renewal term shall be at a mutually agreed upon negotiated rate, which rate shall not exceed ninety-five percent (95%) of the Fair Market Rate at that time. The Base Year for Building Operating Costs and the Base Tax Year shall be updated to the calendar year or the Tax Year, as appropriate, which immediately follows the calendar year in which the renewal term commences. "Fair Market Rate" shall mean the average of the annual rental rates then being charged in the office market sector of the area where the Building is situated, for comparable space for leases commencing on or about the time of the commencement of the lease term to which this definition applies, taking into consideration use, location and floor level of the applicable building, the location, quality and age of the building, leasehold improvements or allowances provided, rental concessions (such as abatements, lease assumptions or takeovers and moving expenses), the date that the particular rate under consideration became effective, the term of the lease under 23 consideration, the extent of services provided thereunder, applicable distinctions between "gross" leases and "net" leases, base year figures for escalation purposes, brokerage fees saved due to the renewal, the period for which space would be vacant if Tenant were to vacate the space rather than to renew, the creditworthiness and quality of Tenant, and other adjustments to the base rental and any other relevant term or condition in making such evaluation, including bonfide written offers made to Landlord by unrelated third parties at an arms-length basis to lease the same comparable space. Tenant shall determine the amount of space that shall be subject to renewal and Tenant shall give Landlord no less than twelve (12) months notice of Tenant's space requirements prior to the expiration of the then initial term. Landlord shall notify Tenant of the Base Rent for the renewal term within one (1) month of receiving Tenant's notice. Landlord and Tenant shall agree upon the Base Rent and renewal terms by March 1, 2004, or this Lease shall automatically expire upon the Lease Expiration Date. If this Renewal Option is exercised, the Lease Expiration Date shall mean the last day of the renewed Lease Term. 4.07. HOLDING OVER If Tenant desires to continue to use the Premises, or any part of the Premises, after the expiration of either the Lease Term or any renewal of this Lease, Tenant will give Landlord ninety (90) days' prior written notice of Tenant's intention to do so which notice shall specify the portion of the Premises with respect to which Tenant intends to hold- over (the "Hold-over Space"). If Tenant timely gives Landlord notice as aforesaid, Landlord shall give Tenant notice within ten (10) days of receipt of Tenants notice (i) specifying whether or not Landlord has previously executed a lease for all or a portion of the Hold-over Space and (ii) upon execution thereafter of a lease for all or a portion of any Hold-over Space specifying such Hold-over Space subject to lease. Tenant may hold-over in any Hold-over Space with respect to which Landlord has not executed a lease, for so long as Landlord shall not have executed a lease with respect thereto, provided that: (i) such tenancy shall be on a month-to-month basis and will not be construed as a tenancy at sufferance and (ii) Tenant will pay Landlord monthly rent during such tenancy the same as the last month's rent of the expiring term, plus the allocable Real Estate Tax and Operating Cost Escalation applicable to the month in question. Such month-to-month tenancy shall not exceed six (6) months in duration (the "Maximum Hold-over Period"). Landlord may not evict Tenant from the Hold-over Space during the Maximum Hold-over Period. Tenant may not hold-over in any Hold-over Space with respect to which Landlord has executed a lease and Tenant must surrender such Hold-over Space in accordance with this Lease. If Tenant should hold-over without the right to do so as provided herein, Tenant shall be responsible for monthly, the Base Rent equal to one and one-half (1 1/2) times the monthly installment of the Base Rent for the last full month of the Lease Term. 24 4.08. EARTH SATELLITE STATION At any time during the term of this Lease, at no additional rental cost, Tenant shall have the right to install, operate and maintain a satellite-earth communications station (antenna and associated equipment), microwave equipment and/or an FM antenna on the Building or the Land in an area designated by Landlord, which area shall be conducive to the operation of an satellite-earth station. The satellite station or microwave equipment will be connected to communications equipment located within the Premises via cable. Adequate cable distribution and conduits will be made available to Tenant, at Tenant's expense. Tenant agrees to comply with all applicable federal, state or local regulations, and shall obtain Landlord's approval for final equipment locations prior to its installation, which approval shall not be unreasonably withheld or delayed. Landlord will support Tenant's efforts to acquire local zoning permits, if such are required for this purpose. The installation and required maintenance of this equipment shall be at Tenant's sole cost and expense and shall in no way deface or adversely alter the appearance of the Premises, the Building or the Land. Tenant will be responsible for removing the installation at the end of its tenancy, if Tenant so elects or if Landlord so requires, and Tenant will repair any damage caused by its removal. Landlord will cooperate with Tenant regarding the installation, maintenance, repair and removal of the satellite station by Tenant. No other tenant may place a satellite station on the Building or on the Land without Tenant's approval, which shall only be withheld if Tenant's reception or transmittals will be adversely impaired. ARTICLE V. LIABILITY 5.01. INSURANCE A. Landlord's Insurance Landlord shall maintain in full force and effect during the Lease Term all-risk property damage insurance for the Building, the Common Area Facilities and the Land and all improvements on the Land, including the Tenant Improvements described in Exhibit C --------- (BASE BUILDING IMPROVEMENTS) and Exhibit D (WORK LETTER --------- AGREEMENT), in the amounts of the full replacement values thereof, as the values may exist from time to time; Boiler and Machinery Insurance; Comprehensive General Liability Insurance, including Contractual Liability, on an occurrence basis with limits of not less than $5,000,000 per occurrence; Worker's Compensation and Employer's Liability Insurance for all of Landlord's agents, employees and contractors; Automobile 25 Liability Insurance for any automobiles or vehicles operated by Landlord, its agents, employees contractors in connection with the operation or maintenance of the Building, the Common Area Facilities and the Land, with limits of not less than $1,000,000. Notwithstanding the foregoing, the originally-named Landlord shall have the right to self insure or to insure with a blanket policy of insurance. Landlord's insurance shall be issued by insurance companies licensed to do business in the state where the Building is situated, with a general policyholder rating of at least A- and a financial rating of at least XV in the most current Best Insurance Report available at the time of execution of this Lease. If the Best's ratings are changed or discontinued, Landlord and Tenant shall agree to an equivalent method of rating insurance companies. Landlord's insurance policies shall be primary in the event of a loss or claim occurring in the Common Area Facilities which is not due to the negligence of Tenant, its agents, contractors, employees or invitees. B. Tenant's Insurance Tenant shall maintain in full force and effect during the Lease Term all-risk property damage insurance for Tenant's personal property and trade fixtures; Worker's Compensation Insurance for all of Tenant's employees working on the Premises and Comprehensive General Liability Insurance with limits of not less than $2,000,000 per occurrence, for injuries, losses, claims or damages to persons or property occurring on the Premises, and due to Tenant's use or occupancy of the Premises or to the negligence or willful misconduct of Tenant, its agents, contractors, employees or invitees. Tenant reserves the right to self-insure or to insure with a blanket policy of insurance the liabilities and casualties specified in this Lease. Therefore, Tenant shall not be required to provide Landlord with any certificates or policies of insurance; however, Tenant shall provide Landlord with a letter confirming such insurance, if requested by Landlord. C. Indemnification Landlord shall indemnify, defend and hold Tenant harmless (with counsel approved by the Tenant) from any liabilities, claims, damages, expenses, costs, losses, actions, fines, penalties, or lawsuits for personal injury, death, and/or property damage including, without limitation, court costs, reasonable attorney fees, and other reasonable costs of litigation arising from any incidents occurring in or about the Common Area Facilities or the Land except that Landlord shall not so indemnify Tenant to the extent the subject injury, death or damage is caused by the negligence or willful misconduct of Tenant or its agents, employees, contractors or invitees. 26 Tenant will indemnify, defend and hold landlord harmless (with counsel approved by Landlord) from any liabilities, claims, damages, expenses, costs, losses, actions, fines, penalties, or lawsuits for personal Injury, death and/or property damage including, without limitation, court costs, reasonable attorney fees, and other reasonable costs of litigation for any incidents occurring in or about the Premises except that Tenant shall not so indemnify Landlord to the extent the subject injury, death or damage is caused by the negligence or willful misconduct of Landlord or its agents, employees, contractors or invitees. 5.02. ENVIRONMENTAL COMPLIANCE A. Environmental Site Assessment Prior to the Lease Commencement Date, Landlord, at Landlord's sole cost and expense, shall provide Tenant with a Phase I Environmental Site Assessment ("ESA") conducted by a reputable and licensed firm in the industry, if one is available. Such ESA shall include an assessment of possible indoor asbestos containing material. If a Phase II Environmental Site Assessment has been conducted, Landlord shall also provide Tenant with the results of the same. If an ESA (or subsequent Phase II) is not available, Landlord shall provide Tenant with an "Asbestos Survey" of possible asbestos containing material in the Building, conducted by a licensed and certified Industrial Hygienist or Environmental Consultant. B. Use of Asbestos and PCB's Landlord represents and warrants to, and covenants with Tenant as follows: (1) If the Building is being constructed or if any modifications or renovations are to be done now or at any time during the Lease Term, Landlord or Landlord's contractors shall not use asbestos containing material for fireproofing or other purposes in such construction. (2) If the results of the ESA or Asbestos Survey, or the actual knowledge of Landlord, or its contractors, employees or Tenant, confirm that asbestos containing material is present in the Premises, Landlord agrees to remove all such asbestos containing material and any debris from the Premises, at Landlord's sole cost and expense prior to the Lease Commencement Date. Such removal shall be completed in accordance with all applicable federal, state and local laws and regulations concerning the removal of asbestos, and completed in accordance with methods approved by the Environmental Protection Agency ("EPA") and the Occupational Safety and Health Administration ("OSHA"), and performed by licensed industrial hygienists. Landlord will prosecute the work diligently to completion. After the removal procedure, Landlord will 27 monitor the air quality of the Premises by performing post abatement air clearance tests. Such tests shall be performed in accordance with procedures which meet the more stringent of the Asbestos Hazard Emergency Response Act ("AHERA") or state or local guidelines. If the results of such tests show an asbestos fiber count exceeding .01 fibers/cc (TEN) ("Acceptable Air Quality"), the Lease Commencement Date shall be delayed and Tenant will not occupy the Premises or commence the payment of Rent, until the situation has been remediated and the results of air sample testing verify an Acceptable Air Quality. Landlord will use due diligence to achieve such results. In no event shall remediation occur later than thirty (30) days following the Lease Commencement Date. (3) If the results of any ESA or the Asbestos Survey, or the actual knowledge of Landlord, or its contractors, employees or Tenant confirm that asbestos containing material is present in other areas of the Building or the Common Area Facilities, such areas shall be identified in the Operations and Maintenance Program attached hereto as Exhibit N. If the --------- results of any ESA's, an Asbestos Survey, or the actual knowledge of Landlord or its contractors, employees or Tenant, confirms that any such asbestos or asbestos containing material is friable, prior to the Lease Commencement Date or within a reasonable period of time thereafter, Landlord shall encapsulate such asbestos or asbestos containing material in accordance with all applicable federal, state and local laws and regulations concerning the encapsulation of asbestos containing material and in accordance with methods approved by the EPA and OSHA. After the encapsulation procedure, Landlord will monitor the air quality of the Premises and the Common Area Facilities directly serving the Premises, by performing post abatement air clearance tests. Such tests shall be performed in accordance with procedures which meet the more stringent of the AHERA or state or local guidelines. If the results of such tests show an asbestos fiber count exceeding the Acceptable Air Quality, the Lease Commencement Date shall be delayed and Tenant will not occupy the Premises or commence the payment of Rent, until the situation has been remediated and the results of air sample testing verify an Acceptable Air Quality. Landlord will use due diligence to achieve such results. In no event shall remediation occur later than thirty (30) days following the Lease Commencement Date. After the completion of the initial asbestos removal from the Premises, or the encapsulation of any asbestos containing material in the Building or the Common Area Facilities, Landlord hereby agrees to implement and maintain throughout the Lease Term, as renewed or extended, or until one (1) year after all asbestos containing material has been removed from the Building 28 and the Common area Facilities and such removal properly documented, at Landlord's sole cost and expense and without cost to Tenant, an on-going Operations and Maintenance Program (the "O&M Program"). The terms and requirements of O&M Program shall be attached hereto as EXHIBIT M. The O&M Program shall include periodic hazard assessments and inspections of any asbestos containing material. Upon Tenant's request, the results of the periodic hazard assessments shall be made available to Tenant. If any such assessment indicates that any asbestos containing material has become friable, or if any friable asbestos containing has become dangerous, or if a possible disturbance of any asbestos containing material is planned, or if previously undisclosed friable asbestos containing material is discovered, Landlord will notify Tenant and initiate immediate encapsulation or removal of the material in the same manner set forth herein and aforementioned. Such remediation procedures shall be at the sole cost and expense of Landlord, unless, however, such is necessitated due to an act of Tenant. Tenant shall be notified in writing, in advance, of the remediation procedure which will occur. Such notice shall set forth the contemplated procedure, and the dates and times in which such procedure will be performed. The procedure will in no event be performed during the Business Hours without the written consent of Tenant. In the event Tenant objects to the time of the procedure because Tenant or its employees intend to be in the vicinity of the procedure during the time which it is to be performed, Tenant shall notify Landlord in writing within five (5) days of Tenant's receipt of Landlord's notice regarding the procedure. Tenant's failure to so notify Landlord shall constitute Tenant's approval of the timing of the procedure. If Tenant objects as aforesaid to the timing of the procedure, Landlord and Tenant shall mutually determine a reasonably appropriate time for such procedure. Before, during and after any asbestos abatement procedures, Landlord shall monitor the air quality of the Premises and the Common Area Facilities and the results of such tests will be provided to Tenant. If the results of the air monitoring tests show an asbestos fiber count exceeding the Acceptable Air Quality in the Premises, the Building or the Common Area Facilities, including during or after a disturbance or remediation procedure, and such is due to an act of Landlord, its agents, employees or contractors, Tenant's rent will be abated and Tenant will vacate the Premises and Landlord will pay for the relocation of Tenant to acceptable alternate office space, reasonable for the conduct of Tenant's business, until Tenant can safely return to the Premises and the results of all air quality testing are in accordance with the standards set forth herein. if the hazardous situation cannot be cured or the Acceptable Air Quality standard reached within ninety (90) days, or within a reasonable period of time thereafter if Landlord is 29 Pursuing a cure with due diligence, but in no event later than one hundred-eighty (180) days thereafter, or if as per the assessment of a licensed industrial hygienist the situation is uncurable and constitutes a material danger of bodily harm to Tenant, its employees or invitees, Tenant shall notify Landlord of its intention to terminate this Lease, without penalty or default and thereafter Tenant will have no further obligations under the Lease (including no further obligations to pay the annual Base Rent or Operating Cost and Real Estate Tax Escalations) after the date which Tenant vacates the Premises. (4) None of the electrical transformers or capacitors that directly serve the Building or the Common Area Facilities or that are located on the Land contain polychlorinated biphenyls ("PCB's") or, if they do, Landlord shall promptly notify Tenant of (i) Landlord's plan for their removal, (ii) all action which has been taken to prevent contamination of the Premises should a fire or accidental release of PCB fluid occur, and (iii) all action which has been taken to insure that health hazards do not and shall not exist at any time during the Lease Term. (5) In the event that Tenant's files, property or equipment are contaminated by asbestos or PCB's found in the Building by a source other than Tenant, Landlord shall pay for the cost of decontamination, removal and reproduction of such items. C. Hazardous Materials Except as otherwise specifically provided for herein, Landlord represents and warrants and covenants with Tenant as follows: (1) The Land, the Building and the Common Area Facilities and its existing uses comply with, and Landlord is not violation of has not in the past violated, and will not violate in the future, any federal, state, county or local statutes, laws, regulations, rules, ordinances, codes or permits of any governmental authorities relating to environmental matters ("Environmental Laws"). (2) Landlord, its agents, contractors and employees have, and shall continue at all times in the future to receive, handle, use, store, treat, transport and dispose of all hazardous substances, as to be defined hereinafter, in compliance with all Environmental Laws. Hazardous Substances shall not include incidental quantities which are commonly used in offices, such as copier fluid, typewriter correction fluids and ordinary cleaning solvents, provided that such are at all times used, kept and stored in a manner which complies with all Environmental Laws. Hazardous Substances shall mean and include the following, or as later defined 30 under any Environmental Laws, including mixtures thereof: any hazardous substance, pollutant, contaminant, waste, by- product or constituent regulated under the Comprehensive Environmental Response, Compensation and Liability Act. 42 U.S.C Section 9601 et seq.; oil and petroleum products and ------- natural gas, natural gas liquids, liquefied natural gas and synthetic gas usable for fuel; pesticides regulated under the Federal Insecticide, Fungicide, and Rodenticide Act. Section 136 et seq.; asbestos and asbestos-containing ------- materials; PCBs; substances regulated under the Toxic Substances Control Act. 15 U.S.C Section 2601 et seq.; ------- source material, special nuclear material, by-product material and any other radioactive materials or radioactive wastes, however produced, regulated under the Atomic Energy Act or the Nuclear Waste Policy Act; chemicals subject to the OSHA Hazard Communication Standard. 29 C.F.R (1910.1200 et seq.; and industrial process and pollution control wastes ------- whether or not hazardous within the meaning of the Resource Conservation and Recovery Act, 42 U.S. C. Section 6901 et --- seq., as amended by the Hazardous and Solid Waste Amendments ---- of 1984. (3) During the period in which Landlord has owned the Building, there have been no decrees, injunctions, judgements, orders or writs of an environmental nature relating to the Building, or the Land or their uses, and there are no current lawsuits, claims, proceedings or investigations of an environmental nature relating to the Land, the Building, or the Common Area Facilities or their uses. (4) There are no indoor air pollution or air quality problems in the Building, the Common Area Facilities or in the HVAC system(s). Landlord shall notify Tenant if any indoor air quality problem is discovered or reported in the Building or relating to the HYAC system(s) and immediately undertake to correct such problem. (5) If an ESA confirms any environmental hazards, on the Land or affecting the Land, or in the Building or the Common Area Facilities, or if Landlord defaults under any of the provisions of this Section 5.02 (C), and such default imposes a material danger to the health or safety of Tenant's employees, then Landlord shall have thirty (30) days following written notice from Tenant to initiate action to cure the same and remove such danger and shall thereafter proceed diligently to complete such cure and remove such danger. In the event that Landlord fails to commence its action within thirty (30) days, or fails to diligently proceed thereafter with such action, and cure the same to completion within ninety (90) days following any such written notice from Tenant, then Tenant may, if it so elects, cancel this Lease after written notice to Landlord, whereupon Tenant shall have no further 31 obligations under the Lease (including no further obligations to pay the annual Base Rent or Operating Cost and Real Estate Tax Escalations) after the date which Tenant vacates the Premises. D. Tenant's Environmental Compliance Tenant at its expense, shall comply with all Environmental Laws, present or future related to environmental conditions in, at or about the Premises or Tenant's use of the Premises, including without limitation, all reporting requirements and the performance of any cleanups required by any governmental authorities which are necessary due to an act of Tenant. E. Indemnification Landlord and Tenant shall each indemnify, defend and hold the other harmless from any costs and expenses (including reasonable attorney fees and consultant fees), fines, suits, claims, actions, damages, liabilities asserted against or sustained by any such person or entity, or any other person or entity, and arising out of or in any way connected with Landlord's or Tenant's failure to comply with its obligations under this Section 5.02. 5.03. REQUIREMENTS OF LAW A. Landlord's Compliance with Laws Landlord shall be responsible for compliance, at Landlord's sole cost and expense, with all statutes, rules, ordinances, orders, codes and regulations, and legal requirements and standards issued thereunder, as the same may be enacted and amended from time to time (collectively referred to in this Lease as the "Laws"), which are applicable to all or any part of the physical condition and occupancy of the Building, the Common Area Facilities or the Land or additions thereto. Landlord represents and warrants that the Building, the Common Area Facilities and the Land are in compliance with the Laws as of the Lease Commencement Date. Landlord shall also obtain, at Landlord's sole cost and expense, any permit, license, certificate or other authorization required for the lawful and proper use and occupancy by Tenant or any other party of all or any part of the Premises and shall exhibit the same to Tenant upon Tenant's request. Landlord shall notify Tenant of any violation notices or waivers of building, OSHA or life safety codes or outstanding insurance carrier recommendations with respect to the Building, the Common Area Facilities or the Land. Tenant shall notify Landlord of any OSHA violation notices with respect to the Premises. 32 Except to the extent affected by Tenants particular use of the Premises, Landlord shall be responsible for the compliance of the Common Area Facilities with applicable laws relating to architectural barriers to the disabled, including but not limited to the law commonly known as the "Americans with Disabilities Act of 1990" (the "ADA"). Landlord hereby agrees to indemnify, defend and hold Tenant harmless from all loss, cost, liability or expense, including reasonable attorney fees, resulting from its failure to comply with all Laws relating to the Premises and condition of the Common Area Facilities, including but not limited to the ADA. 8. Tenant's Compliance with Laws Tenant shall be responsible for compliance with all the Laws, which are applicable to Tenant's particular use and manner of use of the Premises and the Common Area Facilities. In the event that Tenant's particular use of the Premises and the Common Area Facilities violate any provision of the Laws, including but not limited to the ADA, Tenant shall bear all expense, cost and liability for compliance with such Laws, including but not limited to the ADA. Tenant hereby agrees to indemnify, defend and hold Landlord harmless from all loss, cost, liability or expense, including reasonable attorney fees, resulting from its failure to comply with all the Laws relating to its occupancy of the Premises and use of the Common Area Facilities, including but not limited to the ADA. Further, notwithstanding the identity of the party incurring the expense of such Tenant Improvements described in Section 1.08 (IMPROVEMENTS) and per Exhibit D (WORK LETTER AGREEMENT), it shall be the obligation of Tenant to verify that all plans, specifications and finished improvements prepared and completed in connection with such construction comply with all applicable Laws, including but not limited to the ADA. Additionally, if any construction, modification or renovation is necessary in or to the Premises as a result of applicable Laws, including, but not limited to the ADA, such construction, modification or renovation shall be the responsibility of Tenant and Tenant hereby agrees to indemnify, defend and hold Landlord harmless from any loss, cost, liability or damage resulting from the failure of any plans, specifications or finished improvements to comply with all applicable Laws, including but not limited to the ADA. ARTICLE VI. LOSS OF PREMISES 6.01. DAMAGES If the Premises or the Building are totally destroyed by fire or any other casualty, this Lease shall automatically terminate as of the date of such destruction. If the Building, the Common Area Facilities or the Premises are damaged to the extent that Tenant cannot use the same to conduct its business for at least ninety (90) days, Tenant may terminate this Lease as of the date of damage by notice to Landlord within thirty (30) days after such date. If the Building or any portion of the Common Area Facilities or the 33 Premises are damaged by fire, casualty, or any other cause, and Tenant, at the time of such fire, casualty or other cause, was physically leasing greater than twenty percent (20%) of the rentable area of the Building and was not in Default under this Lease, then, except as provided below, the damage shall be promptly repaired by and at the sole cost and expense of Landlord, which obligation to restore shall be limited to the insurance proceeds available to Landlord for such restoration. Until such repairs and restoration are completed, the Base Rent, the Building Operating Cost Escalation and the Real Estate Tax Escalation shall be abated in proportion to the portion of the Premises or the Common Area Facilities which is unusable by Tenant in the conduct of its business by virtue of such casualty. If such damage can be repaired within ninety (90) days and Landlord fails to repair or restore such damage within such period, Tenant may, upon thirty (30) days notice to Landlord, in addition to all other remedies Tenant may have under this Lease, at law or in equity, terminate this Lease. If such damage cannot be repaired within ninety (90) days and Tenant terminates this Lease, as provided above, then Landlord shall not be obligated to repair or restore such damage. If Tenant was leasing twenty percent (20%) or less of the rentable area of the Building or was in Default under this Lease, as of the date of such fire, casualty or other cause, Landlord shall not be obligated to repair and restore such damage and Landlord may terminate this Lease of the date of damage by notice to Tenant within thirty (30) days after such date. If any such damage which causes any portion of the Premises to become unusable by Tenant in the conduct of its business occurs during the last nine (9) months of the Lease Term, Tenant may, upon thirty (30) days notice to Landlord, terminate this Lease. 6.02. EMINENT DOMAIN A. If all of the Land, the Building, the Common Area Facilities, or Premises are taken by eminent domain or condemnation, (the "Taking") this Lease shall terminate immediately upon the effective date of the Taking. B. If there is a partial Taking of the Land, the Building, the Common Area Facilities or the Premises, Tenant may terminate this Lease by notice to Landlord if the remaining Premises, the Building, or the Common Area Facilities are not, in Tenant's judgment, adequate for the conduct of Tenant's business. If Tenant does not terminate this Lease, Landlord shall proceed with due diligence to make all necessary repairs to the Land, the Building, the common Area Facilities, or the Premises in order to render and restore the same to the condition that they were prior to the Taking. Tenant shall remain in possession of the portion of the Premises not taken as long as use of the Common Area Facilities is not materially impaired, upon the same terms and conditions of this Lease, except that the Base Rent, Tenant's Proportionate Share of Operating Cost Escalation and Real Estate Tax Escalation and Tenant's Proportionate Share shall be reduced in direct proportion to the area of the Premises and the Common Area Facilities subject to the Taking. 34 If Tenant Is not able to access or occupy the Premises or any portion thereof not taken, or is not able to use the Common Area Facilities, while Landlord is making the required repairs, the Base Rent, Operating Cost Escalation and Real Estate Tax Escalation shall be abated in proportion to the portion of the Premises or the Common Area Facilities which are unusable by Tenant in the conduct of its business. C. Damages awarded to Landlord for any Taking shall belong to Landlord, whether or not the damages are awarded as compensation for loss or reduction in value of the Land, the Building, the Common Area Facilities, or the Premises; however, nothing shall restrict or limit Tenant from asserting a claim for any additional damages resulting from the Taking for any unamortized leasehold improvements paid for by Tenant, Tenant's moving expenses, or Tenant's trade fixtures and equipment, provided such claim does not reduce Landlord's award. ARTICLE VI. NON-DISTURBANCE 7.01. SUBORDINATION, ATTORNMENT AND NON-DISTURBANCE A. If this Lease is subordinate to any existing fee or leasehold mortgages, ground or air space leases or deeds of trust covering the Land, the Building or the Common Area Facilities, Landlord, prior to the Lease Commencement Date, shall obtain, have executed and shall deliver to Tenant, a Subordination, Non-Disturbance and Attornment Agreement by and between the Tenant and such prior party, in the form of Exhibit I attached to this Lease. --------- B. Subject to the provision of Subsection (1) below, this Lease shall be subordinate and subject to any future fee or leasehold mortgages, ground leases and deeds of trust covering the Land, the Building, or the Common Area Facilities. (1) If any mortgage is foreclosed or ground lease or air space lease terminated, then: (a) This Lease shall continue in full force and effect, and (b) Tenant's quiet enjoyment shall not be disturbed if Tenant is not in default of this Lease, and (c) Tenant shall attorn to and recognize the mortgagee, purchaser at a foreclosure sale or ground or other lessor ("Successor Landlord") as Tenant's landlord for the remaining Lease Term; and (d) Successor Landlord shall not be bound by: (i) any payment of the Base Rent, Operating Cost Escalation or Real Estate Tax Escalation for more than one month in advance, except for any free rent or other rent abatement specified in 35 this Lease, or as otherwise provided In Section 2.02 (ESCALATION). (ii) any amendment, modification, or termination of the Lease without Successor Landlord's consent, after Successor Landlord's name is given to Tenant, unless the amendment, modification, or ending Is specifically authorized by this Lease and does not require Successor Landlord's prior agreement or consent. (2) This Section B is self-operating; however, Landlord or Tenant shall cause a Subordination, Attornment and Non- Disturbance Agreement in the form of Exhibit I to be --------- executed and delivered if either party so requests. 7.02. ESTOPPEL CERTIFICATE Each party hereby agrees, from time to time, upon not less than thirty (30) days prior notice, to execute and deliver an estoppel certificate (the "Estoppel Certificate"). The Estoppel Certificate may be relied upon by Landlord or Tenant, as appropriate, and any third party with whom Landlord or Tenant Is dealing, and shall certify the following, as of the date thereof: A. The accuracy of this Lease; B. The Lease Commencement Date and the Lease Expiration Date; C. That this Lease is unmodified and in full force and effect or in full force and effect as modified, stating the date and nature of all modifications; D. Whether to the executing party's knowledge the other party is in default or whether the executing party has any claims or demands against the other party and, if so, specifying the claim or demand; and E. To other correct and reasonably ascertainable facts that are covered by the terms of this Lease. 7.03. RECORDING OF LEASE At the request of either party, the parties shall promptly execute and record, at the cost of the requesting party, a short form memorandum setting forth the names of the parties to this Lease, the date of execution, the Lease Term, the Lease Commencement Date, the Lease Expiration Date, a description of the Premises, any outstanding options and any other information the parties agree to include or is required by statute governing such short form memoranda. A form of short form memorandum is attached hereto as Exhibit K. --------- 7.04. QUIET ENJOYMENT Tenant shall have the peaceful and quiet enjoyment and possession of the Premises without any interference from Landlord or any person claiming by, through or under Landlord. 36 ARTICLE VIII. DISPUTES 8.01. DEFAULT BY TENANT Tenant shall be considered in default ("Default") of this Lease if (i) Tenant fails to pay the Base Rent within fifteen (15) days after Tenant receives notice from Landlord that the Base Rent was not received; or (ii) Tenant fails to perform any of its other obligations under this Lease within thirty (30) days or within a reasonable period of time thereafter if a cure cannot be accomplished with thirty (30) days after receiving written notice from Landlord specifying that such Default exists, setting forth in reasonable detail the nature and extent of the Default and identifying the applicable Lease section(s). If Tenant is in Default as stated above, Landlord, in addition to the remedies given in this lease or under the law, may end this Lease after giving Tenant thirty (30) days notice of its intention to do so and in accordance with any laws governing such termination, and Tenant shall then surrender the Premises to Landlord; or Landlord may enter and take possession of the Premises, in accordance with any laws governing such repossession, and remove Tenant, with or without having ended the Lease. Landlord's exercise of any of its remedies or its receipt of Tenant's keys shall not be considered an acceptance or surrender of the Premises by Tenant. A surrender must be agreed to in writing signed by both parties. If Landlord terminates this Lease or terminates Tenant's right to possess the Premises because of a Tenant Default, Landlord may hold Tenant liable for the difference between (i) the Base Rent and other indebtedness that otherwise would have been payable by Tenant to Landlord prior to the Lease Expiration Date, and (ii) any sums Landlord receives by reletting the Premises during the remainder of the Lease Term. Tenant shall pay any such sums due within thirty (30) days of receiving Landlord's proper and correct invoice for the amounts. Landlord is not entitled to accelerate the Base Rent or any other amounts which would become due from Tenant to Landlord. During each collection action, Landlord shall be limited to the amount of the Base Rent due that would have accrued had the Lease not been terminated. Landlord shall mitigate its damage by making best efforts to relet the Premises on reasonable terms. 8. 02. DEFAULT BY LANDLORD If Landlord fails to perform any of its obligations under this Lease and such failure is not a result of an act or omission of Tenant or the occurrence of one or more of the events stated in Section 9.01 (FORCE MAJEURE) below (a "Landlord Default"), Tenant shall give Landlord notice specifying the Landlord Default. A Landlord Default must be cured (i) within fifteen (15) days after receiving notice from Tenant; or (ii) if the Landlord Default can not be cured within fifteen (15) days, within a reasonable period of time thereafter in order to cure such Landlord Default as long as Landlord has commenced a cure with due diligence after receiving notice from Tenant (the "Cure Period"). If the Landlord Default is not corrected within the Cure Period, then in addition to all rights, powers or remedies permitted by law, Tenant may: 37 A. Upon the first occurrence of any Landlord Default, correct the Landlord Default and deduct the cost from the Base Rent and other sums payable; provided, that (a) Tenant shall give Landlord at least 10 business days' prior written notice before commencing to correct the Landlord Default, which notice shall describe in reasonable detail the work Tenant intends to perform and shall include copies of all relevant plans, sworn statements, permits, certificates of insurance, names of contractor and any other information reasonably required by Landlord, (b) Tenant shall only use those contractors and subcontractors to perform such work which shall not create disharmony with existing trades in the Building, (c) Tenant is not in Default under this Lease, and (d) Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all claims, actions, damages, costs and expenses (including, without limitation, court costs and attorneys' fees for personal injury, property damage or loss of business, asserted against or sustained by Landlord and arising out of any work performed by or on behalf of Tenant hereunder, and provided such work is the proximate cause of any such claim, action, damage, costs, and/or expense; B. Upon the second and any subsequent occurrence of any Landlord Default, withhold payment of the Base Rent and other sums payable, if any, due to Landlord until Landlord has corrected the specified Landlord Default; or C. Upon the third occurrence of any Landlord Default or upon the failure of Landlord to cure any Landlord Default within ninety (90) days, Tenant shall have the right to seek the judicial remedy of specific performance or to terminate this Lease by providing Landlord with notice of such termination. Tenant agrees to simultaneously give Landlord's mortgagee or deed of trust holders (the "Holder") a copy of any notice of a Landlord Default which Tenant serves upon Landlord, to any address which Landlord has provided to Tenant. The Holder shall have the right to cure a Landlord Default within the Cure Period. 8.03. REDUCTION OF SERVICES The Base Rent is based in part upon Services which Landlord shall provide as described in Section 3.01, (SERVICES PROVIDED BY LANDLORD). If, as a result of an act or omission of Landlord or any employee, agent or contractor of Landlord (as distinguished from an act or omission of Tenant or the occurrence of one or more of the events stated in Section 9.01 (FORCE MAJEURE) below), Landlord does not provide any or all of the Services or does not provide the Services in the manner described therein for more than five (5) consecutive days following notice from Tenant of such failure, interruption or reduction, the Base Rent, the Operating Cast Escalation and the Real Estate Tax Escalation payable for such portion of the Premises shall be abated on a per diem basis for the period of interruption beginning with the date the failure, 38 interruption or reduction in services began and ending when the services are fully restored. Tenant may also withhold the payment of the Base Rent, the Building Operating Cost Escalation and the Real Estate Tax Escalation after giving Landlord notices of two (2) failures to provide a particular service as a result of an act or omission of Landlord or any employee, agent or contractor of Landlord (as distinguished from an act or omission of Tenant or the occurrence of one or more of the events stated in Section 9.01 (FORCE MAJEURE) below) within a twelve (12) month period until the problem with that service has been adequately corrected, so as to provide Tenant with reasonable assurance that such interruption shall not occur again during the Lease Term. Upon the third occurrence within a twelve (12) month period, of any failure to provide a particular service, Tenant may, at its sole option, seek the judicial remedy of specific performance or terminate this Lease by notice to Landlord. 8.04. ARBITRATION If Landlord and Tenant cannot reach agreement upon the interpretation of any of the following described terms or conditions of this Lease, the dispute shall be subject to arbitration as provided in this Lease. Each party shall choose an impartial arbitrator. If the two arbitrators cannot agree, then the parties shall choose a third impartial arbitrator. The arbitrators will have minimum of ten (10) years experience in a profession related to the subject matter of the dispute and the then prevailing Commercial Arbitration Rules of the American Arbitration Association shall govern the proceeding. Both parties shall continue performing their Lease obligations pending the determination of the arbitration proceeding, except as otherwise provided for in this Lease. The arbitrators shall have no power to change the Lease provisions and the arbitrators shall base their decisions upon the provisions of this Lease and, as appropriate, shall apply the law stated in Section 8.05 (GOVERNING LAW) of this Lease. The arbitrators shall submit their findings In writing, signed by each of them, within thirty (30) days. The findings of the arbitrators shall be binding on both Landlord and Tenant and the expense of the arbitration shall be shared equally by Landlord and Tenant. If the arbitrators shall err in the application of law or shall fail to base their judgment on this Lease, the case may be entered into any court having jurisdiction for decision. The following disputes shall be subject to arbitration: a. any dispute which the parties mutually agree to submit to arbitration; b. the date when the Premises was Substantially Complete; c. the amount of any abatement of Rent because of damages or eminent domain; d. the amount of any Operating Cost Escalation or Real Estate Tax Escalation or any component part of the calculation; 39 Form Revised 8/1/93 e. which party must comply with any applicable laws; f. whether the services furnished by Landlord are being provided in the manner described in this Lease; g. whether Tenant is entitled to an abatement of Rent and Operations Cost Escalation and Real Estate Tax Escalation as provided in this Lease; h. whether Landlord's or Tenant's withholding of consent is unreasonable or unduly delayed; i. whether either party has the right to cancel this Lease as provided in this Lease; or j. whether or not a proposed assignee or sublessee has adequate creditworthiness and whether Tenant's continued liability under this Lease would be required in light of such assignment or sublease. 8.05. GOVERNING LAW This Lease, and the rights and obligations of the parties hereto, shall be construed and enforced in accordance with the laws of the Commonwealth of Massachusetts. 8.06. WAIVER OF CONSEQUENTIAL DAMAGES Neither Landlord nor Tenant shall be liable to the other under or in connection with this Lease for any consequential damages and both Landlord and Tenant waive, to the full extent permitted by law, any claim for consequential damages. ARTICLE IX. MISCELLANEOUS 9.01. FORCE MAJEURE After the Lease Commencement Date, neither party shall be responsible to the other for any losses resulting from the failure to perform any terms or provisions of this Lease if the party's failure to perform is attributable to war, riot, acts of God or the elements or any other unavoidable act not within the control of the party whose performance is interfered with and which by reasonable diligence such party is unable to prevent. However, neither party shall be excused from the timely performance of its obligations under this Lease for a period of time greater than ninety (90) days on account of force majeure. 9.02. END OF TERM Upon the termination of this Lease, Tenant shall return the Premises in the same condition as when Tenant took possession, excluding ordinary wear and tear, loss from fire or other casualty, removal of communications cabling and the restoration of the Premises to its condition prior to any Tenant Improvements or Alterations made to it during the Lease Term. 40 9.03. ENTIRE AGREEMENT This Lease and all of its written and attached Exhibits, riders, addendums, modifications, and amendments constitutes the entire agreement between Landlord and Tenant with respect to the Premises and the Common Area Facilities and may be amended or altered only by written agreement executed by both parties. Landlord warrants that it owns the Building and the Land as described herein, and each party warrants that it is authorized to enter into this Lease. 9.04. NON-DISCRIMINATION Landlord and Tenant shall not discriminate on the basis of race, age, color, religion, sex, national origin, disability or veteran's status in the use or occupancy of the Premises or the Building. Landlord and Tenant shall not discriminate on the basis of race, age, color, religion, sex, national origin, disability or veteran's status in their employment or choice of contractors, subcontractors, or suppliers of materials for or used for the installation of any improvements in the Premises or the Building. 9.05. BINDING ON SUCCESSORS This Lease shall bind the parties heirs, successors, representatives and permitted assigns. 9.06. AMBIGUITIES Any rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not apply to the interpretation of this Lease or any amendments or exhibits hereto. 9.07. FIRST-CLASS BUILDING Whenever in this Lease the phrase or phrases "first-class building", "first-class manner", "first-class condition" or phrases of similar import are used, said phrases mean that the Building, the Common Area Facilities, the Land and the Premises are to be maintained, repaired, operated and generally treated in the manner and custom consistent with that used for other buildings which are substantially similar to the Building in geographic location, use, size, type, age, and amenities and services provided. 9.08. BROKER'S WARRANTY Landlord and Tenant warrant and represent that they have dealt with no real estate broker in connection with this Lease and that no broker is entitled to any commission on account of this Lease. The party who breaches this warranty shall defend, hold harmless and indemnify the other from any loss, cost, damage or expense, including reasonable attorney fees, arising from the breach. Landlord is solely responsible for paying the commission of said broker in accordance with a separate agreement. 41 9.09. PARTIAL INVALIDITY If any Lease provision is or becomes invalid or unenforceable to any extent, then that provision and the remainder of this Lease shall continue in effect and be enforceable to the fullest extent permitted by law. 9.10. CAPTIONS The captions appearing in this Lease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of the Lease nor in any way affect the Lease. 9.11. NON-MERGER OF PARTIES Unless subsequently or otherwise provided in a written agreement executed by both of the undersigned parties, neither Landlord nor Tenant hereunder intend that there be, and there shall not in any event be, by operation of law or otherwise, a merger of the tenancy with the fee title or any other interest or estate of Landlord by virtue of this Lease. The parties hereto expressly agree that the estate of each Landlord and Tenant shall be and remain at all times separate and distinct. The foregoing shall be binding upon all successors and assigns of Landlord and Tenant, it being expressly intended that there shall be no such merger upon any subsequent assignment or transfer of any type, whether by operation of law or otherwise. 9.12. SURVIVAL The following provisions or Sections, as appropriate, of this Lease and Landlord's and Tenant's obligations thereunder shall survive the Lease Expiration Date or any earlier termination of this Lease by either Landlord or Tenant: A. For a period of one (1) year, Tenant's obligation to pay the Building Operating Cost Escalation and the Real Estate Tax Escalation for the Lease Term, subject to any termination of this Lease by Tenant due to a Landlord Default; B. Landlord's obligation to refund to Tenant any excess payment of the Base Rent, the Building Operating Cost Escalation and the Real Estate Tax Escalation; C. All indemnifications, hold harmless agreements, representations, warranties and covenants made by Landlord, including those representations set forth in Section 5.02 (ENVIRONMENTAL COMPLIANCE); D. Any representation or warranty regarding either Landlord's or Tenant's use of a broker or agent and any fee or commission which may be due or owing to said broker or agent; E. Any reimbursement or payment obligation from Landlord to Tenant with respect to Tenant's rent or other expenses for leasing other premises prior to the Lease Commencement Date or for leasing substitute or alternate premises; 42 F. Any indemnification or hold harmless agreement or obligation of either Landlord or Tenant; G. Any remedy of Landlord or Tenant pursuant to any provision of this Lease. 9.13. ATTACHMENTS The following exhibits are part of this Lease and were attached before this Lease was signed by the parties: Exhibits: A-1. Legal Description of Land A-2. Tax Assessor's Plan of Land A-3. Plan of Premises A-4. Plan of Parking Areas A-5. Right of First Offer Space B-1. Operating Cost Information Form B-2. Operating Cost Example B-3. Real Estate Tax Information Form C. Base Building Improvements D. Work Letter Agreement E. Janitorial Service and Supplies F. Direct Deposit Form G. Base Rent Schedule H. Commencement Date Agreement I. Subordination, Non-Disturbance and Attornment Agreement J. Building Rules and Regulations K. Short Form Memorandum L. BOMA Modifications 43 IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease, as of the date first above written. LANDLORD: THE TRAVELERS INSURANCE CO. TENANT: THE TRAVELERS INSURANCE CO. BY /s/ [ILLEGIBLE] BY /s/ Andy F. Bessette -------------------------- ---------------------------- Andy F. Bessette Title Assistant Secretary Title National Director of ----------------------- ------------------------- Leasing & Finance IDENTIFYING NUMBER _________________________________________ For Reporting to U.S. Treasury Department Internal Revenue Service 44 EXHIBIT A-1 WESTWOOD BUSINESS CENTRE Business Plan August 7, 1992 - -------------------------------------------------------------------------------- LEGAL DESCRIPTION OF LOT A certain parcel of land situated in Westwood Norfolk County, Massachusetts, shown as two contiguous lots numbered Lot 83 and Lot 83A on a plan designated as: "PLAN OF LAND IN WESTWOOD, MASS.", dated September 17, 1981 by Ernest W. Branch Inc., civil Engineers, said plan being recorded in the Land Court Engineer's Office as Plan 26294-3 ("Plan No. 26294-3") and more particularly described as follows: . Beginning at a point on the northeasterly sideline of Canton Street at the southerly corner of Lot 83A as shown on said plan; . thence running N 38 degrees 22' 19" E a distance of 77.00 feet by land now or formerly of Blue Hills Realty Trust to a point; . thence running by an arc having a radius of 128.00 feet in a general northeasterly direction a distance of 91.04 feet by Land now or formerly of Blue Hills Realty Trust to a point; . thence running N 79 degrees 07' 19" E a distance of 44.00 feet by land now or formerly of Blue Hills Realty Trust to a point; . thence turning and running S 10 degrees 52' 41" E a distance of 20.00 feet by land now or formerly of Blue Hills Realty Trust to a point; . thence turning and running N 73 degrees 27' 19" E a distance of 74.00 feet by land now or formerly of Blue Hills Realty Trust to a point; . thence turning and running N 47 degrees 54' 15" E a distance of 272.76 feet by land now or formerly of Blue Hills Realty Trust to a point; . thence turning and running S 54 degrees 26' 46" E a distance of 125.36 feet by land now or formerly of Blue Hills Realty Trust to a point; WESTWOOD BUSINESS CENTRE Business Plan August 7, 1992 - -------------------------------------------------------------------------------- LEGAL DESCRIPTION OF LOT (Continued) . thence running in the same direction S 54 degrees 26' 46" E, a distance of 114.88 feet by land now or formerly of Blue Hills Realty Trust so a point; . thence turning and running N 37 degrees O5' 11" E a distance of 123.11 feet by land now or formerly of MBZ Trust so a point; . thence running N 43 degrees 30' 43" E a distance of 140.00 feet by land now or formerly of MBZ Trust so a point . thence running N 44 degrees 28' 43" E a distance of 297.16 fees by land now or formerly or MBZ Trust so a point; . thence running N 44 degrees 43' 43" E a distance of 101.44 feet by land now or formerly of MBZ Trust to a point; . thence turning and running N 70 degrees 31' x 17" W a distance of 110.56 feet by land now or formerly of the Boston Company to a point; . thence turning and running S 44 degrees 43' 43" W a distance of 54.58 feet by land now or formerly of LIX Corporation to a point; . thence running S 44 degrees 28' 43" W a distance of 215.85 feet by land now or formerly of LIX Corporation to a point; . thence turning and running N 52 degrees 25' 14" W a distance of 364.03 feet by land now or formerly of LIX Corporation to a point; . thence turning and running N 87 degrees 40' 53" W a distance of 349.02 feet by land now or formerly of LIX Corporation to a point; . thence turning and running S 56 degrees 13' 15" W a distance of 665.00 feet by land now or formerly of LIX Corporation to a point; WESTWOOD BUSINESS CENTRE Business Plan August 7, 1992 - -------------------------------------------------------------------------------- LEGAL DESCRIPTION OF LOT (Continued) . thence turning and running by an arc having a radius of 2000.00 feet in a general southeasterly direction a distance of 363.22 feet along the northeasterly sideline of Canton Street to a point; . thence running S 51 degrees 37' 41" E a distance of 167.20 feet along the northeasterly sideline of Canton Street to the point and place of beginning. . Containing according to said plan 12.465 +/- acres. . REGISTERED LAND: A portion of the above-described premises consists of a registered land shown as LOT 83 on the aforesaid plan dated September 17, 1981, said plan being filed in the Land Court Engineer's Office as Plan No. 26294-3. . Said Lot 83 is bounded and described as follows: . Southwesterly by Lot 82, 114.88 feet; . Southeasterly by Los 59, 661.71 feet; . Northeasterly by Lot 79 as shown on Land Court Plan 26294-1, 110.56 feet; . Northwesterly by Lot 1, 270.51 feet; . Northwesterly again by Lot 83A, 361.29 feet. EXHIBIT B-1 OPERATING COST INFORMATION A. CATEGORY - --------------------------- BASE YEAR CURRENT Year 19X1 Year 19X2 Cleaning ------- ------- Repairs & Maintenance ------- ------- Roads/Grounds/Security ------- ------- Heating/Ventilating/Air Cond. ------- ------- Insurance ------- ------- Administration ------- ------- *Utilities ------- ------- Capital Expenditures ======= ======= Total ------- ------- * Utilities shall be excluded from the calculation of CPICAP B. CALCULATION OF CPI CAP - ---------------------------- Year Index Prior Year = _______ = _______ ** Current Year = _______ = _______ ** (**) - All Items less Food and Energy CPI CAP = ------- = ------- CAP Amount = X Prior Year Allowable Building Operating Costs (less utilities) = ------- X -------- = (CAP Amt.) CURRENT Year Expenses = ---------- (less utilities) CAP Amount Expenses = ---------- Total Allowable Expenses (lesser of CURRENT Year or CAP Amt. Expenses) ----------- EXHIBIT 8-1 Page 2 C. CALCULATION OF TRAVELERS PROPORTIONATE SHARE: - ------------------------------------------------- Premises - Rentable Sq. Ft. --------- = % --------- Building - Rentable Sq. Ft. (Tenant's Proportionate Share) D. CALCULATION OF ESCALATION DUE: - ---------------------------------- Step 1 - ------ Total Allowable Operating Expenses (section B) $------- Utilities $------- Less: BASE YEAR Total Operating Expenses (-------) Increase Over BASE YEAR $------- Step 2 - ------ Increase over BASE YEAR $------ Multiplied: Tenant's Proportionate Share X (Section C) ====== TOTAL AMOUNT DUE ------ E. CALCULATION OF "OPERATING COSTS ESCALATION PAID ON ACCOUNT" (OCEPOA) : - -------------------------------------------------------------------------- Year 19X3 Total Allowable Expenses (section B) $------- Utilities $------- Less: BASE YEAR Expenses (-------) ======= Total Expenses ------- Tenant's Proportionate Share ======= Tenant's OCEPOA Expenses $------- Monthly OCEPOA Amount Due $------- EXHIBIT B-2 OPERATING COST INFORMATION (Sample Only) A. CATEGORY - ----------------------- BASE YEAR CURRENT Year 1990 Year 1991 Cleaning S125,000 $135,000 Repairs & Maintenance $100,000 $105,000 Roads/Grounds/Security $ 85,000 $ 85,000 Heating/Ventilating/Air Cond. $ 75,000 $ 75,000 Insurance $ 50,000 $ 55,000 Administration $ 65,000 $ 75,000 *Utilities $100,000 $110,000 * Capital Expenditures $ 20,000 $ 25,000 ======== ======== Total $620,000 $665,000 * Utilities shall be excluded from the calculation of CPI CAP. B. CALCULATION OF CPI CAP - ---------------------------- Year Index ---- ----- Prior Year = 1990 = 100 ** ** Current Year = 1991 = 104 ** ** (**) - All Items less Food and Energy 104 CPICAP = ------ = 1.04 100 CAP Amount = 1.04 X Prior Year Allowable Building Operating Costs (less utilities) = 1.04 X $520,000 = $540,800 (CAP Amt.) CURRENT Year Expenses = $555,000 (less utilities) CAP Amount Expenses = $540,800 Total Allowable Expenses (lesser of CURRENT Year or CAP Amt. Expenses) $540,800 C. CALCULATION OF TRAVELERS PROPORTIONATE SHARE: - -------------------------------------------------- Premises-Rentable Sq. Ft. 25,000 = 25% ------- Building-Rentable Sq. Ft. 100,000 (Tenant's Proportionate Share) EXHIBIT B~2 Page 2 SAMPLE ONLY D. CALCULATION OF ESCALATION DUE: - ---------------------------------- Step 1 - ------ Total Allowable Operating Expenses (section B) $540,800 Utilities $110,000 Less: BASE YEAR Total Operating Expenses ($620,000) ======== Increase Over BASE YEAR $ 30,800 Step 2 - ----- Increase over BASE YEAR $ 30,800 Multiplied : Proportionate Share (Section C) X 25% ---------- TOTAL AMOUNT DUE $ 7,700 E. CALCULATION OF "OPERATING COST ESCALATION PAID ON ACCOUNT" (OCEPOA) : - -------------------------------------------------------------------------- Year 1992 Total Allowable Expenses (section B) $540,800 Utilities $110,000 Less: BASE YEAR Expenses (620,000) -------- Total Expenses 30,800 Travelers' Proportionate Share 25X -------- Travelers OCEPOA Expenses $ 7,700 Monthly OCEPOA Amount Due $ 641.67 EXHIBIT B-3 REAL ESTATE TAX ESCALATION A. CALCULATION OF REAL ESTATE TAX ESCALATION - ---------------------------------------------- Current Real Estate Taxes $________ Base Year Real Estate Taxes ($________) Increase Over Base Year Taxes $________ Multiplied: Tenant's Proportionate Share (section B) X________ CURRENT AMOUNT DUE B. CALCULATION OF TRAVELERS PROPORTIONATE SHARE: - ------------------------------------------------- Premises-Rentable Sq. Ft. _________ = ________% Tenant's Proportionate Share Building-Rentable Sq. Ft. C. COPIES OF REAL ESTATE TAX RECEIPTS ARE ATTACHED - ---------------------------------------------------- EXHIBIT C BASE BUILDING IMPROVEMENTS The Base Building improvements and systems as described below shall be furnished by Landlord at Landlord's sole cost and expense. These include: 1. The Building structure will be designed for a minimum floor load of 80 lb. live load plus a 20 lb. partition dead load. 2. The Building shell will include a built out and finished interior core, stairwell enclosures and exterior perimeter walls and all building columns. The interior core on each floor will include men's and women's rest room facilities, one drinking fountain per floor, electrical, telephone, Janitorial and mechanical closets, stairways and an elevator lobby. All walls adjacent to public traffic areas will be finished. There are two (2) restrooms per floor with nine (9) toilets per restroom. At least one handicapped accessible water closet will be provided for both men and women on each floor, as required per applicable laws or building codes. 3. A concrete floor will be installed with a smoothed trowel finish for installation of glued-down carpet. The floor will be poured level and finished in accordance with current ACI Standard Specifications 117. A topping of Gyp-Crete 2000 or an approved equivalent shall be used to level the floor to within 1/4" overall. 4. The Ground-level building lobby will be fully finished. 5. A Life Safety system will be installed in accordance with the more stringent of applicable national, state and local codes or the Americans with Disabilities Act Regulations, throughout the Building, including all corridors and stairwells. It shall consists of sprinklers, smoke detectors, internal fire alarm and annunciator system, emergency lighting, self-illuminating exit signs and extinguishers as required by applicable codes or Tenant's safety requirements. Smoke detectors will also be installed in the ceiling of any telecommunication room with both smoke and water detectors installed under the raised floor. The sprinkler system will have an approved water flow alarm connection and tamper-proof detection device, connected to a central station or direct to the fire/police departments. It will include all distribution of mains, laterals, uprights and upright heads. Finished heads or "armovers" will be configured to Tenant's space layout. Exhibit C Page Two 6. Electrical distribution will be provided to the main panel boxes in the electrical closet on each floor. The electrical system shall be sized for 7 1/2 watts per usable square foot for Tenant's consumption. 7. A suspended, revealed edge acoustical ceiling will be installed. It will be listed by Underwriter's Laboratories, Inc. (Materials List) as to Fire Hazard Classification and will have a minimum thickness of 3/4" with a foil back. The ceiling height will be a minimum of 8'6" and a maximum of 9'6". Fissured acoustical tile will be installed on a 2' x 2' mechanically suspended grid system. It will have a minimum noise reduction coefficient of .65, a minimum sound transmission classification rating of 40, and a minimum combustibility rating of Class I or equal to that of local code requirements, whichever is greater. 8. Modern fluorescent lighting will be installed in accordance with the most recent edition of the Illuminating Engineering Society Lighting Handbook. A maintained minimum of 60 foot candles will be furnished at desk height and the fixtures will be arranged so as to provide an even distribution of light. The light fixtures will be 2' x 4', 3 lamp fixtures. Recessed parabolic fixtures will be provided with parabolic 18 cell or 78 cell louvers. Lamps are to be of the "warm white" energy saving type. Ballasts shall also be energy efficient, high power factor U.L. listed, class P, and have a sound rating of `A'. All fixtures will have two-level switching. The ceiling grid will be configured to Tenant's space layout. 9. The Building will be equipped with a variable air volume (VAV) heating, ventilation and air conditioning system. The system will contain polyester air filters with an efficiency of no less than 35%. The fan system shall run continuously during business hours, no duty cycling. All ducts shall be separately zoned by floor, with individual controls provided within Tenant's Premises. These individual zones, thermostatically controlled, shall be preset and tamper proof. The minimum allowable rate is one (1) thermostat and VAV box per 5000 rentable square feet for exterior zone and one (1) thermostat per 2,500 rentable square feet for interior zones, and a minimum of one (1) diffuser for each 200 square feet of usable areas. The location of these thermostats and diffusers will be configured according to Tenant's final space plan. The system will be designed to maintain a space temperature between 72 - 76 degrees F, based upon a dry bulb measurement, on a year-round basis, based on a maximum average occupancy of one (1) person for each 120 square feet of usable area. The requirements for ventilation shall comply with present ASHRAE (American Society of Heating, Refrigeration and Air-Conditioning Engineers) standard 62-1989 as a minimum requirement. Exhibit C Page Three 10. Telephone service, as provided by the local utility, will be brought to Tenant's main telephone room. If conduit or sleeves are required by local code, Base Building will include necessary conduit/sleeves to distribute data and telephone cables between floors. 11. Vertical window blinds will be installed on all windows. 12. Two (2) automatic passenger elevators and zero (0) freight elevators will be provided. If no freight elevator is provided, one passenger elevator will be designed to serve both as passenger and freight elevator and will be equipped to carry supplies and furniture when necessary. Elevator cabs will be equipped with an emergency communications/alarm system, including a bell annunciator, connected to the building security guard station or to a central alarm system. The elevator controls will have Braille lettering for eyesight impaired persons. 13. A loading dock will be provided, with maximum tractor/van clearance. 14. An electronically controlled card access building security system, or equivalent system will be provided. This system will control all entry areas to Tenant's Premises from elevator lobbies on full floors which Tenant occupies or at suite entrances from public corridors. This system will control main building systems to ensure that Tenant's employees and property are adequately safeguarded. Each card is to be separately coded for individual employee access and the system will be configured for a multitude of authorized access levels. 15. Demising walls, including common corridor walls and walls between tenant suite will be provided. These walls will include tenant entry doors from public corridors. Demising walls will be soundproofed/insulated to the floor deck above. 16. Carpeting will be installed in elevator lobbies and in common corridors on all multiple-tenancy floors, in color and type as selected by Landlord. 17. All roadways necessary for Tenant's access to and egress from the Building will be completed. Exhibit C Page Four 18. A directory shall be provided in the lobby of the Building and Tenant shall be allowed space on the directory in proportion to the total rentable area which Tenant occupies in the Building. Landlord shall also provide exterior signs on or adjacent to the Building in accordance with Tenant's specifications, which specifications shall be provided to the Landlord. Such signs shall comply with all applicable local sign ordinances. Landlord shall be fully responsible for all costs and liability pertaining to the erection, maintenance and removal of such signs as necessary. Landlord shall allow Tenant to place its name and logo on the monument sign which identifies the Building and the address at the entrance of the Building driveway, at Tenant's expense. In addition, Landlord shall provide signage for Tenant on the monument sign adjacent to the Building identification sign, at Landlord's expense. Landlord shall obtain any necessary zoning permits or approvals for such identification, at Landlord's expense. If Landlord is unable to obtain such zoning approval, Landlord shall provide similar monument signage for Tenant's use on the Land, in an area which will be visible to traffic entering the Building driveway. EXHIBIT D WORK LETTER AGREEMENT THIS WORK LETTER AGREEMENT is entered into as of the 12/th/ day of October, 1993, by and between The Travelers Insurance Co., A Connecticut corporation ("Landlord") and THE TRAVELERS INSURANCE COMPANY, A Connecticut Corporation ("Tenant"). ARTICLE I RECITALS: 1.01 Concurrently with the execution of this Work Letter Agreement, Landlord and Tenant have entered into a lease (the "Lease") covering certain premises (the "Premises") which is more specifically specified and defined in the Lease. 1.02 This Work Letter has been executed for the purpose of describing and providing the requirements, standards, and specifications and a timetable for Landlord's performance of the work for the Premises to render it suitable for the use and occupancy of Tenant. 1.03 In order to induce Tenant to enter into the Lease (which is hereby incorporated by reference) and in consideration of the mutual covenants hereinafter contained, Landlord and Tenant hereby agree as follows: ARTICLE II PLANS AND SPECIFICATIONS: 2.01 TENANT IMPROVEMENTS References to "Tenant Improvements" or "Work" shall include all work to be done in the Premises pursuant to Tenant's plans and drawings as described below. Landlord shall provide all Tenant Improvements on a "turn-key" basis at Landlord's sole cost and expense and these improvements are itemized in Tenant Specifications attached hereto as Schedule 1 and shown on the plans ---------- attached hereto as Schedule 3. ---------- 2.02 COMPLIANCE WITH APPLICABLE LAW Landlord, at its sole cost and expense, shall comply with and shall be solely responsible for compliance with all applicable laws relative to the build-out of the Premises, the filing of any construction or engineering documents with, and obtaining any required approvals or permits from any applicable federal, state, county or local governmental body or agency; and Landlord shall do so in accordance with any timetable established herein. Exhibit D Page 2 2.03 PAYMENT FOR THE TENANT IMPROVEMENTS Landlord shall provide Tenant with an allowance of $25.00 per rentable square foot to be allocated to the cost of performing the Tenant Improvements, telecommunications wiring and cabline, design services, and to offset moving expenses (the "Allowance"). Landlord shall pay all costs associated with the Tenant Improvements and in addition, Tenant shall submit to Landlord, applications for payment or reimbursement from the Allowance, in the amount of the costs of the work performed or for services provided. Landlord will make payment to the appropriate vendor or to the Tenant, at Tenant's option, within fifteen (15) days after Landlord's receipt of such application for payment. As soon as all the subject work has been performed, Landlord and Tenant shall make a final computation of the application of the Allowance and for any portion of the Allowance that remains or which has been overspent, the Base Rental Rate shall be either decreased or increased, respectively by the portion of the Allowance remaining or that has been excluded (the "Base Rental Rate Adjustment"). 2.04 BUILDING PLANS At Landlord's sole cost and expense, Landlord shall provide Tenant with the building specifications and a complete and detailed set of CAD generated, architecturally dimensioned drawings of the Premises on intergraph, compatible electronic media no later than October 4, 1993. If Landlord fails to provide these plans by this date, then Tenant may apply the remedies provided for in Section 3.05 of this Work Letter Agreement. From Landlord's complete set of fully dimensioned and detailed architectural drawings, Tenant shall develop Tenant's office layout plans and provide Landlord with "design intent" drawings which are not intended for construction. The design intent drawings shall include dimensioned, full height partition, electrical/cabling plans based on furniture layout, furniture and finish plans. Tenant shall submit the design intent drawings to Landlord no later than December 17, 1993. Landlord, at Landlord's sole cost and expense, shall be responsible for any necessary stamped contract documents or any additional drawings required for construction. Any additional architectural work necessary to complete the Premises in accordance with the plans which Tenant submits, shall be at Landlord's sole cost and expense. ARTICLE III TIMETABLE 3.01 SCHEDULE OF COMPLETION The design and construction of the Premises shall be substantially completed in accordance with the dates shown in the "Schedule of Completion" attached hereto as Schedule 2. ---------- Exhibit D Page 3 Tenant and Tenant's agents, contractors and employees may enter the Building, the Common Area Facilities and the Premises prior to the Lease Commencement Date for purposes of installing Tenant's equipment, furniture and supplies. Landlord shall be responsible for the coordination of such installations with Tenant and shall, at Landlord's sole cost and expense, provide elevator service at reasonable hours and other facilities and work conditions satisfactory to Tenant and Tenant's agents, contractors and employees. Any overtime costs incurred by Landlord in order to complete the Building and the Premises in accordance with the Schedule of Completion shall be paid by Landlord and shall not be considered part of the Tenant Improvement Allowance. At Landlord's sole cost and expense, Landlord shall provide Building security prior to the Lease Commencement Date adequate to protect Tenant's furniture, equipment and supplies as they are installed in the Premises. 3.02 SUBSTANTIAL COMPLETION Landlord shall use its best efforts to substantially complete the Premises by the Scheduled Lease Commencement Date. "Substantially Complete" means: (1) The improvements described in this Work Letter Agreement, and the Base Building Improvements described in Exhibit C of the Lease have been completed so that Tenant can use the Premises for their intended purposes without material interference to Tenant conducting its ordinary business activities; (2) The only incomplete items are minor or insubstantial details of construction, mechanical adjustments or finishing touches like touch- up plastering or painting as identified on a punchlist prepared by Tenant in accordance with Section 3.03 of this Work Letter Agreement. (3) Landlord has secured a permanent certificate of occupancy or the equivalent, as required by the appropriate governmental authority having jurisdiction over the Building, permitting the Building, the Common Area Facilities and the Premises to be occupied by Tenant, other tenants of the Building or by the public, as appropriate, in accordance with all public health, safety and building codes; (4) Tenant, its employees, agents and invitees, have ready access to and egress from the Building and the Premises through the lobby, entranceways, elevators and hallways and such areas are installed, clean, free of construction equipment and materials and are in good working order; Exhibit Page 4 (5) All major building systems, including the electrical, heating, ventilation and air conditioning systems, plumbing, utilities, and elevators are installed and are in good working order; (6) The Premises are broom clean. 3.03 INSPECTION AND PUNCHLIST Prior to the Lease Commencement Date Tenant shall inspect the Premises, Landlord shall demonstrate all systems and Landlord and Tenant shall prepare and execute a punchlist. The punchlist shall list incomplete, minor and insubstantial details of construction, necessary mechanical adjustments, and needed finishing touches. Landlord shall complete the punchlist items within thirty (30) days after the Lease Commencement Date. Landlord will promptly correct any latent defects as they become known to Landlord or if Tenant notifies Landlord within thirty (30) days after Tenant first learns of the defect. If Landlord fails to complete the punchlist items, Landlord shall pay Tenant, as liquidated damages, a sum equivalent to the cost to complete or correct such items, as reasonably estimated by Tenant. If Tenant so elects, Tenant shall have the option to withhold the liquidated damages from its monthly rental payments. 3.04 EARLY OCCUPANCY Tenant shall have the option to move into, occupy and conduct business in all or a portion of the Premises prior to the Scheduled Lease Commencement Date (August 1, 1994). Tenant shall exercise such option by: (i) giving Landlord ninety (90) days prior notice; (ii) specifying such area of space to be occupied; and (iii) providing Landlord with final "design intent" drawings for such space. Landlord shall substantially complete (pursuant to Section 3.02 hereof) the Tenant Improvements for such area within ninety (90) days of Tenant's notice. If Tenant does occupy all or a portion of the Premises prior to the Scheduled Lease Commencement Date, such occupancy shall be subject to the terms and conditions of the Lease and Tenant shall not be obligated to pay Base Rent until the Lease Commencement Date. There shall be no limit as to the number of notices Tenant may give Landlord pursuant to this provision. Exhibit D Page 5 3.05 DELAYED OCCUPANCY If the Premises shall not be Substantially Complete prior to the Scheduled Lease Commencement Date, Landlord shall notify Tenant at least sixty (60) days prior to the Scheduled Lease Commencement Date. Commencing with the Scheduled Lease Commencement Date and continuing until the Premises are Substantially Complete, Landlord shall reimburse Tenant, without penalty or default, for the following amounts incurred: (1) Any amount of rent in excess of the Base Rent which Tenant must pay for temporary or alternate premises, or for Tenant's continued occupancy in the Tenant's present location; and (2) Any additional expenses which Tenant incurs in continuing to occupy space beyond the expected lease expiration date of Tenant's present location or in moving to a temporary location; and (3) Any cost or damages, including attorney's fees, caused by such delay in occupancy. If the Premises are not Substantially Completed within forty-five (45) days after the Scheduled Lease Commencement Date, Tenant shall have the option to terminate this Lease upon giving written notice to Landlord. 3.0.6 MOVE-IN PROCEDURES Tenant shall have access to the Building on Fridays and weekends for purposes of moving into the Building. During the move, Tenant shall have exclusive use of both sets of double doors on either side of the first floor atrium, for purposes of loading and unloading its moving trucks. IN WITNESS WHEREOF, this Work Letter Agreement is executed as of the date first above written. LANDLORD: THE TRAVELERS INS. CO. TENANT: THE TRAVELERS INS. CO. By /s/ [ILLEGIBLE] By /s/ Andy F. Bessette --------------------------- --------------------------- Title Assistant Secretary Title Andy F. Bessette -------------------------- -------------------------- National Director of Leasing & Finance SCHEDULE 1 TENANT SPECIFICATIONS Tenant Improvements as described below shall be furnished by Landlord in accordance with Section 1.08 (IMPROVEMENTS) and the Work Letter Agreement. 1. Substitution for Building Standard Improvements Tenant may substitute materials, equipment and fixtures for installation in the Premises instead of those specified as building standard, provided: A. All substituted items are of a quality which are equal to or exceed building standard; and B. All substituted items are purchased, delivered and installed properly without unnecessarily delaying the completion of the Premises. 2. Tenant Improvements A. Partitions (1) The Partitions will be 3 3/4" thick, consisting of 2 1/2" metal studs, a sound attenuation blanket between the exterior of a 5/8" thick gypsum board and will have a 4" high vinyl contrasting resilient base. Tenant will select the wall finishes. (2) On entire floors which Tenant occupies, vinyl wall covering on elevator lobbies and common corridor walls will be used. B. Doors, Door Frames and Hardware (1) Solid core, flush white oak veneer doors -- 36" wide, with painted hollow metal frames will be provided. Interior doors in the Premises will be equipped with latch sets, door stops and closers. Double glass entrance doors with aluminum joinery will be provided, where indicated. A Dutch door will be provided, where indicated. A Dutch door will be provided in the mail and supply room. (2) All doors will be equipped with lever-style latch sets. locks will be furnished on doors in the mail and supply rooms, security closets and double-glass entrance doors. All locks will be master keyed. Simplex locks will be installed on all cable closets and telecommunication room doors. (3) Entrance doors to the rest rooms will be equipped with Simplex locks, as requested by Tenant. Schedule 1 Page 2 C. Electrical Outlets (1) Landlord will furnish duplex electrical outlets per the approved construction drawings. (2) Landlord will furnish wall light switches per the approved construction drawings. D. Telephone/Data Outlets Landlord will furnish telephone/data outlets per the approved construction drawings. E. Flooring (1) Vinyl tile will be installed per the approved construction drawings. (2) Broadloom carpeting, or carpet tile, and base selected by Tenant will be installed per the approved construction drawings. 3. Plumbing Plumbing in the employee lunch room to accommodate vending machines and a sink with hot and cold water and a cabinet will be supplied. 4. Telecommunications Room and Cable Closets A. A telecommunications room, designed by Tenant to accommodate Tenant's specified voice and data communications equipment, will be provided. This room will be fully demised, secured, environmentally controlled and will typically include the following requirements, based upon final Tenant Specifications: (1) Separately controlled HVAC and electrical current to be operational seven days a week, 24 hours a day; (2) Dedicated electrical service terminating at a separate electrical panel installed within the telecommunications room; (3) Dedicated electrical circuits for all equipment and access to a cold water ground; (4) Raised floor with a minimum clearance of seven inches. Floor will utilize 24" x 24" uncarpeted access floor tile with entry ramp, railing and tile cutouts as specified by Tenant; Schedule 1 Page 3 (5) 3/4" x 4' x 8' plywood telephone backboards in specified locations; (6) Entry door with minimum width of 36" and equipped with push button Simplex type combination lock with key bypass; (7) Smoke detectors and, where potential water retention exists, water detectors will be provided under raised floor; and (8) Standard office lighting. B. Cable closets will be fully demised and provided on each full or partial floor occupied by Tenant. Built to Tenant's specifications, these rooms will house data and/or voice cable racks and connections. 3/4" x 4' x 8' plywood telephone backboards will be wall mounted. Each room will have a raised floor with a minimum 7" clearance, and a 36" entry door equipped with a push button (Simplex type) combination lock with key bypass. The size of each closet, typically one per floor, will range from 56 sq. ft. to 104 sq. ft. depending on Tenant Specifications. 5. Drive-in Claims parking enclosure Reserved underground parking spaces with a suitable office facility to be occupied by claims personnel will be provided for the inspection of automobiles and minor damage appraisal. This structure will conform with the architectural design of the Building and will be located as to allow reasonable public identification and access. The enclosure will have a minimum overhead clearance of 9' and will be equipped with overhead lighting. The area will be provided with a conduit sufficient for the installation of telephone cables from the Building. The area will also have an all weather duplex electrical outlet. Additional Tenant Specifications will be dependent upon geographic location, proximity to the Building and local zoning requirements. SCHEDULE 2 SCHEDULE OF COMPLETION 1. Landlord will provide Tenant with building specifications as described in Section 2.04 of the Work Letter Agreement on or before 10/04/93. 2. Tenant will submit "design intent" drawings to Landlord as described in Section 2.04 of the Work Letter Agreement on or before 12/17/93. 3. The area(s) designated for Tenant's telecommunications room and cable closet will be completed on or before 04/01/94. 4. The Premises will be sufficiently completed to accommodate the installation of Tenant's modular furniture systems on or before 06/20/94. EXHIBIT E JANITORIAL AND OFFICE SERVICE AND SUPPLIES DAILY CLEANING AND MAINTENANCE 1. At least twice daily check main building entr vator cabs for cleanliness. 2. At least twice daily check ladies' rest rooms tissue, paper towel and sanitary supplies dispensers and remove trash as necessary. 3. At least twice daily, check men's lavatories. Fill soap, and paper towel dispensers and remove trash as necessary. 4. Keep all stairwells clean; wash stairs as necessary. 5. Properly maintain appearance of building exterior at ground level, including building entrance areas. OFFICE AREAS - NIGHTLY 1. Sweep all hard flooring. 2. Vacuum all carpeting and rugs, moving light furniture and office equipment. 3. Empty and wipe clean all wastebaskets, ashtrays, etc. 4. Dust and wipe clean all furniture, equipment, fixtures and window sills. 5. Clean all glass furniture tops as necessary. 6. Dust baseboards, moldings and trim. 7. Wet mop and/or vacuum lunch and lounge room. LAVATORIES - NIGHTLY 1. Sweep and wash all flooring. 2. Wash and polish mirrors, shelves and bright work. 3. Wash and disinfect all basins, bowls, urinals and both sides of toilet seats. 4. Dust and wipe clean all partitions, tile walls and dispensers. Exhibit E Page 2 OFFICE AREAS - PERIODIC At least every three months: 1. Dust all pictures, wall hangings, etc. not reached in nightly cleaning. 2. Dust all venetian blinds, ventilating louvers, grills, lighting fixtures, partitions and other surfaces not reached in nightly cleaning. Replace blinds and/or Building standard drapes as necessary. 3. Remove fingerprints and other marks from all elevators, stairways and office doors. 4. Wash all non-carpeted areas as applicable. 5. Furnish and replace light tubes and ballasts, as necessary. 6. Shampoo and spot clean carpeting. Replace worn or discolored carpet as necessary. 7. Repaint ceilings and door frames as necessary. WINDOW AND GLASS CLEANING 1. Wash entrance doors, lobby glass and glass in directory daily. 2. At least once every three months wash inside and outside of office area windows. 3. Clean all interior glass and normal amount of partition glass at least once a month. [LOGO OF THE TRAVELERS APPEARS HERE] EXHIBIT F OFFICE RENT PAYMENTS - ELECTRONIC DIRECT DEPOSIT Please type or print all requested information in the spaces provided at the bottom of this form. 1. Enter current monthly rent amount. 2. Check box for either Checking or Savings Account. If checking account, attach a copy of your deposit slip. If savings account, enter number here:_____________________________ 3. Enter Bank Name, Address, Branch and City. 4. Enter name account is under, and the Federal Taxpayer Identification number or Social Security number for the account. Date and sign the authorization. 5. Return both copies of authorization to us, the `Depositors's copy will be returned to you. AUTHORIZATION AGREEMENT FOR AUTOMATIC DEPOSITS (CREDITS) I (We) Hereby Authorize The Travelers. Hereinafter Called COMPANY. To Make Payment of___________. Owing To Me (Either Of Us) For Instalment Payments And The Bank Indicated Below, Hereinafter Called BANK. To Credit With The Amounts Thereof My (Our') [_] Checking [_] Savings Account Indicated Below. -------------------------------------------------------------------------- BANK ADDRESS* NAME -------------------------------------------------------------------------- BRANCH CITY* -------------------------------------------------------------------------- This Authority Is To Remain In Full Effect Until COMPANY Or BANK Has Received Written Notification From Me (Or Either Of Us) Of Its Termination In Such Time And Manner As To Afford COMPANY Or BANK A Reasonable Opportunity To Act On it. Or Until COMPANY Or BANK Has Sent Me (Either Of Us) Ten (10) Day Written Notice Of COMPANY Or BANK'S Termination Of This Arrangement. --------------------------------------------------------------------------- NAME IDENTIFICATION NUMBER --------------------------------------------------------------------------- DATE* SIGNED* SIGNED* --------------------------------------------------------------------------- SECTION BELOW TO BE COMPLETED BY COMPANY --------------------------------------------------------------------------- COMPANY COMPANY NAME The Travelers ID NUMBER 06-0566090 --------------------------------------------------------------------------- TRANSIT A TRANSIT ROUTING NUMBERS CHECK DIGIT ACCOUNT NUMBER INFORMATION -------------------------- ----- ------------------------------- -------------------------- ----- ------------------------------- TRANSIT ASA DESIGNATED BY FEDERAL RESERVE EXHIBIT G BASE RENT SCHEDULE Period Base Rental ------ Rate per RSF ------------ Year 1-3 $18.46 Year 4-5 $18.96 Year 6-7 $19.71 Year 8 $20.21 Year 9-10 $20.71 EXHIBIT H COMMENCEMENT DATE AGREEMENT LEASE DATED ___________ BETWEEN ________________________ ("LANDLORD") AND THE TRAVELERS INSURANCE COMPANY ("TENANT") THIS COMMENCEMENT DATE AGREEMENT IS MADE THIS _____ DAY OF ______________, 19 ____ BY AND BETWEEN Landlord and Tenant pertaining to certain space (the "Premises") in _____________________________________ (the "Building"). WITNESSETH: WHEREAS, by Lease executed the _____________ day of _______________ 19___, Landlord leased to Tenant the Premises known as Suite/Floor __________________, located in the Building; and the Scheduled Lease Commencement Date was ______________________. WHEREAS, Landlord and Tenant now desire to establish the Lease Commencement and Lease Expiration Dates of the Lease. NOW, THEREFORE, Landlord and Tenant hereby agree as follows: 1. The Lease Commencement Date shall be __________, 19__ and the Lease Expiration Date shall be _________________, 19__, unless sooner terminated or extended as provided by the Lease. 2. By execution hereof, Tenant hereby acknowledges that all improvements required of Landlord have been satisfactorily performed and Tenant does hereby accept the Premises delivered by Landlord as being in full compliance with the terms of the Lease except for the items contained in the punch list, or otherwise as provided in the Lease. 3. Except as hereby amended, the Lease shall continue in full force and effect. 4. This Agreement shall be binding upon the parties hereto, their heirs, executors, successors and assigns. EXHIBIT I AGREEMENT OF SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT This AGREEMENT is entered into on ________________, 19__, by and between ___________________________________________ ("Lender"), a ________________________________________________ corporation having an office at _____________________________________ and THE TRAVELERS INSURANCE COMPANY ("Tenant"), a Connecticut corporation having an office at One Tower Square, Hartford, Connecticut 06183, on the basis that: A. THE TRAVELERS INSURANCE COMPANY and _______________________, ("Landlord") entered into a Lease dated_____________________, 19___, for premises described in that Lease as __________________________ (the "Premises"). B. Lender holds a mortgage which encumbers the Premises and other property the ("Mortgage"). C. Tenant has agreed that the Lease shall be subject and subordinate to the Mortgage. D. Lender and Tenant wish to recognize Tenant's right to occupy the Premises according to the terms and conditions of the Lease. IT IS HEREBY AGREED, in consideration of the promises and covenants contained herein, that during the term of the Lease and any extension thereof: 1. So long as Tenant is not in default in the performance of the terms, covenants or conditions of the Lease, Lender shall not terminate Tenant's interest in the Premises under the Lease because of any default under the Mortgage and Lender shall not disturb Tenant's possession or any other right of Tenant under the Lease. 2. Tenant agrees that if the interests of Landlord shall be transferred to and owned by Lender by reason of foreclosure or by any other legal manner, then Tenant shall attorn to Lender or the then owner and recognize Lender or the then owner (the "Successor Landlord") as the Landlord under the Lease. 3. If the Mortgage is foreclosed, the Lease shall continue in full force and effect, except that the Successor Landlord shall not: (a) be bound by any prepayment of more than one month's rent (except for any free rent or other rent abatement which shall have accrued); Exhibit I Page 2 (b) be bound by any amendment, modification or termination of the Lease made without the Successor Landlord's name, after the foreclosure, unless the amendment, modification or ending is specifically authorized by this Lease and does not require prior agreement or consent by Landlord. 4. Lender agrees no property owned or removable by Tenant shall be subject to the lien of the Mortgage held by Lender or any mortgage made paramount to the Lease by means of this Agreement. 5. The terms of this Agreement shall not be affected by the renewal, modification, amendment, replacement or extension of the Lease. 6. This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns. LENDER: TENANT: THE TRAVELERS INSURANCE COMPANY By: _________________________ By: _________________________ Its _________________________ Its _________________________ EXHIBIT "J" RULES AND REGULATIONS --------------------- This Exhibit "F" is attached to and made a part of that Agreement of Lease dated ________________, 19___ (the "Lease"), between THE TRAVELERS INSURANCE COMPANY (hereinafter called "Landlord"), and , (hereinafter called "Tenant"). Unless the context otherwise requires, the terms used in this Exhibit that are defined in the Lease shall have the same meaning as provided in the Lease. The following rules and regulations have been formulated for the safety and well-being of all tenants of the Building and to insure compliance with governmental and other requirements. Strict adherence to these rules and regulations is necessary to guarantee that each and every tenant will enjoy a safe and undisturbed occupancy of its premises in the Building. Landlord may, upon request of any tenant, waive the compliance by such tenant of any of the following rules and regulations, provided that (i) no waiver shall be effective unless signed by Landlord's authorized agent, (ii) any such waiver shall not relieve such tenant from the obligation to comply with such rule or regulation in the future unless otherwise agreed to by Landlord, (iii) no waiver granted to any tenant shall relieve any other tenant from the obligation of complying with these rules and regulations, unless such other tenant has received a similar written waiver from Landlord, and (iv) any such waiver shall not relieve such tenant from any liability to Landlord for any loss or damage occasioned as a result of such tenant's failure to comply. 1. The sidewalks, entrances, passages, courts, elevators, vestibules, stairways, corridors, roof, halls and other parts of the Building not exclusively occupied by any tenant shall not be obstructed or encumbered by any tenant or used for any purpose other than ingress and egress to and from each tenant's premises. Landlord shall have the right to control and operate the public portions of the Building, and the facilities furnished for common use of the tenants, in such manner as Landlord deems best for the benefit of the tenants generally. No tenant shall permit the visit to its premises of persons in such numbers or under such conditions as to interfere with the use and enjoyment of the entrances, corridors, elevators and other public portion or facilities of the Building by other tenants. 2. No awnings or other projections shall be attached to the outside walls of the Building without the prior EX-10.8 10 LEASE DATED DECEMBER 19, 1994 BETWEEN LIEBOCH AND T Exhibit 10.8 LIEBOCH LIMITED R.R. DONNELLEY IRELAND TURNKEY SERVICES KILDARE - and - ALLIED IRISH BANKS, p.l.c. LEASE ----- WILLIAM FRY Solicitors Fitzwilton House Wilton Place Dublin 2 0031-241-JFW:1237JFW TABLE OF CONTENTS ----------------- SECTION 1.0 - COMMENCEMENT -------------------------- 1.1 Date..................................................... -1- 1.2 Parties.................................................. -1- 1.3 Definitions.............................................. -1- 1.4 Interpretation........................................... -4- 1.5 Captions................................................. -5- SECTION 2.0 - DEMISE RENT AND COVENANTS --------------------------------------- 2.1 Demise, Rent and Covenants............................... -5- 2.2 Certificate.............................................. -6- 2.3 Assent to Registration................................... -6- SECTION 3.0 - GUARANTEE ----------------------- 3.1 Covenant and Indemnity by Guarantor...................... -7- 3.2 Guarantor jointly and severally liable with Tenant.............................................. -7- 3.3 Waiver by Guarantor...................................... -7- 3.4 Postponement of claims by Guarantor against Tenant........................................... -8- 3.5 Postponement of participation by Guarantor in security.................................... -8- 3.6 No release of Guarantor.................................. -8- 3.7 Disclaimer or Forfeiture of Lease........................ -10- 3.8 Benefit of Guarantee..................................... -11- FIRST SCHEDULE -------------- Part One -------- The Premises.................. -11- Part Two -------- The Term and Initial Rent........... -11- SECOND SCHEDULE --------------- Part One -------- Rights granted to the Tenant ---------------------------- 1. Passage of Services for the Tenant..................... -15- 2. Support for the Premises............................... -16- Part Two -------- Rights excepted and reserved ---------------------------- to the Landlord and Others -------------------------- 1. Passage of Services for the Landlord....................... -16- 2. Entry...................................................... -16- 3. To Rebuild adjoining buildings............................. -17- 4. Mines and Minerals......................................... -17- 5. Easements and Privileges................................... -17- 6. Repairs.................................................... -17- THIRD SCHEDULE -------------- Covenants by the Tenant ----------------------- 1. Payments by the Tenant..................................... -18- (a) Rent............................................... -18- (b) Rates and Taxes.................................... -18- (c) Legal and Other Charges............................ -18- (e) Stamp duty......................................... -19- (f) V.A.T.............................................. -19- 2. Repair and Maintenance..................................... -20- (a) Repair of Premises................................. -20- (b) Works.............................................. -20- (c) Statutory Notices.................................. -20- 3. Use of the Premises........................................ -21- (a) Authorized Use..................................... -21- (b) Use and Insurance.................................. -21- (c) Nuisance use restriction........................... -21- (d) Insurance use restriction.......................... -21- (e) Safety use restriction............................. -21- (f) Storage use restriction............................ -22- (g) Planning use restriction........................... -22- (h) Services use restriction........................... -22- (i) Buildings and additions prohibition................ -22- (j) Removal of unauthorised structures................. -22- 4. Alienation................................................. -23- (a) No assignment or underlettering without consent.... -23- (b) Sub-Letting........................................ -23- (c) Alienation conditions.............................. -23- (d) Applications for consent to alienate............... -25- (e) Notice of alienation............................... -26- 5. Insurance.................................................. -26- (a) To insure.......................................... -26- (b) Premiums and policy................................ -27- (c) Failure to insure.................................. -27- (d) Third party liability.............................. -28- 6. Miscellaneous.............................................. -28- (a) To permit entry for inspection, repair............. -28- (b) Destruction - insurance irrevocable................ -29- (c) Accident on the Premises........................... -29- (d) Covenants under Head Lease......................... -29- (e) Compliance with agreements......................... -30- FOURTH SCHEDULE --------------- (Covenants by the Landlord) --------------------------- 1. Quiet Possession........................................... -30- FIFTH SCHEDULE -------------- Provisos matters and things agreed and -------------------------------------- declared by and between the parties ----------------------------------- 1. Re-Entry................................................... -30- 2. Section 40 Deasy's Act 1860................................ -31- 3. Interest................................................... -31- 4. Arbitration................................................ -32- 5. Consents of Landlord to be in writing...................... -32- 6. Planning Permission........................................ -32- 7. Payments to be treated as Rent............................. -32- 8. Notice..................................................... -33- 9. To yield up................................................ -33- 10. Indemnity.................................................. -33- 11. Payments Gross............................................. -35- SECTION 1.0 - COMMENCEMENT -------------------------- 1.1 DATE. ---- This Lease is made on 19 December 1994 1.2 Parties. ------- BETWEEN: LIEBOCH LIMITED having its registered office at Bankcentre, Ballsbridge, Dublin 4 (hereinafter called the "Landlord") R.R. DONNELLEY IRELAND TURNKEY SERVICES KILDARE having its registered office at Clonshaugh, Industrial Estate, Clonshaugh, Dublin 17 (hereinafter called the "Tenant") - and - ALLIED IRISH BANKS, p.l.c. having its registered office at Bankcentre, Ballsbridge, Dublin 4 (hereinafter called the "Guarantor") NOW THIS INDENTURE WITNESSETH as follows:- 1.3 Definitions. For the purposes of this lease the following words and ----------- expressions shall have the following meanings and interpretations:- (a) "Act of the Oireachtas", any act of Parliament or act of the Oireachtas or law of the European Union now in force in the State and any such act or law which may hereinafter be passed which has force in the State including (without prejudice to the generality of the foregoing) any instrument directive regulation or bye-law made thereunder. (b) "Building" the building constructed by the Landlord on the Premises. (c) "Determination of the Term", the determination of the Term whether by effluxion of time re-entry under the provisions hereof duly accepted notice of surrender or any other means or cause whatsoever. (d) "Instalment Days", each of the nineteenth days of December, March, June and September of the Term. (e) "Insured Perils", fire explosion lightning impact earthquake aircraft flood storm tempest riots civil commotion and malicious damage bursting or overflowing of water tanks apparatus drains sewers and pipes and other risks perils expenses losses as the Landlord in its sole discretion may require or as may be agreed between the Landlord and the Tenant. (f) "Interest Rate", the rate (to apply as well after as before any judgment) equal to the rate from time to time charged by Allied Irish Banks, p.l.c. as its Prime Rate or any rate replacing the same increased by 2%. If at any time during the currency of this demise it shall not be possible to calculate the said rate of interest payable by the Tenant the matter shall be referred to Arbitration in accordance with the provisions of paragraph 4 of the Fifth Schedule hereto. - 2 - (g) "Planning Acts", the Local Government (Planning and Development) Acts 1963 to 1993 and any statutory modification or re-enactment thereof for the time being in force and any regulations or orders made thereunder. (h) "Guarantor", the party of the Third Part which expression shall include its successors and assigns. (i) "Head Lease", the Lease dated 5 May 1994 made between Forfas and the Landlord relating to the Premises. (j) "Landlord", the party hereto of the First Part, the successors and assigns of the Landlord being the owner for the time being of the reversion immediately expectant on the Determination of the Term. (k) "Premises", the land and the rights hereby demised and any part or parts thereof and all buildings and works now or hereafter erected or constructed thereon and all additions thereto and alterations thereof (but excluding Tenant's fixtures and fittings). (l) "Rent", the rent from time to time hereby reserved including where the context so admits or requires the Rent as varied from time to time upon revision. (m) "Tenant", the party hereto of the Second Part, its successors and permitted assigns. -3- (n) "Term", the term of years created by this Lease. 1.4 Interpretation. -------------- (a) Any reference in this Lease to any Act of the Oireachtas shall be deemed to include any amendment modification or re-enactment thereof for the time being in force. (b) Any covenant in this Lease by the Landlord or the Tenant not to do any act or thing shall extend to its not suffering or permitting the doing of that act or thing. (c) Any reference in this Lease to the doing or permitting of any act or thing by the Landlord or Tenant shall be deemed to include the doing or permitting of that act or thing by the workmen servants or other employees or duly authorised agent of the Landlord or of the Tenant. (d) All rights of entry exercisable hereunder by the Landlord shall extend to and include the Architects Engineers Surveyors Servants Contractors Agents Licensees and Employees of the Landlord. (e) The masculine gender shall include the feminine and neuter and the singular number shall include the plural and vice versa and words importing persons shall include firms or companies. (f) Words such as "hereunder" "hereto" "hereof" and "herein" and other words commencing with "here" shall unless the context clearly - 4 - indicates to the contrary refer to the whole of this Lease and not to any particular section paragraph or sub-paragraph thereof. (g) Any reference to a section, paragraph or sub-paragraph shall be a reference to the Section, Clause, paragraph or sub-paragraph of the provision in which the reference occurs unless from the context it is clear that some other provision is intended. (h) Any interest due hereunder by the Tenant to the Landlord shall accrue from day to day as well after as before any judgment. 1.5 Captions. The Section headings and captions to the Clauses and the Index -------- in this lease are for convenience of referece only and shall not be considered a part of or affect the construction or interpretation of this Lease. SECTION 2.0 - DEMISE RENT AND COVENANTS --------------------------------------- 2.1 Demise, Rent and Covenants. -------------------------- (a) The Landlord hereby demises unto the Tenant the Premises described in Part One of the First Schedule for the Term at the Rent set out in Part Two of the First Schedule with the revisions set out in Part Three of the First Schedule. (b) The Premises are demised together with the rights but excepting and reserving as set out in Parts One and Two respectively of the Second Schedule hereto. - 5- (c) The Tenant convenants with the Landlord in manner set out in the Third Schedule hereto. (d) The Landlord convenants with the Tenant in the manner set out in the Fourth Schedule hereto. (e) The demise made is subject to the provisions matters and things set out in the Fifth Schedule hereto which are hereby agreed and declared by and between the Landlord and the Tenant. 2.2 Certificate. ----------- (a) It is hereby certified that an appropriate consent has been obtained under Section 45 Land Act, 1965. (b) It is hereby certified that an appropriate consent has been obtained under Section 12 of the Land Act 1965. (c) For the purposes of stamping this Lease it is certified that the provisions of Section 112 Finance Act 1990 do not apply hereto for the reason that it is a lease of a completed building. 2.3 Assent to Registration. The Landlord hereby assents to the registr